COURT FILE NO.: C-473-15 DATE: 2016/06/27
ONTARIO SUPERIOR COURT OF JUSTICE
B E T W E E N:
Willsee Holdings Ltd., Sebroco Corp., Canbank Investments Inc., Rockway Holdings Limited, Hogg Fuel & Supply Limited and Transit Lubricants Ltd. Peter H. Griffin and Andrew M. Porter, for the Plaintiffs (Moving Parties) Plaintiffs (Defendants to the Counterclaim)
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Tim Seegmiller Holdings Inc., TS Holdings Inc., TS Holdings II Inc., E. & E. Seegmiller Limited, Preston Sand & Gravel Company Limited, Automatic Welding Inc., APS Aggregate Services Inc., 2070703 Ontario Inc. and Bruman Construction Inc. Daniel J. Fife and Greg Murdoch, for the Defendants (Responding Parties) Defendants (Plaintiffs by Counterclaim)
A N D B E T W E E N:
Tim Seegmiller Holdings Inc., TS Holdings Inc., TS Holdings II Inc., E. & E. Seegmiller Limited, Preston Sand & Gravel Company Limited, Automatic Welding Inc., APS Aggregate Services Inc., 2070703 Ontario Inc. and Bruman Construction Inc. Plaintiffs by Counterclaim
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Willsee Holdings Ltd., Sebroco Corp., Canbank Investments Inc., Rockway Holdings Limited, Hogg Fuel & Supply Limited and Transit Lubricants Ltd. and William Seegmiller also known as Bill Seegmiller Defendants by Counterclaim
Daniel J. Fife and Greg Murdoch, for the Plaintiffs by Counterclaim Peter H. Griffin and Andrew M. Porter, for the Defendants by Counterclaim
HEARD at Kitchener, Ontario: April 21, 2016
The Honourable Justice P. R. Sweeny
DECISION
INTRODUCTION
1The moving parties have brought four motions in the context of three actions. These actions arise out of a corporate reorganization of a group of family-owned materials and construction companies. Three motions seek to remove Sorbara, Schumacher, McCann LLP (“Sorbara”) as counsel of record in the actions. The fourth motion seeks an order for consolidation and/or case management and/or trial together of the three actions.
BACKGROUND
2Harold E. Seegmiller (“Harold”) owned a group of affiliated companies (“the Seegmiller Group”). In 1994, Harold undertook an estate freeze which provided his sons William (“Bill”) and Timothy (“Tim”) equal ownership of the common shares.
3It became apparent that Bill and Tim were unable to cooperate with each other to operate the companies. Negotiations were undertaken to equally divide the Seegmiller Group between Bill and Tim. After protracted and difficult negotiations, in early July 2014 a new ownership structure was agreed to by Bill and Tim (the “Divisive Agreement”).
4During the negotiations, Bill and Tim were separately represented. Tim was represented by Sorbara, and Bill was represented by McCarter, Grespan, Beynon, & Weir. As a result of the Divisive Agreement, Bill owned the following corporations: Willsee Holdings Ltd., Sebroco Corp., Canbank Investments Inc., Rockway Holdings Limited, Hogg Fuel & Supply Limited, and Transit Lubricants Ltd. Tim owned the following corporations: Tim Seegmiller Holdings Inc., TS Holdings Inc., TS Holdings II Inc., E. & E. Seegmiller Limited, Preston Sand & Gravel Company Limited, Automatic Welding Inc., APS Aggregate Services Inc., 2070703 Ontario Inc. and Bruman Construction Inc.
5Under the Divisive Agreement, there was to be a reconciliation of net inter-company debt owed between the corporations now owned separately by Bill and Tim.
6Historically, Sorbara had regularly represented the Seegmiller Group corporations. Sorbara received instructions from both Tim and Bill on matters pertaining to the companies that each managed.
7After the estate freeze in 1994, Hogg Fuel & Supply Limited (“Hogg”) was managed by Bill. Rockway Holdings Limited (“Rockway”) was managed by Tim. As a result of the Divisive Agreement, Bill now owned both Hogg and Rockway.
8The Divisive Agreement did not resolve all the issues between Bill and Tim. The conflict continued. On April 10, 2015, Tim’s E. & E. Seegmiller Limited (“E&E”) commenced an action against Bill’s Rockway, claiming more than $600,000.00 in unpaid invoices for services rendered in relation to the Grand River Flats housing development. On April 14, 2015, Tim’s Preston Sand & Gravel Company Limited (“Preston”) commenced an action against Bill’s Hogg for more than $850,000.00 in unpaid invoices for materials supplied by Preston to Hogg.
9In response to the claims, Bill’s counsel immediately raised the issue of Sorbara being in a conflict of interest because Hogg was an ongoing client of Sorbara, and Rockway was, until about three months before, a client of Sorbara.
10The statements of defence of Rockway and Hogg, delivered on May 14, 2015, plead the Divisive Agreement and assert that Tim’s corporations owed significant funds to Bill’s corporation and, accordingly, an “overall accounting and settling up” has to occur between Tim’s and Bill’s corporations.
11On May 27, 2015, Bill’s corporations issued a claim against Tim’s corporations for claims arising out of the Divisive Agreement, including declarations that Tim’s corporations are in breach of the Divisive Agreement, an accounting, an order staying the other two actions, and set-off and judgment in accordance with the declarations. On June 23, 2015, Tim’s corporations issued a defence and counterclaim which added Bill personally as a defendant to the counterclaim and raised a number of allegations with respect to Bill’s conduct. Sorbara acted as counsel for Tim’s corporations in issuing the statement of defence and counterclaim.
ISSUES
12The issues are:
(I) Should Sorbara be removed as counsel of record for Tim’s corporations? (II) Should the three separate actions be consolidated, tried together, and/or case-managed?
ISSUE (I) - Removal of Counsel
Law
13This issue requires an examination of the legal authorities dealing with conflict of interest and the obligations owed by lawyers to clients (past and present). In Canadian National Railway Company v. McKercher LLP, [2013] 2 SCR 646, McLachlin, C.J. summarizes the principles as follows:
A lawyer, and by extension law firm, owes a duty of loyalty to clients. This 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: Neil, at para. 19.
14I shall address each of the three dimensions in the context of this case.
(1) Conflicts of Interest
15There are several aspects of the duty to avoid conflicts of interest. The misuse of confidential information is a major component. It was described in McKercher as follows:
A lawyer cannot act in a matter where he or she may use confidential information obtained from a former or current client to the detriment of that client. A two-part test is applied to determine whether the new matter would place the lawyer in a conflict of interest:
(1) Did the lawyer receive confidential information attributable to a solicitor and client relationship relevant to the matter at hand? (2) Is there a risk that it will be used to the prejudice of that client?
If the lawyer’s new retainer is sufficiently related to the matters on which he or she worked for the former client, a rebuttable presumption arises that the lawyer possesses confidential information that raises a risk of prejudice (at para.24, citations omitted).
16In determining whether there exists a risk of misuse of confidential information, the bald assertion that a solicitor has access to a litigation philosophy is not sufficient. The information must be capable of being used against the client in some tangible manner (see McKercher, para. 54).
17In this case, Bill refers to the confidential and privileged information as:
(a) The commercial terms of numerous transactions and other contractual arrangements entered into by Rockway and by Hogg. (b) Private information about builders’ agreements. (c) Private matters related to liens and collections. (d) Disclosure of information from management concerning the risk facing Hogg and Rockway in both actual and potential litigation matters.
18This information does not seem capable of being used against Rockway and Hogg in any tangible manner. In his affidavit in response to the motions, Mark Schumacher explains that the only legal work done by Sorbara on the Grand River Flats project was to register a plan of subdivision and transfer title of lots to developers. Sorbara was not involved in the preparation or negotiation of construction contracts. Sorbara says that it received no confidential information relevant to the issues in the actions against Rockway and Hogg. In any event, the information that Sorbara possesses would also be possessed by Tim. Tim was the manager of Rockway, and any confidential information related to Rockway is also possessed by Tim. With respect to Hogg, the issues in the construction lien case are not related to the debt claim or the Divisive Agreement litigation.
19Are the retainers sufficiently related to raise the presumption that the lawyers possessed confidential information that raises a risk of prejudice? The two individual claims were commenced as straightforward debt collection actions. It is not clear that any of the information that may have been obtained in the context of prior representation is relevant to the collection actions. The issues raised in the Divisive Agreement litigation focus on alleged breaches of the Divisive Agreement. The allegations against Bill relate to conduct alleged to have occurred since the Divisive Agreement. The allegations focus on information and instructions provided from Bill to Deloitte. These are not sufficiently related to raise the presumption.
20I find that the alleged privileged information obtained would not be relevant to the issues in the Divisive Agreement litigation. Therefore, I am satisfied that any confidential information Sorbara possesses would not be relevant and would not be used to the prejudice of Rockway or Hogg. The information must be information that was confidential and arising out of the lawyer client relationship.
The Bright Line Rule
21The moving parties say that Sorbara violated the bright line rule. The bright line rule was articulated by Binnie J. in R. v. Neil, 2002 SCC 70, [2002] 3 S.C.R. 631, as follows:
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 current client – even if the two mandates are unrelated – unless both clients consent after receiving full disclosure (and preferably independent legal advice), and the lawyer reasonably believes that he or she is able to represent each client without adversely affecting the other. (para. 29)
22In McKercher, the Supreme Court of Canada clarified that the bright line rule applies where the immediate legal interests of the client are directly adverse. It does not apply to condone tactical abuses and it does not apply in circumstances where it is unreasonable to expect that the lawyer will not concurrently represent adverse parties in unrelated legal matters. In this case, the moving party points out that Sorbara was counsel on a claim by Preston against Hogg when Sorbara was still counsel of record for Hogg on a construction lien matter. This is a clear conflict. Sorbara immediately moved to remove itself as lawyer of record for Hogg in the other matter and the order was granted. The moving parties say that this is too late.
23The moving parties also question the circumstances surrounding the termination of Sorbara’s retainer with Rockway. It happened approximately three months before the claim was issued by E&E against Rockway. This looks like it was motivated to avoid the potential conflict of interest in the future.
24As in McKercher, this situation falls within the scope of the bright line rule. And like McKercher, the actions in which Sorbara acted for Rockway and Hogg are unrelated and there was no relevant confidential information imparted which could be used against Bill’s corporations.
25The circumstances surrounding the termination of the retainers may be relevant to the other two dimensions of the duty of loyalty.
(2) Duty of Commitment to Client’s Cause
26In McKercher, the Court, in referring to the duty of commitment stated:
The duty of commitment prevents the lawyer from undermining the lawyer-client relationship. As a general rule, a lawyer or law firm should not summarily and unexpectedly drop a client simply in order to avoid conflicts of interest with existing or future clients. (para. 44)
27With respect to the termination of the Rockway retainer, the circumstances surrounding the termination, including the dispute between Bill and Sorbara about the payment of fees, would appear to justify the termination of the relationship. As pointed out by Mark Schumacher, there was a natural breaking point in the work done on behalf of Rockway. The transfer of management responsibility from Tim to Bill as a result of the Divisive Agreement makes the break seem appropriate. Sorbara had acted for Tim as opposed to Bill in the negations. I do not see this as an unexpected dropping of a client to avoid a conflict of interest in the future.
28The retainer with Hogg was a construction lien action. The motion by Sorbara to remove itself as lawyers of record for Hogg was not in evidence. Based on the correspondence sent by counsel for Hogg in response to the motion, I surmise that there was an assertion of a breakdown in the relationship. Hogg did not resist the motion. However, it did clarify that the failure to resist would not affect any position that Hogg might take as to whether Sorbara could continue with any claims against Bill’s interest.
29Given that Tim was represented by Sorbara in the context of the negotiations, which culminated in the Divisive Agreement less than one year prior to the issuance of the claims against Hogg, it is reasonable to infer that Bill’s companies would not have wished Sorbara to continue to act as counsel on this or any other matters. The dispute with respect to the legal fees arising out of the Rockway matter suggests that the relationship between Bill’s companies and Sorbara had broken down. Therefore, although as a general rule, a law firm should not summarily or unexpectedly drop a client simply in order to avoid a conflict of interest, in the circumstances of this case it appears to have been a reasonable action to take in light of the recent history. This conduct would not affect the duty of commitment to a client’s case. Once again, this situation is similar to McKercher where the firm terminated the retainers on unrelated matters. The claim made against Bill and his corporations do not challenge any of the prior legal work done by Sorbara.
(3) The Duty of Candour
30The duty of candour requires that the client be given an opportunity to judge for itself whether the proposed concurrent representation would risk prejudice against its interests. In McKercher, CN only learned it was being sued by its own lawyers when it received the statement of claim. McKercher did not give CN the opportunity to assess whether or not it would terminate its existing retainers once McKercher advised of its intention to represent Wallace (the adverse party). That was found to be a breach of the duty of candour. In this case, did Sorbara breach its duty of candour to Hogg? Given the history of Sorbara’s representation of Tim, it was obvious that Sorbara would side with Tim’s corporations in any litigation arising out of the Divisive Agreement. If Sorbara had written to Bill advising that they were retained to commence actions against Bill’s corporations, it is unlikely Bill would have agreed and the matter would be, as it is now, before the court to address the issue of potential conflict of interest. While the failure to specifically raise the issue with Hogg may be seen as a breach of the duty, in my view, it does not necessarily lead to the requirement of disqualification simply by virtue of the breach.
Appropriate Remedy
31In McKercher, the Supreme Court of Canada clarified, at para. 61:
[T]he courts in the exercise of their supervisory jurisdiction over the administration of justice in the courts have inherent jurisdiction to remove law firms from impending litigation. Disqualification may be required: (1) to avoid the risk of improper use of confidential information; (2) to avoid the risk of impaired representation; and/or (3) to maintain the repute of the administration of justice.
32In discussing appropriate remedies, the Court noted that to prevent the misuse of confidential information, disqualification is generally the only appropriate remedy. Where there is the concern or risk of impaired representation, disqualification would normally be required, if the law firm continues to act concurrently for both clients (McKercher, at para. 62, emphasis added). While Sorbara did act for Bill’s corporations, I am satisfied that there is no risk of any confidential information being used to the detriment of Bill’s corporations. The risk of impaired representation is addressed by the fact that Sorbara no longer acts for any of Bill’s corporations.
33This case turns on a consideration of the third purpose, that is, where disqualification is necessary to protect the integrity and repute of the administration of justice. The Supreme Court of Canada says, at para 65:
… It must be acknowledged that in circumstances where the lawyer-client relationship has been terminated and there is no risk of misuse of confidential information, there is generally no longer a concern of ongoing prejudice to the complaining party. In light of this reality, courts faced with a motion for disqualification on this third ground should consider certain factors that may point the other way: such factors may include: (i) behaviour disentitling the complaining party from seeking removal of counsel, such as delay in bringing the motion for disqualification; (ii) significant prejudice to the new client’s interest in retaining its counsel of choice and that parties ability to retain new counsel; and (iii) the fact that the law firm accepted the conflicting retainer in good faith reasonably believing that the concurrent representation fell beyond the scope of the bright line rule and applicable law society restrictions.
34In McKercher, the motion judge had ordered disqualification. The motion judge focused on what he perceived was CN’s justified sense of betrayal. The other factors were not in play because there was no ongoing representation. There was no potential for misuse of confidential information. The matter was sent back to the motion judge to consider the factors as set out by the Supreme Court.
35In this case, the motion was brought promptly by Bill. This is a factor which does not disentitle Bill from seeking the removal. The claims have not proceeded down the long and winding road of litigation only to be met with this complaint at the last turn. There has been a history of negotiations between the parties culminating in the Divisive Agreement. Sorbara has extensive knowledge which would have to be imparted to new counsel. This could lead to delay. The right of a party to counsel of choice is an important tenet which underlies the legal system.
36In this case, is disqualification necessary to maintain the repute of the administration of justice? Would the continuing representation by Sorbara of Tim’s interests against Bill’s endanger the public’s confidence in lawyers and the administration of justice? I think not.
37The negotiations with respect to the Divisive Agreement were characterized by Bill as “long, difficult and acrimonious.” The negotiations pitted Tim against Bill. During these angry and bitter negotiations, Tim was represented by Sorbara. Bill was separately represented. In light of this fact, Bill would be labouring under no misapprehension as to Sorbara’s allegiance. Sorbara owed a duty to Tim in those negotiations. The litigation which arises out of the Divisive Agreement does not place Sorbara in a different situation.
38This is not a case where a law firm provided legal advice to individual family members (in a personal capacity) of a closely-held family business. If that were the case, it may be that the apparent betrayal in acting in litigation against a former client personally would require disqualification. However, this case does not rise to that level. Sorbara never acted for Bill personally.
39Sorbara had acted for various corporations. However, in the years leading up to the claims being issued, on the matters where the parties’ interests diverged, Sorbara was acting on behalf of Tim. In the circumstances, the continued representation of Tim’s interests by Sorbara against Bill’s interest does not harm the repute of the administration of justice. Accordingly, the motion with respect to the removal of Sorbara is dismissed.
ISSUE (II) - Consolidation
40Bill’s corporations seek to have an order that the matters be consolidated, or tried together, and case managed. Tim objects to the consolidation or trial together on the basis that the initial actions are simply actions on debts owed. The statements of defence raise issues with respect to the Divisive Agreement. The questions of law and fact are common and the relief claimed arises out of the same series of transactions and occurrences. The same issues would be engaged in defending those claims as exist in the Divisive Agreement action. Therefore, these actions should all be addressed together.
41Pleadings have been exchanged in the three separate actions. The issues are well defined. There is no need for consolidation. The actions should be heard at the same time or one immediately after the other pursuant to rule 6.01(1)(d). The moving parties have requested an appointment of a case management judge. In the circumstances, this is an appropriate case for the appointment of a case management judge. Therefore, a request will be made to Regional Senior Justice J. R. Turnbull that a case management judge be appointed.
ORDER
42In summary, an order shall issue as follows:
(1) That the motion to remove Sorbara, Schumacher, McCann LLP as counsel of record in actions bearing court file numbers C-331-15, C-344-15 and C-473-15 is dismissed; (2) That the actions bearing court file numbers C-331-15, C-344-15 and C-473-15 shall be tried together or one after another; and (3) Subject to the approval of the Regional Senior Justice, a case management judge shall be appointed.
COSTS
43The parties submitted costs outlines with respect to the motions. A substantial amount of time was spent on the issue of the removal of Sorbara, which was unsuccessful. In the circumstances, the moving parties shall pay to the responding parties costs fixed in the amount of $5,000.00 all-inclusive forthwith.
Sweeny J.
Released: June 27, 2016