Court File and Parties

COURT FILE NO.: CV-22-00683696-0000 DATE: 20230728 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: BANK OF MONTREAL, Plaintiff – and – ZIYA HOT YOGA INC. O/A SAANA YOGA and JACQUELINE DIRENZO also known as JACQUELINE HUARD and JACLYN SZABO also known as JACKIE SZABO, Defendants

BEFORE: E.M. Morgan J.

COUNSEL: Trung Nguyen, for the Plaintiff Kenneth Decker, for the Defendant, Jaclyn Szabo Adam Jarvis, for Jacqueline DiRenzo

HEARD: June 14, 2023

Motion to Remove Counsel

[1] This motion arises in the context of an action by the Plaintiff, Bank of Montreal, to recover on a loan to the Defendant, Ziya Hot Yoga Inc. (“Ziya”). I am advised that Ziya is now insolvent.

[2] Ziya’s debt to the Plaintiff is personally guaranteed by its two principals, the Defendant, Jaclyn Szabo (“Szabo”), and the Defendant, Jacqueline DiRenzo (“DiRenzo”). Szabo and DiRenzo are both directors, officers, and shareholders of Ziya.

[3] Szabo and DiRenzo have crossclaimed against each other for contribution and indemnity. Szabo also claims damages from DiRenzo and lesser liability to BMO than DiRenzo, based on DiRenzo’s alleged misappropriation of property belonging to Ziya during the pandemic shutdown.

[4] The present motion is, in effect, between Szabo and DiRenzo. The Plaintiff takes no position on it, and Ziya currently shares counsel with DiRenzo and so shares DiRenzo’s position in the motion. Szabo brings this motion to remove DH Professional Corporation (“DH”) as counsel for Ziya and DiRenzo. She contends that by representing her company and her co-director/co-shareholder, DH is in a conflict of interest.

[5] For a number of years prior to the commencement of the action, DH acted for Ziya and related corporations. Ziya is a closely held corporation. Currently, its only directors, officers, and shareholders are DiRenzo and Szabo. DH drafted the Shareholders Agreements that governs the relationship among these parties.

[6] For the most part, in doing Ziya’s legal work DH took instructions from DiRenzo, but there were occasions where members of the DH firm were instructed by Szabo. Likewise, while DH’s lawyers primarily reported to DiRenzo, they rendered their legal advice to both DiRenzo and Szabo; in turn, DiRenzo and Szabo have both relied on DH’s advice in their capacities as directors, officers, and shareholders of Ziya.

[7] DH’s representation of Szabo and DiRenzo entailed incorporating and structuring their corporate holdings, preparing shareholders agreements setting out the duties and rights as between Szabo and DiRenzo, and negotiating disputes that Szabo and DiRenzo had with their fellow shareholders in Ziya. DH’s affiant swears that he did not consider Szabo to be his or his firm’s client; on the other hand, Szabo deposes that she saw DH lawyers as her lawyers.

[8] The transactions for which DH acted for Ziya, its shareholders, and related companies, went on for about 10 years. These included work on behalf of three corporations in which Szabo and DiRenzo were shareholders, officers and directors: (1) Ziya; (2) 1890079 Ontario Inc., which DH incorporated as the vehicle for Szabo and Di Renzo to purchase and hold shares in Ziya and subsequently buyout the Ziya shares of a third shareholder, Tracey Dos Anjos; and (3) 24697343 Ontario Limited, which was incorporated by Szabo and Di Renzo to purchase and own the building at 577 Wellington St., Toronto in which Ziya operated.

[9] In performing these transactions, it was Ziya that was, for the most part, DH’s client, although in drafting the shareholders agreement DH necessarily dealt directly with Szabo and DiRenzo as shareholders. But even when doing corporate work for Ziya, DH appears to have dealt with Szabo as what is often called a “near client” of the firm: Marchant Realty Partners Inc. v. Milborne, 2022 ONSC 5076, at para 5.

[10] The present litigation, especially the cross-claims, is related to the corporate work DH did in setting up the shareholder relationships in issue. It directly raises the rights and obligations of DiRenzo and Szabo in respect of the corporate structure conceived and drafted by DH. In fact, DH represented DiRenzo and Szabo together in shareholder disputes which they had with other shareholders in their related companies.

[11] It is well established that lawyer may not act against a person to whom the lawyer has given advice that is related to the current retainer. The prior relationship need not be a formal solicitor-client relationship. In fact, it is sufficient if the current retainer involves acting against a person who has instructed counsel on behalf of the corporate client: Canadian Arctic Trading House Ltd. v. Bronstein, at paras 11-13 (SCJ).

[12] Moreover, this court has observed on previous occasions that “[t]he duty of the solicitor for the Company is to advise all of the directors so that they may make an informed decision as a board with respect to the best interests of the Company”: Edwards-Macleod Properties Ltd. v. 1037661 Ontario Ltd., [2001] OJ No 145, at para. 36. Accordingly, in providing legal services and advice to Ziya, it was DH’s duty to advise DiRenzo and Szabo as its client’s directors as part of its duty to advise Ziya. As directors, DiRenzo and Szabo were entitled to, and did, rely on DH’s legal advise.

[13] Now that a dispute has erupted between DiRenzo and Szabo and DH is taking DiRenzo’s side, it is Szabo’s perception that DH has preferred one of its clients over the other. Although as a matter of strict corporate law doctrine the corporation is a separate legal entity from its shareholders, it is entirely understandable why Szabo feels that she is now confronting her own former lawyer. She was, and is, one member of a two-person company, and the law firm that was DiRenzo’s and her mutual counsel has now chosen DiRenzo over her.

[14] Interestingly, there is nothing in the DH’s supporting affidavit that suggests that they have established an ethical wall between DiRenzo’s and Szabo’s interests. There is likewise nothing offered by DH by way of an assurance that none of Szabo’s confidential information will be used against her and in favour of DiRenzo. There is no evidence of Hancock or anyone else at DH preparing a joint retainer agreement or otherwise advising Szabo in writing of any limits on DH’s past retainers, and no indication that DH advised Szabo that she should seek her own independent legal advice in dealing with her rights as a principal of Ziya.

[15] In fact, an ethical wall would be virtually impossible to establish in these circumstances. Adam Jarvis, who is counsel for Ziya and DiRenzo in the present action, was himself involved in prior dealings with Ziya and its two principals. On its corporate side and on its litigation side, DH appears to have knowledge of the respective rights and legal positions of DiRenzo and Szabo which cannot be separated or isolated from each other.

[16] Separate from issues of confidentiality and intimate knowledge of Szabo’s interests and rights vis-à-vis DiRenzo, it is well-established that a lawyer owes a duty of loyalty to a client. This duty requires the lawyer to refrain from accepting a retainer that is adverse to the interests of that client, regardless of whether there is confidential information at stake: G. Raymond Chang Ltd. v. Shopcast Television, [2008] OJ No 4823, at para. 16.

[17] The duty of loyalty also extends to individuals who are “near clients” – i.e. persons who are shareholders, officers and directors of closely held corporate clients where the individual has been involved in instructing the lawyer on the corporation’s behalf or otherwise closely associated with the retainer to act for the company. Ziya is not a large corporation or financial institution whose shareholders or officers’ interests with respect to the company are diffuse and in respect of which a given officer or shareholder may have little to do with the company’s solicitors: see McKenna v. Gammon Gold Inc., 2009 CarswellOnt 32 (SCJ).

[18] Rather, DiRenzo and Szabo are “part of a small group of private closely held companies” for which DH lawyers were “aware of the nature of the operation” and the personal involvement of the principals: Terracap v. 2811 Development Corporation, 2010 ONSC 1183, at para 26. As Justice Lax stated in McKenna, at para 11, “there may be situations where the duty of loyalty will require that a lawyer not act against an affiliate to protect the relationship with the client”. With the greatest of respect to the lawyers at DH, this is one of those situations.

[19] In the within litigation, the subject-matter is the operations and property of Ziya, along with the rights and obligations of DiRenzo and Szabo as its officers, directors and shareholders. While Ziya has now ceased to carry on an active business, those issues are front and centre in the crossclaims between DiRenzo and Szabo. Specifically, the two shareholders of Ziya are litigating Szabo’s claim that DiRenzo improperly took property belonging to Szabo for her own use and therefore caused Ziya to no longer have sufficient assets to satisfy its obligations to BMO.

[20] DH’s retainer to act for Ziya and DiRenzo in defending the BMO action, and advancing and defending DiRenzo in crossclaims with Szabo relating to their respective rights and duties within Ziya, is closely related to the advice and instructions given and received by DH in relation to the preparation of the shareholders agreement for DiRenzo and Szabo. Szabo specifically recalls dealing directly with DH and, in particular, Hancock, regarding the establishment and internal structure of Ziya – the very issues in dispute in the crossclaim between DiRenzo and Szabo.

[21] In fact, Hancock must have had direct dealings with Szabo in relation to matters at issue in the crossclaims. Having he put together a shareholders’ agreement which outline these very rights and obligations for the two principals of Ziya, he must have advised them both. Had he proceeded with this task without giving Szabo any advice and without informing her that she should obtain independent legal advice, he would have been remiss in his duty.

[22] Given the 10-year time span in which DH was engaged by Ziya and its principals, and the nature and scope of DH’s retainers, the presumption that DH has relevant confidential information from its dealings with Szabo is a strong one: 2235512 Ontario Inc. v. 2235541 Ontario Inc., 2016 ONSC 1956, at paras 40-45, 50-51, 74-77. That presumption is difficult to dispel, and the onus of discharging it here has not been met by DH: Canadian Arctic Trading House Ltd. v. Bronstein, at para 21 (SCJ).

[23] Furthermore, DH’s continuing representation of DiRenzo as against Szabo constitutes a breach of the duty of loyalty that DH lawyers owe to Szabo as a former client or near client. There are no safeguards in place to protect Szabo from misuse of any information about her that her lawyers have in their possession, and she was never advised in the first place to protect herself by getting independent legal advice with respect to Ziya’s affairs and her relationship with DiRenzo. Szabo relied on DH for advice, and has a right to expect that they remain loyal to her and not act against her.

Disposition

[24] Szabo shall have an order removing DH and Adam Jarvis as counsel for Ziya and DiRenzo in this action.

[25] The parties to this motion have each submitted a Cost Outline or Bill of Costs, and they are not that far apart. Counsel for Szabo seeks $7,853.22, all inclusive, while counsel for Ziya and DiRenzo would seek the all-inclusive amount of $6,396.12. Both requests are on a partial indemnity basis, and both are reasonable and within the range of what might be expected in a motion of this nature.

[26] Costs are always discretionary under section 131 of the Courts of Justice Act. Using round numbers for convenience, DiRenzo shall pay Szabo costs in the all-inclusive amount of $7,800.

Date: July 28, 2023 Morgan J.