2016 QCCA 1145, 2016 QCCA 1145

Tandalla Inc. c. Lippman Leebosh April 2016 QCCA 1145 COURT OF APPEAL CANADA PROVINCE OF QUEBEC REGISTRY OF MONTREAL No: 500-09-024813-149 (500-17-043997-082) DATE: July 7, 2016 CORAM: THE HONOURABLE NICOLE DUVAL HESLER, C.J.Q. MARK SCHRAGER, J.A. ROBERT M. MAINVILLE, J.A. TANDALLA INC. APPELLANT – Plaintiff / Cross-Defendant v. LIPPMAN LEEBOSH APRIL RESPONDENT – Defendant / Cross-Plaintiff JUDGMENT [ 1 ] On appeal from the judgment of the Superior Court, District of Montreal (the Honourable Pepita G.

Capriolo) of October 3, 2014, dismissing Appellant's motion introductory of suit. [ 2 ] The Court, for the reasons of Justice Schrager with which Justices Duval Hesler and Mainville concur, DISMISSES the appeal with legal costs. NICOLE DUVAL HESLER, C.J.Q. MARK SCHRAGER, J.A. ROBERT M. MAINVILLE, J.A. Mtre Kurt A. Johnson Mtre Emma Lambert IRVING MITCHELL KALICHMAN For Appellant Mtre Caroline Biron Mtre Bogdan-Alexandru Dobrota WOODS For Respondent

Date of hearing: May 31, 2016 REASONS OF SCHRAGER, J.A. FACTS [ 3 ] Appellant, the holding company of Mr. David Ham (“Ham”), purchased all of the shares of Plastik OK inc. (“Plok”). The majority shareholder was Mr. Elie Cohen (“Cohen”) who operated the business of manufacturing plastic bottles.

Appellant alleged that Cohen misrepresented or hid certain important financial information, and thus defrauded Appellant in the share purchase. [ 4 ] The Respondent accounting firm issued an audit opinion regarding Plok’s 2004 financial statements upon which Appellant relied and consequently, alleging Respondent’s negligence, seeks damages to compensate its losses arising from the share purchase. [ 5 ] Prior to instituting proceedings in the Superior Court, Appellant sought compensation from Cohen by initiating arbitration proceedings foreseen by the share purchase agreement.

Prior to the arbitration hearing, the parties agreed to submit the dispute to mediation which resulted in a settlement whereby Cohen paid or refunded on the share purchase price, the sum of $437,581.

This was far less than the total claim of $1,377,000 comprised of the share purchase price ($935,000) plus the additional investment made by Appellant ($250,000) after the share purchase as well as additional costs ($192,000) comprised mainly of professional fees to restructure the insolvent Plok. [ 6 ] The transaction agreement signed pursuant to the mediation includes a release and discharge in clause 2.1 which benefits “Cohen, his representatives and attorneys” as well as the following clause 2.4 : 2.4 Cohen and Tandalla represent and warrant to the other that he or it shall not assert in relation to any claim or matter released herein, any claim against any other person, firm or corporation who in turn, may assert a claim for contribution, indemnity or any claim in warranty against any of the released parties in respect of any matter referred to herein. [Emphases added] TRIAL JUDGMENT [ 7 ] The judge decided that since Respondent was a representative of Cohen, it was released so that the action was dismissed.

The judge also decided that since Respondent was a debtor liable in solidum with Cohen for the damages claimed, the release of Cohen operated as a release of Respondent. [ 8 ] The judgment also addresses the issues of negligence, causality and quantification of damages which do not require consideration by our Court given my analysis of the judge's treatment of the release.

ANALYSIS [ 9 ] Without confirming all the reasons of the trial judge with regard to the effect of the release on the claim by Appellant against Respondent, I am of the opinion that the appeal should be dismissed. [ 10 ] Appellant's first submission is that the judge erroneously determined that Respondent was Appellant's "representative" and thus benefited from the release. Appellant argues that as a matter of law Respondent could not be the representative of Cohen because it was the auditor of Plok and as such was independent given the very nature of the auditor’s function. [ 11 ] In principle, contractual

interpretation raises question of fact or mixed questions of law and fact [1] ; in both instances appellate intervention is limited to palpable and determinant errors. [2] [ 12 ] The

interpretation of the release by the trial judge to include Respondents as a "representative" was a question of fact. Even if the judge's

interpretation was erroneous, it was not determinant because of the combined effect of

section 2.4 of the transaction quoted above and the legal considerations flowing from the notion of in solidum liability. [ 13 ] The judge considered that Cohen and Respondent were debtors liable in solidum for the Appellant's loss. She refers to Articles 1690 and 1531 C.C.Q. as well as clause 2.4 of the transaction and to Ham's admission that (not surprisingly) had he recovered his total claim from Cohen in the arbitration/mediation proceeding, he would not have sued Respondent.

The judge then concluded as follows: [75] In the present instance, the primary responsibility for the damages suffered by Tandalla lies with the vendor, Mr. Cohen. It was Mr. Cohen who committed the fraud, whereas LLA’s [Respondent's] liability lies in not detecting it. This can be clearly seen by comparing the Amended Statement of Claim against Mr. Cohen under the arbitration proceeding and the Amended Introductory Motion against LLA. The misstatements and fraudulent acts in both proceedings originate entirely with Mr. Cohen and Tandalla had claimed the

entire alleged loss from him. It is only because Tandalla did not obtain the full amount of damages claimed in mediation that it turned to LLA for the alleged balance. Should Tandella [sic] obtain any damages from LLA, the latter would want to reclaim them from the source of the fraud, Mr. Cohen himself, which is impossible because of the wording of s. 2.4. Unlike other releases, s.2.4 does not contain an undertaking to hold Mr. Cohen harmless in case of a potential warranty claim as a result of another suit by Tandalla.

Instead, it categorically waives the right to exercise any action that could create a warranty claim. [ 14 ] Appellant refutes the finding of in solidum liability and submits subsidiarly that if indeed Cohen and Respondent are liable in solidum , then as between them, their liability should be split on an equal basis so that Cohen's payment only discharges one half of the total debt of $1,377,000. [ 15 ] I think that Appellant is wrong and that the judge's result is correct. [ 16 ] Debtors are held liable in solidum where their liability arises from different sources but the debt has the same object.

The institution obeys in large measure the articles of the C.C.Q. dealing with solidarity. [3] The doctrine is often applied where one co-debtor is contractually bound while the other co-debtor's liability is extra-contractual as in the present case [4] . However, the decided cases demonstrate that the application of the rules of solidarity require adaptation given the particular nature of in solidum debts. [ 17 ] Cohen owed a contractual obligation to Appellant arising from the representations and warranties in the share purchase agreement.

Respondent's liability was extra-contractual and arose from the audit function and Appellant's reliance on the audit opinion which was negligently issued. However, the damage incurred by Appellant was the same so that payment by either Cohen or Respondent would discharge the debt as Ham candidly admitted in his testimony. [ 18 ] Aside from the consideration of clause 2.4 of the transaction, the judge appears to believe that the discharge of one in solidum co-debtor automatically discharges the other. This is incorrect. [ 19 ] The principal effects of the law regarding solidarity apply [5] and in this instance

Article 1690 C.C.Q. : 1690. La remise expresse accordée à l'un des débiteurs solidaires ne libère les autres codébiteurs que pour la part de celui qui a été déchargé; et si l'un ou plusieurs des autres codébiteurs deviennent insolvables, les portions des insolvables sont réparties par contribution entre tous les autres codébiteurs, excepté celui à qui il a été fait remise, dont la

part contributive est supportée par le créancier. 1690.

Express release granted to one of the solidary debtors releases the other co-debtors only for the share of the co-debtor who has been discharged; if one or several of the other co- debtors become insolvent, the shares of the insolvents are apportioned rateably between all the other co-debtors, except the co-debtor to whom the release was granted, whose share is borne by the creditor. [Emphasis added] [ 20 ] Thus, after Cohen was released, his share of the debt as apportioned between him and the other co-debtor (the Respondent) would be discharged from the co-debtor’s in solidum obligation.

There is no automatic full discharge of Respondent. An analysis is required to determine the share of the debt inter se and, according to the jurisprudence in the circumstances presented by this case, a determination of primary and secondary liability. [ 21 ] Appellant's position throughout was that Cohen misstated the financial statements. Respondent's audit was negligent and he relied on the statements in the share purchase. The liability of Respondent arises from its audit obligations.

Here is what Appellant's expert concluded in this regard: Had LLA [Respondent] performed their audit in accordance with GAAS [generally accepted auditing standards], they would not have failed to recognize the numerous "red flags" encountered throughout the audit. Had they maintained an attitude of professional scepticism, LLA would have identified those "red flags" as such and performed additional procedures to dispel any doubts as to whether or not the misstatements were the result of fraud.

Had LLA uncovered the fraud, it is likely that they would have considered withdrawing from the audit engagement. [ 22 ] Our Court has adjudicated instances of liability in solidum between a party in default of its contractual obligation (such as Cohen) and professionals who fail to exercise the necessary care in the exercise of their obligations (such as Respondent). In Bourque v. Poudrier [6] , the vendor of land did not disclose an unapparent servitude of which he was aware and the notary examining title failed to discover it.

Our Court, while accepting that the professional could be sued in the same proceeding as the contracting party, nevertheless recognized that the latter's liability was primary and that of the notary, secondary. Accordingly, the division inter se between the vendor and the notary would be 100% versus 0%, respectively.

In this regard, the earlier ruling in the factually similar case of Chartré [7] was followed where the Court specifically underlined that, had the notary paid the entire claim, he would have been subrogated and in a position to claim 100% from the vendor. [ 23 ] In the present case, Cohen was primarily liable as the judge determined. Respondent was secondarily liable.

This determination is one of mixed fact and law, and again there appears no palpable error in the judgment which could be determinant or overriding. [ 24 ] Appellant argues that as between Cohen and Respondent they were liable in equal shares because Respondent would have no recursory action versus Cohen as the latter did not lead Respondent astray. Respondent did not apply generally accepted auditing standards which would have led it to discover the inaccuracies in the financial statements, submits the Appellant. Therefore, its liability should stand on its own and not be secondary.

This assertion runs contrary to the decisions of our Court referred to above and also to the facts herein. The audit opinion gave the additional required credibility to the financial statements to enable Cohen to misrepresent crucial information via the financial statements. The financial statements are those of Plok. Cohen (the controlling mind of Plok) used the

audited statements for fraudulent purposes. This use of the statements by Cohen is clearly alleged in Appellant's claim submitted in the arbitration/mediation process. Clearly, had Cohen not concealed or misrepresented information there would have been no negligence in the audit by failure to uncover such inaccuracies. [ 25 ] Thus, since Cohen was primarily liable, the release in his favour was for his "share" of the debt in the words of

Article 1690 C.C.Q. , and consequently, the release enured to the benefit of the co-debtor Respondent. [8] [ 26 ] Appellant could have sought to retain his independent recourse versus Respondent in the transaction. There is no legal position or principle prohibiting this per se. In Bouthillier v. Alexolopoulos [9] , the joint action against the vendors of a home suffering from a defect and against the building inspector who failed to uncover the problem was settled in part after a morning of trial.

The settlement was made as between Plaintiffs and the vendors only; the trial continued against the building inspector. Our Court held that the manner in which the settlement was arrived at and documented suggested that the recourse against the building inspector was saved. [ 27 ] In the present case, nothing was written, done or said at the time of the execution of the transaction to save Appellant's recourse against Respondent.

Ham testified that he had always intended to sue the auditor but there is no proof of the manifestation of this intent prior to or at the signing of the transaction so as to detract from the apportionment of liability explained above. [ 28 ] Moreover, not only was the recourse not saved but the opposite was expressed in clause 2.4 of the transaction whereby Appellant renounced to any recourse against the Respondent as someone who might "assert a claim for contribution, indemnity or … warranty" against Mr. Cohen.

The exchange of emails between counsel in the course of the negotiation of the release explaining that the purpose of this clause was to ensure that Cohen would not have to pay any more than the sum agreed to in the transaction, indicates that the meaning of clause 2.4 was or should have been clearly understood by Appellant. [ 29 ] In

summary, the release of an in solidum debtor who is primarily liable will cause the release of the co-debtor who is secondarily liable. Such full release is not automatic because of the in solidum nature of the liability but rather depends on the apportionment of the debt as between co-debtors. [ 30 ] The judge applied

Article 1531 C.C.Q. as an additional reason to conclude that Respondent benefited from the discharge: 1531. Le débiteur solidaire qui, par le fait du créancier, est privé d'une sûreté ou d'un droit qu'il aurait pu faire valoir par subrogation, est libéré jusqu'à concurrence de la valeur de la sûreté ou du droit dont il est privé. 1531. Where, through the act of the creditor, a solidary debtor is deprived of a security or of a right which he could have set up by subrogation, he is released to the extent of the value of the security or right of which he is deprived.

Based on the primary liability of Cohen, had Respondent paid, the latter would normally have been subrogated. Literally clause 2.4 did not deprive Respondent of its recourse arising from the subrogation. Rather the clause creates an obligation not to do – i.e. Appellant undertook not to sue Respondent since the latter could have a right against Cohen created by subrogation. [ 31 ] Again any error in this regard by the judge is not determinant given the application of

Article 1690 C.C.Q. as indicated above. [ 32 ] For all the foregoing reasons, I would propose that the appeal be dismissed with legal costs. MARK SCHRAGER, J.A.