Appeal court panel critical of ruling strikes down order

The New Brunswick Court of Appeal has vindicated a Toronto lawyer after emphatically overturning a lower court order that she personally pay a $45,000 costs order related to a third party claim she issued in a fraud case.  

In November last year, New Brunswick Court of Queen’s Bench Justice Hugh McLellan labelled the third party claim prepared by Shibley Righton LLP managing partner Sandra Dawe “irresponsible” and “meritless,” giving her 16 days to pay the money or face jail.

But the Court of Appeal decided McLellan should never have struck the claim, rendering the costs decision moot. In any case, the appeal court said McLellan got it wrong on that count too.  

“While much could be written about the motion judge’s award of solicitor-client costs against Ms. Dawe personally, we will exercise restraint and state that since we allowed the appeal on the motion to strike, the appeal regarding the costs becomes moot,” wrote the unanimous three-judge appeal court panel. “We would add that, had we concluded the appeal on the motion decision should be dismissed, we would nevertheless have allowed the appeals from the decision to order solicitor-client costs and that Ms. Dawe personally pay them. In our view, there was simply no proper basis in law or on the facts of this case to order such costs.”

Dawe represents auditors being sued by Deer Island Credit Union in New Brunswick. The credit union alleges the auditors were negligent for failing to notice that a former employee at Deer Island had embezzled more than $1.8 million between 1995 and 2007.

The auditors denied the allegations, and in May 2011, issued a third-party claim against 16 directors of the credit union, arguing their negligence contributed to the loss. That prompted the directors to move for the third party claim to be struck. McLellan granted the motion in October 2011, commenting that he had doubts that the auditors issued the third party claim on their own initiative. The appeal court was unimpressed:

“After apparently concluding, without any evidence, that the auditors were not providing instructions to counsel, the motion judge then observed as follows, before hearing any argument on the costs issue:

‘[…] [T]his is a rare and exceptional case in which it may be appropriate:
a) to make an award of full solicitor and client costs in favour of the directors;
b) to order that such costs be paid by the auditors’ solicitor personally; and
c) To “compel” payment by the judicious exercise of the power to imprison for contempt.;”

The appeal court went on to decide that McLellan granted the motion by relying on principles applicable to the wrong section of the Rules of Court: treating it like a summary judgment motion, rather than a motion to strike.

The three-judge panel also found McLellan had misapplied the law and jurisprudence in concluding that: “courts must protect directors from ill-founded litigation.”

“The auditors limit their claim to negligence. They have every right to come before the courts for a determination of whether or not they are correct in asserting the directors’ negligence caused the Credit Union’s losses,” the appeal court decision reads.

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