A recent decision of the Ontario Superior Court of Justice addresses important aspects of Ontario's secondary market liability regime. In Green v. Canadian Imperial Bank of Commerce, 2012 ONSC 3637, Justice George Strathy denied the plaintiffs leave to commence a proposed class action under Part XXIII.1 of the Ontario Securities Act on the basis that the limitation period had expired. Justice Strathy also rejected the plaintiffs' request to certify common law claims for negligent misrepresentation. Both aspects of the CIBC decision are discouraging for prospective plaintiffs. While the Canadian jurisprudence considering the tests for leave and certification in securities misrepresentation cases continues to evolve, CIBC suggests that a more restrictive approach is developing.
The plaintiffs, who were shareholders of CIBC, alleged that during a period from May 31, 2007 to February 28, 2008, CIBC and four of its senior officers misrepresented and/or failed to disclose CIBC's exposure to the US residential mortgage market, including its exposure to subprime mortgages. They further allege that the "true state" of CIBC's exposure was not revealed until early 2008, at which point the value of CIBC's shares fell. The plaintiffs commenced statutory claims under Part XXIII.1, as well as common law misrepresentation claims. The plaintiffs sought leave under section 138.3 of the Securities Act to commence an action in respect of the statutory claims and certification of a class action including both the statutory and common law claims.
The Plaintiffs' Claims are Barred by the Limitation Period in Part XXIII.1
While the parties were arguing the leave motion in CIBC, the Ontario Court of Appeal released its decision in Sharma v. Timminco Ltd., 2012 ONCA 107, which interpreted the limitation period for commencing claims under Part XXIII.1. Specifically, section 138.14 of the Securities Act provides that such claims must be commenced within three years of the date that an alleged misrepresentation is made (or, in the case of a failure to disclose, within three years of the date on which the disclosure was required to be made). The Court of Appeal held that a cause of action under Part XXIII.1 cannot be asserted until leave has been granted and an action has been commenced. Accordingly, if leave has not been obtained within three years of the alleged misrepresentation, the statutory claims are statute-barred.
Until the release of the Court of Appeal's decision in Timminco, none of the parties to the CIBC case had raised the issue of the limitation period. However, the plaintiffs had not obtained leave within the three-year period required by section 138.14. The defendants relied on Timminco and asserted that the plaintiffs' statutory claims had expired. The plaintiffs argued that Timminco was distinguishable and that the Court should exercise discretion to extend the limitation period and avoid injustice to the proposed class. They sought to rely on the fact that they had consistently demonstrated their intention to proceed with the leave motion and that, unlike the situation in Timminco, the leave application was well advanced by the time the limitation period expired. However, Justice Strathy rejected all of the plaintiffs' arguments and concluded that he had no discretion to extend the limitation period under section 138.14.
Justice Strathy explained that, if not for the passage of the limitation period, he would have granted the plaintiffs leave to commence an action under Part XXIII.1. He noted that this was the first Ontario decision in which the "rubber may really hit the road" in the application of the leave test, and conducted a lengthy obiter dicta analysis into whether the action had a 'reasonable possibility of success' – the second requirement for leave in section 138.8(1). Justice Strathy also explained that, if not for the expiry of the limitation period, he would have certified the statutory misrepresentation claims.
Common Law Misrepresentation Claims are Not Suitable for Certification
Significantly, Justice Strathy held that the common law misrepresentation claims were not suitable for certification because individual proof of reliance is a necessary requirement of common law misrepresentation claims and cannot be addressed on a class-wide basis:
"[T]here is no authority to support the proposition that 'fraud on the market' or the 'efficient market' theory can supplant the need to prove individual reliance."
He also found that, for the same reasons, a class proceeding would not be the preferable procedure for resolving a reliance-based claim since it would "give rise to individual issues of causation and reliance that would be unmanageable."
Justice Strathy also explained that common law claims should not be used to circumvent the checks and balances in Part XXIII.1, including the liability caps that serve to protect the issuer and its continuing shareholders from potentially crippling exposure. Part XXIII.1 was enacted, in part, to overcome the difficulty in proving reliance-based common law claims. In Justice Strathy's view, to permit common law misrepresentation claims to proceed would "allow a plaintiff to circumvent the elaborate and procedural liability structure of Part XXIII.1 of the Securities Act, which is designed for the protection of the public."
This aspect of the CIBC certification decision is consistent with Justice Strathy's prior decision in McKennav.Gammon Gold Inc.1 However, it is inconsistent with the decisions of Justice van Rensburg in Silver v. IMAX Corp.2 and Justice Tausendfreundin Dobbie v. Arctic Glacier Income Fund3 – decisions that certified common law misrepresentation claims along with statutory misrepresentation claims. The divergence between the positions taken by Justice Strathy and his fellow judges on the question whether common law claims for misrepresentations affecting the price of securities on secondary markets should be certified will no doubt be the subject of future appellate consideration.
While the case law will continue to develop, the CIBC decision has two important implications for securities class actions:
- First, this decision (like the Court of Appeal's decision in theTimminco case) will likely lead plaintiffs to move more quickly to seek leave to commence actions under Part XXIII.1 because, as illustrated by both Timminco and CIBC, the ramifications of failing to obtain leave within the three-year window are dire. However, it will remain open to the parties to agree to toll limitation periods.
- Second, the CIBC decision adds ammunition to the argument that common law misrepresentation claims should not be certified alongside statutory claims. As Justice Strathy explained: "If the common law cause of action is available, this entire system [in Part XXIII.1] becomes redundant." While the debate is far from resolved, Justice Strathy's extensive justifications for refusing to certify the common law claims may be persuasive with the appellate courts.
1 McKennav.Gammon Gold Inc., 2010 ONSC 1591, lv. to appeal to Div. Ct. allowed in part, 2010 ONSC 4068
2 Silver v. IMAX Corp., (2009), 86 C.P.C. (6th) 273 (Ont. S.C.J.), lv. to appeal to Div. Ct. refused, 2011 ONSC 1035.
3 Dobbie v. Arctic Glacier Income Fund, 2011 ONSC 25, lv. to appeal to Div. Ct. allowed in part, 2012 ONSC 773.
Mark Gelowitz has a business-focussed civil and securities litigation, appellate and international commercial arbitration practice. Andrea Laing is a partner in the Osler Litigation Department and a member of the firm's Class Action and Corporate and Securities Litigation Specialty Groups. Robert Carson's practice encompasses a broad range of civil litigation, including class actions and corporate and commercial matters.
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