Gardiner Miller Arnold LLP v. Kymbo International Inc., 2007 ONCA 648

CITATION: Gardiner Miller Arnold LLP v. Kymbo International Inc., 2007 ONCA 648

DATE: 20070921

DOCKET: C45146

COURT OF APPEAL FOR ONTARIO

FELDMAN, CRONK and LANG JJ.A.

BETWEEN:

GARDINER MILLER ARNOLD LLP

Plaintiff (Respondent)

and

KYMBO INTERNATIONAL INC., KYMBO CANADA INC., VBX FINANCIAL INC., VANDERBOUX INC., CHRISLEA MARKETING INC., KTI VACATIONS INC., YVONNE LOUISE GURA, GREGORY V. GURA aka GREG GURA, HAIZEL GURA aka HAIZEL BRENES, ROMAN GURA SR., ROMAN ALLAN GURA, JOHN HOWARD TESKEY, VACATION BROKERS INC., RIDINGS FINANCIAL SERVICES INC., ANDREW J. MARKET Barrister and Solicitor, SCOTT M. SULLIVAN Barrister and Solicitor, and SULLIVAN, ISTL Barrister and Solicitors

Defendants (Appellants)

Paul J. Pape for the appellants

Mark H. Arnold, in person and as agent for the respondent, and Christopher J. Jaglowitz for the respondent

Heard: August 28, 2007

On appeal from the judgment of Justice Geoffrey B. Morawetz of the Superior Court of Justice dated March 1, 2006.

LANG J.A.:

[1] This is an appeal from the judgment of Morawetz J. in which he held the appellants liable to the respondent, a law firm, for fees owing to the respondent by its former clients.

[2] In essence, the trial judge concluded that, on the initiative and persistence of the appellants, who were defendants in a lawsuit brought by the law firm’s clients as plaintiffs, the appellants met with the plaintiffs to the lawsuit in the absence of counsel and agreed to settle their outstanding action. Since the trial judge found that the parties colluded in arriving at the settlement for the purpose of defeating the law firm’s claim for its outstanding fees of $105,647.98, he found the appellants jointly and severally liable for the law firm’s fees.

[3] The appeal challenges both the findings of the trial judge and his application of the law to those findings. For the reasons that follow, I would dismiss the appeal.

Background

[4] The appellants, John Howard Teskey, Vacation Brokers Inc. and Ridings Financial Brokers Inc. (collectively referred to as the Teskey Group) were the defendants in a claim referred to as the Kymbo action. That action was instituted by Kymbo International Inc., Kymbo Canada Inc., and Roman Gura Sr. and Roman Allan Gura (collectively referred to as the Gura Group). The action involved a multimillion dollar claim and counterclaim in which the parties accused each other of various breaches arising out of their respective roles in a time-share vacation business. Although the Teskey Group was represented in the Kymbo action, its lawyer was suspended from practice in the days leading up to the events at issue. The plaintiffs were represented by the respondent, Gardiner Miller Arnold LLP (GMA), principally through Mark Arnold.

Grounds of appeal

[5] The appellants argue that the trial judge erred because he made no specific finding that Mr. Teskey knew that the Gura Group owed fees to GMA at the time of the settlement and in finding that the purpose of the settlement was to defeat those fees.

[6] The appellants also argue that the trial judge impermissibly considered the merits of the Kymbo action, something he told counsel that he would not do. As well, they argue that the trial judge’s finding that the settlement was not commercially reasonable was unsupported by the evidence.

The trial reasons

[7] Before considering the issues raised by the appellants, it is helpful to review the reasons of the trial judge.

[8] To arrive at his result, the trial judge considered the parties’ positions in the Kymbo action at the time of the settlement to determine whether the settlement, which on its face provided for no exchange of money between the two Groups, was “commercially reasonable”. His review considered the conduct of the parties in the Kymbo action, particularly their conduct during the period of October 6 to 14, 2004 – the period when the settlement was reached.

[9] The trial judge noted the following events. On Thursday, October 6, Mr. Teskey phoned Mr. Gura Sr. to suggest they meet in the absence of counsel to discuss a settlement; Mr. Gura Sr. did not agree. On Friday, October 8, Mr. Teskey called Mr. Gura Sr. again. On Saturday, October 9, during another telephone call, the parties agreed to meet on Sunday, October 10. At that meeting, the parties reached an “agreement in principle”. On Monday, October 11, the parties spoke again. On Tuesday, October 12, Mr. Teskey prepared and faxed a proposed offer to settle to the Gura Group. On Wednesday, October 13, the Gura Group communicated its acceptance of that offer. Finally, the Teskey Group executed the offer below the signatures of the Gura Group indicating that the Kymbo “claim and counterclaim is now fully settled … as reconfirmed by the below [Teskey] signatures”.

[10] The proposed terms of settlement provided for the dismissal of the claim and counterclaim and for the transfer of all documents to the Teskey Group, including all membership documentation and all promissory notes, which had a face value in excess of $1 million U.S.[^1] The offer specified that the Gura Group would pay no money to the Teskey Group; however, it was silent on whether the Teskey Group would pay any money to the Gura Group. The offer also provided for the dismissal of the action without costs, that the parties would bear their own costs, and that any costs orders outstanding would be nullified. Finally, the offer required both Groups to keep the terms of the settlement confidential.

[11] In considering whether the acceptance of these terms amounted to an agreement to unfairly defeat GMA’s accounts, the trial judge considered the context in which the settlement was reached and whether the “walk-away” settlement described in the agreement was commercially credible.

[12] On this issue, the trial judge noted that, as recently as October 4, the Gura Group had instructed GMA to submit an offer to settle providing that the Teskey Group pay the Gura Group $500,000. This offer was less than the Gura Group’s earlier offer to settle for $650,000. Mr. Gura Sr. was reluctant to agree to the new offer because he thought the amount was too low.

[13] On the reasonableness of the settlement, the trial judge also considered the opinion of the Gura Group’s expert chartered accountant, David Burkes, that the Gura claim against the Teskey Group was worth more than $1.2 million. The trial judge also noted that, at the time of the settlement, the Gura Group had an interlocutory injunction in its favour requiring the Teskey Group to hold $400,000 U.S. in trust for the Gura Group, which was granted on evidence that the Teskey Group had recovered that amount from vacation time-share customers by redirecting payments away from Kymbo.

[14] The trial judge was also cognizant that, while the Teskey Group had obtained an order against the Gura Group for security for costs based on the Guras’ individual bankruptcies and Kymbo’s lack of assets in Ontario, the quantum of those costs had not been determined pending the release of a reserved decision on final injunctive relief, which the Gura Group was optimistic about winning.

[15] Additionally, at the time of the settlement, the Gura Group had expressed no loss of confidence in GMA’s representation. Indeed, days before the settlement, the Gura Group expressed no wish to negotiate with Mr. Teskey Sr., whom Mr. Gura Jr. described as a “snake” who had devastated their business. As well, the Guras had instructed Mr. Arnold to write counsel for the Teskey Group specifically confirming that Mr. Teskey “is to have no communication directly with my clients.”

[16] In the meantime, on Friday, October 8, counsel for the Teskey Group was no longer responding to communications. GMA learned that day that the Teskey Group’s counsel had been suspended by the Law Society of Upper Canada. The trial judge found that this information did not come to Mr. Teskey’s attention until Wednesday, October 13.

[17] When the Gura Group uncharacteristically did not respond to Mr. Arnold’s telephone calls at the beginning of the week of October 11, he became concerned that the Groups were negotiating in his absence. On October 13 at 9:43 a.m., Mr. Arnold faxed Mr. Teskey notifying him that GMA would commence legal proceedings against the Teskey Group to recover the amount of any outstanding account with the Gura Group if the parties to the litigation reached a direct settlement.

[18] Later that day, GMA obtained a charging order and a solicitor’s lien against any settlement proceeds. Mr. Arnold faxed the charging order to the Teskey Group between 4:30 and 5:00 p.m. At 5:44 p.m., GMA received a communication that a new law firm was now acting on behalf of the Gura Group. At 6:16 p.m., the Gura Group faxed its acceptance of the offer to the Teskey Group.

[19] During October 13 and 14, the Gura Group obtained all signatures required to accept the Teskey offer and the Teskey Group (apparently thereafter) “reconfirmed” the settlement by signing the offer below the signatures of the Gura Group.

[20] In making his factual findings, the trial judge rejected the evidence of Mr. Gura Jr., Mr. Gura Sr. and Mr. Teskey. He accepted the evidence of Mr. Arnold, including admissions by the Guras to Mr. Arnold, that Mr. Teskey made a settlement payment to the Guras. As well, he accepted the evidence of Mr. Burkes and Mr. McClogan, both of whom were independently retained by the Gura Group to give litigation support. In particular, the trial judge accepted that Mr. Gura Sr. had made separate admissions to these two witnesses that the Teskey settlement included a payment to the Gura Group, but that “no one would find [the money]” and “no one would ever know” about the payment.

[21] The trial judge concluded that Mr. Gura Sr. entered into “secret negotiations” with Mr. Teskey on October 10, 2004 and that the Gura Group and the Teskey Group “reached an agreement … which was subsequently reduced to writing and executed on October 13 and 14, 2004.” He found that the Teskey Group “was aware of the Charging Order before the settlement was consummated” and that it had made a secret payment to the Gura Group. He determined that the Groups’ evidence that the Teskey Group paid nothing for the settlement defied commercial common sense for several reasons, which I will discuss later in these reasons.

[22] Finally, the trial judge concluded that the two Groups:

… settled this matter in secret and that they colluded to ensure that the settlement was documented in a way that would not reflect any financial consideration being paid by the Teskey Group to the Gura Group. The settlement defies commercial reality. It is a settlement that the Gura Group could have achieved by simply walking away from the action. The settlement did not have to be done in secret, without informing counsel.

[23] On this basis, the trial judge applied the law that was put forward by counsel. In particular, the trial judge applied Dicarllo v. McLean (1915), 33 O.L.R. 231(S.C. (A.D.)), in which Middleton J. explained two potential avenues for liability:

The cases fall into two distinct classes. If a solicitor has a lien upon the proceeds of litigation for his costs, and gives notice of that lien to the opposite party, and after such notice money is paid over to the client, the Court will, in general, upon motion, compel the party paying to pay the solicitor's costs. ...

The other class of cases is where upon the facts it is shewn that the parties have acted collusively. In this case, the defendant renders himself liable to pay the full amount of the solicitor's bill, his liability being in no way limited to the amount paid to the plaintiff.

[24] At trial, GMA did not rely on the first avenue, although relief may have been available on that basis. Instead, GMA focussed on collusion.

[25] The law was not at issue. The trial judge applied the Dicarllo principle based on the earlier authority of Price v. Crouch (1891), 60 L.J.N.S. Q.B. 767, which held that collusion denotes “an agreement between two parties, with the knowledge that they are doing an unfair thing in depriving a third party of a right he had”.

[26] Accordingly, the trial judge asked himself whether the Teskey Group had notice of GMA’s claim, whether the Teskey Group had agreed to make or had made a payment to the Gura Group, and whether there was an agreement between them to deprive GMA of the fees to which it was entitled.

[27] Since the trial judge answered these three questions in the affirmative, he held the Teskey Group to be jointly and severally liable for GMA’s costs.

[28] Given the finding of collusion, and in accordance with the principle set out in Dicarllo, it was unnecessary for the trial judge to determine the quantum of the settlement payment made by the Teskey Group to the Gura Group. On this appeal, counsel sought to argue for the first time that the remedy for collusion is unfair and that the court should revisit the law as set out by this court in 1915. This issue was not challenged at trial and was not appropriately raised on appeal.

[29] Accordingly, I will proceed to consider the appellants’ challenge to the factual underpinnings for the trial judge’s conclusions.

Analysis

[30] The appellants argue that the finding of collusion cannot stand because the trial judge made no specific finding that the Teskey Group knew the Gura Group owed fees to GMA at the time it reached the settlement. Further, they argue that the trial judge erred in finding that the purpose of the settlement was to defeat GMA’s claim.

(1) Knowledge

[31] In my view, if not explicit, it is implicit in the trial judge’s reasons that he was satisfied the Teskey Group knew of the Gura Group’s financial obligations to GMA. That information was known by Mr. Teskey when he negotiated the “agreement in principle” on October 10, discussed the settlement with the Gura Group on October 11, prepared the offer to settle on October 11 and 12, and executed the offer to settle (by which time he was also in receipt of GMA’s charging order).

[32] The finding of knowledge is supported by a number of circumstances that combine to lead inevitably to the necessary inference that the Teskey Group had knowledge of the outstanding accounts.

[33] First, it is apparent that the Groups discussed legal fees when negotiating the settlement. The draft offer to settle makes no less than four references to costs by providing that (i) the parties’ respective claims would be dismissed without costs; (ii) the Divisional Court proceedings would be dismissed without costs; (iii) any outstanding or pending costs orders[^2] would be nullified; and (iv) that all parties would bear their own legal costs. Accordingly, the question of costs and legal charges was considered both at the time the settlement was negotiated and when it was reduced to writing.

[34] Second, the Teskey Group would have been alive to the issue of GMA’s costs because the terms of the October 5 offer specifically stipulated that the $500,000 settlement payment was payable to GMA in trust and further provided that the parties would bear their own costs. Mr. Teskey would have appreciated this direction was needed to protect GMA’s fees because Mr. Teskey was an experienced litigant who acknowledged that he had “been involved in more than a hundred litigations before the court.”

[35] Third, while Mr. Teskey gave evidence at the trial that the Guras did not tell him on October 10 about any outstanding accounts to GMA, and that in any event, he believed the Gura Group to be financially strong, the trial judge rejected his evidence generally, which included this evidence. The rejection of Mr. Teskey’s evidence is supported by the fact his trial evidence was inconsistent with the affidavit he filed just a few months before the settlement on his motion seeking security for costs from the Gura Group. In that affidavit, which was filed as an exhibit at trial, Mr. Teskey relied on the bankruptcies of the individual Guras and the inadequacy of Kymbo’s assets in Ontario. He knew that the Gura Group was financially strapped.

[36] Fourth, Mr. Teskey used the Gura Group’s financial difficulties as a bargaining chip during the negotiations. According to Mr. Gura Sr., Mr. Teskey told the Guras at the October 10 meeting that the Teskey Group had funds to continue the litigation for years, but queried where the Gura Group would find the money to see the litigation to its conclusion, which Mr. Teskey estimated would cost $500,000.

[37] Accordingly, taken together, this evidence was more than sufficient to support a finding that the Teskey Group knew about GMA’s outstanding fees on October 10.

[38] However, even if this evidence was not clear, the parties only arrived at an “agreement in principle” on October 10 and on October 11 continued their discussions. As well, the terms of the settlement, which were somewhat complex, were not reduced to writing until October 12. Interestingly, Mr. Teskey incorporated those terms not into minutes of settlement, which may have suggested a pre-existing agreement, but rather into an offer of settlement, which implies that a settlement had not yet been concluded. Moreover, even after the Gura Group accepted the offer, the Teskey Group felt the need to counter-sign the offer to signify its agreement. By that time, and even before the Gura Group completed its signatures, the Teskey Group knew about the charging order.

[39] Accordingly, I see no basis on which to interfere with the trial judge’s conclusion that the Teskey Group had knowledge of the Gura Group’s debt to GMA at the time of settlement.

(2) Purpose

[40] However, even accepting that the Teskey Group knew about the outstanding GMA accounts, the appellants argue that there was no evidence to support a finding that a purpose of the settlement was to defeat GMA’s claims. Again in my view, a finding of purpose is both explicit and implicit in the trial judge’s reasons. Not only did the trial judge specifically find “purpose” because Mr. Teskey entered into a “secret deal”, but he reiterated that finding in his reasons for refusing to reopen the trial.

[41] In coming to this conclusion, the trial judge relied on the inference to be drawn from the Groups’ conduct in keeping both the settlement and the payment secret. In other words, if the Groups took steps to keep the terms of the settlement and payment secret, they must have done so for the purpose of defeating GMA’s accounts.

[42] The appellants, however, argue that the settlement was not secret but, instead, that it was expeditiously communicated to GMA and promptly followed by the Gura Group’s retainer of new counsel. For several reasons, this argument is not supported by the evidence.

[43] First, Mr. Teskey persisted in seeking a direct meeting with the Guras in the absence of their counsel. Mr. Teskey provided alternative explanations for this, namely, it was either because Mr. Arnold refused to meet with him in the absence of his lawyer or because the Teskey Group’s counsel had been suspended from practice. Neither of these explanations survives scrutiny.

[44] Before the settlement meeting, Mr. Teskey requested a meeting among himself, Mr. Arnold, and the Guras in the absence of Mr. Teskey’s lawyer. Mr. Arnold properly explained that this was inappropriate because Mr. Teskey was represented by counsel. Thus, Mr. Teskey knew he could not meet with Mr. Arnold as long as he was represented by counsel. Accordingly, if Mr. Teskey no longer had counsel – and he claimed that he knew his lawyer was suspended – then he also knew there was no impediment to meeting with Mr. Arnold and the Guras. Significantly, Mr. Teskey no longer sought such a meeting.

[45] In any event, the trial judge found as a fact that Mr. Teskey did not learn about his lawyer’s suspension until October 13, three days after the October 10 meeting. Since he believed himself to be represented, clearly Mr. Teskey wanted to meet with the Guras in the absence of any lawyers and presumably with the intention of not informing the lawyers about the meeting. This intention is reflected in Mr. Teskey contacting the Guras directly, even though he had specific instructions not to do so.

[46] In either event, the trial judge was entitled to describe the meeting as one that was kept “secret” from the lawyers.

[47] In addition to the secrecy of the meeting, both the settlement and its terms were kept secret.

[48] Mr. Arnold was not advised of the fact of a settlement until late in the day on October 13 and only contemporaneously with the acceptance of the Teskey offer to settle. Clearly, the Teskey Group did not want GMA to learn about the fact of the settlement any earlier, presumably so that it could complete the negotiations and execution of the offer of settlement before Mr. Arnold had the opportunity to take any recourse.

[49] Moreover, when the fact of the settlement was disclosed to Mr. Arnold, both Groups refused to disclose its terms. Indeed, the settlement specifically provided that its terms would remain confidential. Only by obtaining an order for production was GMA finally able to ascertain the terms of settlement.

[50] The Groups’ determination to keep the settlement secret is also evident from the haste with which it was completed. On Sunday, the parties first met. On Monday, they spoke again. On Tuesday, Mr. Teskey presented the Gura Group with a draft offer to settle, which required acceptance by 6:00 p.m. on Wednesday. The settlement was accomplished with remarkable expedition, particularly compared to the lengthy history of the litigation. While Mr. Teskey tried to explain this by saying that he intended to be away the following week, such a brief planned absence does not serve to explain the haste with which the Groups acted.

[51] I conclude that the behaviour of the Teskey and Gura Groups supported the trial judge’s finding that the purpose of the settlement was to defeat GMA’s accounts.

(3) Commercial reasonableness

[52] The appellants also take exception to the trial judge’s finding that the accepted offer was not commercially reasonable, at least, from the Gura Group’s perspective. On this issue, the appellants put forward two arguments. First, they argue that because the trial judge informed them that he would not be considering the merits of the Kymbo action, it was unfair for him to determine the commercial reasonableness of the settlement. Second, the appellants argue that the evidence did not support the trial judge’s finding about the commercial reasonableness of the settlement, which was largely based on his finding of a secret payment and his conclusion that the Gura Group could have walked away from the action. I do not accept these arguments.

[53] On the first point, the appellants brought a motion before the trial judge after the delivery of his reasons seeking to reopen the trial on the issue of the merits of the Kymbo action. In refusing to reopen the trial, the trial judge comprehensively explained the distinction between dealing with the Kymbo action on its merits, which he did not do in his original reasons, and considering the totality of the circumstances surrounding the settlement, including the parties’ conduct, which he did take into account.

[54] The trial judge did not mislead counsel in any way. As he said, he made no determination about the merits of the Kymbo action. The trial judge simply considered the behaviour of the parties because that behaviour explained why the settlement was conducted in secret, rendering it more likely that the Teskey Group paid the Gura Group money in order to achieve a settlement. I do not accept the submission that the appellants were denied trial fairness.

[55] On the second point of commercial reasonableness, an issue referred to by both counsel in opening arguments at trial, the trial judge considered whether it was likely that the Gura Group would have settled the action without any payment from the Teskey Group. He determined that it was not. That determination is supported by the evidence. I say this for several reasons. First, the Gura Group had been reluctant to even deliver the $500,000 offer on October 5. Thus, it was extremely unlikely that it would agree, a mere five days later, to a settlement under which it received no compensation. Second, based on the opinion of Mr. Burkes, Mr. Gura Sr. was of the view that the Teskey Group owed the Gura Group more than $1.2 million. With that opinion in hand, Mr. Gura Sr. was unlikely to settle for nothing. Third, it made no sense for the Gura Group to give all the membership documents and all the promissory notes to the Teskey Group for free. Fourth, the Teskey Group was required to hold $400,000 in trust, which the Gura Group perceived put it in a favourable position. Fifth, absent some financial advantage under the settlement, logic says it was in the Gura Group’s interest to await the determination of the reserved injunction motion and the quantification of security for costs before entering into a settlement. Sixth, the direct settlement was made when the Gura Group knew it owed GMA more than $100,000 and at a time when it continued to have confidence in GMA. Accordingly, there was no reason for the timing and the manner of the settlement, except to defeat GMA’s fees. Finally, but importantly, while the offer to settle specifically provided that the Gura Group would not pay anything to the Teskey Group, there was the glaring omission of any reciprocal provision that the Teskey Group would not pay anything to the Gura Group.

[56] As a result of these factors, there was overwhelming direct and circumstantial evidence to support the trial judge’s finding that the Teskey Group agreed to make a secret payment to the Gura Group. That finding, in turn, renders the trial judge’s conclusion of collusion unassailable. It simply makes no sense for the Teskey Group to conceal its payment to the Gura Group unless it did so for the purpose of defeating GMA’s claim. I would dismiss the appeal.

Costs

[57] The parties agreed that the successful litigants in this proceeding are entitled to their costs of this appeal in the amount of $30,000. However, at the conclusion of the appeal, the parties indicated that offers to settle the appeal were exchanged. If the parties are of the view that those offers are relevant to our costs award, they may make brief submissions in writing within thirty days of the release of these reasons. If no such submissions are received, costs will be to the respondent fixed at $30,000, inclusive of disbursements and Goods and Services Tax.

RELEASED: SEP 21 2007

“KNF J.A.” “S.E. Lang J.A.”

“I agree K. Feldman J.A.”

“I agree E.A. Cronk”

[^1]: Mr. Teskey took issue with the realizable value of the promissory notes.

[^2]: The Gura Group had a $2,500 outstanding costs order in its favour against the Teskey Group.