The Ontario Superior Court of Justice court has cleared the way for a hearing to consider whether to certify a class-action lawsuit against the former CEO and several trustees of a real estate investment trust (REIT) on behalf of unitholders who claim that they lost money after a problematic transaction was uncovered.

Specifically, the court struck down several of the proposed grounds for a class action against the former CEO and several trustees of Partners REIT, which trades on the Toronto Stock Exchange. However, it ruled that a couple of the claims represent reasonable causes of action and that they will be considered at a certification motion that’s currently scheduled to be held in early October.

According to the decision, a class action is being proposed on behalf of unitholders who say they lost money after an alleged conflict of interest involving the sale of a property to the REIT was discovered and its unit price subsequently dropped by more than 30%.

“The unitholders claim they sustained losses when the REIT’s unit price dropped because an improper property transaction had to be set aside,” the decision notes.

Specifically, the decision indicates that the REIT’s former CEO, Ronald McCown, failed to disclose a close business and personal relationship with a woman, Laura Philp, and her company, Holyrood Holdings, which sold three properties into the REIT in early 2014.

According to the plaintiffs in the case, McCown had a de facto ownership interest in the properties as a result of that relationship; and, when this conflict was exposed, the transaction was set aside, which, the plaintiffs argue, led to the price drop.

In October 2014, the transaction was unwound, the three properties were returned to Holyrood, and the securities issued to Holyrood were returned to the REIT and subsequently cancelled.

The initial class action targeted eight defendants including McCowan, Philp and Holyrood, along with the REIT’s trustees (Allen Weinberg, Joseph Feldman and Marc Charlebois) and the lawyers that were involved with the transaction. The claims against the lawyers who acted for the trust were dismissed; claims remained against the other defendants alleging breach of fiduciary duty, breach of trust and knowing assistance in the commission of these breaches.

In this initial decision, the court struck down the claims for breach of fiduciary duty against the former CEO and the trustees; it also dismissed claims against Philp, Holyrood and their lawyers. However, it found that breach of trust claims against the REIT’s trustees, and the “knowing assistance” claim against the former CEO do represent reasonable causes of action. Those allegations have not been proven, nor has the lawsuit been certified as a class action.

On the claims of breach of fiduciary duty against the former CEO and the trustees, the court said, “It is clear that each of these defendants owed a fiduciary duty to the REIT itself, but it is equally clear — indeed it is plain and obvious — that none of these defendants owed a fiduciary duty to the unitholders.”

The court also notes that the trustees “cannot owe fiduciary duties to both the REIT and to the unit-holders because such duties may conflict.” Similarly, it also found that the former CEO only owes a duty to the company, not its unitholders.

However, the court could not summarily dismiss the claims for breach of trust against the trustees; nor could it automatically dispense with the claim that the CEO assisted the alleged breach of trust. These remaining claims will be considered further at the certification motion in October.