The British Columbia Court of Appeal recently released a helpful decision applying principles of discoverability to determine when a limitation period begins to run. In Roberts v. E. Sands & Associates Inc., 2014 BCCA 122, the Court rejected 650 claims against a bankrupt investment firm on the basis that these claims were made after the six-month limitation period under the Securities Act had expired.1
In so doing, the Court sent a clear message to potential claimants: a limitation period will start to run when the known facts suggest the pursuit of an investigation into a cause of action – and reasonable diligence in pursuing this investigation is expected.
In this case, there were two potential triggering events to commence the limitation period for a cause of action for misrepresentation. First, investors received an email from their investment firm informing them that their investments had been squandered by a trading company acting fraudulently. Over a year and a half later, upon the investment firm's application for bankruptcy, the investors received a Trustee's report explicitly stating that the investment firm had not exercised due diligence in preparing its disclosure document discussing its arrangements with the fraudulent traders.
The Court held that the first event – the email alerting investors that their money had been lost through fraud – should have caused the investors, acting reasonably and diligently, to review the disclosure document that governed their purchase of the investment; as such, the email notice started the clock on the limitation period. The investors were not entitled to wait until the Trustee's report, in which the investment firm's misrepresentations were spelled out for them.
The Court arrived at this conclusion in part because of the central role of disclosure documents in the securities scheme; where a disclosure document is required to purchase certain investments, and there is a remedy specifically for investments purchased pursuant to such documents, reasonable diligence requires injured investors to pay attention to that document when they suffer a loss. This holding suggests more generally that what constitutes reasonable diligence in discovering a statutory cause of action will be coloured by the statutory context.
The Appellant, an individual, and the Respondents, a group of 650 investors, all purchased investments issued by a firm known as "Horizon". Pursuant to a requirement under the Securities Act to provide a disclosure document when offering securities for sale, Horizon provided these investors an Offering Memorandum, which set out certain representations concerning the investment.
Horizon put these investors' money in the hands of another firm, Razor FX, for trading in the foreign exchange market. Unfortunately, Razor was later revealed to be a Ponzi scheme.
On January 16, 2008, upon learning that the principal of Razor had been charged with fraud, Horizon emailed its investors to so advise, and to state that it was "investigat[ing] means of recovering any available assets from the traders who appear to have defrauded all of us".
As a case about limitation periods, the events that followed and the timing thereof are somewhat important.
- On March 20, 2008 – well within the six-month limitation period – the Appellant brought an action against Horizon for damages for misrepresentation in the Offering Memorandum under s. 132.1(1) of the Securities Act. In short, Horizon's Offering Memorandum had highly touted the experience of the traders, who in fact had a history of fraudulent misconduct, and provided that the investment accounts were insured, which they were not. The Appellant received judgment for $331,435.12 (US) on February 9, 2009 (see Roberts v. Horizon FX Limited Partnership, 2009 BCSC 304).
- Also in March 2008, another Horizon investor (not involved in this appeal) sought rescission based on misrepresentations in the Offering Memorandum.
- On August 12, 2009 – more than a year and a half after Horizon's notice email – Horizon filed a proposal under the Bankruptcy and Insolvency Act, and the Trustee issued a report on the proposal to investors. The Trustee's report explicitly stated that the Horizon Offering Memorandum "was prepared without appropriate due diligence".
- On September 1, 2009, Horizon went into bankruptcy.
The Respondents filed 650 proofs of claim shortly thereafter, which the Trustee approved. The Trustee explained in his report to the Court that the Respondent investors could not have known about Horizon's lack of due diligence until the Trustee's report was issued in August 2009.
The judgment appealed from
The Appellant brought an application in the British Columbia Supreme Court under s. 135(5) of the Bankruptcy and Insolvency Act to expunge the Respondents' claims on the basis that the limitation period for claims for misrepresentation under the Securities Act had expired six months after Horizon's notice email of January 16, 2008 (see Roberts v. E. Sands & Associates Inc., 2013 BCSC 902). The claims against Horizon exceeded the potential recovery in the bankruptcy, so the Appellant – who already had a judgment against Horizon – would inevitably receive less if the recovery had to be shared with 650 latecomers.
The reviewing judge, however, agreed with the Trustee's assessment that the Respondents, acting reasonably, could not have known of the facts giving rise to an action for misrepresentation until the Trustee's report was issued on August 12, 2009, stating: "This was the first time that the misrepresentations contained in the Offering Memorandum were drawn to the attention of the Represented Respondents."
The reviewing judge rejected the Appellant's contention that the Horizon email notice from January 2008 should have led the Respondents, using reasonable diligence, to review the Offering Memorandum to see if there were misrepresentations.
The Court of Appeal's decision
The Court of Appeal held that the reviewing judge's decision failed to apply appropriate standards of discoverability in the law of limitations. Specifically, the Court held that it was unreasonable to conclude that the Respondents had no reason to examine the Offering Memorandum after the fraud was announced to them.
The Court succinctly summarized the doctrine of discoverability as follows:
According to the doctrine of discoverability, a limitation period does not begin to run until the claimant knows the material facts upon which a cause of action is founded. The claimant must be diligent in discovering those facts.
In rejecting the reviewing judge's conclusion regarding discoverability, the Court considered these two operative concepts – diligence and knowledge – finding that the reviewing judge had applied too low a standard for diligence, and too high a standard for knowledge.
Reasonable diligence in discovering the facts
The Court held it was "plainly wrong" to say the Respondents had no reason to review the Offering Memorandum when they received the email notice. To the contrary, the Trustee's report acknowledged that many, if not all, of the Respondents would have become aware at that time that misrepresentations relating to the nature of Razor's business had been made.
The Court also placed some weight on the fact that two investors (including the Appellant) had reviewed the Offering Memorandum upon receiving the email notice to find the basis for their own actions against Horizon.
Perhaps most importantly, the Court held that, in light of the central role of the offering memorandum in the securities, the standard of reasonable diligence "requires [injured investors] to pay attention to the document when a loss is suffered". This holding suggests more generally that the standard for reasonable diligence in discovering a statutory cause of action may be coloured by the statutory scheme.
Knowledge of the facts underlying a cause of action
The Court of Appeal articulated and applied an established standard for the state of knowledge required to satisfy the discoverability rule: a claim is discovered "when the known facts suggest the pursuit of an investigation into a cause of action". This may include seeking expert advice – such as consulting a lawyer, as the Appellant did shortly after receiving the email notice.
The Court held that the investors' knowledge that they had been defrauded by traders chosen by Horizon should have been enough to suggest pursuit of an investigation.
For these reasons, the Court of Appeal allowed the appeal and declared that the limitation period for the Respondents' claims had expired.
Roberts v. E. Sands & Associates Inc., 2014 BCCA 122
Date of Decision: April 2, 2014
1. Although common law claims for negligent misrepresentation have a more generous limitation period of six years, misrepresentation claims under the Securities Act do not require claimants to prove they relied on the misrepresentations, which is a required element of common law claims for the tort of misrepresentation.
To view the original article, please click here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.