In the recent decision of Law Society of Alberta v Higgerty, 2023 ABKB 499 (“Higgerty”), the Court of King’s Bench of Alberta allowed for the appointment of a receiver and manager under the Judicature Act, RSA 2000, c J-2 (the “Judicature Act”) on the basis that solicitor-client privilege takes priority when in conflict with the interests and entitlements of secured creditors.
In Higgerty, Higgerty Law was placed under custodianship in March of 2023 pursuant to an Order from the Court (the “Custodianship Order”). Following this, the Custodian of Higgerty Law successfully applied under the Custodianship Order and to the Law Society of Alberta (the “LSA”) to appoint a receiver and manager over certain undertakings, personal property, real property and assets of Higgerty Law. “Property” under the Custodianship Order included file material of Higgerty Law.
Importantly, at the time of the Custodianship Order, Higgerty Law also had a substantial number of creditors, including its largest secured creditor, Easy Legal Finance Inc. (“ELFI”). ELFI was owed in excess of $1.4 million by Higgerty Law and was entitled to all of its present and after-acquired personal property, including any proceeds of class actions that it had.
The application brought by the Custodian under the Custodianship Order was particularly unique because there was a tension between: (i) The desire of ELFI, a secured lender, to enforce its rights and entitlements under the security over the assets held by Higgerty Law; and (ii) The desire of the LSA to ensure the parties were acting in the public interest and to protect solicitor-client privilege related to the files of Higgerty Law.
The main issue for the Court to consider was whether it was just or convenient to appoint a receiver and manager of Higgerty Law. In order to make this determination, the Court had to balance the interests and rights of Higgerty Law’s clients to have their solicitor-client privileged communications protected and the entitlement of a ELFI to enforce its legal and beneficial rights.
The Court noted that there is a test under Section 13(2) of the Judicature Act for appointing a receiver and manager if it is just or convenient to do so in light of the circumstances. Unlike certain provisions in the Bankruptcy and Insolvency Act, RSC 1985, c B-3, a receivership order may be granted under the Judicature Act following an application by a party that is not a creditor and in circumstances outside the normal course of bankruptcy, which is why the LSA has the status necessary to apply for a receivership order.
ELFI challenged the proposal to appoint a receiver and manager, asserting there was no business of Higgerty Law to manage, there was no material estate to administer, and the appointment of a receiver and manager would negatively impact its ability to realize on its security. ELFI instead offered an alternative method where the case files of Higgerty Law would be transferred to another law firm and protected by establishing an information wall or barrier within the law firm.
The Court noted that by virtue of being members of the LSA, custodians can maintain solicitor-client privilege over files and information within their custody. Further, because “Property” included the Higgerty Law’s client files, and given the fact that it was inevitable that matters concerning solicitor-client privilege would be engaged, the LSA, as a regulator, had an obligation to ensure the parties were acting in the public interest and to protect privilege over the Higgerty Law’s client files. Further, there was a risk that solicitor-client privilege could be breached if matters were not monitored by the LSA and the Custodian.
As a result, the Court ordered of a receiver and manager to be appointed over Higgerty Law under Section 13(2) of the Judicature Act. In doing so, the Court ruled that solicitor-client privilege is a fundamental underpinning of the legal profession in Canada, and that it cannot be breached by the interests and entitlement of a secured creditor. The Court further determined that the higher duty in the circumstances of this case was to protect the public interest, which included the protection of privilege associated with the client files of Higgerty Law.
The Court further stated that, although the rights and entitlements of ELFI and other secured and unsecured creditors were important, they were displaced in this particular circumstance because the risk to the public was greater if there is a breach of solicitor-client privilege than if there is displacement of the rights of ELFI.
This case serves as a reminder that the Judicature Act can be used to appoint a receiver or receiver and manager, non-creditors can be granted standing to bring an application for the appointment of a receiver or a receiver and manager, and solicitor-client privilege may displace the interests and entitlements of secured creditors if the two are in conflict.
Santina E. Sincennes, Student-At-Law