Enterprise Cape Breton Corporation v. Crown Jewel Resort Ranch, Inc.

Enterprise Cape Breton Corporation v. Crown Jewel Resort Ranch, Inc. Court Supreme Court Date 2014-03-28 Citation 2014 NSSC 105 Docket Syd 423486 Judge/Registrar/Adjudicator Edwards, Frank C. (Honourable Justice) Document Type Decision Decision Content Supreme Court of Nova Scotia Citation: Enterprise Cape Breton Corporation v. Crown Jewel Resort Ranch, Inc. 2014 NSSC 105 Date: 20140321 Docket: SYDJC No. 423486 Registry: Sydney Between: Enterprise Cape Breton Corporation, a body corporate, incorporated pursuant to the Enterprise Cape Breton Corporation Act, enacted as Part II to the Government Organization Act, Atlantic Canada, 1987, R.S., 1985, c. 41 (4th Supp.) (“ECBC”) Applicant v. Crown Jewel Resort Ranch, Inc., a body corporate Incorporated under the laws of Nova Scotia (“Crown Jewel”) And I.N.K. Real Estate Inc., a body corporate incorporated Under the laws of Nova Scotia (“I.N.K.”) Together the Respondents DECISION ON CONFLICT MOTION Judge: The Honourable Justice Frank C. Edwards Heard: March 5, 2014, in Sydney, Nova Scotia Written Decision March 28, 2014 Counsel: Robert Risk, for the Applicant Nahman Korem, for the Respondent Companies By the Court: [1] Introduction: The Respondent has brought a Motion seeking an order to remove the firm of Sampson MacDougall from representing ECBC due to conflict of interest. The Applicant, ECBC, had made an Application to have a Receiver appointed for the Respondent Companies. The Application had been filed with this Court on January 16, 2014 and was set to be heard on February 3, 2014. It was on the latter date that the Respondents’ owner/representative, Nahman Korem, (Korem) first gave notice of his intention to bring the conflict motion. [2] Background: The Respondent Companies (RC’s) were incorporated in 2002. The law firm used at the time was Stewart McKelvey. Between 2002 and 2005, the principals of the RC’s decided to seek from ECBC the financing necessary to develop a tourist resort near Baddeck, N.S.. The principals were Nahman Korem and his wife, Iris Kedmi (Kedmi). The RC’s retained Mr. Patrick Murray, Q.C. (as he then was) to place the required ECBC security interests against the assets of the Companies. Sampson MacDougall (SM) represented ECBC. [3] In January, 2008, Korem transferred the RC’s files to SM (care of James Gogan). [4] Between 2010 and December, 2012 Korem and Kedmi were embroiled in protracted divorce proceedings. Throughout these proceedings, Korem was represented in his personal capacity by SM (Ms. McCarthy). [5] In October, 2011 Mr. Gogan left SM. On November 4, 2011 Korem transferred the RC’s files to Mr. Gogan’s new law firm, The Breton Law Group. [6] In March, 2012 Korem retained Robert Sampson, Q.C. of SM to effect a name change to another company owned by him, Crown Jewel Aviation Inc.. The new name was Crown Jewel Resources Inc.. This corporate entity owes no obligation to ECBC and is unrelated to the Receivership Application. [7] On May 14, 2012, Korem changed the recognized agent of INK from Robert Sampson to himself. [8] In January of 2013, Korem met with Robert Sampson regarding the possible restructuring of his companies and transferring certain assets. No changes were made as a result of this meeting. In any event, Korem would have been aware that any changes he had decided to make to the corporate structure of the RC’s, or any transfer of assets subject to existing ECBC security interests, would have to have been disclosed to ECBC. There is therefore nothing confidential vis a vis ECBC about the January 2013 meeting with Robert Sampson. SM has not provided Korem with any legal advice since January, 2013. [9] Mr. Robert Risk, counsel for ECBC in the receivership application, represented Korem in one domestic matter at the onset of the divorce proceeding in September, 2010. Kedmi had apparently applied for an emergency protection order and Risk was the available SM lawyer on that particular day. [10] The divorce proceedings ended with the dismissal of Kedmi’s appeal by the N.S. Court of Appeal in December, 2012. [11] On or about May of 2011, ECBC was concerned about the operations of the RC’s because of the divorce proceedings. ECBC thus requested Korem and Kedmi to attend a meeting with their legal counsel. ECBC continued to be represented by SM with no objection from Korem. [12] During one of the Family Division hearings, Mr. Lane of ECBC testified about ECBC’s position re the RC’s. Lane attended Court with Risk of SM as ECBC’s legal counsel. [13] Lane states in paragraph 13 of his affidavit that Korem voluntarily and regularly provided ECBC “with detailed and extensive updates with respect to the on-going court proceedings.” [14] In November of 2013, ECBC met with Korem to discuss the RC’s intentions regarding repayment of the indebtedness owed to ECBC. Korem requested Mr. Gogan to attend but Gogan was unavailable. Risk was present as ECBC’s counsel. Korem did not object. It was at this November 2013 meeting that Korem claims he first became aware of ECBC’s intention to make a receivership application regarding the RC’s. [15] I note that ECBC had served Korem with Notices of Intention to Enforce Securities re both RC’s on October 24, 2013. Korem would therefore have known by October 24, 2013 that legal action by ECBC was imminent and that SM would be representing ECBC. [16] Findings: In view of the foregoing, I am satisfied that Korem was fully aware of, and implicitly consented to, ECBC’s legal representation by SM. That awareness would have begun as early as 2005 when his then lawyer, Mr. Murray, dealt with SM as counsel for ECBC. It is important to emphasize that SM did not act for Korem or the RC’s when the securities in question in the Receivership Application were executed. [17] Korem’s implicit consent to SM acting for both the RC’s and ECBC would have begun in January, 2008 when Korem appointed Gogan of SM as recognized agent for the RC’s. Korem also had no problem with SM representing him personally and ECBC as well during the divorce proceedings between September 2010 and December 2012. [18] I am satisfied that Korem and the RC’s ceased to be clients of SM as of January, 2013. Neither the RC’s nor Korem was therefore a client of SM when ECBC gave Notice of Intention to Enforce its security in October, 2013. [19] I am further satisfied that Korem had no difficulty with SM’s representation of ECBC throughout the fall of 2013 up to and including the initiation of the Receivership Application on January 16, 2014. It was only on the morning of February 3, 2014 (when the Receivership Application was to be heard) that Korem advised the Applicant in Court that he intended to make a conflict motion. [20] I reject Korem’s contention that he did not raise the matter sooner because he hoped for a negotiated resolution. Korem’s conflict motion has the unmistakable flavor of a tactic designed to delay the receivership proceeding. [21] I am further satisfied that Korem voluntarily kept ECBC completely updated on the divorce proceedings and their possible impact on the RC’s. I am satisfied that ECBC made the decision to initiate the Receivership Application on the basis of information available to them, in particular that the loans were in default with no prospect of repayment (see esp. Lane Aff. of January 16, 2014 paras 12 – 24 and 49 – 54). I am satisfied that SM has no confidential information in its possession germaine to the proposed receivership that ECBC does not already have, compliments of Korem. [22] Code of Professional Conduct: Korem’s motion relies upon the Code of Professional Conduct, which reads in part: Commentary: 1. As defined in these rules, a conflict of interest exists when there is a substantial risk that a lawyer’s loyalty to, or representation of a client, would be materially and adversely affected by the lawyer’s own interest or the lawyer’s duties to another client, a former client, or a third person. The risk must be more than a mere possibility; there must be a genuine, serious risk to the duty of loyalty or to client representation arising from the retainer. A client’s interests may be seriously prejudiced unless the lawyer’s judgment and freedom of action on the client’s behalf are as free as possible from conflicts of interest. Use of Confidential Information 3.3-2 A lawyer must not use or disclose a clients or former client’s confidential information to the disadvantage of the client or former client, or for the benefit of the lawyer or a third person without the consent of the client or former client. (Emphasis added) Consent 3.4-2 A lawyer must not represent a client in a matter when there is a conflict of interest unless there is express or implied consent from all clients and the lawyer reasonably believes that he or she is able to represent each client without having a material adverse effect upon the representation of or loyalty to the other client. (a) Express consent must be fully informed and voluntary after disclosure. (b) Consent may be inferred and need not be in writing where all of the following apply: (i) The client is a Government, financial institution, publicly traded or similarly substantial entity, or an entity with in-house counsel; (ii) The matters are unrelated; (iii) The lawyer has no relevant confidential information from one client that might reasonably affect the other; and (iv) The client has commonly consented to lawyers acting for and against it in unrelated matters. (Emphasis added) Acting Against Former Clients 3.4-10 Unless the former client consents, a lawyer must not act against a former client in: (a) the same matter; (b) any related matter, or (c) any other matter if the lawyer has relevant confidential information arising from the representation of the former client that may prejudice that client. (Emphasis added) [23] In view of the background recited above, I am satisfied that SM has not breached the Code of Conduct. As stated, SM had no confidential information re Korem or the RC’s germaine to the Receivership Application. Korem had already voluntarily disclosed all such information to ECBC. Korem had consented to SM’s continued representation of ECBC long after he and the RC’s had ceased to be clients of SM. Korem further raised no objection to SM representing ECBC in the Receivership Application until more than two months after he knew the application was going to happen. I agree with the submission put forward by ECBC in its Conflict Brief. What follows is primarily taken from that Brief. Jurisprudence [24] The RC’s rely on the 1990 Supreme Court of Canada decision in MacDonald Estate v. Martin in support of their Motion. The Supreme Court of Canada has recently had occasion to revisit this decision in Canadian National Railway Co. v. McKercher LLP, [2013] S.C.J. No. 39, commenting at paragraphs 21 and 22 that: [21] In the Martin case, this Court (per Sopinka J.) adopted the English common law’s focus on protecting the client from real risks of harm, although it diverged from some of the English case law with respect to the exact level of risk that should attract the conflicts rule. The issue in Martin was whether a law firm should be disqualified from acting against a party because a lawyer in the firm had received relevant confidential information in the course of her prior work for that party. As will be discussed further below, the Court held that a firm cannot be disqualified unless there is a risk of prejudice to the client, although in some cases the client benefits from a presumption of risk of prejudice: pp. 1260-61. [22] In addition to retaining an emphasis on risk of prejudice to the client, the Court concluded in Martin that an effective and fair conflicts rule must strike an appropriate balance between conflicting values. On the one hand stands the high repute of the legal profession and the administration of justice. On the other hand stand the values of allowing the client’s choice of counsel and permitting reasonable mobility in the legal profession. The realities of large law firms and litigants who pick and choose between them must be factored into the balance. As was the case in the English common law, the Court declined to endorse broad rules that are not context-sensitive. [emphasis added] [25] As discussed above, there is no real risk of harm or prejudice to the RC’s as a result of any information SM may have received with respect to its prior representation of the RC’s or Korem personally. In the event any conflicting values are found, the balance should fall in ECBC’s favour. ECBC has retained SM with respect to this matter from the outset. Korem, on behalf of the RC’s, freely and voluntarily subsequently transferred his files to and from SM. He participated in recent meetings with ECBC with SM present as its counsel [February 25, 2014 Affidavit of Steve Lane –Paragraphs 11 & 12]. At no time did Korem object to such representation. The issue of conflict was never raised, not until the eleventh hour of the pending Receivership Application. [26] Finally, the comments of the Supreme Court of Canada in McKercher at paragraph 65 are of particular note: [65] On the other hand, it must be acknowledged that in circumstances where the lawyer-client relationship has been terminated and there is no risk of misuse of confidential information, there is generally no longer a concern of ongoing prejudice to the complaining party. In light of this reality, courts faced with a motion for disqualification on this third ground should consider certain factors that may point the other way. Such factors may include: (i) behaviour disentitling the complaining party from seeking the removal of counsel, such as delay in bringing the motion for disqualification; (ii) significant prejudice to the new client’s interest in retaining its counsel of choice, and that party’s ability to retain new counsel; and (iii) the fact that the law firm accepted the conflicting retainer in good faith, reasonably believing that the concurrent representation fell beyond the scope of the bright line rule and applicable law society restrictions. Conclusion [27] SM did not receive any confidential information relevant to the matter at hand. This application turns on the existence of the indebtedness owed to ECBC, the validity of the security interest it provided to ECBC as collateral for this indebtedness and other obligations owed. It appears that the ECBC loans are in arrears and that a demand has been made for payment in full for all outstanding indebtedness and interest. [28] The factors to be considered in determining whether the Application for a court-appointed receiver and/or manager should be granted are based upon circumstances which were already known to ECBC notwithstanding its retention of SM as its solicitors with respect to this matter. It is clear from the affidavits filed on behalf of both ECBC and the RC’s that Korem freely and frequently updated ECBC with respect to the status of the various corporate and divorce court proceedings conducted from 2008 to 2012 and for which he retained the services of SM. Further, Korem himself has acknowledged that ECBC must be advised of any corporate changes he may implement that could affect the validity of the ECBC security interest. It is clear from a review of the security documentation itself, together with the loan agreements, that Mr. Korem cannot take such measures without the consent of ECBC. The issue of any alleged corporate advice Mr. Sampson may have provided to Korem over a year ago is irrelevant to the application to appoint a receiver. [29] Korem was both aware of and consented to SM’s representation of ECBC with respect to this matter at all relevant times. Korem retained his own solicitors with respect to the enforcement proceedings brought by ECBC. Both he and his solicitors participated in various meetings and negotiations with ECBC and its solicitors with respect to this matter. At no time did Korem or his solicitors allege any conflict of interest. It was only at the 11th hour with respect to the impending Receivership Application that Korem raised the issue of conflict. Clearly, Korem is simply attempting to delay the proceedings. Relief [30] The motion is denied. The RC’s will pay $500.00 costs in any event payable forthwith. J. Sydney, Nova Scotia