COURT FILE NO.: CV-10-413040

MOTION HEARD: February 17, 2012

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Merike Berehowsky, Danielle Berehowsky, Darren Berehowsky and Drake Berehowsky v. 2170836 Ontario Ltd. c.o.b. Butler Capital Management Group, Avalon Funds Ltd., Phillip Butler, Kyle Butler and Sandra Butler

BEFORE: MASTER R.A. MUIR

COUNSEL: Lucas E. Lung for the plaintiffs

Andrea Gorys for the proposed defendants ALT Capital LLC and ALT Capital Markets Inc.

Phillip Butler in person

REASONS FOR DECISION

[1] The plaintiffs bring this motion pursuant to Rule 5.04(2) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 (the “Rules”) for an order granting them leave to amend their statement of claim to add ALT Capital LLC, ALT Capital Markets Inc. (collectively “ALT”), Dorman Trading LLC (“Dorman”) and Keri-Lee Butler (“Keri-Lee”) as defendants to this action.[^1] ALT opposes the relief sought. The current defendants, along with the proposed new defendants Dorman and Keri-Lee, do not oppose.

BACKGROUND

[2] This action arises out of a series of financial investments made by the plaintiffs. The plaintiffs allege that the current defendants provided them with planning and investment advice. The plaintiffs appear to have invested a total of US$2,078,012 with the defendants between February 2006 and March 2007. The plaintiffs allege that in July, 2009, the defendants advised the plaintiffs that the entirety of their investments had been lost as a result of a “huge mistake” made by the current defendants.

[3] This action was commenced on October 26, 2010. On November 16, 2010, Justice Himel made an order restraining the current defendants from dissipating their assets. At the same time, Justice Himel also ordered the current defendants to provide sworn statements describing the nature, value and location of their assets. On December 13, 2010, the defendant Kyle Butler (“Kyle”) served an affidavit stating that his company, the defendant Avalon Funds Ltd., received funds from investors through his father, the defendant Phillip Butler (“Phillip”) and then transferred those funds to a brokerage account in Chicago, for trading purposes.

[4] In February and March, 2011, the defendants produced copies of various personal and corporate financial records. It appears that it was only upon reviewing those records that the plaintiffs became aware that their investments were traded through trading accounts with Dorman and MF Global Inc.[^2] Those records also indicated that ALT had acted as introducing broker in connection with those trading accounts. Finally, the plaintiffs allege that those records also indicate that Keri-Lee may have improperly received funds or assets derived from the plaintiffs’ investments in the amount of $25,500.00.

[5] The plaintiffs’ draft amended statement of claim alleges negligence on the part of ALT. The allegations against ALT are found in proposed new paragraphs 14.4, 14.5, 65.3, 65.4, 70.1, 70.2, 70.3, 70.4 and 70.5 of the draft amended statement of claim. Specifically, the plaintiffs make the following allegations in respect of ALT:

• the ALT defendants carry on business in Ontario and the United States as introducing brokers and investment advisors;
• a portion of the plaintiffs’ funds were transferred to ALT and put into unauthorized and unsuitable high risk investments;
• at all times, ALT acted as a broker, dealer and investment advisor to the plaintiffs;
• ALT had a duty to ensure that the plaintiffs’ investments were suitably invested, consistent with applicable statutory, regulatory and professional rules and standards;
• ALT knew, or should have known, that Kyle and Phillip were using the plaintiffs’ investments to conduct risky options trading in accounts held at ALT, contrary to applicable industry, professional, statutory and regulatory rules and standards;
• ALT failed to contact the plaintiffs to determine whether trading in futures securities would be suitable investments for the plaintiffs;
• ALT advised and recommended the investment of the plaintiffs’ funds in high risk investments that were unsuitable for the plaintiffs;
• ALT owed the plaintiffs a duty of care which required it to determine the suitability of the plaintiffs’ investments;
• ALT breached the duty of care it owed to the plaintiffs by failing to properly investigate or ascertain the source of the funds it received from Kyle, by permitting Phillip and Kyle to engage in risky trading with the plaintiffs’ money, by failing to determine whether the investments were suitable for the plaintiffs, by recommending unsuitable investments and investment strategies, by failing to provide the plaintiffs with disclosure statements and generally by failing to comply with applicable professional, statutory and regulatory rules; and,
• ALT knew, or ought to have known, that its breach of its duty of care would result in damage to the plaintiffs.

[6] Of course, these are simply allegations and, at least at this stage, the plaintiffs appear to have very little evidence to support the claims they are making against ALT.

ANALYSIS

[7] Rule 5.04(2) provides as follows:

(2) At any stage of a proceeding the court may by order add, delete or substitute a party or correct the name of a party incorrectly named, on such terms as are just, unless prejudice would result that could not be compensated for by costs or an adjournment.

[8] Rule 26.01 provides as follows:

26.01 On motion at any stage of an action the court shall grant leave to amend a pleading on such terms as are just, unless prejudice would result that could not be compensated for by costs or an adjournment.

[9] On motions under both Rule 5.04(2) and Rule 26.01, the moving party must demonstrate that no prejudice would result that could not be compensated for by costs or an adjournment. See Mazzuca v. Silvercreek Pharmacy Limited, 2001 CanLII 8620 (ON CA) at paragraph 25. However, unlike Rule 26.01, the court does retain a discretion when deciding a motion brought under Rule 5.04(2) to refuse to allow amendments relating to a change of parties in appropriate circumstances, even in the absence of non-compensable prejudice. See Mazzuca at paragraph 30.

[10] An example of where such a discretion may be exercised by the court is where the proposed amendments are not tenable at law. See Wong v. Adler, 2004 CanLII 8228 (ON SC), [2004] O.J. No. 1575 (S.C.J. – Master) at paragraph 12; affirmed, 2004 CanLII 73251 (ON SCDC), [2005] O.J. No. 1400 (Div. Ct.). This is the argument ALT is advancing on this motion in opposing the proposed amendments.

[11] ALT argues that the proposed amendments are vague and general in nature without sufficient factual support. ALT points out that the plaintiffs admit to having had no interaction or communications with ALT. ALT argues that it was only acting as introducing broker, and has no duty to investigate beyond the introduction. ALT submits that the proposed claim against it is merely a fishing expedition on the part of the plaintiffs.

[12] I agree that the factual and evidentiary support for the plaintiffs’ claims against ALT is limited to say the least. The plaintiffs admit that they have no particulars of the allegations of negligence against ALT other than the references to ALT set out in the documents produced by Kyle. However, the right to amend a pleading is not dependent upon evidence to support the proposed amendments. The court must assume that all of the allegations in the proposed amendments are true. See Financialinx Corporation v. K & D Auto Ventures Inc., 2009 CanLII 55320 (ON SC) at paragraphs 23 and 24. A motion to add a claim or a party should only be dismissed on the basis of no tenable claim when the proposed claim is “clearly impossible of success”. See CC&L Dedicated Enterprise Fund (Trustee of) v. Fisherman, 2001 CanLII 28387 (ON SC), [2001] O.J. No. 4622 (S.C.J.) at paragraph 40.

[13] The plaintiffs allege that ALT went well beyond the role of a mere introducing broker. The plaintiffs have pleaded that ALT received funds and acted as a broker, dealer and investment advisor to the plaintiffs. The proposed amended statement of claim pleads that ALT knew or ought to have known that Kyle and Phillip were trading with the plaintiffs’ money and that ALT breached the duty of care it owed to the plaintiffs by, among other things, failing to conduct a proper suitability inquiry. The question of whether any particular defendant in a negligence action owes a duty of care was summarized by Justice Cumming in Financialinx at paragraph 65 where he stated as follows:

65 La Forest J. stated that there is a two-part test for determining whether a defendant owes a duty of care (at p. 184), adopting the principles articulated in Anns v. Merton London Borough Council [1978] A.C. 728 at 751-752 (H.C.). First, does a relationship of proximity exist between two persons, such that the alleged wrongdoer can reasonably foresee that carelessness on his/her part is likely to cause damage to the person who has suffered damage, thereby giving rise to a prima facie duty of care? Second, if so, are there any factors or considerations which ought to limit or negate the scope of the duty, or the class of person to whom it is owed, or the damages to which a breach of the duty may give rise? See Kamloops v. Nielsen, 1984 CanLII 21 (SCC), [1984] 2 S.C.R. 2 at 10-11.

[14] In my view, if I accept the allegations set out in the proposed amended statement of claim to be true, as I am required to do, the plaintiffs have met the first element of the Anns test. As set out above, the plaintiffs have pleaded that ALT received funds and acted as a broker, dealer and investment advisor to the plaintiffs (albeit indirectly through the Butler defendants). If this is true, it is certainly arguable that ALT owes a duty to the plaintiffs to inform itself of the plaintiffs’ investment objectives, risk tolerances and personal circumstances. See Varcoe v. Sterling, 1992 CanLII 7478 (ON SC), [1992] O.J. No. 60 at paragraphs 26 to 32 (G.D.); affirmed 1992 CanLII 7730 (ON CA), [1992] O.J. No. 1501 (C.A.); leave to appeal refused, [1992] S.C.C.A. No. 440. The plaintiffs allege that ALT failed to do this and that the plaintiffs have suffered damage as a result.

[15] As for the second stage of the Anns test, such an analysis should only be made on a full evidentiary record and not on a motion of this nature. See Financialinx at paragraph 79. The question of whether policy considerations may exist which ought to negate or limit the scope of any duty ALT may allegedly owe to the plaintiffs is a matter best left to the trial judge or, at the very least, to a court hearing a motion for summary judgment.

[16] In my view, the plaintiffs’ proposed claims against ALT are tenable at law and cannot, at this stage, be viewed as being “clearly impossible of success”.

[17] I am also of the view that it is otherwise appropriate to add the proposed ALT defendants as parties to this action. Although this action was commenced in 2010, it has not yet progressed to the documentary or oral discovery stage. There is no evidence of non-compensable prejudice to ALT or any of the other proposed new parties or to the existing defendants. The proposed new claims all arise out of the same transactions. It is, in my view, appropriate that these proposed new claims be joined with the existing claims in order to avoid inconsistent findings of fact and in the interest of judicial economy and the efficient administration of justice.

CONCLUSION

[18] The plaintiffs are hereby granted leave to amend their statement of claim in accordance with the draft amended statement of claim at Tab 1A of the plaintiffs’ motion record originally returnable August 16, 2011.

[19] At the hearing of this motion, counsel for the plaintiffs indicated that there may be an issue with respect to Phillip’s compliance with Master Graham’s order of August 16, 2011. If the parties require a further attendance in order to address this issue, they may contact my assistant at 416-327-9406 by no later than March 6, 2012.

COSTS

[20] If the parties are unable to agree on the issue of costs, they may make brief submissions in writing by no later than March 6, 2012.

Master R.A. Muir

DATE: February 21, 2012

[^1]: The notice of motion also seeks an order to continue this action in the names of the estate trustees for the plaintiff Merike Berehowsky and an order that the defendants Phillip Butler and Sandra Butler provide the plaintiffs with current contact information for Keri-Lee. Those portions of the relief sought were dealt with by Master Graham on August 16, 2011.

[^2]: The plaintiffs had sought to add MF Global Inc. as a defendant as well, but have now abandoned that portion of the relief as a result of the bankruptcy of MF Global Inc.