CITATION: LBP Holdings Ltd. v. Hycroft Mining Corporation, 2017 ONSC 6342

COURT FILE NO.: CV-14-508513CP

DATE: 20171024

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

LBP HOLDINGS LTD.

Plaintiff

– and –

HYCROFT MINING CORPORATION, SCOTT A. CALDWELL, ROBERT M. BUCHAN, DUNDEE SECURITIES LTD. and CORMARK SECURITIES INC.

Defendants

Andrew J. Morganti and Hadi Davarinia for the Plaintiff

John Fabello, Gillian B. Dingle, and Alexandra Shelley for the Defendants Cormark Securities Inc. and Dundee Securities Ltd.

John M. Picone for the Defendants Hycroft Mining Corporation, Scott A. Caldwell and Robert M. Buchan

Proceeding under the Class Proceedings Act, 1992

HEARD: October 6, 2017

PERELL, J.

REASONS FOR DECISION

A. Introduction

[1] Pursuant to the Class Proceedings Act, 1992,[^1] LBP Holdings Ltd. sues Hycroft Mining Corporation and two of its executives, Scott A. Caldwell and Robert M. Buchan for primary market misrepresentation pursuant to s. 130 of Ontario’s Securities Act[^2] and equivalent Securities Acts in other provinces. The Hycroft defendants consent to certification of the statutory action against them as a class proceeding.

[2] Abandoning a statutory claim, LBP Holdings also sues Cormark Securities Inc. and Dundee Securities Ltd., (the “Underwriters”), for negligent misrepresentation and for negligence simpliciter; i.e., for common law negligence. The Underwriters resist certification of the tort claims. They submit that LBP Holdings’ Statement of Claim does not disclose a reasonable cause of action in tort against them and, in any event, a class proceeding is not the preferable procedure for resolving the common issues. The Underwriters also submit that they are entitled, in any event, to costs arising from LBP Holdings’ abandonment of the statutory claim against them.

[3] For the reasons that follow, I certify the action as against the Hycroft Defendants and I dismiss the certification motion as against Cormark Securities and Dundee Securities.

B. Factual and Procedural Background

1. The Bought Deal Distribution of Hycroft’s Shares

[4] LBP Holdings is a Nova Scotia corporation. Lloyd B. Parker is its director, president and secretary. LBP Holdings was a shareholder in Hycroft.

[5] Hycroft, formerly Allied Nevada Gold Corp., operates the Hycroft Gold Mine in Nevada, U.S.A. The mine is its source of revenue. Hycroft’s shares trade on the New York (“NYSE”) and Toronto (“TSX”) stock exchanges.

[6] Cormark Securities and Dundee Securities are underwriters. Under the Ontario Securities Act, an underwriter is defined in s. 1(1) as follows:

“underwriter” means a person or company who, as principal, agrees to purchase securities with a view to distribution or who, as agent, offers for sale or sells securities in connection with a distribution and includes a person or company who has a direct or indirect participation in any such distribution but does not include,

(a) a person or company whose interest in the transaction is limited to receiving the usual and customary distributor’s or seller’s commission payable by an underwriter or issuer,

(b) a mutual fund that, under the laws of the jurisdiction to which it is subject, accepts its shares or units for surrender and resells them,

(c) a company that, under the laws of the jurisdiction to which it is subject, purchases its shares and resells them, or

(d) a bank listed in Schedule I, II or III to the Bank Act (Canada) with respect to securities described in paragraph 1 of subsection 35(2) or to such banking transactions as are designated by the regulations

[7] Where securities are distributed pursuant to a prospectus and there is an underwriter, s. 59(1) of the Ontario Securities Act requires that the prospectus include a certificate in the prescribed form from the underwriter(s). Section 59(1) states:

59(1) Subject to subsection 63(2), where there is an underwriter, a prospectus shall contain a certificate in the prescribed form, signed by the underwriter or underwriters who, with respect to the securities offered by the prospectus, are in a contractual relationship with the issuer or security holder whose securities are being offered by the prospectus.

[8] The prescribed form requires the underwriters to certify that the prospectus contains full, true and plain disclosure to the best of their knowledge, information and belief.[^3]

[9] Underwriters are among the entities that are exposed to liability for misrepresentations in a prospectus pursuant to s. 130 of the Ontario Securities Act. Section 130 provides a purchaser of a security under a prospectus; i.e., a purchaser in the primary market, with a remedy for misrepresentation. The statutory remedy is available against the issuer and the underwriters of the security as well as against the directors of the issuer and others who have signed the prospectus or have allowed their reports or statements to be used in the prospectus. The remedy is available regardless of whether the purchaser relied on the misrepresentation, which makes the statutory claim easier to prove than the common law claim for negligent misrepresentation, which has reasonable reliance as a constituent element. The statutory claim is also more amenable to certification as a class action. Section 130 states:

Liability for misrepresentation in prospectus

130. (1) Where a prospectus, together with any amendment to the prospectus, contains a misrepresentation, a purchaser who purchases a security offered by the prospectus during the period of distribution or during distribution to the public has, without regard to whether the purchaser relied on the misrepresentation, a right of action for damages against,

(a) the issuer or a selling security holder on whose behalf the distribution is made;

(b) each underwriter of the securities who is required to sign the certificate required by section 59;

(c) every director of the issuer at the time the prospectus or the amendment to the prospectus was filed;

(d) every person or company whose consent to disclosure of information in the prospectus has been filed pursuant to a requirement of the regulations but only with respect to reports, opinions or statements that have been made by them; and

(e) every person or company who signed the prospectus or the amendment to the prospectus other than the persons or companies included in clauses (a) to (d),

or, where the purchaser purchased the security from a person or company referred to in clause (a) or (b) or from another underwriter of the securities, the purchaser may elect to exercise a right of rescission against such person, company or underwriter, in which case the purchaser shall have no right of action for damages against such person, company or underwriter.

Defence

(2) No person or company is liable under subsection (1) if he, she or it proves that the purchaser purchased the securities with knowledge of the misrepresentation.

Idem

(3) No person or company, other than the issuer or selling security holder, is liable under subsection (1) if he, she or it proves,

(a) that the prospectus or the amendment to the prospectus was filed without his, her or its knowledge or consent, and that, on becoming aware of its filing, he, she or it forthwith gave reasonable general notice that it was so filed;

(b) that, after the issue of a receipt for the prospectus and before the purchase of the securities by the purchaser, on becoming aware of any misrepresentation in the prospectus or an amendment to the prospectus he, she or it withdrew the consent thereto and gave reasonable general notice of such withdrawal and the reason therefor;

(c) that, with respect to any part of the prospectus or the amendment to the prospectus purporting to be made on the authority of an expert or purporting to be a copy of or an extract from a report, opinion or statement of an expert, he, she or it had no reasonable grounds to believe and did not believe that there had been a misrepresentation or that such part of the prospectus or the amendment to the prospectus did not fairly represent the report, opinion or statement of the expert or was not a fair copy of or extract from the report, opinion or statement of the expert;

(d) that, with respect to any part of the prospectus or the amendment to the prospectus purporting to be made on his, her or its own authority as an expert or purporting to be a copy of or an extract from his, her or its own report, opinion or statement as an expert but that contains a misrepresentation attributable to failure to represent fairly his, her or its report, opinion or statement as an expert,

(i) the person or company had, after reasonable investigation, reasonable grounds to believe and did believe that such part of the prospectus or the amendment to the prospectus fairly represented his, her or its report, opinion or statement, or

(ii) on becoming aware that such part of the prospectus or the amendment to the prospectus did not fairly represent his, her or its report, opinion or statement as an expert, he, she or it forthwith advised the Commission and gave reasonable general notice that such use had been made and that he, she or it would not be responsible for that part of the prospectus or the amendment to the prospectus; or

(e) that, with respect to a false statement purporting to be a statement made by an official person or contained in what purports to be a copy of or extract from a public official document, it was a correct and fair representation of the statement or copy of or extract from the document, and he, she or it had reasonable grounds to believe and did believe that the statement was true.

Idem

(4) No person or company, other than the issuer or selling security holder, is liable under subsection (1) with respect to any part of the prospectus or the amendment to the prospectus purporting to be made on his, her or its own authority as an expert or purporting to be a copy of or an extract from his, her or its own report, opinion or statement as an expert unless he, she or it,

(a) failed to conduct such reasonable investigation as to provide reasonable grounds for a belief that there had been no misrepresentation; or

(b) believed there had been a misrepresentation.

Idem

(5) No person or company, other than the issuer or selling security holder, is liable under subsection (1) with respect to any part of the prospectus or the amendment to the prospectus not purporting to be made on the authority of an expert and not purporting to be a copy of or an extract from a report, opinion or statement of an expert unless he, she or it,

(a) failed to conduct such reasonable investigation as to provide reasonable grounds for a belief that there had been no misrepresentation; or

(b) believed there had been a misrepresentation.

Limitation re underwriters

(6) No underwriter is liable for more than the total public offering price represented by the portion of the distribution underwritten by the underwriter.

Limitation in action for damages

(7) In an action for damages pursuant to subsection (1), the defendant is not liable for all or any portion of such damages that the defendant proves do not represent the depreciation in value of the security as a result of the misrepresentation relied upon.

Joint and several liability

(8) All or any one or more of the persons or companies specified in subsection (1) are jointly and severally liable, and every person or company who becomes liable to make any payment under this section may recover a contribution from any person or company who, if sued separately, would have been liable to make the same payment provided that the court may deny the right to recover such contribution where, in all the circumstances of the case, it is satisfied that to permit recovery of such contribution would not be just and equitable.

Limitation re amount recoverable

(9) In no case shall the amount recoverable under this section exceed the price at which the securities were offered to the public.

No derogation of rights

(10) The right of action for rescission or damages conferred by this section is in addition to and without derogation from any other right the purchaser may have at law.

[10] Although this action is about the primary market, for the discussion later of the cause of action criterion for certification and the scope of an underwriter’s duty of care, it shall be useful to note that with respect to distributions of shares in the secondary market, at common law a purchaser of shares had no cause of action about misrepresentations in a prospectus.[^4] This lacunae in the law was remedied by amendment to the Ontario Securities Act and the addition of Part XXIII.1 (Civil Liability for Secondary Market Disclosure), which provided a statutory cause of action for misrepresentation without proof of reliance. The statutory remedy is available against the issuer, directors of the issuer and certain others who have signed the prospectus or have allowed their reports or statements to be used in the prospectus. There, however, is no statutory secondary market misrepresentation claim against underwriters. Thus, although underwriters are exposed to statutory liability in the primary market, they are not included amongst those exposed to statutory liability for secondary market disclosure.[^5] Underwriters are, however, exposed to tort claims in both the primary and the secondary markets.

[11] In an Underwriting Agreement dated May 2, 2013, Cormark Securities and Dundee Securities contracted with Hycroft to act as underwriters in a public offering of Hycroft’s common shares. Under the Underwriting Agreement, Cormark Securities and Dundee Securities were permitted to conduct due diligence with respect to their certificate under the Ontario Securities Act. The Underwriting Agreement stated:

[Hycroft agrees to] …allow the Underwriters to conduct all due diligence which they may reasonably require in order to fulfill their obligations as Underwriters and in order to enable the Underwriters to responsibly execute the certificates required to be executed by them in the Canadian Preliminary Prospectus, the Canadian Final Prospectus or in any Supplementary Material.

[12] On May 9, 2013, Hycroft released the final short form prospectus and published it on SEDAR (System for Electronic Document Analysis and Retrieval). The prospectus included the certification of the Underwriters. In the short form prospectus, Cormark Securities and Dundee Securities affirmed:

To the best of our knowledge, information, and belief, this short form prospectus together with the documents incorporated by reference, constitutes full, true and plain disclosure of all material facts relating to the securities offered by this short form prospectus as required by the securities legislation of the provinces of British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, New Brunswick, Prince Edward Island, Nova Scotia and Newfoundland and Labrador.

[13] On May 17, 2013, Hycroft effected a cross-border $150 million (USD) secondary public offering of 14 million shares of common stock at a price of $10.75 (USD) per share. The offering was financed as a "bought deal" with Cormark Securities and Dundee Securities acting as principals. A bought deal is an offering where the underwriter, rather than acting as sales agent of the issuer, commits to buying the entire offering from the issuer of the security and then the underwriter resells it. Under a bought deal, the underwriter takes on the market risk of reselling, and thus a bought deal is different from an underwriting in which an underwriter makes best efforts to sell the securities of the issuer but provides no guarantee of the amount or value of the securities that will be sold and the issuer takes on the market risk.

[14] For the resale of the Hycroft shares, the price of the shares sold pursuant to the prospectus was based on the prevailing price for Hycroft’s shares in the secondary market on the TSX on April 29, 2013 (the last trading day before the announcement of the offering) and May 8, 2013 (the last trading day before the filing of the prospectus).

[15] Incorporated by reference as an integral part of the short form prospectus was Hycroft’s 2012 Annual Report, its Q12013 Interim Report, and its MD&As (Management Discussion and Analysis of Financial Conditions and Results of Operations). The documents incorporated by reference included representations about Hycroft’s gold production and its ability to finance its gold mine.

[16] LBP Holdings alleges that the representations about the gold mine’s production violated Hycroft's disclosure obligations because the prospectus omitted to disclose that during late 2012, the company was having persistent operational problems with its Lewis Leach Pad that had not been rectified. These operational problems had an adverse effect on Hycroft’s ability to produce gold. LBP Holdings alleges that the production projections were unreasonable because of the persistent operational problems.

[17] LBP Holdings submits that before signing the underwriter’s prescribed certificate for the public offering, by the exercise of due diligence, the Underwriters ought to have discovered the material facts not disclosed by Hycroft.

[18] LBP Holdings alleges that the Underwriters knew and intended that the purchasers would rely on the prospectus in making a decision to purchase Hycroft’s securities.

[19] Pursuant to the prospectus, Hycroft shares were distributed in British Columbia, Alberta, Saskatchewan, Ontario, Nova Scotia, and the United States. Excluding U.S. purchasers, 247 Canadians and 7 foreigners purchased 7.2 million Hycroft common shares directly from Cormark Securities and Dundee Securities.

[20] The Underwriters know the identities and addresses of the purchasers. On average, each purchaser purchased $307,745.12 (USD) worth of shares.

[21] LBP Holdings reviewed the prospectus for the secondary public offering before making its purchase. LBP Holdings purchased 20,000 shares of Hycroft for $215,000 (USD).

[22] On August 6, 2013, Hycroft released information about operational problems with the Lewis Leach Pad at the mine. The disclosure led to a nearly 26% decline in the value of Hycroft’s shares falling from $6.09 to $4.56.

[23] On August 7, 2013, the decline continued, and the shares closed at $3.85, a two-day decline of approximately 37%.

2. LBP Holdings’ Proposed Class Action

[24] By notice of action, on July 16, 2014, LBP Holdings commenced a proposed class action against Hycroft and Messrs. Caldwell and Buchan.

[25] LBP Holdings’ Statement of Claim was filed on August 14, 2014. LBP Holdings claims damages of $47 million (USD). The Underwriters were not named as parties.

[26] LBP Holdings proposed to be the representative plaintiff for:

All persons, other than Excluded Persons, who acquired Hycroft Mining Corporation’s SPO [secondary public offering] securities in a transaction occurring outside the United States pursuant to the Prospectus and during its distribution period (the “Class”).

Excluded Persons is defined as the defendants’ affiliates, officers, directors, senior employees, legal representatives, heirs, predecessors, successors and assigns, and any member of the Individual Defendants’ immediate families and any entity in which any of the foregoing has or had an interest during the distribution period for the Prospectus, or any time a document incorporated by reference in the Prospectus was released, and, with respect to the Class definition in paragraph 1(g) means U.S. citizens or residents who acquired Hycroft’s securities in the SPO in a trade under the U.S. prospectus. Also excluded from the Class are any SPO shares sold prior to July 22, 2013.

[27] The definition of “Excluded Persons” will exclude any investor that is included within a U.S. class proceeding against Hycroft that parallels the action in Ontario.

[28] In the Canadian proposed class action, LBP Holdings alleges that Hycroft published core documents and made other statements containing material misrepresentations about: (a) its ability to process and leach ore at the Hycroft Mine; (b) the feasibility of its 2013 gold production and cash cost guidance projections; and (c) its ability to finance the expansion of the Hycroft Mine. LBP Holdings pleads that these misrepresentations were incorporated by reference into the short form prospectus for the secondary public offering.

[29] LBP Holdings pleads that the alleged misrepresentations were first corrected on July 22, 2013, when Hycroft published its second quarter operating results. Those results disclosed previous operating errors that prevented Hycroft from achieving its production targets. LBP Holdings pleads that the alleged misrepresentations were corrected again on August 6 and 7, 2013, when Hycroft announced in a series of conference calls that, because it could not leach enough ore to generate sufficient cash flows, the expansion of the Hycroft Mine had to be postponed.

[30] On March 5, 2015, LBP Holdings amended its Statement of Claim.

[31] On March 9, 2015, Hycroft filed for protection under U.S. bankruptcy law.

[32] Two months later, on May 15, 2015, LBP Holdings served a motion seeking to add Cormark Securities and Dundee Securities as defendants to the proposed Canadian class action. The motion to add the Underwriters as defendants was to be heard a year later by Justice Belobaba.

[33] On October 2015, before the argument of the joinder motion, Hycroft emerged from the Chapter 11 bankruptcy protection in the United States.

[34] On the motion to add defendants, on April 27, 2016, Justice Belobaba held that LBP Holdings’ claim against Cormark Securities and Dundee Securities under s. 130 of the Ontario Securities Act was statute-barred and that its claims under Part XXIII.1 of the Act - the secondary market claim against the Underwriters as alleged "experts" - for which leave is required, had no reasonable prospect of success. Justice Belobaba also held that LBP Holdings’ unjust enrichment claim did not disclose a reasonable cause of action.

[35] At the joinder motion, Cormark Securities and Dundee Securities did not object to the common law claims, and Justice Belobaba held that the tort claims, “remain alive for purposes of certification, although I assume that this is not a preferred alternative for the plaintiff.”

[36] After the decision on the joinder motion, LBP Holdings discontinued its secondary market claims (both statutory and common law) and its common law primary market claims against the Hycroft Defendants. This left LBP Holdings with a statutory claim against the Hycroft Defendants. The discontinuance of the other claims was in exchange for the consent of the Hycroft Defendants to certification of the statutory primary market prospectus misrepresentation claim under s. 130 of Ontario’s Securities Act and the equivalent Securities Acts in other provinces. In March 2017, LBP Holdings filed a Fresh as Amended Statement of Claim reflecting these changes.

[37] There was no agreement between LBP Holdings and the Underwriters about the certification of the action against them and by Notice of Motion dated March 17, 2017, LBP Holdings sought to certify the claims against the Underwriters for: (a) prospectus misrepresentation under s. 130 of the Securities Act, (b) negligent misrepresentation, and (c) negligence. The certification motion was returnable on July 25, 2017.

[38] On the return of the certification motion, LBP Holdings abandoned its statutory claims as against Cormark Securities and Dundee Securities, and Justice Belobaba adjourned the incomplete certification motion to allow LBP Holdings to amend, once again, its Statement of Claim. The substantive part of the Order of Justice Belobaba stated:

1. THIS COURT ORDERS that subject to submissions on costs, leave is granted to the plaintiff pursuant to s. 29(1) of the Class Proceedings Act 1992, S.O. 1992, c. 6 (the “CPA”) to abandon all claims for primary market liability under securities legislation, including under Part XXIII of the Ontario Securities Act, R.S.O. 1990, c. S.5 and equivalent provisions of other securities legislation (the “Statutory Primary Market Claim”) as against the Underwriters.

2. THIS COURT ORDERS that this motion is adjourned pursuant to s. 5(4) of the CPA to permit the plaintiff to deliver an amended Fresh as Amended Statement of Claim for consideration under s. 5 of the CPA:

(a) to remove the Statutory Primary Market Claim as against the Underwriters;

(b) to re-plead the plaintiff’s claims for primary market common law liability in negligence simpliciter and negligent misrepresentation;

(c) to revise the proposed common issues as they relate to the plaintiff’s claims for primary market common law liability in negligence simpliciter and negligent misrepresentation.

3. THIS COURT ORDERS that the Underwriters are not precluded from advancing any arguments in response to the plaintiff’s amended Fresh as Amended Statement of Claim, including the argument that the plaintiff’s claim for primary market common law liability in negligence simpliciter is subsumed with the plaintiff’s claim for primary market common law liability in negligent misrepresentation.

4. THIS COURT ORDERS that the costs of this motion, including costs resulting from the plaintiff’s abandonment of its Statutory Primary Market Claim as against the Underwriters, are to be determined as part of the hearing of the motion for certification of this action as a class proceeding.

[39] On August 10, 2017, LBP Holdings served a Second Fresh as Amended Statement of Claim that deleted the statutory prospectus misrepresentation claim as against the Underwriters; repleaded the negligence and the negligent misrepresentation claim, and revised the proposed common issues.

[40] In the Second Fresh as Amended Statement of Claim, LBP Holdings alleges that: the Underwriters owed class members a duty of care to conduct reasonable due diligence and ensure that the prospectus made “full, true and plain disclosure…free of misrepresentation” and the duty of care arose from the Underwriters’ certificate and from the Underwriting Agreement between Hycroft and the Underwriters that created a “special relationship” between the Underwriters and class members. LBP Holdings pleads that the Underwriters’ certificate represented that the prospectus made full, true and plain disclosure but the prospectus contained multiple misrepresentations. Paragraph 104 of the Second Fresh as Amended Statement of Claim states:

104. Had the Underwriters not breached their duty of care in conducting their due diligence and pricing the securities offered by the Prospectus, the Plaintiff and the members of the Class would either: (a) not have purchased Hycroft’s securities in the SPO [secondary public offering] at all; or, in the alternative, (b) they would have purchased those securities at a lower price; or, in the further alternative, (c) they would have purchased fewer securities offered in the SPO.

[41] LBP Holdings alleges that the Underwriters failed to meet the standard of care because they knew or ought to have known that the prospectus did not make full, true, and plain disclosure of all material facts and, therefore, contained misrepresentations. It alleges that the Underwriters failed in their due diligence to learn about the operational problems at the Lewis Leach Pad or did learn about the problems and were negligent in not reporting the material facts in the prospectus.

[42] In an amended Notice of Motion for certification, LBP Holdings proposes the following common issues:

Common Issues relating to Part XXIII of the OSA [“Ontario Securities Act”] (against the Corporate Defendants)

1. Was Hycroft a responsible issuer within the meaning of the OSA?

2. Was Hycroft obliged to disclose all material facts in the Prospectus?

3. Did Hycroft encounter operational problems with the Lewis Leach Pad during Q1 2013 and prior to the release of the final Prospectus?

4. If so, was Hycroft required to disclose the operational problems at the Lewis Leach Pad in its final Prospectus for the SPO [secondary public offering]?

5. Did Hycroft’s final Prospectus omit the material facts about the then known operational problems with the Lewis Leach Pad?

6. Were the Individual Defendants aware of the operational problems with the Lewis Leach Pad prior to the release of the final Prospectus?

7. If so, did the Individual Defendants conduct any type of due diligence to determine whether the facts about the operational problems at the Lewis Leach Pad were material facts as defined in the OSA?

8. Were the gold production and cash cost guidance projections relating to Hycroft’s Q2 and annual results for 2013 fiscal year reasonable when made prior to and within the final Prospectus?

9 Did the pricing of the SPO incorporate the material facts released by the Individual Defendants during quarterly conference calls?

10. Are any of the Individual Defendants liable for releasing the final Prospectus that contained misrepresentations? If so, which Individual Defendant or both Individual Defendants?

Common Issues relating to Negligent Misrepresentation (against the Underwriters)

1. Did the Underwriters owe a duty of care to the Plaintiff and the members of the Class to ensure that the final Prospectus for the SPO did not contain any misrepresentations and otherwise made full, true and plain disclosure of all material facts?

2. What is the standard of care applicable to the Underwriters?

3. Did the Prospectus contain any misrepresentations or other failures to make full true and plain disclosure of all material facts?

4. If so, did the Underwriters breach the applicable standard of care?

5. If so, how did the Underwriters breach the applicable standard of care?

6. Did the Underwriters’ breach of the applicable standard of care result in their section 59 OSA underwriter certification forms being released containing a misrepresentation?

Common Issues relating to Negligence Simpliciter (against the Underwriters)

Were the Underwriters negligent in conducting their due diligence and in pricing the securities offered by the final Prospectus? More specifically:

1. Did the Underwriters owe a duty of care to the Plaintiff and the members of the Class in respect of the SPO?

2. What is the standard of care applicable to the Underwriters?

3. Did the Underwriters breach the applicable standard of care?

4. If so, how did the Underwriters breach the applicable standard of care?

5. Did the Underwriters’ breach of the applicable standard of care result in the securities offered by the final Prospectus being over-priced?

6. If so, at what price should the securities offered by the final Prospectus have been priced?

C. Discussion and Analysis

1. The Certification Motion as against the Hycroft Defendants

[43] Pursuant to s. 5(1) of the Class Proceedings Act, 1992, the court shall certify a proceeding as a class proceeding if: (1) the pleadings disclose a cause of action; (2) there is an identifiable class; (3) the claims or defences of the class members raise common issues of fact or law; (4) a class proceeding would be the preferable procedure; and (5) there is a representative plaintiff or defendant who would adequately represent the interests of the class without conflict of interest and who has presented a workable litigation plan.

[44] The test for certification is to be applied in a purposive and generous manner, to give effect to the important goals of class actions -- providing access to justice for litigants; promoting the efficient use of judicial resources; and sanctioning wrongdoers to encourage behaviour modification.[^6] The purpose of a certification motion is to determine how the litigation is to proceed and not to address the merits of the plaintiff's claim; there is to be no preliminary review of the merits of the claim.[^7]

[45] As noted at the outset, the Hycroft Defendants consent to certification of the statutory claim under s. 130 of the Ontario Securities Act and equivalent legislation in other provinces in exchange for LBP Holdings abandoning its common law tort claims against them.

[46] Having reviewed the record, I am satisfied that as against the Hycroft Defendants, LBP Holdings has satisfied the criterion for certification of the statutory claims under the Ontario Securities Act and equivalent Securities Acts in other provinces.

[47] Accordingly, I order the action be certified as a class proceeding with respect to the Hycroft Defendants.

2. The Certification Motion as against the Underwriters: Overview

[48] Turning to the certification motion as against Cormark Securities and Dundee Securities, they resist certification by challenging: (a) the cause of action criterion; and (b) the preferable procedure criterion.

[49] By way of overview of the analysis that will follow, I shall address the preferable procedure criterion first and then consider the cause of action criterion.

[50] With respect to the preferable procedure criterion, I shall assume that LBP Holdings has satisfied the cause of action criterion for discrete claims for negligent misrepresentation and for negligence (what LBP Holdings calls a negligence simpliciter claim). To foreshadow the result, I conclude that a class action is not the preferable procedure for either cause of action against the Underwriters.

[51] Notwithstanding this dispositive conclusion, following the discussion of the preferable procedure criterion, I shall go on to consider Cormark Securities’ and Dundee Securities’ argument that the cause of action criterion is not satisfied.

[52] To foreshadow the result, I agree with the Underwriters’ argument that LBP Holdings’ negligence claim is subsumed by its negligent misrepresentation claim, but I do not agree with the Underwriters’ argument that LBP Holdings has not adequately pleaded a cause of action for negligent misrepresentation. Thus, LBP Holdings’ action does satisfy the cause of action criterion for a claim of negligent misrepresentation.

[53] Still foreshadowing the result, I agree with the Underwriters’ argument that the cause of action criterion cannot be satisfied for a negligence claim based on the Underwriters’ conduct in association with the bought deal distribution of Hycroft’s shares. In my opinion, a free-standing negligence claim, although adequately pleaded, does not survive a duty of care analysis, which I also foreshadow to say is a different analysis from simply determining whether the constituent elements of a negligence claim have been properly pleaded. I also foreshadow to say that if the duty of care element is satisfied for a negligent misrepresentation claim that it does not necessarily follow that the defendant will also have a duty of care for a negligence claim.

[54] The result of the analysis below is that the cause of action criterion is satisfied for a negligent misrepresentation claim but not for a negligence claim. However, the action should, nevertheless, not be certified because, in any event, a class proceeding is not the preferable procedure for either cause of action.

[55] I pause here to note that because the action is not being certified as against Cormark Securities and Dundee Securities, it is not necessary to address - as a discrete item - their request for costs arising from LBP Holdings’ abandonment of its statutory claims as against them. This claim for costs, including any claim for substantial indemnity costs in whole or in part, is incorporated in their claim for costs for the dismissal of the certification motion.

3. Preferable Procedure Criterion

(a) General Principles: Preferable Procedure

[56] Under the Class Proceedings Act, 1992, the fourth criterion for certification is the preferable procedure criterion. Preferability captures the ideas of: (a) whether a class proceeding would be an appropriate method of advancing the claims of the class members; and (b) whether a class proceeding would be better than other methods such as joinder, test cases, consolidation, and any other means of resolving the dispute.[^8]

[57] In AIC Limited v. Fischer,[^9] the Supreme Court of Canada emphasized that the preferability analysis must be conducted through the lens of judicial economy, behaviour modification, and access to justice. Justice Cromwell for the Court stated that access to justice has both a procedural and substantive dimension. The procedural aspect focuses on whether the claimants have a fair process to resolve their claims. The substantive aspect focuses on the results to be obtained and is concerned with whether the claimants will receive a just and effective remedy for their claims if established. Thus, for a class proceeding to be the preferable procedure for the resolution of the claims of a given class, it must represent a fair, efficient, and manageable procedure that is preferable to any alternative method of resolving the claims.[^10] Arguments that no litigation is preferable to a class proceeding cannot be given effect.[^11] Whether a class proceeding is the preferable procedure is judged by reference to the purposes of access to justice, behaviour modification, and judicial economy and by taking into account the importance of the common issues to the claims as a whole, including the individual issues.[^12]

[58] Relevant to the preferable procedure analysis are the factors listed in s. 6 of the Class Proceedings Act, 1992, which states:

6. The court shall not refuse to certify a proceeding as a class proceeding solely on any of the following grounds:

7. The relief claimed includes a claim for damages that would require individual assessment after determination of the common issues.

8. The relief claimed relates to separate contracts involving different Class Members.

9. Different remedies are sought for different Class Members.

10. The number of Class Members or the identity of each Class Member is not known.

11. The class includes a subclass whose members have claims or defences that raise common issues not shared by all Class Members.

[59] To satisfy the preferable procedure criterion, the proposed representative plaintiff must show some basis in fact that the proposed class action would: (a) be a fair, efficient and manageable method of advancing the claim; (b) be preferable to any other reasonably available means of resolving the class members' claims; and (c) facilitate the three principal goals of class proceedings; namely: judicial economy, behaviour modification, and access to justice.[^13]

[60] In considering the preferable procedure criterion, the court should consider: (a) the nature of the proposed common issue(s) and their importance in relation to the claim as a whole; (b) the individual issues which would remain after determination of the common issue(s); (c) the factors listed in the Act; (d) the complexity and manageability of the proposed action as a whole; (e) alternative procedures for dealing with the claims asserted; (f) the extent to which certification furthers the objectives underlying the Act; and (g) the rights of the plaintiff(s) and defendant(s).[^14]

[61] The court must identify alternatives to the proposed class proceeding.[^15] The proposed representative plaintiff bears the onus of showing that there is some basis in fact that a class proceeding would be preferable to any other reasonably available means of resolving the class members’ claims, but if the defendant relies on a specific non-litigation alternative, the defendant has the evidentiary burden of raising the non-litigation alternative.[^16] It is not enough for the plaintiff to establish that there is no other procedure which is preferable to a class proceeding; he or she must also satisfy the court that a class proceeding would be fair, efficient and manageable.[^17]

[62] In AIC Limited v. Fischer, Justice Cromwell pointed out that when the court is considering alternatives to a class action, the question is whether the alternative has potential to provide effective redress for the substance of the plaintiff’s claims and to do so in a manner that accords suitable procedural rights. He said that there are five questions to be answered when considering whether alternatives to a class action will achieve access to justice: (1) Are there economic, psychological, social, or procedural barriers to access to justice in the case?; (2) What is the potential of the class proceeding to address those barriers?; (3) What are the alternatives to class proceedings?; (4) To what extent do the alternatives address the relevant barriers?; and (5) How do the two proceedings compare?[^18]

[63] And in light of the Supreme Court of Canada’s directives in Hryniak v. Mauldin[^19] and Bruno Appliance and Furniture, Inc. v. Hryniak,[^20] one should now add to the preferable procedure factors the factor of the relationship between access to justice, which is the preeminent concern of class proceedings, and proportionality in civil procedures. The proportionality analysis, which addresses how much procedure a litigant actually needs to obtain access to justice, fits nicely with the focus on judicial economy and with the part of the preferable procedure analysis that considers manageability and whether the claimants will receive a just and effective remedy for their claims.

[64] In cases, particularly cases where the individual class members’ respective harm is nominal, or cases where an aggregate assessment of damages in whole or in part is possible, a class action may more readily satisfy the preferable procedure criterion because the common issues trial may be the only viable means for remedying the wrong and for calling the wrongdoer to account because individual litigation may be prohibitively expensive.[^21]

[65] In undertaking a preferable procedure analysis in a case in which individual issue trials are inevitable, it should be appreciated that the Class Proceedings Act, 1992 envisions the prospect of individual claims being litigated and sections 12 and 25 of the Act empowers the court with tools to manage and achieve access to justice and judicial economy in those circumstances, and, thus, the inevitability of individual issues trials is not an obstacle to certification. In the context of misrepresentation claims, numerous actions have been certified notwithstanding individual issues of reliance and damages.[^22]

[66] That said, in a given particular case, the inevitability of individual issues trials may obviate any advantages from the common issues trial and make the case unmanageable and thus the particular case will fail the preferable procedure criterion.[^23] Or, in a given case, the inevitability of individual issues may mean that while the action may be manageable, those individual issue trials are the preferable procedure and a class action is not the preferable procedure to achieve access to justice, behaviour modification, and judicial economy. A class action may not be fair, efficient and manageable having regard to the common issues in the context of the action as a whole and the individual issues that would remain after the common issues are resolved.[^24] A class action will not be preferable if, at the end of the day, claimants remain faced with the same economic and practical hurdles that they faced at the outset of the proposed class action.[^25]

4. Analysis: Preferable Procedure

[67] In the case at bar, LBP Holdings seeks to combine common law claims for negligent misrepresentation and negligence against the Underwriters with the certified statutory claim under s. 130 of the Ontario Securities Act against the Hycroft Defendants. Cormark Securities and Dundee Securities submit, however, that the negligence claim is subsumed by the negligent misrepresentation claim. As I shall explain in my discussion of the cause of action criterion below, I agree with the Underwriters’ submission that this has occurred in the case at bar; however, for the purposes of a preferable procedure analysis, I shall assume that the cause of action criterion has been satisfied for both causes of action, and I shall examine whether these discrete actions satisfy the preferable procedure criterion.

[68] Cormark Securities and Dundee Securities argue that the proposed class action would ultimately involve a vast number of complex individual trials on the critical issues of reliance, causation, and damages, thus undermining two of the key goals of a class action, judicial economy and access to justice. They submit that in the circumstances of the immediate case, a class action is unmanageable, inefficient, unfair and unnecessary having regard to the alternative of individual actions.

[69] In opposition, LBP Holdings submits that the combination of claims in the case at bar appropriately satisfies the preferable procedure criterion and will provide behaviour modification, judicial economy, and access to justice.

[70] I shall begin the analysis of the parties’ competing arguments by noting that I agree with LBP Holdings’ submission that a common law negligent misrepresentation claim can be certified notwithstanding that there will be individual issues trials to address the reliance and damages elements of the tort.[^26] I also agree with its submission that the circumstance in the immediate case that there is a statutory claim, which the courts have held is uniquely suited for a class action,[^27] does not derogate from a plaintiff’s right to also sue for a common law claim. And I agree that this last point is underlined by s. 130 of the Ontario Securities Act, which expressly states that: “the right of action for rescission or damages … is in addition to and without derogation from any other right the purchaser may have.”

[71] Further, I agree with LBP Holdings’ submission that, generally speaking, if the statutory cause of action is certified, then numerous synergies might be achieved for a companion common law tort. However, I note that in the immediate case, the statutory cause of action is not being certified as against the Underwriters and, as I shall explain below, the statutory misrepresentation claim against the Hycroft Defendants is not congruent with the common law claims against the Underwriters.

[72] Where I part company with LBP Holdings is my view that in the particular circumstances of the immediate case, the tort claims against the Underwriters (either separately or in combination with the statutory claim against the Hycroft Defendants) do not satisfy the preferable procedure criterion.

[73] In Musicians’ Pension Fund of Canada (Trustee of) v. Kinross Gold Corp.,^28 the Court of Appeal held a common law negligent misrepresentation claim in securities cases may not be suitable for certification where it would involve numerous individual issues of causation, reliance, and damages assessments. In McKenna v. Gammon Gold Inc.,[^29] Justice Strathy, as he then was, concluded that reliance was an individual issue and the need to prove reliance as a constituent element of negligent misrepresentation makes a common law misrepresentation claim fundamentally unsuitable for certification.

[74] However, courts have been willing to certify common law misrepresentation claims alongside associated statutory claims or alongside associated negligence claim.[^30] The point to note is that notwithstanding the categorical arguments of the parties, it cannot be said that a class action is always or is never the preferable procedure for a negligent misrepresentation claim or a negligence claim in a proposed class action about the sale of securities in the primary or secondary markets for corporate securities. The principles for determining whether the preferable procedure criterion has been satisfied must be applied to the exigencies of each case.

[75] In my opinion, in the case at bar, applying the principles as they have been articulated by the Supreme Court in AIC Limited v. Fischer,[^31] LBP Holdings’ negligent misrepresentation claim and its negligence claim do not satisfy the preferable procedure criterion either standing alone or standing in combination with the statutory claim.

[76] I begin a more detailed analysis of the preferable procedure criterion in the circumstances of the immediate case by describing the constituent elements of a negligent misrepresentation cause of action and of a negligence cause of action and by noting that they are more complex than the statutory misrepresentation claim under s. 130 of the Ontario Securities Act.

[77] The constituent elements of negligent misrepresentation are: (1) duty of care based on a special relationship between the plaintiff and the defendant; (2) an untrue, inaccurate, or misleading representation; (3) the defendant making the representation negligently; (4) the plaintiff having reasonably relied on the misrepresentation; and, (5) the plaintiff suffering damages as a consequence of relying on the misrepresentation.[^32]

[78] The constituent elements of a negligence action are: (1) the defendant owes the plaintiff a duty of care; (2) the defendant's behaviour breached the standard of care; (3) the plaintiff suffered compensable damages; (4) the damages were caused in fact by the defendant's breach; and, (5) the damages are not too remote in law.[^33]

[79] In contrast, the constituent elements of a statutory misrepresentation claim with respect to the sale of securities pursuant to a prospectus are: (a) a distribution of securities by prospectus; (b) a misrepresentation in the prospectus; (c) the plaintiff purchasing a security offered by the prospectus during the period of distribution; and (d) the defendant being the issuer of the prospectus or one of the persons referred to in s. 130(1) of the Act.[^34]

[80] In the case at bar, having regard to the constituent elements of the torts, the elements of reliance, causation, and damages are matters that raise highly individual issues that must be proven at individual issues trials. In the case at bar, individual issue trials against the Underwriters are inevitable for both the negligent misrepresentation and the negligence claim.

[81] I would not go so far as to say that the individual issues would completely overwhelm the common issues in the action against the Underwriters, but the inevitability of individual issues trials does very substantially diminish the productivity of the common issues trial and introduces significant concerns about manageability similar to the concerns that led the Court of Appeal, in Musicians’ Pension Fund of Canada (Trustee of) v. Kinross Gold Corp,^35 to conduct a preferable procedure analysis and to conclude that the common law action was not certifiable. Moreover, the individual issues in the case at bar are not amenable to summary determinations using the tools of s. 12 and 25 of the Class Proceedings Act, 1992. A costs benefits analysis indicates that little benefit is added by subjecting the individual claims to the procedure of a class action.

[82] Further, in the case at bar, the common issues of the statutory claim against the Hycroft Defendants are not congruent with the common issues of the tort claims against the Underwriters. These circumstances increase the problems of managing the action with the combined claims and decrease the benefits of a class action procedure.

[83] In the case at bar, combining the statutory misrepresentation claim against the Hycroft Defendants with the common law misrepresentation and negligence claims against the Underwriters is incongruent and unlikely to produce synergies and efficiencies because the legal situation of the Underwriters is different from that of the Hycroft Defendants. The Underwriters’ misrepresentation is of a different order than the Hycroft Defendants’ misrepresentation, and outside of the statutory scheme the Underwriters’ standard of care is also different in its nature, as the discussion below of the cause of action criterion will reveal.

[84] Cormark Securities or Dundee Securities are not in the mining industry, and their misrepresentations, if any, are concerned with their representing that the prospectus contains full, true and plain disclosure to the best of their knowledge, information and belief. The Underwriters’ representation is different from the representations or omissions of material facts made by the Hycroft Defendants. Thus, the Underwriters’ representation could be true even if the prospectus did not contain full, true and plain disclosure by the Hycroft Defendants. The Underwriters’ duty of care in negligence and standard of care in negligence are also different from the duty of care and standard of care of the Hycroft Defendants. The misrepresentation claim and the negligence claim against the Underwriters, while they arise out of a common factual narrative that involves the Hycroft Defendants, do not rest on the same factual or legal foundation as the claim against the Hycroft Defendants. The findings made in the statutory action against the Hycroft Defendants will only moderately assist the prosecution of the tort misrepresentation claim.

[85] In the case at bar, coat tailing the tort claims against the Underwriters with the statutory misrepresentation claim against the Hycroft Defendants is problematic in terms of manageability and given the difference between the claims against the co-defendants, there is only modest advancement in judicial economy and much less than would be the case if a statutory claim against the Underwriters had been combined with the common law claims against them. Indeed, given that the misrepresentations, duty of care, and standard of care issues are not the same for the co-defendants, combining the statutory and common law claims may complicate the prosecution and defence of the various causes of action.

[86] The negligence claim against the Underwriters is also incongruent with the misrepresentation claim against them, which presupposes a very different theory of liability that does not concern what the Underwriters said but rather concerns what they did or did not do before signing the certificate in the prospectus. The misrepresentation claim is about words found in the prospectus, but the negligence claim is about deeds and the Underwriters’ alleged role as a gatekeeper and price setter before the prospectus was released and shares distributed.

[87] I appreciate that for the purposes of a free standing negligence claim, a common issues trial would be an efficient and productive means to determine the duty of care and standard of care issues of the claim against the Underwriters. I appreciate that the prosecution of the negligence claim will require expensive expert evidence about the role that underwriters play in the securities marketplace. And I appreciate that advantageously, the expense of the common issues trial could be distributed over hundreds of class members; however, there is the prospect of unmanageability and negligible synergies to be achieved by combining all the claims, and, in any event, after the common issues trial of the common law claims, expensive evidence, and repetitive evidence, would be required at the individual issues trials about reliance, causation, and damages.

[88] And given the monetary size of most, if not all of the putative Class Members’ claims, a class action is not preferable to individual actions by those Class Members who can prove that they relied on something that Cormark Securities and Dundee Securities said or did not say before they decided to purchase Hycroft’s shares. The individual claims would appear to be economically viable to litigate in the Superior Court. There is an alternative route for access to justice. For example, the Plaintiff’s own claim is in excess of $200,000 (USD) and the average claim of the Class Members is over $300,000 (USD). Indeed, LBP Holdings indicated that if its action was not certified as against the Underwriters, it would proceed with an individual action against the Underwriters perhaps with other putative Class Members joined as co-plaintiffs.

[89] I, therefore, conclude that the preferable procedure criterion is not satisfied in the proposed class action against the Underwriters.

5. The Cause of Action Criterion

(a) General Principles and Introduction

[90] The first criterion for certification is that the plaintiff's pleading discloses a cause of action. The Underwriters submit that this criterion has not been satisfied in the case at bar.

[91] The Underwriters do not dispute that LBP Holdings is capable of disclosing a reasonable cause of action for negligent misrepresentation, but they assert that as currently pleaded, LBP Holdings’ misrepresentation claim is deficient for failure to plead the constituent element of reliance.

[92] Further, the Underwriters argue that the negligence claim fails the cause of action criterion because the duties pleaded do not exist, reliance on the Underwriters is not and cannot be properly pleaded, and the negligence claim overlaps with and is subsumed within the negligent misrepresentation claim. Thus, they argue that the cause of action criterion has not been satisfied and cannot be satisfied by granting LBP Holdings leave to amend, for the sixth time, its Statement of Claim.

[93] In this part of my Reasons for Decision I shall analyze whether the cause of criterion has been satisfied. To do this, I shall first set out in this introduction the general principles about the cause of action criterion. Next, I will discuss the pleading of the negligent misrepresentation claim. This discussion will be brief because I disagree with the Underwriters’ submission that the pleading is inadequate. Then, in the following parts of the decision, I will consider at much greater length whether LBP Holdings’ Statement of Claim discloses a reasonable cause of action in negligence assuming that it is distinct and independent and not subsumed by the negligent misrepresentation claim.

[94] The "plain and obvious" test for disclosing a cause of action from Hunt v. Carey Canada[^36] is used to determine whether a proposed class proceeding discloses a cause of action for the purposes of s. 5(1)(a) of the Class Proceedings Act, 1992. Thus, to satisfy the first criterion for certification, a claim will be satisfactory, unless it has a radical defect or it is plain and obvious that it could not succeed.[^37]

[95] In a proposed class proceeding, in determining whether the pleading discloses a cause of action, no evidence is admissible, and the material facts pleaded are accepted as true, unless patently ridiculous or incapable of proof. The pleading is read generously, and it will be unsatisfactory only if it is plain, obvious, and beyond a reasonable doubt that the plaintiff cannot succeed.[^38] Matters of law that are not fully settled should not be disposed of on a motion to strike, and the court's power to strike a claim is exercised only in the clearest cases.[^39]

[96] In R. v. Imperial Tobacco Canada Ltd.,[^40] the Supreme Court of Canada noted that although the tool of a motion to strike for failure to disclose a reasonable cause of action must be used with considerable care, it is a valuable tool because it promotes judicial efficiency by removing claims that have no reasonable prospect of success, and it promotes correct results by allowing judges to focus their attention on claims with a reasonable chance of success.

[97] On motions brought under the procedure to strike a claim or defence as untenable in law, leave to amend the pleading may and usually will be given, and leave to amend will be denied only in the clearest cases when it is plain and obvious that no tenable cause of action is possible on the facts as alleged and there is no reason to suppose that the party could improve his or her case by any amendment.[^41]

(b) The Negligent Misrepresentation Cause of Action

[98] But for an alleged failure to plead reasonable reliance, which, as noted above, is a constituent element of the tort of negligent misrepresentation, Cormark Securities and Dundee Securities do not dispute that LBP Holdings has adequately pleaded a reasonable cause of action for negligent misrepresentation.

[99] Reading the Statement of Claim generously, in my opinion, all of the constituent elements of a negligent misrepresentation claim have been adequately pleaded.

[100] As for the reliance element, LBP Holdings pleads that the Underwriters intended and knew the purchasers of Hycroft shares would rely upon the prospectus in making a decision to purchase. Mr. Parker testified that LBP Holdings reviewed a copy of the prospectus and relied on it in making its decision to purchase Hycroft’s shares.

[101] I, therefore, conclude that insofar as a common law negligent misrepresentation claim is concerned, that LBP Holdings has satisfied the cause of action criterion.

(c) The Negligence Cause of Action:

Is it Subsumed by the Negligent Misrepresentation Cause of Action?

[102] Turning to LBP Holdings’ cause of action in negligence, I agree with the Underwriters that as was the case in Deep v. M.D. Management;[^42] Singer v. Schering-Plough Canada Inc.;[^43] Silver v. IMAX Corp.,[^44] and Mask v. Silvercorp Metals Inc.[^45], the negligence claim is subsumed by the negligent misrepresentation claim and reliance is a constituent element of this claim.

[103] The above cases are authority that a plaintiff cannot dress up what in substance is a negligent misrepresentation claim as a negligence claim and thereby avoid the necessity of proving reliance as a constituent element of its cause of action. In my opinion, it is plain and obvious that in the immediate case, the pleading of negligence has been dressed up to hide its real identity as a negligent misrepresentation claim arising out of the circumstances that led to the Underwriters signing their certification found in the short form prospectus.

[104] In the case at bar, the negligence claim arises from the same circumstances as the negligent misrepresentation claim, and it does have the appearance of being a disguised version of the misrepresentation claim. The alleged duties to properly price the shares and to perform due diligence to ensure comprehensive disclosure of material facts in the prospectus are inexorably intertwined with the negligent misrepresentation claim that caused the alleged inflated share price and the putative Class Members’ damages by purchasing Hycroft’s shares. LBP Holdings’ negligence claim purportedly focuses on the fact that it was a purchaser in a bought deal from the Underwriters, but this circumstance does not detach the negligence claim from the circumstance that the claim is essentially about the content of the prospectus, the Underwriters’ due diligence about its certificate that was found in the prospectus, and the damage caused by the purchasers reading the prospectus before making a decision to purchase shares.

[105] The negligence claim in the case at bar is much like the claim in Deep v. M.D. Management, where Mr. Deep sued Nortel for negligent misrepresentation and for negligence after the value of Nortel’s shares dropped precipitously in value. Much like the case at bar, the underlying alleged duty of care was to accurately represent Nortel’s financial situation in the prospectus and the misconduct, i.e. the breach of duty concerns activities or the failure to take steps before the shares were ever released to the public.

[106] It follows from the conclusion that the negligence claim is subsumed by the negligent misrepresentation claim that there is no free-standing negligence claim and rather that the negligence claim is a reprise of a negligent misrepresentation claim that satisfies the cause of action criterion. Therefore, the negligence claim as such does not satisfy the cause of action criterion.

[107] However, I shall nevertheless go on in the next parts of my Reasons for Decision to analyze LBP Holdings’ negligence pleading as if it were an independent cause of action in negligence and determine whether it is plain and obvious that LBP Holdings’ Statement of Claim does not disclose a legally viable claim in negligence.

(d) Negligence Duty of Care Analysis: General Principles

[108] Notwithstanding my view that the negligence pleading is a reprise of the negligent misrepresentation pleading, for the purposes of a cause of action analysis, I shall treat the negligence claim against the Underwriters as a discrete and independent claim from the negligent misrepresentation claim, and I shall analyze that claim as an independent cause of action.

[109] I shall proceed in this fashion because I agree with LBP Holdings’ submission that it is doctrinally possible that a defendant may be concurrently liable for negligent misrepresentation and negligence, and I agree with its submission that concurrent negligent misrepresentation and negligence claims have been certified in cases such as: Robinson v. Rochester,[^46] Dobbie v. Arctic Glacier Income Fund,[^47] Lipson v. Cassels Brock & Blackwell LLP;[^48] Cannon v. Funds for Canada Foundation;[^49] Excalibur Special Opportunities LP v. Schwartz Levitsky Feldman LLP.[^50] and Lavender v. Miller Bernstein.[^51] Thus, in the case at bar, it is necessary to undertake a duty of care analysis to explain why LBP Holdings’ negligence claim does not satisfy the cause of action criterion.

[110] In this section of my Reasons for Decision, I shall set out the general principles for a duty of care analysis, and then in the following section, I shall apply those principles to the case at bar.

[111] The Canadian approach to determining whether there is a duty of care has been developed in a series of Supreme Court of Canada decisions[^52] adapting and explaining the House of Lord's decision in Anns v. Merton London Borough Council,[^53] which derived from the seminal negligence case, Donoghue v. Stevenson.[^54]

[112] The first element of a tort claim for negligence is a duty of care. As Lord Esher stated in Le Lievre v. Gould:[^55] "[a] man is entitled to be as negligent as he pleases towards the whole world if he owes no duty to them". The contemporary Canadian analysis of whether a duty of care exists begins by asking whether the plaintiff and the defendant are in a relationship that the law categorically recognizes as involving a duty of care or whether the relationship constitutes a new category of claim. If the claim falls within an established category, then precedent will have established that there is a duty of care associated with the relationship between the parties.[^56]

[113] Where the plaintiff’s loss is purely economic, although the categories are not closed, there are five recognized categories of claims for which a duty of care has been found with respect to pure economic losses; namely (1) negligent misrepresentation;[^57] (2) negligent performance of a service (professional negligence)[^58]; (3) products liability where the goods pose a danger;[^59] (4) the liability of public authorities[^60]; and (5) relational economic loss.[^61]

[114] If the case does not come within an established category, it is necessary to undertake a duty of care analysis. In Anns v. Merton London Borough Council, the House of Lords adopted a two-step analysis to determining whether there was a duty of care between a plaintiff and a defendant: (1) Is there a sufficiently close relationship between the plaintiff and the defendant such that in the reasonable contemplation of the defendant, carelessness on its part might cause damage to the plaintiff?; and (2) Are there any considerations that ought to negative or limit (a) the scope of the duty; (b) the class of persons to whom it is owed; or (c) the damages to which a breach of it may give rise?

[115] As developed by the case law in Canada, the two-step analysis became a four-step analysis. The first step is to determine whether the case falls within a recognized category of case. In Canada, if the relationship between the plaintiff and the defendant does not fall within a recognized class whose members have a duty of care to others, then whether a duty of care to another exists involves satisfying the requirements of the next three steps: (1) foreseeability, in the sense that the defendant ought to have contemplated that the plaintiff would be affected by the defendant's conduct; (2) sufficient proximity, in the sense that the relationship between the plaintiff and the defendant is sufficiently close prima facie to give rise to a duty of care; and (3) the absence of overriding policy considerations that would negate any prima facie duty established by foreseeability and proximity. Thus, in a new category of case whether a relationship giving rise to a duty of care exists depends on foreseeability and proximity, moderated by policy concerns.[^62]

[116] To determine the foreseeability element, the court asks whether the harm that occurred was the reasonably foreseeable consequence of the defendant's act.[^63] A reasonable foreseeability analysis requires only that the general harm, not its manner of incidence, be reasonably foreseeable.[^64]

[117] Proximity focuses on the type of relationship between the plaintiff and defendant and asks whether this relationship is sufficiently close that the defendant may reasonably be said to owe the plaintiff a duty to take care not to injure him or her.[^65] Proximate relationships giving rise to a duty of care are of such a nature as the defendant in conducting his or her affairs may be said to be under an obligation to be mindful of the plaintiff's legitimate interests.[^66] The proximity inquiry probes whether it would be unjust or unfair to hold the defendant subject to a duty of care having regard to the nature of the relationship between the defendant and the plaintiff.[^67] The focus of the proximity probe is on the nature of the relationship between victim and alleged wrongdoer and the question is whether the relationship is one where the imposition of legal liability for the wrongdoer's actions would be appropriate.[^68] Not every foreseeable harm will attract a duty of care, which must be grounded in a relationship of sufficient closeness, or proximity, to make it just and reasonable to impose an obligation on one party to take reasonable care not to injure the other.[^69] The proximity analysis of the first stage of the duty of care test involves policy issues because it asks the normative question of whether the relationship is sufficiently close to give rise to a legal duty.[^70]

[118] The proximity analysis involves considering factors such as expectations, representations, reliance, and property or other interests involved.[^71] Proximity is not concerned with how intimate the plaintiff and defendant were or with their physical proximity, so much as with whether the actions of the alleged wrongdoer have a close or direct effect on the victim, such that the wrongdoer ought to have had the victim in mind as a person potentially harmed.[^72]

[119] The proximity inquiry recognizes a distinction between misfeasance, which is an overt act that may be foreseen to cause harm to another, and nonfeasance which is the failure to act to prevent foreseeable harm to another. Where the conduct alleged against the defendant is a failure to act, foreseeability alone may not establish a duty of care.[^73] Where the allegation is that the defendant failed to prevent harm, the law requires close examination of the question of proximity and is concerned with whether the case discloses factors that show that the relationship between the plaintiff and the defendant is sufficiently close and direct to give rise to a legal duty of care.[^74]

[120] The proximity aspect of the formulation of a duty of care was examined in Childs v. Desormeaux,^75 which was the case that examined whether a social host has a duty of care to a stranger who is injured by an inebriated guest who drives away from the social host's party and causes a motor vehicle accident. In this case, Chief Justice McLachlin noted at para. 31 that: "[W]here the conduct alleged against the defendant is a failure to act, foreseeability alone may not establish a duty of care." This qualification recognizes that action that causes harm to another and inaction that fails to prevent harm being caused to another have different qualities of moral and legal culpability. In Childs v. Desormeaux, without intending to establish rigid categories, the Chief Justice identified three situations where there may be a relationship giving rise to a duty of care and liability for failure to act: (1) where a defendant intentionally attracts and invites third parties to an inherent and obvious risk that he or she has created or controls; (2) where the parties have relationships of supervision and control, such as those of a parent and a minor child, or a teacher and student; and (3) where the defendant either exercises a public function or engage in a commercial enterprise that includes implied responsibilities to the public at large.

[121] At paras. 38-40, Chief Justice McLachlin identified several recurrent themes running through the situations where the law will impose a duty of care and liability for failure to act to prevent the harm suffered by the plaintiff; namely: (1) the defendant's involvement in the creation of a risk or in controlling a risk to which others have been invited may justify imposing an obligation to minimize the risk; (2) respect for the plaintiff's autonomy may justify a defendant standing by and not intervening to prevent or minimize the risk to the plaintiff because the law accepts that competent people have a right to engage in risky activities; and (3) where the defendant creates or invites others into a dangerous situation, the defendant may reasonably expect that the persons invited can rely on the defendant to ensure that the risk is a reasonable one or to take appropriate rescue action if the risk materializes. In Childs v. Desormeaux, the Chief Justice explained (para. 39) that: “the law does not impose a duty to eliminate risk. It accepts that competent people have the right to engage in risky activities. Conversely, it permits third parties witnessing risk to decide not to become rescuers or otherwise intervene.”

[122] Moving on to the final stage of the duty of care analysis, and the consideration of whether countervailing policy considerations negate a duty of care, the policy concerns must be more than speculative and a real potential for negative consequences must be apparent.[^76] The final stage of the analysis is not concerned with the type of relationship between the plaintiff and the defendant. At this stage of the analysis, the question to be asked is whether there exist broad policy considerations that would make the imposition of a duty of care unwise, despite the fact that harm was a reasonably foreseeable consequence of the conduct in question and there was a sufficient degree of proximity between the plaintiff and the defendant such that the imposition of a duty would be fair.[^77] The final stage of the analysis is about the effect of recognizing a duty of care on other legal obligations, the legal system and society more generally.[^78]

(e) The Negligence Cause of Action: Analysis

[123] I regard LBP Holdings’ negligence claim as adequately pleaded from the perspective of alleging the constituent elements of a negligence claim, which are set out above. As a free-standing and independent tort claim, the negligence claim against the Underwriters focuses on their failing to perform due diligence, mispricing the shares, and allowing a sale of the shares to proceed in the primary marketplace. To quote from its factum, LBP Holdings’ negligence claim concerns the manner in which the underwriters: (1) performed their due diligence obligations under the Underwriting Agreement, (2) performed their contractual duties under the Underwriting Agreement, and (3) performed their statutory duties as gatekeepers in connection with the share offering.

[124] LBP Holdings emphasizes that the theory of its case in negligence is discrete and different from the theory of its case in negligent misrepresentation. Insofar as the negligence claim is concerned, LBP Holdings’ argument that the Underwriters had a proximate relationship hinges on the existence of a bought deal and contract of sale between the Underwriters and the purchasers of shares. In its Reply Factum, LBP Holdings states:

…[its] common law negligence simpliciter claim is absolutely distinct and independent cause of action from the negligent misrepresentation claim. That is, the negligence claim concerns different impugned acts of the Underwriters, that were performed at different times within the underwriting process, from the impugned conduct that leads to a negligent misrepresentation. … Given that the Underwriters sell to, distribute to, and collect the capital from (either directly or through agents) the members of the Class, there is a special relationship between the Underwriters and investors, which gives rise to a duty of care between the Underwriters and the Class Members.

[125] What LBP Holdings’ submission reveals is that insofar as its negligence claim is concerned, the pertinent relationship between the putative Class Members and the Underwriters is the relationship of a seller to a purchaser. Based on this relationship, LBP Holdings submits that in addition to the Underwriters’ statutory duties and its duty of care for the economic tort of negligent misrepresentation, they also have an independent duty of care for a pure economic loss claim in negligence. As acknowledged during the hearing of the certification motion, LBP Holdings’ negligence claim focuses on the relationship that comes about between the putative Class Members and the Underwriters because the distribution of shares in the case at bar was pursuant to a “bought deal”. LBP Holdings also acknowledged that it was not asserting that underwriters acting just as sales agents of the vendor would have comparable duties of care in negligence for pure economic losses.

[126] These acknowledgements by LBP Holdings reveal both the novelty and also the tenuousness of the alleged duty of care. In general, there is no recognized duty of care to properly price goods to reflect their genuine value in the marketplace or to perform due diligence in the pricing of the goods sold. In general, while vendors of goods will have contractual duties to purchasers, sometimes statutory duties to purchasers, and duties to not manufacture dangerous or potentially dangerous goods, generally speaking, the law of the sale of goods is caveat emptor and permits self-interested hard bargaining. Apart from negligent misrepresentation and warranty in contract, vendors of goods typically do not have a duty of care to purchasers.

[127] I begin the analysis of whether there is a duty of care of the type posited in the case at bar by noting that it does not follow that because a defendant has a legally proximate relationship that gives rise to a duty of care for negligent misrepresentation that he or she will necessarily have a duty of care for negligence simpliciter. The converse is also true and it does not follow that because a defendant has a duty of care for negligence that he or she will have a duty of care for negligent misrepresentation.

[128] These points are trite and can be quickly demonstrated by illustration and analogy. The fact that a defendant motor vehicle driver has a duty of care to a plaintiff passenger to drive the vehicle without negligence does not necessarily mean that the defendant has other duties of care to the passenger, including a duty of care about what he or she says to the passenger about buying stocks in the stock market. Similarly, it does not categorically follow that because a defendant has a proximate relationship giving rise to a duty of care for negligent misrepresentation that the defendant has a duty of care of a different sort.

[129] Thus, it does not necessarily follow from the fact that a defendant underwriter has a duty of care for the words it expresses in a certificate in a prospectus that the defendant underwriter has a duty of care to price the shares so that they do not understate their true value. The duties of care being different, each requires a duty of care analysis. In other words, in the case at bar, that LBP Holdings’ negligent misrepresentation claim falls within an established duty of care to prevent pure economic loss, does not by itself mean that LBP Holdings’ discrete negligence claim falls within a new category where pure economic losses are recoverable.

[130] The categories of negligence are not closed, but newly proposed categories require new analysis. In the case at bar, the posited Underwriters’ duty of care in negligence is a novel cause of action that does not fall within an established duty of care category for pure economic loss. It also cannot be regarded as an extension of an existing category. For example, there is no relationship contractual, statutory, or otherwise where the Underwriters, directly or indirectly, undertook to provide a service for the benefit of the putative Class Members.

[131] LBP Holdings’ argument for a duty of care in the case at bar is similar to the unsuccessful argument of the plaintiff in Martel Building Ltd. v. Canada.[^79] The facts of the Martel Building Ltd. case were that were that Martel leased space to the federal government’s Department of Public Works. In the spring of 1991, Martel’s president met with officials from Public Works to negotiate a renewal of the lease, but then over a year passed until Public Works indicated that negotiations would have to be completed promptly or an open tender process would begin. Several more meetings followed without much progress and, in October 1992, Martel was told the tender process was proceeding, although Public Works would accept proposals from Martel until October 27, 1992. On that day, a proposal was made that Martel thought the negotiators would recommend, but on October 30, Public Works required that details of Martel’s plans to retrofit its building be immediately settled or there would be a tender to find new space. It was not possible for Martel to comply, and tender documents were issued by Public Works. Martel and three others submitted bids and, although Martel’s bid was the lowest, it was not awarded the contract. After the lease was awarded to Standard Life, Martel sued Public Works. Martel advanced three different claims, one in contract and two in negligence. With respect to negligence, Martel argued that Public Works had breached a duty to negotiate in good faith and also a duty of care in the tendering process.

[132] The Supreme Court’s judgment dismissing Martel’s claim was written jointly by Justices Iacobucci and Major.[^80] They concluded that all three of Martel’s claims failed. The duty of care in tendering claim failed because it was subsumed by the contract claim that had failed. As for the breach of a duty to negotiate in good faith, it largely turned on how Public Works had conveyed or not conveyed information to Martel and Justices Iacobucci and Major regarded it as a novel economic loss claim that required a duty of care analysis. They concluded that Martel had shown a sufficiently close relationship between the parties such that the defendant Public Works was under an obligation to be mindful of Martel’s legitimate interests; however, they also concluded that policy considerations would negate or limit the scope of the duty of care, the class of persons to whom it is owed, or the damages from a breach of duty. Justices Iacobucci and Major concluded that, as a general proposition, no duty of care arises in conducting negotiations.

[133] For the present purposes of analyzing the negligence claim against the Underwriters, Justices Iacobucci’s and Major’s identification of policy factors negating a duty of care is particularly pertinent. They identified six factors that were relevant to determining whether a duty of care for pure economic loss should be recognized; namely (1) whether extending recovery for pure economic losses would create circumstances of indeterminate liability; (2) whether extending recovery for pure economic losses would deter useful economic activity; (3) whether extending recovery for pure economic losses would encourage or discourage economically efficient conduct; (4) whether extending recovery for pure economic losses would interject tort law as after-the-fact insurance against failures to pursue alternative strategies or opportunities or to act with due diligence or self-vigilance, a necessary ingredient of commerce; (5) whether extending recovery for pure economic losses would introduce the courts to a significant regulatory function when other causes of action already provided remedies for misconduct; and (6) whether extending recovery for pure economic losses would encourage needless litigation and a multiplicity of lawsuits in place of allowing market forces to operate.

[134] In the circumstances of the Martel Building Ltd. case, there was no indeterminate liability, but the Supreme Court concluded that the other policy factors negated a prima facie duty of care. In essence, Justices Iacobucci and Major agreed with the argument of Public Works that to extend the tort of negligence into the conduct of commercial negotiations would be an unnecessary and unsound invasion of the marketplace where business risks should be borne by the parties and not be re-allocated through the imposition of a duty of care.

[135] Returning to the case at bar, assuming that the Underwriters had a duty of care for negligence independent of their duty of care for representations, then in my opinion, policy factors similar to those that were identified in the Martel Building Ltd. case negate the duty of care. I accept that there is no problem of indeterminate liability on the particular facts of the case at bar; however, extending an underwriter’s liability for pure economic losses beyond an underwriter’s current liability for negligent misrepresentation or for statutory liability under the Ontario Securities Act would: (a) deter useful economic activity where the parties are best left to allocate risks through the autonomy of contract, insurance, and due diligence; (b) encourage a multiplicity of inappropriate lawsuits; (c) arguably disturb the balance between statutory and common law actions envisioned by the legislator; and (e) introduce the courts to a significant regulatory function when existing causes of action and the marketplace already provide remedies.

[136] In the case at bar there are also factors that indicate that the claim against the Underwriters does not even reach the policy factors stage of an Anns v. Merton analysis. In the immediate case even if the foreseeability stage of an Anns v. Merton analysis is satisfied, the proximity stage arguably is not satisfied. As noted above, the proximity analysis recognizes a distinction between misfeasance and nonfeasance, and at the heart of the negligence claim against the Underwriters, as distinct from the claim for misrepresentation, is the notion that the Underwriters had a gatekeeper’s duty to prevent the harm of buying Hycroft’s shares at an inflated price. Where the allegation is that the defendant failed to prevent harm, the law requires close examination of the question of proximity,[^81] and as noted by Chief Justice McLachlin in Childs v. Desormeaux,[^82] where the conduct alleged against the defendant is a failure to act, foreseeability alone may not establish a duty of care. In my opinion, even in the circumstances of a bought deal, an underwriter would not anticipate that purchasers would be relying on it to act as a gatekeeper beyond and distinct from its duties of care under s. 130 of the Ontario Securities Act and its common law duties with respect to misrepresentations in the prospectus.

[137] As reflected by the scheme of the Securities Act, which responds to misrepresentations in a prospectus, the role played by the underwriters is different and more remote and less proximate, than the role played by the issuers, the auditors, and others whose words and opinions are found in a prospectus or in the disclosure documents that inform the secondary marketplace in securities. Underwriters, in their role in a distribution of securities pursuant to a prospectus, do not stand in the same relationship of proximity to shareholders as do the others involved in the distribution.

[138] In the case at bar, it simply begs the question of whether there is a duty of care in negligence to submit that had the Underwriters fulfilled their duties, the securities would either not have been issued or would have been offered at lower prices. That questioning reads negligence backwards from harm having occurred to a foreseeable duty to prevent harm.

[139] I disagree with LBP Holdings’ argument that its concurrent and independent negligence claim against the Underwriters is essentially the same as the negligence claims that were made in Robinson v. Rochester,^83 Lipson v. Cassels Brock & Blackwell LLP;^84 Cannon v. Funds for Canada Foundation;^85 Excalibur Special Opportunities LP v. Schwartz Levitsky Feldman LLP,^86 and Lavender v. Miller Bernstein,^87 which claims survived a duty of care analysis. In making its argument for a duty of care in negligence, LBP Holdings principally relied on Excalibur Special Opportunities LP v. Schwartz Levitsky Feldman LLP.

[140] In those cases, the role of the defendants and their relationship to the class members was different and more proximate than in the case at bar, where, but for the bought deal, LBP Holdings acknowledged that an underwriter would not have a duty of care beyond his statutory duties and its duty of care with respect to misrepresentations in its certificate.

[141] The facts of Excalibur Special Opportunities LP v. Schwartz Levitsky Feldman LLP were that in March 2010, Rodman & Renshaw LLP, as placement agents, offered a private placement of the shares and warrants of Southern China Livestock, an American corporation that was raising money for its hog farming business in China. The portfolio manager of the plaintiff, Excalibur, a Manitoba limited partnership that invested in small-cap companies carefully read the Private Placement Memorandum. The Memorandum included the audited financial statements and the auditor’s opinion prepared by Schwartz Levitsky Feldman LLP, a firm of chartered accountants that held itself out as an expert in conducting financial due diligence and providing auditing services for companies based in China. Based on his reading of the offering memorandum and relying on the fact that Schwartz Levitsky Feldman LLP had delivered a clean audit opinion, the portfolio manager decided that Excalibur should invest $950,000 of what turned out to be an approximately $7.5 million investment by 57 investors. From the proceeds of the private placement, Schwartz Levitsky Feldman LLP was paid $45,000 for its services. Later that year, in December, Southern China Livestock filed its annual 10-K Report under American securities legislation that included a Management’s Discussion and Analysis section. Upon reading the 10-K Report, the portfolio manager was shocked by the disclosures and he concluded that the audit report could not have fairly and fully represented the financial state of Southern China Livestock. Seven months’ later Southern China Livestock’s North American directors resigned and it closed. Its shares and warrants were worthless. With the demise of Southern China Livestock, Excalibur commenced a class action against Schwartz Levitsky Feldman LLP and advanced concurrent claims for negligent misrepresentation and negligence. In other words, Excalibur submitted that in breach of a duty of care, Schwartz Levitsky Feldman LLP spoke falsely (negligent misrepresentation) and alternatively in breach of a duty of care, Schwartz Levitsky Feldman LLP ought not to have spoken at all (negligence). The essence of Excalibur’s negligence claim is that Schwartz Levitsky Feldman LLP breached a duty of care by issuing a clean audit report and but for this report the private placement would not have been able to proceed.

[142] In contrast to the circumstances and the relationships in Excalibur Special Opportunities LP v. Schwartz Levitsky Feldman LLP, in the case at bar, the role of the Underwriters is different. The Underwriters are not auditors; they are not hired to provide an opinion or to develop an investment transaction or an investment scheme, but rather they are hired essentially to be distributers of another’s goods often as sales agents or, as in the immediate case, by assuming the risks of a bought deal. Underwriters make a weak representation of the sort made in the case at bar that the prospectus contains full, true and plain disclosure to the best of their knowledge, information and belief. They do not make strong representations of the nature made by the promoters, auditors, lawyers, and experts involved in the creation of the investment. Underwriters are obliged by statute to make a representation but are afforded a variety of statutory defences if they exercise due diligence before providing their certificate, but that is not the same thing as assuming a responsibility to ensure that the purchasers are making a sound bargain.

[143] For similar reasons, while I do not doubt the soundness of the conclusions in Robinson v. Rochester,^88 Dobbie v. Arctic Glacier Income Fund,^89 Lipson v. Cassels Brock & Blackwell LLP;^90 Cannon v. Funds for Canada Foundation;^91 and Excalibur Special Opportunities LP v. Schwartz Levitsky Feldman LLP^92 that it was not plain and obvious that there was not a concurrent duty of care in negligence, the case at bar, which involves underwriters, and not auditors, promoters, and lawyers expressing tax opinions necessary to market or promote an investment, does not present a tenable duty of care in negligence in addition to the underwriters’ duty of care in negligent misrepresentation.

[144] Nor is Lavender v. Miller Bernstein,^93 where on a summary judgment motion on the common issues in a class action against an auditing firm, Justice Belobaba held that the auditors had breached a free-standing duty of care in negligence of any assistance to LBP Holdings in advancing its negligence claim against the Underwriters in the case at bar. In that case, Justice Belobaba also held that the negligence claim was not subsumed by the negligent misrepresentation claim against the auditors.

[145] The facts of Lavender v. Miller Bernstein were that Buckingham Securities was a securities dealer that was obliged to file with the Ontario Securities Commission (“OSC”) audited Form 9 reports confirming its minimum net free capital and confirming the segregation of assets and investor accounts. The accounting firm Miller Bernstein audited the Form 9s. It, however, failed to note that the reports were false for fiscal years 1998, 1999, and 2000. In 2001, the OSC placed Buckingham Securities into receivership because it failed to segregate investor (class member) assets and to maintain a minimum net free capital in breach of regulatory requirements. Buckingham Securities went out of business, and the investors lost $10.6 million. The plaintiff, Lavender, who was one of the investors, sued Miller Bernstein for negligence, but it submitted that he was attempting to dress up a negligent misrepresentation claim as something else because he was unable to establish reliance. Miller Bernstein also submitted that it had no duty of care to its client's client.

[146] In Lavender v. Miller Bernstein, Justice Belobaba accepted that there could be a free-standing cause of action in negligence against the auditors in a situation in which a duty of care exists independent of the duty of care for negligent misrepresentation, and then Justice Belobaba examined whether the relationship between Miller Bernstein with Buckingham Securities’ investors was proximate enough to give rise to a duty of care. Justice Belobaba appreciated that it was a novel duty of care to safeguard against pure economic loss and that an Anns v. Merton duty of care analysis was required. He stated:[^94]

16. The more pressing issue is whether on the facts herein the plaintiff can establish a duty of care. This is a case about an auditor's misstatement that was filed with the OSC, was never seen by the class members, and arguably caused pure economic loss to the auditor's client's clients. This is obviously not a conventional negligence case. Nor is it sufficient for the plaintiff to say that the case fits within the "negligence performance of a service" category in which courts have recognized duties of care in certain third-party-benefit situations. The underlying facts in the cases that have been grouped by academic commentators under the "negligent performance of a service" category are varied and the applicable law has not yet been uniformly articulated or accepted. [footnotes omitted]

[147] Justice Belobaba undertook the duty of care analysis, and he concluded that on the particular facts of the case, a duty of care had been established. He stated:^95

20. Here on the evidence, I find that the foreseeability and proximity requirements are satisfied. Even though the class members never saw or even knew, at the time, about the Form 9s, the defendant auditor as a matter of simple justice had an obligation to be mindful of the plaintiff's interests when auditing and filing the Form 9 reports with the OSC.

21. My analysis is based on the auditing standards applicable at the time and the evidence and admissions of the parties and their experts. The defendant understood that the Form 9s were used by the OSC to police the securities dealers and protect their investors. If the Form 9s indicated a breach of the segregation or minimum capital requirements, the OSC would intervene. If the defendant was negligent in its audit and filed false Form 9s, causing the OSC to believe that the securities dealer was in compliance with the regulatory requirements when the truth was otherwise, monies invested by clients of the securities dealer could well be lost. In short, the defendant … well understood the consequences to "its client's clients" if the segregation or capital deficiency information was misstated in the Form 9s - that a negligent audit of these Form 9s could expose the class members to the very loss that they incurred.

22. In my view, on the particular facts herein, a relationship of sufficient closeness has been established. The defendant was retained by Buckingham to audit and file the Form 9s. In doing this "assurance audit" for its client, the defendant had access to the individual names and investor accounts of every class member. The defendant knew the exact amounts involved, and even corresponded with some of the class members to verify that Buckingham's internal client account records were complete and accurate. Some of the class members responded to the auditor's letter and alerted the defendant to serious discrepancies between Buckingham's internal account records and the actual holdings and activity within their accounts. The defendant also knew, without being told, that even if the class members knew nothing about the Form 9s, they would reasonably expect Buckingham and its auditor to provide any information required under provincial law accurately and honestly, particularly if that information could affect their financial interests.

23. I therefore have no difficulty concluding on the particular facts of this case, that it is just and reasonable to impose a prima facie duty of care on the defendant auditor. Tracking the language used by the Supreme Court in Hercules Management, I am satisfied that "as a matter of simple justice, the defendant [had] an obligation to be mindful of the plaintiff's interests in going about his or her business." [footnotes omitted]

[148] While there was a duty of care existing on the particular facts of Lavender v. Miller Bernstein, the particular facts of the case at bar, including the pleaded fact that the purchasers relied on the Underwriters’ certificate in making their investment decision, do not lead to comparable conclusions that that the purchasers could reasonably expect the Underwriters to have superadded duties of care to act as a gatekeeper, to undertake due diligence, and to assume the risk of ensuring that the shares were properly valued. The Underwriters do not have a responsibility comparable to the auditors in Lavender v. Miller to prepare a document designed to ensure regulatory compliance. Nor do I think that it is a matter of simple justice that underwriters who can be sued for both negligent misrepresentation and also under s. 130 of the Ontario Securities Act should have the posited superadded duties of care in negligence when they enter into a bought deal that exposes them to the commercial risk associated with the sale of the shares. Insofar as the bought deal is concerned, the Underwriters had a contractual relationship and warranting the value of the shares sold is a matter of contract not negligence simpliciter.

D. Conclusion

[149] For the above reasons, I certify the action as against the Hycroft Defendants and I dismiss the certification motion as against Cormark Securities and Dundee Securities.

[150] If the parties cannot agree about the matter of costs, they may make submissions in writing beginning with the submissions of Cormark Securities and Dundee Securities within 20 days from the release of these Reasons for Decision followed by LBP Holdings’ submissions within a further 20 days.

Perell, J.

Released: October 24, 2017

CITATION: LBP Holdings Ltd. v. Hycroft Mining Corporation, 2017 ONSC 6342

COURT FILE NO.: CV-14-508513CP

DATE: 20171024

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

LBP HOLDINGS LTD.

Plaintiff

– and –

HYCROFT MINING CORPORATION, SCOTT A. CALDWELL, ROBERT M. BUCHAN, DUNDEE SECURITIES LTD. and CORMARK SECURITIES INC.

Defendants

REASONS FOR DECISION

PERELL J.

Released: October 24, 2017

[^1]: S.O. 1992, c. 6.

[^2]: R.S.O. 1990, c. S.5.

[^3]: Ibid, s. 59(1).

[^4]: Menegon v. Philip Services Corp., 2001 28396 (ON SC), [2001] O.J. No. 5547 (S.C.J.), aff’d 2003 36468 (ON CA), [2003] O.J. No. 8 (C.A.).

[^5]: LBP Holdings Ltd. v. Allied Nevada Gold Corp., 2016 ONSC 1629, leave to appeal to Div. Ct. ref’d 2016 ONSC 6037, appeal to C.A. dismissed 2017 ONCA 13.

[^6]: Western Canadian Shopping Centres Inc. v. Dutton, 2001 SCC 46, [2001] 2 S.C.R. 534 at paras. 26 to 29; Hollick v. Toronto (City), 2001 SCC 68, [2001] 3 S.C.R. 158 at paras. 15 and 16.

[^7]: Hollick v. Toronto (City), supra, at paras. 28 and 29.

[^8]: Markson v. MBNA Canada Bank, 2007 ONCA 334 at para. 69, leave to appeal to SCC ref’d [2007] S.C.C.A. No. 346; Hollick v. Toronto (City), supra.

[^9]: 2013 SCC 69 at paras. 24-38.

[^10]: Cloud v. Canada (Attorney General) (2004), 2004 45444 (ON CA), 73 O.R. (3d) 401 (C.A.) at paras. 73-75, leave to appeal to the S.C.C. ref'd, [2005] S.C.C.A. No. 50, rev'g (2003), 2003 72353 (ON SCDC), 65 O.R. (3d) 492 (Div. Ct.).

[^11]: 1176560 Ontario Limited v. The Great Atlantic and Pacific Company of Canada Ltd. (2002), 2002 6199 (ON SC), 62 O.R. (3d) 535 (S.C.J.), at para. 45, aff’d (2004), 2004 16620 (ON SCDC), 70 O.R. (3d) 182 (Div. Ct.).

[^12]: Markson v. MBNA Canada Bank, supra, leave to appeal to S.C.C. ref'd, [2007] S.C.C.A. No. 346; Hollick v. Toronto (City), supra.

[^13]: AIC Limited v. Fischer, supra; Hollick v. Toronto (City), supra; Musicians’ Pension Fund of Canada (Trustee of) v. Kinross Gold Corp. 2014 ONCA 901.

[^14]: Cloud v. Canada (Attorney General), supra at paras. 73-75, leave to appeal to the S.C.C. ref'd, [2005] S.C.C.A. No. 50, rev'g (2003), 2003 72353 (ON SCDC), 65 O.R. (3d) 492 (Div. Ct.); Chadha v. Bayer Inc. (2003), 2003 35843 (ON CA), 63 O.R. (3d) 22 (C.A.).

[^15]: AIC Limited v. Fischer, supra, at para. 35; Hollick v. Toronto (City), supra at para. 28.

[^16]: AIC Limited v. Fischer, supra at paras. 48-49.

[^17]: Amyotrophic Lateral Sclerosis Society of Essex County v. Windsor (City), 2015 ONCA 572 at para. 62; Caputo v. Imperial Tobacco Ltd., 2004 24753 (ON SC), [2004] O.J. No. 299 (S.C.J.) at para. 62-67.

[^18]: AIC Limited v. Fischer, supra, at paras. 27-38; Musicians’ Pension Fund of Canada (Trustee of) v. Kinross Gold Corp., supra, at para. 125.

[^19]: 2014 SCC 7.

[^20]: 2014 SCC 8.

[^21]: Markson v. MBNA Canada Bank, supra, leave to appeal to SCC ref’d [2007] S.C.C.A. No. 346; Marcantonio v. TV/ Pacific Inc., [2009] O.J. No. 3409 at para. 9 (S.C.J); Silver v. IMAX Corp., 2009 72334 (ON SC), [2009] O.J. No. 5585 (S.C.J.) at paras. 215-216, leave to appeal to Div. Ct. refused, 2011 ONSC 1035 (Div. Ct.).

[^22]: Carom v. Bre-X Minerals Ltd. (2000), 2000 16886 (ON CA), 51 O.R. (3d) 236 (C.A.) at paras. 48-49, rev’g (1999), 1999 14794 (ON SCDC), 44 O.R. (3d) 173 (S.C.J.), leave to appeal to S.C.C. refused, [2000] S.C.C.A. No. 660; Canadian Imperial Bank of Commerce v. Deloitte & Touche, 2003 38170 (ON SCDC), [2003] O.J. No. 2069 (Div. Ct.) at para. 35; Lewis v. Cantertrot Investments Ltd., [2005] O.J. No. 3535 (S.C.J.) at para. 20; Hickey-Button v. Loyalist College of Applied Arts & Technology (2006), 2006 20079 (ON CA), 267 D.L.R. (4th) 601 (Ont. C.A.); Murphy v. BDO Dunwoody LLP, 2006 22809 (ON SC), [2006] O.J. No. 2729 (S.C.J.); Silver v. Imax Corp., 2009 72334 (ON SC), [2009] O.J. No. 5585 (Ont. S.C.J.), leave to appeal to Div. Ct. refused, 2011 ONSC 1035 (S.C.J.); Ramdath v. George Brown College of Applied Arts & Technology, 2010 ONSC 2019 at para. 103; Cannon v. Funds for Canada Foundation, 2012 ONSC 399 at paras. 340, 350-351, leave to appeal to Div. Ct. refused, 2012 ONSC 6101 (Div. Ct.); OPA v. Ottawa Police Services Board, 2014 ONSC 1584 (Div. Ct.)at para. 59; Fantl v. Transamerica Life Canada, 2016 ONCA 633.

[^23]: Mouhteros v. DeVry Canada Inc. (1998), 1998 14686 (ON SC), 41 O.R. (3d) 63 (Gen. Div.); Arabi v. Toronto-Dominion Bank, [2006] O.J. No. 2072 (S.C.J.), aff’d 2007 56527 (ON SCDC), [2007] O.J. No. 5035 (Div. Ct.).

[^24]: Musicians’ Pension Fund of Canada (Trustee of) v. Kinross Gold Corp., supra.

[^25]: Fantl v. Transamerica Life Canada, 2016 ONCA 633 at para. 26.

[^26]: Fantl v. Transamerica Life Canada, supra; Sharbern Holdings Inc. v. Vancouver Airport Centre Ltd., 2011 SCC 23 at para. 122.

[^27]: Pennyfeather v. Timminco Ltd., 2017 ONCA 369 at para. 6; McKenna v. Gammon Gold Inc., 2010 ONSC 1591 at para. 174, leave to appeal allowed in part, 2010 ONSC 4068 (Div. Ct.), varied and returned for reconsideration with respect to conspiracy pleading, 2011 ONSC 3782, reconsidered 2011 ONSC 6630.

[^29]: Supra, at para. 160.

[^30]: Fantl v. Transamerica Life Canada, supra; Green v. Canadian Imperial Bank of Commerce, 2012 ONSC 3637, rev'd on other grounds, 2014 ONCA 90, aff'd, 2015 SCC 60; Ottawa Police Association v. Ottawa Police Services Board, 2014 ONSC 1584 (Div. Ct.); Cannon v. Funds for Canada Foundation, 2012 ONSC 399, leave to appeal to Div. Ct. refused, 2012 ONSC 6101 (Div. Ct.); Silver v. IMAX Corp., 2009 72334 (ON SC), [2009] O.J. No. 5585 (S.C.J.), leave to appeal to Div. Ct. refused, 2011 ONSC 1035 (Div. Ct.); Ramdath v. George Brown College of Applied Arts and Technology, 2010 ONSC 2019; Hickey-Button v. Loyalist College of Applied Arts & Technology (2006), 2006 20079 (ON CA), 267 D.L.R. (4th) 601 (Ont. C.A.); Murphy v. BDO Dunwoody, 2006 22809 (ON SC), [2006] O.J. No. 2729 (S.C.J.); Lewis v. Cantertrot Investments Ltd., [2005] O.J. No. 3535 (S.C.J.); Canadian Imperial Bank of Commerce v. Deloitte & Touche, 2003 38170 (ON SCDC), [2003] O.J. No. 2069 (Div. Ct.); Carom v. Bre-X Minerals Ltd. (2000), 2000 16886 (ON CA), 51 O.R. (3d) 236 (C.A.), rev’g (1999), 1999 14794 (ON SCDC), 44 O.R. (3d) 173 (S.C.J.), leave to appeal to S.C.C. refused, [2000] S.C.C.A. No. 660.

[^31]: 2013 SCC 69.

[^32]: Queen v. Cognos, 1993 146 (SCC), [1993] 1 S.C.R. 87.

[^33]: Mustapha v. Culligan of Canada Ltd., 2008 SCC 27 at para. 3.

[^34]: Dugal v. Manulife Financial Corporation, 2011 ONSC 1764 at para. 44.

[^36]: 1990 90 (SCC), [1990] 2 S.C.R. 959.

[^37]: Dawson v. Rexcraft Storage & Warehouse Inc. (1998), 1998 4831 (ON CA), 164 D.L.R. (4^th) 257 (Ont. C.A.); Anderson v. Wilson (1999), 1999 3753 (ON CA), 44 O.R. (3d) 673 (C.A.) at p. 679, leave to appeal to S.C.C. ref'd, [1999] S.C.C.A. No. 476; 176560 Ontario Ltd. v. Great Atlantic & Pacific Co. of Canada Ltd. (2002), 2002 6199 (ON SC), 62 O.R. (3d) 535 at para. 19 (S.C.J), aff'd (2004), 2004 16620 (ON SCDC), 70 O.R. (3d) 182 (Div. Ct.).

[^38]: Hollick v. Toronto (City), supra, at para. 25; Cloud v. Canada (Attorney General), supra; Abdool v. Anaheim Management Ltd. (1995), 1995 5597 (ON SCDC), 21 O.R. (3d) 453 (Div. Ct.) at p. 469.

[^39]: Dawson v. Rexcraft Storage & Warehouse Inc. (1998), 1998 4831 (ON CA), 164 D.L.R. (4^th) 257 (Ont. C.A.); Temelini v. Ontario Provincial Police (Commissioner) (1990), 1990 7000 (ON CA), 73 O.R. (2d) 664 (C.A.).

[^40]: 2011 SCC 42 at paras. 17-25.

[^41]: Mitchell v. Lewis, 2016 ONCA 903 at para. 21; Conway v. Law Society of Upper Canada, 2016 ONCA 72 at para. 16; Holdings Ltd. v. Toronto-Dominion Bank (c.o.b. TD Canada Trust)), 2007 ONCA 456, [2007] O.J. No. 2445 (C.A.) at para. 6; Miguna v. Ontario (Attorney General), 2005 46385 (ON CA), [2005] O.J. No. 5346 (C.A.).

[^42]: 2007 22655 (ON SC), [2007] O.J. No. 2392 (S.C.J,), aff’d 2008 ONCA 189.

[^43]: 2010 ONSC 42.

[^44]: 2009 72334 (ON SC), [2009] O.J. No. 5585 (S.C.J.), leave to appeal to Div. Ct. refused, 2011 ONSC 1035 (Div. Ct.). See also McKenna v. Gammon Gold Inc., supra, at paras. 51-52.

[^45]: 2015 ONSC 5348, aff’d 2016 ONCA 641.

[^46]: 2010 ONSC 463, leave to appeal ref’d 2010 ONSC 1899 (Div. Ct.).

[^47]: 2011 ONSC 25, leave to appeal granted 2012 ONSC 773 (Div. Ct.).

[^48]: 2011 ONSC 6724, rev’d on other grounds 2013 ONCA 165.

[^49]: 2012 ONSC 399, leave to appeal to Div. Ct. refused, 2012 ONSC 6101 (Div. Ct.)

[^50]: 2014 ONSC 4118, aff’d 2015 ONSC 1634 (Div. Ct.), rev’d on different grounds 2016 ONCA 916, leave to appeal to the SCC ref’d [2017] SCCA No. 54.

[^51]: 2017 ONSC 3958.

[^52]: Haig v. Bamford, [1976] 1 S.C.R. 466; Kamloops (City) v. Nielsen, 1984 21 (SCC), [1984] 2 S.C.R. 2; B.D.C. Ltd. v. Hofstrand Farms Ltd., 1986 51 (SCC), [1986] 1 S.C.R. 228; Just v. British Columbia, 1989 16 (SCC), [1989] 2 S.C.R. 1228; Rothfield v. Manolakos, 1989 17 (SCC), [1989] 2 S.C.R. 1259; Canadian National Railway Co. v. Norsk Pacific Steamship Co., 1992 105 (SCC), [1992] 1 S.C.R. 1021; Winnipeg Condominium Corporation No. 36 v. Bird Construction Co., 1995 146 (SCC), [1995] 1 S.C.R. 85; Hercules Managements Ltd. v. Ernst & Young, 1997 345 (SCC), [1997] 2 S.C.R. 165; Bow Valley Husky (Bermuda) Ltd. v. Saint John Shipbuilding Ltd., 1997 307 (SCC), [1997] 3 S.C.R. 1210; Ingles v. Tutkaluk, 2000 SCC 12; Martel Building Ltd. v. Canada, 2000 SCC 60, [2000] 2 S.C.R. 860; Cooper v. Hobart, 2001 SCC 79; Edwards v. Law Society of Upper Canada, 2001 SCC 80; Odhavji Estate v. Woodhouse, 2003 SCC 69; Childs v. Desormeaux, 2006 SCC 18; Syl Apps Secure Treatment Centre v. D. (B.), 2007 SCC 38; Hill v. Hamilton-Wentworth Regional Police Services Board, 2007 SCC 41; Design Services Ltd. v. Canada, 2008 SCC 22; Mustapha v. Culligan of Canada Ltd., 2008 SCC 27; Fullowka v. Pinkerton's of Canada Ltd., 2010 SCC 5; R. v. Imperial Tobacco Canada Ltd., 2011 SCC 42.

[^53]: [1978] AC 728 (H.L.).

[^54]: 1932 536 (FOREP), [1932] AC 562 (H.L.).

[^55]: [1893] 1 QB 491 (C.A.) at p. 497.

[^56]: Childs v. Desormeaux, 2006 SCC 18 at para. 14.

[^57]: Hercules Managements Ltd. v. Ernst & Young, 1997 345 (SCC), [1997] 2 S.C.R. 165.

[^58]: B.D.C. Ltd. v. Hofstrand Farms Ltd., 1986 51 (SCC), [1986] 1 S.C.R. 228.

[^59]: Winnipeg Condominium Corporation No. 36 v. Bird Construction Co., 1995 146 (SCC), [1995] 1 S.C.R. 85.

[^60]: Kamloops (City) v. Nielsen, 1984 21 (SCC), [1984] 2 S.C.R. 2; Ingles v. Tutkaluk, 2000 SCC 12.

[^61]: Bow Valley Husky (Bermuda) Ltd. v. Saint John Shipbuilding Ltd., 1997 307 (SCC), [1997] 3 S.C.R. 1210; Design Services Ltd. v. Canada, 2008 SCC 22; Canadian National Railway Co. v. Norsk Pacific Steamship Co., 1992 105 (SCC), [1992] 1 S.C.R. 1021.

[^62]: Anns v. Merton London Borough Council, [1978] AC 728 (HL); Mustapha v. Culligan of Canada Ltd., 2008 SCC 27 at para. 4.

[^63]: Cooper v. Hobart, 2001 SCC 79 at para. 30.

[^64]: Bingley v. Morrison Fuels, a Division of 503373 Ontario Ltd., 2009 ONCA 319 at para. 24.

[^65]: Donoghue v. Stevenson, 1932 536 (FOREP), [1932] AC 562 (HL); Eliopoulos v. Ontario (Minister of Health & Long Term Care) (2006), 2006 37121 (ON CA), 82 OR (3d) 321 (CA), leave to appeal to SCC ref’d [2006] SCCA No 514.

[^66]: Odhavji Estate v. Woodhouse, 2003 SCC 69 at para. 49; Hercules Managements Ltd. v. Ernst & Young, 1997 345 (SCC), [1997] 2 S.C.R. 165 at para. 24.

[^67]: Syl Apps Secure Treatment Centre v. D. (B.), 2007 SCC 38; Hill v. Hamilton-Wentworth Regional Police Services Board, 2007 SCC 41; Design Services Ltd. v. Canada, 2008 SCC 22 at para. 26.

[^68]: Hill v. Hamilton-Wentworth Regional Police Services Board, supra, at para. 23.

[^69]: R. v. Imperial Tobacco Canada Ltd., 2011 SCC 42 at para. 41.

[^70]: Cooper v. Hobart, supra, at paras. 25-30.

[^71]: Cooper v. Hobart, supra, at para. 34; Hill v. Hamilton-Wentworth Regional Police Services Board, supra; Odhavji Estate v. Woodhouse, supra, at para. 50.

[^72]: Hill v. Hamilton-Wentworth Regional Police Services Board, supra, at para. 29.

[^73]: Design Services Ltd. v. Canada, 2008 SCC 22, [2008] 1 S.C.R. 737; Childs v. Desormeaux, 2006 SCC 18; Kim v. Thammavong, 2007 52791 (ON SC), [2007] O.J. No. 4769 (S.C.J.), leave to appeal ref'd 2008 63230 (ON SCDC), [2008] O.J. No. 4908 (Div. Ct.); Irvine v. Smith, [2008] O.J. No. 547 (S.C.J.).

[^74]: Fullowka v. Pinkerton's of Canada Ltd., 2010 SCC 5 at para. 26.

[^76]: Hill v. Hamilton-Wentworth Regional Police Services Board, supra, at paras. 47-48; Fullowka v. Pinkerton's of Canada Ltd., supra, at para. 57.

[^77]: Cooper v. Hobart, supra, at para. 37; Odhavji Estate v. Woodhouse, supra, at para. 51.

[^78]: Cooper v. Hobart, supra; Odhavji Estate v. Woodhouse, supra.

[^79]: 2000 SCC 60, [2000] 2 S.C.R. 860.

[^80]: Chief Justice McLachlin and Justices Gonthier, Bastarache, Binnie and Arbour, JJ. concurred.

[^81]: Fullowka v. Pinkerton's of Canada Ltd., supra, at para. 26.

[^82]: 2006 SCC 18.

[^94]: Ibid, at para. 16.