In a case involving an Ontario law in which directors’ and officers’ liability insurers are said to have a “critical and unique interest,” the Supreme Court of Canada announced Friday it is allowing a class action lawsuit against the Canadian Imperial Bank of Commerce – as well as four former senior executives – to proceed.
Court records indicate that CIBC’s stock price dropped 37% between May 31, 2007 and Feb. 28, 2008, and the bank incurred after-tax losses of more than $6 billion due to its investments in the United States residential mortgage market.
In their lawsuit against the bank, shareholders essentially allege, among other things, that CIBC officials failed to disclose, in 2007, the bank’s exposure to the U.S. mortgage market through collateralized debt obligations and credit default swap (CDS) contracts. The allegations have not been proven in court.
Part XXIII.1 of Ontario’s Securities Act took effect at the end of 2005. Section 138.3 (1) of that law “creates a statutory cause of action for misrepresentation in the secondary securities market in favour of any person who acquires or disposes of the securities of an issuer between the time the document containing the representation was released and the time the misrepresentation was corrected,” wrote Mr. Justice George Strathy – then of the Ontario Superior Court of Justice – in a decision released in 2012.
Part XXIII.1 of the Securities Act also contains a three-year statute of limitations, in Section 138.14.
The representative plaintiffs (Howard Green and Anne Bell) in the class action against CIBC and the former executives filed their statement of claim in July, 2008. A notice of motion seeking leave – under Section 138.8 of Part XXIII.1 of Ontario’s Securities Act – was filed Jan. 21, 2010. The plaintiffs’ record was not completed until Jan. 15, 2011, after the three-year statute of limitations expired.
Justice Strathy – who has since been appointed Chief Justice of Ontario – ruled in 2012 that the lawsuit against CIBC was time-barred. That ruling was overturned on appeal. The Supreme Court of Canada dismissed CIBC’s appeal – as well as appeals from two other firms facing shareholder class-action lawsuits – in a divided ruling released Dec. 4, 2015.
In order to start an action for misrepresentation, under the Ontario Securities Act, plaintiffs must obtain leave of the court, Justice Strathy found in his 2012 ruling that was later overturned.
Insurance Bureau of Canada (IBC) has intervener status in the case and is essentially supporting CIBC’s position.
One issue before the courts was how Section 28 of Ontario’s Class Proceedings Act applies. That section stipulates when limitation periods are suspended and resumed.
“In order to grant leave, the court must be satisfied that (a) the action is being brought in good faith; and (b) there is a reasonable possibility that the action will be resolved in favour of the plaintiffs,” Justice Strathy noted in his 167-page ruling, released July 3, 2012. “The observations on the evidence that follow must be understood to have been made on the basis of that test, rather than on the more demanding ‘balance of probabilities’ standard that would apply to the trial of an action. Any findings of fact made on the leave motion should therefore be understood as provisional only.”
One question before the courts was whether – in a class action lawsuit, claiming both the Securities Act statutory cause of action and the common law tort of negligent misrepresentation – Section 28 of CPA can suspend the three-year limitation, if a court has yet to grant leave.
Section 28 of CPA states:
“Any limitation period applicable to a cause of action asserted in a class proceeding is suspended in favour of a class member on the commencement of the class proceeding and resumes running against the class member when,
(a) the member opts out of the class proceeding;
(b) an amendment that has the effect of excluding the member from the class is made to the certification order;
(c) a decertification order is made under section 10;
(d) the class proceeding is dismissed without an adjudication on the merits;
(e) the class proceeding is abandoned or discontinued with the approval of the court; or
(f) the class proceeding is settled with the approval of the court, unless the settlement provides otherwise.
Without Section 28 of CPA, “the commencement of a proceeding by a representative plaintiff would only suspend the limitation period with respect to that plaintiff; the limitation period governing other potential class members would continue to run during the certification proceedings,” wrote Madam Justice Andromache Karakatsanis of the Supreme Court of Canada, on behalf of herself and two of the other judges hearing CIBC’s appeal. “Thus, potential class members would have to initiate parallel individual proceedings to protect their rights from becoming statute-barred. Neither outcome – the inundation of the courts by parallel individual proceedings or the expiration of plaintiffs’ individual rights due to a delayed or failed certification process – is desirable.”
Justice Karakatsanis wrote the ruling on behalf of herself, Mr. Justice Michael Moldaver and Mr. Justice Clément Gascon. Those three judges found that the statutory actions against CIBC are not time barred and dismissed CIBC’s appeal.
A fourth judge – Mr. Justice Thomas Cromwell – wrote in a separate decision that he would grant leave nunc pro tunc and would also dismiss CIBC’s appeal.
The other Supreme Court of Canada judges who heard the appeal Feb. 9, 2015 – Chief Justice Beverley McLachlin, Madam Justice Suzanne Côté and Mr. Justice Marshall Rothstein (who retired Aug. 30) – dissented and would have allowed CIBC’s appeal.
Members of IBC who write D&O coverage “have a critical and unique interest in the leave requirement” under the Ontario Securities Act, “as it affects the way in which D&O insurers defend potential secondary market actions,” wrote lawyers for IBC, in the Bureau’s factum to the Supreme Court of Canada.
“Without a robust and meaningful leave test, public companies, D’s & O’s, and in turn, their D&O insurers, would be left exposed to meritless proceedings including ‘strike suits’ brought only to pressure potential defendants and their insurers into nuisance settlements,” IBC added in its factum supporting CIBC. “They would also be in the unanticipated position of incurring unnecessary defence costs early in the proceedings if the test was too low.”
The individual defendants in the lawsuit against CIBC were: Gerald McCaughey, CEO until September, 2014; Tom Woods, chief financial officer until 2007 and chief risk Officer from 2008 through 2013; Brian Shaw, former CEO of CIBC World Markets Inc.; and Ken Kilgour, CIBC’s former senior executive vice-president and chief risk officer.
In its Dec. 4, 2015 ruling, the highest court was also ruling on two separate shareholders’ lawsuits before the Supreme Court of Canada. In those, the corporate defendants were motion picture firm IMAX Corp. and Celestica Inc., a Toronto-based firm spun off from IBM that makes electronics equipment for computer, telecommunications and aerospace firms. IBC did not have intervener status in the Celestica and IMAX cases. The individual defendants in the lawsuit against Celestica were Stephen Delaney (chief executive officer of Celestica from 2004 through 2006) and Anthony Puppi (chief financial officer of Celestica from 1994 through 2007). There were eight individual defendants – including CEO Richard Gelfond and chairman Bradley Wechsler – in the lawsuit against IMAX.
In ruling that the class action lawsuit against CIBC was time-barred, Justice Strathy had cited a Court of Appeal for Ontario ruling, released Feb. 16, 2012, in favour of silicon metals firm Timminco Ltd. and several other individual and corporate defendants.
One effect of the Timminco ruling was that “there is no suspension of the three-year limitation period for class members when the representative plaintiff commences a class action for negligence which also seeks a s. 138.3 remedy but without first obtaining leave,” wrote Madam Justice Kathryn Feldman of the Court of Appeal for Ontario in CIBC. This, she added, “means that class members must do” what Section 28 of the Class Proceedings Act “was intended to obviate: commence their own action with leave in order to try to ensure that their action is brought within the limitation period.”
The four other Court of Appeal for Ontario judges hearing CIBC agreed.
IBC had argued that the Court of Appeal for Ontario “erred both in modifying its reasoning on the limitation issue in the Timminco Decision and in its interpretation of the leave requirement under section 138.8 of the Act.”
Section XXIII.1 of the OSA “is remedial legislation intended to promote the twin purposes of facilitating and enhancing access to justice for investors and deterring corporate misconduct and negligence,” Justice Karakatsanis of the Supreme Court of Canada wrote in CIBC.
The limitation period in that law “is restrictive in that it runs from the occurrence of the misrepresentation, or from a news release advising that leave has been granted to commence an action based on such misrepresentation, rather than from a prospective plaintiff’s discovery or awareness of that event,” she wrote.
The Supreme Court of Canada “should prefer an interpretation that does not frustrate the purposes” either the Securities Act or the Class Proceedings Act, she added.
Section 28 of CPA “is engaged at a very early stage in the litigation – the commencement of a class proceeding,” she wrote. “At this stage, the representative plaintiff must plead the constituent elements of the cause of action founding the right or claim in order to then apply for certification …. It is in this sense that the plaintiff ‘makes the claim’ or ‘invokes the legal right.’”
In order to make a claim or invoke a legal right, a plaintiff “must plead the essential factual elements required to constitute the cause of action,” Justice Karakatsanis added.
But obtaining leave of the court is not a requirement to constitute the cause of action, she suggested.