“When you look at what went on in May 2009 and the need these dealers had to be represented, then layer on to it the conflict of interest, it was going to be two trains coming down the same track and that’s why there was a significant damages award made,” says David Sterns, a partner with Sotos LLP in Toronto.
Last week, an Ontario Superior Court judge awarded damages against Cassels Brock in the amount of $45 million for breach of fiduciary duty, breach of contract, and professional negligence.
In his 160-page decision issued July 8 in Trillium Motor World Ltd. V. General Motors of Canada Ltd., Justice Thomas McEwen found that Cassels Brock owed contractual and fiduciary duties to some or all of the class members in the case and breached those duties. As well, he found it also owed a duty of care, which was also breached.
McEwen wrote: “I find that Cassels was retained by the Class Members including Trillium to protect their interests in any complex restructuring of the dealer network and to represent them in any GMCL CCAA proceedings. I further find that Cassels breached its contractual and fiduciary duties by accepting the retainer having already agreed to act for the Federal Government (through Industry Canada) in relation to any GMCL CCAA proceedings. Cassels knew about this conflict from the outset; yet, rather than declining to act for the GMCL dealers and referring to an unconflicted law firm, or even telling the dealers about the retainer with the Federal Government, continued to act for both the Federal Government and the dealers.”
McEwen also determined GM Canada did not breach the Arthur Wishart Act (franchise disclosure), 2000. Therefore he dismissed the action against GMCL. He also dismissed the counterclaim by GMCL against each of the class members.
The case dates back to 2009, when about 200 General Motors dealers were eliminated during the federal auto bailout. The class action was seeking $750 million in damages on behalf of those dealers. Also named in the suit was Cassels Brock, which had been retained to represent Canadian dealers in a GM restructuring bankruptcy.
In light of the decision against the firm, in a statement July 9, Cassels Brock general counsel John Birch said it’s business as usual and the firm is actively pursuing an appeal. He noted the judgment “creates potentially indeterminate liability for lawyers.”
“Of course, we are disappointed,” Birch said. “But we remain confident that we conducted ourselves properly and in accordance with our professional responsibilities.”
“We feel that the findings are not justified on the evidence and that there are significant legal errors in the decision. We continue to believe that Trillium Motor World and the other automotive dealers had not become our clients in the circumstances, and they were each represented by their own independent legal counsel.”
In his decision, McEwen wrote: “Cassels takes the position that there was only ever the potential for a conflict to arise on account of the two retainers. In other words, Cassels accepts that there was indeed a risk that immediate legal interests of Industry Canada and the GMCL dealers would be directly adverse.”
He referred to testimony that indicated “Cassels would have dropped the GMCL dealers if the risk became reality (“if an adverse interest arose with respect to that retainer, it’s conceivable that we could not act for the dealers at that time”), there can be little doubt that there was a risk that Cassels’ representation of the GMCL dealers would have been materially affected.
“Thus, the issue is really whether this risk was a substantial one. In my view, the evidence supports a finding that it was,” McEwen wrote.
Cassels Brock held the position there was no retainer because the only retainer it would have had was for a Companies’ Creditors Arrangement Act proceeding that did not happen. However, the judge found the retainer extended to the negotiation and advice on the dealer wind-down agreements.
“That was critical because if he found the scope of the retainer was more narrow it is likely Cassels Brock would not have been found to be liable,” says Brian Radnoff, a partner at Lerners LLP. “That determination was informed by inferences the trial judge made. Another judge looking at the same evidence could have come to a different conclusion.”
The other issue was Cassels Brock’s conflict over the retainer with Industry Canada. Radnoff says in any CCAA proceeding there would have been a conflict between the law firm’s representation of the GM dealers and its representation of Industry Canada.
“In my view Justice McEwen’s finding on that is unimpeachable. The evidence was quite clear and he makes it clear you can’t take on these retainers and take a wait-and-see approach, which frankly has, to some extent, been the practice of some firms on Bay Street,” says Radnoff.
Most law firms typically have sophisticated conflict systems and databases that if accurately populated will identify potential conflicts at the outset, says Gavin MacKenzie of DLA Piper in Toronto.
“Sometimes it can be difficult to determine whether acting for two clients involved in the same matter really does give rise to a conflict,” he says. “I think that was a large part of the issue in this trial. The trial judge certainly concluded that the interests of the government of Canada and the dealers who entered into the wind-down agreements were potentially adverse. Whether they actually became adverse was very much an issue at trial.”
Co-counsel for Trillium Motor World says McEwen made comments about the importance of collective retainers both in the insolvency context and in general for the purpose of access to justice.
“The fact is people have collective counsel and some may have individual counsel and that is not an irreconcilable position. In fact, it’s quite common in the context of a collective retainer,” says Marie-Andrée Vermette, a partner with WeirFoulds LLP.
The dealers had banded together and hired Cassels Brock to protect them.
“Each one that testified was asked who they thought their lawyer was and each one thought it was Cassels Brock,” says Sterns. “They paid money into Cassels Brock, checked a form saying they wanted to be represented by Cassels Brock, and were advised by Cassels Brock. To suggest they weren’t a client of Cassels Brock is to go against the overwhelming evidence.”
Vermette says Cassels Brock’s position at trial was it had a retainer for the GM dealers but it was only to be triggered if there was a CCAA filing.
Sterns says this case will be a “resounding reminder to the profession” the issue of conflicts “isn’t some kind of red tape bureaucracy rule. This goes to the heart of what we do as lawyers.”
He adds there was a “huge power imbalance” at play with small independent dealers who had a lot at stake but lacked the sophistication and knowledge of what was going on.
“They reached out to what they thought was a sophisticated powerful Bay Street firm, paid them a substantial retainer with a view to having someone in their corner,” he says.
While the damages award appears significant, Sterns says so were the losses suffered by the dealers.
“We’re still digesting [the decision] and have some decisions to make ourselves regarding appeals,” he says.
So what does a damages award of $45 million mean to the future of a firm like Cassels Brock? Most large law firms that do commercial transactions have excess insurance, typically in the range of tens of millions of dollars.
“If they didn’t have insurance to cover the damages awarded it would likely put the firm at risk, but it is likely they have sufficient excess insurance to cover all or most of the judgment,” says Radnoff.