Zimak v., 2015 MBCA 58

Citation: Zimak v. 4244354 Manitoba Ltd. et al., Date: 20150615 2015 MBCA 58 Docket: AI14-30-08206 IN THE COURT OF APPEAL OF MANITOBA Coram: Madam Justice Freda M. Steel Mr. Justice Marc M. Monnin Mr. Justice William J. Burnett BETWEEN : GARY ZIMAK ) ) (Plaintiff) Appellant ) ) E. G. Zazelenchuk - and - ) for the Appellant ) A. DAVID MARSHALL ) L. K. Troup and ) S. M.

Christiansen (Defendant) Respondent ) for the Respondent ) - and - ) Appeal heard: ) December 1, 2014 4244354 MANITOBA LTD., CHRUSTIE ) ENTERPRISES LTD., MYRNA EAKIN ) Judgment delivered: and MAXINE CHRUSTIE AS JOINT ) June 15, 2015 LITIGATION GUARDIANS OF THE ) ESTATE OF MARTIN CHRUSTIE, ) DECEASED ) ) (Defendants) ) MONNIN J.A. [ 1 ] The plaintiff, Gary Zimak, appeals from the decision of a motion judge granting

summary judgment to the defendant, A. David Marshall, and dismissing the claim on the grounds that there was no genuine issue for trial. This appeal turns on whether the motion judge was correct in finding that the defendant, a lawyer, was never in a solicitor-client relationship with the plaintiff such as to be liable for any breach of a fiduciary duty by placing himself in a conflict of interest, nor did he owe the plaintiff a duty of care. [ 2 ] For the reasons that follow, I have concluded that the appeal must be dismissed.

Factual Background [ 3 ] In March 2000, the plaintiff and his business partner, Grant Eakin (Eakin), made an offer to purchase a 60 acre piece of property in an area in the City of Winnipeg which was undergoing development. Their avowed purpose was to build an ice-rink complex on part of the property and to sell whatever was not needed for the project. [ 4 ] The offer to purchase was made by the plaintiff and Eakin on behalf of a corporation to be incorporated. To that end, in September 2000, they approached the defendant, a lawyer with the firm of Taylor McCaffrey LLP in the City of Winnipeg.

The defendant, at the request of the plaintiff and Eakin, incorporated a numbered company, 4244354 Manitoba Ltd. (424), which assumed the rights and obligations of the plaintiff and Eakin with respect to the purchase of the property. [ 5 ] As a result of further negotiations in the fall of 2000 between the plaintiff, Eakin and the vendors of the property, a final purchase price for the property of $900,000 with a vendor take-back mortgage in the amount of $600,000 was concluded. The mortgage was guaranteed by both the plaintiff and Eakin, but the purchase of the property was done in the name of 424.

A unanimous shareholders agreement was prepared involving the plaintiff, Eakin and others.

[ 6 ] A second numbered company, 4314620 Manitoba Ltd. (431) was incorporated for the purpose of either owning or leasing part of the property owned by 424, for the purposes of pursuing the ice-rink complex project. [ 7 ] Shortly after the closing, 424 encountered some financial difficulties and failed to make its mortgage payment on the vendor take-back mortgage. At that time, the defendant Martin Chrustie (Chrustie), Eakin ’s father-in-law, was brought in to provide financial support.

Through his company, Chrustie Enterprises Ltd. (Chrustie Ltd.), he provided the sum of $600,000 of which $150,000 was used to subscribe for shares of 424 in the name of Chrustie Ltd., and the balance used to assume the outstanding amount of the original mortgage. [ 8 ] In November 2001, a second mortgage was granted to Chrustie Ltd. for the sum of $234,946 to account for additional funding and expenses Chrustie paid for on behalf of 424. [ 9 ] At a meeting with shareholders on March 11, 2002, to discuss both the state of the project with respect to the ice-rink complex and the outstanding indebtedness of the corporation, Chrustie made it clear that he had spent $150,000 for excavation of the land to ensure it was ready to proceed with the project once financing came through and wished to have Eakin and the plaintiff pledge their shares as security for that amount.

They agreed to do so. Other discussions took place with respect to continued involvement of other shareholders including the possibility of Chrustie purchasing further shares. [ 10 ] In a letter dated July 11, 2002, the defendant circulated to all the shareholders various documents on the instructions of Chrustie. They included: (

a) a revised shareholder agreement, (

b) pledge agreements of shares from all the shareholders, (

c) acknowledgement of debt agreements for all of the then shareholders, (

d) resignations of the plaintiff and Eakin as directors of the corporation, and (

e) a resolution of the shareholders. [ 11 ] The letter stated that the defendant had prepared the documents on the basis of the changes and the matters discussed amongst all of the parties on the assumption they were acceptable to each of them. If that was not the case, he advised them that they should communicate directly with Chrustie.

The defendant concluded the document by indicating that all parties should take the opportunity to obtain independent legal advice in respect of these documents as he was not representing any of “Zimak, Eakin, … in their personal capacities.” Chrustie was not included in that list. [ 12 ] Each of the shareholder agreements, pledge agreements and acknowledgment of debt agreements contained a clause stating that the parties to the agreements acknowledged and agreed that they had the opportunity to obtain independent legal advice prior to the execution of each agreement in question. [ 13 ] In a subsequent letter dated October 10, 2002, the defendant forwarded signed copies of these documents to the plaintiff. [ 14 ] The plaintiff alleges that during the period that followed, Chrustie did not actively promote the project, but in fact took steps to sabotage it, including instructing the excavator to cease work and having the defendant allow the registration of 431 to lapse leading to its dissolution in April 2003. [ 15 ] During the fall of 2003, Chrustie gave instructions to the defendant to demand payment from the plaintiff and Eakin of their share of the accrued interest under the vendor take-back mortgage and the second mortgage.

The demand letter indicated that if payment was not made within a specific period of time, Chrustie would be at liberty to exercise his rights to the shares held by the plaintiff and Eakin pursuant to their pledge agreements. [ 16 ] In early 2004, again at Chrustie’ s instructions, the defendant prepared and sent out to the plaintiff and Eakin share transfer documents asking for them to be signed.

Shortly after sending the documents out, Chrustie advised the defendant that he had agreed to extend a little more time for the shares to be transferred to him. [ 17 ] In late May 2004, Chrustie gave instructions to the defendant that the shares should be transferred immediately. In his instructing memorandum, he notes that he had considered refunding the monies put into the project by the plaintiff and others, but as they appeared to be seeking potential new investors, he was not willing to do so.

This would confirm the evidence of the defendant and the plaintiff that at that time the plaintiff was attempting to interest a third party to take an investment position in the company. [ 18 ] After the defendant met with the plaintiff to explain to him the effect of amendments to the shareholders agreement which he had signed, the defendant, finding himself in the middle of the dispute between the plaintiff, Eakin and Chrustie, advised the plaintiff that all three should have independent counsel.

Nevertheless, he also advised the plaintiff that he would make himself available to meet with the third party to organize a proposal to Chrustie. [ 19 ] In late June 2004, the defendant received instructions from Chrustie advising that, as a result of discussions the latter had with the plaintiff, the plaintiff agreed to have the share certificate transfer signed by June 30, 2004. The terms would be that Chrustie would return the plaintiff and Eakin ’s original investments after some of the property had been sold.

However, if the shares had to be transferred as a result of legal action, then the offer to return the original investment would not apply.

[20] The next day, after speaking with the plaintiff, the defendant advised Chrustie that he had forwarded the stock transferforms to the plaintiff who advised him that he was still trying to structure a deal for the site with the third party. The defendantsuggested that if the shares were signed over then he could hold them in escrow until the end of July to allow the plaintiff time to comeup with a proposal.

Chrustie agreed and by letter dated July 15, 2004, sent by the defendant to the plaintiff, he confirmed hisinstructions from Chrustie which were to have the plaintiff return the stock transfer forms for his shares signed by July 21, 2004, andthey would be held in escrow until July 31, 2004, to allow the plaintiff time to finalize a development proposal with the third partyacceptable to the shareholders and Chrustie.

If no proposal was presented by that date, then the forms would be used to transfer theshares to Chrustie and, in return, Chrustie would offer to pay back the plaintiff’s original investment in the corporation within areasonable period of time after the sale of some parcels of the property.

The letter went on to state that Chrustie had instructed thedefendant to take steps necessary to enforce the pledge of securities pursuant to the share pledge agreement. [21] The plaintiff responded, not by accepting the proposal, but advising that he wished to have a shareholders’ meeting toreview available options to the corporation and its shareholders.

However, by letter dated August 17, 2004, no doubt on Chrustie’sinstructions, the defendant wrote to the plaintiff stating in clear and unequivocal terms that, on the basis of the demand for payment andthe rights provided to Chrustie under the acknowledgement of debt and pledge agreement forms, Chrustie was in control of the votingshares of the corporation and would thereby control any meeting held pursuant to the provisions of the agreement.

It ended by askingthe plaintiff to return the stock transfer power of attorney form that had been sent to him with respect to his shares and noted that both thepledge agreement and the acknowledgement of debt included the plaintiff’s recognition that he had had the opportunity to obtainindependent legal advice. [22] Shortly thereafter, on August 23, 2004, the stock transfer forms signed by the plaintiff were returned.

The informationbefore the court was that at some later time, the plaintiff received a return of his original investment, but nothing further. [23] The plaintiff commenced an action against 424 and Myrna Eakin and Maxine Chrustie as joint litigation guardians ofthe estate of Chrustie (he having passed away), alleging that Chrustie had engaged in oppressive conduct and seeking to set aside thetransfer of his shares to Chrustie.

As well, he sought an accounting of transactions between the estate of Chrustie and the defendant, anddamages for breach of fiduciary duty and breach of contract against the defendant. [24] The defendant moved for

summary judgment dismissing the action against himself principally on the ground that hewas never in a solicitor-client relationship with the plaintiff and therefore did not owe him a duty of care. [25] The motion proceeded before the Master who agreed with the defendant that the evidence did not disclose that thedefendant was ever in a solicitor-client relationship with the plaintiff, but rather was counsel to 424. [26] The plaintiff appealed that decision. On appeal, the motion judge confirmed the Master’s decision. After reviewingthe affidavit evidence, he concluded that the defendant’s activities were on behalf of 424. Issues (

a) Was the defendant ever in a solicitor-client relationship with the plaintiff? (

b) If not in a solicitor-client relationship, did the defendant owe the plaintiff a duty of care? (

c) Was the defendant in a conflict of interest? Standard of Review [27] The motion judge came to the conclusion that there was not a solicitor-client relationship between the plaintiff and thedefendant. While made in the context of a

summary judgment motion which is usually of a discretionary nature, his conclusion as towhether a relationship existed is a decision of mixed fact and law. As such, it is reviewable in this court on a standard of palpable andoverriding error unless the error is with respect to an extricable principle of law. That does not appear to be the situation here. (

a) Was the defendant ever in a solicitor-client relationship with the plaintiff? [28] The thrust of the plaintiff’s position is that the plaintiff had a solicitor-client relationship with the defendant, and thedefendant acted for the plaintiff and others at different times. This is in contrast to the position taken by the defendant that he onlyrepresented 424, represented no one else and therefore owed no duty of care to anyone other than the corporation. [29] In the courts below, the plaintiff relied upon the case of Jeffers v.

Calico Compression Systems et al., 2002 ABQB 72,314 A.R. 294, where the court set out a number of indicia which could be used to determine whether a solicitor-client relationshipexisted.

They include a number of factors, some of which are obvious such as a retainer, the opening of a file, the rendering of a bill,giving of instructions and/or legal advice. [30] However, as noted by Romaine J. in Guardian Insurance Co. of Canada v. 379227 Alberta Ltd. et al. (1999), 1999ABQB 637 , 251 A.R. 334 (Q.B.), the question to be answered appears to be whether a reasonable person, in the position of aparty with knowledge of all the facts, could reasonably form the belief that the lawyer was acting for a particular party. [31] The plaintiff refers to documentary evidence to support his position that there was a relationship between him and thedefendant which could reasonably lead to the conclusion that the latter was acting on his behalf.

He refers to a letter from one of thelawyers at the defendant’s firm with respect to the issue of use of a trade name. The letter is sent to the plaintiff and Eakin and not to thecorporation. However, it appears to be with respect to an isolated matter and does not bear on the analysis of whether the defendant wasacting for the plaintiff on the corporate matters involving 424.

[ 32 ] Other correspondence referred to by the plaintiff in support of his contention that there was a solicitor-client relationship, are letters and faxes clearly showing that the defendant was taking instructions from Chrustie. These faxes and letters are written at a time when Chrustie was becoming involved with 424 and was seeking revisions to the shareholders agreement.

It ultimately led to the letter of July 11, 2002, coming after the May 27, 2002 meeting which recognized Chrustie as the most significant shareholder in the corporation as a result of his financial involvement. [ 33 ] Another part of the documentary evidence which the plaintiff relies on is correspondence confirming that the defendant assisted in trying to put a deal together with a third party and suggesting that the defendant was expecting the plaintiff to be responsible for the legal fees incurred for that endeavour. [ 34 ] That is not how I read the correspondence.

Rather, it is an indication that the defendant, having been involved in trying to arrange for the third party involvement in the project, seeks to recoup that time from the parties involved, not specifically the plaintiff. It is quite plausible for the defendant to claim that, at that time, he was still advancing the interests of 424 in obtaining financial support which would allow for Chrustie’s investment to be repaid or diminished. [ 35 ] In my view, it is quite reasonable for the defendant to take the position that he was the corporate counsel for 424. As noted in M.

Deborah MacNair, Conflicts of Interest: Principles for the Legal Profession (Toronto: Canada Law Book, 2015) (loose-leaf revision 2015-17), vol. 2 (at p. 9-4): As a general rule the corporate counsel is hired to provide legal advice to the corporation, as opposed to the employees, directors, officers or shareholders. [ 36 ] As well, in Gavin MacKenzie, Lawyers & Ethics: Professional Responsibility and Discipline (Toronto: Carswell, 2014) (loose-leaf revision 2014-3) (at p. 20-7): In law, a lawyer retained or employed by a corporation or other organization owes allegiance to the entity and not to a shareholder, director, officer employee, agent, or other person affiliated with the entity. …. [ 37 ] The defendant’s position throughout has been that he was acting for 424 only and for no one else.

That he was acting for 424 is clear from the evidence before the motion judge and is not seriously under dispute. His firm incorporated 424, accounts were submitted and paid by 424 and the defendant prepared documentation with respect to the shareholders of 424 evidencing what the corporate structure would be, as well as how it would be modified.

As such, he owed a duty of care to the corporation which has a legal personality distinct from its shareholders, officers, directors and employees. [ 38 ] By the summer of 2002, with the new shareholder agreement in place and the resignations of the plaintiff and Eakin as directors, the directing mind of the corporation was clearly Chrustie. It was therefore appropriate for the defendant to receive instructions from Chrustie with respect to the corporate matters of 424. [ 39 ] In my view, however, it is also the case that the defendant was acting for Chrustie in his capacity as a shareholder.

The acknowledgement of debt documents and the pledge of shares are documents which relate to the relationship between shareholders and the indebtedness of the plaintiff and Eakin to Chrustie arising from the mortgages held by Chrustie Ltd. against 424’s property. They are not strictly speaking documents only for the benefit of the corporation. They are evidence of the dealings between the shareholders. Instructions with respect to those documents were given to the defendant by Chrustie and he acted upon them.

He recognized that the plaintiff and Eakin as well as the other shareholders may have different interests by specifically advising that if they were concerned about any aspect of what the documents reflected, they should speak to Chrustie. As well, he noted on a number of occasions that they should obtain independent legal advice.

This was in his correspondence of July 2002 and contained in the documents which were sent to the shareholders. [ 40 ] Whether the defendant was acting on Chrustie’s behalf and not solely on behalf of the corporation, does not mean that he was in a conflict of interest with respect to the plaintiff since at no time did the plaintiff have a solicitor-client relationship with the defendant with respect to the matters involving 424. [ 41 ] The defendant’ s actions with respect to the share transfers to Chrustie and specifically the enforcement of the pledge agreement, may not have been prudent.

While there may be some argument that the pledge agreement was for the benefit of both 424 and Chrustie by ensuring the financial stability of the corporation, it is unclear how the enforcement of the security was of benefit to the corporation. [ 42 ] It is clear that Chrustie was the party who benefited the most from the pledge agreement and acknowledgement of debt. The limited benefit to 424 was the potential of the project coming to fruition.

Of note, however, this is not a derivative action commenced on behalf of the corporation by the plaintiff whereby the latter could raise the issue of a potential conflict of the defendant. This is an oppression remedy claim where the plaintiff alleges that Chrustie, as the majority shareholder and a director, did not act in a way to protect his rights as a minority shareholder ( see Rea v. Wildeboer , 2015 ONCA 373 (QL) ). [ 43 ] As to the claim against the defendant, it is based solely on the duty of care he owed to the plaintiff as his solicitor. I am

satisfied that the motion judge was correct in holding that, at no time was the defendant in a solicitor-client relationship with the plaintiff. (

b) If not in a solicitor-client relationship, did the defendant owe the plaintiff a duty of care? [44] In the alternative, the plaintiff argues that if the defendant did not owe a fiduciary duty as a solicitor to the plaintiff, therelationship was such that he owed a duty of care to the plaintiff as a member of the public given the proximity of the relationship. Thisargument relies upon the principles set out in Tracy et al. v. Atkins (1979), (BC CA), 105 D.L.R. (3d) 632 (B.C. C.A.).

In that case, the British Columbia Court of Appeal recognized the possibility of a duty of care being owed to a party in a transactionwhere a solicitor is the only one engaged in the transaction or it can otherwise be foreseen that the other party may be relying on thesolicitor for the protection of his interests.

In support of that position, the plaintiff argues that it was he who approached the defendant toretain him to incorporate 424, that they were on a first name basis, that the plaintiff was seeking and obtained the defendant’s assistanceto put a deal together with the third party and that the defendant was the only lawyer involved in the shareholders’ agreement whichdrastically changed the balance of power within the corporation. [45] The difficulty with the plaintiff’s argument on this point is that the defendant made it clear in his correspondence and inthe documents he drafted, that he was not acting on the plaintiff’s behalf and that it was the responsibility of each party to seekindependent legal advice.

The plaintiff acknowledged that he had the opportunity to obtain independent legal advice prior to executingthe revised shareholder agreement and was aware of its contents, but did not do so. [46] On the facts of this case, I do not believe the plaintiff can reasonably argue that he was left with the impression that thedefendant was his lawyer or was looking out for his interests at the time. [47] In my view, in the circumstances of this case, there was no duty of care created by the alleged proximity between theplaintiff and the defendant. (

c) Was the defendant in a conflict of interest? [48] Having found that the motion judge was correct in holding that there was no relationship which would create a fiduciaryduty, it is not necessary to consider the third issue raised in this appeal, namely, whether there was a conflict of interest. Conclusion [49] In

summary, I am of the view that the motion judge was correct in finding that there was no genuine issue for trial as towhether the defendant owed a duty to the plaintiff and/or breached that duty as advanced by the pleadings. The appeal should bedismissed with costs in favour of the defendant Marshall. J.A. I agree: J.A. I agree: J.A.