Amack v. AW Holdings Corp., 2011 ABQB 376

Court of Queen ’ s Bench of Alberta Citation: Amack v. AW Holdings Corp., 2011 ABQB 376 Date: 20110614 Docket: 1003 00161 Registry: Edmonton Between: Jonathan James Amack Applicant - and - AW Holdings Corp., Booster Juice Inc., 952110 Alberta Ltd., Frozen Canuck Import Corp., Kiwi Kiss Frozen Yogurt Ltd. and Dale Wishewan Respondents _______________________________________________________ Reasons for Judgment of the Honourable Mr. Justice R. Paul Belzil _______________________________________________________ The Application [ 1 ] Jonathan James Amack has filed an application seeking the removal of counsel for two corporations and the appointment of replacement counsel. Facts

[ 2 ] AW Holdings Corp. (AW) was incorporated in 1999 and operated under the trade name Booster Juice. Amack and Dale Wishewan are equal voting shareholders and directors of the corporation. [ 3 ] Frozen Canuck Import Corp. (Frozen Canuck) was incorporated in 2005 to import and supply frozen fruit to AW franchises. Amack and Wishewan were equal voting shareholders and directors of the corporation. [ 4 ] 952110 Alberta Ltd. (952) was incorporated in 2001 for the purpose of collecting rebates from suppliers to AW franchises.

Amack and Wishewan are listed as equal voting shareholders and directors of the corporation. [ 5 ] Kiwi Kiss Frozen Yogurt Ltd. (Kiwi Kiss) was incorporated in 2008 with Wishewan as a majority shareholder. [ 6 ] Booster Juice Inc. (Booster Juice) was incorporated in 2000 with Amack and Wishewan as equal shareholders and directors. Currently, Wishewan is the sole shareholder and director. This corporation was formed to operate AW corporate stores for Booster Juice and to hold the leases for AW franchised stores. [ 7 ] In June 2001 Amack resigned as an officer of AW but remained as a shareholder and director.

He alleges that all profits of AW were to be divided equally between himself and Wishewan. [ 8 ] In 2005 Frozen Canuck was supplying fruit products to AW franchises.

Amack alleges that it was his understanding that subsequently Frozen Canuck ceased operating and was no longer supplying these franchises. [ 9 ] Amack later determined that, without his knowledge or consent, he had been removed as a shareholder and director of Frozen Canuck which was continuing to supply AW franchises. [ 10 ] Amack alleges that he later learned that Wishewan developed a similar franchise model for the sale of frozen yogurt to Kiwi Kiss. [ 11 ] Amack alleges that Kiwi Kiss is being operated on the premises of AW, Kiwi Kiss expenses have been expensed to AW and that Wishewan has been marketing Kiwi Kiss to AW franchisees.

He also alleges that AW has paid personal expenses for Wishewan. [ 12 ] Pursuant to

Part 18 of the Business Corporations Act R.S.A. 2000, c. B-9 (as amended) I granted an ex parte order on January 6, 2010 appointing KPMG as Inspector for the purpose of investigating and reporting on these allegations. [ 13 ] Fraser Milner Casgrain LLP (FMC) has been retained by Wishewan to represent his personal interests and pursuant to his instructions has also been retained to represent the interests of AW and 952. Amack alleges that he was not consulted as to which law firm should be retained to represent the two corporations. [ 14 ] No pleadings have been filed as of the current date.

Counsel for Amack have advised that an action may be filed on his behalf once the Inspector’s final report has been received. Amack filed an affidavit in support of the ex parte application of January 6, 2010. Wishewan has filed three affidavits in opposition to this application. [ 15 ] Previously Wishewan brought an application to remove Amack’s counsel, MacPherson Leslie & Tyerman, as counsel for the Applicant. I dismissed this application in a written decision cited 2010 ABQB 759 .

[ 16 ] There are a number of pending applications in this litigation including the following:

a) An application by the Respondents to set aside or vary my order of January 6, 2010.

b) If the order of January 6, 2010 is not set aside, the Respondents will bring an application to restrict dissemination of the Inspector’s report.

c) If the order of January 6, 2010 is not set aside, the Applicant will bring an application to increase the amount of money the Inspector may expend.

d) There will be an application by the Applicant to determine which parties will be liable to pay the Inspector’s fees and disbursements. [ 17 ] In addition to the pending applications, Amack and Wishewan are embroiled in a dispute over the distribution of corporate funds of AW and 952 including the issue of whether funds distributed to them should be subject to deduction for income tax purposes. Is This Application Premature? [ 18 ] Counsel for the Respondents argue that this application is premature and, at the earliest, should be deferred until the filing of an action.

Counsel for the Applicant argued that there is sufficient evidence before me which justifies inquiring as to whether FMC can continue to act for the corporations notwithstanding that no action has yet been filed. [ 19 ] It bears noting that I heard this application as case management judge and that if an action is ultimately commenced I will be disqualified from hearing the trial. As case management judge, it is imperative that I remain neutral and not make any findings of fact or credibility.

Accordingly, my decision as to whether FMC should be removed as counsel can only be based on alleged misconduct. [ 20 ] In his affidavit sworn June 2, 2011 Wishewan answered a series of questions submitted by counsel for the Applicant. [ 21 ] In brief

summary the questions and answers dealt with the following subjects: Q Did Frozen Canuck receive income supplying products to AW? A Yes. Q Were any resources of AW (other than human resources) used in the development or operation of Frozen Canuck from January 1, 2006 to the present date without reimbursement or expense allocation? A Yes. Q What resources were used? A Telephone, internet, fax machine, printer and general office supplies. Q Have such resources been accounted for by way of reimbursement or expense allocation? A No allocation occurred prior to October 1, 2009 and after that date $940 was allocated.

Q Did any AW employees work on Frozen Canuck business after January 2, 2006 without reimbursement or expense allocation? A Some AW employees did a small amount of work for Frozen Canuck. Q Were any rebate cheques paid to any entity other than 952? A No rebate cheque has ever been deposited other than by 952. Wishewan never deposited or kept rebate payments in any form. Q Did Wishewan ever claim personal expenses through AW? A Yes. Q Were any AW employees involved in the planning, development or implementation of Kiwi Kiss without reimbursement orexpense allocation?

A Yes, franchise business consultants, training personnel, operations department personnel and purchasing department personnelwere involved to a minimal extent. [22] I do not accept that this application is premature.

Notwithstanding that an action has not yet been commenced, Amack andWishewan as shareholders of AW and 952 are embroiled in a dispute which clearly engages the issue of whether it is appropriate forFMC to continue to act as counsel for the corporations while acting for Wishewan. [23] Without in any way deciding whether anything improper has occurred, Wishewan’s responses to the written questionssubmitted to him make it clear that Amack’s allegations relating to the interrelationship of AW and Frozen Canuck and Kiwi Kiss dohave some factual foundation.

As such it is not premature to consider whether FMC should be removed as counsel for the corporations. Discussion [24] In R. v. Neil, 2002 SCC 70, it was observed at para. 12 that a lawyer owes a duty of loyalty to a client and that the client isentitled to the undivided loyalty of the lawyer. At para. 17 it was noted that this duty of loyalty is to be defined broadly and includes therequirement that lawyers avoid conflicts of interest.

At para. 19 the court recognized that a divided loyalty could cause a lawyer to “softpeddle” the defence of a client out of concern for another client. [25] In corporate litigation it is recognized that duties owed by lawyers to companies and their shareholders are not identical andthat their interest may differ. [26] In Mottershead v. Burdwood Bay Settlement Co. (BC SC), [1991] B.C.J. No. 2554, minority shareholdersalleged oppressive conduct on the part of majority shareholders. A lawyer was retained to act on behalf of the company and majorityshareholders.

An application was brought for an order enjoining the lawyer from acting. [27] In granting the application the following observations were made at p. 2: In my view, it is clear that Mr. Davies and his law firm are in a conflict of interest. As corporate solicitor and counsel for theCompany, Mr. Davies' duty is to the Company; as counsel for the three personal defendants, who are also the majority shareholders, hisduty is to those individuals. The best interests of the Company are not necessarily those of the majority shareholders and directors. TheCompany is a separate legal entity and it is no answer for Mr.

Davies to say that his instructions from the individual majorityshareholders as personal defendants are one and the same as those instructions which they provide as majority directors of the Company.The duty of the solicitor for the Company is to advise all of the directors so that they may make an informed decision as a board withrespect to the best interests of the Company.

In shareholder litigation, there exists a potential conflict of interest between the personal interests of the individual parties both plaintiffs and defendants as shareholders and their fiduciary duties as directors of the Company. A solicitor acting both for the majority shareholders and for the Company on the sole basis of the instructions of that same majority personifies that conflict. Moreover, a solicitor owes a duty of confidentiality to his or her client and information received from the majority shareholders in their capacity as personal defendants would be privileged.

Surely a conflict arises when that solicitor receives privileged information in his capacity as solicitor for the majority shareholder defendants and declines to advise the board of directors which includes the minority shareholders of that information notwithstanding his role as corporate solicitor and counsel for the defendant Company. [ 28 ] In Gaylor v. Galiano Trading Co. [1996] B.C.J. No. 1895 , the court adopted the reasoning in Mottershead and accepted at para. 22 that what is in the best interests of a company is not necessarily what is in the best interests of individual shareholders. [ 29 ] In King v.

Arnett 2006 ABQB 639 , Wittmann A.C.J.Q.B. (as he then was) was faced with an application to remove counsel in the context of alleged shareholder oppression. He adopted the reasoning in Mottershead and Gaylor . Paragraphs 17 and 23-25 are instructive: 17 The case law as relied upon by the Plaintiff is directly on point. Where oppression is alleged against both the majority shareholders and the corporation, there can be both an actual and an apparent conflict when the same solicitor purports to act for both.

This is so because in these circumstances it is the very essence of the oppression remedy that the majority has used its position of control over the company in such a way as to unfairly prejudice the complainant. Where the company may have been operated in a manner that is not in its best interests as a distinct legal entity, it must have separate representation from the majority. This is so because the interests of each are separate.

It is no answer to assert that the interests are the same, so long as those interests are not necessarily the same. 23 In this case, we are dealing with an oppression action, by one group of intended shareholders, against the company and the majority shareholders. SML purports to represent both the majority shareholders and the Corporate Defendants in a situation where these two separate entities might have differing legal interests. 24 The claim of oppression alleges abuse by the majority to the detriment of the company and the minority.

In such circumstances, the appearance of conflict should be avoided for the sake of public confidence in the legal system. The company should have, and be seen to have independent legal advice. 25 This order should not, however, be made lightly. For an applicant to be successful in obtaining an order for separate counsel, it is necessary for there to be some factual basis upon which the Court can discern a potential conflict.

Otherwise, the litigation process is subject to the mischief of parties interfering with their adversary's right to counsel merely by alleging oppression. [ 30 ] While the factual situation before me is not framed as alleged oppression, it is alleged that one shareholder has engaged in conduct to the detriment of the other shareholder.

In this context, the principle that what is in the best interests of the corporations may not correspond to what is in the best interests of the shareholders is no less applicable. [ 31 ] AW and 952 are entitled to legal representation which will focus solely on their interests without consideration of the interests of Wishewan or Amack. [ 32 ] The jurisprudence is clear in establishing that any application to remove counsel is to be approached with a great deal of caution mindful that mischief could occur.

Interference with the right to select and instruct counsel is to be exercised sparingly. [ 33 ] However, as demonstrated by the authorities cited above, courts will not hesitate to intervene where a conflict of interest exists as upholding the requirement of individual loyalty by a lawyer to a client is of overarching importance.

[ 34 ] In argument before me counsel for the Applicant identified a number of areas within which the interests of Wishewan and the corporations may diverge: 1. The pending application to set aside the Ex Parte Order of January 6, 2010. If, as alleged, there has been a misuse of corporate resources by Wishewan or companies controlled by him, the corporation as a distinct legal entity may take the position that the order should not be set aside on the basis that the inspection is a recognized legal mechanism to determine if corporate resources have in fact been misused.

This position, if adopted, would conflict with Wishewan’s position. 2. The application respecting dissemination of the Inspector’s report. The companies may take the position that all shareholders should be entitled to this information. This position, if adopted, would conflict with Wishewan’s position that dissemination should not be allowed. 3. The pending application to increase the cost ceiling for the Inspector. The companies may adopt a position which is different than Wishewan. 4. The shareholders’ distribution dispute.

The corporations will have to ensure that all legal requirements including tax requirements are satisfied. The interests of the corporations in this regard are not necessarily the same as those of the shareholders who may adopt a different position on tax issues. [ 35 ] The foregoing list of issues in which the interests of Wishewan and the corporations may not be identical, makes it clear that FMC cannot provide its undivided loyalty to the corporations while representing Wishewan and therefore must be removed as counsel for them.

Moreover, this list of potential issues is not necessarily exhaustive and there may be other issues in which the interests of Wishewan and the corporations may not be identical. [ 36 ] In reaching this conclusion I am mindful that some additional costs may be incurred by the corporations having to retain new counsel. However, this concern cannot trump the importance of maintaining the integrity of independent legal representation for clients. [ 37 ] There will accordingly be an order removing FMC as counsel for the corporations.

As discussed with counsel, if they are unable to reach agreement as to who should represent the them they have leave to make further submissions before me on this issue. Costs of this application may be spoken to. Heard on the 7 th day of June, 2011. Dated at the City of Edmonton, Alberta this 14 th day of June, 2011.

R. Paul Belzil J.C.Q.B.A. Appearances: Richard J. Cotter, Q.C. and Jonathan Hillson Fraser Milner Casgrain LLP for the Applicant Leonard W. Hendrickson and Jeffrey M. Lee MacPherson Leslie & Tyerman LLP for the Respondents