ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
CANADIAN IMPERIAL BANK OF COMMERCE, HIGH RIVER LIMITED PARTNERSHIP and PHILIP SERVICES CORP. by its receiver and manager, ROBERT CUMMING
Plaintiffs
– and –
DELOITTE & TOUCHE, DELOITTE & TOUCHE LLP, DELOITTE TOUCHE TOHMATSU, DELOITTE TOUCHE TOHMATSU LLP and DELOITTE TOUCHE TOHMATSU f/k/a DELOITTE TOUCHE TOHMATSU INTERNATIONAL
Defendants
– and –
HOWARD BECK, MARVIN BOUGHTON, CONNIE CAISSE, ALLEN FRACASSI, PHILIP FRACASSI, PETER McQUILLAN, FELIX PARDO, DERRICK ROLFE, COLIN SOULE, ROBERT WAXMAN and JOHN WOODCROFT
Third Parties
Thomas J. Dunne, Joe Thorne, and James Camp for the Plaintiffs
Michael Schafler and Mark Evans for the Defendants
HEARD: January 22 and 23, 2013
Proceeding under the Class Proceedings Act, 1992
PERELL, J.
REASONS FOR DECISION
I. INTRODUCTION
1This is a billion dollar action under the Class Proceedings Act, 1992, S.O. 1992, c. 6. It is essentially a battle about the application of the law of negligence and negligent misrepresentation as it may apply to auditors that issue audit reports that are used by lenders deciding to lend money to a public corporation.
2The leading cases about the duty of care of auditors and to whom that duty might be owed are the Supreme Court of Canada’s decisions in Haig v. Bamford and Hercules Managements Ltd. v. Ernst & Young, and the factual and legal battleground in this certified class action is about the application of these and other leading cases about the law of negligence.
3The Defendant auditors in this action are Deloitte & Touche (“Deloitte”), Deloitte & Touche LLP, Deloitte Touche Tohmatsu, Deloitte Touche Tohmatus LLP and Deloitte Touche Tohmatus f/k/a Deloitte Touche Tohmatsu International.
4The Representative Plaintiffs in this class action are Canadian Imperial Bank of Commerce (“CIBC”), which was the lead lender of a syndicate of sixty banks that pursuant to a Credit Agreement loaned Philip Services Corp. (“Philip”) US$ 1.5 billion in the summer of 1997, and High River Limited Partnership, which is an assignee of the security granted by Philip for its borrowing.
5The Representative Plaintiffs allege that but for Deloitte’s negligence or recklessness in preparing the audit reports, they would not have advanced the loans to Philip.
6A co-plaintiff is Philip by its Receiver and Manager, Robert Cumming. He alleges that Philip would not have undertaken an acquisition program that proved fatal to Philip’s business but for Deloitte’s negligence or recklessness in preparing the audit reports.
7Notable features of the auditors’ defence are that they deny a duty of care to the lenders and with respect to the Receiver’s claim, Deloitte relies on the defence of ex turpi causa in that Philip, through its senior management, was at all times fully aware of its financial position and of an accounting fraud committed by a senior officer of Philip.
8The Defendant auditors have brought a third party claim against certain of Philip’s directors and officers for contribution and indemnity under the Negligence Act, R.S.O. 1990, c. N.1.
9There are now two motions before the court. Deloitte brings a refusals motion because it is unsatisfied with the answers given by the Plaintiffs’ representatives during their examinations for discovery. The Plaintiffs also bring a refusals motion because they are unsatisfied with the answers given by Deloitte’s representatives during their examinations for discovery.
II. METHODOLOGY
10In order to decide the two refusals motion, I will first describe the factual and procedural background to this litigation. During this description, I will foreshadow several issues that are the major subject areas for the competing refusals motions.
11Then, I will describe the law about the scope of examinations for discovery in a class action context. In this section of the reasons, I will have something to say about what obligations, if any, a party has to make admissions about what it knows about the facts by information and belief. I will also discuss what are proper grounds for a party to refuse to answer questions posed during an examination for discovery.
12Next, I will describe the arguments of the parties about why they submit that their opponent has improperly refused to answer questions about particular topics probed during the examinations for discovery.
13The discussion of the arguments of the parties will be followed by my general analysis, comments, and conclusions about the several topic areas identified by the parties.
14The analysis section of these Reasons for Decision will include the “Refusals Charts” and my discrete conclusions about the contested questions.
15Where I uphold a refusal, the chart will set out the categorical reason or reasons that justify the refusal.
III. FACTUAL AND PROCEDURAL BACKGROUND
16Philip Services was a public company based in Hamilton, Ontario. It was an integrated resource recovery and industrial service business that provided metal recovery and processing services, by-products recovery, and environmental services to major industry sectors throughout North America.
17One of its operating divisions was the Metals Services Group, whose President was Robert Waxman. Mr. Waxman reported to Philip’s President and Chief Executive Officer, Allen Fracassi.
18Deloitte was Philip’s auditor. Deloitte is a partnership of accountants that provides audit, tax, and related services throughout Canada and, through sister firms around the world.
19Deloitte Touche Tohmatsu is a partnership that is a partner of Deloitte, and Deloitte Touche Tohmatsu LLP is the successor partnership to Deloitte Touche Tohmatsu.
20Deloitte Touche Tohmatsu International is a Swiss verein, an entity with some of the attributes of a society or association, with headquarters in New York City.
21Pursuant to two engagement letters dated December 8, 1995 and December 12, 1996, Deloitte conducted audits of Philip for the years ending December 31, 1995 and 1996.
22In the course of performing its audits, Deloitte was provided with several letters from Philip’s lawyers who were providing legal advice to Philip.
23In the summer of 1997, a syndicate of lenders led by CIBC entered into a US$1.5 billion Credit Agreement with Philip.
24CIBC alleges that in deciding whether to make a loan to Philip, it relied on the audited financial statements prepared by Deloitte. However, it alleges that the audited financial statements contained significant misstatements.
25To foreshadow an issue for the refusals motion, Deloitte asked CIBC a series of questions eliciting information about what CIBC understood Deloitte’s audit engagement to be.
26Around the same time as the Philip loan application, a different CIBC lending team was evaluating another prospective borrower, Euro United Corporation.
27On Mr. Beauclair’s examination for discovery, he was questioned with respect to documents relating to that Euro United Corporation transaction and refused to answer certain questions.
28During the time that Mr. Beauclair’s lending team was preparing its internal credit application, the Supreme Court of Canada released its decision in Hercules Managements Ltd. v. Ernst & Young.
29On his examination for discovery, Mr. Beauclair was asked about CIBC’s awareness of the Hercules decision and whether directives or changes in lending policies were made as a result.
30In early 1998, it was determined that, due to an accounting fraud allegedly perpetrated by Mr. Waxman, Philip’s financial statements were materially misstated.
31In February 1998, Philip and the lending syndicate retained KPMG to conduct a forensic investigation.
32On May 12, 1998, the Institute of Chartered Accountants of Ontario invited the partner responsible for the audits to provide comments on the audit of Philip for 1995 and 1996.
33Deloitte has refused to answer numerous questions with respect to the Institute’s investigation and subsequent discipline hearing.
34Subject to some privilege claims, Deloitte has produced documents about the Institute’s investigation but takes the position that the proceedings are irrelevant.
35On May 21 and 26, 1998, Philip restated its 1995 and 1996 year‑end financial statements.
36In the fall of 1998, Deloitte asked the Institute to delay its investigation.
37Around November 1998, the Institute’s Professional Conduct Committee retained an investigator.
38In March 1999, legal counsel retained by Deloitte contacted the Institute and suggested that its investigation was premature.
39Meanwhile, after the revelation of an accounting fraud, Philip defaulted on its loans and its business failed.
40On June 30, 1999, PricewaterhouseCoopers LLP produced a report for a special committee of Philip’s board of directors.
41In October 1999, Deloitte sought to prohibit the Institute’s investigation in court proceedings.
42On March 8, 2000, the Divisional Court dismissed Deloitte’s application to stay the Institute’s investigation.
43Meanwhile in the CCAA proceedings, Philip’s assets were transferred to a new company.
44On November 21, 2000, the lenders appointed a receiver and manager of Philip.
45On November 22, 2000, CIBC commenced a proposed class action against Deloitte.
46On December 19, 2000, the Receiver commenced a separate action against Deloitte.
47The actions were later consolidated.
48The Plaintiffs allege that Deloitte did not perform its audits in accordance with applicable professional standards.
49The Representative Plaintiffs rely, in part, on findings by the Institute of Chartered Accountants of Ontario concerning the audit.
50They also allege deficiencies in Deloitte’s internal audit system.
51On April 22, 2004, Justice Winkler ordered that the class action be certified for several common issues.
52The Receiver’s action raises similar issues.
53In January 2007, the Institute brought charges against the chief audit partner.
54Deloitte commenced examinations for discovery of the Plaintiffs’ representatives in 2007.
55By reasons released on August 8, 2008, Justice Sanderson granted leave to examine Allen Fracassi.
56Justice Sanderson also ruled that the Receiver was obliged to make reasonable inquiries when answering questions on discovery.
57She also ruled that the scope of discovery should not be confined strictly to the certified common issues.
58In October 2008, the Institute convened a discipline hearing.
59Following Justice Sanderson’s ruling, discoveries resumed.
60There is also a dispute about questions concerning the status of errors and omissions insurance available to the Defendants.
61Another dispute concerns production of internal investigation reports.
62Finally, the Plaintiffs requested that Deloitte specify which dockets correspond to particular invoices.
IV. THE SCOPE OF EXAMINATIONS FOR DISCOVERY
63Section 15(1) of the Class Proceedings Act, 1992 states that parties to a class proceeding have the same rights of discovery under the rules of court against one another as they would in any other proceeding.
64The basic scope of an examination for discovery is set out in rule 31.06 (1) of the Rules of Civil Procedure.
65The case law has developed several principles governing discovery, including that discovery must be relevant to the issues defined by the pleadings and cannot amount to a fishing expedition.
66Materiality and relevance are key determinants in determining the propriety of a discovery question.
67Materiality concerns whether the evidence addresses a fact in issue.
68Relevance concerns whether the evidence increases or decreases the probability of a fact in issue.
69Evidence is relevant if, as a matter of common sense and human experience, it makes the existence of a fact in issue more or less likely.
70In class proceedings, discovery is often restricted to the certified issues.
71However, that restriction is not absolute.
72The proportionality principle in rule 29.02.03 also limits the scope of discovery.
73The court must consider whether the burden of answering a question is unreasonable or disproportionate.
74In earlier decisions, I identified categorical justifications for properly refusing to answer a discovery question.
75I have refined those categories and added an additional category of “answered”.
76In this case, both sides asked the other to disclose information and belief about numerous matters and sometimes went too far.
77Hearsay evidence from discovery may be admissible if adopted as true.
78However, a party is not obliged to admit hearsay evidence to be true.
79The party being examined may deny the truth of hearsay evidence and reserve the right to challenge it at trial.
80The rules for discovery do not change the laws of evidence at trial.
81The categorical justifications for refusals in a class action include: unanswerable, immaterial, irrelevant, untimely, idiosyncratic, answered, disproportionate, and privileged.
V. DELOITTE’S ARGUMENT
82Deloitte argues that the Plaintiffs have provided improper argumentative responses and failed to provide clear discovery evidence.
83Deloitte focuses on eight issues, including which audit opinions are relied upon, the relevance of invoices, the Plaintiffs’ admissions regarding third‑party discovery evidence, CIBC’s understanding of the audit engagement, the relevance of the Hercules decision, and other matters.
VI. THE PLAINTIFFS’ ARGUMENT
83The Plaintiffs submit that the Defendants wrongfully refused to provide answers to numerous questions.
They focus on nine issues including:
- the Institute investigation
- insurance coverage
- insurance adjuster reports
- internal investigations
- expert evidence
- discovery on common issues
- invoice documentation.
VII. ANALYSIS
1. Comments with Respect to Deloitte’s Argument
84In my opinion, it was proper for Deloitte to ask whether the Receiver relies on other Deloitte opinions in addition to the two audit opinions.
85However, the Receiver’s answer was disproportionate and non‑responsive.
86The answer placed “the needle into the haystack”.
87I will direct the Receiver to provide responsive answers.
88It was also proper for Deloitte to ask about the services provided by Deloitte to Philip in relation to the credit facility.
89The nature of Deloitte’s engagement is relevant.
90The next issue concerns third‑party evidence.
91Deloitte wishes to know which admissions the Receiver accepts from third‑party discovery evidence.
92Rule 31.09 obliges parties to correct incorrect discovery answers.
93The Receiver may also be asked to identify what parts of the third‑party evidence it admits to be true.
94A party may answer that it admits the evidence, knows it is false, or does not know.
95However, a problem arises because Deloitte asked omnibus questions.
96Deloitte argued the Receiver must respond to these omnibus questions.
97I agree with the Receiver that such omnibus questions are unanswerable and disproportionate.
98Deloitte also seeks to question CIBC about its understanding of the audit engagement.
99Deloitte argues that CIBC’s subjective understanding is relevant to duty of care.
100Subject to proportionality, this is a relevant line of inquiry.
101Deloitte also asked questions about CIBC’s knowledge of the Hercules decision.
102In my opinion, unless tied to duty of care evidence, this line of questioning is immaterial and disproportionate.
103The same conclusion applies to questions about the Euro United loan transaction.
104Certain other issues were resolved by the parties.
2. Disposition of Deloitte’s Refusals Motion
105Two charts set out the particular questions in dispute and my rulings.
(Charts reproduced verbatim above in the source decision.)
3. Comments with Respect to the Plaintiffs’ Argument
106In my opinion, it was proper for the Plaintiffs to ask about information gathered by the Institute of Chartered Accountants of Ontario.
107The Plaintiffs intend to rely on these materials to establish issue estoppels.
108Even though estoppel was not pleaded, the questions remain relevant.
109Questions about insurance coverage were also proper.
110Rule 31.06(4) expressly permits discovery about the existence and amount of insurance coverage.
111However, production of insurance adjuster reports would be irrelevant and disproportionate.
112Questions about internal investigations may be relevant subject to privilege.
113Disclosure of expert opinions is governed by rule 31.06(3).
114Questions about the certified common issues are clearly relevant.
115However, Deloitte need not provide further information about invoice dockets beyond what has already been produced.
4. Disposition of the Plaintiffs’ Refusals Motion
116A further chart sets out the specific questions refused by the Defendants and my rulings.
(Chart reproduced verbatim above in the source decision.)
VIII. CONCLUSION
117An order should issue in accordance with these Reasons for Decision.
118In my opinion, the costs of both refusals motions should be in the cause.
Perell, J.
Released: February 7, 2013
COURT FILE NO.: 00-CV-201162CP
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
CANADIAN IMPERIAL BANK OF COMMERCE, HIGH RIVER LIMITED PARTNERSHIP and PHILIP SERVICES CORP. by its receiver and manager, ROBERT CUMMING
Plaintiffs
‑ and ‑
DELOITTE & TOUCHE, DELOITTE & TOUCHE LLP, DELOITTE TOUCHE TOHMATSU, DELOITTE TOUCHE TOHMATSU LLP and DELOITTE TOUCHE TOHMATSU f/k/a DELOITTE TOUCHE TOHMATSU INTERNATIONAL
Defendants
– and –
HOWARD BECK, MARVIN BOUGHTON, CONNIE CAISSE, ALLEN FRACASSI, PHILIP FRACASSI, PETER McQUILLAN, FELIX PARDO, DERRICK ROLFE, COLIN SOULE, ROBERT WAXMAN and JOHN WOODCROFT
Third Parties
REASONS FOR DECISION
Perell, J.
Released: February 7, 2013