Strother told Monarch that he had no technical fix for the new matchable expenditure rules, and that the “tax shelter business was over.” There was what Justice Lowry of the British Columbia Supreme Court later called “a bitter-sweet boardroom champagne toast to both past success and the unhappy end of the business.” Monarch closed up its tax shelter business at the end of October 1997. An exclusive written retainer agreement signed on October 8, 1996, which prevented Davis from acting for anybody else in TAPSF transactions, lapsed at the end of December 1997.
Early in 1998, Strother concluded that perhaps there was a fix to the new matchable expenditures rules after all, and started working on a “new idea” for tax shelters. He worked on this new idea, not with Monarch, but with a former employee of Monarch, Paul Darc, a chartered accountant. Crucial evidence in the subsequent litigation suggested that Darc had thought up the new idea, and counsel opposing Monarch’s claim consistently referred to it as “Darc’s idea.” On January 30, 1998, using his personal letterhead, Strother signed an agreement with Darc to provide him with legal services in connection with the idea, an agreement that gave Strother a substantial personal participation in any profits of the new business. In March, Strother and Darc formed Sentinel Hill Entertainment Corporation, apparently named after the Vancouver neighbourhood where Strother then lived, and Sentinel Hill became a Davis client. Then, also in March, Strother applied for an advance tax ruling for a tax-assisted production financing of a U.S. film, an application based on an exception to the matchable expenditures rule that said that the rule would not apply where more than 80 percent of the right to receive income was realized before the end of the year in which the expenditure was made. (Davis had opened a file for the tax ruling on January 19, and Strother had a draft prepared by January 26. The request was submitted to Revenue Canada on March 3.) Strother prepared the ruling request without a fee. Darc agreed that, if the request was successful, Strother personally, through a Sentinel share option he was granted, would participate approximately equally in any profit. Expenses were to be borne equally by the two men.
Strother said nothing about any of this to Knutson or Cheikes, although he and other lawyers at Davis continued to do a limited amount of other legal work for Monarch. The B.C. Court of Appeal later said that, during 1998, Strother “took pains to ensure that no one at Davis let slip to Monarch the fact that the firm was acting for Sentinel Hill in connection with a new … tax ruling.”11 (It was argued later that it would have been a breach of confidentiality if Strother and Davis had told Monarch anything about the business of another client.) Nor did Strother tell his partners at Davis & Company about his personal agreement with Sentinel Hill until many months after it had been entered into, and even then, as the trial judge in the subsequent litigation noted, “not with complete accuracy.” (Strother and Monarch both dispute this and say many Davis partners, including the managing partner, were aware of Strother’s involvement with Darc early on.) When he finally sent a memorandum about the agreement to Davis’s managing partner, Doug Buchanan, on August 4, Buchanan wrote back that Strother was not to “personally have any kind of ownership interest in Sentinel Hill.” Mr. Strother signed Buchanan’s memorandum under the words, “This is correct.” Despite this exchange, nothing seems to have been done formally to set aside Strother’s January agreement with Darc giving him an ownership interest in Sentinel, although Strother and Darc have consistently maintained that the agreement terminated when Davis approval was denied, and that thereafter, until he left Davis, Strother acted only as Sentinel Hill’s lawyer.
In October 1998, Strother obtained a favourable advance tax ruling for the new tax shelter scheme.12 Only then did he prepare a retainer agreement between Sentinel and Davis & Company, which Darc quickly signed. It was similar to the agreement the firm had with Monarch, except it was more than twice as remunerative. There was celebration in the halls of the law firm. A new and big fish had been landed. By the end of 1998, Sentinel Hill had closed transactions worth $260 million in studio production. In March 1999, Strother resigned as a partner of Davis to devote himself full-time to the lucrative business of Sentinel Hill.
After Strother left Davis, he received 50 percent of the common shares of Sentinel Hill Entertainment Corporation for a nominal amount. By the time the government tried once more to terminate tax shelters, through amendments to the Income Tax Act introduced in September 2001, Sentinel Hill had closed transactions exceeding $4 billion in studio production, with profits said to have approached $130 million. Darc and Strother had together, personally, realized in excess of $60 million. Davis had been paid fees by Sentinel that exceeded $9 million.
One day in the spring of 1999, Harry Knutson of Monarch Entertainment saw a Sentinel Hill offering memorandum for the new tax shelter. “I couldn’t believe it,” he says now. “I went and saw my then friend Doug Buchanan, who was the managing partner at Davis & Company. I asked him, what the hell is going on. He wouldn’t talk about it. He said he couldn’t—client confidentiality.” In March 1999, Monarch Entertainment began a legal action against Strother and Davis, arguing that Strother had deliberately concealed tax shelter knowledge from it to usurp a business opportunity for his personal benefit.13 Monarch alleged breaches of fiduciary obligations by Strother and Davis & Company, obligations created by the lawyer-client relationship that were separate from, and went beyond, any contractual obligations that existed. Knutson says that before the trial Davis & Company offered Monarch a $10-million settlement. He regarded the offer, given the stakes, as “not serious.”
The complex trial before Justice Lowry of the
B.C. Supreme Court (now a judge of the B.C. Court of Appeal) took nine weeks. It was not without its lighter moments. Consider the cross-examination of Strother by R.D. Holmes, one of Monarch’s lawyers:
Holmes: Was it your view that you were to prefer Monarch’s interests to your own?
Strother: Again, it depends on the context in which you’re asking me that question.
Holmes: What do you mean by that?
Strother: Well, if we were ordering lunch and the Monarch principals preferred pizza, and I preferred turkey sandwiches I would feel myself free to order turkey sandwiches.
Holmes: If you could focus on financial matters, sir.
In the end, Justice Lowry agreed with the arguments put forward by the lawyers for Strother and Davis & Company. He agreed that Strother’s fiduciary obligations were tied to the contractual obligations created by the retainer agreement between Monarch and Davis that expired at the end of 1997: When the retainer agreement came to an end, Strother’s fiduciary obligations came to an end as well. Strother was free to take the new idea about tax shelters and turn it into a business for himself. Justice Lowry said that Strother “employed only the skill and knowledge [he was] entitled to employ.…”
In January 2005, the B.C. Court of Appeal unanimously reversed Justice Lowry. In lengthy and erudite reasons given by Justice Newbury, the court found Strother in breach of his fiduciary duties, and instructed him to account to Monarch for over $30 million personally gained from breach of those duties. It didn’t matter to the court that the Monarch retainer had expired when Strother embarked on his Sentinel business venture; the judges were clear that he had fiduciary duties that went far beyond those that were strictly contractual.
Strother, said the Court of Appeal, had created an undisclosed dual conflict—a conflict between Monarch and Sentinel, and, because of his financial interest in Sentinel, a conflict between Monarch and himself. Even after the retainer agreement expired, Strother and Davis still had obligations to Monarch. Justice Newbury said, “One must not … equate the scope of a lawyer’s contractual duty to advise his client … with his fiduciary duties, including the duty not to place himself in a position of conflict and the duty to disclose any personal interest he may have that might affect his loyalty and dedication to the client’s cause. The latter duties are implied by law and are unlikely to be valid
ly excluded or diminished by contract.”
The court rejected the argument that Strother, once his Monarch retainer expired, had no obligation to continue giving Monarch advice on tax shelter matters, and rejected as well the further argument that Monarch was no longer entitled to such advice. Said Justice Newbury, of the Monarch representatives, “They were not legally knowledgeable, and whether they ‘expected’ to be told that there was a possible solution to their predicament, they were entitled to candid and complete advice from a lawyer who was not in a position of conflict.” [original emphasis]
What about Davis & Company? The court called for further arguments, within two months or so, on a variety of points dealing with the law firm’s possible liability. Those arguments were heard in May 2005. On July 25, the court gave its unanimous judgment.14
The Court of Appeal first considered whether Davis should be held directly liable with Strother for all the profits and benefits Strother received from the Sentinel Hill enterprise. That, said the court, depended on whether Davis gave “knowing assistance” to Strother in breaching his duty toward Monarch, or was reckless or wilfully blind to his misconduct. The court decided that neither was the case. Davis had no direct liability to Monarch for Strother’s gains at Monarch’s expense.
But should Davis & Company be held vicariously liable for the money made by Strother? Applying the usual test, the court asked whether Strother was acting in “the ordinary course” of the firm’s business when enmeshed in his conflicts of interest. It noted that “the fact that an agent has contravened the principal’s instructions (and, by analogy, the fact a partner has contravened his firm’s partnership agreement or policies) does not necessarily mean that he or she was acting outside the ordinary course of business.” The question was “whether the practice of law as carried out by Davis materially increased the risk of Mr. Strother’s taking of a personal interest, or whether there were only ‘incidental’ connections such as time and place, with the law practice.” The court decided that there were only incidental connections. What Strother did was not in the ordinary course of the firm’s business. Davis & Company did not have vicarious liability for the money Strother put in his own pocket.
So far so good, the partners of Davis & Company must have thought, as they eagerly leafed through the judgment. But then the court turned to a new issue—Monarch’s claim for “disgorgement” by Davis of the profits Davis itself earned in the form of legal fees paid by Sentinel Hill.
The purpose of an order for disgorgement, said Justice Newbury, is to maintain the integrity of fiduciary relationships by ensuring that persons who are subject to fiduciary duties cannot profit from them. She said:
Although it does not appear that the partners of the firm were aware of the advice Mr. Strother was giving, either directly or by his silence to Monarch, in 1998 that there was “nothing to be done”, Davis’s vicarious liability for that breach seems to me clear: the firm acted for both Monarch and Sentinel Hill in the ordinary course of its business and with the authorization of its partners; Mr. Strother’s advising them on tax-related matters was what he was retained by both to do; the firm earned substantial profits (the ultimate amount of which has yet to be determined in the court below) under its contingent arrangements with Sentinel Hill; and … logically [sic] requires that the firm not be permitted to retain them, even if the partners (other than Mr. Strother) were personally innocent.
Davis was ordered to “account for and disgorge the profits it earned from acting for Sentinel Hill in breach of its duty to Monarch.”
Some questions remained: What were those “profits”? Must Davis disgorge the gross amount of fees Sentinel Hill paid? Or can it deduct some amount for costs and overheads and, if so, how much? This issue was sent back to the trial division for determination. Justice Newbury then gave a final twist of the knife and ordered Davis to return all fees Monarch paid subsequent to the date when the conflicts of interest arose, judged to be January 1, 1998. The gross amount of fees Sentinel paid to Davis is thought to be about $9 million, and the fees Monarch paid (that must be returned) to be another $1 million or so.15 Based on the decision of the Court of Appeal, the partners of Davis & Company had a big bill to split.
On December 15, 2005, the Supreme Court of Canada gave leave to appeal to the parties in the Strother litigation.16 Strother, of course, had appealed against the order that he disgorge $30 million or so. He argued that the Court of Appeal improperly “departed from the findings of the trial judge in a number of substantial respects, and in others made findings of fact not supportable by the evidence”;17 that the court acted in error when it said that Davis’s acceptance of a retainer from Sentinel Hill in 1998 created a conflict of interest with Monarch; and that the court’s use of the accounting principle as a remedy was incorrect.18 Davis & Company argued, for a variety of reasons, that it should not be required to give up the substantial profit it made from Strother’s activities. Said Davis of the Court of Appeal, “The Court’s view is, apparently, that once a solicitor has given an opinion to a client … he or she may not, without disloyalty, later accept instructions from another client to assert an opinion contrary to that first opinion. Davis submits that this surprising result constitutes an unnecessary expansion of the duty of loyalty which is not warranted by precedent or policy.”19
Monarch, the company that had been Strother’s principal client and believed that it should have had the benefit of the new tax idea, argued that it should recover a much greater amount than awarded by the Court of Appeal—possibly as much as $140 million, representing the total of Sentinel Hill profits—and that all defendants, including Paul Darc, should be held jointly and severally liable.20 The Canadian Bar Association was given intervenor status, saying that it “wishes to provide the Court with the benefit of its expertise and perspective concerning the nature and extent of a lawyer’s duty of loyalty.”21
Harry Knutson of Monarch was optimistic about his prospects before the Supreme Court. First, he believed that Paul Darc was vulnerable. “Why shouldn’t an accountant be held to the same standard of fiduciary duty as a lawyer?” he asked.22 But his real interest was in what happened to Davis & Company. “My lawyers tell me that our arguments on the joint and several liability of Davis are very strong,” he said. “I expect to be sending them a very big bill, and it’ll be up to them to collect what they can from Strother.” He added, “Davis partners needn’t worry. I’ll work out a payment plan for them.”
Strother seemed sanguine about his fate. A December 15, 2005, press release put out by his public relations firm, Sullivan Media, said this: “Robert Strother … is pleased and grateful that the Supreme Court of Canada decided today to hear the case. ‘This case has occupied my life for almost half a decade, and it is my hope that the Supreme Court will restore the Trial Judge’s findings and conclusions,’ said Mr. Strother in Vancouver today. ‘… Obviously the court has seen the important elements of the case and has moved to address them.’” The press release referred to the B.C. Court of Appeal decision as “surprising and controversial.” A December 17, 2005, article by David Baines in The Vancouver Sun described Strother as striking “a philosophical pose” when asked about the Court of Appeal ruling, and saying—of the forthcoming Supreme Court decision—“whatever the decision I will live with it.” Commented Baines, “It is a brave front, but not terribly convincing.… He cringes when he reflects on the impact on his family, particularly his 13-year-old daughter, who could never be expected to understand the nuances of the case.”23
Arguments before the Supreme Court took place in early October 2006.24 At the end of 2006, no judgment had been delivered. The Supreme Court will address these questions: What is the duty of a lawyer to his client? What is the duty of a lawyer to his law firm? And what is the duty of a law firm to the client of an individual law firm member?
ROBERT STROTHER and Paul Darc are still in the tax shelter business, most recently selling units in a limited partnership mining s
cheme called Red Mile Resources Fund Limited Partnership, which Harry Knutson described as having a “financial and tax profile like TAPSF.” Strother has lavish houses in Vancouver and Phoenix, Arizona, and Darc has built a $7-million house in West Vancouver. Meanwhile, by all accounts, the investors in Sentinel Hill financings are being subjected to aggressive audits by the income tax authorities.
SEVEN
SLEEPING WITH A CLIENT
A lawyer sleeps with a client.1 What happens if, later on, things go sour, and the client complains to the law society? Canadian discipline cases suggest the lawyer might (i) be reprimanded or (ii) be suspended from the bar for anywhere from thirty days to eighteen months or (iii) be disbarred. What’s he or she done wrong? Having sex with a client is generally thought to be a conflict of interest. What determines the severity of the penalty? Any number of unknowable factors, including whatever is blowing in the political and cultural wind at the time.
ON JULY 17, 1991, in New Liskeard, Ontario, fiftyfive-year-old Mrs. A. went to see her lawyer, fifty-four-year-old Peter Ramsey. She wanted to add a codicil to her will.
Mrs. A. asked the Solicitor the cost of the codicil and when she was advised that the fee would be $75.00, she pointed out that he had previously indicated that the fee would be approximately $50.00. The Solicitor responded by indicating that there would be no charge if Mrs. A. would come to his office without a brassiere and provide him a viewing of her breasts.2
Mrs. A. complained about Peter Ramsey to the Law Society of Upper Canada. A discipline committee said it was “not prepared to regard the Solicitor’s comments as an ill-advised attempt at humour.” In November 1992, Ramsey was reprimanded, the lightest possible penalty. The Ramsey case, with its simple and compelling facts, has become part of legal legend, and to this day is often the subject of ribald commentary by lawyers as they drink at the local bar at the end of the day.
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