COURT FILE NO.: CV-22-249

DATE: 2022-10-27

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

Robert Gondosch

Applicant

– and –

Michael Gondosch and 1394536 Ontario Ltd.

Respondents

Jarvis Postnikoff, for the Applicant

Thomas Mathews and Gordon Clarke, for the Respondents

HEARD: July 28, 2022 by video-conference

SMITH, J.

Reasons on Motion

Introduction

[1] Robert Gondosch (“Robert”) and Michael Gondosch (“Michael”) are brothers. They are engaged in litigation against each other in connection with the corporate respondent (“139 Corp.”). 139 Corp. owns two rental properties, two automobiles and some equipment.

[2] Robert launched this application on March 1, 2022. He seeks, among other things, remedies for oppression. He asserts that Michael has unfairly taken over sole ownership of the company, to Robert’s detriment. Then, on March 16, 2022, Michael and 139 Corp. sued Robert and his wife alleging that they misappropriated over $400,000 from 139 Corp.

[3] In this motion, Robert takes the position that counsel to Michael and 139 Corp., Mr. Clarke, should be removed as counsel because the interests of his two clients are in conflict and because Mr. Clarke may be a witness on the application.

[4] For the following reasons, the motion is allowed in part.

Facts

[5] The record before me appears to be far from complete with respect to the corporate history of 139 Corp. Moreover, the brothers assert different versions of that history. That debate, it seems to me, is for the trial of this matter. However, I can supply the following summary of the contested history.

[6] Robert deposes in his affidavit as follows: “I believe that Michael and I are both 50% shareholders of [139 Corp.] and that we are both officers and directors of [139 Corp.]. I am the president, and Michael is the secretary.”

[7] By contrast, Michael claims that Robert has never been a shareholder of 139 Corp. and that through resolution of the board of 139 Corp. in December 2021, Robert was removed as a director and officer of the company. When cross-examined on his affidavit, Michael said that he and Robert established 139 Corp. “as a 50/50 partnership back in the year 2000” through which company they engaged in the business of construction. He said that there were no other “partners.” However, a family trust owned the shares of 139 Corp. Other members of the Gondosch family sat on a board with the brothers.

[8] There appear to be several sources of conflict between the brothers, but chief among them is a dispute about money used to purchase a house in Ariss, Ontario (the “Ariss property”). Robert says that, with the knowledge and approval of Michael, in December 2013, he borrowed over $400,000 from 139 Corp. so that he and his wife could buy the Ariss property. Robert deposes that he has been faithfully servicing that loan ever since and has already paid back over $175,000.00.

[9] Michael says that the brothers agreed to use over $400,000 of 139 Corp.’s money to purchase the Ariss property for the company, with a plan to improve the property at the expense of 139 Corp. and to sell it for a profit for the benefit of 139 Corp. Michael claims that Robert and his wife have since converted or misappropriated the funds used to purchase the Ariss property and taken sole legal title to it, to the detriment of Michael and 139 Corp.

[10] In November 2021, Michael retained Mr. Clarke personally to pursue a litigation strategy “to obtain control of the Respondent [139 Corp.]” and to “retrieve” the Arris property, which he describes as “a corporate asset.”

[11] By December, 2021, Michael had, through a series of steps, become the sole shareholder, director and officer of 139 Corp. Among those steps was the removal of Robert “as an officer and director of [139 Corp.], with cause.” Robert claims that Mr. Clarke had little or no involvement in these events in December, 2021, but there is no affidavit from Mr. Clarke before me[^1] and Robert refused to answer questions respecting who, if anyone, assisted him in the preparation of corporate documents at that time. In any case, by January, 2022, Mr. Clarke’s mandate was expanded, and he was retained to act for both Michael and 139 Corp. in the litigation with Robert.

[12] According to Robert, Michael has denied him access to information about 139 Corp., including denying him an opportunity to review the corporate minute book, and has unilaterally convened meetings of the board which has, without Robert’s consent, allowed Michael to take complete control of 139 Corp. Michael says that he has acted appropriately, and that Robert had no right to the information he sought.

[13] As I have said, the parties have since commenced litigation against each other.

Positions of the Parties

[14] Robert says that Mr. Clarke stands in a conflict of interests between his two clients because the relief sought by the applicant against Michael and 139 Corp. is not the same. He writes in his factum as follows: “For example, the applicant requests and order that [139 Corp.] be wound up; and also request [sic] an order for an accounting of shareholders’ accounts.”

[15] Robert also says that he believes that Mr. Clarke must have “assisted Michael with the unilateral actions which he took with respect to” 139 Corp. He argues that he “does not believe that Michael would have been able to do so on his own without legal assistance.” He continues as follows: “It is therefore believed that Mr. Clarke will be a witness in the application. In all likelihood, he will provide evidence that is material to the application.” During the hearing of this motion, counsel for Robert committed to calling Mr. Clarke to testify at trial if the respondents did not call him.

[16] Michael takes the position that the motion to remove Mr. Clarke is merely tactical, intended to drive up litigation costs and to interfere with Michael’s right to counsel of choice. Michael says that Robert has failed to establish that any conflict exists and that the interests of Michael and 139 Corp. are the same. Moreover, Robert’s suggestion that Mr. Clarke will be a witness “is tenuous at best.” He argues that each of the steps taken to remove Robert as a director and officer were properly taken and were not “unilateral” given that they required the approval of the family trust. Since then, as the sole director, he has been entitled to authorize litigation in the name of 139 Corp.

General Principles

[17] Courts should be cautious when one party to litigation asks that counsel for the other party be removed. In Re Kaiser, 2011 ONCA 713, at para. 21, Cronk J.A. articulated the issue and stated the test as follows:

… Canadian courts exercise the highest level of restraint before interfering with a party’s choice of counsel. Where such discretionary, equitable relief if invoked, there must be a possibility of real mischief should a removal order be refused. The test is whether a fair-minded and reasonably informed member of the public would conclude that counsel’s removal is necessary for the proper administration of justice …

[18] “Real mischief” may come in the form of a conflict of interests for the lawyer in question. Two forms of conflict are in issue here: the conflict which arises when counsel to one of the parties in the litigation is also to be a witness, and the conflict which arises when counsel acts for more than one party whose interests are not aligned.

[19] Principles respecting both of these kinds of conflict are helpfully summarized in the judgment of Leach J. in Rice v. Smith, et al, 2013 ONSC 1200. As to the former, Leach J. wrote as follows (at para. 19, citations omitted):

The particular conflict of interest prohibition dealing with “lawyer as witness” is intended to prevent the inevitable conflict of interest a lawyer otherwise would have between the duty owed to his or her client, and duties of independence otherwise owed to others, especially the Court. In particular, lawyers are independent officers of the court, and a trial judge must be able to rely upon counsel for a high degree of objectivity and detachment. That fundamental relationship is compromised, and the administration of justice and integrity of the system accordingly are undermined, where the objectivity and credibility of counsel necessarily are subjected to challenge in the course of determining the substantive merits of an underlying dispute.

[20] Leach J. then set out a series of factors to consider when determining whether counsel should be removed because they may be required to give evidence. Those factors include the likelihood that the witness will be called and the significance of the evidence to be led (see Smith v. Rice, supra, at para. 20).

[21] The second potential area of conflict, acting for more than one party in litigation where the interests of those parties are not aligned is also addressed in Smith v. Rice. Of particular note for present purposes is the following excerpt from Justice Leach’s judgment (at paras. 24 – 29, citations omitted):

[24] […] authorities repeatedly have identified corporate shareholder disputes as situations involving inherent conflicts of interest that effectively restrict a lawyer’s ability to extend joint representation.

[25] In particular, as emphasized by the professional codes of conduct, a lawyer representing a corporate organization must remember at all times that the corporation has a legal personality distinct from its individual directors and shareholders, and that those interests may very well diverge, thereby preventing a lawyer’s continued involvement in an internal corporate dispute.

[26] In matters of legal representation, it accordingly is a fundamental error to regard a corporation as being synonymous with its majority directors and shareholders.

[27] Doing so almost inevitably leads to a corporate lawyer’s disregard of obligations owed to the corporate body and structure as a whole, in favour of a particular corporate faction. Most notably, the corporate lawyer effectively may ignore his or her obligation to seek litigation instructions from the corporation’s entire board of directors, and/or the lawyer’s corresponding obligation to share otherwise confidential and privileged litigation information with all of the corporation’s directors.

[28] It also ignores possible and probable distinctions between the interests of the corporation and such a majority. For example, where conduct of the director or shareholder majority is the real focus of a litigation dispute with a director or shareholding minority, (rather than any conduct of the corporation per se), corporate payment of the majority’s legal representation benefits the majority directors and shareholders but not the corporation. It also results in a situation where the minority shareholders effectively are being compelled to pay, at least in part, the legal fees of opposing legal counsel.

[29] The above concerns have been highlighted in numerous cases emphasizing a lawyer’s inability to jointly represent both a corporation and individual majority directors and shareholders in litigation focused on an internal corporate dispute.

Should Mr. Clarke be removed because he may be a witness?

[22] In my view, this question can be disposed of quickly. On the basis of the record before me, I am not satisfied that there is cause to remove Mr. Clarke because he will be called as a witness. While Mr. Clarke may have some knowledge of relevant events in this matter, there is no evidence before me that he acted as anything other than counsel who gave advice and acted on instructions. The advice was given to, and the instructions came from, Michael. Evidence of the relevant events can be given by people other than Mr. Clarke, including Michael, among others.

[23] Leach J. cautioned against removing counsel in these circumstances, writing as follows in Rice v. Smith, supra, at para. 34:

Parties regularly act on the recommendations and advice of lawyers, who frequently communicate decisions made and positions adopted by their clients. Lawyer involvement in that limited sense should not necessarily disqualify continued lawyer involvement if a dispute evolves into formal litigation. Otherwise, a great many litigants automatically would be deprived of their preferred legal representation, in which they have invested considerable time and expense.

See also: Hames, et al. v. Greenberg, et al., 2013 ONSC 4410, at paras. 67 – 70.

[24] There is no evidence in this matter of Mr. Clarke’s involvement beyond this “limited sense.” This is to be contrasted with the facts in Rice v. Smith itself where the lawyer in question was heavily involved in crucial events which went “to the heart of the substantive dispute between the parties.”

[25] In my view, at this stage there is no reason to believe that Mr. Clarke, who was first retained to pursue a litigation strategy for Michael, should have to be a witness in that very litigation. For example, he has no knowledge of the matter at the “heart of the substantive dispute between the parties,” that is, the use of the funds deployed to purchase the Ariss property.

Is there a conflict of interests between the respondents?

[26] The more difficult question is whether Mr. Clarke should be prevented from acting for either or both of the respondents because their interests are not the same. As I have said, Michael takes the position that Robert has failed to establish that any conflict exists between Michael and 139 Corp. Part and parcel of this argument is Michael’s assertion that all steps to remove Robert as a director and officer were proper and that since that time Michael has been entitled to authorize litigation and give instructions to Mr. Clarke in the name of 139 Corp.

[27] The flaw in this argument is that it assumes the correctness of Michael’s positions on the various issues in this matter, all of which are disputed by Robert. These include, but may not be limited to, whether Robert misappropriated corporate funds, whether the Ariss property belongs to Robert or to 139 Corp., whether Robert was a shareholder of 139 Corp., whether Robert was afforded proper notice of board meetings, whether there was cause to remove Robert from his positions with 139 Corp., whether Michael was properly installed as the sole shareholder, officer and director or 139 Corp., and whether Michael’s conduct has been oppressive. These are the very questions raised by the litigation and which are to be decided by the court.

[28] In another case decided by Leach J., he warned against putting the cart before the horse in this way. In Andersson, et al. v. Aquino, et al., 2018 ONSC 852, it was argued that because the defendants (who sought to have plaintiffs’ counsel removed) were not directors of the corporation and that the individual plaintiffs were both “the only true directors,” and in agreement as to how the litigation should be conducted, there was no conflict for counsel who acted for all plaintiffs, including the corporation in question. Leach J. continued as follows (at paras. 55 – 57):

[55] Adopting such an approach improperly presupposes the outcome of the litigation.

[56] As noted above, there are serious unresolved disputes about such matters as: whether Ms Aquino was properly removed as a director; whether Mr Dillon was properly appointed in her stead; and whether the actions taken by the defendants at the purported Special Meeting of Shareholders resulted in Mr Kamran, Ms Aquino and Mr Andersson all being directors of the company.

[57] Until such matters are resolved, it seems inherently perilous and inappropriate for litigation counsel representing LEO Canada to report to and take instructions only from certain putative directors while ignoring and withholding information from others.

[29] The situation here is similar. As noted above, Robert is said by Michael to be at the very least a “partner” in 139 Corp., the company which is engaged in litigation against Robert. While that may not by itself be improper, the decisions relating to litigation against Robert’s interests in the name of 139 Corp. should be made independent of Michael’s interests. In this regard, counsel acting for 139 Corp., independent of Michael, would have the ethical obligation to “ensure that it is the interests of the organization that are to be served and protected” (Rules of Professional Conduct, Law Society of Ontario, Rule 3.2-3, Commentary 1).

[30] Last, as Robert argues, the relief sought against the two respondents is not identical. To that I add that some of the forms of relief, even if sought against both respondents, would have disparate effects on them if Robert is successful. To take just one example, Michael has a significant interest both in not being found to have engaged in oppressive conduct and in avoiding any remedy for oppressive conduct. On the other hand, 139 Corp. as an organization has an interest in complying with the law in the interests of all its stakeholders. If there has been oppressive conduct, 139 Corp.’s interest is to “rectify” any misconduct so that “the interests of every security holder, creditor, director or officer of the corporation” are respected (Business Corporations Act (Ontario), R.S.O. 1990 c. B.16, s. 248(2); see also Hames v. Greenberg, supra, at paras. 64 – 65). For these reasons also, the interests of Michael and 139 Corp. are not necessarily aligned.

[31] Accordingly, I am of the view that Mr. Clarke stands in a conflict between the interests of Michael and the interests of 139 Corp.

Remedy

[32] As I have found that it is unlikely that Mr. Clarke should be a witness in these proceedings, I see no reason to disqualify him from continuing to act as counsel to Michael. I do, however, find that Mr. Clarke should be disqualified from acting for 139 Corp. (Hames v. Greenberg, supra, at paras. 70 – 71).

[33] Subject to my comments in the following paragraph, new independent counsel should be appointed for 139 Corp. If the selection of new counsel is contentious between the parties, either of them may apply to the court for directions (Rice v. Smith, supra, at paras. 32, 64; Andersson v. Aquino, supra, at paras. 69 – 70).

[34] I note that it appears that 139 Corp. has limited resources. Michael said in cross-examination that he was personally paying 139 Corp.’s legal bills because “the corporation has no money.” Robert notes in his affidavit that earlier this year the corporate bank account was in a state of overdraft. In addition, I note that the litigation is largely a dispute between Robert and Michael over the control and assets of 139 Corp. and is not about the conduct of 139 Corp. per se (see Rice v. Smith, supra, at para. 28). As Leach J. observed in similar circumstances in Andersson v. Aquino, supra (at para. 70), “one issue for consideration … may be whether the corporation properly or usefully should remain a litigant in this proceeding.”

Conclusion

[35] For these reasons, the motion is allowed in part.

[36] As success has been divided on this motion there will be no order for costs.

I.R. Smith, J.

Released: October 27, 2022

COURT FILE NO.: CV-22-249

DATE: 2022-10-27

ONTARIO

SUPERIOR COURT OF JUSTICE

Robert Gondosch

Applicant

– and –

Michael Gondosch and 1394536 Ontario Ltd.

Respondents

REASONS FOR JUDGMENT

I.R. Smith, J.

Released: October 27, 2022

[^1]: Instead of an affidavit from Mr. Clarke, the respondents have filed an affidavit from Mr. Mathews’ legal assistant. This affidavit purports to be based on information received from Mr. Clarke. Some of the content of the affidavit is controversial between the parties. I put little weight on this affidavit except where it is used to attach relevant documents.