3464920 Canada Inc. v. Strother et al., (2010) 289 B.C.A.C. 268 (CA)

• Judge: Frankel, Tysoe and Garson, JJ.A.
• Court: Court of Appeal (British Columbia)
• Case Date: June 28, 2010
• Jurisdiction: British Columbia
• Citations: (2010), 289 B.C.A.C. 268 (CA);2010 BCCA 328

3464920 Can. v. Strother (2010), 289 B.C.A.C. 268 (CA);

    489 W.A.C. 268

MLB headnote and full text

Temp. Cite: [2010] B.C.A.C. TBEd. JN.088

3464920 Canada Inc. (formerly known as Monarch Entertainment Corporation) (appellant/respondent on cross-appeal/plaintiff) v. Robert C. Strother (respondent/appellant on cross-appeal/defendant) and Davis & Company, a partnership, University Hill Holdings Inc. (formerly known as 589918 British Columbia Ltd.) (Company No. 1), Partnership No. 1, Partnership No. 2, Partnership No. 3, Partnership No. 4, Partnership No. 5, Partnership No. 6, Partnership No. 7, Partnership No. 8, Partnership No. 9, Partnership No. 10, Strother Family Trust (Trust No. 1), Trust No. 2, Trust No. 3, Trust No. 4, Trust No. 5, Trust No. 6, Trust No. 7, Trust No. 8, Trust No. 9 and Trust No. 10 (respondents/defendants)

(CA037587; 2010 BCCA 328)

Indexed As: 3464920 Canada Inc. v. Strother et al.

British Columbia Court of Appeal

Frankel, Tysoe and Garson, JJ.A.

June 28, 2010.

Summary:

Monarch promoted tax-sheltered investments in film production. Strother, a partner in the Davis law firm, was Monarch's tax lawyer. Darc was Monarch's chief financial officer. Amendments to the Income Tax Act eliminated the tax shelter as of October 1997. Strother advised Monarch that he had no technical fix and, even if he did, he did not believe an advance tax ruling could be obtained from Revenue Canada. Darc was dismissed as of October 1997. In March 1998, Strother, acting on instructions from Darc, sought, and subsequently obtained, an advance tax ruling permitting a new tax shelter based on an exception in the amending legislation. The previous tax shelters were effectively resurrected until eliminated in 2001. Both Darc and Strother, who resigned from his law firm in 1999 and became a 50% shareholder in Darc's promotion company (Sentinel Hill), took steps to keep the "exception" secret until they obtained the favourable tax ruling, then profited from the promotion of the tax shelters. When Monarch learned of the advance ruling, it terminated its relationship with the Davis firm and sued, inter alia, Strother, Darc and the Davis firm. Monarch claimed that Strother breached his duty to it by advising Monarch that it could not continue in business due to tax law changes and then, using the "exception" which was not disclosed to Monarch, secretly starting up and pursuing the same tax shelter business in partnership with Monarch's former employee. Strother submitted that his retainer with Monarch ended before he began to act for Darc and that he was under no continuing duty to disclose a new initiative developed by he and Darc to revive such tax shelters.

The British Columbia Supreme Court, in a judgment reported [2002] B.C.T.C. 1179, dismissed Monarch's action for an accounting for the profits derived from the tax shelter. Monarch failed to establish a breach of any fiduciary or contractual duty in failing to advise Monarch of the exception. Monarch appealed.

The British Columbia Court of Appeal, in a judgment reported (2005), 208 B.C.A.C. 39; 344 W.A.C. 39, allowed the appeal in part. Strother was liable for breach of fiduciary duty to account for and disgorge all benefits, profits, interests, etc., he received or was subsequently entitled to receive. A constructive trust was imposed. The dismissal of the claim against Darc and the Sentinel Hill companies was affirmed. The court stated that without resolving certain issues, which were never dealt with, it was unable to determine whether the law firm was also liable. The court directed further argument on those, and other, issues.

The British Columbia Court of Appeal, in a judgment reported (2005), 215 B.C.A.C. 9; 355 W.A.C. 9, held that the law firm was liable to repay all fees paid by Monarch since January 1, 1998, the time when the conflict of interest arose. The law firm was also liable to account for and disgorge the profit from fees earned from Sentinel Hill, after January 1, 1998. The law firm was not jointly and severally liable for the profits Strother earned from Sentinel Hill. The law firm was not a joint wrongdoer and did not provide "knowing assistance" to Strother's wrongdoing. The law firm had no knowledge of Strother's interest in Sentinel Hill, nor were they wilfully blind or reckless. The court, in supplementary reasons, resolved a dispute as to the form of the order for judgment. Strother and the law firm appealed. Monarch cross-appealed.

The Supreme Court of Canada, McLachlin, C.J.C., Bastarache, LeBel and Abella, JJ., dissenting in part, in a judgment reported (2007), 363 N.R. 123; 241 B.C.A.C. 108; 399 W.A.C. 108, allowed both appeals in part and dismissed the cross-appeal. Strother was liable for breach of fiduciary duty by putting himself in a position of conflict between his duty to Monarch and his personal financial interest. The law firm, as an innocent party in Strother's misconduct, was not directly liable for breach of fiduciary duty, but was vicariously liable under s. 12 of the Partnership Act. The court reduced the amount of compensation awarded against Strother as excessive. Strother was liable to account to Monarch for the personal profit gained directly from the Sentinel group and indirectly through his earnings as a law firm partner on account of billings to Monarch, but only for the period of January 1, 1998, to March 31, 1999. Such amount was to be determined by a reference. The law firm was vicariously liable for the same amount. McLachlin, C.J.C., opined that "the Court of Appeal erred in holding that Strother's duty to Monarch extended beyond the terms of the 1998 retainer agreement with Monarch, grounding an ongoing duty to advise Monarch of any developments in the film production tax shelter business".

The British Columbia Supreme Court, in two judgments ([2009] B.C.T.C. Uned. 1286 and [2009] B.C.T.C. Uned. 1740) assessed Strother's liability for profits at $1,017,618 and granted judgment to Monarch for that amount, plus pre-judgment interest. The law firm was vicariously liable for the same amount. The remaining defendants, related to Strother, were not liable. Each party was ordered to pay their own costs of the accounting. Monarch appealed respecting the assessment of profits, the failure to find the related defendants liable and the costs award. Strother cross-appealed respecting the assessment of profits (particularly income tax respecting those profits) and the award of pre-judgment interest.

The British Columbia Court of Appeal dismissed both the appeal and the cross-appeal.

Equity - Topic 1006

Equitable relief - General - Accounting of profits - Monarch promoted tax-sheltered investments - Strother, a partner in the Davis law firm, was Monarch's tax lawyer - Darc was Monarch's chief financial officer - Legislative amendments eliminated the tax shelter as of October 1997 - Strother advised Monarch that he had no technical fix and, even if he did, he did not believe an advance tax ruling could be obtained from Revenue Canada - Darc was dismissed as of October 1997 - In March 1998, Strother, acting on instructions from Darc, sought, and subsequently obtained, an advance tax ruling approving a tax shelter based on an exception in the amending legislation - The previous tax shelters were effectively resurrected until eliminated in 2001 - Both Darc and Strother, who resigned from his law firm in 1999 and became a 50% shareholder in Darc's promotion company (Sentinel Hill), kept the "exception" secret until they obtained a favourable tax ruling - When Monarch learned of the advance ruling, it terminated its relationship with the Davis firm and sued Strother for breaching his fiduciary duty - Strother was found liable to account for breach of fiduciary duty - The Supreme Court of Canada held that "to the extent Strother personally made a profit under the Davis firm allocation process attributable to hours docketed to Monarch's account, or to fees paid to the firm by Monarch, such profit (earned at a time when Strother was in a position of conflict, and derelict in his duty to Monarch) should form part of Strother's accounting to Monarch." - Legal fees paid by Monarch to the law firm after Strother left the firm were not the result of any breach of fiduciary duty and therefore need not be accounted for - Strother had to account for the profit earned from the personal financial opportunity he pursued in breach of his fiduciary duty, but only from January 1, 1998, to March 31, 1999, by which time Monarch and Strother had severed their links with the law firm and the "conflict was spent" - Given that the remedy was prophylactic rather than restitutionary, this was not an appropriate case for apportionment - Finally, Strother was entitled to a deduction for his reasonable and necessary expenses incurred in earning the profit to be disgorged - The reference judge assessed profits for the stated time period using generally accepted accounting principles, rejecting Monarch's argument that profits also included profits earned after March 31, 1999, but for work attributable prior to March 31, 1999 - The judge also rejected Strother's claimed deduction of $559,000 for income tax on the $1,050,617 assessed profit, finding that it was not normally regarded as an expense to earn profit and there was no evidence that Strother paid any income tax on the profit - The British Columbia Court of Appeal affirmed the profit assessment - The court also affirmed Monarch's entitlement to pre-judgment interest, as Strother had use of the money for over 10 years and the failure to order pre-judgment interest would defeat the full prophylactic purpose of the judgment.

Equity - Topic 3654

Fiduciary or confidential relationships - Breach of fiduciary relationship - Remedies - [See Equity - Topic 1006 ].

Interest - Topic 5401

Interest as damages (pre-judgment interest) - Breach of fiduciary relationships - General - [See Equity - Topic 1006 ].

Cases Noticed:

MacMillan Bloedel Ltd. v. Binstead (1983), 22 B.L.R. 255 (B.C.S.C.), refd to. [para. 22].

Canadian Pacific Railway Co. v. Blain (1905), 36 S.C.R. 159, refd to. [para. 27].

Quebec, Jacques-Cartier Electric Co. v. R. (1915), 51 S.C.R. 594; 24 D.L.R. 424, refd to. [para. 27].

Whittall v. Canada (Minister of National Revenue), [1965] 1 Ex. C.R. 342, affd. [1968] S.C.R. 413, refd to. [para. 50].

Huff v. Price (1990), 76 D.L.R.(4th) 138; 51 B.C.L.R.(2d) 282 (C.A.), refd to. [para. 54].

J.L.V.M. v. P.H. (1998), 109 B.C.A.C. 165; 177 W.A.C. 165 (C.A.), refd to. [para. 54].

Counsel:

R.D. Holmes and L.J. Muir, for the appellant;

P.A. Gall, Q.C., and R.W. Grant, for the respondents, Robert C. Strother, University Hill Holdings Inc. and Strother Family Trust;

G.G. Hilliker, Q.C., for the respondent, Davis & Co.

This appeal and cross-appeal were heard on May 27, 2010, at Vancouver, B.C., before Frankel, Tysoe and Garson, JJ.A., of the British Columbia Court of Appeal.

On June 28, 2010, Tysoe, J.A., delivered the following judgment for the Court of Appeal.