BARRIE COURT FILE NOS.: 10-0690 and 11-0234
DATE: 20130816
ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN:
George French
Plaintiff
– and –
Investia Financial Services Incorporated, Money Concepts (Barrie), Diamond Tree Capital Inc., David Karas and Financial Victory Associates Inc.
Defendants
Alan A. Farrer, L. Craig Brown and Darcy R. Merkur, for the Plaintiff
David Di Paolo and Nicole Westlake, for the Defendant, Investia Financial Services Incorporated
Roger Horst, for the Defendants, David Karas, James Stephenson, Diamond Tree Capital Inc., and Financial Victory Associates Inc
Michael Comartin, for the Objectors, Lawrence Edgar, Kimberlee Edgar and Alison Marshall
AND BETWEEN:
Bruce Smith and Edith Irene Smith
Plaintiff
– and –
Investia Financial Services Incorporated and James Stephenson
Defendants
Darcy R. Merkur, for the Plaintiff
David Di Paolo and Nicole Westlake, for the Defendant, Investia Financial Services Incorporated
Roger Horst, for the Defendant, James Stephenson
HEARD: June 7, 2013
REASONS FOR DECISION
EDWARDS j.
Overview
[1] It has been said many times by others in the past that the most important person in the courtroom to whom a judge’s reasons should be directed is not the successful party but rather the party that leaves as the loser. It is vitally important that anyone who is aggrieved knows why their case has not found favour with the court. Thus, in a situation where a class action settlement is before the court for approval, everyone – not the majority, nor even virtually the entirety of the class, must know they have been treated fairly. Even a few objectors must know that the settlement is fair and reasonable and that they have been given a fair opportunity to be heard. This case demonstrates the importance of due process that is so fundamental to a class action and to our system of justice.
The Issue
[2] In a class action lawsuit, the court is required to give its approval to any settlement between the parties. It is clear that the court must be satisfied that the quantum of the settlement is fair, reasonable, and in the best interest of the class as a whole. In its deliberations on the issue of fairness and reasonableness, the court must not only consider the adequacy of the settlement from a quantum perspective but also whether the distribution of the settlement funds is fair and reasonable amongst the class members. It is therefore possible for the court to be satisfied that the quantum is fair and reasonable but that the method of distribution is not. This court must consider both quantum and method of distribution from the perspective of whether the settlement is fair and reasonable.
The Facts
[3] The underlying facts to these two actions have been reviewed extensively in the Reasons of Shaughnessy J. certifying the class action, see French and Karas et al. v. Smith and Stephenson et al. 2012 ONSC 1150. I do not propose to review the facts in detail. Essentially, the allegations made by the plaintiffs relate to so-called investment advice provided by David Karas (“Karas”) and James Stephenson (“Stephenson”) to clients of Money Concepts (Barrie) (“MCB”) to borrow money to invest in mutual funds and/or segregated funds (the “Leveraging Scheme”). As noted by Shaughnessy J. at para. 12 of his Reasons, it is alleged that Karas and Stephenson recommended the Leveraging Scheme systemically and that MCB arranged the loans for clients. Utilizing this borrowed money, clients of MCB invested money that they effectively did not have thereby increasing the assets under management by Investia Financial Services Incorporated (“Investia”) and, as such, generated fees for Karas, Stephenson, and Investia.
[4] Procedurally, the plaintiffs were successful before Shaughnessy J. in certifying the proceedings as a class action, pursuant to section 5(1) under the Class Proceedings Act, 1992. The decision of Shaughnessy J. was released on February 17, 2012. While the decision of Shaughnessy J. certified the class, it is worth noting, as it relates to the question of the plaintiffs’ damages, Shaughnessy J. at para. 67 stated:
The evidence shows that the quantification of the harm suffered by investors is an individual and not a common issue. The evidence shows that the calculation of harm is the summation of the investors individual harms. It was not suggested by the plaintiffs that, in the circumstances of this case, it would be possible to use statistical sampling as provided for under section 23 of the CPA.
[5] As such, Shaughnessy J. agreed with the position of the defendants and found that the assessment of the class members’ damages would require individual assessment for each potential class member. Shaughnessy J. therefore refused to certify damages as a common issue, but did certify for determination whether the defendants’ conduct warranted an award of punitive damages.
[6] Subsequent to the release of the decision of Shaughnessy J., the defendants served a motion seeking leave to appeal, which ultimately came on for hearing on June 15, 2012 and was adjourned to a later date.
[7] During the time leading up to the certification motion before Shaughnessy J. and again during the leave to appeal process, the parties entered into settlement discussions utilizing the services of private mediators.
[8] The first mediation took place on November 15 and 16, 2011 with Joel Wiesenfeld, a noted senior securities litigation lawyer with the law firm of Torys LLP. At this mediation, Mr. Wiesenfeld, after hearing submissions from counsel and after lengthy caucuses, indicated that he had considered the merits of the claim and the prospects of a successful certification order. He submitted a mediator’s proposal with his own assessment of the claims and proposed a figure of $6 million for claims, plus partial indemnity fees. There was no indication that the defendants would be prepared to settle on that basis and the mediation failed.
[9] The certification motion then proceeded before Shaughnessy J. on December 12, 13, and 14, 2011 and again on February 13, 2012. With the release of the decision of Shaughnessy J. and the motion seeking leave to appeal, the parties then agreed to try and resolve the plaintiffs’ claims utilizing the services of Mr. George Adams, who is a former Superior Court justice with considerable experience both as a trial judge and mediator dealing with difficult commercial and financial matters.
[10] After a three day mediation and an exchange of offers, the defendants presented what ultimately became the agreed upon settlement of $10 million, all in, broken down as to $8,200,000 for claims, $1,500,000 inclusive of HST for counsel fee, $100,000 for disbursements, and $200,000 for administration expenses.
[11] As part of the approval process, the court is also called upon to approve the legal fees that are proposed to be charged to the class members. In addition to the partial indemnity fees of $1,500,000 to be paid by the defendants as part of the agreed upon terms of settlement (which amount includes HST of approximately $173,000) class counsel are seeking approval of solicitor-client fees to be paid by the class inclusive of disbursements of $1,230,000, plus HST of approximately $160,000). As such, the total amount of fees that are sought to be approved by class counsel is approximately $2,890,000, plus disbursements.
[12] The counsel fee of approximately $2,557,000 exclusive of HST, represents approximately thirty-one per cent of the damage recovery of $8,200,000 that is being paid for the claims by the defendants. If the proposed legal fees are approved by this court, there will be a net amount available for distribution to the class of approximately $6,810,000 (the “Net Proceeds”), plus any interest earned on the funds since the date of settlement, which at the present time stands at approximately $65,000.
[13] The terms of settlement were reduced to writing pursuant to minutes of settlement that were executed on October 25, 2012. It was contemplated with the execution of the two-page minutes of settlement (the “Minutes”) that the parties would have to sign further documentation to give effect to the Minutes. In that regard, an eight-page settlement agreement (the “Settlement Agreement”) was executed by counsel for the various parties on March 5, 2013.
[14] Amongst the terms set forth in the Settlement Agreement was a provision with respect to the administration of the settlement. Of particular concern to this court is paragraph 4(h) which provides:
Quantifying the Claimants Actual Compensation Amount – the Administrator will quantify the Claimants Unadjusted Claim Total Amount along with the estimated Resolution Adjustment Factor and will advise Validated Class Members of their anticipated Claimants Actual Compensation Amount (along with the Challenge process and will thereafter make a final decision on any such challenges). The Administrator will assemble a chart summarizing the Claimants Actual Compensation Amount for all claimants and will provide it to Class Counsel. (my emphasis added)
[15] The Settlement Agreement provided for various definitions. Amongst those definitions was a definition of the word “challenge”. In that regard, the Settlement Agreement defined “challenge” as follows:
Challenge – refers to the process as determined by the administrator for claimants to seek a reconsideration of any decision made by the administrator requiring the claimant to submit additional documents to the administrator by a fixed deadline (as determined by the administrator) for consideration and for final determination by the administrator.
[16] While the issue of a challenge process did not occupy a position of prominence within the Settlement Agreement, it is quite clear to this court, and fundamental to the ultimate determination of whether or not the settlement is fair and reasonable, that any potential class member have an opportunity to “challenge” the ultimate amount that the administrator determined was to be awarded from the Net Proceeds to any potential class member. Fundamentally, this court will ultimately have to determine whether or not those who objected to the settlement were afforded an opportunity to present a “challenge”, in accordance with provisions of the Settlement Agreement.
(Complete remaining text reproduced exactly as in the source up to:)
Justice M.L. Edwards
Released: August 16, 2013