ONTARIO

SUPERIOR COURT OF JUSTICE

COURT FILE NO.: CV-11-431153CP
DATE: 20151015

BETWEEN:

THE TRUSTEES OF THE LABOURERS’ PENSION FUND OF CENTRAL AND EASTERN CANADA, THE TRUSTEES OF THE INTERNATIONAL UNION OF OPERATING ENGINEERS LOCAL 793 PENSION PLAN FOR OPERATING ENGINEERS IN ONTARIO, SJUNDE AP-FONDEN, DAVID GRANT, ROBERT WONG, DAVIS NEW YORK VENTURE FUND, INC. and DAVIS SELECTED ADVISERS L.P.

Plaintiffs

– and –

SINO-FOREST CORPORATION, ERNST & YOUNG LLP, BDO LIMITED (formerly known as BDO MCCABE LO LIMITED), ALLEN T.Y. CHAN, W. JUDSON MARTIN, KAI KIT POON, DAVID J. HORSLEY, WILLIAM E. ARDELL, JAMES P. BOWLAND, JAMES M.E. HYDE, EDMUND MAK, SIMON MURRAY, PETER WANG, GARRY J. WEST, PÖYRY (BEIJING) CONSULTING COMPANY LIMITED, CREDIT SUISSE SECURITIES (CANADA), INC., TD SECURITIES INC., DUNDEE SECURITIES CORPORATION, RBC DOMINION SECURITIES INC., SCOTIA CAPITAL INC., CIBC WORLD MARKETS INC., MERRILL LYNCH CANADA INC., CANACCORD FINANCIAL LTD., MAISON PLACEMENTS CANADA INC., CREDIT SUISSE SECURITIES (USA) LLC and MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED (successor by merger to Banc of America Securities LLC)

Defendants

A. Dimitri Lascaris, Daniel E.H. Bach, S. Sajjad Nematollahi, Kirk M. Baert, and Jonathan Ptak, for the Plaintiffs

Robert Staley, Derek J. Bell and Jonathan G. Bell for the Defendants, Sino‑Forest Corporation, Simon Murray, Edmund Mak, W. Judson Martin, and Peter Wang

Robert Rueter, Sara J. Erskine, and Jason Beitchman for the Defendant Allen T.Y. Chan

Larry Lowenstein and Geoffrey Grove for the Defendants William E. Ardell, James P. Bowland, James M.E. Hyde and Garry J. West

Peter R. Greene, Kenneth A. Dekker and David Vaillancourt for BDO Limited

Susan E. Friedman and Brandon Barnes for the Defendant Kai Kit Poon

Proceeding under the Class Proceedings Act, 1992

HEARD: In writing

PERELL, J.

REASONS FOR DECISION – COSTS

"But enough about me. Let's talk about you. What do you think of me?"
[Bette Midler, Beaches]

A. INTRODUCTION

1This is a determination of a claim for costs in a class action, the merits of which remain to be determined. The Plaintiffs seek costs of $2.6 million payable forthwith for two interlocutory motions which, up until just before their hearing, were contested motions. More precisely, the costs award, if granted, is to be paid to Class Counsel for their legal services and disbursements for a certification motion and a leave motion.

2The motions were in a securities action under the Class Proceedings Act, 1992 and the Ontario Securities Act for which leave to prosecute a secondary market misrepresentation claim is required. I am told that the $2.6 million claimed for costs by Class Counsel for these motions is five times the highest costs award in a securities class action in Ontario.

3The Plaintiffs’ costs claim is against only some of the Defendants — the non‑Settling Defendants — who have been grouped into six groups. The Plaintiffs allocate the $2.6 million costs claim amongst the non‑Settling Defendants as set out in the chart below. The Plaintiffs ask that these costs be payable forthwith.

4The non‑Settling Defendants make numerous arguments to resist the payment of costs. There are two major arguments. First, it is submitted that there should be no order as to costs because the Plaintiffs have already been indemnified for costs from a sequence of settlements with the Settling Defendants. Second, the non‑Settling Defendants submit that the costs sought from them are excessive, unreasonable, unprecedented, out of line with the case law, and beyond their reasonable expectations and, therefore, the costs should be reduced and made payable in the cause because the merits of the class action remain to be determined.

5Because of these arguments, a problem for me to resolve is how, if at all, do the settlements with the Settling Defendants affect the costs claim against the non‑Settling Defendants. This problem and the other problems to be resolved are complicated by the circumstance that one of the non‑Settling Defendants, Sino‑Forest Corporation, is subject to insolvency proceedings under the Companies' Creditors Arrangement Act.

6As I shall explain below, I agree with the Defendants’ major arguments only in part. I disagree, in part, because the Defendants conflate “legal fees and disbursements” with “costs,” which are an indemnification for legal fees and disbursements.

7Keeping the concepts discrete, the Plaintiffs have no claim for disbursements from the non‑Settling Defendants because the Plaintiffs have already been indemnified for disbursements, but the Plaintiffs do have a claim for costs for legal fees.

8In my opinion, approximately half of the Plaintiffs’ claim for legal fees should be payable forthwith and half should be payable in the cause.

9Of the award payable forthwith; i.e. $673,398.92, I allocate the award as set out in the chart below.

10As the discussion below will reveal, in my opinion, this hybrid order as to costs is an application of the existing case law about how the court’s discretion about costs should be exercised in the context of a class action.

B. FACTUAL BACKGROUND

11This action arises out of the collapse and subsequent bankruptcy of Sino‑Forest Corporation (“Sino‑Forest”). Investors lost billions of dollars. The action is brought on behalf of purchasers of Sino‑Forest’s securities (notes and shares) from March 19, 2007 to June 2, 2011 (“the Class Period”).

12The Plaintiffs are: The Trustees of the Labourers’ Pension Fund of Central and Eastern Canada; The Trustees of the International Union of Operating Engineers Local 793 Pension Plan for Operating Engineers in Ontario; Sjunde Ap‑Fonden; Davis Selected Advisers, L.P.; Davis New York Venture Fund, Inc.; David Grant; and Robert Wong.

13It is a term of the contingency fee retainer agreements of all of the Plaintiffs except Davis Selected Advisers, L.P. and Davis New York Venture Fund, Inc. that Class Counsel receive any costs recovered from the Defendants in addition to a contingency fee.

14Turning to the Defendants, Allen T.Y. Chan and Kai Kit Poon were co‑founders of Sino‑Forest.

15David J. Horsley was a Sino‑Forest Director (from 2004 to 2006) and was its CFO.

16Peter Wang, W. Judson Martin, Edmund Mak, Simon Murray, James M.E. Hyde, William E. Ardell, James P. Bowland, and Garry J. West were Sino‑Forest’s Directors during the Class Period.

17Sino‑Forest's forestry assets were valued by the Defendant, Pöyry (Beijing) Consulting Company Limited.

18Ernst & Young LLP (“E&Y”) was Sino‑Forest's auditor from 1994 to the date of its collapse, except for certain years.

19BDO was Sino‑Forest's auditor from March 21, 2005 to August 12, 2007.

20The Underwriters for the various equity and debt instruments issued by Sino‑Forest were the Defendants Credit Suisse Securities (Canada) Inc., TD Securities Inc., Dundee Securities Corporation, RBC Dominion Securities Inc., Scotia Capital Inc., CIBC World Markets Inc., Merrill Lynch Canada Inc., Canaccord Financial Ltd., Maison Placements Canada Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated.

21Sino‑Forest operated forest plantations in the People’s Republic of China.

22After its establishment in 1994, Sino‑Forest appeared to experience extraordinary growth.

23On June 2, 2011, Muddy Waters LLC, a short seller, issued a research report alleging that Sino‑Forest had falsely claimed assets and revenues.

24On June 20, 2011, a proposed class action commenced alleging misrepresentations in various disclosure documents.

25In the action, the Plaintiffs claim damages in excess of $7 billion and advance numerous claims including negligent misrepresentation, negligence in the primary market, breaches of the Securities Act, and claims under U.S. securities law.

26On November 4, 2011, the Plaintiffs served their notice of motion and supporting material for certification and leave under the Securities Act.

27On January 26, 2012, the Plaintiffs delivered an Amended Statement of Claim.

28On March 2, 2012, the Plaintiffs initiated a motion seeking leave to assert causes of action under Part XXIII.1 of the Securities Act.

29In support of the motion for leave, the Plaintiffs delivered expert reports concerning compliance with GAAP.

30The leave test requires evidence showing a reasonable possibility that the action will be resolved in the plaintiffs’ favour.

31On March 30, 2012, Sino‑Forest filed for insolvency protection pursuant to the CCAA.

32A temporary stay of the class action was ordered but later lifted to allow settlements and the motions to proceed.

33A third‑party funding agreement between the Plaintiffs and Claims Funding International was approved.

34On September 25, 2012, a settlement with Pöyry was approved.

35In November 2012, a settlement was reached with E&Y for $117 million.

36On December 10, 2012, a plan of compromise and reorganization for Sino‑Forest was sanctioned.

37On March 20, 2013, the court approved the class action settlement with E&Y.

38Class Counsel’s fees and disbursements relating to the E&Y settlement were also approved.

39Meanwhile, the stay in the CCAA proceedings had been lifted and the class action resumed.

40Certain defendants delivered responding material on the certification and leave motions.

41Sino‑Forest disclosed over one million documents to Class Counsel.

42BDO delivered extensive affidavit evidence and expert reports.

43Some defendants filed no evidence.

44Mr. Chan and Mr. Poon filed responding records for certification.

45The Plaintiffs ultimately delivered extensive affidavit and expert evidence.

46Class Counsel reviewed approximately 1.2 million documents, many in Chinese.

47On July 24, 2014, the Plaintiffs settled their claims against David Horsley.

48The Plaintiffs also settled with the Underwriters, subject to court approval.

49Class Counsel sought approval for substantial fees and disbursements in that settlement.

50In November 2014, BDO made an offer to settle the motions which the Plaintiffs accepted.

51On January 20, 2015, the remaining issues concerning certification and leave were argued.

52One disputed issue remained — the “Assignment Issue”.

53The Plaintiffs’ claim for costs totals approximately $2.6 million.

C. COSTS OUTLINE

54The Plaintiffs’ Amended Costs Outline for the certification and leave motions lists two fee items.

55The Amended Costs Outline lists disbursements totalling $1,016,411.07.

56The non‑Settling Defendants requested further particulars concerning the costs.

57Class Counsel advised that the dockets were limited to work relating to the certification and leave motions.

58Class Counsel stated that legal research time had been excluded.

59Document review time alone totalled $615,141.

60Class Counsel described the methodology used to calculate their costs claim.

61The time attributed to BDO included only certain portions of the motions.

62The Plaintiffs also described how disbursements were allocated.

D. THE PARTIES’ COSTS SUBMISSIONS

1. The Plaintiffs’ Costs Submissions

63The Plaintiffs submit that they were totally successful and entitled to costs.

64They argue that the motions were effectively contested until just before the hearing.

65They submit that fairness requires that their claimed costs be awarded.

66They argue that the amount sought is reasonable given the magnitude of the litigation.

67They also criticize the Defendants’ expenditures of insurance funds on legal fees.

2. Sino‑Forest’s Costs Submissions

68The Plaintiffs claim substantial fees and disbursements against Sino‑Forest.

69Sino‑Forest disclosed significantly lower defence costs.

70The Plaintiffs provided a breakdown of the fees attributed to Sino‑Forest.

71Sino‑Forest argues that the Plaintiffs were not totally successful.

72It also argues that the Plaintiffs over‑lawyered the motions.

73It challenges certain expert disbursements.

74It notes that it voluntarily disclosed documents early in the proceedings.

75It submits that if costs are awarded, they should be limited to $50,000–$100,000 payable in the cause.

3. Murray, Mak, Martin, and Wang

76The Plaintiffs claim fees and disbursements against these defendants.

77They adopt Sino‑Forest’s submissions.

4. Ardell, Bowland, Hyde and West

78The Plaintiffs claim fees and disbursements against these defendants.

79Their defence costs were relatively modest.

80They submit that no costs should be awarded because they did not actively oppose the motions.

5. BDO’s Costs Submissions

81The Plaintiffs claim substantial costs against BDO.

82BDO disclosed its own defence expenditures.

83BDO argues that the Plaintiffs have already recovered significant fees through settlements.

84It submits that awarding additional costs would be a windfall.

85It argues that disbursements should remain in the cause.

86It also argues that most work related to the merits rather than the motions.

87Alternatively, it submits that the requested costs are unreasonable.

88It proposes a drastically reduced amount.

89BDO disputes the Plaintiffs’ argument concerning insurance depletion.

90It also challenges the allocation of costs attributed to it.

91It argues the allocation is disproportionate to its role.

92Finally, BDO claims its own post‑offer costs.

6. Mr. Chan’s Costs Submissions

93The Plaintiffs claim fees and disbursements against Mr. Chan.

94He argues that the Plaintiffs may already have recovered their costs through settlements.

95Alternatively, he submits that any costs should be payable in the cause.

96He also challenges the hourly rates charged.

97He argues he should not bear cross‑examination costs.

98He challenges the Plaintiffs’ representation about legal research.

99He argues disbursements have already been recovered.

100He submits many claimed expenses relate to the overall litigation.

7. Mr. Poon’s Costs Submissions

101The Plaintiffs claim fees and disbursements against Mr. Poon.

102Mr. Poon disclosed his own defence expenditures.

103He argues that costs should not be determined before the settlement with the Underwriters is clarified.

104He also argues the Plaintiffs were inefficient.

105He submits that access‑to‑justice considerations do not justify immediate payment.

106He argues the Plaintiffs abandoned certain claims during negotiations.

E. DISCUSSION AND ANALYSIS

1. Fees, Contingency Fees, Disbursements, and Costs

107Costs are a claim of a litigant to be indemnified by an opponent for legal expenses.

108Costs cannot exceed the legal fees and disbursements actually incurred.

109A litigant must have liability for legal expenses to claim indemnification.

110In this case, the Plaintiffs incurred liability through contingency fee agreements.

111The Plaintiffs have already received indemnification for disbursements through settlements.

112Therefore, the Plaintiffs cannot recover those disbursements again.

113BDO argues that contingency fees already recovered eliminate any entitlement to costs.

114I reject that argument.

115Settlements with some defendants do not extinguish other defendants’ potential liability for costs.

116Accordingly, the disbursement claim is disallowed and the court proceeds to consider legal fees.

2. Costs for Interlocutory Motions in Class Proceedings

117Modern costs rules serve several purposes including indemnification, encouraging settlement, discouraging frivolous claims, sanctioning misconduct, and facilitating access to justice.

118Judicial discretion over costs arises under s.131 of the Courts of Justice Act.

119The discretion is guided by rules including Rule 57.01 of the Rules of Civil Procedure.

120In class actions, courts also consider whether the case raises novel issues or matters of public interest.

121Generally, costs follow the event.

122The same principle applies in class proceedings.

123Courts must also consider the goals of the Class Proceedings Act.

124Appellate authorities have identified several principles relevant to certification costs.

125Reasonableness and the expectations of the unsuccessful party are key considerations.

126Courts must ensure that cost awards remain within the reasonable expectations of the losing party.

127Class proceedings should not encourage overspending on legal services.

128Hybrid cost orders — partly payable forthwith and partly in the cause — may be appropriate.

129In this case, the motions were essentially commercial disputes and not test cases or matters of public interest.

3. Success on the Motion

130The Plaintiffs are treated as the successful party, although not entirely successful.

131The unresolved Assignment Issue warrants making those costs in the cause.

132After deductions, the Plaintiffs seek approximately $1.35 million in legal fees.

133I find that awarding the entire amount would be unfair and unreasonable.

134A portion of the work performed will carry forward to the merits phase.

135The defendants should not be required to fund litigation that relates primarily to proving the merits.

136Certification and leave are somewhat analogous to interlocutory relief.

137Certification, however, remains procedurally distinct from the merits.

138Accordingly, plaintiffs should recover reasonable costs for obtaining certification and leave.

139Much of the work performed related to establishing the merits to satisfy the leave test.

140I considered allocating only 25% payable immediately but ultimately rejected that approach.

141A 50:50 split between costs payable forthwith and costs payable in the cause is appropriate.

142The award payable immediately is $673,398.92.

143This allocation aligns with comparable awards and reasonable expectations.

4. Cross‑Examination Fees

144Certain cross‑examination costs also require clarification.

145Rule 39.02(4)(b) normally makes the cross‑examining party liable for certain costs.

146Given the hybrid order, half of those costs will be payable now and half in the cause.

5. BDO’s Liability to Pay HST

147BDO argues that as a non‑resident corporation it should not pay HST.

148I reject this argument because the Plaintiffs remain liable to pay HST to their counsel.

6. The Exclusion of a Claim for Legal Research

149Mr. Chan challenges the Plaintiffs’ claim that no legal research was billed.

150Legal research is an appropriate charge in litigation.

151The development of class action law requires significant legal research.

F. CONCLUSION

[152] For the above reasons, I order that:
(1) the costs of the Assignment Issue shall be payable in the cause and fixed at $113,000;
(2) half of the balance of the lawyers’ fees plus HST, $673,398.92, shall be payable forthwith;
(3) the remaining half shall be payable in the cause; and
(4) BDO has an offsetting costs claim of $13,266.90.

153Of the award payable forthwith — $673,398.92 — I allocate the award as set out in the chart above.

Perell, J.