Nova Scotia Court Of Appeal Not Amused At Bank's Attempt To 'Whistle And Chew At The Same Time'

After more than 10 years of complex, aggressively fought litigation, the Nova Scotia Court of Appeal had its say concerning National Bank Financial Ltd.'s ("NBFL") litigation tactics - it was not amused.

"Enough is enough. By your actions you have forfeited the right to participate and you will be held accountable for the harm and grief you have caused others."1

In lengthy and detailed reasons for judgment, Mr. Justice Saunders, writing for the unanimous panel of the Court of Appeal, found that NBFL's conduct during the course of the litigation constituted an abuse of process. The court struck out the Bank's claims, counterclaims and defences, wiped out judgments granted in its favour and increased the damages that had been awarded against it. The court found that the litigation had "shattered" friendships, "damaged" many individuals' reputations and led to 10 years of "misery, humiliation and expense". The court's central finding was that the Bank had adopted a position in the litigation that it knew was not supported by the facts and that was contrary to what it had secretly admitted to in a settlement agreement with the Nova Scotia Securities Commission. The following is a brief review of the background to the proceedings and the central findings made by the court. The decision itself contains a detailed review of the law concerning abuse of process and the jurisdiction of appellate courts to fashion remedies.

A Bit of Background

Knowledge House Inc. ("KHI") was a struggling learning technology provider operating in Halifax during the late 1980's and 1990's. Initially trading as a penny stock on the Montreal Stock Exchange, its shares soared from 9 cents to a peak of $9.85 after transferring its listing to the Toronto Stock Exchange in 1999. In August, 2001 its share price collapsed, leaving investors with enormous losses and, in some cases, large outstanding debts owing on their margin accounts. The trial judge found:

"With the help of other insiders, including some of those who had sold their companies to KHI for shares, a lawyer and Bruce Clarke, a stock broker employed by NBFL, the President of the KHI, kept KHI afloat until August 2001 by manipulative and artificial trading in KHI shares, while attempting to create a viable business and secure financing, deter existing shareholders from selling their shares, and entice wealthy individuals and institutions to invest.

The primary instrument of the artificial and manipulative trading in KHI shares was Bruce Clarke. The failure of NBFL to supervise Bruce Clarke facilitated that trading in a manner that was contrary to statutory and industry regulations, and NBFL's own rules."2

Shortly after KHI's collapse, NBFL commenced a series of actions against clients and former clients for unpaid debts on their margin accounts. When some of the defendants counterclaimed, alleging they were victims of a conspiracy for which the NBFL was liable, the NBFL denied that it had been part of any conspiracy, denied that it was vicariously liable for Mr. Clarke's actions and advanced its own claim against Mr. Clarke and KHI insiders alleging that they had conspired to manipulate KHI's shares. In 2005, NBFL discontinued the proceedings against all of the alleged conspirators save Mr. Clarke. However when it sought leave to amend its pleadings to withdraw its conspiracy allegations, leave was denied on the basis that no explanation had been provided for NBFL's change of position and the motion had been brought in bad faith.3

By 2008, there were 11 lawsuits underway involving more than 54 groups...