COURT FILE NO.: CV-08-359335
DATE: 20220117
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
HOWARD GREEN and ANNE BELL Plaintiffs
– and –
CANADIAN IMPERIAL BANK OF COMMERCE, GERALD MCCAUGHEY, TOM WOODS, BRIAN G. SHAW, and KEN KILGOU Defendants
Counsel:
Joel Rochon, Peter Jervis, Douglas Worndl, and Ron Podolny, for the plaintiffs
Andrew Gray and Gillian B. Dingle, for Canadian Imperial Bank of Commerce
David Conklin and Dan Block, for Tom Wood, Gerald McCaughey, Brian Shaw and Ken Kilgour
HEARD: January 12, 2022
BEFORE: FL Myers J
This Lawsuit
[1] This is a motion to approve a settlement of this class action and to approve the fees and disbursements of class counsel.
[2] The action is almost 14 years old. It arises from the worldwide failure of financial markets in 2007. It involves difficult questions of corporate governance and securities laws disclosures concerning some of the most mathematically complex investment products unleashed on public markets - subprime U.S. residential mortgage-backed securities.
[3] The plaintiffs were shareholders of CIBC, a major Canadian bank. In 2007, CIBC had about US$11.5 billion in sub-prime investments of various forms. In this lawsuit, the plaintiffs alleged that CIBC failed to disclose properly its exposure to risk of losses on these investments. They went further and alleged that CIBC positively misrepresented to the market place that it did not have any major risk of exposure on May 31, 2007.
[4] The plaintiffs claim that when the market learned of the true extent of CIBC’s exposure to losses on its sub-prime portfolio, in November and then, through CIBC’s corporate disclosure in December, 2007, CIBC’s shares lost 20% of their value.
[5] The plaintiffs claim that due to CIBC’s failure to make proper disclosure of its risk on its sub-prime investments, they bought CIBC shares at a time when the price was inflated and they suffered commensurate losses when the truth was revealed.
Settlement Efforts
[6] Justice G.P. Strathy was the original case management judge assigned to this action. Some time after his elevation to the Court of Appeal for Ontario, case management transitioned to Justice E.P. Belobaba.
[7] Under s. 34 (1) of the Class Proceedings Act, 1992, SO 1992, c 6, the same judge shall hear all motions before the trial of the common issues. Under s. 34 (2) if that judge becomes unavailable the Regional Senior Justice shall assign another judge to do so. Under s. 34 (3), if a case management judge hears motions, she or he shall not preside at the trial.
[8] Initially, I was appointed to be the trial judge for this action. Unfortunately, an internal mis-communication about the schedule made it impossible for me to hear the trial. Accordingly, Justice S.F. Dunphy was appointed as the trial judge.
[9] The parties had not finished all of their discovery and other interlocutory steps at the time that the matter was handed over to the Civil Team for trial. The parties brought motions that could not be heard by the trial judge under s. 34 (3) of the statute.
[10] Accordingly, I heard the outstanding motions before the trial. I also conducted the pretrial conference before the trial.
[11] The parties engaged in many formal and informal settlement efforts before then. They participated in a mediation with the Hon. George W. Adams, QC. They also held another mediation before the Hon. Dennis O’Connor, QC last summer.
[12] The pretrial conference commenced before me in August, 2021. As there was already a trial judge appointed, trial management issues were left for the parties to resolve with him. The only issue before me was settlement.
[13] The initial meetings did not bear fruit. In September, I was contacted by counsel for the plaintiffs to resume the pretrial conference. This time, settlement was achieved.
[14] The settlement will see CIBC pay a total of $125 million. The payment will be used to fund class counsel fees and disbursements, pay mandatory CPF repayment and 10% levy, leaving approximately $68 million to be distributed to class members as described below. If all of the class members recover their full losses, any remaining funds, if any, will be paid to charity or otherwise pursuant to the doctrine of cy près No amount will ever revert to the bank.
Should I hear the Settlement Approval Motion
[15] Class action settlement motions present a type of motion that involves two particular, but in no way unique, features:
(a) There are participants whose interests may be seriously affected who may not be represented before the court.
(b) Counsel for the plaintiffs are invariably compensated by contingent fee agreements that only see them paid when the case is settled or litigated to a conclusion.
[16] Class counsel is supposed to represent all the class members. But counsel also has an interest in getting paid through a settlement. Case law recognizes that the court must pay particular attention to settlement proposals in which counsels’ personal interests in collecting a large fee may conflict with their duties to their clients.
[17] As discussed by Belobaba J, in Leslie v. Agnico-Eagle Mines, 2016 ONSC 532, at para. 8,
But how does a judge do this? Judges are obviously not in position to second-guess the actual amount of the proposed settlement. Nor should they do so. The most they can do, apart from making sure that the settlement was negotiated at arm’s length by competent counsel, is (1) scrutinize the actual agreement and supporting affidavit material for any so-called “structural” indicators that suggest collusion or conflict of interest and (2) satisfy themselves that the settlement amount falls within a range or zone of reasonableness. [Notes omitted.]
[18] In effect the court watches for a “sweetheart” deal in which class counsel lets the defendants off with a smaller payment or one that does not properly compensate some or all of the class members because counsel is favouring their own desire to be paid.
[19] In addition to these concerns, there is an added issue because class counsel is also seeking approval of its fees on this motion. The two motions are not tied together. That is, the parties have agreed that I can approve the settlement without approving counsel’s fees. (If class counsel ties approval of a settlement to approval of its fees at a particular amount, the righteousness of the settlement will be subject to much greater suspicion. It is not a good practice).
[20] I deal below with the usual tests for consideration of the reasonableness of the amount sought by class counsel for fees. The usual test looks at several contextual factors and considers the appropriate percentage of the settlement payment based on certain presumptive rules of thumb that have been developed over time. A back-up metric looks at the fees sought expressed a multiplier of the time docketed by counsel. There are frailties with this method that prevent it from being universally applied.
[21] But in cases like this one, where the proposed settlement payment is very high – over $100 million - an added concern arises. The actual fee amount may just be so high as to undermine the integrity of the profession in the public eye.
[22] Justice Belobaba expressed the concern this way in in MacDonald et al v. BMO Trust Company et al., 2021 ONSC 3726, at para. 27,
It is the concern about the integrity of the profession that may best explain judicial approval of premium legal fees in mega-settlements. The concern about the integrity of the profession is said to be a concern about the “decency, honour and high-mindedness of the profession, both in substance and in public perception.” And the approval of straight-line percentages in mega-settlements resulting in undeserved or unseemly legal fees will obviously not maintain “the integrity of the profession.”[Notes omitted.]
[23] Unfortunately there are really no objective criteria for measuring when fees are so high as to be unseemly. It seems to me there may be an element of the “gag test” at play. That is, if granting the amount claimed, makes the judge gag a little before signing his name, the integrity concern is invoked. Put differently, I borrow from the definition of obscenity utilized by US Supreme Court Justice Potter Stewart in Jacobellis v. Ohio, 378 U.S. 184 (1964), at p. 197,
I shall not today attempt further to define the kinds of material I understand to be embraced within that shorthand description ["hard-core pornography"], and perhaps I could never succeed in intelligibly doing so. But I know it when I see it, and the motion picture involved in this case is not that. [Emphasis added.]
[24] So, I am hearing a motion that has a special need to watch for interests of class members who may be prejudiced by a “sweetheart” deal and I need to apply a rather subjective assessment of the gross fees sought in light of the integrity of the profession.
[25] The question arises of whether my involvement as the judge who oversaw the settlement negotiation at the pretrial conference interferes with the appearance of my independence in hearing this motion. Might I be perceived to be biased? Or, more generally, is there a reasonable apprehension that because of my involvement, I may be approaching the matter without an open mind.
[26] In Committee for Justice and Liberty et al. v. National Energy Board et al., 1976 2 (SCC), [1978] 1 S.C.R. 369, at p. 394, the Supreme Court of Canada set out the prevailing test for the appearance of bias,
As already seen by the quotation above, the apprehension of bias must be a reasonable one, held by reasonable and right minded persons, applying themselves to the question and obtaining thereon the required information. In the words of the Court of Appeal, that test is “what would an informed person, viewing the matter realistically and practically—and having thought the matter through—conclude. Would he think that it is more likely than not that Mr. Crowe, whether consciously or unconsciously, would not decide fairly.
[27] It is of note that the assessment is not made based on the sensibilities of internet conspiracy seekers. On the other hand, the class engaged in this proceeding has tens of thousands of members who purchased CIBC shares in the relevant time frame in 2007. The people whose interests are in issue and who have the most need to ensure that the judge is independent are a great swath of the public. But they still must be assumed to be right thinking and have taken some steps to inform themselves before being taken to have formed a reasonable apprehension that the court is biased.
[28] How might my involvement as the pretrial judge predispose me to approve the settlement? My salary and benefits are set by statute, transparent, and fixed. I cannot have an economic interest in the outcome. I get no bonus or credit for participating in the settlement negotiation. There is no promotion available to me internally in the court. All judges occupy equal positions. I know of no statistic kept on settlements achieved by a judge. We all hear a huge number of settlement conferences over the years – most of which result in a settlement - because something in the order of 97% of all civil cases settle.
[29] The only way in which I can be perceived to be interested in the outcome is just a generalized, ephemeral sense that a judge who participates in a settlement would not be dispassionate in considering whether it is a reasonable one. What judge would want to say that he or she guided the parties to an unreasonable settlement?
[30] Were there no counter-balancing factors, and given that there are 90 judges who could hear the motion in Toronto, I would not dismiss this concern out of hand. However, there are counter-balancing factors that make the process beneficial that outweigh the ephemeral risk of some unconscious bias.
[31] First, as alluded to above, the subject matter of this action involved financial transactions of the utmost complexity. In his costs decision in relation to the certification motion in this action, reported at 2016 ONSC 3829, Chief Justice Strathy, sitting ex officio as a judge of this court, described the case to that point as follows.
[11] This is an extraordinary case by any standard. In considering a fair and reasonable award, I have regard to all the circumstances, but particularly the following:
a) the plaintiffs put the claim at between $2 billion and $4 billion, amounts that I cannot say are unrealistic;
b) the class is very substantial and includes over 100,000 Canadian shareholders;
c) this was one of the first cases to advance a claim under Part XXIII.1 of the Securities Act dealing with secondary market misrepresentation and it is an important landmark case;
d) the facts were extraordinarily complex and required sophisticated expert evidence;
e) the law was both complex and novel;
f) the record was massive: there were a total of 25 affidavits filed by the parties, cross-examinations were conducted over 29 days, and the evidentiary record comprised 45 volumes of material;
g) the hearing before me, which was based entirely on the record, took seven days;
h) the proceeding was vigorously contested by the defendants, who were well resourced and represented by teams of highly experienced counsel;
i) although the plaintiffs did not achieve everything they sought on the certification motion, they achieved very substantial success; and
j) the motions were skillfully and thoroughly prepared, prosecuted and argued by experienced class counsel.
[32] This is not a run-of-the-mill case in which a plaintiff seeks $1,000 for the cost of goods sold and delivered evidenced by an unpaid invoice. It is not a case that one can just pick up on an hour’s notice. It requires substantial study and preparation.
[33] Background in the subject area helps. When reading the material, one is quickly immersed in discussions of different types of mortgage bonds, collateralized debt obligations, mezzanine CDOs and CDO2, credit default swaps, credit enhancements like monoline insurers, and concepts like attachment and detachments whereby an 11% decrease in the market price of the underlying collateral can wipe out the super-senior level of the multi-tranche AAA-rated instrument. It helps to know what this means.
[34] Few counsel or members of the judiciary can readily engage in a case involving collaterized and synthetic investment products and market details associated with the failure of the sub-prime mortgage market. Of course, anyone is perfectly capable of learning about the case with sufficient time and study. But there is an undeniable benefit to leveraging existing market experience and utilizing time and effort already invested. That is one of the main purposes and perceived benefits of having a single case management judge.
[35] In Confederation Treasury Services Ltd., Re, 1995 7386 (ON SC), Farley J. was asked to appoint Richter, a firm of accountants, to be the trustee in bankruptcy despite having acted for one set of competing creditors previously. The matter had a lengthy history by that time and involved the complicated insolvency and liquidation of the massive Confederation Life Insurance Company.
[36] At para. 28 of the decision, Farley J. noted and was swayed by the benefit to be obtained by choosing the Richter firm as trustee precisely because of its experience,
Thus given that Richter is the preference of the petitioning creditor it has the advantage of being quite familiar with and knowledgeable of the situation from its prior involvement as forensic investigator; the proprietary claims have been acknowledged as complex and difficult to describe; those advancing proprietary claims have had the advantage of advice from their own forensic investigators; it does not appear on the material before me that Richter has any ongoing relationship with any creditor and particularly not with any creditor or claimant which may have an adverse position to the estate, it would not seem to me appropriate to disqualify Richter as the nominee for trustee…but rather it would seem that Richter was adequately qualified to act as trustee. This result would avoid the estate taking a significant period of time to catch up with potential slippage exposure if the litigation heats up quickly and a duplication of expense for another firm to come to the same position as Richter now is on the learning curve.
[37] In Leslie, Belobaba J. was in need of information concerning the reasonableness of the proposed settlement and at para. 14, he reported that he has asked to see the parties’ mediation briefs. Understanding the parties’ negotiation positions and hearing their internal considerations (to the extent that the judge hears some of that in settlement discussions) provides meaningful insight into what the parties truly see as their strengths and weaknesses and the value of their claims.
[38] In personal injury cases, where a plaintiff is under disability (a minor or someone lacking legal capacity), settlements also require judicial approval. Counsel’s contingency fees are also subject to approval at the same time. The same tensions as between counsel and his own client are present. It is common on the Civil List, for the judge who helps the parties settle a catastrophic personal injury mega-case at a pretrial conference to hear the approval motion. Counsel fees are often scaled back from the amount claimed to protect the vulnerable party whose counsel is potentially conflicted on the motion. The only difference is that in this case there are many people sharing the plaintiffs’ vulnerability.
[39] The court also hears settlement approval motions in insolvency cases under the Companies' Creditors Arrangement Act, RSC 1985, c C-36. Those cases do not usually have contingency fees but the insiders ask for releases that provide them with extra protections against claims of all kinds from anyone.
[40] There is a recognized and important need to consider carefully in insolvency plan approval motions the risk that the parties have sacrificed the interests of thousands of people who are not before the court. Creditors look out for themselves. No one carving up an insolvent estate to minimize their losses has incentive to leave money on the table for people who are not there. Some of the cases use external mediation services. Many do not. The case management judge can have been involved in settlement efforts for months played out in various interlocutory proceedings or in chambers discussions. Yet, the case law is replete with references to the need to defer to the case management judge precisely because of her intimate involvement with the parties, the facts, and the issues.
[41] In addition, in this case at least, watching the settlement discussion let me have a front row seat to ensure that the parties were acting in a bona fide, adverse, and arm’s length manner. The resumption of the pretrial conference in September was not agreed upon between counsel with the plaintiffs’ counsel going to the bank’s counsel with cap in hand. Rather, there were discussions through my office about how to re-engage strategically to maintain the appropriate adversarial tension and to try to ensure that each side got the most out of the other.
[42] To that end, I note in passing that I agree with the plaintiffs’ position that they obtained the top dollar that was realistically available from the bank in this settlement. Both sides were ready for a long trial that was going to commence in a few short weeks. There was no bluffing available and there were no savings left apart from the costs of the trial itself, to pressure either side to move beyond what it believed was fair and appropriate.
[43] I have spent several paragraphs on this issue because there was no one raising it expressly. No one opposed approval of the settlement or the fees sought by counsel. Nevertheless, it seemed to me to be appropriate to charge myself on the risks so as to protect the integrity of the process.
[44] I am not to be taken to express a general principle. This case is sui generis in many ways – the subject matter complexity; the length of the proceeding; the imminence of a long trial; my involvement hearing motions and the pretrial; the amount of time invested in the settlement process; the lack of any opposition to the motion despite ample notice to class members, are all aligned in this case. The ephemeral concern that I might want to support the settlement and ignore prejudice to class members does not outweigh the many benefits of having me hear the motion.
[45] In this case, I do not see a basis for an informed observer, having thought the matter through, weighing the lack of any actual conflict, the intangible risk of a conflict, the sui generis benefits of leveraging the significant investment already made, and seeing the same thing done routinely in other very substantial civil cases, would think that because I conducted the pretrial conference, it is more likely than not that I, whether consciously or unconsciously, would not decide fairly (to borrow the language of Committee for Justice).
Is the Settlement Fair and Reasonable?
[46] As recently as 2016, as quoted by Strathy CJO above, the plaintiffs claimed $2 billion- $4 billion and the judge could not characterize that as “unrealistic”. Well, it was. The plaintiffs’ experts opined that if everything aligned as they hoped, damages were around $700 million.
[47] That is still a long way from $125 million.
[48] While the plaintiffs’ counsel point to numerous risks they say they had to overcome, many are boiler-plate. There is always a risk of loss. But there are two specific risks on the merits in this case that struck me as truly formidable.
1. The Bank is a Very Sophisticated Litigant with Thorough Corporate Governance Processes.
[49] First, as is often the case, there was a US class action commenced on the same facts and issues. Canadian class actions often are a tail end add-on to much larger US cases. This is not surprising given the relative populations and, particularly, the relative size of the respective financial markets.
[50] In this case however, the US class action was blown out on a motion to dismiss in 2012. See: Plumbers & Steamfitters Local 773 Pension Fund v. CIBC et al ., 08 Civ. 8143, US District Court, Southern District Of New York.
[51] In this case, the plaintiffs rely on statements made by various bank officials in public contexts as misrepresentations. The US court summarily and disparagingly dismissed the plaintiffs’ evidence of misrepresentations as,
Despite opportunistic rummaging through press releases and internal company documents, Plaintiff buttresses its allegation only with citations to newspaper and magazine articles and the website The Motley Fool, http://www.fool.com.
[52] The very same statements form the heart of the plaintiffs’ claims in this class action.
[53] That plays into the second equally or more formidable obstacle to the plaintiffs’ claim for liability. CIBC is not a penny-stock huckster. It is a venerable, massive banking conglomerate. It has committees and whole processes designed to conduct necessary due diligence. The bank’s exposure to its sub-prime investments was studied internally by management, by committees, and the board of directors itself in a day long meeting dedicated solely to the one topic.
[54] Of course, in any analysis of millions of pages of relevant documents, one can always find outliers. In that sense, the US judge’s reference to rummaging, can be seen as an indication that a couple of questionable statements do not outweigh or undermine weeks and months of dedicated effort by in-house and external professionals all cognizant of the bank’s obligations and all trying their best to exercise good corporate governance in unprecedented and immensely complicated circumstances.
[55] At trial, the bank could be expected to call a formidable army of senior, experienced, highly competent managers, officers, and directors, to say they studied the facts as best they could and made proper disclosure in the circumstances.
[56] As there is a due diligence defence in the statute, in light of the US judge’s findings and the sheer size and comprehensiveness of the bank’s corporate governance apparatus, the plaintiffs faced a very serious risk of losing this case even if they proved everything on which they relied.
[57] So why did the bank pay so much to settle? I do not know what was before the US judge and make no comment on his holdings. I read the public statements on which the plaintiffs relied. I read much of the due diligence documentation, memos, committee minutes, and board minutes on which the bank relied. I do not pretend to have anything like the exposure that a trial judge would have after seven weeks or that counsel have after more than a dozen years and in the midst of final trial preparations.
[58] But I was left distinctly troubled after reading the bank’s material. At least two of the public statements relied upon seemed to be both authoritatively made and quite likely wrong. Moreover, while the bank’s massive due diligence apparatus was heavily engaged, hindsight shows that it failed spectacularly. So the bank’s case is not that they did a great job. Rather, they need to say they did an adequate job on what was known and being done by others in the market place and they covered themselves by retaining professionals as one does. But we know now that the facts were known and were being yelled by a few in the market place at the time. Arguably, the bank failed or refused to hear and act on facts and evidence that were available to it.
[59] In my view, there was a real risk that the bank would be found to have been too late to the party and that its diligence was not quite all that was due.
[60] I understand, of course, that hindsight is not the test. But the monumental collapse that occurred cannot be ignored. How do you risk losing as much as $11 billion and not see it coming? The market froze many months earlier while the bank was telling shareholders that all was well. There were facts available in real time that undermined important assumptions made by the bank – like the questionable strength of the monoline insurers whose covenants were relied upon as effective hedges for the bulk of the portfolio, for example. The bank says it disclosed the risks on its investments once an insurer’s credit rating was downgraded by ratings agencies. But everyone understands that the ratings agencies do not stand behind their ratings. Much of the failed investment products were rated AAA by ratings agencies. Is it really due diligence to rely on ratings when there was information available that logically led to a very big question mark? Reading many of the bank’s memos left me saying “Yes, but what about…”.
[61] The bank starts with a major leg up given the sophistication of its corporate governance processes. But I would not expect the trial judge to accept a bureaucratic effort to paper a due diligence process if he felt that the contents should not have survived scrutiny.
[62] So each side recognized a very real risk of losing on case-specific and evidence-based issues with trial around the corner. Both sides had very good reason to settle in the views of experienced, skilled counsel with whom I agree.
2. The Plaintiffs’ Damages Assumptions were Thin.
[63] The second real issue affecting the plaintiffs was with respect to their damages. There are always boilerplate issues about how aggregate damages might play out and whether the experts’ reports were likely to be successfully received. The plaintiffs’ problem in this case was that even on their expert’s own evidence, a couple of factual holdings could grossly reduce their damages to modest amounts.
[64] The plaintiffs’ experts valued the plaintiffs’ loss at about $16 per share through the whole class period. The defendants’ experts valued the loss, if proven, at 91¢ per share. But the plaintiffs’ calculations varied depending on when a plaintiff bought shares and then whether the date of the bank’s correction of its misrepresentations was made in November or December leading up to the delivery of its Q3 report on December 6, 2007. There are a number of complexities around that issue that I do not need to deal with precisely. But of the $16 per share claimed by the plaintiffs, about $10 of that amount relates to the period before the Dec. 6, 2007 report. A simple holding that it was the formal report that was the relevant date, could reduce the damages on the plaintiffs’ own theory by about 35% (from around $700 million to perhaps around $450 million).
[65] The plaintiffs are claiming aggregate damages. But, it is also understood from US experience that the take-up rate by plaintiffs in US securities class actions is as low as 10% to 15%. If the plaintiffs were put to proving precisely which class members were advancing losses at individualized trials, even on their own experts’ evidence, they were looking at potentially very modest recoveries depending on who shows up. Mr. Jervis noted that the Canadian market place is less widely distributed than the US market place. A significant portion of the CIBC shares were owned by large institutions in large tranches, he says. The institutional shareholders will have fiduciary duties to try to collect their losses, he says. I suppose that is one possibility. I am in no position to predict which third parties will likely come forward 15 or more years later to claim a loss if the class action succeeds but without aggregate damages.
[66] So, even ignoring the boilerplate risk of loss, the $125 million number is not nearly so small as it seemed compared to the $2 - $4 billion claimed in 2016 or even the $700 million headline from the plaintiffs’ experts report. Not much has to happen to the plaintiffs, to reduce their provable damages on their own theories of the case.
[67] I have seen no indicia of collusion. In fact, I witnessed arm’s length adversity literally to the last dollar. I cannot make a finding on the precise dollar amount of course. But I can readily find it to be within he zone of reasonableness. This settlement bears the hallmark of a good settlement – both sides gave until it hurts.
[68] This settlement was reached at the last minute. The plaintiffs’ counsel had made a very substantial investment and were ready for trial. The issues were known and studied. There was thorough, massive documentary and oral discovery. There were a large number of experts reports for trial on every conceivable issue. Counsel know their cases. There is no suggestion of this being an early settlement to reap a fee without putting in the work.
[69] The settlement is cash only. There are no opportunities for counsel’s fee to move. They claim a fixed percentage against all class members’ recovery equally (in whatever amount I approve). They are as aligned with the interests of the class as is possible. Counsel recommend settlement and no one objects.
[70] The distribution protocol proposed by counsel was created by one of the plaintiffs’ experts. It uses the losses per share found by the main damages expert to fix a notional loss for each participating plaintiff depending on when he, she, or it purchased shares. The protocol provides that if there is not enough money to pay them all in full, the plaintiffs will share the settlement proceeds pro rata based on the notional losses as calculated.
[71] I have no hesitation in finding the settlement agreement as proposed is fair and reasonable and approving the agreement as asked.
Costs
[72] Under their retainer agreement, class counsel are entitled to the greater of 30% of the amount recovered or four times their docketed time. The multiplier approach would produce the highest amount. Counsel are not asking for it however. They ask for 30% of the $125 million gross settlement proceeds or $37.5 million. I need to determine if the amount is fair and reasonable and, even if it is fair and reasonable on costs principles, whether it is such a big number as to engage concerns about the integrity of the profession.
[73] In my view, in this particular case, the fee sought was completely earned over 14 years of difficult slogging against a formidable foe. The bank had every advantage of size, deep pockets, internal subject-matter expertise, and then delivered a devastating knock-out blow to the plaintiffs’ case in the US.
[74] This is also a landmark case. To obtain certification, the plaintiffs had to convince the Court of Appeal to overrule itself and then succeed at the Supreme Court of Canada. This was a David v. Goliath situation and the little guy survived by hard work, perseverance, and impressive tolerance of risk.
[75] In The Trustees of the Drywall Acoustic Lathing and Insulation Local 675 Pension Fund v.SNC-Lavalin Group Inc., 2018 ONSC 6447, Perell J. set out the basic approach to fee approval in class actions.
[74] The fairness and reasonableness of the fee awarded in respect of class proceedings is to be determined in light of the risk undertaken by the lawyer in conducting the litigation and the degree of success or result achieved.
[75] Factors relevant in assessing the reasonableness of the fees of class counsel include: (a) the factual and legal complexities of the matters dealt with; (b) the risk undertaken, including the risk that the matter might not be certified; (c) the degree of responsibility assumed by class counsel; (d) the monetary value of the matters in issue; (e) the importance of the matter to the class; (f) the degree of skill and competence demonstrated by class counsel; (g) the results achieved; (h) the ability of the class to pay; (i) the expectations of the class as to the amount of the fees; and (j) the opportunity cost to class counsel in the expenditure of time in pursuit of the litigation and settlement. [Notes omitted.]
[76] Mr. Genova’s evidence was that this action was properly characterized as a “bet the firm” case. In addition to working without being paid, the lawyers had to indemnify the representative plaintiffs if costs were awarded to the defendants.
[77] The defendants are represented by two “Seven Sisters” firms. Their costs of certification alone would likely have each exceeded by a large margin the $2,679,277.82 partial indemnity award obtained by the much smaller class counsel firm.
[78] In addition, the plaintiffs’ counsel had to pay for all of the experts reports - $760,000 just for certification alone. By the time of trial that number reached about $7.5 million.
[79] The Class Proceedings Fund did not fund disbursements or provide a backstop for costs liabilities until the case was finally certified. Even then, class counsel have amassed about $2.6 million in experts fees that are not covered by the fund.
[80] Mr. Genova’s evidence is that the firm had to hire for this case specifically. Messrs. Jervis, Worndl, and Podolny were all brought in for this case and had to be paid.
[81] The case started in 2008. The CPF agreed to participate in 2016. Class counsel were exposed for eight years including after initially losing the certification motion; appealing to a five-judge panel at the Court of Appeal; and then to the SCC. Mr. Rochon notes that the risk was high at ever step of the process. For example, had the Court of Appeal not agreed to sit as a five-judge panel to re-consider an earlier precedent that had been relied upon by Strathy J. to deny certification, the plaintiffs’ chances on the appeal would have been greatly reduced. Even seemingly small decision-points had the potential to have great consequences. The plaintiffs had to steer the proceeding skillfully at all times.
[82] Mr. Genova and Mr. Rochon had many discussions over eight years about the amount of risk that they could undertake. They realized that if the case failed before the CPF was engaged the firm’s assets were insufficient to meet the likely liabilities. They had to assess their personal risk tolerances in respect of the recognized likelihood that if they failed, they would have to significantly encumber their personal assets to the tune of several millions of dollars.
[83] I am troubled somewhat by the “bet the firm” concept. Firms capitalize as they choose. Some firms keep partners’ capital on hand and borrower commensurately less for operations. Other firms distribute their partners’ capital each year and finance their working capital. Others organize themselves to try to be creditor-proof to the extent possible. Evidence that a firm has insufficient capital to pay a major judgment may not be saying much at all about the risk truly being incurred by the partners.
[84] But, by any standard, the partners of class counsel’s law firm incurred personal risk that was significant both in the likelihood of an adverse event and in the high quantum of liability to be incurred if a negative event came to pass. I would not have liked to have been in their shoes when the US judge summarily dismissed the US class action in 2012 or when Strathy J. initially dismissed the certificate motion. This was not a “shooting ducks in a barrel” case.
[85] The risk was decidedly worse before the CPF became engaged. Case law suggests that the CFP involvement is to be ignored as a matter of policy. Regardless, the eight years incurred in this case before the CPF provided its backstop was a lengthy, risky period.
[86] Class counsel are carrying work-in-process of 21,000 hours valued at $14.8 million in docketed time since 2008. They also owe experts about $2.6 million.
[87] As the case is so old, complex, and was ready for trial, these numbers are not surprising. This is the opposite of the opportunistic filing that is the subject of specific concerns in the case law.
[88] Class counsel seek a 30% contingency fee or about 2.5 times their docketed fees. The 30% contingency would be par for the course in a smaller case. But with cases with recovery over $100 million, the percentage recovery analysis is adjusted to recognize the additional concern about the costs award prejudicing the integrity of the process as discussed previously.
[89] In MacDonald et al v. BMO Trust Company et al, 2021 ONSC 3726, Belobaba J. discussed using the docket multiple as a cross-check in mega-cases.
[36] Here however, as already noted, class counsel docketed $5.5 million in time and at the end were carrying just under $900,000 in disbursements. A 2.5 multiplier would allow $13.75 million in fees. A 3.0 multiplier would allow $16.5 million in fees. The 4.0 multiplier, reserved for “the most deserving case” and used by me in Brown, would result in $22 million in legal fees. However, this is not Brown where a tiny law firm risked its very survival and where I concluded that the use of the highest multiplier as a cross-check was fully justified. [Notes omitted.]
[90] In his costs decision on the certification motion in the case, Strathy CJO, provided his understanding of the principles at play,
[12] I also recognize the public interest in ensuring that parties pursuing secondary market misrepresentation claims that are certified and pass successfully through the statutorily-mandated judicial screening process are fairly compensated by realistic costs awards.
[13] This is an access to justice issue. These claims are suitable for class action treatment because no individual class member would take on the risks involved in pursuing individual litigation.
The ability of the class to pursue these claims depends on the willingness of class counsel to accept the very substantial risks in exchange for the potential rewards.
[14] The risks are – quite simply – the exposure to substantial personal liability for costs and the risk of receiving no compensation for the time and disbursements invested in the case. There is no funding agreement in this case, but the latter risk exists even where there is a funding agreement to indemnify class counsel for an adverse costs award or for some portion of their disbursements. The efficacy of the statutory remedy depends on incentivizing class counsel to take these formidable risks.
[15] Defence counsel do not face these risks. They are well paid and rightly so. They no doubt bill on an interim basis – as they are entitled to do – and their clients will likely spare no expense in attempting to shut down the proceeding at the initial stages.
[16] If this claim had been defeated there is absolutely no doubt that the defendants would be seeking costs at least as substantial as those claimed by the plaintiffs and probably more substantial. The defendants retained two separate law firms and some of the best class action defence talent in the country. The costs the defendants would claim in the event of their success must inform their reasonable expectations in the event of the plaintiffs’ success. In making these observations, I note, of course, that had the defendants been successful the litigation would be over and they would normally have expected to recover all their costs of the proceeding.
[17] Although this claim has passed through the initial screening, the plaintiffs and their lawyers have a long road ahead of them. A failure to award fair costs to the plaintiffs will encourage and reward a defence strategy of wearing down the plaintiffs by wearing down their lawyers. I am not suggesting that this was, or will be, the defendants’ strategy in this case, but defendants have everything to gain and little to lose by sparing no expense in this kind of case.
[91] On a micro basis, I see no reason to deviate from the 30% fee agreed upon by counsel. It is well within historic norms. The $125 million in aggregate compensation is available to the class due, in large measure, to the entrepreneurship and risk tolerance of class counsel.
[92] Subject to the macro view to be discussed below, I also agree with that decreasing fees now would create the very disincentive foreshadowed by Strathy CJO in para. 17 of his decision above. Reducing the multiplier below 2.5 would essentially penalize the lawyers for their sustained effort.
[93] In MacDonald, Belobaba J. suggested that the most import element of fee approval in mega-cases is the need to apply a principled approach. From my discussion throughout these reasons, I find that of the ten principled factors listed by Perell J. in SNC-Lavalin above, (including: complexity, risk, demonstrated skill, the amount in issue, the importance of the case) my assessment of the first nine factors is “high” and the 10th is irrelevant in this case. Based on normal costs principles therefore, I accept the 30% figure sought.
[94] Stepping back then, and assessing the matter from a more macro perspective, is payment of $37.5 million to class counsel unseemly so as to impact on the integrity of the legal profession? If the Toronto Star has a headline, “Law Firm Bilks Clients for $37.5 Million” it certainly will not be a happy day for lawyers. But it would also be horribly misleading. The fee represents 14 years of effort by a small firm whose partners undertook substantial personal financial risk on a very tough case. I do not see that the situation would be different if I use a 25% contingency fee and the headline says “$31 million” or a 20% fee and the headline says “$25 million”. By any objective measure, the fee is a big number. But that is all that can be said in my view.
[95] I am troubled by the fact that the class members will be receiving only about 55% of the recovery paid by the bank. The best case expectation by class members with a 30% contingency, is 70%. So where is the other 15% (about $20 million)? The rest goes to HST ($4.9 million), outstanding disbursements for experts’ fees ($2.6 million), projected distribution costs ($0.6 million), CPF reimbursement for experts’ fees paid ($4.6 million), and the CPF levy, ($7.4 million).
[96] If I were to reduce counsel’s contingency fee to 25%, that would add another $6.25 million to the class recovery (ignoring the CPF levy). Class recovery would increase to about 59% of the bank’s payment. I just do not see how the integrity of the profession can be said to be undermined at 55% but is intact at 59%. There is an element of arbitrariness to the “I know it when I see it” assessment that does not resonate highly with me.
[97] In all, considering fully the interests of the class members, the importance of counsel being rewarded for their efforts but the need to strictly protect against unreasonable fees or fees that would impact negatively on the integrity of the profession, I see nothing unreasonable or untoward about the fee request advanced by counsel.
[98] This is a “bet the firm” case which went on for 14 years, with very significant risks, and very satisfactory results. On the facts, this may be the poster child for a mega-case in which full fees ought to be maintained.
[99] Order to go as sought.
FL Myers J
Released: January 17, 2022