Rice v D’Arcy & Deacon LLP et al, 2016 MBCA 104

Citation: Rice v D’Arcy & Deacon LLP et al, 2016 MBCA 104 Date: 20161027 Docket: AI16-30-08556 IN THE COURT OF APPEAL OF MANITOBA Coram: Madam Justice Barbara M. Hamilton Madam Justice Holly C. Beard Madam Justice Janice L. leMaistre BETWEEN : ) RICHARD RICE ) ) R. L. Tapper, Q.C. (Plaintiff) Appellant ) for the Appellant ) - and - ) ) S. F. Vincent and D’ARCY & DEACON LLP, GRANT A. ) K. R. Poetker STEFANSON, JONATHAN L. ) for the Respondents GOLDENBERG, HAROLD COCHRANE, ) DERYK W. COWARD, KENNETH A. ) FILKOW, MICHAEL G. FINLAYSON, ) Appeal heard: ROGER D. GRIPP, JAMES G. HARLEY, ) September 6, 2016 GWEN B.

HATCH, BRIAN J. MERONEK, ) PATRICK METCALFE, MICHAEL D. ) RICHARDS, PAUL G. SARANCHUK, ) Judgment delivered: JOHN C. STEWART, MICHAEL D. ) October 27, 2016 WERIER, MICHAEL WILLCOCK and ) RUSS WOOKEY ) ) (Defendants) Respondents ) HAMILTON JA [ 1 ] The plaintiff appeals the order staying his action against the defendants, his former law firm and partners.

In the action, he seeks a declaration, and judgment, to indemnify him for the legal costs to defend a third-party assessment against him by Canada Revenue Agency (CRA), and for any ultimate penalty payable by him arising from the assessment. [ 2 ] The motion judge concluded that the defendants have an arguable defence that is not frivolous or vexatious, that they would suffer irreparable harm if the stay was not granted and that the balance of convenience weighed in favour of granting the stay. [ 3 ] For the reasons that follow, I am of the view that the motion judge’s decision to grant the stay is entitled to deference.

I would dismiss the appeal. Background [ 4 ] For a number of years, the plaintiff was a partner with the law firm D’Arcy & Deacon LLP (the firm). He left the firm in 2010. The written partnership agreement does not address the matter of indemnity raised by the circumstances in this case. Its one indemnity provision concerns the obligations of remaining partners to a withdrawing partner for bank indebtedness. [ 5 ] In 2006, the plaintiff represented clients who entered into an agreement to sell some commercial real estate.

Prior to the closing, a third party commenced litigation which challenged the clients’ ownership of the property. Settlement negotiations ensued, which resulted in a settlement agreement. One of the plaintiff’s then partners, Grant Stefanson, and an associate of the firm, Jonathan Goldenberg, participated in the settlement negotiations and the finalizing of the settlement agreement. [ 6 ] In March 2011, CRA gave written notices to the plaintiff and the firm that it was conducting an audit for a possible third-party penalty under

section 163.2 of the Income Tax Act , RSC 1985, c 1 (5th Supp) (the ITA ). CRA took exception to the terms of the settlement agreement that required the cross-payment of certain charitable donations, which had the effect of reducing the tax payable on the sale of the commercial real estate.

[ 7 ] The plaintiff and the firm agreed (the oral agreement) to jointly retain independent legal counsel to respond to the CRA audit and to dispute any proposed assessment. They agreed that the 18 partners of the firm would each pay one-eighteenth of the legal fees incurred. As a result, the plaintiff was obliged to pay his one-eighteenth share and the other partners of the firm would pay the rest. [ 8 ] The plaintiff and the firm, on behalf of its partners, notified their professional liability insurer, the Law Society of Manitoba Professional Liability Claims Fund (the insurer), about the CRA audit.

The insurer confirmed it would reimburse them on account of personal defence costs if the independent legal counsel was successful in convincing CRA that no penalty should be imposed. [ 9 ] In June 2013, after completion of the audit, CRA wrote to the plaintiff and proposed the assessment of a penalty in the amount of $164,878 against him for misrepresentation in tax-planning arrangements pursuant to

section 163.2(2) of the ITA and for participating in a misrepresentation pursuant to

section 163.2(4) of the ITA (the CRA claim). [ 10 ] CRA advised the firm that it was not proceeding with proposing the third-party penalties against it. [ 11 ] As a result of CRA’s decision, the insurer reimbursed the firm for the legal fees incurred to that point. The firm paid the plaintiff his one-eighteenth share of that amount. [ 12 ] The firm advised the plaintiff that the partners would no longer cover any part of the legal fees of the independent legal counsel arising from his defence of the ongoing CRA claim against him. [ 13 ] The plaintiff filed a notice of objection of the CRA claim.

Nothing further has been done by CRA or the plaintiff. [ 14 ] The plaintiff currently practices law on a very limited basis. Several years ago he was diagnosed with Parkinson’s disease.

Relevant Statutory Provisions [ 15 ] Sections 163.2(2) and 163.2(4) of the ITA read as follows: Penalty for misrepresentations in tax planning arrangements 163.2(2) Every person who makes or furnishes, participates in the making of or causes another person to make or furnish a statement that the person knows, or would reasonably be expected to know but for circumstances amounting to culpable conduct, is a false statement that could be used by another person (in subsections (6) and (15) referred to as the “other person”) for a purpose of this Act is liable to a penalty in respect of the false statement.

Penalty for participating in a misrepresentation 163.2(4) Every person who makes, or participates in, assents to or acquiesces in the making of, a statement to, or by or on behalf of, another person (in this subsection, subsections (5) and (6), paragraph (12)(

c) and subsection (15) referred to as the “other person”) that the person knows, or would reasonably be expected to know but for circumstances amounting to culpable conduct, is a false statement that could be used by or on behalf of the other person for a purpose of this Act is liable to a penalty in respect of the false statement. [ 16 ] Culpable conduct referred to in the above-noted sections is defined in

section 163.2(1) of the ITA as follows: 163.2(1) The

definitions in this subsection apply in this section. culpable conduct means conduct, whether

an act or a failure to act, that (

a) is tantamount to intentional conduct; (

b) shows an indifference as to whether this Act is complied with; or (

c) shows a wilful, reckless or wanton disregard of the law. [ 17 ]

Section 27 (b)(

i) of The Partnership Act , CCSM c P30, obliges all partners, subject to the terms of a partnership

agreement, to indemnify any partner for liabilities that partner incurred in the ordinary and proper conduct of the business of the firm: Rules as to interests and duties of partners 27 The interests of partners in the partnership property and their rights and duties in relation to the partnership shall be determined, subject to any agreement, express or implied , between the partners, by the following rules: . . . (

b) The firm must indemnify every partner in respect of payments made and personal liabilities incurred by him, (

i) in the ordinary and proper conduct of the business of the firm; [emphasis added] The Pleadings [ 18 ] The plaintiff’s statement of claim pleads that he has a right to indemnity from the defendants based on: • the oral agreement to jointly defend the CRA claim; • express or implied terms of the partnership agreement; •

section 27 (b)(

i) of The Partnership Act ; and • the involvement of Stefanson and Goldenberg in negotiating the terms of the settlement agreement in the ordinary course of the practice of law on behalf of the firm. [ 19 ] The defendants’ statement of defence denies liability based on: • there being no express or implied term in the partnership agreement that obliges the defendants to indemnify the plaintiff with respect to the CRA claim; • the plaintiff and the defendants impliedly agreed that

section 27 (b)(

i) of The Partnership Act does not apply because the only indemnity in the partnership agreement concerns bank indebtedness; • alternatively,

section 27 (b)(

i) of The Partnership Act does not apply because the CRA claim is based on an allegation of “culpable conduct” under the ITA , which does not constitute the “ordinary and proper conduct of the business of the firm”; • the oral agreement was revocable by any of the parties on notice, which was given to the plaintiff by the firm; and • the action is premature because, if the plaintiff is successful in resisting the CRA claim, his legal fees will be reimbursed by the insurer and there will be no penalty assessed against him by CRA.

The Stay Motion [ 20 ] In March 2015, the defendants filed their motion for a stay of the action pending the judicial determination of the CRA claim. The motion was supported by the affidavit of Stefanson. The plaintiff filed an affidavit in response. Both were cross-examined on their affidavits. [ 21 ] Stefanson’s affidavit sets out the background facts outlined above.

During his cross-examination, he explained that the firm gave notice to the plaintiff that he would be responsible for all the defence costs for the CRA claim because the firm was no longer being pursued by CRA, this after the firm obtained a legal opinion that the firm had no legal obligation to the plaintiff in these circumstances.

He could not remember ever discussing with the plaintiff whether the oral agreement was revocable or not. [ 22 ] In his affidavit, the plaintiff describes his “limited financial resources” and his current and anticipated health problems, including the prospects of becoming mentally and physically disabled in the future as a result of his Parkinson’s disease.

He fears that, if the action is delayed, he “will be compromised in [his] ability to instruct counsel and to participate in the process.” Much of the cross- examination of the plaintiff concerns his financial situation and how he and his wife have organized their affairs so that assets are in her name, except for his registered retirement savings plan (RRSP) and his tax-free savings account (TFSA). The Motion Judge’s Decision [ 23 ] The motion judge explained the test for the stay sought by the defendants:

[W]hether the defendants have an arguable defence to the plaintiff’s claim; whether the defendants will suffer irreparable harm if thestay is not granted; and whether the harm to the defendants from refusing the stay is greater than the harm to the plaintiff from grantingone. [24] She concluded that the defences pleaded by the defendants are arguable, stating that there were “serious issues to betried.” [25] In the course of her analysis in this regard, she rejected the plaintiff’s reliance on two Ontario Court of Appealdecisions: McDonic Estate et al v Hetherington, Fallis, Park, Watt & Carriere (1997), (ON CA), 96 OAC 289; andKorz v St Pierre, Woods and Martin (1987), (ON CA), 23 OAC 226.

She was of the view that these cases concernedthe obligation of partners to third parties for the conduct of a partner, which was not the issue here. [26] She addressed the possibility of mootness and the potential for unfairness if the action becomes moot: This action will be rendered moot if the plaintiff is successful in defending the CRA assessment. In fact, given the delay by CRA inpressing the matter forward, it may be that it will abandon the matter.

In Ludlow [2011 MBCA 29, 262 ManR (2d) 261], the ManitobaCourt of Appeal addressed the issue of mootness on a stay motion in the context of determining whether there was a serious issue to beargued. In doing so, the Court of Appeal noted that except in exceptional circumstances (which are not present here), the court willgenerally refuse to hear cases that are moot because there is no live issue before the court. . . . [T]here would be a degree of unfairness if the plaintiff is permitted to proceed with the action and it is later determined that the action isunnecessary.

This, again, stems from the issue of mootness. [27] With respect to whether the defendants would suffer irreparable harm if the action proceeded before the CRA claimwas resolved, she agreed with the defendants that the manner in which the plaintiff had structured his financial affairs was of “someconcern” to their ability to recover costs in the action if they were successful.

She also agreed with them that the deterioration of theplaintiff’s health could affect his ability to deal with the CRA claim in the future, to the detriment of the defendants. [28] The motion judge was of the view that the possibility of inconsistent findings in the action and the CRA claim wouldhave “very limited” impact in this case because of: the different character of the CRA dispute, which involves a determination as to whether the plaintiff’s conduct was “culpable”, and thisaction which is based on The Partnership Act, the written Partnership Agreement, and the oral agreement to share legal expenses. [29] When considering the balance of convenience, the motion judge rejected the plaintiff’s argument that it was unfair thatthe firm paid for the independent legal counsel’s fees with respect to other members of the firm (Stefanson and Goldenberg), and not hislegal fees for the same kind of allegations by CRA as made against him.

She noted that “the firm’s payment of legal fees was inconnection with an audit directed to the firm, not other individual partners.” [30] She found that the plaintiff “should have sufficient funds to pay the costs associated with a CRA challenge”: [D]ocuments produced and evidence given by the plaintiff on cross-examination indicate that he has had significant income over theyears, has approximately 1.3 million dollars in RRSPs, and has access to assets of his wife based on their agreement regarding sharing ofexpenses. [31] With respect to the effect of the plaintiff’s health issues on pursuing the action and dealing with the CRA claim, shestated: It may be that, if a stay is granted, the plaintiff will ultimately be physically or mentally incapable of pursuing this action.

Equallyhowever, as I have explained, if a stay is denied and he proceeds only with this matter, he could end up being unable to deal with theCRA issue, which would not only be to his detriment but also that of the defendants.

[32] She also addressed the plaintiff’s approach, to date, of dealing with the CRA claim: [T]he balance of convenience is impacted by the approach the plaintiff has already taken in the CRA matter. Given that CRA has notresponded to his Notice of Objection, he could have pursued the matter by appealing to the Tax Court of Canada. . . . Instead, however,on cross-examination on his affidavit, he admitted that he was waiting for CRA to take the next step and was not pushing it.

Had hetaken steps to deal with the CRA matter, it may already have been determined--thereby addressing to some extent concerns arising fromhis health issues. [33] She concluded that the balance of convenience weighed in favour of granting the stay pending the final determinationof the CRA claim, agreement of the parties or further order of the court.

The Positions of the Parties [34] The parties agree that the motion judge correctly identified the test to be met by the defendants for the stay. [35] The plaintiff’s primary assertions are that the motion judge was wrong to grant the stay because: 1) his medicalcircumstances require him to have the action heard as soon as possible and to do otherwise is unjust; and, 2) the firm breached the oralagreement. [36] He also asserts that the motion judge committed the following errors: 1. failing to consider, or even reference, his argument that the defendants are relying on conduct by the plaintiff that wasconduct also engaged in by Stefanson and Goldenberg and indemnified by the firm; 2. considering the plaintiff’s ability to afford the litigation, which was not argued by the plaintiff; 3. considering the possibility of inconsistent verdicts, which is mere speculation; 4. not relying on the principles articulated in Korz and McDonic; and 5. considering, in her analysis of irreparable harm, the possibility that the plaintiff would be unable to pay the costs of theaction, given the availability of his TFSA and the applicable Court of Queen’s Bench tariff. [37] In response, the defendants argue that the motion judge made a discretionary decision that is entitled to deferencebecause the plaintiff has not identified any error in principle, any misapprehension of the facts or demonstrated that the decision is soclearly wrong as to amount to an injustice. [38] Their fundamental point is that the prosecution of the action will only be necessary if the plaintiff is unsuccessful indefending the CRA claim because a successful defence will result in the reimbursement by the insurer of legal costs incurred by theplaintiff and no penalty will be payable by him.

Analysis and Decision [39] The question of whether to grant a stay is a discretionary decision. It is entitled to deference. An appeal court cannotintervene unless a judge errs in principle or the decision is so clearly wrong as to amount to an injustice. An error in principle is amisdirection on the law or the facts.

See Elsom v Elsom, (SCC), [1989] 1 SCR 1367; and Kostic v Merrill LynchCanada Inc, 2010 MBCA 81, 258 ManR (2d) 125. [40] As previously noted, the parties agree that the motion judge correctly stated the three-part test for a stay, as set out inthe well-known decision RJR—MacDonald Inc v Canada (Attorney General), (SCC), [1994] 1 SCR 311. The plaintifftakes issue with how she applied the test. I will deal with the plaintiff’s specific grounds of appeal in the course of addressing the threefactors of the test and his argument that the granting of the stay is so clearly wrong as to amount to an injustice.

Arguable Defence [41] The threshold to establish an arguable defence is a low one. See RJR. The motion judge was not required to engage in“[a] prolonged examination of the merits” (RJR at p 38). This was not one of those exceptional cases, referred to in RJR, that called forsuch an examination. The motion judge reviewed the parties’ positions with respect to the asserted defences and concluded that theywere all arguable. [42] I see no error by the motion judge in distinguishing the McDonic and Korz decisions, relied upon by the plaintiff, fromthe circumstances here. Those decisions considered the equivalent of

section 13 of The Partnership Act, which concerns the liability ofpartners to third parties for any wrongful act or omission of a partner acting in the ordinary course of the business of the firm. Here, theaction concerns the liability of partners to another partner, not a third party, and brings into play

section 27(b)(

i) of The Partnership Act. [43] With respect to the defence that the plaintiff’s conduct is not conduct that must be indemnified pursuant to

section 27(b)(i), the plaintiff argues that the defendants have already acknowledged that such conduct is ordinary and proper conduct of the firm forthe purposes of

section 27(b)(

i) because they were willing to defend Stefanson and Goldenberg for the same alleged conduct. He saysthat the motion judge did not consider this argument. I disagree. The reasons of the motion judge demonstrate that she understood thisargument (see para 29 above). She appropriately noted that Stefanson and Goldenberg were never personally the subject of the CRAclaim. While the motion judge did not address this argument at any length, she was not required to do so.

[ 44 ] As for the other defences, including the defence that the defendants were entitled to terminate the oral agreement, I see no reviewable error in the motion judge’s findings that these defences were all arguable, given that the threshold to demonstrate an arguable defence is a low one. [ 45 ] The motion judge’s finding that the defendants have demonstrated an arguable defence is entitled to deference. Irreparable Harm [ 46 ] The motion judge did not err when she considered the possibility of inconsistent verdicts between the CRA claim and the action, as argued by the plaintiff.

Some of the asserted defences do not concern the plaintiff’s conduct at issue in the CRA claim, but the defence with respect to the inapplicability of

section 27 (b)(

i) certainly does. In my view, the conduct at issue in the CRA claim is the same conduct at issue for the purposes of whether the plaintiff is entitled to indemnity under

section 27 (b)(i). If anything, the conclusion of the motion judge that the possibility of inconsistent findings was “very limited” was one that generously favoured the plaintiff. [ 47 ] The plaintiff says that the motion judge also erred when she considered the possibility that he would be unable to pay the costs of the action if the defendants are successful. The motion judge did not find that the plaintiff would be unable to pay costs. She agreed with the defendants that there was “some concern” with regard to their ability to recover the costs, given how the plaintiff had structured his financial affairs.

This was a finding that was open to her given the evidence and submissions about his financial circumstances. In any event, her finding in this regard was just one aspect of her analysis with respect to irreparable harm. She also addressed the implications of a deterioration of the plaintiff’s health: Moreover, although the plaintiff says that he may suffer harm if the stay is granted because his health may deteriorate such that he cannot deal with this action, the denial of a stay would also give rise to harm to the defendants for much the same reason.

That is, the thrust of the plaintiff’s position seems to be that if the stay is denied, he would likely pursue this action to secure funding and then deal with the CRA matter once this action is complete. In this scenario, if the plaintiff’s health were to deteriorate, he could become unable to deal with the CRA matter, thereby exposing the defendants to a liability that cannot be challenged. [ 48 ] The motion judge’s finding that the defendants have demonstrated that they will suffer irreparable harm if a stay is not granted is entitled to deference.

Balance of Convenience [ 49 ] The motion judge found that the plaintiff has sufficient funds to pay for the costs to defend the CRA claim. The plaintiff asserts that she erred by considering his ability to afford this litigation because he did not rely on his financial circumstances in his response to the stay motion. I am not persuaded that the motion judge erred in this regard, for two reasons. First, the plaintiff raised his “limited financial resources” in his affidavit to respond to the CRA claim and his motion brief did not specifically resile from the point.

Second, the defendants cross-examined the plaintiff at length about his financial circumstances and made submissions in that regard. The motion judge was required to respond to the issue. [ 50 ] As for the plaintiff’s health issues, the motion judge appropriately considered their impact on the action and the CRA claim, and from the points of view of both the plaintiff and the defendants.

She concluded that the balance of convenience weighed in favour of the stay of the action, particularly given the plaintiff’s wait-and-see approach to the CRA action. [ 51 ] The motion judge’s conclusion that the balance of convenience weighed in favour of the defendants is entitled to deference. Is the Decision Unjust? [ 52 ] The plaintiff’s overarching assertion is that the stay is unjust given his heath issues and his prospects for the future.

While I am sympathetic to the plaintiff’s medical circumstances, I am not persuaded that the decision to grant the stay is unjust. [ 53 ] In the action, the plaintiff seeks a declaration and indemnity for a penalty that may, or may not, be owing in the CRA claim, and for legal fees to defend the CRA claim that may be reimbursed by the insurer. I note that his statement of claim does not seek any sort of interim relief for legal fees to be paid pending the resolution of the CRA claim. Rather, he wishes to proceed with the action before the CRA claim is concluded.

In other words, he seeks to have the Court determine his right to indemnity for legal fees, and for a penalty, that he may or may not owe. Therefore, what happens in the CRA claim is crucial to whether the action is even necessary. If he successfully defends the CRA claim, no penalty is owing and his legal fees will be reimbursed by the insurer. [ 54 ] The motion judge understood this, as well as how his medical circumstances and prognosis could affect him and his ability to defend the CRA claim and pursue the action at a later date.

Importantly, in my view, the motion judge made the significant finding that the plaintiff had the financial resources to defend the CRA claim. In any event, at the appeal hearing, the plaintiff’s position was that he was not relying on any lack of financial resources to challenge the stay. Given all of this, her decision to stay the action cannot be viewed as being so clearly wrong as to amount to an injustice. Conclusion [ 55 ] The motion judge made no error in principle with respect to the law or the facts.

Her findings, that the defendants have an arguable defence, will suffer irreparable harm if the stay is not granted and that the balance of convenience weighs in favour of the

stay, are entitled to deference. Her decision to grant the stay does not amount to an injustice. [ 56 ] I would dismiss the appeal with costs in favour of the defendants. JA I agree: JA I agree: JA