Docket: CACV2245 Dr. N. Vankoughnett Dental Prof. Corp v. Norman Vankoughnett, 2012 SKCA 110

THE COURT OF APPEAL FOR SASKATCHEWAN Citation: 2012 SKCA 110 Date: 2012-11-26 Between: Docket: CACV2245 Dr. N. Vankoughnett Dental Prof. Corp and Norman Vankoughnett Appellants - and - Kelly Gallagher, Adrienne Gallagher, Raju Bhargava, Dr. K. Gallagher Dental Prof. Corp., Dr. A. Gallagher Dental Prof. Corp., Dr. R. Bhargava Dental Prof. Corp., GBGV Dental Prof. Corp., and Miller Thomson LLP Respondents Coram: Jackson, Richards & Caldwell JJ.A. Counsel: Curtis J. Onishenko, for the appellants Christopher C. Boychuk, Q.C., for the respondent Miller Thomson LLP Appeal: From: 2012 SKQB 84 Heard: October 17, 2012

Disposition: Allowed (in part) Written Reasons: November 26, 2012 By: The Honourable Mr. Justice Caldwell In Concurrence: The Honourable Madam Justice Jackson The Honourable Mr. Justice Richards Caldwell J.A. [1] Dr. Norman Vankoughnett and Dr. N. Vankoughnett Dental Prof. Corp. appeal from the dismissal of their application for anorder disqualifying Miller Thomson LLP from acting as solicitors of record for Dr. Kelly Gallagher, Dr. Adrienne Gallagher, Dr. RajuBhargava, Dr. K. Gallagher Dental Prof. Corp., Dr. A. Gallagher Dental Prof. Corp. and Dr. R. Bhargava Dental Prof.

Corp. [2] The parties, with the exception of the respondent law firm, were involved in an incorporated dental practice known as the“Grosvenor Dental Clinic”. The respondent law firm has, at all relevant times, provided legal services in respect of that business; and, in2007, it acted for the dentists in the restructuring of that business from a partnership to a corporation. The action before the Court ofQueen’s Bench is based on allegations that the business and affairs of the parties’ operating corporation, GBGV Dental Prof.

Corp., andthe powers of the directors of that corporation have been carried out, conducted, or exercised in a manner that is oppressive or unfairlyprejudicial to or that unfairly disregards the interests of Dr. Vankoughnett and his shareholder dental professional corporation.

In defenceof this action, the respondent law firm had purported to act for all of the defendants, including GBGV. [3] Although the civil proceedings and the negotiations between the parties had advanced to some degree under the respondent lawfirm’s representation of all defendants, the appellants brought the instant application to have the respondent law firm disqualified fromacting for the respondent dentists and dental professional corporations on the bases that: (

a) the respondent law firm had received, and might use, relevant confidential information of the appellants; (

b) the respondent law firm owed a duty of loyalty to the appellants as current or former clients, or both; and (

c) GBGV required legal representation independent of all other parties. [4] For its part, the respondent law firm disputed the first two grounds for its disqualification but acknowledged that it could notcontinue to act for both the respondent dentists and dental professional corporations, on the one hand, and GBGV, on the other.

Toresolve this conflict, the respondent law firm proposed to continue its representation of the former and undertook to cease to act for thelatter. [5] At heart, this appeal is from the chambers judge’s finding that the respondent law firm is not disqualified from acting for therespondent dentists and dental professional corporations provided that it does not also act for GBGV. The parties do not dispute that thechambers judge correctly identified the relevant legal standards applicable to the disqualification of legal counsel of record.

Theappellants submit, however, that the chambers judge erred in the application of those legal standards to the facts at hand in three ways: (

a) he erred in concluding that the respondent law firm had met the burden imposed on it to prove that it had not receivedconfidential information attributable to a solicitor and client relationship with the appellants; (

b) he erred in concluding that the respondent law firm had not breached its duty of loyalty to the appellants; and (

c) he erred in concluding that the respondent law firm could resolve the conflict of interest that arises from acting for both therespondent dentists and dental professional corporations, on the one hand, and GBGV, on the other, by withdrawing as counsel forGBGV. [6] I address each allegation of error in that order. Conflict of Interest [7] The appellants ask this Court to review the chambers judge’s

interpretation of the evidence to determine whether, in thecircumstances, the solicitor-client relationships between the respondent law firm and the various parties were sufficiently related to giverise to a conflict of interest which would preclude the law firm from acting against the appellants. [8] In Wallace v. Canadian Pacific Railway, 2011 SKCA 108, 340 D.L.R. (4th) 402, Ottenbreit J.A. summarized the law withrespect to receipt of confidential information and disqualifying conflicts of interest.

He wrote: [45] The Court [in MacDonald Estate, (SCC), [1990] 3 S.C.R. 1235] at p. 1260 also set the appropriate test fordetermining when there would be a disqualifying conflict of interest where it was alleged confidential information was at risk:

Typically, these cases require two questions to be answered:

(1) Did the lawyer receive confidential information attributable to a solicitor and client relationship relevant to the matter at hand?

(2) Is there a risk that it will be used to the prejudice of the client?

The focus of such an analysis is on whether the public, represented by the reasonably informed person, would be satisfied that no use of confidential information could occur. [46] On the first question, the court in MacDonald Estate determined at p. 1260 that “once it is shown by the client that there existed a previous relationship which is sufficiently related to the retainer from which it is sought to remove the solicitor, the court should infer that confidential information was imparted unless the solicitor satisfies the court that no information was imparted which could be relevant.” The court observed that this presumption, while rebuttable, is difficult to displace.

Acquisition of confidential information is therefore initially inferred not from the nature of the solicitor-client relationship, but rather from the relationship between the previous and current retainers.

On the second question, the court determined that a lawyer who has relevant confidential information is automatically disqualified from acting against a client or former client. [emphasis in original] [ 9 ] The law, as stated, is not in question; rather, the appellants’ request for appellate relief is underpinned by an allegation that the judge erred by preferring the evidence of the respondent law firm to that of the appellants on the issue of the nature of the previous solicitor-client relationship between the respondent law firm and Dr. Vankoughnett.

In this respect, the judge found that the legal services provided by the respondent law firm to Dr. Vankoughnett were limited to the incorporation of the corporate appellant and the rollover of the dental practice business to GBGV, “without addressing the topics that have become the subject of this action”. [ 10 ] The appellants’ evidence was that the respondent law firm had provided advice to Dr. Vankoughnett with respect to his dental professional corporation’s minority shareholder rights in GBGV and the advisability of a unanimous shareholders’ agreement.

The appellants submit advice of this nature would necessarily have addressed the very issues at play in the action against GBGV and the respondent dentists and dental professional corporations.

Accordingly, the appellants say the relationship between this previous retainer and the current litigation retainer of the respondent law firm is sufficiently related to disqualify the respondent law firm from so acting. [ 11 ] In contradiction to the appellants’ evidence, the judge had before him the affidavit evidence of two partners of the respondent law firm both of whom attested to the fact their firm had not provided advice to Dr. Vankoughnett of the nature alleged.

But, more importantly, the judge also had documentary evidence which corroborated this express disavowal by the respondent law firm. [ 12 ] The judge weighed the evidence from both sides on this point and he concluded that the documentary evidence confirmed the statements made by the two lawyers. On my reading of his reasons, the judge found that the conflict in evidence which arose on the affiants’ statements was resolvable, without resort to cross-examination or viva voce evidence, on the basis of the adduced documentary evidence.

Given the nature and substance of the documentary evidence before the judge, I can find no fault with his conclusion. [ 13 ] The appellants further submit that, in the face of conflicting affidavit evidence, the judge should have concluded that the respondent law firm had failed to discharge its burden of proving it did not possess confidential information of the appellants, citing Lavik v. Johnston , 2000 SKQB 47 , 191 Sask. R. 43, in support of this proposition.

In that case, a judge found it was not possible to assess the credibility of affiants on the basis of conflicting affidavits and, on that basis, was prepared to infer that confidential information had been exchanged between a law firm and its former client. In my view, the circumstances of this appeal are readily distinguished from those of Lavik v. Johnston .

In that case the judge found the law firm had not met its onus to discharge the inference not because the evidence was in conflict but because the conflict was unresolvable ; whereas, here, the judge was able to resolve the conflict. [ 14 ] On the whole of it then, I find no merit in the appellants’ contention that the conflicting nature of the evidence or the law is such that it precluded the judge from making the finding of fact in question. The judge gave full consideration to the relevant evidence, whether adduced by the appellants or the respondent law firm, and to the applicable law.

His findings of fact are reasonable and his legal conclusion, on the basis of those findings, that the solicitor-client relationship between the appellants and the respondent law firm and that firm’s current litigation retainer were not sufficiently related, within the meaning of MacDonald Estate , was correct. I would therefore dismiss this ground of appeal. Duty of Loyalty [ 15 ] The appellants submit the judge erred in concluding the respondent law firm did not owe the appellants a duty of loyalty both as current clients and as former clients.

The appellants further submit that the respondent law firm owes a duty of loyalty to GBGV, as a current client, and should be disqualified from acting contrary to GBGV’s interests in the oppression action. I deal with the latter submission with respect to GBGV separately and later in these reasons. [ 16 ] As to the duty owing to current clients, the appellants do not challenge the judge’s findings (at para. 28) that the appellants were not clients of the respondent law firm after 2007 and that Dr.

Vankoughnett’s concerns and the disagreements between the parties, which now underpin the oppression action, began in 2009. Nevertheless, they say, in as much as the retainers between GBGV and the respondent law firm were related to the structure and day-to-day affairs of the business known as “Grosvenor Park Dental”, it was reasonable for Dr. Vankoughnett to expect the respondent law firm to be loyal to him as well as to GBGV.

In my view, this argument must fail because, as the judge pointed out at para. 25 of his reasons, even though the appellants retained their respective interests as a director and shareholder of GBGV while GBGV was a current client of the respondent law firm, the indirect nature of that relationship does not somehow vicariously give rise to the same duty of loyalty owing by a law firm to its current clients.

As such, in that this avenue of the appeal is based on a duty of loyalty to current clients, it is without foundation and must be dismissed. [ 17 ] As to the nature of the duty of loyalty owing to former clients, in Brookville Carriers Flatbed GP Inc. v. Blackjack Transport Ltd. ,

2008 NSCA 22 , 263 N.S.R. (2d) 272, Cromwell J.A. (as he then was) said: 51 Under the principle relevant here, that concerning acting against a former client in a related matter, the focus is different [than that of the risk of confidential information being used]. As the cases and commentators show, the scope of this duty is very limited absent confidential information being at risk. This broader continuing duty of loyalty to former clients is based on the need to protect and to promote public confidence in the legal profession and the administration of justice.

What is of concern is the spectre of a lawyer attacking or undermining in a subsequent retainer the legal work which the lawyer did for the former client or of a lawyer effectively changing sides by taking an adversarial position against a former client with respect to a matter that was central to the previous retainer. … … 55 ... As I have attempted to explain, the approach to the question of whether two matters are related is entirely different in a MacDonald Estate situation than it is in the case of an alleged disqualifying conflict of interest where confidential information is not at risk.

The purpose of assessing the relationship between the two retainers in MacDonald Estate is to determine whether an inference should be drawn that confidential information obtained in the course of the first retainer is relevant to the second. When, as here, confidential information is not at risk, the relationship between the two retainers is considered in order to identify whether the second retainer involves the lawyer attacking the legal work done during the first retainer or amounts, in effect, to the lawyer changing sides on a matter central to the earlier retainer.

The concept of relatedness for this purpose is much narrower and has an entirely different focus than the concept as applied in the MacDonald Estate analysis. [emphasis added] [ 18 ] As noted, the judge found that the appellants had not been clients of the respondent law firm after 2007. He noted that the last legal work performed by the respondent law firm for Dr. Vankoughnett had been under a limited engagement to incorporate the corporate appellant.

The judge then turned to consider the nature of the past retainers to determine whether respondent law firm’s current litigation retainer involved an attack on or undermining of the legal services previously provided to the appellants. As to the nature of the previous retainers, he found as follows: [26] Dr. Vankoughnett had been a client of the law firm by virtue of being a partner in the partnership to which the law firm provided legal services. When the partnership ceased to receive legal services from the law firm in 2007, Dr. Vankoughnett ceased to be a client of the law firm by virtue of being a partner.

Nothing took the place of his partnership status in terms of being a client of the law firm. Dr. Vankoughnett ceased to be a client of the law firm, in the context of legal services being provided to the business, at the time of the 2007 restructuring. [27] The law firm, as I have said, also provided legal services specifically to Dr. Vankoughnett and his professional corporation in connection with the 2007 restructuring. That work, and the solicitor-client relationship that it entailed, ended in 2007 with the conclusion of the restructuring process as I have discussed.

On that point I note that the law firm has not been the registered office for the professional corporation, and the law firm has neither retained the corporate minute book nor attended to any of the corporate filings such as annual returns. [ 19 ] Against this backdrop of issue-specific retainers, all of which had ended in 2007, the judge evaluated the nature of the oppression action brought by the appellants.

By its nature, the action put into issue the question of whether the business and affairs of GBGV and the powers of its directors had been carried out, conducted, or exercised in a manner that was oppressive or unfairly prejudicial to or that unfairly disregarded the interests of the appellants. As noted, the judge found, as fact, that the appellants’ concerns had not arisen until 2009, or two years after the termination of any direct relationship between the appellants and the respondent law firm. This was an important consideration for the judge.

He said: [30] In representing the respondents in this oppression remedy action, the law firm is not attacking or undermining the legal work that it has done during its earlier retainers for the business or specifically for the applicants. That legal work is not the subject of the action. The subject of the action is the conduct of the respondents beginning around 2009.

Likewise, the subject of the action is not a matter central to the earlier retainers. [31] In these circumstances, the law firm’s duty of loyalty to its former clients, the applicants, does not prohibit it from representing the respondents in this action. In simple terms then, the judge found the matters at issue in the oppression action are not sufficiently related to any of the work performed by the respondent law firm for the appellants such that the current litigation retainer could be said to amount either (

i) to an attack on legal work performed by the respondent law firm or (ii) to the respondent law firm “changing sides” on a matter central to any of those earlier retainers. Given the facts, I can find no error in the judge’s application of the law to the facts or in his legal conclusions and I would, therefore, dismiss this avenue of the appeal.

Conflict of Interest and the Duty of Loyalty to GBGV [ 20 ] That leaves the issue of the correctness of the judge’s finding that the respondent law firm could continue to act for the respondent dentists and dental professional corporations provided it ceased to act for GBGV. [ 21 ] Although it purported to do so prior to the instant application, the respondent law firm does not now dispute that in an oppression action a solicitor may not act for both the corporation and its majority shareholders. This is so for the reasons set out by Wittmann A.C.J. (now C.J.Q.B.) in his decision in King v.

Arnett , 2006 ABQB 639 , [2007] 1 W.W.R. 280 at paras. 15-17 . [ 22 ] In his

interpretation of the law, as set forth in King v. Arnett , the judge here said:

[37] The King decision provides a statement of the applicable guiding principle, which is that a law firm may not represent both the corporation and the majority shareholders in litigation in which oppressive conduct is alleged. That principle is based on the need for the corporation to have independent legal advice. [38] I am not persuaded that there is any reason to go beyond that principle to declare that the law firm may not represent the majority shareholders.

The goal of ensuring that the corporation has independent legal advice is achieved by enforcing the principle that the law firm may not represent both it and the majority shareholders. In this case that goal will be accomplished because the law firm has undertaken that it will not represent the operating corporation. [ 23 ] The appellants submit the foregoing discloses an error in that the judge’s finding ignores an inherent conflict of interest and breach of the respondent law firm’s duty of loyalty to GBGV.

The appellants submit that to maintain its loyalty to GBGV, the respondent law firm must be disqualified from acting for the respondent dentists and dental professional corporations. In counter to this, the respondent law firm submits that there is no clear conflict of interest in it continuing to act for the majority shareholders so long as it does not continue to represent GBGV.

Furthermore, the respondent law firm notes that MacDonald Estate holds (at p. 1243) that there is a “countervailing value that a litigant should not be deprived of his or her choice of counsel without good cause.” Finally, the respondent law firm wonders whether the application to disqualify it from acting at this stage of the proceedings is more of a litigation tactic than a legitimate concern regarding a conflict of interest or breach of the duty of loyalty. [ 24 ] This issue itself, as well as the parties’ submissions, raises intriguing policy questions with respect to the nature and effect of the conflict of interest arising and of a solicitor’s duty of loyalty in these circumstances.

The question of whether a corporate solicitor may choose to act for the majority shareholders, as opposed to the corporation, in an oppression remedy appears to be previously untested in court. Moreover, it is a decision which could reshape the way in which some corporate solicitors practice law and deal with their clients. [ 25 ] Given the well-known principles set out in King v. Arnett , none of the appellants or the respondents, other than GBGV itself, was the appropriate advocate for GBGV in the application before the chambers judge.

The appellants and the respondent law firm so much as acknowledged this in their arguments before this Court, but neither had taken steps to address the predicament.

I do not mean to say that either side should have intentionally undercut its position in this application, but I do not see how GBGV’s interests can be adjudicated when it has not been made a party to these proceedings and was not represented by its own counsel. [ 26 ] In the result, I find I am unable to address the question before the Court for the very reason that it arose: GBGV’s interests were not independently represented before the chambers judge or before us. As such, the issues and interests arising in this application were not fully-canvassed or fully-tested by counsel before the chambers judge.

In my opinion, the fact GBGV was neither impleaded nor represented independently in these proceedings is reason enough to set aside the judge’s finding that the respondent law firm is not disqualified from acting for the respondent dentists and dental professional, if it ceases to act for GBGV; however, I would do so without prejudice to any party who might seek to revisit the issue in an appropriate proceeding. [ 27 ] There will be no order as to costs. DATED at the City of Regina, in the Province of Saskatchewan, this 26 th day of November, A.D. 2012. “Caldwell J.A.” _____________________ Caldwell J.A.

I concur. “Jackson J.A.” Jackson J.A. I concur. “Richards J.A.” Richards J.A.