Statements of Defence Required In Advance of Certification in Sino-Forest Class Proceeding

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In the recent Trustees of the Labourers’ Pension Fund et al. v. Sino-Forest decision – released March 26, 2012 – Justice Perell affirmed his earlier reasoning in Pennyfeather v. Timminco 1 by requiring the delivery of statements of defence before the certification hearing. Perell J. also ordered that the certification hearing be held together with the plaintiffs’ motion for leave to advance statutory secondary market claims under Part XXIII.1 of the Ontario Securities Act. Justice Perell observed that the delivery of statements of defence may not always be appropriate in advance of certification – particularly in the context of proposed class proceedings involving claims for secondary market misrepresentations under the Securities Act. Nonetheless, defendants in Ontario must now anticipate the very real possibility that statements of defence will be required before the issues are narrowed at the certification hearing.

Background

The Sino-Forest class action is one of the largest securities class actions ever brought in Canada. Sino-Forest is a public company whose shares formerly traded on the Toronto Stock Exchange. On June 2, 2011, a short selling firm known as Muddy Waters released a report alleging Sino-Forest was a fraud and a “multi-billion dollar Ponzi scheme.” In the fallout of the Muddy Waters Report, the Sino-Forest share price dropped dramatically, trading at less than 75% of its pre-Muddy Waters value when cease-traded on August 28, 2011.

The plaintiffs in the proposed class proceeding seek more than $6 billion in damages arising from the drastic reduction in share value, and have advanced causes of action in conspiracy, negligence, and negligent misrepresentation in the secondary market. A significant part of the plaintiffs’ claim for damages is their secondary market misrepresentation claims under Part XXIII.1 of the Securities Act. Plaintiffs seeking to bring claims under that Part of the Act must first obtain leave of the court.

On this motion before Justice Perell, the plaintiffs sought two principal procedural orders: 1) that statements of defence be delivered within 30 days and in any event before the leave and certification motion; and 2) that the leave motion under Part XXIII.1 of the Securities Act be heard together with the certification motion. While Justice Perell had previously ordered statements of defence be delivered before certification in Pennyfeather and in Kang v. Sun Life Assurance Company of Canada 2, the Sino-Forest case was the first time that this relief was actively sought by plaintiffs and opposed by defendants on a motion before the Court. Similarly, though the Ontario Superior Court of Justice considered whether the leave and certification motions should be heard together in Silver v. Imax Corp. 3 and Dobbie v. Arctic Glacier Income Fund 4, this was the first time that defendants had actively opposed the joint hearing.

Delivery of Statements of Defence Before Certification

Justice Perell’s decision requiring statements of defence before certification in Pennyfeather marked a reversal of the convention that had stood in Ontario for over fifteen years since Justice Winkler’s (as he then was) ruling in Mangan v. Inco Ltd. 5 In Pennyfeather, Justice Perell stated that “[...] it would be advantageous for the immediate case and for other cases, if the current convention ended and defendants were required in the normal course to deliver a statement of defence before the certification motion.”

In the Sino-Forest decision, Justice Perell stood by his earlier reasoning in Pennyfeather. He held that it was “the clear intention of the Legislature” that statements of defence be delivered before certification. Further, he stated that the early delivery of statements of defence will assist in the adjudication of the standard certification criteria, and that defendants’ arguments against certification are stronger when defendants have ‘shown the colour of their eyes’ by pleading a defence.

While Justice Perell favoured the delivery of statements of defence before certification as a general rule, difficulties were raised in this case by the fact that the plaintiffs had claimed damages under Part XXIII.1 of the Securities Act. The defendants argued that because the plaintiffs required leave to bring their Part XXIII.1 claims, that there was no cause of action for the defendants to defend unless and until leave had been granted.

In support of this argument, the defendants referred to the very recent decision of the Court of Appeal in Sharma v. Timminco, where the Court held that “without leave having been granted, a s. 138.3 cause of action [...] cannot be invoked as a legal right”. 6 The defendants argued that an order requiring them to deliver statements of defence before leave had been granted would force them to shoot at a moving target. The defendants noted that the plaintiffs had served a substantially revised “proposed claim” (which included the Part XXIII.1 claims for which they were seeking leave) which had not yet been filed with the Court, and that further amendments would likely be made after the certification and leave motions.

Justice Perell held that these arguments were not fatal to the plaintiffs’ request that the defendants deliver statements of defence before certification, but took them into account in fashioning a novel procedure. With respect to the requirement that leave be obtained under Part XXIII.1, Justice Perell held that only those defendants who contest the plaintiffs’ leave motion under the Securities Act and file responding affidavit evidence under s. 138.8 of the Act are required to deliver statements of defence before certification. He held that “[d]elivering an affidavit under s. 138.8 is essentially the same as delivering a statement of claim or defence.” Accordingly, “if a Defendant does deliver an affidavit, then its protest that it would be unfair to require a statement of defence loses its potency [...]”.

At the same time, Justice Perell ordered that these statements of defence should respond to the plaintiffs’ “proposed” statement of claim, even though leave had not yet been granted to advance the statutory secondary market claims set out in that statement of claim and despite the fact that this “proposed” claim had not yet been filed.

Though the defendants had also argued that they should not be forced to defend before having the opportunity to bring motions to strike under Rule 21 of the Rules of Civil Procedure, Justice Perell ordered that the delivery of statements of defence would be without prejudice to the defendants’ ability to subsequently move against the statement of claim. For reasons of efficiency, Justice Perell held that motions under Rule 21 should be held together with the leave and certification motions.

As a result of Justice Perell’s decisions, defendants now face the prospect of having to deliver statements of defence in response to “proposed” statements of claim, before plaintiffs have met their burden of demonstrating that a cause of action exists.

The Leave Motion and the Certification Motion Held Together

Justice Perell ordered that the leave motion and the certification motion should be heard together. In making this order, he followed the lead of Justice Rensberg and Justice Tausendfreund in IMAX and Arctic Glacier, respectively, which were the only two prior decisions in which the court considered the leave requirement under Part XXIII.1 of the Securities Act. Justice Perell dismissed the defendants’ arguments that a joint hearing was inappropriate because the court must consider a different test on the leave motion than on the certification motion. Whatever the differences between the two tests, he held that the “evidentiary footprint” for the leave and certification motions are the same.

Given his finding that there would be no unfairness to defendants as a result of a joint hearing, the principal consideration on which Justice Perell based his order to hold the two motions together was efficiency. In particular, Justice Perell noted the prospect of delay: he stated that if the leave motion was to be heard first, then the class proceeding would be derailed because the unsuccessful party on that motion would launch an appeal that would take several years to resolve.

In practical effect, joining the two proceedings obligates defendants to prepare their certification materials on the assumption that a valid cause action exists under Part XXIII.1 of the Securities Act. Moreover, since the plaintiffs are unable to file their statement of claim containing claims under Part XXIII.1 of the Securities Act until after leave is granted, it is unclear how the Court can be in a position to consider the plaintiffs’ “proposed” statement of claim as the operative statement of claim for the certification analysis.

Conclusion

There has been no decision from other judges in Ontario regarding whether this early delivery of defences is appropriate or desirable. Until a uniform practice emerges or guidance is provided from an appellate court, it remains unclear as to whether statements of defence will be required before certification as a matter of course. Justice Perell’s ruling in Sino-Forest acknowledges that an “across the board” requirement for delivery of statements of defence may not be appropriate in all circumstances, and particularly in the context of proposed class proceedings involving statutory secondary market claims under the Securities Act. While it remains to be seen whether the delivery of statements of defence before certification becomes the new normal practice in Ontario, defendants should anticipate being confronted with the prospect of being compelled to defend before certification.


1 Pennyfeather v. Timminco, 2011 ONSC 4257

2 Kang v. Sun Life Assurance Company of Canada, 2011 ONSC 6335

3 Silver v. Imax Corp., [2009] O.J. No. 5585

4 Dobbie v. Arctic Glacier Income Fund, 2011 ONSC 25

5 Mangan v. Inco Ltd. (1996), 30 O.R. (3d) 90

6 Sharma v. Timminco, 2012 ONCA 107, para. 18

Published In: Business Torts Updates, Civil Procedure Updates, Finance & Banking Updates, Labor & Employment Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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