First Calgary Savings & Credit Union Ltd. v. Perera Shawnee Ltd., 2011 ABQB 26

Court of Queen ’ s Bench of Alberta Citation: First Calgary Savings & Credit Union Ltd. v. Perera Shawnee Ltd., 2011 ABQB 26 Date: 20110118 Docket: 1001 03215 Registry: Calgary Between: First Calgary Savings & Credit Union Ltd. Plaintiff - and - Perera Shawnee Ltd., Development Corporation, Don L. Perera and Shiranie M. Perera Defendant And between: Perera Shawnee Ltd., Perera Development Corporation, Don L. Perera and Shiranie M.

Perera Plaintiffs by Counterclaim - and - First Calgary Savings & Credit Union Ltd. and Deloitte Touche LLP Defendants by Counterclaim _______________________________________________________ Reasons for Judgment of the Honourable Madam Justice C.A. Kent _______________________________________________________

[1] On March 3rd 2010, I granted a Receivership Order appointing Deloitte & Touche Inc. as the Receiver of Perera ShawneeLtd. (“PSL”) and Perera Development Corporation (“PDC”). That order was consented to by PSL, PDC and the Pereras. Two days earlier on March 1st 2010, First Calgary Credit and Savings Union Ltd. (“First Calgary”) issued a Statement of Claim in this action. [2] On November 8th 2010, a Statement of Defence of PSL, PDC, Don Perera and Shiranie Perera was filed.

Attached was anAmended Counterclaim brought by PSL, Don Perera and Shiranie Perera against First Calgary and Deloitte & Touche LLP (“Deloitte”).This is an application by Deloitte to strike out the Counterclaim brought by Don Perera and Shiranie Perera. [3] Rules 3.68 provides as follows: 3.68

(1) If the circumstances warrant and the condition under subrule (2) applies, the Court may order one or more of thefollowing: (

a) that all or any part of a claim or defence be struck out;... (2) the conditions for the order are one or more of the following: ... (

b) a commencement document or pleading discloses no reasonable claim or defence to a claim; (3) no evidence may be submitted on the application made on the basis of the conditions set out in subrule (2) (b). [4] Counsel agree that the test for striking this counterclaim is an onerous one. The Court must find that it is plain and obviousthat the plaintiff’s claim discloses no reasonable cause of action in law. That determination is made without affidavit evidence. TheCourt must assume that the allegations and fact in the counterclaim are true.

There is a tension in determining whether or not it is plainand obvious that there is no cause of action. On the one hand because striking brings an end to the claim, the court must give a liberalinterpretation to the pleadings (Hunt v. Carey Canada Inc., (SCC), [1990] 2SCR 959). On the other hand, even with aliberal

interpretation of the pleadings, the court must apply the rule as intended so that if on the alleged facts there is no cause of action, the claim should be struck because needless litigation should be avoided (Tottrup v. Lund et al (2000), 186DLR (4th ) 226). [5] In the Respondents’ brief, there is a

summary of the claim against Deloitte. I repeat and modify some of that

summary toprovide the background to the allegations in the counterclaim. The Respondents say that First Calgary made a series of loans to PSL. ThePereras guaranteed those loans. Don Perera was at all times the sole director of PSL. He is a 100% shareholder of PSL and a 30%shareholder of PDC. Shiranie Perera is a 30% shareholder of PDC.

As part of the December 2009 loan agreement, First Calgary, PSL,PDC, and Don Perera agreed that Deloitte would conduct an investigation into the financial affairs of PSL at the expense of PSL. [6] At this point, I turn to the Amended Counterclaim which reads as follows: [19] PSL, PDC and D.

Perera entered into the Review Monitoring Agreement and supplied Deloitte with full disclosure anddocumentation with respect to every material inquiry made by Deloitte. [20] The Review Monitoring Agreement executed by PSL, First Calgary and Deloitte contemplated that Deloitte would prepare areport and that: A draft of the factual sections of the report will be shown to the Company. The Company will have the opportunity to review the draftprior to the submission to the Lender and to provide comments thereon.

Deloitte will ask the Company to confirm that the facts, as stated,are accurate in all material respects and that they are not aware of any material matters relevant which have been excluded.

[21] Notwithstanding the fact that PSL provided full disclosure to Deloitte, Deloitte did not, contrary to its obligations to First Calgary and the Defendants pursuant to the Review Monitoring Agreement provide PSL with a copy of its draft report and reported directly to First Calgary.

Deloitte charged more than $25,000 which was paid by First Calgary and charged to the account of PSL for a report that it never delivered or shared with PSL. [22] What, if anything, Deloitte reported to First Calgary is unknown to the Defendants although it is reasonable to believe, based on a reading of paragraph 38 of the Amended Statement of Claim, that Deloitte did report to First Calgary and that such report was false, misleading, incomplete or inadequate for the purposes set out in the Review Monitoring Agreement. [23] With respect to paragraph 38 of the Amended Statement of Claim the Defendants specifically deny that PSL failed to provide Deloitte with all the information it requested or that any failure on the part of PSL or any of the Defendants in any way hindered Deloitte from preparing a report for review by PSL or First Calgary.

If Deloitte provided any report or information to First Calgary as alleged in the Amended Statement of Claim or at all it is in breach of its commitments to PSL to first provide a draft of such report to PSL as set out in Paragraph 20 herein. [39A] The Plaintiffs by Counterclaim state and the fact is that in addition to breaching its contractual obligations under the Review Monitoring Agreement Deloitte negligently carried out those obligations by:

a) Failing to review the material provided by PSL in a manner to be expected of a reasonably competent Monitor carrying on business in the City of Calgary, Alberta;

b) Failing to reasonably interpret the material provided by PSL and reaching conclusions that were demonstrably wrong and misleading; [39B] The Plaintiffs by Counterclaim state and the fact is that in addition to their negligence and their breaching its contractual obligations under the Review Monitoring Agreement Deloitte breached its fiduciary obligations to the Plaintiffs by Counterclaim by:

a) Preferring their own interest to the interest of the Plaintiffs by Counterclaim and urging First Calgary to appoint Deloitte & Touche Inc. as Receiver in this action rather than providing First Calgary and the Plaintiffs by Counterclaim with the reporting contemplated in the Monitoring Agreement;

b) Failing to disclose to First Calgary and the Plaintiffs by Counterclaim that Deloitte & Touche LLP did not have the competence or professional credentials to act as a Receiver of PSL and PDC in a manner that could reasonably realize the value of the assets of those companies. [40] As a result of the breaches by Deloitte of the Review Monitoring Agreement, the negligence of Deloitte and the breaches of fiduciary obligation of Deloitte as set out in the Statement of Defence and in this Amended Counterclaim the Plaintiffs by Counterclaim have suffered damage as follows:

a) The Defendants D. Perera and S. Perera have lost or will lose the Perera November Advance in the sum of $1,488,000; aa) The Defendants D. Perera and S. Perera have lost or will lose their equity and shareholder loans due to them from PSL and PDC in the sum of not less than $18,000,000;

b) The Defendant PSL has or will lose its equity in the PSL Lands in the sum of not less than $18,000,000;

c) The Defendant PSL will lose future profits from the development of the PSL Lands in the sum of not less than $40,000,000. [7] Deloitte argues that on the face of the pleadings, the claims of breach of contract, breach of fiduciary duty and negligence arenot made out. Furthermore, the rule in Foss v. Harbottle, (1843) 67 AllE.R. 189 precludes the claim for damages. Breach of Contract [8] First, Deloitte says that Shiranie Perera was not a party to the monitoring agreement so she has no remedy in breach ofcontract.

The Pereras argue that there are times when someone who is not a party to a contract receives the benefit of the contract andthereby acquires the right to sue for a breach. No authority for this proposition was provided. Although the doctrine of privity of contractallows for some exceptions, and the doctrine has been subject to much criticism, none of the exceptions apply in this case: see McCamus,The Law of Contract, 2005,

Chapter 9. The claim for breach of contract by Shiranie Perera is struck. [9] As for the breach of contract claim made by Don Perera, Deloitte argues that the monitoring agreement created noobligations by Deloitte toward Mr. Perera. Paragraph 20 of the counterclaim says that a draft of the agreement is to be provided to PSLso that PSL could review the contents before the report was provided to First Calgary. Deloitte may have had an obligation to PSL toprovide PSL with a copy of any report. That does not create an obligation to Mr. Perera. His claim for breach of contract is struck.

Breach of Fiduciary Duty [10] The parties do not disagree on the characteristics of a fiduciary relationship: - the fiduciary has some scope for the exercise of discretion or power; - the fiduciary can unilaterally exercise the power or discretion to affect the beneficiary’s legal or practical interests; - the beneficiary is peculiarly vulnerable to or at the mercy of the fiduciary. Physique Health Club Ltd. v.

Carlsen, 1996 ABCA 358 , 1996 CarswellAlta 958 (Alta.C.A.) [11] The pleadings do not disclose a relationship between Deloitte and the Pereras that exhibits any form of vulnerability on thepart of the Pereras. Paragraph 15 of the Statement of Defence discloses that the defendants were represented by counsel at the meetingwhere the monitoring agreement was negotiated. The claim for breach of fiduciary duty is struck. Negligence [12] Deloitte argues that it had no duty of care to the Pereras. Without a duty, there is no claim in negligence.

The analysis requiredto determine whether there is a duty owed by one party to another is set out in Cooper v. Hobart 2001 SCC 79 , 2001, 206D.L.R. (4th) 193 (S.C.C.) and Edwards v. Law Society of Upper Canada (2001), 2006 D.L.R. (4th) 211 (S.C.C.) as follows: In brief compass, we suggest that at this stage in the evolution of the law, both in Canada and abroad, the Anns analysis is bestunderstood as follows. At the first stage of the Anns test, two questions arise: (1) was the harm that occurred the reasonably foreseeableconsequence of the defendant’s act?

And (2) are there reasons, notwithstanding the proximity between the parties established in the firstpart of this test, that tort liability should not be recognized here? The proximity analysis involved at the first stage of the Anns testfocuses on factors arising from the relationship between the plaintiff and the defendant. These factors include questions of policy, in thebroad sense of that word. If foreseeability and proximity are established at the first stage, a prima facie duty of care arises.

At the secondstage of the Anns test, the question still remains whether there are residual policy concerns outside the relationship of the parties that

may negative the imposition of a duty of care. It may be, as the Privy Council suggests in Yuen Kun Yeu, that such considerations willnot often prevail. However, we think it useful expressly to ask, before imposing a new duty of care, whether despite foreseeability andproximity of relationship, there are other policy reasons why the duty should not be imposed. [13] Hercules Management Ltd. v. Ernst & Young (1997), (SCC), 2 S.C.R. 165 is instructive in two ways. Ernst& Young were the auditors for two corporations. The corporations went into receivership.

Several shareholders and investors in one ofthe corporations sued Ernst & Young alleging that annual audit reports were negligently prepared. They claimed that they relied on thereports and suffered financial losses. Ernst & Young brought a

summary judgment application alleging in part that Ernst & Young owedno duty to the shareholders and investors and that the claims could only be brought by the corporations. On the duty analysis, the courtfound there was a prima facie duty of care. Although this case was decided before Cooper and Edwards, the public policy analysis thatfollowed falls under the first branch of the Cooper/Edwards framework. The court reviewed the cases starting with Glanzer v. Shepard,135 N.E. 275 (N.Y.C.A., 1922) where courts have negated a duty owed by auditors to shareholders because there would be indeterminateliability.

The court acknowledged that since Ernst & Young knew the identity of all the shareholders who claimed to have relied on thestatements, there arguably was no issue of indeterminate liability. That, however, did not end the analysis.

The court said at p. 203: “...even if the specific identity or class of potential plaintiffs is known to a defendant, use of the defendant’s statement for a purpose ortransaction other than that for which it was prepared could still lead to indeterminate liability.” [14] In this case, the purpose of Deloitte’s report is set out in paragraph 16 of the statement of defence: “to ensure that therepresentations made by PSL to First Calgary...were accurate.” There is no question that Deloitte owed a duty to First Calgary. It mayhave owed a duty to PSL.

However, the claims of the Pereras are the loss of a $1.4888 million investment and their equity andshareholders loans (paragraph 40 of the counterclaim). The purpose of the report had nothing to do with these claims. There is a risk ofindeterminate liability, not because some shareholders or investors are unknown but because the potential value of the claims of thePereras would be indeterminate at the time the contract was made. [15] Hercules Management is instructive in a second way. In that case the court found that the shareholders could not bringindividual claims because of the rule in Foss v.

Harbottle, supra. The rule provides that individual shareholders have no claim for lossessuffered by a corporation. Any such losses must be claimed by the corporation or by way of a derivative action. The court noted thatthere may be circumstances where liability may arise. For example, if auditors prepared a report to shareholders for a specified purposeas was the case in Haig v.

Bamford, (SCC), [1977] 1 S.C.R. 466 where the auditors were told that the financialstatements were going to be used to attract investors, there may be a duty to the investors. [16] In this case, the purpose of the report is not linked to the Pereras; it is linked to First Calgary and PSL. Second, the report hadno link to the Pereras. It was not intended to aid the Pereras in any way and was not prepared with the knowledge that the Pereras wouldrely on it to protect their investments and loans. The claim for negligence is struck. In any event, the claim for damages is contrary to therule in Foss v.

Harbottle. [17] The application is granted. Heard on the 21st day of December, 2010. Dated at the City of Calgary, Alberta this 18th day of January, 2011 C.A. Kent J.C.Q.B.A. Appearances:

Josef Kruger, Q.C. and Matti C. Lemmens Borden Ladner Gervais for the Plaintiff Jeffrey D. Poole for the Defendant