A lawyer's duty of loyalty to a former client doesn't end when the client's proposal to creditors collapses. In Suguitan (Re), 2026 ONCA 738, the Ontario Court of Appeal set aside a bankruptcy order because the law firm acting for the trustee had previously represented the bankrupt in the very insolvency proceedings at issue. The court's concern went beyond whether a privileged document had been misused. Counsel had changed sides while the trustee's claim depended on proving the former client acted dishonestly.
Jose Lava Suguitan was deemed to have assigned into bankruptcy on March 3, 2023. The trustee, MSI Spergel Inc., alleged that he had transferred his one half interest in a Florida property to his wife, Sarah Morrison, for nominal consideration less than 5 years earlier with the intention of defrauding, defeating or delaying a creditor. Relying on section 96(1)(b)(ii) of the Bankruptcy and Insolvency Act, the trustee sought US$250,000, the price Morrison later received when she sold the property. The motion judge found the conditions for a transfer at undervalue had been met, but limited the recovery to US$117,340.18, the value he attributed to Suguitan's interest after deductions. Morrison appealed.
Manis Law had been retained in February 2023 to assist Suguitan with a proposed arrangement with creditors. Once he was bankrupt, the firm appeared for the trustee in the litigation over the property transfer. Morrison and Suguitan represented themselves at the original hearing. When Morrison raised the firm's earlier involvement, the judge understood that it had acted only for the trustee, and counsel didn't correct that understanding. The appeal record included fresh evidence of the retainer and related correspondence, which the Court of Appeal admitted.
Justice Trotter, writing for a unanimous panel, explained that conflicts involving former clients can't be reduced to proof that confidential information was actually used. The continuing duty of loyalty is reflected in the Law Society of Ontario's Rule 3.4-10, which restricts acting against a former client in the same or a related matter without consent. Drawing on R v Neil, MacDonald Estate v Martin and Canadian National Railway Co v McKercher LLP, the court also rejected the argument that Suguitan had effectively consented by failing to object during two earlier, unopposed applications. Silence in those circumstances wasn't informed permission to change sides.
The trustee argued that its motion sought recovery from Morrison rather than directly from Suguitan. That distinction didn't resolve the conflict. To succeed, the trustee needed to prove that Suguitan had transferred property with a dishonest purpose. His former lawyers were therefore pursuing a position adverse to him within the very bankruptcy proceeding in which they had earlier represented him. The court found a breach of loyalty requiring disqualification, whether or not any particular confidence was actually disclosed or used. The reasoning appears at paragraphs 19 to 30.
The Court of Appeal held that the first hearing had been unfair. Counsel should have explained the earlier retainer when Morrison raised it, especially given that the people affected were unrepresented. The court allowed the appeal, set aside the motion judge's order, directed a new hearing and barred Manis Law from representing the trustee at that hearing. It also awarded Morrison $5,000 in costs. None of this established that the Florida property transfer was valid. Nor did the appeal determine whether the trustee could ultimately recover its value under section 96. The court resolved the conflict ground without deciding Morrison's other challenges.
For insolvency trustees and organizations retaining counsel, the lesson begins when a failed workout becomes contested recovery litigation. Representation during an intended proposal to creditors may prevent the same lawyers from taking a later position that depends on the former client's alleged dishonesty. A file review that focuses only on whether confidential documents will be tendered misses the broader loyalty obligation. Here the consequence was a new hearing rather than a final decision on the transfer claim. The full Ontario Court of Appeal reasons explain that distinction across paragraphs 1 to 32.