3464920 Canada Inc. v. Strother et al., 2005 BCCA 385

• Judge: Newbury, Hall and Levine, JJ.A.
• Court: Court of Appeal (British Columbia)
• Case Date: July 25, 2005
• Jurisdiction: British Columbia
• Citations: 2005 BCCA 385;(2005), 215 B.C.A.C. 9 (CA);2005 BCCA 384

3464920 Can. v. Strother (2005), 215 B.C.A.C. 9 (CA);

    355 W.A.C. 9

MLB headnote and full text

Temp. Cite: [2005] B.C.A.C. TBEd. AU.002

3464920 Canada Inc. (formerly known as Monarch Entertainment Corporation) (appellant/plaintiff) v. Robert C. Strother, Davis & Company, a partnership, J. Paul Darc, Pacific Cascadia Capital Corporation, Sentinel Hill Entertainment Corporation, Sentinel Hill Productions Corporation, Sentinel Hill Productions II Corporation, Sentinel Hill Productions (1999) Corporation, Sentinel Hill Management Corporation, Sentinel Hill 1999-1 Master Limited Partnership, Sentinel Hill 1999-2 Master Limited Partnership, Sentinel Hill 1999-3 Master Limited Partnership, Sentinel Hill 1999-4 Master Limited Partnership, Sentinel Hill 1999-5 Master Limited Partnership, Sentinel Hill 1999-6 Master Limited Partnership, J. Paul Darc and Leslie Marie Darc, Trustees of the Darc Family Trust, and the said Darc Family Trust, Sentinel Hill 1998 Master Limited Partnership, Sentinel Hill 1998-2 Master Limited Partnership, Sentinel Hill Productions No. 5 Limited Partnership, Sentinel Hill Productions No. 7 Limited Partnership, Sentinel Hill 1999 Master Limited Partnership, Sentinel Hill Ventures Corporation, Sentinel Hill Alliance Atlantis Equicap Millennium Limited Partnership, Sentinel Hill Productions III Corporation, Sentinel Hill Alliance Atlantis Equicap Limited Partnership, Sentinel Hill GP Corporation, Company No. 1, Company No. 2, Company No. 3, Company No. 4, Company No. 5, Company No. 6, Company No. 7, Company No. 8, Company No. 9, Company No. 10, 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, 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, Trust No. 10 (respondents/defendants)

(CA030145; 2005 BCCA 384; 2005 BCCA 385)

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

British Columbia Court of Appeal

Newbury, Hall and Levine, JJ.A.

July 25, 2005.

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 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 firm was also liable to account for and disgorge the profit from fees earned from Sentinel Hill, after January 1, 1998. The firm was not jointly and severally liable for the profits Strother earned from Sentinel Hill. The firm was not a joint wrongdoer and did not provide "knowing assistance" to Strother's wrongdoing. The firm had no knowledge of Strother's interest in Sentinel Hill, nor were they wilfully blind or reckless. The court, in supplementary reasons reported at paragraphs 70 to 74 below, resolved a dispute as to the form of the order for judgment.

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 British Columbia Court of Appeal held that the law firm was not jointly and severally liable for all of the profits and benefits Strother received from Sentinel and was ordered to disgorge - The firm was unaware that they were assisting Strother's breach of fiduciary duty and received no direct benefit - The firm did not knowingly authorize his misconduct, nor was it reckless or wilfully blind - Strother's misconduct did not take place "in the ordinary course of the business of the firm or with the authority of his ... partners" (Partnership Act, s. 12) - However, the firm was liable, in agency, to account for and disgorge the profit it earned on fees paid by Sentinel to the firm since January 1, 1998 (when conflict arose) - The firm was also liable to repay all fees received from Monarch since January 1, 1998 - See paragraphs 1 to 56.

Equity - Topic 3652

Fiduciary or confidential relationships - Breach of fiduciary relationship - Liability of third parties or accessories (incl. doctrines of knowing receipt or assistance) - [See Equity - Topic 1006 ].

Partnership - Topic 3104

Relations between partners and third parties - Liability of firm for acts of partner - For partner's breach of fiduciary duty - [See Equity - Topic 1006 ].

Cases Noticed:

Zwicker v. Stanbury, [1953] 2 S.C.R. 438, refd to. [para. 4].

Westdeutsche Landesbank Girozentrale v. London Borough of Islington, [1996] A.C. 669; 198 N.R. 241 (H.L.), refd to. [para. 4].

Bhullar v. Bhullar, [2003] E.W.J. No. 1690 (C.A.), refd to. [para. 16].

Ship Koursk, Re, [1924] P. 140 (C.A.), refd to. [para. 18].

Osborne et al. v. Pavlick et al. (2000), 134 B.C.A.C. 311; 219 W.A.C. 311; 74 B.C.L.R.(3d) 311 (C.A.), refd to. [para. 18].

Liquidators of the Imperial Mercantile Credit Association v. Coleman and Knight, [1873] 6 L.R. 189 (H.L.), refd to. [para. 19].

CMS Dolphin Ltd. v. Simonet, [2001] 2 B.C.L.C. 704 (Ch. D.), refd to. [para. 20].

Canadian Aero Service Ltd. v. O'Malley, [1974] S.C.R. 592, refd to. [para. 21].

Barnes v. Addy (1874), 9 Ch. App. 244, refd to. [para. 24].

Royal Brunei Airlines Sdn. Bhd. v. Tan, [1995] 3 All E.R. 97; 185 N.R. 136 (P.C.), refd to. [para. 24].

Twinsectra Ltd. v. Yardley et al., [2002] 2 All E.R. 377; 287 N.R. 33 (H.L.), refd to. [para. 24].

Jyske Bank (Gibraltar) Ltd. v. Spjeldnaes, [1999] E.W.J. No. 4996 (C.A.), refd to. [para. 24].

Walker v. Stones, [2000] 4 All E.R. 412 (C.A.), refd to. [para. 24].

Grupo Torras S.A. v. Al-Sabah, [2000] E.W.J. No. 5884 (C.A.), refd to. [para. 24].

Air Canada v. M & L Travel Ltd., Martin and Valliant, [1993] 3 S.C.R. 787; 159 N.R. 1; 67 O.A.C. 1, refd to. [para. 25].

Citadel General Life Assurance Co. et al. v. Lloyd's Bank of Canada et al., [1997] 3 S.C.R. 805; 219 N.R. 323; 206 A.R. 321; 156 W.A.C. 321, refd to. [para. 25].

MacMillan Bloedel Ltd. v. Binstead (1983), 22 B.L.R. 255 (B.C.S.C.), refd to. [para. 26].

Canson Enterprises Ltd. et al. v. Boughton & Co. et al. (1995), 63 B.C.A.C. 209; 104 W.A.C. 209; 11 B.C.L.R.(3d) 262 (C.A.), refd to. [para. 27].

Lloyd v. Grace, Smith & Co., [1912] A.C. 716 (H.L.), refd to. [para. 36].

Lockhart v. Canadian Pacific Railway Co., [1941] S.C.R. 278, refd to. [para. 36].

P.A.B. v. Children's Foundation et al., [1999] 2 S.C.R. 534; 241 N.R. 266; 124 B.C.A.C. 119; 203 W.A.C. 119, refd to. [para. 36].

Bazley v. Curry - see P.A.B. v. Children's Foundation et al.

G.T.-J. et al. v. Griffiths et al., [1999] 2 S.C.R. 570; 241 N.R. 201; 124 B.C.A.C. 161; 203 W.A.C. 161, refd to. [para. 36].

Polkinghorne v. Holland (1934), 51 C.L.R. 143 (Aust. H.C.), refd to. [para. 38].

Dubai Aluminium Co. v. Salaam, [2003] 1 All E.R. 97 (H.L.), refd to. [para. 39].

Hamlyn v. Houston (John) & Co., [1903] 1 K.B. 81 (C.A.), refd to. [para. 40].

Amphlett v. Blaylock (1910), 13 W.L.R. 515 (Alta. Q.B.), refd to. [para. 43].

K.L.B. et al. v. British Columbia et al., [2003] 2 S.C.R. 403; 309 N.R. 306; 187 B.C.A.C. 42; 307 W.A.C. 42, refd to. [para. 46].

Blackwater et al. v. Plint et al. (2003), 192 B.C.A.C. 1; 315 W.A.C. 1; 235 D.L.R.(4th) 60; 2003 BCCA 671, refd to. [para. 47].

Phipps v. Boardman, [1965] 1 All E.R. 849 (C.A.), refd to. [para. 48].

Hodgkinson v. Simms et al., [1994] 3 S.C.R. 377; 171 N.R. 245; 49 B.C.A.C. 1; 80 W.A.C. 1, refd to. [para. 48].

Item Software (UK) Ltd. v. Fassihi et al., [2004] E.W.C.A. Civ. 1244, refd to. [para. 48].

Québec (Commission des Relations de Travail) v. Cimon Ltée, [1971] S.C.R. 981, dist. [para. 49].

Cunningham Drug Stores Ltd. v. Labour Relations Board (B.C.), [1973] S.C.R. 256, dist. [para. 49].

Hilton v. Barker Booth and Eastwood, [2005] 1 All E.R. 651; 330 N.R. 317 (H.L.), refd to. [para. 56].

Statutes Noticed:

Partnership Act, R.S.B.C. 1996, c. 348, sect. 12, sect. 14 [para. 33].

Authors and Works Noticed:

Waters, Donovan W.M., The Law of Trusts in Canada (3rd Ed. 2005), p. 494 [para. 25].

Counsel:

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

G.K. Macintosh, Q.C., and L.A. Warren, for the respondents, Robert C. Strother, J. Paul Darc and for the companies known as the "Pre-1999 Sentinel Entities" (Pacific Cascadia Capital Corp., Sentinel Hill Entertainment Corp., Sentinel Hill Productions Corp., Sentinel Hill Productions II Corp., Sentinel Hill Management Corp., J. Paul Darc and Leslie Darc, Trustees of the Darc Family Trust, and the said Darc Family Trust, Company No. 1, Company No. 2, Company No. 3, Company No. 4 and Trust No. 1);

I.G. Nathanson, Q.C., A.A. Thompson and G.B. Gomery, for the respondent, Davis & Co.;

A.N. MacKay, for the respondents known as the "New Sentinel Hill Entities" (Sentinel Hill Productions (1999) Corp., Sentinel Hill Master Limited Partnerships, Sentinel Hill Productions Limited Partnerships, Sentinel Hill Alliance Atlantis Equicap Millennium Limited Partnership, Sentinel Hill Productions III Corp., Sentinel Hill Alliance Atlantis Equicap Ltd. Partnership and Sentinel Hill GP Corp.).

This appeal was heard on May 25-26, 2005, at Vancouver, B.C., before Newbury, Hall and Levine, JJ.A., of the British Columbia Court of Appeal.

Newbury, J.A., delivered the following judgment and supplementary reasons for judgment for the Court on July 25, 2005.