Top 5 Civil Appeals From The Court Of Appeal (February 2016)

1. Livent Inc. v. Deloitte & Touche, 2016 ONCA 11 (Strathy C.J.O, Blair and Lauwers JJ.A.), January 8, 2016 2. Goldsmith v. National Bank of Canada, 2016 ONCA 22 (Weiler, Pardu and Benotto JJ.A.), January 13, 2016 3. 1250264 Ontario Inc. v. Pet Valu Canada Inc., 2016 ONCA 24 (Hoy A.C.J.O., MacFarland and Lauwers JJ.A.), January 14, 2016 4. Fleming v. Massey, 2016 ONCA 70 (Feldman, Juriansz and Brown JJ.A.), January 26, 2016 5. U.S. Steel Canada Inc. (Re), 2016 ONCA 68 (Hoy A.C.J.O., Blair and Lauwers JJ.A.), January 26, 2016 1. Livent Inc. v. Deloitte & Touche, 2016 ONCA 11 (Strathy C.J.O, Blair and Lauwers JJ.A.), January 8, 2016 In April, 2014, Deloitte & Touche was found liable to Livent Inc. for almost $120 million in losses arising out of negligently performed audits of Livent's books and records due to the failure of the auditors to detect the now-notorious fraud. In an expansive, four hundred and forty paragraph decision, the Court of Appeal upheld that ruling, addressing a number of issues, including whether the losses sought to be recovered were those of Livent or its creditors and shareholders, the purpose of audits of public companies and the defence of ex turpi causa. In the 1990s, entertainment moguls Garth Drabinsky and Myron Gottlieb created and developed a live entertainment empire known as Live Entertainment Corporation of Canada Inc., or Livent. The company, which developed stage productions such as The Phantom of the Opera, appeared to be a successful and vibrant business enterprise. It was, in fact, a "house of cards", which toppled in 1998 when new management discovered that Drabinsky and Gottlieb had been fraudulently manipulating the company's financial books and records over a number of years in order to inflate its earnings and profitability. Livent filed for insolvency protection in Canada and the United States and was placed in receivership, its assets later sold. Drabinsky and Gottlieb were convicted of fraud and forgery and sent to prison. Deloitte & Touche, the auditor for Livent from 1989 to 1998, had issued clean audited financial statements throughout this period. Livent - through a Special Receiver appointed in the insolvency proceedings for various purposes, including bringing this claim - sued Deloitte for damages in contract and negligence arising out of its failure to follow generally accepted auditing standards and discover material misstatements in Livent's books, records and financial reporting attributable to the Drabinsky's and Gottlieb's fraud. After a 68 day trial, the judge found that Deloitte was not negligent in respect of the pre-1996 audits. He found Deloitte negligent, but not liable in respect of the 1996 audit; while it was negligent, that negligence caused Livent no damage. The trial judge found that Deloitte was liable, however, for damages arising from negligence in August and September of 1997 and the spring of 1998. He awarded Livent damages of $118,035,770. Deloitte argued on appeal that it should not be held responsible for damages that were in fact suffered by Livent's creditors and shareholders for fraud committed by Livent. It sought to attribute wrongs committed by Livent officers and employees to the corporation and to rely on the defence of illegality, or ex turpi causa. Deloitte also argued that its negligence was not the factual or proximate cause of damages to Livent. While Livent became insolvent, it was in a money-losing business. Moreover, since Livent was insolvent, its creditors were injured, not the company itself. Livent meanwhile submitted that the trial judge erred in failing to hold Deloitte liable for negligence in respect of the 1996 audit and also in reducing the award of damages by 25% to account for what he called "contingencies". Writing for the Court of Appeal, R.A. Blair J.A. rejected Deloitte's submission that Livent was not claiming for its own losses, but rather advancing a proxy claim, indirectly, for losses sustained by its creditors and shareholders that would be recoverable in the company's insolvency proceedings. Blair J.A. emphasized that the losses sustained were Livent's losses, not those of its creditors and other stakeholders. The claim for breach of contract and for negligence was accordingly that of the corporation, and no such cause of action rested with the shareholders or creditors, regardless whether they might ultimately benefit from recovery in the company's action. Deloitte sought to use the corporate identification or attribution doctrine to attribute the frauds of Drabinksy and Gottlieb to Livent, allowing it to then rely on the ex turpi causa defence. Justice Blair noted that the policy underlying the ex turpi causa doctrine is "to maintain the integrity of the justice system by preventing a wrongdoer from profiting from his or her wrongdoing or evading a criminal sanction." In this case, there was no basis for invoking the ex turpi causa defence through attribution because it was not required to maintain the integrity of the justice system. The actual fraudsters would not profit from their wrongdoing and had not evaded criminal sanction. Nor would Livent profit from their wrongdoing. In fact, Livent suffered a loss. Moreover, applying the ex turpi causa doctrine in these circumstances would risk undermining the value of the public audit process and the integrity of the justice system. Blair J.A. also rejected the suggestion that the U.S. bar orders obtained in the U.S. class action litigation precluded Livent from advancing its claim. He agreed with the trial judge that the U.S. litigation was entirely different from the proceeding at bar and that Deloitte's submission was contrary to Livent's plan of reorganization, which courts in Canada and the U.S. had approved and to which Deloitte was deemed to have consented. The trial judge had disposed of the duty of care question easily, noting that in the wake of the Supreme Court's decision in Hercules Management Ltd. v. Ernst & Young, [1997] 2 S.C.R. 165, "there can be little doubt that auditors owe a duty of care to the company for the benefit of the corporate collective, the shareholders". Deloitte submitted before the Court of Appeal that the trial judge effectively extended the auditor's duty of care to its client to include economic responsibility for losses experienced by those standing behind it, raising the spectre of indeterminate liability. Blair J.A. dismissed this submission, however, emphasizing that there was no dispute that Deloitte owed a duty of care to its client, Livent, to conduct the audit in accordance with the applicable standard of care. For the purpose of the duty of care, once it was accepted that the cause of action being asserted belonged to Livent and was not being advanced on behalf of third-parties, policy concerns about imposing indeterminate liability on auditors fell away. Turning to...