Authorson Estate v. Canada (Attorney General)
Joseph Patrick Authorson, deceased, by his Litigation
Administrator, Peter Mountney and by his Litigation
Guardian, Lenore Majoros, plaintiff, and
The Attorney General of Canada, defendant
 O.J. No. 5581
 O.T.C. 1125
49 C.C.P.B. 207
2005 CarswellOnt 7468
Court File No. 99-GD-45963
Ontario Superior Court of Justice
J.H. Brockenshire J.
Heard: May 24-27, 2005.
Judgment: December 29, 2005.
Civil evidence -- Admissibility -- Objections -- Exclusionary rules -- Prejudice -- Documentary evidence -- Admissibility -- Ontario Rules of Civil Procedure, Rule 25.11.
Civil procedure -- Applications and motions -- Evidence -- Ontario Rules of Civil Procedure, Rule 25.11.
Preliminary motion by class counsel under Rule 25.11 to strike all of the Crown's material as prejudicial, scandalous and vexatious, and as an abuse of process -- In prior proceedings, after finding that the government had breached its fiduciary duty to invest the veterans' money, the court delivered a decision outlining appropriate investments that the government should have made and reserved its final judgment on the matter -- In response to a one-volume record, plus a supplementary record, that class counsel filed containing calculations prepared by an expert, the Crown filed an eight-volume motion record with voluminous schedules attached -- One report filed by the Crown was a critique of the court's judgment in the prior proceeding, while the others were critiques of class counsel's expert report -- HELD: One entire report along with a considerable amount of a second report were struck out -- A considerable amount of the material filed lacked a legal basis and therefore invited a remedy under Rule 25.11 -- The direct attacks on the court's decision constituted serious infringements, may well have offended the doctrine of issue estoppel, and were an abuse of process -- One report and a considerable amount of a second report were found to be manifestly unfair to the plaintiff class and brought the administration of justice into disrepute.
Statutes, Regulations and Rules Cited:
Department of Veteran Affairs Act, R.S.C. 1985, c. V-1
Ontario Rules of Civil Procedure Rule 25.11
Superannuation Adjustment Benefits Repeal Act, S.O. 1994, c. 21
Raymond G. Colautti, David G. Greenaway, Peter Sengbusch, for the Plaintiff
John Spencer, William Knights, Roslyn Mounsey, Sheila Hepworth, Cynthia Koller, for the Attorney General
REASONS FOR DECISION ON PRELIMINARY
MOTION TO STRIKE DEFENCE MATERIALS
1 J.H. BROCKENSHIRE J.:-- In this long outstanding and complex class action, after the decision of the Supreme Court of Canada, that the amendment to the Department of Veterans Affairs Act barring claims for interest was in full force and effect, the matter came back to me, as the case management judge, on a motion for judgment, despite the Supreme Court of Canada decision, on the basis that the claim had always been one for damages for breach of the fiduciary obligation to invest, and not just for interest. I decided that summary judgment motion in favour of the plaintiffs, finding that the Crown had been under an obligation to invest the funds, and while not liable for the value of interest as defined in the Act, the Crown would be liable for the difference between what that interest would have produced, and an appropriate investment program would have produced, over the years. That decision was appealed by the Crown to the Court of Appeal.
2 Class counsel then brought a separate summary judgment motion before me to assess the resulting damages on an aggregate basis. The Court of Appeal granted a motion by class counsel to delay its hearing on liability until the decision on quantum was available, so that the entire matter could be dealt with once in that court.
3 The motion on quantum before me centered around various competing theories from various experts as to how the funds in the hands of the Government should have been invested, and various legal arguments on the equitable principles involved in assessing damages in a breach of fiduciary obligation situation, including the applicability of hindsight.
4 On December 31, 2004, I delivered my decision on what would have been appropriate investments, and on the make-up of an appropriate theoretical portfolio, with limited flexibility to adjust that portfolio, to be used with the benefit of hindsight. Having delivered my decision on the approaches to be followed, I adjourned the motion for summary judgment to permit Professor Charrette, the class expert, to calculate and circulate the financial results of applying those principles. After the Crown had an opportunity to review and deal with those calculations, the matter was to come back to me to fix an amount for aggregate damages.
5 Prior to this court reconvening in May of this year, class counsel filed a one-volume record, containing the calculations of Professor Charrette and his explanations therefore, and later a supplementary record containing further calculations of Professor Charrette after he had received the critiques of the defence experts.
6 The Crown filed an 8-volume motion record, consisting of affidavits by Messrs. Neufeld, Kirzner, Scott, Hodson, and Gorham, with voluminous schedules attached to several of the affidavits. Class counsel brought a preliminary motion under Rule 25.11 to strike all of this material as prejudicial, scandalous and vexatious, and as an abuse of process.
7 In opening remarks to counsel on May 24th, I indicated that my initial impression, without hearing submissions from counsel, was that at least some of that material should properly go to the Court of Appeal on a motion to admit new evidence, rather than being brought before me, that some of it raised issues that were res judicata, and that a good deal of it had nothing to do with the calculations of Professor Charrette, and the resulting figures on quantum, which was the one remaining matter currently before the court. However, I noted that class counsel, in its general factum, had responded to this material, that the Court of Appeal would probably appreciate some comment from the court below on this material rather than having it simply being presented cold together with a motion for the admission of new evidence, and that although I had delivered rather extensive reasons after the previous hearing, no formal judgment had ever been taken out, so that it would still be open to this court to vary or amend its earlier conclusions. Therefore I directed that, while class counsel could proceed with their Rule 25.11 motion to strike the defence materials my ruling on it would be reserved and dealt with together with my ruling on the general issue before me.
8 Class counsel proceeded with their arguments on that basis, and Crown counsel responded. I will now provide my comments on the affidavits and materials provided by Crown counsel, which class counsel moved to strike, followed by my decision on the motion.
EDWARD P. NEUFELD
9 My Neufeld holds a doctorate in economics, was a professor of economics at the University of Toronto for 17 years, was at Stanford University for a year, then in 1973 joined the Department of Finance in Ottawa, where he held senior positions in relation to international trade and finance, Federal/Provincial relations and tax legislation. In 1980 he became the Chief Economist and Senior Vice President for the Royal Bank of Canada and retired after 14 years. He has written extensively, including a book on the Financial System of Canada. He has served as a Director of a number of public and publicly held corporations.
10 His very distinguished career does not include acting as a trustee or as an investment advisor to a trusteed fund.
11 He deposes that he was retained by the Department of Justice and the Department of Veterans Affairs to provide,
"Analysis and comments on the approach of Justice Brockenshire to the quantification of damages relating to deposits of veterans with the Department of Veterans Affairs. Specifically I was asked to consider the appropriateness of the portfolio selected by Justice Brockenshire, and to provide analysis and comments on the questions of permitted 'swings' in the ratios of cash, bonds, and equities in the formula proposed by Justice Brockenshire."
12 Needless to say, the report that was prepared was a critique of my judgment, rather than a response to the calculations done by Professor Charrette, or a response to my own request that a value to date be calculated of a portfolio constructed and managed within the guidelines which I laid down in my decision.
13 I find it very curious that this document would be presented as evidence before me. Because the conclusions are that my decisions were baseless and utterly wrong, his report, or at least ideas contained in it, would more properly belong before the Appellate court reviewing my decision.
14 However, on the basis that this was presented to me before I had become a functus by the formal signing of a judgment incorporating my previous decision, I would say that I am not persuaded by the report, and will make a few comments regarding it.
15 Mr. Neufeld starts by commenting on the "swings" permitted in asset ratios. I had put forward as an appropriate asset mix, a portfolio of 60% bonds, 35% equities, and 5% cash, with provisos that for flexibility the proportion of bonds could rise to 70% or drop to 50%, the proportion of equities could rise to 45% or drop to 25%, and the portion of cash could rise to 20% but not drop below 5%. Those allocations could be adjusted from time to time within the limits imposed using the full benefit of hindsight.
16 Incidentally, at Paragraph 14, Mr. Neufeld acknowledges that,
"There are today a very large number of mutual funds and trusteed pension plans with many different investment philosophies and policies among them. The asset ratios change from time to time in some of them and in others not, while some changing more than others because they are actively, rather than passively managed."
17 However, Mr. Neufeld notes that all of those portfolio managers have to make their investment changes before, and not after the fact and that in the real world making adjustments on the basis of hindsight is an impossibility. I observe that of course this is absolutely true. However this does not take into account the equitable principle of permitting hindsight in calculating damages for breach of fiduciary obligation in order to provide appropriate compensation for the lost opportunity caused by the trustee's default.
18 Mr. Neufeld then noted that there were no withdrawal restrictions on the funds deposited in the veteran's accounts, and therefore concluded that the totality of the fund had to be treated as deposits cashable on demand. With that outlook, he saw the Post Office Savings Bank as a good proxy. He also looked to the practice of the Government in making investments under the Superannuations Act, the annuities program, and the early years of the Canada Pension Plan. The investments were all in Government bonds.
19 He looked to the restrictions placed on insurance company investments, and in the Trustee Acts across the country. He also pointed to the lack of statistics on the portfolio make-ups of estate, trust, and agency funds, and noted that the few reports available would include some special purpose funds with special instructions. Although he mentions him, Mr. Neufeld does not comment on the evidence provided by Mr. Barrasso of Royal Trust as to the standard type of portfolio used during the entire period in question here by that company. The Affidavit evidence of Mr. Barrasso stood up under cross-examination and has not been contradicted by any Crown witness.
20 A concern of Mr. Neufeld over the demand nature of the deposits into this fund is one shared by most if not all of the Government experts. The reverse view is expounded by class counsel. I perceive this as the equivalent of the well known debate over whether the glass is "half empty or half full". The problem with the accumulated fund as a whole is that since shortly after its conception, it has been made up of a very large number of very small and often transient accounts, and a much smaller number of very large accounts. At the small end were quite a number of veterans who simply could not manage a month's worth of pension money, so the Department held their funds and doled it out as needed. At the other end were veterans who were in hospital for years for mental or physical problems, with all of their living costs taken care of. Their monthly deposits accumulated, and should have been earning compounding investment returns. In my view, both ends of that spectrum had to be accommodated, by providing sufficient liquidity for the small accounts and an appropriate return for what in fact were very substantial long-term accounts.
21 Mr. Neufeld points to the lack of stock and bond index funds until very recently, and comments that any Trustee would have to buy the entire market, which would have been impossible before computers, so that the numbers reported by Professor Charette are not the numbers of any real portfolio. I accept that, and understand that Professor Charette accepted that it would be physically impossible to go back and construct a portfolio of individual stocks or individual bonds and then track their performance from 1920 to the present, and so used available annual statistics as proxies. What is being sought in this entire exercise, is understood, at least by me, to produce the best reasonable approximation of a lump sum amount representative of the damage suffered by a great number of account holders over a long period of years.
22 The conclusions of Mr. Neufeld is that the earnings of a balanced portfolio was inappropriate, and the proper measure would be either the rate paid on Post Office Saving Bank deposits or the average rate of interest on the public debt of Canada.
23 I agree that those conclusions follow from the premises used by Mr. Neufeld in his report, but I do not agree that they follow from the findings I made in my decision.
RONALD W. SCOTT
24 Mr. Scott is a Chartered Accountant, so designated since 1961 and is a retired partner of Ernst & Young. He had prepared an earlier report on rates of return, referred to in my previous decision. Mr. Scott's report is a response to the calculations done by Professor Charrette. However, the response, outside of some technical comments on Professor Charrette's calculations, raise two issues which were not raised, let alone argued, before me. He was of the view that on and after December 31, 1989, when the Crown started to pay interest on the funds it held has a Trustee, the crediting of portfolio returns to the class members should stop. He also opined that, instead of using the portfolio mix which I had found appropriate, what should have been used was the portfolio mix or the investment portfolio under the terms of the "Hepatitis C" class action settlement. Mr. Scott reports that the portfolio under that settlement was made up of 1.2% cash and receivables, 91.1% of a variety of short and long-term fixed income investments, and 7.7% in domestic and international equities. Neither of these proposals had been put forward by Mr. Scott before his Affidavit of April 2, 2005, and neither of these proposals was argued before me prior to my decision of December 31, 2004.
25 Crown counsel took up these proposals in its factum, and in oral argument before me. I will comment here on the Scott materials. I will comment on the Crown arguments in my decision re quantum of aggregate damages.
26 On the first issue, the commencement of the payment of interest by the Government on January 1, 1990, ending other claims, my comment is that the Government put itself in the position of acquiring the liability that has been the subject of this litigation by undertaking the role of a fiduciary without imposing, as it could, limits or parameters on its obligations. When it finally accepted the fact that it had created a problem, it passed legislation specifically providing for a paying interest in the future, and specifically providing that claims could not be made for interest before that time. The Supreme Court of Canada, on policy grounds, upheld that statutory bar, but did no more. My decision, yet to be reviewed by an Appellate Court, is that that bar extended no further than it said, and that the equitable claim for damages for failure to invest continues, subject to the limitation that there has to be deducted from it interest, as defined in the Veterans' Legislation.
27 My comment on the second suggestion, that the "Hepatitis C" settlement portfolio would be a preferred investment policy, is necessarily limited because no evidence has been presented to me as to the details of the specific circumstances of these class members, the details of the litigation and the risks involved in it, or the details of the settlement that led up to this particular portfolio. However, I find interesting and illuminating, the comments of Mr. Scott at p. 91 of Volume 1 of the Crown's motion record just below the Table and Graph describing the make-up of the portfolio. Firstly he comments that it could be argued that there are differences between the two situations that might justify a more aggressive risk seeking orientation in managing the veterans' funds. He carries on to say that,
"However in my judgment, and recognizing that it is the Federal Government that must necessarily be assumed to be in charge of any investment decisions that will be made in relation to the veterans' monies, the higher likelihood is that the veterans' funds would have been managed in a manner much more like what applies to the 'Hepatitis C monies' than to the risk enhancing/maximum return seeking algorithm that is expressed in Professor Charrette's analysis."
28 This in my mind reflects the unfortunately faulty premise to Mr. Scott's analysis and conclusions. Underlying this lawsuit was the Federal Government assumption that it was "in charge" of the investment decisions, and its decision had been to pay nothing. The findings of this court, and the Court of Appeal, not disputed before the Supreme Court of Canada, were that because the Federal Government did not impose any statutory parameters on its investment obligations, it assumed the obligations in common law and in equity that would bind any Trustee in a similar situation. Therefore the comparator is not what the Government might be inclined to do but what a private trustee would be required to do. Because of this, the appropriate source of information has been, in my view, not Government bureaucrats but rather persons with experience in acting as trustees and in satisfying the obligations of trustees.
29 Other than these areas, I find the balance of the Scott Report to be un-contentious but not very helpful. A good portion of it is devoted to calculations relating to compound interest, which as I clarified in my December 31, 2004, decision can only be applicable if the funds were not invested in a portfolio, because in a portfolio compounding would occur naturally through the investment of undistributed income.
30 Professor Kirzner teaches finance and executive MBA courses at the Rotman School of Management at the University of Toronto. He has also acted as advisor to or Director or Chair of numerous economic and financial institutions, acted as a private investment advisor, and written extensively about investing. He had provided an earlier report in this case, opining that the appropriate investment strategy for these funds was 100% cash.
31 His current report, following his Affidavit sworn April 1, 2005, is pursuant to a retainer by the Crown to respond to Professor Charrette's report, estimating damages.
32 Professor Kirzner's conclusion was that Professor Charrette's assumptions were untenable while his calculations were flawed and thus unreliable. Professor Kirzner disagrees with the appropriateness of the 5% cash, 60% bonds, and 35% equity portfolio. He repeats that it should be 100% cash. The basis for that conclusion was that when risk tolerance couldn't be determined directly from an investor, industry practice is to infer the lowest risk tolerance. I would comment that I have earlier noted that the DVA undertook the care of the pension funds of these disabled veterans. The ones that built up substantial balances were the ones where the DVA also undertook the personal care of the veterans around the clock in the Veterans' Hospitals. I believe it would be fair to assume that the DVA staff and case workers would be intimately aware of the needs and responsibilities of these hospitalized veterans, and their tolerance for financial risk.
33 After giving his rational for a 100% cash portfolio, Professor Kirzner offers as an alternative a conservative portfolio he and someone else developed for the Financial Post of 20% cash, 65% bonds and 15% equities. He felt this would be more appropriate for a highly conservative investor with low risk tolerances, if bonds and stocks are to be included at all.
34 Professor Kirzner also disagreed with permitting variances in the asset allocation, opining that the average Canadian Mutual Fund manager does not engage in technical asset allocation because they have fixed mandates and stick to them. Further, he says the finance and economic literature finds the technical asset allocation approach has not been used successfully. Interestingly, he quotes from a paper by William F. Sharpe (a Nobel laureate economist) written in 1975 that, "... unless a manager can predict whether the market will be good or bad each year with considerable accuracy, (eg. be right at least 7 times out of 10), he probably should avoid attempts to time the market altogether." At p. 62 of Volume I of the Crown's Motion Record, he speaks of Canadian balanced mutual funds and their typical asset allocations and notes that,
"Some allow the managers a narrow range (such as 5% or 10% from the target) within which to tilt their asset allocation, many such funds do not alter their strategic asset allocation. In contrast, technical asset allocation funds hold portfolios of cash, bonds and stocks in order to earn income and capital appreciation. The portfolio strategy allows active departures from the normal asset mix. It involves forecasting asset returns, volatilities, and correlations. The forecasted variables typically are functions of economic and business conditions."
He then notes that over the 10 years to January 31, 2005, the average Canadian balanced Mutual Fund outperformed the tactical asset allocation funds by .42% per annum.
35 At p. 63 of Volume I of the Crown's Motion Record, Professor Kirzner states that,
"The tactical asset allocation hindsight strategy that has been prescribed by Justice Brockenshire and adopted by Professor Charrette is hopelessly flawed. The approach creates results that in my opinion were in fact impossible to obtain."
However, he footnotes that by noting that,
"I realize there is a legal principle underlying this approach; I am confining my comments to generally accepted investment finance practice."
36 Professor Kirzner makes limited comments on the actual figures produced by Professor Charrette. He does however, provide considerable useful detail on transaction costs, which is a subject to be dealt with in the calculation of a lump sum aggregate damage amount.
37 Peter Gorham is an actuary of some 25 years experience, particularly in relation to pensions, who had provided a previous opinion in this case.
38 In the current report, dated March 31, 2005, Mr. Gorham identifies 8 areas in Professor Charrette's report of January 19, 2005, which he opines contain errors, which had the effect of increasing the damages amount by over a billion dollars. Further, he states that the C.I.A. rates, which he had used in the June 2004 report, were used only for the purpose of estimating the quantum of errors in Professor Charrette's earlier report and should not be used for determining the amount of damages. He presents a modified set of rates, which should be used. He, as others have, commented on the impossibility of buying and selling bonds on the market without incurring transaction costs. He notes on p. 3 of his report in Volume VIII, in the Motion Record (pages in which are not numbered) that, "it is recognized practice in the investment industry to allow for asset shifts, but uncommon practice to engage in it as asset shifts increase portfolio risk."
39 At p. 23 of his report, he discusses my comments at Para.125 of my decision about excluding capital gains and trading profits from the damage calculation. I am afraid he may have misunderstood the background and the intent of that direction. Early on, in discussions with counsel, I had been referring to the fact that some fund managers seem to produce extraordinary results by a deliberate policy of buying and selling stocks and bonds in order to provide income from the capital gain on the trades as well as income from interest or dividends. I was persuaded in argument that that may well be true for a certain individuals for certain periods of time, but over the long run, that investment approach had proved unsuccessful time and again, both because of the inability to consistently pick winners, and the increased transaction costs involved in following the policy. My directive was therefore to not factor in, as an element of annual return, the potential for making additional money for the fund by strategic purchases and sales. I had no intention of disallowing natural economic events, which include the rise of stock prices through economic growth and inflation, and the rise and fall of bond prices inversely with interest rates.
40 Mr. Hodson is a Chartered Accountant and a partner in the firm of Ernst & Young. He has been the lead in the team from Ernst & Young investigating the books and records of the D.V.A. and producing the numbers that were the basis for the estimates to date of the damages suffered. His report, which takes up all of Volumes, 2, 3, 4, 5, 6 and 7 of the Crown's Motion Record, is essentially a vast array of calculations based on the various theories as to damages put forth at various times, and prepared at the request of the Crown for the possible assistance of the court and Professor Charrette.
THE MOTION BEFORE ME
41 I have no indication that any of the information contained in the 8 volumes filed (except direct critiques of my decision of December 31, 2004) could not have been prepared and filed for use at the previous hearing. As the previous hearing had, in my view, limited the areas for further discussion, a considerable amount of the material filed could be looked at as "lacking a legal basis or legal merit, not reasonably purpose-full" (per Black's Law Dictionary) and therefore inviting a remedy under Rule 25.11. Examples would be a good many of the tables produced by Mr. Hodson and as pointed out in Para. 37 of class counsel's factum on the motion, 28 of the 29 calculations made by Mr. Gorham in the Appendix to his report.
42 In my view, the more serious infringements on R.25.11 which I have noted in my foregoing comments are the direct attacks upon, or refusals to accept, the findings of this court in the December 31, 2004 decision. These had no place whatever in the present proceeding, which is limited to calculating a lump sum award in accordance with the directions given in the December 31, 2004 decision. In my view, those comments may well offend the doctrine of issue estoppel and they fit directly within the definition of abuse of process as defined by Mr. Justice Goudge J.A. of our Court of Appeal in Canam Enterprises Inc. v. Coles, 51 O.R. (3d) 481 (C.A.) and agreed with by the Supreme Court of Canada at  3 S.C.R. 307. Mr. Justice Goudge at pp. 55 and 56 of his decision said,
"The doctrine of abuse of process engages the inherent power of the court to prevent the misuse of its procedure, in a way that would be manifestly unfair to a party to the litigation before it, or would in some other way bring the administration of justice into disrepute. It is a flexible doctrine unencumbered by the specific requirements of concepts such as issue estoppel ... one circumstance in which abuse of process has been applied is where the litigation before the court is found to be in essence an attempt to re-litigate a claim which the court has already determined."
43 The only excuse for the admission of these materials that I can think of was that as above mentioned, no formal judgment had been taken out incorporating the findings of December 31, 2004. However, no application was made by the Crown to correct errors, misunderstandings or misapprehensions contained in my earlier reasons. The materials were simply filed and class counsel was left to respond to those materials.
44 If the Court of Appeal does find, on materials properly before it, that my decision of December 31, 2004 was in error, they may vary or overturn it as they see fit. On the basis of the comments above made, I do not intend to vary that earlier decision.
45 On the motion before me, I find that the entire Neufeld Report, and the portions of the Scott Report relating to the defence theories, raised after judgment and not before, as they should have been, about stopping portfolio income after December 31, 1989, and about the "Hepatitis C" fund, constitute abuse of process, as defined supra in Canam Enterprises, as they are manifestly unfair to the plaintiff class, and bring the administration of justice into disrepute. I accordingly strike them out from the current proceeding before me. I appreciate that the Crown may move to have them admitted as new evidence before the Court of Appeal, which is why I provided some comment on them in these reasons.
46 The reports of Kirzner, Gorman, Hodson, and the balance of the Scott Report could, and in my view should, have been obtained and filed for use on the quantum motion, rather than on this motion to value the income flow from the portfolio directed by me in my December 31, 2004 decision. However, while this inappropriate filing certainly lengthened the proceedings on the current motion, it can perhaps be excused on the basis that I was not yet functus on the previous motion, and I do not find the filing of them to be manifestly unfair, or to be bringing the administration of justice into disrepute. The Hodson and Gorman Reports contain many tables that proved to be completely irrelevant to the matters at hand, but so did their previous reports, and I understand those many tables were produced simply for completeness.
47 Following the argument of this motion, I have received, in stages, more boxes of materials from the Crown, ending (hopefully) with a 17 page submission from Mr. Colautti dated October 3, 2005, on the additional materials filed, and a responding letter from Mr. Knights, forwarding a further volume of materials. Much of the additional material is irrelevant, but included in it is the correction of previous calculation errors, and some new calculations which Mr. Colautti found useful for his position. He did not ask that this motion on behalf of the class be expanded to these new materials, so I will not comment further on them here. However, this flow of additional material, and the expectation of a response thereto, has delayed the preparation of these reasons, and my reasons on the assessment of aggregate damages, until now.
J.H. BROCKENSHIRE J.