Counsel’s recommendation rejected as judge weighs in on cy-près debate

In an unusual decision acknowledging the burgeoning debate over cy-près awards, a Superior Court judge has rejected the recommendation of class counsel about who should receive the residual funds from a class action launched by investors in the Bre-X Minerals Ltd. case.

Instead, Justice Paul Perell accepted a recommendation by a single class member on who should receive settlement funds that couldn’t be distributed among investors wronged in the Bre-X saga.

In Carom v. Bre-X Minerals Ltd., Perell decided to distribute 80 per cent of settlement residues to the Law Foundation of Ontario’s access to justice fund and ordered the remaining amount to go to a university one of the class members has links to.

Class counsel believed the school was a viable recipient but suggested the law foundation should receive the full $3.5 million with it then allowing other charities to compete for the funds as well.

But Perell said the University of Ottawa’s Telfer School of Management should receive some portion of the amount without competition. One of the class members, James Roache, is a member of the faculty at the school, according to the ruling. (The University of Ottawa’s web site shows Roache is an alumnus and a donor who has a business and finance ethics award named after him.)
“Whether a particular cy-près award satisfies the purposes of the Class Proceedings Act, 1992, can be a matter of debate, because there may be many worthy candidates that could arguably be connected to the collective or common interests of the class members and the goals of the particular class action, but class counsel should, at least, consider the views of class members,” wrote Perell.

“In the case at bar, class counsel was satisfied that the Telfer School was an appropriate candidate for a cy-près award.”

Perell acknowledged it was extraordinary for the court to reject class counsel’s recommendations. “I wish to make it clear, because the case at bar may have implications for other cases about the administration of a settlement agreement, the court will normally not second guess the decision of class counsel between worthy and appropriate recipients of a cy-près award,” he wrote.

“The problem in the immediate case, however, is that class counsel’s recommendation was, in effect, a recommendation that the LFO, which in and of itself is a worthy candidate, should decide who are the other worthy candidates.”

But to University of Windsor law Prof. Jasminka Kalajdzic, class counsel generally have the best interests of the whole class at heart and their recommendations should trump one made by a single class member.

Giving the money to an organization a class member like Roache has links to “is not obviously representative of the collective interest whereas class counsel is specifically charged with representing and protecting the best interest of the class,” says Kalajdzic.

“Why arbitrarily give 20 per cent to a recipient proposed by one class member out of a class of thousands?” she asks.

Kalajdzic recently published a study that found the courts often approve cy-près awards without proof of the difficulty of distributing the funds among class members. She also found there’s no guidance for the courts on how to distribute cy-près awards.

“Judges accept, with little or any discussion, the submissions or evidence that identifying class members is ‘cost-prohibitive,’” the study says.

Although she agrees it wasn’t possible to distribute the funds in Carom among class members as the cost of distribution would have far exceeded the benefit to all investors, Kalajdzic says the decision to assign 80 per cent of the funds to the law foundation and 20 per cent to the school shows the arbitrary nature of the process.

“What troubles me is the manner in which the judge decides who should receive the money,” she says, adding that when it comes to these decisions, “the case law is all over the map.”

Class action lawyer Garth Myers agrees. “Where did the 80-20 come from?” asks Myers, an associate at Koskie Minsky LLP. Cy-près awards are a developing area of jurisprudence, he says, noting “the reality is there are a Wild West of rules.”

In his decision, Perell said that when it comes to cy-près awards, courts are not “in the business of being a grant approving institution.”

“Cy-près awards are somewhat controversial, and academics have debated whether and how such awards advance the purposes and public law policies of class actions. There has been some academic criticism about the transparency and rationale for how courts approve the recipients of cy-près awards,” he wrote.

“The simple answer is that courts are not in the business of being a grant approving institution and the issue of a cy-près award arises in the context of an adversarial system in which the court is responsive to the submissions of the parties and treats a cy-près award as subject to the same approach and the same principles that apply to the rest of the proposed settlement or to the administration of an approved settlement.”

But by rejecting class counsel’s recommendation in this case, approving grants is exactly what the court did, according to Myers.

“It’s a very interesting decision because at paragraph 136, Justice Perell says the ultimate decision remains with class counsel and then he goes on to vary the recommendation of class counsel,” he says.

“It’s sort of saying one thing and doing another,” he adds.

“I think in cases like this, class counsel’s recommendation should go a long way because they’re obliged to act in the best interest of the class. So I agree with the principle but not its application.”

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