BigLaw Tax Advice Contributes to Significant Adverse Judgment

When Ahmed Baig decided to purchase and flip a commercial building that was under receivership, he turned to BigLaw for help. He retained Peter Kiborn, then a partner at Miller Thomson LLP to handle the transaction on his behalf. As part of that retainer, Mr. Kiborn provided advice concerning Baig’s obligations to pay land transfer tax. That advice would later play a significant role in Justice Myers decision that Mr. Baig was liable for fraudulent misrepresentations. Meridian Credit Union Limited v. Baig, 2014 ONSC 4717 (CanLII), affirmed by Meridian Credit Union Limited v. Baig, 2016 ONCA 150 (CanLII).

Factual Background

The Baig case arose after a Toronto building owner defaulted upon his mortgage to Meridian Credit Union. Meridian commenced proceedings, and in 2005 had a Receiver of the building appointed. After a lengthy marketing process, the Receiver agreed to sell the building to Mr. Baig, in trust for a company to be incorporated, for $6.2 million. A purchase agreement was entered into, Article 39 of which provided that the Receiver had the right to arbitrarily withhold its consent to any assignments (beyond the company to be incorporated by Baig).

Before that transaction closed, Baig agreed to re-sell the building to Yellowstone Property Consultants Corp. for approximately $9 million. While Baig was not prohibited by the agreement from re-selling the building, he was prohibited from assigning his interest without the Receiver’s consent, which could be arbitrarily withheld (except as noted above). Baig did not tell the Receiver about his subsequent sale agreement (and the Receiver later claimed it would not have recommended the Court approve the sale to Baig for $6.2 million had it known, as there were unsecured creditors behind Meridian going unpaid and the Receiver had an obligation to maximize recovery).[1]

To avoid land transfer tax, Kiborn suggested that title to the building be transferred to Yellowstone directly.[2] In an internal memo dated December 19, 2005, Mr. Kiborn set out the issues for his colleagues as follows:

  • transfers of beneficial interests in land are subject to LTT [land transfer tax] (exception for continuing affiliates);

  • LTT is not payable if title is directed straight over to the flippee (but, the higher price being paid by the flippee will be shown on transfer and the LTT affidavit, so the flip will be apparent to the seller, unless you prepaid the LTT directly to the Ministry);[3]

Both Kiborn and Baig wanted to prevent the Receiver from discovering the sale to Yellowstone, because the $2.8 million differential would jeopardize court approval.[4] While real estate transactions normally include a land transfer tax affidavit disclosing the price paid and the tax payable, Baig, through his counsel, entered into a direct agreement to pay the tax with the Minister of Finance to “avoid the need to deliver a land transfer tax affidavit at closing that would have disclosed the transaction and its $9 million purchase price to the Receiver.[5]

In the course of closing the transaction, Kiborn delivered to the Receiver a number of documents including a draft title direction, a resolution of Yellowstone’s board of directors – in which Yellowstone was listed as the purchaser and a document registration agreement, in which Yellowstone was listed as the purchasing corporation.[6]The document registration agreement further listed Mr. Kiborn’s firm, Miller Thomson LLP as the “Purchaser’s Solicitor,” though Yellowstone was in fact represented by another firm.[7]Kiborn admitted he intended the Receiver to rely upon those documents.[8]

The Receiver subsequently obtained Court approval for the sale, and in August 2006, title was transferred to Yellowstone. In 2009, Meridian discovered that Yellowstone had purchased the building for $9 million (rather than $6.2 million) and contacted the Receiver. Meridian then obtained an assignment of the Receiver’s rights, and initiated suits against Baig and Yellowstone, seeking an accounting of the profit made by Baig on the re-sale or alternately damages of approximately $2.1 million for breach of contract, fraudulent misrepresentation and conspiracy. Baig in turn brought claims against Kiborn and Miller Thomson LLP for contribution and indemnity.

The Superior Court Decision of Justice Myers

In the trial court, Baig moved for summary judgment. A lawyer from Miller Thomson LLP provided an affidavit in support of Baig’s motion. Kiborn was a witness, though no relief was sought from him, and he did not attend the hearing.[9] After the hearing, Justice Myers granted summary judgment in favor of Meridian, finding Baig liable for having made fraudulent misrepresentations, in an amount to be determined. In his analysis, Justice Myers stated that “[t]he title direction, the other closing documents, the corporate resolution, and the document registration agreement contained untrue statements. Mr. Kiborn admitted under cross-examination that he knew the statements in those documents were incorrect and he intended them to be relied upon by the Receiver’s counsel for closing.” On that basis, Justice Myers held that an express case of fraudulent misrepresentation had been made out.[10] Justice Myers further opined that “[a]lthough Baig had no duty to disclose his flip, once his lawyers knowingly made misleading disclosures misrepresenting Yellowstone to be the purchaser under Baig’s agreement with the Receiver, the failure to correct the misimpression created amounts to fraudulent misrepresentation as well.”[11]

Further, Justice Myers held that providing Baig’s closing documents from Yellowstone was a misrepresentation. Additionally, “the mis-descriptions that the documents contained were express representations of fact that were not true. Accordingly, I find on the balance of probabilities that it was fraudulently misrepresented to the Receiver that Yellowstone was Mr. Baig’s corporation incorporated to close the sale with the Receiver and that Baig and his counsel actively hid by such misrepresentations that Yellowstone was a third party purchaser from Baig. Were there an enhanced standard of proof applicable in light of the seriousness of the allegations of fraud, I would have found that standard met on these formal transaction documents in any event.”[12]

The Court of Appeal Decision

Baig appealed the ruling of Justice Myers, arguing that Justice Myers erred in finding him personally liable for fraudulent misrepresentations. Additionally, Kiborn & Miller Thomson LLP were granted leave to intervene, arguing that Justice Myers breached the rules of natural justice and procedural fairness in making findings against them in their absence.

On the record before it, the Court of Appeal had little difficulty finding there was sufficient evidence to prove the elements of fraudulent misrepresentation. Specifically, “both the appellant and his counsel actively hid the agreement to sell to Yellowstone. They fraudulently misrepresented that Yellowstone was the corporation incorporated to close the sale with the Receiver. For instance, the appellant personally signed a title direction that falsely identified Yellowstone, and not himself or his company, as the purchaser. He admitted that he knew this information was false.”[13] The Court of Appeal further held that Baig had some knowledge about the misrepresentations, that without those representations the Receiver would have acted differently and to Baig’s detriment, and finally, that as a result of those misrepresentations, the Receiver lost an opportunity to negotiate a higher price.[14]

The Court of Appeal next addressed Baig’s argument that Justice Myer’s erred in finding him personally liable and piercing the corporate veil. That argument was swiftly rejected, as “[t]he consistent line of authority in Canada holds simply that, in all events, officers, directors and employees of corporations are responsible for their tortious conduct even though that conduct was directed in a bona fide manner to the best interests of the company.”[15]

The Court then turned to the arguments of Kiborn & Miller Thomson, whose “main complaint was that the motion judge’s publically available reasons could damage their reputation.”[16]In support thereof, Kiborn & Miller Thomson argued that by “making adverse findings against them in their absence, the motion judge breached the rules of natural justice and procedural fairness.”[17] Specifically, the intervenors sought to reverse Justice Myer’s finding that “they had prepared documents which contained fraudulent misrepresentations and held that they had “actively hid” Yellowstone’s ownership through those misrepresentations.”[18]

In denying their appeal, the Court held that the intervenors were no different than any other non-party witness, and as such did not have the right to notice, a chance to adduce evidence or to make submissions, even where an adverse credibility determination may be made.[19] Moreover, the Court held that non-parties are limited to whatever procedural rights they have under the rules, and noted that the intervenors knew of the motion, adopted a ‘wait-and-see approach’ and failed to avail themselves of their rights to intervene or consolidate the actions. In dismissing their appeal, the Court stated that “[n]on-parties should not be able to lurk in the shadows and then spring up to challenge a decision whenever the outcome – or findings of fact – may affect them in some manner they do not like. In my view, the statement of claim in the appellant’s action is the only notice to which the interveners were entitled.[20]

The Appellate Court also noted that the intervenors were not directly impacted by the order, nor bound by the motion judge’s finding that they made fraudulent misrepresentations and remained free to defend their reputations and argue that they never made fraudulent misrepresentations. Though not necessary to its decision, the Appeals Court pointed out that with Baig being liable, the intervenors were at increased risk of his claims for contribution and indemnity.[21] Finally, both defendants were ordered to pay costs.

Implications for Legal Professionals

The Baig decision is a significant decision for legal professionals in a number of respects. Initially, while not touched upon in the decision, it should serve as a reminder that lawyers are subject to numerous Rules of Professional Conduct, and that violations of those Rules, such as, for instance, making or causing fraudulent misrepresentations to be made or even taking advantage of the slips and mistakes of others, can result in professional discipline from the Law Society. This article reaches no conclusion as to whether Kiborn, Miller Thomson LLP or any employee thereof made such representations, it simply seeks to summarize the 2 cited opinions and identify risks faced by legal professionals. As noted herein, the findings of Justice Myers are not binding upon Kiborn or Miller Thomson LLP.

The Baig decision is also significant from a professional liability perspective. As noted, on being sued by Meridian, Baig brought an action against Kiborn & Miller Thomson LLP for contribution and indemnity, where the damages sought may be more than 50 times greater than the amount charged as fees. At the end of the day, decisions made by Mr. Kiborn to save his client approximately $100,000.00 in land transfer tax have exposed him and his former firm to potential liability far in excess of that amount.[22] This article reaches no conclusion as to whether Kiborn, Miller Thomson LLP or any employee thereof may be liable as a result of their advice or involvement in the above noted transaction or in any way breached the applicable standard of care, it simply seeks to summarize the 2 cited opinions and identify risks faced by legal professionals. Likewise, no conclusions are reached as to the merits of Baig’s claims for contribution and indemnity.

Implications for Clients

The Baig case illustrates that legal clients may have recourse after encountering problems with a transaction or with their legal representation. If you have hired a lawyer only to discover significant problems later, you may have a valid claim for legal malpractice.

Claims for malpractice may arise when your lawyer loses your case at trial, under settles your case, handles a transaction where a significant liability is only discovered after the fact or otherwise breaches the standard of care applicable to legal professionals. If you feel that you may have suffered from legal malpractice, fill out our Free Case Evaluation Form or call our GTA legal malpractice lawyers at 1-647-495-8995 for your free and confidential legal malpractice case evaluation. We have law offices in Hamilton and Toronto, and our Ontario malpractice lawyers will meet you where it’s most convenient.

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