Sutts, Strosberg LLP v. Atlas Cold Storage Holdings Inc., 2009 ONCA 690

CITATION: Sutts, Strosberg LLP v. Atlas Cold Storage Holdings Inc., 2009 ONCA 690

DATE: 20091001

DOCKET: C50192

COURT OF APPEAL FOR ONTARIO

Doherty, Rosenberg, and MacFarland JJ.A.

BETWEEN

Paul Lawrence, Anne Eagles and Charles Simon, Evelyn Simon and Erica Prussky, in their capacity as Trustees of the Charles Trust

Plaintiffs (Appellants)

and

Sutts, Strosberg LLP, Koskie Minsky LLP, and Groia & Company

Appellants

and

Atlas Cold Storage Holdings Inc., Patrick A. Gouveia, Susan Elizabeth Peters, as Executrix of the Estate of Andrew W. Peters, deceased, Ronald Perryman, Joseph Wiley, Robert W. Martin, Albrecht W.A. Bellstedt, J. Nicholas Ross, Michael H. Wilson, Ernst & Young LLP and BMO Nesbitt Burns Inc.

Defendants (Respondents)

and

Rosetim Investments Inc. and PBMH Investments Ltd.

Objectors (Respondents)

Paul J. Pape, for the appellants Paul Lawrence, Anne Eagles, Charles Simon, Evelyn Simon, and Erica Prussky

David Stratas, for the appellants Sutts, Strosberg LLP, Koskie Minsky LLP, and Groia & Company

Jeffrey S. Leon, for the respondent Patrick A. Gouveia

Brendan Van Niejenhuis, for the respondent Ronald N. Perryman

Larry Lowenstein and Andrea Laing, for the respondent Atlas Cold Storage Holdings Inc.

Timothy Fellowes, Q.C., for the objector respondent Rosetim Investments

R. Brian Foster, Q.C., for the objector respondent PBMH Investments Ltd.

Heard: July 2, 2009

On appeal from the order of Justice Joan Lax of the Superior Court of Justice, dated February 12, 2009. Only the appellants and the objector respondents participated in the appeal. The other respondents, although present through counsel, took no part in the argument.

MacFarland J.A.:

[1] This is an appeal by Sutts, Strosberg LLP, Koskie Minsky LLP, and Groia & Company ("Class Counsel") from the order of Lax J. dated February 12, 2009, wherein she fixed Class Counsel's fees at $6,300,000, plus $315,000 for G.S.T. The appellants argue that this amount is approximately one-half the amount agreed upon in their contingency fee agreements.

[2] At the outset of the hearing in this court, two members of the class, Rosetim Investments Inc. ("Rosetim") and PBMH Investments Ltd. ("PBMH"), referred to collectively as "Objector Respondents", moved to quash the appeal on three grounds. First, they argued that neither Class Counsel nor the representative plaintiffs had a right of appeal. Second, they argued that the within appeal was a "costs" appeal and, as such, leave to appeal was required. In their final ground of appeal, they argued that the conflict of interest between Class Counsel and members of the class was such as to render the appeal an abuse of process. The motion was dismissed without calling on the appellants (respondents on the motion).

[3] Sections 32 and 33 of the Class Proceedings Act, 1992, S.O. 1992, c. 6 are relevant to case at bar. Section 32(2) sets out the following requirement:

Court to approve agreements

An agreement respecting fees and disbursements between a solicitor and a representative party is not enforceable unless approved by the court, on the motion of the solicitor.

[4] Sections 33(4) and (7) specifically govern agreements to increase fees by a multiplier, providing that:

An agreement under subsection (1) may permit the solicitor to make a motion to the court to have his or her fees increased by a multiplier.

On the motion of a solicitor who has entered into an agreement under subsection (4), the court,

(a) shall determine the amount of the solicitor's base fee;

(b) may apply a multiplier to the base fee that results in fair and reasonable compensation to the solicitor for the risk incurred in undertaking and continuing the proceeding under an agreement for payment only in the event of success; and

(c) shall determine the amount of disbursements to which the solicitor is entitled, including interest calculated on the disbursements incurred, as totalled at the end of each six-month period following the date of the agreement.

[5] Both sections contemplate the motion by a solicitor for approval of an agreement respecting fees and disbursements between Class Counsel and a representative party, as well as for the fixing of a multiplier in relation to fees being made by Class Counsel. The resulting order is a final order of a Superior Court judge, from which an appeal lies to this court by virtue of s. 6(1)(b) of the Courts of Justice Act, R.S.O. 1990, c. C-43.

[6] Class Counsel brought the motion which led to the order of Lax J. Although not parties to the proceedings in which the motion was brought, they very clearly were parties to the motion. Moreover, Class Counsel had a direct interest in the subject matter of the motion and the order eventually made. Their status as a party to the motion, and their direct interest in the order made, are sufficient to give Class Counsel standing to appeal: see Parsons v. Canada Red Cross Society (2001), 11 C.P.C. (5th) 16 (Ont. C.A.).

[7] The moving parties' argument that the order of Lax J. is a costs order simply cannot succeed. The order approves the contingency fee retainer agreement executed on March 3, 2008 which set out the fees owed to Class Counsel by their clients, to be paid out of a settlement fund. Lax J. made an order for the payment of money to Class Counsel, as well as a declaratory order approving the fee agreement. It is not an order with respect to costs payable by one party to the litigation to another party, referable to the other party's legal costs in the litigation.

[8] There is simply no merit to the final ground for quashing the appeal. The alleged conflict of interest between Class Counsel and some of the members of the class is utterly without merit. The requirement for court approval of any agreement respecting fees and disbursements between a solicitor and a representative party resolves any concern for potential "conflict". It was for these reasons that the motion to quash the appeal was dismissed.

[9] The nature of the proceeding was succinctly described in the motion judge's reasons at paras. 2 - 4:

Nature of the Claim

Atlas was an income trust that was intended to pay trust unit holders regular income distributions and provide them with the opportunity for capital appreciation as a result of its ownership of Atlas Cold Storage Holdings Inc. ("Atlas Holdings"), operators of North America's second largest temperature–controlled distribution network. The trust units traded only on the TSX. Following an investigation that revealed that its net earnings were overstated, Atlas announced[,] following the close of trading on August 29, 2003, that it would be restating its financial statements for fiscal years 2001 and 2002.

The Plaintiffs allege that misrepresentations were made by Atlas in its prospectuses, financial statements and press releases. The defendants in the action are Atlas Holdings and several of its former officers and directors; the former Trustees of Atlas, Ernst & Young LLP ("E&Y") (Atlas Holdings' auditors) and BMO Nesbitt Burns Inc. ("Nesbitt"), the underwriter of two offerings of trust units during the class period. The causes of action pleaded against some or all of the defendants are negligence, negligent and fraudulent misrepresentation, conspiracy, breach of fiduciary duty, breach of s. 130 of the Securities Act, R.S.O. 1990, c. S. 5 ("OSA") and declarations.

Nature of the Settlement

Some of the defendants agreed to pay $40 million in full and final settlement of all claims in exchange for a release of the claims. After payment of administration costs, a 10% levy to the Class Proceedings Fund and class counsel's fees, each eligible class member will receive the amount of the actual net loss based upon the number of eligible trust units to a maximum loss of $4.50 per eligible trust unit. Under settlement, there is a claim administration process that has been designed so that class members can prepare their claims easily and then have those claims processe[d] fairly and efficiently. Eligibility and calculation of net loss is determined by the Administrator, Deloitte and Touche LLP, and is subject to appeal to a Referee. If the value of all valid claims exceeds the value of the settlement fund net of expenses, a class members' loss may be pro-rated. If all valid claims against the settlement are paid in full, the balance, if any, will be paid as prejudgment interest pro-rata to each class member receiving a distribution up to an amount equal to 17% of their net loss, and the balance, if any, cy-prés as the court directs.

[10] The motion judge reviewed the background of the litigation in detail, both in terms of procedure and substance, at paras. 7 - 22 of her reasons before beginning her analysis of the three issues before her.

[11] The analysis begins at para. 7, with the motion judge's observation that Class Counsel's fees "are to be fixed and approved on the basis of whether they are fair and reasonable in all the circumstancs". Lax J. goes on to state that what is "fair and reasonable" must be determined "in light of the risk undertaken and the degree of success or result achieved" (citations omitted).

[12] The motion judge was asked to approve a fee of $12 million where the base fee claimed was approximately $3.25 million. The motion judge summarized the amounts sought by the three law firms, which acted together in the prosecution of this litigation, the disbursements which totalled $434,474.09, with a total base fee of $3,226,023.00 (both exclusive of G.S.T.).

[13] At para. 49, the motion judge summarized the three objections taken by the Objector Respondents to fixing Class Counsel's fees in the amount requested as follows:

1. There was no justification for fees in this amount for an action that settled after cross-examinations and three days of mediation with no trial, defence pleadings, or examinations for discovery.

2. One objector complained that his loss was greater than the maximum loss of $4.50 per trust unit agreed to in the settlement, and that this should be addressed before approving fees and disbursements in the amounts requested.

3. The requested fees are disproportionate to the settlement achieved.

[14] The motion judge found all three objections valid. She considered that the representative plaintiffs had entered into fee agreements in 2006 and 2007, but that those agreements were replaced by the agreement executed March 3, 2008, effective as of February 1, 2004. Lax J. concluded at para. 50:

There is no reason to refuse to approve the fee agreement as I am satisfied that it complies with sections 32 and 33 of the CPA. The retainer agreement was executed at a time when the settlement amount had been finalized and the affidavits that have been filed support class counsel's request for fees. It is nonetheless my task to assess the reasonableness of the fee.

[15] She then went on to list the factors that are relevant in determining the reasonableness of the fee at para. 51, including:

(a) the time expended;

(b) the factual and legal complexities of the matters to be dealt with;

(c) the degree of responsibility assumed by the lawyer;

(d) the monetary value of the matters in issue;

(e) the importance of the matter to the client;

(f) the degree of skill and competence demonstrated by the lawyer;

(g) the results achieved;

(h) the ability of the client to pay; and

(i) the expectations of the client as to the amount of the fee.

[16] At para. 52, the motion judge accepted counsel's submissions that this was

... difficult, risky litigation that was prosecuted against eleven well-resourced defendants in which the plaintiffs advanced novel legal arguments that may not have succeeded. The litigation risk was exacerbated by the leveraged buyout and the risks relating to collection. The plaintiffs were largely successful on the motions brought under Rules 21 and 25 and class counsel vigorously and capably prosecuted the action in preparation for the certification motion.

Lax J. observed that the result that was achieved was probably the best that could be attained in the circumstances. In reaching this conclusion, she considered each of the factors outlined above, as well as a number of other class action cases which considered the use of a multiplier.

[17] The motion judge ultimately concluded that the 7,400 docketed hours for a three day pleadings motion, preparation for a certification motion that was never argued, which included 12 days of cross-examination, and a three day mediation was not justified. She further held that the base fee of $3.25 million was not a reasonable base fee for the work that was performed.

[18] In my view, the motion judge applied the proper test in considering the relevant factors enumerated above at para. 14 and in concluding that a 25% reduction in the base fee was warranted. It was her call to make. Absent any palpable and overriding error, of which none have been demonstrated, it is not for this court to interfere. As noted by Goudge J.A. in Gagne v. Silcorp Ltd. (1998), 1998 CanLII 1584 (ON CA), 41 O.R. (3d) 417(C.A.) at p. 425, "the selection of [a] precise multiplier is an art, not a science".

[19] The motion judge considered the submissions of Class Counsel, including their argument that this "was the third largest securities class action settlement in Canadian history." On the basis of the authorities submitted by the parties, Lax J. concluded that if the Atlas Settlement was the third largest, then it was quite a distant third. She compared the results achieved in the only shareholder approval decisions cited to her, including, Mondor v. Fisherman (2002), 2002 CanLII 49647 (ON SC), 22 C.P.C. (5th) 346 (Ont. S.C.) and Frohlinger v. Nortel Networks Corp., 2007 CanLII 696 (ON SC), [2007] 40 C.P.C. (6th) 62 (Ont. S.C.). She concluded that the amount sought for fees in the case before her, compared with those cases, "could represent up to 52% of the net recovery" and that "[t]his offends the principle of proportionality". Her conclusion is supported by several authorities, including the words of Cumming J. in Vitapharm Canada Ltd. v. F. Hoffmann-La Roche Ltd., [2005] O.J. No. 1117 at para. 112:

It was argued in the course of submissions that the implicit multiplier of about 2.26 upon the base fee is modest and a higher multiple would be supportable. In my view, the implicit multiplier applied to the base fee is one standard to measure whether the fees sought are fair and reasonable. The $15 million sought for fees is reasonable if the actual recovery is $100 million ... The results achieved, i.e. the actual recovery, is a seminal factor in determining fair and reasonable fees in any class action settlement.

[20] Those words have been effectively approved by this court in Gagne v. Silcorp Ltd., supra, where Goudge J.A. at p. 425 wrote:

In the end, three considerations must yield a multiplier that, in the words of s. 33(7)(b), results in fair and reasonable compensation to the solicitors. One yardstick by which this can be tested is the percentage of gross recovery that would be represented by the multiplied base fee. If the base fee as multiplied constitutes an excessive proportion of the total recovery, the multiplier might well be too high.

[21] The appellants argue that the motion judge erred in dismissing their submission that they achieved a percentage recovery for the class that is more than six time greater than the average recovery of $5 million in U.S. securities class action settlements. I concur with Lax. J.'s conclusion, at para. 59 of her reasons, that this line of argument is irrelevant. In my view, the appellants' submission could be of little or no assistance to the motion judge. Her obligation was to determine what was a fair and reasonable fee on the specific facts of the case before her and averages from another jurisdiction do not assist in that determination. She considered Mondor, supra, being factually similar and from this jurisdiction, to be more relevant and I agree with her conclusion in that regard.

[22] She did not ignore the fee agreement, but rather considered it as she was bound to do. She was not obliged to accept it. That agreement is but one factor which "can" be considered "in determining what is fair and reasonable": see Gagne v. Silcorp Ltd., supra, p. 425.

[23] The motion judge then considered the multiplier, noting correctly that "[i]t is extremely rare to find a case where a multiplier of 3.7 or 4 has been awarded".

[24] In short, she considered all of the required factors in coming to her conclusion of what a fair and reasonable fee would be in all the circumstances. Her conclusion is well summarized at para. 54 of her reasons, where she states:

I believe that it is important to encourage experienced counsel to take on meritorious cases that are tough and this is particularly so in shareholder class actions, which are really in their infancy in Canada. I accept that the result achieved was probably the best that could be achieved in the circumstances. I accept that the risks were great, although perhaps not as great as counsel contend. I do not, for example, accept that this was a "bet your firm" litigation referred to in Endean v. Canadian Red Cross Society, [2000] B.C.J. [N]o. 1254. The risks were spread across three firms and support was obtained from the Class Proceedings Fund. The members of the class counsel team are very experienced, very creative and they did a thorough and diligent job. They are deserving of being fairly compensated at a level significantly above an amount that might be considered a reasonable base fee given the risks involved. However, I do not believe that the base fee of $3.25 million is reasonable or that the requested fee of $12 million, representing 30% of the gross recovery and a much greater percentage of the net recovery is fair and reasonable. In my opinion, it is excessive in relation to the recovery for the class.

[25] I agree with her conclusion and specifically endorse her observation that the risks here were not as great as counsel contend, nor were the complexities. The settlement was completed by way of contribution from the insurers of the directors and officers of Atlas, and did not come from the deep-pocketed defendants, against whom the risk of obtaining judgment was much greater.

[26] The appellants argue that the motion judge's finding that the multiplier chosen would create "more than adequate incentive" to prosecute actions of this kind was an error in principle.

[27] There can be no doubt that the motion judge was alive to need for fees to provide the necessary economic incentive to encourage lawyers to take these cases on and prosecute them. At paragraph 54 of her reasons she stated:

I believe that it is important to encourage experienced counsel to take on meritorious cases that are tough and this is particularly so in shareholder class actions, which are really in their infancy in Canada.

[28] As this court noted in Gagne, supra:

Finally, fair and reasonable compensation must be sufficient to provide real economic incentive to solicitors in the future to take on this sort of case and to do it well.

[29] The motion judge accepted that the members of the class counsel team were very experienced, very creative and that they did a thorough and diligent job and were "... deserving of being fairly compensated at a level significantly above an amount that might be considered a reasonable base fee given the risks."

[30] The base fee claimed for all three firms on the basis of their dockets was $3.23 million which represented an expenditure of some 7,400 hours of docketed time at counsel's full billing rates.

[31] After reducing the base fee by 25%, the motion judge applied a multiplier of 2.6 and concluded:

I consider this to be not only at the higher end of the range, but more than adequate incentive to prosecute actions of this kind. This produces a fee of $6,290,746 rounded to $6.3 million and represents roughly 16% of gross recovery and a more equitable sharing of net recovery as between class members and class counsel. This falls within the range of percentages of gross recovery that have been accepted in other cases.

[32] Even after the 25% reduction, the approved fee represents nearly twice the full docketed fee. I agree with the motion judge's observation that a fee in this range would be more than adequate incentive to solicitors to take on and prosecute an action of this nature.

[33] In conclusion, I see no error on the part of the motion judge. She considered all the relevant factors and applied the proper legal authorities. There is no basis to interfere with her decision. Accordingly, I would dismiss the appeal.

[34] At the outset of the oral submissions, counsel for the appellants began with an argument based on the interpretation of the statutory language in ss. 32 and 33 of the Class Proceedings Act. It was argued that once the motion judge approved the fee agreement under s. 32(2), she had no jurisdiction to go on and test the reasonableness of the fees in accordance with s. 33 of the Act. Counsel argued that a declaration proclaiming the agreement enforceable took it outside the specific constraints of s. 33.

[35] This argument was not made before the motion judge, nor was it set out in the Notice of Appeal or referred to in the appellants' factum. Counsel for the respondents on the appeal contend that they had not had adequate notice of this argument and that it should not be permitted to proceed.

[36] While there is much merit in the respondents' position, in the course of oral argument, counsel for the appellants acknowledged that, regardless of the interpretation of ss. 32 and 33, at some point the motion judge was obliged to assess the reasonableness and fairness of the amount claimed by Class Counsel. Counsel further acknowledged that whether it was under s. 32 or s. 33, the motion judge had to determine whether the fee amount produced by the terms of the fee agreement was within the range of what was reasonable and fair. In my view, it follows that if the judge decided it was not fair and reasonable, she had authority under either s. 32 or s. 33 to determine what a reasonable amount was. Regardless of what interpretation may be placed on ss. 32 and 33, the reasonableness and fairness of the fees must be addressed.

[37] For the reasons set out above it is both unnecessary and inappropriate to address the merits of the statutory interpretation of s. 32 and s. 33 put forward in oral argument by counsel for the appellant.

[38] At the conclusion of argument, counsel for the appellants submitted that in his view, the Objector Respondents, who appeared and participated in the appeal, should be entitled to their costs of the appeal, irrespective of the result, on a partial indemnity basis, fixed in the all inclusive sum of $10,000 each.

[39] If the appellants were successful on the appeal, those costs should be payable out of the settlement fund. If unsuccessful, those costs should be paid by Class Counsel.

[40] The Objector Respondents did not have their cost outlines available at the conclusion of argument. Bills of costs were subsequently submitted by Mr. Fellowes on behalf of Rosetim and by Mr. Foster on behalf of PBMH.

[41] Mr. Fellowes claims costs of $112,976.79, on a full indemnity scale, for 134 hours at $800 per hour. Mr. Foster claims costs of $89,464.73, on a full indemnity scale, for 104.7 hours at $800 per hour.

[42] In a somewhat unusual turn, also subsequent to the completion of oral argument, the court received a letter from a Mr. Peter Hyde, who describes himself as President and director of PBMH, claiming additional personal costs for his attendances and time spent in assisting Messrs. Fellowes and Foster, including travel costs and incidental related expenses, in the total sum of $8,929.96. It was always the understanding that Mr. Foster was counsel to PBMH and it was that corporation that was the member of the class, not him. Costs cannot be claimed both on behalf of the corporation and on behalf of the directors and/or officers individually unless they are parties in their personal capacity. There can be but one set of costs for PBMH.

[43] In my view, the amounts claimed by the Objector Respondents are excessive. While entitled to be present and make the arguments, in my view, they should not be entitled to claim fees separately. Their interests were those of the class and the same objections applied to all members of that class. They were, in effect, representational of some of the members of the class although not the representative plaintiffs. In such circumstances, it seems fair that only one set of costs be awarded. I see no reason why costs should be on anything other than a partial indemnity scale, and, on that basis, I would fix costs of the Objector Respondents in the sum of $10,000 inclusive of disbursements and G.S.T., to be paid by Class Counsel.

RELEASED: October 1, 2009 ("D.D.")

"J. MacFarland J.A."

"I agree Doherty J.A."

"I agree M. Rosenberg J.A."