COURT FILE AND PARTIES

COURT FILE NO.: 4622/11CP
DATE: 2012/09/18
SUPERIOR COURT OF JUSTICE – ONTARIO

RE: KEITH LOCKING (Plaintiff) -and- ARMTEC INFRASTRUCTURE INC., SCOTIA CAPITAL INC., TD SECURITIES INC., BMO NESBITT BURNS INC., CHARLES M. PHILLIPS, JAMES R. NEWELL, ROBERT J. WRIGHT, RON V. ADAMS, DON W. CAMERON, BRIAN W. JAMIESON, JOHN E. RICHARDSON and MICHAEL S. SKEA (Defendants)

Proceeding under the Class Proceedings Act, 1992

A N D B E T W E E N:

COURT FILE NO.: CV-11-16465

RE : BRUCE SIMMONDS, ROBERT GRANT and GORDON MOORE (Plaintiffs) –and- ARMTEC INFRASTRUCTURE INC., CHARLES M. PHILLIPS, JAMES R. NEWELL, MAICHAEL S. SKEA, DONALD W. CAMERON, SCOTIA CAPITAL INC., TD SECURITIES INC. AND BMO NESBITT BURNS INC. (Defendants)

Proceeding under the Class Proceedings Act, 1992

BEFORE: JUSTICE A. D. GRACE

COUNSEL:
P. Kryworuk , for Keith Locking

W. Sasso and A. Constantin, for Bruce Simmonds, Robert Grant and Gordon Moore

HEARD: September 7, 2012

REASONS ON MOTION FOR LEAVE TO APPEAL

[1] In reasons dated January 20, 2012, Thomas J. decided competing “carriage” motions. He concluded that the class proceeding commenced by Bruce Simmonds and two others against Armtec Infrastructure Inc. (“Armtec”), certain directors and various underwriters (the “ Simmonds action”) would continue. Thomas J. ordered that a similar action commenced by Keith Locking (the “ Locking action”) be stayed.

[2] Mr. Locking appealed. The Court of Appeal concluded it lacked jurisdiction. [1]

[3] Mr. Locking had the foresight to file a notice of motion seeking leave to appeal to the Divisional Court in the event of that disposition. That motion came on for hearing before me.

[4] The factual background is set forth in detail in the reasons of Thomas J. A short summary will suffice.

[5] Securities of Armtec were sold in 2011 through a public offering. On June 8, 2011 Armtec issued a press release disclosing disappointing financial results in the first quarter of 2011. The payment of dividends was suspended. The share price fell dramatically.

[6] Lawyers were retained: Sutts, Strosberg LLP by Mr. Simmonds and his co-plaintiffs and Siskinds LLP by Mr. Locking. Each law firm started a class proceeding in Ontario. Each action makes allegations of wrongdoing and seeks substantial damages. Unable to make arrangements to act in concert, the plaintiffs asked the court to intervene and allow one action to continue and to stay the other.

A. The Evidence on the Carriage Motions

[7] Most of the evidence on the motions was presented by way of affidavits sworn by lawyers for the parties: Michael Robb on behalf of Mr. Locking and Jay Strosberg on behalf of Mr. Simmonds et al. [2]

[8] Mr. Robb’s affidavits were sworn October 24, November 9 and 14, 2011 and those of Mr. Strosberg on October 24, November 8 and 14, 2011.

[9] In their initial affidavit, each lawyer described the steps taken prior to and following institution of the action with which they were involved – and in the case of Mr. Robb – an affiliated firm in Québec, outlined the composition of their firm and detailed the qualifications and experience of their class action team. The personal attributes of the representative plaintiffs and details of their trades in Armtec securities were described.

[10] To varying degrees the affidavits addressed aspects of their client’s claims. For example, Mr. Robb explained the rationale for a shorter class period, the inclusion of “early sellers” and for the parallel proceeding in Québec. Mr. Strosberg offered an explanation for a longer class period, the exclusion of early sellers and also briefly explained why the Simmonds action did not plead unjust enrichment or waiver of tort.

[11] Supplementary affidavits allowed each lawyer to respond to comparisons made by the other and to raise new issues. For example, in his November 8, 2011 affidavit, Mr. Robb commented on Mr. Simmonds curriculum vitae which had been appended to Mr. Strosberg’s first affidavit.

[12] Mr. Robb deposed that he had reviewed public filings of one of the entities mentioned in that résumé. He appended copies of two press releases, an annual information form and management information circular.

[13] Based on those documents, Mr. Robb indicated that “we have become concerned that Mr. Simmonds had an undisclosed conflict of interest from his previous relationship” with two members of Armtec’s audit committee.

[14] In his last affidavit and based on information and belief, Mr. Strosberg denied that allegation. Mr. Strosberg was cross-examined at length prior to the return of the motions.

B. The Decision of Thomas J.

[15] Thomas J.’s analysis began with a summary of the governing considerations. He wrote:

The court’s primary concern on a class action carriage motion is to determine which of the competing actions is more, or most, likely to advance the interests of the class. The task...is to find a solution that is in the best interests of the putative class members, promotes the objectives of the Class Proceedings Act, 1992 ...and is fair to the defendants. [3] [Citations omitted]

[16] Citing Setterington v. Merck Frosst Canada Ltd (“ Setterington ”) [4] and ss. 12 and 13 of the Class Proceedings Act, 1992 (the “ C.P.A. ”), [5] Thomas J. held the court had a broad discretion on a carriage motion. Its task was to consider and balance a host of factors and then “determine which action best melds the cohesive with the comprehensive and thereby best promotes and protects the identified class.” [6]

[17] The non-exhaustive list of factors to which he referred was drawn from Vitapharm Canada Ltd. v. F. Hoffman-Laroche Ltd. [7] The motions judge wrote:

In determining which counsel group should have carriage of the action, the court should engage in a qualitative as opposed to quantitative analysis. Specifically, the court should consider, among other factors, the following:

a) the nature and scope of the causes of action advanced;

b) the presence of any conflicts of interest;

c) counsel factors including;

i) the theories advanced by counsel,

ii) the status of each class action, including preparation;

iii) the resources, experience and competence of counsel; and

iv) the prior success of counsel in class actions, particularly, similar class actions.

d) the number, size, and extent of involvement of the proposed representative plaintiffs; and

e) the relative priority of commencing the class actions. [8]

[18] Thomas J. then analyzed the competing actions using seven categories: causes of action, proposed class, named defendants, so-called “early sellers”, counsel factors, the status of and preparation for each class action and the number, size and extent of involvement of the representative plaintiffs.

[19] The motions judge determined that counsel factors were neutral. The firms selected by the named plaintiffs are experienced and skilled.

[20] One factor weighed in favour of the Locking action. Thomas J. concluded it was wise to have cast the net broadly and to have included the members of Armtec’s audit committee as defendants.

[21] The Simmonds action was given the advantage in all other respects.

[22] With respect to the causes of action raised, Thomas J. preferred the “simple, direct and uncomplicated claim” in Simmonds and the “straightforward assessment of damages” which would follow if liability was imposed. [9] He concluded the inclusion of waiver of tort and unjust enrichment in the Locking action “will potentially add unnecessary complexity and costs to the litigation, and perhaps delay resolution for class members.” [10]

[23] Thomas J. preferred the longer class period in Simmonds . In both actions the class period ends on June 8, 2011 when Armtec made additional disclosure. However, the plaintiffs chose different starting dates. In Simmonds , the class period commences March 24, 2011 which corresponds with the date of an earlier press release issued by Armtec. Mr. Locking chose March 30, 2011 when a preliminary short-form prospectus was issued. The motions judge noted the potential advantage of the earlier start date and concluded “the class period can easily be shortened” if necessary. [11]

[24] An analysis of the composition of the putative classes resulted in the Simmonds action receiving an additional point. The proposed class in the Locking action included those who had acquired securities of Armtec during the class period even if the securities were no longer held on June 8, 2011. The putative class in the Simmonds action did not include an investor who purchased securities during the relevant period unless securities were still held when Armtec made further disclosure. The motions judge concluded the latter approach was “a clean, simple method of defining the class and determining damages.”

[25] With respect to status and preparation, Thomas J. concluded the actions were at the same stage. However, the motion judge was impressed by the information he received concerning efforts made in the Simmonds action to locate and communicate with potential class members and it was given the advantage in that category as well.

[26] A similar conclusion was reached with respect to assessment of the representative plaintiffs. Thomas J. concluded the plaintiffs in the Simmonds action had “significant business acumen” and were “experienced in the corporate responsibilities attached to public offerings.” The motions judge seemed less impressed with Mr. Locking although his experience as a business owner and investor in the public market for more than twenty years was noted.

[27] Two specific concerns raised by those involved in the Locking action were rejected. The first was the conflict of interest issue mentioned earlier.

[28] Thomas J. concluded the issue of conflict was “entirely speculative” and that Mr. Simmonds “will fairly and adequately and without conflict, represent the interests of the class”. [12]

[29] The second concern related to the terms of the retainer. In Locking an agreement had been negotiated and signed. The contingency fee was specified. Siskinds LLP agreed to indemnify the representative plaintiffs if costs were awarded against them. No similar arrangement – with respect to fees or indemnification – was disclosed in the Simmonds action. The motions judge observed that “further solace” may have been drawn from “more fulsome retainers” but did not place greater significance on their absence. He observed “it will ultimately be for the court to determine whether the fees charged are fair and reasonable to the class”. [13]

[30] Thomas J. summarized his conclusion in these terms:

This was a decision made most difficult by the superb quality of the competing firms who have brought their expertise to bear on these actions...In the final analysis, however, I believe the Simmonds action should survive this motion because of its simple and cohesive yet adequately comprehensive approach to class and to damages and the fact that the benefits of its accomplished plaintiffs outweigh any concern I have over the fewer number of defendants named in the Simmonds action. [14]

C. The Test for Leave

[31] The test for leave is set forth in rule 62.02 (4). The relevant portion of the rule provides:

( 4) Leave...shall not be granted unless,

(a) there is a conflicting decision...on the matter involved...and it is in the opinion of the judge...desirable that leave...be granted; or

(b) there appears...good reason to doubt the correctness of the order...and the proposed appeal involves matters of such importance that...leave should be granted.

D. The Position of the Parties

[32] Mr. Kryworuk, counsel for Mr. Locking on this motion, acknowledges that Thomas J. identified and considered a list of factors consistently referenced by judges of the Superior Court of Justice when faced with carriage motions. He pointed out that those factors and their application have not been the subject of appellate scrutiny.

[33] Mr. Kryworuk maintains the time for appellate review has come. He submitted that both branches of the test for leave are met. With respect to rule 62.02 (4) (a), Mr. Kryworuk argued Thomas J. declined to give weight to factors which other decisions suggest are significant. He suggested it is important that those involved in class actions know which approach is correct. He also argued that the motion judge deviated from established principles by conducting a detailed substantive comparison of the two actions.

[34] With respect to rule 62.02 (4) (b), he submits that the correctness of the decision is open to serious debate: matters that should have been considered individually were consolidated, the theories advanced in the two actions were, in part, misunderstood and assessed inconsistently in others and that important factors were ignored or given insufficient weight. He maintains appellate guidance with respect to the test, the factors and the approach to be adopted in assessing and weighing them is overdue and vital to everyone who is or may be involved in a carriage dispute in a class proceeding.

[35] Mr. Sasso, counsel for Mr. Simmonds and his co-plaintiffs, delivered a pithy response. He argued there has been no appellate review because the principles to be applied on a carriage motion are clear and universally accepted.

[36] Two class proceedings arising from the same alleged wrong cannot be allowed to continue. One must give way to the other. Mr. Sasso maintained carriage of a class proceeding is a preliminary issue which the interests of justice require be resolved expeditiously. He says the choice in this case was between two viable actions, brought by experienced and competent counsel on behalf of qualified plaintiffs. Thomas J. made a difficult – and discretionary – choice after considering all of the factors which have been identified and assessing them to the extent possible on the basis of the pleadings and limited evidence the competing plaintiffs had compiled.

[37] Mr. Sasso submitted there is no basis to suggest that a wrong principle was applied or that Thomas J. made an incorrect choice. In any event, the motions involved the competing plaintiffs and their counsel only and no broader interest is affected. He submits that neither branch of the test for leave has been met.

E. Analysis and Decision

i. The Nature of the Decision under Review

[38] Mr. Kryworuk fairly acknowledged the discretionary nature of the order he seeks to review.

[39] Sections 12 and 13 of the Class Proceedings Act provide as follows:

12. The court, on the motion of a party or class member, may make any order it considers appropriate respecting the conduct of a class proceeding to ensure its fair and expeditious determination and, for the purpose, may impose such terms on the parties as it considers appropriate.

13. The court, on its own initiative or on the motion of a party or class member, may stay any proceeding related to the class proceeding before it, on such terms as it considers appropriate

[40] A discretionary order is entitled to deference. It is not to be set aside simply because the discretion would have been exercised differently had those reviewing the decision heard the matter at first instance.

[41] Only if the exercise of discretion is based on a misunderstanding of the law or was exercised arbitrarily or capriciously is intervention justified. [15] In dissenting reasons in Wong v. Lee , Borins J.A. offered the following instructive comments:

...when we say that a judge has a discretion we mean that there is no legal rule that compels the judge to make a particular decision. Rather, if the judge considers relevant factors, it is accepted that different judges can reasonably interpret the factors in different ways and reach different, but reasonable decisions. Thus, where no legal rule unambiguously requires a particular legal decision, there are no constraints that require a given result. In such cases, judges no doubt believe that neither party has the right to any particular decision. They identify their task as selecting the decision that is best on the whole, all things considered, and they talk not about what they must do but about what they should do. It can be said, therefore, that discretionary decisions illustrate that judging is an art, not a science, and that the judge, in considering the relevant factors, blends analogy, craft, political wisdom, and experience into a decision which his or her reasons, no matter how carefully crafted, may fail to capture or express his or her full insight. Such decisions may also illustrate that there are no right answers to hard questions, that insight is subjective, and that the decision is only what seems right, for better or worse, to the particular judge on a particular day. Such, then, is the nature of discretionary decision making and, no doubt, accounts for the significant deference to be accorded to discretionary decisions reached by judges. [16]

ii. Rule 62.02 (4) (a) – Conflicting Decision and Desirability of an Appeal Test

[42] Mr. Kryworuk made these submissions. The body of law in class proceedings is developing but there have been only a handful of carriage decisions. While they have produced similar lists of relevant factors, the cases evidence inconsistent approaches.

[43] He offered several examples. The first relates to the analysis of the causes of action advanced in the competing proceedings and the theories underlying them. Thomas J. summarized the existing legal principles in the following terms:

It is inappropriate for me in this carriage motion to, “parse the action finely or overly analyse it for the purposes of comparison but rather to scrutinize each for any glaring deficiencies”...Further, this is not a time for me to attempt to determine the ultimate success of a claim unless one is “frivolous or fanciful”...” [citations omitted]

[44] Yet, Mr. Kryworuk submits, the cautionary words were not heeded. Differences in the eligibility requirements for class members and the causes of action advanced were assessed despite the fact that rational decisions were made by competing firms of “superb quality”. That conclusion, he maintains, is inconsistent – or conflicts – with the authorities the motions judge cited.

[45] Those submissions warrant serious consideration. In Setterington , Winkler J. (as he then was) noted:

Here there are different theories underlying the causes of action in the two competing Statements of Claim and each plaintiff group urge that their approach is to be preferred. However, on a carriage motion it is inappropriate for the Court to embark upon an analysis as to which claim is most likely to succeed unless one is “fanciful or frivolous”, to adopt the words of Rady J. in Gorecki . [17]

[46] That decision is consistent with Genier v. CCI Capital Canada Ltd. (“ Genier ”) where Pardu J. was faced with competing class actions which adopted different approaches. [18] At para. 7 she noted:

It is premature to come to a conclusion about the ultimate viability of the action against each defendant.

[47] Setterington was cited with approval in Sharma v. Timminco Ltd. (“ Sharma ”). [19] The competing claims advanced in Sharma were described by Perell J. as one which favoured “comprehensiveness over cohesiveness” and another which “seems to favour cohesiveness over comprehensiveness.” [20]

[48] In his analysis of factors described as critical or determinative, Perell J. aptly described the difficulty of the task he was asked to perform:

On this motion, both law firms raised issues about the comparative merits and demerits of the pleadings, legal theories, and strategic battle plans of their rival. I am not to be taken as scolding them for this approach, but such an approach to a carriage motion puts the court in a difficult position because at this point in the respective proceedings, without hearing from the defendants, it is inappropriate, and, practically speaking, not possible to say much about: (a) the substantive merits of the competing theories and their chances of success; (b) substantive legal weaknesses in the causes of action and theories advanced; (c) whether the court would certify either action as a class proceeding... [21]

[49] Yet the temptation to travel that road grows where a consideration of other factors leaves the scale evenly balanced. That was the situation which faced Perell J. in Sharma. It led him to say:

With these reservations and qualifications and strictly for the purposes of deciding this carriage motion, some opinion can nevertheless be expressed about the causes of action and supporting theories developed by the rival law firms. [22]

[50] Indeed, the substantive comparison was “determinative” of the carriage motion. [23] Perell J. wrote:

...my opinion is that Siskinds’ theory and the nature and scope of the causes of action it develops sets a higher and more challenging legal bar for the representative plaintiff and for the class to vault over. In my opinion, Siskinds’ theory is more problematic than the Kim Orr theory with respect to such matters as class definition, commonality and preferable procedure. I, however, do not say Siskinds’ theory is wrong or not capable of success. [24]

[51] Perell J. undertook a similar analysis in Smith v. Sino-Forest Corp. and wrote:

I conclude that the fraudulent misrepresentation action is a substantial weakness in Northwest v. Sino-Forest. In fairness, I should add that I think that the unjust enrichment causes of action and oppression remedy claims in Labourers v. Sino-Forest add little. [25]

[52] Do the cases support the conclusion different principles are being applied? In Comtrade Petroleum Inc. v. 490300 Ontario Ltd. , Montgomery J. cautioned:

An exercise of discretion which has led to a different result because of different circumstances does not meet the requirement for a “conflicting decision”. It is necessary to demonstrate a difference in the principles chosen as a guide to the exercise of such a discretion. [26]

[53] In my view, different principles are being applied now despite the fact that Setterington is consistently cited with approval. The analysis currently being undertaken, albeit cautiously, is far removed from the limited approach contemplated by the “fanciful or frivolous” phrase adopted by Winkler J.

[54] It may be that a more expansive substantive inquiry is appropriate today. The market for class actions is a competitive one. The participants are sophisticated, innovative, diligent and skilled. One cannot call a carriage contest a tie and should not force a working relationship on those who were unable to establish it through negotiation. The evidence filed during a carriage motion includes an outline of the parties’ theories and a detailed comparison of the competing actions. That aspect caused Perell J. to say:

No doubt to the delight of the defendants and the defendants’ lawyers, which have a watching brief, the second step also involves the rivals half heartedly and toughly reviewing and criticizing each other’s work and pointing out flaws, disadvantages and weaknesses in their rivals’ plans for suing the defendants. [27]

[55] I recognize the scorecard developed by Thomas J. in this case included other items. However, the ultimate conclusion to stay the Locking rather than the Simmonds action seemed to receive significant support from the findings with respect to the assessment of the merits of the approach taken in the actions.

[56] In my view, there are conflicting decisions with respect to the principles to be applied when determining carriage motions. Some decisions suggest that competing theories are to be assessed only to weed out those that are patently weak, while others support a more rigorous review, albeit on a preliminary basis. The first component of rule 62.02 (4) (a) has been fulfilled.

[57] Mr. Sasso submitted the second stage of the inquiry could not be satisfied because the issues raised are of no importance to anyone but the competing plaintiffs and their counsel.

[58] I disagree. Appellate guidance would, in my view, be useful not only for the purposes of this case but those which follow.

[59] The extent to which the court can and should undertake a substantive review of the cases advanced by the competitors to a carriage motion is not solely an academic one and transcends the facts of and parties to these proceedings. At issue is whether the law remains as stated in Setterington and Gorecki .

iii. Rule 62.02 (4) (b) – Reason to Doubt the Correctness of the Order and Matters of Importance Test

[60] Because it was fully argued I will also address rule 62.02 (4) (b) of the Rules of Civil Procedure .

[61] As noted previously, leave is only to be granted under this subrule if two preconditions are met: first, there must be good reason to doubt the correctness of the order and second, the issues involved must be of such importance that it is appropriate that leave be granted.

[62] The first requirement is met so long as the correctness of the order “is open to very serious debate”. [28]

[63] That finding may be made even if the judge hearing the leave motion is unable to say the decision is probably wrong. [29] The first precondition may be satisfied even if that judge believes the reasons under review are “persuasive”. [30]

[64] Before returning to the substantive review issue, I will address two other issues highlighted by Mr. Kryworuk: the alleged conflict of interest affecting Mr. Simmonds in light of prior dealings with two members of Armtec’s audit committee and the scope of retainers signed by the competing groups.

[65] I start with the conflict issue. As noted earlier, it is a factor expressly recognized in the cases considering carriage.

[66] Mr. Kryworuk submits the issue should have been given significant weight by the motion judge. I disagree.

[67] As near as I can determine, the only fact proven was that Mr. Simmonds’ term as a director of a company overlapped with two members of Armtec’s audit committee for about four months. [31]

[68] According to the evidence, Mr. Simmonds did not even know those individuals were members of Armtec’s audit committee when the action bearing his name started. [32] Mr. Locking simply did not prove the existence of a conflict.

[69] Mr. Kryworuk also focused on the differences in the arrangements made between the plaintiffs in the two actions and their counsel: a five page Contingency Fee Retainer Agreement in the case of Mr. Locking and a one paragraph retainer in the case of Mr. Simmonds and his co-plaintiffs. [33]

[70] As noted earlier, Thomas J. concluded that fact was of little consequence because the fee charged by class counsel is subject to court approval. Mr. Kryworuk submitted the arrangement should have been given more weight since the contingency fee had been capped at a modest level. He maintained the importance of an indemnity was ignored.

[71] I accept this point may have been given more weight. Mr. Strosberg offered no explanation for the rudimentary retainer used by Sutts, Strosberg LLP. However, none was sought. As Strathy J. noted in Dugal v. Manulife Financial Corp., indemnities are commonplace:

The grim reality is that no person in their right mind would accept the role of representative plaintiff if he or she were at risk of losing everything they own. No one, no matter how altruistic, would risk such a loss over a modest claim. Indeed, no rational person would risk an adverse costs award of several million dollars to recover several thousand dollars or even tens of thousand dollars. [34]

[72] Fee arrangements are negotiated routinely too. Nonetheless, in a carriage dispute, the court is asked to compare two competing actions. I recognize the existence of an indemnity and appropriate fee arrangement cannot simply be assumed. However, the motion judge’s analysis of this issue does not cause me to conclude there is good reason to doubt the correctness of the order in question. This item was considered and factored into the analysis.

[73] Neither of these issues warrants appellate consideration.

[74] I return to the scope of the substantive review undertaken by the motion judge. I have already attempted to explain why I am of the view that the analysis and hence the decision - is open to serious debate.

[75] It may also be argued the analysis is internally inconsistent. Breadth of the proceeding was determined to be an advantage when it came to the naming of defendants and the class period but a disadvantage with respect to the inclusion of “early sellers” and causes of action founded on waiver of tort and unjust enrichment.

[76] In other words and borrowing unabashedly from Sharma , comprehensiveness and cohesiveness each prevailed half the time. In my view, the analysis was critical to the carriage decision. I do not suggest the result is wrong. However, the extent of the analysis of several factors underlying the decision is subject to serious debate.

[77] The second aspect of rule 62.02 (4) (b) is also met. The issue is relevant and important because it relates to the current state and development of the law. Its resolution may also provide guidance with respect to the approach to be adopted by those pursuing or deciding between competing class actions.

F. Conclusion

[78] For the reasons given, leave to appeal is granted with respect to the following issues:

(a) Did the motion judge err in his analysis of the theories and attributes [35] of the Locking and Simmonds actions?

(b) If so, did the motion judge err in his disposition of the carriage motions?

[79] Mr. Sasso raised an additional concern. He noted a three year limitation period is set forth in Part XXIII.1 of the Securities Act , that an action cannot be commenced until leave of the court is obtained on a merits-based leave application and maintained there is a serious risk the time limit will pass if the parties remain mired in a carriage dispute. [36]

[80] Mr. Kryworuk says the concern can be managed.

[81] In order to ensure that it is, I encourage the parties to seek an early date for the hearing of the appeal and, if necessary, an order expediting same.

“ Justice A. D. Grace”

Justice A. D. Grace

Date: September 18, 2012