A Tale of a Faithless Fiduciary

3444920 Canada Inc. v. Strother , 2005 BCCA 35[1]

A recent decision of the B.C. Court of Appeal has hit a senior Vancouver lawyer, and possibly his firm, with a judgment worth more than $30 Million as a result of the lawyer’s breach of fiduciary duty to a client.

The lawyer is Robert Strother, formerly a senior partner at Davis & Company in Vancouver , who had an extremely profitable and successful relationship with Monarch Entertainment Corporation setting up tax sheltered syndication deals to finance film productions. In 1996, Strother and Monarch signed an agreement that prohibited Strother from acting for Monarch’s competitors. Near the end of 1997 the federal government implemented new rules to effectively shut down these tax shelters. Strother informed Monarch that he had no “technical fix” and that the tax shelter business was over. Monarch abandoned its tax shelter business. The written retainer agreement between Monarch and Davis & Company lapsed. Strother and Davis & Company continued to do other legal work for Monarch throughout 1998.

Unbeknownst to Monarch, at the end of 1997 Strother decided there may be a “fix” after all and started working on his “new idea” with a former Monarch executive, Darc. Under his agreement with Darc, Strother sought and obtained a favourable tax ruling that allowed a new company called Sentinel Hill to sell tax sheltered film financing limited partnerships in return for substantial personal participation in any profits of the new business.

Sentinel Hill began operations. Sometime thereafter, Strother left Davis & Company and worked for Sentinel Hill under an arrangement that gave him 55% of the profits on the first $2 million earned, and 50% on the excess. Sentinel Hill was extremely successful raising $40 million in 1998 and $600 million in 1999. In 1999, Sentinel Hill merged with Alliance Atlantic Equicap, raising $1.6 billion in 2000 and $500 million in the first 6 months of 2001. During the period 1998 through June 2001 Strother earned more than $32 million at Sentinel Hill.

When Monarch discovered the Sentinel Hill tax ruling in early 1999, it began legal proceedings. Monarch argued that Strother had deliberately concealed tax shelter knowledge from it in order to appropriate a business opportunity for his personal benefit. Monarch also alleged breaches of fiduciary duty by both Strother and Davis & Company.

At trial, Strother and Davis & Company were successful in arguing that any fiduciary obligations ended when the formal retainer agreement expired near the end of 1997. Recently, the British Columbia Court of Appeal unanimously reversed the trial judge’s decision, finding Strother in breach of his fiduciary duties and ordering him to account for and disgorge over $30 million personally gained from the breach of those duties. The court invited Davis & Company to give further arguments as to why the firm should not be held jointly and severally liable with its former partner. This issue remains outstanding.

It didn’t matter to the Court of Appeal that the Monarch retainer had expired by the time Strother embarked on his venture with Darc. Strother’s fiduciary duties went well beyond those that are strictly contractual. In agreeing to work with Darc, Strother had created a dual conflict – between Monarch and the new client and, due to his personal interest in the new venture, a conflict between himself and Monarch. The court left no doubt that Strother and Davis & Company still had obligations to Monarch after the retainer agreement expired. Newbury J.A. said: “one must not … equate the scope of a lawyer’s contractual duty to advise his client…with his fiduciary duties, including the duty not to place himself in a position of conflict and the duty to disclose any personal interest he may have that might affect his loyalty and dedication to the client’s cause. The latter duties are implied by law and are unlikely to be validly excluded or diminished by contract.”

So, Strother must hand over to Monarch over $30 million personally gained in the venture. It did not matter that Monarch did not re-enter the tax shelter business after it learned of the Sentinel Hill ruling. Rather, the court followed a long line of Canadian jurisprudence that confirms that the basis of the fiduciary’s liability is not that the fiduciary seized a business opportunity for himself, but rather that the fiduciary has permitted his self-interest to conflict with the duties that are owed to the beneficiary. Further, the court recognized that the contribution of others to the Sentinel Hill ventures added much value to the tax shelters. Since none of those parties were found to be in breach of a fiduciary duty to Monarch, no order to account was made against those defendants.

The moral of the story? Fiduciary obligations to clients can extend far beyond the actual written retainer document. Any breach will be taken very seriously by Canadian courts and faithless fiduciaries will be punished so as to ensure that others remain faithful to their duties.[1]

Published April 6, 2005