Citation: 2017 TCC 124
Date: 20170628
Docket: 2014-3415(IT)G
BETWEEN:
ADOLF
WOESSNER,
Appellant,
and
HER
MAJESTY THE QUEEN,
Respondent.
REASONS
FOR ORDER
Campbell J.
Introduction:
[1]
The Respondent brings this motion to remove the
Appellant’s lawyer, Matthew Clark, and his law firm, Shea Nerland Calnan LLP (“Shea Nerland”), as counsel of record, in this appeal
on the grounds of a conflict of interest. The Respondent also requests an
extension of time to complete the remaining steps of the litigation together with
costs of this motion. The Respondent alleges that a conflict of interest will
arise because one or more partners and a former associate of the law firm are
likely to be called as witnesses at the hearing with the result that Mr. Clark
will be unable to properly represent the Appellant.
[2]
The motion arises in respect to an appeal that
has been brought under the General Procedure in respect to the Appellant’s
1997, 1998, 1999 and 2000 taxation years. In reassessing the Appellant,
the Minister of National Revenue (the “Minister”)
disallowed business losses that resulted from capital cost allowance (“CCA”) deductions that were claimed in respect to his
acquisition costs of an interest in certain software. According to the
assumptions of fact contained in the Reply to the Notice of Appeal, the
Appellant participated as an investor in a software tax shelter scheme that was
developed and promoted by the following: a United States Corporation, Betasoft
Games Ltd. (“Betasoft”), its United States
parent corporation, American Softworks Corp. (“ASC”),
the Canadian law firm, Shea Nerland and a Canadian corporation, Softech Asset
Management Corp (“SAM”). The Minister further
asserts that SAM is also directed and managed by several current and former
partners and associates of Shea Nerland.
[3]
At the heart of this appeal is a series
of agreements entered into by the investors, including the Appellant, to
purchase an interest in software that was owned by Betasoft for consideration
consisting of cash and indebtedness represented by a promissory note. The
Respondent asserts that, in acquiring the interest in the Betasoft software in
late 1997, the Appellant participated in a computer software tax shelter
designed to take advantage of a favourable 100 percent CCA by paying a
relatively small down payment in cash with the larger balance to be paid
according to the terms of a promissory note. According to the Respondent, the
Appellant never repaid the loan. The Minister denied all of the Appellant’s
claimed business losses resulting from the CCA deductions on the basis that the
interest acquired in the software was a tax shelter, as defined in subsection
237.1(1) of the Income Tax Act (the “Act”)
and since it was not registered, no amount was deductible by the Appellant
pursuant to subsection 237.1(6).
[4]
The Respondent
has further asserted that, in addition to Betasoft, both Shea Nerland and SAM
were also promoters of the software tax shelter scheme and that Dennis Nerland,
a partner at Shea Nerland, and Alykan Mamdani, an associate with this law firm
during the relevant period, were directors of SAM. According to the Respondent
Mr. Mamdani, who has since left the law firm, was also President and CEO of
SAM. It is further alleged that both Mr. Mamdani and Mr. Nerland have
continued to act in these roles at least up to the date of the commencement of
the litigation.
[5]
Finally, the
Respondent claims that Shea Nerland provided legal advice to the Appellant in
respect to the various agreements he executed and the related transactions and
that SAM entered into a contract to provide managerial, consulting, financial
and supervisory services to the Appellant with respect to the acquisition of
his interest in the software owned by Betasoft.
[6]
Respondent counsel
first raised his concerns in regard to this alleged conflict of interest by
letter to Appellant counsel dated July 20, 2015. Counsel again reiterated his
concerns respecting Appellant counsel’s ability to represent the Appellant by
email dated October 23, 2015. The alleged conflict of interest was also discussed
informally at a status hearing held on November 4, 2015. However, the Court
declined to consider the issue at that time as there was no motion before the Court.
On September 21, 2016, a scheduled examination for discovery was postponed at
the request of the Appellant.
[7]
The Respondent
filed the present motion on September 23, 2016, seeking to disqualify Mr. Clark
and his law firm, Shea Nerland, from continuing to represent the Appellant. The
Appellant filed a response opposing the Respondent’s motion on March 22, 2017, together
with an affidavit of Ralph Woessner, the Appellant’s son, who is administering
his father’s affairs pursuant to a Power of Attorney.
Appellant’s Position:
[8]
Appellant counsel argues that he should be
permitted to continue to represent Mr. Woessner because there is no conflict of
interest since the interests of the Appellant, his counsel and the law firm are
aligned. Appellant counsel relied on this Court’s decision in Hochberg v The
Queen, 2004 TCC 487, which concluded that where the interests of the
parties are aligned, counsel should not be disqualified from representing both
the promoter of the tax shelter and the investors in that shelter. In Ralph
Woessner’s affidavit, he states that his father is fully aware of the Minister’s
assumptions of fact in the appeal and specifically that the members of Shea
Nerland were promoters of the alleged tax shelter scheme. However, the
Appellant and his son do not believe that there is any conflict of interest
because their interests are aligned with those of Shea Nerland and its members
or former associates.
[9]
Appellant counsel submits that even if
this Court concludes that a conflict of interest exists, it should give
deference to the wishes of the Appellant because this is not a case where it is
necessary to protect the administration of justice. In addition there will be
increased costs and delay to the Appellant if he is compelled to find alternate
counsel. In Ralph Woessner’s affidavit, he states that his father, the
Appellant, has a “payment arrangement…on a favourable
basis” and that it would be otherwise “difficult to pursue the Tax Court appeal”.
(Affidavit of Ralph Woessner, paragraph 8). These factors should weigh against
granting the Respondent’s motion.
[10]
Finally,
Appellant counsel submits that neither he nor his firm should be disqualified
on the grounds of their past representation of Mr. Mamdani. While this issue
was not specifically raised by the Respondent in his written submissions or at
the motion hearing, it appears that the Appellant is asserting that Shea
Nerland previously represented Mr. Mamdani after he left the law firm as one of
its associates, but that Appellant counsel would not be subject to any
disqualifying conflict of interest because of the passage of time since that
representation. (Appellant’s Response to Respondent’s Motion, paragraphs 28 and 31).
Respondent’s Position:
[11]
The Respondent contends that Shea Nerland was a
promoter of the alleged unregistered tax shelter in which the Appellant
invested and that at least one current partner, Mr. Nerland, and one former
associate of the law firm, Mr. Mamdani, also continue to act as directors
of SAM, the corporation that manages the investors’ interest in this alleged
tax shelter. Consequently, the Respondent believes it is likely that Mr.
Nerland and Mr. Mamdani will be required to testify at the hearing in respect
to the key factual issues. This will compromise Appellant counsel’s ability to
fully commit to his client at the hearing where his employer, Shea Nerland, and
his colleagues in the firm, as well as a former associate, will be witnesses.
His obligations to his employer and his colleagues will interfere with his duty
to his client, Mr. Woessner.
Jurisprudence:
[12]
The general test for the removal of legal
counsel due to a conflict of interest is whether a “fair-minded
and reasonably informed member of the public would conclude that the removal of
the solicitor is necessary for the proper administration of justice” (Boudreau
v Marler, [2004] OJ No 1543 (Ont CA) at paragraph 60; Carterra
Management Inc. v Palm Holdings Canada Inc., 2011 ONSC 7087, at paragraph
6; Mazinani v Bindoo, 2013 ONSC 4744, at paragraph 60(iv) and Esco
Corp v Quality Steel Foundries Ltd., 2003 FC 993 at paragraph 22).
[13]
A solicitor may
face disqualification due to a conflict of interest in two situations: first,
where counsel assumes the dual role of both advocate and witness in the same
proceeding and, second, where counsel is likely to be placed in a position of
having to examine or cross-examine a member of his or her own law firm as part
of the proceedings. In the first instance, courts have consistently held that a
solicitor must be disqualified from continuing to act (Canada (Director of
Investigation & Research v Irving Equipment, [1988] 1 FC 27 (FCTD) and
Urquhart v Allen Estate, [1999] OJ No 4816 (Ont. SCJ)). In the second instance,
although it is generally accepted that there is no automatic bar to a solicitor
continuing as counsel of record where an affiliated colleague will testify at
a proceeding, the courts have adopted differing judicial approaches in deciding
whether particular circumstances warrant disqualification. While some courts
have adopted a more discretionary framework, others have followed a more rigid
one, downplaying the interests of the affected party and considering a narrower
set of factors.
[14]
A leading case in Canada
on the disqualification of counsel on grounds of conflict of interest, where an
affiliated colleague is likely to testify at the hearing, is the decision of
the Ontario Divisional Court in Essa Township v Guergis, [1993] OJ No 2581 (Ont Div Ct),
sometimes cited under the name of one of the trial level decisions, Heck v
Royal Bank of Canada, [1993] OJ No 229 (Ont Gen Div). The court
considered the issue of whether a conflict existed where it appeared that
another lawyer, from the same firm that was representing the plaintiff, would
be called to testify at the trial. Justice O’Brien stressed the potential
hardships that litigants may experience when they are forced to change their
counsel in the course of litigation. He stressed that courts should be
reluctant to prematurely disqualify counsel and law firms where the potential
for a conflict of interest has not fully materialized. At paragraphs 43 and 44,
he stated the following:
43 I
believe courts should be reluctant to make what may be premature orders
preventing solicitors from continuing to act. In view of the expense of
litigation and the enormous waste of time and money and the substantial delay
which can result from an order removing solicitors, courts should do so only in
clear cases. I adopt the approach taken on this point in Carlson v. Loraas
Disposal Services Ltd. (1988), 30 C.P.C. (2d) 181 at p. 188, 70 Sask. R.
161 (Q.B.).
44 As discussed in the Carlson decision, an application
to remove counsel can be made to the trial judge when it is certain there is a
problem. In this case Mr. Green may, or may not be, subpoenaed to testify.
Concessions or admissions may be made which will obviate the need to call him
as a witness. The evidence he could give may be readily obtainable from other
witnesses. As issues are developed, or resolved during trial, his evidence may
not be required at all. A trial judge will be in a much better position to
determine if his firm should be disqualified.
[15]
Justice O’Brien, at paragraphs 45 to 46 of this
decision, stated that he was not prepared to establish a bright-line rule that
would bar counsel from acting in all cases where a lawyer from the same firm
would be providing evidence either through testimony or by affidavit:
45 I
do not accept the argument that when a lawyer is compelled to testify against
the "other" side in a lawsuit the lawyer's firm must always be
prevented from acting in the lawsuit. There are a variety of scenarios which
might develop at, or during, trial. The possible conflict as discussed in the Kitzerman
decision, supra, should not automatically result in a law firm's
removal. In the course of litigation an honest witness is often compelled to
give evidence which will assist a party that witness feels is
"opposite". I do not agree that such a possible conflict requires
removal in all cases. There may be some where it does. I am not persuaded that
decision should be made at this pre-trial stage of the proceedings in this
case.
46 It should also be borne in mind that all applications to
remove solicitors from the record are not brought with the purest of motives.
The expense and delay involved in retaining new counsel may work to the
substantial benefit of an opposing party in some cases.
[16]
In determining whether removal of counsel is
warranted in a proceeding, Justice O’Brien at paragraph 48 of Essa
outlined a non-exhaustive set of factors that a court may utilize in
considering whether counsel should be disqualified. Those factors include: the
stage of the proceeding, the likelihood that the witness will be called, the
good faith of the party making the application or motion, the significance of
the evidence to be led, the impact of removing counsel on a party’s right to be
represented by counsel of choice, whether the trial will be by judge or jury,
who will call the witness and what unfair advantage may result where counsel
may be cross-examining a favourable witness and the connection/relationship
among counsel, a prospective witness and the parties involved in the
litigation. The court in Essa concluded that, based on an application of
these factors, the trial court had been premature in ordering the removal of
counsel. Since the decision in Essa, these factors have been
consistently applied in a long line of cases in Ontario involving alleged
conflicts of interest where counsel from a firm representing one of the parties
may be called to testify (Boudreau v Loba Ltd., 2015 ONSC 4877; Talisman
Resort GP Inc. v Kyser, 2013 ONSC 1901; Bedford Resources Holdings Ltd.
v 743584 Ontario Inc., [2009] OJ No 1299 and Essex Condominium Corp.
No. 89 v Glengarda Residences Ltd., 2007 CarswellOnt 1421
(Ont SCJ)). As well, the decision in Essa has been endorsed by the Ontario
Court of Appeal in Boudreau v Marler, and by other courts in other
provinces (Goji’s Franchising Corp v McCabe, 2014 NBQB 163; Brogan
v Bank of Montreal, 2013 NSSC 76 and Matic v Waldner, 2013 MBQB
75) and the Federal Courts (Butterfield v Canada (AG), 2005 FC 396;
Bojangles International LLC v Bojangles Cafe Ltd., 2005 FC 272 and Cross-Canada
Auto Body Supply (Windsor) Ltd. v Hyundai Auto Canada, 2006 FC 133).
[17]
The Respondent relied on two cases which predate
the decision in Essa. In Pari Air Ltd. v Blue Sky Air Limited,
[1986] 3 WWR 719 (Sask QB), the Saskatchewan court relied on a number of
factors similar to those outlined in the later decision in Essa. In
concluding that counsel and his law firm should be disqualified from continuing
to represent the plaintiff at trial, the court, at paragraph 11, listed the
following factors:
…the significance
of the anticipated testimony, the likelihood that in discussing the case in the
office the testimony of the witness may become interwoven with the client's
best interests and thus, unconsciously, become tainted, and the stage in the
proceedings at which the event occurs on which the testimony may be sought or
at which the need for such evidence becomes apparent,…
[18]
Similarly, in International Business Machines
Corp. v Printech Ribbons Inc., [1993] FCJ No 1237 (FCTD), Justice Nadon
concluded that a law firm may not continue to act as counsel of record on a
motion if one of the members of that firm swore an affidavit which will be
relied upon in deciding that particular motion. Justice Nadon relied on the
reasoning of the trial level decision in Essa, (again also referred to as
Heck), which had not as yet been overturned by the Ontario Divisional
Court in Essa. Concurring with the reasons of the court in Heck,
Justice Nadon at paragraph 34 cited Heck:
I conclude that this practice should
generally not be permitted because it may create an impression of impropriety
and unfairness in the mind of the public and because it places counsel in an
unacceptable conflict of interest where counsel's duty to the court conflicts
with counsel's duty of loyalty and protection to the witness who is a business
associate and counsel's duty to provide objective advice and representation to
the client. When any counsel's business associate's skill, judgment,
veracity or integrity is challenged that counsel would have difficulty being
objective.
Where counsel has a connection to a
witness who will testify on issues where factual or expert credibility is at
issue there is a risk and a possible perception that counsel may be
inappropriately influenced by that relationship to the detriment of counsel's
duties to the court and the client.
The role of counsel of record in our
system requires the assumption of an independent position from which the
counsel can represent the client with objectivity and fulfil counsel's duties
to the court from a position of detachment. When a counsel calls as a witness a
close relative or someone with whom counsel has an employment relationship, the
client, the public and the presiding judge will not be assured that counsel
will act with that degree of objectivity required by our adversary system.
This is not
an issue which should turn on the wishes of the client or the witness because
their acceptance of the practice could not eliminate the conflict with the duty
of counsel to the court and could not eliminate any appearance of impropriety
in the eyes of the public.
(Emphasis added)
[19]
However, in a later decision, Imperial Oil
Ltd. v Lubrizol Corp., 116 FTR 112, [1999] FCJ No 74 (FCTD), dealing with
the same issue, Justice Nadon fully endorsed the rationale subsequently
developed by the Ontario Divisional Court in Essa.
[20]
Some courts have adopted the more rigid position
that as a general rule counsel should be disqualified on grounds of a conflict
of interest whenever another member of the same firm is likely to offer
evidence, whether testimonial or by affidavit. In Shipdock Amsterdam B.V. v
Cast Group Inc., [2000] FCJ No. 295 (FCTD), Justice O’Keefe of the
Federal Court held that where counsel has deposed to facts in an affidavit to
be used in a motion then another member of the same firm should not argue the
motion. It should be noted, however, that Justice O’Keefe cited only the
earlier decision of Justice Nadon in International Business Machines.
[21]
This Court has considered the removal of counsel
of record in only limited circumstances and none of those decisions considered
the reasoning of the Ontario Divisional Court in Essa. However, the
framework adopted in Essa was endorsed and the factors applied by the
Federal Court of Appeal in Cross-Canada Auto Body Supply, where the
court stated that counsel should generally be barred from introducing evidence
from affiliated members of the firms, based on the policy rationale that such
evidence, being inherently less credible, will be detrimental to the client’s
interests. Where there is a risk that goes to the weight of the evidence being
considered, then such a risk should be avoided by disqualifying counsel of
record unless it is otherwise clearly necessary to continue with that counsel.
[22]
Although none of the decisions from this Court
have involved removal of counsel of record where a lawyer from the same firm
would be providing testimony by affidavit or at the hearing, Appellant counsel
relied on these decisions to support their argument against removal of counsel
in the motion before me.
[23]
Most of this Court’s decisions relevant to this
motion were canvassed by Chief Justice Rossiter in this 2016 case, Attisano
v The Queen, 2016 CarswellNat 966 (TCC). After reviewing several cases
including the Supreme Court of Canada decision in Cunningham v Lilles,
2010 SCC 10, he concluded that the Tax Court of Canada has the inherent power
to remove counsel of record where such an order is necessary in order to
control its own processes, even though neither the Act nor the Rules of
this Court specifically authorize the Court to make such an order. Although
this point was not addressed in the present motion, I agree with the conclusion
reached in Attisano.
[24]
Attisano involved
an alleged conflict of interest where counsel representing the taxpayer in that
case had also previously represented other taxpayers who had also been
directors of the corporation that was under assessment. The court concluded
that appellant counsel was barred from continuing to act due to his prior representation
of the appellant’s co‑directors where the issue of joint and several
liability would arise. Justice Rossiter went on to make the following comment
and conclusion at paragraph 28:
It would
therefore appear that if the Appellant wishes the lawyers to continue to act
for him after having been fully informed of the potential conflict of interest,
then the Court should not interfere on his behalf. However, if there is a
conflict of interest with respect to former clients and they have not waived
the conflict, the Appellant may not be entitled to have the lawyers continue to
act for him. This is the case before the Court. There is no evidence whatsoever
or indication that Mr. T and Mr. D have consented, in any way, to the
Appellant’s counsel continuing to represent the Appellant.
[25]
With respect, I do not believe that the
jurisprudence from other Canadian courts support such a statement. Even when an
appellant has been given full disclosure of the risks involved in going forward
with counsel of record, in some circumstances, the administration of justice
and the integrity of the tax system will be of paramount importance and may
require removal of counsel despite an appellant’s wishes.
[26]
In Hochberg, which had been referenced in
the Attisano decision, Justice Bowie concluded that counsel would not be
disqualified from representing taxpayers who invested in a tax shelter where
counsel had previously represented the promoter of the tax shelter scheme who
had been convicted of fraud. Justice Bowie noted that the taxpayers felt that
their interests coincided entirely with those of the promoter.
[27]
In the 1994 decision in Moffat v The Queen,
[1994] 1 CTC 2756 (TCC), Justice Bell commented, without making specific
findings, on whether filing an affidavit from a lawyer, within the law firm
that was representing the taxpayer, constituted a conflict of interest in
respect to the taxpayer’s counsel of record. He acknowledged the divergent judicial
approaches to this issue and cited both the decisions in Pari Air Ltd.
and the trial decision in Heck which reached similar results by adopting
a stricter rule or framework. Justice Bell, at paragraph 25, commented that “…when a partner or associate will be giving evidence, issues
such as credibility will be important” but he did not clarify which framework,
if any, had been adopted by this Court.
[28]
Three other cases decided by this Court are not
particularly relevant to the issue before me. Two of those dealt with the
potential exposure to and subsequent use of confidential information where
solicitors and employees of one firm or of the Department of Justice change
employment and are subsequently involved with the subject matter (Williamson
v The Queen, 2009 TCC 222, and L & D Petch Contracting v The Queen,
2010 TCC 211). Both decisions emphasized the importance of the public’s
perception of a conflict of interest in respect to the operation of the
judicial system. In the third case, Justice Bowman (as he was then) ordered the
removal of counsel on a motion because that counsel had been suspended by the
Law Society (Spillman v The Queen, 98 DTC 1565 (TCC)).
Analysis:
[29]
I turn now to the application of the caselaw to
the issue before me. The question which I must decide is whether a law firm
should be permitted to continue to represent an investor in a tax shelter
scheme that was allegedly developed, promoted and managed in part by members of
that firm. The relevant caselaw has established at least two potential
frameworks to assist the Court in the determination of such an issue. There has
been wide acceptance by Canadian courts of the decision of the Ontario
Divisional Court in Essa which establishes a non-exhaustive set of
factors to be utilized in determining if counsel of record should be
disqualified in respect of conflict of interest. The decision in Essa
has also been specifically endorsed by the Federal Court of Appeal in Cross-Canada
Auto Body Supply. Other cases, such as Pari Air Ltd., appear to downplay
the importance of protecting the interests of the affected party and provide a
narrower set of factors that the court should consider. Finally, cases such as Shipdock,
favour a more rigid general rule that counsel should be disqualified on grounds
of conflict of interest where another member of the lawyer’s firm is likely to
offer evidence either through testimony or by affidavit.
[30]
Whether I follow the more flexible set of
factors established in Essa or the more rigid framework adopted in Pari
Air Ltd., I would reach the same conclusion in these circumstances.
However, since the Federal Court of Appeal provided specific endorsement of Essa,
I believe it provides the most appropriate framework upon which the present
motion should be decided. I intend to apply each of the Essa factors to
the facts before me keeping in mind that this is not an exact science. As Justice
Conlan stated in Talisman Resort, at paragraph 41, when applying these
factors it is “…not a lesson in arithmetic. We do not
make decisions by adding up the checkmarks on each side.”
Factor 1 – The Stage of the Proceedings:
[31]
The different approaches to the question of
whether a court should address a motion for disqualification of counsel in the
early stages of a proceeding, when the impact on the affected party may be
slight, versus closer to the trial or hearing, when the reviewing judge may be
in a better position to assess the likelihood that an affiliated lawyer to the
counsel of record will in fact testify, were canvassed by Master Beaudoin of
the Ontario Superior Court in George S. Szeto Investments Ltd. v Ott,
[2006] OJ No 1174 (Ont SCJ), at paragraphs 11‑13:
11 …There
are those cases that suggest that a motion to remove a solicitor should be made
at an early stage of the proceedings so as to allow the Plaintiff to retain new
counsel without difficulty and to minimize the financial impact on the
Plaintiff. (Khataan v. Kozman (c.o.b. College Medical Group), [1997]
O.J. No. 3104 at para. 8 (Ont. Ct. Gen. Div.); Ottawa Triple "A"
Management Ltd. v. Ottawa (City), [1998] O.J. No. 891 at para. 8 (Ont. Ct.
Gen. Div.), Breslin v. Breslin [2003] O.J. No. 5207 (S.C.J.)).
12 Another
line of cases suggest that the application to remove should be deferred to the
trial judge who is in the best position to determine if a firm should be
disqualified. (Essa (Township) v. Guergis; Membery v. Hill (supra);
Zesta Engineering v. Cloutier, [2000] O.J. No. 2893, para. 11 (S.C.J.); International
Business Machines Corp. v. Printech Ribbons Inc. (T.D.), [1994] 1 F.C. 692,
paras. 38-40 (Trial Division)).
13 In my view, the apparent conflict between these lines of
cases is easily resolved by examining when the court can conclude that there is
more than real likelihood that the solicitor will be called as witness. If there
is some doubt, "merely a potential", the courts have been more
generous in allowing counsel to remain on the record and deferring the matter
until after discoveries or leaving the matter to the trial judge. Where the
court is satisfied on the record before it that the counsel will be called as a
witness, the decisions favour an early determination of the issue.
[32]
This appeal has not yet advanced to the
examination for discovery stage. Despite the significant period of time that
has elapsed since the filing of the Notice of Appeal on September 17, 2014,
this proceeding is still in its early stages. Examinations were scheduled for
September 21, 2016, but were postponed just prior to that date when the Appellant
counsel advised that the Appellant was no longer available to proceed on that
date.
[33]
However, based on the pleadings and the
written and oral submissions of counsel for both parties, there is a sufficient
record before the Court to enable me to determine whether there is a “real likelihood”, and not simply the mere potential, that
Mr. Nerland and Mr. Mamdani will be called as witnesses, if not by the
Appellant then certainly by the Respondent. I do not believe that this proceeding has reached a stage in
which the prejudice, which may be experienced by the Appellant due to delay and
increased costs, outweighs the interest of maintaining the high standards of
the legal profession and the integrity of our system of justice.
[34]
Consequently, the current stage of this
proceeding and the delay caused by the disqualification of Appellant’s counsel,
will not be impediments to granting the Respondent’s motion.
Factor 2 - The Likelihood that the Witness will be Called:
[35]
The testimony of both Mr. Nerland and Mr.
Mamdani appears to be central to the resolution of the appeal and the
determination of whether the Appellant will be entitled to the claimed CCA
deductions. This impacts both the likelihood that they will be called as
material witnesses at the hearing and the significance of their testimony to
the outcome of the Appellant’s appeal.
[36]
Although Appellant counsel indicated that he did
not intend to call Mr. Nerland or Mr. Mamdani as witnesses, he did admit
during his oral submissions that it remained a possibility. Even if they are
not called by Appellant counsel, there was a submission by Respondent counsel
that he would call them because they are key witnesses. I believe it is more
than a likelihood that these two individuals will be called to testify as to
their communications with the Appellant regarding his investment and also with
respect to the involvement in the alleged software tax shelter scheme of the
law firm, Shea Nerland, SAM, Betasoft and ASC.
[37]
Therefore this factor weighs in favour of
granting this motion because it is likely that both Mr. Nerland and Mr. Mamdani
will be called as witnesses.
Factor 3 – The Good Faith (or Otherwise) of the Party Making
the Application:
[38]
This is a neutral factor in this motion. There
is no assertion by the Appellant that the Respondent has acted in bad faith in
bringing this motion.
[39]
According to the affidavit of Manon Bourgeois,
Respondent counsel first raised this issue with the Appellant in an email in
July 2015, then again in a second email in October 2015 and finally raised the
issue during a status hearing in November 2015. Written submissions by both
parties confirm that settlement negotiations were ongoing during this period
relating to the Appellant’s appeal, as well as several related appeals.
Settlement was successfully concluded in all appeals except for the Appellant’s
appeal. The Respondent’s written submissions state that counsel expected that
if the Appellant’s appeal was also settled, it would negate the alleged present
conflict and the need for this motion.
[40]
The fact that Respondent counsel anticipated
that a successful settlement of this appeal would negate the alleged conflict
explains why the motion was not filed until September 2016. With the
possibility of a settlement significantly reduced, the Respondent directed his
mind to the filing of this motion within a week of being advised that the
Appellant was unwilling to settle.
Factor 4 – The Significance of the Evidence to be Led:
[41]
This factor is an important one in favour
of granting the Respondent’s motion. Previously in these Reasons, I concluded
that the testimony of Mr. Nerland and Mr. Mamdani will be of vital
importance in determining whether the scheme was in fact a “tax shelter” that was not registered. Their testimony
concerning the transactions which involved the Appellant, the other investors, the
law firm, Betasoft and SAM, will likely be central to the resolution of the
appeal.
[42]
Furthermore, there was
no indication in the oral or written submissions that the Respondent will be
able to produce this evidence by some other means. Courts will be hesitant to disqualify
counsel where there is a possibility that the evidence may be adduced by other
means (Watkins v Toronto Terminals Railway, 2014 ONSC 5553 (Ont SCJ)). However, there is no indication in this motion that would allow me
to conclude that there are other persons that could give the necessary evidence
regarding the nature of the communications with the Appellant and the
circumstances of his investment in the alleged software tax shelter scheme.
Factor 5 – The Impact on the Party’s Right to be Represented
by Counsel of Choice:
[43]
The right of a party to freely engage legal
counsel of their choosing is of paramount importance but it is not an absolute
right. Nevertheless, this right will weigh heavily against ordering the removal
of counsel. It is a right that will be accorded deference whenever possible but
in some circumstances it may be required to “…yield to
the paramount public interest in preserving the integrity of the system, as
well as its appearance.” (781332 Ontario Inc. v Mortgage Insurance Co. of
Canada, [1991] OJ No 1592 (Gen Div), as quoted in Condoluci v Martins,
[2004] OJ No 4501 (Ont SCJ) at paragraph 26.
[44]
In this case, Appellant counsel has
argued that his disqualification, as well as that of his law firm, will be
extremely prejudicial to his client, Adolf Woessner. The affidavit of the
Appellant’s son states that such disqualification would cause a financial
burden for the Appellant because Shea Nerland has provided his father with a “payment arrangement…on a favourable basis” and that it would
be otherwise “difficult to pursue the Tax Court Appeal.” (Affidavit of Ralph
Woessner, paragraph 8). However, courts have
repeatedly noted that the right to choose counsel can be outweighed where it
would “detrimentally affect the administration of justice” (George S. Szeto
Investments Ltd. and Karas v Ontario, 2011 ONSC 5181 (Ont SCJ)) and
further that financial impact upon a party is not an automatic bar to the
removal of counsel (Mazinani).
[45]
The only evidence
submitted by Appellant counsel on this point was the affidavit of the
Appellant’s son. The affidavit did not elaborate on the nature and terms of the
payment arrangement provided by Shea Nerland, nor did it contain any detail
regarding the financial impact on the Appellant with respect to retaining new
counsel beyond the bald statement that it would be difficult for the Appellant
to otherwise continue the appeal. These statements, standing alone, were
insufficient to allow me to conclude that the Appellant would be unduly prejudiced
by the removal of Mr. Clark and his law firm as counsel of record.
[46]
Furthermore, even
if there was sufficient evidence for me to conclude that the Appellant would be
prejudiced financially, the present case is one in which considerations of the
proper administration of justice and the integrity of the tax system outweigh
any prejudice to the Appellant from the removal of counsel of record. In this
case, there is a strong likelihood that Appellant counsel will be required to
cross-examine his partner and a former associate on matters bearing directly on
the quality of the legal services provided to the Appellant and the law firm’s
participation in the alleged tax shelter scheme. In such circumstances, it
would be inappropriate to allow considerations of the financial impact on the
Appellant to supersede the very real risks to the integrity of the tax system
and to the maintenance of high professional standards in the conduct of tax
appeals before this Court.
Factor 6 – Whether the Trial is by Judge or Jury:
[47]
This factor is not relevant in Tax Court
appeals.
Factor 7 – Who Will Call the Witness:
[48]
This factor may be relevant where there is a
probability counsel will be in a position to cross-examine a favourable
witness, resulting in an unfair advantage arising. In this motion, it is likely
that the Respondent counsel will call Mr. Nerland and Mr. Mamdani to
testify, putting Appellant counsel in the position of cross-examining them.
Although this raises some concerns, I consider some of the other factors to be
more relevant to my decision.
Factor 8 – The
Relationship/Connection between Counsel, the Prospective Witness and the
Parties Involved in the Litigation:
[49]
There are two connections at play that raise
concern. While the relationship between the Appellant, Mr. Woessner, and Shea Nerland
is at the heart of this motion, it is the relationship between Matthew Clark, the
Appellant counsel and his law firm and more specifically Mr. Nerland and
Mr. Mamdani that will have significant impact in this appeal. Appellant
counsel and Mr. Nerland are colleagues and partners in the same firm.
While Mr. Mamdani is a former associate with the firm, his precise present
connection with Appellant counsel is unknown as there appears to be a
continuation of strong links between this individual and Appellant counsel’s law
firm. This is evidenced by Mr. Mamdani continuing to act as President, CEO
and director of SAM. Mr. Nerland continues to be a director of SAM and it
was SAM that entered into the contract to provide managerial, consulting,
financial and supervisory services to the Appellant in respect to his
investment in the software.
[50]
Finally, the Respondent asserts that it was Shea
Nerland that provided the legal advice to the Appellant in the first instance
in respect to his investment. Key factual matters are at the heart of the
involvement of these parties to the transactions as they relate to the
Appellant. The interests of those various parties may not be identical and in
fact may be adverse to the interests of the Appellant. Appellant counsel may unknowingly
be putting himself at variance to his role as advocate for his client as
opposed to partisanship and loyalty he may have to his firm and his colleagues.
As a result, his ability to represent his client, the Appellant, in an
objective and independent manner will be impaired. There is also concern about the
nature of the discussions and disclosures that have been made to the Appellant
about these potential conflicts although I have no reason to conclude that
consent given to counsel to act in this appeal is anything other than a fully
informed and understood consent.
Conclusion:
[51]
Removal of counsel of record will always be an
extreme remedy and must not be ordered except in the clearest of cases. The
conflict of interest giving rise to the request for disqualification must be
real, substantial and ongoing. If the conflict is contingent, remote or
premature, the removal should not be granted (Essa, at paragraphs 43 and
47).
[52]
Essentially, all of the factors outlined in Essa,
with the exception of the right of the Appellant to choose his own counsel,
favour the granting of this motion. The degree to which Shea Nerland appears to
be immersed in the promotion and management of the alleged tax shelter scheme
and the likely importance of the testimony of Mr. Nerland and Mr. Mamdani,
necessitate an order for the removal of Appellant counsel and the law firm in
order to maintain the reputation of the administration of the judicial system
and to avoid the appearance of impropriety to the public.
[53]
If I allowed Appellant counsel to remain as
counsel of record and let this scenario play out at the hearing, there is also an
extremely high likelihood of conflict arising to the detriment of the
Appellant, Mr. Woessner. This risk is not minimal or remote in these circumstances
but actual and likely. Consequently, it is unrealistic to conclude that Mr.
Clark will be able to balance his obligations to his partners and colleagues
with his professional obligations to his client, Mr. Woessner. Therefore
this risk places the present case squarely within the scope of the concern
identified by the Federal Court of Appeal in Cross-Canada Auto Body Supply.
[54]
The multiple conflicts, that are likely
to arise in these circumstances, are evident. Although the Appellant has
apparently received full disclosure and has consented to his counsel
continuing, the second problem relating to the administration of justice cannot
be waived. There may be conflicts between Appellant counsel’s obligations to
Mr. Woessner to present his case in the most favourable light and counsel’s
obligations of objectivity in view of his law firm’s central involvement in
this Appellant’s investment. As noted in some of the jurisprudence, this
conflict cannot be waived by a client where that conflict involves counsel, as an
officer of the Court and his role within the justice system. The assumption that
counsel, who is representing a client and fulfilling his duty to the court at
the same time, will be independent of undue influences, is a requirement of our
system. When counsel of record has the type of intricate “connection” to a witness, as in this case, there can be no
assurances to the court, the public or the client that counsel, in fact and in
appearance, will act objectively in those duties. Hence the high probability of
appearance of impropriety in the public’s eyes.
[55]
These comments
bring me back to the central question to be asked and that is whether a fair-minded,
reasonably informed member of the public would conclude, in the circumstances
of the present case, that there is a compelling reason for disqualifying
counsel of record such that the proper administration of justice requires it.
For the reasons I have outlined, I am granting the Respondent’s motion together
with costs for removal of Appellant counsel, as well as the law firm, Shea
Nerland.
[56]
Both parties had
also agreed that the Appellant would pay $237.00 to the Respondent to indemnify
the Respondent for costs associated with the Appellant’s cancellation of the
scheduled examination for discovery. I order those costs in the amount of
$237.00 to be paid forthwith. The Appellant shall have 60 days from the date of
this Order and Reasons for Order to find alternate counsel and to advise both
Respondent counsel and the Court. After the Appellant has found alternate
counsel, both parties shall have 60 days from the date the Appellant has
advised the Court of his new counsel, to contact and advise the Court with
respect to a proposed timeline for the remaining steps in the litigation.
Signed
at Ottawa, Canada, this 28th day of June 2017.
“Diane Campbell”
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