Appeal court certifies class action against accounting firm

After concluding that both the motion judge and the majority of the Divisional Court erred, the Ontario Court of Appeal (OCA) has certified a class-action lawsuit against an accounting firm that involves international investors who lost money in an investment in a Chinese livestock company, says Toronto class-action lawyer Margaret Waddell.

Waddell acted as counsel to Excalibur.

In Excalibur Special Opportunities LP v. Schwartz Levitsky Feldman LLP, 2016 ONCA 916 (CanLII), Excalibur was one of 57 investors to lose money in the investment and sought to certify a class action against Schwartz Levitsky Feldman (SLF), a Montreal- and Toronto-based accounting firm, for alleged negligence and negligent misrepresentation in respect of a “clean” audit report that the investors claim to have relied upon when deciding to invest.

Motion denied

The motion judge denied Excalibur’s motion for certification and the majority of the Divisional Court upheld that order. Excalibur, a limited partnership organized in Manitoba and operating as an investment fund based in Toronto, appealed the Divisional Court order to the OCA, with leave.

Justice Jean L. MacFarland, in writing for the majority of the OCA, set aside the order of the Divisional Court and certified the class action. She accepted the common issues that the minority of the Divisional Court, Justice Harriet Sachs, would have certified.

Justice Robert A. Blair of the OCA dissented, saying the motion judge “did not err in law, nor did he commit any palpable and overriding error of fact or of mixed fact and law in refusing to certify a global class or in determining that a class proceeding was not the preferable procedure. “His determinations are entitled to deference, which the majority of the Divisional Court properly accorded him. I would dismiss the appeal,” he wrote.

Can move forward

Waddell, now counsel to Phillips Gill LLP, says the decision of the OCA majority is a good one for Excalibur. After years of delay, the plaintiff can finally move forward so that the merits of their case can be determined by the court.

In 2010, Excalibur invested US$950,000 in a company called Southern China Livestock International Inc., which was incorporated in Nevada, U.S. and owned or operated hog farms in China through various subsidiary corporations. Excalibur was one of 57 investors — 50 in the U.S. — that invested a total of US$7.6 million. By mid-2011 the company had “gone dark” and effectively stopped carrying on business. Excalibur began a proposed class action against the company’s auditor, SLF, in 2012 on behalf of the 57 investors, seeking damages equal to the value of their investments, according to the claim.

“The essence of the claim is that in light of the true state of Southern China Livestock’s financial affairs in 2008 and 2009 — i.e. that it had little control over the revenue and expenses of its all-cash business — SLF could not have provided a clean audit report in accordance with generally accepted accounting principles, as it had professed to do,” the court file alleges.

The allegations against the accounting firm have not been proven in court.

Erred in two respects

Waddell points to how the majority of the OCA concluded that the motion judge erred in two material respects.

First, the motion judge erred in his analysis of whether the court should take jurisdiction simpliciter over the claims of the class, including the foreign class members, she explains.

“Patently, the court has jurisdiction simpliciter, given the fact that the sole defendant is present and carrying on business in Ontario, and the document containing the alleged misrepresentation was disseminated from Ontario,” she says. “The motion judge erred by focusing on the underlying transaction rather than the actual negligence claim asserted by the plaintiff.”

Second, the OCA found the motion judge did not undertake the necessary comparative analysis for determining if a class action was preferable to joinder for the adjudication of the issues raised in the action, Waddell says.

“The OCA found it was an error for the court to suggest that the plaintiff must establish that a class proceeding is necessary to obtain access to justice for the class,” she says. “The OCA also found it was a further error for the motion judge to conclude joinder was available in the absence of any evidence that it was available or that it would be superior in overcoming the barriers to access to justice that the class faces.”

Important decision

Waddell says the decision of the majority of the OCA in Excalibur is particularly important insofar as it corrects the errors in the preferability analysis that were articulated by the motion judge and the majority of the Divisional Court.

“The OCA found the plaintiff does not need to establish that a class action is necessary to obtain access to justice, nor is joinder the ‘default’ procedure, as the Divisional Court majority had asserted,” she says.

Waddell says the court is to look at all reasonably available means of resolving the class members’ claims, and to conduct the comparative analysis dictated by AIC v. Fischer.

“In undertaking that analysis, the court cannot cherry pick a few of the class members, but must take into consideration the circumstances of the class as a whole,” she explains. “The fact that a few class members may have the financial means to litigate independently does not mean that a class action is not preferable for the adjudication of the common issues of the entire class.”