The Supreme Court of Canada’s recent 5-4 decision reducing the
financial remedy against former Davis & Company partner Robert
Strother, but still finding him in a conflict of interest position, was
“one judge short of perfect,” says the man at the controversy’s hub.
Strother, after seven years of court battles, says the SCC decision “was a good and thoughtful hearing and the financial result, although not what I had hoped, is satisfactory.”
Strother believes the case demonstrates that lawyers should have clear, well-written guidelines outlining client expectations. The retainer was “really the core of the lawsuit,” maintains Strother, who finds comfort in the initial trial judge’s and SCC minority’s rulings. “The key message is, ‘Get it in writing and clearly communicate what you are expected to do for the client.’ ”
The conflict case arose when Strother acted for Monarch Entertainment Corp. (now 3464920 Canada Inc.), under a written retainer, setting up film industry tax shelters. The retainer limited Davis to Monarch’s business.
Federal guidelines changed the write-off rules in 1996, Monarch’s tax-shelter business wound down, it laid off staff, and dissolved the retainer relationship. It continued with Davis on other tax-related issues on a verbal retainer, dispensing advice when needed. The arrangement was no longer exclusive.
Paul Darc, a laid-off Monarch employee, spotted a possible loophole and approached Strother to write for a Revenue Canada ruling. Strother called it a “long-shot.” As payment, he took a 55-per-cent share in a new company, Sentinel Hill Entertainment Corp., if a favorable ruling occurred, which it did in March 1998. Strother informed his partners he had an option to own part of Sentinel and was told he couldn’t. In early 1999, Strother left Davis & Co., to become a 50-per-cent shareholder in Sentinel. Monarch, hearing of the new Revenue Canada ruling, sued Strother.
Strother believed the suit would fizzle. The ruling he had obtained opened the door for all companies to re-enter the film tax-shelters business. “I believed that Monarch would get back in the business, as they had good contacts in the film industry, and the lawsuit would be withdrawn,” he says.
“When you look at us in 1999, Sentinel was a little company, with no real money or prospects and working out of a small office on the east side of Vancouver,” he says, adding that they would start competing with the “lions” in the industry starting from “scratch.”
“We were very lucky, but we also took tremendous risks,” he says, adding he had left Davis after “wondering if I could be a businessman.” Lawyers by nature make conservative decisions, while business requires greater risk-taking. After discussion with his wife, he decided to go with Sentinel.
When the B.C. Supreme Court case came forward, Strother spent seven days on the stand being examined and two cross-examinations under the adverse-party rule. “It was extremely stressful and an expensive trial, but I was completely exonerated and I expected to get on with my life,” says Strother of the 2002 decision, which maintained there was no conflict because Strother was no longer under a written retainer to Monarch.
The 2005 B.C. Court of Appeal decision stunned him. Strother says: “Everything crumbled around me after two and a half years of peace.” He maintains the ruling changed the factual underpinnings of the case and ignored the findings of the trial judge. He was ordered to disgorge $32 million, half the gross profits from Sentinel during all its years in business. Strother says he didn’t have $32 million and maintains anyone who does would have it greatly reduced by taxes and other costs of doing business.
“I was shocked,” says Strother, as the ruling spelled potential “financial ruin for me.” He says it shook his faith in a system he had worked in for 25 years. He decided to appeal to the SCC but hit one major glitch. The B.C. Supreme Court had established a constructive trust over all his assets. “I had no access to funds to finance a leave of application or file,” he says. It was only through “the charity of friends and associates and the kindness of my legal counsel [George Macintosh at Farris Vaughan Wills & Murphy LLP] that I managed to soldier on,” he says.
The SCC decision in June 2007 said Strother was in conflict and breach of his fiduciary duty to Monarch, but the Appeal Court erred in determining remedy, as it only applied to the period when Strother was still at Davis & Co. and involved with both clients, a 15-month period starting Jan. 1, 1998. Strother says the profits are approximately $4 million, with half going to Darc and from that, $2 million is deduction of taxes and costs. Strother is expected to repay to Monarch approximately $1 million, a sum that is not inconsequential, he maintains.
In June, Strother was in the process of removing his assets from freeze. “For the first time in 2.5 years, I get my financial life back,” he says.
