CITATION: LBP Holdings Ltd. v. Hycroft Gold Corporation, 2020 ONSC 59
DIVISIONAL COURT FILE No.: 709/17
Court File NO.CV-14-50851300-CP
DATE: 20200106
ONTARIO SUPERIOR COURT OF JUSTICE DIVISIONAL COURT
BACKHOUSE, D.L. CORBETT, and MYERS JJ.
BETWEEN:
LBP Holdings Ltd.
Appellant (Plaintiff)
– and –
Hycroft Mining Corporation, Scott A.Campbell, Robert M.Buchan, Cormark Securities Inc., and Dundee Securities Ltd.
Respondents (Defendants)
Paul Bates, Eli Karp and Hadi Davarinia, lawyers for the Appellant
John Fabullo, Alexandra Shelley and Gillian Dingle, lawyers for the Respondents
HEARD at Toronto: December 19, 2019
REASONS FOR DECISION
Backhouse J.:
Introduction
[1] This is an appeal from the decision of Perell J. dated October 24, 2017, in which he declined to certify the plaintiff’s negligent misrepresentation claim. The only issue on the appeal is whether the certification judge erred by concluding that a class proceeding is not the preferable procedure under s.5(1)(d) of the Class Proceedings Act^1 for advancing the plaintiff’s claim against the defendants Cormack Securities Inc. and Dundee Securities Inc. (“the underwriters”).
[2] The proposed class in this case is composed of investors who, in a secondary public offering, acquired shares in Hycroft directly from the underwriters. On consent of Hycroft and two of its executives (“the Hycroft defendants”), the certification judge certified a statutory misrepresentation claim against them comprised of the same class that the plaintiff seeks to have certified against the underwriters.
[3] The plaintiff’s claim against the Hycroft defendants arises from its statutorily mandated certificate in its prospectus that it constituted full, true and plain disclosure of all material facts. The plaintiff alleges that the prospectus contained misrepresentations contrary to s.130 of the Ontario Securities Act[^2] and equivalent Securities Acts in other provinces (“the statutory claim). Under s.130, there is deemed reliance by the investors on a misrepresentation by the issuer.
[4] The plaintiff’s claim against the underwriters is that it was a misrepresentation for the underwriters to state in its statutorily mandated certificate that disclosure in the prospectus was true, to the best of their knowledge, information and belief. There is no statutory secondary market remedy against underwriters. Underwriters are, however, exposed to tort claims in the secondary market but, unlike the claim against Hycroft, the element of reliance must be proved.
[5] The certification judge found that a class proceeding is not the preferable procedure for resolving the class members’ negligent misrepresentation claim against the underwriters, either standing alone or in combination with the statutory claim, because there is little to be gained by subjecting the individual issues (reliance, causation and damages) to the procedure of a class action and the statutory claim against the Hycroft defendants is not congruent with and would make unmanageable the negligent misrepresentation claim against the underwriters.
[6] For the reasons that follow, I would allow the appeal.
Factual Background
[7] Hycroft engaged the underwriters to underwrite and sell an offering of securities by prospectus in May 2013. Fourteen million shares were offered, at the price of $10.75 USD per share. Excluding U.S. purchasers (as the proposed class definition does), 247 Canadians and seven parties from outside of Canada and the U.S. purchased 7.2 million shares from the offering as follows:
(a) Alberta: 22 buyers purchased 59,000 shares;
(b) British Columbia: 35 buyers purchased 318,700 shares;
(c) Nova Scotia: 5 buyers purchased 28,800 shares;
(d) Ontario: 172 buyers purchased 5.2 million shares;
(e) Saskatchewan: 2 buyers purchased 3,000 shares;
(f) “Other”: 4 buyers purchased 93,000 shares.
[8] The plaintiff purchased 20,000 shares of Hycroft for $215,000 USD. On average each investor bought $307,745.12 USD worth of shares.
[9] As required by s. 59(1) of the Ontario Securities Act, the underwriters signed a certificate that was appended to the prospectus for Hycroft’s offering. The certificate included the following statement:
“To the best of our knowledge, information, and belief, this short form prospectus, together with the documents incorporated by reference, constitutes full, true and plain disclosure of all material facts relating to the securities offered by this short form prospectus as required by the securities legislation of the provinces of British Columbia, Alberta, Saskatchewan Manitoba, Ontario, New Brunswick, Prince Edward Island, Nova Scotia and Newfoundland and Labrador.”
[10] Except for the words “To the best of our knowledge, information, and belief”, the underwriters’ certificate is identical to Hycroft’s certificate in regard to which the certification judge certified the statutory claim. The class sought to be certified against the underwriters for negligent misrepresentation is the same as the class certified in the statutory claim.
[11] Incorporated by reference to Hycroft’s prospectus was its 2012 annual report, the 2013 interim report, representations about Hycroft’s gold production and its ability to finance its gold mine. The plaintiff alleges that the representations about the gold mine’s production violated Hycroft’s disclosure obligations because the prospectus omitted to disclose that during late 2012, the company was having persistent operational problems which had not been rectified and had an adverse effect on Hycroft’s ability to produce gold. The plaintiff alleges that the production projections were unreasonable because of the persistent operational problems. The plaintiff submits that before signing the underwriter’s prescribed certificate for the public offering, by the exercise of due diligence, the underwriters ought to have discovered the material facts not disclosed by Hycroft. Thus the plaintiff’s claim is that it was a misrepresentation for the underwriters to state that disclosure in the prospectus was true, to the best of their knowledge, information and belief.
[12] The certification judge certified the common issues against the Hycroft defendants that are set out in Appendix 1 hereto. The common issues that are proposed against the underwriters which were not found to be inappropriate by the certification judge are set out in Appendix 2 hereto.
[13] The common issues that are proposed against the underwriters (Appendix 2) can be divided into two parts:
(a) Common issues relating to misrepresentation found in the prospectus (common issues 1-3 of “Part A”); and
(b) Common Issues relating to the underwriters’ liability for misrepresentation found in the prospectus (Common issues 4-9 or “Part B”).
The Certification Judge’s Decision on Preferable Procedure
[14] The certification judge found that a class proceeding is not the preferable procedure for the common law claim of negligent misrepresentation against the underwriters either standing alone or in combination with the statutory claim against the Hycroft defendants. He found that the individual issues that would have to be determined (reliance, causation and damages) would very substantially diminish the productivity of the common issues trial and introduce significant concerns about manageability. He held that the individual issues in this case are not amenable to summary determinations using the tools of ss.12 and 25 of the Class Proceedings Act and that there was little to be gained by subjecting the individual claims to the procedure of a class action.
[15] The certification judge further found that the common issues of the statutory claim against the Hycroft defendants are not congruent with the common issues of the claim for negligent misrepresentation and are unlikely to produce synergies and efficiencies. He concluded that the findings made in the statutory action against the Hycroft defendants will only moderately assist the prosecution of the negligent misrepresentation claim. Finally, he found that individual claims appear to be economically viable to litigate.
[16] The plaintiff was also seeking before the certification judge to have a claim of negligence simpliciter certified against the underwriters which the certification judge found was also incongruent with the misrepresentation claim, adding to what he found was a prospect of unmanageability and negligible synergies. The plaintiff is not appealing the certification judge’s decision not to certify in regard to the negligence claim.
Standard of review
[17] The decision of a certification judge as to preferable procedure is a decision involving the weighing and balancing of a number of factors. As such these decisions are normally entitled to special deference and a reviewing court should only intervene where the judge has made a palpable and overriding error of fact or otherwise erred in principle.[^3]
[18] I am satisfied that the certification judge fell into legal error on matters central to a proper application of s.5 of the CPA and this displaces the deference usually paid to decisions on certification motions.
Analysis
[19] The claim against the underwriters is predicated on a finding that the Hycroft defendants made a misrepresentation in the prospectus. The common issues relating to the misrepresentation in the prospectus (Part A of Appendix 1) have a 100% overlap with and are derivative of, the common issues that are already certified against the Hycroft defendants. If the court finds that the Hycroft defendants made a misrepresentation in the prospectus, then there is a basis for the plaintiff’s claim against the underwriters. If the common issues certified against the Hycroft defendants are resolved in its favour, then the plaintiff’s claims against the underwriters will fail. If the remaining common issues relating to the underwriters (Part B of Appendix 2) are resolved in favour of the plaintiff, the individual issues that would have to be determined are reliance, causation and damages.
[20] The constituent elements of negligent misrepresentation as found by the certification judge are:
(1) 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.
[21] Three of these five elements are common issues. Notwithstanding these findings, he concluded that a class action, even standing alone, was not the preferable procedure for the negligent misrepresentation claim because of the individual issues and unmanageability. In this, he erred by failing to interpret the CPA in a broad and purposive manner in accordance with the objects of class actions, namely access to justice, judicial economy and behavior modification.[^4]
[22] Whether a class action against the underwriters would be a fair, efficient and manageable proceeding has to be considered in light of the fact that there is already a class action which is certified. Because it is already going on, common sense indicates that for the same class members to be permitted to add a claim against the underwriters arising out of a common factual narrative and with so many common issues will alleviate expense and promote access to justice, judicial economy and behavior modification. There is nothing unfair, inefficient or unmanageable about that.
[23] The certification judge held that the individual issues were not amenable to summary determination using the tools of s.12 and 25 of the CPA. He did not provide a basis for this conclusion.
[24] In Fantl v. Transamerica Life Canada, the Divisional Court[^5] and then the Court of Appeal[^6] found that a claim for negligent misrepresentation joined with a class action for breach of five contracts of insurance was the preferable procedure for the resolution of the class members’ claims. Sachs J. for the Divisional Court stated:
“[44] This case involves one uniform written representation that was included in a disclosure document required by legislation that was given to each class member and that each class member acknowledged receiving. To prove actual reliance, the class members do not need to prove that the misrepresentation was the only factor that induced them to invest in the Can-Am Fund but simply that they relied on the misrepresentation (NBD Bank, Canada v. Dofasco Inc.(1999), 1999 3826 (ON CA), 46 O.R.(3d) 514 (Ont.C.A.), at para.78, leave to appeal to S.C.C. refused (S.C.C.)) Thus the individual inquiries with respect to reliance need not be complex.
[45] I agree with the motion judge that the issue of damages may be a more complex issue to resolve on an individual basis. However, as Justice Strathy stated, in Brown v. Canadian Imperial Bank of Commerce, 2012 ONSC 2377, 24 C.P.C.(7th) 251 (Ont.S.C.J.) at para.195:
I do not regard the potential need for individual assessments as detracting from the preferability of a class action. Not only is this factor specifically excluded from consideration by s.6(1) of the CPA but practical experience has shown that systems can be devised for the fair and efficient resolution of such issues.
[25] Justice Sachs found that the elements of reliance and damages that had to be established through individual trials may well become issues that can be resolved through fairly straightforward mechanisms.[^7]
[26] The Court of Appeal upheld the Divisional Court substantially for the reasons set out by the Divisional Court. The Court of Appeal found that the individual issues of reliance and damages could be resolved under the alternative procedures available to the court under the CPA. Strathy C.J.O. stated the following:
[41] If the common issues are resolved in favour of the defendant that will be the end of the matter. If they are resolved in favour of the class, a class proceeding can provide a framework for the resolution of the individual issues. It is realistic to expect that having tried the common issues the trial judge will have a full appreciation of the individual issues and will be well equipped to devise a procedure for the resolution of those issues. Section 25 of the CPA gives the judge authority to craft fair, inexpensive and efficient procedures in order to do so. This is ancillary to the broad discretion conferred on the court under s.12 to “make any order it considers appropriate respecting the conduct of a class proceeding to ensure its fair and expeditious determination.”[^8]
[27] In Cassano v. Toronto Dominion Bank [^9] it was held that the resolution of individual issues is an essential element of many class proceedings and is crucial if there is to be an advancement of the goal of access to justice.
[28] While there was no evidence before the certification judge in the case at bar of an aggregate assessment of damages, there is clearly that possibility. If the individual approach to assessing damages is deemed to be appropriate, the assessment should still be straightforward and cost effective.
[29] In the case at bar, the certification judge found that the individual issues trials would substantially diminish the productivity of the common issues trial and introduce significant concerns about manageability similar to the concerns that led the Court of Appeal in Musicians’ Pension Fund of Canada (Trustee of ) v. Kinross Gold Corp. (“Kinross”)[^10] to conclude that the common law action was not the preferable procedure.
[30] Kinross was distinguished by the court in Fantl[^11] because:
(i) Kinross was a case about multiple misrepresentations and not a single uniform misrepresentation;
(ii) In Kinross there had already been a judicial determination that the allegation of misrepresentation was doomed to failure;
(iii) The common issues sought to be certified [in Fantl,] overlapped with common issues that were already certified under the breach of contract claim.
[31] As in Fantl, supra, the case at bar involves one uniform written representation by the underwriters that was included in a disclosure document required by legislation. The common issues overlap with issues already certified against the Hycroft defendants. There has been no judicial determination that the claim against the underwriters is doomed to failure.
[32] I find that the certification judge erred in concluding that this case was analogous to Kinross, supra, and in not finding as the court did in Fantl, supra, that the resolution of the common issues of duty of care, truth or falsity of the representation and negligence would significantly advance the claim of every class member. The certification judge erred in his conclusion that a class action was not the preferable procedure for the negligent misrepresentation claim even standing alone because of the individual issues and unmanageability.
[33] When the certification judge concluded that combining the claims led to issues of unmanageability and negligible synergies and was therefore not the preferable procedure, he focused on comparing the more significant judicial economy gains that would have been attained if the plaintiff had been attempting to join the negligent misrepresentation claim as an additional claim against the Hycroft defendants who have already been certified as class defendants to the s.130 statutory claim rather than on the relative advantages of a class action suit over individual claims against the underwriters. In this, he made an error in principle.
[34] The certification judge found that the plaintiff’s own claim was in excess of $200,000(USD) and the average claim was over $300,000(USD). He held that individual claims would appear to be economically viable to litigate in the Superior Court which he found was an alternative route for access to justice. This presumed that the securities were worthless. There was no evidence in this regard. There was also no evidence that the entire value of the class member’s investment was lost.
[35] The average claim does not mean that every class member has a claim as large as the average claim. In Excalibur Special Opportunities LP v. Schwarz Levitsky Feldman LLP [^12] the court found that the motion judge erred by not properly considering the barriers to access to justice for all the proposed class members, choosing to focus instead on those with the highest value claims.
[36] Nevertheless, on the evidence before the certification judge, the claims in the case at bar seem to be significantly higher and more economically viable to litigate than what the court considered in Fantl, supra and Excalibur, supra. The issue that must be decided is the relative advantages of a class action suit over individual actions in this case.
[37] The certification judge noted that the preferability requirement that a class proceeding would be a fair, efficient and manageable method of advancing the claim and that it would be preferable to any other reasonably available means of resolving the class members’ claims must be considered through the lens of judicial economy, behavior modification and access to justice. He cites the five questions set out in AIC v. Fischer, supra[^13] and acknowledged that he was mandated to compare the two alternatives in determining whether a class procedure is the preferable procedure to individual actions. However his reasons do not set out a comparative analysis of the relative advantage of a class action suit over individual actions, in achieving judicial economy, access to justice and behavior modification. This was an error in principle.
[38] In AIC Limited v. Fischer, writing for the majority, Cromwell, J. stated:
[23] This is a comparative exercise. The court has to consider the extent to which the proposed class action may achieve the three goals of the CPA[^14], but the ultimate question is whether other available means of resolving the claim are preferable, not if a class action would fully achieve those goals. This point is well expressed in one U.S. Federal Court of Appeals judgment and it applies equally to CPA proceedings: “Our focus is not on the convenience or burden of a class action suit per se but on the relative advantages of a class action suit over whatever other forms of litigation [and I would add dispute resolution] might be realistically available to the plaintiffs.”: Klay v Humana, Inc., 382 F.3d 1241 (11th Cir.2004), at p.1269, cited in Rubenstein at 4:85, fn.2.[^15]
[39] If the certification judge had conducted the required analysis, he would have found that with individual actions there are economic and social barriers to access to justice, that judicial economy and behavior modification are thwarted by individual actions and that a class action is the preferable procedure. I set out the questions below and conduct a brief analysis on each.
(1) What are the Barriers to Access to Justice?
[40] Even considering the amount of the average claim of $300,000 USD, the costs of litigation are enormous and represent a barrier. The certification judge found that expensive and repetitive evidence would be required at the individual issues trials. Many class members would likely be deterred from prosecuting on his or her own as too costly and too risky, given the high cost of litigation in this case and the spectre of costs being awarded against an individual plaintiff if the claim is unsuccessful against the underwriters.
[41] Moreover, as the court points out in AIC v. Fischer, supra, barriers are not limited to economic ones and can also be psychological or social in nature.[^16] In AIC v. Fischer, Justice Cromwell cites favorably from the OLRC Report as follows:
The Commission is of the view that many claims are not individually litigated, not because they are lacking in merit or unimportant to the potential claimant, but because of economic, social and psychological barriers. We believe that class actions can help to overcome such barriers and by providing access to the courts, may perform an important function in society. …
Moreover, empirical evidence indicates that class actions do in fact, provide access to justice for a broader range of persons.[^17]
[42] Justice Cromwell’s observation that a common procedural barrier is that there is no other procedure available to afford meaningful redress[^18] is apt in the circumstances of this case.
(2) What Is the Potential of the Class Proceedings to Address Those Barriers?
[43] Class proceedings have the potential to address the barriers to access to justice. The class members will not need to pay out-of-pocket for class counsel to litigate the common issues on their behalf. In the event that the action against the underwriters is unsuccessful, the Class Proceedings Fund will pay any adverse cost awards. A class action has a greater potential to address access to justice concerns than individual actions.
(3) What are the Alternatives to Class Proceedings?
[44] The only alternative addressed by the certification judge is individual actions with joinder.
(4) To What Extent Do the Alternatives Address the Relevant Barriers?
[45] The alternative of individual actions does not address the economic, social and psychological barriers discussed above. Access to justice concerns favour a class proceeding.
(5) How Do the Two Proceedings Compare?
[46] If the class action against the underwriters is not certified, the alternative is multiple trials across Canada where the class members will be forced to add the Hycroft defendants as parties in any individual litigation. The issue of whether Hycroft made a misrepresentation and the six proposed common issues against the underwriters will have to be heard again and again. This will have a deleterious effect on judicial economy and there is a clear risk of inconsistent results. Joinder of claims of up to 254 individual actions is not realistic. The avoidance of a multiplicity of proceedings is fundamental to our rules of civil procedure.[^19] Conflicting results would also cause harm by bringing the administration of justice into disrepute.[^20]
[47] The certification judge found that a common issues trial would be an efficient and productive means to determine the duty of care and standard of care issues of the negligence claim against the underwriters. He also held that the prosecution of the negligence claim will require expensive expert evidence which could be advantageously distributed over hundreds of class members. He conceded that the individual issues would not completely overwhelm the common issues in the action against the underwriters.
[48] As discussed above, the individual issues do not detract from the preferability of a class action. The number of common issues raised by the plaintiff and their significance to the litigation makes this a case where a class proceeding is a fair, efficient and manageable method of advancing the claim and therefore the “preferable procedure”. The interests of judicial economy would be well served by addressing the common issues in a single class proceeding rather than in a number of individual actions.
[49] Behaviour modification of the wrongdoers whose conduct may cause widespread harm and may continue to cause harm if not called to account is a further benefit flowing from a class proceeding. Deterrence is significantly weakened if the claims are brought in individual actions because the loss amounts are smaller and because of access to justice issues. If individual investors are left to their own devices to right these wrongs, there will be little financial incentive for underwriters to meet the standard of care required by the certificate mandated by the Securities Act. This claim is one involving an alleged misrepresentation in a statutorily-mandated investment document, behavior that society has an interest in curbing.
[50] In this case, there is a statutory incentive for the investors to bring the s.130 claim. There already is a certified class proceeding against the Hycroft defendants for statutory misrepresentation on behalf of the same class that the plaintiff seeks to have certified against the underwriters. The underwriters also have a statutory responsibility to certify that disclosure in the prospectus was true to the best of their knowledge and they may also have done something wrong. Whether Hycroft violated its disclosure obligations must be proven for both claims. Damages may well overlap. It is not synergistic or conducive to judicial economy to require the class members to bring individual actions against the underwriters. It was an error in principle not to find that a class action is the preferable procedure.
Conclusion
[51] For these reasons the appeal is allowed and an order is to go certifying the plaintiff’s claim for negligent misrepresentation in accordance with the proposed common issues in Appendix 2 to these reasons.
Costs
[52] Costs as agreed by the parties shall be paid by the underwriters to the plaintiff in the amount of $30,000 for this appeal and $6750 for the leave application.
Backhouse J.
I agree _______________________________
F.L. Myers J.
I agree _______________________________
D.L. Corbett J.
Release Date: January 06, 2020
CORRECTION NOTICE
Amended Decision: The text of the original judgment was amended on January 29, 2020 and the description of the correction is as follows:
January 29, 2020: the words “Hycroft defendants” in paragraph 52 were replaced by “underwriters”.
CITATION: LBP Holdings Ltd. v. Hycroft Gold Corporation, 2020 ONSC 59
DIVISIONAL COURT FILE No.: 709/17
Court File NO.CV-14-50851300-CP
DATE: 20200106
ONTARIO SUPERIOR COURT OF JUSTICE DIVISIONAL COURT
BACKHOUSE, D.L. CORBETT, and MYERS JJ.
BETWEEN:
LBP Holdings Ltd.
Appellant (Plaintiff)
– and –
Hycroft Gold Corporation, Scott A. Caldwell, Robert M. Buchan Cormark Securities Inc. and Dundee Securities Ltd.
Respondents (Defendants)
REASONS FOR DECISION
Backhouse J.
Released: January 06, 2020
[^1]: Class Proceedings Act, 1992, S.O.1992, c.6.
[^2]: Securities Act, R.S.O. 1990, c.S.5
[^3]: Pearson v. Inco Ltd. (2005), 2006 913 (ON CA), 78 O.R. (3d) 641 (Ont.C.A.).
[^4]: Canadian Imperial Bank of Commerce v. Green, 2015 SCC 60 at para 75; Hollick v. Toronto (City), 2001 SCC 68 at para 15.
[^5]: Fantl v. Transamerica Life Canada, 2015 ONSC 1367.
[^6]: Fantl v. Transamerica Life Canada, 2016 ONCA 633.
[^7]: Fantl v. Transamerica Life Canada, 2015 ONSC 1367 at para 46.
[^8]: Fantl v. Transamerica Life Canada, 2016 ONCA 633 at para 41.
[^9]: Cassano v. Toronto Dominion Bank, 2007 ONCA 781 at para 63.
[^10]: Musicians’ Pension Fund of Canada (Trustee of) v. Kinross Gold Corp, 2014 ONCA 901.
[^11]: Fantl v. Transamerica Life Canada, 2016 ONCA 633 at para.36-39.
[^12]: Excalibur Special Opportunities LP v. Schwarz Levitsky Feldman LLP, 2016 ONCA 916 at para 57.
[^13]: Aix v. Fischer, supra at paras.27-35.
[^14]: Class Proceedings Act,1992, S.O.1992, c.6.
[^15]: AIC Limited v. Fischer, 2013 SCC 69 at para.23.
[^16]: Aix v. Fischer, supra at para 27.
[^17]: Aix v. Fischer, supra at para 31.
[^18]: AIC Limited v. Fischer, supra, para 27.
[^19]: S.138 of Courts of Justice Act, R.S.O.1990, C.43; Fantl v. Transamerica Life Canada, 2016 ONCA 633 at para.39; Kowalyshyn v Valeant Pharmaceuticals International Inc., 2016 ONSC 3819 at para.231; McNaughton v Baker, 1988 3036 (BCCA) at para.14.
[^20]: Fontaine v. Canada (Attorney General), 2018 ONCA 832 at para.15.