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that Monarch would get back in the business, as they had good contacts in the film industry, and the lawsuit would be withdrawn,” he says.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.
The majority findings of the SCC ruling essentially say law firms can handle clients in the same field and that, since some firms specialize, this is going to happen. However, the lawyer has to exercise a sense of fairness in the dealings by not favouring one client over the other. When a competitive situation arises that can lead to a conflict of interest, it is the lawyer who must defuse it by disclosing information or if that information is confidential, suggesting one client seek another firm to look into the matter. The SCC faulted Strother in that area, saying that when he made an agreement to go into business with Sentinel, he was compromised. “The conflict compromised Strother’s duty to ‘zealously’ represent Monarch’s interests,” the SCC ruling states, and he had a personal stake in keeping Monarch uninformed, even if it didn’t ask about new rulings.
Justice Ian Binnie, writing for the majority, found that fiduciary duty “may include obligations that go beyond what the parties expressly bargained for” and that Monarch was dealing with “a professional adviser, not used car salesmen or pawnbrokers whom the public may expect to operate on a basis of ‘didn’t ask, did tell.’ ”
Chief Justice Beverley McLachlin, writing for the minority, drew the issue back to the scope of the retainer, which set out the work required by Strother. “The lawyer owes the client a duty to act loyally for the client in performing as agreed in the retainer. The duty of loyalty is not a duty in the air. It is attached to the obligations the lawyer has undertaken pursuant to the retainer. It is not conflict of loyalties in the abstract that raises problems, but conflicting duties — duties that are determined by the retainer.”
McLachlin wrote that the trial judge had correctly explored the change in the retainer relationship. “Given the changed nature of the lawyer-client relationship, there is no reason to conclude that Strother’s capacity to loyally and zealously perform the very limited duties owned to Monarch under the 1998 oral retainer would be affected by his taking a personal interest in Sentinel Hill,” she wrote.
She also did not support the majority decision that Strother entered into conflict when taking an interest in Sentinel’s business. Although the fact Strother “stood to make a great deal of money from the business interest . . . might well raise a concern” that he put his own interests ahead of Monarch, she points out that the trial judge extensively explored that issue and found that to not be the case.
Strother says he finds the assumption that fiduciary duty extends beyond an agreement “frighteningly onerous.” Strother, who once taught law at the universities of B.C. and Alberta, has been a partner in numerous large law firms, and authored papers on taxation issues, says there now exists a blurring of the duties that lawyers must perform. “If you bump into someone [that you do work for on a casual basis] on the golf course and have a casual conversation and they ask an off-the-cuff question that you answer and the advice doesn’t work out, are you in breach of contract and fiduciary duty?” he asks, adding “the flip side is just as onerous.” If as a result of the golf-course inquiry, a lawyer returns to his office and does extensive research, would the client be willing to accept a bill?
Strother favours clear retainers. If he had to do it all over again, he says, “I would have reduced my engagement to Monarch to writing and not accepted any work from 1997 onward without clear written instruction outlining the engagement.”
The whole experience, he says, has been insightful and aware of those caught in the machinery of the legal system, often without the resources to plead a case. It has given him greater belief in the validity of trail judge findings, he says, as appeal courts and the SCC really only deal with “snap-shots” of trial cases.
The legal costs of the defences for Strother and Darc (who was also named in earlier proceedings but received a dismissal) is expected to run between $2 million and $3 million, Strother anticipates. “If I had not been supported by the law firm and my friends, I would never had been able to bring this matter to light. I am extremely grateful.”
Strother, who has been working as an independent Vancouver tax consultant, says he may venture into new business opportunities, decide to teach again, or even venture back into law. “I think I have become more sensitive to people who are down on their luck and I realize that there for the grace of God, go I. I think I have changed for the positive. I never welcomed this experience but it has taught me how important it is to have friends and support to get you through difficult times.”
— Jean R. Sorensen