Biglaw, Canada, Legal Ethics

The View From Up North: Canadian Law Firm To Pay $45 Million Judgment For Breach Of Fiduciary Duty

You don’t need an elaborate system to resolve conflict. It's as simple as, “Hey, aren’t we already working on that matter for somebody else?”

By  
on

I went back and read Section 3.4 of Ontario’s Rules of Professional Conduct, which deals with conflicts of interest. This section says, “A lawyer shall not act or continue to act for a client where there is a conflict of interest, except as permitted under the rules in this Section.”

Section 3.4 is followed by four pages of commentary to help practitioners understand conflicts and how to manage them. This commentary is filled with heavy concepts like “substantial risk,” “duty of loyalty,” and “integrity of the legal profession.” It reads like a bunch of gobbledygook to me.

I prefer a Potter Stewart-esque approach to conflicts — they can be hard to define, but I know one when I see it. Justice Stewart made that comment in the context of trying to determine what constitutes pornography, but it translates nicely, I think, to legal conflicts, viz. you know when something’s a conflict. That’s how lawyer brains work (at least, they should).

It’s quiz time. Here’s the question. Lawyers in your firm have already been retained by the federal government in the potential bankruptcy of a large auto manufacturer. The manufacturer decides to reduce a substantial amount of its car dealerships. A number of car dealers approach different lawyers in your firm to represent them in negotiating fair termination agreements with the auto manufacturer.

Raise your hand if you think your firm should accept the car dealers’ retainer. You already have a nag in the race — the government. The government is not necessarily directly adverse to the car dealers, but…

If you take a Justice Stewart approach to conflicts, this sure smells like one to me. I don’t have to look up Section 3.4 to decide to reject the retainer from the car dealerships. I already have a nag in the race. One is plenty… for my firm.

That’s the situation in which Cassels Brock LLP found itself in 2009. General Motors Canada was fighting for its life during the trough of the Great Recession. The federal government retained Cassels to advise it in relation to any GM bankruptcy proceedings (i.e., GM was not yet in a formal bankruptcy proceeding, but it certainly looked like it could happen). The Feds were being asked to help bail out the car manufacturer. While there was no guarantee the Feds would come to the table with a bailout, if they did, they would have a huge stake in making sure GM restructured itself so the business was viable and, therefore, the government would get repaid.

Sponsored

As part of its restructuring, GM decided to close 240 car dealerships, using a contract called a “dealer wind-down agreement.” A large majority of those dealers facing termination approached Cassels to help them negotiate with GM. The car dealers had the right to think Cassels was only riding one horse in the race, not two. At least, that’s what they taught me in law school.

Late last week, a judge agreed with that position, awarding a class-action group of car dealers $45 million for Cassels Brock’s breach of fiduciary duties, breach of contractual duties, and breach of duty of care in representing them. Justice McEwen ruled that Cassels knew about the conflict from the outset and did not disclose the fact it already represented the Feds.

Cassels took the position that a conflict had not yet arisen at the time it accepted the car dealers’ retainer. It adverted to the fact that a conflict might arise in the future, at which point it was prepared to drop representation of the car dealers (which would, presumably, resolve the conflict).

Cassels also argued it was only retained to represent the government if GM entered a Companies’ Creditor Arrangement Act proceeding. Justice McEwen rejected this submission and found the retainer was broader and included advising the Feds about the negotiation of the dealer wind-down agreements.

In a black and white world, porn is porn and conflicts are conflicts. But, we all know there are at least 50 shades of gray on the grayscale — and lawyers make hay in the gray. Lawyers are pretty clever people — sometimes too clever. A crafty lawyer might argue with a straight face that an explicit film about naked people rolling around on a bed constitutes “art.” Yet, that same lawyer who makes the argument would not show an “art film” to her child.

Sponsored

I don’t think it’s any great leap to say Cassels was looking at two potentially lucrative retainers. Big question: can we keep both of them? I’m sure Cassels was convinced by whatever arguments its internal advocates made that it was ethical to act for both the Feds and the dealers.

Justice McEwen disagreed. Cassels saw one shade of gray, the judge saw another. The judge criticized Cassels for having an inadequate conflicts-checking system in place, one that actually leads to lawyers spotting conflicts and discussing ways to resolve them. A proper system is critically important, especially in a large firm like Cassels. But equally important is common sense. Potter Stewart-like common sense. I might not be able to draft a perfect definition of “conflict,” but I know one when I see it. And this was a gimme in my mind.

Perhaps I’m naïve to the ways of Bay Street, but warning bells should go off anytime you already have your lawyers involved with a stakeholder in a massive dispute and another stakeholder wants you to represent it. You don’t need an elaborate system to resolve that conflict. It’s as simple as, “Hey, aren’t we already working on that matter for somebody else?”

Yet, maybe it’s not so simple.

Cassels is (of course) appealing the ruling. As one commentator noted, the evidence in the case is gray enough that a different judge could make inferences from the evidence that would tip the ruling in Cassels Brock’s favor.

Thus, notwithstanding what I think is common sense — don’t ride two horses in the same race — Cassels might still jaunt off victorious into a warm, gray sunset.

The only question — is that a happy ending or a sad one for this story (or somewhere in between)?

That’s the View From Up North. Hope you make some hay in the gray this week.

Steve Dykstra is a Canadian-trained lawyer and legal recruiter. He is the President of Keybridge Legal Recruiting, a boutique recruitment firm that places lawyers in law firms and in-house roles throughout North America. You can contact Steve at steve@keybridgerecruiting.com. You can also read his blog at stevendykstra.wordpress.com, follow him on Twitter (@IMRecruitR), or connect on LinkedIn (ca.linkedin.com/in/stevedykstra/).

Topics

, , , , , , , , ,