ONTARIO
SUPERIOR COURT OF JUSTICE
COURT FILE NO.: 04-CV-272445 CM2
DATE: March 6, 2013
BETWEEN:
ANAND BAHL
Plaintiff
– and –
CADESKY & ASSOCIATES and BARRY SELTZER
Defendants
Yan David Payne for the Plaintiff
Sandra E. Dawe for the Defendant, Cadesky & Associates
Alfred J. Esterbauer for the Defendant Barry Seltzer
HEARD: February 25, 26, and 27, 2013
PERELL, J.
REASONS FOR DECISION
I. INTRODUCTION
[1] In this action, the Plaintiff Anand Bahl sues the accounting firm of Cadesky & Associates (“Cadesky”) and lawyer Barry Seltzer. The Cadesky firm makes a crossclaim against Mr. Seltzer. There are now two motions before the court. Cadesky moves to have Mr. Bahl’s claim dismissed, and Mr. Seltzer moves to have the claim and the crossclaim dismissed.
[2] In the action, Mr. Bahl alleges that for tax planning purposes, he retained the Cadesky firm and Mr. Seltzer to implement a family trust that had been created on October 1, 1996. He alleges that as a result of the Defendants’ negligence, the tax planning failed. Mr. Bahl was re-assessed by reassessment by Canada Customs and Revenue Agency, now Canada Revenue Agency, (“Revenue Canada”), and he was required to pay $695,616.11. In his action, he claims damages of $12 million.
[3] By way of defence and in support of its motion for a summary judgment, Cadesky denies that it was retained to provide the allegedly defective tax planning, and, in any event, it denies negligence. It also submits that Mr. Bahl suffered no damages because the family trust, which was prepared by Mr. Seltzer, was both: (1) invalid, because it was backdated; and (2) illegal (ex turpi causa) because the backdating was to perpetrate a tax fraud. Cadesky alleges that Mr. Bahl was always aware that his family trust had been backdated and intentionally backdated the trust.
[4] By way of reply to Cadesky’s defence, Mr. Bahl states that if the family trust was invalid or illegal, which is denied, then these faults constitute further failures and negligence by the Defendants, who, he claims, should have prepared and implemented an effective and lawful family trust.
[5] For his part, by way of defence and in support of his motion for a summary judgment, Mr. Seltzer submits that his retainer did not extend to formalizing the family trust and that his retainer certainly did not extend to providing tax advice to Mr. Bahl and it is the faulty tax advice that is the source of any damages suffered by Mr. Bahl.
[6] Mr. Seltzer submits that there is no genuine issue requiring a trial with respect to his limited retainer defence. He also submits that with respect to Mr. Bahl’s negligence claim, there is no genuine issue for trial because Mr. Bahl has not provided any expert evidence of the standard of care of the reasonably competent solicitor. Further, Mr. Seltzer submits that Mr. Bahl’s claim is statute-barred under the Limitations Act, 2002, S.O. 2002, c. 24, Sch. B.
[7] For the reasons that follow, I dismiss the two summary judgment motions with costs in the cause.
II. FACTUAL AND PROCEDURAL BACKGROUND
[8] For the purposes only of these motions for summary judgment, the factual and procedural background is as follows.
[9] As will appear from my account, many factual matters are disputed. From time to time during the narrative, I will identify genuine issues that require a trial. Later, in the discussion part of these Reasons, I will conclude that the Defendants’ defences raise issues that require the full appreciation of a trial.
[10] Mr. Bahl is an electrical engineer, who immigrated to Canada in 1967. He forged himself a career in the software industry. In the 1980s, he founded Zoomit International Inc., which business was purchased in 1999 by Microsoft for $24 million. The other shareholders in Zoomit were Barry McPeake and Kim Cameron.
[11] From around 1992, Mr. Seltzer, who was called to the bar in 1981, was corporate counsel to Zoomit. He was a general practitioner with no expertise in taxation. His law practice was largely built around real estate transactions. He did not provide tax advice to Mr. Bahl.
[12] Ken Finkelstein was Zoomit’s general accountant. Like Mr. Seltzer, Mr. Finkelstein did not provide tax planning advice to Zoomit or its shareholders.
[13] In the summer of 1996, there were discussions among the Zoomit shareholders about a possible sale of shares to a U.S. company called Pretty Good Privacy Inc. (“PGP Inc.”).
[14] Around this time, both Mr. Seltzer and Mr. Finkelstein suggested to Messrs. Bahl, Cameron, and McPeake that they establish family trusts. The general idea was that the shareholders would sell their shares to the family trusts and pay tax on the sale; however, tax on a resale of the shares to a third party, like PGP Inc., would be attributable to the trusts rather to the shareholders personally.
[15] It is Mr. Bahl’s position and evidence that the family trusts were actually established as of October 1, 1996, subject only to documenting the trusts to ensure that they complied with legal and tax objectives. Mr. Bahl states that Mr. Seltzer was charged with the responsibility of promptly doing the legal work to constitute the family trusts.
[16] The responsibility to implement the family trust is denied by Mr. Seltzer, who disputes that there was any settled intention to create family trusts in October 1996. He submits that the decisions about a family trust came in January 1996 without his participation or responsibility.
[17] There is a genuine issue requiring a trial with respect to the scope of Mr. Seltzer’s retainer and whether, at any time, it included establishing family trusts or supervising the creation of trusts for tax planning purposes.
[18] There is also a genuine issue requiring a trial about whether the family trusts were constituted but not documented in the fall of 1996.
[19] Further, another genuine issue for trial is when Mr. Bahl’s family trust purchased Zoomit shares. It is known that Mr. Bahl transferred his Zoomit shares (a 40% interest) into the Bahl Family Trust, in exchange for a promissory note in the amount of $1,200,000 based on an October 1, 1996 valuation of $3 million for Zoomit’s business. However, when that sale and the transfer of shares occurred is unclear.
[20] It is also Mr. Bahl’s position that the Cadesky firm was involved in the creation of family trusts in the fall of 1996.
[21] From the Plaintiffs’ side of the case, there is evidence that in the fall, Mr. Finkelstein recommended that Howard Berglas of the Cadesky firm be retained to provide Mr. Bahl with tax advice for the family trust. It is Mr. Bahl’s evidence that Mr. Berglas was retained in the fall of 1996 to provide tax planning advice for the family trusts that were already created on October 1, 1996.
[22] It is Mr. Bahl’s evidence that in mid-November, he and Mr. McPeake had a dinner meeting with Mr. Berglas, at a restaurant that served kosher Chinese food, where they discussed various ways to structure the family trusts.
[23] It is, however, Cadesky’s position that Mr. Berglas was not retained until late 1996 to provide go-forward advice about already-established trusts, including advice about the sale by the trust of its Zoomit shares to PGP Inc. It is Cadesky’s position that the firm was retained: (a) to file annual tax returns for the trust; (b) to file annual tax returns for Mr. Bahl and his wife Susan; (c) to provide advice about the sale of shares by the already established Bahl Family trust to PGP Inc. and (d) to provide go-forward advice for the already-established trust.
[24] It is Cadesky’s position that it was not retained to implement and ensure the effectiveness of the initial creation of the family trusts. Mr. Berglas denies that he ever attended the meeting at the kosher Chinese restaurant, and he denies knowing that the family trusts had not already been constituted when his own retainer began in late 1996 and early 1997. He denies knowing that the trusts were documented in 1997 and backdated to October 1996.
[25] What remains unclear and what requires a trial is whether and to whom Mr. Bahl gave instructions to establish a family trust for him in October 1996, and, if he did give those instructions, whether his family trust came into existence in October 1996. Also, as already noted, at issue is when the family trust acquired shares in Zoomit.
[26] What is clear is that the trust and the sale to the trust were not documented in the fall of 1996.
[27] By January 1997, there was an imminent sale to PGP Inc., and, in January, Mr. Bahl retained Irwin Greenblatt of Fogler Rubinoff to act on the sale of the Zoomit shares to PGP Inc. The Zoomit shares were being sold for for US$8,300,000, approximately $12 million in Canadian dollars.
[28] It is undisputed that Mr. Seltzer and Mr. Bahl knew that the family trust had not been documented and the format of it was still being settled.
[29] It also seems undisputable that Mr. Berglas knew that the sale of the Zoomit shares to the trust had not been documented in the fall and were being prepared in 1997, although he denies that he knew that the documents for the family trust were concurrently being prepared. There is a genuine issue for trial about whether Mr. Berglas knew that the Bahl family trust was being documented and whether he knew about the backdating of the family trust deed.
[30] Although Mr. Berglas denies knowing about the documenting of Mr. Bahl’s family trust, there is evidence that he knew that Mr. McPeake’s family trust had not been established. On January 24, 1997, Mr. Berglas provided Mr. McPeake’s lawyer in Vancouver with instructions on how to set up the trust.
[31] Pausing to state a point that may be obvious, if the trusts and the sale of shares to the trust happened for the first time in January 1997 and not in October 1996, then the shareholders would have sold to the trust Zoomit shares that then had a value of around $12 million (based on the sale to PGP Inc.) for $3 million, which was the value of the shares in October 1996. This point underlies Cadesky’s allegation of ex turpi causa.
[32] This point also underlies a genuine issue for trial about whether and what Mr. Bahl, his fellow shareholders, Mr. Finkelstein, the Cadesky accountants, and Mr. Seltzer knew about the creation of the family trusts and, if so, when they respectively knew about it. The knowledge and behavior of the parties may raise evidentiary estoppels about the legality of the Bahl family trusts, which estoppels, like the defence of ex turpi causa seem to have emerged during the motions for summary judgment and may at present not be adequately pleaded. I pause to say that I make no ruling about the adequacy of the pleadings and that this will be a matter for the trial judge, unless the parties move to amend their respective pleadings.
[33] Around the time of the PGP Inc. transaction, Mr. Seltzer was involved in documenting the sale of Zoomit shares to the family trust. It is Mr. Seltzer’s evidence, however, that he had no retainer to document the family trust, but rather he merely agreed to have the trust deed typed as an accommodation to Mr. Bahl.
[34] Mr. Seltzer’s evidence is that on January 22, 1997, Mr. Finkelstein told him that family trusts were in existence as of October 1, 1996, but had to be documented. It is Mr. Seltzer’s evidence that Mr. Finkelstein provided a precedent trust deed, and on January 24 and 26, 1997, Mr. Bahl only asked Mr. Seltzer to arrange to have the deed typed as soon as possible, because Mr. Bahl was hoping to complete the sale to PGP Inc. Mr. Seltzer’s evidence is that the trust deed was typed by his assistant, but he was never provided with information about the identity of the settlor, trustees, or beneficiaries. Thus, he did not complete the preparation of the trust deed but arranged to have the incomplete document delivered to Zoomit’s offices along with a computer disk copy.
[35] Mr. Seltzer says that Mr. Bahl knew that at the relevant time, Mr. Seltzer did not practice tax or trust law. Mr. Seltzer says that Mr. Bahl placed no reliance on Seltzer in any respect with regard to the family trust deed and that was confirmed in a written Acknowledgement that Mr. Bahl signed, confirming that Mr. Seltzer acted only as a typing service in regard to the preparation of the Anand Bahl Family Trust Agreement. The Acknowledgement indicates that Mr. Seltzer provided no legal advice or otherwise about the contents of the trust deed.
[36] Mr. Seltzer submits that Mr. Bahl is fully aware of the circumstances under which the Family Trust deed was created and that Mr. Bahl knew that Seltzer was not providing any legal advice in any respect with regard to the Family Trust, which understanding is embodied in the acknowledgement that Mr. Bahl signed.
[37] In his cross-examination, Mr. Seltzer admitted that he did not discuss the Acknowledgment with Mr. Bahl but that it was prepared and simply sent to Mr. Bahl for signature. Nevertheless, Mr. Seltzer relies on the Acknowledgement as clear and undisputable evidence of his limited retainer.
[38] Mr. Bahl’s position is that the Acknowledgment is another example of solicitor’s negligence.
[39] As already noted above, Mr. Berglas says he was unaware and uninvolved in this activity associated with the typing of the trust deed. He says that he did not know it was being backdated, and it was only later that he noted how the trust was constituted in terms of appointment of trustees and designation of beneficiaries.
[40] Here, it may be noted that several years later, Revenue Canada attributed tax to Mr. Bahl because of its view of the effect of the interrelationship between the named trustees and the named beneficiaries. Here, it may also be noted the surreal aspect of this litigation is that the Cadesky firm, and not Revenue Canada, makes an issue of the backdating of the trust deed as an aspect of its motion for summary judgment. In its notice of motion and in its factum for the motion for summary judgment – but not in its Statement of Defence – Cadesky takes the position that the backdating of the family trust deed was both legally ineffective as a trust and also illegal based on the doctrine of ex turpi causa. It is the Cadesky firm that puts the blame on Mr. Bahl and Mr. Seltzer for backdating the trust deed.
[41] It is known, however, that by March 1997, Mr. Berglas had a copy of Mr. Bahl’s family trust deed. Cadesky submits, however, that it did not provide any tax advice as to whether or not it the family trust would be effective for its initial tax planning purposes.
[42] There is evidence that Mr. Berglas did make some suggestions about the appointment of additional trustees, and in June 1997, Mr. Bahl appointed two additional trustees; namely his wife and Adele Freedman, who is Mr. Cameron’s wife. These appointments did not influence Revenue Canada’s decision later to reassess Mr. Bahl.
[43] In any event, in May 1997, the PGP Inc. transaction was rescinded because it had failed to achieve financing. The Bahl Family trust waited for a new purchaser.
[44] In 1999, Mr. Bahl’s Family Trust sold its shares in Zoomit to Microsoft. After the closing of the transaction, the proceeds were allocated and paid to the beneficiaries and the capital gain was reported on the tax returns of the beneficiaries.
[45] On May 2, 2001, Revenue Canada began an audit of Mr. Bahl’s tax returns.
[46] On May 30, 2003, Revenue Canada delivered a notice of reassessment.
[47] On July 3, 2003, Mr. Bahl was reassessed $695,616.11, respecting taxation years 1999-2001. Of that amount, all except about $155,000.00 represents penalties and interest.
[48] The re-assessment attributed the capital gains from the sale of shares to Microsoft to Mr. Bahl personally. Revenue Canada’s position was to attribute the gain pursuant to section 75(2) of the Income Tax Act, because the family trust was structured in a way in which Mr. Bahl was the controlling trustee and also a beneficiary of the trust.
[49] There is an issue between the parties about when Mr. Bahl became aware that there might be a problem under s. 75 (2) of the Income Tax Act and aware of problems about how the family trust had been structured. Mr. Seltzer submits that Mr. Bahl was made aware of potential problems as far back as 1998, and, therefore, Mr. Seltzer submits that Mr. Bahl’s claim is statute-barred under the six-year limitation period under the former Limitations Act and the transition provisions of the current Act.
[50] Returning to the narrative, Mr. Bahl did not appeal the re-assessment, but rather, with Cadesky’s assistance, he negotiated to have Revenue Canada permit him to have stock trading losses treated as business losses rather than capital losses. There is a genuine issue for trial about whether Mr. Bahl missed opportunities to mitigate and about the quantum of his damages.
[51] In any event, Mr. Bahl was unhappy with the outcome of his dealings with Revenue Canada, and he sought legal advice. He was advised by Borden Ladner Gervais that Mr. Berglas ought to have noted that there were problems with how the trust deed was constituted in its appointment of trustees and designation of beneficiaries.
[52] On July 15, 2004, Mr. Bahl commenced an action against Cadesky. In his action, he alleges that Cadesky recommended the formation of the Bahl Family Trust and that the trust deed was prepared in January, 1997 pursuant to Cadesky’s advice. He alleges that because of flaws in the tax deed, he was reassessed by Canada Revenue and that Cadesky was negligent in the services it provided.
[53] Mr. Seltzer was added as a defendant to the action effective March 27, 2007.
[54] The addition of Seltzer as a Defendant was approximately 2 years and 9 months following the commencement of the action. If the current Limitations Act, 2002 applies and based on the discovery of the cause of action against Cadesky in 2004, the claim against Mr. Seltzer would be statute-barred.
[55] Mr. Bahl, however, argues that the claim against Mr. Seltzer was governed by the six-year limitation period under the former Limitations Act and is not statute-barred.
[56] In the action, affidavits of documents have been exchanged. There have been no examinations for discovery and the parties have been pre-occupied by the motions for summary judgment now before the court. Affidavits were delivered from Mr. Bahl, Mr. McPeake, Mr. Seltzer, Mr. Berglas, and Howard Wasserman, another Cadesky accountant. All of these deponents were cross-examined.
[57] An affidavit contained an expert opinion from Donovan W.M. Waters expressing an opinion about the application of trust law to the circumstances of this case was also delivered. While I have the greatest respect for Professor Waters as a trust scholar and do not doubt his expertise, I have ignored his legal opinion as evidence. His opinion is argument not admissible evidence.
III. DISCUSSION
[58] Under rule 20.01(3) of the Rules of Civil Procedure, a defendant may, after delivering a statement of defence, move with supporting affidavit material or evidence for summary judgment dismissing all or part of the claim in the statement of claim.
[59] Under rule 20.04(1), the court shall grant summary judgment if the court is satisfied that there is no genuine issue requiring a trial with respect to a claim or defence. In determining whether there is a genuine issue requiring a trial, the court shall consider the evidence submitted by the parties and may exercise any of the powers outlined in rule 20.04(2.1), unless it is in the interest of justice for such powers to be exercised only at a trial. The powers in rule 20.04(2.1) are: (1) weighing the evidence; (2) evaluating the credibility of a deponent; and (3) drawing a reasonable inference from the evidence.
[60] In Combined Air Mechanical Services Inc. v. Flesch, 2011 ONCA 764, the Court of Appeal discussed the test for summary judgment, and the Court articulated what is now described as the full appreciation test. Under this test for determining when there is a genuine issue requiring a trial, the motions judge asks him or herself whether the full appreciation of the evidence and the issues required to make dispositive findings can be achieved by way of a summary judgment, or can this full appreciation only be achieved by way of a trial? The test for granting a summary judgment focuses on whether as a matter of procedural fairness and substantive justice, the action should be tried by a trial judge or jury.
[61] Of the full appreciation test, the Court stated in Combined Air at paras 51-52:
We think this "full appreciation test" provides a useful benchmark for deciding whether or not a trial is required in the interest of justice. In cases that call for multiple findings of fact on the basis of conflicting evidence emanating from a number of witnesses and found in a voluminous record, a summary judgment motion cannot serve as an adequate substitute for the trial process. Generally speaking, in those cases, the motion judge simply cannot achieve the full appreciation of the evidence and issues that is required to make dispositive findings. Accordingly, the full appreciation test is not met and the "interest of justice" requires a trial.
In contrast, in document-driven cases with limited testimonial evidence, a motion judge would be able to achieve the full appreciation of the evidence and issues that is required to make dispositive findings. Similarly, the full appreciation test may be met in cases with limited contentious factual issues.
[62] The Court of Appeal's judgment in Combined Air Mechanical Services Inc. v. Flesch, 2011 ONCA 764 does not change the evidentiary and procedural law that on a motion for summary judgment, the court is entitled to assume that the parties have respectively advanced their best case and that the record contains all the evidence that the parties respectively will present at trial: Dawson v. Rexcraft Storage & Warehouse Inc., 1998 4831 (ON CA), [1998] O.J. No. 3240 (C.A.); Bluestone v. Enroute Restaurants Inc. (1994), 1994 814 (ON CA), 18 O.R (3d) 481 (C.A.); Papaschase Indian Band No. 136 v. Canada (Attorney General), 2008 SCC 14, [2008] 1 S.C.R. 372 (S.C.C.) at para. 11; Saltsov v. Rolnick 2010 ONSC 914 at paras. 43-44 (Ont. Div. Ct).
[63] The onus is on the moving party to show that there is no genuine issue requiring a trial, but the responding party must present its best case or risk losing: Pizza Pizza Ltd. v. Gillespie (1990), 1990 4023 (ON SC), 75 O.R. (2d) 225 (Gen. Div.); Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co. (1996), 1996 7979 (ON SC), 28 O.R. (3d) 423 (Gen. Div.), affd [1997] O.J. No. 3754 (C.A.).
[64] In 1061590 Ontario Ltd. v. Ontario Jockey Club (1995), 1995 1686 (ON CA), 21 O.R. (3d) 547 at para. 35 (C.A.), Justice Osborne stated: "a respondent on a motion for summary judgment must lead trump or risk losing". The responding party may not rest on the allegations or denials in the pleadings but must set out in affidavit material or other evidence, specific facts showing that there is a genuine issue requiring a trial.
[65] In my opinion, even with the enhanced powers to make findings of fact on a motion for summary judgment, the case at bar is not an appropriate case for a summary judgment. I see a need for a trial in the case at bar.
[66] Applying the full appreciation test from Combined Air Mechanical Services Inc. v. Flesch, 2011 ONCA 764, I cannot accurately weigh and draw inferences from the evidence presented on this motion for summary judgment without the ability to hear the witnesses speak in their own words and the assistance of counsel to understand the trial narrative.
[67] In my opinion, the full forensic powers of a trial are necessary to determine the limitation period issues, the issues associated with the respective retainers of the Defendants, the issues associated with the validity and legality of the Bahl Family trust and whether there are estoppels that would preclude a Defendant from denying the validity of the trust deed.
[68] Because it is my view that a trial is clearly necessary, it would not be fair or appropriate for me to express an opinion about the parties’ factual and legal arguments.
[69] All I will say in this regard - because it is relevant to my view about the costs for the motions for summary judgment - is that depending on a trial judge’s full appreciation of the facts, one possible outcome to a trial is that some or all of the parties and some non-parties knew or turned a blind eye to the fabrication that a family trust and a sale to that trust occurred in October 1996. However, another possible outcome is that there was a trust and a sale that occurred in October 1996 but that the trust and the sale was memorialized in early 1997.
[70] In these circumstances, where the outcome of the trial may or may not involve a finding that some or all of the parties may be involved in an illegal transaction, it is appropriate to make the costs of the unsuccessful motions for summary judgment in the cause.
IV. CONCLUSION
[71] For the above reasons, I dismiss the motions for summary judgment with costs in the cause.
Perell, J.
Released: March 6, 2013
COURT FILE NO.: 04-CV-272445 CM2
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
ANAND BAHL
Plaintiff
‑ and ‑
CADESKY & ASSOCIATES and BARRY SELTZER
Defendants
REASONS FOR DECISION
Perell, J.
Released: March 6, 2013.