Monday, November 23, 2009

Law firm accused of "naked cash grab"

A Report from the Law Times by Tim Shufelt Publication Date: Monday, 23 November 2009

A Toronto litigation boutique possibly will be on the hook for legal costs after its conduct sparked a harsh rebuke by a Superior Court judge in a long-running trusts-and-estates saga. Polten & Hodder, along with lawyer Eric Polten, was the subject of strongly worded condemnation from Justice David Brown, who said the firm ran up “scandalous” legal costs and “attempted to perpetrate a naked cash grab” on two elderly clients. Polten, whose experience includes domestic and international family and estate law matters, also misrepresented himself to the court and was in breach of his professional duties as an officer of the court, Brown said in a judgment in Miksche Estate v. Miksche released this month. According to Sandra Schnurr, counsel for the estate trustee, the legal gossip mill is churning with news of the ruling.“It already seems to be well known. I’ve had numerous lawyers comment to me on it,” she says. On the ruling itself, Schnurr says the judge’s decision speaks for itself. “I’m satisfied but I’m not jubilant. Whenever I see a colleague at the bar being harshly criticized, it makes me uncomfortable,” she says.

In representing Johanna Miksche, a Scarborough woman who died two years ago, and her sister Ursula Lill, Polten racked up more than $1 million in legal fees that he first tried to recover from the Miksche estate and then from the older sister, who was the primary beneficiary, the ruling said.“Having been rebuffed in his effort to have the assets of one vulnerable person satisfy the scandalous costs he ran up, Mr. Polten came before me on this application attempting to poach upon the assets of another vulnerable person. From such conduct, I conclude that Mr. Polten was prepared to use any means to place his financial interests in this proceeding ahead of those of his former clients,” Brown wrote. “Such conduct merits the strongest condemnation by this court.”When reached for comment, Polten would only say that he would be appealing the decision. “The matter will be dealt with in the notice of appeal,” he says in response to questions about specific criticisms in the ruling. “I presently have no other comment.”

Miksche was 78 when she passed away in a long-term care facility in Scarborough. Her husband had died many years prior, and her only living sibling was her sister, who was then 87 and living in Germany.Miksche had previously granted powers of attorney to two friends who were also included as beneficiaries in her will.Then in 2005, Miksche’s three nephews travelled from Germany to visit their aunt in the care facility, accompanied by a member of Polten & Hodder.At that time, Miksche also granted powers of attorney to one of her nephews as well as her sister and signed a retainer for Polten & Hodder. The two groups — Miksche’s two friends on the one hand and her relatives on the other — then filed competing applications for guardianship.Before a decision could be rendered, Miksche died, prompting the parties to submit claims for costs.“The Polten and Hodder firm sought the staggering amount of $1,038,297 . . . against Johanna’s estate,” Brown wrote. Not only did the amount include a success premium but it also exceeded the value of the estate, according to the judgment.

In a separate 2007 ruling on the same matter, Superior Court Justice Nancy Spies called the arguments raised by the law firm “preposterous” and “alarming” and said the legal approach advocated by the firm exploited the elderly woman. The firm had also alleged on behalf of the nephews that Miksche’s two friends had held her as a “prisoner” in the care facility. “I do not understand how Mr. Polten even has the audacity to make this submission,” Spies wrote, adding that the submission demonstrated a “complete detachment from reality and lack of judgment.” The judge awarded the nephews costs of $35,500 but ordered them to first cover $28,000 in legal fees to Miksche’s two friends. Polten & Hodder appealed the ruling on behalf of Lill and the nephews but a few days later made an offer to settle by proposing to drop the matter in return for an agreement on how to distribute the estate to its beneficiaries. The offer, however, “radically changed the flow of estate funds to Ursula Lill,” Brown wrote, noting that all of the residual assets of the estate would be payable to the law firm in trust under the new arrangement.“And it was quite clear from the written and oral submissions made by Mr. Polten what would happen to those funds once in his trust account — there they would stay until he was able to extract from Lill payment of his ‘scandalous’ costs claim.”

Regards,

Blair

Monday, November 16, 2009

Supreme Court clarifies ad hoc fiduciary relationships

In the recent case of Galambos v. Perez, P made voluntary sizeable advances of cash — some $200,000 in total — to her employer, a law firm founded by G, often without informing G beforehand. Although P was hired as the firm’s part‑time bookkeeper she effectively became the office manager, overseeing the firm’s income, expenses and accounting and had unlimited signing authority on the firm’s non‑trust bank accounts. Initially, to resolve a cash flow problem, P obtained a personal loan and deposited $40,000 into the firm’s bank account. G did not ask her to advance this money and he did not even know about the advance until several days later. G instructed P to reimburse herself with interest, instructions she did not follow other than by repaying herself $15,000. As the firm’s financial situation deteriorated, P made several more deposits of her own funds into the firm’s account and covered some firm expenses with her personal credit card. The firm, during the time she worked for it, handled the preparation and execution of new wills for P and her husband as well as two mortgage transactions. The firm did not expect to be and was not paid for these services. When the firm went into receivership and G went bankrupt P found herself an unsecured creditor and recovered nothing. P then sued G and the defunct firm for negligence, breach of contract and breach of fiduciary duty.

The trial judge dismissed P’s claims, finding that her rights were those of a creditor and nothing more. The Court of Appeal set aside that decision and granted P judgment for $200,000. The Court of Appeal concluded that there were ad hoc fiduciary duties owed to P by G and his law firm in relation to the cash advances. It held that: there was a power‑dependency relationship between P and G; it is not necessary that there be any mutual understanding that G had relinquished his self‑interest in favour of P’s for the duty to arise; P was vulnerable; and, the evidence overwhelmingly supported the conclusion that G took advantage of her trust.

The Supreme Court of Canada restored the decision of the trial judge and held that the Court of Appeal had exceeded the limits of appellate review and unduly extended the scope of fiduciary obligations. Absent an error of law or a palpable or overriding error of fact the SCC held that the trial judge’s findings of fact and conclusion that a fiduciary duty did not exist must be upheld on appeal. In this case, the Court of Appeal retried the case on the basis of the written record and substituted its view of the facts and their significance for that of the trial judge.

The SCC held that the Court of Appeal erred in three respects.

1. The conclusion that G was in a position of power and influence relative to P was at odds with the findings of fact at trial that P was not vulnerable in terms of her relationship with G. There was no evidence of any express requests for loans, which makes it illogical to conclude that P was unable to refuse requests when there were in fact none.

2. Not all power‑dependency relationships are fiduciary in nature and identifying a power‑dependency relationship does not, on its own, materially assist in deciding whether the relationship is fiduciary or not. There are no special rules for recognition of fiduciary duties in the case of power‑dependency relationships. The Court of Appeal erred when it held that, in the case of a power‑dependency relationship, a fiduciary duty may arise even in the absence of a mutual understanding that one party would act only in the interests of the other. In both per se and ad hoc fiduciary relationships, there will be some undertaking on the part of the fiduciary to act with loyalty. The Court of Appeal’s analysis went wrong when it found a fiduciary duty without finding an undertaking, express or implied, on the part of G that he would act in relation to the loans only in P’s interests, and based its conclusion that a fiduciary duty existed on P’s expectations alone.

3. The Court of Appeal appears to have accepted the proposition that a fiduciary duty may arise even though the fiduciary has no discretionary power to affect the other party’s legal or important practical interests. The nature of this discretionary power to affect the beneficiary’s legal or practical interests may, depending on the circumstances, be quite broadly defined. It may arise from power conferred by statute, agreement, from a unilateral undertaking or, in particular situations by the beneficiary’s entrusting the fiduciary with information or seeking advice in circumstances that confer a source of power. The presence of this sort of power will not necessarily on its own support the existence of an ad hoc fiduciary duty; its absence, however, negates the existence of such a duty. The findings of the trial judge that the evidence did not establish that P relinquished her decision‑making power with respect to the loans to G, and that G had no discretionary power over P’s interests that he was able to exercise unilaterally or otherwise, were fatal to P’s claim that there was an ad hoc fiduciary duty on G’s part to act solely in her interests in relation to these cash advances.

Finally, the SCC held there had been no conflict of interest. Given the limited nature of the retainers and the unusual nature of the advances G and the law firm did not breach their duty of care arising from the solicitor‑client relationship between them and P. There was no actual conflict of interest between the firm’s duties to her in connection with the limited retainers and its interest in receiving the advances and there was not any reasonable apprehension of conflict. Given the very limited nature of the retainers and the manner in which the advances were made — unsolicited and frequently without advance notice — there was no duty on the firm under negligence principles to give P advice about those advances or to insist that she obtain independent legal advice about them.

Regards,

Blair

Thursday, November 12, 2009

Letters of Credit and the Bank's Duty of Good Faith

In the case of Nareerux Import Co. Ltd. v. Canadian Imperial Bank of Commerce, 2009 ONCA 764 the Court of Appeal held that a Bank owes a duty of good faith to the holders of letters of credit so that the bank cannot act in a manner which would defeat the purpose of the letter of credit.

Robertson was a customer of CIBC, and financed the purchase of shrimp from Thailand Fisheries through a credit facility arranged with the Bank. Upon arrival in the United States, the shrimp were stored in large warehouses where they awaited purchase from various Sam’s Club outlets. Payment was to be made under letters of credit upon presentation to CIBC of purchase orders and receipts showing that the shrimp had been taken down by Sam’s Club.

Although Thai Fisheries had not been paid for all of the shrimp it supplied under the letters of credit, the proceeds of sale from the shrimp were used by Robertson and the Bank to reduce the Robertson line of credit that had been arranged to finance the trade transaction.

Thai Fisheries argued that CIBC and Robertson colluded to reduce Robertson’s line of credit – and therefore CIBC’s exposure – by arranging for shrimp to be sold without documentation from Sam’s Club and then relying on non-compliance with the letters of credit to refuse payments, while at the same time directing the monies received to reduce Robertson’s overdraft instead of ensuring that the monies were used to pay Thai Fisheries under the letters of credit.

CIBC argued that it did nothing improper, that it complied with the provisions of the letters of credit, which were not honoured because the requisite documentation was not presented, and that Thai Fisheries knowingly ran the risk of this eventuality when it accepted the letters of credit.

The trial judge ruled in favour of Thai Fisheries and granted judgment in its favour in the amount of $10,381,035 together with pre-judgment interest and costs. The court of Appeal dismissed the appeal.

CIBC raised one defence only: Thai Fisheries failed to comply with its obligation imposed by the special conditions in the Letters of Credit because receipts from Sam’s Club, through Robertson, were never delivered to CIBC. Since letters of credit must be strictly construed the delivery of the receipts from Sam’s Club was a pre-condition to payment. No receipts were provided for the shrimp in question, and therefore CIBC was not liable to pay.

The Court of Appeal held that CIBC was not entitled to rely upon the defence of non-compliance because:
(a) CIBC knowingly contributed to, or acquiesced in, the circumstances that undermined the prospect of strict compliance with the Letter of Credit, then used that non-compliance to justify the refusal of payment. It did so in collaboration with its customer, Robertson, in order to ensure that the proceeds of sale of the shrimp sold under the Letters of Credit were used to reduce the Bank’s exposure on the Robertson line of credit without corresponding payments being made to Thai Fisheries under the Letters of Credit. This conduct was either a direct breach of the principle of autonomy underlying letter of credit transactions or a breach of CIBC’s implied duty of good faith not to act in a manner meant to defeat or eviscerate the purpose of the Letters of Credit, On either scenario CIBC, as issuer of the Letters of Credit, was precluded from raising the defence of non-compliance.
(b) CIBC failed in its obligation to give timely notice of dishonour to Thai Fisheries when it held back on notifying the seller for more than a year that no receipts would be forthcoming and that the Letters of Credit would be cancelled. In doing so, CIBC placed Thai Fisheries in a position where it reasonably believed that the Letters of Credit would be honoured when the problems with the receipts had been resolved. Consequently, Thai Fisheries took no steps to protect itself by seeking return of the shrimp until it was too late and the shrimp had all been sold.

Regards,

Blair