Lepitre v. Welder, 2013 ABQB 18

Court of Queen ’ s Bench of Alberta Citation: Lepitre v. Welder, 2013 ABQB 18 Date: 20130110 Docket: 0901 19222; 1101 00609 Registry: Calgary Docket 0901 19222 Between: Michael Lepitre Plaintiff - and - Douglas Welder Defendant And Between: Docket : 1101 00609 Chadwick Ventures Inc. Plaintiff - and - Douglas Welder, Douglas W. Welder & Company Law Corporation,

Enrique Toscano, Knight Capital Corporation, Kustom Design Professional Services Corp., Kustom Design Strategies Inc., International Fiduciary Corp. S.A., Roy M. Terry Jr. As Receiver of International Fiduciary Corp.

S.A., ABC Corporation, XYZ Corporation, Kustom Design Group Inc., 1204322 Alberta Ltd. 4240278 Canada Inc., Baymart Capital Corporation, Michael Lepitre and Mark Jones Defendants _______________________________________________________ Reasons for Judgment of the Honourable Chief Justice Neil Wittmann _______________________________________________________ Introduction [ 1 ] A Joint Application has been brought by the Plaintiff and Defendant (“Joint Applicants”) under the Class Proceedings Act , S.A. 2003, c.

C-16.5 claiming detailed relief, including certifying the action as a class proceeding on a no opt-out basis, defining the Alberta Settlement Class, approving a Multi-Jurisdiction Settlement Agreement and Distribution Plan, staying Chadwick Ventures Inc. v.

Douglas Welder (Court of Queen’s Bench of Alberta - Judicial District of Calgary, Action 1101 00619) as against Douglas Welder and barring all claims against the Defendant, Douglas Welder and his insurer, in connection with monies deposited in his trust account in relation to a fraudulent investment. [ 2 ] Chadwick Ventures Inc. (“Chadwick”) has cross applied for an Order declaring that it is not a member of the proposed Alberta Settlement Class.

Alternatively, Chadwick has asked the Court to define the class in such a manner as to exclude Chadwick and in the further alternative, has asked the Court to declare that Chadwick has the right to opt-out of the class action proceedings in Alberta. [ 3 ] Many of the background facts are not in issue.

Chadwick’s position in opposition is based on the nature of his involvement and the potential for a recovery from Welder’s insurer, should he be allowed to pursue his separate action. [ 4 ] At the opening of the oral hearing of these applications, I indicated to counsel that the Alberta Rules of Court (ARC) require that a judge who facilitated a Judicial Dispute Resolution cannot hear or decide any subsequent application in the action without the written agreement of every party, as well as the agreement of the judge: ARC 4.21(1).

I heard a Judicial Dispute Resolution with respect to this matter on an earlier occasion. The matter was not resolved. I indicated to counsel that I would be willing to bring in another judge for the hearing of the application. All counsel indicated to me that they were aware of ARC 4.21(1) and after a brief adjournment submitted the written agreement of the parties before me that I would hear the application and I agreed.

Background Facts [ 5 ] The fraudulent investment in question arose through a Ponzi scheme marketed to investors in British Columbia and Alberta under the name International Fiduciary Corp., S.A. (“IFC”). The IFC scheme has been the subject of investigation or action by the British Columbia Securities Commission (“BCSC”), the Alberta Securities Commission, the Manitoba Securities Commission, the United States Securities and Exchange Commission (“SEC”) and the Royal Canadian Mounted Police.

The description of the IFC scheme is set out in the BCSC decision, February 20 th , 2008, as follows. [ 6 ] Daniel Eric Byer (“Byer”), Malcolm Cameron Boyd Stevenson (“Stevenson”), and Preston Pinkett II (“Pinkett”) started the IFC scheme using IFC as the investment vehicle. It was a sham. The minimum investment was $100,000, deposited in the United Bank, a U.S. bank in Arlington, Virginia. Stevenson, Pinkett and Byer told investors that their investment was not at risk, that they could withdraw their funds at any time on short notice.

The investors were promised a return of 6% per month through an asset growth program which involved using the investors’ money to buy First Tier Medium Term Bank Notes at a discount and then selling the notes at a profit. These statements were false. Stevenson, Pinkett and Buyer knew they were false and took over $12.7 Million Dollars of investor money for their own use. Of the almost $42 Million Dollars deposited into a pooled account at the United Bank, about $26 Million Dollars was returned to investors before the scheme collapsed.

IFC, Boyd, Stevenson and Pinkett were the subject of an action by the BCSC which issued a Temporary Order and Notice of Hearing dated November 1 st , 2006 requiring them to cease trading and to cease all investor relations. Similarly, the Alberta Securities Commission and Manitoba Securities Commission issued cease trade and related Orders against IFC, Stevenson, Byer and Pinkett. [ 7 ] On December 4 th , 2006, a complaint was made by the SEC against Byer, Stevenson and Pinkett. A Temporary Restraining Order was issued freezing IFC’s assets, resulting in the appointment of a Receiver in January 2007.

In March 2007, the Receiver reported that it recovered cash in the amount of $8,697,025.33 (USD) and later approved claims in the sum of $12,903,345.27 (USD). [ 8 ] Welder, at all material times, was a Kelowna, British Columbia lawyer maintaining a trust account. Lepitre wire transferred $60,000 (USD) into Welder’s trust account in 2006. He was induced to do so through Enrique Toscano (“Toscano”) who owned a corporation, Knight Capital Corporation (“Knight Capital”), which was the vehicle through which the money was to be invested in IFC.

Toscano instructed Welder and Toscano told Lepitre to send the money to Welder. [ 9 ] The evidence is that Welder has no personal assets that could be used to satisfy any potential judgment against him and that his only asset is his Professional Liability Policy or Policies (the “Policies”) with the Lawyer’s Insurance Fund, a captive insurer of the Law Society of British Columbia. [ 10 ] The Multi-Jurisdiction Settlement Agreement entered into and confirmed by the Court in British Columbia provides that all of Welder’s Part A available insurance proceeds, less defence costs, will be paid to eligible class members on a pro-rata basis.

The Policies in question have defence expense eroding policy limits for Part A. The Part A limits are $1,000,000 Dollars. Part A generally covers lawyers’ negligence. The Part B limits are $300,000 Dollars and generally cover dishonest misconduct. The Part B limits are not defence expense eroding. The Policies are claims made policies and it is asserted by the Joint Applicants that only one policy will respond to the IFC investor claims. The Policies define an “error” under each of Part A and Part B.

Conduct constituting an error within each definition, triggers coverage under that Part, subject of course to relevant exclusions.

An “error” under Part A means ... “an actual or alleged negligent act, negligent error or negligent omission” ... [ 11 ] An “error” under Part B means ... “a dishonest appropriation of money ... which was entrusted to and received by the Individual Insured [Welder] in his ... capacity as a Barrister and Solicitor and in relation to the provision of professional services to others.” [ 12 ] Welder is represented in this Court and the British Columbia Court by a lawyer appointed by Welder’s insurer. [ 13 ] The recovery of monies by the Receiver in the United States was such that claims of the class members in British Columbia and Alberta are to be paid on a pro-rata basis, provided the money invested found its way to IFC.

Chadwick made a claim. Its claim was denied by the Receiver on the basis that the money it deposited into Welder’s trust account never made its way to IFC and that therefore it was not eligible to recover any share of the monies recovered by the Receiver. Chadwick has commenced a separate action as indicated

above. Welder’s insurer says it will settle only if Chadwick is included in the Alberta Settlement Class and is prohibited from opting out of that class and if the insurer and Welder obtain a release upon payment of the limits remaining under Part A of the Policy, which are approximately $830,000 Dollars at this point in time. [ 14 ] Should Chadwick’s cross-application be allowed, Welder’s insurers say they will not put up the remainder of their Part A Policy limits. [ 15 ] Some of the facts and positions of the parties will be elaborated below. Positions of the Parties (

A) The Joint Applicants, Lepitre and Welder [ 16 ] The claim against Welder by Lepitre, commenced on December 22 nd , 2009, alleges that Welder acted dishonestly, or in the alternative, negligently.

Welder denied the Plaintiff’s allegations and raised a number of defences including that Welder did not have a retainer with any class member and therefore, did not owe them any duties, that the class members who did have dealings with Welder did not rely on him and his conduct did not cause the loss, that the class members were themselves complicit in the scheme because they were paid some initial return on their investment and that they were contributorily negligent. [ 17 ] The main thrust of the joint submission is that Welder has no assets but for the Policies, a 2007 Policy and a 2010 Policy.

It is asserted that the 2007 Policy responds to the claims raised in the Lepitre action and the British Columbia class action already certified and settlement approved. Further, it is asserted that the Chadwick action was commenced in 2010 and that therefore either the 2007 Policy of the 2010 Policy applies. [ 18 ] The evidence is there are approximately 13 legitimate class members in British Columbia and Alberta who invested approximately $2.7 Million Dollars into Welder’s trust account in relation to the IFC scheme and that 7 of those members are in Alberta.

The Joint Applicants entered into a detailed analysis of the 2007 Policy and the 2010 Policy. They say that Part A of the 2007 Policy covers negligence and Part B covers dishonest appropriation of trust money, that the limits under Part A are $1,000,000 less defence costs. Further, they say that coverage is restricted to the performance of professional services but if Welder was performing them, a claim can only fall into one of Part A or Part B, because actual or alleged dishonest, fraudulent or malicious acts are excluded from Part A, whereas fraudulent acts are covered under Part B.

They argue there can only be one error in the circumstances, as defined by Part A and that Part A is eroded by defence costs. [ 19 ] The Joint Applicants further submit that Part B, on the other hand, has a limit of $300,000 per claim but there are contained in Part B relevant exclusions. Some of those exclusions are: An exclusion applicable to Part B of the 2007 Policy: 15. A claim arising from or in connection with an investment.

This exclusion does not apply to any part of the investment funds dishonesty appropriated, that is diverted by the individual insured to any party, including the individual insured, not contemplated by the terms of the investment. [ 20 ] The 2010 Policy contains a similar relevant Part B exclusion stated as follows: 17. A claim that is connected to or arises out of, in whole or in part an investment, a purported investment or a Ponzi scheme. [ 21 ] The Joint Applicants say, that in light of the difficulties with the insurance coverage, it is likely that the class would fail in

asserting a claim under Part A or Part B, even if a judgment were to be recovered against Welder. Further, that the insurer’s offer to pay Part A limits, less defence costs to date, is favourable to all of the members of the class including Chadwick.

But Welder’s insurer says it will not surrender its remaining limits under Part A, as part of the approved settlement, unless Welder and the insurer is released and that cannot happen unless Chadwick is made a member of the class and not allowed to opt-out and the Chadwick action stayed as against Welder. [ 22 ] The Joint Applicants point out, that the British Columbia class action has been settled on identical terms and approved by the British Columbia Supreme Court on September 11 th , 2009.

Further, that a Multi-Jurisdiction Settlement Agreement and Distribution Plan and a limited opt-out procedure was approved by the British Columbia Supreme Court on September 25 th , 2012. The limited opt-out procedure contemplates that if anyone opts out, the class counsel will apply to the Court to have that class member named as a party in the action and that failure to appear at the hearing will result in the opt-out notice being declared null and void.

Since the hearing of this application, the Court has been advised that no member of the British Columbia Settlement Class elected to opt-out. [ 23 ] The proposed Distribution Plan, if the terms in the Settlement Agreement are approved by this Court, are essentially the same as that approved by the British Columbia Supreme Court. It includes provisions that the Courts will have a supervisory role, with the Alberta Court having the primary supervisory role over the administration and settlement in the Alberta action and the distribution of the settlement fund to class members resident in Alberta.

The assessed value of each class member’s investment in IFC would include credits for any monies received under the scheme or from the Receiver process. Thus, Chadwick’s claim would not be subject to a deduction for any amount paid by or through Receiver, because the Receiver refused to pay Chadwick anything because its money did not reach IFC.

The administration of the settlement is proposed to be done by class counsel. [ 24 ] The Joint Applicants propose a class definition as follows: All persons resident in Alberta who placed funds into or through the trust account of Douglas Welder in association with the IFC scheme. It is also proposed that the issues to be certified would be that as stated a common issue in the British Columbia action as follows: Was the settling Defendant negligent or otherwise liable to the members of the BC settlement class and the settlement subclass in relation to the legal services he provided in respect of the IFC scheme?

If so, what aggregate damages, if any, did such persons suffer? The same common issue is proposed in this action, changing the settlement class to the Alberta Settlement Class from the British Columbia Settlement Class. [ 25 ] The essence of the Joint Application is that the Court ought to stay the Chadwick action, define the Alberta Settlement Class as including Chadwick, and not permit it to opt-out. The position of the Joint Applicants is based on the alleged futility of Chadwick’s action against Welder for dishonest appropriation of trust money in view of the exclusions in the Policies.

They say Welder has no assets other than the Policies and that recovery under those Policies would be subject to insurmountable exclusions. [ 26 ] Should the Court approve the settlement and grant the remainder of the relief asked for by the Joint Applicants, they submit that everyone benefits. That is, all members of the British Columbia class and the Alberta class including Chadwick, because Welder’s insurer has offered to put up its Part A policy limits, albeit defence eroding limits, now approximately $830,000 remaining.

Further, the applicant Welder, through the insurer, was adamant that should the Court not approve the settlement with Chadwick as a member of the Alberta class, or if Chadwick is a member, permits him to opt-out, Welder, through the insurer would refuse to settle with the British Columbia class and the Alberta class. (

B) Chadwick

[ 27 ] Chadwick asserts it has a separate and unique claim against Welder. The distinguishing feature, according to Chadwick, is that Welder misappropriated trust funds which never went to IFC and that no other investors involved in the IFC scheme are in the same position, because their money was transferred to IFC before its bank account was frozen. The principal of Chadwick is Chad Hughes (“Hughes”). His accountant, at all material times, was Lepitre. It was Lepitre that recommended the IFC scheme to Hughes.

Lepitre introduced Hughes to Toscano and the opportunity to participate in the IFC scheme was promoted and sold by Toscano. According to Hughes, on November 29 th , 2006, Chadwick wire transferred $200,000.00 to the trust account of Welder. Welder opened the file entitled “Knight - Chad Hughes / IFC”. Prior to this, Chadwick ways Welder became aware that the BCSC had issued a Cease Trading Order against IFC and Byer, Stevenson and Pinkett. He further states that Welder appeared as counsel for IFC at a hearing held by the BCSC on November 16 th , 2006.

The distribution of the trust monies belonging to Chadwick occurred from January to March 2007, when Chadwick’s monies were sent to Toscano, Lepitre’s company and another IFC investor. [ 28 ] Chadwick produced evidence that it was advised through Chad Hughes that the money would be deposited in the lawyer’s trust account in British Columbia and that Hughes believed that the lawyer would ensure the investment was legitimate and that his interest was protected.

In addition, Chadwick argues that on November 29 th , 2006, the wire transfer of $200,000 Dollars to the trust account of Welder was made after Welder knew that on November 1 st , 2006, the BCSC issued a Cease Trading Order against IFC and its insiders shutting down the sale of the program to investors. The submission of Chadwick is that it has been provided with the trust account records of Welder and that in the period January to March 2007, Welder transferred $100,069.54 of Chadwick ’ s trust funds to Lepitre ’ s company and $60,263.67 to Enrique Toscano.

Further, that Welder also wired $12,543.18 to another IFC investor and paid himself, that is Welder, $838.28 for services rendered. [ 29 ] Chadwick further points out that the Receiver appointed by the SEC which succeeded in freezing IFC monies, rejected Chadwick’s claim after Chadwick filed a Proof of Claim with that the Receiver on January 17 th , 2010. The claim was rejected on the basis that there was no evidence that the Chadwick money could be traced into IFC.

It was conceded during argument by the Joint Applicants and there is evidence to support the fact that the Receiver will be distributing funds to the Alberta and British Columbia class members, having accepted proofs of claim from them, showing their money was in fact sent to the United Bank in Virginia, as part of the IFC scheme. Therefore, as Chadwick points out, all of the other people defined in the Settlement Agreement as the Alberta class members with the exception of Chadwick are receiving monies from the United States Receiver, whereas Chadwick receives nothing.

Further, Chadwick says it has no interest in pursuing Welder for any cause of action other than dishonest appropriation of trust funds, notwithstanding the present Statement of Claim issued by Chadwick, as amended, makes broader allegations, including negligence against Welder. Chadwick indicates it is not going to assert any entitlement to a claim against Welder for negligence, or any other cause of action, but for dishonest appropriation of trust funds.

Chadwick submits that therefore it would not be entitled to recover anything under Part A of the Policies and seeks to recover only under Part B of the Policies. As indicated above, the Part B policy limits are $300,000 exclusive of defence costs, whereas, as already been stated, the Part A limits are a $1,000,000, including defence costs. [ 30 ] Chadwick states that the British Columbia class action settlement class, certified in the decision of Slade J. on September 11 th , 2009 defined the class as: ... “class members are people who lost money in the IFC scheme.

The Defendants are two lawyers, Welder and McCandless who received the class members’ money into their trust accounts in relation to IFC and forwarded such funds into the IFC scheme:” Denis Hall v. Henry Alexander McCandless and Douglas Welder , British Columbia Supreme Court, Docket S073021, Vancouver Registry, para. 10. [ 31 ] In addition, Chadwick states that the British Columbia class members were to receive a payment or distribution from the United States Receiver and that Chadwick was denied that payment because the Receiver said Chadwick’s money never went to IFC.

Further, Chadwick states that its claim against Welder is for wrongfully taking trust money which would be covered under Part B of the Policies. Chadwick has requested this Court order and declaration that it is not a member of the British Columbia and Alberta class actions and therefore, there is no requirement that it be allowed to opt-out of the Alberta class proceeding, or alternatively if it is a member of the class, it be permitted to opt-out and proceed with its action. Legislation [ 32 ] The relevant provisions of the Class Proceedings Act are as follows:

1 In this Act, (a) “certification order” means an order certifying a proceeding as a class proceeding; (b) “certified”, in respect of a proceeding, means certified as a class proceeding; (b.1) “class” means 2 or more persons with common issues related to a cause of action or a potential cause of action; (c) “class member” means a person who is a member of a class on whose behalf a proceeding that is certified as a class proceeding is commenced or otherwise conducted; (d) “class proceeding” means a proceeding certified as a class proceeding under

Part 1; (e) “common issue” means (

i) common but not necessarily identical issues of fact, or (ii) common but not necessarily identical issues of law that arise from common but not necessarily identical facts; (h.2) “multi-jurisdictional class proceeding” means, except where the context requires otherwise, a proceeding certified as a multi- jurisdictional class proceeding under

Part 1; (j) “prospective class member” means, in respect of a proceeding that has not yet been certified as a class proceeding, a person who will be a class member if the proceeding is certified; (k) “prospective subclass member” means, in respect of a proceeding for which a representative plaintiff for a subclass has not yet been appointed, a person who will be a subclass member if a representative plaintiff is appointed for the subclass; (o) “subclass members” means persons who are class members but who also make up a subclass of the class members and who, in respect of that subclass, have a claim that raises common issues that are not shared by all the class members and for whom a representative plaintiff has been appointed. 2(1) One member of a class of persons may commence a proceeding in the Court on behalf of the members of that class.

(2) A person who commences a proceeding under subsection (1) must (

a) make an application to the Court for an order certifying the proceeding as a class proceeding and, subject to subsection (4), appointing that person, or another person who on certification will be a member of the class, as the representative plaintiff, and 3(1) A defendant to a proceeding may, at any stage of the proceeding, make an application to the Court for an order certifying the proceeding as a class proceeding and appointing a person who on certification will be a member of the class as the representative plaintiff, whether or not more than one proceeding has been commenced against the defendant. 4 Where a plaintiff has reached a settlement with a defendant in respect of a proceeding prior to the proceeding’s being certified but certification of the proceeding as a class proceeding is being sought as a condition of the settlement for the purposes of imposing the settlement on persons who will be class members in respect of the proceeding if the proceeding is certified as a class proceeding, those persons, on the application for certification being commenced, constitute a settlement class with respect to the proceeding for which certification is being sought. 5(1) In order for a proceeding to be certified as a class proceeding on an application made under

section 2 or 3, the Court must be satisfied as to each of the following: (

a) the pleadings disclose a cause of action; (

b) there is an identifiable class of 2 or more persons; (

c) the claims of the prospective class members raise a common issue, whether or not the common issue predominates over issues affecting only individual prospective class members;

(

d) a class proceeding would be the preferable procedure for the fair and efficient resolution of the common issues; (

e) there is a person eligible to be appointed as a representative plaintiff who, in the opinion of the Court, (

i) will fairly and adequately represent the interests of the class, (ii) has produced a plan for the proceeding that sets out a workable method of advancing the proceeding on behalf of the class and of notifying class members of the proceeding, and (iii) does not have, in respect of the common issues, an interest that is in conflict with the interests of other prospective class members.

(2) In determining whether a class proceeding would be the preferable procedure for the fair and efficient resolution of the common issues, the Court may consider any matter that the Court considers relevant to making that determination, but in making that determination the Court must consider at least the following: (

a) whether questions of fact or law common to the prospective class members predominate over any questions affecting only individual prospective class members; (

b) whether a significant number of the prospective class members have a valid interest in individually controlling the prosecution of separate actions; (

c) whether the class proceeding would involve claims that are or have been the subject of any other proceedings; (

d) whether other means of resolving the claims are less practical or less efficient; (

e) whether the administration of the class proceeding would create greater difficulties than those likely to be experienced if relief were sought by other means.

(3) Where the Court is satisfied as to each of the matters referred to in subsection (1)(

a) to (e), the Court is to certify the proceeding as a class proceeding.

(4) The Court may not certify a proceeding as a class proceeding unless the Court is satisfied as to each of the matters referred to in subsection (1)(

a) to (e).

(5) Notwithstanding subsection (3), where an application is made to certify a proceeding as a class proceeding for the purposes of binding members of a settlement class, the Court may not certify the proceeding unless the Court has approved the settlement.

(6) If a multi-jurisdictional class proceeding or a proposed multi- jurisdictional class proceeding has been commenced elsewhere in Canada that involves subject-matter that is the same as or similar to that of a proceeding being considered for certification under this section, the Court must determine whether it would be preferable for some or all of the claims or common issues raised by the prospective class members to be resolved in the proceeding commenced elsewhere.

(7) When making a determination under subsection (6), the Court must be guided by the following objectives: (

a) ensuring that the interests of all parties in each of the relevant jurisdictions are given due consideration; (

b) ensuring that the ends of justice are served; (

c) where possible, avoiding irreconcilable judgments; (

d) promoting judicial economy.

(8) When making a determination under subsection (6), the Court may consider any matter that the Court considers relevant but must consider at least the following: (

a) the alleged basis of liability, including the applicable laws; (

b) the stage each of the proceedings has reached; (

c) the plan for the proposed multi-jurisdictional class proceeding, including the viability of the plan and the capacity and resources for advancing the proceeding on behalf of the prospective class members; 14 The Court may at any time stay or sever any proceeding related to the class proceeding on any terms or conditions that the Court considers appropriate. 17(1) A person who meets the criteria to be a class member in respect of a class proceeding is a class member in the class proceeding unless the person opts out of the class proceeding.

(2) The Court may, in a certification order or at any time, (

a) specify the manner in which and the time within which the members of a class, or any individual member of a class, may opt outof the proceeding, and (

b) impose terms or conditions subject to which the class members or an individual member may opt out of the proceeding.

(3) A person who opts out of a class proceeding ceases, effective from the time the person opts out, to be a class member of the classproceeding.

(4) Notwithstanding anything in this section, where the Court certifies a proceeding pursuant to an application by a defendant, a classmember is prohibited from opting out of the class proceeding other than with leave of the Court. Authorities and Secondary Sources [33] The parties have cited the following: Adrian v. Canada (Minister of Health), ABQB 376 ; Amoco Canada Petroleum Co. v. Propak Systems Ltd.,2001 ABCA 110, [2001] A.J. No. 600 (Alta. C.A.); Dabbs v. Sun Life Assurance Company of Canada, [1998]O.J. No.1598 (Gen Div) and(1998), (ON SC), 40 O.R. (3d) 429 (Gen.

Div.); affirmed (1998), (ON CA), 41 O.R. (3d) 97(CA);leave to appeal to SCC denied [1998] SCCA No. 372; Hall v. McCandles et al, (11 Sept 2009), Vancouver S073021 (In Chambers);Jeffery v. Nortel Networks Corp., 2007 Carswell BC 90 (SC); National Trust Co. v. Smallhorn, [2007] O.J. No. 3825 [Ont. S.C.J.]; Ortizv. Fibreboard Corp. (97-1704) 527 U.S. 815 (1999) 134 F. 3d 668; Sawatzky v. Societe Chirurgicale Instrumentarium Inc., (BCSC); Sun-Rype Products Ltd. v. Archer Daniels Midland Co. 2010 Carswell BC 850 (SC [In Chambers]); Western CanadianShopping Centres Inc. v.

Dutton, 2001 SCC 46, [2001] 2 S.C.R. 534, [2001] S.C.J. No. 63; Windsor v. Canadian Pacific RailwayLimited, 2006 ABQB 348 ; Alberta Law Reform Institute Final Report No. 85, Class Actions at pp. 99-101; J.A. Kazanjiam“Class Actions in Canada” (1973), 11 Osgoode Hall L.J. 397 at pp. 401 and 410. [34] The Joint Application of Lepitre and Welder asks for the following relief: (

a) An order certifying the action as a class proceeding in accordance with sections 2 and 3(1) of the Class Proceedings Act, SA2003, c. C-16.5, for the purpose of settlement. (

b) An order that pursuant to section 17(4) of the Class Proceedings Act, SA 2003, c. C-16.5, the action is certified as a classproceeding on a no opt-out basis. (

c) An order that the Alberta Settlement Class be defined as: All persons resident in Alberta who placed funds into or through the trust account of Douglas Welder in association with the IFCscheme. (

d) An order appointing Michael LePitre as representative plaintiff in this action, representing the Alberta Settlement Class. (

e) An order certifying the common issue as follows: Was the Settling Defendant negligent or otherwise liable to the members of the Alberta Settlement Class in relation to the legal serviceshe provided in respect of the IFC scheme? If so, what aggregate damages, if any, did such persons suffer? (

f) An order that the Multi-Jurisdiction Settlement Agreement entered into with the defendant Douglas Welder, attached as Schedule“A” to the Application, is approved pursuant to

section 35 of the Class Proceedings Act, SA 2003, c. C-16.5 and shall be implemented inaccordance with its terms. (

g) An order approving the Distribution Plan attached to the Application as

Schedule “B”. (

h) An order approving the Notice to Class Members of the Certification and Settlement Approval attached to the Application asSchedule “C”. (

i) An order appointing Camp Fiorante Matthews Mogerman as the Administrator. (

j) An order staying Chadwick Ventures Inc. v. Douglas Welder (Court of Queen’s Bench of Alberta - Judicial District of Calgary,Action No. 1101-00609) as against the defendant Douglas Welder.

(

k) An order barring all claims against the defendant, Douglas Welder, and his insurers in connection with monies deposited in his trust account in relation to the IFC scheme. [ 35 ] The relief requested by Chadwick in its application is as follows: 1. An Order abridging the time for service of this Application. 2. An Order declaring that Chadwick Ventures Inc. (“Chadwick”) is not a member of the class action proceedings commenced against the Defendant Douglas Welder in Alberta and British Columbia. 3.

In the alternative, an Order that the Alberta Settlement Class be defined as: “All persons resident in Alberta who placed funds into or through the trust account of Douglas Welder which were transferred to or invested in the IFC scheme.” 4. In the alternative, an Order declaring that Chadwick has the right to opt-out of the class action proceedings in Alberta in accordance with the provisions of the Class Proceedings Act , or granting Chadwick leave to opt-out.

Issues [ 36 ] The Joint Application is not contested by Chadwick so long as Chadwick is not included in the Alberta class or, alternatively, if included, is allowed to opt-out.

Therefore, there is no contest with respect to certifying the action as a Class Proceeding, appointing Michael Lepitre the representative Plaintiff representing the Alberta Settlement Class, declaring the common issue requested, approving the Multi-Jurisdiction Settlement Agreement and the Distribution Plan, approving the Notice to Class Members of the Certification and Settlement Approval, appointing Camp Fiorante Matthews Mogerman as the Administrator. [ 37 ] The remainder of the relief asked for by the Joint Applicants, mainly the definition of the Alberta Settlement Class on a no opt-out basis, an order staying Chadwick Ventures Inc. v.

Douglas Welder as against Welder and a Bar Order barring all claims against Welder and his insurer in connection with monies deposited in his trust account “in relation to” the IFC scheme, remains an issue. Analysis [ 38 ] This Court is mindful of the authorities cited by the Joint Applicants in favour of certification, including the principles summarized by Rooke J. (as he then was) in Windsor at paragraph 67 . In addition, the statutory requirements for certification as set forward in the Class Proceedings Act ,

section 5 and section 3(1) where the defendant may apply, are noted. There is an identifiable class and the claims raise common issues. Chadwick puts forth a definition of a Alberta class member which is different from the definition put forth by the Joint Applicants. The difference is significant.

Chadwick’s definition would exclude Chadwick as an Alberta class member and there would be no need for the Court to consider whether Chadwick is entitled to opt-out, if Chadwick is not a member of the Alberta class. [ 39 ] The definition sought by the Joint Applicants is as follows: All persons resident in Alberta who placed funds into or through the trust account of Douglas Welder in association with the IFC scheme. [ 40 ] The definition put forth by Chadwick is as follows:

All persons resident in Alberta who placed funds into or through the trust account of Douglas Welder which were transferred to or invested in the IFC scheme. [ 41 ] It is not disputed that Chadwick’s funds were never transferred to or invested in the IFC scheme. They were placed in Welder’s trust account and were disposed of as indicated above. There is no doubt that Chadwick’s $200,000 was lured to Welder’s trust account to be placed in the IFC scheme.

Welder’s trust account ledger, in evidence as Exhibit D to the Affidavit of Hughes is entitled: “Matter: Chad Hughes - IFC Funds.” The description of the investment, in the Affidavit of Hughes, paragraph 4, is consistent with the description in the BCSC decision. Chadwick says that it is unique, in that none of its money went to the United Bank in Virginia from Welder’s trust account and that every other member of the British Columbia and Alberta Settlement Class had money go to the United Bank to IFC.

Therefore, Chadwick asserts he has a separate and unique claim against Welder for dishonest appropriation of funds to third parties. His money was never invested in IFC. [ 42 ] As noted above, “class” is defined in

section 1 (b.1) of the Class Proceedings Act as meaning two or more persons with common issues related to a cause of action or a potential cause of action. Chadwick has many common issues with the proposed Alberta Settlement Class members. Regard must be had to the definition of “common issue” in

Section 1(

e) of the Class Proceedings Act which makes clear that issues of law need not be identical and may arise from common, but not necessarily identical, facts. Similarly, the issues of fact need not necessarily be identical to be common issues of fact. [ 43 ] Having regard to the foregoing, all investors including Chadwick were lured into the IFC scheme, all put money in Welder’s trust account, all have a cause of action or potential cause of action against Welder based on a common issue, as defined in the Class Proceedings Act .

Chadwick has common but not necessarily identical issues of fact and issues of law that arise from common but not necessarily identical facts. Accordingly, I accept the definition of the Alberta Settlement Class as proposed by the Joint Applicants.

Opting-Out [ 44 ] The Joint Applicants point out that section 17(4) makes an express provision that when a class action is certified on the application of the defendant, that no opt-outs will be permitted without leave of the Court and seeks this Court’s declaration that no opt- outs will be permitted, a declaration aimed at Chadwick. [ 45 ] The cross application before me expressly seeks permission by Chadwick to opt-out. The submission of the Joint Applicants is that the objective of the Court ought to be to preserve Welder’s realizable assets. There are none, but for the proceeds of his Policies.

The argument is that because under Part A, there are $1,000,000 limits eroded by defence costs, there remains only approximately $830,000 available to the British Columbia and Alberta Settlement Class members. [ 46 ] In support of this argument, the Joint Applicants cite the Final Report #85 “Class Actions” from the Alberta Law Reform Institute , December 2000, at pages 99-101 and quote the passage page 100 where it is stated: ... where the Court certifies a plaintiff class on a defendant’s application, plaintiff class members could defeat the purpose of the Court order by opting-out.

The Joint Applicants argue allowing Chadwick to opt-out would defeat or frustrate the very purpose of the class proceeding. [ 47 ] Following this line of reasoning, an inquiry as to the “purpose of the Court order” is required. In the context of this case, the purpose of the Court order requested by the Joint Applicants is to access the remainder of the Part A limits, namely $830,000 of the Policies. [ 48 ] Leave of the Court may be granted on terms.

Section 17(2) of the Class Proceedings Act authorizes this Court to specify the manner in which, and the time within which, a class member may opt-out of the proceeding and impose terms or conditions, subject to which the member may opt-out of the proceeding. Chadwick comes forward and says that it is unfair to it to be excluded by the United

States Receiver from a distribution of the frozen assets under the IFC scheme because his money never made it into the IFC scheme and at the same time, to put Chadwick in a class with Alberta and British Columbia residents whose money did make it into the United Bank to IFC, thus entitling them to a distribution. As stated by Mr. Justice Slade in Hall v.

McCandless and Welder at para. 31, in his certification decision in British Columbia, when the remaining Part A limits were “approximately $900,000”, this money “tops up money already recovered by the receiver.” [ 49 ] Chadwick will receive no money from the Receiver to “top up”. [ 50 ] Moreover, Chadwick says it has no interest in pursuing a negligence claim against Welder. It wishes to proceed only a cause of action based on dishonest appropriation of trust money.

That, says Chadwick, would trigger potential recovery under Part B of the Policies only. [ 51 ] The purpose of the Court order requested by the Joint Applicants is to excise The Law Society of British Columbia’s captive insurer from any further exposure respect of claims against Welder for any cause of action by anyone associated with the IFC scheme.

But the purpose of Chadwick’s opting-out is not to defeat the purpose of the Court order, in terms of certification, the approval of the multi-jurisdictional settlement and all of the ancillary relief asked for in the Joint Application, except for a stay of the Chadwick action, a Bar Order and preventing Chadwick from opting-out. Everything else may proceed.

As will be seen below under the heading of the Bar Order, The Law Society of British Columbia’s Part A of Welder’s policy may be exhausted without further exposure from Chadwick to the insurer under Part A. [ 52 ] In deciding to let Chadwick to opt-out, this Court is conscious of Chadwick’s different position from that of the other investors in the IFC scheme and the unfairness that would result to Chadwick were it required to participate as a member of the Alberta Settlement Class.

The Bar Order and Opting-Out Terms [ 53 ] The relief asked for is that this Court make an Order barring all claims against Welder and his insurer in connection with monies deposited in his trust account in relation to the IFC scheme. I will grant a Bar Order, modified to the extent that the Bar Order requested will not apply to Chadwick, as it pertains to any potential recovery under Part B of the Policies. It will apply to Chadwick as it pertains to any potential recovery under Part A of the Policies.

Chadwick will not be permitted to pursue a claim against Welder which, if successful, would require the insurer to indemnify Welder for a judgment covered by Part A of the Policies. Chadwick may only pursue Welder for a judgment for dishonest appropriation of trust funds. For greater certainty, Chadwick will not be allowed to pursue Welder for a claim arising out of an error as defined in Part A of the Policies. [ 54 ] In making the Bar Order as modified and in allowing Chadwick to opt-out, I have considered the following additional factors.

First, the Multi-Jurisdiction Settlement Agreement by its terms contemplates in

section 4.1(2) that a member of the Alberta Settlement Class may not opt-out without leave of the court. Therefore, the contemplation of the parties to the Agreement is that this Court may grant leave for a member of the Alberta Class to opt-out. Secondly, the combined result of the Joint Application and the Cross- Application by Chadwick has resulted in Chadwick being granted leave to opt-out on restricted terms.

Third, the parties contemplated the eventuality of opting-out in the Multi-Jurisdiction Settlement Agreement based on the number of members of the British Columbia and Alberta class who validly opt-out, or fail to opt-in, defined as the Threshold. The British Columbia Settlement Class has been defined without any opt-outs. Now the Alberta Settlement Class has been defined. It excludes only Chadwick. The Threshold number is unknown to the Court and it not in evidence.

Section 4.3(1) allows Welder to terminate the Multi-Jurisdiction Settlement Agreement in the event the Threshold number is exceeded. [ 55 ] It was urged upon me that I should basically protect Chadwick from a futile endeavour, namely the pursuit of Welder under Part B of the Policies. Much time was spent in oral and written argument by counsel for Welder appointed by the Law Society of British Columbia’s captive insurer under the Policies, attempting to persuade me that Chadwick’s claim, under Part B of the Policies, was doomed to fail, in part, because of the exclusions mentioned above. [ 56 ] This Court does not deem it appropriate to make findings about the proper

interpretation of the Policies in the context of the limited facts on the applications before it. Nor should this Court make findings as to the nature and scope of Welder’s duties in accepting the trust monies in issue. What the Court has attempted to do, is to ensure that members of the British Columbia and Alberta classes may proceed to settle with Welder and his insurer while Chadwick is permitted to opt-out on terms. The terms of the opt-out and Bar Order

are calculated to limit the exposure of Welder’s insurer under Part A of the Policies, at least from Chadwick or because of Chadwick’s pursuit of its action against Welder. [ 57 ] The Court also notes, that Part A of the Policies expressly provides that the insurer has a duty to defend Welder in respect of a Part A error, but that Part B contains only the right of the insurer, but not the duty, to defend any suit against Welder in respect of an error under Part B. [ 58 ] It is not, in the view of this Court, its function to foreclose a litigant’s chance to recover, on the basis that an action against the Policies may be slim.

Chadwick will be entitled to proceed with its action on the terms stated. [ 59 ] The Court notes the provisions of

Section 7.2 of the Multi-Jurisdiction Settlement Agreement with respect to claims for contribution and indemnity.

Section 7.2 states, amongst other things, that if settlement class members make any claim or take proceedings against any other person or corporation who might claim contribution or indemnity from [Welder] which may result in the Court making a finding of fault against [Welder], then in a case where that person or corporation claims contribution or indemnity, an obligation arises on the part of the Settlement Class Member. The first obligation, is to notify the Court that a claim for contribution or indemnity has been brought.

The second obligation is to amend the pleading to make it clear that the relevant Settlement Class Member expressly waives any right to recover from the party claiming contribution or indemnity, any portion of the losses which they claim and which the Court may attribute to the fault of [Welder]. [ 60 ] Chadwick’s counsel, in oral argument, indicated that Chadwick could not stop a third party claim, which the Court took to mean a claim for contribution or indemnity by a co-defendant in the Chadwick action against Welder.

That may be so, but by applying the provisions of 7.2 of the Multi-Jurisdiction Settlement Agreement to Chadwick in the same manner into the same extent as if it were a Settlement Class Member that did not opt-out, the same protection to Welder and its insurer is achieved. [ 61 ] Thus, the disposition allowing Chadwick to opt-out is subject to an additional condition. In the Chadwick action, Douglas Welder and Douglas W. Welder & Company Law Corporation (“Welder”) are defendants. Should the co-defendants of Welder in that action bring a claim for contribution or indemnity against Welder, the provisions of

Section 7.2 of the Multi-Jurisdiction Settlement Agreement will apply to Chadwick in the same manner and to the same extent as if it were a Settlement Class Member. [ 62 ] Finally, the Court notes that it might be argued that Lepitre has a conflict in being appointed as a representative plaintiff in light of the provisions of Section 3(1) (e)(iii) of the Class Proceedings Act in light of the fact Lepitre is a defendant in the Chadwick action. There is evidence that Lepitre invested $60,000 (USD) into the trust account of Welder for placement into what later became known as the IFC scheme.

In the Lepitre Affidavit, there is also a explanation that Lepitre did not benefit personally from the IFC scheme by bringing in investors, nor did he receive any monies back. His corporation, Kustom Design Group Inc. received funds which he believes were distributed by a former Director, Mark Jones, to investors. No argument was put forward by Chadwick that he objected to Lepitre being the representative plaintiff, nor was any such argument put forward by any other party.

On this basis, the Court declines to delve into the issue and accepts the Joint Applicants and Chadwick’s submission on the representative plaintiff issue. Conclusion [ 63 ] The Joint Application requesting the relief detailed in paragraph 32 of these Reasons is granted as to (a), (c), (d), (e), (f), (g), (

h) and (i). [ 64 ] Chadwick is permitted to opt-out on terms. The Chadwick action will not be stayed as against Welder except for any allegations against Welder by Chadwick that would constitute an error under Part A of the Policies. [ 65 ] All claims by Chadwick against Welder and his insurer in connection with monies deposited in his trust account, in relation to the IFC scheme are barred, except for the claim of Chadwick for dishonest appropriation of trust funds on the basis of an error under Part B of the Policies. In the event of claims for contribution or indemnity against Welder in the Chadwick action, Chadwick will be subject to and bound by the provisions of

Section 7.2 of the Multi-Jurisdiction Settlement Agreement as if it were a Settlement Class Member.

[ 66 ] Chadwick may opt-out upon accepting the foregoing terms and sending its notification to the Joint Applicants’ counsel within thirty days of the entry of the Order resulting from these applications. In the event of an appeal, the thirty days will be extended to a period of thirty days subsequent to the final disposition of these applications. [ 67 ] The parties may speak to the Court with respect to costs of these applications, if necessary. Heard on the 22 nd day of October, 2012. Dated at the City of Calgary, Alberta this 10 th day of January, 2013. Neil Wittmann C.J.C.Q.B.A.

Appearances: Joe Fiorante, Q.C. Jen Winstanley for the Plaintiff, Michael Lepitre Jack Webster, Q.C. for the Defendant, Douglas Welder J. Peter McMahon for Chadwick Ventures Ltd.