LBP Holdings Ltd. v. Allied Nevada Gold Corp., 2016 ONSC 6037

CITATION: LBP Holdings Ltd. v. Allied Nevada Gold Corp., 2016 ONSC 6037

DIVISIONAL COURT FILE NO.: 248/16

DATE: 20160926

SUPERIOR COURT OF JUSTICE – ONTARIO

DIVISIONAL COURT

RE: LBP HOLDINGS LTD., Plaintiff/Responding Party

AND:

ALLIED NEVADA GOLD CORP., SCOTT CALDWELL, ROBERT M. BUCHAN, DUNDEE SECURITIES LTD. and CORMARK SECURITIES INC., Defendants (Moving Parties)

BEFORE: Thorburn J.

COUNSEL: Matthew Stroh, Andrew Morganti and Peter Neufeld, for the Plaintiff (Responding Party)

John Fabello, Gillian Dingle and Eliot Che, for the Defendants (Moving Parties)

Motion in Writing: September 21, 2016

MOTION FOR LEAVE TO APPEAL

[1] On January 19 and March 8, 2016, Belobaba J. heard motions to reject affidavits filed by LBP Holdings Ltd. (the Plaintiff in the class action proceeding that gives rise to this motion) and by Dundee Securities Ltd. and Cormark Securities Inc. (together “the Underwriters”), and to allow the Plaintiff to amend its Claim to join the Underwriters as defendants to the proceeding.

[2] Belobaba J. dismissed each of the Plaintiff’s and the Underwriters’ motions to strike the affidavits filed by the opposing parties and he admitted the expert reports filed by each party. Although he admitted the affidavit of the Underwriters’ representative, Paula Amy Hewitt, he struck certain portions of it on the basis that she was not qualified to opine on those issues.

[3] He dismissed the Plaintiff’s motion to add the Underwriters as defendants with respect to the Plaintiff’s primary and secondary market statutory claims and its unjust enrichment claim. However, he granted the Plaintiff leave to amend its Claim to join the Underwriters as defendants to the proceeding in respect of two common law claims in negligence and negligent misrepresentation for purposes of the certification motion in this class action.

[4] He did not award costs to either party “[b]ecause overall success on these motions is almost equally divided.” He reasoned as follows:

I rendered a split decision on the [Underwriters’] Hewitt motion. The Plaintiff prevailed on the [Underwriters’] Gellert motion and, based on earlier in-court discussions with counsel, would have been entitled to $8,000 in costs. Success on the plaintiff’s motion to add the Underwriters was divided albeit in favour of the Underwriters: the Plaintiff prevailed on the non-compensable prejudice argument but failed on the contested causes of action arguments. The latter commanded somewhat more time and attention than the former and will thus absorb the plaintiff’s $8,000 credit.

[5] The Underwriters seek leave to appeal the order of Belobaba J. on the grounds that he erred when he:

a. gave no weight to certain fact evidence provided by Ms. Hewitt, Canadian in-house counsel at Dundee Securities Ltd.;

b. admitted and assigned weight to the report of the Plaintiff’s expert, Ronald Gellert;

c. found that the Underwriters would not suffer non-compensable loss and thus be prejudiced by being added as defendants and therefore granted the Plaintiff leave to amend its Claim to join the Underwriters as defendants to the proceeding in respect of two common law claims in negligence and negligent misrepresentation for purposes of the certification motion in this class action; and

d. awarded them no costs.

[6] For the reasons that follow, this motion for leave to appeal from Belobaba J.’s orders is dismissed.

TEST FOR LEAVE TO APPEAL

[7] An appeal of an interlocutory order of a judge of the Superior Court of Justice lies to the Divisional Court with leave. Rule 62.02(4)(b) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, on which the Underwriters rely, provides that leave shall not be granted unless “there appears to the judge hearing the motion good reason to doubt the correctness of the order in question and the proposed appeal involves matters of such importance that, in his or her opinion, leave to appeal should be granted.”

[8] The requirement of importance contemplates matters of public importance that go beyond the interests of the parties. Leave to appeal should be granted only on questions that involve matters relevant to the development of the law and the administration of justice (Aronowicz v. Emtwo Properties Inc., 2008 55454 (ON SCDC), at para. 17).

THE APPLICABLE LAW

[9] Rule 5.04(2) of the Rules of Civil Procedure provides as follows:

At any stage of a proceeding the court may by order add, delete or substitute a party or correct the name of a party incorrectly named, on such terms as are just, unless prejudice would result that could not be compensated for by costs or an adjournment.

[10] Rule 26.02 provides that

A party may amend the party’s pleading,

(a) without leave, before the close of pleadings, if the amendment does not include or necessitate the addition, deletion or substitution of a party to the action;

(b) on filing the consent of all parties and, where a person is to be added or substituted as a party, the person’s consent; or

(c) with leave of the court.

[11] To defeat a motion to amend, the party resisting the amendment must show that the non-compensable prejudice it relies on “would result” from the amendment (Iroquois Falls Power Corp. v. Jacobs Canada Inc., 2009 ONCA 517, 264 O.A.C. 220, leave to appeal refused, [2009] S.C.C.A. No. 367, at para. 20; Marks v. Ottawa (City), 2011 ONCA 248, 280 O.A.C. 251, at para. 19).

[12] A pleading is legally sufficient on a motion for leave to amend under Rule 26.01 of the Rules of Civil Procedure unless it is “plain and obvious” that the proposed claim discloses no reasonable cause of action. The court must accept the pleaded facts as proven unless they are patently ridiculous or incapable of proof. The pleading is to be read generously to accommodate drafting deficiencies and if the claim has a reasonable prospect of success it should be allowed to proceed to trial. (Hunt v. Carey Canada Inc., 1990 90 (SCC), [1990] 2 S.C.R. 959, 74 D.L.R. (4th) 321, at p. 980; R. v. Imperial Tobacco Canada Ltd., 2011 SCC 42, [2011] 3 S.C.R. 45, at para. 17.)

[13] Expert evidence is allowed where the evidence is relevant to an issue at trial, the evidence is necessary, there is no rule to preclude its introduction, and the expert is properly qualified. The court must assess the independence and impartiality of an expert when determining threshold admissibility and the weight to be accorded to an expert report as an expert must be fair, objective, and non-partisan. Once an expert attests to his independence, the burden falls to the opposing party to show that the expert is “unable or unwilling” to comply with his duty to the court. Exclusion at the threshold stage should occur only in very clear cases. (White Burgess Langille Inman v. Abbott and Haliburton Co., 2015 SCC 23, [2015] 2 S.C.R. 182).

[14] Prejudice is a question of fact and a decision as to prejudice is entitled to substantial deference on appeal. (R. v. Nwanebu, 2014 BCCA 387, 362 B.C.A.C. 166, at para. 50).

[15] There is no rule that precludes experts from adopting the work product of others as their own (R. v. Marquard, 1993 37 (SCC), [1993] 4 S.C.R. 223, 108 D.L.R. (4th) 47, at p. 251).

BACKGROUND FACTS

[16] The background facts are clearly and succinctly set out by Belobaba J. at paragraphs 2 to 11 and paragraph 20 of his reasons (reported at LBP Holdings v. Allied Nevada Gold Corp., 2016 ONSC 1629, 130 O.R. (3d) 401) which I have reproduced below:

[2] [The defendant] Allied Nevada is a gold mining company. Its primary asset is the Hycroft Mine in Nevada and its shares trade on the New York and Toronto stock exchanges. On May 17, 2013 Allied Nevada effected a cross-border US$150 million secondary public offering that was financed as a “bought deal” with Dundee Securities and Cormark Securities (“the Underwriters”) acting as principals.

[3] The plaintiff, LBP Holdings, a Nova Scotia company, purchased 20,000 shares. When the share price collapsed following several “corrective disclosures”, the plaintiff commenced a proposed class action for damages. The notice of action was issued on July 16, 2014 and the statement of claim followed a month later.

[4] The plaintiff says that Allied Nevada published core documents and made other statements containing material misrepresentations about its ability to process and leach ore at the Hycroft Mine, the feasibility of its 2013 gold production and cash cost guidance projections, and its ability to finance the expansion of the Hycroft Mine. The plaintiff pleads that these misrepresentations were incorporated by reference in a short form Prospectus for the secondary public offering (“SPO”).

[5] The plaintiff further pleads that the alleged misrepresentations were first corrected on July 22, 2013 when Allied Nevada published its second quarter operating results disclosing previous operating errors that prevented it from achieving its targets. They were corrected again on August 6 and 7, 2013 when Allied Nevada announced in a series of conference calls that, because it could not leach enough ore to generate sufficient cash flows, the expansion of the Hycroft Mine had to be deferred.

[6] When the plaintiff issued the initial notice of action and statement of claim in July and August, 2014 it named Allied Nevada and two of its former executives as the defendants. On March 9, 2015 Allied Nevada filed for protection under U.S. bankruptcy law. Two months later, in May 2015, the plaintiff served the motion herein seeking to add the Underwriters as defendants.

[9] The Underwriters say that the plaintiff’s attempt to add them as defendants only after Allied Nevada filed for bankruptcy protection has prejudiced the Underwriters. Their right to be indemnified by Allied Nevada for legal costs has been compromised irrevocably because of the bankruptcy proceeding. The Underwriters argue that this “missed opportunity” gave rise to the non-compensable prejudice and the plaintiff’s motion must therefore be dismissed.

[10] To support the non-compensable prejudice argument, the Underwriters filed the affidavit of Ms. Hewitt, an experienced in-house legal counsel at Dundee. In response, the plaintiff first filed the expert report of Mr. Stemerman, an American bankruptcy specialist. When the Underwriters objected to this report because of an alleged conflict of interest, []the plaintiff[] relented and filed the expert report of Mr. Gellert, another American bankruptcy specialist. [Footnoted in original: The Underwriters objected to Mr. Stemerman’s report because he appeared as counsel for LBP Holdings Ltd. in Allied Nevada’s Chapter 11 proceeding. The plaintiff disagreed with the Underwriters’ position but retained Mr. Gellert, who reviewed the Hewitt and Stemerman affidavits and filed his own opinion.] The Underwriters, in turn, responded with the report of Ms. Edmonson, yet another American bankruptcy specialist. Mr. Gellert then filed a reply report.

[11] The Hewitt and Edmonson affidavits concluded that the Underwriters were prejudiced by the bankruptcy proceeding. The Gellert opinion and reply found otherwise.

[20] … [W]hen Ms. Edmonson was asked on cross-examination whether the Underwriters’ claim for the indemnification of defense costs was “extinguished” in the bankruptcy proceeding, she responded that they were not extinguished; that under U.S. bankruptcy law these claims are deemed allowed unless an objection has been filed (and none has been to date); and that the Underwriters may be still able to seek payment of their claims under Allied Nevada’s insurance policies.

ANALYSIS OF THE ISSUES RAISED AND CONCLUSIONS

[17] The motions judge held that all of the affidavits filed by the parties to assist in the determination of whether the Underwriters may be added as new defendants were to be admitted.

The Hewitt Affidavit

[18] Ms. Hewitt’s affidavit, filed by the Underwriters, did not purport to be an expert report. It provided useful background information and observations about an underwriter’s interaction with an issuer, based on Ms. Hewitt’s experience as an in-house legal counsel with the Canadian underwriter Dundee Securities. However, Ms. Hewitt was not admitted to practice law in the United States, she had never practiced bankruptcy law, and was unable to speak to the procedural or substantive law distinctions between Chapter 11 proceedings in the United States and CCAA proceedings in Canada.

[19] Although she testified on cross-examination that her affidavit was not intended to provide expert opinion evidence, that was, in part, what it did. For example, she gave her opinion on the importance to underwriters of the indemnity provision in U.S. underwriting agreements, how underwriters react to being sued, and what happens where a securities misrepresentation claim is commenced against an underwriter.

[20] Since Ms. Hewitt is not an expert on American bankruptcy law, the motions judge gave no weight to paragraphs 41, 50, 52, 53, and 55 to 57 of her affidavit, as those paragraphs “purport to describe and opine on U.S. bankruptcy practice and the rights or remedies that flow therefrom.”

The Gellert Affidavit

[21] The Underwriters did not dispute that Mr. Gellert is an expert on U.S. bankruptcy law. They objected to the introduction and reliance on Mr. Gellert’s expert opinion affidavits as they said he “plagiarized” parts of his opinion and 30 of the approximately 45 paragraphs of his affidavit were virtually identical to paragraphs in Mr. Stemerman’s affidavit.

[22] Mr. Gellert was engaged by Mr. Stemerman after the Underwriters objected to the introduction of Mr. Stemerman’s affidavit on the basis that he had made an appearance in the Allied Nevada bankruptcy proceedings on behalf of LBP Holdings and the Underwriters therefore did not consider him to be independent. Without conceding the issue, Mr. Stemerman referred the matter to Mr. Gellert and forwarded to him a Microsoft Word version of his draft report.

[23] Mr. Gellert reviewed the draft, undertook an independent analysis, and modified it to the extent he felt necessary. The motions judge accepted that the portion that was copied was a “boiler plate recitation of relevant bankruptcy code sections and the case law.”

[24] There was no evidence to dispute the following assertions in Mr. Gellert’s affidavit dated December 28, 2015: “I independently reviewed the validity of the contents of the Stemerman draft. … Upon review, I adopted only those portions of the Stemerman draft that I determined were true, correct and accurate for my Expert report … and the opinions are my own.”

[25] The motions judge therefore held that the Gellert opinions filed on behalf of the Plaintiff were admissible and to be given full weight. He rejected the Underwriters’ submission that Mr. Gellert “plagiarized” the Stemerman report. Instead, he found that Mr. Gellert used the Stemerman report as a template and repeated about 30 non-controversial, background, or narrative paragraphs with little to no revision. The remaining 15 paragraphs – which contain the core opinion component – were substantially rewritten by Mr. Gellert to reflect his own independent opinion on the points in question. I agree with the motions judge that it is the importance of the content not the word count that matters.

[26] The motions judge therefore properly determined that the affidavit opinion evidence was admissible and properly admitted Mr. Gellert’s expert opinion and accorded it weight.

Whether the Underwriters Established Non-Compensable Prejudice

[27] The Underwriters claim they would suffer non-compensable prejudice if they are added as parties as this choice to add them as parties was not made until after Allied Nevada’s Chapter 11 bankruptcy protection filing was commenced, thus compromising irrevocably their right to be indemnified by Allied Nevada for legal costs under an existing indemnity agreement. As of October 2015, the Underwriters had incurred US$215,487.77 in legal fees for their Canadian counsel and US$173,271.27 in legal fees for their U.S. counsel. They have not received reimbursement from Allied Nevada under the indemnity agreement.

[28] The Plaintiff’s expert, Mr. Gellert, opined that the Underwriters were not prejudiced by the timing of the Chapter 11 filing. In Mr. Gellert’s opinion, 1) the Underwriters had “ample opportunity” to contribute to the plan of reorganization process and largely chose not to do so; 2) the Underwriters were not entitled to non-consensual releases by shareholders and creditors; 3) any hypothetical payments that may have been made by Allied Nevada to the Underwriters for legal fees would potentially have been subject to a “claw-back”; and 4) any claims asserted by the Underwriters would likely be subordinated to the claims of general unsecured creditors.

[29] The Underwriters’ expert, Ms. Edmonson, was asked on cross-examination whether the Underwriters’ claims for the indemnification of defence costs had been “extinguished” in the bankruptcy proceeding. She responded that they were not extinguished; that under U.S. bankruptcy law these claims are deemed allowed unless an objection has been filed (and none has been to date); and that the Underwriters may be still able to seek payment of their claims under Allied Nevada’s insurance policies. “Thus, I believe that the Underwriters’ claims against the Debtor’s [Allied Nevada’s] estate are valid unless and until they are the subject of an objection, which objection is sustained by the Bankruptcy Court.”

[30] For these reasons, I agree with the following finding of the motions judge: “I am unable to find that the Underwriters have established non-compensable prejudice. Based on the record before me, the plaintiff has cleared the first hurdle to add the Underwriters as defendant –non-compensable prejudice has not been established.” He therefore granted the Plaintiff leave to amend its Claim to join the Underwriters as defendants to the proceeding in respect of two common law claims in negligence and negligent misrepresentation for purposes of the certification motion in this class action.

Costs

[31] Given the divided success on the motions before him, the motions judge made no order as to costs. He explained that the Plaintiff would have been entitled to $8,000 on the motion in respect of Mr. Gellert’s evidence but that there would be no costs awarded because they were largely unsuccessful on the motion to add the Underwriters as defendants.

[32] Contrary to the assertion made by the Underwriters, there is no requirement to recite every principle governing costs awards. The rationale for the costs award was rational, sensible, and clearly articulated.

CONCLUSION

[33] In summary, there is no good reason to doubt the correctness of the motions judge’s decision: it is not “open to very serious debate.” In any event, the proposed appeal does not involve matters of such importance that leave to appeal should be granted.

[34] The motion for leave to appeal is therefore dismissed.

COSTS OF THIS MOTION

[35] The parties filed voluminous materials. The Underwriters filed a costs outline for party and party costs in the event they were successful. They sought costs in the amount of $39,759.33. Much of the material was filed by the Underwriters. They were unsuccessful.

[36] The Plaintiff/Respondent LBP seeks partial indemnity costs in the amount of $11,340.40, inclusive of HST and disbursements. The Plaintiff was successful.

[37] Given the factors set out in Boucher v. Public Accountants Council (Ontario) (2004), 2004 14579 (ON CA), 71 O.R. (3d) 291 (C.A.), especially the governing principles of reasonableness and proportionality, the reasonable expectation of the parties, the volume of material filed, the complexity of the matter and the Respondent’s success on this motion, partial indemnity costs in the amount of $11,340.40 inclusive of HST are awarded to the Plaintiff LBP.

Thorburn J.

Date: September 26, 2016

CITATION: LBP Holdings Ltd. v. Allied Nevada Gold Corp., 2016 ONSC 6037

DIVISIONAL COURT FILE NO.: 248/16

DATE: 20160926

ONTARIO

SUPERIOR COURT OF JUSTICE

DIVISIONAL COURT

BETWEEN:

LBP HOLDINGS LTD.,

Plaintiff/Responding Party

AND:

ALLIED NEVADA GOLD CORP., SCOTT CALDWELL, ROBERT M. BUCHAN, DUNDEE SECURITIES LTD. and CORMARK SECURITIES INC.,

Defendants (Moving Parties)

MOTION FOR LEAVE TO APPEAL

Thorburn J.

Released: September 26, 2016