Diane Francis on Business Issues

Saturday, June 03, 2006

A Critical Lawsuit

Diane Francis column May 31 Post:

The Supreme Court of Canada has decided to hear a case this fall that
has sweeping implications for business, individuals and the legal

The case pits Stephen Cheikes, an American who ran a movie tax
shelter business in Vancouver, against his former Canadian lawyer Robert Strother as well as against Mr. Strother's former law firm, Davis & Co., the second largest firm in British Columbia.

The Supreme Court of Canada's decision in this matter will determine what duties and loyalties lawyers and their firms owe to their clients.

Mr. Cheikes started Monarch Entertainment Corporation in 1993 and hired the lawyers. It was successful.

Then in 1997, he said Mr. Strother advised him he could not legally operate his tax shelter business because of tax rule changes. So he shut operations down in fall 1997 and asked Mr. Strother to find ways to comply so that Monarch could re-open.

A year later, in 1998, he found out that Mr. Strother had become a 50-per-cent partner in a movie tax shelter business, called Sentinel Hill, and that Davis & Co. were its attorneys.

He also discovered that from 1998 to 2002, Sentinel Hill made C$140 million in total profits, Mr. Strother made C$32 million for himself and that Davis & Co. had been paid C$9 million in fees.

By the time, Monarch discovered this competing enterprise it was too
late to catch up so it sued in early 1999. Mr. Cheikes sued both parties for breach of fiduciary trust as well as breach of an obligation of client confidentiality.

In 2003, the B.C. Supreme Court found no wrongdoing, but in 2005 the British Columbia Court of Appeal overturned that decision and found the lawyer and firm guilty.

Mr. Strother was ordered to pay back the C$32 million he had made and Davis & Co. was ordered to pay back C$7 million of the C$9 million in fees to Mr. Cheikes and his partners.

The high-stakes case was appealed again and the Supreme Court of Canada has granted leave to appeal, likely in October. This is not surprising. The case has been widely circulated and discussed within the legal profession for months. Even the Canadian Bar Association is intervening.

"This is a case of grave consequence to the citizens of this country,"
said Mr. Cheikes in a recent telephone interview.

"To summarize, this is what happened to us," said Mr. Cheikes. "Myself and others created a new business opportunity; we hired a large law firm for five years; that law firm advised us to close down because laws had changed; then that law firm and its lawyer failed to advise us that they were mistaken and that the law would permit us to restart our business; and then our lawyer and our firm got into the same business without telling us."

Clearly, the case is important because a lawyer who ends up in
competition with a client is of great concern to everyone. So are the
issues involved in the previous court decisions.

The lower court agreed with Mr. Strother when he argued that because
Monarch had shut its doors on his advice he had no obligation to correct his mistaken legal advice even though it had led to the shutdown.

The lower court also agreed with Davis & Co. which argued that it should be
able to represent two competitors in a business without being obliged to
tell one what the other is doing.

But the B.C. Appeal Court disagreed.

"Mr. Strother was a lawyer and there are duties which lawyers have to
clients," said Mr. Cheikes. "The Court of Appeal said he had an
obligation to tell us that he was wrong initially in his interpretation
of the Tax Act. Because he didn't, the court ordered him to give us all
his profits. The law firm was ordered to give us only part of the fees
they earned. But they should pay us all fees because we hired the law
firm and we believe that both Strother and the firm should be liable. If this case loses, how can anyone in Canada trust their lawyers?"


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