Y Taddese: Source of high-flying bankrupt’s legal support privileged, appeal court rules

Fr0m Law Times – original post (with photos) from the Law Times website; click HERE

Monday, 10 December 2012 08:00 | Written by Yamri Taddese

The Ontario Court of Appeal’s decision to uphold the right of a bankrupt Toronto man not to reveal the source of his legal expenses sets the record straight when it comes to solicitor-client privilege, according to his legal counsel.

In a case involving a trustee doubtful of its debtor’s penury, the appeal court set aside a December 2011 ruling that ordered Morris Kaiser, a bankrupt, to identify the person financing his legal matters.

The identity of that person must have been part of the discussions when Kaiser retained his counsel and is therefore subject to client-solicitor privilege, the appeal court determined in its Nov. 29 ruling.

“The court provided needed clarification and guidance to the profession of the application of solicitor-client privilege protection to the source of payment for legal fees,” says Kaiser’s lawyer, Melvyn Solmon of Solman Rothbart Goodman LLP.

“The implications of this decision extend beyond the bankruptcy context to all retainers where clients are assisted financially by a third person in obtaining legal counsel,” he adds.

Kaiser has been bankrupt for three years, but his frequent visits to U.S. casinos to gamble away thousands of dollars have left his trustee doubting that he’s penniless, the appeal court noted.

The trustee, Soberman Inc., suspects Kaiser is hiding his assets and accessing them through a third party, Cecil Bergman.

But when Soberman applied for the appointment of a receiver over Bergman’s property, Kaiser cried foul and launched a motion to have the trustee’s legal counsel removed. He argued Milton Davis, managing partner at Davis Moldaver LLP, couldn’t represent the trustee since he has previously acted for litigants who sued him.

But a judge struck Kaiser’s removal motion, deeming it a tenuous excuse to delay the case, and ordered Kaiser to pay $50,000 to the trustee for the cost of it. When he failed to pay the amount, the trustee asked to have Kaiser identify the person taking care of the costs of his legal battle.

When he ordered Kaiser to reveal who was paying for his lawyer, Superior Court Justice Frank Newbould said the information is neither privileged communication nor an important fact for the case brought before him.

“I fail to see how the amount of fees paid by the third person to Mr. Solmon could reveal any communication between Mr. Kaiser and Mr. Solmon protected by solicitor-client privilege,” he said.

“The identity of the person who paid Mr. Solmon’s fees is not relevant to the merits of what was before the court, namely, whether Mr. Davis’ firm should be removed as a solicitor for the trustee. Nor could it be prejudicial to that issue or cause any other legal prejudice to Mr. Kaiser,” he added.

In the appeal court ruling written by Justice Robert Blair, the court disagreed with Newbould’s conclusion because it didn’t take into account the full context of the dispute between the trustee and Kaiser.

“Mr. Solmon is not simply retained for the removal motion,” wrote Blair. “He is retained to represent Mr. Kaiser in the bankruptcy proceedings in general. In those proceedings, the real dispute is about whether Kaiser, a bankrupt, is hiding assets from the trustee through a straw man.

“Should it turn out that Mr. Bergman is the person paying Mr. Solmon’s fees on the removal motion, the trustee will have a significant piece of circumstantial evidence for use in the receivership and related proceedings that there is a straw man.”

Blair also said Newbould’s conclusion that the identity of the alleged straw man isn’t privileged communication stems from an incorrect application of related jurisprudence.

“The prevailing law now appears to be that administrative information related to the establishment of a solicitor-client relationship — including a lawyer’s bill and a client’s ability to pay, and by extension, the source of the lawyer’s fees — is presumptively privileged,” wrote Blair. That means a party can rebuff the protection if it can prove the information doesn’t reveal confidential solicitor-client communication.

In Kaiser’s case, “the information is provided in the context of Mr. Solmon’s need to know how his fees will be paid and in order to decide whether to act,” wrote Blair.

“In the words of Supreme Court, it is therefore ‘information which a person must provide in order to obtain legal advice and which is given in confidence for that purpose,’ and accordingly ‘enjoys the privileges attached to confidentiality.’”

Solmon lauds the decision as “vigilant protection of the right to confidentiality with respect to information arising from the commencement of the solicitor-client relationship.”

For University of Ottawa law professor Adam Dodek, the case in an unusual one that “is likely to have ramifications beyond the bankruptcy context.”

“The Court of Appeal’s decision is consistent with the generally expansive definition of what is covered by solicitor-client privilege in Canada,” he says. “The specific issue of lawyers’ fees is a very confusing area of the law and I’m not sure that the Court of Appeal’s decision is able to provide the much-needed clarity because it is stuck with attempting to make sense of and apply challenging Supreme Court precedent in this area.”

In fact, Dodek notes court rulings have gone the other way in other areas of law. “The Court of Appeal’s decision that the source of funding a lawyer’s fees is presumptively privileged clashes with lower court decisions in class actions where prospective class representatives have to disclose the identity of third-party funders. It is not clear how this decision will be applied to those types of cases in the future.

For the decision on CanLII, click HERE

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