Deloitte & Touche Inc. v. Felderhof et al.
COURT FILE NO.: Court File No. 98-CV-145809
DATE: March 7, 2013
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
DELOITTE & TOUCHE INC., IN ITS CAPACITY AS TRUSTEE OF THE ESTATE OF BRE-X MINERALS LTD., A BANKRUPT
Plaintiff
– and –
JOHN B. FELDERHOF, J.P. MORGAN & CO. INC., REPUBLIC NATIONAL BANK OF NEW YORK, DAVID G. WALSH, JEANETTE WALSH, T. STEPHEN McANULTY, NANCY JANE McANULTY, JOHN B. THORPE, ROLANDO C. FRANCISCO, HUGH C. LYONS, PAUL M. KAVANAGH, SNC-LAVALIN GROUP INC., SNC-LAVALIN INC., KILBORN ENGINEERING PACIFIC LTD., KILBORN SNC-LAVALIN INC., P.T. KILBORN PAKAR REKAYASA AND BRESEA RESOURCES LTD.
Defendants
Angus T. McKinnon and Mark Hines for the Trustee for Bre-X Minerals Ltd.
Paul J. Pape for the Plaintiffs in Court File No. 97-GD-39574
HEARD: March 4, 2013
PERELL, J.
REASONS FOR DECISION
[1] This motion is the anti-climax of the Bre-X saga.
[2] By the appointment of the Alberta Court of Queen’s Bench, Deloitte & Touche Inc. is the Trustee of the Estate of Bre-X Minerals Ltd., a bankrupt, and for the last almost sixteen years, Deloitte has been the plaintiff in a derivative action under Ontario’s Business Corporations Act, R.S.O. 1990, c. B-16. Deloitte now seeks the leave of the courts in Ontario and Alberta to discontinue the derivative action.
[3] At the outset of the derivative action, the defendants were John B. Felderhof, J.P. Morgan & Co. Inc., Republic Bank of New York, David G. Walsh, Jeanette Walsh, T. Stephen McAnulty, Nancy Jane McAnulty, John B. Thorpe, Rolando C. Francisco, Hugh C. Lyons, Paul M. Kavanagh, SNC-Lavalin Group Inc., SNC-Lavalin Inc., Kilborn Engineering Pacific Ltd. Kilborn SNC-Lavalin Inc., P.T. Kilborn Pakar Rekayas, and Breasea Resources Ltd.
[4] The Deloitte derivative action is brought essentially for the benefit of the creditors of Bre-X. For a variety of reasons, Deloitte’s derivative action dwindled down to claims associated with allegations of insider trading against the remaining Defendants; namely: (1) John Felderhof, Bre-X’s former Chief Geologist; (2) Ingrid Felderhof, his former wife; and (3) the Estate of David Walsh, the deceased former President of Bre-X.
[5] Many years ago, in order to preserve assets to enforce a judgment against the remaining Defendants, Deloitte obtained Mareva injunctions in actions in Grand Cayman and the Bahamas.
[6] There is also an timeworn companion class action, which has been certified under the Class Proceedings Act,1992 S.O. 1992, c. C.6, in which Donald Carom, 3218520 Canada Inc., 662492 Ontario Limited, and Osamu Shimizu are the Plaintiffs. The remaining defendants in the Carom Class Action are the same as in the derivative action, with the additions of Jeannette Walsh, personally, and Stephen and Nancy McAnulty.
[7] Deloitte now moves for a discontinuance of the derivative action without costs. The remaining Defendants consent to the motion, since they have agreed to settle the action on this basis.
[8] The Plaintiffs in the Carom Class Action initially opposed Deloitte’s discontinuance motion, but now they do not oppose. The Class Action Plaintiffs represent the remaining creditors, the shareholders of Bre-X, who would have benefited by a judgment in the derivative action. Deloitte is not aware of any other claims and relevant limitation periods expired years ago.
[9] Deloitte agreed to the settlement with the remaining Defendants for the interrelated reasons that as Trustee in Bankruptcy, it lacks the financial resources to continue prosecuting the action and that it believes that there are no reasonable prospects of any meaningful recovery, even if it were successful at trial.
[10] The action has not been prepared for trial. No expert witnesses have been retained, and the action has not been set down for trial. The further prosecution of the action would require Deloitte as Trustee to incur a significant amount of additional legal costs. Counsel for all parties and Deloitte have concluded that the significant costs of continuing the derivative action are not justified given the unlikelihood of any reasonable recovery.
[11] The lack of progress in the derivative action and in the companion class action can in part be explained by Deloitte’s and the Representative Plaintiffs’ decision to await the outcome of other proceedings against Mr. Felderhof. In addition to the various civil proceedings commenced following Bre-X’s collapse, the Ontario Securities Commission brought eight charges under the Ontario Securities Act, R.S.O., 1990, c. S. 5 against Mr. Felderhof.
[12] The OSC trial began in December 1999 and concluded in 2006. The decision was released on July 31, 2007, and Mr. Felderhof was acquitted of all charges. See R. v. Felderhof, 2007 ONCJ 345.
[13] The factual allegations in the OSC proceedings have many features in common with the derivative action, including what are referred to as the “title” defect allegations and the “gold fraud” allegations.
[14] By early 2010, Deloitte became concerned that the Bre-X Estate did not have the financial resources to fund the derivative action to the completion of trial and to then seek to enforce any resulting judgment overseas. Deloitte and the Estate’s Inspectors held a series of meetings to discuss the options available.
[15] Deloitte and the Estate’s Inspectors eventually concluded that the Bre-X Estate had insufficient funds to continue prosecuting the derivative action, and that no additional source of funding was available. In addition, there would be insufficient funds to enforce any judgment obtained in Grand Cayman or the Bahamas.
[16] As at September 24, 2012, the Bre-X Estate had approximately $130,000 in cash on hand. By January 30, 2013, this had reduced to about $79,000.
[17] Deloitte has concluded that it will face enormous difficulties in making any meaningful recovery on any judgment obtained in this action and given the outcome of the OSC proceedings, a successful outcome is far from assured.
[18] Deloitte’s inquiries and its monitoring of expenditures permitted under the Cayman Island and Bahamian Mareva injunctions, had led it to conclude that the vast majority of monies received by the remaining defendants from the sale of their Bre-X shares has either been spent or is unlikely to be traceable. Counsel for the plaintiffs in the Carom Class Action concur with the Deloitte’s assessment.
[19] After over fifteen years of litigation, Deloitte’s counsel, on the instructions of the Estates’ three Inspectors entered into settlement discussions with counsel for Ingrid Felderhof and Jeannette Walsh. Mr. Felderhof is self-represented. Counsel to the Carom Class Action plaintiffs participated in the negotiations, which were conducted at arms’ length by counsel who had been involved in the Bre-X litigation since its inception.
[20] Deloitte and the remaining Defendants ultimately agreed to settle the derivative action on the terms contained in the Settlement Agreement and Covenant Not to Sue or Advance Claims, executed on or about August 7, 2012. In part, the Settlement provides that the Trustee will seek leave of the Court to discontinue this action on a without costs basis.
[21] Notice of the motion to seek leave to discontinue the derivative Action was given to counsel for the Carom Class Action plaintiffs, first in September 2012 in Alberta and then in November 2012 in Ontario.
[22] Before the hearing of this motion, Deloitte in accordance with the direction of this Court, issued a press release advising of its intention to seek leave to discontinue this action and advising of the motion hearing date. In addition, counsel to the Plaintiffs in the Carom Class Action placed a notice on its website advising of the motion to discontinue.
[23] The only issue on this motion is whether leave should be granted to discontinue the derivative action. Subsequently, on May 30, 2013, the Alberta Court of Queen’s Bench in Bankruptcy will also be asked to grant leave and to approve Deloitte’s actions as Trustee in Bankruptcy.
[24] To discontinue a derivative action commenced under the Ontario Business Corporations Act, a plaintiff requires leave of the Court. Section 249(2) of the OBCA provides the following:
249 (2) An application made or an action brought or intervened in under this Part shall not be stayed, discontinued, settled or dismissed for want of prosecution without the approval of the court given upon such terms as the court thinks fit and, if the court determines that the interests of any complainant may be substantially affected by such stay, discontinuance, settlement or dismissal, the court may order any party to the application or action to give notice to the complainant.
[25] The Court may grant leave if the circumstances of particular case make discontinuance appropriate. The only specific requirement prescribed by the Act is that notice be given to affected complainants – in this case, Bre-X’s former shareholders who maintain claims through the Carom Class Action – if their interests may be substantially affected. As noted above, in the case at bar, notice has been given to the affected shareholders.
[26] For the purposes of section 249(2) of the Act, the governing consideration is whether the proposed agreement is fair and reasonable to all shareholders in the circumstances: Sparling v Southam Inc., 1988 4694 (ON SC), [1988] O.J. No. 1745 at para. 18 (H.C.J.); Ontario Securities Commission v. McLaughlin, 2010 ONSC 4193 at para 21; Ironworkers Ontario Pension Fund v. Research in Motion Ltd., 2007 50277 at para. 15 (Ont. S.C.J.).
[27] For the purposes of section 249(2), it is recognized that settlements are, by their nature, compromises, which need not satisfy every concern of every party affected. Acceptable settlements may fall within a broad range of reasonableness. In assessing the reasonableness of a particular settlement, a court must consider the nature of the claims advanced, the nature of the defences to those claims, and the benefits accruing and lost to the parties as a result of the settlement: Ontario Securities Commission v. McLaughlin supra at para. 21; Sparling v Southam Inc., supra at paras. 18 and 20; Ironworkers Ontario Pension Fund v. Research in Motion Ltd., supra at para. 15.
[28] Acceptable settlements may fall within a broad range of upper and lower limits. It is not the court's function to attempt to litigate the merits of an action in assessing the reasonableness of a settlement: Sparling v Southam Inc., supra at paras. 18 and 19.
[29] Where negotiations have been conducted in a bona fide manner and at arm’s length, there is a strong overriding presumption that the settlement is fair and reasonable. In such circumstances, the judicial evaluation of a proposed settlement involves a limited inquiry as to whether the potential rewards of successful litigation, with its attendant risks and costs, are outweighed by the benefits of the proposed settlements: Ontario Securities Commission v. McLaughlin supra at para. 24; Sparling v Southam Inc., supra at para. 22. This presumption is strengthened where a settlement is reached by a court-appointed officer, such as a trustee in bankruptcy, acting in accordance with its statutory powers and duties: Sparling v Southam Inc., supra at para. 21.
[30] In my opinion, given the current circumstances of the case at bar, a discontinuance without costs of the derivative action is the most reasonable resolution of the action and it is appropriate to grant leave pursuant to s. 249 of the OBCA.
[31] Order accordingly.
Perell, J.
Released: March 7, 2013
COURT FILE NO.: Court File No. 98-CV-145809
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
DELOITTE & TOUCHE INC., IN ITS CAPACITY AS TRUSTEE OF THE ESTATE OF BRE-X MINERALS LTD., A BANKRUPT
Plaintiff
‑ and ‑
JOHN B. FELDERHOF, J.P. MORGAN & CO. INC., REPUBLIC NATIONAL BANK OF NEW YORK, DAVID G. WALSH, JEANETTE WALSH, T. STEPHEN McANULTY, NANCY JANE McANULTY, JOHN B. THORPE, ROLANDO C. FRANCISCO, HUGH C. LYONS, PAUL M. KAVANAGH, SNC-LAVALIN GROUP INC., SNC-LAVALIN INC., KILBORN ENGINEERING PACIFIC LTD., KILBORN SNC-LAVALIN INC., P.T. KILBORN PAKAR REKAYASA AND BRESEA RESOURCES LTD.
Defendants
REASONS FOR DECISION
Perell, J.
Released: March 7, 2013