CITATION: Keyton v. Canada Lithium Corp., 2016 ONSC 7354
COURT FILE NO.: CV-12-462933CP
DATE: 20161128
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
JOHN KEYTON and HUGH LATIMER
Plaintiffs
– and –
CANADA LITHIUM CORP., PETER SECKER, CHARLES TASCHEREAU, MITCHELL LAVERY and MICHELLE STONE
Defendants
Michael G. Robb for the Plaintiffs
Dana M. Peebles for the Defendants Canada Lithium Corp., Peter Secker, Charles Taschereau and Mitchell Lavery
H. James Marin for the Defendant Michelle Stone
Proceeding under the Class Proceedings Act, 1992
HEARD: November 23, 2016
PERELL, J.
REASONS FOR DECISION
1. Introduction
[1] Pursuant to the Class Proceedings Act, 1992, S.O. 1992, c.6, John Keyton and Hugh Latimer, who invested in the securities of Canada Lithium Corp. (now known as RB Energy Inc. or Énergie RB Inc.), were successful in having a securities misrepresentation action certified as a class action. The action, which advanced claims under the Ontario Securities Act, R.S.O. 1990, c. S.5, was against Canada Lithium, Peter Secker, Charles Taschereau, Mitchell Lavery, who are directors and officers of Canada Lithium, and Michelle Stone, who is a geoscientist.
[2] Unfortunately for Messrs. Keyton and Latimer, Canada Lithium was ultimately placed in receivership, and it has no exigible assets. All but $400,000 of insurance coverage, which is being depleted by the ongoing litigation, is left for recovery.
[3] Messrs. Keyton and Latimer, along with Canada Lithium’s receiver and the other Defendants, have now agreed to settle the action and they bring a motion for approval of the settlement. The settlement is based on a discontinuance of the action along with a bar order precluding the Class Members from advancing any cause of action that was or that could have been asserted in Messrs. Keyton’s and Latimer’s action.
[4] The settlement agreement, which is subject to court approval, provides for the payment of the $400,000 in exchange for releases. The $400,000 is not to be paid to the Class Members but rather is to be paid to Class Counsel, who have disbursements of $159,038.13 and docketed time of $633,410.50, excluding the time for the preparation of the settlement approval motion now before the court.
[5] After the settlement agreement was signed, the Defendants indicated that as an alternative to receiving releases, the settlement could be implemented by a discontinuance of the action with a term of the discontinuance being a bar Order precluding new actions by the Class Members.
[6] The Class Members have not been given notice of this motion, and it is proposed that they be given notice after the settlement and after the fee award are approved.
[7] For the reasons that follow, I shall approve the settlement as originally envisioned by the parties, and I direct that notice of the settlement approval be given to Class Members by having a notice posted on Class Counsel’s website.
[8] A discontinuance with a bar Order is a contradiction in terms and all that is required in the immediate case is approval of the settlement, which includes a release, and approval of Class Counsel’s fee request.
2. Factual Background
[9] Canada Lithium was a public company engaged in the exploration, development, and production of lithium carbonate. It had a project near the city of Val d’Or, Québec. Messrs. Keyton and Latimer commenced what was then a proposed class action following disclosures by the Defendants that: (a) there were “significant issues” with geological modeling underlying a mineral resource estimate; and, (b) there would be a materially negative reduction to the estimate as a consequence.
[10] Those disclosures led Messrs. Keyton and Latimer to conclude that the Canada Lithium’s mineral resource estimate assigned lithium grades to areas that had not been sampled and included barren areas with no lithium at all. They concluded that the mineral resource estimate did not accord with the Canadian Securities Administrators’ National Instrument 43-101, Standards of Disclosure for Mineral Projects.
[11] In the action, Messrs. Keyton and Latimer alleged that, contrary to the Ontario Securities Act, there were misrepresentations as to the material scientific and technical information underlying the mineral resource estimates. They alleged that the misrepresentations were made in a prospectus under which Canada Lithium raised in excess of $100 million and the misrepresentations were also made in secondary market disclosure documents. Messrs. Keyton and Latimer alleged economic loss resulting from the misrepresentations and claimed damages from the Defendants under Parts XXIII and XXIII.1 of the Ontario Securities Act.
[12] The Defendants denied, and continue to deny, the allegations.
3. Procedural History
[13] The action was commenced at London, Ontario, in April 2011, and subsequently transferred to Toronto.
[14] Initially, additional individual defendants were named but on consent, the action was discontinued against these defendants in July 2012.
[15] On August 6, 2013, the remaining Defendants consented to an order granting, amongst other things, leave to proceed under Part XXIII.1 of the Ontario Securities Act and certification of the action as a class proceeding, which order was amended by a further consent order issued August 19, 2013.
[16] The Opt-Out deadline was November 25, 2013. There were 15 Class Members who opted out of the action. To the knowledge of Class Counsel, no opt-out party has commenced another proceeding in relation to the matters at issue in the action.
[17] Pleadings closed in February 2014, following which the parties engaged in extensive and technical documentary discovery. The Defendants produced in excess of 15,000 documents. Examinations for discovery were scheduled to occur in the fall of 2014, to be completed by November 30, 2014.
[18] As the action moved forward, Canada Lithium’s financial situation deteriorated, and Canada Lithium and its wholly-owned direct subsidiaries, Québec Lithium Inc., QLI Metals Inc. and Sirroco Mining Inc., sought and obtained creditor protection under the Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36 (“CCAA”). On October 14, 2014, the action was stayed as against all Defendants, except Dr. Michelle Stone. Thereafter, the action remained stayed with respect to Canada Lithium to May 8, 2015; and, with respect to the individual Defendants, except Dr. Stone, to June 21, 2016.
[19] Canada Lithium and its subsidiaries failed to achieve a plan of compromise under the CCAA; and, while in CCAA protection, a sale of Canada Lithium’s business and assets was also unsuccessful. This resulted in the termination of the CCAA proceedings and in transitioning Canada Lithium and its subsidiaries transitioning into a receivership. The receivership occurred in May 2015, on the application of a creditor with a court-ordered first charge.
[20] Under receivership, it was determined: (a) that it would take approximately $150 million to $200 million and a further 12 to 18 months to bring Canada Lithium’s Québec Lithium Project into commercial production (50% of full production); and (b) that the Québec Lithium Project had significant environmental issues requiring monthly capital expenditure in the hundreds of thousands of dollars until a permanent fix could be instituted, estimated to cost $30 million.
[21] Substantially, all of the business and assets of Canada Lithium and its subsidiaries were sold in June 2016. While Canada Lithium had invested approximately $350 million in the Québec Lithium Project, it had financial debt obligations of approximately one-third of that amount at the time. It has been disclosed that the sale, for an undisclosed amount, resulted in a “substantial shortfall” to Investissement Québec, a subordinate secured lender and guarantor. There has been no payment to unsecured creditors, and the receiver has advised that shareholders will not recover any value.
[22] The only remaining asset of Canada Lithium, excluding any tax attributes, is an indirect shareholding interest in a Chilean company, Atacama Minerals Chile S.C.M., which is itself heavily indebted and owns and operates a negative cash flow iodine mine in Chile. The indirect shareholding in Atacama was optioned to the new owner of the Québec Lithium Project for $10,000.
[23] The CCAA stay affecting the action, except Dr. Stone, has been terminated following court approval of the sale.
4. The Proposed Settlement and Discontinuance
[24] The parties, through their counsel, and the receiver, entered into a settlement agreement. The settlement required a payment of $400,000 for the benefit of the Class in full settlement of the action, including all interest and legal fees incurred. The settlement is not an admission of liability and the Defendants continue to deny any wrongdoing, including all allegations against them in the action. In exchange for payment, the Defendants are to receive a full and final release from all Class Members.
[25] After a case management conference with the Court, at which alternate forms of resolution were discussed, counsel for the Defendants indicated that the Defendants would accept, in lieu of releases, a bar on the commencement of further claims in relation to the matters at issue.
[26] Class Counsel recommends the settlement. In making the recommendation, Class Counsel understood that the estate of Canada Lithium is insufficient to satisfy creditor claims, with the result that there is likely to be no estate available to satisfy any judgment or settlement that might be obtained by the Class. Class Counsel considered the risk of continued litigation to recover any remaining available insurance coverage. Class Counsel determined that there are no viable alternate sources of recovery. While Class Counsel believed the claims advanced in the action have merit, they see no realistic prospect of significant recovery beyond the amount provided for by the settlement agreement.
[27] Class Counsel believe that continued litigation will deplete the available insurance funds. Early in the prosecution of the action, counsel for Canada Lithium and Defendants Secker, Lavery and Taschereau, provided Class Counsel with a copy of a directors and officers professional liability insurance policy. The significant aspects of the D&O Policy are that the policy limit (including excess side coverage) is $3 million; however, the policy is a wasting policy such that defence costs are drawn against the limits and reduce the coverage available to fund any judgment or settlement. Counsel to those Defendants for which the D&O Policy is responding have advised that the D&O Policy will, after anticipated legal costs to complete the settlement, be exhausted or almost exhausted by payment of the settlement amount.
[28] The Representative Plaintiffs have sought to identify other viable sources of recovery, to no avail. Coverage has been denied under Dr. Stone’s professional liability insurance policy, which has a policy limit of $100,000. She is also no longer practicing as a professional geoscientist and is unable, at this time, to fund a personal contribution to a settlement. Additionally, the personal means of the individual Defendants who may have liability appear insufficient to satisfy a judgment or fund a settlement any greater than has been achieved.
[29] In light of Canada Lithium’s insolvency and the absence of viable alternate sources of recovery, Class Counsel have concluded that the remaining D&O Policy limits are now the only realistic source of recovery for the Class; and, if the action is not resolved now, continuing the action will fully exhaust the remaining D&O Policy limits well before trial.
[30] The Representative Plaintiffs have approved and support the settlement with the Defendants. They also support the proposed discontinuance.
[31] Class Counsel, in consultation with RicePoint Administration Inc., a class action claims administrator, has determined that the settlement amount is insufficient for distribution to Class Members. The parties also agree that the settlement amount is not appropriate for an economic and efficient distribution to the Class.
[32] For practical and cost efficiencies, notice of the pendency of this motion has not been given. Class Counsel believes dispensation of pre-approval notice is desirable in all of the circumstances and is also in the interests of judicial economy.
[33] Class Counsel propose a form of notice to be posted to the website for the action. It is proposed that the website will also be updated to advise, for a period of no less than 12 months, that the action has been settled and discontinued. Any settlement and discontinuance order will also be posted there. Additionally, Class Counsel proposes to contact each person who has contacted it about the action, to provide information relating to any settlement approval and discontinuance order that may be made, and to provide a copy of the notice and order.
5. Class Counsel’s Fee Request
[34] Class Counsel request fees, including disbursements and taxes, in the amount of $400,000 to be paid as a term of the discontinuance. This equates to the total settlement amount. The $400,000 is to be allocated as follows: (a) $159,038.13 for disbursements; (b) $20,585.38 for HST on disbursements; (c) $195,023.44 for fees (i.e. approximately 31% of total docketed time before tax); and, (d) $25,353.05 for HST on fees.
[35] The request falls outside the terms of the retainer agreements between the Representative Plaintiffs and Class Counsel. However, Class Counsel’s investment in the case significantly exceeds the amount recovered from the settlement, and the Representative Plaintiffs’ instructions are to request that, as a term of the discontinuance, the entire settlement amount, payable by the Defendants for the benefit of the Class, be paid to Class Counsel on account of fees and disbursements incurred.
[36] Class Counsel have docketed time of $633,410.50 and financed disbursements of $159,038.13, excluding time and disbursements for the preparation of the settlement approval motion.
6. Settlement Approval
[37] Section 29 (1) of the Class Proceedings Act, 1992, governs the discontinuance, abandonment and settlement of class actions. Section 29 states:
Discontinuance, abandonment and settlement
- (1) A proceeding commenced under this Act and a proceeding certified as a class proceeding under this Act may be discontinued or abandoned only with the approval of the court, on such terms as the court considers appropriate.
Settlement without court approval not binding
(2) A settlement of a class proceeding is not binding unless approved by the court.
Effect of settlement
(3) A settlement of a class proceeding that is approved by the court binds all class members.
Notice: dismissal, discontinuance, abandonment or settlement
(4) In dismissing a proceeding for delay or in approving a discontinuance, abandonment or settlement, the court shall consider whether notice should be given under section 19 and whether any notice should include,
(a) an account of the conduct of the proceeding;
(b) a statement of the result of the proceeding; and
(c) a description of any plan for distributing settlement funds.
[38] As may be noted, s. 29(4) of the Act provides that in approving a discontinuance, abandonment, or settlement, the court shall consider whether notice should be given. In the immediate case, assuming I approved the settlement with a release of the claims against the Defendants or assuming I approved a discontinuance with a bar Order, in either case no purpose would be served by giving notice to the Class Members apart from giving them information that the litigation is over. It is clear that no purpose would be served by continuing this action and no purpose would be served by giving notice apart from informing Class Members that there is nothing that they need do or could do to salvage the situation. I agree with Class Counsel that in the circumstances of this case, it would have served no purpose to notify Class Members of the settlement approval hearing. It would have been a waste of time and money.
[39] Given that the action has been certified as a class proceeding and by not opting out the Class Members are bound by any settlement order, I see no purpose in discontinuing the action with a bar Order. Typically, class actions are discontinued before, not after certification, and in my opinion, it is a contradiction to discontinue a class action and impose a bar Order on the Class Members. The bar Order, practically speaking, would operate much the same way as a release would operate. The contradiction is that a discontinuance is not intended to be a determination on the merits or to preclude Class Members from commencing their own action if they were so inclined. This motion should be treated as a straightforward settlement approval motion with the variation that notice of the motion along with its outcome will be given after the fact.
[40] Section 29(2) of the Class Proceedings Act, 1992, provides that a settlement of a class proceeding is not binding unless approved by the court. To approve a settlement of a class proceeding, the court must find that, in all the circumstances, the settlement is fair, reasonable, and in the best interests of the class: Fantl v. Transamerica Life Canada, [2009] O.J. No. 3366 (S.C.J.) at para. 57; Farkas v. Sunnybrook and Women’s Health Sciences Centre, [2009] O.J. No. 3533 (S.C.J.) at para. 43; Kidd v. Canada Life Assurance Company, 2013 ONSC 1868.
[41] In determining whether a settlement is reasonable and in the best interests of the class, the following factors may be considered: (a) the likelihood of recovery or likelihood of success; (b) the amount and nature of discovery, evidence or investigation; (c) the proposed settlement terms and conditions; (d) the recommendation and experience of counsel; (e) the future expense and likely duration of the litigation; (f) the number of objectors and nature of objections; (g) the presence of good faith, arm’s-length bargaining and the absence of collusion; (h) the information conveying to the court the dynamics of, and the positions taken by, the parties during the negotiations; and (i) the nature of communications by counsel and the representative plaintiff with class members during the litigation. See: Fantl v. Transamerica Life Canada, supra, at para. 59; Corless v. KPMG LLP, [2008] O.J. No. 3092 (S.C.J.) at para. 38; Farkas v. Sunnybrook and Women’s Health Sciences Centre, supra, at para. 45; Kidd v. Canada Life Assurance Company, supra.
[42] The case law establishes that a settlement must fall within a zone of reasonableness. Reasonableness allows for a range of possible resolutions and is an objective standard that allows for variation depending upon the subject-matter of the litigation and the nature of the damages for which the settlement is to provide compensation: Parsons v. Canadian Red Cross Society, [1999] O.J. No. 3572 (S.C.J.) at para. 70; Dabbs v. Sun Life Assurance Company of Canada (1998), 1998 CanLII 14855 (ON SC), 40 O.R. (3d) 429 (Gen. Div.). A settlement does not have to be perfect, nor is it necessary for a settlement to treat everybody equally: Fraser v. Falconbridge Ltd. (2002), 24 CPC (5th) 396 at para. 13; McCarthy v. Canadian Red Cross Society (2007), 158 ACWS (3d) 12 (Ont. S.C.J.) at para. 17.
[43] In the immediate case, having regard to the various factors that the court must consider in approving or rejecting a settlement, I conclude that the settlement is fair, reasonable, and the best interests of the Class Members. Messrs. Keyton and Latimer and Class Counsel made a valiant effort but further litigation is without meaningful purpose and the settlement is the best that can be achieved to advance the purpose of the Class Proceedings Act, 1992. I approve the settlement.
7. Class Counsel Fees
[44] The court has jurisdiction under s. 32(4) of the Class Proceedings Act, 1992, to order the proposed class counsel fees. Section 32(4) provides:
Determination of fees where agreement not approved
(4) If an agreement is not approved by the court, the court may,
(a) determine the amount owing to the solicitor in respect of fees and disbursements;
(b) direct a reference under the rules of court to determine the amount owing; or
(c) direct that the amount owing be determined in any other manner.
[45] Class Counsel have not sought approval of their retainer agreements with the Representative Plaintiffs, as they might have, under s. 32(2) of the Act. Notwithstanding, the court may still determine appropriate fees and disbursements, pursuant to s. 32(4). The Court of Appeal, in Smith Estate v National Money Mart Co., 2011 ONCA 233, stated at para. 69:
Section 32(4), however, does not require that a fee agreement be expressly disapproved before it applies. Section 32(4) applies whenever there is no approval of the fee agreement. This is made clear by the opening words of s. 32(4), which clearly state that the court's authority to determine the amount owing to class counsel in respect of fees and disbursements under that subsection arises "if an agreement is not approved by the court".
[46] The Court of Appeal also found that the court's authority under s. 32(4) is far more expansive than its authority under s. 33(7); the Court stated at para. 55: “Section 33(7) provides only for the base fee/multiplier approach, whereas s. 32(4) provides the court with broad discretion to set the fee, direct a reference or direct the fee be determined in any other manner.”
[47] The fairness and reasonableness of the fee awarded in respect of class proceedings is to be determined in light of the risk undertaken by the lawyer in conducting the litigation and the degree of success or result achieved: Parsons v. Canadian Red Cross Society, 2000 CanLII 22386 (ON SC), [2000] O.J. No. 2374 (S.C.J.) at para. 13; Smith v. National Money Mart, 2010 ONSC 1334 at paras. 19-20, varied 2011 ONCA 233; Fischer v. I.G. Investment Management Ltd., [2010] O.J. No. 5649 (S.C.J.) at para. 25.
[48] Factors relevant in assessing the reasonableness of the fees of class counsel include: (a) the factual and legal complexities of the matters dealt with; (b) the risk undertaken, including the risk that the matter might not be certified; (c) the degree of responsibility assumed by class counsel; (d) the monetary value of the matters in issue; (e) the importance of the matter to the class; (f) the degree of skill and competence demonstrated by class counsel; (g) the results achieved; (h) the ability of the class to pay; (i) the expectations of the class as to the amount of the fees; and (j) the opportunity cost to class counsel in the expenditure of time in pursuit of the litigation and settlement: Smith v. National Money Mart, supra; Fischer v. I.G. Investment Management Ltd., supra, at para. 28.
[49] In my opinion, having regard to the various factors used to determine whether to approve the fees of class counsel, the fee request in the immediate case should be approved. The fee award recognizes that class counsel undertook and actually experienced the litigation risks associated with class proceedings, which include the risk of defendants becoming impecunious making further proceedings meaningless.
8. Conclusion
[50] In the result, I approve the settlement and Class Counsel’s fee request. A notice of this outcome shall be posted on Class Counsel’s website. An order should be taken out in accordance with these Reasons for Decision.
Perell, J.
Released: November 28, 2016
CITATION: Keyton v. Canada Lithium Corp., 2016 ONSC 7354
COURT FILE NO.: CV-12-462933CP
DATE: 20161128
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
JOHN KEYTON and HUGH LATIMER
Plaintiffs
– and –
CANADA LITHIUM CORP., PETER SECKER, CHARLES TASCHEREAU, MITCHELL LAVERY and MICHELLE STONE
Defendants
REASONS FOR DECISION
PERELL J.
Released: November 28, 2016