{"id":2267,"date":"2016-09-30T01:17:53","date_gmt":"2016-09-30T05:17:53","guid":{"rendered":"https:\/\/www.zeilikmanlaw.com\/case-summaries\/deloitte-liable-for-negligence-in-auditing-practices-decision-to-be-appealed-to-supreme-court\/"},"modified":"2022-06-27T11:23:40","modified_gmt":"2022-06-27T15:23:40","slug":"deloitte-liable-for-negligence-in-auditing-practices-decision-to-be-appealed-to-supreme-court","status":"publish","type":"post","link":"https:\/\/www.zeilikmanlaw.com\/deloitte-liable-for-negligence-in-auditing-practices-decision-to-be-appealed-to-supreme-court\/","title":{"rendered":"Deloitte Liable for Negligence in Auditing Practices; Decision to be Appealed to Supreme Court"},"content":{"rendered":"

In a 2016 decision, Ontario\u2019s Court of Appeal upheld a Superior Court decision finding Deloitte liable in negligence for failing to meet their duties as auditor of Livent Inc. (\u201cLivent\u201d). Livent was a publically listed live entertainment company involved in the production of theatrical works such as\u00a0The Phantom of the Opera<\/em>,\u00a0Show Boat, Kiss of the Spider Woman, Music of the Night<\/em>\u00a0and\u00a0Sunsent Boulevard<\/em>. Some time around 1998, it was discovered that Livent was insolvent, due in part to the actions of numerous high-level employees amounting to fraud and forgery. Livent filed for insolvency protection in Canada and the United States and was placed in receivership. Garth Drabinsky and Myron Gottlieb\u2014creators and principals of Livent\u2014were convicted of fraud and forgery and sent to jail. Livent\u2019s creditors then sued Deloitte in negligence for their involvement in the fraudulent scheme that ultimately resulted in the downfall of Livent. At trial, Deloitte argued that the fraud was committed by Livent\u00a0vis a vis\u00a0<\/em>the Officers of the company, thereby precluding Livent\u2019s creditors from suing Deloitte due to the doctrine of\u00a0ex turpi causa<\/em>, which precludes a party from profiting from \u201cillegal\u201d or \u201cwrongful\u201d actions. The trial judge found that the doctrine of\u00a0ex turpi causa\u00a0<\/em>did not apply to prevent Livent\u2019s creditors from claiming from Deloitte in negligence and ordered Deloitte to pay Livent $84,750,000 plus interest. Deloitte appealed and lost.<\/p>\n

OUR THOUGHTS<\/strong><\/p>\n

The doctrine of\u00a0ex turpi causa\u00a0<\/em>is a general legal doctrine preventing parties from profiting from \u201cillegal\u201d or \u201cwrongful\u201d actions. In the context of civil litigation, the doctrine allows judges to deny recovery in tort to a plaintiff if doing so would\u2014in the opinion of the judge\u2014undermine the integrity of the justice system. On its face, the\u00a0ex turpi causa\u00a0<\/em>doctrine seems like a blanket power judges possess to deny actions because they think it \u201cright\u201d to do so. Through its application, however, the doctrine has been limited in its application to prevent actions wherein the plaintiff essentially seeks to \u201cprofit from an illegal or wrongful act, or to evade a penalty prescribed by criminal law.\u201d The inquiry is predominantly one of public policy. It requires asking whether the administration of justice would be undermined by allowing the plaintiff to claim for damages arising out of their own illegal or wrongful act. As such, the inquiry is a highly contextualized one. In the case at bar, the trial judge decided that the question to be answered was: \u201cwhether their (Gottlieb and Drabinsky) fraud should be attributed to Livent for the purposes of applying the\u00a0ex turpi causa\u00a0<\/em>doctrine.\u201d After all, Gottlieb and Drabinsky left behind a slew of innocent shareholders and directors. Would it be fair to preclude them from suing Deloitte just because Gottlieb and Drabinsky committed fraud in their capacity as officers of Livent? The Superior Court of Justice and the Court of Appeal both answered in the negative.<\/p>\n

The parties responsible for Livent\u2019s fraudulent scheme\u2014Gottlieb and Drabinsky\u2014have been removed and would therefore not benefit from any award given by the court to Livent. Granting the application of the\u00a0ex turpi causa\u00a0<\/em>doctrine in this case would essentially prevent Livent\u2019s innocent shareholders and directors from claiming for damages because of the unilateral actions of some of the directors and managers. The Court of Appeal agreed with the trial judge in that this outcome is not acceptable, as it would prevent innocent parties from claiming for damages arising out of conduct that is otherwise negligent. The reasoning is instructive for future cases wherein courts are charged with the onus of determining whether to transpose the actions of directors or officers of a corporate entity to the corporation itself, in order to estop future actions on behalf of the corporation. This decision is also interesting in that it essentially extends the duty of auditors to third-party creditors in that creditors can sue auditors for negligence arising out of the audits the conduct for the corporation. Creditors and shareholders are granted some peace of mind in knowing that auditors will be held liable for failing to disclose fraud.<\/p>\n

The Supreme Court of Canada has already accepted to hear this decision. It will be interesting to see whether the Court will adopt the reasoning of the trial judge in this case. No hearing date has been scheduled yet.<\/p>\n

See:\u00a0Livent Inc. (Reciever of) v Deloitte and Touche\u00a0<\/em>ONCA 2016<\/p>\n","protected":false},"excerpt":{"rendered":"

In a 2016 decision, Ontario\u2019s Court of Appeal upheld a Superior Court decision finding Deloitte liable in negligence for failing to meet their duties as auditor of Livent Inc. (\u201cLivent\u201d). Livent was a publically listed live entertainment company involved in the production of theatrical works such as\u00a0The Phantom of the Opera,\u00a0Show Boat, Kiss of the […]<\/p>\n","protected":false},"author":6,"featured_media":5196,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[39,35],"tags":[],"jetpack_sharing_enabled":true,"jetpack_featured_media_url":"https:\/\/www.zeilikmanlaw.com\/wp-content\/uploads\/2022\/06\/Case-Summary.jpg","_links":{"self":[{"href":"https:\/\/www.zeilikmanlaw.com\/wp-json\/wp\/v2\/posts\/2267"}],"collection":[{"href":"https:\/\/www.zeilikmanlaw.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.zeilikmanlaw.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.zeilikmanlaw.com\/wp-json\/wp\/v2\/users\/6"}],"replies":[{"embeddable":true,"href":"https:\/\/www.zeilikmanlaw.com\/wp-json\/wp\/v2\/comments?post=2267"}],"version-history":[{"count":1,"href":"https:\/\/www.zeilikmanlaw.com\/wp-json\/wp\/v2\/posts\/2267\/revisions"}],"predecessor-version":[{"id":5124,"href":"https:\/\/www.zeilikmanlaw.com\/wp-json\/wp\/v2\/posts\/2267\/revisions\/5124"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.zeilikmanlaw.com\/wp-json\/wp\/v2\/media\/5196"}],"wp:attachment":[{"href":"https:\/\/www.zeilikmanlaw.com\/wp-json\/wp\/v2\/media?parent=2267"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.zeilikmanlaw.com\/wp-json\/wp\/v2\/categories?post=2267"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.zeilikmanlaw.com\/wp-json\/wp\/v2\/tags?post=2267"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}