COURT FILE NO.: CV-21-656008
DATE: 2022-09-23
HEARD: 2022-09-21
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: John Kumer (Sr.) and Josephine Kumer v. John Kumer (Jr.), J. Kumer Holdings Inc., Maria Kumer and Albert Kumer;
BEFORE: ASSOCIATE JUSTICE C. WIEBE
COUNSEL: Rebecca Studin for John Kumer (Jr.) and J. Kumer Holdings Inc.; Nadia Chiesa for John Kumer (Sr.) and Josephine Kumer; Paul Sadler for Maria Kumer and Albert Kumer; Ryan Chan for Frances Church;
HEARD: September 21, 2022.
REASONS FOR DECISION
[1] This is a motion brought by John Kumber (Jr.), hereafter “John Jr.,” for an order requiring the production of documents by a non-parties, Frances Church and Anthony Klemencic, and the examinations of Ms. Church and Mr. Klemencic pursuant to Rule 39.03 of the Rules of Civil Procedure. Ms. Church is an accountant. Mr. Klemencic is a lawyer. The motion was originally opposed entirely by John Kumer (Sr.), hereafter “John Sr.,” and his wife, Josephine Kumer, hereafter “Josephine,” who will be referred to collectively as “the Parents.” The other parties, Maria Kumer (“Maria”) and Albert Kumer (“Albert”), siblings of John Kumer (Jr.), and Ms. Church attended to observe. Mr. Klemencic had notice of the motion, but did not appear.
[2] The motion is within an application brought by the Parents to have a corporate estate freeze transaction dated November 26, 2015 concerning the shares of the family company, J. Kumer Holdings Inc. (“JKH”), declared invalid. They also seek oppression remedy relief. There are two other relevant applications, one brought by John Jr. against the Parents, Maria and Albert, CV-21-664839, and another by Maria and Albert as against John Jr. and the Parents, CV-21-666081. There are also two actions by the Parents, Maria and Albert against Ms. Church.
[3] These proceedings concern the following background facts. The Parents are originally from Slovenia but can converse and do business in English. In 1983 John Sr. and John Jr. purchased a commercial plaza in Mississauga. John Jr., an engineer, devoted his time to converting the plaza into a commercial success. The plaza prospered. In 1989 JKH was incorporated with John Sr. appointed president and John Jr. secretary, and with the 500 common shares owned equally by John Sr., John Jr., Josephine, Albert and Maria. In 1999 the plaza was transferred to JKH. John Jr. asserts that throughout the Parents verbally promised him that he would eventually be given control of JKH if he continued his work. When this did not happen, John Jr. advised the Parents in 2014 that he would leave and pursue a career in engineering.
[4] This led to the issues in these proceedings. On November 26, 2015 the Parents signed a Special Resolution of the Controlling Shareholders of JKH (“the Resolution”) which instituted an estate freeze whereby the existing shareholders converted their common shares to preferred shares and set up a new common share ownership structure involving only the children, with John Jr. owing 76 common shares and Albert and Maria each owning 12 common shares. This gave John Jr. control of JKH. John Jr. alleges that he was told by the company accountant, Ms. Church, that this was done voluntarily by the Parents in her office and with her assistance. There is a March 5, 2021 email from Ms. Church confirming that the Parents signed the Resolution in her office on November 26, 2015. John Jr. also alleges that the Parents later told him that they used their longtime, personal lawyer, Mr. Klemencic, to change their wills to incorporate the estate freeze. It is undisputed that the Parents gave copies of these wills to Ms. Church.
[5] The Parents, on the other hand, allege in this application and motion that they signed the Resolution in John Jr.’s presence relying entirely on his misrepresentations about the document. In his affidavit in this motion, John Sr. states that John Jr. represented to them that the document “would help manage the operation of the Plaza and help Kumer Holdings save on taxes.” He denied that the Parents received help from Ms. Church in signing the document and that the document was signed in her office. He denied that the Parents received any advice from Mr. Klemencic about the estate freeze. He insisted that the Parents always wanted the share structure of JKH to remain is it was originally.
[6] John Jr. stayed with JKH. The plaza continued to prosper. Maria alleges that in the summer of 2020 she was reviewing the company minute book, discovered the Resolution, and brought it and its meaning to the attention of the Parents. The proceedings ensured.
[7] In this motion, John Jr. wants an order requiring the disclosure of the documents about the estate freeze in the possession of Ms. Church and Mr. Klemencic for the period from January, 2015 to July, 2021, and an order requiring that Ms. Church and Mr. Klemencic be examined about the estate freeze pursuant to Rule 39.03 of the Rules of Civil Procedure.
[8] In the course of the argument, the Parents confirmed the following:
a) They do not object to having the documents about the estate freeze in Ms. Church’s JKH file disclosed.
b) They do not object to having the documents about the estate freeze in Ms. Church’s personal file concerning the Parents disclosed. This disclosure will include the copies of the Parents’ wills Ms. Church has. The condition on this disclosure is that the Parents review these documents for relevance before their release and that the portions of the wills that have nothing to do with the estate freeze be redacted. Ms. Studin argued that Ms. Church should the one to review the documents for relevance. I rejected that argument on the grounds that the personal files belong to the Parents.
c) The Parents also do not object to the Rule 39.03 examination of Ms. Church about the estate freeze.
d) They do, however, object to the requested disclosure and examination of Mr. Klemencic on the grounds of solicitor-client privilege. The only exception to this objection was a very short Rule 39.03 examination of Mr. Klemencic as to the fact of whether he gave legal advice to the Parents about the estate freeze. The Parents even object to having Mr. Klemencic disclose the timing of his advice about the estate freeze if he gave that advice. Ms. Studin argued that the Parents have waived the solicitor-client privilege by John Sr.’s assertion in this application that the Parents relied upon John Jr. about the estate freeze and received no legal advice about the estate freeze. John Sr. reiterates this evidence in this motion. The argument is that this puts the Parents’ state of mind and their actual reliance on John Jr. in issue, thereby implicitly waiving privilege concerning advice on the subject they may have received from Mr. Klemencic.
[9] Therefore, the sole issue that I must determine is whether the Parents have waived solicitor-client privilege concerning the documents and evidence of Mr. Klemencic about the estate freeze.
[10] The leading case on the issue of such waiver is the decision of the Court of Appeal in Roynat Capital Inc. v Repeatseat Ltd., 2015 ONSC 1108. In this case the plaintiff agreed to lend money to the corporate defendant on terms, one of which was that the defendant was to raise additional equity funds. Among the defendants were the lawyers who acted for the defendant borrower. The allegation against them was that an associate lawyer with that firm represented to the plaintiff in an email that the equity funds had been raised, when they had not all been raised. The plaintiff alleged that it relied on this representation in advancing the loan. The allegation was that the defendant lawyers were liable for negligent misrepresentation. The plaintiff had its own lawyer throughout the transaction. At discovery the plaintiff’s representative refused to answer questions about the advice the plaintiff received from its own lawyers about the associate’s confirmation. On a motion, the master ruled that this advice was privileged and not to be disclosed. This decision was reversed on appeal, which reversal was later upheld in the Court of Appeal.
[11] The Court of Appeal adopted the test laid out by Justice Perell in Creative Career Systems Inc. v. Ontario, 2012 ONSC 649(S.C.J.) namely that solicitor-client privilege will be deemed waived if a party puts its state of mind in issue and says it has obtained legal advice in formulating that state of mind. In paragraph 41 the Court expressly adopted the two part test articulated by Justice Perell, namely that two elements must be established to create the deemed waiver: (1) the presence or absence of legal advice is relevant to the existence or non-existence of a claim or defence; which is to say that the presence or absence of legal advice is material to the lawsuit; and (2) the party who received the legal advice must make the receipt of it an issue in the claim or defence.
[12] There was no real issue in Roynat about the first part of the test, as the presence or absence of independent legal advice concerning the associate’s confirmation was obviously material to the plaintiff’s case about reliance and negligent misrepresentation. The focus of the discussion was on the second part of the test, namely whether the plaintiff had made the legal advice of its lawyers an issue in its claim. There was no evidence that the plaintiff had done so in its pleading or otherwise.
[13] The Court of Appeal found that, being a negligent misrepresentation case, the plaintiff implicitly made the independent legal advice of its own lawyer an issue. To prove such a claim, the Court held, the plaintiff must prove not only that there was reliance on the alleged negligent misrepresentation, but that the reliance was reasonable. If the plaintiff received advice from its lawyers about the associate’s confirmation that contradicted the alleged reliance, the reliance would not be reasonable. This is what the Court said in paragraph 58:
The applying the two-step test, this negligent misrepresentation claim advanced by the plaintiffs makes (1) the presence of legal advice relevant to the plaintiffs' allegation of reliance; and (2) the party who received the legal advice (in this case the plaintiffs) made the receipt of the legal advice an issue in this claim as the plaintiff must prove that relying on the defendants' alleged representations was reasonable. If Cassels provided the plaintiffs with legal advice on this issue to the contrary to the position alleged in this claim, the plaintiffs' reliance would not be reasonable.
[14] Interestingly, the Court distinguished two other decisions that concerned good faith claims on this ground. In Creative Career Systems, the plaintiff sued a government department and individuals for acting in bad faith by refusing to register the plaintiff, a private educational institution, under the governing statute. At discovery the defendants admitted getting legal advice when they made their decisions. The plaintiff moved to have the legal advice disclosed. Justice Perell dismissed the motion finding that the defendants had not explicitly made the receipt of the legal advice an issue in the case. In Guelph (City) v. Super Blue Box Recycling Corp., 2004 CanLII 34954 (ONSC) the plaintiff was seeking disclosure of in-house counsel advice to the defendant municipality about its good faith performance of a contract. Justice Corbett determined the issue on the basis of either whether the advice had been disclosed or whether the municipality expressly made the legal advice an issue in the case. He found that the municipality had not done so.
[15] In Roynat the Court of Appeal found that in cases like this of alleged bad faith, a party seeking to defend its own conduct will be found to have waived solicitor-client privilege only where it expressly makes the legal advice a part of its defence. Otherwise, the privilege will not have been waived. The Court found that the analysis is different when one is alleging negligent misrepresentation. Here the question is whether the plaintiff relied on the defendant and whether that reliance was reasonable. If the plaintiff received independent legal advice on the subject matter of the reliance, it is implicitly waiving the solicitor-client privilege concerning that advice by asserting the claim.
[16] Applying this analysis to the motion before me, I find that the Parents have indeed waived solicitor-client privilege concerning any advice they received from Mr. Klemencic about the estate freeze. They did this by asserting in this application that they relied entirely on the alleged misrepresentations John Jr. made about the estate freeze and the Resolution when they signed the document. This claim is in the nature of fraudulent or negligent misrepresentation. They must, therefore, prove the alleged reliance and that it was reasonable. If they received independent legal advice from their lawyer, Mr. Klemencic, that clarified the estate freeze for them either before or after signing the Resolution, any reliance they may have placed on John Jr.’s alleged misrepresentations would have been unreasonable. This analysis would apply not only to any direct advice Mr. Klemencic may have given to the Parents about the estate freeze, but also to any advice and work Mr. Klemencic did in incorporating the estate freeze into the Parents wills. It applies to any advice Mr. Klemencic may have given on the subject before or after the Resolution.
[17] In their written submissions, the Parents argued that there needed to be evidence from the Parents of actual legal advice from Mr. Klemencic on the estate freeze or circumstances where such legal advice was probably given for there to be a deemed waiver. They referred me to the decisions in Do Process LP v. Infokey Software Inc., 2015 BCCA 52 and Dramel Limited v. Multani, 2020 ONSC 4440. I do not agree that these decisions stand for that proposition.
[18] Therefore, I rule that Mr. Klemencic must disclose any documents in his possession about the estate freeze pursuant to Rule 30.10, and must attend on an examination under Rule 39.03 to answer questions concerning the estate freeze. It would be unfair to John Jr., who is facing an allegation of misrepresentation, to have that disclosure.
[19] In conclusion, I rule the following:
a) Ms. Church must disclose the documents in her JKH file and her personal file for the Parents concerning the estate freeze. Concerning the personal file, the Parents will be entitled to review the documents for relevance prior to release. The copies of the Parents’ wills in Ms. Church’s possession must be disclosed but with the parts of same that do not relate in any way to the estate freeze redacted.
b) Ms. Church must attend on a section 39.03 examination to give her evidence about the estate freeze.
c) Mr. Klemencic must disclose the documents in his possession about the estate freeze, which must include any documents concerning the work Mr. Klamencic did on the Parents’ wills as they pertain to the estate freeze.
d) Mr. Klemencic must attend on a section 39.03 examination to give his evidence about the estate freeze.
[20] Concerning costs, John Jr. has served and filed a costs outline that shows $34,689.35 in full indemnity costs, $31,220.59 in substantial indemnity costs and $20,813.72 in partial indemnity costs. The Parents have served and filed a costs outline that shows $8,533.97 in partial indemnity costs. If the parties cannot agree on costs, John Jr. should serve and file written submissions on costs of no more than one page on or before September 28, 2022, and the Parents should serve and file written submissions on costs of no more than one page on or before October 3, 2022.
DATE: September 23, 2022
ASSOCIATE JUSTICE C. WIEBE