Bay Street law firm takes on 164 lawyers

The Canadian legal profession has always seemed, at least from the outside, a rather gentlemanly group. Barristers, after all, are still required to don the black robes of old England to attend higher courts. So when one of Canada’s largest and most storied law firms launched an epic battle against more than 100 other lawyers, it started a scrap of the sort rarely seen in this country.

Last month, Cassels Brock and Blackwell LLP, a Bay Street firm with a roster that includes former Ontario premiers David Peterson and Mike Harris, began serving dozens of lawyers with notice of a lawsuit. The lawyers—164 in all—range from partners in some of the country’s biggest law firms to more than a dozen one-man shops in places like Morris, Man., Bathurst, N.B., and Yorkton, Sask. In some cases, Cassels doesn’t even know who the lawyers are: 14 are listed in court filings simply as “John or Jane Doe,” including two “Doe Professional Corporations.”

Cassels’ suit is merely the latest development in a massive and complex $750-million class action case that revolves around the harried legal negotiations that all of the lawyers were involved in to restructure General Motors’ Canadian operations (including closing dealerships) in 2009 so the company could stave off a bankruptcy.

While it is hardly unusual for lawyers to face off against each other in court, or even sue each other for malpractice, this degree of professional infighting is virtually unheard of in Canada. And the case is already having major implications for the way firms give independent legal advice and defend against a growing number of class action lawsuits. “It’s a highly unusual move,” says Dimitri Lascaris, a partner in the class actions department at Siskinds LLP, which is not among the firms being sued by Cassels Brock. “I’ve never heard of that before and I’ve been involved in many class actions and read hundreds of class action decisions.”

The case began with a letter from GM to its dealers back in May 2009. The automaker, desperate to reduce the size of its dealer network, wrote 240 of its Canadian dealers with a proposal: voluntarily close their dealerships and receive a payout, or wait and lose everything when the carmaker goes bankrupt. The deal wasn’t open to negotiation, the company said. It gave its dealers six days to decide. The dealers brought the proposal to Cassels Brock, whom they had hired months earlier to represent them in case of a GM bankruptcy.

To qualify for GM’s payout, dealers needed to show a signed certificate saying they had sought independent legal advice on the company’s offer and that they wouldn’t sue. In a four-hour conference call hours before GM’s offer expired, two lawyers from Cassels Brock allegedly told the dealers their only course of action was to take the deal or risk a GM bankruptcy. Despite the fact that dealers had paid a multi-million-dollar retainer to Cassels, according to the claim, the law firm said it couldn’t sign the offer and told the dealers to find their own independent legal advice.

Gary Decker, who had run a successful GM dealership in Clarenville, Nfld., a two-hour drive north of St. John’s, for 30 years, took the offer to his local lawyer. “He said to me, ‘What do you think you should do?’ ” Decker recalled. “I said: ‘It looks to me that I don’t have a choice.’ ” (Decker’s lawyer, Corwin Mills, declined to comment.) Decker took the deal—as did 214 other dealers—and closed his dealership, laying off almost all of his 30 employees, some of whom had been with the company for 25 years.

But GM’s Canadian subsidiary never went bankrupt and instead received $10.6 billion from the federal and Ontario governments, the largest government bailout in Canadian history. Dealers who had refused to sign GM’s offer got to keep their business. Those who signed it were forced to shut down. Decker now runs a business repairing snowmobiles and selling a few used cars on the side. “It was the worst day of my life,” he says of closing his dealership. “I’ve lost good family members to death and everything else. I’ve been though a divorce. But this thing was rougher than that.”

The dealers who signed the papers and shut down filed a class action lawsuit against General Motors in 2010. Along with GM, the dealers also sued Cassels Brock, alleging its lawyers had a conflict of interest since the law firm never told the dealers it was also representing the Canadian government in its bailout negotiations with GM. It was the federal government who had asked GM to slash its dealer network in order to get taxpayer support. Cassels Brock, the lawsuit claims, was more interested in helping the federal government get what it wanted from GM than protecting a few hundred dealers who were about to get cut loose. Cassels Brock declined to comment on the case.

According to the dealers’ claim, the law firm never mentioned that dealers actually had grounds to collectively fight GM’s offer, or that it violated franchise law in several provinces because, among other things, it didn’t come with the required disclosure document containing detailed information about GM’s finances and it didn’t give dealers the 14 days required by law to consider the offer.

“They said there was no other option. There was no ‘Let’s go and negotiate this thing,’ ” says David Sterns, whose law firm, Sotos LLP, represents the GM dealers in the class action suit. “Cassels Brock really basically beat a hasty retreat and then told these [dealers] at the 11th hour they would have to go speak to their local lawyer and some of them had 24 hours to look at these agreements.”

At $750 million, the claim, which has been certified by an Ontario court, is one of the largest class actions ever filed against a Canadian law firm.

In its statement of defence, Cassels Brock contends it was never in a solicitor-client relationship, saying it had been retained by the dealers to represent them only in case of a GM bankruptcy, which never happened. The multi-million-dollar legal fund paid into by the dealers to fight a GM insolvency was never paid out to Cassels and was later refunded.

It also denied any conflict of interest over its decision to advise both the GM dealers and the federal government because it had “erected an ethical wall within the firm” to handle the two separately—a standard practice among large firms with huge rosters of clients that keeps lawyers from communicating with each other over potentially conflicting cases. (In court filings, the dealers claim Cassels lawyers did, indeed, talk to each other about their competing clients.)

In Cassels Brock’s counterclaim against the dealers’ lawyers, it contends that if it’s found liable for any damages through either a settlement or court judgment, the dealers’ lawyers should share in the pain.

The unusual tactic—a law firm suing hundreds of mainly small-town lawyers—has significant ramifications for the Canadian legal system, but has been met with public silence by virtually everyone involved. Maclean’s contacted more than a dozen of the law firms named in the suit. None were willing to talk on the record. Neither were law professors from several law schools. Cassels Brock’s insurance company, LawPRO, which also insures the 70 Ontario lawyers named in the suit, said it couldn’t comment on the case for privacy reasons.

“It’s very controversial,” said one lawyer from a major Toronto firm that is being sued by Cassels Brock, who spoke only on background. “It’s definitely going to have an impact on whether lawyers are prepared to give independent legal advice in situations like this claim, because obviously the lawyers who gave independent legal advice never imagined in a million years they’d get dragged into this action.”

The fact that the dealers decided to sue Cassels Brock for malpractice instead of the dozens of lawyers who actually signed their offers from GM shows the law firm’s counterclaim has little merit, says Sterns. “It’s not every day that you see a major law firm suing that many other lawyers,” he says. “If anyone was to go after these [lawyers], you’d think it would be their own clients. That’s pretty important because we know what happened and we know the situation those lawyers were placed in and the finger of blame in this case is pointing squarely at GM and Cassels.”

Lawyers are rarely the subject of class action lawsuits in Canada, although they are becoming more common. At least three law firms, including Cassels, have been sued in recent years over tax shelter schemes that allowed investors to donate money to charity and receive tax receipts for much more than they donated. The Canada Revenue Agency has cracked down on the alleged donation-for-profit schemes, leaving investors on the hook for billions of dollars in unpaid taxes. Investors have sued the law firms who provided legal opinions that gave a green light to the practice. (The class action against Cassels was rejected by the court. The firm also filed a counterclaim against lawyers in that case.)

At the heart of Cassels Brock’s counterclaim against so many other lawyers, insiders say, is the need to offset the enormous cost a successful lawsuit would mean to the firm’s insurance company. Like virtually all law firms in Ontario, Cassels Brock is insured against malpractice suits by LawPRO. Most lawyers, however, also take out “excess” coverage with other insurance companies for claims that go beyond LawPRO’s standard $1-million limit.

At $750 million, the class action suit is more than seven times larger than the $100 million in claims against lawyers filed with LawPRO last year. Malpractice claims have been on the rise, the company said in its 2011 annual report—up nearly 40 per cent last year alone. The number of claims above $100,000 has more than doubled since 2000. More than one in every 10 lawyers in Ontario was the subject of an insurance claim last year.

Cassels Brock’s counterclaim is a strategic move by the defence that is part of a much larger trend in Canadian class action litigation, says Siskinds lawyer Lascaris. Corporations are no longer simply settling out of court for huge sums and have been pushing harder against the onslaught of class action suits. “You’re seeing more cases going into discovery,” Lascaris says. “Defendants have decided they’re going to put the plaintiff to the test and see whether they’re prepared to risk it all at trial.”

Last year, an Ontario Court of Appeal tossed out a class action lawsuit by a group of Port Colborne residents who claimed environmental damage from an Inco Ltd. nickel refinery had harmed their property values. The company vigorously fought the suit. In the end, the court ordered the plaintiffs to pay $100,000 in legal costs to Inco. In 2010, another Ontario court issued a $456-million judgment in a class action filed by policyholders of Great-West Lifeco that the company had been challenging in court for the past 12 years.

In the case of the suit by Cassels Brock against the other lawyers, Lascaris says it’s likely an attempt to flood the court with hundreds of new defendants, forcing the judge to examine all of the advice that each individual lawyer gave to his or her clients. “It increases enormously the complexity and cost of litigating the case,” he says. “It undoubtedly causes very significant expenses and inconvenience to the plaintiff, but it also jeopardizes the credibility of the case and could potentially persuade the judge that the case is simply not manageable as a class action.”

All that has left a bitter taste in the mouths of dealers like Gary Decker, who said his lawyer called him to advise him of the lawsuit. For him, it’s a bad situation made even worse. “They’re trying to pass the buck, obviously, and a lot of those local lawyers are small compared to the big corporations,” he says. “All those guys are getting dragged through the mud for no reason.”