CITATION: Frayce v. BMO Investorline Inc., 2024 ONSC 533
DIVISIONAL COURT FILE NO.: 132/23
DATE: 2024/01/24
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
McWatt A.C.J.S.C.J., Sachs and Abrams JJ
BETWEEN:
Denis Frayce and Maxwell Wallace
Plaintiffs/Appellants
– and –
BMO Investorline Inc., CIBC Investor Services Inc., Credential Qtrade Securities Inc., Desjardins Securities Inc., HSBC Securities (Canada) Inc., Scotia Capital Inc. and TD Waterhouse Canada Inc.
Defendants/Respondents
James Sayce, Paul Bates, John Archibald, and Caitlin Leach for the Plaintiffs/Appellants
Ian C. Matthews and Adrian Pel, for the Defendant/Respondent, BMO Investor Line Inc.
Linda Fuerst, Randy Sutton and Katarina Wasielewski for Defendant/Respondent, Desjardins Securities Inc.
Linda Plumpton, Gillian Dingle and Ryan Lax for the Defendant/Respondent, CIBC Investor Services Inc.
Rahool P. Agarwal and Xin Lu (Crystal) Li for the Defendant/Respondent, Credential Qtrade Securities Inc.
Mark Evans and Ara Basmadjian for the Defendant/Respondent, HSBC Securities (Canada) Inc.
Paul-Erik Veel and Caroline Humphrey for the Defendant/Respondent, Scotia Capital Inc.
David Hausman, Vera Toppings and Tina Cody for the Defendant/Respondent, TD Waterhouse Canada Inc.
HEARD at Toronto: December 4^th^, 2023
The court
Overview
[1] On January 20, 2023, Belobaba J. dismissed a motion by the Plaintiffs to certify a class action against the Defendants, all of whom were discount brokers who received mutual fund trailing commissions.
[2] On June 1, 2022, Canadian securities administrators prohibited the practice of paying trailing commissions to discount brokers as they, unlike full-service brokers, do not provide advice about an investment’s suitability.
[3] The proposed class action alleges that long before the prohibition, the receipt of trailing commissions by discount brokers (which was expensed to the mutual fund) caused harm to mutual fund investors by reducing the value of their investment.
[4] The motion judge found that the motion turned on the question of whether the Plaintiffs could satisfy the common issue criterion for the core proposed issue in the action – namely, whether there was “some evidence” that the receipt of trailing commissions by the Defendants contravened any applicable Canadian securities law. He found that the answer to this question was “no” and, therefore, there was no basis for any of the pleaded causes of action.
[5] The Plaintiffs submit that the motion judge made three errors of law. First, he ignored the statutory test for certification by requiring “some evidence” that the receipt of trailing commissions contravened applicable Canadian securities law. According to the Plaintiffs, this is a legal question, which the motion judge attempted to answer at the certification stage. In doing so, the motion judge strayed into assessing the merits of the action, something that is impermissible at the certification stage, which is procedural in nature.
[6] Second, the Plaintiffs allege that the motion judge erred when he found that all the causes of action pleaded by the Plaintiffs failed because the motion judge concluded that there was not some evidence of illegality. According to the Plaintiffs, three of those causes of action – negligence, knowing assistance, knowing receipt – do not rely on the allegation that the impugned conduct contravened Canadian securities law prior to the explicit prohibition of the practice in 2022.
[7] Third, the Plaintiffs argue that the motion judge wrongly decided the case based on a concession by the Plaintiffs that they submit they never made. The Plaintiffs submit that the motion judge took one line from one factum out of context and treated that line as a binding concession.
[8] For the reasons that follow, the appeal is dismissed.
Analysis
The motion judge did not err when he determined the motion by focusing on the “core” issue
[9] While not the central focus of their submissions, the Plaintiffs suggest that the motion judge erred in his approach to the motion for certification. Rather than going through each of the requirements for certification and discussing whether they were met, the motion judge short-circuited the motion by focusing on what he found to be the core proposed issue and deciding that if that issue could not be certified, the whole action could not be certified.
[10] While not every case may be suited to such an approach, it is not an error to do so in the appropriate case.
[11] The way the motion judge decided this case parallels how he decided Simpson v. Facebook, 2021 ONSC 968, which was upheld by the Divisional Court at 2022 ONSC 1284. It is also like the approach used by Perell J. in Marcinkiewicz v. General Motors of Canada Co., 2022 ONSC 2180.
The motion judge did not err in requiring “some evidence” of illegality
[12] Proposed Common Issue 2 (“PCI-2”) (which the motion judge found to be the core issue) reads:
- By receiving and retaining Trailing Commissions from the Class Members, did the Defendants contravene any of those Applicable Canadian Securities Laws?
[13] In order to certify an issue as a common issue, the plaintiff must show some basis in fact that (1) the proposed common issue actually exists; and (2) the proposed common issue can be answered in common across the entire class (Butten v. Boehringer Ingelheim (Canada) Ltd., 2017 ONSC 6098 (Div. Ct.), at paras. 14-15; Kuiper v. Cook (Canada) Inc. 2020 ONSC 128 (Div. Ct.) at paras. 26-36).
[14] The Plaintiffs submit that the motion judge ignored this two-step test when he required the Plaintiffs to demonstrate that there was some evidence that the receipt of trailing commissions was illegal.
[15] The motion judge, an experienced class action judge, was clearly aware of the two-part test for certification. Judges are “presumed to know the law with which they work, day in and day out, and their reasons must be read functionally, contextually and with this presumption in mind” (R. v. CP, 2023 ONCA 70 at para. 7). Keeping this in mind, the motion judge’s reference to “some evidence” is equivalent to the requirement for “some basis in fact”. His use of the term “illegal” is his shorthand for “contravene any applicable Canadian securities law”.
[16] According to the Plaintiffs, the “some basis in fact” test is an evidence-based requirement that cannot apply to a question of law. Whether the impugned conduct contravened applicable Canadian securities law is a question of law that cannot be subject to an evidentiary burden, especially at the certification stage. To do so inevitably involves straying into the merits of the proposed action. As confirmed by the Supreme Court in Pro-Sys Consultants v. Microsoft Corporation, 2013 SCC 57, [2013] 3 SCR 477, “the certification stage is decidedly not meant to be a test of the merits of the action”; it “is concerned with form and with whether the action can properly proceed as a class action.”(para. 99)
[17] The Plaintiffs rely on the decision of the Supreme Court of British Columbia in Bowman v. Kimberly-Clark Corporation, 2023 BCSC 1495 to support their argument that questions of law cannot be subject to the evidentiary component of the “some basis in fact” requirement. At para. 137 of Bowman the Court states:
The “existence” of legal issues will not always be amenable to evidentiary demonstration, although the requirement that they are based on common facts is amenable to evidence and is the one step evidentiary test described in Pro-Sys. For example, aggregate damages have spawned much of the law on the evidentiary burden regarding common issues….
[18] After discussing how the requirements for an award of aggregate damages under the Class Proceedings Act, RSBC 1996, c 50 are not matters of evidence the court goes on to state:
In summary, I conclude that the two-step evidentiary test as it has been articulated is not appropriate for every common issue that might be sought to be certified in a given case. It may overstate the burden and run the risk of a merits-focussed inquiry. It may misstate the burden. While there must be common issues to certify a class proceeding, their existence is determined by whether there are live issues of fact or law which is not always an evidentiary matter. (para. 139).
[19] Contrary to the submissions of the Plaintiffs, Bowman does not stand for the proposition that questions of law are not subject to the “some basis in fact” analysis. Rather, it highlights the necessity to focus on whether there is a legal issue to be determined. Sometimes answering that question will require an examination of the evidence; sometimes it will not.
[20] In Pro-Sys, supra, at para. 103, the Supreme Court emphasized the importance of certification “as a meaningful screening device”. While the standard for assessing evidence at the certification stage does not involve a determination of the merits, it does involve more than a “superficial level of analysis into the sufficiency of the evidence that it would amount to nothing more than symbolic scrutiny.”
[21] Recently, the Federal Court of Appeal highlighted the importance of the two-step approach to achieving the objectives of certification. In Jensen v. Samsung Electronics Co. Ltd., 2023 FCA 89 at para. 80, the Court states:
…full agreement with the Motion Judge that the two-step approach is the only one consistent with the underlying rationale and the purpose of the certification process. If that process is to be meaningful and to achieve its objective to root out unfounded and frivolous claims, there must be a minimum assessment of the proposed common issue to ensure that it has an air of reality. Otherwise, the certification would not achieve its goal and almost any proposed certified action would have to be certified…Allowing a common issue lacking a basis in fact to proceed to trial would certainly not promote judicial economy, nor would it promote behavioural modification, or enable access to justice.
[22] In the case at bar the motion judge’s assessment was directed at determining whether there was an “air of reality” to the proposition that the receipt by online brokers of trailing commissions prior to their prohibition was contrary to applicable Canadian securities law. After examining the large record put forward by the Plaintiffs on the issue, he determined that there was not. The Plaintiffs do not appeal the motion judge’s weighing of this evidence. They say that he should never have engaged in the exercise of looking at the evidence. The proposition that the receipt of these commissions was illegal clearly had an air of reality.
[23] To support their position on this point the Plaintiffs took us to the evidentiary record with a view to demonstrating that the payment and receipt of trailing commission was not permitted under applicable Canadian securities law prior to June of 2022. The Defendants did the same, pointing to sections of the applicable law that they say permitted online brokers to receive these commissions.
[24] This was part of the extensive record that the motion judge reviewed and, after doing so, decided that there was no basis in fact for the contention that prior to June of 2022 the receipt by online brokers of trailing commissions was contrary to applicable Canadian securities law. His weighing of the evidence on this issue is entitled to considerable deference from this court and is not being challenged by the Plaintiffs. However, more importantly, the way the appeal was argued before us illustrates that the motion judge was correct that, in order to perform his necessary screening function at the certification stage, it was necessary for him to examine the evidentiary record with a view to determining whether there was some basis in fact for the proposition that the receipt of trailing commissions by online brokers was contrary to applicable Canadian securities law.
[25] For these reasons we find that there is no merit to the submission that the motion judge erred when he conducted an evidence-based inquiry to determine if there was some basis in fact for the proposition being put forward by the Plaintiffs in PCI-2.
The motion judge did not err when he found that all the causes of action pleaded by the Plaintiffs failed because there was not “some evidence” of illegality.
[26] As the motion judge framed the issue, if the “some evidence” of illegality requirement was not met, there could be no basis for the pleaded causes of actions.
[27] The Plaintiffs contend that some of the causes of action do not rely on the allegation that the impugned conduct contravened Canadian securities laws, specifically: negligence, knowing assistance, and knowing receipt. Accordingly, the failure of that allegation cannot render those causes of action non-viable.
[28] Further, the Plaintiffs assert that, as a matter of law, a failure to meet the “some evidence” of illegality cannot dispose of those causes of action, and that the motion judge erred in law in finding otherwise.
[29] We find no merit in these submissions.
[30] With respect to the claim based in negligence, the Plaintiffs pleaded that the Defendants receipt and retention of trailing commissions was contrary to the “Applicable Canadian Securities Law.” Thus, the Plaintiffs claimed that the duty of care owed to them necessarily required the return of the trailing commissions.
[31] Framed as such, illegality is directly relevant to the negligence claim. Put another way, the Plaintiffs expressly pleaded that the content of the duty of care is informed by the Defendants’ obligations under the “Applicable Canadian Securities Law.”
[32] The motion judge considered the evidence of the standards of conduct in securities industry rules and legislation that could possibly underpin a negligence action and found no basis in fact for their existence, as he was entitled to do.
[33] With respect to the claims based in knowing assistance and knowing receipt, the Plaintiffs pleading also demonstrates that these claims are rooted in illegality. The pleading is replete with references to illegality, unlawfulness, and wrongful conduct attributed to the Defendants, all of which is tied directly to Canadian securities law. For example, the claims for knowing assistance and knowing receipt rest upon allegations that the Defendants “have long known the unlawfulness of their practice of collecting Trailing Commissions from clients when they provided no ‘advice or services’ in return” and that the Defendants “have also long known about the unlawfulness of their collecting Trailing Commissions through publications of the CSA.”
[34] Again, the motion judge, having considered all the evidence, found that there was simply no basis in fact for these allegations, which resulted in the total collapse of all commonality among the claims sought to be advanced by the Plaintiffs, which he was entitled to do. Moreover, as explained below, the Plaintiffs conceded that failure to satisfy the “some evidence” of illegality requirement would result in there being no basis for any of the pleaded causes of action.
The motion judge did not err in relying on the concession by the Plaintiffs.
[35] After finding that there was no basis in fact for the proposition put forward by the Plaintiffs in PCI-2, the motion judge did not go on to deal with the other common issues proposed by the Plaintiffs, each of which relate to different pleaded causes of action. As put by the motion judge:
The plaintiffs agree that if the answer to PCI-2 is “no” then there is no basis for the pleaded causes of action – breach of contract, negligence, unjust enrichment, knowing receipt and knowing assistance – and, I would add, no basis for any of the other common issues or damages claims. If the answer to the PCI-2 is “no”, the proposed class action collapses and must be dismissed.
[36] The Plaintiffs submit that this concession was never made. According to them, only one Defendant, TD Waterhouse Canada Inc. stated, in one of the final factums delivered on the certification motion that:
The plaintiffs candidly acknowledge how central the premise of illegality is to their case…They state that their breach of contract, negligence, unjust enrichment and accessory tort claims of necessity fall away if the defendants did not engage in unlawful conduct.
[37] According to the Plaintiffs, this was a mischaracterization of their position and led the motion judge into error.
[38] The Plaintiffs acknowledge that they did make the following statement in one of their factums. They claim they did so in response to an assertion by the Defendants that whether the Defendants complied with their obligations under securities law could not be answered in common for the class. The Plaintiffs responded that a determination of whether the defendants’ conduct was appropriate would apply across the entire class:
The Plaintiffs’ case poses a binary question, either the impugned conduct was legal or illegal. The answer to this question will resolve all of the Plaintiffs’ claims in breach of contract, knowing assistance, knowing receipt, negligence and unjust enrichment.
[39] However, they say, this was not a concession that, if the impugned conduct did not contravene the applicable securities laws, all of the Plaintiffs’ claims were bound to fail. As put by them in their appeal factum:
The law recognizes wrongs beyond those described in statutes and regulations. Conduct can be “inappropriate” or “illegal” without contravening securities law. Just as a breach of statute or regulations, alone, does not ground a civil cause of action, the absence of such a breach does not exclude all possible civil causes of actions.
[40] The Plaintiffs submitted in their appeal factum that they made this clear to the motion judge during the hearing of the certification motion. To support this proposition, the Plaintiffs filed a motion for leave to admit fresh evidence on the appeal before us. The fresh evidence they sought to admit was an affidavit from a lawyer at the Plaintiffs’ firm who attended the certification hearing and made notes of that hearing, which were attached as an exhibit. At the beginning of the appeal hearing the Plaintiffs’ counsel stated that he thought that he would be able to make his submissions without seeking to rely on the lawyer’s notes of the hearing. If he did so, there would be no need for us to rule on the fresh evidence motion. If he did not, both parties were content for us to make a ruling based on their written submissions. Plaintiffs’ counsel did not seek to refer to the proposed fresh evidence and therefore, there is no need for us to make a ruling on their motion.
[41] The Plaintiffs argue that the motion judge should not have relied on their concession because it was not clear, unambiguous and unequivocal. If there was a concession, the Plaintiffs submit that it can be withdrawn at any time, including at the appeal hearing before us.
[42] The certification motion was heard over three days – one in February of 2022 and two more in September of 2022. On the first day, the motion judge raised concerns about the case and the Plaintiffs agreed that the matter should be adjourned to allow them to review their position and discuss with the Defendants the various objections they were raising about the action’s suitability for certification as a class proceeding. The motion judge signed a written direction on February 10, 2022 that stated:
As suggested by the court and at the request of the plaintiffs, the certification motion is adjourned pursuant to s. 5(4) of the CPA pending review by the plaintiffs and discussion with the defendants of various objections to certification raised by the defendants.
The plaintiffs shall consider the addition of further representative plaintiffs to address the defendants’ Ragoonanan argument, amendments to the claim, whether to deliver additional evidence on behalf of the plaintiffs, the reformulation of certain of the common issues, and whether the action will proceed against all of the defendants in one action.
Counsel to the plaintiffs shall advise the court and the defendants by March 31, 2022 of their position on these issues to permit counsel for the defendants to obtain instructions in advance of a Zoom CMC to be arranged by counsel for the plaintiffs for April 29, 2022 at 9:30 am EST.
The adjournment was not opposed by the defendants. All parties’ rights are reserved.
[43] Additional factums were exchanged. Paragraph 3 of the Plaintiffs’ factum states:
- The mutual fund transactions at the heart of this action are governed by the Applicable Canadian Securities Laws. The Plaintiffs allege that the Applicable Canadian Securities Laws always prohibited the receipt and retention of trailing commissions by Discount Brokers. The prohibition was set out in recent amendments to regulations confirming the illegality of Discount Brokers receiving trailing commissions on mutual fund transactions. The Plaintiffs’ case poses a binary question: either the impugned conduct was legal or illegal. The answer to this question will resolve all of the Plaintiffs’ claims in breach of contract, knowing assistance, knowing receipt, negligence and unjust enrichment.
[44] Further, at para. 6 of the same factum, the Plaintiffs state:
- This class proceeding ought to be certified so that a summary judgment motion may be scheduled on the question of the legality of trailing commissions in the discount broker channel. This entire action can be quickly and efficiently resolved in this manner.
[45] After receiving this factum, the Defendants responded with a factum, the relevant portions of which read as follows:
This factum responds to the Plaintiffs’ supplementary factum for certification dated September 7, 2022 (“Plaintiffs’ Supplementary Factum”). Specifically it addresses the lynchpin premise, as observed by the court at the original return date of the certification motion in February 2022, that underlies each of the proposed common issues-ie. that the defendants’ acceptance of trailing fees from investment fund managers was contrary to applicable securities law.
The Plaintiffs candidly acknowledge how central the premise of illegality is to their case in paragraph 3 of their Supplementary Factum. They state that their breach of contract, negligence, unjust enrichment and accessory tort claims of necessity fall away if the defendants did not engage in the unlawful conduct.
However, there is no basis in fact for the allegation that the defendants’ conduct was illegal.
[46] In reply, the Plaintiffs filed a factum that contained the following statement:
- If the Defendants’ arguments on the lawfulness of their conduct is so straightforward, they would have moved for summary judgment on a full evidentiary record. If this matter is certified, the Plaintiffs will bring such a motion. In this respect, the Plaintiffs’ central, binary question on the lawfulness of trailing commissions benefits all the parties. It will lead to a full and final resolution of all the issues in this action.
[47] In the face of this record, it is quite clear that the motion judge did not simply, as the Plaintiffs asserted in oral argument, take one sentence from one of many factums out of context to support his conclusion that if there was no basis in fact for the core issue, the whole action fails. This is the position that the Plaintiffs took on the certification motion. They make this clear both in their Supplementary Factum and in their response to the Defendants’ answer to their Supplementary Factum. This was a strategic choice they made after adjourning the matter to rethink their approach on the certification motion in the face of the Defendants’ many arguments that the action was not one that ought to be certified as a class proceeding. The question becomes whether, having made this choice before the motion judge, the Plaintiffs should be permitted to resile from it on appeal.
[48] In Ontario Service Employees Union Pension Trust Fund v. Clark, 270 DLR (4^th^) 429, 2006 20839 (ONCA), the Court of Appeal had this to say about a party’s attempt to resile from a strategy adopted by them before the court below:
[24] Deloitte took an “all or nothing” approach before the application judge, contending that it would not be feasible to narrow the request by attempting to separate the relevant from the irrelevant in the circumstances – thereby tactically strengthening its argument based on “burdensomeness.” On appeal, Deloitte attempted to resile from that position and argued that, if the court were to uphold the enforcement order, it should order one of a series of suggested options narrowing the production permitted under the letters rogatory. While it was open to the application judge to narrow the request, she was not invited to do so, on the basis that it was impracticable. In my view, fairness considerations preclude Deloitte from reversing that position now on appeal.
[49] In our view, fairness considerations also preclude us from allowing the Plaintiffs to change their position on the concession on appeal. Having made a strategic decision that did not work at the court below, it is not appropriate for the Plaintiffs to reverse that decision and try again before an appellate court.
Conclusion
[50] For these reasons the appeal is dismissed. As agreed by the parties, the Defendants are entitled to their costs of the appeal, fixed in the amount of $50,000, all inclusive.
McWatt A.C.J.S.C.J.
H. Sachs J.
Abrams J.
Released: January 24, 2024
CITATION: Frayce v. BMO Investorline Inc., 2024 ONSC 533
DIVISIONAL COURT FILE NO.: 132/23
DATE: 2024/01/24
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
McWatt A.C.J.S.C.J., Sachs and Abrams JJ
BETWEEN:
Denis Frayce and Maxwell Wallace
Plaintiffs/Appellants
– and –
BMO Investorline Inc., CIBC Investor Services Inc., Credential Qtrade Securities Inc., Desjardins Securities Inc., HSBC Securities (Canada) Inc., Scotia Capital Inc. and TD Waterhouse Canada Inc.
Defendants/Respondents
REASONS FOR JUDGMENT
THE COURT
Released: January 24, 2024