Canada: Nova Scotia Court Of Appeal Not Amused At Bank's Attempt To "Whistle And Chew At The Same Time"

Last Updated: August 20 2015
Article by Angus T. McKinnon

After more than 10 years of complex, aggressively fought litigation, the Nova Scotia Court of Appeal had its say concerning National Bank Financial Ltd.'s ("NBFL") litigation tactics – it was not amused.

"Enough is enough. By your actions you have forfeited the right to participate and you will be held accountable for the harm and grief you have caused others."1

In lengthy and detailed reasons for judgment, Mr. Justice Saunders, writing for the unanimous panel of the Court of Appeal, found that NBFL's conduct during the course of the litigation constituted an abuse of process. The court struck out the Bank's claims, counterclaims and defences, wiped out judgments granted in its favour and increased the damages that had been awarded against it. The court found that the litigation had "shattered" friendships, "damaged" many individuals' reputations and led to 10 years of "misery, humiliation and expense". The court's central finding was that the Bank had adopted a position in the litigation that it knew was not supported by the facts and that was contrary to what it had secretly admitted to in a settlement agreement with the Nova Scotia Securities Commission. The following is a brief review of the background to the proceedings and the central findings made by the court. The decision itself contains a detailed review of the law concerning abuse of process and the jurisdiction of appellate courts to fashion remedies.

A Bit of Background

Knowledge House Inc. ("KHI") was a struggling learning technology provider operating in Halifax during the late 1980's and 1990's. Initially trading as a penny stock on the Montreal Stock Exchange, its shares soared from 9 cents to a peak of $9.85 after transferring its listing to the Toronto Stock Exchange in 1999. In August, 2001 its share price collapsed, leaving investors with enormous losses and, in some cases, large outstanding debts owing on their margin accounts. The trial judge found:

"With the help of other insiders, including some of those who had sold their companies to KHI for shares, a lawyer and Bruce Clarke, a stock broker employed by NBFL, the President of the KHI, kept KHI afloat until August 2001 by manipulative and artificial trading in KHI shares, while attempting to create a viable business and secure financing, deter existing shareholders from selling their shares, and entice wealthy individuals and institutions to invest.

The primary instrument of the artificial and manipulative trading in KHI shares was Bruce Clarke. The failure of NBFL to supervise Bruce Clarke facilitated that trading in a manner that was contrary to statutory and industry regulations, and NBFL's own rules."2

Shortly after KHI's collapse, NBFL commenced a series of actions against clients and former clients for unpaid debts on their margin accounts. When some of the defendants counterclaimed, alleging they were victims of a conspiracy for which the NBFL was liable, the NBFL denied that it had been part of any conspiracy, denied that it was vicariously liable for Mr. Clarke's actions and advanced its own claim against Mr. Clarke and KHI insiders alleging that they had conspired to manipulate KHI's shares. In 2005, NBFL discontinued the proceedings against all of the alleged conspirators save Mr. Clarke. However when it sought leave to amend its pleadings to withdraw its conspiracy allegations, leave was denied on the basis that no explanation had been provided for NBFL's change of position and the motion had been brought in bad faith.3

By 2008, there were 11 lawsuits underway involving more than 54 groups of parties. As a result of a series of settlements, five actions involving six groups of parties remained outstanding by 2012. These proceeded to trial together before Justice Warner. The trial commenced February 13, 2012, and continued until April 17, 2012, when it ended "much earlier than scheduled". NBFL called no evidence. Eight months later and while the trial judgment remained under reserve, a 2005 Settlement Agreement entered into between NBFL and the Nova Scotia Securities Commission became public and was brought to the trial judge's attention. After receiving submissions from the parties, Justice Warner concluded that the admissions contained in the Agreement were all contained in the documents and other evidence tendered at trial and he need not rely on the admissions in the Settlement Agreement, save as regards punitive damages. Justice Warner went on to find that a conspiracy had existed amongst certain insiders. He awarded damages to certain of the investors for portions of their losses and damages to NBFL for the unpaid balances on the investors' margin accounts. He also awarded punitive damages against NBFL totalling $400,000.00, but without specific reference to the secret Settlement Agreement.

The Court of Appeal took an entirely different view of the import of the Settlement Agreement, but first a word about how it remained secret for so long.

The Secret Escrowed Settlement Agreement

Following the collapse of KHI, the Nova Scotia Securities Commission and the Investment Dealers Association of Canada each commenced investigations. In June, 2005, NBFL and the Securities Commission staff signed a Settlement Agreement in which the NBFL acknowledged that it had failed to supervise its broker, Bruce Clarke, and that he had used a personal trading account to facilitate the market manipulation of KHI's shares on behalf of company insiders. At the same time NBFL signed the Settlement Agreement, its counsel entered into an Escrow Agreement with Commission staff precluding the disclosure of the Agreement:

"... the Settlement Agreement will be held in escrow until such time as there is a final disposition of regulatory proceedings relating to trading activity in the common shares of Knowledge House Incorporated."4

In April, 2010, staff of the Securities Commission were being examined for discovery and were asked why no charges had ever been brought against NBFL. They refused to answer, citing undisclosed securities laws. The matter was referred to the Superior Court which ruled, in a sealed decision,5 that there was no basis for the question being refused however this decision was overturned on appeal6 by NBFL and the matter was referred back to the Commission for determination. In April, 2012 (as the civil trial was concluding) Commissioner Gruchy of the Securities Commission ruled that the discovery question should be answered and that the Escrow Agreement was invalid. He found:

"I can see no public interest in maintaining the escrow agreement. It has thwarted the established process for dealing with settlement agreements and has had the effect of keeping the settlement agreement confidential for a completely unreasonable length of time.

[...] it is this public confidence that comes to the fore in the present matter as the existence of the escrow agreement – which has kept a settlement agreement secret for seven years – cannot possibly be viewed by a right thinking member of the public, the man on the Clapham omnibus or any other standard of reasonableness, as something that would inspire confidence in securities regulation in Nova Scotia. For these reasons I decline to maintain the escrow agreement."7

NBFL again appealed this decision, however its appeal was dismissed in September, 20128 paving the way for the Settlement Agreement to become public and brought to the attention of Justice Warner. Interestingly, the fact of and the terms of the Settlement Agreement had become known to the investors' counsel prior to the trial as a result of the various proceedings described above. However, under the terms of its disclosure to counsel, he was forbidden from making it public, seeking to tender it in evidence or even telling his clients of its existence. This surreal circumstance led trial counsel to advise the trial judge:

"I am not allowed to tell my clients what is the single biggest factor in their favour. I am not allowed to tell you the single most important fact about this entire matter."9

The Decision of the Court of Appeal

Appeals from Justice Warner's trial decisions were brought by NBFL, the investors and the sole insider who had been held liable for conspiracy. The central thrust of the investors appeal was that NBFL's conduct amounted to an abuse of process, calling for a stronger response than the punitive damages award made at trial. The Court of Appeal agreed.

"At this juncture, it is enough to say that National Bank's actions throughout these proceedings have proven to be so serious as to amount to an abuse of process, calling for extreme, unequivocal, and permanent sanctions. For more than 10 years the Bank maintained a position and asserted facts in its pleadings which it knew to be false. It deliberately set out on a path to hide the truth from the Court and opposing parties. In doing so it deprived the adjudicative process of high relevant and critically important facts.

It would be a mistake to characterize these appeals, and their disposition, as turning on a mere failure to disclose. While undoubtedly that dereliction is serious enough, the misconduct here also involves a deliberate and ongoing pattern of deception amounting to an intentional misleading of the Court, something so egregious as to strike the very heart of the administration of justice."10

Justice Saunders conducted a detailed review of the law concerning abuse of process and the power of the court on appeal to strike pleadings and stay proceedings. He pointed out that the abuse of process doctrine focuses on the integrity of the adjudicative process and that the court was entitled to consider the conduct of a party over the history of the proceeding. Noting that the doctrine was most frequently applied in the context of criminal and administrative proceedings, and that the Supreme Court had not addressed the application of it in the context of civil litigation, he nevertheless determined that it was available to enable the court to prevent the misuse of its own procedures "where such violations have proven to be manifestly unfair to a party to the litigation ... or in some other way brought the administration of justice into disrepute."11

Justice Saunders found that the circumstances of the case were such that an extreme response was called for.

"The words and actions of the Bank in perpetuating this subterfuge must be denounced by this Court in the strongest possible terms. In the vernacular, the Bank tried to "whistle and chew at the same time" without thought or regard for the harm its posturing caused others."12

He reviewed the various basis upon which NBFL sought to justify its failure to disclose the Settlement Agreement referring to them as "the Bank's Excuses". He reviewed prior decisions of the Superior Court and the Court of Appeal itself in the various interlocutory proceedings leading up to trial, noting the occasions on which the courts had expressed its concerns with the Bank's tactics.

"I do have concerns about NBFL's approach to this litigation. Its original counsel were removed because of breach of solicitor/client privilege; its amendments of pleadings motion was denied, in part, upon a finding of bad faith in bringing the motion; and NBFL is making a motion with respect to conflict of interest by the applicant's counsel which does not arise out of dealings with NBFL itself but with respect to the relations of Mr. Dunlop's clients inter se ..."13

"A review of the twists and turns in the pleadings and disclosure phases of this litigation over the past seven years leads to the common sense conclusion that those litigants with the deeper pockets have a better likelihood to have their case properly prepared and presented to the Court then those who have empty or near empty pockets. It is obvious that all of the litigants to these actions do not have the same financial stake in the action (that is in absolute terms or in relative terms), or the same capacity to protect their interests in this litigation."14

The trial judge was similarly concerned with NBFL's tactics:

"The aggressive, no-holds-barred, prolonged pursuit of litigation against Dunham, with respect to liability more than quantum, in light of what NBFL knew when it commenced the main action about Clarke's misconduct, and which it defended in motions before Justice Scanlan in 2005, is not justifiable. It was, in hindsight, outrageous."15

"NBFL's conduct of its litigation against Weir and Blackwood has been outrageous. It promised to settle, then reneged, and waged an aggressive, no-holds-barred, defence of their claim, especially respecting liability."16

"The vulnerability of the Plaintiffs and consequential abuse of power by the Defendant reflected a substantial power imbalance. Many other "outside" investors dropped out of the litigation between 2001 and the commencement of trial 11 years later. NBFL has benefited from the fact that many could not stay in the arena with it."17

The result of the Court of Appeal's decision to strike out NBFL's pleadings and stay its proceedings was that the damages awards made in favour of the investors were increased. The Court of Appeal overturned the trial judge's finding that certain of the investors had, at specific points in time, become aware of the insiders' conduct and thereby ratified the behaviour resulting in them not recovering damages for their subsequent investments. The result was an increase in the damage awards to those investors. NBFL's conduct was also sufficient to deny it the right to pursue the outstanding balances on the investors' margin accounts. The Court of Appeal vitiated those debts. While accepting the trial judge was best placed to assess the credibility of the witnesses before it, the Court of Appeal nevertheless overturned his finding of conspiracy as against the sole insider who had remained a defendant by the time the trial commenced. Finally, the Court of Appeal awarded a total of $3 million dollars in punitive damages and solicitor and client costs to those represented by counsel. Even the insider who was not represented by counsel was awarded $50,000.00 in costs!

In order to leave no doubt about its view of the Bank's conduct, the Court of Appeal concluded its reasons in the following language:

"Canadians have the right to expect that the integrity of the adjudication process in this country's courts and tribunals will be preserved. In cases where fairness is not achieved, respect for the integrity of the administration of justice will be diminished ...

If people are willing to have their disputes decided in open court, where their personal and professional lives will be put on public display, they need to know that the courts' own adjudicative processes can be trusted and will not be abused ...

...

This is such a rare and exceptional case. It does not reflect the fair and honourable way by which business or litigation is to be conducted in Nova Scotia. Because of the Bank's egregious misconduct the appellants were forced to endure more than 10 years of unwarranted litigation to say nothing of the monumental expense, inconvenience, delays, frustration and waste of time that entailed."18

The question is, will the Supreme Court of Canada agree?

Footnotes

[1] Ibid, para. 1.

[2] 2013 NSSC 248 (CanLii), p.4.

[3] 2008 NSSC 135 (CanLii).

[4] 2015 NSCA 47 (CanLii) para. 53.

[5] 2011 NSSC 239 (CanLii).

[6] 2012 NSCA 12 (CanLii).

[7] 2015 NSCA 47 (CanLii) para. 88.

[8] 2012 NSCA 99 (CanLii).

[9] 2015 NSCA 47, para. 324.

[10] Ibid, paras. 8 and 9.

[11] Ibid, para. 235.

[12] Ibid, para. 326.

[13] 2010 NSSC 214 (CanLii) para. 83.

[14] 2008 NSSC 135 (CanLii) para. 163.

[15] 2013 NSSC 248 (CanLii), para. 892.

[16] Ibid, para. 915.

[17] Ibid, paras. 923-924.

[18] 2015 NSCA 47 (CanLii) paras. 466, 467 and 469.

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