Does Your Debtor Owe His/Her/Its Lawyers?

I read an interesting article about a decision rendered in Newmarket last month in a case that has interesting ramifications.

In Dalcor Inc., the fight was over the priority of creditors.  Trisura had a validly registered PPSA security interest and claimed that it had priority over certain monies paid into court.  The debtor’s lawyers, BPR, claimed that they were entitled to first priority over the funds in court because they had a right to a charging order under the Solicitors Act.

Let’s breakaway on a quick tangent to explain charging orders.  Fact #1: lawyers do not generally work for free.  Fact #2: while parties can represent themselves, the process of litigation does go more smoothly if all parties have lawyers than if the parties represent themselves.  Fact #3: Depending on the circumstances, a lawyer, as an officer of the court, cannot get out of his/her duty to represent his/her client just because the lawyer is not getting paid.  So, for example, if a case has been going on for years and it’s 3 days before trial and the lawyer hasn’t been paid, then he/she cannot simply say “either I get paid, or I do not show up to court.”  If the lawyer was allowed to do this, then the whole scheduling system could be thrown into upheaval.  So, if the circumstances apply and a lawyer is not allowed to quit the case at that time, the lawyer is faced with the unfortunate situation of having to work without any guarantee of payment.  To alleviate or minimize this potentially problematic situation for the lawyer, the Solicitors Act and the common law permit the lawyer to apply for, and if granted to register, a charging order against the property.  This is not an automatic right and the lawyer has to make a motion to the court to get such an order.  In my example, the lawyer is still not guaranteed of being paid, but he/she will at least have some security over any property owned by the client to ensure that at least some (or possibly all) of the legal fees get paid.

Back to our case.  The dispute, then, was between a Personal Property Security Act registered creditor and the debtor’s lawyers and the question was who would get priority.  The secured creditor argued that it had registered and it had done this long before the lawyers came on the scene (and any search by the lawyers would have revealed the secured creditor’s security interest), so the secured creditor should have priority.  The lawyers argued, however, that the PPSA did not apply to this situation.  Paragraph 4(1)(a) of the PPSA says that the Act does not apply with respect to any lien given either by another statute (for example, the Construction Lien Act or the Repair and Storage Liens Act) and Section 20 of the Act says that a security interest is subordinate to any lien that arises prior to perfection of the security interest (usually by registration).  So the lawyers argued that they could have priority over the PPSA-registered secured creditor.  Of course, the question (and hence the underlining) is whether a “charging order” under the Solicitors Act amounted to a “lien”.

The Court held that Section 34 of the Solicitors Act only speaks to “charging orders” but that this is not the end of the situation.  This is because a lawyer can obtain his/her security under either or both of Section 34 of the Solicitors Act or under the court’s inherent jurisdiction granted at common law.  When one discusses the common law and the court’s inherent jurisdiction, the right is referred to as a “charging lien” – and now the magic word “lien” has appeared.  On this basis, then, the court determined that the PPSA did not give a secured creditor priority over a lien claimant and, it followed, that the lawyers could have priority over the PPSA secured creditor.

If you are lending money or you hold some form of security (for example, you are storing something for a customer who doesn’t pay his/her/its rent and you no longer have possession of the item but have registered your lien), this now adds another aspect that you have to look at.  Has your debtor paid his/her/its lawyers?  If the lawyers haven’t been paid, then your security may be behind the lawyers’ unpaid fees and the security that you thought you had for your debt may not be sufficient to ensure that you are paid what you are owed.  If you are a lender, as part of your standard due diligence, you may well want to get assurances from the debtor’s legal counsel that they are not owed any money for legal fees and that no charging orders or liens for fees have been obtained or obtained but not yet registered against the client’s assets.  Similarly, as part of the “regular” reporting required by a debtor (either quarterly or year-end), you may now want to include getting an updated confirmation from the lawyers that they have no unpaid invoices or charging orders related to the debtor.

Something to think about.



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