COURT FILE NO.: 391/02

DATE: 20030623

ONTARIO

SUPERIOR COURT OF JUSTICE

DIVISIONAL COURT

B E T W E E N:

JOHN STONEMAN, SARAH STONEMAN and MAKO FILMS LTD.

Plaintiffs/Applicants

• and -

J. GARY GLADMAN, FRANK MONTELEONE, A. FARBER & PARTNERS INC. and MAXIMA FILM CORPORATION

Defendants/Respondents

James C. Morton, for the Plaintiffs/Applicants

Anthony J. O’Brien, for the Defendants/Respondents

HEARD: June 5, 2003

Pitt J.

1This is an appeal from a master’s order removing the firm of Steinberg Morton Frymer (the “Steinberg firm”) as solicitors of record for the plaintiffs in respect of their retention of a foreign counsel, who has done legal work for one of the defendants.

2Based on the cases submitted by counsel, the circumstances outlined here have not been the subject matter of litigation before.

3Below is a reproduction of the exact layout of the Steinberg firm letterhead.

Steinberg Morton Frymer

BARRISTERS & SOLICITORS ● TRADEMARK AGENT

Irwin Steinberg, B.A. LL.B. James C. Morton ⁺ B.Sc., LL.B. LL.M. (U.K.) Jack Frymer, B.COM. M.B.A. LL.B

Michael E. Cass, B.A., LL.B. Robert M.S. Lambert, Q.C., B.A., LL.B. Peter J. Lewarne, B.A., LL.B., Counsel

Jack W. Hope, LL.B. Shelly Brian Brown*, B.C.L., LL.B. David M. Israel, B.A., LL.B.

Moses Muyal, B.A., LL.B. Jay H. Krieger, B.A., LL.B.

⁺ Certified by the Law Society * Member of the Ontario and Quebec Bars.

as a Specialist in Civil Litigation

U.S. Counsel-Steven Garellek, B.COM, LL.B.J.D.

Member of the Florida, New York and Ontario Bars

THE STANDARD OF REVIEW

4Mr. Morton’s view was that, as I understand it, since the master was clearly wrong legally, it would hardly matter how searching was the standard of review, while Mr. O’Brien, in his factum argues for a standard of palpable and overriding error. So, in a sense, there is not much difference between them.

THIS ISSUES

5The basis for the challenge to the Steinberg firm’s representation of the plaintiffs is that the defendant, J. Gary Gladman, has used the services of Mr. Garellek (described as U.S. Counsel-Steven Garellek on the Steinberg firm letterhead) and continues to retain him in regard to personal matters and matters related to his family’s estate and businesses. Mr. Gladman has consulted Mr. Garellek over the years with regard to business and personal affairs, as well as matters of law involving both Ontario and Florida property. Mr. Gladman wishes to continue to use Mr. Garellek, and Mr. Gladman claims he would suffer obvious and immediate prejudice if the relationship would not continue.

6Mr. Garellek has expertise with regard to Ontario and Florida legal matters. Although Mr. Garellek’s name in on the Steinberg firm letterhead, the firm claims in its factum that the relationship is restricted to a referral arrangement. Mr. Frymer of the Steinberg firm, in cross-examination, admitted that one of the things the clients of the firm could expect is the knowledge, talent and advice of Mr. Garellek in any matters where Mr. Garellek may be able to assist. The sophistication of the respective parties is an issue in the action, and Mr. Gladman’s business acumen and understanding of legal obligations will be examined.

7Mr. Gladman is concerned that the connection between Mr. Garellek and the Steinberg firm means that a solicitor who has intimate and complete knowledge of his affairs is counsel to and therefore, for all intents and purposes, a member of the firm that is taking an action against him.

8As I understand the submissions, it is conceded that there is no reason to believe Mr. Garellek knew of the circumstances giving rise to the litigation. Mr. O’Brien submits in his factum that in addition to the denial of his right to Mr. Garellek’s counsel, what Mr. Garellek knows generally about Mr. Gladman is important information that, if transmitted to the Steinberg firm, could assist the plaintiffs at some stage or stages of the litigation. In addition, Mr. O’Brien argues that the plaintiffs’ failure to offer any evidence of prejudice to them from the removal of the Steinberg firm effectively resolves the issue in the defendants’ favour.

9In oral argument, Mr. O’Brien also advanced the proposition that Mr. Garellek has a duty to provide the plaintiffs with all information that could be helpful to them, which would include information about Mr. Gladman that could have an impact on the litigation. In Martin v. Goldfarb (1997), 1997 12430 (ON SC), 31 B.L.R. (2d) 265 (Ont. Gen. Div.), varied in part (1998), 1998 4150 (ON CA), 41 O.R. (3d) 161 (C.A.), Lederman J. found that a solicitor breached his fiduciary duty and duty of full disclosure when he failed to advise the plaintiff, a current client, about the criminal background of another client with whom the plaintiff was entering into a business relationship. Lederman J. held at para. 42 that, “At the least, a solicitor cannot refrain from keeping material information from one client merely because disclosure would be harmful to the other.” However, Martin v. Goldfarb is distinguishable because it is in the context of negotiating a deal with a third party, not litigation between two clients.

10In the absence of authority, I must say at the outset that I do not accept the latter argument about duty without evidence that the plaintiffs had knowledge of the existence of a U.S. counsel when they retained the Steinberg firm and that the presence of the U.S. counsel meant something to them. It is my view that foreign counsel like Mr. Garellek are retained by law firms, not to be solicitors to any particular client, but to provide counsel to the firm where the relevant foreign law or facts having a connection to the foreign jurisdiction is at issue. This type of arrangement is more akin to an agency relationship than a solicitor-client relationship. Mr. Garellek would not have considered the plaintiffs as clients by virtue only of his being retained by the Steinberg firm. It is common practice for lawyers and law firms to refer clients to other lawyers and firms with more expertise, experience, resources or just more time to take on the file. While it may not be common to put those lawyers names on the letterhead, it does not change the nature of the relationship.

11It is useful to remember that the leading cases on disqualifying solicitor conflict, R. v. Neil (2002), 2002 SCC 70, 168 C.C.C. (3d) 321 (S.C.C.), MacDonald Estate v. Martin, 1990 32 (SCC), [1990] 3 S.C.R. 1235 (S.C.C.), Davis, Ward & Beck v. McKenzie (1998), 1998 5083 (ON CA), 40 O.R. (3d) 257 (C.A.) and Chapters Inc. v. Davies, Ward & Beck LLP, 2001 24189 (ON CA), [2001] O.J. 206 (C.A.), start the inquiry with the question whether the “tainted” lawyer received confidential information attributable to a solicitor-client relationship relevant to the matter at hand. The receipt of such information seems to be (and reasonably so, in my view) a sine qua non for continuing the inquiry. The next step is whether there is a risk that the confidential information will be used to the prejudice of the client.

12There is a presumption that lawyers who work together share confidences. The court will draw the inference that a “tainted lawyer’s” firm possesses the confidential information disqualifying its partners and associates from acting unless the court is satisfied on the basis of convincing evidence that steps have been taken to establish a Chinese wall or a cone of silence to foreclose such sharing of confidences. See Inron Contracting Limited v. Whitebread (2001), 56 O.R. (3d) (Sup. Ct.). The inference that lawyers share information is a rebuttable presumption.

13In other words, the courts implicitly recognize that a tainted lawyer could conceivably have untainted partners. Rule 2.05(4) of the Rules of Professional Conduct, The Law Society of Upper Canada, reads as follows:

2.05(4) Where the transferring member actually possess relevant information respecting the former client that is confidential and that, if disclosed to a member of the new law firm, may prejudice the former client, the new law firm shall cease its representation of its client in that matter unless

(a) the former client consents to the new law firm’s continued representation; or

(b) the new law firm establishes that it is in the interests of justice that it act in the matter, having regard to all relevant circumstances, including,

(i) the adequacy and timing of the measures taken to ensure that no disclosure to any member of the new law firm of the former client’s confidential information will occur,

(ii) the extent of prejudice to any party,

(iii) the good faith of the parties,

(iv) the availability of suitable alternative counsel, and

(v) issues affecting the public interest.

14The thrust of Inron Contracting Limited [supra] was that the tainted lawyer may not have tainted his partners if his partners had moved expeditiously to insulate themselves.

15The statement of the law by Granger J. in Moffat v. Wetstein (1996), 1996 8009 (ON SC), 29 O.R. 371 (Gen. Div.) at para. 46 is also instructive and relevant to the issue at hand and it reads as follows:

The onus is on Peat Marwick [the defendant/applicant], as the party seeking to remove McCarthy Tétrault as solicitor of record, to demonstrate that David Thompson, the lawyer, received confidential information attributable to a solicitor and client relationship and relevant to a matter at hand, and that there is a risk that it will be used to the prejudice of Peat Marwick. The information that causes Peat Marwick concern, namely, partnership agreements, financial structure, and litigation philosophy is not sufficiently related to the matter at hand to create a disqualifying conflict.

16In Manville Canada Inc. v. Ladner Downs (1993), 1993 955 (BC CA), 100 D.L.R. (4^th) 321 (B.C.C.A.), the Court addressed a situation where three independent Canadian firms collaborated on a fourth practice to carry on a separate practice outside of Canada. McEachern C.J.B.C. noted at paragraph 24 that the inference that lawyers working together will share information refers to perceptions of practicing partnership or association, not distant affiliations. Paragraphs 25 - 26 and 36 - 37 are relevant to the case before me:

[The appellant argues] that where firms present themselves as being affiliated, regardless of the real nature of their relationship, they must be treated as one firm for the purposes of the confidentiality rule.

In my view, it will sometimes be possible, just from the fact of affiliation, to infer a risk of disclosure of confidential information, but that question must be considered by the mythical reasonable person not in a vacuum, but upon a consideration of how the parties actually carry on their practices. …

It is apparent that in a case where the lawyers are practicing in the same law firm, the heavy burden of proof will not usually be satisfied merely on the say-so of the lawyers. The reasons for this are that the client cannot disprove the oath of the lawyers. The reasons for this are that the client cannot disprove the oath of the lawyers, and a simple “trust me” would not likely satisfy the natural skepticism of a reasonably informed person, nor would such assurance dispel the appearance of conflict.

The test must be the same when lawyers are merely affiliated in an international law firm, that is to say there must be confidence that the client’s information will not become available to be used against him or her. Such an assurance must withstand the scrutiny of reasonably informed persons but the burden of proof may be less if the lawyers are not actually working together in a conventional practice. Whether this level of confidence can be maintained when lawyers with confidential information are only affiliated indirectly in an international partnership can only be decided upon a careful consideration of the arrangements made between the firms. [My emphasis.]

17I would not myself be prepared to find that the presence on a law firm’s letterhead of a foreign counsel, who has acted for a party in the subject proceeding, necessarily results in disqualifying conflict of interest. The mere presence of a name on a firm’s letterhead does not automatically make that person a member of the firm, nor does it automatically create a solicitor-client relationship with its incumbent duties.

18Mr. Garellek’s relationship with the Steinberg firm is limited to a referral arrangement where the firm refers American cases to Mr. Garellek and Mr. Garellek refers Canadian cases to the Steinberg firm. The Steinberg firm states at para. 3 of its factum, “There is no sharing of files, confidential information or fees between the firms. Mr. Gladman has no evidence to the contrary.” Apart from Mr. Garellek’s name on the letterhead, Mr. Gladman has provided no other evidence that he is a member of the firm.

19In Smith v. Salvation Army in Canada (2000), 50 C.P.C. (4^th) 331 (Ont. Sup. Ct.), Gillese J. (as she then was) addressed a situation similar to the facts before me. In that case, the firm Cavalluzzo Hayes hired the firm Siskinds to act as its agent in filing and serving motion materials. Siskinds met with Cavalluzzo Hayes’s clients, the plaintiffs, to swear the affidavits for a total of twenty-four minutes. Siskinds invoiced Cavalluzzo Hayes for their time. Six days later, the defendants hired Siskinds to represent them in an action involving Cavalluzzo Hayes’s clients, the plaintiffs. Gillese J. found that there was no solicitor-client relationship between Siskinds and the plaintiffs, that Cavalluzzo Hayes was Siskinds client, and that Siskinds was purely an agent for Cavalluzzo Hayes. Since there was no solicitor-client relationship, the court should not presume that confidential information was imparted. Gillese J. held that there was no conflict of interest.

20In the case before me, the connection between Mr. Gladman and the plaintiffs is even further removed than in Smith v. Salvation Army in Canada. Mr. Garellek has never done any work directly or indirectly for the plaintiffs, nor has the Steinberg firm done any work for Mr. Gladman. The only work done by Mr. Garellek for the Steinberg firm has been on unrelated matters for unrelated third parties, and even then this was on a referral basis. There was no solicitor-client relationship in Smith v. Salvation Army in Canada, a case with a much closer connection between the parties and the solicitors than the case before me.

21However, in Schober v. Walker, [2003] B.C.J. No. 1161 (S.C.), the Court addressed the situation of former partners working for opposing parties. In 2000, Ms. Walker retained Mr. Maxwell of Maxwell, Schuman and Company to advise her on an account. Subsequently, Maxwell and Schuman ended their partnership in June 2002; however they continued to practice out of the same premises. Ms. Walker then hired Mr. Schuman to provide an expert report on the account in dispute in Schober v. Walker litigation. Ms. Walker believed that she was retaining the Maxwell, Schuman and Company firm when she hired Mr. Schuman in 2002. The Court found at para. 17 that the former partners “were still holding themselves out to the public as a partnership or at the very least as two lawyers working together in the same firm.” As such, they were presumed to have shared confidences and found to be in a conflict of interest.

22Schober v. Walker is distinguishable. In that case the lawyers were actually members of the same firm in the recent past, they continued to share physical space, and they did not implement adequate procedures or practices to ensure confidential information was not shared. In comparison, Mr. Garellek has never been a member of the Steinberg firm, and he has separate offices in an independent firm in a foreign country. I find it hard to fathom what measures the Steinberg firm or Mr. Garellek could implement to ensure no conflicts of interest arose when neither one had control of the other’s independent practice.

23I find the connection between Mr. Gladman and the Steinberg firm to be too remote to constitute a solicitor-client relationship. At most, Mr. Garellek acted as agent for the Steinberg firm; he was not a member of the firm. Since Mr. Garellek was not a member of the Steinberg firm, there is no presumption of shared confidences, and the firm is not presumed to be restricted from acting against Mr. Gladman. None of the work referred to the Steinberg firm or to Mr. Garellek was related to Mr. Gladman or this action.

24In the absence of a solicitor-client relationship, there is no presumption of shared confidences. If there is no presumption of shared confidences, then there must be very compelling evidence to persuade me that “a reasonably informed person” would not be satisfied that no use of confidential information by the Steinberg firm would occur before I find there is a conflict of interest.

25There is no evidence that any confidential information has been communicated to the Steinberg firm about Mr. Gladman from Mr. Garellek or vice versa from the Steinberg firm to Mr. Garellek. In fact, the Steinberg firm has deposed that they do not share files, or confidential material generally with Mr. Garellek. The Steinberg firm has also deposed that the Steinberg firm and Mr. Garellek are completely separate law offices.

26Especially considering the remote connection between Mr. Gladman and the Steinberg firm, Mr. Gladman must provide more than a bare statement that confidential information may have passed or might pass in the future to the Steinberg firm. In Moffat v. Wetstein (1996), 1996 8009 (ON SC), 29 O.R. 371 (Gen. Div.), Granger J. held at para. 102:

I am not suggesting that a client must disclose the exact specifics of the confidential information it seeks to protect, but some particulars are warranted, given the remedy sought. A party does not meet its onus of establishing that the prior relationship is sufficiently related to the present retainer, merely by making a bald assertion that the past relationship has provided the solicitor with access to insurance policies, partnership agreements, and litigation philosophy. At the very least, in order to discharge its onus, the client should describe how the solicitor gained that information, and why it is related to the matter at hand. It is also important to look at the dynamic of the past relationship.

27In R. v. Neil (2002), 2002 SCC 70, 168 C.C.C. (3d) 321 (S.C.C.), Binnie J. addressed the duty of loyalty in the context of national firms. He pointed out practical difficulties for large firms and national firms with the conflict searches and restriction on mobility. However, Binnie J. went on to hold at 337 that despite these difficulties, “it is the firm not just the individual lawyer, that owes a fiduciary duty to its clients.” However, in the case before me, there is no national firm nor is there an international firm; Mr. Garellek is not a member of the Steinberg firm. As such he is not presumed to have shared confidences with the Steinberg firm.

28It is upon the presumption of shared confidences that I find the Master erred. The Master appears to base her decision upon the inability of the Steinberg firm to reassure her that information would not be shared in the future. She was not satisfied that she received all the assurances that she needed from the Steinberg firm about the likelihood of transmission of information between Mr. Garellek and the Steinberg firm. Since Mr. Garellek was not a member of the Steinberg firm, the firm did not bear the burden of proving that there was no sharing of confidential information. The Steinberg firm is not required to rebut a presumption of shared confidences. It is Mr. Gladman who has the burden of proof to show on a balance of probabilities that the Steinberg firm is in possession of confidential information.

29I find that Mr. Gladman has not shown on a balance of probabilities that the Steinberg firm is in possession of confidential information and therefore in a conflict of interest. Mr. Garellek is not a member of the Steinberg firm, Mr. Gladman is not a client of the Steinberg firm, and Mr. Gladman has provided no evidence to show that the Steinberg firm had, has or will have his confidential information.

30Mr. Gladman has, for whatever reason, communicated with Mr. Garellek and obviously discussed this matter with him. The extent to which the matter was discussed is not clear, but there is no doubt that there was some discussion.

31I find that I must respectfully disagree with the Master’s finding that,

a reasonably informed person could conclude that relevant confidential information pertinent to Mr. Gladman, might in the future pass to Steinberg Morton Frymer and, also, that the appearance of conflict is here well-founded. Further and, again, on the evidence before me, there is no reason for me to prefer the plaintiffs’ right to choice of counsel over that of Mr. Gladman.

DISPOSITION

32The appeal is therefore granted.

COSTS

33Brief written submissions on costs are to be made within 20 days of the release of these reasons.

Pitt J.