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Civil Litigation - CIVIL PROCEDURE - Parties - Class or representative actions - Certification - Procedure

Thursday, January 19, 2017 @ 7:00 PM  

Appeal by the plaintiff, Excalibur Special Opportunities LP, from refusal of certification of its action against the defendant, Schwartz Levitsky Feldman LLP, as a class proceeding. The plaintiff was an investment fund based in Toronto. Southern China Livestock International was a Nevada company that owned and operated hog farms in China through various subsidiaries and sought to raise further financing. It arranged for a private placement memorandum to be distributed to accredited high net worth investors. One of the exhibits to the memorandum was an audit report prepared by the defendant, an accounting firm based in Toronto and Montreal with a stated expertise in auditing Chinese companies. The audit report stated that the financial statements fairly represented the financial position of Southern China Livestock in accordance with generally accepted accounting principles. Southern China Livestock raised $7.6 million from 57 investors, 50 of whom were based in the United States, and with the plaintiff being the sole Ontario-based investor. Southern China Livestock subsequently filed a securities report indicating it lacked control over its cash-based business. Its shares were rendered worthless and the plaintiff lost its $950,000 investment. The plaintiff sought to certify a class action on behalf of investors alleging that the defendant’s negligence and negligent misrepresentations caused the loss of their investments. A motion judge refused certification due to an absence of a real and substantial connection with Ontario, and the fact that joinder was a more preferable procedure. Otherwise, the criteria for certification were met. The Divisional Court sustained the motion judge’s ruling. The plaintiff obtained leave to appeal to the Court of Appeal.

HELD: Appeal allowed. The Divisional Court majority erred in deferring to the motion judge’s determination that there was no real and substantial connection between Ontario and the subject matter of the dispute. The motion judge erred in approaching the real and substantial connection issue with restraint due to the foreign investors. The finding of a lack of real and substantial connection resulted from erroneous focus on the foreign investors and private placement transaction rather than the defendant’s preparation of the audit report in Ontario. This was an auditors’ negligence case, involving Ontario auditors in the context of a private placement in the United States. At its core, it did not concern the regulation of such placements in the United States. The connection to Ontario was not modest or trivial, as found by the motion judge. In addition, the Divisional Court majority further erred in deferring to the motion judge’s determination that joinder was the preferable procedure to advance the issues raised in the pleadings. There was no evidence joinder was available as an alternative procedure, as there was no evidence other class members were a cohesive group, prepared to assume the burdens and risks associated with commencing their own claims. A class action would allow members with smaller claims access to a common issues trial that, if successful, would yield an Ontario judgment recoverable against a defendant resident in Ontario. The preferred procedure requirement was met. The Divisional Court order was set aside and substituted with an order certifying the action as a class proceeding.