2005 BCSC 17err1.doc Gilson v. 605541 B.C. Ltd. and Monical

Before: The Honourable Mr. Justice Powers

Reasons for Judgment

Counsel for petitioners	R.A. Foulston
Counsel for respondents	P.D. Messner Q.C.
Date and Place of Trial/Hearing:	December 15, 2004
	Kamloops, B.C.

[1] This decision relates to two notices of motion. The first brought by the Monicals to declare a claim of lien under the Livestock Act, RSBC [1996] c. 270 as null, void and of no effect and to enjoin the Gilsons from executing documents as officers of 605541 B.C. Ltd. (the “company”), except as authorized by an agreement of July 4, 2003, or a court order and special costs. The second notice of motion is by the Gilsons seeking a declaration that the Monicals’ lawyer, Messner, is in a conflict of interest and to enjoin him from acting for the company or for the Monicals. The motion also seeks a declaration that the court has no jurisdiction to deal with the livestock lien and costs.

[2] The declaration with regard to jurisdiction and the Livestock Lien Act, RSBC [1996] c. 272 is really a defence or an argument against the motion brought by the Monicals.

BACKGROUND

[3] This dispute in litigation is a conflict between the parties about their interests in the company and the deadlock that has resulted between them as shareholders. The Monicals contributed $1,190,814.37 and the Gilsons $670,000.00 to acquire the Onward/Mission Ranch near 150 Mile House. They were to acquire this through a corporate entity, being the company. They also borrowed approximately $1,000,000.00 by way of bank financing. They were completely unable to cooperate, and the Gilsons commenced the existing action for relief under the Company Act, R.S.B.C. [1996] c. 62 for an order winding up the company. They consented to an order apportioning the ranch between them on an interim basis to allow them each to continue to occupy and operate a portion of the ranch land. The parties had, through counsel, agreed on April 30, 2002, as to the terms of the division of the ranch on an interim basis, and restrictions on the operation of the company. These restrictions included double signatures on all company cheques; one Monical and one Gilson. The Monicals and Gilsons were to pay to the company reasonable pasturage fees, to be either agreed upon or determined at trial.

[4] The parties recognized at an early date that due to the conflict between them as shareholders, the operations of the company were deadlocked. They had not had the initial meeting of the company; shares had not been issued. Officers and directors had not been appointed. Income tax returns had not been filed and the Annual Reports for the company had not been filed. It was in the interest of everybody to preserve the company while this litigation continued. The Gilsons and Monicals agreed, through negotiations with counsel, to a process in which officers of the company could be appointed. They entered into a written agreement on July 4, 2003, which provided that all four parties would continue to act as directors of the company. They agreed to a process to select the nominal president and secretary of the company. The nominal president was selected for the purposes of filling the position solely for the purpose of filing the companies Form 16 Annual Report with the Registrar of Companies. The nominal secretary was selected for this same purpose. They agreed at ¶3:

The parties agree that the role of President and Secretary are nominal only, and do not carry any authority except as specifically authorized by a Resolution signed by all four shareholders/directors.

[5] The Gilsons and Monicals both had the benefit of counsel when that agreement was entered into and in fact, signed the agreement in the presence of counsel. The company was a party to the agreement and all four signed as authorized signatories of the company.

[6] The Monicals continued to occupy a portion of the ranch allocated to them by the order of Mr. Justice Hunter. They ran their cattle on the ranch and on the range permit. Throughout the last three or four years they have paid approximately $730,000.00 towards the company expenses. These include the significant mortgage payments the company had to make each year.

[7] The Gilsons continue to occupy the portion of the ranch allocated to them pursuant to the order of Mr. Justice Hunter. However, they have kept very few cattle on their portion of the ranch and they say they have not used the range permit that was allocated to them. Their position is that because of the way the ranch land was apportioned, it was not feasible for them to run a cattle herd. They also refer to lack of use of company machinery that prevented them from operating or running their cattle on the ranch.

[8] The Gilsons argue that the Monicals have failed to properly pay pasturage for their cattle to the company and that this has put the company in a position where it was unable to meet its expenses. The Gilsons did, on their own and without consultation with the Monicals, take steps to rent a number of residences on the ranch property and collect the rents for those. The Gilsons’ position is that they have deposited those monies into the company accounts after the payment of some expenses, but that they have still incurred personal obligations in excess of $4,000.00 relating to those rental operations.

[9] In August of 2004, the Monicals decided that they did not wish to make any more payments towards the company debts because of the position taken by Gilsons with regard to an earlier offer to settle. The Gilsons have taken the position that they have accepted an offer pursuant to Rule 37, from the Monicals which would allow the Gilsons to purchase the Monicals’ share for 1.2 million dollars. The Monicals take the position that the offer was no longer outstanding and that the trial had commenced and the Gilsons were no longer in a position to accept the offer. The issue was resolved at the trial level in favour of the Monicals, but has been appealed by the Gilsons.

[10] Ms. Gilson took the position that she, as president of the company, was entitled to act in the interest of the company in order to attempt to collect the outstanding pasturage fees from the Monicals. The issue of quantum of pasturage fees had been referred to the registrar by the consent of both parties. The parties have not completed that reference, although it has been commenced and set for completion on a number of occasions. Each party and each counsel have their own explanation as to why matters have not proceeded as they should have. It is not necessary for me to determine at this stage where the responsibility for that lies, but failure to cooperate even in this court process has not benefited any of the parties.

[11] Ms. Gilson gave instructions to Mr. Foulston to file a Livestock Lien Act claim of lien on behalf of the company. In doing so, Mr. Foulston was taking his instructions from Ms. Gilson, not as a shareholder of the company, but in her capacity as president or director, and was acting on behalf of the company. Ms. Gilson was clearly operating in contravention of the agreement reached between the parties with regard to the limited authority she would have as nominal president. She was well aware that she had no authority to act on behalf of the company without the approval of all the shareholders. She and Mr. Gilson had been renting the residences and collecting rent for the residences on the company lands without objection by the Monicals. The Monicals simply wished them to account for any monies they received on behalf of the company. The Gilsons and Mr. Foulston knew that the Monicals would not consent to an action being taken against them on behalf of the company for the disputed pasturage fees.

[12] During submissions, Mr. Foulston tried to argue that too much emphasis was being placed on Ms. Gilson’s role as president and that really she was simply acting as agent of the company. Ms. Gilson signed the claim of lien as president of the numbered company. Subsequently, Mr. Foulston sent correspondence to the Bank of Montreal and the Royal Bank secured creditors of the Monicals, a demand for information pursuant to s.18 of the Personal Property Security Act, RSBC [1996] c. 359. In his opening paragraph in those letters he stated:

Please be advised that the undersigned has been retained to act on behalf of George and Caroline Gilson, officers and directors of 605541 B.C. Ltd., concerning their position as a creditor of the following individuals…

and then refers to the Monicals. Mr. Foulston’s position is that he was acting on behalf of the Gilsons and not the company when he sent that letter, but the opening paragraph is certainly equivocal. There is no explanation as to how the Gilsons became creditors of the Monicals.

[13] In any event, Ms. Gilson had no authority to claim any lien on behalf of the company nor to instruct any counsel to apply for or register any lien on behalf of the company. In particular, she knew she had no authority to bring any action on behalf of the company against the Monicals.

[14] The Gilsons argue that this court has no jurisdiction to deal with any debt that may be owing by the Monicals to the Gilsons in this proceeding and, therefore, should make no order with regard to the claim of lien. Counsel refers to the decision Pasnak v. Chura 2004 BCCA 221 and the trial decision at 2003 BCSC 782. The Court of Appeal at ¶28 refers to an earlier decision of the Court of Appeal S.G. & S. Investments (1972) Ltd. v. Golden Boy Foods Inc. (1991), 56 B.C.L.R. (2d)273(C.A.) for the proposition that:

…in an oppression case that it was an error to include a shareholder’s loan in the purchase price.

[15] The court simply found that a loan to the company owed to the shareholder was not the subject matter of an oppression claim. It was not a consideration in fixing the purchase price of the shares.

[16] Even if the Gilsons are correct, that does not mean that this court does not have jurisdiction in these proceedings with regard to the conduct of the company affairs. The parties have not sought the appointment of a receiver or a receiver/manager, although it is one remedy that is available to them. Rather, they have agreed and obtained various court orders to allow them to occupy the ranch property and, in some fashion, continue their own business operations. They have agreed and consented to an order referring the issue of ownership of cattle and pasturage charges owed to the company to the registrar. They may well, if they are unable to agree, seek an order that the court value the shares of the company. In the meantime, it is clear that nobody has the authority to act independently on behalf of the company. I am satisfied that where any of the shareholders purport to act on behalf of the company in excess of their authority, that this court has jurisdiction in this proceeding to deal with that matter.

[17] I therefore find and declare that the claim of lien dated August 25, 2004, and all steps taken by the Gilsons on the strength of that lien are null and void. Neither the Gilsons nor their counsel had the authority to act on behalf of the company in pursuit of the lien.

GILSON’S NOTICE OF MOTION

[18] These proceedings were commenced by a petition by the Gilsons naming the company and the Monicals as respondents. The Monicals were the parties that were to hold two-thirds of the shares of the company. The Monicals retained counsel, Mr. Messner, who filed a response on behalf of the company and the Monicals. The Professional Conduct Handbook, which contains the Canons Of Legal Ethics in c.1, provides in ¶3(2):

A lawyer should disclose to the client all the circumstances of the lawyer’s relations to the parties and interest in or connection with the controversy, if any, which might influence whether the client selects or continues to retain the lawyer. A lawyer shall not act where there is a conflict of interests between the lawyer and a client or between clients.

[19] Chapter 6 deals with conflicts of interest between clients and the undivided loyalty a lawyer has to every client. That chapter provides the circumstances in which a lawyer may act for clients who are adverse in interest, including the requirement of informed consent. This includes the requirement that no information received from either of them may be treated as confidential as between them. (4(b) c. 6) Paragraph 5 also provides that if a conflict arises between clients, a lawyer must cease representing all of the clients unless the clients have specifically consented to them continuing to act. In this case it is clear that, although Mr. Messner filed a response on behalf of the company, he has never taken instructions from anyone on behalf of the company. It is also clear that he has never acted on behalf of the company in these proceedings. Mr. Messner has advised me in court that he has never received any confidential information from anybody in their capacity as an officer or director of company. He has sought and received instructions and acted on behalf of the Monicals as shareholders of the company. He has opposed applications brought by the Gilsons, but only on behalf of the Monicals. No issue has ever been raised with regard to the fact that Mr. Messner may have filed a court document purporting to file a response on behalf of the company until now. The Gilsons were represented by counsel throughout and it was apparent to everyone that Mr. Messner was acting on behalf of the Monicals and not on behalf of the company.

[20] It is difficult for the Gilsons to argue that Mr. Messner has somehow been acting as solicitor for the company on the one hand and at the same time, argue that they were entitled to instruct and Mr. Foulston was entitled to act on behalf of the company in the filing of the lien referred to above.

[21] This case is not analogous to the situation in MacDonald Estate v. Martin, [1990] 3 S.C.R.1235, which the Gilsons referred to. The MacDonald case involved a junior solicitor who was actively involved in that particular case for one party and privy to many confidences disclosed, who subsequently joined the firm of the law firm representing the other party in the action. The court recognized in ¶16 and 18 that the relevant Law Society Rules were an expression of the professional standard in a code of ethics and were an important statement of public policy. The court found that it was important that there not only be any actual conflict but that there be no appearance of conflict between solicitors and clients.(¶42) Where there was issues of whether confidential information had been exchanged, the court said in ¶46:

In my opinion, once it is shown by the client that there existed a previous relationship which is sufficiently related to the retainer from which it is sought to remove the solicitor, the court should infer that confidential information was imparted unless the solicitor satisfies the court that no information was imparted which could be relevant. This will be a difficult burden to discharge.

¶47:

A lawyer who has relevant confidential information cannot act against his client or former client. In such a case the disqualification is automatic. No assurances or undertakings not to use the information will avail. The lawyer cannot compartmentalize his or her mind so as to screen out what has been gleaned from the client and what was acquired elsewhere. Furthermore, there would be a danger that the lawyer would avoid use of information acquired legitimately because it might be perceived to have come from the client. This would prevent the lawyer from adequately representing the new client. Moreover, the former client would feel at a disadvantage.

[22] In the present case, Mr. Messner has, from the beginning in fact, acted only on behalf of the Monicals. In the ongoing dispute he is not acting against the company. He is acting against and his clients’ interests are against the Gilsons as shareholders. The company is named in these proceedings but is not an active participant in any way. It is an entity affected by the proceedings, but otherwise is not a participant.

[23] This case is also distinguishable from the decision in Mottershead v. Burdwood Bay Settlement Co., [1991] B.C.J.2554.

[24] In Mottershead, two minority shareholders brought proceedings under the Company Act. Three majority shareholders retained one lawyer. There was then a Director’s Resolution appointing the same lawyer as the company’s solicitor for the purposes of defending the action. The petition was subsequently converted to an action and the solicitor filed a statement of defence on behalf of the company and the majority shareholders. The registered records office of the company was also moved to that solicitor’s firm. The issue was whether the solicitor and his firm had put themselves in a conflict of interest. The court found that as corporate solicitor and counsel for the company, the lawyer’s duty was to the company. As counsel for the three personal defendants, his duty was to those individuals. The interest of the company and the majority shareholders and directors may not be the same. In fact, the solicitor had written a letter indicating that one of the defendants that he did not act for, and the plaintiffs, were not acting in the best interest of the company in pursuing the positions they took in the litigation and therefore, must exclude themselves from any meetings of the directors in which the litigation was discussed. Other examples included legal costs incurred by the majority being billed and paid by the company, and the advice that the solicitor gave to one of the minority shareholders that he was prohibited from communicating with him about the litigation by the Rules of Conduct. The solicitor presented an offer to purchase one of the minority shareholders interest without consulting the other. There were also allegations of refusal to disclose documents on the basis that they were subject to solicitor/client privilege.

[25] It is clear that in the Mottershead case, the solicitor simply took the position that the interest of the company and the majority shareholders were the same. It was clear he had actually acted on behalf of the company, and on behalf of the majority shareholders.

[26] In that case, the court found that the solicitor was in a conflict of interest and ordered that he be removed as solicitor of record for both the individual defendants and the company.

[27] The circumstances in our case are different in that, the only thing that Mr. Messner has done is file a response which appears to be a response of the company as well as his clients. In no other way, has he purported to act on behalf of the company or to take instructions from anybody to act on behalf of the company.

[28] In the circumstances, Mr. Messner must be removed as solicitor of record for the company, but it is not necessary that he be removed as solicitor of record for the Monicals. There is no actual conflict nor would a reasonable member of the public, having knowledge of all of the circumstances, believe that there would be a conflict in Mr. Messner continuing to act. There has been no acquisition of confidential information from the company.

[29] This situation is really no different than a solicitor filing an appearance or defence on behalf of two defendants in an action through inadvertence, and never acting on behalf of one of those defendants. It would be reasonable to expect that solicitor to withdraw any pleadings on behalf of the defendant that they had inadvertently appeared for, and provided they had not actually acted for that person, there would be no impediment to them continuing to act for the client that had actually instructed them.

SUMMARY AND COSTS

[30] The livestock lien is declared invalid. The Gilsons and Monicals are both enjoined from executing documents as officers of 605541 B.C. Ltd., except as authorized by the agreement of all four shareholders, in writing, or a court order. The Gilsons’ motion to have Mr. Messner removed as solicitor for the Monicals is dismissed. Mr. Messner will forthwith take steps to remove himself as counsel for the company. The Gilsons will pay the Monicals costs at scale 3 in any event of the cause.

“R.E. Powers, J.”
The Honourable Mr. Justice R.E. Powers

January 14, 2005 – Revised Judgment

Corrigendum to the Reasons for Judgment issued by Mr. Justice Powers advising that the date of the hearing on the first page is noted as November 15, 2004 and should read December 15, 2004.

In paragraph 27, the second sentence reads, “In no other way, is he purported to act on behalf of the company …” and it should read, “In no other way, has he purported to act on behalf of the company …”.

Citation:	*Gilson v. 605541 B.C. Ltd. and Monical ,*
	2005 BCSC 17