A business subject to a class action receives a “without prejudice” letter from a potential class member offering to settle a small personal claim for nearly a million dollars, or else the writer will “go public” with the allegations and seek class certification. The business does not accept the “extortionate” offer and the writer proceeds with certification. Can the business put this “without prejudice” letter before the court? And does the appearance of extortion disqualify the writer from acting as representative plaintiff?

The British Columbia Court of Appeal recently answered “yes” to both questions in Sandhu v. HSBC Finance Mortgages Inc.

Background

The original plaintiffs in Sandhu were brothers. They obtained a mortgage from the defendants to purchase residential property. The defendants provided a disclosure statement to the plaintiffs identifying $357 of the mortgage proceeds as going toward a “Title insurance premium.” The plaintiffs subsequently alleged that of this $357, only $115 was the actual insurance “premium”, with the remainder being for “policy insurance costs” and “additional charges.” They commenced an action in 2007 that eventually evolved into a complaint regarding fee disclosure.

In 2011, prior to the certification application, the plaintiffs offered “without prejudice” to settle the action for $876,000, or $438,000 each. Such amounts represented over 3,600 times their individual claims. They threatened that unless these disproportionate sums were paid, they would amend their claim to allege “actual fraud, or at the very least fraudulent misrepresentation.” The plaintiffs pitched this offer as the defendants’ “one chance before it becomes publically known.”

Defence counsel put this letter before the court on the certification application, arguing that the plaintiffs’ efforts at personal enrichment disqualified them from acting as representative plaintiffs.

The applications judge held that the “without prejudice” letter was not admissible on grounds of settlement privilege and faulted defence counsel for putting it on the record. The court certified a class action and designated the two original plaintiffs (and two others) as representative plaintiffs.

British Columbia Court Of Appeal Decision

The B.C. Court of Appeal allowed the appeal. Justice Saunders held, among other things, that the “without prejudice” letter was properly before the court and that the original plaintiffs had disqualified themselves from representing the class.

Justice Saunders held that the “without prejudice” letter fell within an exception to the blanket privilege for settlement communications because it provided a “reasonable basis to question” the plaintiffs’ fitness to represent the class. She explained that this flows from the importance of the representative plaintiff to the integrity of class proceedings: “It is obvious that the confidence of the community of class members and to a large degree the integrity of the proceeding rests on the representative plaintiffs.” Courts should not close their eyes to evidence challenging this integrity.

Taking into account the letter, Justice Saunders held that the application judge erred in principle by designating the original plaintiffs as representatives of the class. In her view, “such a demand for large scale payment on the threat of a certification application is highly problematic.” She held:

In failing to weigh the lingering effect of this combination of menace and disproportionate recovery, the certification order does not reflect the values inherent in the Class Proceedings Act. Above all, no litigation should be, or reasonably be seen to be, extortionate. This letter, when sent, bore that character and in my view is a disqualifying event for the appointment of its authors as representative plaintiffs.

The original plaintiffs sought to put a fresh affidavit before the Court of Appeal claiming that the “without prejudice” letter was sent fearing a potential adverse cost award and that any surplus would have been given “to non-profit consumer advocacy groups.” Justice Saunders considered this fresh evidence but held that it “does not lessen the appearance of large personal gain, or the appearance of using the threat of a class proceeding to extract a disproportionate payment.”

One would hope that such a situation would not arise frequently. Where it does, however, Sandhu permits defendants to put evidence of the plaintiffs’ “extortionate” behaviour before the court – and challenge the fitness of representative plaintiffs who seek to personally enrich themselves through class actions.