CITATION: Kastner et al. v. Fairfax partners Corp., 2015 ONSC 3365

COURT FILE NO.: 12-CV-449302

Heard: February 25, 2015

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Kastner et al. v. Fairfax partners Corp.

BEFORE: Master Joan Haberman

COUNSEL: Tourgis, N.J. for the moving party

Camelino, G. for the responding party

ENDORSEMENT

Master Haberman:

[1] This motion by Fairfax, the defendant/plaintiff by counterclaim, to remove McLean & Kerr LLP (“MK”) as counsel for the plaintiffs/defendants by counterclaim was heard on February 25, 2015. The motion stems from Fairfax’s concerns that MK acted both on their behalf and against them simultaneously, thereby placing themselves in a position of disqualifying conflict. Fairfax also asserts that MK was made privy to their confidential information and used it against them. Although the Fairfax retainer has since been terminated, Fairfax asserts this in no way negates the impact of the conflict, and that the only remedy for this is MK’s removal.

PRELIMNARY ISSUE: a brief word about the respondent’s evidence

[2] This motion was scheduled as a special appointment, assigned to me on January 14, 2015, to be heard on February 25. When counsel obtain a specific date at the time of assignment, it is assumed they are ready to proceed. It appears that was an erroneous assumption in this case, as the factums were only prepared after the date was assigned.

[3] The fact that counsel were not actually ready appears to have caused problems for the responding party. The motion record and responding record were both filed with the court in February 11, 2015, so served before that date. Those two documents ought to have contained all of the evidence put before the court.

[4] However, the respondent then purported to supplement their record by including evidence in their factum, dated February 19, 2015. This included various court orders appended at the back. I am not concerned about them. I am concerned, however, about references to the contents of letters in the body of the factum and the fact that the footnotes for each of these references notes that leave would be sought to file these letters at the hearing – less than a week away.

[5] Handing up bits of paper does not constitute filing evidence with the court and is not a practice I am prepared to endorse. As a result, these letters and the references to them in the factum were not part of the record before the court and did not enter into my deliberations.

BACKSTORY

The asset acquisition transaction and the other two agreements

[6] The saga begins with Fairfax’s purchase of the assets of the Embury Company (“the transaction”), a business specializing in continuous aluminum anodizing, aluminum forming and panel fabrication for the construction industry. Prior to this transaction, Embury was a partnership consisting of Embury Co. Ltd. and Lloyd Metal Manufacturing Company Ltd. The plaintiff, Gustav Kastner (“Kastner”) was the managing principal of Embury at the time of the transaction.

[7] The defendant Fairfax and Embury entered into an Asset Purchase Agreement (the “APA”) on October 15, 2010, and the transaction closed on November 7, 2010. Pursuant to the APA, Fairfax purchased Embury as a going concern, acquiring assets and liabilities, including outstanding accounts receivables and inventory on hand. In addition to the APA, Fairfax entered into an employment agreement with Kastner, as well as a consulting agreement with Kastner Holdings Inc.

[8] Gardiner Roberts LLP acted for Fairfax in these matters, while Christine Renaud of MK, the law firm that Fairfax seeks to remove pursuant to the current motion, represented the Kastner parties. Previous to this transaction, Michael Citak of MK had already dealt with litigation matters for the Kastner parties. In his affidavit of November 1, 2014, Citak states that MK was retained by Kastner/Embury in April 2010 to respond to a demand for payment by Alcan International and again in August 2010 to send a demand letter to Dundas Iron, regarding an outstanding balance due on an invoice. There is therefore no question that Kastner obtained legal assistance from MK from time to time before these events.

[9] On closing of the APA, and pursuant to the employment agreement, Kastner became an employee of Fairfax, occupying the office of President- Emeritus. In that role, he was to receive a fee for services, on a declining scale, over a three year period. The agreement also established the duties of his new role, which included oversee(ing) daily operations of the Company’s finance department, including accounts receivable, accounts payable and payroll departments. There is no express reference in these documents as to whether Kastner had been tasked with retaining counsel in order to perform any of these tasks or if he was authorized to do so.

[10] Kastner’s employment agreement also contained a section dealing with “confidential information”, making it clear that he was required to maintain the confidential information of the company in strict confidence, and not disclose it to any company employee except to the extent necessary to perform his services, or to any third party, except with the prior written consent of the Company. “Confidential information” is a defined term in the agreement, and includes all information that is non-public…including financial. In my view, the term was defined very broadly.

[11] The APA provides for the calculation and payment of the purchase price. A set price was paid on or before closing, and a holdback was retained, to be paid out as outstanding account receivables were paid and inventory on hand was sold. The APA makes it clear that the purchaser was only required to pay out the holdback to Kastner if and when such accounts receivable were actually collected. Kastner therefore had a direct personal interest in pursuing any outstanding debts that had arisen during his ownership, as collection translated to funds in his pocket.

[12] The APA mechanism for paying Kastner the accounts receivable portion of this holdback is the focus of this motion. The APA required Fairfax to provide Kastner with a monthly statement certified by a senior financial officer as to the amount of receivables collected, with a cheque for the amount owing based on the APA formula. If Kastner wished, he was entitled, on notice to Fairfax, to conduct an audit of such amounts, in which case Fairfax was required to produce its working papers and back-up documentation (s. 3.3).

[13] The fact that Kastner was required to provide notice before gaining access to Fairfax’s documents for this purpose underlines the fact that the parties considered these materials to fall within the scope of Fairfax’s “confidential information”. Thus, while Kastner could obtain access to these materials, he had to first give notice of his wish to do so, and the purpose for which he could see the documents appears to have been prescribed. This is a contractual term that the parties agreed to.

Where the holdback stood before and after the events complained of

[14] On January 19, 2011, Kastner’s accountant, Mr. Forster, wrote to both Kastner and Mr. Ishakis, the principal of Fairfax, to advise that, pursuant to the APA, a reconciliation of inventory and accounts receivable was to be done in every month in order to calculate holdback. Forster then provided his calculations from November 2010 indicating that the net result was zero money was owing at that time. This was done without notice to Fairfax that Kastner would be using the company’s confidential information, nor a request from Fairfax for their numbers. Forster simply appeared to take charge of the process.

[15] Five days later, on January 24, 2011, Forster again wrote to both men, this time claiming that Fairfax owed Kastner $426,314, pursuant to the December 2010 reconciliation. On February 9, 2011, Forster wrote again, this time advising of the amount due for January 2010 and claiming that interest on the December 2010 installment was also due. On March 2, 2011, Forster wrote, pointing out that the payment due for February was $267,264, and stating that the total amount owing from December 2010 and January 2011 was now $1,070,131.

[16] When notifying Ishakis of these numbers, Forster quoted from the APA, so he was clearly aware of its terms. Despite that, he continued to review Fairfax documents which Kastner forwarded to him and to rely on them for his calculations. He at no time asked Fairfax for their calculations or explained why he had taken it upon himself to do what the APA required Fairfax to do. That has still not been explained.

[17] By March 2, 2011, it ought to have been apparent to Kastner that there was a strong possibility that he and the Kastner group were adverse in interest to Fairfax, as Kastner’s accountant claimed that Fairfax owed Kastner in excess of $1 million of the holdback; Fairfax had paid none of it; and they had provided no assurances during the preceding months that the outstanding funds were forthcoming.

[18] From various exhibits filed, it appears that Forster requested and Kastner provided accounts receivable and inventory lists to him, while keeping a copy for himself. Kastner sent this information to Forster by faxes dated December 2 and 16, 2010, January 19, and 24 and February 9, 2011. Kastner’s handwritten lists of cash receipts were also included in the materials forwarded. Ishakis claims he has never seen these materials

[19] Ishakis asserts that he was not given notice that these materials would be used by Kastner. He states that he was not otherwise aware these materials were being forwarded to Forster and that he did not turn his mind to it when he received these numbers from Forster. He did not consent to this arrangement, and he considers the information to have been “confidential” pursuant to the APA. Among the types of information sent were customer names, account numbers, account receivables, collections and bank balances.

[20] Kastner disputes the information was confidential and denies that he was prohibited from sharing it with his advisors. He claims that it is ingenuous of Fairfax to now say any of it was confidential, as Fairfax has disclosed it in these materials.

[21] On the one hand, Kastner claims that he was permitted to access and share this information in his role as President-Emeritus, but he also claims that he accessed and shared it as he needed to make out his holdback claim, something that would certainly not have fallen into his job description.

[22] To the extent that Kastner used the numbers for his work, this would have been for Fairfax’s benefit, but to the extent that he used them to calculate his holdback entitlement, this was clearly for his personal benefit. These two positions - needing the numbers to do his work and needing them for his own personal gain - are two very different matters and inconsistent positions for him to have taken on this motion and I have difficulty reconciling how they can stand together.

Three letters and two retainers: March 3 and 11, 2011

[23] There are three relevant pieces of correspondence to consider in this matter:

• Citak’s (of MK) demand letter of March 3, 2011, sent on behalf of Embury/Fairfax to Eastwood Glazing;

• Citak’s (of MK) demand letter of March 11, 2011, sent at 9:41 on behalf of Kastner to Fairfax, via their solicitors Gardiner Roberts; and

• Gardiner Robert’s letter of March 11, 2011 sent at 1:54 to Renaud, at MK, to ask her to ensure that Kastner stop contacting customers, without first obtaining Ishakis’ approval.

[24] Two of these letters indicate that MK was retained to perform certain tasks, the first on behalf of Fairfax, the second, against Fairfax, though sent only 8 days apart. Pursuant to the first retainer, MK purported to collect accounts receivables on behalf of Fairfax, having been retained by Kastner to do so. Pursuant to the second, MK threated to commence suit against Fairfax for failing to pay out to Kastner what he was allegedly entitled to by way of holdback.

[25] On Citak’s evidence, he was retained to pursue the Eastwood Glazing accounts receivables on February 28, 2011. However, he was only equipped with what he needed in order to carry out the retainer on March 3, 2011, when Kastner sent invoices and other information regarding this outstanding account receivable from Eastwood Glazing.

[26] This was the day after Kastner had received the up-dated holdback figured from Forster, such that he was already aware, by that date, how far apart the parties were regarding the quantum of holdback. Despite that, and knowing what was collected would actually ensure to his personal benefit, Kastner had Citak, his own counsel, pursue this issue on behalf of Fairfax (presumably at their expense). Kastner does not explain on this motion why, in that context, he chose to involve Citak of MK, his former counsel, in the new business.

[27] Further, MK, as transaction counsel for Kastner, were also ware that, though they were pursuing monies owed to Fairfax, it was actually in Kastner’s personal interests to collect on the Eastwood account. As Citak notes in his evidence, these were monies, if collected, would flow through to Kastner Co.

[28] On Ishakis’ evidence, Kastner’s chosen approach of involving counsel to write a heavy-handed demand letter despite the small sum involved was actually contrary to Fairfax’s interests. Ishakis states that he feared it could affect his relationship with the customer.

[29] Kastner agrees that he retained Citak on behalf of Fairfax (referring to it as Embury in the demand letter, as that was the entity with whom Eastwood had done business). In view of Kastner having been made aware at that time of what he viewed as Fairfax’s outstanding debt to him, this was an usual and, in my view, risky retainer. While Citak may not have had the full picture yet, Kastner, who had been in regular contact with Forster, certainly did.

[30] In the context of his retainer from Kastner, purportedly on behalf of Fairfax, Citak wrote to Eastwood as follows later in the day on March 3, 2011:

We are the solicitors for Embury Company.

[31] He then went on to say that several attempts had already been made to collect the sum of $15,372.62, and to advise that interest and legal costs would be sought if they were forced to commence legal action to collect that amount.

[32] This letter was copied to Kastner, but not to Ishakis. Ishakis was not consulted about the letter or aware of its delivery until March 10, 2011. His evidence is that, previous to the letter being sent, he had repeatedly directed Kastner not to take aggressive steps to collect accounts receivables as it could harm Fairfax/Embury’s relationships with valued customers. Kastner disputes this.

[33] On learning of the letter, Ishakis’ lawyers, Gardiner Roberts wrote to Renaud at MK on behalf of Fairfax at 1:54 on March 11, 2011, as follows:

Christine, as per my voicemail message, please call me to discuss your letter from this morning regarding the accounts receivables and inventory reconciliations.

Jason forwarded the attached demand letter (to Eastwood) to my attention. We understand that Eastwood has been late in their payment. However, the business is now being run by Jason and, as you can imagine, customer relations are very important to him. Jason instructed Ms. Kastner a while ago that he is not to talk to customers. As well, the demand letter was not authorized by Jason.

Jason will pursue Eastwood and will work with Mr. Kastner to ensure payment from them.

Please ensure that no further letters are sent to any customers to any matters without first having been approved by Jason. As well, please advise Mr. Kastner that he is not to speak with or correspond with any customers, suppliers or any parties dealing with the business without Jason’s pre-approval.

[34] In his affidavit, Citak states that MK’s retainer by Fairfax regarding the Eastwood collection matter ceased upon receipt of the above letter, e-mailed, at 1:54 on March 11, 2011, and this is the only retainer he claims that MK had from Fairfax.

[35] Ishakis denies that they terminated the retainer at that time and, in fact, the e-mail to Citak says nothing about termination, the focus being on what Kastner, not MK, can and cannot do. The fact that the letter also explains that Ishakis’ pre-approval will be necessary for future dealings with customers suggests that Gardiner Roberts, in taking the time to clarify proper protocol, are acknowledging MK’s potential involvement for Fairfax with respect to future litigation matters

[36] More importantly, the timing of the letters does not support Citak’s evidence. At 9:41 on March 11, 2011, before hearing from Gardiner Roberts about the Eastwood letter, MK wrote to Gardiner Roberts, but this time, on behalf of Kastner. MK demanded immediate payment of $1,070,131 which they claim Fairfax owned under the APA holdback provisions.

[37] It is clear from the evidence that the demand letter to Fairfax was sent before the MK alleges their services on Fairfax’s behalf were terminated by Gardiner Roberts’ letter to them. As a result, MK purportedly acted on Fairfax’s behalf on March 3, then acted against their interests on a few days later, relying on Fairfax’s own confidential information to make their case.

[38] The wording of Renaud’s demand letter to Gardiner Roberts is interesting:

Section 3.3(a) stipulates that the Purchaser will provide the Vendor with certified monthly statements as to the amount of the Accounts Receivable collected and Inventory sold, together with cheques for payment out of the holdback. To date, no such monthly statements have been delivered to the Vendor….However, such monthly statement figures have been prepared by the Vendor’s accountant on a continuing monthly basis and delivered to the Purchasers.

[39] There is no evidence in the record to the effect that Fairfax’s omission in supplying monthly statements was ever raised with them before Kastner began conveying their confidential information to his accountant, or that Fairfax was ever asked to produce same in advance of this practice having begun.

[40] It is also quite remarkable that Renaud quotes from the very section that makes it clear that Kastner had to give notice to Fairfax before seeking an audit of the statements, yet he was keeping his own records with respect to Fairfax’s financial information, and sharing it with both his accountant and his counsel without adhering to this provision. While Kastner may have required access to some of this information in the context of his assigned tasks, keeping track of what he was owed and sharing this information with his personal advisors certainly fell beyond the scope of his role as President-Emeritus.

[41] Citak also explained on April 4, 2011 that the figures he used in the demand letter to Gardiner Roberts were based on Forster’s calculations, using a hand written journal that reflected sales as recorded by Kastner but not posted by him to the Embury Company’s sales ledgers. Ishakis only learned of the existence of this journal when he received Citak’s e-mail.

[42] It is therefore clear that MK acted against Fairfax while still retained by them with respect to the Eastwood matter, and that he used confidential information” within the definition of the APA with respect to both retainers.

CURRENT LITIGATION

[43] It was a full year before Kastner commenced suit, on March 20, 2012, for, among other things, breach of his employment agreement and the consulting agreement. In his factum, he claims he was terminated by Ishakis by telephone on March 13, 2011. Fairfax has counterclaimed for, among other things, breach of the APA covenants and reduction of the purchase price, and, as a result and they have added Kastner’s accountant to this action.

Was the information imparted by Kastner to Forster and in turn to Citak of MK “confidential”?

[44] Kaster submits that I am not required to decide if he was authorized to share the information he conveyed to his accountant, Forster, and to his legal counsel, Citak. I disagree. In view of the legal tests in play, I am required to make a preliminary assessment as to whether the information conveyed by Kastner to third parties constitutes “confidential information.” That will inform my view of whether he was within his rights when he conveyed this information or if he was out of bounds when he did so. I therefore must decide, at least for the purpose of this motion, if the information Kastner shared with his accountant and lawyer constituted “confidential information.”

[45] Fairfax alleges that the information that was accessed and conveyed to Forster and forwarded to Citak fell into the realm of “confidential information” as contemplated by the agreements, such that written notice was required before Kastner could do what he did, and even then, he could only access and share for purposes prescribed by the agreements. There is no suggestion that Kastner adhered to this practice before sharing information with his accountant and counsel.

[46] Kastner has suggested that he needed all of this information to calculate his post-closing payments and he points out that there is nothing in the agreement that prohibits him from sharing the information with his advisors. He relies on three sections of the APA to support his position, but in my view, they are either neutral or actually support Fairfax.

[47] In particular, section 3.3(a), of the APA, discussed earlier, sets out the mechanism by which the holdback pay-outs are to be calculated and by whom. It is the purchaser’s responsibility to undertake the task of calculating the pay-outs and to then release the amount of hold-back the calculations dictate. The vendor is only entitled to an audit, at his expense, on notice to the purchaser. Notice was never given in this case. As MK was involved in the asset acquisition transaction, they were familiar with these documents and the necessary steps that had to be followed before they could review Fairfax’s financial documents. Renauld actually refers to this provision in her demand letter. In that context, the position being taken by MK and Kastner now is a surprising one and a difficult one to understand.

[48] Kastner is correct when he states that there is nothing in any of these agreements that expressly prohibits him from sharing confidential information with his own advisors. However, what he fails to note is that this scenario is covered by the general prohibition against sharing with “third parties”. In order for Kastner to share with his advisors without giving prior notice to Fairfax, there would had to have been a specific provision in these agreements exempting advisors from this general prohibition. As that is not the case, both accountants and counsel are covered by it. Again, it is difficult to understand why MK ignored provisions in agreements that they, as transaction counsel, were involved in drafting and would have been extremely familiar with.

[49] Whether the concern expressed by Fairfax regarding the release of these documents is disingenuous, as Kastner suggests, is not relevant at this stage of the inquiry. It is a factor that could go to Fairfax’s alleged damages on the counterclaim, but really has no place on this motion.

[50] In my view, based on the wording of these agreements, Kastner did, in fact, impart what appears to be confidential information to third parties without having given prior notice to Fairfax. There is nothing in any of the agreements that carve out Kastner’s advisors as an exception to the general prohibition to maintain these documents in confidence, subject to giving Fairfax prior written notice. This was a simple prerequisite and Kaster has failed to provide an adequate explanation for why failed to comply with or why he believed it did not apply.

[51] Ishakis claims he was not aware that this was going on, and he certainly did not approve of the process. Thus, for the purpose of this motion, I find that Kastner shared confidential information with MK directly and indirectly, through Forster, with foreknowledge that Forster would be passing the information along to MK, both of whom are third parties in the context of the APA.

[52] Thus, within a matter of eight days, MK presented itself as counsel to Fairfax and then sought to advance a claim against them, using Fairfax’s own “confidential information”.

Prejudice

[53] Ishakis states that Fairfax is part of a small and close knit industry, with only a few competitors throughout the continent. He asserts that sensitive business or financial information in the hands of one of those competitors could be detrimental to his business, as knowledge of his margins could allow others to outbid him on projects.

[54] Kastner alleges that it is he who will be prejudiced if MK is removed as his solicitors. He points out that MK has acted for him both before and after the transaction. It is, in fact, the prior retainers that have contributed to the current problem. Kastner sold the business, yet carried on as if he still had sole control. He used his accountant to keep track of what was owed to him, sending what was now the confidential information of Fairfax. He had this information relayed to his counsel, to assist them in crafting a demand letter to Fairfax.

[55] Kastner complains that the issue was only raised on June 10, 2012¸which he calculates as being 15 months after MK was first retained to sue Fairfax. On June 19, 2012, Fairfax’s former counsel demanded that MK get off the record for Kastner and he threatened to sue them, asserting that MK had a conflict. He booked a motion for November 2012 to have MK removed for conflict but did not proceed with it at that time.

[56] Kastner claims that Fairfax’s delay in raising these concerns will add to his costs if he has to change lawyers at this time. However, he fails to note that action was only started in March 2012, so only three months before the issue was raised. Kastner could have mitigated his alleged added costs at that time by changing counsel 3 months into the suit. Though the motion did not proceed for a further two years, this was not a new issue that can be said to have taken Kastner by surprise. Yet again, Kastner took a risk, this time in continuing with MK after having been warned.

[57] This issue has now been on the table for almost 3 years, yet Kastner continued with MK despite the concerns expressed at a very early stage in the life of this action. As a result, continuing with MK was a risk Kastner was apparently prepared to accept, just as he was prepared to have them issue the Eastwood demand letter at a time where he ought to have known that he and Fairfax did not see eye to eye.

THE LAW, ANALYSIS and CONCLUSION

Use of confidential information – 2-part test

[58] Fairfax relies on three seminal cases out of the Supreme Court of Canada to make its case. In MacDonald Estate v. Martin, 1990 32 (SCC), [1990] 3 SCR 1235, counsel acted against a client after having been privy to the client’s confidential information while performing work on their behalf. In the course of dealing with problems that arise when lawyers move between firms, the Supreme Court discussed counsel’s duty of loyalty to the former client and the need to protect that client’s confidential information.

[59] There, the court’s analysis came down to two essential questions:

1. Did the lawyer receive confidential information attributable to a solicitor and client relationship; and

2. Is there a risk that it will be used to the prejudice of the client?

In MacDonald, the court held that:

…once it is shown by the client that there existed a previous relationship which is sufficiently related to the retainer from which it is sought to remove the solicitor, the court should infer that confidential information was imparted unless the solicitor satisfied the court that no information was imparted that could be relevant.

[60] Thus, once the court finds that the previous relationship is sufficiently related to the new retainer, the inference that arises is that confidential information was imparted. The onus then shifts to the responding party to show that no information that could be relevant was conveyed.

[61] While the McDonald case dealt with the issue of counsels’ mobility between firms, so not factually a perfect fit with the matter before this court, the principles enunciated within it are applicable here.

[62] In Chapter Inc. v. Davies, Ward and Beck LLP (2001), 2001 24189 (ON CA), 52 OR (3d) 566, Sopinka J. discussed the nature of the relationship required between the retainers from the former and the current clients which would lead to these rules being invoked. He noted that, in approaching the analysis, the court had to continue to be guided by MacDonald Estate:

In the end, the client must demonstrate that the possibility of relevant confidential information having been acquired is realistic, not just theoretical. For the court to find that the retainers are sufficiently related, it must conclude that in all of the circumstances it is reasonably possible that the lawyer acquired confidential information pursuant to the first retainer that could be relevant to the current matter.

[63] In this case, the facts go beyond what is “reasonably possible”. The respondent’s own evidence makes it clear that there was an ongoing conveyance of Fairfax’s financial information from Kastner to his accountant and from the accountant to MK. Kaster provided MK, through Forster and, at times, directly, with what they needed for the Eastwood demand letter. Among the information conveyed and used by MK were the figures they used as the basis for drafting the Eastwood demand letter, the anticipated goal of which was to generate payment that would flow through directly to Kastner. In short, there was an ongoing transmission of the details of Fairfax’s collection of outstanding accounts receivables, on which Kastner now bases the claim against Fairfax.

[64] What is apparent is that both Kastner and his advisors continued to act as though nothing had changed after the transaction. Kastner continued to instruct MK and they continued to do as he requested, oblivious to the interposition of Fairfax. Ishakis was not even copied with the demand letter to Eastwood - Kastner was.

[65] In their factum, the responding parties plainly state that the monies from Eastwood were owed to Kastner, not to Fairfax. The fact that the APA set out a structure for how this would work was ignored by both Kastner and MK. Kastner appears to have used his position as president emeritus at Fairfax to collect what had become Fairfax’s confidential information for his own benefit. What was collected would increase Kastner’s entitlement to payment out of the holdback, as MK, transaction counsel for Kastner, was aware.

[66] Though Kastner was entitled to access to information about Fairfax’s accounts receivables, that was in the context of his role as a Fairfax employee. This limited access for a defined purpose did not entitle him to share that information without following the procedures outlined in the APA. He was certainly not authorized to share that information with his own advisors, asking them to act for Fairfax, when, in essence, this work was actually for his own benefit and was possibly prejudicial to Fairfax. MK, as transaction counsel, had to have been aware of all of this when they wrote to Eastwood.

[67] In Kastner’s retainer of MK for the purpose of sending a demand letter to Eastwood, Kastner conveyed Fairfax’s confidential information about the state of accounts receivables to MK to help him increase his holdback payout.

[68] Similarly, in this action, MK is using further information about accounts receivables to claim that Kastner is entitled to a significant payment out of the holdback, based on receipt of outstanding debt and sale of inventory.

[69] Both retainers involve the use of accounts receivable data to increase Kastner’s holdback payments. The fact that different client information may be involved is not, in my view, material. Kaster conveyed the same genre of information to MK, first for Fairfax, though ultimately for his own benefit, then against Fairfax’s interests.

[70] The retainers are therefore sufficiently related to create a presumption that the information conveyed was relevant. As a result, it remains for MK to rebut this presumption.

[71] I do not accept Kastner’s submission that the information cannot be viewed as confidential, as it would all come out eventually during the disclosure process. That in no way remedies the fact that this information was conveyed outside the terms of the APA before and in order for the litigation to have been commenced.

[72] Here, the confidential information to which MK became privy was the state of affairs as between Fairfax and its customer, Eastwood Glazing. While they received that information from Kastner, they did so in the context of his acting for Fairfax. Kastner admits he retained MK on behalf of Embury, now Kastner. To the extent that MK used that information to write a heavy-handed letter to Eastwood, there is a risk that the information was used to the prejudice of Fairfax.

[73] Similarly, the fact that the information conveyed would ultimately become the subject of discovery is also no answer in the context of potential privilege. There are mechanisms in the context of a civil action to protect confidential information by court order, if sought and a basis for it is established.

[74] Here, Kastner simply helped himself to information to which he had easy access and shared it without following proper channels. His counsel – who were also transaction counsel, thus well aware of those channels – also chose to disregard the contractual protocol that had been established, and used the information to commence suit against Fairfax. All of this occurred without notice to Fairfax so they were not in a position to seek a court order to maintain confidentiality.

The Bright line test – CN v. McKercher LLP [2013] SCC 39

[75] Where the new retainer involves the lawyer acting against another current client, disqualification is automatic.

[76] In R. v. Neil [2002] SCC 70, and again in McKercher, the Supreme Court stated:

A lawyer, and by extension, a law firm, owes a duty of loyalty to client. The duty has three salient dimensions: (1) a duty to avoid conflicting interests; (2) a duty of commitment to the client’s cause; and (3) a duty of candour.

[77] In Neil, supra, the court described how the test operates:

…The bright line is provided by the general rule that a lawyer may not represent one client whose interests are directly adverse to the immediate interests of another client – even if the two mandates are unrelated…unless both clients consent…

[78] This bright line rule takes no prisoners. Once a lawyer or firm fall offside, there is no way to avoid removal for disqualifying conflict unless both clients consent.

[79] In McKercher, the court spoke clearly when it said:

The bright line is precisely what its name implies: a bright line rule. It cannot be rebutted or otherwise attenuated. It applies to concurrent representation in both related and unrelated matters.

[80] Thus, regardless of whether or not the information conveyed by Kasnter to his advisors can be characterized as “confidential”; regardless of whether or not Fairfax is liable to suffer prejudice; and regardless of whether or not the two retainers are sufficiently related, MK can be removed on the basis of the bright line rule.

[81] MK clearly held a retainer on behalf of Fairfax while simultaneously acting against them. There is no evidence to indicate that Fairfax’s retainer of MK was terminated by their counsel’s letter of March 11, 2011, and the fact that MK’s demand letter to Fairfax sent on Kastner’s behalf was sent earlier in the day dispels any such suggestion. At the very least, for a few hours on March 11, 2011, MK acted both for and against Fairfax.

[82] Kaster’s retainer of MK on Fairfax’s behalf to pursue the Eastwood debt was questionable, in view of the fact that MK had been his own counsel. The fact that he continued to instruct MK on March 3, 2011, a day after being advised that Fairfax was heavily indebted to him, was all the more questionable. Kastner ought to have anticipated at that point that he could need counsel’s assistance to press for payment from Fairfax. In that factual context, he chose to use MK’s services to pursue a negligible accounts receivable, when more than $1 million hung in the balance as between him and Fairfax.

[83] MK crossed a line when they accepted this retainer from Fairfax via Kastner and acted on it, but they crossed a bright line when they went on to send a threatening letter to Fairfax on behalf of Kastner. In doing so, they placed themselves in a position of conflict, favouring Kastner, their former client. Kastner retained them for his new employer at a time when he ought to have foreseen the likelihood that he would need their assistance, himself. While they may not have been aware of that when they wrote a demand letter to Eastwood for a sum that barely exceeded $15,000, the end result is the same – having done so on behalf of Fairfax, they could then not take up arms against Fairfax in their dispute with Kastner.

[84] On the basis I find that the bright line has been crossed here and MK must now step aside. I am also satisfied that all of the elements for disqualification based on the use of confidential information are also present, justifying this relief. The information that was conveyed was “confidential” within the terms of the APA, for the purpose of this motion. Even if that was not the case, confidentiality would be inferred, as the retainers have been shown to have been sufficiently related, and that inference has not been displaced by Kastner.

[85] Removal is the most appropriate remedy for this problem in the context of all the relevant circumstances of this case, including the necessity of maintaining the repute of the administration of justice. A critical and rather unique feature of this action is the role Kastner played. Whether or not Kastner ultimately has a good case on the merits, the way in which he went about using what had become Fairfax’s information in order to remedy what he viewed as a wrong contravened the terms of these carefully drafted agreements.

[86] In his role as president emeritus of Fairfax, Kastner retained his own counsel for debt recovery, which would actually inure to his, not Fairfax’s benefit. He did this without copying Fairfax. His counsel were complicit in this arrangement as they were also transaction counsel, so were well aware of the terms of the APA, including the terms for payout of the holdback. Both counsel and client acted as though Fairfax’s information remained available to them for their own use. For the sake of Fairfax’s $15,000 collection retainer, Kastner and MK jeopardized Fairfax’s position in this litigation by having MK then act against them.

[87] This was the first risky move on Kastner’s part. After having been warned about this motion, Kastner persisted in using MK to proceed with this action against Fairfax on his behalf. This, too, was a risky move, such that he cannot not now complain about prejudice caused by having to change counsel at this stage. This was something he ought to have done in June 2012 when the issue was first raised. In both instances, Kastner assumed the risk, well aware of what it was.

[88] The motion is therefore granted.

[89] I can be spoken to regarding costs of the parties are unable to agree within 30 days from the release of these reasons.

Master Joan M. Haberman

Release May 20, 2015