Court File and Parties
COURT FILE NO.: CV-15-11067-00CL COURT FILE NO.: CV-16-548624 DATE: 20160808
ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN: WOLFGANG VAETH, ANIKA VAETH, ROWITHA VAETH, SASKIA VAETH, THORSTEN FUERHOLZER, ROSWITHA FUERHOLZER, SABINE FUERHOLZER, and BURKHARD SCHNEIDER Plaintiffs – and – NORTH AMERICAN PALLADIUM LTD., PHIL DU TOIT, DAVID LANGILLE, and KPMG LLP Defendants
Counsel: Eli Karp for the Plaintiffs Wolfgang Vaeth, Anika Vaeth, Saskia Vaeth, Thorsten Fuerholzer, Roswitha Fuerholzer, Sabine, Fuerholzer, Burkhard Schneider, and Craig Johnson Alan W. D’Silva and Alexandra Urbanski for the Defendants North American Palladium Ltd., Phil Du Toit, and David Langille Dana M. Peebles for the Defendant KPMG LLP
AND BETWEEN: CRAIG JOHNSON Plaintiff – and – NORTH AMERICAN PALLADIUM LTD., PHIL DU TOIT, DAVID LANGILLE, and KPMG LLP Defendants
Proceeding under the Class Proceedings Act, 1992
HEARD: July 22, 2016
PERELL, J.
REASONS FOR DECISION
A. INTRODUCTION
1Pursuant to the Class Proceedings Act, 1992, S.O. 1992, c. 6, Morganti Legal acts for Craig Johnson in a securities misrepresentation class action, (the “Johnson Class Action”) against North American Palladium Ltd. (“Palladium”), Phil Du Toit, David Langille, (collectively, the “Palladium Defendants”) and KPMG LLP, which was Palladium’s auditor. The class action is about alleged misrepresentations made in Palladium’s corporate public disclosure documents between July 30, 2014 and April 14, 2015 inclusive.
2Morganti Legal also acts for Wolfgang Vaeth, Anika Vaeth, Saskia Vaeth, Thorsten Fuerholzer, Roswitha Fuerholzer, Sabine Fuerholzer and Burkhard Schneider (the “Vaeth Plaintiffs”), in a securities misrepresentation action (the “Vaeth Action”) against the Palladium Defendants and KPMG about the same alleged misrepresentations. The plaintiffs in both actions advance common law negligence claims and statutory misrepresentation claims under Ontario’s Securities Act, R.S.O. 1990, c. S.5.
3The Defendants in both actions bring a motion to stay both actions temporarily.
4For the reasons that follow, I shall make an Order that temporarily stays both actions for the purpose of effecting a change of lawyer in one or the other of the actions. The Order is as follows:
Subject to the right of the plaintiffs in the Vaeth Action (the Vaeth Plaintiffs) to discontinue their action or to deliver a notice of change of lawyer, it shall be temporarily stayed until the earlier of: (a) the certification of the Johnson Class Action and the delivery of opt-out notices by the Vaeth Plaintiffs; or (b) the discontinuance or other termination of the Johnson Class Action.
If the Vaeth Action is discontinued, the Vaeth Plaintiffs may participate in the Johnson Class Action as Class Members or as Representative Plaintiffs.
The Johnson Class Action shall be temporarily stayed until the earlier of: (a) the discontinuance of the Vaeth Action; (b) the delivery of a notice of change of lawyer in the Vaeth Action; or (c) the delivery of a notice of change of lawyer in the Johnson Class Action.
If the Vaeth Action is not discontinued or if no notice of change of lawyer is delivered in the Vaeth Action within ninety days and if no notice of change of lawyer is delivered in the Johnson Action within ninety days, then pursuant to s. 29 of the Class Proceedings Act, 1992, the Johnson Class Action shall be discontinued.
B. FACTUAL AND PROCEDURAL BACKGROUND
5Palladium is a publicly traded mining exploration and production company based in Toronto. Mr. Du Toit is its former President and Chief Executive Officer. Mr. Langille is its former Chief Financial Officer. KPMG is a public accounting firm with offices in Toronto and was Palladium's auditor. Mr. Johnson and the Plaintiffs in the Vaeth Action are all investors that purchased Palladium shares in the secondary market.
6On August 7, 2015, Wolfgang Vaeth, Thorsten Furholzer, and Burkhard Schneider, all represented by Morganti Legal, commenced the Vaeth Action (CV-15-11067-00CL). The Vaeth Action was subsequently amended to add Anika Vaeth, Saskia Vaeth, Roswitha Fuerholzer, and Sabine Fuerholzer. All the Plaintiffs are residents of Germany; they claim damages of approximately $2 million.
7A few days later, on August 12, 2015, Mr. Vaeth also commenced action CV-15-11073-00CL (the Vaeth Class Action), a proposed class action.
8The Statements of Claim in the Vaeth Action and in the Vaeth Class Action plead that that the Defendants are liable for misrepresentations made in Palladium’s corporate public disclosure documents between July 30, 2014 and April 14, 2015 inclusive. Both actions seek damages from the same Defendants for the same alleged misrepresentations in public filings over the same time period. Morganti Legal was the lawyer of record in both actions.
9After the Defendants’ counsel communicated their view that there was a conflict of interest in Morganti Legal acting for Mr. Vaeth in both the Vaeth Action and the Vaeth Class Action, Mr. Vaeth discontinued the Vaeth Class Action. After discontinuing the Vaeth Class Action, Mr. Vaeth and his co-plaintiffs undertook to the Defendants not to commence another class action. The Vaeth Action continued with Morganti Legal as lawyer of record.
10By order dated January 2, 2016, I granted leave for the Vaeth Class Action to be discontinued. Leave is required under s. 29 of the Class Proceedings Act, 1992. Notice of the discontinuance was given to putative Class Members. The notice was given to the persons who had contacted Morganti Legal. There was a press release to the investing public. The press release alerted investors that the running of the limitation period for claims against the Defendants would resume with the discontinuance of the Vaeth Class Action, unless another investor chose to commence another class action.
11On February 19, 2016, the Plaintiffs in the Vaeth Action brought a motion for leave to make a secondary market misrepresentation claim pursuant to s. 138.8 of the Ontario Securities Act. The delivery of the motion is required to arrest the running of the limitation period for the statutory claim.
12The delivery of the notice of motion for leave under Part XXIII.1 of the Ontario Securities Act created a civil procedure problem. As explained at length in The Trustees of the Labourers’ Pension Fund of Central and Eastern Canada v. Sino-Forest Corporation, 2012 ONSC 1924, an action asserting both a common law negligence cause of action and also a statutory cause of action for which leave is required presents a special or unique civil procedure problem.
13In a normal action, after a statement of claim is delivered, the defendant is required to deliver its statement of claim, but in an action that combines a common law cause of action with a statutory cause of action under Ontario’s Securities Act, a “hybrid” action, the defendant can refuse to deliver a statement of defence to the statutory cause of action because that action, technically speaking, does not exist until leave to commence it is granted.
14The situation of a hybrid action is further complicated because in the motion for leave to commence the statutory cause of action, the defendant may - but under s. 138.2 of the Ontario Securities Act, is not obliged to - deliver an affidavit to resist the leave motion: Ainslie v. CV Technologies Inc. (2008), 93 O.R. (3d) 200 (S.C.J.) at paras. 14-20, 24-25; Sharma v. Timminco Ltd., 2010 ONSC 790 at para. 32. There are further complications if the hybrid action is also a proposed class action.
15In The Trustees of the Labourers’ Pension Fund of Central and Eastern Canada v. Sino-Forest Corporation, supra, I analyze the choices of the defendant in a hybrid action. From that analysis, it follows that the defendant in a hybrid action has three choices: (1) deliver both an affidavit to resist the leave motion under s. 138.8 of the Ontario Securities Act and also a statement of defence; (2) voluntarily deliver a statement of defence without delivering an affidavit under s. 138.8; or (3) do not deliver any affidavit or pleading and await the outcome of the leave motion.
16In the immediate case, the current decision of the Defendants is not to deliver any affidavits or pleadings until it is determined whether leave to commence the statutory claim will be granted. The Defendants, however, complain that they find themselves between a procedural rock and a hard place because they would like the Vaeth Plaintiffs, who are foreign plaintiffs, to post security for costs, but under the Rules of Civil Procedure, the Defendants are unable to make this request until after delivering a statement of defence, which they are not prepared to do.
17Returning to the narrative, on March 14, 2016, Mr. Johnson issued his proposed class action against the Palladium Defendants and KPMG. Morganti Legal was, once again, the lawyer of record. Mr. Johnson and the Class Members sought damages from the same Defendants for the same alleged misrepresentations in public filings over the same time period as in the Vaeth Action and the discontinued Vaeth Class Action.
18Upon being served with the Johnson Class Action, the Defendants asked Morganti Legal how it proposed to pursue both the Vaeth Action and the Johnson Class Action. The Defendants, once again, communicated their view that there was a conflict of interest in Morganti Legal appearing as lawyer of record in both actions.
19In response, Morganti Legal indicated that it intended to simultaneously press forward with discovery of the common law misrepresentation claims in the Vaeth Action and to bring a motion for leave to commence an action for secondary market liability pursuant to s. 138.8 of the Ontario Securities Act in the Johnson Class Action. Subsequently, Morganti Legal said that it would be prepared to stay the Johnson Class Action while the Vaeth Plaintiffs pursued just their common law claim. Morganti Legal disputed that there was any conflict of interest or problem in its plan to be lawyer of record in both the Vaeth Action and the Johnson Class Action.
20Without conceding that there was any conflict of interest in the firm acting as lawyer of record in both actions, Morganti Legal submitted that this issue could and should be dealt with at the certification motion. More precisely, it submitted that its qualifications to be Class Counsel would be determined under s. 5(1)(e) of the Class Proceedings Act, 1992, which addresses the qualification of the proposed representative plaintiff.
21Further, the law firm submitted that its clients; i.e., Mr. Johnson and the Vaeth Plaintiffs, had consented to the firm acting in both actions. The law firm submitted that under the Law Society’s Rules of Professional Conduct there is no requirement that their clients receive independent legal advice in consenting to a joint retainer.
22I pause here to make three observations.
23First, Morganti Legal’s original plan (discovery of the common law claim in the Vaeth Action followed by the leave motion in the Johnson Class Action) has the procedural difficultly that under Rule 30.1 (Deemed Undertaking), all parties and their lawyers are deemed to undertake not to use evidence or information from documentary discovery (Rule 30) and from examinations for discovery (Rule 31) for any purposes other than those proceedings in which the evidence or information was obtained. The Defendants submitted that Morganti Legal’s plan of proceeding with just the common law negligence claim in the Vaeth Action was unfair and improper because it was unavoidable that the deemed undertaking in the Vaeth Action would be violated and Morganti Legal would eventually use evidence or information from the Vaeth Action in the Johnson Class Action. To use the evidence and information from the Vaeth Action in the Johnson Class Action, Morganti Legal and Mr. Johnson would require an order pursuant to rule 30.1.01(8) that the deemed undertaking did not apply. Morganti Legal, however, disputed that the deemed undertaking applied, or it submitted that it would undoubtedly be able to obtain an order under rule 30.1.01(8) to be relieved of the deemed undertaking and thus use the discovery evidence in the Vaeth Action in the Johnson Class Action.
24The second observation is that Morganti Legal’s alternative plan (discovery in the Vaeth Action and a temporary stay of the Johnson Class Action) reveals that the Vaeth Plaintiffs apparently believe that their common law negligence claim will succeed and, therefore, they do not need what the statutory claim under the Ontario Securities Act has to offer; namely, a misrepresentation claim without the necessity of establishing that the plaintiff reasonably relied on the misrepresentation.
25In other words, a common law negligent misrepresentation claim has five elements that the Veath Plaintiffs must prove; namely: (1) a duty of care based on a special relationship between the plaintiff and the defendant; (2) an untrue, inaccurate, or misleading representation; (3) the defendant making the representation negligently; (4) the plaintiff having reasonably relied on the misrepresentation; and, (5) the plaintiff suffering damages as a consequence of relying on the misrepresentation: Queen v. Cognos, [1993] 1 S.C.R. 87. In contrast, the statutory claim has fewer constituent elements and the statute deems that investors relied on the public documents that contained the misrepresentations, and the Vaeth Plaintiffs apparently believe that they can succeed without resorting to the statutory cause of action, which also comes with the baggage of some limits on the amount of damages and statutory defences.
26The third observation, which foreshadows the discussion below, is that the alternative plan demonstrates, in a small way, how Morganti Legal may have a conflict in representing both the Vaeth Plaintiffs and Mr. Johnson because the Johnson Class Action would be delayed to accommodate the Vaeth Plaintiffs who apparently believe that they do not need the fallback of the statutory claim under the Ontario Securities Act.
27Returning to the factual background, the Defendants disagreed with the positions and submissions of Morganti Legal and moved to have both actions temporarily stayed until the conflict problems were resolved. The Defendants did not propose that both actions be stayed permanently and conceded that Morganti Legal could be lawyer of record in one or the other of the Vaeth Action or the Johnson Class Action. The Defendants also agreed that if the Vaeth Plaintiffs wished to discontinue the Vaeth Action and again become the representative plaintiff or a Class Member in the Johnson Class Action, then the Defendants would release them from the undertaking not to resume a class action. I regard this concession as without prejudice to the Defendants’ right to challenge the Vaeth Plaintiffs as satisfying the representative plaintiff criterion for certification. There is, however, no getting around the fact that the Vaeth Plaintiffs are putative Class Members in the Johnson Class Action.
28By objecting to the multiplicity of proceedings, the Defendants also submitted that there were reasons to temporarily stay the Vaeth Action that are independent of the conflict of interest problems.
C. DISCUSSION AND ANALYSIS
Introduction
29It’s complicated.
30But, in my opinion, Morganti Legal cannot be permitted to act as lawyer of record in both the Johnson Class Action and the Vaeth Action. The law firm may be retained by one or the other of Mr. Johnson or the Vaeth Plaintiffs, but the law firm cannot be retained to simultaneous act for both.
31In my opinion, the mutual consent of Mr. Johnson and of the Vaeth Plaintiffs will not resolve the law firm’s irreconcilable conflicts of interest and the procedural problems arising from the joint retainer.
32Further, it is my opinion, that there are reasons to temporarily stay the Vaeth Action independent of the problems of Morganti Legal’s joint retainer. As will become apparent, these independent reasons for a temporary stay of the Vaeth Action are complications in the problems of the law firm’s joint retainer.
33The problems of the joint retainer, however, can be resolved by the Order described above and explained below. As will be explained below, the purport of the Order is to permit a class action to go forward. In that class action, Morganti Legal can be Class Counsel only if the Vaeth Plaintiffs discontinue the Vaeth Action and participate in the Johnson Class Action; however, if the Vaeth Plaintiffs persist in opting out of the Johnson Class Action, then Morganti Legal can act for them, but Mr. Johnson must retain another law firm to be Class Counsel.
34In order to explain my decision, I shall first explain why I am temporarily staying the Vaeth Action until the earlier of: (a) the discontinuance or other termination of the Johnson Class Action; or (b) the certification of the Johnson Class Action and the delivery of opt-out notices by the Plaintiffs of the Vaeth Action. This explanation will describe the court’s jurisdiction to temporarily stay individual actions when there is a companion class action.
35Second, I shall explain why Morganti Legal as putative Class Counsel has irreconcilable conflicts of interest and cannot have a joint retainer with a representative plaintiff (Mr. Johnson) and Opt-out Class Members (the Vaeth Plaintiffs).
36Third, I shall explain the operation of the Order described above.
1. The Court’s Jurisdiction to Temporarily Stay Actions Pending the Certification of a Class Action
37Civil procedure encourages the avoidance of a multiplicity of proceedings. Multiple proceedings that litigate the same issue are obviously inefficient, a waste of scarce judicial resources, and the cause of expense and delay in the administration of justice. And multiple proceedings that litigate the same issues entail the possibility of inconsistent results that may be embarrassing to the administration of justice and instill sentiments of unfairness because similarly situated parties experience and perceive different outcomes. Multiple proceedings against the same defendant over the same issue may compromise the ability of the defendant to defend itself because it must defend itself over and over again, and while this circumstance may explain why the outcomes of virtually identical cases can be contradictory, it is not fair to the defendants.
38Section 138 of the Courts of Justice Act, R.S.O. 1990, c. C.43, provides that “[a]s far as possible, multiplicity of legal proceedings shall be avoided.” This provision is fostered by s. 106 of the Courts of Justice Act, which provides that “[a] court, on its own initiative or on motion by any person, whether or not a party, may stay any proceeding in the court on such terms as are considered just.” It is also fostered by s. 107 of the Act, which allows for a party in one action to seek the transfer of a related action to the same venue for consolidation or trial together with another action.
39Section 138 of the Courts of Justice Act is recognized and facilitated by various Rules of Civil Procedure, including: the joinder of claims and parties (Rule 5); consolidation and hearing together (Rule 6); separate hearings (Rule 6.1); class proceedings (Rule 12); service outside Ontario (Rule 17); and the determination of an issue before trial (Rule 21), which rule, among other things, empowers the court to stay or dismiss an action on the ground that “the court has no jurisdiction over the subject matter” or that “another proceeding is pending in Ontario or another jurisdiction between the same parties in respect of the same subject matter.” The avoidance of a multiplicity of proceedings as far as possible is also facilitated by case managing together the multiple cases or by an order that all motions be heard by one judge pursuant to rule 37.15.
40In the last regard, in Dumoulin v. Ontario, Justice Cullity jointly case managed a proposed class action by Mr. Dumoulin on behalf of a class of persons harmed by exposure to toxic mould at the Newmarket Court House along with an individual action by Ms. Verkerk who was a class member in the Dumoulin action. Justice Cullity said that to avoid unnecessary duplication of procedures, to avoid inconsistencies in the application of legal principles, and to achieve the most economical use of judicial and other litigation resources, it was desirable to manage both cases together.
41The avoidance of a multiplicity of proceedings is also a goal of the Class Proceedings Act, 1992. The primary goal of class proceedings legislation is access to justice, but judicial economy, behaviour modification, and procedural fairness to all the parties are closely associated ancillary goals. Through the mechanism of a common issues trial, a class proceeding empowers the court to dispose of or substantially advance a multiplicity of individual claims through a single proceeding with consistent results. Class proceedings allow both plaintiffs and defendants to maximize the efficiency of their claims and defences respectively.
42Optimally, a class proceeding would resolve in one proceeding all the claims and defences. This optimization frequently occurs; however, as in the case at bar, class members are not obliged to participate and are entitled to opt-out. Ultimately, the Vaeth Plaintiffs are entitled to pursue their joinder of claims outside of the Johnson Class Action.
43From the vantage point of all of access to justice, judicial economy, behaviour modification, and fairness to Defendants, the circumstances of the Johnson Class Action, the former Vaeth Class Action, and the current Vaeth Action would be best served by a single class action. This is particularly true in the context of securities misrepresentations class actions, which were designed precisely to fit with class actions. It would have been preferable for judicial economy, etc., if in the fall of 2015, the Vaeth Action had been discontinued and the Vaeth Class Action had been continued and not abandoned. It then would not have been necessary for Mr. Johnson to commence a class action. However, with the leave of the court, the Vaeth Plaintiffs were entitled to abandon their class action and to pursue an individual action with a joinder of individual claims.
44By providing Class Members with a right to opt-out, the Class Proceedings Act, 1992 preserves an individual plaintiff’s right to bring his or her own action. Where an individual plaintiff does not opt-out of class proceedings, a court will stay his or her individual proceedings: Dumoulin v. Ontario, supra at paras. 8-10; Cheung v. Kings Land Development Inc. (2001), 55 O.R. (3d) 747 (S.C.J.) at para. 12, leave to appeal ref’d , 156 O.A.C. 73 (S.C.J.). A class member loses his or her litigation autonomy, if he or she does not opt-out of the class action.
45However, class proceedings legislation is not intended to impede actions by individual plaintiffs who opt-out of the class proceedings: Northfield Capital Corp. v. Aurelian Resources Inc. (2007), 84 O.R. (3d) 748 (S.C.J.). The authorities reveal that putative class members may decide to maintain their litigation autonomy, opt-out, and sue the defendant in individual actions or in actions involving the joinder of two or more plaintiffs: Northfield Capital Corp. v. Aurelian Resources Inc. supra; Durling v. Sunrise Propane Energy Group Inc., 2011 ONSC 266 at paras. 19-20; Abdulrahim v. Nav Canada, 2010 ONSC 5542 at para. 66.
46The Vaeth Plaintiffs’ litigation autonomy, however, is not unfettered, and while they ultimately are entitled to pursue their joinder of claims outside the Johnson Class Action, the court has the jurisdiction to at least temporarily avoid a multiplicity of proceedings. The Class Proceedings Act, 1992, confers upon the court a broad discretion to manage the proceedings. Section 13 of the Act authorizes the court to "stay any proceeding related to the class proceeding," and s. 12 authorizes the court to "make any order it considers appropriate respecting the conduct of a class proceeding to ensure its fair and expeditious determination." Sections 12 and 13 state:
Court may determine conduct of proceeding
- The court, on the motion of a party or class member, may make any order it considers appropriate respecting the conduct of a class proceeding to ensure its fair and expeditious determination and, for the purpose, may impose such terms on the parties as it considers appropriate.
Court may stay any other proceeding
- The court, on its own initiative or on the motion of a party or class member, may stay any proceeding related to the class proceeding before it, on such terms as it considers appropriate.
47Sections 12 and 13 of the Class Proceedings Act, 1992, may and are used to avoid a multiplicity of proceedings. As I discussed recently in Kowalyshyn v. Valeant Pharmaceuticals International, Inc., 2016 ONSC 3819, which was a carriage fight in Ontario about rival class actions in Ontario and across the country, the avoidance of a multiplicity of proceedings is a complex and troublesome problem that can arise in a variety of ways. The immediate case does not involve a carriage fight, but it involves a multiplicity of proceedings because there is both: (1) the Vaeth Action, which in the lingo of the trade, is an individual action or joinder of claims action; and (2) the Johnson Class Action, which is a form of representative action. Since both actions involve investors in Palladium, the same Defendants, the same factual circumstances, and the same legal issues, there is a multiplicity of proceedings. The motion now before the court raises the general issue of whether some avoidance of a multiplicity of proceedings can be achieved.
48In Durling v. Sunrise Propane Energy Group Inc., supra, the individual plaintiffs, who planned to opt-out, withdrew their objection to the putative representative plaintiff’s request that their individual actions be temporarily stayed pending the certification motion. Justice Horkins granted the request for a stay, and she stated at paras. 17-20:
Class proceedings often exist alongside individual actions. One does not automatically preclude the other from proceeding.
Section 13 of the Class Proceedings Act, 1992, S.O. 1992, c. 6 permits the court, on its own initiative or on a motion by a party or class member, to stay a proceeding related to a class proceeding before it. Typically, the individual actions are stayed pending the outcome of a certification hearing, but this is not mandated by the Class Proceedings Act, 1992.
If the class proceeding is certified, the individual plaintiff must decide whether to opt out or participate as a member of the certified class. There is an absolute right to opt out of a class under s. 9 of the Class Proceedings Act, 1992. Existing case law suggests that individual plaintiffs who opt out of a certified class can move forward with their individual actions. However, the individual action commenced by a plaintiff who does not opt out, will be stayed: see Cheung et al. v. King's Land Development Inc. et al. (2001), 55 O.R. (3d) 747 (S.C.J.), at para. 12.
The Class Proceedings Act, 1992 permits "freedom of choice by allowing those who do not wish to be bound by the outcome of the proceeding to opt out. Thus, the Class Proceedings Act clearly contemplates that there may be a multiplicity of proceedings arising from the same event or transaction": See Abdulrahim v. Nav Canada, 2010 ONSC 5542, [2010] O.J. No. 4660 at para. 66.
49In Hollinger International Inc. v. Hollinger Inc., leave to appeal to Div. Ct. refused, , Justice Farley, at para. 5, sets out the issues that courts have considered in deciding to exercise their discretion in issuing a temporary stay of a proceeding. These issues are: (a) whether there is substantial overlap of issues in the two proceedings; (b) whether the two cases share the same factual background; (c) whether issuing a temporary stay will prevent unnecessary and costly duplication of judicial and legal resources; and (d) whether the temporary stay will result in an injustice to the party resisting the stay.
50In the immediate case, as noted above, the Vaeth Plaintiffs are putative Class Members of the Johnson Class Action, but they have indicated that if the Johnson Class Action were certified as a class proceeding, they would opt-out of the Johnson Class Action and they would pursue their claims in the Vaeth Action. They, therefore, submit that the Vaeth Action should not be temporarily stayed as requested by the Defendants to await the outcome of the certification motion and the leave application under Part XXII1.1 of the Ontario Securities Act.
51I disagree, and in my opinion there are good reasons independent of the conflict of interest matters, discussed below, associated with their choice of lawyer that justify a temporary stay of the Vaeth Action. In other words, assuming that the Vaeth Plaintiffs had retained a different law firm to pursue their individual joined claims, it would still be appropriate for the court to stay the Vaeth Action pending the outcome of the certification and leave motion in the Johnson Class Action. In my opinion, the fairest, most efficient, and sensible way to co-ordinate and administer the multiplicity of proceedings is to stay the Vaeth Action until the status of the Johnson Class Action crystallizes.
52In other words, there are good reasons for imposing a temporary stay of the Vaeth Action regardless of who the lawyer of record is.
53One reason for temporarily staying the Vaeth Action is that while the Vaeth Plaintiffs are entitled to opt-out of the class proceedings, they would not be prejudiced and rather would benefit by delaying making any decision until after the leave motion and the certification motion are adjudicated.
54In Rooney v. Arcelormittal S.A., 2013 ONSC 6062, there was a class action in which the plaintiff alleged misrepresentations in the disclosure documents of a takeover bid for Baffinland Iron Mines motion. A group of shareholders who were putative class members in the class action were also applicants in a share valuation application against one of the defendants in the class action. Thus the takeover of Baffinland was at the heart of both the class action and also the valuation proceeding. More specifically, the fair value of the shares in Baffinland was at issue in both proceedings. The plaintiff in the class action supported by the applicants in the valuation application sought a temporary stay of the valuation until after the certification motion.
55Notwithstanding the resistance of the defendant common to both the class action and the valuation proceeding, Justice Leitch granted a temporary stay of the valuation proceeding. After noting that the two proceedings shared the same factual background and that there was a substantial overlap of issues, she saw no prejudice to the defendant if the temporary stay was granted. Further, issuing a temporary stay would prevent unnecessary and costly duplication of judicial and legal resources.
56I can understand why in some class actions, a putative class member with sufficient resources to take on the defendants directly would be prepared to forgo the advantages of being a class member and not wait to learn the outcome of a certification motion, but this is not such a case. There are no apparent circumstances of urgency compelling the Vaeth Plaintiffs to prosecute their claims ahead of the Class Members’ claims. The case at bar is not a personal injury claim where an individual plaintiff with a substantial claim may actually need the compensation sooner than the later of a class action that requires certification before it can progress.
57A second reason, to speak colloquially, to temporarily stay the Vaeth Action is that the Defendants cannot be in two places at once. Practically speaking, the individual action and the class action require co-ordination and administration. The need to co-ordinate the multiplicity of proceedings is acute because the Vaeth Plaintiffs and Mr. Johnson both plead causes of action under the Ontario Securities Act. The Vaeth Plaintiffs do not need to bring a certification motion, but they do need to bring a motion for leave to pursue their claims under the Ontario Securities Act.
58The Vaeth Plaintiffs, because they may be satisfied with their common law negligent misrepresentation action, plan to proceed to discoveries on just the common law claim and suggest that the Johnson Class Action can wait. However, the Vaeth Plaintiffs have no automatic right for a bifurcated examination for discovery separating the common law misrepresentation claims from the statutory misrepresentation claims for which leave is required under the Ontario Securities Act. At the current time, the Defendants in the Vaeth Action are being asked to deliver their statement of defence, but as I explained above, while they can do so voluntarily, they cannot be obligated to plead until after it is determined whether the court will grant leave to either the Vaeth Plaintiffs or Mr. Johnson to commence the statutory cause of action.
59A third reason to temporarily stay the Vaeth Action, but one that is not independent of the fact that Morganti Legal is at the moment lawyer of record on the Vaeth Action and the Johnson Class Action is that practically speaking or de facto the Vaeth Action and the Johnson Class Action have been consolidated.
60However, in Obonsawin (c.o.b. Native Leasing Services) v. Canada, Justice Epstein held that an individual action could not be joined, i.e. consolidated, with a class action about the same subject matter. She noted at para. 23:
- Moreover, joinder of a class action with an individual claim is not compatible with the advancement of the objectives of class proceedings. Certainly joinder of an individual action with a class action is not consistent with the objectives of behaviour modification or access to justice. Depending on the facts of the particular case, joinder may also interfere with the type of judicial economy contemplated by class proceedings. In fact, joinder may unnecessarily complicate the class proceeding. There are therefore policy reasons why such joinder should not be permitted.
61In Northfield Capital Corp. v. Aurelian Resources Inc., supra, Justice Ground held that consolidating an individual claim with a class action proceeding would be contrary to the purpose and goals of the Class Proceedings Act, 1992.
62In Abdulrahim v. Nav Canada, supra, which involved a largely settled class action, Justice Strathy, as he then was, refused the remaining defendant’s request to have the class action tried together with the individual actions brought by plaintiffs who had opted out of the class action. The opt-out plaintiffs supported this request. Class Counsel objected and submitted that this would be a perversion of the opt-out process because it would permit the opt-outs to dictate the pace of the litigation - to have their cake and eat it - by opting out but continuing to call the tune of the prosecution. Justice Strathy agreed with this submission and stated at para. 66:
- These authorities acknowledge that class actions, by their very nature, avoid a multiplicity of proceedings and that the rules concerning consolidation of ordinary actions should be applied with some caution to class actions. I therefore agree with the submission of class counsel that a class action cannot be treated as being the same as any other action for the purposes of a motion such as this. A class action is the very embodiment of the principle that a multiplicity of proceedings should be avoided. In permitting a claim to be advanced on behalf of numerous similarly-situated individuals, the class action promotes access to justice and judicial economy. At the same time, the Ontario class action regime permits freedom of choice by allowing those who do not wish to be bound by the outcome of the proceeding to opt out. Thus, the C.P.A. [Class Proceedings Act] clearly contemplates that there may be a multiplicity of proceedings arising from the same event or transaction. The statute expressly contemplates that, in spite of its size and scope, the class action will be managed so as to promote its "fair and expeditious" determination. It would be a strange perversion of the intent of the statute if those who opt out are permitted to fetter the progress of the class action. It would be even stranger if those opt-outs could sit on the sidelines and do nothing while the class action marches to the finish line and then call "time out" so they can catch up.
63Where this analysis takes me is to the conclusion that regardless of whom may be their lawyer of record, the Vaeth Plaintiffs should stand their action down until it is determined whether the Johnson Class Action is certified with or without a statutory claim for which leave of the court is required.
64If the court grants leave under the Ontario Securities Act in the class action for the secondary market misrepresentation claim, it is highly unlikely that the Defendants would not oppose leave being granted in the Vaeth Action, and, in any event, the Vaeth Plaintiffs will be able to make a reasoned decision about whether to opt-out of the Johnson Class Action assuming it was certified.
2. The Joint Retainer Conflicts of Class Counsel
65The above analysis has led to the conclusion that regardless of who may be lawyer of record, the Vaeth Action should be temporarily stayed to await the outcome of the leave motion and certification motion in the Johnson Class Action. The above analysis, however, does not address the problem that Morganti Legal is the lawyer of record for the Vaeth Plaintiffs and Mr. Johnson and will remain so during the temporary stay of the Vaeth Action and it will be lawyer of record after the stay is lifted, when the Vaeth Plaintiffs may opt-out of the Johnson Class Action.
66Although it denies it, Morganti Legal has a conflict of interest with this joint retainer and may only act for one or the other of these clients. The clients have conflicting interests and the law firm has conflicts of interest in purporting to provide independent legal advice and professional services to both Mr. Johnson and the Vaeth Plaintiffs.
67There are inherent conflicts between the joint retainer clients given that the Vaeth Plaintiffs are putative Class Members in the Johnson Class Action that plan to opt-out of the Johnson Class Action. Presumably, the reason that the Vaeth Plaintiffs would opt-out is the belief that they will do better outside the class action than as participants sheltered from adverse costs consequences and from examinations for discovery in the common issues trial without leave of the court.
68Once the Vaeth Plaintiffs do opt-out of the Johnson Class Action, there is a direct conflict of interest between the Vaeth Plaintiffs and the Class Members in the Johnson Class Action about the sequence of any settlement if there are genuine or imposed solvency limits on the settlement proceeds. Visualize, if Mr. Johnson negotiated a settlement with the Palladium Defendants at their insurance limits and assuming the Palladium Defendants had no other assets, then there might be nothing left for the Vaeth Plaintiffs.
69Visualize; if the Palladium Defendants or KPMG were only prepared to offer a fixed amount of settlement funds, and if the Vaeth Plaintiffs settled first, while their settlement would not require court approval, the settlement could deplete the resources available for Class Members in the Johnson Class Action who might be disappointed by their lawyers allowing this to happen.
70If there was enough money for all, unless the formula for distributing the settlement funds was the same for the Vaeth Plaintiffs and the Class Members in the Johnson Class Action, then one or the other may be disappointed in the results achieved by Morganti Legal.
71Visualize; if the Palladium Defendants or KPMG were only prepared to offer a fixed amount of settlement funds, then regardless of which client settled first, the other client might be disappointed by what it might regard as an unfair or disproportionate distribution of those settlement funds.
72The circumstance of different recoveries for similarly situated persons may have particularly bad optics if the Vaeth Plaintiffs’ settlement is a substantially better one than the settlement negotiated for the Class Members in the Johnson Class Action and this circumstance would make obtaining court approval of the settlement more difficult. Thus, the circumstance of Morganti Legal acting for both the Vaeth Plaintiffs and for Class Members in the Johnson Class Action compromises its ability to recommend a settlement for the class that might in their best interests but appear to be a capitulation when contrasted to what the Vaeth Plaintiffs recovered.
73In this regard, in this area of the optics of class action settlements, it needs to be noted that the Vaeth Plaintiffs, given their significant individual losses, are more incented to demand a less compromising settlement than Mr. Johnson who given the entrepreneurial model of Ontario’s class action regime is, practically speaking, in partnership with Morganti Legal. The law firm accepts the risks of the litigation in return for a contingency fee and it may be assumed that the law firm has agreed to protect Mr. Johnson from his exposure to costs. Morganti Legal, given its assumption of risk compared to the risk assumed by the Vaeth Plaintiffs in their individual actions, may be more inclined to negotiate a less remunerative settlement for Class Members in the Johnson Class Action but one that in the aggregate is a handsome return for the law firm.
74Apart from the optics and apart from the difficulties associated with the prospect of different settlements, there is the problem of the deemed undertaking noted above. It is certainly possible that the court might relieve the Vaeth Plaintiffs and Morganti Legal from the deemed undertaking, but there is something unseemly in the Vaeth Plaintiffs opting out of the class action and then using the leverage of that class action against the Defendants possibly to secure a better settlement than the one achieved by the class.
75There is also the problem for Morganti Legal of the possibility of conflicting instructions about the prosecution of the claims against the Defendants. As already noted above, there is already one example in the proposal to pursue the Vaeth Plaintiffs’ common law negligence claim and park the Johnson Class Action. I do not see this as beneficial to the Class Members.
76In Logan v. Canada (Minister of Health), Ms. Bulloch-MacIntosh had an individual personal injury action against Canada and others with respect to allegedly defective jaw implants. Without discontinuing her individual action, Ms. Bulloch-MacIntosh wished to be added as a representative plaintiff in a proposed class action brought by Ms. Logan against Canada so that the discovery evidence in her individual action could be used in Ms. Logan’s action. Ms. Logan proposed that her individual action be stayed while she turned her attention to be added to the class action. Justice Winkler, as he then was, adjourned the motion because he reasoned that it was inappropriate for Ms. Bulloch-MacIntosh – and her lawyer of record - to have both a class action and an individual action outstanding and, therefore, the matter of the status of Ms. Bulloch-MacIntosh’s individual action had to be addressed first. Justice Winkler stated at paras. 6-7, with emphasis added:
To permit a litigant to maintain their individual action, albeit subject to a stay, while at the same time acting as a representative plaintiff in a class proceeding in respect of the same issues appears, prima facie, to be inimical to the objects of the CPA [Class Proceedings Act], and in particular to the stated goal of judicial economy or litigation efficiency. The conduct of proceedings in this way creates duplicative litigation in respect of those issues which remain alive if the individual action is merely stayed while the plaintiff in that action participates in the class proceeding. Additionally, the stay against one defendant in the individual action creates the risk of an inherent prejudice through delay to the other defendants, who are not parties to the class proceeding and who have cross-claims to assert against the defendant subject to a stay. The class proceeding has the potential to continue for a significant time, especially if appeals are pursued. As well, there is the potential for a conflict of interest for Bulloch-MacIntosh and her counsel, who are also class counsel, if both actions are permitted to continue. Each will have obligations in the context of their respective roles as representative plaintiff and class counsel in the class proceeding. Those obligations cannot be performed where an individual action is being maintained by the representative plaintiff at the same time as the class proceeding is being prosecuted.
Moreover, in light of the inherent prejudice of delay, the prospect of duplicative litigation, the complexity occasioned by the presence of cross-claims and the appearance of a conflict of interest on the part of the representative plaintiff and class counsel, it is arguable that granting a stay as opposed to a discontinuance or dismissal, would defeat the elements of fairness, efficiency and manageability that must exist in a class proceeding. See: Hollick v. Toronto (City), 2001 SCC 68, [2001] S.C.J. No. 67.
77In short, Morganti Legal’s plans to act for individual plaintiffs and Class Members is a multiplicity of problems added on top of a multiplicity of proceedings. None of the problems are answered by the consent of the Vaeth Plaintiffs and Mr. Johnson to the joint retainer.
78In short, Morganti Legal can act for the Vaeth Plaintiffs, but then Mr. Johnson must retain a new lawyer of record. Or, Morganti Legal can act for Mr. Johnson, but then the Vaeth Plaintiffs must retain a new lawyer or discontinue their own action and participate in the class action, where they will be treated no better or no worse than Mr. Johnson and the other Class Members.
79I, therefore, conclude that the Johnson Class Action should be temporarily stayed in the manner described in the introduction to these Reasons for Decision, which I will explain in the next part of these Reasons.
3. The Temporary Stay Orders
80As explained above, independent of the conflict of interest problems of Morganti Legal, there are reasons to temporarily stay the Vaeth Action. I, therefore, stay it until the earlier of: (a) the certification of the Johnson Class Action and the delivery of opt-out notices by the Vaeth Plaintiffs; or (b) the discontinuance or other termination of the Johnson Class Action.
81The temporary stay of the Vaeth Action would also be lifted if the Vaeth Plaintiffs voluntarily discontinued their own action, which would allow them to participate in the Johnson Class Action. As noted above, the Defendants release the Vaeth Plaintiffs from the undertaking not to commence another class action.
82As explained above, because of the conflict of interest problems of Morganti Legal being lawyer of record in both the Vaeth Action and in the Johnson Class Action, it is also necessary to temporarily stay the Johnson Class Action.
83Therefore, the Johnson Class Action shall be temporarily stayed until the earlier of: (a) the discontinuance of the Vaeth Action; (b) the delivery of a notice of change of lawyer in the Vaeth Action; or (c) the delivery of a notice of change of lawyer in the Johnson Class Action.
84The purpose of this temporary stay is to move toward the situation where Morganti Legal is lawyer of record in just one action, which depends upon whether the Vaeth Plaintiffs discontinue their action or retain a new lawyer of record in the Vaeth Action in which case Morganti Legal could continue to act for Mr. Johnson in his proposed class action. However, if the Vaeth Plaintiffs propose to continue with their action with Morganti Legal as lawyer of record, then Mr. Johnson must obtain a new lawyer of record.
85If the Vaeth Action is not discontinued or if no notice of change of lawyer is delivered in the Vaeth Action within ninety days and if no notice of change of lawyer is delivered in the Johnson Class Action within ninety days, then pursuant to s. 29 of the Class Proceedings Act, 1992, the Johnson Class Action shall be discontinued.
86I have added the above temporal provision to my Order to resolve the current predicament in a timely way and to deal with the contingency of the Vaeth Plaintiffs continuing with Morganti Legal as lawyer of record but Mr. Johnson being unable to obtain new Class Counsel willing to take on the risks of a class action against the Palladium Defendants and KPMG.
87Under the Class Proceedings Act, 1992, a representative plaintiff cannot be a self-represented party. If Mr. Johnson cannot retain class counsel, he would have no choice but to discontinue his proposed class action, and pursuant to s. 29 of the Class Proceedings Act, 1992, I direct that the Johnson Class Action shall be discontinued if he is unable to find a new lawyer of record.
D. CONCLUSION
88For the above reasons, I make the order described at the outset of these Reasons for Decision.
89If the parties cannot agree about the matter of costs, they may make submissions in writing beginning with the Defendants’ submissions within 20 days of the release of these Reasons for Decision followed by Mr. Johnson’s and the Vaeth Plaintiffs’ submissions within a further 20 days.
Perell, J.
Released: August 8, 2016
