Cooperatieve Centrale Raiffeisen-BoerenleenBank BA (Rabobank International) v Liebig & Keown LLP, 2016 ABQB 417

Court of Queen’s Bench of Alberta Citation: Cooperatieve Centrale Raiffeisen-BoerenleenBank BA (Rabobank International) v Liebig & Keown LLP, 2016 ABQB 417 Date: 20160726 Docket: 1301 07048 Registry: Calgary Between: Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., "Rabobank International", New York Branch Plaintiff - and - Liebig & Keown LLP, Stout & Company LLP, Grant Thornton LLP, Brett Liebig Professional Corporation, Chris L.

Keown Professional Corporation, and James Stout Professional Corporation Defendants _______________________________________________________ Memorandum of Decision of the Honourable Mr. Justice W.P. Sullivan _______________________________________________________ Introduction [ 1 ] The Plaintiff Bank is in the business of, among other things, lending money. In the course of this business, the Bank lent money to an Alberta based company known as “Agra”. The business of Agra, at the relevant time, was brokering sales of agricultural commodities in Mexico. Agra’s only asset was receivables.

Funding for these receivables was provided by the Bank. [ 2 ] The Defendants are accountants and Charted Accountants and all, except for Grant Thornton LLP, provided accounting services to Agra. The accounting services provided were both audited and unaudited (“Notice to Reader”).

[ 3 ] In December 2011, the Bank learned that one of the principals of Agra died and that Agra had defrauded the Bank of approximately 42 million dollars. The Bank sues the Defendants in negligence. [ 4 ] The Defendants applied for

summary dismissal of the claim and the Learned Master granted substantial relief to the Defendants. It is from the Master’s decision that the Bank appeals. [ 5 ] The two Master’s decisions under appeal are reported at Cooperatieve Centrale Raiffeisen-Boerenleenbank BA v Liebig & Keown LLP , 2015 ABQB 628 , 31 Alta LR (6) 391 and Cooperatieve Centrale Raiffeisen-Boerenleenbank BA v Liebig & Keown LLP , 2015 ABQB 669 , 32 Alta LR (6) 206. [ 6 ] The Learned Master, as is referenced above, divided his reasoning in two decisions.

He rendered the first decision in respect, Grant Thornton LLP, and he dealt with the remaining Defendants in the second decision. It is to be noted that Grant Thornton is a limited liability partnership as is Liebig & Keown and Stout & Company. [ 7 ] The detailed history of this matter is found in the Master’s decisions. Facts [ 8 ] The facts, briefly stated and as necessary for my decision regarding Grant Thornton LLP, are as follows: (

a) Grant Thornton LLP bought the assets of Stout & Company LLP in 2011. At the time of the transaction, Grant Thornton LLP was not aware, nor was Stout & Company LLP, that there was a significant negligence claim pending from the Bank. It is clear from the evidence, notwithstanding some of the advertising to the contrary to existing clients of Stout & Company LLP, that this was a clean asset purchase. The assets purchased were clearly identified in the contractual document for purchase and sale.

It is also clear from the evidence and affidavits filed that Grant Thornton LLP did not at any time provide accounting services to the Plaintiff. Grant Thornton LLP is sued based on an attempt by the Plaintiff, to apply alien law to a Canadian circumstance. (

b) The Bank alleges that because Grant Thornton LLP purchased the assets of Stout & Company LLP, it also became liable in negligence for the actions of Stout & Company LLP prior to the asset purchase. As indicated above, Agra was never a client of Grant Thornton LLP, nor was the Bank. (

c) The Bank asks the Court of Queen’s Bench to apply “the equitable doctrine of successor liability”, which has been applied in some U.S. states when there has been a merger of corporate interest generally dealing with product liability. [ 9 ] With respect to the other Defendants: The Bank states in its materials that it relied on the financial statement and audited statements prepared by each and all of the other Defendants when deciding whether to advance funds to Agra to finance its receivables.

They allege these statements were prepared negligently and that although there was no contractual relationship between the Bank and the accountants, the accountants well knew of the Bank’s reliance on the preparation of the financial statements. [ 10 ] For the purpose of this decision, it is also important to note some further facts as disclosed from the materials: (

a) The Bank had an office in Mexico and it carried on operations in that country. It began financing Agra in 2001 and although the evidence indicates the Bank relied on the statements prepared by the Alberta accountants, they performed their own detailed and collateral inspections of Agra’s books. (

b) The Bank also knew that the accountants for Agra resided and conducted their business in Edmonton, Alberta. (

c) There is no evidence that the accountants conducted any “investigations” in Mexico relative to the audits. (

d) The timeline with respect to the accountants is important. Liebig & Keown LLP, were auditors for Agra from 2004 up to and including the end of fiscal year 2006. They prepared Notice to Reader statements for the years of 2004 through to 2010. For the audited financial statements, that function moved from Liebig & Keown LLP to Stout & Company LLP commencing with the fiscal year ending December 31, 2007. (

e) As to the liability of Liebig & Keown LLP and its principals, these dates are important as there is no evidence of any fraudulent activity having occurred during the period that Liebig & Keown LLP prepared audited financial statements for Agra. This is not the case with respect to Stout & Company LLP, as they commenced preparing audited financial statements in the year 2007. [ 11 ] On a review of the facts, I am satisfied that the “principal user” of all of the financial statements, both the audited and Notice

to Reader statements, was the Bank. All the reliable evidence produced relating to the fraudulent activity conducted by Agra indefrauding the Bank of some $42 million shows that this fraud commenced in the year 2009.

It is also important to note that all of theevidence before the Court with respect to the fraudulent activity of Agra came about a result of the Bank’s detailed and exhaustiveexamination of the books and tracing of the accounts of Agra. [12] All of the evidence that a Court will hear at trial is now available to the Court and filed except for professional expertevidence regarding standard of care, and evidence quantifying damages. The Master’s Decision [13] In his first decision, regarding Grant Thornton LLP, the Learned Master came to this conclusion, at paragraph 74: However, this is a

summary judgment application where the facts are to be carefully reviewed, and upon careful analysis, the facts of thiscase do not support the argument that this is a claim that might succeed.

The defence of Grant Thornton is unassailable because even ifthe doctrine [Equitable Doctrine of Successor Liability] applies, they would not apply to these facts. [14] In his second decision, regarding the balance of the Defendants, the Learned Master decided, at paragraphs 99-102: The evidence is very clear that Rabobank should not have been placing any reliance on LKL in respect of the financial statements thatwere not audited. The information contained within them was provided by Agra’s management. The Notices to Reader made it clear thatthe accounting firm had done nothing to audit those statements.

There is merit to the argument advanced by LKL that there is no evidence that the audited financial statements done by it contained anymisstatement. The only evidence before the Court is that the fraud began in September 2009. By then LKL was no longer auditingAgra’s financial statements, merely assembling the “Notice to Reader” unaudited statements. It is a fair assumption that at some pointAgra was a business with actual receivables, operating with no fraud. Without at least some evidence that there was a misstatementappearing in the audited statements prepared by LKL, there is no claim.

Each party is to put its best foot forward on a

summary judgmentapplication: Papaschase Indian Band No. 136 v. Canada (Attorney General), 2008 SCC 14 , [2008] 1 S.C.R. 372 at 378 and 382. I am unable to conclude that the defendant’s positions in relation to the audited financial statements of SCL are unassailable, meaningthat it is highly likely that they will succeed. Accordingly, the claim is dismissed as against Liebig & Keown LLP, Brett Liebig Professional Corporation and Chris L. KeownProfessional Corporation. The

summary dismissal application insofar as it relates to Stout & Company LLP and James Stout ProfessionalCorporation is dismissed Standard of Review [15] The standard of review on appeal from a Master to a Judge is “non-deferential”, that is to say, the standard is “correctness”:Bahcheli v Yorkton Securities Inc., 2012 ABCA 166, at paras 3 and 30, 524 AR 382. Decision [16] For the reasons that follow, the appeal from the Master’s Order is dismissed. [17] Rule 7.3(1) of the Alberta Rules of Court, Alta Reg /2010 (the “Rules”) provides as follows: 7.3(1) A party may apply to the Court for

summary judgment in respect of all or part of a claim on one or more of the following grounds: (

a) there is no defence to a claim or part of it; (

b) there is no merit to a claim or part of it; (

c) the only real issue is the amount to be awarded. [18] As I indicated above, the existing record is complete and all of the information that will be available at the trial of this matteris now available except for the experts’ opinion evidence. [19] In 776826 Alberta Ltd. v Ostrowercha, 2015 ABCA 49, at paras 9-11, 592 AR 391, the Court of Appeal stated: The governing test for

summary judgment in Alberta finds expression in Windsor v CPR, 2014 ABCA 108 at para 13, 572 AR 317;Sherwood Steel Ltd v Odyssey Construction Inc., 2014 ABCA 320, at paras 7 to 8, 59 CPC (7th) 22; Maxwell v Wal-Mart, 2014 ABCA383 at para 12; WP and cases mentioned therein, inter alia. From the process perspective,

summary judgment can be given if adisposition that is fair and just to both parties can be made on the existing record by using that alternative method for adjudication:Hryniak v Mauldin, 2014 SCC 8, [2014] 1 SCR 87. From the substantive perspective,

summary judgment can be granted if, in light of what that fair and just process reveals, there is nomerit to the claim. No “merit” means that, even assuming the accuracy of the position of the non-moving party as to any material andpotentially decisive matters -- matters which would usually require ordinary forensic testing through a trial procedure with viva voceevidence and which could not be resolved through the fair and just alternative -- the non-moving party’s position viewed in the round hasno merit in law or in fact.

Stated another way, in order for the non-moving party's case to have merit, there must be a genuine issue of a potentially decisivematerial fact in the case which cannot be summarily found against the non-moving party on the record revealed by the “fair and justprocess”. The mere assertion of a position by the non-moving party in a pleading or otherwise, or the mere hope of the non-moving partythat something will turn up at a trial, does not suffice.

The key is whether the circumstances require a viva voce evidence in order toproperly resolve the case: see Canada v Lameman, 2008 SCC 14 at paras 10 to 11, [2008] 1 SCR 372. [20] In Condominium Corporation No. 0321365 v Cuthbert, 2016 ABCA 46, at para 27, 612 AR 284 the Court of Appeal stated: When deciding a

summary judgment application, there are two considerations. With respect to the process, the court must ask, “whetherexamination of the existing record can lead to an adjudication and disposition that is fair and just to both parties”: Whitecourt at para 9;see also Ostrowercha at para 9; WP at para 26; Windsor at para 16.

With respect to the substantive issues, the court must ask “whetherthere is any issue of merit that genuinely requires a trial or, conversely, whether the claim or defense is so compelling that the likelihoodit will succeed is very high such that it should be determined summarily”: Whitecourt at para 9; see also Ostrowercha at para 10.

Anissue of merit is established when the respondent’s (non-moving party) case discloses a “genuine issue of a potentially decisive materialfact in the case which cannot be summarily found against the non-moving party on the record revealed by the ‘fair and just [summary]process’”: Ostrowercha at para 11.

In the cases above, the Alberta Court of Appeal makes it clear that: (A) “summary judgment can be given if a disposition that is fair and just to both parties can be made on the existing record”; and (B) “summary judgment can be granted if, in light of what that fair and just process reveals, there is no merit to the claim”, and inorder for the respondent’s case to have merit, “there must be a genuine issue of a potentially decisive material fact which cannot besummarily found against the [respondent] on the record revealed by the ‘fair and just process’”. [21] In their submissions, the Defendants note the test for negligent misrepresentation as follows: 45.

In a negligent misrepresentation claim, the plaintiff must prove each and every one of the following elements: a. a duty of care based on a “special relationship” between the parties; b. a misrepresentation (i.e., a representation that is untrue, inaccurate or misleading); c. negligence by the representor in making the representation; d. reasonable reliance by the representee on the misrepresentation; and e damages to the representee caused by the reliance. Sharbern Holding Inc. v Vancouver Airport Centre Ltd., 2011 SCC 23 , [2011] 2 S.C.R. 175 (S.C.C.), at para 121 46.

For the sole purposes of this Appeal, LKL’s and SCL’s argument is limited to the following elements of the tort of negligentmisrepresentation: a. whether LKL or SCL made a misrepresentation (i.e., a representation that is untrue, inaccurate or misleading); b. whether Rabobank reasonably relied on any such misrepresentation; and c. whether damages suffered by Rabobank were caused by its reliance on any such misrepresentation. [22] Keeping all of this in mind, it appears from the Bank’s exhaustive study of Agra’s books and attempting to trace the funds, thefraud did not commence until September 2009 and, by that time, Liebig & Keown LLP was long gone.

I, therefore, am compelled toagree with the Master’s decision with regard to this Defendant. Its position is unassailable and it must be dismissed from the action as soordered by the Master. [23] Conversely, there is a case for Stout & Company LLP to meet with respect to their audited financial statements for the yearsof 2009 and 2010. Therefore, they should be, as so ordered by the Master, left in the action for those two years. There are importantliability issues to be argued with respect to Stout & Company LLP during this time period. There is no question that Stout & Companyowed a duty to the Bank.

There is also good evidence, certainly ‘prime facie’ evidence of the Bank’s reliance on the audited financialstatements. And there is clear evidence of a loss. [24] Turning now to the Defendant, Grant Thornton LLP, and the Bank’s attempts to have it found liable pursuant to an applicationof the doctrine of successor liability. In his paper, Wayne D. Gray, “The Case Against Adopting a General Doctrine of SuccessorLiability” 53 CanBusLJ 116 (HeinOnline), Gray discusses and comments, at pages 128 and 130, that: 3.

Policy Dimensions It is submitted that a general doctrine of successor liability is manifestly inconsistent with Canadian legal norms and unjustifiable from apolicy perspective. (

a) Fairness and Efficiency Considerations Buyers agree to acquire ownership of a specific set of assets for a fixed price, all or part of which may include the assumption of definedliabilities. Typically, the buyer does not assume the residual liabilities of the business – in large part because these are difficult for thebuyer to accurately quantify and therefore reflect in the price he is willing to pay. Rather, the seller’s residual liabilities are left behind

for the seller to satisfy out of the case proceeds of sale... (

c) Consistency with Prevailing Canadian Legal Norms As stated above, there is indeed one final decision (Cominco Ltd. v. Westinghouse Canada Ltd.; Cominco Ltd. v. Canadian GeneralElectric Co. (1981), (BC SC), 127 D.L.R. (3d) 544, 45 B.C.L.R. 26 (B.C.S.C.) per Bouck J., vard (BC CA), 147 D.L.R. (3d) 279, 45 B.C.L.R. 35 (B.C.C.A.), addt’l reasons (BC CA), 4 D.L.R. (4th) 186, 50 B.C.L.R.145, leave to appeal to S.C.C. refused 47 B.C.L.R. xxxiii, 51 N.R. 157n) on successor liability, and the holding in that case rejected thedoctrine. ...

Furthermore, a stand-alone doctrine of successor liability is not consistent with the Canadian common law privity of contract doctrine. [25] Additionally, Grant Thornton LLP, at paragraphs 47 and 48 of its materials, made the following argument on appeal: 47. There is no evidence that either the intention or the effect of the Transaction was to place Stout & Company’s assets out of reachfrom its creditors. In fact, there is no evidence that the Transaction has operated to allow Stout & Company to escape liability for itsnegligence, if any.

Section 12 of the Partnership Act, RSA 2000, c P-3 dictates that individual partners in a limited liability partnershipbear full personal liability for their own negligence and the negligence of those under their supervision. The relevant portions of section12 are reproduced below. LLP limited liability 12(1) Subject to subsections (2) and (4), a partner in an Alberta LLP is not individually liable, directly or indirectly by means ofindemnification, contribution, assessment or otherwise, for debts, obligations or liabilities of the partnership or another partner that arisefrom the negligence, wrongful acts or omissions, malpractice or misconduct of (

a) another partner, or (

b) an employee, agent or representative of the partnership that occurred in the ordinary course of carrying on practice in an eligible profession within the meaning of

section 81 while thepartnership is an Alberta LLP. (2) Subsection (1) does not operate to protect a partner from liability (

a) where the partner knew of the negligence, wrongful act or omission, malpractice or misconduct at the time it was committed andfailed to take reasonable steps to prevent its commission, or (

b) where (

i) the negligence, wrongful act or omission, malpractice or misconduct was committed by an employee, agent or representative of thepartnership for whom the partner was directly responsible in the supervisory role, and (ii) the partner failed to provide such adequate and competent supervision as would normally be expected of a partner in thosecircumstances. ...

(4) The protection from liability given to a partner under subsection (1) shall not be construed as offering any protection from claimsagainst that partner’s interest in the partnership property. 48. Accordingly, notwithstanding the Transaction, Stout remains personally liable in the event that Stout & Company is found to havebeen negligent in relation to its audits of Agra’s consolidated financial statements. [26] The law in my view is clear. The doctrine of successor liability does not apply in Alberta, nor indeed, does it apply in Canada.It certainly does not apply on these facts.

This is not a proper case for its introduction into Canadian law. [27] Grant Thornton LLP did not acquire the liabilities of Stout & Company LLP. For further evidence of this see paragraph 3.0 ofPurchase Agreement between Grant Thornton LLP and Stout & Company LLP.

If any liability exists to the Bank from any of theremaining Defendants, it is during the period in which Stout & Company LLP prepared audited financial statements, where there is someevidence to conclude that there may have been a fraud – that being the years 2009 and 2010. [28] I am therefore satisfied, having reviewed all of the evidence provided, that the Learned Master was correct. The appeals aredismissed. [29] Costs may be spoken to if the parties are unable to agree. Heard on the 22 day of June, 2016. Dated at the City of Calgary, Alberta this 26 day of July, 2016.

W.P. Sullivan J.C.Q.B.A. Appearances: C. Popowich and R. Moyse, for the Plaintiff G. W. Jaycock and B. Tsukishima, for the Defendants Liebig & Keown LLP and Stout & Company LLP, Brett Lieig Professional Corporation, Chris L. Keown and James Stout D. Dear and M. Baldasaro, For the Defendant Grant Thornton LLP