COURT FILE NO.: 526/08

DATE: 20081128

ONTARIO

SUPERIOR COURT OF JUSTICE

DIVISIONAL COURT

B E T W E E N:

IN THE MATTER OF THE BANKRUPTCY OF 1964 BAY INC. f/k/a/

BUDGET CAR RENTALS TORONTO LIMITED, A CORPORATION INCORPORATED UNDER THE LAWS OF THE PROVINCE OF ONTARIO, CARRYING ON BUSINESS IN THE CITY OF MISSISSAUGA, IN THE PROVINCE OF ONTARIO

Barbara L. Grossman and Reena Goyal, for the Moving Parties, Coachman Insurance Company and Fraser Milner Casgrain

Mark Walli, for the Responding Parties: Ronald Bresler, Eric Bresler, Rita Bresler, Samuel Bresler, Lola Goldblum, Raymond McCarron, Harry Edgar and Norman Walter McNamee

HEARD at Toronto: November 28, 2008

janet wilson J.:

1Should independent counsel be appointed in a law firm when a question of conflict of interest arises? Is counsel obliged to notify opposing counsel promptly after becoming aware of a conflict of interest?

2These are the questions raised in the interlocutory decision of Morawetz J. dated October 9, 2008, for which motion for leave to appeal is being sought. The motion is dismissed, as the applicants have failed to meet the test for leave to appeal, pursuant to either rule 62.02(4)(a) or (b) of the Rules of Civil Procedure.

3Morawetz J., in lengthy and carefully crafted reasons, concluded with some reluctance in the facts and circumstances of this case that the applicant law firm, Fraser Milner Casgrain (FMC), should be removed as solicitors of record due to conflict. He reached this conclusion as a result of the transfer of a litigation associate from Stikeman Elliott (SE) to FMC in December 2007. SE represents the moving parties in this bankruptcy and in related contested proceedings. SE brought the motion seeking to have FMC removed as solicitor of record due to the conflict of interest.

4Morawetz J. granted the motion sought by SE and concluded at paragraphs 66 and 68 of his reasons:

[66] However, this prejudice [to FMC] must be considered in light of the prejudice to the Bresler Interests [represented by SE] and the conclusion that a reasonably informed person would not be satisfied that no use of confidential information would occur. This is the governing test and, in view of this conclusion, disqualification must follow.

[68] I have, in the result, determined that FMC has not established that it has taken all reasonable measures to ensure that no disclosure of the former client’s confidential information would occur and, consequently, the motion is granted and FMC is to be removed as counsel of record for Coachman.

5The conflict of interest, as a result of the transfer of the associate from SE was not immediately detected. It was, however, detected a few days after the transfer. An ethical screen was promptly put into place in accordance with the requirements of McDonald Estate v. Martin, 1990 32 (SCC), [1990] 3 S.C.R. 1235.

6Morawetz J. concluded that in the circumstances, the ethical screen prima facie was effectively put into place at the time the conflict arose. However, he outlines other facts and circumstances giving rise to concern with respect to the events that occurred at FMC after counsel for Coachman became aware of the conflict.

7First, counsel at FMC for the Coachman file, which gave rise to the conflict, discussed the issues of conflict of interest directly with the associate in question.

8Second, litigation steps were taken by FMC prior to notification of SE with respect to the conflict.

9Third, when the respondents initiated the motion requesting FMC to remove themselves as solicitors of record, counsel for FMC with carriage of the Coachman file discussed the FMC responding affidavit with the associate in question, and also assisted with its preparation.

62.02(4) (a)

10Counsel for FMC suggests that leave should be granted pursuant to rule 62.02(4)(a).

11She argues that there are conflicting decisions in other jurisdictions with respect to the issue of the failure to provide notice of a conflict to opposing counsel requiring clarification of this important issue by the Divisional Court. The cases referred to by counsel, which consider only the issue of notice include Bank of Montreal v. Dresler, 2002 NBCA 69, 224 D.L.R. (4^th) 337, Oxner v. National Life Insurance Co. of Canada Ltd., 2006 NSSC 161, 26 C.P.C. (6th) 276, and Rich v. Canada, 2001 NLCA 39, 2001 NFCA 39, 34 C.P.C. (5th) 260.

12The notice cases are distinguishable from the facts of this case. The only issue raised in the notice cases deals with whether the failure to provide notice alone is sufficient to require a firm to be removed as solicitor of record. The failure to provide timely notice was one factor of concern. Morawetz J. concluded in all of the circumstances FMC should be removed as solicitors of record. There is no conflict in the decision of Morawetz J. and the notice cases.

13The applicant also raises concern that Morawetz J. was not correct in his conclusion that an independent member of the firm should be responsible for all matters once a conflict is identified. This includes the implementation of protective measures and ensuring compliance, and responding to any court proceedings relevant to the conflict. In this case the lawyer with carriage of the file giving rise to the conflict assumed responsibility for these measures.

14In my view, there is no conflicting decision on the need for independent counsel to be appointed to manage any conflict issue. The decision is consistent with the comments made by Lax J. in Cartledge, a minor by his litigation Guardian v. Ground (1998), 1998 14696 (ON SC), 41 O.R. (3d) 376 (Gen. Div.). Morawetz J.’s decision makes practical sense.

15I also note that the Canadian Bar Association Task Force Report, dated August 2008, identifies the need for independent counsel to manage a conflict issue. The conflicts of interest tool kit prepared by the CBA Task Force on conflicts of interest states at page 267:

(3) Have an independent firm member assess the conflict and design and construct the confidentiality screen. The independent lawyer outside the immediate client service team must be available to monitor the screen’s effectiveness and address any difficulties.

16The report was released after the conflict arose, and after the motion was argued. A copy of the Task Force Report was provided by counsel to Morawetz J. before his decision was released.

17Independent counsel should deal with any issues arising with conflict in terms of setting up screening measures, ensuring that the screening measures are respected, and dealing with any litigation arising as a result of the conflict. The continued involvement of counsel with carriage of the file giving rise to the conflict taints what may well be non-substantive discussions. Involvement of an independent counsel is necessary to meet the objective test so that a reasonably informed person would be satisfied that no use of confidential information would occur.

18The appellant’s motion for leave to appeal pursuant to rule 62.02(4)(a) is dismissed. There are no conflicting decisions in an Ontario Court or a court of another jurisdiction warranting a review of this issue by a full panel of the Divisional Court.

62.02(4)(b)

19Counsel for FMC suggest that there is good reason to doubt the correctness of the order in question.

20I disagree.

21Morawetz J. outlines his concerns at paragraph 61 and 62 of his reasons as follows:

[61] In my view, the submissions of FMC do not, in the context of the objective test, provide the required clear and convincing evidence that FMC took all reasonable measures to prevent disclosure of the moving parties’ confidential information. The establishment of the Protective Screen should, at all times, have been undertaken by a member of the firm who was not engaged on the Coachman retainer which is directly adverse to the Bresler Interests. This concern was heightened by the continued participation of Mr. Bissell in responding to this motion.

[62] Further, the failure to promptly inform the moving parties of the conflict of interest or measures put in place in response to it, also causes concern, especially when additional litigation was commenced after the conflict was identified.

22I agree with the careful reasons of Morawetz J. In my view the applicants have failed to meet the test that there is good reason to doubt the correctness of his decision. This case is a fact-specific, discretionary, interlocutory decision. The principles outlined by the Supreme Court of Canada in Martin are clear and they were followed by the motions court judge.

23The applicants’ motion pursuant to rule 62.02(4)(b) is therefore dismissed.

24Parties agree that the losing party should pay costs fixed in the amount of $5,000.00, payable forthwith. Therefore, the applicant moving party shall pay the respondent these costs.

JANET WILSON J.

Date of Release: December 4, 2008

COURT FILE NO.: 526/08

DATE: 20081128

ONTARIO

SUPERIOR COURT OF JUSTICE

DIVISIONAL COURT