Executive Summary: Key Legal and Evidentiary Issues

• Whether Milot Law breached solicitor-client privilege or confidentiality by disclosing information obtained during representation of the Sittlers to the bankruptcy trustee, particularly regarding a specific email.

• Distinction between privileged and confidential information in the context of bankruptcy proceedings and the Sittlers’ disclosure obligations.

• The professional and ethical obligations of a lawyer who is both a former counsel and a creditor in bankruptcy.

• The correctness of the chambers judge’s finding that an email contained legal advice and constituted a breach of privilege, and the refusal to admit new evidence.

• Application of the Alberta Rules of Court regarding entitlement and quantum of costs following appeal and cross-appeal outcomes.

• Determination of the appropriate costs award, balancing Schedule C tariff and actual legal fees incurred.

Background and facts

Heather and Sheldon Sittler were clients of DeMara Consulting Inc., a company involved in a large-scale tax evasion scheme. After the scheme was discovered, the Sittlers refiled their taxes and received a gross negligence penalty from the Canada Revenue Agency. They retained Duane Milot of Milot Law to act as their counsel in dealings with the Canada Revenue Agency and anticipated litigation. At the time, the Sittlers had an outstanding tax debt of approximately $4 million. Over the course of their relationship, they became indebted to Milot Law for legal fees totaling $167,109.17. The professional relationship ended in April 2017.

On September 7, 2018, the Sittlers assigned themselves into bankruptcy. Two months prior, they transferred their collective 82% shares in a numbered Alberta company to the Sittler Family Trust. After the bankruptcy, Milot Law became one of their creditors under the Bankruptcy and Insolvency Act. Mr. Milot received correspondence from the bankruptcy trustee, including the Sittlers’ Statements of Affairs, and determined that not all assets had been disclosed. Mr. Milot, having obtained information about the Sittler Family Trust and other assets while acting as their lawyer, notified the Sittlers and their then counsel that if all assets were not disclosed, Milot Law would provide information to the trustee. The Sittlers did not respond.

Mr. Milot consulted the Law Society of Ontario, which confirmed under Rule 3.3-5 that a lawyer may disclose confidential information to establish or collect fees, but not more than required. On December 19, 2018, Mr. Milot provided the trustee with previously undisclosed records and other information about the Sittlers’ assets and transfers, in redacted form. The trustee requested further disclosure, and the Sittlers provided more information in April and October 2019, and August 2020. On September 2, 2020, the trustee filed an application under section 96 of the Act regarding alleged transfers at undervalue, but could not proceed due to lack of funds.

On December 12, 2022, a chambers judge granted an order under section 38 of the Act on the application of Milot Law in Heather Sittler’s bankruptcy, authorizing Milot Law to pursue the section 96 application. The order gave Milot Law the same rights and powers as the trustee to require delivery of books and records and conduct examinations. On the same date, the Canada Revenue Agency obtained a similar order in Sheldon Sittler’s bankruptcy. On August 23, 2023, Milot Law applied to compel Heather Sittler to attend questioning, and the Sittlers brought a cross-application to set aside the section 38 order and to disallow use of their “privileged information.”

Chambers judge’s decisions

The chambers judge ordered questioning to occur and dismissed the Sittlers’ cross-application. He found that the Sittlers’ assignment into bankruptcy triggered extensive disclosure obligations under section 158 of the Act and that almost all information disclosed by Mr. Milot was information the Sittlers were obligated to disclose. The judge observed that, as a former lawyer, Mr. Milot could have been compelled by the trustee to disclose everything about the Sittlers’ property except legal advice and communications disclosed in the course of seeking legal advice. The judge found that Mr. Milot had not disclosed legal advice, except for an email sent on May 13, 2016, at 5:18 pm, concerning a second mortgage on property owned by the Sittlers through a trust. The judge said that failing to redact a couple of lines in that email constituted a limited breach of privilege.

On October 17, 2023, Milot Law applied to vary the August 23, 2023 order and to adduce additional evidence, including the unredacted email string. The chambers judge dismissed both applications. On March 8, 2024, he granted an amended order setting out his findings with respect to Mr. Milot’s disclosure, including the May 13, 2016 email. The parties were granted leave to appeal and cross-appeal the August 23, 2023 order as amended. The Sittlers did not appeal the refusal to set aside the section 38 order.

Appeal and cross-appeal

The Sittlers appealed, seeking a declaration that Milot Law’s actions breached privilege and that no party in the bankruptcy proceedings may rely on the information disclosed. Milot Law cross-appealed the finding regarding the email and applied to adduce new evidence, specifically the unredacted email. The Court of Appeal dismissed the Sittlers’ appeal and allowed Milot Law’s cross-appeal. The Court found that the information disclosed was not privileged but was confidential, and that Mr. Milot acted appropriately after consulting his Law Society, given his position as both former counsel and creditor. The Court found that the unredacted email did not contain legal advice, so there was no breach of solicitor-client privilege. The application to admit the unredacted email as new evidence was granted in part; the remainder of the new evidence application was dismissed.

Costs decision

Milot Law, as the successful party in both the appeal and cross-appeal, sought costs based on a percentage of its legal fees and disbursements, totaling $56,012.22, or alternatively, based on Schedule C of the Rules, which would total $16,118.01. Milot Law requested approximately $33,000, representing 80% of fees for steps related to the redacted email and 40% for other steps. The Sittlers argued for costs pursuant to Schedule C. The Court found that Milot Law was the successful party and that the issues regarding the email were especially important. The Court concluded that the Sittlers should pay and Milot Law should recover a greater proportion of reasonable expenses than Schedule C provides, due to the circumstances of the case. The Sittlers were ordered to pay costs and disbursements totaling $25,000 to Milot Law, reflecting column 2, Schedule C costs for the chambers judge applications and approximately 50% of legal fees and disbursements for all steps taken in the Court of Appeal.

Conclusion

Milot Law was the successful party in both the appeal and cross-appeal. The Court of Appeal found no breach of privilege in the disclosure of information to the trustee, and the finding of breach regarding the email was overturned. The Sittlers were ordered to pay $25,000 in costs to Milot Law, as specified in the Court’s memorandum of judgment regarding costs. No other amounts were ordered or awarded in the decisions.