Case to consider lawyer’s fiduciary duty to client he had ‘spousal relationship’ with

The Superior Court of Justice has delivered an unusual decision in a decade-old legal dispute involving the fiduciary duty of a Davis Moldaver LLP lawyer towards a client who would later become his romantic partner and, in his view, his spouse.

It’s a case that one Toronto litigator suggests could have lawyers on the hook indefinitely for claims of breach of fiduciary duty.

“It could certainly open the door for clients who are looking to bring actions against their former counsel who then rely on the pre-2004 time period to bring their motions for breach of fiduciary duty,” says Brett Harrison, a litigator at McMillan LLP.

Writing in Kastner v. Davis, Superior Court Justice Thomas Lederer determined that although a motion for summary judgment was brought almost 10 years after the event occurred, the nature of the relationship between lawyer Milton Davis and his former client, Rhonda Kastner, raised important questions about fiduciary duties, the time limit placed on actions under the Limitations Act, and whether any duty was in fact owed.

“The action was begun almost 10 years after the events on which it relies occurred,” wrote Lederer.
“In the normal course, one would anticipate it to be out of time.

The plaintiff says that, taken from when she discovered the claim, the action was commenced in time but that, even if she is found to be wrong in this, her relationship with the defendant was such that he owed her a fiduciary duty which he had breached.

This is significant because, at the time, there was no limitation period directly applicable to a claim for breach of fiduciary duty and the plaintiff would, in such circumstances, be free to proceed with the action.”

According to Lederer’s ruling, the matter began when Kastner met Davis in 1999 after she started managing her deceased father’s business. Davis had been representing her father’s business in ongoing litigation, and Kastner sought his legal advice on other matters as well.

The pair would become romantically involved from 1999 to 2002, although Kastner denied there was any spousal relationship. During that period, Kastner and Davis exchanged money, property, and services.

Among the most significant exchanges was a $125,000 loan from Kastner to Davis to pay taxes he owed; a $102,700 loan from Kastner to Davis to purchase a lot next to his cottage; and a $30,000 loan from Kastner to Davis to help him assist a friend with the purchase of a cottage. Kastner also gave Davis almost $360,000 to help him renovate his law office.

In return, Davis transferred a 50-per-cent interest in the cottage lot to Kastner and made unspecified plans to provide her with free legal advice.

According to Lederer’s ruling, Davis has since repaid the three loans and Kastner has returned the interest in the cottage.

But Kastner argues Davis should repay the outstanding $360,000 that she describes as a loan. She maintains the money is repayable within the terms of the fiduciary duty Davis owed to her and meets the two-year time limit under the Limitations Act.

According to Kastner’s affidavit, she “was suddenly in the precarious position of having to take over management of the business on [her] own” and told Davis she would be “completely dependent upon him to provide [her] advice and guidance for dealing with the Kaiser litigation.”

Davis, however, argued the money was a gift. Davis also argued that if the money was a loan, any applicable limitation period had long since expired.

But while Lederer ruled a breach of fiduciary duty would be impossible to determine without a trial, he alluded to what he suggests are bigger concerns.

“While it is not for me to decide, it may be that the suggested failure to ensure that the plaintiff obtained independent legal advice, in respect of each of the transactions, will be the larger concern,” wrote Lederer.

He later added: “It could be that, as in Central Trust Co. v. Rafuse, the core of the case runs to the professional responsibility of the defendant as a lawyer. These responsibilities may arise where there is a fiduciary duty, even if the contribution to the office renovations was a gift.”

As for the limitation period, Lederer determined that if Kastner issued the statement of claim on Aug. 13, 2010, there was an overall agreement to repay the money for the office renovations, and that agreement was breached in March 2010 when Davis refused to act for her, the two-year limitation period would apply but wouldn’t have expired.

At the same time, if Kastner didn’t become aware that there was a fiduciary duty owed to her until April 2010, she still would have made the discovery less than two years before issuing the statement of claim.

“Simply put, $359,866.35 is a great deal of money,” wrote Lederer. “For such an amount to be given as a gift in any circumstance would be unusual.

Where the recipient is a lawyer, who acts for the donor, or for any other reason stands as a fiduciary, it may be that there is a responsibility to be sure that the donor understands the impact of what is being done.”

That duty, according to Harrison, could become particularly important for lawyers if clients are able to circumvent traditional limitation periods in the future.

“If that is the case, it seems that lawyers would need to become more aware of the limitation period, particularly if clients are able to bring actions more than 10 years old successfully,” he says.

But while the repercussions may be troublesome for lawyers, the courts have considered related issues before.

Lederer noted that in Piccolo v. DiBenedetto, the court found that a fiduciary obligation can exist, if not on a solicitor-client basis, then on the grounds of a relationship of close proximity to a solicitor-client one.

Similarly, in Cassey v. Morrison, the court ruled a lawyer owed a fiduciary duty to a client with whom he had an intimate and friendly relationship.

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