COURT FILE NO.: CV-08-00360779
DATE: 20140325
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Kehoe’s Pharmacy Ltd. and 1126456 Ontario Inc.
Plaintiffs
– and –
Shoppers Drug Mart Inc., G.G. Pharmacy Inc. and Bennett Best Burn LLP
Defendants
Jeffrey Radnoff, for the Plaintiffs
Adam Pantel, for the Defendant, Bennett Best Burn
HEARD: Sept. 18-20, 2013 and
Jan. 20, 2014
E.M. Morgan J.
[1] By the time this action reached the trial stage, the only remaining Defendant was the law firm Bennett Best Burn LLP, the Plaintiff having settled with the other original defendants, Shoppers Drug Mart Inc. and G.G. Pharmacy Inc. (“Shoppers”). Accordingly, the matter proceeded to trial only on the issue of the Defendant solicitors’ negligence.
I. The sale transaction
[2] The Plaintiffs were a pharmacy and retail store located in Perth, Ontario. In October 2006, Dianne Kehoe, the principal of the Plaintiffs, sold the business to Shoppers for approximately $4 million in assets and $1.5 million in inventory. The Defendant, Bennett Best Burn LLP, is the law firm that represented the Plaintiffs in that sale transaction.
[3] Ms. Kehoe is a licensed pharmacist and an impressive business person. She opened her store in 1991, and for 17 years singlehandedly built her business into a “big city” style, 8,000 square foot retail pharmacy, at a time when all of the other pharmacies in Perth were small dispensaries. She testified, with great passion and credibility, that she worked long hours herself in the store, that she personally covered for her staff when they went on vacation, personally shopped for holiday gift baskets for the town’s doctors and other important customers, and generally ran an efficient and profitable business.
[4] Kehoe’s Pharmacy, in other words, was Ms. Kehoe’s major life’s work. Understandably, she expected to be rewarded for it at the end of the day. As she stated in her own testimony, she is a single woman who had no other pension, retirement package, or source of support. Ensuring that she got the most out of the sale of her business was obviously important to her.
II. The relationship between the parties
[5] The Defendant’s offices are in Toronto. Ms. Kehoe had never used this firm before the sale of her business, but she testified that she specifically sought out a Toronto law firm as the local firms in Perth were, in her words, “too small and too gossipy”. The Defendant was recommended to her by Don Inwood, a personal friend of Ms. Kehoe’s and the longtime accountant for Kehoe’s Pharmacy.
[6] The two solicitors at the Defendant who worked on the Kehoe-Shoppers sale were David Burn, the firm’s senior partner, and Paul Mahaffy, a specialist in commercial transactions and business law. Mr. Burn had the primary contact with Ms. Kehoe, while Mr. Mahaffy did most of the hands-on work. Both Mr. Burn and Mr. Mahaffy testified at the trial.
[7] As a general matter, the file seemed to be far from the front of Mr. Burn’s mind. He testified in chief that he only communicated with Ms. Kehoe by email, as she did not want to take time to meet or speak on the phone; however, in cross-examination he was asked about his own dockets, in which he recorded and billed for time spent in various meetings and telephone conversations with Ms. Kehoe. Plaintiffs’ counsel asked him whether he could recall what was discussed at those meetings and phone calls, and his response was dismissive: “I don’t recall what I had for lunch that day, either.”
[8] As for Mr. Mahaffy, he was more attentive to the file than Mr. Burn. Nevertheless, he carried out his duties in what can be described as passive or minimalist fashion. He testified that it was Shoppers’ lawyer, Michael Gomes, that did the primary drafting of the agreement, and that his own role was, essentially, to pass on these drafts to Ms. Kehoe and to wait for her comments.
[9] It was Mr. Mahaffy’s evidence that he gave Ms. Kehoe no advice on what matters were included, or should be included, in the assignment of assets to Shoppers and in the contract more generally. There is nothing in record that demonstrates, or even hints, that he gave her any guidance on the terms of the deal or how to improve it or better protect her position. He conceded in his testimony that he did not discuss the deal in any advisory way with his client except on closing day, when he reviewed with her the total contents of the contract that was already negotiated and fully drafted.
[10] Mr. Mahaffy testified that his practice was to pass on to Ms. Kehoe the emails and successive drafts prepared by Mr. Gomes on behalf of Shoppers, and if he did not hear back from her he took Ms. Kehoe’s silence as her agreement to anything in Mr. Gomes’ draft. He stated this in a completely matter-of-fact way, as if this were standard lawyering. This passive approach to client communication included emails and drafts from Shoppers’ lawyer that contained detailed and, from the seller’s viewpoint, detrimental changes from the prior draft. Mr. Mahaffy apparently did not draw any of Shoppers’ changes or drafting proposals to Ms. Kehoe’s specific attention, and did not discuss with her the implications of any of those changes.
III. The Defendant’s failings
[11] There are three specific areas of contention between the parties: a) the termination of Ms. Kehoe’s consulting position with Shoppers; b) the non-assignment of the Plaintiffs’ MCAP business software lease; and c) foregone interest on funds held in trust by the Defendant. Each of these areas has led to a negligence allegation and a head of damages claimed by the Plaintiffs, and each will be addressed in turn.
a) Termination of Ms. Kehoe by Shoppers
[12] As a term of the sale transaction, the Plaintiffs agreed that Ms. Kehoe (in her corporate guise) would stay on as a consultant to Shoppers for eight weeks after the closing of the sale. The closing took place on December 18, 2006, and she began work in her new capacity immediately thereafter.
[13] Ms. Kehoe worked for about three weeks as a consultant in Shoppers’ newly purchased drug store, but had an argument with an employee in the store on January 8, 2007. That turned out to be her last day of work.
[14] The closing book for the sale transaction contains an unsigned copy of the Shoppers consulting agreement. Ms. Kehoe’s evidence is that the Defendant was supposed to ensure that all of the closing documents were properly signed by all parties, but that the law firm did not take any steps to ensure that the consulting agreement was signed.
[15] Neither Mr. Burn nor Mr. Mahaffy provided any real explanation for not having obtained Shoppers’ signature on the consulting agreement. Mr. Burn testified that Shoppers had signed an undertaking to sign the consulting agreement, and in testimony he seemed to place little importance on getting Shoppers to actually sign it. Indeed, on the witness stand he made a quip at the expense of his client, and offered that perhaps his firm could follow up on the consulting agreement now if Ms. Kehoe wishes.
[16] Ms. Kehoe testified that after her argument with an employee in the store on January 8th, she took a day off to recover on January 9th, which also happened to be her birthday. She stated that the next day, January 10th, she called Mr. Mahaffy to relay to him the difficulties she was having in the store. She testified that it was in that conversation that Mr. Mahaffy told her that Shoppers was terminating her. She never heard directly from anyone at Shoppers, but rather was made to understand from Mr. Mahaffy that Shoppers was communicating her termination through him.
[17] Ms. Kehoe further testified that she was surprised that Shoppers was firing her or, indeed, that it could fire her in this way. She told Mr. Mahaffy that this was not possible because the consulting agreement required Shoppers to send her a termination letter by registered mail, and she had received no such letter. It was then, she indicated, that Mr. Mahaffy told her for the first time that Shoppers never signed the consulting agreement.
[18] Shoppers’ lawyer, Michael Gomes, was called by the Defendant to testify at the trial. He indicated that, as far as he was concerned, the consulting agreement ended when Ms. Kehoe stopped attending at the store. He testified that he never told anyone at the Defendant law firm that Shoppers had terminated the consulting agreement, and that in fact Shoppers never did terminate the agreement.
[19] Mr. Burn’s and Mr. Mahaffy’s responses to Ms. Kehoe’s testimony regarding her termination by Shoppers are a maze of contradictions.
[20] On the stand, Mr. Mahaffy denied telling Ms. Kehoe that she was terminated by Shoppers. This, however, is countered by Mr. Mahaffy’s own docket entry for January 10, 2007, which specifies that he spoke with Ms. Kehoe on that date about “termination”.
[21] Mr. Mahaffy’s testimony at trial that he never told Ms Kehoe that she was terminated by Shoppers is also countered by his own testimony at a solicitor-client assessment hearing held prior to the trial. The transcript of that hearing was put to Mr. Mahaffy in cross-examination. At the assessment hearing, Mr. Mahaffy testified that Shoppers refused to sign the consulting agreement because they said Ms. Kehoe had breached the agreement when she left the store after the argument with the employee on January 8th. It is hard to understand how Mr. Mahaffy could have told Ms. Kehoe that Shoppers viewed her to be in breach of the contract so that it did not have to sign it, without telling her that Shoppers considered her consulting arrangement to be at an end. One or the other of those accounts must be wrong.
[22] In his trial testimony, Mr. Mahaffy indicated that, in fact, when Ms. Kehoe called him on January 10th about the difficulties she had with the Shoppers’ employee, he did not tell her anything at all. His explanation of this phone call was that he simply listened to Ms. Kehoe, but did not convey any message or offer any advice in respect of the consulting arrangement because she did not seek any advice.
[23] This explanation, of course, raises the question of why Mr. Mahaffy thought Ms. Kehoe was calling him. They were not personal friends, and she certainly was not calling him to pass the time of day. Ms. Kehoe would have had no reason to call her lawyer except to relay a legal problem and to get legal advice.
[24] Mr. Mahaffy’s assertion that Ms. Kehoe did not seek any advice regarding the consulting agreement is literalist to the point of being indifferent. Any lawyer representing a client in these circumstances would have, or at least should have, understood that she was in need of some advice whether she specifically asked for it or not. For Mr. Mahaffy to say that he gave her no advice at the moment when she needed it most is to concede that he did not meet the standard of care one expects of a solicitor.
[25] Mr. Burn tells a different story. Indeed, he tells a different story each time he tells the story. In his examination for discovery, he stated explicitly that he learned from Mr. Mahaffy that Ms. Kehoe had been terminated from her consulting arrangement. “Shoppers turfed her”, was how he put it at discovery. At the solicitor-client assessment hearing, Mr. Burn stated quite clearly that it was the pharmacist at the Shoppers store that fired Ms. Kehoe. In his evidence at trial before me, however, he was unsure how he learned that Ms. Kehoe had been terminated. “It was the talk of the town among the people involved in this transaction,” he testified.
[26] The one thing that I take from Mr. Burn’s evidence about the termination of the consulting agreement is that he did not take Ms. Kehoe’s rights seriously. Indeed, Mr. Burn stated this himself at trial, where he testified that, “The consulting agreement was an irrelevance. It was a joke.”
[27] As for Ms. Kehoe’s testimony, it was entirely consistent at discovery, at the assessment hearing, and at trial. She conceded that she had an argument with a Shoppers employee on January 8th; she conceded that she stayed home from work on January 9th; and she indicated that she spoke with Mr. Mahaffy on January 10th and that he advised her that Shoppers was terminating her. She further testified at each of her appearances that Mr. Mahaffy told her that the consulting agreement was unsigned by Shoppers, and that she took from that that she had no rights in the face of her having been terminated. She never heard from Shoppers again and never received any further consulting fees.
[28] I find that Mr. Mahaffy must have told Ms. Kehoe that she was terminated by Shoppers. This is confirmed by Mr. Burn’s testimony at discovery and by Mr. Mahaffy’s own docket entry.
[29] But for Mr. Mahaffy’s statement – which, according to Mr. Gomes, was a misstatement of the true state of affairs – Ms. Kehoe would have returned to work. Had the Defendant fulfilled its duty in pressing Shoppers to sign the consulting agreement, and had the Defendant provided Ms. Kehoe with proper legal advice on January 10, 2007, she would have been in a position to earn $3,000.00 per week for the five weeks that remained on the eight week consulting agreement.
b) Non-assignment of the MCAP lease
[30] Ms. Kehoe testified that at her very first meeting with the Defendant, she gave instructions that all equipment, computer, ATM machine, photocopier, and other leases that the Plaintiffs owned were to be assigned to Shoppers as part of the sale transaction. These leases had value, and she considered them part of the assets that she was selling. This included a business inventory and data software system called the MCAP, which she leased for $7,910 per year.
[31] Several weeks prior to closing, in late November 2006, Ms. Kehoe spoke with Mr. Mahaffy who, she says, left her with the impression that all her contracts, including the MCAP lease, had been accepted by Shoppers. She stated in her testimony that this came as a relief to her, since she was anxious that the sale dispense with the ongoing burden of the lease payments.
[32] In early December 2006, Mr. Gomes indicated to Mr. Mahaffy that, in fact, Shoppers was not interested in taking an assignment of the MCAP lease. On December 8th, Mr. Mahaffy copied Ms. Kehoe on correspondence with Mr. Gomes which reviewed all of the leases and PPSA registrations against them. In a half sentence, the email stated that the MCAP lease “does not perfect any other security interest”, and then referred to the MCAP lease as “excluded assets”.
[33] No explanation of this bit of legalese was ever provided to Ms. Kehoe by her lawyers. Furthermore, Mr. Mahaffy never specifically brought to Ms. Kehoe’s attention the fact that the MCAP lease was being excluded from the list of assigned assets. Mr. Mahaffy confirmed in his testimony that he never discussed this exclusion with Ms. Kehoe. When asked why he had not done so, his answer was brief and to the point: “Because it was in the emails.”
[34] As a result of this failure to discuss the matter or provide any advice to Ms. Kehoe, she was unaware at closing that the MCAP lease had not been included in the assigned assets. She did not deny receiving the email referred to by Mr. Mahaffy that contained the cryptic reference to the MCAP lease; indeed, in her testimony in chief she conceded that she probably did receive all of the Mahaffy-Gomes correspondence on which she was copied in early December 2006. She testified that at the time she was busy working in the pharmacy, and may well have missed the line about the MCAP that was buried in one of the many pieces of email correspondence forwarded to her by Mr. Mahaffy.
[35] On December 18, 2006, shortly after the closing of the sale, Ms. Kehoe sent a request for reimbursement of the pre-paid MCAP leasing payment to the Defendants to be forwarded on to Shoppers for payment. Reimbursement of the Plaintiffs for the pre-paid annual amount of $7,560.00, was, in fact, listed as an adjustment to the purchase price in the statement of adjustments contained in the closing book prepared by the Defendant.
[36] It is obvious that neither Mr. Mahaffy nor Mr. Burn had ever explained to Ms. Kehoe that the MCAP lease had not been agreed to by Shoppers. Had she been made aware that the MCAP lease was not assigned, she would not have prepared and forwarded the request for reimbursement of the pre-paid annual lease payment. Indeed, since reimbursement of the pre-paid MCAP lease payment was included in the closing book as an adjustment to the purchase price, it is evident that both Mr. Mahaffy and Mr. Burn overlooked this item altogether.
[37] Mr. Mahaffy’s explanation of how reimbursement of the MCAP lease payment came to be included on the final statement of adjustments is telling. He testified that the statement had been prepared by Ms. Kehoe’s accountant, and not by him. Mr. Mahaffy stated that he merely passed it on to Shoppers and included it in the closing book without comment.
[38] As a result of all of this, Ms. Kehoe never had the opportunity to negotiate further with respect to the assignment of the MCAP lease. She was candid in her testimony that she is not sure whether she would have been able to convince Shoppers that they should take over the MCAP lease, but she was confident that some concession could have been negotiated with Shoppers over this issue. She had a good track record in negotiating, and had been successful in exacting several other concessions from Shoppers when they initially balked at one of her requests.
[39] The non-assignment of the MCAP lease effectively cost Ms. Kehoe $23,380.00. The pre-paid amount of $7,560.00 was never reimbursed to her, and the lease continued for two more years for total of $15,820.00 in extra rent. All of these payments were made by her on a software lease for which she had no further use.
[40] Mr. Mahaffy’s statement that he had passed on to Ms. Kehoe the email exchange with Shoppers’ lawyer that referenced the non-assignment of the MCAP lease, is unsatisfactory. His explanation that he had reproduced in the closing book the statement of adjustments prepared by the Plaintiffs’ accountant, is equally unsatisfactory. A law firm is more than a messenger service. Ms. Kehoe had a right to some actual advice from her lawyers.
[41] The consequence of this was that Ms. Kehoe had no opportunity to assess the true value of the deal or to attempt to negotiate an improved deal for herself. She therefore incurred $23,380.00 in lease payments that she did not expect to have incurred.
c) The foregone interest claim
[42] The Defendant, in trust for the Plaintiffs, received the closing funds from Shoppers in several trenches. Ms. Kehoe claims that although the majority of the funds were disbursed to her in a timely fashion, there was over $1 million in closing funds that the Defendant withheld from her and retained in its trust account for nearly two months for no discernable reason. She claims that at the very least the Defendant should have placed these funds in an interest bearing account.
[43] The Defendant’s trust ledger shows that on December 19, 2006 the firm held $616,008.33 in its trust account on the Plaintiffs’ behalf. By January 8, 2007, after paying its own bill and the Plaintiffs’ accounting bill, the Defendant held $1,128,366.58 in trust for the Plaintiffs. These funds were not forwarded to Ms. Kehoe until February 7, 2007.
[44] Although the Defendant claimes to have been holding the funds in trust for the payment of the Plaintiffs’ creditors, the evidence shows that virtually all of the creditors had in fact been paid at or shortly after closing. The only outstanding amount to be paid out of the funds held in trust was PST in the estimated amount of $35,000.
[45] In his testimony, Mr. Mahaffy conceded that, “In hindsight we didn’t have to hold back as much as was held back.” This may have become apparent to Mr. Mahaffy in hindsight, but it should have been apparent at the time. Ms. Kehoe telephoned the law firm on January 7, 2007 and asked why the funds were not being disbursed to her, and called again on January 30, 2007 and spoke to Mr. Burn about this. It is clear that she was agitated about the withholding of the money and that Mr. Burn had no real explanation for it.
[46] Mr. Burn testified that, “We would use best judgment” to estimate how much to disburse to the client and how much to hold back. Under the circumstances, however, it is apparent that the Defendant never really turned its mind to the question of withholding such a large amount of money for so long. There was, in point of fact, no reason for the Defendant to hold on to $1,128,366.58 of its client’s money.
[47] Mr. Burn was asked in cross-examination why the Defendant did not place the funds in an interest bearing account pending their distribution. His answer was that, “We are not investment counselors. We require very specific instructions from the client in order to invest trust funds.” This, of course, is both formally correct and entirely unsatisfactory from the client’s point of view.
[48] In closing argument, Defendant’s counsel submitted that a lawyer’s mixed trust account does not bear interest in the ordinary course, and that the law firm must be specifically instructed to deposit the funds in a segregated, interest bearing account. He further submitted that there is no authority for there being a positive obligation on a law firm to invest client funds held in trust.
[49] In making these submissions, Defendant’s counsel is indeed correct. I have been referred to no authority for the existence of any positive obligation on lawyers to invest trust funds held on behalf of a client. In my view, there is no such obligation.
[50] That said, it is a lawyer’s duty to render some advice to a client. Mr. Burn’s statement that “We are not investment counselors” is, with respect, far too curt. Ms. Kehoe testified with credibility that as a business person she would have assumed that if over $1 million was to be held in a bank account for her for an extra couple of months, there would be some interest earned on that money. Since her lawyers failed to tell her otherwise, she was under an understandable misapprehension.
[51] The evidence presented by Ms. Kehoe is that in late 2006 and early 2007, GIC’s were paying 2.68% interest. This is the most basic form of investment and is the least that one would expect to earn on funds being withheld for no particular reason. Plaintiffs’ counsel calculates that for 20 days, from December 19, 2006 to January 7, 2007, the Defendant held $616,008.33, which would have earned $904.60, and that from January 8, 2007 to February 7, 2007, the Defendant held $1,126,366.58, which would have earned $2,485.50. Ms. Kehoe’s total loss in terms of foregone interest was therefore $3,390.10.
IV. The standard of care
[52] As the Supreme Court of Canada stated in Central & Eastern Trust Co. v Rafuse, [1986] 2 SCR 147, at para 66, “[a] solicitor is required to bring reasonable care, skill and knowledge to the performance of the professional service which he has undertaken. The requisite standard of care has been variously referred to as that of the reasonably competent solicitor, the ordinary competent solicitor and the ordinary prudent solicitor.” [citations omitted]
[53] However one may describe it, the Defendant fell below the reasonable standard of care in all three areas in contention here.
[54] I pause to briefly note that neither party led expert evidence on the issue of the applicable standard of care. In my view, no expert evidence was needed. As the New Brunswick Court of Appeal stated in Mailhot v Savoie (2004), 2004 NBCA 17, 268 NBR (2d) 348, at para 15, “that state of affairs [i.e. the lack of expert evidence on a lawyer’s standard of care] did not preclude a finding of professional negligence. Indeed, the trial judge was entitled to settle upon a standard of care dictated by his own experience and the common law.”
[55] With respect to the consulting agreement, the Defendant here misadvised (or failed to advise) Ms. Kehoe of her rights under that agreement, and negligently informed her that she had been terminated when in fact Shoppers had not communicated any termination. Barrington-Foote, J. noted in Kopp v Halford, 2013 SKQB 128, [2013] 11 WWR 713, at para 90 (Sask QB), that solicitors operate under “a duty to warn the client of the risks of pursuing a particular course of action.” In failing to advise Ms. Kehoe of the real position of Shoppers and the dangers of assuming she had been terminated, the Defendant failed her in this important duty.
[56] Turning to the MCAP lease, the Defendant also failed to advise Ms. Kehoe that Shoppers had not agreed to the assignment of that lease. As a result, the Defendant deprived her of the opportunity to improve the deal she had negotiated. Citing Girardet v Crease & Co. (1987), 11 BCLR (2d) 361, (BC SC), the court in Kopp pointed out at para 91 that “[a] solicitor must not only give good advice, but make the reasons for that advice sufficiently clear to enable the client to make an informed judgment.” Ms. Kehoe was unable to make an informed judgment regarding the MCAP lease, as her lawyers gave her no advice at all on the issue.
[57] Finally, the Defendant failed to disburse Ms. Kehoe’s funds in a timely fashion and failed to advise her that these funds would be held in a non-interest bearing account pending their disbursement. The British Columbia Supreme Court aptly observed in Morton v Harper (1995), 8 BCLR (3d) 53, at para 41, that “[s]olicitors are able to act only upon instructions received from a client… however, a solicitor is under an obligation to advise a client on what instructions are required.”
[58] The Defendant here expected Ms. Kehoe to not only instruct them with respect to the trust funds, but to know that it was up to her to instruct them. That, however, was an expectation too far.
[59] Ms. Kehoe did not instruct her lawyers to place her funds in an interest bearing account because she did not know that her funds would be held in a non-interest bearing account. The Defendant neither drew this fact to her attention nor advised her that they needed her specific instructions in this regard. By so maintaining its pattern of silence with its client, the Defendant breached its duty to take reasonable care in advising her of her rights.
V. Disposition
[60] The Defendant’s negligence caused the Plaintiffs’ losses as follows:
$15,000, representing 5 weeks of foregone consulting fees;
$23,380, representing 3 years of extra MCAP lease payments; and
$3,390.10, representing foregone interest on funds held in trust from December 19, 2006 to February 7, 2007.
[61] The Defendant shall therefore pay the Plaintiffs damages in the total amount of $41,770.10.
[62] The parties may make written submissions as to costs. I would ask that they be sent directly to me, with counsel for the Plaintiffs providing his submissions within two weeks of the date of this judgment and counsel for the Defendant within a week thereafter.
Morgan J.
Released: March 25, 2014
COURT FILE NO.: CV-08-00360779
DATE: 20140325
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Kehoe’s Pharmacy Ltd. and 1126456 Ontario Inc.
Plaintiffs
– and –
Shoppers Drug Mart Inc., G.G. Pharmacy Inc. and Bennett Best Burn LLP
Defendants
REASONS FOR JUDGMENT
E.M. Morgan J.
Released: March 25, 2014