Canada: Supreme Court Of Canada Decision Cautions - Lawyers, Banks, Brokers, And Other Third Parties Holding Funds Subject To Freezing Injunction

Carey v. Laiken 2015 SCC 17 a recent Supreme Court of Canada decision, found a lawyer in contempt of court for returning funds to his client that were subject to a Mareva freezing injunction. This decision serves as a caution to banks, brokerage houses, and other third-party persons and institutions holding client funds.

THE FACTS

In the prior litigation leading to the decision, one Ms Laiken sued her broker, Mr Sabourin, whom she claimed had defrauded her of some $800,000. She obtained a Mareva order prohibiting Mr Sabourin and anyone having notice of the order from "disposing of, or otherwise dealing with" any of his assets. Mr Sabourin was represented by Mr Carey, a Toronto lawyer. A few months after the freeze order, Mr Sabourin sent Mr Carey a cheque for $500,000. On several occasions, Mr Carey used the funds to pay his fees: such payments were permitted under the order. Mr Sabourin told Mr Carey to use the remaining funds to settle claims of other creditors. No settlement was achieved, and Mr Sabourin instructed Mr Carey to return the remaining funds ($440,000). He did so. Mr Sabourin's business failed and he disappeared. Ms Laiken was awarded over $1million in her claim against Mr Sabourin but of course a significant potential means of collecting on that award was now lost. Ms Laiken applied to have Mr Carey found in contempt.

THE DECISION: CONTEMPT

The Supreme Court of Canada confirmed that Mr Carey was guilty of contempt of court when he transferred the funds to his client. To be guilty of contempt, the person need not have the deliberate intent to breach a court order. All that need be shown is that the person did a deliberate act that was contrary to the terms of the order.

Mr Carey argued that he should not be found in contempt for complying with what he understood to be his professional obligations in following his client's instructions and returning the funds, all without disclosing these acts to the court or the claimant. He also argued that no contempt should be found as the funds were always beneficially owned by the client. Both arguments were rejected by the Supreme Court: neither ownership nor perceived professional obligations will serve as a defence.

FINANCIAL INSTITUTIONS LIKELY IN CONTEMPT FOR BREACH

On its face, the decision equally applies to financial institutions and other third parties in possession of funds of a client who is the subject of an asset-freezing injunction or other court order such as a garnishing order. In most cases, such orders will be sent to all financial institutions that the defendant has dealt with in the past, thus providing notice and setting up potential liability.

Findings of contempt against third parties are rare in Canadian law, but there are precedents in the United Kingdom. In R. (Revenue & Customs Prosecution Office) v. Lloyds TSB Plc [2007] EWHC 2393 (Admin), the financial institution defendant was found in contempt for transferring its client's frozen funds into a new account without advising the claimant, even though the transfer was well-intentioned and even though no losses occurred.

LIKELY NO FINANCIAL LIABILITY FOR BREACH

There is some (qualified) reassurance for financial institutions. First, the Court in Carey v. Laiken acknowledges, without deciding one way or the other, that some legal rulings in the United Kingdom and Australia hold that third parties will not be found in contempt unless they show a conscious intent to interfere with the administration of justice. Second, at least in the UK, a financial institution or other party transferring its client's funds in breach of a court order will not, in addition to contempt, face financial liability for breach, leading to reimbursement to the claimant of the transferred funds: Customs and Excise Commissioners v. Barclays Bank plc, [2006] UKHL 28. That said, there is no guarantee that Canadian courts will follow the lead of the UK courts, and both questions remain open in Canada, as shown by two cases.

In Kovacs v. TD Bank Financial Group, 2010 ONSC 3469, the Court declined to strike a claim that sought compensation from a bank for improper transfer of funds allegedly transferred in breach of a court order; the issue of potential liability was never determined as the case settled. Notably, the Carey v. Laiken case also claims personal liability against Mr Carey: this aspect of the case, as of yet undetermined, may lead to a court finding of whether or not a third party such as a bank or financial institution will be required to reimburse the plaintiff for funds that they let slip away from potential execution by releasing them to the defendant.

PRACTICAL STEPS

It goes without saying that a financial institution or other third party served with a freezing order, or other order directing the treatment of a client's funds, should tread very cautiously and take no actions with respect to those funds without seeking legal advice and securing the permission of the court (or, if appropriate, the party obtaining the order). Generally, where an order permits the client to withdraw living (or other stipulated) expenses, the prudent course is to:

1. Confirm proper service, and then freeze all accounts identified in the order, and consider whether the order impedes or affects the bank's lending status with the client and ability to access accounts to apply to client indebtedness to the bank;

2. Have the client provide a summary of necessary living expenses, based on the wording of the order, and seek instructions and consent from the client to deal with the funds in such manner as most appropriate to manage the account during the term of the freeze, including obtaining written consent from the client to discuss such with counsel for the party that obtained the order;

3. Propose to counsel for the party that obtained the order that funds be deposited on a monthly basis into a new account for the client's permitted use; and

4. Do not move or release the funds until and unless the party that obtained the order provides written consent in accord with the order (if permitted by its terms), or the court approves such an arrangement.

The Carey and Lloyds decisions make clear that any institution receiving a freezing order must not unilaterally implement what it believes to be a practical way of dealing with that order, but must ensure that the proposed mechanism is approved of by the party that acquired the order, or, if that party refuses, the court.

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