Lavender v. Miller Bernstein LLP
2018 ONCA 729
Court of Appeal for Ontario, G.J. Epstein, van Rensburg and D.M. Brown JJ.A.
September 5, 2018
Torts — Negligence — Duty of care — Securities dealership placed into
receivership for failing to segregate investor assets and maintain minimum level of net free capital — Clients losing millions of dollars —
Plaintiff bringing class action against dealership’s auditor alleging that
it negligently audited annual Form 9 reports filed with Ontario
Securities Commission that confirmed compliance with segregation and
minimum capital requirements — Class members not receiving Form 9
reports and being unaware of their existence — Motion judge erring in
finding that auditor owed duty of care to class members in relation to
Form 9 reports — No relationship of proximity existing between auditor
and class members.
The Ontario Securities Commission suspended the registration of Buckingham,
a securities dealer, and an order was made placing it into receivership because it
breached regulatory requirements by failing to segregate investor assets and
maintain a minimum level of net free capital. Buckingham’s clients, who held
investor accounts, lost millions of dollars. The plaintiff commenced a class action
on behalf of every person who had an investment account with Buckingham when
it was placed into receivership. He alleged that Buckingham’s auditor, the defendant, negligently audited Form 9 reports filed with the OSC that confirmed
compliance with segregation and minimum capital requirements. The motion
judge granted a motion for summary judgment in favour of the class, holding that
the defendant owed class members a duty of care in conducting the audit and that
it fell below the requisite standard of care. The defendant appealed.
Held, the appeal should be allowed.
The motion judge erred in finding that the defendant owed a duty of care to class
members in relation to the Form 9 reports, as no relationship of proximity was
established. Class members did not receive or review the Form 9 reports and were
unaware of their existence. The defendant made no representations to class members, most of whom never knew of its existence or its involvement with Buckingham.
The defendant did not undertake to assist the class in making investment decisions.
The interposition of the OSC and Buckingham between the defendant and the class
rendered the relationship between the parties too remote to ground a duty of care.
Moreover, there was no reliance by class members on the Form 9 reports. The
motion judge made factual findings that amounted to palpable and overriding errors.
He incorrectly found that the defendant, and not Buckingham, filed the Form 9
reports with the OSC, and that the defendant had access to the names and accounts
of very member of the class. Both of those palpable and overriding errors further
distanced the defendant from the class and undermined the motion judge’s proximity
analysis. The statutory scheme which required Buckingham to segregate investor
assets and maintain a net free capital and to file an audited Form 9 report with the
OSC that confirmed that it had met those obligations was not sufficient to ground
a relationship of proximity between the defendant and the class. Finally, significant
scrutiny is warranted when deciding whether to recognize a duty of care in a claim
for pure economic loss.
Anns v. Merton London Borough Council,  A.C. 728,  UKHL 4,
 2 W.L.R. 1024,  2 All E.R. 492 (H.L.); Cooper v. Hobart,