Court File and Parties

COURT FILE NO.: CV-16-564796 DATE: 20170519 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Srebrolow Lebowitz Spadafora PC AND: PW Lawyers Professional Corporation and Paul Wilkins

BEFORE: Madam Justice J. T. Akbarali.

COUNSEL: J. Srebrolow and G. Fabiano, for the Plaintiff/Moving Party J. Katz, for the Defendants/Responding Parties

HEARD: May 16, 2017

Endorsement

Overview

[1] The defendant, Paul Wilkins, was employed by the plaintiff firm, Srebrolow Lebotwitz Spadafora PC (“SLS”) as an associate lawyer practicing in the field of plaintiff personal injury. Mr. Wilkins decided to open his own firm, Pazuki Wilkins LLP. He gave SLS notice of his intention to leave.

[2] Mr. Wilkins and SLS entered into a written agreement to govern the terms of Mr. Wilkins’ separation from the firm. It required each party to make payments to the other in relation to files retained by each. Disputes have arisen with respect to the amounts paid under the agreements. Most of them have been resolved. On this motion, I am asked to determine whether the fees owing to SLS under the agreement are reduced by certain referral fees paid out by Mr. Wilkins.

The Agreement

[3] Pursuant to the parties’ written agreement, Mr. Wilkins was entitled to take certain files of which he had carriage to his new firm under terms including that Mr. Wilkins would pay SLS 50% of the net fees he received on those files. Net fees represent fees after referral fees were paid.

[4] The agreement included a schedule of the files Mr. Wilkins would bring with him to his new firm. By the terms of the agreement, the schedule was to include a complete list of every client and the names of all referral sources together with “a breakdown of the percentage paid to said referral source”. Since the files Mr. Wilkins was bringing with him were active, no referral fee would have yet been paid. Presumably SLS wanted to know what referral fees were agreed to be paid on the resolution of the files Mr. Wilkins was taking with him. However, that is not what the written agreement required.

[5] In addition, the agreement provided that on the resolution of files of which Mr. Wilkins had had carriage and that remained at SLS, Mr. Wilkins was entitled to receive 20% of the net fees that he would have generated had he remained at the firm.

Background to the Action and Position of the Parties

[6] In the summer of 2016, SLS learned from the website of PW Lawyers Corporation (Mr. Wilkins’ most recent firm) that two files related to a particular client, K, – an accident benefit claim and a tort claim – had been settled for $5,900,000. K’s files are identified on the schedule to the agreement between the parties, but no referral source or referral fee is identified in respect of K’s claims. According to SLS’s records, it had been paid $109,022.40 in respect of K’s accident benefits claim but nothing in respect of the tort claim. SLS thus believed it was entitled to a significant amount which Mr. Wilkins had not paid.

[7] Thereafter SLS sent correspondence and made various demands to which Mr. Wilkins did not satisfactorily respond. SLS decided to commence an action and obtained leave to serve a Notice of Motion for Summary Judgment, seeking partial summary judgment, together with the originating process. The claim has since been defended, responding materials served and cross-examinations on affidavits conducted.

[8] In his Statement of Defence and Counterclaim, and his responding materials on the motion, Mr. Wilkins raised the issue of set-off, and claimed that SLS owed him money pursuant to the agreement in respect of the files remaining at SLS that had resolved and of which he had had carriage. Mr. Wilkins’ suspicions were correct. SLS had not paid certain amounts owing to Mr. Wilkins from as early as 2013.

[9] By the time they appeared before me, the parties had significantly narrowed the issues, such that the motion for partial summary judgment has become, in effect, a motion for summary judgment. SLS and Mr. Wilkins agree that SLS owes Mr. Wilkins $65,054.63 inclusive of HST in respect of the fees to which he is entitled under the agreement.

[10] Mr. Wilkins agrees that he owes SLS its share of fees on K’s tort claim. The parties agree that, subject to the issue regarding referral fees that I explain more fully below, Mr. Wilkins owes SLS $427,004.40 inclusive of HST. After setting off the amounts owed to Mr. Wilkins, SLS is entitled, at the least, to $361,949.77 inclusive of HST.

[11] However, SLS claims that its entitlement to fees from the K files is higher because it disputes the referral fees paid out on the K files. In particular:

a. On the accident benefits file, which was settled for $288,000, Mr. Wilkins paid out a referral fee of 33%, or $95,040 plus HST, to Ranjit Mann, an immigration lawyer. SLS agrees the fee was paid and accepts Mr. Mann’s entitlement to the fee. It argues that the fee is not reasonable and suggests 15% would be an appropriate referral fee. b. On the tort file, which was settled for $1,128,000, Mr. Wilkins paid out 33%, or $372,240 plus HST, to Sharndip Khaira, a paralegal who was originally employed with Mr. Wilkins at SLS, and who joined Mr. Wilkins at his new firm. SLS disputes Mr. Khaira’s entitlement to a referral fee and, if he is entitled, argues that the fee is not reasonable. SLS does not dispute that the fee was paid.

[12] There are two referral sources because of the manner in which K came to Mr. Wilkins. K originally came to Mr. Mann who called Mr. Khaira. Mr. Khaira was then an employee at SLS, and he referred the file to Mr. Wilkins, who was then also an employee at SLS. Thus, the law firm that received the referral was SLS. Mr. Wilkins departed with the K files. When they settled, although Mr. Mann was expecting no referral fee, Mr. Wilkins decided he had to get something, and so he allotted the referral fee on the accident benefits file to Mr. Mann. He allotted the referral fee on the tort file to Mr. Khaira.

[13] Thus, the key issue before me is how these referral fees ought to be considered in determining the fees to which SLS is entitled pursuant to the agreement. There is a second issue as to the basis of liability of the corporate defendant, which did not exist nor was contemplated at the time the written agreement was entered into.

Is summary judgment appropriate?

[14] The parties agree the issues on this motion are amenable to summary judgment.

[15] Summary judgment is appropriate where there is no genuine issue requiring a trial. This will be the case where the summary judgment process provides me with the evidence required to fairly and justly adjudicate the dispute, by allowing me to make the necessary findings of fact and to apply the law to the facts, and where summary judgment is a timely, affordable and proportionate procedure: see Hryniak v. Mauldin, 2014 SCC 7, at paras. 49-50 and 66.

[16] In my view, this case is appropriate for summary judgment. The facts relevant to the issue of the validity of the referral fees are, for the most part, not in dispute and are readily discernible from the record.

[17] Similarly, the issue of the liability of the corporate defendant turns on facts that are apparent on the record before me.

[18] I am thus confident that I can find the necessary facts and apply the law to reach a just conclusion.

Referral Fee Paid to Mr. Mann

[19] I turn first to the question of the referral fee paid to Mr. Mann. SLS relies upon Rule 3.6-6.1(1)(a) of the Rules of Professional Conduct, which requires that a referral fee be “fair and reasonable” and that it “does not increase the total amount of the fee payable by the client”. SLS accepts that the referral fee did not increase the total amount of the fee payable by the client and does not dispute that the total amount of the fee was fair and reasonable; however, it argues that the referral fee is not fair and reasonable.

[20] Rule 3.6-6.1(1)(a) was not in place at the time the referral fees were paid out on the K files. However, I find that it was an implied term of the parties’ agreement that, to reduce the fees payable to SLS, any referral fee that Mr. Wilkins paid out had to be fair and reasonable.

[21] There is very little evidence before me, and no jurisprudence, as to what constitutes “fair and reasonable” in the context of a referral fee. On his cross-examination, Mr. Wilkins acknowledged that, while he was at SLS, referral fees were paid out at 15%. However, he also deposed that he could not function at SLS “because I was going to lose all my referral sources because I couldn’t pay the 33%”.

[22] The commentary to rule 3.6-1.1 sets out the factors that are relevant to determining whether a fee is fair and reasonable, but these factors appear to address the fees of counsel who has had carriage of a file, not a referring lawyer’s referral fee. In any event, no one made argument as to the reasonableness of the referral fee having regard to the factors identified in the rule.

[23] SLS also acknowledged before me that Mr. Wilkins had paid referral fees on other files at 33%. This appears to have been a business decision taken by Mr. Wilkins to encourage referrals. As I have noted, the new rules regarding referral fees were not in place at the time the K files were settled and the referral fees paid.

[24] SLS could point me to nothing in the agreement between the parties that required Mr. Wilkins to discuss or agree to the referral fees paid out with SLS, or that would have limited him to paying out the 15% that was customary at SLS. SLS did not argue that by failing to list Mr. Mann and Mr. Khaira as referral sources of the K files in the schedule to the written agreement that Mr. Wilkins was not entitled to reduce the net fees on which the fees payable to SLS would be calculated by the referral fee he paid.

[25] SLS has failed to prove that the referral fee at 33% was not fair and reasonable at the time that it was paid.

Referral Fee Paid to Mr. Khaira

[26] I turn next to the referral fee paid to Mr. Khaira. SLS argues that the money paid to Mr. Khaira is not properly a referral fee, but is, in fact, compensation. It points to Rule 3.6-6.0 which defines “referral” as including “recommending another lawyer or paralegal to do legal work for a anyone except where the work is done through the same law firm in which the referring lawyer primarily practices”. SLS argues that Mr. Khaira was employed at SLS when the referral came in and that he worked on the K files. As such, he falls into the exclusion in the rule for “work done through the same law firm”.

[27] In the result, SLS argues, what was paid to Mr. Khaira was in fact compensation for his work as a paralegal at Mr. Wilkins’ firm. It argues that Mr. Khaira is entitled to be compensated for his work, but not at its expense.

[28] Mr. Wilkins did not respond to this argument in oral argument and he filed no written argument.

[29] Although rule 3.6-6.0 was not in place at the time the referral fee was paid to Mr. Khaira, I find this argument persuasive. Nothing before me suggests that the nature of what can be considered a referral changed when rule 3.6-6.0 was enacted. Internal referrals may be relevant for assessing compensation of firm members, but in my view, they are not referrals that attract referral fees.

[30] I agree that the money paid to Mr. Khaira is not properly a referral fee but was compensation. Accordingly, Mr. Wilkins was not entitled to deduct the money paid to Mr. Khaira from his net fees on the K tort claim when he calculated SLS’s entitlement. SLS is thus entitled to 50% of the funds paid to Mr. Khaira, or $210,315.60 inclusive of HST, in addition to the $361,949.77 previously identified. In total, pursuant to the agreement, Mr. Wilkins owes SLS $572,265.37 after setting off the amounts owing to him.

Liability of PW Lawyers Professional Corporation

[31] SLS argues that, whatever it is owed, liability falls on Mr. Wilkins pursuant to contract and against PW Lawyers Professional Corporation by way of constructive trust. Mr. Wilkins admitted on his cross-examination that the settlement funds were first paid into PW Lawyers Professional Corporation’s trust account and were eventually transferred to its general account after the file was billed. The defendants’ counsel argued that he “doesn’t see a constructive trust” but did not articulate why.

[32] SLS relies on the doctrine of unjust enrichment to ground its entitlement to a constructive trust against PW Lawyers Professional Corporation. To establish unjust enrichment, SLS must prove an enrichment or benefit to the corporate defendant, that it suffered a corresponding deprivation, and the absence of a juristic reason for the enrichment: see Reiter v. Hollub, 2017 ONCA 186 at para. 17.

[33] SLS has established that it has been deprived of $572,265.37 to which it was entitled and that PW Lawyers Professional Corporation was enriched by that amount.

[34] Counsel for the defendants argued that the written agreement was a juristic reason for the unjust enrichment. He also argued that the corporation was not a party to the written agreement. These are inconsistent arguments.

[35] There is no contract between PW Lawyers Professional Corporation and SLS that would amount to a juristic reason for the enrichment. No other juristic reason is alleged, nor can I identify one. I thus find that as against PW Lawyers Professional Corporation, SLS has made out a case for unjust enrichment. A constructive trust is an appropriate remedy for unjust enrichment: Soulos v. Korkontzilas, 1997 SCC 346 at p. 238.

[36] Mr. Wilkins’ evidence is that the funds were transferred into the corporation’s general account where they were co-mingled with other funds. His evidence is that the money remains available. Thus, I find PW Lawyers Professional Corporation is impressed with a constructive trust in favour of SLS in the amount owing to SLS by Mr. Wilkins.

Interest

[37] SLS argues that interest on both, the amount owing to it and the amount owing to Mr. Wilkins, be disregarded. It acknowledges some delay on its part and suggests the interest calculation would be in its favour in any event. The defendants’ counsel did not oppose the suggestion. Accordingly, I order no interest in respect of any of the amounts owing.

Costs

[38] There remains the matter of costs. SLS was substantially successful on this motion, which, the parties agree, disposes of the action. There is no reason to depart from the general rule that costs follow the event.

[39] After reductions to its bill of costs for time it would have expected to spend as a party had it retained counsel rather than acting for itself [1], SLS seeks its costs of the action on a substantial indemnity scale of $29,642.00 inclusive of HST, plus disbursements inclusive of HST of $3,889.68, for a total of $33,531.68. In contrast, the defendants would have sought $5,756.00 in fees and disbursements, inclusive of HST, if successful.

[40] SLS did significant work on this motion, filing two factums, two books of authorities, and three affidavits. It produced detailed accounting records. In contrast, Mr. Wilkins delivered a five-page affidavit, and filed no factum or book of authorities. Both parties conducted a cross-examination of the other’s affiant.

[41] I am not surprised SLS’s fees are significantly higher; it did a lot more work. Thus, I do not consider the defendants’ costs to be an indication of their reasonable expectations of SLS’s costs. The expense involved in putting SLS’s materials together is obvious. The defendants would have known that SLS’s costs were reasonably much higher than their own.

[42] Significant funds were at stake for the firm. Because the motion was thoroughly prepared, the issues were able to be narrowed and the motion has resolved the entire proceeding. I thus agree that SLS is entitled to costs in an amount greater than that disclosed on the defendants’ costs outline.

[43] However, I do not agree that an award of substantial indemnity costs is warranted in the circumstances. I can identify no misconduct on the part of the defendants in the litigation to justify costs on an elevated scale. It would have been far preferable for SLS and Mr. Wilkins to communicate with each other about these issues earlier. Each appears to have held back funds owing from the other because they did not trust that the other was paying what each was owed. On this, they were both right. When SLS attempted to begin a dialogue, Mr. Wilkins should have engaged with the firm on the outstanding issues. This alone does not justify substantial indemnity costs. Neither party’s pre-action conduct is immune from criticism.

[44] I conclude that partial indemnity costs in the amount of $17,500 plus disbursements of $3,889.68, all amounts inclusive of HST, are fair and reasonable.

Conclusion

[45] In summary, after setting off the amounts owing to Mr. Wilkins from SLS, the defendants owe SLS $572,265.37 plus $21,389.68 in costs, disbursements and HST, for a total of $593,655.05. By agreement of the parties, this disposes of the entirety of the action and the counterclaim.

Justice J. T. Akbarali

Date: May 19, 2017

[1] This time primarily relates to the time spent calculating what SLS owed Mr. Wilkins pursuant to the agreement.