ONTARIO
SUPERIOR COURT OF JUSTICE
COURT FILE NO.: 00-CV-201162CP
DATE: February 7, 2013
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
[1] This 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.
[2] The 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.
[3] The 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.
[4] The 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.
[5] The 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.
[6] A 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.
[7] Notable 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.
[8] The 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.
[9] There 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
[10] In 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.
[11] Then, 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.
[12] Next, 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.
[13] The 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.
[14] The analysis section of these Reasons for Decision will include the “Refusals Charts” and my discrete conclusions about the contested questions.
[15] Where I uphold a refusal, the chart will set out the categorical reason or reasons that justify the refusal.
III. FACTUAL AND PROCEDURAL BACKGROUND
[16] Philip 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.
[17] One 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.
[18] Deloitte 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.
[19] Deloitte Touche Tohmatsu is a partnership that is a partner of Deloitte, and Deloitte Touche Tohmatsu LLP is the successor partnership to Deloitte Touche Tohmatsu.
[20] Deloitte 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.
[21] Pursuant 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.
[22] In the course of performing its audits, Deloitte was provided with several letters from Philip’s lawyers who were providing legal advice to Philip.
[23] In the summer of 1997, a syndicate of lenders led by CIBC entered into a US$1.5 billion Credit Agreement with Philip.
[24] CIBC 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.
[25] To 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.
[26] Around the same time as the Philip loan application, a different CIBC lending team was evaluating another prospective borrower, Euro United Corporation.
[27] On 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.
[28] During 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.
[29] On 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.
[30] In early 1998, it was determined that, due to an accounting fraud allegedly perpetrated by Mr. Waxman, Philip’s financial statements were materially misstated.
[31] In February 1998, Philip and the lending syndicate retained KPMG to conduct a forensic investigation.
[32] On 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.
[33] Deloitte has refused to answer numerous questions with respect to the Institute’s investigation and subsequent discipline hearing.
[34] Subject to some privilege claims, Deloitte has produced documents about the Institute’s investigation but takes the position that the proceedings are irrelevant.
[35] On May 21 and 26, 1998, Philip restated its 1995 and 1996 year‑end financial statements.
[36] In the fall of 1998, Deloitte asked the Institute to delay its investigation.
[37] Around November 1998, the Institute’s Professional Conduct Committee retained an investigator.
[38] In March 1999, legal counsel retained by Deloitte contacted the Institute and suggested that its investigation was premature.
[39] Meanwhile, after the revelation of an accounting fraud, Philip defaulted on its loans and its business failed.
[40] On June 30, 1999, PricewaterhouseCoopers LLP produced a report for a special committee of Philip’s board of directors.
[41] In October 1999, Deloitte sought to prohibit the Institute’s investigation in court proceedings.
[42] On March 8, 2000, the Divisional Court dismissed Deloitte’s application to stay the Institute’s investigation.
[43] Meanwhile in the CCAA proceedings, Philip’s assets were transferred to a new company.
[44] On November 21, 2000, the lenders appointed a receiver and manager of Philip.
[45] On November 22, 2000, CIBC commenced a proposed class action against Deloitte.
[46] On December 19, 2000, the Receiver commenced a separate action against Deloitte.
[47] The actions were later consolidated.
[48] The Plaintiffs allege that Deloitte did not perform its audits in accordance with applicable professional standards.
[49] The Representative Plaintiffs rely, in part, on findings by the Institute of Chartered Accountants of Ontario concerning the audit.
[50] They also allege deficiencies in Deloitte’s internal audit system.
[51] On April 22, 2004, Justice Winkler ordered that the class action be certified for several common issues.
[52] The Receiver’s action raises similar issues.
[53] In January 2007, the Institute brought charges against the chief audit partner.
[54] Deloitte commenced examinations for discovery of the Plaintiffs’ representatives in 2007.
[55] By reasons released on August 8, 2008, Justice Sanderson granted leave to examine Allen Fracassi.
[56] Justice Sanderson also ruled that the Receiver was obliged to make reasonable inquiries when answering questions on discovery.
[57] She also ruled that the scope of discovery should not be confined strictly to the certified common issues.
[58] In October 2008, the Institute convened a discipline hearing.
[59] Following Justice Sanderson’s ruling, discoveries resumed.
[60] There is also a dispute about questions concerning the status of errors and omissions insurance available to the Defendants.
[61] Another dispute concerns production of internal investigation reports.
[62] Finally, the Plaintiffs requested that Deloitte specify which dockets correspond to particular invoices.
IV. THE SCOPE OF EXAMINATIONS FOR DISCOVERY
[63] Section 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.
[64] The basic scope of an examination for discovery is set out in rule 31.06 (1) of the Rules of Civil Procedure.
[65] The 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.
[66] Materiality and relevance are key determinants in determining the propriety of a discovery question.
[67] Materiality concerns whether the evidence addresses a fact in issue.
[68] Relevance concerns whether the evidence increases or decreases the probability of a fact in issue.
[69] Evidence 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.
[70] In class proceedings, discovery is often restricted to the certified issues.
[71] However, that restriction is not absolute.
[72] The proportionality principle in rule 29.02.03 also limits the scope of discovery.
[73] The court must consider whether the burden of answering a question is unreasonable or disproportionate.
[74] In earlier decisions, I identified categorical justifications for properly refusing to answer a discovery question.
[75] I have refined those categories and added an additional category of “answered”.
[76] In this case, both sides asked the other to disclose information and belief about numerous matters and sometimes went too far.
[77] Hearsay evidence from discovery may be admissible if adopted as true.
[78] However, a party is not obliged to admit hearsay evidence to be true.
[79] The party being examined may deny the truth of hearsay evidence and reserve the right to challenge it at trial.
[80] The rules for discovery do not change the laws of evidence at trial.
[81] The categorical justifications for refusals in a class action include: unanswerable, immaterial, irrelevant, untimely, idiosyncratic, answered, disproportionate, and privileged.
V. DELOITTE’S ARGUMENT
[82] Deloitte argues that the Plaintiffs have provided improper argumentative responses and failed to provide clear discovery evidence.
[83] Deloitte 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
[83] The 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
[84] In my opinion, it was proper for Deloitte to ask whether the Receiver relies on other Deloitte opinions in addition to the two audit opinions.
[85] However, the Receiver’s answer was disproportionate and non‑responsive.
[86] The answer placed “the needle into the haystack”.
[87] I will direct the Receiver to provide responsive answers.
[88] It was also proper for Deloitte to ask about the services provided by Deloitte to Philip in relation to the credit facility.
[89] The nature of Deloitte’s engagement is relevant.
[90] The next issue concerns third‑party evidence.
[91] Deloitte wishes to know which admissions the Receiver accepts from third‑party discovery evidence.
[92] Rule 31.09 obliges parties to correct incorrect discovery answers.
[93] The Receiver may also be asked to identify what parts of the third‑party evidence it admits to be true.
[94] A party may answer that it admits the evidence, knows it is false, or does not know.
[95] However, a problem arises because Deloitte asked omnibus questions.
[96] Deloitte argued the Receiver must respond to these omnibus questions.
[97] I agree with the Receiver that such omnibus questions are unanswerable and disproportionate.
[98] Deloitte also seeks to question CIBC about its understanding of the audit engagement.
[99] Deloitte argues that CIBC’s subjective understanding is relevant to duty of care.
[100] Subject to proportionality, this is a relevant line of inquiry.
[101] Deloitte also asked questions about CIBC’s knowledge of the Hercules decision.
[102] In my opinion, unless tied to duty of care evidence, this line of questioning is immaterial and disproportionate.
[103] The same conclusion applies to questions about the Euro United loan transaction.
[104] Certain other issues were resolved by the parties.
2. Disposition of Deloitte’s Refusals Motion
[105] Two 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
[106] In my opinion, it was proper for the Plaintiffs to ask about information gathered by the Institute of Chartered Accountants of Ontario.
[107] The Plaintiffs intend to rely on these materials to establish issue estoppels.
[108] Even though estoppel was not pleaded, the questions remain relevant.
[109] Questions about insurance coverage were also proper.
[110] Rule 31.06(4) expressly permits discovery about the existence and amount of insurance coverage.
[111] However, production of insurance adjuster reports would be irrelevant and disproportionate.
[112] Questions about internal investigations may be relevant subject to privilege.
[113] Disclosure of expert opinions is governed by rule 31.06(3).
[114] Questions about the certified common issues are clearly relevant.
[115] However, Deloitte need not provide further information about invoice dockets beyond what has already been produced.
4. Disposition of the Plaintiffs’ Refusals Motion
[116] A further chart sets out the specific questions refused by the Defendants and my rulings.
(Chart reproduced verbatim above in the source decision.)
VIII. CONCLUSION
[117] An order should issue in accordance with these Reasons for Decision.
[118] In 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