SUPERIOR COURT OF JUSTICE - ONTARIO
COURT FILE NO.: 08-CV-349792 CP
DATE: 20120207
RE: Kathryn Robinson and Rick Robinson , Plaintiffs/Moving Parties
- and -
Rochester Financial Limited et al ., Defendants/Respondents
BEFORE: G.R. Strathy J.
COUNSEL:
David Thompson and Matthew G. Moloci , for the Plaintiffs
Glenn Smith and Sean O’Donnell , for the Defendant Fraser Milner Casgrain LLP
John Finnigan , for the Monitor, Grant Thornton Limited
DATE HEARD: January 17, 2012
E N D O R S E M E N T
(Settlement Approval and Class Counsel Fee Approval)
[ 1 ] This endorsement sets out my reasons for approving the settlement of this class action and approving the fees and disbursements of class counsel, an Order to that effect having been issued on January 17, 2012.
[ 2 ] The action relates to a tax shelter called the Banyan Tree Foundation Gift Program, which operated in 2003-2007. It has been referred to as a “leveraged” charitable donation program because, in return for a proportionately small out-of-pocket payment, a taxpayer was purportedly entitled to ratchet-up his or her donation and to receive a charitable tax receipt equivalent to 3 ½ times the amount of his or her cash outlay.
[ 3 ] The leverage was supposed to be provided by a “loan” to the participant, made by one of the defendants, Rochester Financial Limited, secured by a promissory note. Part of the participant’s cash payment was described as a “security deposit”, which was supposed to be invested so that it would pay off the loan before the taxpayer was ever called upon to pay it.
[ 4 ] The effect of this was to allow the taxpayer to profit from his or her donation – in the case of a taxpayer in the highest bracket, a payment of $2,700 would secure a tax credit of $4,600, resulting in a profit of about $1,900.
[ 5 ] The program was promoted by the Banyan Tree Foundation through a network of salespeople who were paid substantial commissions.
[ 6 ] Canada Revenue Agency (“C.R.A.”) disallowed the charitable donation tax credits claimed by participants in the Gift Program. It took the position that the “donation” made by the taxpayer was not a gift for the purposes of the Income Tax Act , because the loan was not bona fide and there were nothing more than book-keeping entries to give an aura of respectability to the transaction. It said that the participants were never at risk to repay their loans and that the program was a sham, designed to have the appearance of a legitimate charitable donation, when the real purpose was to enrich the taxpayer rather than benefit a charity. It therefore disallowed the charitable donation tax credits, and the participants were required to repay the taxes they had deducted, with interest.
[ 7 ] Not only did the participants lose their deductions, their security deposits have disappeared, apparently due to defalcation by the investment manager.
[ 8 ] In January 2010, Justice Lax certified this action as a class proceeding: Robinson v. Rochester Financial Ltd. , 2010 ONSC 463 , [2010] O.J. No. 187.
[ 9 ] There is no realistic prospect of recovery from any of the parties directly responsible for the Gift Program. This leaves the defendant law firm, Fraser Milner Casgrain LLP (“FMC”), as the last party standing. It provided legal opinions that the Gift Program complied with the applicable tax legislation and that the tax receipts issued by the Banyan Tree Foundation should be recognized by C.R.A.
[ 10 ] As a result of mediation before a former judge of this Court, class counsel negotiated a settlement, subject to Court approval, of class members’ claims against FMC for the total sum of $11 million. Approximately $7.75 million of this amount will be paid to class members in proportion to the charitable contributions they made, under a distribution plan that will be administered by class counsel. The balance will be used to pay the fees and disbursements of class counsel and the costs of administration of the settlement. In addition to this cash distribution, the plaintiffs asked the Court to make a declaration that the promissory notes executed by class members in connection with the Gift Program are unenforceable.
[ 11 ] The proposed settlement, and the order I have granted, are somewhat unusual in that all individuals who have previously opted-out of this action, will have the opportunity to opt back in and to enjoy the benefits of the settlement. One of the reasons for this is that, following certification, Banyan Tree Foundation engaged in a misinformation campaign, designed to encourage class members to opt-out of this proceeding, suggesting that class members who opted out would be unable to challenge their C.R.A. reassessments. When this was brought to my attention by class counsel, I issued an order dated June 25, 2010, providing for further notice to class members and an opportunity to revoke their opt-outs. I am satisfied that, in the particular circumstances of this case, it is appropriate to extend this relief in connection with the settlement.
[ 12 ] Those class members who have previously opted-out, and wish to remain outside the Class, need not do anything further.
[ 13 ] There were approximately 2,825 participants in the Gift Program. They have received extensive individual notice of the proposed settlement. Approximately 500 objections to the settlement have been delivered. Almost all of these objectors have sent a standard form letter that appears to have been authored by Mr. Tim Millard, an accountant who was also a salesman for the Gift Program and who had approximately 40 clients who are class members. Mr. Millard and two other class members, Mr. Harrington and Dr. Maier, attended the hearing and made submissions. About seven or eight other class members attended the hearing but made no submissions.
[ 14 ] The uniform concern expressed by Mr. Millard, Mr. Harrington and Dr. Maier, who spoke at the hearing, and by those class members who sent in the standard form letter, related not to the amount of the settlement, but rather to the proposed term of the settlement that would declare the “loan” portion of the taxpayer’s contribution to the Gift Program (i.e., the leveraged portion), void and unenforceable. These objectors were concerned that a declaration to this effect would potentially adversely affect any future appeals they may make of their tax assessments or re-assessments.
[ 15 ] This issue was raised at the hearing and, as a result of further discussions between class counsel and the objectors, a revised form of order, satisfactory to Messrs Millard, Harrington and Maier, was approved. That form of order, simply declares that the loan agreements and promissory notes executed by class members in connection with the Gift Program are unenforceable by the defendants, their successors and assigns.
[ 16 ] A handful of objectors who sent written communications were concerned about the relatively modest amount they would receive under the settlement in comparison to the loss of their contributions, the loss of their anticipated deductions and any penalties and interest they may be required to pay. I will discuss this issue below.
[ 17 ] In order to approve a settlement, the court must be satisfied that it is fair, reasonable and in the best interests of the class: Nunes v. Air Transat A.T. Inc. , 2005 CarswellOnt 2503 (S.C.J.) at para. 7 ; Vitapharm Canada Ltd. v. F. Hoffmann-La Roche Ltd ., 2005 8751 (ON SC) , [2005] O.J. No. 1118 (S.C.J.). The “fairness and reasonableness” analysis will vary from case to case, but courts frequently turn to the factors set out in Dabbs v. Sun Life Assurance Company of Canada , [1998] O.J. No.1598 at 13 (Gen. Div.) ; and (1998), 1998 14855 (ON SC) , 40 O.R. (3d) 429 at 440-444 (Gen. Div.); aff’d (1998), 1998 7165 (ON CA) , 41 O.R. (3d) 97 (C.A.); leave to appeal to S.C.C. denied [1998] S.C.C.A. No. 372:
(a) the presesence of arm’s length bargaining and the absence of collusion;
(b) the proposed settlement terms and conditions;
(c) the number of objectors and nature of objections;
(d) the amount and nature of discovery, evidence or investigation;
(e) the likelihood of recovery or likelihood of success;
(f) the recommendations and experience of counsel;
(g) the future expense and likely duration of litigation;
(h) information conveying to the court the dynamics of, and the positions taken by the parties during the negotiations;
(i) the recommendation of neutral parties, if any; and,
(j) the degree and nature of communications by counsel and the representative plaintiff with class members during the litigation.
[ 18 ] I am satisfied that most of these factors have been addressed in this settlement. The settlement is clearly the product of hard bargaining at arms’ length, facilitated by an experienced mediator. It comes with the recommendation of highly qualified and reputable counsel, who have engaged the assistance of expert tax counsel. The concerns of the overwhelming majority of objectors have been satisfied. The settlement is clearly a compromise, but liability of FMC was a very contentious issue. FMC would argue, if the matter proceeded to trial, that its opinions were consistent with the state of the law as it existed at the time and that the subsequent hardening of the position of C.R.A. and, it would appear, the appellate case law, was not something that could have been foreseen at the time. There were other issues that would also be brought into play by FMC, including whether class members relied on its opinions. A significant discount of the claim was warranted to reflect the real risk that the claim against FMC would not succeed.
[ 19 ] While a very small number of objectors have expressed concerns about the amount of the settlement, the vast majority of the objectors were concerned only with the issue of the proposed relief in relation to their loans. Over eighty percent of class members have made no comment on the settlement. I acknowledge, however, that some class members think that the settlement amount is too low. Every settlement is necessarily a compromise. It reflects the possibility that the class may recover nothing if the action goes to trial and that there is a benefit to early resolution.
[ 20 ] For the purposes of a settlement approval motion, I should assume that if the settlement is not approved, the action will proceed to trial. In effect, I would be substituting my view of the prospects of success for the views of class counsel, who have lived with this action since its outset and who are familiar with the risks and benefits of continuing with the action. While I can, in appropriate cases, appoint amicus to assist my examination of the settlement, I have in this case a high level of confidence in the fairness and reasonableness of the settlement and I approve it.
Fee of Class Counsel
[ 21 ] Class counsel entered into a contingency fee retainer agreement with the representative plaintiffs that provided for a contingent fee of 25% of the total value of any settlement. They request approval of the payment of $3,252,682.65 for their fees, disbursements and taxes.
[ 22 ] I find that the fee agreement meets the requirements of s. 32(1) of the Class Proceedings Act, S.O. 1992, c. 6 (the “ C.P.A. ”) and that it is fair and reasonable, having regard to the factors set out in the case law, as summarized in Vitapharm Canada Ltd. v. F. Hoffmann-LaRoche Ltd ., [2005] O.J. NO. 1117 (S.C.J.) at para. 67 .
[ 23 ] In this case, I consider the following circumstances of particular significance:
(a) this action would never have been commenced, let alone successfully resolved, had it not been been for the initiative, tenacity and persistence of class counsel in the face of widespread apathy on the part of all class members;
(b) class counsel funded disbursements of almost $200,000, making it unnecessary to apply to the Class Proceedings Fund;
(c) class counsel have gone without any compensation at all through four years of litigation;
(d) class counsel gave an indemnity to the representative plaintiffs with respect to any adverse costs award – the assumption of a significant risk of not only receiving no fees and disbursements, but the possibility of a substantial six figure costs award against them;
(e) the matter was complex and the outcome was far from certain;
(f) the result achieved is financially significant and every class member will receive actual cash compensation;
(g) in addition to the cash value of the settlement, class members will receive the added benefit of a declaration that their loans and promissory notes are unenforeceable, a matter of some concern to class members;
(h) the time spent by class counsel was about 4,600 hours with a face value of about $1.8 million, and the proposed fee represents a multiplier of less than 2;
(i) there has been no real opposition to class counsel’s fee by class members, whose only significant objection related to the scope of the proposed declaration; and
(j) the payment of the proposed fee does not significantly dilute the recovery by class members, and their ability to pay the fee is not an issue.
[ 24 ] Having supervised this proceeding for more than two years, I am satisfied that class counsel have demonstrated commendable diligence, perseverance and skill in pursuing a very challenging piece of litigation and bringing it to a successful conclusion.
[ 25 ] I do not propose to repeat the observations I made in Baker Estate v. Sony BMG Music (Canada) Inc. , 2011 ONSC 7105 () , [2011] O.J. No. 5781, concerning the value of contingency fees in the fair compensation of class counsel. In my view, with the benefit of hindsight, it is fair and reasonable that class members should pay the fee requested by class counsel and I approve that fee.
Compensation for the Representative Plaintiffs
[ 26 ] Class counsel have made a request for compensation in the amount of $5,000 for each of the representative plaintiffs, relying on the authority of Windisman v. Toronto College Park Ltd. , [1996] O.J. No. 2897 (Gen. Div.) , on the basis that the plaintiffs have rendered “active and necessary assistance” in the prosecution of the case.
[ 27 ] In Baker Estate v. Sony BMG Music (Canada Inc.), 2011 ONSC 7105 , [2011] O.J. No. 5781, I set out the principles applicable to this request at para. 93:
The payment of compensation to a representative plaintiff is exceptional and rarely done: McCarthy v. Canadian Red Cross Society [2007] O.J. No. 2314 (S.C.J.) at para. 20 ; Windisman v. Toronto College Park Ltd. , [1996] O.J. No. 2897 (Gen. Div.) ; Sutherland v. Boots Pharmaceutical plc , [2002] O.J. No. 1361 (S.C.J.) ; Bellaire v. Daya [2007] O.J. No. 4819 (S.C.J.) at para. 71 . It should not be done as a matter of course. Any proposed payment should be closely examined because it will result in the representative plaintiff receiving an amount that is in excess of what will be received by any other member of the class he or she has been appointed to represent: McCutcheon v. Cash Store Inc. [2008] O.J. No. 5241 (S.C.J.) at para. 12 . That said, where a representative plaintiff can show that he or she rendered active and necessary assistance in the preparation or presentation of the case and that such assistance resulted in monetary success for the class, it may be appropriate to award some compensation: Windisman v. Toronto College Park Ltd ., [1996] O.J. No. 2897 (Gen. Div.) at para. 28 .
[ 28 ] Class counsel says that this is one of those exceptional cases in which compensation should be paid. As I have noted, class counsel faced considerable apathy on the part of class members and it was exceedingly difficult to find someone prepared to take on the role of representative plaintiff until Mr. and Mrs. Robinson stepped up to the plate. Taking on that role required that they expose private personal financial information, including their income tax returns for the years they participated in the Gift Program. They each spent more than 300 hours in assisting class counsel in the prosecution of the action. In comparison, they will receive a modest award of about $6,000 under the settlement.
[ 29 ] In Windisman , above, Sharpe J. observed, at para. 28:
Ordinarily, an individual litigant is not entitled to be compensated for the time and effort expended in relation to prosecuting an action. In my view, there is an important distinction to be drawn with reference to class proceedings. The representative plaintiff undertakes the proceedings on behalf of a wider group and that wider group will, if the action is successful, benefit by virtue of the representative plaintiff's effort. If the representative plaintiff is not compensated in some way for time and effort, the plaintiff class would be enriched at the expense of the representative plaintiff to the extent of that time and effort. In my view, where a representative plaintiff can show that he or she rendered active and necessary assistance in the preparation or presentation of the case and that such assistance resulted in monetary success for the class, the representative plaintiff may be compensated on a quantum meruit basis for the time spent. I agree with the American commentators that such awards should not be seen as routine. The evidence here is that Ms. Windisman took a very active part at all stages of this action. It seems clear that the case would not have been brought but for her initiative. She assumed the risk of costs and she devoted an unusual amount of time and effort to communicating with other class members, acting as a liaison with the solicitors, and assisting the solicitors at all stages of the proceeding. She kept careful records of her time and effort.
[ 30 ] In that case, the representative plaintiff had kept docketed time entries showing 81.2 hours of time and estimated a further 25 hours of undocketed time. Sharp J. awarded compensation of $4,000, to be deducted from the net recovery of the class.
[ 31 ] This issue brings into play some conflicting values. On the one hand, we do not wish to create a conflict of interest between the representative plaintiffs and the class, by giving the former more substantial contribution. This was discussed by Winkler J. in Sutherland v. Boots Pharmaceutical Plc., [2002] O.J. No. 1361 (S.C.J.) :
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[ 45 ] The settlement is therefore approved, as are the fees and disbursements of class counsel. I have also issued an order, on consent, discharging the Monitor, Grant Thornton Limited.
G.R. Strathy J.
DATE: February 7, 2012