Plaintiffs in a secondary markets securities class action case involving CIBC and its subprime mortgage exposure may have been denied certification, but Ontario Superior Court Justice George Strathy’s lengthy decision indicates he saw merit in the case.
On July 3, Strathy ruled that the plaintiffs failed to obtain the required leave to proceed with the action within the three-year period mandated by the Ontario Securities Act. The plaintiffs’ request to certify common law claims for negligent misrepresentation was also rejected. However, Strathy indicated that had he found the limitation period had expired, he would have granted leave and certified the action as a class proceeding.
“It was very tough,” says John Archibald of Rochon Genova LLP, which represented the plaintiffs in Green v. Canadian Imperial Bank of Commerce. “To basically have it come down to a decision as Justice Strathy pointed out, on the penultimate date of hearing, is certainly frustrating.”
Archibald said the plaintiffs intend to appeal.
He says the fact that leave has been sought to the Supreme Court of Canada in Sharma v. Timminco Ltd., which Strathy relied on in Green, provides further hope for appeal.
In February of this year, shareholders seeking $540 million in a class action lawsuit against insolvent metal producer Timminco Ltd., saw much of their claim rejected by the Ontario Court of Appeal, which ruled that a legal time limit had run out.
“Personally, I think that Ontario Court of Appeal decision is wrong, and it’s clear from [Strathy’s] decision he agreed with the merits of our case in terms of showing there’s a reasonable possibility of success it will succeed on trial,” says Archibald.
Jasminka Kalajdzic, assistant professor at the University of Windsor law school, says it all came down to a technicality.
“The term that came to mind as I was reading the decision is triumph of form over substance,” says Kalajdzic. “CIBC survived this motion by the skin of its teeth.”
She says the Court of Appeal’s decision in Timminco resulted in a windfall for the defendants.
“I think there was potentially room for Justice Strathy to find there were special circumstances on the facts of this case to permit an extension of time, but he really felt constrained by the Court of Appeal’s reasoning in Timminco,” she says.
“In terms of his examination of the evidence that had been led for the motion for leave, CIBC does not come out wholly innocent. In terms of certification he would have easily found for the plaintiffs on all of the criteria for certification,” she says.
An Osler Hoskin & Harcourt LLP brief on the ruling suggests the Green v. CIBC decision “gives defendants to securities class actions cause for optimism,” and “suggests that a more restrictive approach is developing.”
What it might in fact do is help bring clarity to the process, says Michael Rosenberg, an associate at McCarthy Tétrault LLP and adjunct professor of class actions at the University of Toronto Faculty of Law.
“I think this decision will have consequences for the way that this kind of action is pursued in the future. I think one of the biggest changes we’re going to see is that the certification motion won’t be lumped together with the leave application if there is a prospect of proceeding more expeditiously by considering them separately,” says Rosenberg.
It is likely that leave will be sought independent of certification, recognizing the time constraints.
“I think we’re also likely to see this limitation period discussed at an earlier stage in case conferences that are held to plan the procedure for the class action. The judges will be aware of the fact there is this three-year limitation period that is running and putting pressure on the plaintiffs,” says Rosenberg.
In his decision, Strathy notes that if the plaintiffs had brought the issue to his attention earlier, it might have been possible to craft a solution where either the leave application was heard at an earlier date or the plaintiffs and defendant could have entered into an agreement to forgo reliance on the limitation period.
Kalajdzic says Strathy’s detailed reasons illustrating the strength of the plaintiff’s case highlight the injustice caused by the literal interpretation of the leave provision.
“It’s clear he took great pains to write very detailed reasons setting out what he thought was a strong case against the defendants,” she says.
In his decision, Strathy refers to the defendants and comments made in conference calls about the size and nature of CIBC’s subprime assets.
“These kinds of statements and description of the evidence don’t exonerate CIBC,” says Kalajdzic.
In paragraph 127, Strathy notes: “By the end of June and into July 2007, there was recognition at the Board level that CIBC had a serious problem on its hands.”
Kalajdzic agrees with Rosenberg and says any new actions under s. 138 of the Securities Act will require a change in the way parties prosecute these cases.
“It will require additional judicial resources to ensure that judges are available to hear these arguments within the three-year period but not only hear them, but decide them,” she says. “If class members are expected to obtain leave three years from the date of the misrepresentation being made, then a significant paradigm shift has to take place in terms of how detailed pleadings have to be, and how quickly plaintiffs have to bring issue and action.”
But it’s premature to call for a complete overhaul of the secondary markets securities regime, says Rosenberg.
“It’s true that limitation periods often produce harsh results but they are a fact of our civil procedure,” he says. “The question is can you find a workable solution given what the legislature has said about the appropriate limitation periods in a case like this?”
Another factor, he says, is s. 28 of the Class Proceedings Act, which says once a class action is commenced the limitation period is temporarily suspended as long as the class action is ongoing, and is interpreted to apply even if the party is not successful on certification. So even if an action is started and the court says it can’t be certified, all the individual plaintiffs can still pursue their own actions because the limitation period has been suspended.
“It’s a powerful weapon for the plaintiffs because it allows them to preserve their claims while they explore the possibility of a class action,” he says. “It’s the second leg of the debate here — when s. 28 starts and suspends the running of the limitation period. It won’t spring into action simply because the plaintiffs have sought leave to bring a class action under s. 138 of the Securities Act, it requires leave having been granted, then certification sought.”