Court File and Parties

COURT FILE NO.: CV-11-422085 DATE: 20190523 ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

Marc Charette and Andrew Cumming Plaintiffs – and – Trinity Capital Corporation, Trinity Wood Capital Corporation, Capital Structures Ltd., Capital Structures 2002 Ltd., TC Capital Limited, James Douglas Beatty, James Gordon Arnold, The John McKellar Charitable Foundation, Fraser Milner Casgrain LLP, Graham Turner, BDO Dunwoody LLP, and Ralph Thomas Neville Defendants

Counsel: Jay Strosberg, Joseph Groia, and Bonnie Roberts Jones, for the Plaintiffs Glenn A. Smith for the Defendants Fraser Milner Casgrain LLP and Graham Turner Daniel Murdoch and Jordan Moss for the Defendants BDO Dunwoody LLP and Ralph Thomas Neville and for BDO Dunwoody LLP and Ralph Thomas Neville in the third party action CV-11-422085A2 John Porter for Fraser Milner Casgrain LLP and Graham Turner in the third party action CV-11-422085A3 Gordon Baker, Q.C. for Pepper Weberg Trading & Investment Corporation in the third party actions CV-11-422085A2 and CV-11-422085A3 Meredith Hayward for IPC Securities Corporation and IPC Investment Corporation in the third party actions CV-11-422085A2 and CV-11-422085A3

HEARD: May 15, 2019

GLUSTEIN J.

REASONS FOR DECISION

Nature of motion and overview

[1] The plaintiffs Marc Charette (“Charette”) and Andrew Cumming (“Cumming”), and class counsel Strosberg Sasso Sutts LLP and Groia & Company Professional Corporation (“Class Counsel”) bring this motion pursuant to the Class Proceedings Act 1992, S.O. 1992, c. 6 (the “CPA”) for an order (along with ancillary relief) to:

(i) on consent, approve the settlement of this action in accordance with the terms of the settlement agreement dated February 13, 2019 (the “Settlement Agreement”),

(ii) approve the Fee Agreements and payment of Class Counsel fees and disbursements, and

(iii) approve the payment of a $50,000 honorarium to each of Charette and Cumming.

[2] The Settlement Agreement was reached between the plaintiffs and the defendants Fraser Milner Casgrain LLP (“FMC”), Graham Turner (“Turner”), BDO Dunwoody LLP (“BDO”), and Ralph Thomas Neville (“Neville”) (collectively, the “Settling Defendants”).

[3] All of the corporate entities involved in the creation, marketing and financing of the Donation Program for Medical Science and Technology (the “Program”) have been dissolved. They have been noted in default. The defendants James Douglas Beatty (“Beatty”) and James Gordon Arnold (“Arnold”) likely do not have the assets to satisfy a judgment. The plaintiffs earlier reached a settlement with the John McKeller Charitable Foundation (the “Foundation”).

[4] Consequently, the plaintiffs seek an order on consent dismissing the action against all defendants and I grant it on that basis.

[5] All of the third parties, other than IPC Investment Corporation, IPC Securities Corporation, and Pepper Weberg Trading & Investment Corporation agreed to dismissal of the action and the third party actions. The third party actions against those three companies will continue.

[6] At the hearing, by endorsement, I granted the relief sought approving the Settlement Agreement, the approval of the Fee Agreements and payment of Class Counsel fees and disbursements, the plaintiffs’ request for payment of the honorarium to Charette and Cumming, as well as the ancillary relief sought, subject to some minor modifications to the draft order provided at court.

[7] I signed an order later that day which reflected the changes required by the court at the hearing.

[8] I now set out my reasons below.

Facts

(a) The Program

[9] The Program was an income tax shelter scheme designed to capitalize on “leveraged donations” to the Foundation. Donors were told that in exchange for a cash donation of approximately 30% of the total donation (the other 70% being funded by what was described as a “loan”), they would receive a tax credit for 100% of the donation amount, including both the cash and leveraged amounts.

[10] For example, if a donor advanced $30,000 in cash and borrowed $70,000, for a total donation to the Program of $100,000, they were told that they would receive a tax credit for $100,000.

[11] The Program was designed by Beatty and Arnold, implemented through Trinity Capital Corporation (“Trinity”), and facilitated by FMC.

[12] The Program began in the 2001 taxation year. In that year, 118 donors made leveraged donations totaling approximately $18.3 million, including the financed portion of the donation.

[13] The Program operated in the 2002 and 2003 taxation years in slightly different formats. The donors made leveraged donations, including the financed portions, totaling approximately $106 million and approximately $94 million, in each respective year, for a total of approximately $218 million.

[14] In each year, donors were provided with two options for participating in the Program. The first option required donors to pay for the full amount of the donation using their own funds. If the donor elected to participate in the Program in this manner, they were required to deliver a certified cheque for the full amount of the donation payable to FMC in trust.

[15] The second option required the donors to contribute a percentage of the total donation using their own funds, payable by cheque to FMC, and to borrow the balance. The leveraged portion of the donation was financed by Capital Structures Ltd., Capital Structures 2002 Ltd., or TC Capital Limited (the “Lenders”) in 2001, 2002, and 2003, respectively. In order to obtain the financing, Class Members were required to pay millions of dollars in “security deposits” to the Lenders. The promoters of the tax shelters – Arnold and/or Beatty – controlled the Lenders, which have since been dissolved.

[16] If the donor elected to participate in the Program in accordance with the second option, the donor:

(a) completed a pledge form, loan application, agreement, power of attorney and promissory note;

(b) delivered a certified cheque of up to 32% of the total donation payable to FMC in trust;

(c) paid a security deposit to either TC Capital Limited in 2001, Capital Structures 2002 Ltd. or TC Capital Limited in 2002, or TC Capital Limited in 2003 of up to 12% of the loan;

(d) paid a loan fee and insurance premium to either TC Capital Limited in 2001, TC Capital Limited in 2002, or TC Capital Limited in 2003 of up to 5% of the loan;

(e) was provided with an insurance policy after the closing of each donation transaction that purportedly insured the donor against the risk that the security deposit would not increase in value to equal the loan amount on the due date of the loan; and

(f) had the option to execute a quit claim and assignment, the effect of which was to assign the insurance policy and the security deposit to TC Capital Limited in 2001, Capital Structures 2002 Ltd. or TC Capital Limited in 2002 or TC Capital Limited in 2003 in full satisfaction of the outstanding loan.

[17] In each year, donors who participated in the Program received an official charitable donation income tax receipt by the Foundation in the amount of the total donation, including the financed portion if the donor used the second option.

[18] The defendants promoted the Program as producing income tax credits of up to 62.4% depending on the donor’s province of residence. The marketing package for the Program included, or referenced, a letter from FMC for all three taxation years. A letter from BDO was included in the 2002 and 2003 agent package.

(b) The destination of the funds

[19] All of the money donated by the Class Members did not end up in the hands of charities. Instead, much of it found its way into the pockets of the promoters – Arnold and Beatty – through various off-shore entities. The donations made by participants flowed briefly into the Foundation, then briefly into the hands of the charities whereupon the funds were immediately transferred to other corporations (some of which were off-shore) pursuant to a series of commercial transactions.

(c) The marketing materials

[20] The Program was marketed by a promotional package.

[21] The 2001 marketing package said the following under the heading “Tax Implications”:

A tax opinion has been prepared by Fraser Milner Casgrain, Barristers & Solicitors, describing the tax implications of the Program and is available, upon request, to all potential Donors. Fraser Milner Casgrain is one of Canada’s pre-eminent international law firms.

The tax opinion addresses all key tax implications of the Program, including the availability of the interest-free Loan, the Policy and the assignment of the Policy pursuant to the Put Option. In conclusion, the opinion states:

The transactions proposed herein should constitute a gift by an individual to a registered charity, and accordingly, will entitle the donor to a tax credit equal to the top combined federal/provincial tax rate in the province in which the individual is resident.

[22] The marketing materials for the Program in 2002 and 2003 were substantially similar to the 2001 materials, except that they referred to the BDO opinion as well as the FMC opinion.

(d) The FMC opinions

[23] The FMC opinion letters, prepared by FMC and Turner, then a partner of FMC, were dated November 9, 2001, February 28, 2002, January 22, 2003 and August 20, 2003. FMC provided the opinion letters to its client, Trinity, in connection with “the Canadian federal income tax consequences to an individual resident in Canada (a “Donor”) who makes a cash donation to a charitable foundation (the “Foundation”) as described below.”

[24] FMC permitted Trinity to provide a copy of its opinions to authorized agents (who recruited participants and received a 5% agency fee on all donations made) and putative donors for the purpose of reviewing it before participating in the Program. The opinion letters provided that:

The opinions in this letter may only be relied upon by the addressee and by a Donor who is provided a copy of this letter by the addressee or its authorized agent. Each Donor should review this letter and their particular circumstances with their professional tax advisor.

[25] In its opinion letters, which were updated from year to year to account for any modifications to the structure of the Program and changes in the law, FMC analyzed the relevant legal issues, and concluded:

The transactions proposed herein should constitute a gift by an individual to a registered charity, and accordingly, will entitle the Donor to a tax credit equal to the top combined Federal / Provincial tax rate in the Province in which the individual is resident.

[26] The August 20, 2003 opinion letter contained the following disclaimer:

No advance income tax ruling has been obtained in respect of the Program. CCRA may not agree with some or all of the opinions set out herein. Each Donor should consult their own tax advisor in respect of their Donation, if any.

[27] A further FMC opinion letter dated December 10, 2003, commented on draft legislation released by the Department of Finance relating to charitable gifts and contained a similar disclaimer that the CRA [1] “may not agree with our analysis set out in the opinion or below.”

(e) The BDO opinions

[28] BDO did not provide a tax opinion letter for the Program in 2001.

[29] In 2002 and 2003, the marketing package for the Program was amended to include references to a tax opinion authored by BDO and Neville, then a partner of BDO. The BDO opinion was produced in the agent marketing package in 2002 and 2003. Under the heading “Conclusions”, BDO stated the following:

The transactions described herein should be treated for income tax purposes as a donation by an individual to a registered charity which will entitle the Donor to a tax credit in the amounts discussed above.

[30] The BDO opinions did say that there was a chance that donations made as part of the Program may not be considered a “gift”, in which case the income tax credits from the Program would be denied. For example, in the BDO opinions dated June 5, 2002 and January 28, 2003, BDO highlighted the uncertainty in respect of whether the interest free loan could be considered a benefit under the Income Tax Act, R.S.C., 1985, c. 1 (5th Supp.) (“ITA”), and would therefore affect the donation being a gift:

While many would view an interest free loan as a form of “benefit”, this would by itself not be sufficient evidence to preclude the cash donation made by a Donor is accordance with a Pledge from being a gift…

However, a question arises around whether the availability of an interest-free loan from the Lender would adversely affect this conclusion in any way. While not entirely free from doubt, in our view the availability of an interest-free loan from the Lender would not preclude a cash donation made by a Donor to the Foundation in accordance with a Pledge from being a gift for the purpose of section 118.1 of the Tax Act.

[31] BDO also mentioned in its opinions that the CRA “has been closely monitoring” donation-oriented programs because of “the perceived potential for abuse” in these types of programs. The BDO opinions stated, “In a number of instances, the CRA has issued notices of reassessment denying the tax credits claimed by many taxpayers...” BDO advised that it had been informed by Trinity that no reassessment action has been taken by the CRA against participants in the Program previously, but that “this should not be taken as evidence that CCRA accepts the program nor that it will not attempt to deny Donors the benefits claimed.”

(f) The income tax assessments and the Tax Court test case

[32] Between 2005 and 2007 (approximately), most Class Members received notices of reassessment from the CRA disallowing the entirety of their donations, including the cash portions, on the grounds that the donations were not valid gifts pursuant to section 118.1 of the ITA and that the General Anti-Avoidance Rule (“GAAR”) applied to the series of transactions.

[33] The amounts owing to the CRA in the notices of reassessment usually exceeded the cash portion of each Class Member’s donation. For example, in 2001 Mr. Cumming made a donation of $2 million of which $600,000 were his own funds. On June 28, 2005, he received a notice of reassessment indicating he owed $1,149,163.91, with interest continuing to accrue.

[34] Trinity and some of the donors retained FMC to respond to the CRA reassessments. In 2006 FMC filed a “test case” appeal in the Tax Court of Canada. Before the test case was heard, FMC withdrew from the retainer due to non-payment of its fees. Trinity and some of the donors subsequently retained Miller Thomson to proceed with the test case.

[35] The participant selected for the test case, Mr. Maréchaux, was unsuccessful at the Tax Court of Canada. In Maréchaux v. The Queen, 2009 TCC 587, Justice Woods dismissed Mr. Maréchaux’s appeal on the basis that the donation had not been a “gift” under section 118.1 of the ITA because the interest-free loan constituted a “benefit” to the participant. The Court found that Mr. Maréchaux could not get credit for the cash portion of the donation. Mr. Maréchaux lost his appeal to the Federal Court of Appeal: Maréchaux v. The Queen, 2010 FCA 287. Leave to appeal to the Supreme Court of Canada was dismissed in June 2011: Maréchaux v. The Queen, [2011] S.C.C.A. No. 45. Neither the Tax Court of Canada nor the Federal Court of Appeal addressed the CRA’s position that GAAR applied to the Program.

(g) The changes to the ITA

[36] Although the Class Members’ donations were initially entirely disallowed by the CRA, on June 26, 2013, amendments to the ITA came into force, which applied retroactively after December 20, 2002. The amendments, among other things, permitted Class Members to receive a tax credit for the actual cash portion of the donation.

[37] Class Members who made pledges up to, and including, December 20, 2002 are unaffected by the amendments.

[38] Class Members who made pledges after December 20, 2002 were entitled to and received a tax credit equal to part of the cash portion of their donations. For these Class Members, the CRA allowed between 21.5% and 32% of the total pledge to be treated as a valid donation. This amendment substantially reduced the Class’ damages.

(h) The Quebec action

[39] In 2012, after Mr. Maréchaux was denied leave from the Supreme Court of Canada, Guy Du Pont of Davies Ward Phillips and Vineberg LLP in Montreal commenced a series of new test cases, appealing the CRA re-assessments on behalf of hundreds of Class Members.

[40] The appeals focused on whether split-gifting is permissible for donations made before the ITA amendments.

[41] The test cases were unsuccessful. The Tax Court of Canada determined there was no “donative intent” on the part of the Class Members and upheld the CRA re-assessments.

(i) The third party actions

[42] The third party defendants are professional advisors who promoted the Program to their clients. Many of the third party defendants were agents or sub-agents of Trinity for the purpose of recruiting participants and received commissions for the donations of their clients.

(j) Procedural history of the action

[43] The action was commenced on March 11, 2011.

[44] The plaintiffs completed the following steps in this litigation:

(a) settlement with the Foundation which provided its records for each donation;

(b) preparation of responding motion materials and cross examinations for the summary judgment motion brought by some of the Defendants;

(c) successfully defended a summary judgment motion;

(d) preparation of materials and cross examinations for the certification motion;

(e) successfully certified the action as a class proceeding;

(f) the opt-out period expired on October 1, 2013 and 99 individuals opted out;

(g) documentary production;

(h) completed examinations for discovery;

(i) retained and instructed multiple liability and damages experts;

(j) applied for and received funding from the Class Proceedings Fund on May 17, 2017;

(k) obtained a pre-trial date for January 9, 2020;

(l) obtained a trial date for March 23, 2020; and

(m) attended a mediation on November 27, 2018, which is described below.

(k) The retainer agreement

[45] The contingency fee agreements entered into with the plaintiffs dated February 5, 2011 and June 5, 2012 (“Fee Agreement”) confirms the contingency arrangement with Class Counsel and provides that they are to be paid “thirty percent (30%) of the Recovery, plus HST, plus a proportionate share of any interest accruing on the Recovery, if the Action is settled after examinations for discovery have commenced…” The Fee Agreement also provides for Class Counsel to recover their disbursements incurred in the action and all applicable taxes.

(l) The mediation

[46] The plaintiffs and the Settling Defendants agreed to attend a mediation with Joel Weisenfeld as the mediator. The mediation was held on November 27, 2018.

[47] The negotiations continued into the early evening until the plaintiffs and the Settling Defendants came to an agreement in principle and a Term Sheet was signed. Even with this agreement in principle, negotiations continued over the wording of the Settlement Agreement until a final draft was executed in February 2019.

[48] The negotiations were adversarial, hard-fought, protracted, and arms-length.

[49] The Term Sheet provided for the Settling Defendants to pay the settlement funds to Strosberg Sasso Sutts LLP in trust within 90 days of execution. Eventually, the $37 million was paid and currently remains in an interest-bearing trust account pending final approval of the settlement.

(m) Settlement terms and conditions

[50] The key settlement terms and conditions are:

(i) Settlement Amount: The Settling Defendants have agreed to pay $37 million with no right of reversion. That amount is within the range of the amounts set out by in expert reports filed by the parties as to the aggregate economic losses of the Class.

A Class Member is entitled to a pro rata share of the settlement amount, net of administration expenses and approved Class Counsel fees, disbursements and taxes, being the ratio between his, her or its notional damages and the total notional damages of all Class Members. Each Class Member’s compensation is subject to a ten percent (10%) deduction for the Class Proceedings Fund, as prescribed by regulation.

Notional damages will be based on the cash portion paid by a Class Member to participate in the Program together with a prescribed amount for arrears interest as assessed by the CRA, with deductions for any tax benefits as a result of the retroactive amendments to the ITA. Class members who were not reassessed will have zero notional damages.

Once all claims have been received and verified the Administrator will make a distribution to the eligible Class Members. If 180 days after the distribution, there are cheques that have not been cashed, those funds will be paid cy près to a recipient, or recipients, selected by Class Counsel and approved by the Court.

Class Counsel believe that each eligible Class Member will receive a substantial portion of his/her/its loss but that is dependant on the take-up rate.

(ii) Claims process and distribution of recovery: There will be a bilingual national claims and distribution process with a single administrator, including a secure, web-based administration system accessible to the claimants and a summary dispute resolution process.

Eligibility will be authenticated by the Administrator, including the identity of each Class Member, the Class Member’s participation in the Program, the cash portion of the donation, the tax credit ultimately allowed by the CRA and the arrears of interest paid. Class Members who disagree with the Administrator’s decision can appeal the decision to the Referee.

Both the proposed Administrator (Epiq Class Action Services Canada (“Epiq Canada”), a subsidiary of Epiq Class Action & Claims Solutions, Inc. (“Epiq”), a U.S. firm)) and Referee (Gregory Wrigglesworth) are experienced in those class action roles. If appointed, Epiq will keep the data acquired from or on behalf of Class Members in Canada, with no access to anyone outside of Canada. Epiq will keep the escrowed settlement funds in a banking facility in Canada, probably Scotiabank.

Epiq Canada estimates the cost of the administration to be approximately $345,000, with costs potentially increasing to $448,000 (although that amount is not a hard cap).

(iii) Notice of settlement approval: As a result of a settlement with the Foundation, Class Counsel obtained the loan documentation for each Class Member. This information included each Class Member’s address. However, the information is about 18 years old. Class Counsel spent a significant amount of time attempting to locate the Class Members and update their addresses.

If the settlement is approved, notice will be effected in a targeted and cost-effective manner through posting on the Class Counsel web site, email, mail, and delivery by third parties to Class Members who were their clients or for whom they have contact information (with the reasonable costs of third party notice applied as an administrative expense).

(n) The involvement of the representative plaintiffs

[51] There is evidence that the action would not have been brought but for the willingness of Charette to serve as a representative plaintiff. In particular, in early 2011, Charette contacted class counsel after no other class member was willing to act as a proposed representative plaintiff and the action was unable to move forward.

[52] In May 2012, Cumming contacted class counsel to discuss his participation in the Program. As the discussions progressed, Cumming informed class counsel that he wanted to have a larger role in the action and agreed to act as a representative plaintiff.

[53] Both Charette and Cumming faced exposure to a real risk of costs. Prior to certification, the litigation was not funded by the Class Proceedings Fund, so both Charette and Cumming could have faced significant costs, particularly as they faced both a motion for summary judgment and a contested certification hearing.

[54] Charette founded a pharmaceutical marketing research company specializing in the evaluation of communications between pharmaceutical sales representatives and physicians. He sold that company in 2002 to an American multinational corporation and since 2002 has served on boards of directors and oversaw his portfolio of investments.

[55] From 1993 to 2002, Cumming held executive positions in the equity derivatives departments of both Citibank Canada, Deutsche Bank Canada, and Scotia Capital Inc. He left the work force for health reasons between 2003 until January 2009, when he launched his own hedge fund and managed the hedge fund until his retirement in September 2015.

[56] Both plaintiffs set out similar evidence as to their role in the litigation. I review that evidence below.

[57] Each plaintiff spent approximately 200 to 300 hours working on various aspects of the case, including time for assembling tax documents, swearing affidavits, attending at cross-examinations and examination for discovery, reviewing expert reports, attending strategy sessions and mediation, and reviewing draft settlement agreements and the draft plan of allocation.

[58] Each plaintiff provided proposed amendments to class counsel on the draft settlement agreement and the draft plan of allocation, with counsel incorporating most of the suggestions. Charette and Cumming were in regular contact about the litigation.

Issue 1: Approval of the Settlement Agreement

(a) The applicable law

[59] In my prior decision in Cass v. Westernone, 2018 ONSC 4794 (“Cass”), I addressed the law relevant to both settlement and fee approval. I rely on those reasons where applicable below.

[60] In Cass, I set out the applicable law on the test for approval of a settlement agreement in a class action, at paras. 85-90:

In Parsons v. Canadian Red Cross Society (“Parsons 1”), Winkler J. (as he then was) set out the applicable legal principles relevant to the court’s assessment of the reasonableness of a settlement agreement (at paras. 69-80):

(i) The test for approving a settlement is whether, in all of the circumstances, the settlement is fair, reasonable and in the best interests of the class as a whole, not whether the settlement meets the demands of a particular class member;

(ii) The court should not engage in a “dissection of the settlement with an eye to perfection in every aspect”. The settlement need only fall “within a zone or range of reasonableness”, which is an “objective standard which allows for variation depending on the subject matter of the litigation and the nature of the damages for which the settlement is to provide compensation”;

(iii) In determining whether to approve a settlement, the court may take into account the following factors:

(a) the likelihood of recovery or success,

(b) the proposed settlement terms and conditions,

(c) the amount and nature of discovery, evidence or investigation,

(d) the future expense and likely duration of litigation,

(e) the recommendation of neutral parties, if any,

(f) the number of objectors and nature of objections,

(g) the presence of good faith, arm’s-length bargaining and the absence of collusion,

(h) the degree and nature of communications by counsel and the representative plaintiff with class members during the litigation and information conveying to the court the dynamics of, and the position taken by the parties during, their negotiation, and

(i) the recommendation and experience of counsel;

(iv) These factors “are, and should be, a guide in the process and no more. Indeed, in a particular case, it is likely that one or more of the factors will have greater significance than others and should accordingly be attributed greater weight in the overall approval process”; and

(v) Class action settlements must be “seriously scrutinized by judges”.

The function of the court in reviewing a settlement is not to reopen and enter into negotiations with litigants in the hope of improving the terms of the settlement. It is within the power of the court to indicate areas of concern and afford the parties an opportunity to answer those concerns with changes to the settlement. However, the court’s power to approve or reject settlements does not permit it to modify the terms of a negotiated settlement (Dabbs v. Sun Life Assurance Co. of Canada (“Dabbs”), at para. 10).

“Evidence sufficient to decide the merits of the issue is not required because compromise is necessary to achieve any settlement. However, the court must possess adequate information to elevate its decision above mere conjecture” (Ontario New Home Warranty Program v. Chevron Chemical Co., [1999] O.J. No. 2245 (S.C.J.), at para. 92). The parties proposing the settlement have an obligation to provide sufficient information to permit the court to exercise an objective, impartial and independent assessment of the fairness of the settlement in all the circumstances (Dabbs, at para. 15).

It is not necessary that examination for discovery have occurred at the time of settlement. Settlements reached at an early stage of proceedings are appropriate (Dabbs, at para. 24).

There is a “strong initial presumption of fairness” when the settlement is negotiated at arm’s length and recommended by class counsel (Serhan (Trustee of) v. Johnson & Johnson, 2011 ONSC 128 (“Serhan”), at paras. 55-56).

Similarly, Sharpe J. (as he then was) held in Dabbs v. Sun Life Assurance Co. of Canada, [1998] O.J. No. 2811 (S.C.J.), at para. 32:

The fact that this settlement is strongly recommended by experienced class counsel is certainly a factor in its favour. The recommendation of class counsel is clearly not dispositive as it is obvious that class counsel have a significant financial interest in having the settlement approved. Still, the recommendation of counsel of high repute is significant. While class counsel have a financial interest at stake, their reputation for integrity and diligent effort on behalf of their clients is also on the line. […] [Footnotes omitted.]

[61] I now review the above factors based on the evidence on this motion.

(b) Application of the law to the evidence

1. The likelihood of recovery, or the likelihood of success

[62] In the present case, all of the corporate entities involved in the creation, marketing and financing of the Program have been dissolved. They have been noted in default. Messrs. Beatty and Arnold likely do not have the assets to satisfy a judgment.

[63] Consequently, recovery for the class depends on the claims against FMC and BDO.

[64] I find that there is a reasonable concern as to recovery against FMC and BDO, which strongly supports the settlement reached. I summarize the basis of that concern as follows:

(a) BDO had limited involvement with the Program. The Program was initially developed, structured, and promoted without any opinion from BDO, who was not involved in 2001. In 2002 and 2003, BDO did not deal directly with participants in the Program and communicated with only one financial advisor. BDO’s professional fees were modest and not commission based;

(b) One of the plaintiffs’ experts agreed that CRA’s interpretation that the donations were not “gifts” because donors received the “benefit” of an interest-free loan was first and foremost a legal issue, when BDO rendered accounting advice;

(c) While BDO and FMC were unsuccessful on a motion for summary judgment based on the two year limitation period in the Limitations Act, 2002, S.O. 2002, c. 24, Sch. B, Strathy J. (as he then was) concluded on the motion that this was a genuine defence regarding trial (Charette v. Trinity Capital Corp. et al, 2012 ONSC 2842 (“Charette – Summary Judgment”), at paras. 113-16);

(d) There is case law holding that in some circumstances the receipt of a notice of reassessment will trigger the running of a limitations period (cited at Charette – Summary Judgment, at para. 111);

(e) Limitations issues are always questions of fact that depend on the circumstances of the case, and the Court of Appeal for Ontario has stated in a similar case that “this may be an issue that must be determined individually for each class member, depending on what individual class members were told and when” (Lipson v. Cassels Brock & Blackwell LLP, 2013 ONCA 165, 114 O.R. (3d) 481, at para. 84). Mini-trials or individual assessments would lengthen and complicate any recovery;

(f) A claim for economic loss must fall within a recognized exception to the law relating to negligence for economic loss or meet the two-stage test in Anns [2] in order to establish a new exception. It is not certain that the plaintiffs could meet that test;

(g) In a negligence claim, the plaintiffs would have to establish reasonable reliance as non-clients. Further, if the court accepted the defendants’ position that the claim was based in negligent misrepresentation rather than negligence, reliance would remain an important issue, raising the possibility of individual inquiry to determine which investors read or relied upon their reports, or even if the reports were included in the marketing packages provided to the investors; and

(h) Contributory negligence would remain as an issue, since many, if not most, of the class members were sophisticated investors and high net worth individuals who arguably understood the risk of reassessment by the CRA.

[65] Consequently, the risks of litigation, while far from insurmountable, were significant. The settlement terms and conditions fairly and reasonably reflect the uncertainty of success for the plaintiffs, as well as the cost and time which would be required if individual assessments were ordered after a common issues trial.

2. The proposed settlement terms and conditions

[66] As set out above, the evidence is that the proposed settlement amount is well within the range of estimated aggregate loss set out in the expert reports filed by the parties. Further, given the risks of litigation discussed above, the settlement amount is within the range of reasonableness.

3. The amount and nature of discovery, evidence or investigation

[67] Class Counsel reviewed approximately 65,000 pages of documents produced in this action. They retained three experts to address, respectively, the standard of care of a competent tax lawyer, the standard of care of a competent chartered accountant, and quantification of damages.

[68] A trial date had been set for early next year. As a result of the advanced stage of the litigation, Class Counsel’s communication with the Class and Class Counsel’s work with the experts, Class Counsel and the plaintiffs were able to evaluate the risks, had an appropriate evidentiary basis and developed an in-depth understanding of the liability and damage scenarios in order to confidently negotiate with the Settling Defendants and to recommend the settlement to the Court.

[69] This factor further supports settlement approval.

4. Future expense and likely duration of litigation

[70] Even assuming that liability could be determined at trial, individual assessments would likely be necessary to address causation, limitations defences, contributory negligence, allocation among defendants and quantum of damages.

[71] As the court held in Silver v. Imax Corp., 2016 ONSC 403, at para. 24, the practical value of an expedited recovery is a factor supporting settlement. In the present case, the investments were between 15-17 years ago, and additional years of uncertain litigation is avoided by the settlement.

5. The number of objectors and nature of objections

[72] No class member has objected to the settlement.

6. The presence of good faith, arm’s length bargaining and the absence of collusion, the dynamics of the negotiations and the recommendation of neutral parties

[73] The evidence is uncontested that the negotiations leading to settlement were adversarial, difficult, hard-fought, protracted and arm’s-length, and facilitated by an experienced and neutral mediator.

7. Recommendation and experience of class counsel

[74] Class Counsel are very experienced in class actions. They believe that the proposed settlement is fair, reasonable and in the best interests of the Class Members, affords significant judicial efficiency and economy, promotes access to justice and fosters behaviour modification on the part of persons involved in the promotion of instruments designed to minimize tax.

[75] As I held in Cass, another settlement involving the same class counsel (at para. 108):

Those terms are supported by Class Counsel who are very experienced in securities cases and in class actions generally. They have put their reputation “on the line” in supporting such a settlement as being fair, reasonable and in the best interests of the Class members. In these circumstances, the “strong initial presumption of fairness” in Serhan, which arises when the settlement is negotiated at arm's length and recommended by class counsel, is justified.

8. Support of the plaintiffs

[76] The plaintiffs support and recommend approval of the settlement.

[77] The representative plaintiffs were involved in this case and communicated with counsel throughout. Charette and Cumming met with their lawyers at various times, spoke with them on the phone and corresponded with them by email. They were kept informed of the progress of the case, as well as the related litigation.

9. Conclusion

[78] Based on the above evidence, I approve the Settlement Agreement.

Issue 2: Approval of class counsel fees and disbursements

[79] Approval of the settlement is not contingent on court approval of the fees for class counsel.

[80] I reviewed the applicable law for approval of class counsel fees and disbursements in Cass, at paras. 117-26:

Class counsel fees are to be approved on the basis of whether they are “fair and reasonable” in all of the circumstances (Parsons v. Canadian Red Cross Society (2000), 49 O.R. (3d) 281 (S.C.J.) (“Parsons 2”), at para. 13-14 and 56; Lefrancois v. Guidant, 2014 ONSC 1956 (“Lefrancois”), at para. 52).

The courts in Lefrancois (at para. 52) and in Silver (at para. 41) set out the following factors which may be considered by the court when determining whether class counsel’s fees are fair and reasonable:

(i) the factual and legal complexities of the matters,

(ii) the risks assumed in pursuing the litigation, including the risk that the matter might not be certified, and the risk of loss at trial,

(iii) the opportunity cost to class counsel in the expenditure of time in pursuit of the litigation and settlement,

(iv) the amount in issue,

(v) the result achieved,

(vi) the importance of the matter to the class members and to the public,

(vii) the degree of responsibility assumed and the skill and competence demonstrated by class counsel,

(viii) the ability of the class to pay, and

(ix) the expectations of the representative plaintiffs, the class and class counsel as to the basis for calculating fees and the amount of fees.

An agreement to make a contingent payment, on the basis of a percentage of a settlement or recovery, is contemplated by the word “otherwise” in s. 32(1)(c) of the CPA, and has often been awarded (Nantais v. Telectronics Proprietary (Canada) Ltd. (1996), 28 O.R. (3d) 523 (Gen. Div.) at pp. 528-29; Crown Bay Hotel Ltd. Partnership v. Zurich Indemnity Co. of Canada (1998), 40 O.R. (3d) 83 (Gen. Div.) (“Crown Bay”), at 86).

Contingency fee arrangements are an “important means” to provide “enhanced access to justice to those with claims that would not otherwise be brought because to do so as individual proceedings would be prohibitively uneconomic or inefficient”. Similar to a multiplier, a contingency fee retainer “gives the lawyer the necessary economic incentive to take the case in the first place and to do it well” and, as such, “that opportunity must not be a false hope” (Gagne v. Silcorp Limited (1998), 41 O.R. (3rd) 417 (C.A.), at 422-23).

The policy of the CPA is to provide an incentive to class counsel to pursue class actions in order to increase access to justice. Class counsel fees have been awarded and are intended to compensate law firms for the risk that they may never be paid for their time or reimbursed for their disbursements. In Parsons 2, Justice Winkler (as he was then) stated (at para. 56; see also para. 14):

[…] The legislature has not seen fit to limit the amount of fees awarded in a class proceeding by incorporating a restrictive provision in the CPA. On the contrary, the policy of the CPA, as stated in Gagne, is to provide an incentive to counsel to pursue class proceedings where absent such incentive the rights of victims would not be pursued. It has long been recognized that substantial counsel fees may accompany a class proceeding. […]

In Crown Bay, Winkler J. commented on the benefits of a contingency fee in class actions to encourage settlement (at 88):

[…] On the other hand, where a percentage fee, or some other arrangement such as that in Nantais, is in place, such a fee arrangement encourages rather than discourages settlement […] Fee arrangements which reward efficiency and results should not be discouraged.

Similarly, in Osmun v. Cadbury Adams Canada Inc., 2010 ONSC 2752, Strathy J. (as he then was) endorsed contingency fee arrangements in class actions. He held (at paras. 21 and 22):

There is much to be said in favour of contingent fee arrangements. Litigants like them. They provide access to justice by permitting the lawyer, not the client, to finance the litigation. They encourage efficiency. They reward success. They fairly reflect the considerable risks and costs undertaken by class counsel, including the risk that they will never be paid for their work, the risk that their compensation may come only after years of unpaid work and expense, and the risk that they will be exposed to substantial cost awards if the action fails. Effective class actions simply would not be possible without contingent fees. Contingent fee awards serve as an incentive to counsel to take on difficult but important class action litigation.

[…] in my respectful view, courts should not be too quick to disallow a fee based on a percentage simply because it is a multiple – sometimes even a large multiple – of the mathematical calculation of hours docketed times the hourly rate.

In Abdulrahim v. Air France, 2011 ONSC 512, Strathy J. (as he then was) approved a “one-third” contingency fee, referring to it as “standard in class action litigation”. He held (at para. 13):

A contingency fee of one-third is standard in class action litigation and has been common place in personal injury litigation in this province for many years. It has come to be regarded by lawyers, clients and the courts as a fair arrangement between lawyers and their clients, taking into account the risks and rewards of such litigation. Fees have been awarded based on such a percentage in a number of class action cases.

In Cannon v. Funds for Canada Foundation, 2013 ONSC 7686 (“Cannon”), Justice Belobaba also approved a one-third contingency fee and held that there was a presumption that such arrangements are valid and enforceable provided that they are “fully understood and accepted by the representative plaintiffs”. He held (Cannon, at para. 8):

What I suggest is this: contingency fee arrangements that are fully understood and accepted by the representative plaintiffs should be presumptively valid and enforceable, whatever the amounts involved. Judicial approval will, of course, be required but the presumption of validity should only be rebutted in clear cases based on principled reasons.

In Cannon, Justice Belobaba provided “examples of clear cases where the presumption of validity could be rebutted” which included (Cannon, at para. 9):

(i) “Where there is a lack of full understanding or true acceptance on the part of the representative”,

(ii) “Where the agreed-to contingency amount is excessive”, and

(iii) “Where the application of the presumptively valid one-third contingency fee results in a legal fees award that is so large as to be unseemly or otherwise unreasonable”.

[81] Class Counsel ask this Court to approve a 30 percent contingency fee, which amounts to $11,100,000, plus a pro-rata share of the interest accumulated on the settlement fund, plus disbursements and taxes.

[82] Class Counsel incurred $53,897 in disbursements (including taxes) in the prosecution of the action, which were not paid for by costs awards.

[83] In addition, the Class Proceedings Fund has advanced $372,000 for disbursements which must be reimbursed.

[84] I apply the above principles to the present case.

[85] I find that there is no basis to rebut the “strong presumption of validity” of the contingency fee arrangement (Cannon, at para. 9).

[86] I rely on the following factors:

(i) The settlement amount is $37 million. Given the estimated range of damages, the amount recovered is substantial;

(ii) The action commenced in Quebec was dismissed. The test case in the Tax Court of Canada was also dismissed. As a result, but for the commencement of this action, none of these losses would have been recovered;

(iii) The request for fees of 30 percent of the recovery plus disbursements and taxes was contained in the notice advising the Class Members of the approval hearing, with express reference to the amounts sought, which was widely distributed and was advertised on Class Counsel’s website. There were no objections to this request;

(iv) Class Counsel still faced substantial risks had the action proceeded to trial. This was a complex action where liability would have to be established in circumstances where there was no direct relationship between the Class and FMC and/or BDO. In addition, as described above, the risks relating to a reduced damage award and the individual issues likely would have added years to the prosecution of the action;

(v) When the action started, there was considerable legal uncertainty as to whether this claim would be successful. Consequently, Class Counsel undertook risks to pursue the action;

(vi) Class Counsel pursued litigation through all stages up to the common issues trial. It was only after a trial date was obtained that a settlement was reached;

(vii) Class Counsel spent an enormous amount of time and effort preparing material for and arguing motions, preparing for and attending cross examinations, preparing for and attending examinations for discovery, working with the experts, preparing for and attending the mediation and drafting, and reviewing and approving the settlement agreement and the materials for the settlement approval;

(viii) The negotiations leading to the settlement were difficult.

(ix) The mediation was ultimately successful, but negotiations on the precise wording of the settlement agreement continued for three months;

(x) Class Counsel will have to devote significant time to the implementation of the settlement if it becomes final in order to:

(a) review, revise and approve notice materials;

(b) monitor notice to ensure it has been disseminated in accordance with the approved notice plan;

(c) communicate with Class Members who contact Class Counsel with questions;

(d) monitor settlement implementation to ensure the procedures are followed;

(e) address any questions or issues raised by the Administrator in the administration of claims;

(f) review updates from the Administrator;

(g) review final distribution lists; and

(h) attend to any other matter that may be raised during settlement implementation that requires Class Counsel’s attention, including any motions for directions to the Court, which may arise on behalf of Class Members; and

(xi) The representative plaintiffs are sophisticated businessmen and executed the Fee Agreements in 2011 and 2012 with the clear understanding that legal fees would be determined on a percentage basis. Both of them support Class Counsel’s fee request.

[87] For the above reasons, I approve the Fee Agreements and the fees, disbursements, and taxes sought by Class Counsel.

Issue 3: Approval of honorarium for Charette and Cumming

(a) The applicable law

[88] In Park v. Nongshim Co., 2019 ONSC 1997 (“Park”), I reviewed the law governing the approval of honorarium for class members. I set out that law below (Park, at paras. 84-86):

The payment of honorarium to representative plaintiffs in Ontario for class actions is “exceptional and rarely done”. In Baker Estate v. Sony BMG Music (Canada) Inc., 2011 ONSC 7105 (“Baker”), Strathy J. (as he then was) conducted a thorough review of the case law and held, at paras. 93-95:

The payment of compensation to a representative plaintiff is exceptional and rarely done: McCarthy v. Canadian Red Cross Society [2007] O.J. No. 2314 (S.C.J.) at para. 20; Windisman v. Toronto College Park Ltd. [1996] O.J. No. 2897 (Gen. Div.); Sutherland v. Boots Pharmaceutical PLC [2002] O.J. No. 1361 (S.C.J.); Bellaire v. Daya [2007] O.J. No. 4819 (S.C.J.) at para. 71. It should not be done as a matter of course. Any proposed payment should be closely examined because it will result in the representative plaintiff receiving an amount that is in excess of what will be received by any other member of the class he or she has been appointed to represent: McCutcheon v. Cash Store Inc. [2008] O.J. No. 5241 (S.C.J.) at para. 12. That said, where a representative plaintiff can show that he or she rendered active and necessary assistance in the preparation or presentation of the case and that such assistance resulted in monetary success for the class, it may be appropriate to award some compensation: Windisman v. Toronto College Park Ltd., [1996] O.J. No. 2897 (Gen. Div.) at para. 28.

The Court of Appeal has recently indicated in Smith Estate v. National Money Mart Co., 2011 ONCA 233, 106 O.R. (3d) 37 at paras. 134-135 that any compensation paid to the representative plaintiff should normally be paid out of the settlement fund and not out of Class Counsel's fee, to avoid concerns with respect to fee-splitting.

It is interesting to note that on certification motions, the Court is often concerned to ensure that the representative plaintiff is truly engaged in the litigation and is not a mere “bench-warmer” or a “straw man” recruited by Class Counsel. Courts have frequently commented on the need to have an active and involved plaintiff who will be familiar with the proceedings, instruct counsel, monitor settlement discussions and generally act as any private client would in supervising his or her own litigation. A private client will normally receive indirect compensation for such efforts out of the proceeds of settlement or judgment. A representative plaintiff normally will not. That being said, these are contributions the Court expects a representative plaintiff to make and I respectfully agree with the observation of Hoy J. in Bellaire v. Daya, above, at para. 71 that compensation should not be awarded simply because the representative plaintiff has done what is expected of him or her. It should be reserved for cases, like Garland v. Enbridge Gas Distribution Inc., [2006] O.J. No. 4907 (S.C.J.) where the contribution of the representative plaintiff has gone well above and beyond the call of duty.

In Robinson v. Rochester Financial Ltd., 2012 ONSC 911 (“Robinson”), Strathy J. again refused to order an honorarium. He summarized the factors for the court to consider, at para. 43:

In this particular case, while I acknowledge the contribution made by Kathryn Robinson and by Rick Robinson, and commend them on the work they have done to bring this matter to a successful conclusion on behalf of their fellow class members, I am not prepared to award such compensation. In my respectful view, requests for compensation for the representative plaintiff are becoming routine, as Sharpe J. anticipated in Windisman, above. I agree with those who have expressed the opinion that compensation should be reserved to those cases where, considering all the circumstances, the contribution of the plaintiff has been exceptional. The factors that might be appropriate for consideration could include:

(a) active involvement in the initiation of the litigation and retainer of counsel;

(b) exposure to a real risk of costs;

(c) significant personal hardship or inconvenience in connection with the prosecution of the litigation;

(d) time spent and activities undertaken in advancing the litigation;

(e) communication and interaction with other class members; and

(f) participation at various stages in the litigation, including discovery, settlement negotiations and trial.

The exceptional nature of an honorarium is even more circumscribed in a cy-près settlement where there is no monetary success for the class. Winkler J. (as he then was) held in Sutherland v. Boots Pharmaceutical PLC [2002] O.J. No. 1361 (“Sutherland”), at para. 22:

While the work of the Representative Plaintiffs is commendable, to compensate them for their work when the settlement funds for the entire class are being donated to research without a single penny finding its way into the hands of a class member would be contrary to the precept of a Cy-pres distribution in particular and to a class proceeding generally. Compensation for representative plaintiffs must be awarded sparingly. The operative word is that the functions undertaken by the Representative Plaintiffs must be “necessary”, such assistance must result in monetary success for the class and in any event, if granted, should not be in excess of an amount that would be purely compensatory on a quantum meruit basis. Otherwise, where a representative plaintiff benefits from the class proceeding to a greater extent than the class members, and such benefit is as a result of the extraneous compensation paid to the representative plaintiff rather than the damages suffered by him or her, there is an appearance of a conflict of interest between the representative plaintiff and the class members. A class proceeding cannot be seen to be a method by which persons can seek to receive personal gain over and above any damages or other remedy to which they would otherwise be entitled on the merits of their claims. This request is denied.

(b) Application of the law to the evidence

[89] I find that the evidence supports the “exceptional” order of the payment of an honorarium to both Charette and Cumming, based on the factors set out in Robinson.

[90] Charette was actively involved in the initiation of litigation and the retainer of counsel. While he did not bring the issue to Class Counsel on his own, he was the only investor willing to act as a representative plaintiff at the outset of the litigation in early 1991 after many other investors who approached Class Counsel about the case refused to act as a representative plaintiff.

[91] Cumming sought a larger role in the action and agreed to act as a representative plaintiff following discussions with Class Counsel in May 2012.

[92] Consequently, on the evidence, the court can conclude that the action likely would not have been commenced but for the active involvement of Charette, and to a lesser extent, Cumming (as Charette had already agreed to act as a representative plaintiff).

[93] Further, both Charette and Cumming faced “exposure to a real risk of costs”. No funding from the Class Proceedings Funds was provided until well after certification.

[94] The summary judgment motion based on limitation periods was strenuously contested, which could have resulted in massive costs exposure to both representative plaintiffs. While the certification issue resolved at the hearing, significant costs again could have been incurred if that motion had not been successful, for which both representative plaintiffs would have been personally exposed.

[95] Further, both representative plaintiffs were sophisticated businesspeople. Their considerable assistance in organizing tax documents, reviewing expert reports, attending strategy sessions and mediation, and reviewing draft settlement agreements and the draft plan of allocation involved more than just the “oversight” role of a representative plaintiff. Rather, they were active participants with comments often accepted by Class Counsel.

[96] Consequently, while the court in Robinson held that a time contribution of more than 300 hours to assist class counsel was not sufficient, on its own, to meet the “exceptional” requirement of an honorarium, in the present case, the evidence set out above (which includes a similar time commitment) establishes the exceptional nature of Charette and Cumming’s roles as representative plaintiffs.

[97] For the above reasons, I grant the honorariums sought by the plaintiffs.

Order and costs

[98] For the above reasons, I grant the relief sought.

GLUSTEIN J.

Date: 20190523

COURT FILE NO.: CV-11-422085 DATE: 20190523 ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN: Marc Charette and Andrew Cumming Plaintiffs – and – Trinity Capital Corporation, Trinity Wood Capital Corporation, Capital Structures Ltd., Capital Structures 2002 Ltd., TC Capital Limited, James Douglas Beatty, James Gordon Arnold, The John McKellar Charitable Foundation, Fraser Milner Casgrain LLP, Graham Turner, BDO Dunwoody LLP, and Ralph Thomas Neville Defendants

REASONS FOR DECISION Glustein J. Released: May 23, 2019

Footnotes:

[1] I refer to the Canada Customs and Revenue Agency as the “CRA” in these reasons but the same agency is also referred to as the CCRA in the FMC and BMO opinions.

[2] The analysis was set out by the House of Lords in Anns v. Merton London Borough Council (1977), [1978] A.C. 728 (U.K. H.L.) and somewhat reformulated but consistently applied by the Supreme Court of Canada, most notably in Cooper v. Hobart, 2001 SCC 79, [2001] 3 S.C.R. 537.