Performance Diversified Fund v. Flatiron et al

CITATION: Performance Diversified Fund v. Flatiron et al, 2014 ONSC 6892

COURT FILE NO.: 447/14

DATE: 20141127

SUPERIOR COURT OF JUSTICE – ONTARIO

DIVISIONAL COURT

RE: Performance Diversified Fund, Plaintiff

AND:

Flatiron GP Inc., Flatiron Fund Management Ltd., Flatiron Capital Management Partners, Parm Kalirai, Steve Duenkler, Michelle Moore, Kalirai Management Corporation, Duenkler Management Corporation, Mimo Management Corporation, Sean Chopra, Sprott Inc., Sprott Asset Management LP, Front Street Capital 2004, Front Street Management Inc., and KPMG LLP, Defendants

BEFORE: Conway J.

COUNSEL: Harvin Pitch, for the Plaintiff/ moving party

James D.G. Douglas, for Flatiron GP Inc., Flatiron Fund Management Ltd., Flatiron Capital Management Partners, Kalirai Management Corporation, Duenkler Management Corporation, Mimo Management Corporation, Sprott Inc., Sprott Asset Management LP, Front Street Capital 2004 and Front Street Management Inc., Defendants/responding parties

Deborah E. Palter and Michael Shakra, for Steven Duenkler, Defendant/responding party

Melissa MacKewn, for Parm Kalirai and Michelle Moore, Defendants/responding parties

HEARD: November 25, 2014

ENDORSEMENT

[1] The plaintiff (“Performance”) seeks leave to appeal the decision of D. M. Brown J. dated July 14, 2014 removing the Teplitsky, Colson LLP law firm (the “Firm”) as Performance’s lawyers of record in this action.

Overview

[2] In the fall of 2012, Performance sought the advice of Martin Teplitsky with respect to its investment in the Flatiron Market Neutral LP hedge fund (the “Fund”). The Fund had been owned and managed by the Flatiron defendants. It was acquired by the Sprott defendants in August 2012. Mr. Teplitsky initially wrote some letters and subsequently opened a file for Performance on December 18, 2012.

[3] Also in December 2012, Shawn Chopra, a securities trader for the Fund, sought legal advice about his employment situation. He consulted with Michael Winterstein, another lawyer at the Firm. During the course of that retainer, Mr. Chopra provided Mr. Winterstein with financial and other information about the Fund (the “Information”).

[4] When Mr. Chopra’s file was opened on December 6, 2012, a conflict search did not disclose that Mr. Teplitsky was already giving advice to Performance with respect to the Fund.

[5] Mr. Winterstein completed his work for Mr. Chopra by the end of February 2013.

[6] This action was commenced by Performance in June 2013. Mr. Chopra was initially included as a defendant (a conflict search inadvertently had not been conducted on his name). Mr. Chopra’s counsel Helen Daley brought the conflict to Mr. Teplitsky’s attention. He told her he was unaware that the Firm had previously acted for Mr. Chopra and said he would send Mr. Chopra’s file to storage. Ms. Daley was not satisfied and brought a motion to remove the Firm as Performance’s counsel of record. Ultimately, Mr. Chopra was released from the action and his motion was withdrawn.

[7] The Sprott and Flatiron defendants also brought a motion to disqualify the Firm. They claimed that the Firm had acquired confidential information about the Fund from Mr. Chopra. They argued that this put the Firm in a conflict position - not only with respect to Mr. Chopra, but also with respect to them as affected parties.

The Motion Judge’s Decision

[8] The motion judge reviewed the law on disqualification of counsel due to conflict of interest and misuse of confidential information. He recognized that the defendants were not former or current clients of the firm and could not meet the two part test in MacDonald Estate v. Martin, 1990 32 (SCC), [1990] 3 S.C.R. 1235. He concluded that they were not entitled to the expanded protection given to “near clients” under the Law Society rules and case law. He rejected the broad definition of “client” used in Roadrunner Apparel Inc. v. Gendis Inc., 2006 MBCA 137. He acknowledged that the defendants never gave the Information to the Firm and that Mr. Chopra did not give it to the Firm on their behalf.

[9] However, he disqualified the Firm from acting for Performance because of his concerns with its conflict check system. He held that the Firm should never have taken the retainer from Mr. Chopra since Mr. Teplitsky was already acting for Performance against the defendants. He reasoned that if the conflict check had been done properly, the Firm would not have accepted the Chopra retainer and would not have obtained the Information from him. He relied on a statement of Binnie J. in Celanese Canada Inc. v. Murray Demolition Corp., 2006 SCC 36, at para. 46, to conclude that the Firm, as opposing solicitors, possessed “relevant and confidential information attributable to a solicitor-client relationship to which they had no claim of right whatsoever.” He held that permitting the Firm to act under these circumstances would undermine public confidence in the administration of justice.

Analysis

[10] Leave to appeal must be granted pursuant to Rule 62.02(4)(b).

[11] There is good reason to doubt the correctness of the motion judge’s order. The case law is designed to protect a client who provides confidential information to his lawyer from having that information used against him in another lawsuit. As stated by Binnie J. in Celanese, at para. 34, “Parties should be free to litigate their disputes without fear that their opponent had obtained an unfair insight into secrets disclosed in confidence to their legal advisors” (my emphasis).

[12] In this case, the defendants were not clients of the Firm and had not disclosed the Information to the Firm. This was not a complaint by Mr. Chopra about the misuse of the Information. This was also not a case (like Celanese) where the Firm had come into possession of information that the defendants had disclosed in confidence to their own legal advisors. The motion judge acknowledged that the defendants did not meet the established test but nonetheless disqualified the Firm based on his public confidence concerns. Whether he was entitled to do so is open to very serious debate and warrants a higher level of judicial authority.

[13] The proposed appeal further involves matter of such importance that in my opinion leave to appeal should be granted. It is critical for litigants to know when and on what basis the law firm of their choice can be disqualified by an opposing party.

Decision

[14] Leave to appeal is granted.

[15] Costs of this leave application are fixed at $7500, all inclusive. The disposition of these costs is left to the panel hearing the appeal.

Conway J.

Date: November 27, 2014

CORRECTION NOTICE

Corrected decision: the text of the original endorsement was corrected on December 9, 2014, and the description of the correction is appended:

On the first page of the endorsement under the heading of “counsel”, the name John A. Douglas has been corrected to read James D.G. Douglas.