Ontario Court of Appeal Upholds Dismissal of Proposed Class Action for Alleged Prospectus Misrepresentation

In its decision in Coulson v. Citigroup Global Markets Canada Inc., et al., the Ontario Court of Appeal upheld the decision of the Ontario Superior Court of Justice dismissing the claims made by the representative plaintiff in a proposed class action for shareholders of Philip Services Corp. The claim was for alleged misrepresentations contained in a prospectus (under s. 130 of the Ontario Securities Act) against the underwriters of the share offering and the auditor of Philip Services. This case confirms the manner in which s. 28 of the Class Proceedings Act, 1992, which provides for the suspension and resumption of limitation periods against class members, operates.

In 1998, approximately five years prior to the commencement of the Coulson action, a different plaintiff commenced a virtually identical proposed class action against Philip Services and the defendants, asserting a claim under s. 130 of the Ontario Securities Act and also claiming, or seeking leave to amend to claim, for common law negligent misrepresentation (Menegon v. Philip Services Corp., et al.). Pursuant to s. 28 of the Class Proceedings Act, the commencement of the Menegon action had the effect of suspending the running of the limitation periods applicable to the s. 130 Securities Act cause of action asserted by Menegon (which limitation periods are found in s. 138 of the Securities Act) in favour of class members, including Coulson. Under s. 28 of the Class Proceedings Act, a suspended limitation period resumes running upon the occurrence of certain enumerated events, including a dismissal of the class proceeding without an adjudication on the merits. Where there is a right of appeal this dismissal, the limitation period only resumes running once the time to appeal has expired or once any appeal has been finally disposed of.

In March 2001, the Ontario Superior Court of Justice denied Menegon's certification motion and dismissed the entire action on the basis that it failed to disclose a cause of action under s. 130 of the Securities Act because Menegon purchased his shares of Philip Services in the secondary market and not under the prospectus (and therefore had no claim under s. 130), and also because his pleading (including the proposed amendments) did not disclose a viable claim for common law negligent misrepresentation. Menegon conceded that he did not have a s. 130 claim, but argued that he could nevertheless represent s. 130 claimants. Menegon appealed the dismissal of the action, as well as the motion judge's refusal to grant an adjournment to add a representative plaintiff with a s. 130 claim. The Ontario Court of Appeal dismissed Menegon's appeal in January 2003 and the Supreme Court of Canada dismissed his application for leave to appeal in July 2003.

Just prior to the release of the Supreme Court's decision in the Menegon action, the Coulson action was commenced. In this proceeding, only a claim under s. 130 of the Ontario Securities Act was asserted.

In 2010, the Ontario Superior Court of Justice denied Coulson's certification motion and dismissed his action in its entirety on the basis that the limitation period applicable to the s. 130 claim, though temporarily suspended upon the commencement of the Menegon action, had resumed upon its dismissal (without an adjudication on the merits) in March 2001, and therefore expired long before the commencement of the Coulson action in July 2003. In so holding, the motion judge found that Menegon's appeals were only with respect to his common law negligent misrepresentation claim and not the s. 130 claim, and therefore the suspension of the limitation period applicable to that cause of action did not continue through the appeal in the Menegon action.

The main issue on the appeal was the effect to be given to the Menegon appeal under s. 28(2) of the Class Proceedings Act. In upholding the dismissal of the Coulson action, the Court of Appeal agreed with the motion judge's careful examination of the evidentiary record regarding the nature of the appeal in the Menegon action.

In addition, the Court of Appeal rejected the plaintiff's argument that an analysis of whether a limitation period remains suspended pending an appeal pursuant to s. 28 of the Class Proceedings Act must be done from the perspective of extant class members, and confirmed that the analysis under s. 28 of the Class Proceedings Act requires an objective assessment of what the appeal is about, regardless of what absent class members may individually think.

Benjamin Zarnett, Jessica Kimmel and Melanie Ouanounou of Goodmans LLP represented the underwriter defendants/respondents, Citigroup Global Markets Canada Inc., Merrill Lynch Canada Inc., CIBC World Markets Inc., National Bank Financial Inc., HSBC Securities (Canada) Inc., RBC Dominion Securities Inc. and TD Securities Inc.

Robb Heintzman, Michael Schafler and Jacob Kaufman of Fraser Milner Casgrain LLP represented the auditor defendant/respondent, Deloitte & Touche.

On the appeal, Joel Rochon, Peter Jervis and Sakie Tambakos of Rochon Genova LLP represented the plaintiff/appellant.