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Gardiner Miller prevails against former clients

|Written By By Kirsten McMahon

Correction

An article "Gardiner Miller Prevails Against Former Client" [Law Times, March 27, 2006] referred to a March 1, 2006 ruling by Justice Geoffrey Morawetz of the Ontario Superior Court in Gardiner Miller Arnold LLP v Kymbo International Inc. et al. and included comments by Mark Arnold, a lawyer involved in the case. The decision permitted Arnold''s firm to recover legal fees from his former clients and opposing parties in a law suit which was settled secretly without his involvement by the parties themselves. Aspects of Justice Morawetz''s ruling were not accurately described in the article and require clarification.

In fact, there was no finding that defendants John H. Teskey, Vacation Brokers Inc. and Ridings Financial Services Inc. had defrauded Arnold''s law firm of its fees, only that they had colluded with Arnold''s former clients in a secret settlement giving rise to their liability. Further, there was no evidence that, at the time the settlement was first reached, Teskey knew Arnold''s firm was owed money by its clients or that the injunction decision then pending would necessarily have tied up a substantial sum of money.

Both Law Times and Mr. Arnold regret any misunderstanding they may have caused and apologize to John H. Teskey, Vacation Brokers Inc. and Ridings Financial Services Inc.

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An Ontario Superior Court judge has ruled that a lawyer is entitled to special relief for legal fees when there has been collusion and fraud on the part of former clients and the party they were suing.

"It's an important decision for all of us who toil in this unforgiving profession," says Mark H. Arnold of Gardiner Miller Arnold LLP, the law firm at the centre of a suit against its former clients, Kymbo International Inc. et al., and the party the clients were suing, John Howard Teskey et al.

"In the case at bar, I find that [Gregory] Gura Sr. and [Gregory] Gura Jr., as the principles of Kymbo and its associated companies, entered into secret negotiations with Teskey and they directed Kymbo and its associated companies to enter into the secret deal with Teskey with the purpose of defrauding Gardiner Miller Arnold's legal fees," ruled Justice Geoffrey Morawetz earlier this month in Gardiner Miller Arnold LLP v. Kymbo International Inc. et al.

The case started back in 2003, when Kymbo and its associated companies, which sold vacation club memberships, entered into a retainer agreement with Gardiner Miller to represent them in a dispute with the Teskey Group, which conducted the business of servicing vacation memberships for vacation clubs sold, as well as an ensuing counterclaim.

As a result of the legal services rendered to Kymbo, which filed for bankruptcy in October 2005, and the Gura family, the corporation and the individuals became indebted to the firm for the amount of almost $130,000.

The Kymbo action was never tried and was settled on a walk-away basis, according to the parties, without the knowledge or involvement of Gardiner Miller sometime in October 2004. This after a $650,000-settlement offer was refused and an impending decision on an injunction motion.

"In the teeth of the lawsuit I was involved in acting for the Kymbo Group ? we were on the verge of getting a decision released by a judge on an injunction motion that would have tied up a substantial amount of money, approximately $500,000 ? just prior to that decision being released, my client, Kymbo, and the party we were suing, Teskey, went off and had coffee together at a Tim Hortons doughnut shop in London, Ont., and agreed to settle the case behind my back, knowing full well I was owed a substantial amount of money in legal fees," says Arnold.

 "What Justice Morawetz did on the evidence is he found that both of them had defrauded my law firm and colluded to defeat my claim for fees."

While Morawetz didn't create new law in this case, he did rely on an old Ontario decision from the 1940s, Cohen v. Journal Publications of Toronto Ltd., which provides for relief to a lawyer who has been aggrieved and injured by a settlement made.

The test in Cohen requires two of the three following questions to be answered in the affirmative:

?    Was there any notice of this lien to the other side?

?    Were there any fruits of this action?

?    Was there any collusion to deprive a solicitor of his costs?

Morawetz found that in this case, all three questions could be answered in the affirmative.

"The important thing is not that my client is on the hook for my fees, because I've always known that, but that the party that we were suing is on the hook for my fees," says Arnold.

"For lawyers out there who are faced with a similar situation ? and by the way I'm sure it goes on all the time where your client goes out and makes a deal behind your back with the party that you're suing ? all of those parties are liable for the lawyers' legal fees under what Morawetz refers to as the 'special solicitors remedy.'"

Members of the Gura family argued that because they were not individually named on the retainer agreement, they were not liable for the outstanding legal fees.

Arnold says he prepared a retainer agreement with Kymbo and its affiliated companies in haste, because the matter was described as urgent. When Teskey counterclaimed six months later, naming individuals of the Gura family, Arnold says he made a mistake by not going to his client at that time and asking for a revised retainer agreement confirming that he was acting on behalf of the individual family members as well.

Morawetz agreed but said he had no doubt Arnold thought he had been retained not only by Kymbo and its associated companies, but also by the principals.

"When it became apparent to me my client was doing something behind my back, I went to my client and said, 'Look, I'm acting for all the family members, I want you to all to sign retainer agreements,' and my clients individually refused to do that," says Arnold. "That's the retainer issue in the lawsuit and the judge criticized me mildly for realizing in essence too late that my retainer agreement didn't cover the individual family members."

Arnold says part of the lesson learned is that counsel have to be very careful and cautious with respect to retainer agreements and that when the picture changes, counsel must protect themselves to ensure all bases are covered.

However, retainer agreements that are that complicated and precise may serve to drive away potential clients or even invite future litigation.

"We now have a two-page retainer agreement. It's complicated," he says. "I wonder whether I have to send a client off for independent legal advice before I take a retainer from that client because I've got such a lengthy, complicated retainer agreement to try to cover all possibilities.

"So much so that I can see a client turning around and challenging it down the road and saying, 'I didn't understand the retainer agreement, it was too complicated.'"

Aaron Crangle, counsel for Teskey, says he has been instructed to appeal the decision and would rather comment on the case after the notice has been filed.

Arnold says while he thought the decision was just and Morawetz's remedy of $105,650 plus interest to be paid by both parties was fair, no lawyer likes to be in this kind of dispute with a client.

"I guess what deeply disappoints me is that I was betrayed and defrauded by a client who I had worked passionately hard for," he says.

"In a way it shows me how we as lawyers, how vulnerable we are sometimes. We're held to a very high standard yet we are vulnerable to this type of conduct that takes place."

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