CITATION: 1307839 Ontario Limited et. al. v. Klotz Associates et. al., 2024 ONSC 1120
DIVISIONAL COURT FILE NO.: DC-22-067
DATE: February 23, 2024
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
Kurke, O’Brien and MacNeil JJ.
BETWEEN: )
1307839 ONTARIO LIMITED, TRACY ) F. Scott Turton, for the Appellants POWELL, TODD POWELL, TRICAR ) DEVELOPMENTS INC. AND ) JOSEPH CARAPELLA ) Appellants/Plaintiffs )
- and - )
KLOTZ ASSOCIATES, ROBERT KLOTZ, ) G. Tighe, for the Respondents, Klotz BRIAN MCLAY, MCLAY & COMPANY INC., ) TRUSTEE IN BANKRUPTCY OF PAUL ) M. Romeo, for the Respondents, FERNAND JOSEPH VACHON, MURRAY ) Sholdice and Farber SHOLDICE, AND A. FARBER & PARTNERS ) INC. O/A FARBER DEBT SOLUTIONS ) Respondents/Defendants )
) HEARD at London (by video- ) conference): November 24, 2023
REASONS FOR DECISION
THE COURT:
Introduction
[1] The Appellants/Plaintiffs (“the plaintiffs”) appeal and seek to set aside part of the order of The Honourable Justice Gorman (“the motion judge”), dated June 6, 2022, that requires them to produce all documentation related to the settlement of prior litigation, including records containing any discussion or advice as between them and their legal counsel (“the Order”).
[2] The Respondents/Defendants (“the defendants”) oppose the appeal.
Background
The Vachon litigation
[3] A dispute arose between the plaintiffs, operating as real estate developers, and Donna Vachon (“Ms. Vachon”), the former wife of Paul Vachon, one of the plaintiffs’ partners. In an earlier legal proceeding, Ms. Vachon had sued the plaintiffs. She claimed entitlement to certain proceeds of a loan agreement made between her husband and the Powell and Carapella plaintiffs, on the basis that he had assigned it to her before his bankruptcy and subsequent death (“the Vachon Litigation”).
[4] The plaintiffs disputed the validity of the assignment of the loan agreement to Ms. Vachon on the basis that it was a sham and a fraudulent transfer made on the eve of bankruptcy. They allege that they consulted with and paid Brian McLay of McLay & Company Inc., the trustee in bankruptcy of Paul Vachon’s Estate (“the trustee”), to: 1) take steps to challenge the loan agreement assignment through the bankruptcy of Paul Vachon and to: 2) obtain the necessary approval from the court for the Powell and Carapella plaintiffs to fund the trustee and his lawyer, Mr. Klotz. From 2012 onwards, the trustee became Sholdice and the Farber firm.
[5] However, the plaintiffs only learned in December 2017, shortly before a judicial pre-trial, that the trustee had never obtained court approval for the plaintiffs to provide funding. The plaintiffs were surprised, and at risk of not having standing to challenge the assignment of the loan agreement to Ms. Vachon.
[6] The plaintiffs assert that Mr. Klotz then advised that orders for the funding approval and standing would be sought at the commencement of the Vachon Litigation trial in March 2018. On the day of trial; however, Mr. Klotz instead withdrew himself and the trustee citing a lack of funding. The plaintiffs learned that a separate claim to challenge the validity of the loan agreement assignment had not been made and, as a result, no position was being taken at the trial as to the assignment of the loan agreement to Ms. Vachon. The plaintiffs were not creditors of the Paul Vachon Estate and had no standing themselves to challenge the assignment.
[7] Rather than engage in a hopeless multi-week trial on the issue, after 11 years of litigation the plaintiffs settled the Vachon Litigation by agreeing to pay $1,025,000 to Ms. Vachon. Mr. Thacker and counsel for the plaintiffs on this appeal, Mr. Turton, were counsel to the plaintiffs at the time of the settlement.
The current litigation
[8] The plaintiffs’ statement of claim asserts that Mr. Klotz and his firm acted as litigation counsel to the plaintiffs in the Vachon Litigation. They assert that Mr. Klotz acted negligently and in breach of contract in his representation of them in that legal proceeding. The plaintiffs further assert that they were “forced to settle the Vachon Litigation” because of the defendants’ conduct, and they argue that the settlement was on unfavourable terms.
[9] The defendants deny that the plaintiffs relied on advice given by Mr. Klotz, as they were represented by other counsel. The defendants assert that Mr. Klotz at all material times acted as counsel for the trustee, and that Mr. Klotz owed no duty of care to the plaintiffs, who were not his clients and who had their own counsel.
[10] Examinations for discovery of all parties were scheduled to be held in the Fall of 2021. The parties had served affidavits of documents prior to the scheduled discoveries; however, none of the affidavits of documents contained an itemized Schedule B. Examination for discovery of the McLay defendants was completed. The discovery of the Farber defendants had been started but not completed, as then-counsel for the plaintiffs declined to proceed further, alleging obstructive conduct. The discovery of the Klotz defendants and the plaintiffs did not proceed.
[11] In March 2022, the Farber and Klotz defendants made the motion that resulted in the order in question, after the plaintiffs unilaterally terminated the examination for discovery of Farber. Plaintiffs, Tracy Powell and Todd Powell, were self-represented at the time of the motion before the motion judge. Mr. McLay took no part in the motion and has not participated in the appeal.
[12] The moving party defendants sought an order directing the plaintiffs to: complete the examination for discovery of Farber; commence and complete the discovery of the Klotz defendants; attend for examinations for discovery themselves; and deliver a further and better affidavit of documents and, in particular, an itemized Schedule B listing documents over which privilege was claimed.
[13] The relief sought concerning the attendance and completion of the examinations for discovery of the parties ended up being ordered by the motion judge on consent.
[14] The relief seeking a further and better affidavit of documents was opposed on the motion, but ordered by the motion judge who noted that, given that they were self-represented, the plaintiffs may not have known what documents should be included in Schedule B. The motion judge directed as follows:
- THIS COURT ORDERS that the plaintiffs are to deliver a further and better affidavit of documents and in particular an itemized schedule B, to list documents over which privilege is claimed. In relation to this, the plaintiffs are to produce all documentation related to the settlement of the Vachon litigation, specifically documents between October 1, 2017 and March 31, 2018, and further they are to produce all documentation that contains any discussion or advice as between the plaintiffs and/or legal counsel, including Mr. Thacker and Mr. Turton, within 60 days.
[15] In her written endorsement of June 6, 2022, the motion judge set out very brief reasons for her decision. Those reasons, as they relate to the part of the Order under appeal, are virtually the same as the language of the Order itself and read:
In response to the defendants motion the plaintiffs filed material indicating that they were in agreement with matters a)-c) (inclusive) above. It appears to me that as the Powells are now self-representing they were unaware what documents should be included in schedule B.
There will be an order to go in terms of paragraph a) - d) above. In relation to d), the plaintiff are two [sic] produce all documentation related to the settlement of the Vachon litigation, specifically documents between October 1, 2017 and March 31 2018. Further, they are to produce all documentation that contains any discussion or advice as between the plaintiffs and/or legal counsel, including Mr. Thacker and Mr. Turton. This shall be done within 60 days.
[16] There can be no doubt from the wording of the Order and the reasons that the motion judge has ordered certain material involving both settlement privilege and solicitor-client privilege to be disclosed.
Issues
[17] The plaintiffs appeal, with leave, on the grounds the motion judge erred in law by:
(a) failing to give sufficient reasons that would allow for appellate review of her decision to order production of the privileged documentation; and
(b) improperly abrogating the plaintiffs’ solicitor-client privilege and settlement privilege.
Standard of review
[18] A failure to give sufficient reasons is an error in law: see R. v. Sheppard, 2002 SCC 26, [2002] 1 S.C.R. 869, at para. 28. As such, it is reviewable on the standard of correctness.
[19] A determination of whether evidence is privileged is a question of law and so the applicable standard of review on appeal is correctness: see Leadbeater v. Ontario, 70 O.R. (3d) 224, at para. 29; Kennedy v. McKenzie, 17 C.P.C. (6th) 229, at para. 15; and Laliberté v. Monteith, 2021 ONSC 4133, 155 O.R. (3d) 596 (Ont. Div. Ct.), at para. 24.
Law regarding privilege
Solicitor-client privilege
[20] Solicitor-client privilege is fundamental to the Canadian legal system and has evolved over the years from a rule of evidence to a rule of substantive law: R. v. McClure, 2001 SCC 14, [2001] 1 S.C.R. 445, at para. 17; Descôteaux c. Mierzwinski, [1982] 1 S.C.R. 860, [1982] S.C.J. No. 43, at paras. 26-27.
[21] While solicitor-client privilege is not absolute, the Supreme Court of Canada has repeatedly held that it “must be as close to absolute as possible to ensure public confidence and retain relevance”: McClure, at para. 35; Goodman Estate v. Geffen, [1991] 2 S.C.R. 353, [1991] S.C.J. No. 53; Smith v. Jones, [1999] 1 S.C.R. 455, [1999] S.C.J. No. 15; R. v. Lavallee, Rackel & Heintz, 2002 SCC 61, [2002] 3 S.C.R. 209; Ontario (Ministry of Correctional Services) v. Goodis, 2006 SCC 31, [2006] 2 S.C.R. 32.
[22] In determining whether a document for which privilege is claimed should be ordered disclosed, the appropriate test to be applied is “absolute necessity”: Goodis, at para. 24.
[23] Privilege may be waived expressly or impliedly. Implied waiver typically happens either by way of disclosure or reliance. Once a privileged document or legal advice has been disclosed, the privilege attaching to it is considered to be lost. If a party claiming privilege pleads or otherwise relies upon a privileged document or legal advice for the purpose of pursuing their position in a legal proceeding, then the privilege is considered lost. Waiver of privilege attaching to a solicitor-client communication will be implied where the communication is “legitimately brought into issue in an action”. Waiver of privilege attaching to legal advice will be implied where a party has put in issue its state of mind and that state of mind has been informed by legal advice received. In determining whether there has been an implied waiver of privilege, the court must balance the principles of fairness and consistency against the importance of solicitor-client privilege: Bank Leu AG v. Gaming Lottery Corp., 43 C.P.C. (4th) 73, at para. 5; McQueen et al. v. Mitchell et al., 2022 ONSC 649, at paras. 59-60; Laliberté, at para. 22.
[24] Once it has been established that a communication is subject to solicitor-client privilege, the party seeking to overcome the privilege bears the onus of establishing that the communication ought to be compelled from the party asserting the privilege: Guelph (City) v. Super Blue Box Recycling Corp., 2 C.P.C. (6th) 276, at para. 76.
Settlement privilege
[25] Settlement privilege is a class privilege and, as such, material covered by settlement privilege is presumed to be prima facie inadmissible; exceptions will be found “when the justice of the case requires it”: see Sable Offshore Energy Inc. v. Ameron International Corp., 2013 SCC 37, [2013] 2 S.C.R. 623, at para. 12. As the court in Moyes v. Fortune Financial Corp., 22 C.P.C. (5th) 154, at para. 22, explained:
The principle that discussions and agreements with respect to settlement are generally inadmissible in any subsequent proceeding is one of long standing. The purpose behind the principle is to facilitate settlements of disputes. It recognizes that parties would be reluctant to settle matters or even to engage in settlement discussions if the contents of their agreements or discussions could be used against them in subsequent proceedings.
[26] To justify a removal of settlement privilege, a party must show that, on balance, a competing public interest outweighs the public interest in promoting settlement, for instance, allegations of misrepresentation, fraud or undue influence: see Sable Offshore, at para. 19; R. v. Delchev, 2015 ONCA 381, 126 O.R. (3d) 267, at para. 33.
Analysis
Position of the defendants
[27] The defendants contend that while the motion judge’s reasons may be deficient, when read in the context of the full record that was before her, it is clear that the motion judge found the documentation relevant and not protected by any privilege. The outcome of the motion was so obvious that there is no reversible legal error. The motion judge’s decision is entitled to deference and, in any event, is correct.
Discussion
[28] In our view, the appeal must succeed on the ground that the failure of the motion judge to give reasons has deprived this court of its ability to address the substantive issue of the abrogation of privilege.
[29] The modern approach to considering the sufficiency of reasons for a ruling or verdict and whether it constitutes an error of law is as found in R. v. Sheppard, 2002 SCC 26, [2002] 1 S.C.R. 869. At para. 28 of that decision, the Supreme Court of Canada held: “[t]he simple underlying rule is that if, in the opinion of the appeal court, the deficiencies in the reasons prevent meaningful appellate review of the correctness of the decision, then an error of law has been committed.”
[30] A deficiency in reasons is not a stand-alone ground of appeal in and of itself. This is because the duty to give reasons is not simply for the purpose of keeping a judge “accountable”. Rather, reasons are necessary to justify and explain the result; to tell the losing party why he or she lost; to provide public accountability and satisfy the public that justice has been done and is seen to have been done; and to permit effective appellate review: Dovbush v. Mouzitchka, 2016 ONCA 381, 131 O.R. (3d) 474, at paras. 22-23; R. v. M. (R.E.), 2008 SCC 51, [2008] 3 S.C.R. 3, at paras. 11-13.
[31] Appellate courts will not interfere where “the reasons demonstrate that the trial judge has considered the important issues in a case, or where the record clearly reveals the trial judge’s reasons, or where the evidence is such that no reasons are necessary”: see R. v. R. (D.), [1996] 2 S.C.R. 291, [1996] S.C.J. No. 8, at para. 55; Van Decker Estate v. Van Decker, 2022 ONCA 712, 163 O.R. (3d) 227. Therefore, when considering the sufficiency of reasons, appellate courts should take them as a whole, in the context of the evidence, the arguments and the proceeding itself, appreciating the purposes or functions for which they were delivered: R. v. M. (R.E.), at para. 16.
[32] The motion judge was required to review the record before her and make a determination whether privilege had been expressly or impliedly waived by the plaintiffs. The reasons do not contain necessary findings of fact that there has been a waiver of the privileges or that the pleadings against the defendants were sufficient to destroy the privileges. The reasons lack any legal analysis as it relates to the abrogation of the solicitor-client privilege and settlement privilege attaching to the plaintiffs’ documents, so it is not possible for this court on appeal to understand the legal basis for the motion judge’s decision. There is also nothing showing the motion judge’s balancing of the principles of fairness and consistency with the importance of solicitor-client privilege or settlement privilege.
[33] We do not accept the defendants’ submission that, by virtue of the plaintiffs pleading in the statement of claim that the Klotz defendants acted as their legal counsel in the Vachon Litigation and that they were forced to settle that litigation because of the defendants’ conduct, it is obvious the plaintiffs waived privilege. This cannot be accepted on the motion judge’s paucity of reasons – did she find privilege was waived because of the plaintiffs’ pleadings and, if so, which pleadings? Did she find that the plaintiffs had put their state of mind in issue and, if so, how? This is important because it affects not only whether privilege is waived but also the scope of the production order. Since we do not have reasons to determine how the motion judge reached her conclusion, we cannot determine whether it is correct that privilege was waived; and, if it was correct, we cannot determine whether the order was appropriately tailored.
[34] Since this court is unable to conduct a meaningful review of the motion judge’s reasons, we are compelled to grant the appeal and set aside the impugned part of the Order.
[35] Finally, in responding to the appeal, the defendants suggested that Mr. Turton should be removed as he is in a conflict of interest with the plaintiffs. That issue does not properly arise before us, and we decline to comment on it.
Conclusion
[36] Based on the foregoing, the appeal is allowed and the following order is made:
(a) The second sentence of paragraph 3 of the Order of Gorman J. of June 6, 2022, requiring the production of documents by the plaintiffs, is set aside; and,
(b) The first sentence of that paragraph stands.
Costs
[37] On agreement of the parties, the plaintiffs are awarded costs of this appeal fixed in the amount of $6,000.00 all-inclusive, and costs of the leave to appeal that were fixed by that panel in the amount of $5,000.00; the costs order made by the motion judge on the motion below is varied to no costs.
A.D. Kurke J.
S. O’Brien J.
B. MacNeil J.
Released: February 23, 2024
CITATION: 1307839 Ontario Limited et. al. v. Klotz Associates et. al., 2024 ONSC 1120
DIVISIONAL COURT FILE NO.: DC-22-067
DATE: February 23, 2024
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
Kurke, O’Brien and MacNeil JJ.
B E T W E E N:
1307839 Ontario Limited et. al.
Appellants
- and –
Klotz Associates et. al.
Respondents
REASONS FOR DECISION
Kurke, O’Brien and MacNeil JJ.
Released: February 23, 2024