ONTARIO
SUPERIOR COURT OF JUSTICE
COURT FILE NO.: 11-50798-A1
11-50797-A1
DATE: 20140702
BETWEEN:
SIGMA CAPITAL MANAGEMENT GROUP INC.
Plaintiff
– and –
KPMG LLP
Defendant
Stephen J. Maddex, for the Plaintiff
Patrick J. O’Kelly and James Mangan for the Defendant
– and –
DEVRY, SMITH & FRANK LLP
Third Party
AND BETWEEN:
BENZER LIMITED and RAJ MATHUR
Plaintiffs
Allan R. O’Brien for the Third Party
Stephen J. Maddex, for the Plaintiffs
– and –
KPMG LLP
Defendant
– and –
KOMTECH INC., and DEVRY, SMITH & FRANK LLP
Third Parties
Patrick J. O’Kelly and James Mangan for the Defendant
Stephen J. Maddex for Komtech Inc. and Allan R. O’Brien for Devry, Smith & Frank LLP
HEARD: January 29 and March 10, 2014 (Ottawa)
HACKLAND J.
REASONS FOR DECISION
Overview
[1] This is a professional negligence action brought by the former principals/shareholders and successors of Komtech Ltd. (Komtech) against Komtech’s former accountants, KPMG LLP (KPMG). KPMG subsequently commenced a third party action claiming contribution and indemnity from Komtech’s former solicitors, the law firm of Devry, Smith & Frank LLP (Devry). These reasons relate to two motions for summary judgment, one brought by KPMG to dismiss the main claim and one brought by Devry to dismiss the third party claim brought against them by KPMG. The motions were argued separately but I have treated the extensive materials before the court on the two motions as a joint record and counsel have responded in writing to any matters or documentation that was not before the court on one or other of the motions.
Disposition
[2] For the reasons outlined below, I dismiss the motion for summary judgment brought by KPMG and hold that this complex and multi-faceted commercial claim must proceed to trial. On the other hand, I grant summary judgment dismissing the third party claim brought by the defendant KPMG against the plaintiff’s former solicitors Devry, on the basis that the solicitors owed no duty of care in negligence to KPMG in the circumstances of this case.
The Facts
[3] Komtech was established in July 1999 and KPMG were the company’s accountants. In October and November of 2004, discussions took place between the principals of Komtech and KPMG as to whether the company could qualify as a Canadian Controlled Private Corporation (CCPC) for the purposes of the Income Tax Act. The company sought this status so that it could claim research tax credits which would greatly reduce the corporate taxation payable. KPMG undertook a study of the question and rendered an opinion to the company that it did not qualify as a CCPC because the ownership and corporate structure was such that it was not Canadian controlled.
[4] Discussions then ensued between Komtech and KPMG, particularly involving Raj Mathur, an officer of Komtech and a particular accountant at KPMG, as to how the company might be re-structured to qualify as a CCPC. KPMG specifically told Komtech how to change the control provisions of the Shareholders Agreement to accomplish this objective, i.e. to transition the control away from the non-resident directors (Enterprise Group Holdings), and to vest control in the Canadian directors. KPMG and Komtech also decided that the changes to the shareholders agreement would be back-dated to the time of the inception of the company. KPMG’s position is that this was done upon the instructions of the management of Komtech that the original separation agreement did not correctly express the control provisions and the revised shareholders agreement expressed the party’s original intention. The position of the plaintiffs is essentially that the Shareholders Agreement was back-dated to mislead the Canada Revenue Agency (CRA) and that this was done on the advice of KPMG. The plaintiffs allege that the advice provided to them by KPMG with respect to Komtech qualifying as a CCPC was negligent.
[5] As of 2004, Komtech began filing tax returns identifying itself as a CCPC and, KPMG prepared amended tax returns for the years 2001 and 2003 identifying Komtech as a CCPC.
[6] After accepting Komtech’s filings for several years, the CRA commenced an audit of Komtech in 2008. The CRA concluded that Komtech was not a CCPC and, therefore, not entitled to any related investment tax credits. The CRA required Komtech to pay back all amounts claimed or received as a CCPC. According to the plaintiffs, this amount was approximately $2.2 million (the “reassessment liability”).
[7] The plaintiffs allege that as a result of being unable to re-pay the reassessment liability to CRA and obtain further investment tax credits, Komtech was compelled to enter insolvency proceedings and then bankruptcy. KPMG denies that the re-assessment liability was the proximate cause of Komtech’s demise or of any of the losses claimed by the various plaintiffs.
[8] The events in issue transpired over a number of years. There are multiple issues related to both the factual occurrences, the applicable standards of professional practice and many credibility issues arising from conflicting evidence. On March 10, 2014 KPMG argued its motion for summary judgment on what it described as “a narrow issue of law”. The argument presented was that a recent decision of the Federal Court of Appeal in Price Waterhouse Coopers Inc. v. R., 2012 D.T.C. 1142 establishes that KPMG gave Komtech accurate and non-negligent advice as to its entitlement to claim the status of a CCPC. I dismissed this motion on the basis that the Price Waterhouse decision turned on its own factual record and could not be taken to be determinative of the negligence issues presented in this case.
[9] I turn now to Devry’s summary judgment motion to dismiss the third party claim against it by the defendant KPMG. KPMG claims essentially that if it is found negligent for advice it provided to Komtech in regard to its tax filings as a CCPC, then Komtech’s solicitors (Devry) are also contributorily negligent due to certain advice Devry provided to KPMG that was material to the advice KPMG provided to Komtech and to the steps taken by KPMG.
[10] The evidence establishes that Devry was not consulted by KPMG about Komtech’s plans to claim CCPC status nor is there evidence that Komtech consulted with Devry on this issue. Indeed Komtech’s principal, the plaintiff Raj Mathur, has deposed that Komtech’s solicitors were not consulted or involved in this tax issue, which was discussed and dealt with strictly between Komtech and KPMG.
[11] KPMG basis its third party claim against Devry on the principles of negligent misrepresentation. These requirements of this cause of action are well understood and were set out by the Supreme Court of Canada in Queen v. Cognos Inc., 1993 146 (SCC), 1993 CarswellOnt 801 at para. 34.
(1) there must be a duty of care based on a “special relationship” between the representor and the representee;
(2) the representation in question must be untrue, inaccurate, or misleading;
(3) the representor must have acted negligently in making said misrepresentation;
(4) the representee must have relied, in a reasonable manner, on said negligent misrepresentation; and
(5) the reliance must have been detrimental to the representee in the sense that damages resulted.
[12] KPMG was never a client of Devry’s. However a special relationship could exist, given their mutual client Komtech, provided that there was “foreseeable and reasonable reliance” by KPMG on certain representations from Devry. However, I am unable to conclude that there was any reasonable reliance on KPMG’s part on any information obtained from Devry’s in the circumstances of this case and no detrimental reliance on the content or accuracy of such information.
[13] As noted, Devry and in particular the firm’s associate Mr. Holmes was not involved in drafting, reviewing or advising Komtech with respect to any changes to its corporate documents or to the filing of its annual tax returns and was not aware that Komtech filed amended tax returns identifying itself as a CCPC.
[14] The evidence establishes that in 2004, in order to attempt to quality as a CCPC, changes to Komtech’s original Shareholders Agreement were made and this was done by Komtech on the advice of and with the wording provided by an accountant at KPMG. Notably this accountant has not filed an affidavit in these proceedings. KPMG’s evidence is that of a supervising partner with general knowledge of the events. These amendments or revisions included a back-dating of the Shareholders Agreement to November 10, 1999. After the Shareholders Agreement was amended, KPMG requested, without providing any background information, that Komtech’s lawyer, Mr. Holmes, confirm its existence and effective date. He did so and KPMG takes the position that this confirmation allowed them to proceed with the filing of Komtech’s tax returns as a CCPC.
[15] Importantly however, KPMG knew that the original Shareholders Agreement had just been altered as to its terms and back-dated with their close involvement. They chose not to advise Mr. Holmes of this. KPMG’s factum asserts that KPMG believed Mr. Holmes had likely drafted the revisions to the Shareholders Agreement. I see no reasonable basis for this assertion. An October 2004 e-mail from KPMG to Komtech set out what KPMG considered to be the required amendments to allow Komtech to file tax returns as a CCPC. The KPMG e-mail asked Komtech to “please forward to us the amended Shareholders Agreement and confirmation from your lawyer of the effective date of the amended agreement at your earliest convenience”.
[16] By letter dated November 25, 2004, Mr. Holmes of Devry wrote to Denis Trottier of KPMG (copying Komtech), stating: “We are the corporate solicitors for Komtech Inc. As such we confirm that the shareholders’ agreement dated November 10, 1999 is the only such agreement currently in effect. We trust the foregoing will be satisfactory for your purposes.”
[17] By letter dated December 2, 2004 KPMG responded … “kindly also confirm that such agreement has had effect since November 10, 1999”. Mr. Holmes responded on December 3, 2004 “… we confirm that the shareholders agreement has had effect since November 10, 1999”. KPMG submits that on the basis of the amended Shareholders Agreement and Mr. Holmes’ two letters (the Devry letters), “Komtech filed tax returns as a CCPC for 2004 to 2008 and re-filed its 2001 and 2003 tax returns as a CCPC.
[18] It is common ground that the later disallowance of investment tax credits by CRA had nothing to do with the retroactivity of the Shareholders Agreement, a circumstance of which CRA was not aware. Rather, the disallowance resulted from CRA’s view that Komtech did not qualify as a CCPC. Significantly, Komtech never challenged this ruling in the Tax Court.
[19] As noted, in its Third Party claim KPMG bases its claim for contribution and indemnity against Devry on the tort of negligent misrepresentation, alleging that Devry owed KPMG a duty of care not to provide inaccurate, untrue or misleading information. The evidence establishes that in writing the two Devry letters discussed above, Mr. Holmes was incorrectly operating on the assumption that the amended Shareholders Agreement was in fact the original Shareholders Agreement that he had drafted for Komtech in 1999 when the company was first established. However I am of the opinion that KPMG’s argument that they were misled fails because they knew exactly what the true situation was. KPMG did not rely on the information in the Devry letters for the accuracy or the truth of it. Moreover, reasonable reliance in the circumstances, had there been any intention to rely, would have required an accurate and informative communication to Mr. Holmes as to what he was actually being asked. KPMG needed to tell Mr. Holmes that he was being asked about an amended Shareholders Agreement. I find on the evidence that Mr. Holmes believed that he was being asked simply to identify the Shareholders Agreement that he had drafted five years previously and to confirm that it had been in force throughout that period. Even if Mr. Holmes did not meet the proper standard of care by not making further inquiries, there is still no duty of care owed to KPMG who did not rely on the accuracy of the information provided. In find that KPMG had personal and direct knowledge that the original 1999 Shareholders Agreement had been amended and executed in 2004 and were not misled by any of the information in the Devry letters.
[20] I do not accept KPMG’s submission that it is necessary to accept all of Mr. Mathur’s evidence to conclude that the changes to the Shareholders Agreement, including the decision to back-date it, came from KPMG. Mr. Holmes said in his testimony that he did not give any such advice to Komtech and was unaware of the CCPC issue. Mr. Mathur testified in his examination that KPMG advised him of what changes were required in the agreement and advised him to back-date the agreement. KPMG has not provided evidence to contradict this and in particular has not provided affidavit evidence of the accountant directly involved to challenge this evidence. I accept the submission of counsel for Devry that given the fact that parties are expected to put their best foot forward on a motion for summary judgment, the possibility that there might be contradictory evidence at trial is no reason to deny a motion for summary judgment.
[21] I also accept Devry’s submission that the involvement of KPMG’s in-house solicitor in these issues, at the time of the receipt of the Devry letters, is relevant evidence weighing against the proposition that KPMG relied on the accuracy of information provided by Mr. Holmes. While KPMG declined to waive solicitor-client privilege concerning the subject matter and content of the advice of the in-house solicitor, there is an inference to be drawn that the significance of the retro-activity issue was well understood and considered by KPMG as well as the issue of how they would communicate with Mr. Holmes as Komtech’s solicitor. Authority for this approach is to be found in Royal Bank v. Sebastian Terzo Investments Inc. 1993 CarswellOnt 1842 in which White J. held that the refusal of a guarantor to waive solicitor and client privilege was a proper basis for an inference that the guarantor understood the guarantee and was not misled.
[22] For the reasons set out above this court grants:
(a) An order dismissing the defendant KPMG’s Third Party Claim against Devry in Benzer Ltd. and Raj Mathur v. KPMG LLP (Court File No. CV-11-50797-A1); and
(b) An order dismissing the defendant KPMG’s Third Party Claim against Devry in Sigma Capital Management Group Inc. v. KPMG LLP (Court File No. CV-11-50798-A1).
[23] I direct the Third Party Devry to provide a brief written submission on costs of the motion and of the action (in both proceedings), within 30 days of the release of these reasons. KPMG is to respond within 30 days of the receipt of Devry’s costs submission.
[24] With respect to the main claim in the two actions, I will not remain seized of them because the balance of convenience is against this. I will be unavailable and on administrative leave for much of the balance of the year and these actions will apparently be tried by a jury in any event. However, I can be available for a judicial pre-trial if counsel wish, to be arranged through the trial co-ordination office.
Mr. Justice Charles T. Hackland
Released: July 2, 2014
COURT FILE NO.: 11-50798-A1
11-50797-A1
DATE: 20140702
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
SIGMA CAPITAL MANAGEMENT GROUP INC.
-and-
KPMG LLP
-and-
DEVRY, SMITH & FRANK LLP
AND BETWEEN:
BENZER LIMITED and RAJ MATHUR
-and-
KPMG LLP
-and-
KOMTECH INC. and DEVRY, SMITH & FRANK LLP
REASONS FOR DECISION
HACKLAND J.
Released: July 2, 2014