Roberts v. E. Sands & Associates Inc., 2014 BCCA 122
1. CASE SUMMARY
Areas of Law: Procedural law; Limitation periods; Discoverability
~ A limitation period in the context of s. 140 of the Securities Act begins to run when the claimant knows the material facts giving rise to a cause of action, and the claimant must be diligent in discovering those facts~
Background: This was an appeal from an order upholding a decision by the Respondent, E. Sands & Associates Inc., to approve proofs of claim that the Appellant, Mr. Roberts, says were barred by a limitation period. The Appellant had put money in an investment issued by a firm known as Horizon. The Appellant and several hundred other investors in Horizon lost their investments when Horizon put the investors’ funds in the hands of a New York firm that was later revealed to be part of a Ponzi scheme. The Offering Memorandum from Horizon, which was a disclosure document akin to a prospectus that set out representations concerning the investment product, contained misrepresentations with respect to the New York firm. On January 16, 2008, Horizon contacted its investors to inform them of the fraud. Section 140 of the Securities Act sets a limitation period on such an action for 180 days from the time the plaintiff first had knowledge of the facts giving rise to the cause of action. The Appellant and one other investor started claims against Horizon within six months from the time they received Horizon’s email. The Respondent was a trustee in bankruptcy of Horizon. On August 12, 2009, the Respondent reported to the investors regarding the bankruptcy and, among other things, noted that the Memorandum was prepared without due diligence. As the Respondent administered the bankruptcy, it received proofs of claim from the Appellant and from some 650 other investors, who were collectively referred to in the judgment as the Represented Respondents. Unlike that of the Appellant, none of the Represented Respondents’ claims had proceeded to judgment. The Respondent accepted all of the claims. The claims exceeded the recovery from the New York firm, meaning that the Appellant stood to receive considerably less if he had to share the recovered funds with the Represented Respondents. He therefore challenged the Respondent’s decision to accept the other claims in the Supreme Court. The chambers judge upheld the Respondent’s decision that the six month limitation period did not begin to run until the publication of the August 12, 2009 report.
APPELLATE DECISION: The appeal was allowed. The Appellant argued first that the chambers judge erred in law by interpreting s. 140(b)(i) of the Securities Act to require too high a standard of knowledge and too low a standard of diligence. The Appellant further argued that the chambers judge erred in law, or made an overriding and palpable error of mixed law and fact, in concluding that the 180 day limitation period did not expire for all investors before the first bankruptcy event. The Court of Appeal found that the chambers judge failed to apply generally accepted standards of discoverability in the law of limitations. The limitation period does not begin to run until the claimant knows the material facts upon which a cause of action is founded, and the claimant must be diligent in discovering those facts. The chambers judge was wrong in holding that the Represented Respondents had no reason to review the Offering Memorandum when they received the January 16, 2008, email regarding the fraud. The law provides a special remedy to investors who purchase security under such a memorandum, and reasonable diligence requires them to pay attention to the document when a loss is suffered. The limitation period therefore began when the investors had knowledge of the New York firm’s fraud. The Supreme Court order was set aside, and the limitation period declared to have expired before the Represented Respondents submitted their proofs of claim.
Counsel Comments by John Shewfelt, Counsel for the Appellant
“How is the purchase of a private security different from the purchase of a car or a patch of land? The simple answer is that a security purchaser typically has no independent means of knowledge about what they are buying. The quality of a private security is knowable only through the information that is disclosed by the corporate issuer. The reliability of corporate disclosure is therefore a central policy concern of all provincial securities regulation. Indeed, the Supreme Court of Canada has referred to proper disclosure as the “heart and soul” of securities regulation: Kerr v. Danier Leather Inc., 2007 SCC 44.
However, investor protection through proper disclosure is not the only focus of securities legislation. The goal of capital market efficiency stands side-by-side with that of investor protection. The tension and competition between these two legislative policy goals is apparent in many aspects of securities law, including the civil liability provisions of British Columbia’s Securities Act. Part 16 of the Securities Act creates civil liability for misrepresentations contained in several types of disclosure documents. The key feature of these statutory civil liability provisions is the concept of deemed reliance. A plaintiff who sues for misrepresentation under common law principles must prove that he or she actually relied on a misrepresentation, whereas the statutory cause of action under the Securities Act states that an investor is “deemed to have relied upon the misrepresentation.” This is an extraordinary remedy and its policy purpose is to encourage proper disclosure by making it easier to sue. The countervailing legislative policy concern over the efficiency of the capital markets is addressed by means of a relatively short limitation period. Under s. 140(b) of the Securities Act, an investor must sue within 180 days after they “first had knowledge of the facts giving rise to the cause of action” (or three years, whichever is shorter). The proper interpretation of this limitation period was the subject of the Roberts appeal.
Other courts have noted the legal policy orientation underlying short limitation periods in the securities law context. As held by the Alberta Court of Appeal, short limitation periods reflect the policy that “[p]ermitting investors to lie in the weeds…would create uncertainty in the market place”: Ironside v. Smith, 1998 ABCA 366. Similarly, an Ontario court has observed that the “extraordinary cause of action for misrepresentation without reliance must be exercised promptly”: Dugal v. Manulife Financial Corporation, 2011 ONSC 1764. Our Court of Appeal in Roberts also acknowledged this underlying legislative policy, holding that the “law has provided a special remedy to investors who purchased their security under an offering memorandum. Reasonable diligence requires them to pay attention to the document when a loss is suffered.”
However, the Court did not rely primarily upon this legislative policy orientation from securities law to arrive at its decision. Instead, the focus of the Court’s reasoning is upon traditional core principles of limitations law, most notably the principles and sub-principles of discoverability. The discoverability rule arises out of and incorporates the legislative rationales for statutes of limitation generally, including a “diligence rationale” under which plaintiffs are expected to act diligently and not “sleep on their rights”: Peixeiro v. Haberman,  3 S.C.R. 549. The Roberts decision is best understood as a specific application of the overarching principle that, in all cases in which the discoverability rule applies, a plaintiff is required to exercise reasonable diligence to discover material facts.
By focusing upon general limitations law principles, the Court of Appeal decision in Roberts has articulated a useful framework of analysis that is applicable to other statutory limitation periods. In particular, the Court articulated and gave legal authority to the notion that a statutory limitation period should be approached with two standards in mind (1) the standard of diligence and (2) the standard of knowledge. With respect to the former, the Court accepted the submission that “the standard of diligence under section 140(b)(i) of the Securities Act must, at the very least, require an injured investor to read or to otherwise be aware of the content of the offering memorandum under which they purchased their securities.” The standard of diligence will, of course, vary depending upon the factual context. With respect to the standard of knowledge, the Court held it to be settled law that the knowledge required to trigger a limitation period is present “when the known facts suggest the pursuit of an investigation into a cause of action”, an investigation which may require a plaintiff to seek expert advice.”