The end of the Castor saga: Coopers' negligence and liability are confirmed as the Supreme Court of Canada denies leave to appeal

MONTREAL, Jan. 9, 2014 /CNW Telbec/ - The Supreme Court of Canada announced earlier today that it had dismissed Coopers & Lybrand's Application for Leave to Appeal in Canada's longest-running trial. The ruling extinguishes any hope that Coopers & Lybrand ("Coopers") had that it could evade liability for its professional negligence in the services it provided to the Montreal-based company, Castor Holdings Ltd. ("Castor") and for the resultant harm suffered by third parties who relied on its opinions when deciding to invest in or lend money to Castor. The questions Coopers put forward to the Supreme Court of Canada were largely based on whether the civil law of Quebec or the common law should govern the issue of auditors' liability and today's decision sends the message that negligent auditors can and should be held accountable for their failure to comply with the applicable professional standards.

Although the audited financial statements of Castor for the year ended 1990 reported assets of more than $1.8 billion, Castor declared bankruptcy in early 1992 and investors, lenders and creditors soon learned from the Trustee in Bankruptcy, Richter Advisory Group Inc. ("Richter"), that the reported assets were virtually worthless. A multitude of lawsuits against Coopers and each of the individual partners of the firm practicing in Canada in 1988, 1989 and 1990 were instituted in 1993 and 1994 in the Quebec Superior Court making the Castor litigation the largest auditors' negligence case in Canadian history. With interest, the pending Castor claims against Coopers amount in the aggregate to more than a billion dollars. In 1998, a test case was selected to proceed first to trial. Although liability would only be determined for that one plaintiff, investor Peter Widdrington, the judgment was to resolve and be binding on all the Castor-related cases on the key common issues including, primarily, Coopers' negligence with regard to its audit work and other professional opinions.

The Widdrington trial commenced in September 1998, 2 months after Coopers merged with accounting firm Price Waterhouse to form PricewaterhouseCoopers ("PwC"). The plaintiff was represented by the Montreal law firm of Fishman Flanz Meland Paquin LLP ("FFMP") which also represents the Trustee in Bankruptcy as well as various Canadian and foreign banks. Extensive delays were caused by the litigation strategy of Coopers which included more than 40 appeals on a myriad of issues. The defence strategy was described by the courts as a scorched-earth war of attrition.

Notwithstanding the delays and roadblocks to which plaintiff was subjected, he prevailed in full before the Quebec Superior Court. In her 753-page trial judgment issued in April 2011, the Honourable Marie St-Pierre upheld the positions put forward by the plaintiff. She held that Coopers breached generally accepted auditing standards and that the audited financial statements of Castor contained numerous material misstatements and did not fairly present the financial position of Castor. She found that "superficiality and brevity characterized the audits" conducted by Coopers and that the audit planning "was performed in an automatic, thoughtless manner without professional judgment or serious consideration of anything other than going through the motions of mindlessly filling out forms." Judge St-Pierre also determined that the civil law of Quebec would govern the issue of civil liability. However, given the unique circumstances of the case and the specific factual matrix, she also concluded that, had the common law applied, Coopers would still have been liable for its negligence.

The Quebec Court of Appeal, which substantially upheld the trial judgment, held that the audit work performed by Coopers was "botched" and that it was "easy to see why the result was a fiasco."

The legal team at FFMP is gratified that, after such a long and challenging legal journey, a final decision has been rendered confirming the liability of Coopers.

FFMP's Avram Fishman describes the result as the "satisfying culmination of an arduous 20-year journey" and Mark Meland of the same firm states that "the time for Coopers to run and hide is over and Coopers and its partners must now face the music for the harm caused to investors and lenders".

Richter also played a pivotal role in providing litigation support to counsel throughout this long process.

As a result of this decision, the plaintiffs will now intensify their efforts to take all steps necessary to recover their losses from Coopers, its individual partners across Canada, its professional liability insurers and PwC, the successor firm that emerged from the merger of Coopers and Price Waterhouse.

In respect of PwC, proceedings are currently pending before the courts seeking to hold the firm liable for an amount up to the value of all of Coopers' assets transferred to PwC at the time of the merger. In the Superior Court judgment, the court held that "it is not believable" that one of the managing partners of PwC, who acted as an expert for the defence, "would assume that he has and had no economic interest in the outcome of the present litigation either directly as a partner of PricewaterhouseCoopers or indirectly because of the potential liability of a number of his partners".

With respect to the issue of insurance, a Motion for Declaratory Judgment will be heard by a judge of the Quebec Superior Court in early 2015. The court has been asked to declare that Coopers' professional liability insurance policies are governed by and subject to Quebec law. The public order provisions of the Civil Code of Quebec stipulate that the amount of insurance is for the exclusive benefit of the third party victim and that costs and expenses, including defence costs, and interest on the amount of the insurance are borne by the insurer over and above the limits of insurance.

SOURCE: Fishman Flanz Meland Paquin LLP

Me Avram Fishman, email: [email protected] and Me Mark E. Meland, email: [email protected], Fishman Flanz Meland Paquin LLP, 1250 René-Lévesque Blvd. West, Suite 4100, Montreal, Quebec, H3B 4W8, tel: [phone].