How far can you trust your lawyer?
A law firm's duty to client the subject of court hearing
canada.com
Diane Francis, Financial Post
Published: Saturday, May 27, 2006
A case that is expected to be heard by the Supreme Court of Canada this fall has sweeping implications for business and the legal profession.
It pits Stephen Cheikes, an American who ran a movie tax-shelter business in Vancouver, against Robert Strother, his former lawyer, and Mr. Strother's former law firm, Davis & Co., the second-largest legal firm in British Columbia. The Court's ruling will determine what duties and loyalties lawyers and their firms owe their clients.
Mr. Cheikes started Monarch Entertainment Corp. in 1993 and hired the lawyers. The company was a success.
Mr. Cheikes says that in 1997 Mr. Strother advised him he could not legally operate his tax-shelter business because of tax rule changes. Mr. Cheikes shut operations down that fall and asked Mr. Strother to find ways to make Monarch compliant so that the company could re-open.
A year later, he found out that Mr. Strother had become a 50% partner in a movie tax shelter business called Sentinel Hill, and that Davis & Co. were its attorneys. Mr. Cheikes says that from 1998 to 2002, Sentinel Hill made $140-million in total profits, that Mr. Strother made $32-million for himself and that Davis & Co. had been paid $9-million in fees.
By the time Monarch discovered this competing enterprise, however, it was too late to catch up, Mr. Cheikes says. In 1999 Monarch went to court. Mr. Cheikes sued both Mr. Strother and Davis & Co. for breach of fiduciary trust as well as breach of an obligation of client confidentiality.
In 2003, the B.C. Supreme Court heard the case but found no wrongdoing. Two years later, however, the B.C. Court of Appeal overturned that ruling, finding the lawyer and firm guilty.
Mr. Strother was ordered to pay back the $32-million he had made and Davis & Co. was ordered to return $7-million of the $9-million in fees to Mr. Cheikes and his partners.
The high-stakes case was appealed again and the Supreme Court of Canada has granted leave to appeal, probably in October.
It's no surprise the case has gone this far -- it has been widely circulated and discussed within the legal profession, with even the Canadian Bar Association intervening.
"This is a case of grave consequence to the citizens of this country," Mr. Cheikes said in a telephone interview.
"To summarize, this is what happened to us," he said. "Myself and others created a new business opportunity; we hired a large law firm for five years; that law firm advised us to close down because laws had changed; then that law firm and its lawyer failed to advise us that they were mistaken and that the law would permit us to restart our business; and then our lawyer and our firm got into the same business without telling us."
The case is important not simply because it pertains to a lawyer who ends up competing with a client. There are also issues of concern that came out of the lower court rulings.
For example, the B.C. Supreme court agreed with Mr. Strother's argument that he had no obligation to correct his mistaken legal advice even though that advice had led to the closure of Monarch.
The lower court also agreed with Davis & Co.'s contention that it should be able to represent two competitors in a business without being obliged to tell one what the other is doing.
But on that point the B.C. Appeal Court disagreed.
"Mr. Strother was a lawyer and there are duties which lawyers have to clients," said Mr. Cheikes.
"The Court of Appeal said he had an obligation to tell us that he was wrong initially in his interpretation of the Tax Act. Because he didn't, the court ordered him to give us all his profits. The law firm was ordered to give us only part of the fees they earned.
"But they should pay us all fees because we hired the law firm and we believe that both Strother and the firm should be liable.
"If this case loses, how can anyone in Canada trust their lawyers?"
© National Post 2006 |
