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Court Orders Undistributed Settlement Funds to be Paid to the Class Proceedings Fund

A short but novel decision was released in the mid-summer that may have slipped under many radars.

On July 29, 2019, Justice Perell of the Ontario Superior Court of Justice approved a cy près distribution of settlement funds to the Class Proceedings Fund in Cappelli v. Nobilis Health Corp. However, in what is likely a first of its kind, the cy près distribution was approved upon undistributed settlement funds.

In this case, the plaintiff was a shareholder of Nobilis Health Corp. (Nobilis) who pursued causes of action in misrepresentation against several defendants. In 2018, the plaintiff entered into a settlement pursuant to which the action was dismissed as against several individual defendants, while the defendant accounting firm agreed to pay USD$1 million (which was the statutory maximum of damages against these defendants). At that point, only Nobilis remained as a defendant.

In 2019, the court dismissed the plaintiff's certification motion as against Nobilis. The plaintiff then settled with Nobilis, on the basis that Nobilis would withdraw its appeal, in return for reducing the costs of the failed certification motion at CAD$250,000.

As part of this ultimate settlement, the court approved a total of approximately CAD$500,000 in class counsel fees (USD$300,000 on the original settlement, and an additional CAD$100,000) on the ultimate settlement), and approximately CAD$160,000 for disbursements (principally expert fees). Class counsel received a small amount of funding, around CAD$95,000, from the Class Proceedings Fund. Subtracting the plaintiff's cost liabilities owed to Nobilis, approximately CAD$258,000 was held in trust from the CAD$1 million settlement with the accounting firm.

As such, given the economics of this case, it was economically unviable to distribute the remainder of the settlement funds to the class. According to the court, "the costs of the notice program and the distribution scheme would wipe out any recovery to the class, which, in any event, would be about $0.01 on the dollar."

In the circumstances, the court held that it was appropriate to direct the remainder of the undistributed settlement funds to be paid to the Class Proceedings Fund:

The factual circumstances of the immediate justify a cy près distribution to the Class Proceedings Fund, which accepted the risk of this class action and without whose support, the class proceeding would not have been viable at all. I, therefore, approve the proposed cy près distribution.

The Class Proceedings Fund was established by a 1992 amendment of the Law Society Act. Administered by The Law Foundation of Ontario, its purpose is to provide financial support for plaintiffs to class proceedings in respect of disbursements and adverse cost awards. In other words, funds going to the Class Proceedings Fund will be used to support future class actions.

The court justified its approval of the cy près distribution on the basis that it would fulfill the access to justice and behavioural modification purposes of the Class Proceedings Act. However, the court did not give much reasoning to explain how that is, especially in light of the fact that this was ultimately a costly and failed class action against the issuer. It is also worth noting that the court declined to order a requested "honorarium" for the representative plaintiff, with the result that the plaintiff derived no direct benefit at all from litigation for which its counsel received CAD$500,000 in fees.

As well, there are conceivably other causes that would further the court's stated aims, in equal if not in greater measure. Should cy près distributions be made to other socially meritorious endeavours? If so, should there be public participation to determine what such causes should be? While cy près distributions remain a tool in the design of class action settlements, this decision invites a critical examination of this practice.

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