3464920 Canada Inc. v. Strother et al., 2005 BCCA 35

• Judge: Newbury, Hall and Oppal, JJ.A.
• Court: Court of Appeal (British Columbia)
• Case Date: January 21, 2005
• Jurisdiction: British Columbia
• Citations: 2005 BCCA 35;(2005), 208 B.C.A.C. 39 (CA)

3464920 Can. v. Strother (2005), 208 B.C.A.C. 39 (CA);

    344 W.A.C. 39

MLB headnote and full text

Temp. Cite: [2005] B.C.A.C. TBEd. JA.045

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 Millenium 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 35)

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

British Columbia Court of Appeal

Newbury, Hall and Oppal, JJ.A.

January 21, 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 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.

Barristers and Solicitors - Topic 1502

Relationship with client - General - Lawyer as fiduciary - 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 (duty of loyalty) by not advising Monarch of the "exception" and secretly starting up and pursuing the tax shelter business in partnership with Darc - 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 Court of Appeal held that Strother was liable to account because of his breach of fiduciary duty (loyalty) - By entering into the agreement with Darc, Strother placed himself in a conflicting position of being unable to meet his duty of loyalty to Monarch - Strother, notwithstanding that his contractual duty to advise may have ended, still had a fiduciary duty to avoid a conflict of interest and to disclose any personal interest that might conflict with his duty of loyalty - Strother should have told Darc that he was unable to represent him - Once Strother accepted Darc's retainer, he should have ceased to act for both Darc and Monarch and alerted Monarch that his previous advice as to the amending legislation was possibly incorrect - See paragraphs 1 to 61.

Barristers and Solicitors - Topic 1545

Relationship with client - Duty to client - General - Obligation of loyalty - [See Barristers and Solicitors - Topic 1502 ].

Barristers and Solicitors - Topic 1548

Relationship with client - Duty to client - General - Fiduciary duty - [See Barristers and Solicitors - Topic 1502 ].

Barristers and Solicitors - Topic 1554

Relationship with client - Duty to client - General - Duty to inform or advise client - [See Barristers and Solicitors - Topic 1502 ].

Barristers and Solicitors - Topic 1609

Relationship with client - Conflict of interest - Resulting from lawyer's self-interest - [See Barristers and Solicitors - Topic 1502 ].

Equity - Topic 1006

Equitable relief - General - Accounting of profits - The British Columbia Court of Appeal stated that "the accounting remedy has often been used to redress and deter fiduciary wrongdoing in cases of 'secret profits' and in cases where the profits are all clearly attributable to a specific asset wrongly acquired by the fiduciary. Where, however, the profits of a business are in question and the efforts and resources of persons other than the wrongdoer have contributed to those profits, care must be taken to ensure that the remedy does not itself become an instrument of injustice. Courts of Equity have sounded notes of caution when they are asked to impose burdens on, or appropriate benefits from, investors or business partners who have little connection with the breach; and this is especially so where the plaintiff will be enriched by an accounting far beyond the profits he or she would have earned had the breach not occurred" - See paragraph 52.

Equity - Topic 1006

Equitable relief - General - Accounting of profits - [See Equity - Topic 3654 ].

Equity - Topic 3644

Fiduciary or confidential relationships - Breach of fiduciary relationship - Nondisclosure - Effect of - [See Barristers and Solicitors - Topic 1502 ].

Equity - Topic 3652

Fiduciary or confidential relationships - Breach of fiduciary relationship - Liability of third parties or accessories (incl. doctrines of knowing receipt or assistance) - A lawyer breached his fiduciary duty to a client by advising the client that it could not continue its tax shelter business because of legislative amendments and then, using an exception in the legislation (which he did not disclose to the client), secretly start up and pursue the same business with a former employee of the client while still owing the client a duty of loyalty - The employee did not pursue his tax shelter business until after he was dismissed - There was no contractual duty not to compete - The British Columbia Court of Appeal affirmed that the employee was not liable in his own right for breach of the statutory duty of loyalty, breach of confidentiality or for appropriating a maturing business opportunity - The employee created the opportunity after he left - Further, the employee was not liable for "participating" in the lawyer's breach of fiduciary duty because the requisite knowledge of the breach was not present - See paragraphs 62 to 82.

Equity - Topic 3654

Fiduciary or confidential relationships - Breach of fiduciary relationship - Remedies - A lawyer breached his fiduciary duty to a client by advising the client that it could not continue its tax shelter business because of legislative amendments and then, using an exception in the legislation (which he did not disclose to the client), secretly starting up and pursuing the same business with a former employee of the client while still owing the client a duty of loyalty - The British Columbia Court of Appeal held that the appropriate remedy was an accounting - The lawyer was ordered "to account for and disgorge all benefits, profits, interests and advantages he has received or which he may hereafter be entitled to receive, directly or indirectly, from or through any of the Sentinel Hill Entities" - See paragraphs 50 to 61.

Master and Servant - Topic 4204

Duties of servant - General - Duty not to compete with employer - [See Equity - Topic 3652 ].

Master and Servant - Topic 4302

Duties of servant - On termination - Confidentiality - [See Equity - Topic 3652 ].

Master and Servant - Topic 4305

Duties of servant - On termination - Competition in business - General - [See Equity - Topic 3652 ].

Cases Noticed:

Ramrakha et al. v. Zinner et al. (1994), 157 A.R. 279; 77 W.A.C. 279 (C.A.), refd to. [para. 6].

R. v. Neil (D.L.), [2002] 3 S.C.R. 631; 294 N.R. 201; 317 A.R. 73; 284 W.A.C. 73, refd to. [para. 7].

Webb Real Estate Ltd. and Antigonish Home Furnishing Ltd. v. McInnis, Meehan and Tramble, [1978] 2 S.C.R. 1357; 19 N.R. 632; 25 N.S.R.(2d) 272; 36 A.P.R. 272, refd to. [para. 16].

Smith v. McInnis - see Webb Real Estate Ltd. and Antigonish Home Furnishing Ltd. v. McInnis, Meehan and Tramble.

Housen v. Nickolaisen et al., [2002] 2 S.C.R. 235; 286 N.R. 1; 219 Sask.R. 1; 272 W.A.C. 1; 211 D.L.R.(4th) 577; 2002 SCC 33, refd to. [para. 16].

Ocean City Realty Ltd. v. A & M Holdings Ltd. (1987), 36 D.L.R.(4th) 94 (B.C.C.A.), refd to. [para. 18].

R. & L. Contracting Ltd. v. A. and B. et al. (1981), 28 B.C.L.R. 342 (C.A.), refd to. [para. 19].

Mouat v. Clark Boyce, [1993] 4 All E.R. 268 (P.C.), refd to. [para. 19].

Credit Lyonnais S.A. v. Russell Jones & Walker, [2003] Lloyd's Rep. PN 7 (Ch. D.), refd to. [para. 19].

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; [1994] 9 W.W.R. 609; 22 C.C.L.T.(2d) 1; 117 D.L.R.(4th) 161, refd to. [para. 21].

Midland Bank Trust Co. v. Hett, Stubbs & Kemp, [1978] 3 All E.R. 571 (Ch. D.), refd to. [para. 23].

Allison v. Clayhills, [1907] All E.R. Rep. 500; 97 L.T. 709 (Ch. D.), refd to. [para. 24].

McMaster v. Byrne, [1952] 1 All E.R. 1362 (P.C.), refd to. [para. 24].

Korz v. St. Pierre, Woods and Martin (1987), 23 O.A.C. 226; 43 D.L.R.(4th) 528 (C.A.), refd to. [para. 24].

Spector v. Ageda, [1971] 3 All E.R. 417 (Ch. D.), refd to. [para. 25].

Moody v. Cox and Hatt, [1917] 2 Ch. 71, refd to. [para. 25].

Keech v. Sandford, [1726] Sel Cas. T. King 61; 25 E.R. 223 (Ch.), refd to. [para. 25].

Henfrey & Co. v. Law Firm (1983), 149 D.L.R.(3d) 736 (B.C.S.C.), refd to. [para. 26].

Bray v. Ford, [1896] A.C. 44 (H.L.), refd to. [para. 27].

Warman International Ltd. v. Dwyer (1995), 128 A.L.R. 201 (Aust. H.C.), refd to. [para. 46].

Canson Enterprises Ltd. et al. v. Boughton & Co. et al., [1991] 3 S.C.R. 534; 131 N.R. 321; 6 B.C.A.C. 1; 13 W.A.C. 1; 85 D.L.R.(4th) 129; [1992] 1 W.W.R. 245; 61 B.C.L.R.(2d) 1, refd to. [para. 46].

Parker v. McKenna (1874), L.R. 10 Ch. App. 96, refd to. [para. 47].

Regal (Hastings) Ltd. v. Gulliver, [1942] 1 All E.R. 378 (H.L.), refd to. [para. 47].

Boardman v. Phipps, [1966] 3 All E.R. 721 (H.L.), refd to. [para. 47].

Industrial Development Consultants Ltd. v. Cooley, [1972] 1 W.L.R. 443 (Aust. H.C.), refd to. [para. 47].

Brickenden v. London Loan & Savings Co., [1934] 3 D.L.R. 465 (P.C.), refd to. [para. 47].

Canadian Aero Service Ltd. v. O'Malley et al., [1974] S.C.R. 592, refd to. [para. 48].

Abbey Glen Property Corp. v. Stumborg, Stumborg and Gem Holdings Ltd. (1975), 65 D.L.R.(3d) 235 (Alta. T.D.), affd. (1978), 9 A.R. 234; 85 D.L.R.(3d) 35 (C.A.), refd to. [para. 48].

Chan v. Zacharia (1984), 154 C.L.R. 178 (Aust. H.C.), refd to. [para. 48].

Jacks v. Davis (1982), 141 D.L.R.(3d) 355; 39 B.C.L.R. 353 (C.A.), refd to. [para. 48].

Capacious Investments Ltd. v. Tang, [1996] 1 A.C. 514; 192 N.R. 138 (P.C.), refd to. [para. 50].

Nocton v. Lord Ashburton, [1914] A.C. 932 (H.L.), refd to. [para. 51].

Coomber, Re; Coomber v. Coomber, [1911] 1 Ch. 723 (C.A.), refd to. [para. 52].

Jarvis, Re, [1958] 1 W.L.R. 815 (Ch. D.), refd to. [para. 52].

Soulos v. Korkontzilas et al., [1997] 2 S.C.R. 217; 212 N.R. 1; 100 O.A.C. 241; 146 D.L.R.(4th) 214, refd to. [para. 61].

Peoples Department Stores Inc. (Bankrupt) v. Wise (2004), 326 N.R. 267; 244 D.L.R.(4th) 564; 2004 SCC 68, refd to. [para. 64].

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; 2003 SCC 51, refd to. [para. 64].

International Corona Resources Ltd. v. LAC Minerals Ltd., [1989] 2 S.C.R. 574; 101 N.R. 239; 36 O.A.C. 57; 61 D.L.R.(4th) 14; 35 E.T.R. 1; 44 B.L.R. 1, refd to. [para. 64].

57134 Manitoba Ltd. v. Palmer, Smith Paper Ltd. and Classic Packaging Corp. (1989), 37 B.C.L.R.(2d) 50 (C.A.), refd to. [para. 67].

Coco v. Clark (A.N.) (Engineers) Ltd., [1969] R.P.C. 41 (Ch. D.), refd to. [para. 69].

Ridgewood Resources Ltd. v. Henuset (1982), 35 A.R. 493; 18 Alta. L.R.(2d) 68 (C.A.), leave to appeal refused (1982), 43 N.R. 90; 36 A.R. 450 (S.C.C.), refd to. [para. 69].

ERSS Equity Retirement Savings Systems Corp. et al. v. Canadian Imperial Bank of Commerce, [2002] B.C.T.C. 1462; 8 B.C.L.R.(4th) 340 (S.C.), refd to. [para. 69].

Alberts (Edgar T.) Ltd. v. Mountjoy (1977), 16 O.R.(2d) 682; 79 D.L.R.(3d) 108 (H.C.), refd to. [para. 70].

Barnes v. Addy (1874), L.R. 9 Ch. App. 244, refd to. [para. 75].

Selangor United Rubber Estates Ltd. v. Cradock (No. 3), [1968] 2 All E.R. 1073 (Ch. D.), refd to. [para. 75].

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; 108 D.L.R.(4th) 592; 50 E.T.R. 225, refd to. [para. 76].

Carl-Zeiss-Stiftung v. Smith (Herbert) & Co. (No. 2), [1969] 2 All E.R. 367 (C.A.), refd to. [para. 76].

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. 77].

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; 152 D.L.R.(4th) 411, refd to. [para. 78].

El Ajou v. Dollar Land Holdings plc, [1993] 3 All E.R. 717 (Ch. D.), refd to. [para. 78].

MacMillan Bloedel v. Binstead (1983), 22 B.L.R. 255 (S.C.), refd to. [para. 78].

Canada Safeway v. Thompson, [1951] 3 D.L.R. 295 (B.C.S.C.), refd to. [para. 78].

R. v. Canadian Dredge & Dock Co., Marine Industries Ltd., Porter (J.P.) Co. and Richilieu Dredging Corp., [1985] 1 S.C.R. 662; 59 N.R. 241; 9 O.A.C. 321, refd to. [para. 83].

Baillie et al. v. Charman et al. (Supplementary Reasons) (1993), 22 B.C.A.C. 81; 38 W.A.C. 81; 107 D.L.R.(4th) 577 (C.A.), refd to. [para. 84].

Dubai Aluminium Co. v. Salaam, [2003] 1 All E.R. 97 (H.L.), refd to. [para. 93].

Statutes Noticed:

Canada Business Corporations Act, R.S.C. 1985, c. C-44, sect. 122(1)(a) [para. 64].

Authors and Works Noticed:

Birks, Peter B.H., An Introduction to the Law of Restitution (1985), generally [para. 48].

Finn, Paul D., The Liability of Third Parties for Knowing Receipt or Assistance, in Waters, Donovan W.M., Equity, Fiduciaries and Trusts (1993), pp. 214 to 217 [para. 78].

Goff, Robert, and Jones, Gareth, The Law of Restitution (6th Ed. 2002), § 33-027 to 33-033 [para. 78].

Lindley and Banks, R.C.P., The Law of Partnership (18th Ed. 2002), pp. 334 to 342 [para. 90].

Loughlan, P.L., Liability for Assistance in a Breach of Fiduciary Duty (1989), 9 Oxford J. Legal Stud. 260, p. 265 [para. 59].

McCamus, J.D., Remedies for Breach of Fiduciary Duty, Special Lectures of the Law Society of Upper Canada (1990), p. 60 [para. 48].

McGuinness, Kevin Patrick, The Law and Practice of Canadian Business Corporations (1999), pp. 745, 746 [para. 27].

Ong, Denis, Breach of Fiduciary Duty: The Alternative Remedies (1999), 11 Bond L. Rev. 336, p. 346 [para. 50].

Waters, Donovan W.M., Equity, Fiduciaries and Trusts (1993), pp. 214 to 217 [para. 78].

Waters, Donovan W.M., The Law of Trusts in Canada (2nd Ed. 1984), pp. 409, 410 [para. 78].

Counsel:

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

G.K. Macintosh, Q.C., J.K. McEwan, 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 E.A. Poyner, for the respondent, Davis & Company;

W.S. Berardino, Q.C., D.C. Harris, Q.C., and 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 Millenium Limited Partnership, Sentinel Hill Productions III Corp., Sentinel Hill Alliance Atlantis Equicap Ltd. Partnership and Sentinel Hill GP Corp.).

This appeal was heard on November 15-18, 2004, at Vancouver, B.C., before Newbury, Hall and Oppal, JJ.A., of the British Columbia Court of Appeal.

On January 21, 2005, Newbury, J.A., delivered the following judgment for the Court of Appeal.