The civil suit, filed in Court of Queen's Bench for Saskatchewan, claims the Merchant Law Group should repay $25 million, plus interest, and cover the costs incurred by taxpayers in an eight-year legal battle.
"The government is taking legal action to recover public money that was paid to this firm as a result of serious misrepresentations," a Department of Justice spokesperson told CBC News in an email.
Allegations not proven
None of these allegations have been proven in court.
CBC News was unable to reach Merchant Thursday night for comment. He has 20 days to file a statement of defence.
Merchant, who is husband of Liberal Senator Pana Merchant, is known as the king of class action lawsuits in Canada.
In 2005, the Regina lawyer was expecting his law firm to rake in roughly $80 million dollars for legal services on residential school claims.
The federal government approved a multi-billion dollar settlement agreement. A chunk would go to law firms, including the Merchant Law Group, while former students received a common experience payment of, on average, $24,000.
In 2005,Tony Merchant presented his stake to former Supreme Court justice Frank Iacobucci, the man in charge of the residential school agreement. Merchant claimed his law firm was owed $80 million for legal services to represent more than 7,000 former residential school students. However, Iacobucci was not satisfied that Merchant had documentation to support that claim.
Eventually, Ottawa and Merchant struck a deal to have a forensic accountant examine the firm's files and billing system, but Merchant later claimed it was a violation of solicitor-client privilege.
In August, 2008, a court decision forced the federal government to pay $25 million to the Merchant Law Group in application of a previous agreement.
But that wasn't the end of it.
In December 2009, the Court of Queen's Bench in Saskatchewan ruled the Merchant Law Group must provide Ottawa with an extract of its electronic billing records, without client names or personal information.
Since then, the law firm has submitted various versions of its records, always deemed unacceptable by the government.
57,000 entries questioned
According to this statement of claim, Merchant at one point acknowledged that 57,000 entries in its records were "misdescribed" or would not be billed for.
Now, the auditor general claims an audit by Deloitte, completed a year ago, revealed Merchant's records are full of "illegitimate time entries and excessive disbursement records."
Among other things, the civil suit alleges that the Merchant Law Group:- Falsely and intentionally represented that it incurred more unbilled time in relation to residential school cases than it did.
- Falsely and intentionally created and modified illegitimate time entries and records "as part of a scheme to deceive and defraud Canada."
- Submitted false claims that prompted Canada to pay millions of dollars in legal fees and disbursement for which the law firm was not entitled.
As to why this was being pursued as a civil case, rather than criminal, the Department of Justice spokesperson said, "The attorney general of Canada reviewed the details of the report and is taking the most appropriate corrective actions."