“Behaviour modification” the goal in suit against law firm

publication date: Mar 1, 2012
author/source: Janet Gadeski
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When donors are enriched by the process of giving, that's a red flag, says class action lawyer David Thompson of Scarfone Hawkins LLP. And he expects his legal colleagues to know that too. That's why he took on the Bay Street law firm that backstopped the Banyan Tree Foundation giving program with a favourable opinion on its legality.

The foundation's charitable registration was revoked in September 2008 after the Canada Revenue Agency disallowed $208 million in tax receipts and described its donation arrangements as "a sham."

"One of the primary objectives of class proceedings legislation is behaviour modification," explained Thompson's colleague Bridget Scott, speaking on his behalf.  "This case and others like it will hopefully have the effect of causing lawyers and other professionals to be much more vigilant in providing opinions on such programs in the future."

A precedent for giving scheme losses

Scott told Hilborn eNEWS that as far as Scarfone Hawkins is aware, the class action suit against the Banyan Tree Foundation, its financial service providers and the law firm whose opinion was published in the program's marketing materials is the first to include the lawyers among those accountable for participants' losses.

"We do view the Banyan Tree case as an important precedent," she said.

Just words on a page

In a session during Being Good@Doing Good*, Thompson told a packed room of delegates that such opinions are merely "marketing documents. They're just words on a page." From the beginning, he confirmed in an email exchange with Hilborn eNEWS, he and partner Matthew Moloci believed the foundation's lawyers knew or ought to have known that promoters would use their legal opinions in the marketing scheme.

"We felt passionate about the situation and that the legal landscape needed to change so as to impose accountability in situations such as this," he explained.

Like fundraisers, lawyers ran on passion

That fervour supported them through hundreds of hours of analysis and participant interviews. It fuelled their months-long search for a representative plaintiff: someone willing to go on record as the "face" of the class action. And it helped them stand firm when the defendants' much larger law firm threatened to "squash them like a bug" during initial negotiations.

"We formulated the argument that 'but for' a legal opinion, programs such as this could never be launched or marketed," Thompson continued.

Tax opinion tapped rich stream of business

The same law firm that provided the tax opinion also structured the legal arrangements for the gift program - and according to Thompson, the legal structure didn't match the assumed arm's-length arrangements laid out in the tax opinion. He alleged the law firm knew those assumptions were inaccurate.

An out-of-court settlement with no admission of liability was reached before he could bring the claim to trial. But he was able to get the law firm to disclose that it received a "premium fee" based on the number of participants in the gift scheme. The firm, he continued, "also significantly assisted the promoters in attempting to address challenges from the CRA."

Greed trumps rationality

Thompson remains baffled by the loyalty and stubbornness of some duped investors. In the beginning, 200 of them refused to cooperate with him. So convinced were they of the program's validity that they were not even willing to discuss participating in the suit, let alone becoming the representative plaintiff. Finally he found an Oakville couple willing to face publicity but not the representative plaintiff's liability for defendants' legal costs in the event that he lost the case.

To make the suit feasible, Scarfone Hawkins gave the couple an indemnity that released them from all liability for the defendants' costs. While launching the action, they also negotiated with CRA to recognize the cash portion paid by participants as a charitable donation, and grant capital loss treatment for the money that had disappeared offshore with the scheme's promoters.

The $11 million settlement may sound paltry, Thompson concedes. It's less than half of the estimated cash invested in the scheme. But with the primary malefactors declaring bankruptcy, only the lawyers' insurers are able to contribute to the settlement and the plaintiff's legal costs.

* Being Good@Doing Good, held in Toronto in February, was organized by Capacity Builders and the Charity Law Information Program.

For more information on the settlement, http://www.classactionlaw.ca/content/claims/Rochester/Rochester.htm.

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