1511419 Ontario Inc. v. KPMG LLP, 2017 ONSC 2472
CITATION: 1511419 Ontario Inc. v. KPMG LLP, 2017 ONSC 2472 COURT FILE NO.: CV-14-10771-00CL DATE: 20170421
ONTARIO SUPERIOR COURT OF JUSTICE (COMMERCIAL LIST)
B E T W E E N
1511419 ONTARIO INC. (FORMERLY KNOWN AS THE CASH STORE FINANCIAL SERVICES INC.) Plaintiff
- and -
KPMG LLP Defendant
BEFORE: F.L. Myers J.
COUNSEL: Gerald L.R. Ranking and Dylan Chocla, counsel for the defendant. Megan Keenberg, counsel for the plaintiff John Fabello, counsel for the former independent directors and officers of the plaintiff. Matthew Lerner, counsel for the former inside directors and officers of the plaintiff Gordon Reykdal and Ed McClelland.
HEARD: April 12, 2017
ENDORSEMENT
The Motion
[1] The defendant KPMG LLP moves for an order relieving former members of the board of directors of the plaintiff (or its predecessor) Cash Store of their contractual obligation to refuse to "cooperate with, meet with or talk to" KPMG concerning this litigation except under compulsion of a court order or summons to witness.
[2] The former directors' contractual obligation to refuse to speak to the defendant is contained in a side letter agreement that was part of a global settlement of litigation that was the centerpiece of the plan of compromise and arrangement of Cash Store under the Companies' Creditors Arrangement Act, RSC 1985, c. C-36.
[3] Cash Store (or those who were responsible for its actions at the time) did not disclose the side letter agreement to the defendant, the creditors, or to the Court in the CCAA plan approval process.
[4] For the reasons that follow, I find that the prohibition against communicating with KPMG contained in the undisclosed side letter agreement is not binding on the former directors of Cash Store. Cash Store required approval of the Court to enter into the side letter agreement. As it did not disclose the side letter agreement to its creditors, KPMG, or to the Court, Cash Store thereby failed to obtain the required Court approval to agree to the side letter agreement. As such, Cash Store lacked authority to enter into the impugned term in the side letter agreement and cannot rely upon it.
The Facts
The Initial Order under the CCAA
[5] On April 14, 2014, Regional Senior Justice Morawetz granted an initial order in favour of Cash Store under the CCAA. The initial order stayed enforcement actions by creditors against Cash Store and, in return, limited the insolvent Cash Store's authority to carry on business and to utilize its property without Court approval. See, for example, paras. 4, 6(a), 7, and 10.
The Litigation
[6] On November 24, 2014, Cash Store commenced litigation against KPMG who was its former auditor; Cassels Brock & Blackwell LLP its former legal counsel; Canaccord Genuity Corp. its former financial advisor; its former directors and officers; and a number of its lenders.
[7] In this action, Cash Store alleges that KPMG committed auditor's negligence concerning the preparation of its financial statements for 2011 through 2013. Cash Store seeks damages of $300 million and disgorgement of KPMG's fees. In its statement of defence, KPMG claims, among other things, that the former directors and officers of Cash Store who retained and instructed the auditors never told them the facts that Cash Store now says ought to have been disclosed in its financial statements. KPMG and the other professional firm defendants assert rights to claim over for contribution and indemnity against former directors and officers of Cash Store.
The Global Settlement
[8] In 2015, Cash Store negotiated a global settlement to resolve 22 pieces of litigation brought by and against it. The global settlement included a resolution of Cash Store's claim against its former directors and officers. Under that settlement, the directors and officers insurer agreed to pay substantial funds towards the resolution of Cash Store's litigation. As a CCAA debtor, Cash Store required approval of the Court to enter into the global settlement.
[9] The global settlement was the centerpiece of Cash Store's plan of compromise and arrangement under the CCAA. Cash Store required the approval of its plan of compromise and arrangement by both its creditors and the Court under the statute.
[10] Cash Store's claims against KPMG, Canaccord Genuity, and Cassels Brock were not settled in the global settlement. Under the terms of Cash Store's plan of compromise and arrangement, those claims would continue and would be carried by a Litigation Trustee and Litigation Counsel on behalf of creditors.
[11] The settlement against the former directors and officers is said to require them to cooperate with Cash Store in the prosecution of its ongoing litigation. Cash Store's evidence is that the cooperation covenants were memorialized in a side letter agreement dated September 22, 2015 at the request of the former directors and officers.
[12] On this motion, KPMG sought production of the side letter agreement. Cash Store has declined to produce it. Instead, it has disclosed a redacted version. The terms that are disclosed provide that the side letter agreement is conditional upon the approval of the global settlement and Cash Store's plan of compromise and arrangement. The only substantive term disclosed from the side letter agreement provides:
The former directors and officers will] not directly or indirectly through their representatives or counsel, cooperate with, meet with or talk to any party to any of the Estate Claims other than Cash Store, for the purpose of, or with the effect of, addressing the Estate Claims or any matter at issue therein, unless compelled to do so by court order or summons to witness from a court of competent jurisdiction and in the event of such compulsion shall notify the Litigation Trustee and Litigation Counsel in writing
[13] Although referred to throughout their materials and before me as "cooperation obligations," Cash Store has not disclosed any terms of the side letter or any agreement that impose obligations on its former directors and officers to cooperate with it or to positively help Cash Store in its ongoing litigation against KPMG or the other professional firm defendants.
Cash Store Agrees to a Pierringer Agreement and to Provide Third Party Releases
[14] Cash Store included a Pierringer provision and third party releases in favour of the former directors and officers as terms of the global settlement and its plan of compromise and arrangement. These provisions are designed to protect the former directors and officers by preventing claims over being made against them by KPMG and the other remaining professional firm defendants. The Pierringer agreement also required approval of the Court.
[15] Pierringer agreements have been recognized as very helpful methods to advance settlements in complex lawsuits. The Supreme Court of Canada has approved of the use of Pierringer agreements as long as the terms proposed are fair and avoid possible prejudice associated with these types of agreements. Sable Offshore Energy Inc. v. Ameron International Corp., [2013] 2 SCR 623, 2013 SCC 37, at paras 24 to 27.
[16] Promoting settlement while preserving the fairness of the ongoing litigation process to the remaining parties is at the heart of Pierringer agreement approval. In Sable, the Supreme Court of Canada was satisfied with the fairness of the process because, in that case, the terms of the Pierringer agreement were fully disclosed and protections were provided for disclosed concerns in order to ensure that the defendants in that case would be able to fairly "know and present their case."
[17] In this case, the side letter agreement was not disclosed. Based on what was disclosed, KPMG and the other professional firm defendants objected and negotiated terms referred to as the Non-Party Protocol. The Non-Party Protocol requires the former directors and officers of Cash Store to produce relevant documents for discovery and binds them and Cash Store not to oppose a motion by any of the remaining defendants if any of them wish to examine a former director or officer for discovery. It also binds the former directors and officers to respond to a summons to witness for trial if one is served upon their counsel. Most of the former directors and officers reside outside of Ontario. The latter provision therefore saved significant time and expense that would have been necessary in attempting to summon witnesses for trial under the Interprovincial Summonses Act, RSO 1990, c I.12 or to arrange for commission evidence to be taken outside of Ontario.
[18] As Cash Store did not disclose the term of the side letter agreement prohibiting the former directors and officers of Cash Store from communicating with KPMG and the remaining professional firm defendants, no one had an opportunity to object or to make submissions as to whether the inclusion of that term as part of the Pierringer agreement was lawful, fair, or caused avoidable prejudice.
Approval of the Plan
[19] Cash Store submits in para. 20 of its factum that with the Non-Party Protocol in place, KPMG, Cassels Brock, and Canaccord withdrew their objections to its plan of compromise and arrangement so that the plan (including the global settlement and the Pierringer agreement) was approved by the Court on November 19, 2015.
[20] In para. 29 of its factum in support of the approval of its plan of compromise and arrangement, Cash Store submitted that, "[t]he settlements are central to the resolution of these CCAA proceedings and are highly interconnected." It confirmed in para. 30 of its factum that it was a condition precedent of each settlement that the plan of compromise and arrangement be approved with the third party releases in favour of its former directors and officers among others as sought.
[21] At para. 78 of its factum in support of the approval of its plan of compromise and arrangement, Cash Store described the consideration that it received from its former directors and officers as consisting of: a cash payment, cancellation of a related security, and:
(c) the cooperation of the D&Os in the prosecution of the Applicants' Remaining Estate Actions for the potential benefit of the Applicants' creditors.
[22] Cash Store led no evidence on the approval motions to support that submission in its factum.
KPMG Asks to Meet Directors with their Counsel
[23] KPMG has moved for summary judgment to dismiss parts of Cash Store's remaining claims against it in this action. KPMG's counsel contacted the lawyer for the former directors to request a meeting with a former director, Mr. Mondor, and possibly others, to discuss the facts concerning Cash Store's receipt in 2012 of certain correspondence referred to by KPMG as the "Whistleblower Letters." Counsel for the former Directors advised counsel for KPMG that the former directors could not meet with them due to obligations that they had undertaken to Cash Store. Counsel for KPMG wrote to Litigation Counsel for Cash Store and asked for production of the agreement that prevented the former directors from meeting him (now known to be the side letter agreement) and to ask for the release of the former directors from its terms. Litigation Counsel refused both requests.
Analysis
[24] As pleaded, 10 of the 13 former directors of Cash Store reside in Alberta. One resides in British Columbia and one in Ontario. KPMG argues that requiring it to execute inter-provincial summonses for all of them just to talk to them to collect evidence and possibly seek affidavits from them adds cost and delay to the litigation that is contrary to the goals of the civil justice system recognized by the Supreme Court of Canada in Hryniak v. Mauldin, 2014 SCC 7. KPMG argues that Cash Store has no legitimate business rationale for gagging its former directors and officers. Rather, Cash Store just seeks to run up the cost and cause needless delays in the litigation for KPMG and the other professional firm defendants. KPMG is willing to meet with the former directors with their counsel and understands that to the extent that the former directors have confidentiality obligations concerning confidential information, that information is legitimately withheld at the pre-trial stage at least.
[25] KPMG relies upon the decision of Lord Denning in Harmony Shipping Co. S.A. v. Davis, [1979] 3 All E.R. 177 (C.A.) at 180
So far as witnesses of fact are concerned, the law is as plain as it can be. There is no property in a witness. The reason is because the court has a right to every man's evidence. Its primary duty is to ascertain the truth. Neither one side or the other can debar the court from ascertaining the truth either by seeing a witness beforehand or by purchasing his evidence or by making communication to him. In no way can one side prohibit the other from seeing a witness of fact, from getting the facts from him or from calling him to give evidence or from issuing him with a subpoena. [Emphasis added.]
[26] See also Versloot Dredging BV v HDI Gerling Industrie Versicherung AG & 6 Others, [2013] EWHC 581 (Comm) at paras 19, 22, and 27.
[27] Cash Store argues that in 2015 it negotiated settlements to 22 different pieces of litigation including the claim against its former directors and officers. In doing so, it settled and exhausted is former directors' and officers' insurance policy. The settlements were the product of extensive negotiations and multiple mediation efforts. They included releases and Pierringer agreements. Ms. Keenberg acknowledged that the settlements required Court approval even if they had not been contained in Cash Store's plan of compromise and arrangement.
[28] Ms. Keenberg submitted that obtaining cooperation obligations from the former directors and officers was part of consideration that made up the global settlement and was part of Cash Store's plan of compromise and arrangement. The cooperation obligations were referred to para. 78 (c) of the factum supporting the motion. When KPMG objected to the terms initially proposed for the Pierringer agreement, the Non-Party Protocol was negotiated to resolve KPMG's concerns. The law does not require that a Pierringer agreement always include terms like the Non-Party Protocol. It was a concession to KPMG and the other remaining professional firm defendants.
[29] Ms. Keenberg notes that there is no suggestion in the side letter agreement that any former director or officer will not be available to testify. The agreement expressly confirms that the former directors and officers will testify if summoned or otherwise ordered to do so. She argues that there is no question of suppressing testimony or any basis to find the terms of the side letter agreement to be contrary to law or public policy, unfair, or prejudicial.
[30] Ms. Keenberg submits that it would be unprecedented were the Court to deprive a CCAA debtor of part of the consideration that it obtained under its approved plan of compromise and arrangement. In this case, the former directors' and officers' documents are being preserved as agreed. Summonses for trial can be served on Ontario counsel. KPMG does not have these rights against other third parties. They are part of a contractual arrangement which should not be ignored by the Court.
[31] Cash Store relies upon case law in which courts have held that there is no obligation on a potential witness to agree to be interviewed out of court. See, for example, the Alberta Court of Appeal decision in M. (N.) v. Drew Estate, 2003 ABCA 231, at para. 12. As a general rule, I have no doubt that is correct. Cash Store argues that this answers KPMG's motion. KPMG has no right to compel any witness to speak to it, so it has no say in the issues between Cash Store and its former directors and officers as embodied in the side letter agreement.
[32] The inside directors, represented by Mr. Lerner, argue that the former directors have the sole rights to determine if they will cooperate with any party in litigation. The question of whether witnesses wish to speak to parties is not covered by the Rules of Civil Procedure and it is wholly outside of this Court's jurisdiction. Mr. Lerner distinguishes issues of documentary and oral discovery and evidence at trial, on the one side, from interviews with witnesses on the other. All of the former matters are governed by the Rules of Civil Procedure and occur under the general auspices of the Court. But the right to cooperate and be interviewed out of court is a right of each witness and is his or her right to bargain away as he or she sees fit.
[33] Mr. Lerner argues further that the terms as between his clients and Cash Store as to cooperation and non-cooperation were not part of the Pierringer agreement and were not before the Court for approval at all. This is directly contrary to the submission made by Ms. Keenberg, Cash Store's factum on the Pierringer agreement, global settlement, and plan approval motion and Mr. Aziz's affidavit before me.
[34] Mr. Lerner argues that approval of the Pierringer agreement did not prejudice KPMG or the other remaining professional firm defendants in that they never had the right to interview the formers directors and officers informally out of court. Therefore the prohibition against speaking did not require Court approval as part of the Pierringer agreement. Similarly, the Non-Party Protocol did not require Court approval. By contrast, to obtain third party releases, the former directors and officers were required to tell the Court the consideration that they provided to the debtor. That explains why emphasis was placed on the "cooperation obligations" in para. 78 (c) of the factum supporting plan approval. But the agreement to refrain from speaking to KPMG did not form part of the consideration for the third party releases so it stands on a different footing that is outside of the proper scope of the Court's regulation or review.
[35] There were three overlapping Court approval motions at play in November:
a. The Pierringer agreement;
b. The global settlement agreement; and
c. Cash Store's plan of compromise and arrangement.
[36] Pierringer agreements require Court approval in the context of the ongoing litigation to which they apply. They entail a dismissal of proceedings against some defendants and a reconstitution of the claims to assert several liability rather than joint liability against the remaining defendants. In this case, KPMG had not yet commenced its third party claims against the former directors and officers. The Pierringer terms and third party releases were intended to prevent that from happening. The issue on the Pierringer agreement approval motion was whether the pro-settlement purpose of the agreement fairly offsets any potential prejudice caused by the agreement to the remaining defendants' ability to "know and present their case."
[37] While ordinarily non-parties have no duty to cooperate with parties to litigation, they are also ordinarily not prohibited from doing so. What was being proposed was to add a layer of legal obligation, a gag order, that made the former directors and officers quite different than ordinary non-parties. The lawfulness of such a provision is not at all clear. But I do not need to rule on that broad point on this motion.
[38] The issue that was before the Court for approval was the fairness of the remaining litigation process as it was affected by the Pierringer agreement. In my view, it does not matter that the gag proposed is not addressed specifically by the Rules of Civil Procedure. Mr. Lerner tried to create a distinction between processes that fall under the Rules and those that are outside. He argued that the Court had no jurisdiction treading on his clients' rights to bargain about matters outside the Rules of Civil Procedure. In my view, that is a clever argument but it raises a straw man. The issue was not whether a matter was covered by the Rules. As stated above, the issue was the fairness of the remaining litigation process as it was affected by the proposed Pierringer terms. The ability to interview witnesses to obtain evidence and affidavits for motions or trial is certainly an aspect of the litigation process. It is not one specifically covered by the Rules, but that does not prohibit consideration of it under a general assessment of fairness or a balancing of proposed settlement terms against the equitable treatment of the defendants. The Rules are not a complete code for the management of lawsuits before this Court. The Court retains the inherent jurisdiction to control its process specifically in relation to matters where a gap exists in applicable legislation. Stelco Inc. (Bankruptcy), Re, 2005 CanLII 8671 (ON CA), at para. 35. In assessing the balance of the equities under the Pierringer agreement, it was relevant to the remaining defendants and to the Court to know that while the former directors and officers were agreeing to provide "procedural access" recited in the Non-Party Protocol, they had also gagged themselves from talking to the remaining defendants otherwise. That term directly affects the way the remaining defendants will both get to know and present their cases (to borrow the phrase used by the Supreme Court of Canada in Sable).
[39] For the purposes of this motion, I agree with Cash Store, that the terms of the side letter agreement were part and parcel of the Pierringer agreement, the global settlement, and the plan. The creditors who by then were acting for Cash Store ought therefore to have put the side letter agreement before the Court for approval. They did not do so. Accordingly, the gag term of the side letter agreement relied upon by Cash Store was not approved as part of the Pierringer Agreement granted by the Court.
[40] In paras. 82 to 88 of its factum filed for approval of its plan of arrangement and compromise, Cash Store discussed approval of settlements under the applicable case law dealing with settlements between a CCAA debtor and third parties. Among the cases upon which it relied was the decision of Farley J. in Air Canada, Re (2004), 2004 CanLII 11700 (ON SC), 47 CBR (4th) 169 (Ont. SCJ [Commercial List]. In that case Farley J. adopted the "fair and reasonable" test for the approval of settlements as set out by MacEachern, CJBC in Northland Properties Ltd. v. Excelsior Life Ins. Co. of Can., 1989 CanLII 2672 (BC CA). In that case, the B.C. Court of Appeal was required to comment on a side deal entered into between a creditor and the debtor under which the creditor's claim was settled. The Court wrote:
[30] There is no doubt that side deals are a dangerous game and any arrangement made with just one creditor endangers the appearance of the bona fides of a plan of this kind and any debtor who undertakes such a burden does so at considerable risk. In this case, however, it is apparent that this agreement was not made for the purpose of ensuring a favourable vote because at the time the deal was struck the companies had not reached an accommodation with the bank. I think the companies were negotiating, as businessmen do, on values for the purpose of putting a plan together.
[31] Further, the arrangement with Relax was fully disclosed in the plan. This does not ensure its full absolution if it was improper, but at least it removes any coloration of an underhanded or secret deal...[Emphasis added.]
[41] Prior to his appointment to the bench, the great jurist Justice Louis Brandeis wrote the following words that remain as vibrant and applicable today as when they were written over 100 years ago:
If the broad light of day could be let in upon men's actions, it would purify them as the sun disinfects.[^1]
[42] Disclosure to interested parties and to the Court of the terms for which approval is sought or mandated is a minimum requirement. CCAA debtors are supervised by the Court under the watchful eyes of their creditors and other interested parties. Transparency is a part of the quid pro quo that comes with enjoying the protections of the CCAA. This is reflected in the Monitor's role as the Court's eyes and ears, its power to access all information and records of the debtor, its obligation to report to the Court periodically, and the Monitor's specific obligation to provide information concerning the debtor and its restructuring efforts upon request. See paras. 32, 33 (f) and 36 of Cash Store's initial order.
[43] Moreover, transparency obligations flow from the public nature of Court proceedings.
[44] At the hearing of the motion before me, counsel for Cash Store submitted that para. 78 (c) of its factum on the global settlement and plan approval motion amounted to disclosure of the side letter agreement to the Court. Nothing in the sentence disclosed in the factum alerted the Court, the creditors, or KPMG to the fact that, as part of the global settlement and Pierringer terms proposed, Cash Store had purported to obtain an agreement by its former directors and officers that they would not talk to the remaining defendants without a summons to witness or court order. Euphemistic references to "cooperation obligations" at the oral hearing of the plan approval motion as attested to by Mr. Aziz were equally no disclosure at all of the gag provision of the side letter agreement. Accordingly, I find that Cash Store did not disclose the impugned provision of the side letter to the parties or to the Court in respect of the motions to approve the global settlement or Cash Store's plan of compromise and arrangement.
[45] I do not agree with Mr. Lerner's effort to parse some terms which he says were relevant to the third party releases and were required to be disclosed and others which he says were not. It was not up to the debtor and the former directors and officers to decide if the remaining professional firm defendants should or would object to the proposed terms. Nor were they entitled to withhold disclosure of terms that could be relevant to the balancing of prejudices and the assessment of the overall lawfulness, fairness, and reasonableness of the terms for which the Court's approval was required under the CCAA.
[46] Secret side deals are not consistent with the transparency required of a CCAA debtor or with a public, Court-based process.
[47] It follows that I reject Ms. Keenberg's submission that the Court's approval of the the global settlement, the Pierringer agreement, and Cash Store's plan of compromise and arrangement included approval of the undisclosed term of the side letter agreement prohibiting the former directors and officers from communicating with KPMG and the remaining professional firm defendants except under summons or Court order. Accordingly, Cash Store had no authority to enter into that term as part of an agreement. Therefore, Cash Store cannot rely upon or enforce the impugned term and it does not bind the former directors and officers.
[48] I make no finding as to if or how this holding affects the approvals that Cash Store has obtained of the Pierringer agreement, the global settlement, and its plan of compromise and arrangement. While the Court is cognizant of counsel's submission that this outcome could have an effect on prior approvals purportedly obtained, if approval of the side letter agreement was required for any of those approvals to be effective, then it was incumbent on those in charge of Cash Store to seek the approval of the side letter agreement by proper means at that time.
Costs
[49] The parties agreed that the successful party should be entitled to $5,000 in costs. Cash Store shall therefore pay KPMG LLP $5,000 in costs all-in forthwith. No other costs were sought or are awarded.
Order
[50] Order to go in terms of para. 1 of KPMG's notice of motion dated March 24, 2017. KPMG does not need the Court's permission to seek to interview former directors as sought in the notice of motion. If case management directions are sought concerning processes to obtain evidence from former directors and officers or as to scheduling of the action, the parties are always at liberty to convene a 9:30 appointment under the Practice Direction and Rule 50.13.
F.L. Myers J.
Date: April 21, 2017
[^1]: Brandeis and the History of Transparency, online: Sunlight Foundation https://sunlightfoundation.com/2009/05/26/brandeis-and-the-history-of-transparency/