Collette v. Dundee Securities Corporation

2006 BCSC 820 Collette v. Dundee Securities Corporation

IN THE SUPREME COURT OF BRITISH COLUMBIA Citation: Collette v. Dundee Securities Corporation, 2006 BCSC 820 Date: 20060524 Docket: A993104 Registry: Vancouver Between: Guy J. Collette and Janice Myhre Plaintiffs And Dundee Securities Corporation / Corporation De Valeurs Mobilieres Dundee Defendant And Multimetro Mortgage Corporation and Ken Megale Third Parties Before: The Honourable Madam Justice Wedge Reasons for Judgment Counsel for the Plaintiffs D. G. Fredricksen Counsel for the Defendant N. Campbell D. E. Gruber No one appearing for the Third Parties Date and Place of Trial/Hearing: April 27, 2006 Vancouver, B.C.

1. Introduction [1] The Court of Appeal certified the plaintiffs' action as a class proceeding in March of 2004 (Collette v. Great Pacific Management Co. Ltd. (2004), 26 B.C.L.R. (4th) 252, 2004 BCCA 110). The action is based on allegations of breach of contract, negligence and negligent misrepresentation arising from the defendant's sale of investment units offered by the third party, Multimetro Mortgage Corporation ("Multimetro"). [2] The parties jointly seek the Court's direction on the following issue: Having regard to the common issues which have been certified in this Class Proceeding, and having regard to the Reasons for Judgment of the British Columbia Court of Appeal in respect of the certification of this matter, is evidence of the alleged misconduct of Multimetro Mortgage Corporation in the administration of the Nanaimo Mortgage and Parksville Mortgage subsequent to the advance of all funds to the mortgagors relevant and admissible at the trial of the common issues? [3] For purposes of determining this issue, the parties have jointly formulated the following statement which they have asked the Court to assume is true: For the purposes of this hearing only, the parties agree that there is evidence which could support an argument by the Defendant that after the borrowers defaulted and Multimetro obtained Orders Absolute of foreclosure to both the Parksville and Nanaimo properties, Multimetro acted tortiously and in breach of its fiduciary duty to the unitholders in a manner that diminished the unitholders' security and/or equity in the properties which otherwise potentially could have been realized upon for distribution to them.

2. Background to the Application [4] The background to the action is described in the reasons of the Court of Appeal. For purposes of this application, the relevant facts are the following. [5] Multimetro acted as a mortgage broker, providing or arranging mortgage financing for borrowers who wished to purchase and develop commercial property. Once Multimetro entered into an agreement with a prospective borrower, it would fund the prospective mortgage by selling units in the particular mortgage to investors. [6] Multimetro syndicated the mortgages into units for investors. It engaged investment advisor firms such as the defendant Great Pacific (now known as Dundee Securities Corporation but also previously known as Cartier Partners Securities Inc.) to market the units to their clients in exchange for commissions. [7] The investments giving rise to this class action concerned two mortgage investments related to proposed commercial developments in Nanaimo and Parksville. [8] The Nanaimo project involved the proposed purchase and redevelopment of a hotel to be financed by a mortgage to which I will refer to as the Nanaimo Mortgage. The Nanaimo Mortgage was for first mortgage construction financing to a maximum of $15 million. Interest was to be calculated at 18% per annum, of which 8% was to be paid quarterly and the balance of 10% was to be paid at the time of payment out of the

mortgage. The term of the Nanaimo Mortgage was 24 months. Although the commitment letter indicated a maximum mortgage advance of $15 million, it provided for the deduction of mortgage arrangement costs of $3.36 million and an interest reserve fund of $1.4 million. Thus, only $10.24 million was available to be applied against the cost of the land purchase and development. [9] The Parksville project involved the purchase of waterfront property and development of luxury resort condominiums to be financed by a mortgage to which I will refer as the Parksville Mortgage. Multimetro signed a commitment letter to provide financing of $12 million to the developer, secured by a first mortgage. However, only $8.6 million was to be advanced to the borrower. Mortgage arrangement costs of $2.4 million were held back, as was an interest reserve of $1 million. The interest rate was 16%, of which 8% was to be paid quarterly and the balance of 8% was to be paid upon payment out of the Parksville Mortgage. Similar to the Nanaimo Mortgage, the term of the Parksville Mortgage was 24 months. [10] Great Pacific marketed the syndicated mortgage units to its clients for Multimetro in return for a commission of 8% to 10% on each unit. [11] Other than payments made from the interest reserve holdbacks by Multimetro, the borrower made no payments toward principal or interest on either the Nanaimo Mortgage

or the Parksville Mortgage. Eventually, Multimetro commenced foreclosure proceedings. [12] It became apparent that the investors would lose their investments in the Nanaimo Mortgage and the Parksville Mortgage. An action was commenced against Great Pacific, who then successfully applied to have Multimetro and its president, Ken Megale, added as third parties. [13] In April of 2000, one of the plaintiffs, Mr. Collette, applied to have the action certified as a class proceeding. This application was rejected by the chambers judge, but Mr. Collette successfully appealed. [14] The Court of Appeal described the theory of the plaintiff's case, which was that the defendant Great Pacific, before making investment products such as syndicated mortgage units available to its clients, had a duty to "screen out" products which had little or no investment merit. These products were speciality investment products because they were not generally available to the public through a stock exchange or a publicly traded market. Instead, they were made available through investment advisor firms, such as Great Pacific, who were then required to exercise due diligence before offering them to their clients. The Court described this theory as follows at paras. 19-20: The appellant's theory emphasizes a two stage process by Great Pacific in the sale of the mortgage units. The first stage involved a due

diligence review of the mortgage units by the Great Pacific specialty investment department . The second stage involved offering the units to individual investors by particular financial advisors of the respondent firms. The appellant contends that the due diligence responsibility of the specialty investment department at stage one is a common duty to all clients and that the respondents breached that duty in passing the units for sale. [15] The plaintiff acknowledged that the "second stage" duty of individual advisors to clients was an individualized obligation involving consideration of the particular circumstances of investors that did not raise common issues. However, the plaintiff asserted that the "first stage" duty of care constituted an issue common to all clients of the defendant because it did not require individual proof of reliance. The Court of Appeal described the plaintiff's argument as follows at para. 22: The appellant says that the alleged breach of duty at stage one satisfies the "but for" test of causation for all the investors because if the units had failed the due diligence review they would not have been offered for sale by either firm to any of their clients They were specialty investments available only from firms who assumed a responsibility to carry out a due diligence assessment of the investment and offer the units to clients if they met the due

diligence criteria. [16] Ultimately, the Court of Appeal agreed that the action was appropriate for certification because the plaintiff's two stage theory of liability precluded the necessity to prove reliance (which would otherwise be an individual issue) at the first stage. The Court said this at para. 34: Here if the mortgage units had not passed the due diligence test they would not have been offered for sale by the respondents to any clients. Causation is therefore established between a breach of due diligence duty and the investors' loss, independently of proof of individual reliance. In my view, proof of reliance does not present an obstacle to the appellant's case as framed. The appellant's case adequately links a breach of duty causally to the investors' losses. [17] The Court concluded at para. 35 that there were common issues whose determination would move the litigation forward in a significant way: The appellant's case is that no investment advisor could have offered the units to any client unless they passed the due diligence test of the specialty investment department. Any breach of duty at that stage, in allowing the units to be offered for sale by any advisor to any client, is common to all clients of the firm. [18] The Court then defined the common issues as follows at para. 38: 1. Did the [Defendant] owe, to the class members with whom [it] dealt, a duty in contract, tort, or both, to evaluate the Multimetro Mortgages by a standard of due diligence and not to offer units in the mortgages for sale to class members if the investments did not meet the standard of due diligence?

2. If the answer to question 1 is "yes", did the [Defendant] breach that duty?

3. If the answers to questions 1 and 2 are "yes", did the breach of duty cause damage to the class members? [19] Having regard to the common issues as stated by the Court of Appeal, and the reasons underlying them, the parties seek direction as to whether evidence of the alleged misconduct of Multimetro subsequent to the advance of all funds to the mortgagors is relevant to the third common issue and therefore admissible at the trial of the common issues.

3. Positions of the Parties The Plaintiffs' Argument [20] The plaintiffs submit that Multimetro's later conduct is irrelevant to the issue of whether the alleged breach of duty by Great Pacific harmed the class members. The reasons of the Court of Appeal make clear that causation is established if the plaintiffs prove both a breach of a duty owed to the class members and a subsequent loss. Nothing further is required to impose liability on Great Pacific. [21] The evidence obtained through examinations for discovery conducted to this point demonstrates that the class members lost all of the principal amounts they invested. Each class member received only a small payment of interest from the interest reserves that were set up by Multimetro. Great Pacific does not contest this assertion concerning the loss suffered by the class members. [22] Further, representatives of Great Pacific have acknowledged, in examination for discovery, that they knew from the outset that the borrowers (developers of the projects) had no equity in the Nanaimo and Parksville projects. The Nanaimo property was eventually sold by way of a court order for $2,800,000. The Parksville property was sold, again by way of a court order, for $1,775,000. Thus, by the time of the foreclosures, the class members had lost almost all of their invested funds. [23] Even if it is assumed, for purposes of the present

application, that Multimetro's later conduct was both tortious and unforeseeable, this does not alter the chain of causation linking Great Pacific to the class members' losses, or reduce the quantum of those losses recoverable from Great Pacific. Accordingly, evidence of Multimetro's alleged misconduct is legally irrelevant: Even if proved, it will not change the answer to the question of causation as articulated by the Court of Appeal in the third common issue. The Defendant's Argument [24] The defendant says is up to the parties to frame the issues, through the pleadings, that will be relevant at trial. In this case, the defendant has pleaded that no acts or omissions of Great Pacific are the proximate cause of the losses suffered by the plaintiffs. It has also pleaded that the plaintiffs' losses were caused, or contributed to, by the conduct of the plaintiffs and/or Multimetro after foreclosure. [25] In the present case, says the defendant, the third common issue as stated by the Court of Appeal deals with the issue of loss causation generally. Determination of that issue in the context of a class proceeding is not inconsistent with the determination of issues relating to causation raised by the pleadings in the ordinary course. The defendant should only be precluded from leading evidence relating to the effect of the post-foreclosure conduct of the class members or

Multimetro if those provisions of the statement of defence would otherwise be struck out under Rule 19(24) of the Rules of Court. The plaintiffs must establish that it is "plain and obvious" that the defences pled by Great Pacific raise no reasonable defence in law. [26] The defendant argues there may be evidence that the investors' losses were caused entirely by the tortious conduct of Multimetro after foreclosure. Further, if there is evidence that investors knew or ought to have known of misfeasance by Multimetro or mismanagement of the mortgages, and failed to take action by removing Multimetro as trustee, the Court can conclude that class members were contributorily negligent for some or all of their losses. If Multimetro and/or the class members are liable for their losses, there can be no causal connection between the defendant's breach and the losses suffered by the class members. The defendant argues at this stage, it cannot be said that it is plain and obvious that such a finding is untenable.

4. Discussion [27] I do not accept that because the pleadings of the defendant allege contributory and/or third party negligence, it must be permitted to call evidence concerning those pleas in the trial of the common issues unless the plaintiff can establish that they raise no reasonable defence in law. In my view, the Rule 19(24) analogy argued by the defendant is not an apt one. [28] It is beyond question that the common issues must be grounded in the pleadings. However, a class action is certified on the basis of common issues arising from the pleadings that are capable of moving the litigation forward in a significant way. It is entirely possible that not all aspects of the pleadings will be engaged by the common issues in a class proceeding. Typically, individual issues arising from the pleadings are dealt with by way of hearings following the common issues trial. [29] The real question in this case is whether the third common issue, as articulated by the Court of Appeal, encompasses issues of contributory and/or third party negligence. [30] The evidence the defendant seeks to advance at the trial of the common issues is the conduct of Multimetro, and presumably the conduct of the individual class members, which occurred well after Great Pacific approved the mortgage units for sale to its clients, and after Multimetro advanced the funds to the mortgagors, the mortgagors

defaulted, and foreclosure proceedings began. The defendant argues that this post-foreclosure conduct is relevant to the third common issue - that is, the causation issue - because it may reduce or eliminate Great Pacific's exposure for damages. [31] I cannot agree with that argument. A fair reading of the reasons of the Court of Appeal discloses that the focus of the inquiry was whether Great Pacific owed a specific "stage one" duty of due diligence to the class members, whether the duty was breached by Great Pacific, and whether the breach of that duty caused damages to the class members. The Court of Appeal was well aware of the role of Multimetro in the Nanaimo and Parksville projects, and the fact that the class members advanced considerably more money to Multimetro than Multimetro advanced to the borrowers. Yet the Court of Appeal did not include quantification of the damages in the statement of the common issues, nor did it include any questions concerning the conduct of the third party Multimetro or the contributory negligence of the class members. [32] The defendant argues that it may wish to call evidence at the common issues trial to establish that the plaintiffs' capital losses flowed from the actions of Multimetro and the plaintiffs' themselves. However, the defendant does not provide any particulars, or even any theory of Multimetro's liability, that gives an air

of reality to the argument that Multimetro might have been responsible for all of the losses suffered by the class members as opposed to only a portion of those losses. [33] Nor does the defendant provide any particulars of the contributory negligence it alleges on the part of the class members. In any event, whether the class members, or any of them, knew of Multimetro's misfeasance but did not intervene, would necessarily involve individual inquiries. [34] It is not clear at this stage how any post-foreclosure misconduct of Multimetro could alter the chain of causation linking Great Pacific to the class members' losses or reduce the quantum of those losses recoverable from Great Pacific. Multimetro and Great Pacific did not work together or jointly intend the losses. As such, on the facts the Court has been asked to accept as true for purposes of this application, it appears they were concurrent tortfeasors whose independent wrongs produced one set of injuries. A defendant remains liable for all damages arising from injuries they cause. A defendant's share of liability will not be reduced because other causes also contributed to those injuries (Athey v. Leonati, [1996] 3 S.C.R. 458). [35] Further, a defendant remains liable for the losses caused in part by a third party's wrongful or criminal acts if those acts are the very risk the defendant was to guard against, or if they

flowed directly from the defendant's breach of duty (Linden, Canadian Tort Law, 7th ed. (Toronto: Butterworths, 2001) at 372-76). [36] Notwithstanding these observations, I do not intend at this early stage of the proceedings to foreclose the ability of the defendant to argue that Great Pacific's alleged liability for the investors' losses ought to be reduced as a result of post-foreclosure events, or, for that matter, whether Multimetro's alleged misconduct constituted an intervening event that broke the causation chain. While the foundation for these arguments is not yet apparent, it is too early in the proceedings to determine whether the arguments have merit. [37] However, having reviewed yet again the reasons of the Court of Appeal, I am satisfied that the common issues as stated in those reasons do not encompass issues arising from the alleged post-foreclosure conduct of the class members and/or Multimetro. In the event that the plaintiffs succeed in the trial of the common issues, there will be a further hearing dealing with issues relating to quantum of damages and apportionment or contribution as between Great Pacific and Multimetro. Great Pacific will be at liberty at that time to renew its arguments concerning the conduct of Multimetro and the class members after foreclosure proceedings were initiated.

5. Conclusion [38] In summary, I conclude that evidence of the alleged post-foreclosure misconduct of Multimetro is not relevant to the common issues as articulated by the Court of Appeal and is therefore not admissible at the trial of the common issues. "C.A. Wedge, J." The Honourable Madam Justice C. A. Wedge