COURT OF APPEAL FOR ONTARIO
DATE: 20210318 DOCKET: C68534
Doherty, Pepall and Thorburn JJ.A.
BETWEEN
Xundong Qin, also known as Sam Qin and Cenith Air Inc. Plaintiffs (Appellants)
and
Ontario Securities Commission, Christie Johnson, Steve Carpenter and Naomi Chak Defendants (Respondents)
Counsel: Andrew Ostrom, for the appellants Paul Le Vay and Fredrick R. Schumann, for the respondents
Heard: February 17, 2021 by video conference
On appeal from the order of Justice G. Dow of the Superior Court of Justice, dated April 24, 2020, striking the appellants’ statement of claim: reported at 2020 ONSC 1145.
I. Overview
1In February 2015, the Ontario Securities Commission (“OSC”), acting under s. 126 of the Securities Act, R.S.O., 1990, c. S.5 (the “Act”), froze the assets of the appellants and related companies. In March 2015, the OSC commenced a proceeding against the appellants and related companies under s. 127 of the Act. In May 2015, Pattillo J., directed that the freeze order should continue: OSC v. Future Solar, 2015 ONSC 2334. In May 2016, a panel of the OSC dismissed the allegations against the appellants and directed the freeze order lifted forthwith: Future Solar Developments Inc. et al., 2016 ONSEC 17. In May 2018, the appellants sued the OSC and three employees (the “respondents”) for malicious prosecution. [1]
2The respondents moved to strike the statement of claim on the basis the decision of Pattillo J. estopped the appellants from proving the respondents acted without reasonable and probable cause when they commenced proceedings against the appellants. As proof of the absence of reasonable and probable cause is an essential element of the tort of malicious prosecution, the appellants’ claim could not possibly succeed if they were estopped from proving the absence of reasonable and probable cause.
3The motion judge accepted the respondents’ submissions and struck the claim. He allowed the appellants 30 days to amend their claim to plead facts not available before Pattillo J. The appellants chose not to amend the claim, but did appeal from the order. For the reasons that follow, I would allow the appeal, set aside the order and return the proceedings to the Superior Court.
II. The OSC Proceedings
4The appellant, Mr. Qin, and various entities he controlled were involved in the development and management of solar energy projects in Ontario and elsewhere. [2] Mr. Qin attempted to raise capital for his projects, especially in China, using a program sponsored by the Ontario government, which allowed persons who made substantial investments in Ontario-based business to apply for permanent residence status in Canada. Mr. Qin raised several million dollars. Neither Mr. Qin, nor any of his companies were registered to sell securities. No prospectus was filed in connection with Mr. Qin’s efforts to raise funding.
5The OSC commenced an investigation. In February 2015, it issued an order under s. 126 of the Act, freezing the assets of the appellants and related companies. Section 126 allows the Commission to make that order:
If the Commission considers it expedient for the due administration of Ontario’s securities law or the regulation of capital markets in Ontario …
6The OSC, as required by s. 126(5) of the Act, applied to the Superior Court, on notice to the appellants, for an order continuing the freeze order. The application came on before Pattillo J. Section 126(5.1) directs that the freeze order may be continued:
… If the court is satisfied that the order would be reasonable and expedient in the circumstances, having due regard to the public interest and,
(a) the due administration of Ontario’s securities law or the securities law of another jurisdiction; or
(b) the regulation of capital markets in Ontario or another jurisdiction.
7In March 2015, before Pattillo J. heard the motion to continue the freeze order, the OSC commenced a proceeding under s. 127 of the Act against the appellants. The OSC alleged the appellants had breached s. 25 of the Act by trading in securities without proper registration, and s. 53(1) of the Act, by distributing securities without first filing a prospectus. Under s. 127, the OSC can make any of a variety of orders, provided the order is justified in the public interest.
8By order dated May 5, 2015, Pattillo J. continued the freeze order imposed by the OSC. His reasons for doing so are at the centre of the issue estoppel argument on which this appeal turns. I will return to those reasons.
9Subsequent to the order of Pattillo J., the appellants unsuccessfully moved before Commissioner Condon to vary the freeze order: Future Solar Developments Inc. et al., 2015 ONSEC 25.
10In May 2016, the Commission heard the merits of the allegations against the appellants. The panel dismissed both allegations: Future Solar Developments Inc. et al., 2016 ONSEC 17. Commissioner Lenczner, writing for the panel, found the appellants were not mainly engaged in the sale of securities and were not required to register under the Act. He further held the appellants were exempt under the “private issuer” exemption from the requirement of filing a prospectus.
III. The Malicious Prosecution Lawsuit
11In their statement of claim, the appellants pleaded the allegations made by the OSC in support of the freeze order in February 2015 and in the statement of allegations in March 2015 were false, made without reasonable and probable cause, and made for a collateral and improper purpose. The appellants further pleaded the respondents had proceeded with the allegations against the appellants after March 2015, despite having been provided with all relevant documents and a full explanation of the nature of the appellants’ business operations, both of which demonstrated those operations were in compliance with the Act. Lastly, the appellants pleaded the proceedings before the OSC had been resolved entirely in their favour. The appellants claimed damages of $100,000,000.
IV. The Motion Judge’s Decision
12The respondents moved under r. 21.01(d) to strike the statement of claim. The respondents argued, the decision of Pattillo J. effectively decided there was reasonable and probable cause to initiate the proceedings under the Act against the appellants, and that the appellants were estopped from arguing, in the context of a malicious prosecution claim, the respondents did not have reasonable and probable cause.
13The motion judge accepted the respondents’ argument. He held the finding of Pattillo J. that there was a serious issue to be tried in respect of the alleged breaches of the Act, raised the same question as did the pleading in the malicious prosecution action alleging the respondents had acted without reasonable and probable cause. The motion judge reasoned that, as essentially the same question had been determined in the proceedings before Pattillo J., the appellants were estopped from re-litigating that issue in the malicious prosecution lawsuit. That estoppel doomed the appellants’ action and warranted an order striking the claim: Qin v. Ontario Securities Commission, 2020 ONSC 1145, at paras. 11-12, 16.
V. Analysis
14The appellants advanced several arguments. In my view, the appeal can be resolved by addressing one of those arguments. Was the question answered by Pattillo J. on the motion to continue the freeze order the same question that will have to be answered in the civil suit when deciding whether the respondents had reasonable and probable cause to initiate proceedings against the appellants?
15Although the motion judge referred to both issue estoppel and abuse of process in holding the respondents’ claim could not go forward, he correctly analyzed the arguments by reference to the essential elements of issue estoppel: Qin v. Ontario Securities Commission, 2020 ONSC 1145, at paras. 11, 17. The doctrine of abuse of process may preclude re-litigation that does not meet the exact criteria for issue estoppel: see Winter v. Sherman Estate, 2018 ONCA 703, at para. 7. However, on the facts of this case, there is no basis apart from issue estoppel to argue the malicious prosecution claim constitutes an impermissible re-litigation of decided facts. I will examine the merits of the appellants’ argument solely by reference to the elements of issue estoppel.
16Issue estoppel protects against the abuse of the court’s process by preventing an unsuccessful party from re-litigating a material fact or issue previously and finally decided in proceedings involving the same parties or their privies. The doctrine is not absolute and will not be applied if the interests of justice dictate otherwise: Danyluk v. Ainsworth Technologies Inc., 2001 SCC 44, at paras. 20, 24-25, 33.
17Issue estoppel operates to preclude re-litigation when an issue or material fact that must be decided in the second proceeding raises the same question that was decided in the previous proceeding. Binnie J. explained this requirement in Danyluk, at para. 54:
… In this case, for example, the existence of an employment contract is a material fact common to both the ESA proceeding and to the appellant’s wrongful dismissal claim in court. Issue estoppel simply means that once a material fact such as a valid employment contract is found to exist (or not to exist) by a court or tribunal of competent jurisdiction, whether on the basis of evidence or admissions, the same issue cannot be relitigated in subsequent proceedings between the same parties. The estoppel, in other words, extends to the issues of fact, law and mixed fact and law that are necessarily bound up with determination of that “issue” in the prior proceedings. [Emphasis added.]
18Issue estoppel extends to findings that are “necessarily bound up” in the findings made in the prior proceeding. The outcome of this appeal turns on whether a determination the OSC had reasonable and probable cause to commence proceedings against the appellants was “necessarily bound up” in Pattillo J.’s finding that the OSC allegations raised “a serious issue to be tried”.
19What exactly did Pattillo J. decide? He was required to interpret, as a matter of first impression, s. 126(5.1), a relatively new provision in the Act. [3] Pattillo J. concluded, at para. 31, that the OSC had to establish three things to obtain an order continuing the freeze order. Only the first of those three requirements is relevant here. He framed that requirement in these terms:
There is a serious issue to be tried in respect of the respondents’ breaches of the Act or other security laws in another jurisdiction.
20This requirement speaks to some assessment of the merits of the allegations, but only in a very limited way. Just how limited is made clear by Pattillo J., at para. 28, where he describes the “serious issue to be tried” standard as:
A lesser standard than the requirement to establish a strong prima facie case or even a prima facie case.
21A prima facie case is one which, if unanswered, would justify, although not compel, a finding in favour of the party advancing that case. In the context of a s. 126(5) hearing, a finding of a prima facie case may be the equivalent of a finding of reasonable and probable cause to believe the appellants had breached the Act. Pattillo J., however, expressly indicated he was assessing the merits of the OSC’s allegations on the “lesser standard” captured by the phrase “serious issue to be tried”. That standard comes from the interlocutory/stay jurisprudence and is used to describe a claim which, upon a preliminary assessment, is said to rise above the level of a frivolous or vexatious claim. The merits threshold described by the phrase “serious issue to be tried” is clearly a low one: see RJR-MacDonald Inc. v. Canada (Attorney General), [1994] 1 S.C.R. 311, at 337; American Cyanamid v. Ethicon Ltd., 1975 A.C. 396, at pp. 404-405 (H.L.). In my view, a finding a claim is not frivolous or vexatious does not answer the question whether the same claim is based on reasonable and probable cause.
22The “serious issue to be tried” standard and the reasonable and probable cause standard are qualitatively different. The reasonable and probable cause standard invites scrutiny of the record to determine the likelihood or probability, at the time the proceedings were commenced, that the OSC could ultimately establish the allegations. The “serious question to be tried” standard addresses the preliminary question of whether the OSC had provided a sufficient basis upon which it could be said the allegations had some merit warranting the continuation of the freeze orders and related investigative steps. Viewed in their proper context, it is clear the presence of reasonable and probable cause does not flow from a finding of a “serious issue to be tried” and cannot be described as “necessarily bound up” in that finding.
23Although the different standards engaged by the “serious issue to be tried” question and the reasonable and probable cause question are enough to conclude issue estoppel cannot apply, the appellants point to a second related and equally compelling reason for reaching that result.
24In considering whether there was a serious issue to be tried concerning the merits of the allegations made against the appellants, Pattillo J. indicated he would not assess the merits of the exculpatory material placed before the court on the motion: OSC v. Future Solar, 2015 ONSC 2334, at paras. 36-37. The approach taken by Pattillo J. reflects the preliminary nature of his assessment of the merits of the allegations. The matter was still in the investigative stage. Pattillo J. was asked to freeze assets so that those assets might eventually be available, depending on any disposition the OSC might make under s. 127 of the Act. At this stage, Pattillo J. was not engaged in an assessment of the ultimate merits, which would include any explanations offered by the defence.
25While the relatively narrow evidentiary focus taken by Pattillo J. makes sense in the context of a s. 126(5) motion, a broader inquiry is required when assessing whether the respondents had reasonable and probable cause. As explained in Miazga v. Kvello Estate, 2009 SCC 51, [2009] 3 S.C.R. 339, at 375-76, reasonable and probable cause, in the context of prosecutions initiated by public prosecutors, requires a determination of whether, objectively viewed, the facts known to the prosecution when it was undertaken, provided reasonable and probable cause to initiate the proceeding. This exercise engages an examination of all of the facts known to the prosecution when it initiated proceedings. Those facts include facts known to the prosecution which could exculpate the would-be targets of the prosecution. Further, as set out above, the totality of the facts known to the prosecution must be measured, not against the “serious issue to be tried” standard, but against the more demanding reasonable and probable cause standard.
26Had Pattillo J. been called upon to decide whether the OSC had reasonable and probable grounds to commence proceedings against the appellants, he would have been required to consider the merits of the exculpatory information the appellants had provided to the OSC. Pattillo J. expressly, and properly in my view, declined to engage in that exercise in the context of a motion to continue the freeze order.
27I come back to the question – what did Pattillo J. decide? He determined the freeze order made by the OSC should be continued under the criteria he described in his reasons. Those criteria did not require the OSC to demonstrate reasonable and probable grounds to take proceedings against the appellants. Nothing decided by Pattillo J. would preclude the appellants from arguing the OSC did not have reasonable and probable grounds to believe the appellants had breached the Act, either when they initiated the freeze order, or when they commenced proceedings.
28In holding that issue estoppel does not apply, I do not suggest the decision of Pattillo J., to the extent it addresses the merits of the allegations, does not have evidentiary value when it comes to deciding whether the appellants have proved the respondents did not have reasonable and probable cause to commence proceedings: Miazga v. Kvello Estate, at para. 97.
VI. Conclusion
29I would allow the appeal, set aside the order striking the appellants’ statement of claim, and remit the matter to the Superior Court.
30I would award the appellants costs of the motion, fixed at $7,000 “all in”, and costs on the appeal, fixed at $6,000 “all in”.
Released: March 18, 2021 Doherty J.A.
I agree S.E. Pepall J.A.
I agree Thorburn J.A.
Footnotes
1The appellants also alleged “negligent investigation”, but have abandoned that claim.
2The appellants maintain that, unlike the other corporate entities, Cenith Air Inc. was involved in the manufacture of air purifiers and had no involvement in any solar energy project. I need not address that claim as, on my analysis, it has no relevance to the outcome of the appeal.
3The correctness of Pattillo J.’s interpretation of s. 126(5.1) is not in issue on this appeal.
