Lavender v. Miller Bernstein LLP
Ontario Reports
Court of Appeal for Ontario
G.J. Epstein, van Rensburg and D.M. Brown JJ.A.
September 5, 2018
142 O.R. (3d) 401 | 2018 ONCA 729
Case Summary
Torts — Negligence — Duty of care — Securities dealership placed into receivership for failing to segregate investor assets and maintain minimum level of net free capital — Clients losing millions of dollars — Plaintiff bringing class action against dealership's auditor alleging that it negligently audited annual Form 9 reports filed with Ontario Securities Commission that confirmed compliance with segregation and minimum capital requirements — Class members not receiving Form 9 reports and being unaware of their existence — Motion judge erring in finding that auditor owed duty of care to class members in relation to Form 9 reports — No relationship of proximity existing between auditor and class members.
The Ontario Securities Commission suspended the registration of Buckingham, a securities dealer, and an order was made placing it into receivership because it breached regulatory requirements by failing to segregate investor assets and maintain a minimum level of net free capital. Buckingham's clients, who held investor accounts, lost millions of dollars. The plaintiff commenced a class action on behalf of every person who had an investment account with Buckingham when it was placed into receivership. He alleged that Buckingham's auditor, the defendant, negligently audited Form 9 reports filed with the OSC that confirmed compliance with segregation and minimum capital requirements. The motion judge granted a motion for summary judgment in favour of the class, holding that the defendant owed class members a duty of care in conducting the audit and that it fell below the requisite standard of care. The defendant appealed.
Held, the appeal should be allowed.
The motion judge erred in finding that the defendant owed a duty of care to class members in relation to the Form 9 reports, as no relationship of proximity was established. Class members did not receive or review the Form 9 reports and were unaware of their existence. The defendant made no representations to class members, most of whom never knew of its existence or its involvement with Buckingham. The defendant did not undertake to assist the class in making investment decisions. The interposition of the OSC and Buckingham between the defendant and the class rendered the relationship between the parties too remote to ground a duty of care. Moreover, there was no reliance by class members on the Form 9 reports. The motion judge made factual findings that amounted to palpable and overriding errors. He incorrectly found that the defendant, and not Buckingham, filed the Form 9 reports with the OSC, and that the defendant had access to the names and accounts of every member of the class. Both of those palpable and overriding errors further distanced the defendant from the class and undermined the motion judge's proximity analysis. The statutory scheme which required Buckingham to segregate investor assets and maintain a net free capital and to file an audited Form 9 report with the OSC that confirmed that it had met those obligations was not sufficient to ground a relationship of proximity between the defendant and the class. Finally, significant scrutiny is warranted when deciding whether to recognize a duty of care in a claim for pure economic loss.
Authorities
Cases Applied:
- Anns v. Merton London Borough Council, [1978] A.C. 728
- Cooper v. Hobart, [2001] 3 S.C.R. 537, 2001 SCC 79
- Deloitte & Touche v. Livent Inc. (Receiver of), [2017] 2 S.C.R. 855, 2017 SCC 63
Other Cases Referred To:
- Cavanaugh v. Grenville Christian College, 2013 ONCA 139
- Edwards v. Law Society of Upper Canada, 2001 SCC 80
- Fullowka v. Pinkerton's of Canada Ltd., 2010 SCC 5
- Hercules Managements Ltd. v. Ernst & Young
- Hill v. Hamilton-Wentworth Regional Police Services Board, 2007 SCC 41
- Housen v. Nikolaisen, 2002 SCC 33
- Lipson v. Cassels Brock & Blackwell LLP, 2013 ONCA 165
- Mandeville v. Manufacturers Life Insurance Co., 2014 ONCA 417
- Martel Building Ltd. v. Canada, 2000 SCC 60
- Odhavji Estate v. Woodhouse, 2003 SCC 69
- R. v. Imperial Tobacco Canada Ltd., 2011 SCC 42
- Rankin (Rankin's Garage & Sales) v. J. (J.), 2018 SCC 19
Statutes Referred To:
Rules and Regulations Referred To:
- General, R.R.O. 1990, Reg. 1015, ss. 107, 117, 118, 142, 144, Form 9
- Rules of Civil Procedure, R.R.O. 1990, Reg. 194
Counsel
Robert Staley, Gavin Finlayson, Preet Bell and Nathan Shaheen, for appellant.
Paul Bates, Daniel Bach and Serge Kalloghlian, for respondent.
Judgment
The judgment of the court was delivered by EPSTEIN J.A.:
A. Overview
[1] Buckingham Securities ("Buckingham") is a now defunct securities dealer. In 2001, the Ontario Securities Commission (the "OSC") suspended Buckingham's registration and an order was made placing it into receivership because it breached regulatory requirements by failing to segregate investor assets and maintain a minimum level of net free capital. Its clients, who held investment accounts with the firm, lost millions.
[2] The respondent, Barry Lavender, commenced a class action in 2005 on behalf of every person who had an investment account with Buckingham when Buckingham was placed into receivership (the "Class"). Mr. Lavender alleged that in each of fiscal years 1998 to 2000, Buckingham's auditor, the appellant, Miller Bernstein LLP (the "Auditor"), negligently audited an annual registration renewal requirement filed with the OSC that confirmed compliance with segregation and minimum capital requirements: General, R.R.O. 1990, Reg. 1015, s. 142 (under the Securities Act, R.S.O. 1990, c. S.5); see, also, ss. 107, 117, 118 and Form 9, known as "Form 9 Reports". Buckingham's Form 9 Reports falsely stated that Buckingham was in compliance with the regulatory segregation and minimum capital requirements.
[3] The motion judge agreed with the Class, holding that the Auditor owed the class members a duty of care in conducting the audit and that the Auditor fell below the requisite standard of care. He granted summary judgment in favour of the Class.
[4] The Auditor appeals. For the reasons that follow, I would allow the appeal. In my view, the Auditor did not owe the class members a duty of care and the motion judge erred in so holding.
B. Background Facts
[5] Under the statutory regime that existed at the relevant time, which has since been repealed, the Form 9 Report had to be audited each year in accordance with generally accepted auditing standards and audit requirements published by the OSC: General, s. 144. The Auditor audited Buckingham's Form 9 Reports for the years 1998, 1999 and 2000, and signed the audit reports contained in them. After the Auditor audited the Form 9 Reports, Buckingham filed the reports with the OSC. No class member ever obtained or reviewed any of the Form 9 Reports through this process or otherwise.
[6] In 2004, the OSC initiated proceedings against Buckingham and certain of its principals, including Howard Kornblum, the partner at Miller Bernstein who oversaw the audit. Buckingham and several of its principals later admitted to the OSC that, in breach of regulatory requirements, they made materially untrue statements in the 1999 and 2000 Form 9 Reports filed with the OSC.
[7] The Class asserts that by negligently performing its assurance audit by failing to properly review and confirm the accuracy of Buckingham's Form 9 Reports, the Auditor breached the duty of care that it owed to the Class, as clients of Buckingham, causing more than $10 million in losses.
[8] In 2010, the parties consented to certification of the class proceeding. The certification settlement agreement, as codified in a July 20, 2010 order of Cullity J., provided that the class members include those Buckingham clients who maintained accounts at Buckingham on July 6, 2001 -- the date on which the OSC suspended Buckingham's operations. As part of the settlement, the parties agreed to certification on six common issues and to the Class's abandoning its claims in negligent and reckless misrepresentation. In the certification order, the following common issues were certified:
(i) Did the Securities Act and the regulations thereunder (the "OSA") require Buckingham to segregate the cash and securities of its clients from its own cash and securities?
(ii) Did Buckingham fail to segregate its clients' cash and securities in violation of the OSA and, if so, when did Buckingham fail to do so?
(iii) Did the Auditor owe a duty of care to the Class and/or one or more of the subclasses and what is the nature and extent of that duty?
(iv) If the answer to (iii) is yes, did the Auditor breach that duty of care to the Class and/or one or more of the subclasses, either negligently or recklessly?
(v) If the answer to (iv) is yes, was the Auditor's breach of that duty a cause of damages to all of the Class and/or all of one or more of the subclasses?
(1) If the answer to (v) is yes, can such damages be determined on a class wide basis in respect of the Class and/or one or more of the subclasses?
(2) If the answer to (v)(1) is yes, how should the damages to be payable by the Auditor be calculated?
(vi) Does Ontario law recognize a tort of knowing assistance of breach of contract and, if so, what are the elements of that tort?
(1) If the answer to (vi) is yes, have the elements of that tort been met by all of the Class and/or all of one or more of the subclasses?
[9] In 2016, the Class moved for summary judgment on the first five of the six common issues. The motion judge granted summary judgment in favour of the Class on the certified common issues relevant to liability.
C. The Summary Judgment Decision
[10] The motion judge noted that there was no real dispute over the first two issues: Buckingham was required to segregate and hold in trust the cash and securities of the Class members on a client-by-client basis at all times, and it failed to do so.
[11] The motion judge identified the third issue -- the question of whether the Auditor owed the Class a duty of care -- as "the core question" at issue on the motion. This issue is also the crux of this appeal.
[12] The motion judge began his duty of care analysis by noting the Class's claim was properly characterized as one for negligence simpliciter, not negligent misrepresentation. He acknowledged that this was "obviously not a conventional negligence case", but, relying, inter alia, on this court's authority in Lipson v. Cassels Brock & Blackwell LLP, 2013 ONCA 165, he noted that on certain facts it is possible for a plaintiff in a negligent misstatement case to proceed against a defendant on the basis of a simple negligence claim. He explained why the claim was properly one for negligence simpliciter:
Here as well, the plaintiff's negligence claim is based on the allegation that class members sustained losses which, but for the defendant's false audit of the Form 9s, would not have been sustained. If the defendant had filed accurate Form 9s documenting the regulatory breaches (or had not filed at all) the OSC, on the evidence, would in all likelihood have intervened before all the assets and monies were lost. In short, I am satisfied that on these facts and in principle that the negligence claim is appropriate.
[13] Turning to whether a duty of care arose in this context, the motion judge noted that it was not sufficient for the Class to say that the case fit within the negligent performance of a service "category" in which courts have recognized duties of care in certain third-party benefit situations. He pointed out that the categories which have developed to govern recovery in tort for pure economic loss are merely analytical tools. The relationship between the Class and the Auditor was not one that had been previously recognized as giving rise to a duty of care and the two-stage analysis set out in Anns v. Merton London Borough Council, [1978] A.C. 728 and Cooper v. Hobart, [2001] 3 S.C.R. 537, 2001 SCC 79 had to be undertaken.
[14] As outlined in more detail below, the first stage of the Anns/Cooper analysis asks whether the facts disclose a sufficient level of foreseeability and proximity to establish a prima facie duty of care. The motion judge found, relying on Hercules Managements Ltd. v. Ernst & Young, that the foreseeability and proximity requirements were satisfied in this case. Even though the Class members never saw or even knew at the time about the Form 9 Reports, the Auditor "as a matter of simple justice" had an obligation to be mindful of their interests when auditing and filing the reports. More specifically, the motion judge reasoned as follows:
My analysis is based on the auditing standards applicable at the time and the evidence and admissions of the parties and their experts. The defendant understood that the Form 9s were used by the OSC to police the securities dealers and protect their investors. If the Form 9s indicated a breach of the segregation or minimum capital requirements, the OSC would intervene. If the defendant was negligent in its audit and filed false Form 9s, causing the OSC to believe that the securities dealer was in compliance with the regulatory requirements when the truth was otherwise, monies invested by clients of the securities dealer could well be lost. In short, the defendant (and in particular Mr. Kornblum) well understood the consequences to "its client's clients" if the segregation or capital deficiency information was misstated in the Form 9s -- that a negligent audit of these Form 9s could expose the class members to the very loss that they incurred.
[15] The motion judge further concluded that the relationship was of sufficient closeness to ground foreseeability. Here, the Auditor was retained to audit and file the Form 9 Reports, had access to the individual names and investor accounts of every Class member, knew the exact amounts involved and even corresponded with some of the Class members to verify that Buckingham's internal client account records were complete and accurate. Even if the Class members knew nothing about the Form 9 Reports, they would reasonably expect Buckingham and its auditor to provide any information required under provincial law accurately and honestly, particularly if that information could affect their financial interests.
[16] The motion judge was therefore satisfied that the Class had established a prima facie duty of care under the first stage of the Anns/Cooper analysis.
[17] He was similarly satisfied that policy concerns did not negate imposing liability. More specifically, the second stage of the Anns/Cooper analysis asks whether there are residual policy considerations that would justify denying liability in tort even though a prima facie duty of care has been established.
[18] In this case, the motion judge noted that policy concerns are especially important in claims for pure economic loss, particularly given the spectre of indeterminate or unlimited liability. In his view, however, case law was clear that indeterminate liability was not a concern when an auditor knows the identity of the plaintiff (or a class of plaintiffs) and when the auditor's statements are used for the specific purpose for which they were made.
[19] Here, the motion judge was satisfied that the Auditor both knew the Class members' identities and that the Form 9 Reports "were used for the very purpose for which they were prepared -- to be relied on by the OSC in protecting investor (class member) assets". The Auditor knew the names of each of Buckingham's clients at the time of its audits and was required to stay informed of any major changes to Buckingham's business between audits. Moreover, its potential liability was narrowly circumscribed since it knew its precise potential liability (the sum of all customer accounts) at the time of each audit. As a result, the motion judge concluded that "[u]nder the Anns-Cooper analysis . . . the defendant owed a duty of care to the class to conduct an audit of Buckingham's Form 9 reports with the skill and care of a competent practitioner".
[20] After reaching this central conclusion, the motion judge went on to hold that the Auditor breached the duty of care it owed to the Class. The Auditor signed audit reports addressed to the OSC for fiscal years 1998, 1999 and 2000, falsely stating that it had examined the Form 9 Reports in accordance with auditing standards. It admitted that it breached its duty of care in the 1999 and 2000 Form 9 audits and there was uncontested evidence that it also breached its duty with respect to the 1998 Form 9 audit.
[21] On the fifth issue, damages, the motion judge held that it was not possible at that time to determine damages on a Class-wide basis. He noted that the Class had indicated it may bring a follow-up motion based on a "corrected spreadsheet" prepared by the receiver to determine the issue of damages at a later time.
[22] On the basis of this analysis, the motion judge answered the questions, with the exception of the question of damages, in favour of the Class, and granted summary judgment.
D. Issue
[23] In my view, the central issue on appeal is whether the Auditor owed the Class a duty of care in relation to its audit of the Form 9s. For the reasons outlined below, I conclude that it did not. In light of this conclusion, it is not necessary to consider any of the other issues raised on appeal; I would allow the appeal and dismiss the Class's claim.
E. Analysis
(1) The duty of care analysis after Livent
[24] In the Supreme Court's recent decision in Livent, the court applied and refined the Anns/Cooper framework to define the duty of care owed by an auditor. Its analysis sets the conceptual table for my determination of whether the Auditor owed the Class a duty of care in this case. Below, I consider and describe the Anns/Cooper framework, with particular attention paid to the Supreme Court's recent refinements in Livent.
[25] In order to understand the application of Livent to this appeal, it is helpful to briefly restate the facts of that case. The Livent appeal arose out of the receivership of a theatre company, Livent Inc. ("Livent"), whose principals were fraudulently manipulating the company's financial records in order to attract investment. Its auditor, Deloitte & Touche ("Deloitte"), never uncovered the fraud, but did identify irregularities in the reporting of an asset sale in 1997. Nevertheless, Deloitte did not resign and instead assisted Livent in soliciting investment by providing a comfort letter and helping to prepare and approve a press release that misrepresented the basis for the reporting of Livent's profit from the fraudulent sale. It also prepared Livent's 1997 audit, finalized in 1998 after Deloitte's discovery of the reporting irregularities. When the fraud was subsequently uncovered by new equity investors, Livent filed for insolvency protection and was placed into receivership.
[26] Livent, through its receiver, sued Deloitte for damages in negligence and breach of contract. The trial judge concluded that Deloitte owed Livent a duty of care and fell below the standard of care on two occasions: (i) its provision of the comfort letter and approval of the press release containing misrepresentations in order to help Livent solicit further investment; and (ii) its completion of Livent's 1997 statutory audit.
[27] This court dismissed the appeal. Deloitte appealed to the Supreme Court. The principal issue before the Supreme Court was the nature and scope of the duty of care owed by Deloitte with respect to those two separate negligent acts. The appeal was allowed, in part.
[28] Applying the Anns/Cooper framework, Gascon and Brown JJ., for the majority, concluded that Deloitte owed Livent a duty of care in relation to its 1997 statutory audit, but not in relation to its representations concerning the solicitation of investment. Livent asserted that it detrimentally relied on Deloitte in each of these events, which impaired its ability to oversee its operations. The court, however, drew a distinction between the two events. Because the comfort letter and press release were prepared in order to solicit investment and not to assist shareholders with management oversight, Livent could not reasonably rely on those documents to oversee management. By contrast, the majority concluded that Deloitte owed a duty of care to Livent in relation to the statutory audit because the audit was prepared for the precise purpose of scrutinizing management conduct.
[29] In reaching these conclusions, the Supreme Court refined and applied the two stages of the Anns/Cooper analysis. At the first stage, the court asks whether the facts establish a prima facie duty of care. The court then proceeds to the second stage, where it asks whether residual policy considerations justify denying liability in tort. I consider these two stages below.
(a) Stage one: Prima facie duty of care
[30] Most relevant for this appeal, the majority of the Supreme Court in Deloitte & Touche v. Livent Inc. (Receiver of), 2017 SCC 63, at para. 20, reaffirmed that there is a prima facie duty of care where there exists a "sufficiently close relationship between the plaintiff and the defendant". This stage of the analysis involves establishing both reasonable foreseeability and proximity. The majority stressed that these elements are conceptually distinct and must be considered separately.
[31] The majority in Livent reiterated the statement from Cooper that "foreseeability alone" is not enough to establish a prima facie duty of care; the first stage of the Anns/Cooper framework requires "something more". That "something more" is proximity. The majority observed that it is useful to consider proximity before foreseeability in cases of negligent misrepresentation or negligent performance of a service because "[w]hat the defendant reasonably foresees as flowing from his or her negligence depends upon the characteristics of his or her relationship with the plaintiff, and specifically, in such cases, the purpose of the defendant's undertaking".
[32] The proximity analysis determines whether the parties are sufficiently "close and direct" that it would be "just and fair having regard to their relationship to impose a duty of care": Livent, at para. 25, citing Cooper, at paras. 32 and 34. As most recently reaffirmed by the Supreme Court in Rankin (Rankin's Garage & Sales) v. J. (J.), 2018 SCC 19, at para. 23, that close and direct relationship must be such that "the defendant is under an obligation to be mindful of the plaintiff's interests".
[33] A preliminary question at this stage is whether the relationship at issue falls within a previously established category of relationship in which proximity has already been found to exist. If the relationship falls within a previously established category, or is analogous to one, then proximity is established, without more: Livent, at paras. 26-28. The majority in Livent cautioned, however, that courts must be careful to avoid identifying established categories "in an overly broad manner": at para. 28. As the majority noted, at para. 52, "[t]he mere fact that proximity has been recognized as existing between an auditor and its client for one purpose is insufficient to conclude that proximity exists between the same parties for all purposes" (emphasis in original). Rather, the majority explained, at para. 28, that "a finding of proximity based upon a previously established or analogous category must be grounded not merely upon the identity of the parties, but upon examination of the particular relationship at issue in each case".
[34] Where an established proximate relationship cannot be found, courts must undertake a full proximity analysis by examining the relationship between the plaintiff and the defendant. Relevant considerations may include, but are not limited to, "expectations, representations, reliance, and the property or other interests involved" as well as any statutory obligations: Livent, at para. 29, citing Cooper, at paras. 34, 38.
[35] In cases of pure economic loss arising from negligent misrepresentation or performance of a service, two factors are "determinative" of the proximity analysis: (i) the defendant's undertaking; and (ii) the plaintiff's reliance: Livent, at para. 30. Where the defendant undertakes to provide a representation or service in circumstances that invite the plaintiff's reasonable reliance, the defendant becomes obligated to take reasonable care, and the plaintiff has a right to rely on the defendant's undertaking to do so. These "corollary rights and obligations create a relationship of proximity": Livent, at para. 30.
[36] However, the plaintiff's reliance must be within the scope of the defendant's undertaking -- that is, the purpose for which the representation was made or the service was undertaken. Anything outside that scope will fall outside the scope of the proximate relationship and the defendant's duty of care; the defendant cannot be liable for a risk of injury against which it did not undertake to protect: Livent, at para. 31. Further, as the majority in Livent observed, at para. 31, "the proximity analysis not only determines the existence of a relationship of proximity, but also delineates the scope of the rights and duties which flow from that relationship" (emphasis in original).
[37] Although the proximity and reasonable foreseeability stages are analytically distinct, they are nonetheless connected. In cases of negligent misrepresentation or performance of a service, Livent explains that the proximate relationship informs the foreseeability inquiry: at para. 34. A plaintiff's injury will be reasonably foreseeable in such cases where (1) the defendant should reasonably foresee that the plaintiff will rely on its representation; and (2) reliance would, in the particular circumstances of the case, be reasonable: Livent, at para. 35. This is also defined by the nature of the defendant's undertaking. The plaintiff may rely on the defendant to act with reasonable care for the particular purpose of the undertaking, but not for a purpose outside the scope of that undertaking.
(b) Stage two: Residual policy considerations
[38] Where a prima facie duty of care is recognized on the basis of proximity and reasonable foreseeability, the analysis advances to stage two of the Anns/Cooper framework. The court goes on to ask whether there are any "residual policy considerations" outside the relationship of the parties -- that is, despite the proximate relationship between the parties and the reasonably foreseeable quality of the plaintiff's injury -- that may negate the imposition of a duty of care: Livent, at paras. 37, 41.
[39] The majority in Livent clarified, at para. 41, that the first stage of the Anns/Cooper framework does most of the analytical heavy lifting. Only in rare cases, such as those considering decisions of governmental policy or quasi-judicial bodies, will liability be denied on the basis of stage two. Residual policy considerations contemplate "the effect of recognizing a duty of care on other legal obligations, the legal system and society more generally": Livent, at para. 38, citing Cooper, at para. 37.
[40] Accordingly, the Livent majority observed, at para. 42, that rarely, if ever, will a concern for indeterminate liability persist after a properly applied proximity and foreseeability analysis.
[41] Applying this framework, the majority held that Deloitte owed Livent a duty of care in relation to the 1997 statutory audit, but not with respect to the comfort letter and press release.
The statutory audit
[42] The majority concluded that Deloitte's statutory audit fell within an established category of proximity, and that the type of injury Livent suffered as a result of the statutory audit was a reasonably foreseeable consequence of Deloitte's negligence.
[43] Proximity was established based on a previously recognized category of proximate relationship. The court had already held in Hercules Managements that an auditor owes its corporate client a duty of care in the preparation of a statutory audit. It thus followed that, unless the purpose of Deloitte's undertaking to prepare the audit differed from the purpose underlying the audit in Hercules Managements, proximity was established. Finding it did not differ, the majority concluded Livent and Deloitte were in proximity in relation to the audit.
[44] Reasonable foreseeability was also established. The majority agreed that Livent's losses were a reasonably foreseeable consequence of Deloitte's negligence, since the negligence allowed Livent to artificially extend its solvency. The majority found that the purpose of the audit was to protect Livent from the consequences of undetected errors and wrongdoing, and to provide shareholders with reliable intelligence, enabling oversight. Livent's reliance on Deloitte for the purpose of overseeing the conduct of management was therefore both reasonable and reasonably foreseeable.
[45] Since a proximate relationship based on a previously recognized category was found, the court noted that it need not consider whether residual policy considerations negated the duty of care.
The comfort letter and press release
[46] With respect to the comfort letter and press release, the majority found that proximity was established for the purpose of helping Livent to solicit investment, but that Livent's losses (which did not arise out of any inability to attract investment) did not fall within the scope of Deloitte's duty of care and were not a reasonably foreseeable consequence of Deloitte's assistance.
[47] The majority first considered proximity. As the courts had not previously established a proximate relationship between an auditor and its client for the purposes of soliciting investment, it was necessary to conduct a full proximity analysis. Here, the majority held that Deloitte's provision of a comfort letter and ongoing assistance in relation to a press release were undertaken for the purpose of helping Livent to solicit investment and that Livent was therefore entitled to rely upon Deloitte to carry out these services with reasonable care.
[48] However, the court held that Livent's losses were not a reasonably foreseeable consequence of Deloitte's assistance in the solicitation of investment. In drafting the comfort letter and helping with the press release, Deloitte undertook only to assist Livent with soliciting investment; it did not undertake to assist Livent's shareholders in overseeing management. Accordingly, Deloitte could not be held liable for failing to take reasonable care to assist such oversight. Livent had no right to rely on Deloitte's representations for that purpose, and its reliance was neither reasonable nor reasonably foreseeable.
[49] Having concluded that no prima facie duty of care arose, the court did not go on to consider residual policy considerations with regard to the press release and comfort letter that were prepared for Livent's solicitation of investment.
(2) The parties' submissions on the duty of care and Livent's impact on this appeal
[50] The parties filed supplementary factums addressing the application of Livent to the appeal. Both parties agree that the analysis from Livent is highly relevant to the outcome of this appeal and that the key theme from the Supreme Court's decision is the necessity of ascertaining the scope of an auditor's undertaking when conducting a duty of care analysis. They agree that the Auditor's undertaking here is central to determining whether proximity and reasonable foreseeability are established. They disagree, however, on the proper characterization of that undertaking in the circumstances.
(a) The Auditor's position
[51] The Auditor argues the motion judge's decision is inconsistent with the principles articulated in Livent. This is based on two "refinements" to the Anns/Cooper analysis from Livent: (i) the clear distinction drawn between foreseeability and proximity; and (ii) a greater emphasis placed on a more demanding first stage of the Anns/Cooper test.
[52] In the light of these refinements, the Auditor argues the motion judge conflated reasonable foreseeability and proximity and failed to properly engage in the proximity analysis. The Auditor argues that on the facts of this case, reliance is required to establish proximity. Absent reliance, the relationship between the Class and the Auditor cannot meet this threshold.
[53] The Auditor submits that Livent emphasizes the importance of properly ascertaining the scope of a defendant's undertaking -- a defendant cannot be liable for an injury in relation to which it did not take responsibility. Here, the Auditor undertook to audit Buckingham's Form 9 Reports, which were to be confidentially submitted by Buckingham to the OSC only. The scope of the Auditor's undertaking extended only to Buckingham or, at the furthest, to the OSC. The Auditor did not undertake responsibility to assist the Class in supervising the management of Buckingham, or in selecting or retaining a securities dealer. No representations were made to the Class, there was no reliance by the Class and the Class could not have had any expectations of the Auditors.
[54] On the reasonable foreseeability analysis, the Auditor emphasizes Livent's focus on the nature of the plaintiff's reasonable reliance. In this case, there was no reliance -- neither the representative plaintiff nor any member of the Class saw the Form 9 Reports or even knew of their existence. In any event, the Class did not have the right to rely on the Auditor for something outside the scope of the Auditor's specific undertaking.
[55] On the second branch of the Anns/Cooper test, the Auditor argues that indeterminate liability concerns in these circumstances must negate any duty of care, despite the Supreme Court's observing in Livent that only in rare cases will liability be negated solely because of residual policy considerations.
(b) The class's position
[56] The Class agrees that Livent provides the applicable framework for the proximity analysis in this case, subject to necessary modifications to account for a different method of causation since this is not a negligent misrepresentation case. It also agrees that the proximity analysis from Livent focuses on the nature of the defendant's undertaking. However, the Class argues that the Auditor mischaracterizes its undertaking in a manner that is inconsistent with the record. It argues that the Auditor undertook to protect the Class against the very harm that occurred: specifically, the Class asserts that the Auditor undertook to provide accurate information as part of its Form 9 audits so that the OSC would use that information to protect investors.
[57] To support this assertion, the Class points to the following aspects of the record, inter alia:
Mr. Kornblum's admissions that (i) the OSC used the Form 9 Reports to "facilitate the identification of circumstances when an entity was not in compliance with the Securities Act and Regulations"; (ii) he knew the Form 9 Reports would be sent to the OSC; (iii) the reason the OSC wanted the Form 9 Reports to be audited was to provide "comfort" that the numbers were accurate; and (iv) the OSC was relying on the Auditor to achieve that level of comfort.
The Auditor's regulatory expert admitted that the OSC reviewed the Form 9 Reports as part of its investor protection mandate and that the reports were a "key part of the rules around licensing" which "had an underlying goal of protection of investors".
Auditing standards required the Auditor to understand that the OSC would use the Form 9 Reports to execute its investor protection function, and that negligence in its audit of the segregation or capital requirements could cause the precise loss that the Class suffered.
The motion judge found as a fact that "[the Auditor] understood that the Form 9s were used by the OSC to police the securities dealers and protect their investors. If the Form 9s indicated a breach of the segregation or minimum capital requirements, the OSC would intervene. If [the Auditor] was negligent in its audit and filed false Form 9s, causing the OSC to believe that the securities dealer was in compliance with the regulatory requirements when the truth was otherwise, monies invested by clients of the securities dealer could well be lost."
[58] The Class also argues that the harm that occurred was reasonably foreseeable. The Form 9 Report was a "special report on compliance"; its purpose was to provide accurate information to the OSC so the OSC could protect Class member assets. The Auditor's negligent audit impaired the OSC's investor protection function and exposed the Class members to the specific foreseeable risk against which the Auditor undertook to protect.
(3) Application: The duty of care analysis
(a) Stage one: Is there a prima facie duty of care?
(i) Proximity
[59] I agree with the Auditor that the motion judge, who, as I previously indicated, did not have the benefit of the Livent decision, conflated the questions of proximity and foreseeability and that he did not conduct a proper proximity analysis in this case. This is a legal error. Conducting such an analysis, and in light of the Supreme Court's refinements of the Anns/Cooper test in Livent, in my view, the Class's claim fails on the first branch of that test and this court can intervene. I do not believe that proximity is established between the Auditor and the Class in relation to the Form 9 Reports. As I explain below, the parties are not in "such a 'close and direct' relationship that it would be 'just and fair having regard to that relationship to impose a duty of care in law'": Livent, at para. 25.
The relationship does not fit within a previously established category of proximity
[60] I begin by observing that the relationship between the Auditor and the Class does not fall within a previously established or analogous category of relationship where proximity has already been found. The Class has not identified any case in which a duty of care has been recognized between an auditor and a company's investor account holders for purposes of auditing the company's Form 9 Reports or through a similar component of the securities statutory regime. Accordingly, this court must undertake a full proximity analysis to determine whether there is a sufficiently "close and direct" relationship to ground a duty of care: Livent, at para. 29.
No relationship of proximity is established in the circumstances
[61] In conducting the proximity inquiry, courts must examine all relevant factors arising from the relationship between the parties. The relevant factors vary depending on the circumstances of the case. They may include reliance, expectations, representations, property or other interests and statutory obligations: Livent, at para. 29, citing, inter alia, Cooper, at paras. 35 and 38; Odhavji Estate v. Woodhouse, 2003 SCC 69, at paras. 50 and 56; Fullowka v. Pinkerton's of Canada Ltd., 2010 SCC 5, at para. 26; Edwards v. Law Society of Upper Canada, 2001 SCC 80, at paras. 9 and 13. In cases of pure economic loss arising from negligent misrepresentation or performance of a service, the defendant's undertaking and the plaintiff's reliance are determinative: Livent, at para. 30.
[62] The absence of a personal relationship between the parties, while "not necessarily determinative", is nonetheless an "important factor to consider": Hill v. Hamilton-Wentworth Regional Police Services Board, 2007 SCC 41, at para. 30; Cavanaugh v. Grenville Christian College, 2013 ONCA 139, at paras. 75-77. The court will inquire into whether the defendant's actions have a close or direct effect on the plaintiff, "such that the [defendant] ought to have had the [plaintiff] in mind as a person potentially harmed": Hill, at para. 29. As the Supreme Court explained in Hercules Managements, at para. 24, the plaintiff must establish "that the circumstances of the relationship inhering between the plaintiff and the defendant are of such a nature that the defendant may be said to be under an obligation to be mindful of the plaintiff's legitimate interests in conducting his or her affairs".
[63] Here, the motion judge anchored his finding of proximity on the correspondence between some of the Class members and the Auditor as well as his conclusion that the Class members would reasonably expect the Auditor and Buckingham to provide accurate information to the OSC:
In my view, on the particular facts herein, a relationship of sufficient closeness has been established. The defendant was retained by Buckingham to audit and file the Form 9s. In doing this "assurance audit" for its client, the defendant had access to the individual names and investor accounts of every class member. The defendant knew the exact amounts involved, and even corresponded with some of the class members to verify that Buckingham's internal client account records were complete and accurate. Some of the class members responded to the auditor's letter and alerted the defendant to serious discrepancies between Buckingham's internal account records and the actual holdings and activity within their accounts. The defendant also knew, without being told, that even if the class members knew nothing about the Form 9s, they would reasonably expect Buckingham and its auditor to provide any information required under provincial law accurately and honestly, particularly if that information could affect their financial interests.
[64] With respect, I am of the view that the motion judge's finding that a relationship of proximity existed is unsupportable on the evidence. Simply put, it stretches proximity beyond its permissible bounds. I say this for the following reasons.
[65] First, the primary reason I believe proximity has not been established turns on the nature of the Auditor's undertaking and the connection between that undertaking and the loss claimed. Buckingham retained the Auditor to audit its Form 9 Reports, which Buckingham then filed confidentially with the OSC. Although the motion judge observed that the Form 9 Reports were used by the OSC to police securities dealers and that their purpose was to protect investor assets, it does not necessarily follow that the audit of the Form 9 Reports creates proximity between an auditor and those investors. The Auditor made no representations to members of the Class, most of whom never even knew of the Auditor's existence or its involvement with Buckingham. The Auditor did not undertake to assist the Class in making investment decisions. The limited scope of the Auditor's undertaking and lack of direct connection between the Auditor and the Class militate against finding proximity in this case.
[66] In my view, the interposition of the OSC and Buckingham between the Auditors and the Class rendered the relationship between the parties too remote to ground a duty of care. The Auditor may well have owed a duty of care to Buckingham to properly conduct the audit. Perhaps an argument could be made that a duty was also owed to the OSC (which provided regulatory oversight and received the audit reports). This, however, is an issue I need not determine. In this case, the Auditor's undertaking did not extend to assisting the Class members -- who, as mentioned earlier and as the motion judge noted, never saw the Form 9 Reports and did not even know of their existence -- with supervising Buckingham and making investment decisions. As a result, I am of the view that the Auditor's undertaking in this case strongly militates against a finding of proximity.
[67] A second related consideration weighing against holding that the Auditor and Class were in a proximate relationship for the purpose of the Form 9 Reports is the absence of any reliance, whether intended or not. Indeed, the Class conceded that the members did not rely on or review any of the Form 9 Reports. As I have indicated, the Form 9 Reports were held confidentially by the OSC. They were not shared with the Class and not intended to inform or induce the Class in making investment decisions. The absence of the class members' reliance on the Form 9 Reports further supports my view there is no proximity between the Auditor and the Class in relation to the Reports.
[68] The third reason that informs my conclusion that the motion judge erred in finding proximity is because, with respect, I am of the view that his analysis is based, in part, on factual findings that amount to palpable and overriding errors.
[69] First, the motion judge found that the Auditor, and not Buckingham, filed the Form 9 Reports with the OSC. This is incorrect. Although the Auditor audited the Form 9 Reports, the obligation to file the Form 9 Reports rested with Buckingham. Second, the motion judge found that the Auditor had access to the names and accounts of every member of the Class. Again, this is incorrect. The record demonstrates that Buckingham's clients and their accounts changed regularly and the Auditor was not engaged to perform a continuous audit.
[70] In my view, both of these palpable and overriding errors further distance the Auditor from the Class and undermine the motion judge's proximity analysis.
[71] The fourth factor weighing against a finding of proximity in this case is the relevant statutory scheme. While the Class does not contend that the duty of care arises by the direct operation of any statute, the statutory scheme nonetheless provides relevant context for assessing the sufficiency of proximity between parties: Livent, at para. 29. Here, the statutory scheme required Buckingham, as a securities dealer, to segregate investor assets and maintain a net free capital, and to file an audited Form 9 Report with the OSC that confirmed that it had met these obligations: General, ss. 107, 117-118, 142 and 144. In my view, it cannot be said that these provisions are sufficient to ground a relationship of proximity between a securities dealer's auditor and its account holders for the purpose of this case. While the Auditor was required to audit Buckingham's Form 9 Reports in accordance with generally accepted auditing standards and audit requirements published by the OSC, the statutory scheme did not create a proximate relationship between the Auditor and the Class for the purpose of their investment decisions in relation to forms that they never saw.
[72] Finally, I am conscious of the Supreme Court's admonition that significant scrutiny is warranted when deciding whether to recognize a duty of care in a claim for pure economic loss: Martel Building Ltd. v. Canada, 2000 SCC 60, at para. 35; R. v. Imperial Tobacco Canada Ltd., 2011 SCC 42, at para. 42. While there is no automatic bar to recovery for pure economic loss, such claims warrant more rigorous examination than other claims for negligence: Martel, at para. 35; Mandeville v. Manufacturers Life Insurance Co., 2014 ONCA 417, at paras. 148-50, leave to appeal to S.C.C. refused. This consideration further weighs against finding proximity in this case.
[73] In summary, I am of the view that the Class's claim fails at the proximity stage of the Anns/Cooper analysis. When properly scrutinized in the light of the Livent decision and other jurisprudence, the Class's claim cannot survive because there is no proximity between the Auditor and the Class in relation to the Form 9 Reports.
(ii) Reasonable foreseeability
[74] Given my conclusion in relation to proximity, it is not necessary to consider whether any harm suffered was reasonably foreseeable. As Livent confirms, at para. 23, both reasonable foreseeability and proximity are required to establish a prima facie duty of care. In the absence of proximity, there is no prima facie duty of care.
(b) Stage two: Do any residual policy concerns negate the duty of care?
[75] In the light of my conclusion on stage one of the Anns/Cooper analysis, it is not necessary to consider the second stage of the Anns/Cooper analysis: Livent, at para. 57.
F. Conclusion
[76] As I have outlined above, I am of the view that the Class's claim fails due to a lack of proximity. I would not recognize a duty of care owed by the Auditor to the Class in these circumstances for these purposes. The motion judge erred in granting summary judgment in favour of the Class.
G. Disposition
[77] For these reasons, I would allow the appeal, set aside the judgment below, and grant summary judgment to the Auditor, dismissing the Class's claim for negligence.
[78] As to costs, failing agreement as to costs, I would ask the parties and the Law Foundation of Ontario to make submissions as to the costs before the motion judge and before this court, taking into account and providing any requisite notice pursuant to the provisions of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, the Class Proceedings Act, 1992, S.O. 1992, c. 6 or any other relevant legislation.
Appeal allowed.
Notes
1 On appeal, the Class concedes that it was an error for the motion judge to find that the Auditor filed the Form 9 Reports. The Auditor audited and signed the Form 9 Reports, but Buckingham, as the registrant, actually filed them with the OSC.
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