Ernst & Young Inc. v Koroluk, 2022 SKCA 81

Court of Appeal for Saskatchewan Docket: CACV3994 Citation: Ernst & Young Inc. v Koroluk , 2022 SKCA 81 Date: 2022-07-26 Between: Ernst & Young Inc. Applicant/Prospective Appellant (Defendant) And Randy Koroluk Respondent/Prospective Respondent (Plaintiff) And Dan Anderson, Tom Archibald, Francis Bast, Doug Frondall, Mike Hough, Will Olive, Tom Robinson and Irene Seiferling Respondents/Prospective Respondents (Defendants) Before: Barrington-Foote J.A. (in Chambers) Disposition: Application granted Written reasons by: The Honourable Mr.

Justice Barrington-Foote On application from: 2022 SKQB 61 , Regina Application heard: July 14, 2022 Counsel: Douglas Hodson, Q.C. for Ernst & Young Inc. E.F. Anthony Merchant, Q.C. for Randy Koroluk Travis Sylvestre for Dan Anderson, Tom Archibald, Francis Bast, Doug Frondall, Mike Hough, Will Olive, Tom Robinson and Irene Seiferling Barrington-Foote J.A. I.

INTRODUCTION [ 1 ] The prospective appellant, Ernst & Young Inc. [EYI], seeks leave to appeal a March 4, 2022, decision [Chambers decision] of a judge of the Court of Queen’s Bench [Chambers judge] that service of the statement of claim in this proposed class action on EYI should be validated pursuant to Rule 12-1 of The Queen’s Bench Rules [Rules]. The Chambers decision also validated service on four of the individual prospective respondents; however, the proposed appeal and this application relate solely to the question of service on EYI.

Although counsel for the individual prospective respondents appeared at the hearing, he took no position. [ 2 ] For the reasons that follow, I would grant EYI’s application for leave to appeal. II. BACKGROUND [ 3 ] On June 12, 2018, Randy Koroluk issued a statement of claim against eight directors and former directors of PrimeWest Mortgage Investment Corporation, claiming punitive damages and damages for losses allegedly suffered by a class of persons who had invested in PrimeWest.

Rule 3-10(1) of the Rules provides that “[u]nless an enactment provides otherwise, a statement of claim must be served on the defendant within 6 months after the date that the statement of claim is issued unless the Court, on application, grants an extension of time for service”. The deadline to effect service of the statement of claim was accordingly December 12, 2018. [ 4 ] Mr. Koroluk had, prior to the expiration of the deadline, served the statement of claim on four of the individual defendants.

On December 3, 2018, he applied to add EYI as a defendant, alleging that it had been negligent in its capacity as auditor for PrimeWest. Having failed to effect service on Messrs. Anderson, Bast, Frondall and Robinson, Mr. Koroluk applied without notice, as provided by Rule 3-10(2), for an order extending the time for service. On December 19, 2018, Keene J. granted a six-month extension. [ 5 ] With the Keene J. order in hand, Mr. Koroluk continued his attempts to serve the four remaining directors.

He was unsuccessful in doing so, and as a result, applied for a second six-month extension of time to serve both the directors and EYI. On September 6, 2019, Klatt J. granted that order, together with leave to apply for substitutional service if necessary. [ 6 ] The time for service having been extended to March 6, 2020, Mr. Koroluk again sought to serve the remaining directors. Although he took no steps to attempt to serve EYI, either before or after either of the orders extending time, the statement of claim nonetheless came to its attention as a result of another action.

In 2019, PrimeWest applied to the Court of Queen’s Bench for voluntary liquidation. Affidavit evidence filed in that proceeding confirmed that the unserved directors had possession of the statement of claim in February of 2020, when they filed individual proofs of claim for indemnification from PrimeWest with KPMG Inc., PrimeWest’s liquidator. EYI also had notice of Mr. Koroluk’s action by February of 2020 and, on March 9, 2020, it too filed proof of an indemnification claim. [ 7 ] On March 16, 2020, Donald Hanna, in-house counsel for EYI wrote to E.F.

Anthony Merchant, Q.C. confirming that it had the statement of claim and had for that reason filed a proof of claim in the liquidation proceeding. Mr. Hanna’s letter stated that Ernst & Young LLP, a different entity, not EYI, had performed audit reports for PrimeWest. It asserted that EYI had no knowledge of the action until it was contacted by KPMG on February 6, 2020, and that the period for service and the limitation period had expired. It also said this:

As indicated above, it appears to us that the unserved SoC has been abandoned as against EYI, and in any event, even if a claim werebrought and served on the correct party, it would be bound to fail. If we are correct that you do not intend to proceed as against EYI, Iwould appreciate that this be confirmed to us in writing. … [8] Mr. Hanna also sought undertakings that Mr. Koroluk would not amend the statement of claim, seek to extend the serviceperiod, or commence a fresh proceeding against “any EY party”. [9] Mr. Merchant did not respond to Mr. Hanna’s letter. EYI next heard from Mr.

Koroluk’s counsel in July of 2021, 16 monthslater. That is when Mr. Koroluk filed and served two applications; that is, a third application without notice to extend the time for serviceand an application to validate service on EYI and others. It was these two applications that were before the Chambers judge and resultedin the Chambers decision. III.

THE CHAMBERS DECISION [10] In the Chambers decision, following a brief overview of the nature of the application and the background facts, the Chambersjudge reviewed case law relating to both applications to validate service pursuant to Rule 12-1 and applications to extend time.

As tovalidation, she cited McAdam v Grimard, 2017 SKQB 39, 7 CPC (8th) 123, where Goebel J. emphasized the importance of the question ofwhether notice was received, and stated that, in her view, “the court is generally prepared to validate irregular or unauthorized modes ofservice where it is satisfied that as a result of such methods, notice has reached the hands or minds of the intended parties” (at para 24).The Chambers judge also referred to Emigh v Diamond Messenger Services (Saskatoon) Ltd. (1987), (SK KB), 65 SaskR 264 (QB), finding that it stands for the proposition that “documents do not have to be served on an opposing party when it is clear theopposing party has the documents” (Chambers decision, at para 19). [11] As to the law relating to extending the time to effect service, the Chambers judge referred to and quoted extensively fromMerchant v Kohli, The Leader-Post Ltd., Williams and Prpich (1984), (SK KB), 34 Sask R 57 (QB); Jahnke v Thomas,2017 SKQB 161; Simpson v Saskatchewan Government Insurance Office (1967), (SK CA), 65 DLR (2d) 324 (SaskCA); Monahan v Jowsey (1995), (SK KB), 132 Sask R 201 (QB); and to the recent and thorough review of the caselaw in Royal Bank of Canada v Turkey, 2021 SKQB 45. [12] The Chambers judge then turned to her analysis.

She determined (at para 26) that the first issue was to determine whether tovalidate service. In this context, she referred again to the importance of notice, and found that “the defendants had clear notice of the claimwithin the currency of Justice Klatt’s order” (at para 27). [13] However, the Chambers judge did not simply validate service as a result of having reached this conclusion.

Rather, she held (atpara 28) that since the Klatt J. order to extend time was made without notice, it was appropriate to consider whether to confirm that order.She then assessed the application based on the law that applies on an application to extend the time to effect service. She took particularaccount of the potential merits of Mr. Koroluk’s claim, finding that the question was whether it was bound to fail, and that the answer wasthat it was not.

She also rejected EYI’s claim that it was prejudiced by the delay in being served, as it had destroyed relevant employeerecords that would have been kept if it had known Mr. Koroluk intended to pursue his claim. In the result, the Chambers judge found thatMr. Koroluk would suffer greater prejudice than EYI if he was denied relief. [14] Based on this analysis, the Chambers judge concluded that it was appropriate to validate service of the statement of claim onthe four unserved directors and on EYI.

She did so on the basis that service was effected during the currency of the Klatt J. order.Although her reasons could be read as having concluded that the Klatt J. order should be confirmed, the parties agree that the Chambersjudge did not decide the application to extend the time to effect service. IV. ANALYSIS A.

The Rothmans test [15] The test that applies on an application of this kind – which is concerned with the merit and importance of the proposed appeal –is that described by Cameron J.A. in Rothmans, Benson & Hedges Inc. v Saskatchewan, 2002 SKCA 119, 227 Sask R 121 [Rothmans]: [6] The power to grant leave has been taken to be a discretionary power exercisable upon a set of criteria which, on balance, must beshown by the applicant to weigh decisively in favour of leave being granted: Steier v. University Hospital, (SK CA),[1988] 4 W.W.R. 303 (Sask. C.A., per Tallis J.A. in chambers).

The governing criteria may be reduced to two—each of which features asubset of considerations—provided it be understood that they constitute conventional considerations rather than fixed rules, that they arecase sensitive, and that their point by point reduction is not exhaustive.

Generally, leave is granted or withheld on considerationsof merit and importance, as follows: First: Is the proposed appeal of sufficient merit to warrant the attention of the Court of Appeal? • Is it prima facie frivolous or vexatious? • Is it prima facie destined to fail in any event, having regard to the nature of the issue and the scope of the right of appeal, for instance, orthe nature of the adjudicative framework, such as that pertaining to the exercise of discretionary power? • Is it apt to unduly delay the proceedings or be overcome by them and rendered moot? • Is it apt to add unduly or disproportionately to the cost of the proceedings?

Second : Is the proposed appeal of sufficient importance to the proceedings before the court, or to the field of practice or the state of the law, or to the administration of justice generally, to warrant determination by the Court of Appeal? • does the decision bear heavily and potentially prejudicially upon the course or outcome of the particular proceedings? • does it raise a new or controversial or unusual issue of practice? • does it raise a new or uncertain or unsettled point of law? • does it transcend the particular in its implications? (Emphasis in original) [ 16 ] As Jackson J.A. commented in Saskatoon (City) v North Ridge Development Corporation , 2015 SKCA 13 at para 50 , 451 Sask R 265 [ North Ridge ], “the Chambers judge must decide whether he or she is sufficiently concerned about the correctness of a decision to warrant granting leave, including determining whether the appeal is prima facie destined to fail, and must also consider importance”.

B. Should leave to appeal be granted? [ 17 ] I would first note that a good deal of EYI’s written argument and submissions at the hearing of this application were concerned with alleged errors in the application of the test for extending the time to effect service pursuant to Rule 3-10(2). As noted above, however, the Chambers judge did not decide that the time to effect service should be extended. Mr. Koroluk submits that EYI is, for that reason, seeking leave to appeal an order that was never made.

As such, he contends that EYI seeks leave to appeal obiter dicta or a moot point, as the application to extend time fell away when the Chambers judge decided to validate service that occurred during the currency of the Klatt J. order. [ 18 ] Mr. Koroluk’s position on this point has merit. Counsel for EYI agreed that the Chambers judge did not decide the application to extend time. It also agreed that EYI had conflated the issues of validation and the extension of time in its written submissions.

Those submissions contended that the Chambers judge erred in rejecting EYI’s claim that it was prejudiced by destroying records; by adopting an incorrect “destined to fail” test when considering the strength of Mr. Koroluk’s claim; and in her analysis of the merits of the plaintiff’s claim as an investor claiming against an auditor. [ 19 ] However, this error in EYI’s approach was understandable.

EYI’s position on these aspects of the Chambers decision responded to the approach taken by the Chambers judge, who held that she must decide whether the Klatt J. order should be confirmed, despite that EYI had not applied to set it aside. [ 20 ] The question, then, is whether any of this raises an issue that has sufficient merit and importance to pass muster under the Rothmans test.

On the one hand, the fact that the Chambers judge considered issues such as prejudice and the merits of the claim could be read as meaning that she found that the factors that are relevant in determining whether to extend the time to effect service are equally relevant when considering validation. [ 21 ] On the other hand, the Chambers judge heavily emphasized the importance of notice.

Indeed, it is arguable that she decided that notice, taken alone, requires validation of service, and that factors such as whether and how the plaintiff has attempted to effect service, how the defendant came to know of the claim, and what they did in response are irrelevant. [ 22 ] EYI disagrees. It submits, for example, that Rule 12-1 does not authorize validation where, as here, there has been no attempt to effect service, even if in a manner that is not authorized. That argument is based on the language of Rule 12-1(3), which is as follows:

(3) If the Court is satisfied that the person to be served received notice of the document, the Court may: (

a) validate any irregular or unauthorized service of a document; and (

b) impose any terms that it considers appropriate on the validation. (Emphasis added) [ 23 ] EYI also argues that if mere notice of a claim is enough, the floodgates would open, as any search of court registries which disclosed a claim to a defendant – such as a search in the course of conducting due diligence relating to a financing or sale – would call for validation.

Further, EYI contends that other surrounding circumstances are relevant to validation, including whether the plaintiff has repeatedly failed to comply with the Rules. [ 24 ] In my opinion, these issues as to the principles to be applied on an application to validate service pursuant to Rule 12-1 satisfy the Rothmans test. As to the merits aspect of that test, there is limited authority relating to the principles that govern such an application, including as to whether notice is sufficient in and of itself regardless of context.

EYI’s argument that the Chambers judge erred in her identification and application of the legal principles that govern applications to validate service is not destined to fail. Further, I note that Mr. Koroluk’s counsel – while he did not agree that leave should be granted – conceded that it was appropriate that I consider these issues in determining whether leave should be granted, despite that they were not squarely identified by EYI in its proposed grounds of appeal. [ 25 ] Mr.

Koroluk emphasized that the decision as to whether to validate service is discretionary and argued that this should tilt the scale against granting leave. To be sure, the standard of review is a relevant consideration in relation to the merits element of the Rothmans test.

The deferential standard of review that applies on an appeal of a discretionary decision was reviewed and summarized in Kot v Kot , 2021 SKCA 4 at paras 15–20 , 63 ETR (4th) 161 [ Kot ], which affirmed the fundamental principle that discretionary powers “fall to be exercised as the judge vested with them thinks fit, having regard for such criteria as bear upon their proper exercise”: Rimmer v Adshead , 2002 SKCA 12 at para 58 , [2002] 4 WWR 119. An appellate court is not entitled to substitute its own discretion for that of the

judge who made the decision merely because it would have exercised the original discretion differently: Friends of the Oldman RiverSociety v Canada (Minister of Transport), (SCC), [1992] 1 SCR 3 at 76–77. [26] However, discretionary decisions are not beyond review. An appellate court may intervene in a discretionary decision if thechambers or trial judge made a material error of law or a palpable and overriding error of fact: British Columbia (Minister of Forests) vOkanagan Indian Band, 2003 SCC 71 at para 43, [2003] 3 SCR 371 [Okanagan]. The criteria that govern the exercise of discretion arelegal criteria.

An error of law may include a failure to identify the legal criteria that governed the exercise of discretion or misapplying orfailing to apply those criteria: Okanagan at para 43, citing Pelech v Pelech, (SCC), [1987] 1 SCR 801 at 814–815; MostenInvestments LP v The Manufacturers Life Insurance Company (Manulife Financial), 2021 SKCA 36 at para 61, [2021] 9 WWR 1; Kot atpara 20. [27] The potential errors described above in relation to the identification and application of the criteria that governed the applicationto validate service are such that they would, if made out, permit appellate intervention.

The standard of review does not tip the balance infavour of denying leave in this case. [28] Finally, the proposed appeal is of sufficient importance to satisfy the second element of the Rothmans test. It is not onlypotentially conclusive as to the proposed claim against EYI but also transcends the particular in its implications. V. CONCLUSION [29] In the result, I would grant EYI’s application for leave to appeal on the ground that the Chambers judge erred by failing tocorrectly identify or misapplied the legal criteria that governed the decision to validate service. “Barrington-Foote J.A.” Barrington-Foote J.A.