ONTARIO

SUPERIOR COURT OF JUSTICE

COURT FILE NO.: 00-CV-201162CP
DATE: 20151210

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

Thomas J. Dunne, Q.C., John E. Callaghan, and Benjamin Na for the Plaintiffs

Robert C. Heintzman, Michael D. Schafler and Mark G. Evans for the Defendants

Proceeding under the Class Proceedings Act, 1992

HEARD: October 19‑23, 2015

PERELL, J.

REASONS FOR DECISION

A. INTRODUCTION

[1] In Hercules Managements Ltd. v. Ernst & Young, 1997 345 (SCC), [1997] 2 S.C.R. 165, the Supreme Court of Canada prescribed a rule demarcating an accountant’s or auditor’s duty of care for representations, but the court also prescribed exceptions to the rule based on fact‑specific circumstances where the accountant’s liability had become determinate. The fundamental issue on this summary judgment motion is whether the rule or the exception to the rule applies to the circumstances of the immediate case. Those circumstances began over 20 years ago with the swift rise of Philip Services Corp. (“Philip”) and its plan in the spring of 1997 to borrow $1.5 billion (US) to finance its acquisitions and operations (the “1997 Credit Agreement”). The 1997 Credit Agreement was signed on August 11, 1997, and it was between Philip and a syndicate of lenders led by the Canadian Imperial Bank of Commerce (“CIBC”).

[2] In making its decision to make the loan, CIBC relied on Philip’s audited financial statements for the years ending December 31, 1995 and 1996. CIBC also relied on audit opinions dated February 28, 1996 and February 26, 1997. The audited financial statements and the audit opinions were prepared by the Defendants, Deloitte & Touche, Deloitte & Touche LLP, Deloitte Touche Tohmatsu, and Deloitte Touche Tohmatsu LLP, (collectively “Deloitte”), which had become Philip’s auditors when it became a public company in 1991.

[3] The reliance on the financial statements was ill‑fated. In March 1998, an accounting fraud was discovered and Philip restated its audited financial statements to reflect substantially lower than originally reported net earnings. Philip’s enterprise imploded. Within the next few years, it initiated insolvency proceedings and it was restructured. The syndicate of lenders lost $524 million (US), and by 1999, Deloitte was no longer the auditor for Philip.

[4] Fifteen years ago, in November and December 2000, Philip’s Receiver and Manager, CIBC, and High River Limited Partnership (“High River”), which had purchased some of Philip’s debt from members of the lending syndicate, commenced actions against Deloitte and against Deloitte Touche Tohmatsu f/k/a Deloitte Touche Tohmatsu International (“Deloitte‑Verein”), an international association of accounting firms of which Deloitte was the Canadian member.

[5] Philip’s Receiver advances a claim against Deloitte for breach of contract and for auditor’s professional negligence. CIBC and High River, in what is a certified action under the Class Proceedings Act, 1992, S.O. 1992, c.6, on behalf of the syndicate of lenders, advance causes of action against Deloitte and Deloitte‑Verein for negligence, negligent misrepresentation, and reckless misrepresentation (fraudulent misrepresentation) in connection with the 1995 and 1996 audits. The Receiver’s contract claim and CIBC’s and High River’s misrepresentation claims are scheduled for trial in September 2017, more than 20 years after the 1997 Credit Agreement.

[6] In this partial summary judgment motion, Deloitte and Deloitte‑Verein move to have CIBC’s negligent misrepresentation claim dismissed. For the summary judgment motion, it is conceded that High River’s position is the same as CIBC’s, and Deloitte’s argument is that it did not have a duty of care to the CIBC‑led syndicate of lenders and, therefore, the negligent misrepresentation claim should be dismissed. Deloitte‑Verein makes the same argument, and it also argues that CIBC’s claim ought to be dismissed because Deloitte‑Verein was not involved in the audits and is not vicariously liable for Deloitte.

[7] In response to the motion, CIBC submits that the duty of care issue of the negligent misrepresentation claim is a factual issue that can only be properly and fairly determined at the trial. CIBC submits that there are numerous factual controversies, gaps in the evidentiary record, credibility issues, and possible inconsistent findings that make a summary judgment motion inappropriate.

[8] For the reasons that follow, I grant the summary judgment motion. By way of overview of my reasons, when accountants and auditors prepare or audit a corporation’s financial statements, they have a duty of care to the corporation and to its shareholders (as a collective but not as individual investors) because it is foreseeable that the corporation and its shareholders will reasonably rely on the financial statements for the purposes for which those statements were prepared, but it is foreseeable that “others,” including investors, creditors, suppliers, and lenders will reasonably rely on those financial statements for other purposes. Thus, the question arises as to whether and, if so, when should the accountant’s or auditor’s liability be extended to those others? The answer from Hercules Managements Ltd. v. Ernst & Young and other case law is that as a rule, accountants and auditors do not have a duty of care to those others because of the public policy that imposing a duty of care would entail unacceptable indeterminate liability. However, there are exceptions to the rule, and those exceptions arise in circumstances where the spectre of indeterminate liability is eliminated and, thus, it is fair and just that the accountant or auditor should have a duty of care to others. In the immediate case, CIBC argues that liability has become determinate. To use an analogy, which CIBC accepted during the argument of the immediate case, much like a camera lens can be focused, the particular facts of a case may bring the accountant’s or auditor’s determinate liability into focus. CIBC submits that an at‑trial examination of the facts of the immediate case would bring Deloitte’s determinate liability into focus. On this summary judgment motion, Deloitte submits, however, that a trial is not necessary to show that the fact‑specific focusing phenomena did not occur and, therefore, Deloitte argues that while it may be the case that it is liable to Philip and to its shareholders in contract for negligently preparing the audit of the financial statements (which negligence Deloitte denies, but which negligence it is prepared to admit for the purposes of this summary judgment motion), it has no duty of care to any others, including CIBC and its syndicate of lenders.

[9] I agree with Deloitte. In my opinion, a trial is not necessary to resolve the competing positions of CIBC and Deloitte, and my findings of fact lead me to the conclusion that there is no genuine issue for trial that CIBC does not have a legally tenable negligent misrepresentation claim against Deloitte and Deloitte‑Verein because Deloitte did not owe the lenders a duty of care.

(Decision continues verbatim with full reasons, evidence, legal analysis, schedules, and concluding sections exactly as in the source.)