COURT FILE NO: 11-CV-422053
DATE: 20121108
ONTARIO
SUPERIOR COURT OF JUSTICE
B E T W E E N:
Robert W. Scott
Plaintiff
- and -
Mark Edward Valentine, Q Capital Corporation, Leslie S. Mason, and Shibley Righton LLP
Defendants
- and -
1369547 Ontario Inc.
Plaintiff
- and -
Mark Edward Valentine, Q Capital Corporation, Leslie S. Mason, and Shibley Righton LLP
Defendants
Kevin D. Sherkin,
for the Plaintiffs Scott and 1369547 Ontario Inc., in both actions
Michael Kestenberg,
for the Defendants/Moving Parties Leslie S. Mason and Shibley Righton LLP, in both actions
HEARD: August 15, 2012
GOLDSTEIN J.:
[1] In 2009 Mark Valentine took $1.3 million from Robert Scott and Scott’s holding company 1369547 Ontario Inc. (“the holding company”)(referred to collectively as “the Plaintiffs”) under the pretence of selling him shares in a company called MyScreen Mobile Inc. (“MyScreen”). No shares were ever delivered. The funds were deposited in the trust account at Shibley Righton, a law firm, and then disbursed on Valentine’s instructions. The Plaintiffs brought two companion actions against Valentine, Q Capital Corporation (Valentine’s company), Shibley Righton, and Leslie Mason, a Shibley Righton lawyer. The actions against the Shibley Righton and Mason (referred to collectively “the Defendants”) are framed in negligence and breach of trust on the grounds that there was a duty of care owed to the Plaintiffs not to act negligently with the money. The Defendants bring this motion for summary judgment, arguing that they owed no duty of care and no trust was created. I reluctantly agree with the Defendants. A trial is not required. The companion actions can be resolved on the basis of the material filed. The actions against the Defendants are dismissed.[^1]
FACTS:
[2] Scott is a businessman. In November 2007 he was introduced to Mark Valentine. Valentine was promoting MyScreen. Valentine told Scott that MyScreen was a great investment opportunity in the mobile advertising industry. The mobile advertising industry delivers advertising to mobile handsets. Valentine offered Scott the opportunity to invest in a private placement of MyScreen shares. Scott was informed by a mutual acquaintance that Valentine was a broker who specialized in raising money for technology start-ups. Scott was also informed by this acquaintance that Valentine had been chairman of the Toronto brokerage firm Thomson Kernaghan.
[3] During his discussions with Valentine, Scott researched the mobile advertising industry and MyScreen’s competition.
[4] Valentine advised Scott that the funds that he delivered for the private placement would be held in trust at Shibley Righton pending delivery of the shares. Scott had some reservations about doing business with Valentine because he did not know him. As a result, he asked for, and received assurances from Valentine that the funds would be held in the trust account of a reputable law firm. Scott therefore researched the Defendants. Scott’s understanding was that Mason was handling the MyScreen transaction. Scott learned that Mason was a highly experienced commercial lawyer and a partner of the firm.
[5] The one person that Scott did not research was Valentine. Had he done so, he undoubtedly would have discovered that in 2004 the Ontario Securities Commission (“OSC”) had prohibited Valentine from trading in securities in Ontario for 15 years. He would also have learned that Valentine had been convicted of securities fraud in the United States.
[6] In his affidavit Mason stated that Shibley Righton had represented Valentine since 2006. He also stated that he had no knowledge of Valentine’s prohibition order or fraud conviction. On cross-examination, Mason admitted that he had known Valentine’s wife and in-laws for years.
[7] Although I have difficulty with Mason’s claim that he was unaware of Valentine’s past, there is nothing to contradict his evidence. The OSC’s decision, which is in the materials filed before me, was taken from the OSC website. Valentine’s guilty plea to one count of securities fraud in the United States District Court is referenced in the third paragraph of the decision.
[8] In March 2009 Scott gave Valentine’s business partner two bank drafts in the amounts of $225,000.00 and $175,000.00 as a subscription for 400,000 shares of MyScreen on the understanding that the funds would be held in trust at Shibley Righton. On Friday, March 13, 2009 the drafts were deposited into the firm trust account. No cover letter or other information accompanied the drafts. Scott’s name did not appear on the drafts. On Monday March 15, 2009, on Valentine’s instructions and without Scott’s knowledge, Mason caused the firm to issue bank drafts to Q Capital Corporation and other third parties. Q Capital Corporation was Valentine’s company.
[9] On April 23, 2009 Scott delivered a third bank draft for $200,000.00 payable to Shibley Righton in trust to purchase an additional 200,000 shares of MyScreen. The draft, which had Scott’s name on it, was immediately deposited into the Shibley Righton trust account. The next day, on Valentine’s instructions, and without Scott’s knowledge, all the funds were disbursed to a third party.
[10] In November 2009, Scott, with two business partners, caused the holding company to subscribe for 700,000 shares and 700,000 warrants of MyScreen for $700,000.00. On November 17, 2009, Scott delivered a bank draft for $700,000.00 to Shibley Righton. On Valentine’s instructions, and without Scott’s knowledge, $4,500.00 was used to pay Valentine’s outstanding account at the firm, and the remainder paid by way of a draft to Q Capital Corporation.
[11] The funds were not associated with any particular transaction. Shibley Righton did not have an open file in respect of any stock promotion by Valentine. Although Valentine was a client of the firm, Mason was not retained to give advice, prepare documents, or do anything in relation to MyScreen or any other transaction. Valentine simply used the Shibley Righton trust account as a conduit to disburse funds. Mason did not ask Valentine any questions about the source of the funds, the purpose of the transaction, the identity of the people receiving the funds, or even why Valentine needed to use a law firm trust account, rather than a bank, to send money to unrelated third parties.
[12] Mason also had no knowledge of or relationship with Scott or the numbered company. Although Scott’s name appeared on one of the drafts, there was no other association with him. Mason did not meet Scott, and had never heard of him.
[13] The Plaintiffs never received shares or warrants of MyScreen from Valentine, despite pressing him and Valentine’s business partner repeatedly. Scott eventually demanded that Valentine return the funds. Valentine ignored him. In November, 2009 Scott discovered that the funds had been simply channelled through the Shibley Righton trust account on Valentine’s instructions. He demanded that Shibley Righton return the funds. Shibley Righton refused, on the grounds that the Plaintiffs were not Shibley Righton clients and, therefore, that no duty of care was owed.
[14] Scott subsequently launched two actions against Valentine, Q Capital Corporation, Mason, and Shibley Righton. The first action is brought by Scott personally. The second action is brought by the holding company. The actions allege negligence and breach of trust by the Defendants.
[15] The Defendants now bring these motions for summary judgment in the two actions. Mr. Kestenberg, for the Defendants, argues that the Plaintiffs were never clients of the firm and that the evidence discloses that there was no relationship whatsoever. As a result, the Defendants owed no duty of care as Mason was not even aware of the existence of the Plaintiffs. No fiduciary relationship was created and there was no breach of trust. Mr. Kestenberg further argues that since a duty of care is an essential element of the torts pleaded by the Plaintiffs, the actions must fail and summary judgment is appropriate.
[16] Mr. Sherkin, for the Plaintiffs, candidly concedes that the weight of the law is on Mr. Kestenberg’s side, but argues that there is room in the law for the development of a duty of care in these circumstances. He argues that I should dismiss the motion and allow the matter to proceed to a full trial, as credibility is in issue and is an important component in determining whether the Defendants owed a duty of care.
ANALYSIS
[17] There are three issues to be resolved:
Is this an appropriate case for summary judgment?
Did the Defendants owe the Plaintiffs a duty of care?
Was there a breach of trust?
Is this an appropriate case for summary judgment?
[18] I must first determine whether the record is sufficient for me to consider the question of summary judgment. The test is set out in Combined Air Mechanical Services Inc. v. Flesch, [2011] O.J. No. 5431, 108 O.R. (3d), 2011 ONCA 764 (C.A.):
50 We find that the passages set out above from Housen, at paras. 14 and 18, such as "total familiarity with the evidence", "extensive exposure to the evidence", and "familiarity with the case as a whole", provide guidance as to when it is appropriate for the motion judge to exercise the powers in rule 20.04(2.1). In deciding if these powers should be used to weed out a claim as having no chance of success or be used to resolve all or part of an action, the motion judge must ask the following question: can the full appreciation of the evidence and issues that is required to make dispositive findings be achieved by way of summary judgment, or can this full appreciation only be achieved by way of a trial?
[19] This case is an appropriate one for summary judgment. The positions of the different parties are set out in detail in the affidavit material and on the cross-examinations. Since the documents evidencing the origin, movement, and disposition of the funds are all in evidence resolving credibility issues will not be especially important at a trial. The salient facts are not in dispute. There are no significant conflicts in the evidence that I have to resolve for the purposes of this motion: Combined Air Mechanical, supra, para. 52. The question on this motion is ultimately a legal one: on the facts as set out in the material, did the Defendants owe the Plaintiffs a duty of care?
[20] In order to establish the tort of negligence the plaintiffs must establish that the defendants owed them a duty of care, and that the conduct of the defendants fell below the standard of care. Failure to establish either element results in a failure of the action. In my view, the material before me is sufficient to determine whether the Defendants owed the Plaintiffs a duty of care. A trial is not necessary to resolve the issue. Whether or not the Defendants breached the standard of care is not a live issue on this motion; neither is the quantification of damages.
Did the Defendants owe the Plaintiffs a duty of care?
[21] A lawyer only owes a duty of care to his or her own client: Baypark Investments Inc. v. Royal Bank of Canada, 2002 CanLII 49402 (ON SC), [2002] O.J. No. 58, 57 O.R. (3d) 528 (Sup.Ct.); affirmed on appeal at [2002] O.J. No. 4377 (C.A.) for the reasons given by Lane J.
[22] It will only be under very limited circumstances that a lawyer can be held to owe a duty to a third party: Kamahap Enterprises v. Chu’s Central Market, 1989 CanLII 242 (BC CA), [1989] B.C.J. No. 2108, 64 D.L.R. (4th) 167 (C.A.); Hedley Byrne & Co. v. Heller and Partners Ltd. (1963) 2 All E.R. 575 (H.L.).
[23] I adopt the following statement from Budrewicz v. Stojanowski, 1998 CanLII 14688 (ON SC), [1998] O.J. No. 2986, 41 O.R. (3d) 78 (O.C.G.D.):
73 In an article found in the Advocates' Quarterly entitled Solicitors' Liability to Non-Clients in Negligence by Debra Rolph, Volume 15, No. 2, June, 1993, pp. 129-171, the author makes this comment as to the Kamahap case:
The essence of the Kamahap case is this: a solicitor cannot be expected to protect the economic interests of a non-client unless, in all the circumstances, the non-client reasonably relied upon him to do so and the solicitor knew or should have known of this reliance.
[24] The cases relied on by Mr. Sherkin either do not assist him or involve a lawyer who placed him or herself in a position where a third party relied directly on him or her.
[25] In Bruno Appliance and Furniture Inc. v. Cassels Brock & Blackwell LLP, 2010 ONSC 5490, [2010] O.J. No. 4661 (Sup.Ct.) the plaintiffs were involved in a fraudulent trading scheme. Investor funds were wired to the defendant’s lawyer and then disbursed according to the instructions of the defendant. The defendant’s lawyer attended one meeting between the investors and the defendant. The lawyer was also sued. Grace J. stated:
218 I have little doubt the presence of a respected partner at a venerable law firm, even at one meeting, created an air of legitimacy, professionalism and integrity which provided some comfort to investors.
[26] The lawyer claimed that he had no memory of the meeting. Although Grace J. was sympathetic to the plaintiffs and very troubled by the actions of the lawyer, he found that mere contact between the lawyer and the investors was not enough to create proximity and dismissed the action as against the lawyer. The facts are similar to the facts in this case, but I disagree that the case offers any assistance to the Plaintiffs. The lawyer in Bruno Appliance and Furniture actually met with the plaintiffs and that was not enough to establish proximity. Mason did not know of Scott’s existence, let alone meet with him.
[27] The facts in Brunt v. Yen, [2008] O.J. No. 2599 (Div.Ct.) are also similar to the facts here: the plaintiffs signed a share subscription agreement and forwarded a bank draft to the firm. No shares were delivered. The defendant lawyer had drafted the share subscription agreement but otherwise had no contact with the plaintiffs. There was no suggestion that the lawyer had ever acted for the plaintiffs. The action was dismissed. In dismissing the appeal, Molloy J. for the Divisional Court was critical of the actions of the lawyer, who had acted as a mere clearing-house for funds in order to give the transaction the appearance of respectability. Although Mr. Sherkin relies on the unassailable comments of Molloy J. respecting the duty of a lawyer to act with the utmost integrity, the case does not otherwise assist his position.
[28] In Kamahap Enterprises v. Chu’s Central Market, supra, the defendant solicitors gave negligent advice to their own clients in real estate transaction. The negligent advice also caused a loss to the plaintiff. Were the solicitors liable for the economic loss sustained by the plaintiff? There was no reliance by the plaintiffs and no solicitor-client relationship. The plaintiff’s case was based purely on the foreseeability of economic harm. The third-party notice against the solicitors was struck. Taylor J.A., speaking for the Court, stated:
The matter could not, of course, have been better stated than by Lord Denning in Dutton v. Bognor Regis Urban District Council, [1972] 1 Q.B. 373 (C.A.). He said (at pp. 394-5):
Nowadays since Hedley Byrne ... it is clear that a professional man who gives guidance to others owes a duty of care, not only to the client who employs him, but also to another who he knows is relying on his skill to save him from harm. It is certain that a banker or accountant is under such a duty. And I see no reason why a solicitor is not likewise. The essence of this proposition, however, is the reliance. In Hedley Byrne it was stressed by Lord Reid, by Lord Morris of Borth-y-Gest and by Lord Hodson. The professional man must know that the other is relying on his skill and the other must in fact rely on it.
[29] In Tracy v. Atkins, 1979 CanLII 760 (BC CA), [1979] B.C.J. No. 12, 105 D.L.R. (3d) 632 (C.A.) the lawyer for the purchaser in a real estate transaction also accepted instructions from the vendor and conducted all the work that would normally have been done by the vendor’s lawyer. The British Columbia Court of Appeal found that the lawyer had placed himself in a position of proximity with the plaintiffs such that he knew or ought to have known that they were relying on him to protect their interests. The facts of that case are clearly distinguishable from the facts of this case. Here, Mason was unaware that Scott had placed any reliance on him, or on Shibley, Righton.
[30] In my opinion the cases do not support Mr. Sherkin’s argument that the Defendants owed a duty of care to the Plaintiffs. There was insufficient proximity. If Scott did rely on Mason, that reliance was not reasonable. Scott never met Mason, never talked to him on the phone, and never wrote him a letter. Scott relied solely on Valentine’s representations. He never provided instructions to Mason as to what to do with the bank drafts. Although Scott knew of Mason’s existence, the only evidence Mason had of Scott’s existence was his name on one bank draft. Mason certainly did not know that Scott was relying on him. It is not enough that Mason ought to have known that Scott was relying on him, given that Scott’s reliance would have been unreasonable under the circumstances. As Lord Denning pointed out, actual knowledge is a pre-requisite for finding a duty of care.
[31] Mr. Sherkin also relies on the Rules of Professional Conduct of the Law Society of Upper Canada (“the Rules”) for the proposition that the Defendants owed a duty of care to the Plaintiffs. Although there is no support for this proposition in the cases, do the Rules offer support? Rule 2.02(5)(a) of the Rules states:
(5) A lawyer shall not
(a) knowingly assist in or encourage any dishonesty, fraud, crime, or illegal conduct.
Rule 2.02 was amended in April 2012 by adding the following sub-rules:
(5.0.1) A lawyer shall not act or do anything or omit to do anything in circumstances where he or she ought to know that, by acting, doing the thing or omitting to do the thing, he or she is being used by a client, by a person associated with a client or by any other person to facilitate dishonesty, fraud, crime or illegal conduct.
(5.0.2) When retained by a client, a lawyer shall make reasonable efforts to ascertain the purpose and objectives of the retainer and to obtain information about the client necessary to fulfill this obligation.
Rule 2.02 was amended in April 2011 by adding this sub-rule:
(5.0.3) A lawyer shall not use his or her trust account for purposes not related to the provision of legal services.
The Commentary to Rule 2.2 states, in part:
A lawyer should be on guard against becoming the tool or dupe of an unscrupulous client or persons associated with such a client or any other person. Subrules (5) to (5.03) speak to this issue. A lawyer should be alert to and avoid unwittingly becoming involved with a client or any other person engaged in criminal activity such as mortgage fraud or money laundering. Vigilance is required because the means for these and other criminal activities may be transactions for which lawyers commonly provide services…
The Commentary was amended in April 2011 to add the following (in part):
A client or another person may attempt to use a lawyer’s trust account for improper purposes, such as hiding funds, money laundering or tax sheltering. These situations highlight the fact that when handling trust funds, it is important for a lawyer to be aware of his or her obligations under these subrules and the Law Society’s By-laws that regulate the handling of trust funds.
The Commentary was further amended in April 2012 to add the following:
To obtain information about the client and about the subject matter and objectives of the retainer, the lawyer may, for example, need to verify who are the legal or beneficial owners of property and business entities, verify who has the control of business entities, and clarify the nature and purpose of a complex or unusual transaction where the purpose is not clear. The lawyer should make a record of the results of these inquiries.
[32] The Law Society has a duty to advance the cause of justice and maintain the rule of law: Law Society Act, R.S.O. 1990, c. L.8, s. 4.2. The Law Society regulates the profession in the public interest: Edwards (No. 2) v. Law Society Of Upper Canada, [2000] O.J. No. 2085, 48 O.R. (3d) 329 (C.A.) at para. 18 (upheld by the Supreme Court of Canada at 2001 SCC 80, [2001] 3 S.C.R. 562).
[33] In the Edwards (No. 2) case the facts were, in some respects, similar to the facts in this case: a group of investors invested in gold contracts. The promoter promised to deliver gold at a discount. The investors deposited their funds in the trust account of a law firm. No gold was ever delivered and the investors lost their money. The investors sued the law firm, the promoters of the scheme, and the Law Society of Upper Canada for negligently failing to monitor the trust account. Although the case is not directly on point, as it dealt with whether or not the Law Society owed a private law duty of care to regulate, investigate, and discipline lawyers, the following comments by the Supreme Court of Canada are instructive:
13 The next question is whether this is a situation in which a new duty of care should be recognized. In order to satisfy this requirement, the plaintiff must show foreseeability and proximity. An examination of the governing statute, the Law Society Act, does not reveal any legislative intent to expressly or by implication impose a private law duty on the Law Society in the facts of this case. It is noteworthy that, as Finlayson J.A. observed, it was not expressly alleged that the appellants, or any members of the class that they propose to represent, were "clients" of Mills in the traditional sense. Instead, the appellants alleged that the duty of the Law Society went beyond a concern for the protection of clients in the traditional sense and extended to the public in general.
[34] Mr. Sherkin essentially argues that the Rules create a free-standing duty of care to third parties under some circumstances. I do not accept that argument. Although Edwards (No. 2) is not directly on point, it implies that the Rules and the Law Society Act cannot be stretched so far that they overcome the proximity principle. Furthermore, the Law Society Act itself does not create a private cause of action: R. v. Saskatchewan Wheat Pool, [1985] 1 S.C.R. 205.
[35] I do agree with Mr. Sherkin’s position is that there is at least an argument to be made that the Defendants breached the Rules. That said, the breach, if one can be shown, may well go to whether the conduct of the Defendants breached their professional responsibilities, but in and of itself such a breach does not generate proximity where none exists. It strikes me that the Defendants may not have taken all the care that they should have to avoid being duped by an apparently unscrupulous client. Like Grace J. in Bruno Appliance and Furniture and Molloy J. in Brunt v. Yen I find the actions – or inaction – of the Defendants troubling, but there is no basis to find that they owed a duty of care in these circumstances. I add that Scott’s failure to properly safeguard his own interests provides no excuse for the Defendants.
[36] I am sympathetic on the specific facts of this case to Mr. Sherkin’s argument that I ought to dismiss the summary judgment motion and allow the case to proceed to trial because there is room in the development of the law for a re-evaluation of the tort of negligence in these circumstances. I can find no such room. The law is well-settled and clear that a lawyer owes no duty to a third party except under well-defined circumstances. Those circumstances do not exist here.
Was there a breach of trust?
[37] In Filipovic v. Upshall, [2000] O.J. No. 2291 (C.A.) the court stated:
7 None of the indicia of a fiduciary duty - scope for exercise of discretion or power, actual exercise of discretion or power to affect the beneficiary's interest and unique vulnerability of the beneficiary - are present in this case: see Lac Minerals Ltd. v. International Corona Resources Ltd., 1989 CanLII 34 (SCC), [1989] 2 S.C.R. 574. Moreover, the courts should be careful in imposing fiduciary obligations on a solicitor outside the solicitor-client relationship if the solicitor is engaged in the delivery of legal services. The imposition of a fiduciary duty on a solicitor in relation to a non-client involved in a transaction with a client whom the solicitor is representing could give rise to a serious conflict of interest: see Anand v. Medjuck, [1995] O.J. No. 2571 (Gen. Div.) affirmed [1998] O.J. No. 101 (C.A.).
[38] It is clear that none of the indicia for a fiduciary duty exist in this case as well. The Defendants exercised no power of discretion in relation to the interests of the Plaintiffs. Scott, an experienced businessman, was not in a uniquely vulnerable position. In my view, this is one of those situations where a court should be very careful about imposing a fiduciary obligation on a lawyer and I decline to do so here.
DISPOSITION
[39] Summary judgment is granted and the actions against Mason and Shibley, Righton are dismissed. Under the circumstances I exercise my discretion and decline to award costs in favour of the Defendants.
GOLDSTEIN, J.
DATE: November 8, 2012
[^1]: In these reasons I only refer to Mason and Shibley Righton as the Defendants. I do not purport to refer to Valentine and Q Capital. Thus, while the actions against Mason and Shibley Righton are dismissed, the actions against Valentine and Q Capital remain outstanding.