Canadian Imperial Bank of Commerce v. Deloitte & Touche, 2017 ONSC 5000
CITATION: Canadian Imperial Bank of Commerce v. Deloitte & Touche, 2017 ONSC 5000
COURT FILE NO.: 00-CV-201162CP
DATE: 20170824
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
COUNSEL:
John E. Callaghan, Thomas Dunne, Benjamin Na and Matthew Karabus for the Plaintiffs
Robert C. Heintzman and Michael D. Schafler for the Defendants
Sandra Forbes for the Third Parties Beck, Pardo and Rolfe
Proceeding under the Class Proceedings Act, 1992
HEARD: August 24, 2017
PERELL, J.
REASONS FOR DECISION
1. Introduction
[1] Seventeen years ago, (a) Philip Services Corp.’s Receiver and Manager, (b) the Canadian Imperial Bank of Commerce (“CIBC”), and (c) High River Limited Partnership (“High River”), which had purchased some of Philip’s debt from members of a lending syndicate, commenced actions against Deloitte & Touche, Deloitte & Touche LLP, Deloitte Touche Tohmatsu, Deloitte Touche Tohmatsu LLP, and Deloitte Touche Tohmatsu f/k/a Deloitte Touche Tohmatsu International (collectively, “Deloitte”). Philip’s Receiver advanced a claim for breach of contract and for auditor’s professional negligence. CIBC and High River, in what became a certified action under the Class Proceedings Act, 1992, S.O. 1992, c. 6, brought on behalf of the syndicate of lenders, advanced causes of action for negligence, negligent misrepresentation, and reckless misrepresentation (fraudulent misrepresentation) in connection with the 1995 and 1996 audits of Philip.
[2] The Receiver’s contract claim and CIBC’s and High River’s misrepresentation claims are scheduled for trial in September 2017.
[3] CIBC and High River bring a motion for an order approving the settlement of the class action. All of the Lenders; i.e., the Class Members, approve the settlement of this class proceeding. The Receiver has agreed to a settlement of its claim.
2. Factual Background
[4] Deloitte was Philip’s auditor from 1991 to 1999. Deloitte gave unqualified opinions with respect to its audit of Philip’s 1995 and 1996 year-end financial statements. The financial statements portrayed Philip as a company with increasing earnings and shareholders’ equity.
[5] On August 11, 1997, a syndicate of 60 Lenders entered into a Credit Agreement with Philip for a US$1.5 billion credit facility to, among other things, finance Philip’s acquisition strategy.
[6] In 1998, Philip restated its financial statements for the years 1995 and 1996. The 1995 and 1996 year-end financial statements contained misstatements that inflated Philip’s earnings, assets and shareholders’ equity and understated its expenses and liabilities.
[7] After the misstatements were discovered, Philip defaulted on its loan and sought protection under the Companies’ Creditors Arrangement Act. Certain of Philip’s U.S. subsidiaries also filed for protection under the United States Bankruptcy Code. There was a shortfall in the repayment of the credit facility.
[8] In 2000, the Receiver and CIBC respectively commenced actions against Deloitte.
[9] Philip, by its Receiver, sued Deloitte for US$723,692,000 for breach of contract, negligence and reckless or negligent misrepresentation in connection with Deloitte’s audit of Philip’s 1995 and 1996 year-end financial statements. The Receiver claimed that the 1995 and 1996 year-end audited financial statements and Deloitte’s unqualified audit opinions were relied upon by Philip to its detriment in charting the course of the company and, in particular, pursuing its acquisition strategy.
[10] CIBC commenced a proposed class action on behalf of the syndicate of lenders and claimed there had been a US$524,000,000 deficiency in repayment of the loan. It sued for negligence and reckless or negligent misrepresentation. CIBC alleged that that the 1995 and 1996 year-end audited financial statements and the unqualified audit opinions of Deloitte were relied upon by the Lenders in entering into and advancing loans pursuant to the Credit Agreement.
[11] To co-ordinate the two actions against Deloitte, the Receiver and CIBC entered into a Litigation Claims Agreement. Pursuant to this Agreement, a Litigation Advisory Committee was established to supervise the conduct of the litigation and to instruct counsel and to make recommendations with respect to any settlement of the litigation. The Agreement provided that any settlement required the approval of the Lenders holding 662/3% of the outstanding debt under the Credit Agreement). Further, the Litigation Claims Agreement provided that the net recovery would be distributed to the Lenders on a pro-rata basis in accordance with their portion of the debt.
[12] Under the Litigation Claims Agreement, (a) US$5 million, which had been set aside for legal fees and expenses in the Plan of Reorganization, and (b) US$2 million, which had been provided by the Lenders for legal fees and expenses, was established as a fund to finance the litigation (“Lender Litigation Fund”). Under the Agreement, if the Lender Litigation Fund became insufficient to pay the legal fees and disbursements incurred in connection with the litigation of the Lenders’ claim, and if the Litigation Advisory Committee advised legal counsel that they should continue with the litigation, legal counsel would prosecute the Lenders’ claim based on a Contingency Fee Agreement under which counsel was entitled to a first priority payment of 2x multiple of its legal fees that were unpaid as of the contingency onset date and payment of unpaid disbursements plus interest thereon at a rate of 12% per annum.
[13] On April 21, 2004, the actions were consolidated, and CIBC and High River were appointed as representative plaintiffs for the Class Members. The Class was defined as all current holders of debt pursuant to the Credit Agreement (i.e., the Lenders), consisting of two subclasses:
CIBC Subclass - 18 Original Lenders who advanced funds to Philip pursuant to the Credit Agreement and continued to hold debt (by the time of certification, 26 Original Lenders no longer held debt in Philip);
High River Subclass – 16 Assignees who acquired a right, title and interest in the debt under the Credit Agreement and continued to hold debt (by the time of certification, 9 Assignees ceased to hold debt in Philip).
[14] The common issues were:
(i) Did Deloitte owe a duty of care to any member of the Class or Philip in respect of Deloitte's audits of Philip's financial statements for the years ended December 31, 1995 and December 31, 1996?
(ii) Did Philip's audited financial statements for the years ended December 31, 1995 and December 31, 1996 contain material misstatements?
(iii) If the answer to common issue numbers (i) and (ii) is "yes", did Deloitte breach such duty of care?
(iv) If the answer to common issue number (ii) is “yes”, did Deloitte breach its contractual duty to Philip?
(v) What was the value of Philip at the time of its reorganization?
(vi) Does the prohibition of champerty and maintenance apply to the claims of members of the High River Subclass?
[15] Ultimately, the class action was certified. There were no opt-outs.
[16] Deloitte vigorously defended the actions, and its defences included:
a. No Reliance - Deloitte denied that the Lenders and Philip relied or were entitled to rely on the audited financial statements and audit opinions to make lending decisions or to chart the course of Philip’s business.
b. No Duty of Care - Deloitte denied that it owed any duty of care to the Lenders.
c. Statutory Audit - Deloitte asserted that it was only engaged by Philip for the purpose of conducting a statutory audit and for no other purpose. Deloitte asserted that it did not provide financial advisory services to Philip nor did it ever provide any advice to Philip about an appropriate business plan. It submitted that it played no role in connection with the Credit Agreement and had no dealings with the Lenders nor was it instructed by Philip to perform any services for the Lenders.
d. Not Negligent – Deloitte denied that it was negligent in its performance of the audits. Deloitte asserted that Philip had engaged in fraudulent transactions that were kept hidden from it.
e. Ex Turpi Causa - Deloitte asserted that any damages sustained by the Lenders were not caused by Deloitte, but were the result of frauds that were committed by Robert Waxman, a director and President of the Metals Group of Philip.
f. No Damages – Deloitte asserted that neither the Lenders nor Philip sustained any loss attributable to its actions. Deloitte asserted that at the time that the financial statements were restated: (a) Philip was a viable, solvent company with shareholders’ equity of $1.25 billion; (b) Lenders were still prepared to make available to Philip an additional $1.25 billion in new credit and subordinate debt of $200 million after becoming aware of the restatement; and, (c) it was not until June 1999 when commodity prices were at their lowest in 20 years that Philip sought CCAA protection.
g. Knowledge – Deloitte asserted that Philip’s directors and officers, who charted the company’s strategic direction, knew that the financial statements were materially misstated and hid the misstatements from it.
[17] In addition to defending, Deloitte commenced third party claims against several of Philip’s former directors and officers. Deloitte alleged that the third parties knew or ought to have known of Philip’s true financial condition. The third parties included: Robert Waxman (who was found guilty of two counts of fraud); Marvin Boughton, Philip’s CFO (who is now deceased); and Peter McQuillan, the VP of Finance for the Metals Group (who recently settled with Deloitte in consideration for his co-operation at trial).
[18] The litigation was vigorously contested, addressed numerous accounting and legal issues, required extensive documentary and oral discovery, and involved numerous motions and appeals. Philip produced over 92,500 documents. CIBC and High River produced over 5,900 documents. Deloitte produced over 35,000 documents. There were 39 days of discoveries of Deloitte representatives. There were 24 days of discoveries of CIBC and High River representatives. Discoveries of third parties took 32 days. There were over 2,700 undertakings and refusals given by the parties.
[19] The motions included: (a) a motion to determine the scope of the examination for discovery of the Plaintiffs; (b) a two-day refusals motion; (c) a motion to amend the Consolidated Statement of Claim and a cross-motion for an order declaring that no evidence in connection with certain disciplinary proceeding was admissible; (d) a motion for production of documents, reports and notes relating to the investigation and disciplinary action against Noel Woodsford; (e) a motion to strike the claim against the individual partners and employees of Deloitte; and (f) a five-day motion for partial summary judgment to dismiss the negligence and negligent misrepresentation claims of the Lenders.
[20] There were numerous appeals including: (a) an appeal of the original dismissal of the certification motion; (b) an appeal of the dismissal of the motion for leave to amend the Consolidated Statement of Claim; (c) an appeal of the dismissal of the motion for the production of documents; and (d) an appeal of the partial summary judgment.
[21] The litigation was further complicated by the findings of and/or extensive evidence given in a number of related proceedings, including: (a) the disciplinary proceeding against Noel Woodsford; (b) the disciplinary proceeding against Graham Hoey, Senior Vice-President, Philip; (c) a criminal proceeding against Robert Waxman; (d) an Ontario Securities Commission proceeding against Philip and certain directors and officers; (e) a U.S. Securities and Exchange Commission proceeding against Philip; and (f) a U.S. Class Action and Canadian Class Action brought by Philip’s shareholders.
3. Settlement Negotiations
[22] During the course of the litigation, there were several mediation sessions with judges and former judges in an effort to settle the litigation. In this regard, the Honourable Patrick Galligan presided at a two-day mediation in 1999. Former Chief Justice Winkler presided over mediations in 2006 (two days) and 2007 (two days). Those mediation sessions were unsuccessful. In 2016, a two-day mediation with the Honourable George Adams presiding was also unsuccessful.
[23] In late 2016, with the four-month trial pending, there was another extensive round of settlement discussions involving all the parties including the third parties. Finally, by letter dated May 19, 2017, Deloitte agreed in principle to accept the Plaintiffs’ settlement offer of US$90,000,000, in consideration of: full and final mutual releases by the Lenders, Philip and Deloitte and a dismissal of the claims without admission of liability and without costs from Deloitte.
[24] Based on the then USD to CAD exchange rate, the settlement amount was equivalent to $121,896,000.
[25] Plaintiffs’ counsel, Gowling WLG, and the Litigation Advisory Committee consider the settlement to be a fair and reasonable compromise and in the best interests of the Class, particularly given: the defences raised by Deloitte; the uncertainties associated with the common issues trial, individual trials and likely appeals; and the possible liability for costs in the event the claims are unsuccessful.
[26] In recommending the approval of the settlement, Gowling WLG and the Litigation Advisory Committee had the benefit of considering the evidence given by the parties on examinations for discovery and in other related proceedings, and the opinions of the parties’ experts.
[27] The US$90 million settlement exceeds Deloitte’s available insurance to defend and satisfy a judgment in this litigation. Based on information obtained during the examinations for discovery, Deloitte had US$85 million of insurance coverage available in October 2009. By February 2013, the available insurance coverage eroded to US$62.5 million. By the time of the mediation in June 2016, there was approximately US$55 million in insurance coverage available.
[28] Deloitte supports the motion to approve the settlement in part for the reasons advanced by Class Counsel and in addition because: (1) if the action is not settled, there will be a lengthy and enormously expensive trial and if the Plaintiffs are successful, the first trial will be followed by a second long trial on damages after further examinations for discovery and then there certainly will be appeals; and (2) the third parties have agreed to make a significant contribution to make this settlement possible and this contribution is an essential element of the proposed settlement and resulted from difficult and time-consuming negotiations, in addition to those between Deloitte and the Plaintiffs.
4. The Fee Request
[29] Before January 2011, Gowling WLG rendered invoices totalling $7,639,387.18 plus taxes with respect to legal fees of $7,170,117.97 and disbursements of $469,269.21, including experts retained for the mediations before the Honourable Patrick Galligan and former Chief Justice Winkler. These invoices were paid from in part from the Lender Litigation Fund and the Company Litigation Fund; i.e., by the Receiver. The Lender Litigation Fund and the Company Litigation Fund were also used to pay US counsel fees and other experts in respect of the prosecution of the claims.
[30] By January 2011, approximately US$200,000 of the Company Litigation Fund remained from the two Funds. From and after January 2011, Gowling WLG, at the request of the Litigation Advisory Committee, prosecuted the Receiver’s claim and the Lenders’ claim pursuant to the Contingency Fee Agreement.
[31] On May 30, 2013, the Litigation Advisory Committee requested the Lenders to contribute, pursuant to the Litigation Claims Agreement, additional funding to cover the then outstanding and estimated future legal and expert fees and expenses. By that time, Gowling WLG had incurred $3,412,461.68 plus taxes of unpaid legal fees and disbursements.
[32] Significant time and money had been expended by Gowling WLG in prosecuting the claims. The total legal fees incurred as of July 31, 2017 is $9,629,855.26 and total amount of disbursements plus interest thereon is approximately $147,723.86.
[33] In accordance with the Contingency Fee Agreement, the total Class Counsel fees as of July 31, 2017 is $21,930,439.45 (being $9,629,855.26 x 2, plus disbursements of $147,758.02, plus taxes of $2,522,970.91).
[34] Contingency legal fees and disbursements (exclusive of tax) represent approximately 15.9% of the $121,896,000 settlement. The aggregate of the contingency legal fees and disbursements and the amount that has been paid to Gowling WLG (exclusive of tax) represents approximately 22.2% of the settlement.
[35] On May 31, 2017, the Lenders were informed of: the proposed settlement; an estimate of Class Counsel Fees pursuant to the Contingency Fee Agreement; an estimate of the amounts due in respect of the funding agreement; and an estimate of each Lenders’ ratable share of the net recoveries based on their share of the debt holdings of Philip.
[36] All of the Lenders holding a beneficial interest in the Lenders’ claim have approved the settlement, including Class Counsel Fees.
5. Settlement Approval
[37] Section 29(2) of the Class Proceedings Act, 1992, provides that a settlement of a class proceeding is not binding unless approved by the court. To approve a settlement of a class proceeding, the court must find that, in all the circumstances, the settlement is fair, reasonable, and in the best interests of the class: Fantl v. Transamerica Life Canada, [2009] O.J. No. 3366 (S.C.J.) at para. 57; Farkas v. Sunnybrook and Women’s Health Sciences Centre, [2009] O.J. No. 3533 (S.C.J.) at para. 43; Kidd v. Canada Life Assurance Company, 2013 ONSC 1868.
[38] In determining whether a settlement is reasonable and in the best interests of the class, the following factors may be considered: (a) the likelihood of recovery or likelihood of success; (b) the amount and nature of discovery, evidence or investigation; (c) the proposed settlement terms and conditions; (d) the recommendation and experience of counsel; (e) the future expense and likely duration of the litigation; (f) the number of objectors and nature of objections; (g) the presence of good faith, arm’s-length bargaining and the absence of collusion; (h) the information conveying to the court the dynamics of, and the positions taken by, the parties during the negotiations; and (i) the nature of communications by counsel and the representative plaintiff with class members during the litigation. See: Fantl v. Transamerica Life Canada, supra, at para. 59; Corless v. KPMG LLP, [2008] O.J. No. 3092 (S.C.J.) at para. 38; Farkas v. Sunnybrook and Women’s Health Sciences Centre, supra, at para. 45; Kidd v. Canada Life Assurance Company, supra.
[39] In determining whether to approve a settlement, the court, without making findings of fact on the merits of the litigation, examines the fairness and reasonableness of the proposed settlement and whether it is in the best interests of the class as a whole having regard to the claims and defences in the litigation and any objections raised to the settlement: Baxter v. Canada (Attorney General) (2006), 2006 CanLII 41673 (ON SC), 83 O.R. (3d) 481 (S.C.J.) at para. 10. An objective and rational assessment of the pros and cons of the settlement is required: Al-Harazi v. Quizno’s Canada Restaurant Corp. (2007), 49 C.P.C. (6th) 191 (Ont. S.C.J.) at para. 23.
[40] The case law establishes that a settlement must fall within a zone of reasonableness. Reasonableness allows for a range of possible resolutions and is an objective standard that allows for variation depending upon the subject-matter of the litigation and the nature of the damages for which the settlement is to provide compensation: Parsons v. Canadian Red Cross Society, [1999] O.J. No. 3572 (S.C.J.) at para. 70; Dabbs v. Sun Life Assurance Company of Canada (1998), 1998 CanLII 14855 (ON SC), 40 O.R. (3d) 429 (Gen. Div.). A settlement does not have to be perfect, nor is it necessary for a settlement to treat everybody equally: Fraser v. Falconbridge Ltd., [2002] O.J. No. 2383 (S.C.J.) at para. 13; McCarthy v. Canadian Red Cross Society (2007), 158 ACWS (3d) 12 (Ont. S.C.J.) at para. 17.
[41] Applying these principles to the case at bar, the US$90 million proposed settlement is within the range that Class Counsel and the Litigation Advisory Committee consider fair and reasonable and in the best interests of the Class given: (a) the considerable litigation risks; (b) the defences advanced; (c) the factors that may limit the recoverable damages; (d) the uncertainties associated with the common issues trial, (e) the uncertainties associated with individual trials and likely appeals; and (f) the possible liability to the Plaintiffs for costs if the actions are unsuccessful.
[42] In my opinion, the settlement in the case at bar is a good settlement particularly given the defences advanced by the Defendants, the risks associated with a damages assessment and the collectability of a future settlement or judgment and it is undoubtedly a settlement that is fair, reasonable and in the best interests of the Class.
6. Class Counsel Fee
[43] The fairness and reasonableness of the fee awarded in respect of class proceedings is to be determined in light of the risk undertaken by the lawyer in conducting the litigation and the degree of success or result achieved: Parsons v. Canadian Red Cross Society, 2000 CanLII 22386 (ON SC), [2000] O.J. No. 2374 (S.C.J.) at para. 13; Smith v. National Money Mart, 2010 ONSC 1334 at paras. 19-20, varied 2011 ONCA 233; Fischer v. I.G. Investment Management Ltd., [2010] O.J. No. 5649 (S.C.J.) at para. 25.
[44] Factors relevant in assessing the reasonableness of the fees of class counsel include: (a) the factual and legal complexities of the matters dealt with; (b) the risk undertaken, including the risk that the matter might not be certified; (c) the degree of responsibility assumed by class counsel; (d) the monetary value of the matters in issue; (e) the importance of the matter to the class; (f) the degree of skill and competence demonstrated by class counsel; (g) the results achieved; (h) the ability of the class to pay; (i) the expectations of the class as to the amount of the fees; and (j) the opportunity cost to class counsel in the expenditure of time in pursuit of the litigation and settlement: Smith v. National Money Mart, supra; Fischer v. I.G. Investment Management Ltd., supra, at para. 28.
[45] In my opinion, having regard to the various factors used to determine whether to approve the fees of Class Counsel, the fee request in the immediate case should be approved.
7. Conclusion
[46] For the above reasons, I approve the settlement, make the related and ancillary orders, and dismiss the action without costs.
Perell, J.
Released: August 24, 2017
CITATION: Canadian Imperial Bank of Commerce v. Deloitte & Touche, 2017 ONSC 5000
COURT FILE NO.: 00-CV-201162CP
DATE: 20170824
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
REASONS FOR DECISION
PERELL J.
Released: August 24, 2017