Sharbern Holding Inc. v. Vancouver Airport Centre Ltd.; Sharbern Holding Inc. v. MM&R Valuation Services, Inc.

2006 BCCA 96 Sharbern Holding Inc. v. Vancouver Airport Centre Ltd.; Sharbern Holding Inc. v. MM&R Valuation Services, Inc. COURT OF APPEAL FOR BRITISH COLUMBIA Citation: Sharbern Holding Inc. v. Vancouver Airport Centre Ltd.; Sharbern Holding Inc. v. MM&R Valuation Services, Inc., 2006 BCCA 96 Date: 20060302 Docket: CA032793; CA032789 Docket: CA032793 Between: Sharbern Holding Inc. Respondent (Plaintiff) And Vancouver Airport Centre Ltd., Larco Hospitality Management Inc. and MM&R Valuation Services, Inc. doing business as HVS International - Canada and HVS International - Canada Appellants (Defendants) Docket: CA032789 Between: Sharbern Holding Inc. Respondent (Plaintiff) And MM&R Valuation Services, Inc. doing business as HVS International - Canada and HVS International -- Canada Appellant (Defendant) Before: The Honourable Mr. Justice Hall The Honourable Mr. Justice Mackenzie The Honourable Madam Justice Kirkpatrick R.J.R. Hordo, Q.C., M. A. Lankhani and E. Swartz Counsel for the Appellants Vancouver Airport Centre Ltd., Larco Hospitality Management Inc. and Larco Enterprises Inc. G.M. Nijman and C.M. York Counsel for the Appellants MM&R Valuation Services Inc. dba HVS International - Canada and HVS International - Canada S. Schachter, Q.C. and J. Lawn Counsel for the Respondent Place and Date of Hearing: Vancouver, British Columbia January 18, 2006 Place and Date of Judgment: Vancouver, British Columbia March 2, 2006 Written Reasons by: The Honourable Mr. Justice Mackenzie Concurred in by: The Honourable Mr. Justice Hall The Honourable Madam Justice Kirkpatrick Reasons for Judgment of the Honourable Mr. Justice Mackenzie: [1] This appeal is from an order certifying this action as a class proceeding under the Class Proceedings Act, R.S.B.C. 1996, c. 50. The class consists of investors who purchased strata lots in the Vancouver Airport Hilton hotel (the "Airport Hilton") from a developer on terms that included management of the hotel by an affiliate of the developer under a long-term operating agreement. The appellants contend that the chambers judge erred in concluding that a class proceeding would be the preferable procedure for the fair and efficient resolution of the common issues, as required by s. 4(1)(d) of the Act. For the reasons that follow, I am satisfied that the chambers judge did not make any reversible error in ordering certification. [2] The certified class comprises the owners and former owners (the "Owners") of strata lots in the Airport Hilton who purchased their strata lots from the defendant/appellant, Vancouver Airport Centre Ltd. ("VAC") pursuant to an Offering Memorandum and Disclosure Statement dated 3 February 1998, as amended 8 July 1998 (the "Offering Memorandum"). The plaintiff, Sharbern Holding Inc. ("Sharbern"), claims that VAC and its affiliate, Larco Hospitality Management Inc., formerly HMS Hospital Management Services Ltd. ("HMS"), are in a conflict of interest because they are managing and operating the hotel while simultaneously managing and operating competing hotels, including the Vancouver Airport Marriott Hotel (the "Airport Marriott") and the Best Western Richmond Inn under separate hotel asset management agreements ("HAMAs"). Sharbern claims that VAC's conflict of interest is amplified by differences between the Airport Hilton and Airport Marriott HAMAs that give VAC and HMS incentives to prefer the interests of the Airport Marriott owners. [3] Sharbern claims against VAC and HMS for breach of trust and breach of fiduciary duty. It also alleges that VAC made negligent or fraudulent misrepresentations in the Offering Memorandum with respect to conflicts of interest. Sharbern further alleges that financial projections included in the Offering Memorandum were negligently misrepresented by VAC and the appellant, MM&R Valuation Services, Inc. ("MM&R"). Sharbern asks for rescission of the strata lot contracts or damages in the alternative, together with an accounting and other ancillary remedies. [4] The certification order appoints Sharbern as a representative plaintiff. The common issues as certified are as follows: (a) Trust Relationship: (i) Whether VAC and HMS are trustees of the revenues collected under the Hotel Asset Management Agreement defined in the Statement of Claim; and (ii) If so, the scope of the obligation of VAC and HMS to account for the trust funds received and expended in the management of the Hotel; (b) Fiduciary Duty: (i) Whether VAC and HMS owe fiduciary duties to the Class in respect of the operation of the Hotel and, if so, whether their fiduciary duties conflict with their interests with respect to the Airport Marriott or their duties to the unit owners of that hotel; (ii) Whether VAC and HMS have breached their fiduciary duties to the Class; (c) Misrepresentation - VAC: (i) Whether VAC owed a duty of care to the Class in respect of the impugned representations contained in the Offering Memorandum; (ii) Whether the impugned representations in the Offering Memorandum were material misrepresentations and, if so, whether VAC was negligent or fraudulent; (iii) Whether the members of the Class are deemed to have relied on the impugned representations of VAC pursuant to s. 75(2) of the Real Estate Act; (iv) Whether, subject to individual issues of reliance and individual defences, VAC is liable for negligent or fraudulent misrepresentation; (d) Misrepresentation - MM&R: (i) Whether MM&R owed a duty of care to the Class in respect of representations in the Offering Memorandum; (ii) Whether MM&R materially misrepresented to the Class that its projected occupancy rates and average daily room rates included in the Offering Memorandum were reasonable and, if so, whether MM&R was negligent; (iii) Whether, subject to individual issues of reliance and individual defences, MM&R is liable for misrepresentation; [5] The appellants do not directly challenge the common issues as defined but they contend that the chambers judge erred in concluding that the individual owners have no evidence in their knowledge, possession or control that will be relevant for common issues discovery or at the trial of the common issues. The appellants submit that individual discovery of owners is required and consequently certification of the action as a class proceeding is not the preferable procedure for the fair and efficient resolution of the identified common issues as required to satisfy s. 4(1)(d) of the Class Proceedings Act. The appellants submit that the preferable procedure is a multi-plaintiff action that has been commenced in the names of 126 of the owners, to be pursued in the event that the present action was not certified as a class proceeding. The chambers judge stayed proceedings in the multi-plaintiff action when she made the certification order. Background [6] The Airport Hilton and the Airport Marriott are strata-titled hotels, each having 237 hotel strata lots in twin towers connected by a retail concourse and parkade. At all material times, VAC and HMS managed and operated both the Airport Hilton and the Airport Marriott as well as the Best Western Richmond Inn, a third hotel located on an adjacent property. In operating the three hotels, VAC and HMS have integrated marketing efforts and shared employees, contractors and agents, requiring the allocation of costs and services. The Airport Hilton and the Airport Marriott are managed under separate HAMAs. All 237 lots in the Airport Marriott were sold in September 1996 and it opened for business on 15 June 1998. Purchasers of lots in the Airport Marriott were offered a guaranteed minimum rate of return of 12 per cent per year for a period of five years. [7] The lots in the Airport Hilton were marketed commencing in February 1998 pursuant to the Offering Memorandum, issued pursuant to the Real Estate Act, R.S.B.C. 1996, c. 397. The Offering Memorandum attached a joinder and covenant agreement in which each owner would agree to be bound by the Hilton HAMA. It provided that VAC was appointed as the sole and exclusive manager of the Hilton. The Offering Memorandum included excerpts of a market study prepared by MM&R containing projected room rates and occupancy rates for the first five years of operation. On the basis of the projected room rates and occupancies, VAC projected an average annual cash return to investors of 16.6 per cent for the years 2000-2004 inclusive. The Hilton Owners, unlike the Marriott Owners, were not given a guaranteed rate of return on their investment. In March 1998, 215 of the 237 lots in the Airport Hilton were sold at an average sale price of about $155,000 for a total amount of approximately $33.25 million. VAC retained the remaining 22 lots. [8] Under the Hilton HAMA, VAC and HMS, its affiliated subcontractor, have the right to manage the Airport Hilton for 20 years with the proviso that the term may be extended for two further ten-year terms at the discretion of HMS. [9] The alleged misrepresentations with respect to the conflict of interest are contained in two paragraphs of the Offering Memorandum as follows: 4.9(i) Liabilities and Obligations of the Developer. The Developer is currently developing the Vancouver Airport Marriott, a 237 room full service hotel, on the Parent Property. The Vancouver Airport Marriott is scheduled for completion in or about June of 1998. In this regard, the Developer has entered into purchase agreements, ancillary documents similar in form and substance to the Agreements, and certain additional agreements with purchasers of strata lots comprising the Vancouver Airport Marriott, all of which give rise to certain liabilities and obligations of the Developer which could impact upon its ability to perform its obligations under the Agreements. 4.11 Conflicts of Interest The Developer is not aware of any existing or potential conflicts of interest among the Developer, the directors and officers of the Developer, Larco Investments Ltd. as the shareholder of the Developer or those persons providing professional services to the Developer that could reasonably be expected to materially affect the purchaser's investment decision. An affiliate of the Developer will be entitled to a fee payable to the manager under the Management Agreement and the Developer is entitled to income from Hotel Strata Lots which the Developer retains. [10] The Airport Marriott and Airport Hilton HAMAs differ in certain respects. At the Airport Marriott, VAC earns five per cent of the Gross Revenue Rental, as defined, and a possible additional earned incentive fee. At the Airport Hilton, VAC earns three per cent of the Gross Revenue Rental without provision for an incentive fee. As noted earlier, the Airport Marriott Owners have a guaranteed minimum return on investment of 12 per cent for five years; there is no guaranteed return to the Airport Hilton Owners. Sharbern alleges that the differing terms of the two HAMAs provide an incentive for VAC and HMS to prefer the interests of the Airport Marriott to that of the Airport Hilton in the management operation of the two hotels and the allocation of common expenses and that this represents a conflict of interest "that could reasonably be expected to materially affect the [Owners'] investment decision" within the meaning of Article 4.11. Thus the failure to disclose the terms of the Marriott HAMAs in the Offering Memorandum and declare a conflict of interest is alleged to be an actionable misrepresentation. [11] The Offering Memorandum also included MM&R's report which projected financial returns based on assumptions with respect to annual strata fees, occupancy rates and average daily room rates. The actual experience of the Airport Hilton was substantially below the projections. Sharbern asserts that the assumptions underlying the projected annual cash returns were not reasonable and both MM&R and VAC were negligent in projecting cash returns based on those unreasonable assumptions. The Issues [12] The appellants do not question that the trust and fiduciary duty common issues can be tried without further discovery of individual owners. The appeal centres on the common issues of misrepresentation with respect to conflict of interest and the financial projections contained in the Offering Memorandum. Before the chambers judge, the appellants contended that determination of those issues could not be accomplished without providing the appellants the opportunity to obtain discovery of documents from owners in the class as well as oral examination for discovery from at least some of those owners beyond Sharbern as representative plaintiff. Such discovery, as well as the evidence it would produce, would be sufficiently extensive that a class proceeding to resolve those issues was unsuitable and not a preferable procedure for the resolution of the common issues as required to satisfy s. 4(1)(d) of the Class Proceedings Act. [13] The appellants asserted that the multi-plaintiff action was a preferable procedure for trying the litigation. [14] The trial judge rejected that submission. In so doing she said: [111] The defendants argue that even if the issue of whether the representations were true or reasonable are common issues, there remains the question of whether the representations were material. They say the materiality of the financial projections and the statement concerning conflict of interest are individual issues requiring discovery of each Owner. [112] In response, Sharbern asked how either representation could be anything other than material, given the nature of the investment and the obligation to issue a prospectus disclosing all facts material to that investment. With respect to the statement concerning conflict of interest, Sharbern invited consideration of the converse proposition - that is, a statement in the Offering Memorandum that VAC and HMS would be in a conflict of interest in managing the hotel for the next 20 years. Such a disclosure would surely be material to any prospective investor. Sharbern says this is a case where the materiality of the representation can be determined on the face of the document, without considering the individual circumstances of the investors. [113] Sharbern submits that materiality is an issue quite distinct from inducement or reliance. In support of that proposition, it relies on the following excerpt from Spencer Bower and Turner, The Law of Actionable Misrepresentation 3rd ed. (London: Butterworths, 1974) at paras. 124-6: Materiality is a thing distinct from inducement. Each is a question of fact, and each must be separately proved. A representation is material when its tendency, or its natural and probable result, is to induce the representee to enter into the contract or transaction which in fact he did enter into, or otherwise to alter his position in the manner in which he did in fact alter it. For the purpose of determining the question of materiality in any case, as distinct from inducement, the view of either of the parties are of no importance whatever. If in any ordinary case a representation was not material, the fact that the representee thought at the time, or says at trial, that it was, cannot make it so; on the other hand, the fact that the representee at the time considered a material representation to be immaterial, does not negative its materiality, though of course it destroys all prospect of establishing actual inducement. [114] Sharbern accepts that reliance (with the possible exception of deemed reliance under the Real Estate Act) raises individual issues which may be resolved in whatever procedure the Court decides is appropriate after the determination of the common issues. [115] I accept Sharbern's argument that the materiality of a representation is an issue distinct from inducement (and that inducement relates to the reliance issue). The materiality of the representation that there were no conflicts of interest can be determined on the face of the Offering Memorandum. Whether the statement induced the Owners to purchase their units is a separate issue. [116] The materiality of the financial projections, which were based on room rates and occupancy rates, raises the same issue. The Offering Memorandum describes the ownership of units in the Airport Hilton as an investment opportunity, and projects an average annual return of 16.6% over five years. I do not accept (as argued by MM&R) that the projected room and occupancy rates ought to be viewed separately from the financial projections. The latter are directly tied to the former. The materiality of these projections is apparent from the Offering Memorandum itself, and do not require individual discovery of the investors. Whether the projections induced the investors to act as they did is another question which may require individual inquiries. [Underlining added.] [15] The appellants contend that the conclusion of the chambers judge that materiality could be determined on the face of the Offering Memorandum without requiring evidence from individual owners is an error of law that undermines her overall analysis. The appellants say that evidence from individual owners may be relevant to the issue of materiality of the representation that there were no conflicts of interest and they are entitled to discovery of the Owners to pursue such evidence. The chambers judge has erroneously foreclosed those inquiries in advance of the trial of the common issues. [16] The narrow issue, then, is whether evidence from individual owners could reasonably be relevant to the issue of materiality of the representations. The statement of the common issues clearly identifies issues of reliance as individual issues to be deferred until after the trial of the common issues and discovery at that stage of individual owners is not precluded. Sharbern will rely on the deemed reliance provision of s. 75(2) of the Real Estate Act, as the enactment stood at the material time, to overcome any common law requirement to prove reliance by individual owners. [17] There is a separate reliance issue involving one owner, Tevan Trading Ltd., which purchased nine lots in the hotel and may be barred by the number of lots purchased from taking the benefit of the deemed reliance provision of the Act. Tevan Trading has been designated as a separate sub-class and the issue of its status with respect to the deemed reliance provision is to be determined at a later date. The chambers judge rejected discovery of Tevan Trading before trial of the common issues, subject to the appellants' ability to renew its application for discovery on new material. I think it is fair to say, however, that the chambers judge's reasons have effectively determined that evidence from Tevan Trading Ltd. and its principal is not relevant on the question of the materiality of the representations. Analysis [18] The appellants submit that it is an error of law to conclude that the materiality of the impugned representations can be determined on the face of the Offering Memorandum and they contend that evidence of individual owners may be probative of that issue. They rely principally on the judgment of this Court in Inmet Mining Corp. v. Homestake Canada Inc. (2003), 24 B.C.L.R. (4th) 1, 2003 BCCA 610. That case involved a dispute over an agreement by Homestake to purchase a gold mine from Inmet. Homestake refused to complete the purchase of the mine on the ground that Inmet had failed to make required disclosure of material facts. Inmet sued for specific performance of the agreement and succeeded in obtaining judgment for $88,200,000 as equitable damages in lieu of specific performance. On the issue of the materiality of disclosure, Levine J.A. quoted with approval (at para. 26) the standard of materiality applied to proxy solicitations by the Securities and Exchange Commission rule as stated by the United States Supreme Court in TSC Industries Inc. v. Northway Inc., 426 U.S. 438, 48 L. Ed. 2d 757, 96 S. Ct. 2126 (1976) at 766 (L. Ed.): The general standard of materiality that we think best comports with the policies of Rule 14a-9 is as follows: An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote. This standard is fully consistent with Mills' general description of materiality as a requirement that "the defect have a significant propensity to affect the voting process." It does not require proof of a substantial likelihood that disclosure of the omitted fact would have caused the reasonable investor to change his vote. What the standard does contemplate is a showing of a substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder. Put another way, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the "total mix" of information made available. [Italics in original, underlining by Levine J.A.] [19] Levine J.A. summarized the TSC standard as adapted to the facts of Inmet in these terms: [28] The standard of materiality described in TSC as adapted to this case would be: a substantial likelihood that disclosure of the omitted fact would have assumed actual significance in the deliberations of the reasonable purchaser, or would have been viewed by the reasonable purchaser as having significantly altered the total mix of information made available. It is clear from this passage that the TSC test of materiality is objective, that of the reasonable shareholder. She then added: [29] What is material in a contractual context will depend on the nature of the contract, who the parties are, and the state of their knowledge about the subject-matter of the contract. [Underlining added.] [20] The appellants say that this final observation necessarily implies that the knowledge of the purchaser, not only the knowledge of the vendor, was relevant to the issue of materiality. They submit that the investors' potential knowledge is similarly relevant here. [21] In my view, this submission fails to recognize a critical difference between negotiated bilateral contracts and multi-party public solicitations. The knowledge of a purchaser of shares is not suggested as probative in the objective standard of materiality delineated in TSC and the Court in Inmet noted no inconsistency between that standard and the receipt of subjective evidence of the parties to the Inmet contract. Comment on the distinction was unnecessary because of the obvious difference between a proxy solicitation prepared unilaterally by the issuer to fulfil statutory disclosure obligations and a bilateral negotiated contract where the subject of knowledge of the contracting parties may be probative of the intention of the parties expressed in the document. [22] The normal rule in contract is that the words used by the parties are to be construed objectively in accordance with their plain and ordinary meaning. That rule is modified is circumstances where the parties have a common intention to give words a specialized meaning different from the ordinary meaning that would otherwise be attached to them. The two parties to the Inmet contract were sophisticated mining companies who negotiated a specialized contract of some complexity. It was reasonable to explore the subjective knowledge of the parties in interpreting the meaning they attached to Inmet's obligation to disclose "material facts" that could have a "material adverse effect" on the operations or prospects of the mine and its application to the established facts. [23] The facts here are entirely different. The Offering Memorandum is a document prepared unilaterally in compliance with statutory obligations and extends an offer to a wide range of investors in an open market and assumes no independent knowledge or sophistication on the part of prospective investors. The Offering Memorandum is analogous to the proxy solicitation in TSC and the standard of materiality is similarly the objective standard of a reasonable investor. The appellants argued that this objective standard can best be determined with reference to the actual state of knowledge of the investors themselves. While such a connection might logically be made, the probative value of such individual knowledge is likely to be so tenuous that I think it can be said to be legally irrelevant. [24] Evidence that is legally irrelevant, practically speaking, is evidence that is not worth submitting. Addressing legal relevance, Professor Wigmore observed that there is a "rough and practical quality noticeable in the whole law of probative value; for the Court will of course allow to be considered only such evidence as is worth submitting [to be judged] by the most common and practicable tests." Wigmore on Evidence, Cdn. ed., para. 28. The "rough and practical" dimension of prospective probative value also applies to discovery and I think that the prospect of obtaining evidence of significant probative value on the issue of materiality from individual investors was so remote that the chambers judge was entitled to exercise her discretion to refuse individual discovery and assess the preferable procedure question on that basis. In my view, the discovery of the class members individually would be procedurally oppressive in the circumstances of this case. [25] The statement by the chambers judge that the issue of the materiality of the conflict of interest representation is to be determined "on the face of the Offering Memorandum" was made in the context of the probative value of evidence of individual class members. If the issue cannot be resolved by common sense inferences from the general circumstances surrounding the offer, materiality will likely be determined primarily on the basis of expert evidence as to the knowledge of a reasonable investor. I do not think that the ruling of the chambers judge necessarily excludes evidence from appellants on that issue if it has significant probative value on the objective standard of materiality. The chambers judge also left open the possibility of discovery of particular investors on that issue if the appellants can lay a foundation for discovery, by demonstrating that the evidence from that investor may have significant probative value to the standard of the objectively reasonable investor and is thereby legally relevant. No such foundation was advanced before the chambers judge or before us. [26] It follows that I see no inconsistency between the chambers judge's conclusion and the judgment of this court in Inmet. The same applies to Bragg v. Noel Developments Ltd., [1998] B.C.J. No. 1504 (S.C.) (Q.L.). There the purchaser sued to recover his deposit on a contract to purchase a residential condominium unit, alleging material changes to the floor plan in breach of the contract which allowed for "minor modification" considered "desirable and reasonable" by the project architect. Holmes J. heard evidence from experts called by both parties but he also allowed subjective evidence from the plaintiff purchaser. He said (at para 52): In my view, the changes must take into consideration the purchaser's perspective. The standard should be that of a reasonable person, but subjective considerations of the purchaser [should] also be taken into account. The purchase of a residence, with all that entails, is a very personal matter. It is expensive, and the decisions involved not easily changed. In the circumstances here, the plaintiff was required to pay before seeing what he actually would receive. That makes the detail of what is represented extremely important. He relied on the plaintiff's evidence in finding one of the changes in the floor plan to be more than a minor modification, although in the result the plaintiff failed because he had affirmed the contract after becoming aware of the change. Even though the judge viewed the "minor modification" standard as objective, he considered the plaintiff's subjective evidence in determining that standard because of the personal dimension of the purchase. In effect, he decided that the contract intended some latitude be given to the purchaser's subjective view in determining the scope of minor modifications. Here the strata lots were purchased as investments and there is no personal subjective quality imported into the investment decision. In my view, Bragg does not assist the appellants. [27] I think that the objective standard of materiality to be imported into the Offering Memorandum is reinforced by the provision of s. 75(2)(a) of the Real Estate Act that a purchaser is deemed to have relied on the representations made without having to prove reliance. The appellants note that the Act was subsequently amended to provide an exception where the defendant proves that the purchaser had knowledge of the misrepresentation at the time at which the purchaser received the disclosure statement (see Real Estate Development Marketing Act, S.B.C. 2004, c. 41, s. 22(5)). That exception was not in the statute at the material time and, subject to the exception for multiple purchases, the deeming provision was absolute. [28] The appellants also referred us to Kerr v. Danier Leather Inc. (2005), 144 A.C.W.S. (3d) 370, [2005] O.J. No. 5388 (C.A.) (Q.L.). That case involved the subjective knowledge of a securities issuer and its principals that was relevant to certain alleged misrepresentation in a prospectus. The issue was whether management believed a forecast of revenues was reasonable at the material time which necessarily involves the subjective element of management's belief. The relevance of subjective knowledge of individual share purchasers did not arise. Conclusion [29] In the result, I am satisfied that the chambers judge made no reversible error in concluding that discovery of individual class members on the issue of the materiality of representations in the Offering Memorandum was not required and that a class proceeding was the preferable procedure for the resolution of the common issues on that basis. I would therefore dismiss the appeal. "The Honourable Mr. Justice Mackenzie" I AGREE: "The Honourable Mr. Justice Hall" I AGREE: "The Honourable Madam Justice Kirkpatrick"