Laderoute v. Heffernan, 2019 ONSC 914

Court File and Parties

Court File No.: FC-15-1538-1 Date: 2019-02-06 Ontario Superior Court of Justice

Between: Julie Marie-Josée Laderoute, Applicant – and – Scott Edward Birrell Heffernan, Respondent

Counsel: Tanya Davies, for the Applicant Frederic P. Huard, for the Respondent

Heard: February 4, 2019

Mid-Trial Ruling: Voir Dire on Expert Qualifications

Summers J.

Introduction

1In this proceeding, the applicant, Ms. Laderoute, seeks to set aside the Separation Agreement that she and the respondent signed on May 9, 2014 and the Amending Agreement that they subsequently entered into on November 27, 2015. If the agreements are set aside, she seeks orders for the equalization of net family property, retroactive child support and spousal support. If the claim to equalize net family property proceeds, the primary dispute relates to the value of the two Irish pubs owned by the respondent, Mr. Heffernan.

2Both parties hired experts to value the businesses. The applicant hired J.C. Desnoyers of SME Business Appraisers Inc. Mr. Desnoyers’ qualifications were not contested. He is a Chartered Business Valuator and has been qualified as an expert witness many times. Mr. Heffernan hired Arthur Kostaras of Akros Accounting and Financial (“Akros”). Ms. Laderoute challenged his qualifications to give expert evidence.

3This is my ruling on the voir dire held to determine the admissibility of Mr. Kostaras’ evidence.

Admissibility of Expert Evidence

4Expert evidence is an exception to the rule prohibiting witnesses from giving their opinion about matters before the court. For the opinion of an expert to be admissible, it must meet a two-stage test; See R. v. Mohan, 1994 80 (SCC), [1994] 2 S.C.R. 9 and White Burgess Langille Inman v. Abbott and Haliburton Co., 2015 SCC 23.

Stage 1 – The Threshold Criteria

5The first stage of the test was established in Mohan; see paras 17-21. It requires the party seeking to introduce the evidence to satisfy certain criteria:

1. The evidence must be logically relevant;
2. It must be necessary to assist the judge by providing information that is outside his or her experience and knowledge;
3. The absence of a rule that would otherwise operate to exclude the evidence; and
4. The expert must be properly qualified to give opinion evidence.

6There are additional considerations that arise, in this part of the test, when the case involves novel science. They have no relevance in the circumstances of this proceeding.

7Here, the scrutiny is on the qualifications of Mr. Kostaras as an expert in business valuation. According to Mohan, for a witness to be properly qualified as an expert, he or she must have “acquired special or peculiar knowledge through study or experience in respect of the matters on which he or she undertakes to testify”; see para 31.

8Mr. Kostaras is the president and sole owner of Akros. He testified that he is a Chartered Professional Accountant (CPA) by training with a specialty in corporate finance and business valuations. His website indicates that he is also a Certified Management Accountant (CMA) and a CF. The nature of this latter designation was not explained. Prior to establishing Akros, Mr. Kostaras testified that he was the Director of Finance for a multi-faceted business resource group out of Saskatoon. After that role, he was president of a company in Calgary that focused on land purchases and land development. Mr. Kostaras said that he had been in the accounting field for approximately 35 years. Aside from his articles between 1988 and 1990, he did not identify the dates associated with any of his past positions or the date that he founded Akros. He did not provide his resumé to the court or attach a copy of it to his report.

9Mr. Kostaras is not a Chartered Business Valuator (CBV) but states that his CPA and corporate finance designation qualify him to do business valuations. In particular, he points to the two-year program he completed in corporate finance as providing him with the specific training needed to do this work. When asked how many hours of study were dedicated to the area of business valuations, he was unable to answer but believed it was at least a third of the program. He did not say how the course was delivered, whether it was full-time or part-time, or when he completed it.

10Mr. Kostaras testified that corporate finance and business valuations are the focus of his practice. His website includes other practice areas: Accounting and Financial Statements, Brokerage, Business Brokerage, Strategic Planning and Business Plans, Cash Flow Management and Forecasting. When asked how many valuations he had completed, Mr. Kostaras said he had done 15 to 20 formally and at least 200 informally. The formal valuations were done for two purposes: rollovers under s. 85 of the Income Tax Act and business brokerage. When Mr. Kostaras was asked what he meant by informal valuations, he said that his work in corporate finance involves him in many roles and transactions on behalf of clients including land purchases, negotiating for their financing needs and the like. As I understood his evidence in this regard, it was to say that the nature and scope of his work had, by times, included preparation of an informal business valuation. What that might look like was not explained.

11Mr. Kostaras acknowledged that none of his past valuation work was done for the purposes of family law. The report he prepared for Mr. Heffernan was his first. He confirmed that he has never been qualified as an expert witness. His prior valuation engagements did not involve litigation.

12Mr. Kostaras did not identify any professional affiliations, presentations or articles written by him in the field of business valuations. When asked about his knowledge of the restaurant industry, Mr. Kostaras answered that he knows it very well. He said he had recently purchased a minority interest in a local restaurant. He said he had valued this particular business and had learned a lot through his involvement as an investor and in his role as a consultant.

13In my view, business valuation is a highly specialized area of the accounting profession. It is a pursuit that is often described as being an art as well as a science. Mr. Kostaras does not hold the recognized CBV professional designation and did not testify to any particular experiential learning, mentoring, or guidance that in certain circumstances might be considered as an acceptable substitute for the formal certification. Without more, I do not accept on its face Mr. Kostaras’ statement that a program designed to teach special skills in corporate finance, by dedicating a third of the course to the field of business valuation, can also deliver the degree of knowledge and training in that area that one would require to be considered an expert. For these reasons and based on the evidence before me, I am not persuaded that Mr. Kostaras has the necessary expertise to qualify him to give expert evidence on the value of Mr. Heffernan’s businesses. As a result, I find the respondent has not satisfied the threshold criteria in the first stage of the admissibility test. Accordingly, Mr. Kostaras is not permitted to provide the court with opinion evidence.

Stage 2 – The Judge as Gatekeeper

14Apart from my conclusion that Mr. Kostaras is not properly qualified to give expert evidence, I also consider the second stage of the admissibility test as established in White Burgess. This stage is the discretionary gatekeeping role of the trial judge. Rather than admitting expert evidence and considering weaknesses only when deciding the weight to be given to it, the judge, as gatekeeper, is required to consider the frailties in the evidence at the second stage of the admissibility test. It is at this juncture, that the court must “weigh the strength or cogency of the evidence against its potential prejudice in the sense that it may be used by the trier of fact for an impermissible purpose, may create unfair prejudice against the opponent, or may confuse or mislead the trier of fact, thereby rendering the trial unfair, or result in an inefficient and costly trial”; see Sopinka, Lederman & Bryant, The Law of Evidence in Canada, Fifth Edition, at p. 875. For the reasons set out below, I find that the frailties in Mr. Kostaras’ report create more risk than value to the court. The potential prejudice of admitting outweighs the probative value. Accordingly, I exercise my gatekeeping discretion and rule Mr. Kostaras’ evidence to be inadmissible.

15Mr. Kostaras testified that he did his best to follow the Canadian Institute of Chartered Business Valuators Standard No. 110 when he prepared his report. I find he did not do so in some important respects. One example is the requirement in Standard 110 that says a valuation report shall state the purpose for which it was prepared. Here, Mr. Kostaras called his report a “Business Analysis and Valuation Report for Connors Irish Pub and Connors Gaelic Pub (collectively known as Connors)”, yet on page 16, he describes the nature and scope of engagement as “limited to the preparation of annual cash flow statements…” (Emphasis added). Somewhat consistent with this stated purpose, there is an earlier statement in the same section that requires Mr. Heffernan to be responsible for providing Akros Financial with “accurate and complete information necessary for the preparation of the Schedules of Income Available for Support” (emphasis added). This section further requires that Mr. Heffernan “will be responsible for the final review of the Schedules of Income Available for Support (emphasis added) to ensure that they are accurate and complete and include all necessary information…..”. In my view, when read together with subsequent sections of the report that disclose cash flow projections for the business as far out as the year 2020, these statements suggest that the primary purpose of the report is to prepare annual cash flow statements and schedules of available income for support purposes. Although Mr. Kostaras called his analysis a valuation report and testified that the purpose of the report is implicit in the document itself, I do not find this to be the case unless it is a cash flow analysis and business plan for the future. Mr. Kostaras also said that his analysis is implicitly a comprehensive report, however, CBV Standard 110 requires the level of report to be stated explicitly. Mr. Kostaras’ report contains no such statement.

16Consistent with the observation that the purpose of the report appears to be income and cash flow projections and not the historical valuation of the business on a fixed date, the Nature and Scope of Engagement section further references what Mr. Heffernan will be responsible to do when managing his business in the future. These include devising internal control systems, safeguarding assets, maintaining an efficient accounting system, designating employees to oversee the services provided by Akros and evaluate the adequacy and results of those services. The report also requires Mr. Heffernan to be responsible for designing and implementing programs and controls to prevent and detect fraud and for informing Akros about known or suspected fraud that involves related parties who have significant roles in the internal controls of the business where the fraud may have a significant impact on their engagement. In my view, these remarks are more akin to a business analysis or strategic plan than a business valuation report.

17Similarly, the Disclaimer section of the report states that it was prepared based on information provided by Mr. Heffernan for the express purpose of “preparing and providing various documents including a risk assessment matrix, income schedules, an implementation/action plan, and other information.” (Emphasis added). Once again, there is no mention of a business valuation – an omission that, in my view, calls into question the relevance and reliability of the report in relation to the purpose for which it is being offered. The text of the report itself suggests that it may well have been prepared for reasons that do not include valuing Mr. Heffernan’s business.

18When measured under CBV Standard 110, other deficiencies in Mr. Kostaras’ report include: its failure to identify whether it is a comprehensive report, an estimate, or a calculation of value; the absence of a date on the report itself; and the fact that the valuation date is buried in the fine print in the middle of the report.

19I also note Mr. Kostaras’ testimony that he has come to consider Mr. Heffernan as a friend – someone he holds in high regard. He subsequently assured the court of his independence and the objectivity he brought to bear in the preparation of his report, however, at this gatekeeping stage of the admissibility test, I would be remiss to disregard their current relationship entirely. In this regard, I must also note Mr. Kostaras’ failure to sign and attach to his report the acknowledgement of expert’s duty as required by rule 20.1 of the Family Law Rules, O.Reg. 114/99.

20For these reasons, I find Mr. Kostaras’ evidence to be inadmissible.