Legal Ethics Nightmare in B.C.

3 Mar ’05

The National Post is running a story on the Strother case in BC – the Court of Appeal has reversed a trial decision and ordered Robert Strother, a former tax partner of Davis & Co., to pay a former client as much as $32-million received in a business relationship with a competing client.  Quotes:

As a tax partner with Davis & Co., Strother advised Monarch Entertainment Corp. that changes in tax rules introduced in November, 1997, rendered the company’s film production tax shelter business no longer viable. Acting on Strother’s advice, Monarch shut down this aspect of its business.

Strother and Davis & Co. continued to do other legal work for Monarch through 1998, although their initial exclusivity/fee arrangement with Strother expired at the end of 1997.

In early 1998, meanwhile, Strother was approached by Paul Darc, a former Monarch employee, who said he had a new idea and asked him to persist in developing a new tax shelter/tax credit structure for the industry. Without advising his original client, Strother agreed to produce a new tax ruling request in exchange for a share in profits and 50% of equity and voting rights in the new enterprise, which ultimately produced Sentinel Hill Entertainment Corp. and various other related businesses
and trusts.

Strother did not tell his law firm about the arrangement and he did not tell Monarch that his legal opinion about the viability of the tax shelters had changed. Monarch sued Strother and Davis & Co. for breach of fiduciary duty and Mr. Darc for breach of confidentiality, alleging that his tax shelter structure idea was Monarch’s. The Court of Appeal dismissed Monarch’s claim against Mr. Darc, concluding that his tax structure plan had been his own original idea.

The appeal court … has ordered an independent accounting of how much Strother profited when he acted in a conflict of interest and must, therefore, disgorge to the original client. The appellant has suggested it is about $32-million. The court has also asked to hear further arguments on the law firm’s vicarious liability in the case.

It’s widely known that Davis lawyers are very nervously waiting the outcome on this one – no surprise there.  Here are the appeal court’s comments on the issue of the liability of the firm:

[87]  I come next to Monarch’s assertion that the Davis law firm is jointly and severally liable with Mr. Strother, a former partner, for his breach of fiduciary duty. I begin by noting that in its Statement of Claim, Monarch made many of the allegations against Mr. Strother against Davis as well, including the allegation at para. 108 that Mr. Strother and his firm had had an obligation to advise Monarch "of the facts of the errors in the 97/98 advice and to recommend that Monarch seek independent legal advice, but, in further breach of their duties and obligations to Monarch, failed or neglected to do so." As well, Monarch pleaded at para. 114 that Mr. Strother was at all relevant times a partner of Davis and knew or ought to have known of his conduct in connection with the "new structure". At paras. 124-125, Monarch sought the return of legal fees it had paid Davis, and at paras. 122 and 126 and in its prayer for relief, it sought various equitable remedies as well as damages, including punitive, exemplary and aggravated damages against all defendants.

[88]  It is apparent from the transcripts that Davis defended Monarch’s claims on the merits. On appeal, Davis’s factum again speaks to the merits. Nevertheless, Mr. Nathanson in his oral submission raised an objection to the effect that Monarch had not pleaded vicarious liability and therefore could not at this late date seek to hold Davis liable for anything more than whatever profits or benefits the firm had received as a result of any breach of duty by Mr. Strother. In other words, the law firm could not, because of an alleged deficiency in Monarch’s pleadings, be ordered along with Mr. Strother to account to Monarch for profits wrongfully received by Mr. Strother in the event of a breach of duty on his part.

[89]  With respect, this argument overlooks the purpose of pleadings – to state generally the material facts relied upon together with the relief sought – and wrongly assumes that conclusions of law are required to be stated. No authority was cited for Davis’s argument, and as Ms. Basham noted in reply, the Statement of Claim alleges that Mr. Strother was at all relevant times a partner of Davis. The firm cannot claim to be taken by surprise by the assertion of joint and several liability for Mr. Strother’s breach. In these circumstances, I would decline to dismiss Monarch’s claim of vicarious liability on Davis’s part based on this "pleadings" argument.

[90]  Monarch relies on the joint and several liability of partners for wrongful acts of their partners. Although Ms. Basham did not refer to it, this principle is of course codified by ss. 12 and 14 of the Partnership Act, R.S.B.C. 1996, c. 348:

12    If, by any wrongful act or omission of any partner acting in the ordinary course of the business of the firm or with the authority of his or her partners, loss or injury is caused to any person who is not a partner in the firm or any penalty is incurred, the firm is liable for that loss, injury or penalty to the same extent as the partner so acting or omitting to act.

* * *

14    A partner is jointly and severally liable with his or her partners for everything for which the firm, while he or she is a partner in it, becomes liable under either section 12 or 13.

(See also R.C. l’Anson Banks, Lindley  &  Banks on Partnership (18th ed., 2002), at 334-342.)

[91]  It
does not necessarily follow, however, that Davis is liable jointly and severally with, or in the shoes of, Mr. Strother for all the profits for which he must account to Monarch. Several questions arise. Is Monarch in fact asserting liability under the Partnership Act, or seeking only an equitable remedy against Davis? If the former, can it be said Mr. Strother was "acting in the ordinary course of the business of the firm or with the authority of [his] partners" when his breach of duty was committed? Can the firm be liable for profits he earned after he left the partnership? Can the firm be liable to disgorge profits Mr. Strother received, but which Davis did not? Does an accounting for profits come within the ambit of liability under s. 12? Does the fact that many or all the partners of Davis were not informed of, or aware of Mr. Strother’s personal conflict of interest, affect their position? And, if the state of knowledge of the other partners of Davis is relevant, were any of those partners aware that Mr. Strother was breaching his duty to Monarch, or – perhaps more importantly – should any or all of them have been put on inquiry? Looked at from a greater distance, do the equitable underpinnings of ss. 12 and 14 mean that the new "flexibility" of equitable remedies applies here as well? Last, do the principles explored in Citadel General, supra, have any effect on the vicarious liability of partners (under the Act or otherwise)?

[92]  Unfortunately, we did not receive argument on these questions. I have therefore reluctantly come to the conclusion that we must request argument (which would be in writing unless any counsel wishes to make oral submissions) from counsel for Monarch and Davis on the foregoing issues and any other arguments counsel deem to be relevant to the question of the firm’s possible liability. (Counsel for the other parties may also make submissions if they wish.) It may be that once we have received such argument, we will find it necessary to remit this part of the appeal back to the trial court so that any necessary findings of fact may be made; but on the other hand, that may turn out to be unnecessary in law. I would hope that any submissions will be made or filed within the next two months or so.

[93]  I do bring to counsel’s attention the recent decision of the House of Lords in Dubai Aluminium Co. Ltd. v. Salaam [2003] 1 All E.R. 97, which confirmed that in s. 10 of the 1890 Partnership Act(U.K.), the wording of which is almost identical to the wording of our s. 12, the phrase "wrongful act or omission" is not limited to common law torts but may include a lawyer’s breach of fiduciary duty. (The disgorgement of profits was not at issue, however.) Their Lordships also concluded that, to quote from the headnote, the "personal innocence of a person vicariously liable for the wrongful act of his . . . partner was not relevant for the purpose of determining contribution proceedings between that person and another wrongdoer, even in cases of dishonesty." Counsel will no doubt make of this case what they will.

[94]  I will leave for our final Reasons as well the questions pertaining to fees paid by Monarch to Davis between 1993 and 1998, the applicability of the Legal Profession Act, and the allegations regarding the misuse of documents allegedly provided to Davis in confidence.

[97]  With respect to the appeal of the trial judge’s dismissal of Monarch’s case against Davis, I would request argument as set out at paras. 91-92 of these Reasons. I would hope that counsel will be able to agree quickly on a date either for oral argument or on dates for the filing of their written submissions, and would ask that they advise the Registry of their proposed schedule.

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