Docket: CACV2207 Eagle Eye Investments Inc. Appellant (Respondent) - v. -, 2012 SKCA 20

THE COURT OF APPEAL FOR SASKATCHEWAN Citation: 2012 SKCA 20 Date: 20120229 Between: Docket: CACV2207 Eagle Eye Investments Inc. Appellant (Respondent) - and - CPC Networks Corp. Respondent (Applicant) Before: Richards J.A. (in Chambers) Counsel: Larry Ayers for the Appellant appearing by telephone Clayton Barry for the Respondent appearing by telephone

Application: From: 2011 SKQB 436 Heard: February 22, 2012 Disposition: Application is granted Written Reasons: February 29, 2012 By: The Honourable Mr. Justice Richards Richards J.A. I. Introduction [ 1 ] This is an application by the respondent CPC Networks Corp. (“CPCN”) for an order removing Mr. Larry Ayers as counsel of record for the appellant Eagle Eye Investments Inc. (“Eagle Eye”). II.

General Background [ 2 ] CPCN operates a 20 kilometre fibre-optic looped network in the City of Saskatoon. [ 3 ] The business of CPCN is grounded on a concept developed by Timothy Tkachuk and Bernie Sabiston. [ 4 ] At some point prior to the incorporation of CPCN, Mr. Tkachuk was put in contact with Mr. Ayers. Mr. Ayers indicated that he was interested in both assisting Mr. Tkachuk and investing in the project. [ 5 ] CPCN was incorporated in July of 2007. Shares were issued to Jack Adams, Mr. Sabiston, Mr. Tkachuk and his wife, and Mr. Ayers and his wife.

The Ayers’s shares were given to them for past and future services, including legal services, provided to CPCN by Mr. Ayers. [ 6 ] Mr. Ayers did legal work for CPCN in relation to raising capital, corporate structuring, negotiating contracts and general advising. Some of his services were invoiced through the law firm that he was associated with at the time. [ 7 ] The initial directors of CPCN included Messrs. Ayers, Adams, Sabiston and Tkachuk. Mr. Ayers also acted as president of CPCN. Mr. Adams was the chief financial officer. [ 8 ] Mr.

Adams is the president, sole director and sole beneficial owner of the appellant Eagle Eye. [ 9 ] In February of 2008, CPCN entered into a loan agreement with the Business Development Bank of Canada (“BDC”) whereby BDC extended $150,000 to CPCN and CPCN granted BDC a security interest in all of its present and after acquired property. Messrs. Ayers, Adams, Tkachuk and Sabiston each provided personal guarantees for 25 percent of the loan amount. The relevant documents were executed on behalf of CPCN by Messrs. Adams and Ayers. [ 10 ] In 2009, the board of directors of CPCN became aware of an assertion by Mr.

Adams and Eagle Eye that CPCN was indebted to

them for in excess of $400,000. (The debt alleged by Eagle Eye was said to have been incurred while Mr. Ayers was president of CPCN and Mr. Adams was the chief financial officer of the company.) [ 11 ] Mr. Ayers resigned as an officer of CPCN in December of 2009 and as a director in March of 2010. Mr. Adams was removed as an officer of the company. [ 12 ] Eagle Eye sued CPCN in February of 2010 for the amount of $465,555. CPCN denied the indebtedness and commenced a third party claim against Messrs.

Ayers and Adams. [ 13 ] At the end of March of 2010, CPCN was notified that the BDC loan, together with the security interest held by BDC in relation to it, had been assigned to Black Dove Capital Corp. (During subsequent court proceedings, Mr. Ayers indicated that he had incorporated Black Dove for the purpose of assuming the BDC loan and that the sole director and officer of Black Dove was acting as his nominee.) [ 14 ] Black Dove demanded $140,229 by way of repayment of the BDC loan. This total involved a loan amount said to be $106,514, receiver fees for Mr.

Ayers of $10,000 and fees for professional services for Mr. Ayers described as “Paid Lba Claim” of $23,715. Mr. Ayers, on behalf of Black Dove, then took possession of CPCN’s office under a purported interim receivership. The receivership was subsequently set aside by ex parte order. [ 15 ] Next, Black Dove brought its own ex parte application asking, among other things, that the appointment of Black Dove as interim receiver be extended. Mr. Ayers swore two affidavits dated April 8, 2010 for use in connection with the application. [ 16 ] Black Dove’s motion came before Gabrielson J. on April 9, 2010.

He held that Mr. Ayers could not appear as counsel for Black Dove because Mr. Ayers could not be both advocate and witness in the same proceedings. [ 17 ] In July of 2011, CPCN was notified that Black Dove had assigned the BDC loan to Eagle Eye. (Mr. Ayers was one of the individuals who signed the assignment agreement on behalf of Black Dove.) Eagle Eye concurrently demanded specified payments, documents and information from CPCN. Eagle Eye said it intended to enforce the BDC security agreement. [ 18 ] Eagle Eye then served a notice of motion, prepared by Mr.

Ayers, whereby it sought to enforce various rights in relation to the BDC loan and security agreement. CPCN decided to pay out the loan but Eagle Eye refused to cooperate in this regard. [ 19 ] This led CPCN to apply for an order determining the outstanding amount of the BDC loan and directing that, upon the loan being paid out, all security granted by CPCN in support of the loan would be discharged. The application was granted by Gabrielson J. on November 18, 2011. Mr.

Ayers did not appear as counsel for Eagle Eye in that proceeding. [ 20 ] Gabrielson J.’s decision is what is in issue in the proceedings now before this Court. It was appealed by Eagle Eye on December 18, 2011. The notice of appeal was signed by Mr. Ayers as “Solicitor for the Appellant.” III. The Motion to Remove Mr. Ayers [ 21 ] Shortly after receiving Eagle Eye’s notice of appeal, CPCN filed a notice of motion asking that Mr. Ayers be removed as counsel for Eagle Eye. The motion was returnable January 25, 2012. [ 22 ] By letter dated January 20, 2012, Mr.

Ayers advised the Court that he had retained counsel to act for him on the motion but that counsel was presently out of the country. Mr. Ayers asked for an adjournment to March of 2012. On January 23, 2012, Mr. Ayers wrote again, this time to advise that the lawyer he had in mind was likely not going to act for him. He repeated his request for an adjournment. The application to remove Mr. Ayers was ultimately set over to February 22, 2012 by Herauf J.A. [ 23 ] On February 16, 2012, Mr. Ayers, acting as counsel for Eagle Eye, filed a notice of motion aimed at removing McDougall Gauley

LLP as counsel for CPCN. He also advised the Court by way of email that he had been “… instructed to withdraw from the appeal once the matter of McDougall Gauley’s conflict is resolved… .” [ 24 ] When this matter came before me in Chambers, Mr. Ayers confirmed his intention to withdraw as counsel on the appeal proper. However, he also maintained that he was entitled to act for Eagle Eye on the application to remove McDougall Gauley LLP. He took this position on the basis that he had sworn no affidavit relevant to the issues raised in that particular application. [ 25 ] Mr.

Ayers also indicated that he was prepared to deal immediately with the issue of whether he was entitled to act for Eagle Eye on the motion to remove McDougall Gauley LLP. [ 26 ] I should perhaps add here that, well into the oral submissions of this matter, Mr. Ayers (without identifying particulars) suggested he should have an opportunity to file a further affidavit or affidavits. I am not prepared to accede to this suggestion. Mr.

Ayers had more than five weeks to prepare affidavit material and, more importantly, he expressly advised at the outset of the argument that he was ready to proceed and to have the motion determined. IV. Analysis [ 27 ] CPCN argues that Mr. Ayers is not entitled to act for Eagle Eye for two main reasons: (

a) he cannot act as witness and counsel in the same proceeding, and (

b) he cannot act against CPCN because CPCN is his former client. In my view, both of these arguments are well founded. I propose to comment briefly on each of them. A. Acting as Witness and Counsel [ 28 ] The basic rules with respect to a lawyer acting as both witness and counsel are well-settled. Rule 5 of

Chapter IX of the Code of Professional Conduct adopted by the Law Society of Saskatchewan prohibits a lawyer from serving as counsel and witness, save and except for matters that are uncontroverted. Rule 5 states: 5. The lawyer who appears as an advocate should not submit the lawyer’s own affidavit to or testify before a tribunal save as permitted by local rule or practice, or as to purely formal or uncontroverted matters. … The lawyer who is a necessary witness should testify and entrust the conduct of the case to someone else.

Similarly, the lawyer who was a witness in the proceedings should not appear as advocate in any appeal from the decision in those proceedings. … [ 29 ] Civil Practice Directive No. 1 of this Court is intended to clarify the

interpretation and application of Rule 5. In relevant part, it reads as follows: 1. The Court interprets the Rule, as set forth in the Canadian Bar Association Code of Professional Conduct, always to proscribe a lawyer’s appearance except in three situations: (

a) where the Rules of Court (“local rules or practice”) expressly permit a lawyer’s appearance despite his or her submission of an affidavit; (

b) where the matter deposed to in the affidavit is purely a formal one; (

c) where the matter deposed to, although not a mere formality, is uncontroverted, that is, not in issue. [ 30 ] This appeal is grounded in Queen’s Bench Action Q.B.G. No. 452/2010 and, as indicated, it is grounded more particularly in a decision of Gabrielson J. issued on November 18, 2011. By virtue of Notices of Intention to Read Evidence Taken in Another Cause of Matter (October 14, 2011 and October 17, 2011), the following affidavits sworn by Mr. Ayers were before Gabrielson J.: (

a) Affidavit sworn September 27, 2010; (

b) Reply affidavit sworn December 20, 2010; (

c) Affidavit sworn April 8, 2010; (

d) Supplementary affidavit sworn April 8, 2010; (

e) Second supplementary affidavit sworn April 13, 2010; (

f) Third supplementary affidavit sworn April 14, 2010; (

g) Affidavit sworn October 3, 2011; (

h) Affidavit sworn May 18, 2011;

(

i) Supplementary affidavit sworn May 18, 2011; (

j) Affidavit sworn June 27, 2011; and (

k) Affidavit sworn July 14, 2011. [ 31 ] Many or all of these affidavits concern contentious issues. They can in no way be characterized as being limited to “purely formal or uncontroverted matters” as per Rule 5. As a result, it is absolutely clear that Mr. Ayers cannot appear as counsel on behalf of Eagle Eye in this appeal. [ 32 ] Nonetheless, and as explained above, Mr. Ayers contends that he should not be precluded from acting for Eagle Eye on the application to remove McDougall Gauley LLP as counsel for CPCN.

He takes this position because the affidavits he swore are not relied upon by Eagle Eye for purposes of its arguments on the application concerning McDougall Gauley LLP. [ 33 ] Mr. Ayers’s sense of Rule 5 is too restrictive. The reality here is that the application to remove McDougall Gauley LLP is no more than an aspect of the appeal proper. Mr. Ayers’s approach would mean that a lawyer could give evidence in a proceeding and then step in as counsel in connection with other discrete matters as the proceeding unfolds.

For example, a lawyer could testify concerning issues of substance lying at the heart of a trial but continue to be involved as counsel in relation to matters such as evidentiary rulings concerning the testimony of other witnesses, requests for adjournments and the like, i.e. any matter which did not directly engage his or her own evidence. This would be an unseemly result and it is not one contemplated by the Rule. B. Acting Against a Former Client [ 34 ] Lawyers are, of course, subject to restrictions in relation to their ability to act against clients and former clients. Rule 8 of

Chapter V of the Code of Professional Conduct provides as follows: 8. A lawyer who has acted for a client in a matter should not thereafter act against the client (or against persons who were involved in or associated with the client in that matter) in the same or any related matter, or take a position where the lawyer might be tempted or appear or to be tempted to breach the Rule relating to confidential information. It is not, however, improper for the lawyer to act against a former client in a fresh and independent matter wholly unrelated to any work the lawyer has previously done for that person. [ 35 ] Mr.

Ayers provided legal advice to CPCN from its inception. He was involved, as a lawyer, in the incorporation of the company, the company’s initial share offering and the raising of start up capital. He also supplied legal services with respect to various contracts. Indeed, as part of the original financing of the company, Mr. Ayers negotiated and executed the BDC loan which is the subject of this appeal. (The execution was as president of CPCN.) [ 36 ] Mr.

Ayers now proposes to argue an application aimed at depriving CPCN of its preferred counsel in the appeal of a decision concerning the very loan in relation to which, as I understand it, he provided legal services. This clearly puts him in conflict with the rules of professional conduct. He provided legal services to CPCN in respect of a matter, the BDC loan, and now he proposes to act against CPCN in a related matter, i.e. CPCN’s application to determine the amounts properly owing under the loan. I need not say more. C.

Costs [ 37 ] CPCN submits that a special award of costs is appropriate here because of the nature of Mr. Ayers’s conduct. I agree. [ 38 ] Gabrielson J., by way of an order made on April 9, 2010 in related litigation, held that, because of the affidavits he had filed, Mr. Ayers could not act as counsel for Black Dove. This should have made a point but apparently it did not. [ 39 ] Although Mr. Ayers did not argue the decision presently under appeal, he did take out the order in the Court of Queen’s Bench and he did file the notice of appeal in this Court on behalf of Eagle Eye.

He decided not to act as counsel (received “instructions to withdraw”) on the appeal proper only after CPCN brought an application to remove him and filed a substantial affidavit and a detailed brief of law. [ 40 ] Column 2 of the tariff provides for costs of $1,500 in relation to an opposed, complex motion. This self-evidently would not cover the actual expense sustained by CPCN in dealing with the problem posed by Mr. Ayers’s representation of Eagle Eye.

[ 41 ] In my view, $1,500 is not an adequate award in that, if Mr. Ayers had acted with reasonable regard to his obligations as a member of the Law Society, the application to remove him would not have been necessary. In the circumstances, an award of costs in the amount of $4,500 is appropriate as that would approximate CPCN’s actual out-of-pocket cost of dealing with this matter. It is appropriate that Eagle Eye be responsible for $1,500 of this total, the tariff amount. Mr. Ayers is personally responsible for the balance, i.e. $3,000. VI. Conclusion [ 42 ] CPCN’s application to remove Mr.

Ayers as counsel is granted. Eagle Eye shall forthwith pay CPCN costs in the amount of $1,500 and Mr. Ayers shall forthwith pay CPCN costs in the amount of $3,000. DATED at the City of Regina, in the Province of Saskatchewan, this 29th day of February, A.D. 2012. “Richards J.A.” Richards J.A.