Canada: Handling Trust Funds When Your Client Is Subject To A Mareva Injunction

What should a lawyer do with trust funds when his or her client is subject to a Mareva injunction?  In Sabourin and Sun Group of Companies v Laiken, the Court of Appeal held that by applying the money to pay legal fees and returning the balance to his client, the lawyer had breached a court order and was in contempt of court. 

Sabourin was a financial advisor who was subject to a Mareva injunction obtained by Laiken in May of 2006.  The injunction expressly applied to moneys held in trust and did not provide for the payment of legal fees or living expenses.  Both parties and the Court subsequently agreed that the Order was overly restrictive and required variation for routine expenses.  The Court left it to the parties to work out appropriate terms, but no steps were ever taken to amend the Order.

On September 21, 2006, Sabourin sent his lawyer, Carey, a cheque for $500,000 without instructions.  Carey deposited the money into trust per Law Society regulations and Sabourin later instructed him to use the funds to settle with certain third party creditors.  Sabourin had previously informed these creditors that he had $500,000 for settlement negotiations, but Carey refused to pay any money to these creditors because he knew that doing so would violate the Mareva injunction.  Sabourin also instructed Carey to attempt to negotiate a settlement with Laiken, but the settlement negotiations were unsuccessful.

Sabourin then asked Carey to return the trust funds to him.  Carey deducted $60,000 for past and future legal fees and returned the balance of the trust funds to Sabourin.

The third party creditors subsequently obtained judgment against Sabourin and demanded that Carey release the trust funds to satisfy the judgment.  Laiken also obtained judgment against Sabourin.

When Laiken found out that Carey had returned the trust money to Sabourin, Laiken brought a contempt motion and alleged that Carey had violated the Mareva injunction by returning the moneys held in trust.

Laiken's affiant did not appear for his scheduled cross-examination on the motion and Carey decided to have his lawyer attend at the contempt hearing but not to attend himself.  Carey did, however, file an affidavit that was considered by the Court. Justice Roberts found Carey in contempt and adjourned the motion in respect of the sanction to be applied, finding that "[w]ith respect, the Mareva Order could not be clearer: it plainly prohibited any and all dealings whatsoever with any monies belonging to the Sabourin defendants, expressly including any held in trust for them" (para. 17).

Carey filed a notice of appeal and moved for a stay of the Order.  Justice Sharpe dismissed the stay application on the grounds that the appeal should not fragment the proceedings before the Superior Court.

On the return of the motion before Justice Roberts, Carey testified that he honestly believed he had acted properly in his handling of the trust funds.  He stated that he never intended to breach the Order and asked that the finding of contempt be set aside.  In support of his position, he filed an affidavit sworn by Alan Lenczner that stated that Carey's actions were typical of counsel generally.  Carey's main defence was that keeping the money would have meant sheltering it from creditors under the veil of solicitor-client privilege.  Justice Roberts explained that she was not satisfied beyond a reasonable doubt that Carey had intentionally violated the Order or that his interpretation of it was wilfully blind.  Without ruling on the correctness of Carey's actions, she held that the finding of contempt should be set aside.

There were four issues on appeal, but the one of greatest importance to lawyers who hold trust funds from a client subject to a Mareva injunction relates to the finding of contempt.  Justice Sharpe held that the Motion Judge was wrong to find that the terms of the Order were unclear to Carey.  Carey's own behaviour, when he refused to settle with the third party creditors, indicated his understanding.  The Court explained that orders must be respected, even if they are improperly granted or unduly restrictive.  Ultimately, as Sabourin's lawyer, Carey was to be held to the same standard of compliance with the Order as his client.

In the result, the appeal was allowed.  The finding of contempt was restored, but the sanction was limited to costs.  The lesson for lawyers: read Mareva injunction orders carefully and if the Order freezes trust funds, do not use those trust funds for any purpose until the Order is varied to permit the funds to be used.  If in doubt, seek directions from the court.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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