



COURT OF APPEAL FOR ONTARIO

CITATION: Fairfield Sentry Limited v. PricewaterhouseCoopers
    LLP, 2018 ONCA 696

DATE: 20180824

DOCKET: C64006

Benotto, Brown and Miller JJ.A.

BETWEEN

Fairfield Sentry Limited, Fairfield Sigma
    Limited, Fairfield Lambda Limited and Kenneth Krys, as Liquidator for Fairfield
    Sentry Limited and Fairfield Sigma Limited and Fairfield Lambda Limited

Plaintiffs (Appellants)

and

PricewaterhouseCoopers LLP and Stephen Wall

Defendants
    (Respondents)

Peter F.C. Howard, Patrick O'Kelly and Aaron L. Kreaden,
    for the appellants

Gerald L.R. Ranking, Sarah J. Armstrong and Kimberly
    Potter, for the respondents

Heard: April 19, 2018

On appeal from the order of Justice Frank Newbould of the
    Superior Court of Justice, dated June 14, 2017, with reasons reported at 2017
    ONSC 3447, 48 C.B.R. (6th) 209.

BROWN J.A.:


I.

OVERVIEW

[1]

This appeal concerns an auditors liability action that arose out of the
    Ponzi scheme orchestrated by Bernard L. Madoff through his company, Bernard
    L. Madoff Investment Securities LLC (BLMIS). Investors who deposited funds
    with BLMIS thought their money was being invested in securities or other
    assets. It was not. Madoffs scheme was a fraud, which ran for some 20 years.
    It was only revealed on December 11, 2008 by Mr. Madoffs own confession.

[2]

The appellants, Fairfield Sentry Limited (Sentry), Fairfield Sigma
    Limited (Sigma), and Fairfield Lambda Limited (Lambda) (collectively, the
    Funds), invested in BLMIS. Sentry invested directly. Sigma and Lambda were
    feeder funds, indirectly investing in BLMIS through Sentry. The Funds were
    incorporated in the British Virgin Islands (BVI).

[3]

PricewaterhouseCoopers LLP audited the Funds financial statements for the
    years ending December 31, 2006 and December 31, 2007.

[4]

The Funds are in liquidation. By their BVI court-appointed Liquidators
    (the Liquidators), they have brought this action seeking damages from
    PricewaterhouseCoopers LLP and one of its partners, Stephen Wall (collectively
    PwC), asserting that PwC breached its contract and/or was negligent in
    performing the audits of the Funds financial statements for those two years.

[5]

Madoffs fraud was revealed publically on December 11, 2008. Shortly
    thereafter, BLIMIS was put into liquidation under the United States
Securities
    Investor Protection Act of 1970,
15 U.S.C. § 78aaa-78lll

(the
    SIPA). A court appointed Mr. Irving Picard (the SIPA Trustee) as trustee
    for the SIPA liquidation.

[6]

The Liquidators allege PwC should have uncovered Madoffs Ponzi scheme
    no later than April 24, 2007, when it delivered the Funds audited 2006
    financial statements. Because PwC did not do so, the Funds remained invested in
    BLMIS, as a result of which they contend they suffered damages of approximately
    $2.5 billion.

[7]

PwC moved for summary judgment dismissing the action on the basis that
    the Funds had not suffered any damages. For purposes of the motion, liability
    was assumed. The only issue was whether there was a genuine issue regarding
    damages that required a trial.

[8]

The motion judge granted summary judgment and dismissed the action. He
    applied the approach to calculating damages set out by this court in
Livent
    Inc. v. Deloitte & Touche
, 2016 ONCA 11, 128 O.R. (3d) 225; appeal
    allowed in part, 2017 SCC 63. He accepted the evidence of the damages expert
    tendered by PwC, Dr. M. Laurentius Marais. Applying the
Livent
methodology to that and other evidence, the motion judge concluded that the Funds
    had not suffered any damages and there was no genuine issue regarding damages
    that required a trial.

[9]

The Liquidators submit the motion judge erred in arriving at that
    conclusion. They advance five grounds of appeal, which involve findings made by
    the motion judge either in respect of questions of fact or mixed fact and law.
    Four of the grounds of appeal concern findings the motion judge made about
    certain elements of his
Livent
damages calculation. The other ground
    of appeal contends the motion judge erred in drawing adverse inferences against
    the Funds on certain issues.

[10]

The
    Liquidators argue the motion judge made palpable and overriding errors in
    respect of each ground of appeal. They contend that if they succeed on any one
    of the four grounds of appeal concerning the calculation of damages, then a
    genuine issue requiring a trial on damages arises, the order of the motion
    judge should be set aside, and the action should proceed to trial.

[11]

For
    the reasons that follow, I would dismiss the appeal.

[12]

I
    will consider first: (i) the standard of review; (ii) the creation of the
    evidentiary record below; and (iii) whether the motion judge erred by
    improperly drawing an adverse inference against the Funds. I will then deal
    with each of the four additional grounds of appeal concerning the calculation
    of damages under the
Livent
methodology: (i) the motion judges
    treatment of the Funds withdrawal of $1.03 billion from BLMIS; (ii) his
    treatment of the non-forbearance amounts of judgments consented to by the Funds
    in favour of the SIPA Trustee; (iii) his treatment of actual and constructive
    fraudulent conveyance liabilities and investors liabilities; and (iv) his
    description, in para. 65 of his reasons, of the investor liabilities line
    item as a net increase in liabilities.


II.

THE STANDARD OF REVIEW

[13]

Absent
    an error of law, the exercise of powers under r. 20 of the
Rules of Civil
    Procedure
attracts deference. The motion judges determination, based on
    the exercise of his fact-finding powers under r. 20.04(2.1), as to whether
    there is a genuine issue requiring a trial involves a question of mixed fact
    and law. Where there is no extricable error in principle, findings of mixed
    fact and law should not be overturned absent palpable and overriding error:
Hryniak
    v. Mauldin
, 2014 SCC 7, [2014] 1 S.C.R. 87, at para. 81. Palpable and
    overriding error also is the standard of review for findings or inferences of
    fact:
Benhaim v. St-Germain
, 2016 SCC 48, [2016] 2 S.C.R. 352, at
    para. 36.

[14]

A
    highly deferential standard of review, palpable and overriding error means an
    error that is obvious and goes to the very core of the outcome of the case. In
    the language of the metaphors approved by the Supreme Court of Canada in
Benhaim
,
    a palpable and overriding error is in the nature not of a needle in the
    haystack, but of a beam in the eye; it does not involve pulling at leaves and
    branches, leaving the tree standing, instead the entire tree must fall: at
    paras. 38-39.


III.

THE EVIDENTIARY RECORD

[15]

By
    the time of the hearing of the summary judgment motion, the parties were
    proceeding on the basis that the method for assessing whether the Funds
    suffered any damages by reason of PwCs alleged negligence was that set out in
    the decision of this court in
Livent
, at paras. 62 and 63: Loss (L) =
    Actual Liquidation Deficit (ALD)  Estimated Liquidation Deficit (ELD) or, L =
    ALD  ELD.

[16]

In
    the present case, the date for calculating the Actual Liquidation Deficit would
    be December 11, 2008, when Madoffs fraud was revealed. The date for the
    Estimated Liquidation Deficit would be April 24, 2007, the date PwC delivered
    its audit for the Funds 2006 financial year.

[17]

Both
    parties adduced evidence on the issue of the losses allegedly sustained by the
    Funds. It is important to understand the substance of that evidence as it
    unfolded through the parties various filings.

PwCs initial evidence filing: November 2015

[18]

In
    its notice of motion for summary judgment, PwC alleged the Funds did not suffer
    any damage as they had gained and recovered a net value of $1.03 billion from
    BLMIS between the EDL and ADL dates.

[19]

By
    way of supporting evidence, PwC filed an affidavit from Stephen Wall, a PwC
    partner, as well as one from Dr. Marais, whom the motion judge accepted as
    qualified to provide expert evidence on the determination of damages.

[20]

In
    his first affidavit, Dr. Marais opined that the Funds had not suffered any
    damages because they withdrew more from BLMIS between the ELD date and ALD date
    than they had put in.

[21]

I
    would note that the Funds did not appeal the motion judges acceptance of Dr.
    Marais as an expert witness. The notice of appeal did state that the motion
    judge erred by uncritically accepting the evidence of the Respondents expert,
    Dr. Marais, who was not qualified to provide his opinion to the Court. However,
    apart from the occasional comment regarding Dr. Marais lack of accounting
    credentials, the Funds did not otherwise canvass in written or oral argument the
    issue of the motion judges acceptance of Dr. Marais as a qualified expert.

The Liquidators responding evidence: April 2016

[22]

In
    response, the Liquidators filed affidavits from: (i) Mr. Kenneth Krys, one of
    the two joint Liquidators for each fund; (ii) Mr. Ian Ratner, a business
    valuator; and (iii) Mr. Michael Pompeo, a New York attorney.

[23]

Mr.
    Krys was not tendered as an expert witness. His affidavit contained, at para.
    62, a chart showing a comparative balance sheet calculation of the Funds net
    assets as of the ELD and ALD (the Krys Chart). He deposed that the difference
    between the amounts revealed a best estimate of the Funds damages in the
    amount of $2.508 billion.

[24]

Mr.
    Ratner was accepted as a valuation expert. As described by the motion judge,
    Mr. Ratner did not provide any independent analysis of the damage claim but
    did opine that Mr. Krys has applied the appropriate approach and methodology to
    quantify damages. Mr. Ratner also was critical of the approach to value used
    by Dr. Marais in his first affidavit: at paras. 39-40.

[25]

Finally,
    the Liquidators filed an affidavit from Mr. Pompeo, who provided expert opinion
    evidence on matters of United States insolvency law.

PwCs request for information

[26]

In
    May 2016, PwC requested that the Liquidators produce the documents upon which
    Mr. Krys relied to calculate the assets, liabilities, redemptions, and SIPA
    claims set out in his affidavit.

[27]

In
    his supplementary August 11, 2016 affidavit, Mr. Krys produced the requested
    information and updated some of the figures used in his initial calculation,
    including an updated Krys Chart. Mr. Krys revised his best estimate of the
    Funds damages to $2.422 billion.

PwCs reply evidence: November 2016

[28]

In
    reply, PwC filed a second affidavit from Dr. Marais. In it, Dr. Marais used the
    approach that Messrs. Krys and Ratner deposed was the proper one for
    calculating the Funds damages. Dr. Marais started his analysis with the Krys
    Chart, as revised (Marais Ex. C), and then broke down the liabilities shown
    on the Krys Chart into their constituent parts (Marais Ex. D), identified four
    pairs of offsetting asset and liability line items (Marais Ex. E), and then cancelled
    the offsetting pairs and explained why he would disallow other line items as
    unsupported (Marais Ex. F). Dr. Marais concluded that the Funds liquidation
    deficit had decreased, not increased, between the ELD date and the ALD date,
    with the result the Funds had not suffered a loss.

[29]

PwC
    also filed an affidavit from Mr. Robert Gerber, a retired United States
    Bankruptcy Judge, who opined on issues of U.S. insolvency law.

2017 evidence

[30]

Mr.
    Krys was cross-examined on March 6, 2017. At the start of the cross-examination,
    the Liquidators tendered a revised chart prepared by Mr. Krys (hereafter Krys Ex.
    3). The major change Krys Ex. 3 made to the initial Krys Chart was altering
    the basis for calculating the liability line item, Madoff Investors. This
    change will be discussed below in the section dealing with the third ground of
    appeal concerning the judgments the Funds consented to in favour of the SIPA
    Trustee. In Krys Ex. 3, Mr. Krys revised his calculation of the Funds loss to
    $2.577 billion.

[31]

In
    response, about two weeks later PwC filed a second affidavit from Mr. Gerber in
    which he opined on U.S. legal issues raised by Krys Ex. 3.

[32]

The
    Liquidators cross-examined Dr. Marais on March 28, 2017; they cross-examined
    Mr. Gerber on March 31, 2017.

[33]

The
    Liquidators did not file any expert evidence to challenge Dr. Marais critique
    of Mr. Krys calculations. Nor did they file a further affidavit from Mr. Krys.

[34]

As
    this chronology of the evidentiary filings discloses, the damages theory first
    advanced by PwC in its notice of motion quickly shifted to the use of the
Livent
methodology, as propounded by the Liquidators. In the result, the motion judge
    decided whether a genuine issue regarding damages requiring a trial existed by
    applying the
Livent
methodology to the comparative liquidation deficit
    framework advanced by Mr. Krys in his various charts, as broken down and
    critiqued by Dr. Marais, and supplemented by the legal opinions of Mr. Gerber.


IV.

FIRST GROUND OF APPEAL: THE MOTION JUDGE MADE AN IMPROPER ADVERSE
    INFERENCE

[35]

The
    Liquidators did not file evidence replying to the critiques of the Krys charts
    made by Dr. Marais and Mr. Gerber. The Liquidators submit the motion judge
    erred when considering the significance of the absence of such evidence. They contend
    the motion judge improperly drew an adverse inference against the Liquidators for
    not seeking the courts permission to file sur-reply evidence, thereby failing
    to put their best foot forward on a summary judgment motion. According to the Liquidators,
    since the
Rules of Civil Procedure
did not permit them to file
    evidence responding to the second affidavits of Dr. Marais and Mr. Gerber as
    of right, it was inappropriate for the trial judge to hold their failure to do
    so against them. As well, the Liquidators contend the motion judge failed to
    consider whether additional evidence from them was necessary to address the
    issue on the motion. In their view, the record as it stood did not eliminate the
    possibility that the Liquidators could recover damages, so the motion judge
    could not grant summary judgment.

[36]

I
    am not persuaded by these submissions.

[37]

First,
    the motion judges reasons disclose that he did not make any adverse finding of
    fact against the Liquidators by reason of the absence of evidence responding to
    the second affidavits of Dr. Marais and Mr. Gerber. At one point in his reasons
    the motion judge did observe that the Liquidators had not adduced adequate evidence
    explaining certain issues, such as the inclusion of phantom profits in calculating
    the Funds liabilities to its investors: at paras. 80-82 and 85. He described
    that as a failure to put their best foot forward on those issues. The motion
    judge did not draw any adverse inference of fact against the Liquidators. He
    simply observed that certain arguments advanced by the Liquidators lacked
    evidentiary support.

[38]

Second,
    the Liquidators have no basis to complain that as part of his analysis the
    motion judge took into account the absence of evidence, expert or otherwise,
    responding to the critique by Dr. Marais of the Krys Chart or to Mr. Gerbers
    second affidavit. This was a Commercial List proceeding, case managed by the
    motion judge. Great flexibility is available in Commercial List proceedings to
    ensure the fairness of the ultimate hearing. If the Liquidators had wanted to
    file evidence responding to the detailed critique performed by Dr. Marais in
    his second affidavit or Mr. Gerbers evidence, notwithstanding that they had
    already conducted cross-examinations, all they had to do was ask the motion
    judge for leave: r. 39.02(2). In para. 36 of his reasons, the motion judge stated
    what his answer would have been to such a request:

It is said on behalf of the Liquidators that they had no right
    to file further affidavits under the rules because they had cross-examined on
    affidavits filed by PwC. I do not accept that. In the Commercial List, the
    right to file further affidavit material after cross-examinations is routine
    and had the Liquidators sought that right, I would no doubt have granted it to
    them.

[39]

Accordingly,
    I see no error in the motion judges treatment of this issue nor any procedural
    unfairness to the Liquidators from the motion judges conduct of the summary
    judgment motion. I would not give effect to this ground of appeal.


V.

SECOND GROUND OF APPEAL: THE Motion Judges treatment of the $1.03
    Billion at line 7.4 of the deconstructed Krys chart

[40]

The
    Liquidators submit the motion judge made a palpable and overriding error of
    fact by treating the Funds net withdrawal of $1.03 billion from BLMIS between
    the ELD and ALD as a benefit to the Funds and then using that amount to
    eliminate the Funds damages.

A.

The
    evidence

[41]

Assessing
    this ground of appeal requires an understanding of the multi-step approach the
    motion judge used when analyzing the evidence within the framework of the
Livent
methodology.

[42]

In
    his first affidavit, Dr. Marais opined that the Funds had realized a net gain
    on their investments between the ELD and ALD because during that period of time
    the Funds withdrew $1.03 billion more from BLMIS than they had invested in
    BLMIS over the same period.

[43]

Mr.
    Ratner criticized that methodology as inappropriate and incomplete because it
    failed to consider the losses related to all assets and liabilities of the
    Funds between April 2007 and December 2008. Instead, Dr. Marais improperly focused
    solely on the net change in investments and redemptions in BLMIS, which was
    only one component of the Funds total assets and liabilities.

[44]

Mr.
    Ratner stated that the appropriate methodology was that used by Mr. Krys, which
    compared the estimated liquidation deficit of the Funds on the ELD date with
    the actual liquidation deficit on the ALD date.

[45]

In
    his second affidavit, Dr. Marais accepted and applied the methodology used by
    Mr. Krys. The motion judge dealt with the motion on the basis, without
    deciding, that the damages calculation methodology used by Mr. Krys was the
    appropriate one: at para. 40.

[46]

The
    motion judge summarized his findings of fact on a chart contained at para. 86
    of his reasons (the Findings Chart). That chart had its genesis in the Krys
    Chart: at para. 48. As the motion judge observed, Dr. Marais broke down the
    figures on the Krys Chart into their constituent components on Marais Ex. D.
    The motion judge stated: [Dr. Marais] was not cross-examined on his breakdown
    and I accept it: at para. 66.

[47]

Using
    the deconstructed Krys Chart, the motion judge then considered adjustments made
    by Dr. Marais to the Krys Chart, as set out in Marais Exs. E and F. The motion
    judge gave clear, detailed reasons why he preferred the evidence of Dr. Marais
    over that of Mr. Krys on many points. He accepted Dr. Marais conclusion that,
    once proper adjustments were made to the Krys Chart, it showed the Funds were
    better off by some $857.5 million as between the ELD and ALD. The motion judge
    showed the mechanics of that analysis in his Findings Chart. Accepting the
    accuracy of the figures displayed on the Findings Chart, the motion judge
    concluded that the Liquidators had not established any damages. As a result,
    there was no genuine issue regarding damages that required a trial.

B.

Analysis

[48]

The
    Liquidators submit the motion judge erred in his treatment of the $1.03 billion
    entry at line 7.4, column (e), on his Findings Chart, under the Funds liabilities
    to its own investors: BLMIS holdings: Sentry net equity. The motion judge
    took that amount into account in conducting his comparative liquidation deficit
    analysis. The Liquidators submit he erred in so doing. In their factum they
    characterize the error as a palpable and overriding error of fact; during oral
    argument, their counsel described it as an error of law. On either
    characterization, I am not persuaded the motion judge erred.

[49]

It
    is clear from Marais Exs. C, D and E that line 7.4 traces its origins back to
    the single, aggregated line 7  Funds investors - on the initial Krys Chart. In
    his first affidavit, Mr. Krys explained that the Funds investors line item
    estimated the Funds liability to their own investors (not to third party
    investors in BLMIS). The figures he set out at the ELD and ALD dates showed the
    balance outstanding to investors in the Funds.

[50]

As
    mentioned, Dr. Marais took the aggregated line 7 figures for Funds investors
    in the Krys Chart and, using the information provided by Mr. Krys in response
    to PwCs request for production, broke them down into their constituent
    elements, including row 7.4. The motion judge specifically noted that Dr.
    Marais had accepted the entry at line 7.4 - BLMIS holdings: Sentry net equity
    - for a gain of $1.03 billion between the ELD and ALD: at para. 67.

[51]

The
    Liquidators cross-examined Dr. Marais on his two affidavits. However, that
    cross-examination did not involve questioning Dr. Marais on how he had deconstructed
    the Krys Chart  specifically, line 7 of the liabilities, Funds investors 
    or how, as part of that deconstruction, he had arrived at the net figure of
    $1.03 billion shown on line 7.4 of Marais Ex. D. Nor was Dr. Marais cross-examined
    on how he ultimately treated the deconstructed $1.03 billion amount, in the light
    of other adjustments he made to the deconstructed Krys Chart, to arrive at his
    ultimate opinion that the Funds suffered no actual harm by reason of PwCs
    conduct. From the submissions made at the hearing of the appeal, it is clear
    that the absence of such cross-examination was a tactical decision made by the
    Liquidators.

[52]

Further,
    the Liquidators produced Krys Ex. 3 - a revised chart comparing the Funds
    balance sheets at the ELD and ALD dates - at the start of PwCs
    cross-examination of Mr. Krys, which was some three weeks before the
    Liquidators cross-examination of Dr. Marais. Krys Ex. 3 did not employ the
    deconstructed line items used by Dr. Marais on Marais Ex. D. Instead, Mr. Krys
    continued to present the ELD and ALD figures on the aggregated basis used in
    his initial Krys Chart.

[53]

Two
    comments follow from the Liquidators reliance on Krys Ex. 3. First, the net
    change of approximately $172 million in line 7 Investors Liabilities between
    the ELD and ALD shown on the initial Krys Chart  which Dr. Marais broke down
    into its constituent elements  was not removed by Mr. Krys in his Krys Ex. 3.
    This would suggest that Mr. Krys considered it appropriate to continue to
    include the embedded $1.03 billion line item 7.4 in the comparative liquidation
    deficit analysis. Second, at the start of Mr. Krys cross-examination the
    Liquidators could have filed a revised Krys Chart that responded to or modified
    the line item break downs performed by Dr. Marais, including the $1.03 billion.
    They chose not to do so.

[54]

The
    Liquidators did not file any evidence, from an expert or Mr. Krys, critiquing
    Dr. Marais deconstruction of and adjustments to the Krys Chart. Nor did they file
    any reply evidence countering the opinion of Dr. Marais that, in effect, the
    application of the
Livent
comparative liquidation deficit methodology
    to the values shown in the various rows on the deconstructed Krys Chart did not
    give rise to a genuine issue about damages requiring a trial.

[55]

In
    flagging this absence of evidence from the Liquidators, I am not suggesting
    that the Funds bore the ultimate burden of demonstrating the existence of a
    genuine damages issue requiring a trial. They did not. On a motion for summary
    judgment, the ultimate burden remains on the moving party to demonstrate that no
    genuine issue requiring a trial exists. However, on a motion for summary
    judgment a responding party runs significant litigation risk if it leaves
    unchallenged key evidence of the moving party adduced to establish there is no
    genuine issue requiring a trial.

[56]

Given
    the state of the record before him, I see no palpable and overriding error by
    the motion judge in including the $1.03 billion shown on line 7.4 of his Findings
    Chart in his comparative liquidation deficit analysis. The motion judge worked in
    a most transparent way with the evidentiary record placed before him by the
    parties. The starting point of his analysis on this issue was the evidence of
    the Liquidators, as then broken down by Dr. Marais in a manner that was not
    challenged by the Liquidators. Accordingly, his ultimate findings of fact, including
    the $1.03 billion at line 7.4, column (e), of his Findings Chart, were supported
    by the record and based on the comparative liquidation date framework for
    calculating damages advanced by the Liquidators in their evidence.

VI.

THIRD GROUND OF APPEAL: THE MOTION JUDGES TREATMENT OF THE
    NON-FORBEARANCE JUDGMENT AMOUNTS

A.

The issue
    stated

[57]

The
    Liquidators submit the motion judge committed a palpable and overriding error
    in his treatment of the amounts set out in certain judgments the Funds
    consented to in favour of the SIPA Trustee.

[58]

This
    ground of appeal brings into play two matters: (i) the key change made to the
    initial Krys Chart by the updated Krys Ex. 3 chart produced by the Liquidators
    at the start of Mr. Krys cross-examination; and (ii) the meaning and effect of
    the judgments granted by the Funds in favour of the SIPA Trustee as part of the
    May 9, 2011 Settlement Agreement reached between them (the Settlement
    Agreement).

The major change contained in Krys Ex. 3

[59]

In
    his initial Krys Chart, Mr. Krys included, at line 6, amounts for liabilities
    to Madoff investors. In his first affidavit, Mr. Krys described that
    liability as the recognition of potential claims by other investors in BLMIS
    against the Funds, under U.S. and state insolvency and avoidance law, to
    recover redemption payments made by BLMIS to Sentry. The figures at line 6
    represented Mr. Krys estimate of what he described as the Funds actual and
    constructive fraudulent conveyance liabilities to BLMIS investors for the
    six-year avoidance claw back periods prior to the ELD and ALD.

[60]

In
    his second affidavit, Dr. Marais broke line 6 down into two sub-lines. The
    first, line 6.1, set out Mr. Krys estimate of the liabilities of the two
    feeder funds, Sigma and Lambda, to the other investors in BLMIS. Dr. Marais
    opined that the inclusion of those amounts was a form of double-counting and he
    removed the amounts from his analysis.

[61]

The
    second sub-line, line 6.2, set out the estimate by Mr. Krys of Sentrys potential
    liability to other BLMIS investors for redemptions Sentry received from BLMIS during
    the avoidance claw back periods. Dr. Marais opined that those amounts should
    not be included in the analysis for two reasons. First, no such claim by
    another BLMIS investor had been documented notwithstanding that seven years had
    passed since the revelation of Madoffs fraud. Second, Dr. Marais understood
    from counsel that the applicable statutes of limitations bar any such claim
    from being asserted now or in the future.

[62]

In
    the result, Dr. Marais valued the Krys Charts line 6 liability at zero for
    purposes of the
Livent
methodology.

[63]

The
    first affidavit of Mr. Gerber, sworn around the same time as the second Dr.
    Marais affidavit, expressed opinions on matters of U.S. insolvency law and
    state avoidance law. In respect of the Krys Charts line 6 liability of the
    Funds to other BLMIS investors, Mr. Gerber made two main points. First, he
    pointed out that no BLMIS investor actually had asserted any fraudulent
    conveyance claim against the Funds and the limitation period for such claims
    had passed. Second, he stated, at para. 103 of his first affidavit:

[B]ack in December 2011, the SIPA Trustee assumed the necessary
    standing to assert Avoidance Action claims on behalf of the BLMIS estate. Those
    claims thereupon ceased to belong to individual BLMIS creditors, and individual
    BLMIS creditors thereupon lost standing to bring them. They still lack standing
    to bring them. At least unless and until a trustee abandons those claims to
    individual creditors, they belong only to the trustees estate, and creditors
    lack the power and standing to assert them.

[64]

Three
    months later Mr. Krys attended for cross-examination. As mentioned, just prior
    to the start of the cross-examination the Liquidators produced a revised Krys
    Chart, the Krys Ex. 3. The primary change made by Krys Ex. 3 was to the source
    for calculating the line 6 liability of the Funds to Madoff investors. Mr. Krys
    initially estimated the Funds potential liability for actual and constructive
    fraudulent conveyance claims that Madoff investors could bring. However, in Krys
    Ex. 3 he discarded his estimate of potential claims and replaced it with the
    actual amounts of the judgments in favour of the SIPA Trustee to which the
    Funds had consented under the Settlement Agreement, to which I now turn.

The Settlement Agreement

[65]

Under
    the May 9, 2011 Settlement Agreement between the Liquidators and the SIPA Trustee,
    the Liquidators paid the SIPA Trustee $70 million. In addition, the Liquidators
    consented to three judgments in favour of the SIPA Trustee, one against each of
    the Funds (collectively, the Judgments). The amounts of the Judgments were,
    in U.S. dollars: Sentry judgment - $3.054 billion; Sigma judgment - $752
    million; Lambda judgment - $52.9 million. Although the SIPA Trustee agreed to
    forbear from collecting on a defined portion of the Sentry judgment, the
    Settlement Agreement resulted in non-forbearance amounts under the Judgments against
    each Fund.

[66]

As
    long as the non-forbearance amounts of the Judgments remain unsatisfied, the Settlement
    Agreement requires the Liquidators to pay to the SIPA Trustee specified
    portions of recoveries made by the Liquidators against third parties in what
    the Agreement defines as Redeemer Action Recoveries and Service Provider
    Claim Recoveries (collectively, the Judgment Reducing Recoveries). For
    example, s. 4 of the Settlement Agreement provides that as long as the
    non-forbearance amounts of the Judgments have not been satisfied, the
    Liquidators shall pay the SIPA Trustee 15% of the Liquidators net recoveries
    from the specified Redeemer Actions against third parties.

[67]

The
    Settlement Agreement limits the right of the SIPA Trustee to enforce the
    Judgments against the Liquidators. The SIPA Trustee can only look to the
    Judgment Reducing Recoveries to reduce the non-forbearance amounts under the Judgments.

[68]

Shortly
    after the cross-examination of Mr. Krys at which the Funds tendered Krys Ex. 3,
    PwC filed a second affidavit from Mr. Gerber. That affidavit focused on Krys
    Ex. 3, including the revised charts reliance on the Judgments as the source
    for the line 6 liability of the Funds to Madoff Investors. Mr. Gerber expressed
    several opinions: (i) under the terms of the Settlement Agreement, the
    Judgments are not assignable, so only the SIPA Trustee can enforce them; (ii)
    the SIPA Trustee cannot get any distributions on account of the Judgments from
    the existing assets of the Funds but only from the agreed shared recoveries;
    (iii) the SIPA Trustee cannot execute or sue on the Judgments except in
    accordance with their terms as defined by the Settlement Agreement; and (iv)
    the Judgments effectively provide the means for determining when the SIPA
    Trustees entitlement to litigation recoveries under the sharing agreement will
    come to an end.

[69]

Mr.
    Gerber summarized his opinion at para. 41 of his second affidavit, where he
    stated:

Thus, with my knowledge of the U.S. bankruptcy law relating to
    the approval of settlements, and my ability to read an agreement, I cannot find
    the Judgments to be a basis for quantifying the liability of the Fairfield
    Funds to fellow BLMIS investors, or for providing a basis to collect over $3
    billion from PwC.

[70]

The
    Liquidators conducted a brief, 20-minute cross-examination of Mr. Gerber. They
    did not examine him on the opinions he expressed about the effect of the
    Settlement Agreement and Judgments. The Liquidators did not file evidence from
    an expert responding to or commenting on the opinions expressed by Mr. Gerber.

A.

Analysis

[71]

The
    Liquidators submit that the motion judge erred in eliminating the entire amount
    of the Judgments from the damages calculation. They argue in their factum that
    [t]he Judgments did not form part of Marais analysis, so the motion judges
    conclusion on this issue derives from his own interpretation of the Settlement
    Agreement and accounting of these numbers. The Liquidators contend he erred on
    both matters.

[72]

I
    do not accept this submission. I have described in the preceding section how
    the evidence on this issue unfolded and the state of the record before the
    motion judge. The motion judge followed the evidence and his finding was rooted
    in the evidence.

[73]

The
    motion judge summarized the nature of the Funds obligations arising under the
    Judgments in paras. 24 and 62 of his reasons:

The judgments were no ordinary
    judgments. They were subject to the Settlement Agreement which provided that
    part of the judgment against Sentry was forborne and not to be collected. The
    remainder of that judgment and the judgments against Sigma and Lambda were to
    be paid from amounts collected by the SIPA Trustee from third parties against
    whom claims had been made. In exchange, Sentry was granted an allowed claim in
    the SIPA proceeding in the amount of $230 million.




On a plain reading of the judgments and the Settlement
    Agreement, and as confirmed by Mr. Gerber, the judgments for the [non-]forbearance
    amount of the judgment against Sentry and the amounts of the judgments against
    Sigma and Lambda can only be satisfied from funds of third parties through the
    litigation to be pursued against those third parties. There can be no attempt
    to collect on those judgments from the Fairfield Funds or their Liquidators.

[74]

In
    these portions of his reasons, I see no misapprehension by the motion judge
    about how the Funds were to satisfy the non-forbearance amounts of the Judgments
    under the Settlement Agreement. His interpretation was grounded solidly in the
    language of the Settlement Agreement, Judgments, and evidence.

[75]

As
    I understand their submission, the Liquidators main quarrel is with what the
    motion judge wrote in the ensuing portion of para. 62 of his reasons:

Thus I agree with PwC that Mr. Krys erred in including in
    liabilities of the Fairfield Funds any liability of the Fairfield Funds or
    their Liquidators to the SIPA Trustee or to customers of BLMIS. This applies to
    both the ELD as at April 24, 2007 and the ALD as of December 11, 2008.

[76]

The
    Liquidators submit the motion judge erred in failing to treat the Funds
    obligations under the Judgments as a liability for purposes of the comparative
    ELD and ALD analysis using the
Livent
methodology. First, the Liquidators
    repeat the submission they made to the motion judge that since the non-forbearance
    amounts of the Judgments in favour of the SIPA Trustee would be liabilities on
    the Funds financial statements, those amounts should be treated as a loss
    for purposes of the
Livent
damages calculation, notwithstanding that
    the Settlement Agreement limits the obligation to repay those amounts to any
    recoveries the Funds obtains from third parties.

[77]

Second,
    at para. 69 of their factum, the Liquidators argue that since the Settlement
    Agreement requires the Liquidators to pay the SIPA Trustee some portion of
    their net recoveries from third parties until the non-forbearance amounts of
    the Judgments are satisfied  for example, 15% of Redeemer Action Recoveries  the
    Judgments constitute an actual liability of the Funds that must be included in
    the damage calculation.

[78]

The
    motion judge gave clear reasons for rejecting the Liquidators submission
    stating, at para. 63 of his reasons:

In argument, [counsel for the Funds] asserted that the amount
    of the judgments is an item on the Fairfield Funds balance sheets and whether
    they can be paid or not is irrelevant. I disagree.
First,
    there is no accounting evidence of any kind that a balance sheet at the
    relevant dates would include as a liability the judgments in this case in which
    no payments will come from the Fairfield Funds.
It would make little
    sense for a balance sheet to list a liability that did not have to be paid by
    the particular Fund. Moreover,
the formula in
    the Livent case was to take into account the actual losses (the
    Actual Liquidation Deficit or ALD) and the actual estimated loss, (the
    Estimated Liquidation Deficit or ELD)
, in that case involving losses on
    the sale of assets. In this case, the expert valuation expert for the
    Liquidators, Mr. Ratner, said the same thing, although in this case he said
    there are other things to be valued at the ALD and ELD dates, including the
    liabilities of the Fairfield Funds. What is to be garnered from the various
    calculations is the loss (or liquidation deficit) actually incurred and the
    loss (or liquidation deficit) estimated that would have actually occurred at
    the earlier date.
A loss is not some paper entry that
    bears no reality to what actually occurred.
[Emphasis added]

[79]

I
    see no reversible error in that conclusion. The motion judge correctly stated
    the damages formula approved by this court in
Livent
. The extent to
    which liabilities such as the Funds limited obligations under the
    non-forbearance Judgments would amount to an actual loss for the purpose of
    the
Livent
damages calculation turned on the evidence. As the motion
    judge noted: [T]here is no accounting evidence of any kind that a balance
    sheet at the relevant dates would include as a liability the judgments in this
    case in which no payments will come from the Fairfield Funds. It would make
    little sense for a balance sheet to list a liability that did not have to be
    paid by the particular Fund. That finding was firmly anchored in the
    evidentiary record, including the expert evidence of Mr. Gerber set out above
    in paras. 68-69.

[80]

Accordingly,
    I would not give effect to this ground of appeal.


VII.

FOURTH GROUND OF APPEAL: THE Motion Judges Treatment of OTHER LINE
    ITEMS

[81]

The
    Liquidators next argue the motion judge failed to consider the effect of what
    they contend was the improper removal of two line items from the Krys Chart, as
    reproduced at para. 81 of their factum: Actual and constructive fraudulent
    conveyance liabilities to Madoff Investors and Investors Liabilities.

[82]

I
    am not persuaded by this submission. It attempts to isolate certain line items
    without taking into account the motion judges multi-step analysis of the EDL/ADL
    comparison, as described in the preceding sections.

[83]

To
    repeat, the motion judge started his analysis with the appellants evidence 
    the Krys Chart. The motion judge then accepted the deconstructed version of
    that chart adduced by Dr. Marais and explained, in considerable detail, his
    findings in respect of various line items on that chart. The Liquidators did
    not file expert or other evidence responding to Dr. Marais adjustment of the
    figures prepared by Mr. Krys or to Mr. Gerbers evidence about the Settlement
    Agreement and Judgments. It was open to the motion judge to prefer the evidence
    adduced by PwC, as long as he gave reasons for so doing that found support in
    the evidence. He did so. His Findings Chart was the result.

[84]

Accordingly,
    I see no palpable and overriding error by the motion judge on this issue.

VIII.

FIFTH
    GROUND OF APPEAL: The motion judges treatment of INVESTOR LIABILITIES

[85]

Finally,
    the Liquidators advance a further ground of appeal in respect of the motion
    judges treatment of Investor Liabilities. They argue the motion judge made a
    palpable and overriding error in describing, at para. 65 of his reasons, the
    change between the EDL and ADL Investor Liabilities line item as a net
    increase in liabilities.

[86]

I
    do not accept this submission. Instead, I accept the submission made by PwC at
    para. 64 of its factum as the proper way in which to understand the description
    used by the motion judge in his reasons:

While a reduction in the Fairfield Funds liabilities is a
    benefit, rather than a loss, the error is actually only one of terminology  It
    is clear that the Motion Judge did not misapprehend the evidence and correctly
    removed from Mr. Krys calculation non-existent liabilities (in respect of the
    Judgments), offsetting entries, entries that were double-counted and Fictitious
    Profits. Having done so, the Motion Judge correctly identified the gain in
    line 7.4 of [Marais] Exhibit F

[87]

Accordingly,
    I would not give effect to this ground of appeal.


IX.

DISPOSITION

[88]

For
    the reasons set out above, I would dismiss the appeal.

[89]

Based
    on the agreement reached by the parties regarding the costs of the appeal, I
    would award PwC costs of $70,000, inclusive of disbursements and applicable
    taxes.

Released: DB Aug 24 2018

David Brown J.A.
I agree. M.L. Benotto J.A.
I agree. B.W. Miller J.A.



