M.F. Roth, Estate Trustee of the Estate of H.P. Roth, Deceased v. Juschka et al.; Brock, Third Party

[Indexed as: Roth Estate v. Juschka]

Ontario Reports

Court of Appeal for Ontario,

Feldman, Hourigan and Benotto JJ.A.

February 2, 2016

129 O.R. (3d) 261 | 2016 ONCA 92

Case Summary

Professions — Barristers and solicitors — Fiduciary duty — Lawyer acting for both sides in share purchase transaction between plaintiffs as vendors and defendants as purchasers — Parties agreeing that promissory note given by defendants would be forgiven in plaintiffs' wills — Promissory note containing no term to that effect and containing two conditions that allowed plaintiffs to make demand on note before it was forgiven — Lawyer breaching his fiduciary duty to defendants by failing to recognize that there was actual or potential conflict of interest between parties and failing to ensure that defendants received independent legal advice.

Professions — Barristers and solicitors — Negligence — Lawyer acting for both sides in share purchase transaction between plaintiffs as vendors and defendants as purchasers — Parties agreeing that promissory note given by defendants would be forgiven in plaintiffs' wills — Promissory note containing no term to that effect and containing two conditions that allowed plaintiffs to make demand on note before it was forgiven — Lawyer falling short of requisite standard of care as he failed to understand and explain meaning and effect of promissory note to defendants and to warn them of risks of transaction.

HR and his wife MR (referred to as the "plaintiffs", although the action was brought by MR in her personal capacity and as estate trustee after HR's death) held 51 per cent of the shares of a company that owned a grocery store; their daughter and son-in-law (the "defendants") held 49 per cent. After HR received a cancer diagnosis, he decided to transfer his and MR's shares to the defendants. HR's lawyer B acted for both sides in the transaction. The defendants gave the plaintiffs a promissory note for $408,000, and the parties entered into consulting agreements that obligated the company and the defendants to pay the plaintiffs significant annual remuneration for life. While the parties agreed that the promissory note would be forgiven in the plaintiffs' wills, no term to that effect was included in the note. The note contained two conditions where it would become due on demand: if the store were sold or if the female defendant's voting share [page262] fell below 50 per cent. According to B, although he was acting for all four parties, the deal was directed by HR. B did not have the defendants obtain independent legal advice. Because of financial difficulties, the defendants were forced to sell the store. After HR's death, MR demanded payment on the note. The demand ultimately resulted in an action against the defendants. The defendants brought a third party claim against B for negligence and breach of fiduciary duty. The action on the note was successful, and the third party claim was dismissed. The defendants appealed.

Held, the appeal should be allowed.

The share transaction was not wholly beneficial to the defendants; rather, it had significant downsides for them. B breached his fiduciary duty to the defendants as he failed to recognize that there was an actual or potential conflict of interest between the parties which precluded him from acting for both sets of clients. He also failed to ensure that the defendants received independent legal advice. B was also liable to the defendants in negligence. He fell short of the requisite standard of care as he failed to appreciate and explain the meaning and effect of the promissory note to the defendants and to warn them of the risks of the transaction.

Upper Valley Dodge Chrysler Ltd. v. Cronier Estate, 2005 44165 (ON CA), [2005] O.J. No. 5097, 205 O.A.C. 238, 10 B.L.R. (4th) 201, 41 R.P.R. (4th) 211, 144 A.C.W.S. (3d) 351 (C.A.), distd

Other cases referred to

Boardman v. Phipps, [1967] 2 A.C. 46, [1966] 3 All E.R. 721, [1966] 3 W.L.R. 1009 (H.L.); Central Trust Co. v. Rafuse, 1986 29 (SCC), [1986] 2 S.C.R. 147, [1986] S.C.J. No. 52, 31 D.L.R. (4th) 481; Davey v. Woolley (1982), 1982 1787 (ON CA), 35 O.R. (2d) 599, [1982] O.J. No. 3158, 133 D.L.R. (3d) 647, 13 A.C.W.S. (2d) 384 (C.A.) [Leave to appeal to S.C.C. refused (1982), 37 O.R. (2d) 499n, [1982] S.C.C.A. No. 146]; Fasken Campbell Godfrey v. Seven-Up Canada Inc. (2000), 2000 3985 (ON CA), 47 O.R. (3d) 15, [2000] O.J. No. 122, 182 D.L.R. (4th) 315, 128 O.A.C. 249, 94 A.C.W.S. (3d) 171 (C.A.) [Leave to appeal to S.C.C. refused [2000] S.C.C.A. No. 143, 143 O.A.C. 396]; Waxman v. Waxman, 2004 39040 (ON CA), [2004] O.J. No. 1765, 186 O.A.C. 201, 44 B.L.R. (3d) 165, 132 A.C.W.S. (3d) 1046 (C.A.) [Leave to appeal to S.C.C. refused [2005] 1 S.C.R. xviin, [2006] S.C.C.A. No. 486]

APPEAL by the defendants from the judgment of Glithero J., [2013] O.J. No. 3299, 2013 ONSC 4437 (S.C.J.).

Thomas J. Corbett, for appellants.

James D. Virtue and Dagmara Wozniak, for respondent.

The judgment of the court was delivered by

[1] FELDMAN J.A.: — The respondent is a lawyer who acted for both sides in a family share purchase transaction that included the provision of a promissory note. In the action against them on the note, the appellants brought a third party claim against the lawyer for negligence and breach of fiduciary duty. At trial, the action on the note was successful, while the third party claim was dismissed. [page263]

[2] Following that judgment, the parties to the main action settled for a lesser sum. This appeal is solely against the dismissal of the third party claim. The appellants seek indemnification for the amount they paid to settle the judgment on the note. For the reasons that follow, I would allow the appeal and hold the respondent lawyer liable to the appellants for negligence and breach of fiduciary duty.

Facts

[3] Harold Roth is a central figure in the events underpinning this litigation. As he died in 2008, the evidence at trial of what transpired came from his wife, his daughter, his son-in-law, the respondent and two accountants who had involvement at the relevant time.

[4] Mr. Roth had experience in the grocery store business. He wanted to take advantage of an opportunity to take over a grocery store in Corunna, Ontario with his daughter and son-in-law, Cynthia and Roy Juschka, who lived with him and his wife, Marlene Roth. Mr. Roth wanted to acquire the Corunna grocery store and operate it with his wife, daughter and son-in-law, while teaching them the business.

[5] Mr. Roth proposed that he and the Juschkas each put in $10,000 of equity, and he would loan an additional $40,000. This would allow the family to make a down payment on the store in Corunna. The Roths and Juschkas proceeded to acquire the store in 1985. Their initial arrangement was that the profits from the store operation would be split 51 per cent to the Roths and 49 per cent to the Juschkas. Later that year, they incorporated Roth-Juschka Holdings Ltd. Harold Roth received 51 per cent of the shares and Roy and Cynthia Juschka received 49 per cent. There is nothing in the record to suggest that the parties ever had a shareholders' agreement to address issues such as a buy-sell arrangement.

[6] The respondent acted for all four parties on the incorporation. While the respondent did other legal work for the Roths and the Juschkas over the years, he had an ongoing relationship with Harold Roth, who would consult him from time to time as his lawyer.

[7] The store became very successful. Initially, Harold Roth ran the store, teaching Roy and Cynthia Juschka. Marlene Roth worked there full-time for the first two years only, and thereafter only sporadically. Cynthia Juschka began to work only part-time at some point, in order to stay home to look after their children. She came back full-time after 1993. By 1988, Harold Roth had begun to cut back his involvement. [page264]

[8] In 1992, Harold Roth was advised that he needed surgery for stage-four bladder cancer. That diagnosis caused him to take steps to deal with succession planning for the disposition of his shares in the company as well as to provide ongoing income for himself and his wife for the rest of their lives. He wanted his shares to go to Roy and Cynthia Juschka, but he was concerned about interference from other family members if the shares were left as part of his estate.

[9] Mr. Roth approached his accountants to obtain tax and accounting advice about how to accomplish his wishes. He also sought advice from his lawyer, the respondent Allan Brock. Mr. Brock was first approached by Mr. Roth in the late fall of 1991 about amending his will to leave his shares to the Juschkas and not to his other daughter. His concern arose from difficulties in the relationship between Mrs. Roth and Mrs. Juschka and between himself and his other daughter. Mr. Brock recalled advising about family law obligations that Mr. Roth had to Mrs. Roth and her entitlement to support.

[10] Mr. Brock did not hear from Mr. Roth again until February 1992, when Mr. Roth visited his office. Mr. Roth brought a letter from his accountant that proposed a deferred share purchase structure. The deal involved transfer of the Roths' shares to the Juschkas upon payment of a promissory note in the amount of the fair market value of the Roths' 51 per cent interest. It assumed a market value of $570,000 for the shares, based on a 1989 valuation of the company. In the event that the Roths died before the note was paid in full, it would be forgiven in their wills.

[11] Later in February, there was a meeting in Mr. Brock's office with Harold Roth, the two accountants and Roy Juschka, who arrived late and stood behind the others. The plan had evolved again. Mr. Brock said that he and one of the accountants explained to Mr. Juschka what had transpired before he arrived. The trial judge described the evidence as follows [at para. 107]:

The new arrangement had now become a share transfer to the Juschkas, but an income stream would continue to the Roths. The figure was to be $408,000.00 for Mr. Roth's shares, which Mr. Roth thought to be low, but wasn't concerned in a major way because he was to continue to receive his income, and the note was to be forgiven by will. Mr. Brock testified that the promissory note was to justify to Revenue Canada that there was a reasonable price being paid for the shares and it was in Mr. Roth's interest to have the value of the shares at a low figure so as to attract less tax. The note was to be forgiven when the Roths died. His evidence is that at the meeting it was discussed that the purpose of the new arrangement was to freeze the value of the estate, to provide an income stream to the Roths and to get the shares into the hands of the Juschkas. [page265]

[12] Following that meeting, there was continued work on the numbers for the transaction. It wasn't until early summer that year that Mr. Roth instructed Mr. Brock that he was proceeding with the new arrangement and asked him to draft the documents to implement it. Mr. Brock prepared draft documents, which he sent to both Mr. Roth and Mr. Juschka.

[13] The final documents consisted of the share-purchase agreement between the Roths as vendors and the Juschkas as purchasers; two consulting agreements, one for Harold Roth and one for Marlene Roth; and a promissory note from the Juschkas to Harold Roth. Mr. Brock testified that these four documents were "inextricably linked together".

[14] The consulting agreements provided for ongoing consulting fees to be paid to each of the Roths by the company, reflecting a 50 per cent entitlement to the profits of the store (25 per cent each), with the entitlement reducing somewhat over time. The consulting agreements were guaranteed by the Juschkas. By that time, neither of the Roths was working in or providing any service to the business. The consulting agreements were a way to have the Roths continue to receive their income stream from the store.

[15] The promissory note read as follows:

The Payors, Roy Juschka and Cynthia Juschka promise to pay to the Payee, Harold Roth, the sum of $408,000.00 on demand, in forty years being April 30, 2032 bearing interest at the preferred lending rate from time to time of the Royal Bank of Canada, calculated annually, not in advance on the anniversary date of the said note commencing on May 1, 1993 and yearly thereafter. The interest rate chargeable can be reduced at the holder's discretion upon the anniversary date heretofore stated. The note shall also become due and payable upon demand in the event of the sale of Bluewater Food Market or upon the transfer of shares in Roth-Juschka Holdings Ltd. Such that Cynthia Juschka owns or controls the voting rights to less than fifty percent (50%) of the outstanding voting shares in the said Roth-Juschka Holdings Ltd.

[16] The promissory note representing the purchase price for the shares was for $408,000 plus annual interest at the Royal Bank preferred rate, reducible at the option of the Roths as holder. The consulting agreements provided that any interest paid on the note would reduce the amounts of the consulting payments. Both Mr. Roth and Mr. Brock believed that the amount of the note was too low. However, Mr. Brock explained in his evidence his belief that the only significance of the chosen value was to be high enough to satisfy Revenue Canada that it reflected the market value of the shares. Otherwise, it was not important because the note was to be forgiven on the death of the Roths. [page266]

[17] The note contained two conditions where it would become due on demand: if the grocery store was sold or if Cynthia Juschka's voting share interest fell below 50 per cent. The reason the note contained the two conditions where the note would become payable on demand was because Mr. Roth felt that if the Juschkas sold the business or if his daughter were no longer a full partner in the business, then he wanted to be able to receive immediate payment on the note. The note contained no provision that it would be forgiven by the Roths in their wills.

[18] Mr. Brock testified that all four parties were familiar with the documents and knew what the arrangement was. He said he had discussed with the parties that the note could not contain a clause saying it would be forgiven on death, because that would diminish the value that was being paid for the shares and undermine the position with Revenue Canada that the transfer was at arm's length and for fair value.¹

[19] Mr. Brock's evidence, which the trial judge accepted, was that he reviewed the documents with all four of the parties and he explained to each of them that the promissory note was to be forgiven in the Roths' wills. He pointed out to Roy and Cynthia Juschka that there was no guarantee that the note would actually be forgiven because a will can be changed. But the Juschkas just laughed and said they were not concerned that the Roths would not do as they had discussed.

[20] While the Juschkas testified that they understood when they signed the documents that the payments under the consulting agreements would be applied to reduce the balance of the promissory note, the trial judge rejected their evidence. He found that the Juschkas understood in 1992 that the payments under the consulting agreements were independent of the obligation to pay the principal owing on the promissory note.

[21] It was Mr. Brock's evidence that although he was acting for all four parties, the entire deal was being directed by Harold Roth.

[22] Nevertheless, at no time did Mr. Brock put his mind to the question of independent legal advice for the Juschkas. This [page267] was because he believed the share sale was, in effect, a gift of shares from the Roths and that the Juschkas were obtaining a substantial benefit from the arrangement. His evidence on this issue was very clear:

Because there wasn't in my mind any conflict between the parties. There was a situation where a benefit was being given to a son-in-law and daughter by their father, a substantial benefit. There was a change going on where the father and mother, Mr. and Mrs. Roth's income [as] a percentage of the flow of profits from the corporations was being reduced immediately and then thereafter it was going to be reduced even more in increments and the Juschkas were going to receive all of the Roth's shares in the operating company for nothing, that is they were going to be gifted basically on death. A value was placed on it to freeze it so that they would initially automatically get all of the increase in value in those shares.

On death of their parents, of Cindy's parents, they would get the shares fully paid and in the interim they would be paying less of the profits of the corporation to their parents than what their parents were entitled to before the agreement was entered into. So it didn't seem to me there was any conflict. They were getting a huge benefit for nothing.

[23] Shortly after the signing meeting, the respondent drew new wills for Harold and Marlene Roth where each forgave the note if the other had predeceased.

[24] Following the 1992 share transfer, the Juschkas paid the Roths the amounts called for in the consulting agreements until 2002. The Roths performed no services to the business in that time. In 2002, the Juschkas reduced the payments because of financial difficulties at the store. The Juschkas came to see Mr. Brock because Harold Roth had threatened to call the note. Mr. Brock explained that they were obliged to carry on with the payments under the consulting agreement but they need not worry about the note because it would be forgiven in the Roths' wills.

[25] By late 2007, the Roths had received $1.7 million under the consulting arrangements. The Juschkas had expanded the store but were now in debt to Sobeys, which had helped them finance the expansion. Sobeys required that the Juschkas stop making the consulting payments to the Roths. The Juschkas had to decide whether to declare bankruptcy or sell the store to Sobeys and work on a salary. They chose to sell to Sobeys. Mr. Brock's advice then was for them to sit down with the Roths and explain that now that the business was sold, the company was not earning profits and therefore no consulting fees were owing.

[26] However, Mr. Roth died in 2008, and Mrs. Roth elected to demand payment of the note because of the sale of the business [page268] by the Juschkas. That demand eventually resulted in the action against the Juschkas and the company.

Findings by the trial judge

[27] The trial judge made findings in the main action that were important to the determination of the third party claim:

the Juschkas understood when they signed the documents in 1992 that the payments under the consulting agreements would not be applied to the note;

there was an agreement between the Roths and the Juschkas that the Roths would forgive the note in their wills;

Mr. Brock advised the Juschkas that there was a risk that the Roths would not live up to that obligation;

the 1992 share purchase was very advantageous to the Juschkas. They were receiving the Roths' 51 per cent of the shares in the store without any cost because the note was to be forgiven and the income stream that the Roths were already entitled to indefinitely was being reduced;

the Roths received $1.7 million from the Juschkas under the consulting agreements from 1992 to 2007.

[28] With respect to the claim against the respondent for breach of fiduciary duty and negligence, the trial judge also found

the parties were amicable and there were no conflicting positions between them;

-- there was little potential for a collision of interests;

a problem only arose when the Juschkas tried to renege on their agreement;

-- Mr. Brock was sensitive to the risks to the Juschkas;

-- the Juschkas were well served by the 1992 agreement;

Mr. Brock acted within the standard of care which was "reasonable care, skill and knowledge";

while it may have been unwise of Mr. Brock to act for everyone, he did not fall below the standard of care in doing so;

had they gone to another lawyer for independent legal advice, the Juschkas would have signed the 1992 documents [page269] because they were anxious to take advantage of the opportunity that Mr. Roth was affording them;

there was no other advice that another lawyer could have given the Juschkas in respect of the 1992 transaction;

the only advice a lawyer could have given the Juschkas regarding the note was not to sign it if they did not want to risk having to pay it;

the Juschkas would not have heeded that advice nor would it have been in their interests to do so;

-- the Juschkas' loss was not caused by Mr. Brock.

Issues

[29] I would frame the issues on this appeal as follows:

(1) Did the respondent breach his fiduciary duty to the appellants by acting for all parties where there was a conflict of interests and by failing to send them for independent legal advice?

(2) Did the respondent fall below the standard of care by implementing the instructions of Harold Roth and failing to assess and advise the appellants of the significance of the liabilities they were undertaking and whether the arrangement was in their best interests?

[30] The appellants submitted that the trial judge made palpable and overriding errors of fact in three areas, and that those errors undermined his conclusion on their third party claim. I discuss two of those areas -- the potential impact of independent legal advice and the impact of the transaction on the Juschkas -- in my analysis of the issues. In light of my conclusions, there is no need to address the third area raised by the appellants, which is the trial judge's treatment of the evidence of the appellants' expert witness.

Analysis

Fiduciary duty

[31] A solicitor acting for a client owes the client a fiduciary duty to act in the best interests of that client. The proposition comes from the House of Lords decision in Boardman v. Phipps, [1966] 3 All E.R. 721, [1967] 2 A.C. 46 (H.L.), at p. 756 All E.R., where the lawyer's conflict was between his duty to his client and his own self-interest. In this court's 1982 decision in [page270] Davey v. Woolley (1982), 1982 1787 (ON CA), 35 O.R. (2d) 599, [1982] O.J. No. 3158 (C.A.), leave to appeal to S.C.C. refused (1982) 37 O.R. (2d) 499n, [1982] S.C.C.A. No. 146, Justice Bertha Wilson explained that the rule also applies where the conflicting interests are between clients. At p. 602 O.R., she stated:

A solicitor is in a fiduciary relationship to his client and must avoid situations where he has or potentially may develop a conflict of interests. This is not confined to situations where his client's interests and his own are in conflict although it of course covers that situation. It also precludes him from acting for two clients adverse in interest unless, having been fully informed of the conflict and understanding its implications, they have agreed in advance to his doing so. The underlying premise in both these situations is that, human nature being what it is, the solicitor cannot give his exclusive, undivided attention to the interests of his client if he is torn between his client's interests and his own or his client's interests and those of another client to whom he owes the self-same duty of loyalty, dedication and good faith.

(Citation omitted)

[32] In Woolley, the court addressed the argument that in rural areas, solicitors commonly act for both sides in real estate transactions where there is full disclosure and both parties consent. The court responded, at p. 602 O.R.:

This may well be true although even in the case of a so-called "simple" real estate deal, I doubt that it is good practice. In any event the solicitor unquestionably assumes a dual role at his own risk, the onus being on him in any lawsuit that ensues to establish that the client has had "the best professional assistance which, if he had been engaged in a transaction with a third party, he could possibly have afforded": see London Loan & Savings Co. of Canada et al. v. Brickenden, 1933 7 (SCC), [1933] S.C.R. 257 at 262, [1933] 3 D.L.R. 161 [affirmed 1934 280 (UK JCPC), [1934] 3 D.L.R. 465, [1934] 2 W.W.R. 545 (P.C.)].

[33] More recently, in Waxman v. Waxman, 2004 39040 (ON CA), [2004] O.J. No. 1765, 44 B.L.R. (3d) 165 (C.A.), leave to appeal to S.C.C. refused [2005] 1 S.C.R. xviin, [2006] S.C.C.A. No. 486, this court held that "[o]rdinarily a lawyer should not act on both sides of a transaction where the interests of one client potentially conflict with the interests of the other. If there are some simple or routine transactions where a lawyer can act for both parties, the share sale is not one of them" (para. 646).

[34] In this case, the respondent acted for all parties on what turned out to be a share sale transaction. He did so without ever considering whether there was a conflict of interest or a potential conflict because he believed that the effect of the transaction was essentially a gift by Harold Roth of his 51 per cent interest in Roth-Juschka Holdings Ltd. to the Juschkas. Having perceived no potential conflict, he did not undertake the most basic obligations of a lawyer to his client: to raise the problem of acting for both sides, to explain the potential conflict, to obtain [page271] consent to act for both sides or to recommend independent legal advice: Waxman, at para. 647.

[35] The trial judge agreed with the respondent's view of the transaction: that it was very beneficial to the Juschkas and therefore there was no potential conflict of interest. With respect to the trial judge, these findings are based on a misapprehension of the evidence with respect to the effect of the transaction and an error of law.

[36] The transaction was not wholly beneficial to the Juschkas and there was a significant potential conflict of interest between the two sets of clients. That the parties were amicable at the time of the transaction will normally be the case where a lawyer is asked to act for both sides. However, that fact is wholly irrelevant to whether their interests in the transaction had the potential to conflict.

[37] The purpose of the transaction, as conceived by Harold Roth, was to transfer his shares to the Juschkas in a tax-efficient manner while retaining a significant income stream for himself and his wife during their lifetimes. Although he expressed to the respondent that his wish was to benefit the Juschkas by allowing them to become full owners of the grocery business without interference from other family members, the ultimate transaction was in no way a gift of shares. The Juschkas guaranteed the Roths a significant income stream for life, while the terms of the promissory note ensured that until the deaths of both Harold and Marlene Roth, the Roths would be able to enforce it.

[38] The transaction was structured as a share sale for which the Roths were to receive two forms of compensation from the Juschkas:

(1) a promissory note from the Juschkas personally for $408,000, which accrued interest annually at the current rate; and

(2) two consulting agreements that obligated the company and the Juschkas to pay the Roths significant annual remuneration for life, based initially on 50 per cent of the profits of the company and reducing somewhat over time.

[39] A significant part of the deal was not documented: as found by the trial judge, the promissory note was to be forgiven upon the deaths of the Roths.

[40] It is unclear exactly what the respondent understood was the effect of not documenting this condition of the agreement. In his view, the intent of the transaction was not a sale but a gift [page272] accomplished through the vehicle of the share transfer, the consulting contracts and the forgiveness of the note in the will. He testified that the amount of the note "was only important from a tax point of view. It wasn't really important in my analysis of what the clients' wishes were."

[41] However, the evidence also suggests that perhaps the respondent believed the requirement to forgive was not enforceable, since he advised the Juschkas that because the obligation was undocumented, they would have to trust that the Roths actually would forgive the note in their wills and not make a change to that provision.

[42] It is also difficult to understand the respondent's position that the obligation to forgive the note could not be documented. The purpose of the note was to document the value of the shares being sold by Harold Roth and to freeze that value for tax purposes. The respondent testified that the accountants had advised that if the note provided that it was to be forgiven, it would not be worth its face value. The respondent believed that the face value of the note could not be undermined in the eyes of Revenue Canada. If the suggestion is that the intent was to mislead Revenue Canada about the true value being paid for the shares, that would be totally improper.

[43] Regardless, the fact that the respondent suggested that a term in the transaction that was critical to the interests of one client, the Juschkas, remain undocumented and perhaps unenforceable by them in order to protect the interests of the other client, Mr. Roth, reveals an actual conflict of interest.

[44] Even more significant was the failure of the respondent to understand and explain the full business effect of the transaction on the interests of the Juschkas: see Waxman, at para. 648. Although the trial judge found that the respondent did fully explain all the documents and the transaction, it is clear that the respondent himself did not completely understand the significance and potential consequences of the transaction for the Juschkas.

[45] Prior to the share sale, the Juschkas owned 49 per cent of the company and the Roths owned 51 per cent. As majority shareholders, the Roths could have insisted that the Juschkas continue to be the only workers at the store and still share the profits 51 per cent to 49 per cent with the Roths, while they made no further contribution. However, had the Juschkas decided at some point that they were no longer content with that arrangement, or that they wanted to sell the store, they had potential remedies. Those included negotiation with the Roths for the purchase of their shares, with the leverage that the [page273] Juschkas were the sole workforce that created the profitability of the company; or court action, such as seeking an oppression remedy or the wind-up of the company.

[46] By contrast, in the 1992 share purchase deal, the Juschkas bound themselves contractually to pay the Roths consulting fees for life, representing a significant percentage of the profits of the company. They also signed a promissory note for $408,000 on the understanding that the note would never be enforced because it was going to be forgiven. However, the note also contains two conditions that allowed the holders to make demand on the note before it was forgiven: (1) if the grocery store was sold or (2) if Cynthia Juschka became a less than 50 per cent owner of the shares of the company.

[47] There is no mention in the evidence of any explanation by the respondent to the Juschkas of the potential consequences of these conditions at the time of the share sale. The note was a 40-year note due in 2032. From a business point of view, it was highly likely that the Juschkas might have decided to sell their lucrative grocery business at some point and retire before 2032, or they might have been forced to sell for some other reason, which is exactly what occurred.

[48] Roy Juschka testified that his understanding was that if he sold the business before the note was paid down in full by the consulting payments, he would owe the unpaid portion of the note. But the trial judge found that was not the deal or the effect of the documents. He accepted the respondent's understanding of the transaction that the principal of the note and consulting payments were separate obligations. On the basis of that structure, the advice the respondent gave was wholly deficient.

[49] As Wilson J.A. found in Davey v. Woolley, this was where the Juschkas were at risk and needed legal advice. While agreeing that a solicitor is not obliged to give business advice, Wilson J.A. held that, "although legal advice and business advice frequently coalesce in a commercial transaction of this kind, I believe that solicitors are generally sensitive to the distinction and view it as an important part of their responsibility to build into the transaction the maximum legal protection they can for their client" (at pp. 601-602 O.R.).

[50] In my view, it is clear that following the share purchase transaction, the Juschkas were not in a financially better position than before and certainly had not received a gift. Legally, they were now contractually obligated to pay close to the same percentage of profits to the Roths that they were only de facto obliged to pay before, and they were bound by a promissory note to pay $408,000 plus interest in certain eventualities: a sale of [page274] the business, a reduction in Cynthia's ownership interest or if the Roths did not actually maintain the provision in their wills for forgiveness of the note. In addition, they personally guaranteed the payments under the consulting agreements and personally owed the promissory note, expanding their potential legal liability beyond the assets of the company.

[51] The trial judge equated this case with Upper Valley Dodge Chrysler Ltd. v. Cronier Estate, 2005 44165 (ON CA), [2005] O.J. No. 5097, 10 B.L.R. (4th) 201 (C.A.), where this court affirmed the decision of the trial judge that found no breach where the parties came to the lawyer to document a simple transaction that they had already agreed to. The court found that the borrower would have gone through with the loan even had he received independent legal advice.

[52] In my view, that case is distinguishable on the facts and has no application. This transaction had its genesis in estate planning for Harold Roth. Roy Juschka went along with the plan, presented as it was as a great opportunity for him. It was not a negotiated deal that both clients were bringing to one lawyer just to document. Furthermore, Mr. Juschka testified that he understood that the consulting payments would be credited against the promissory note. Although that testimony was rejected by the trial judge, such an arrangement would have made much more commercial sense for Roy Juschka and would have been consistent with the advice he was receiving that the deal was beneficial to him.

[53] Had the Juschkas obtained independent legal advice, the lawyer would have exposed the pitfalls in the deal and suggested alternative responses that the Juschkas could have presented before they agreed to be bound. In my view, it was a palpable and overriding error for the trial judge to find that the Juschkas would have signed the documentation [at para. 159] "whether they had gone to another lawyer or not". There was no evidence to support that conclusion.

[54] In my view, it is clear that at the time of the 1992 transaction, there was a significant potential conflict of interest between the two sets of clients of the respondent which precluded him from acting for both. By doing so, he was in a clear conflict of interest and breached his fiduciary duty to the Juschkas to act in their best interests.

Standard of care

[55] The respondent was also required to bring reasonable care, skill and knowledge to the performance of the services he undertook to perform: Central Trust Co. v. Rafuse, 1986 29 (SCC), [1986] 2 S.C.R. 147, [1986] S.C.J. No. 52, at p. 208 S.C.R. [page275] In my view, the respondent also fell below the standard of care in the performance of his services for the Juschkas.

[56] He failed to understand and explain the meaning and effect of the promissory note, and the fact that, between the consulting agreement and the promissory note, the Juschkas could potentially pay an amount for the Roths' 51 per cent of the shares that was far in excess of their value. He also failed to warn the Juschkas of the risks of the transaction: Fasken Campbell Godfrey v. Seven-Up Canada Inc. (2000), 2000 3985 (ON CA), 47 O.R. (3d) 15, [2000] O.J. No. 122 (C.A.), at paras. 38-42, leave to appeal to S.C.C. refused [2000] S.C.C.A. No. 143, 143 O.A.C. 396.

Result

[57] The Juschkas became liable to double-pay for the Roths' 51 per cent of the shares by paying them $1.7 million in consulting fees plus the amount of the promissory note. They were represented in the transaction by the same lawyer who acted for the Roths and they were not advised of the potential conflict nor sent for independent legal advice. The respondent failed to assess and advise them of the significance of the liabilities they were undertaking.

[58] They are seeking damages in the amount of $200,000, which is the amount they agreed to pay Mrs. Roth on the note as a settlement of the judgment awarded by the trial judge. I would award the appellants damages in that amount, together with prejudgment interest and costs fixed at $35,000, inclusive of disbursements and HST.

Appeal allowed.

Notes

1 This evidence appears at odds with the agreement itself which provides that the parties agreed that they were not dealing at arm's length and that the purchase price would therefore be subject to review by Revenue Canada. In addition, the agreement provides for the shares in Roth-Juschka Holdings Ltd to be held by the Roths as security for payment of the promissory note. This provision appears to be inconsistent with the term of the note that provides that if the store is sold (if it is a share sale) or if Cynthia Juschka's share interest falls below 50 per cent, the note becomes due on demand.

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