Edward Errol Johnston of Auckland
 NZLCDT 14
NEW ZEALAND LAWYERS AND CONVEYANCERS DISCIPLINARY TRIBUNAL
Judge D F Clarkson
MEMBERS OF TRIBUNAL
Ms R Adams
Mr J Clarke
Ms S Gill
Ms J Gray
Ms K Davenport and Mr Trealeaven for Standards Committee
Mr A H Waalkens QC for the Practitioner
Practitioner faced charges of misconduct and unsatisfactory conduct — client to client and client/solicitor conflict of interest — breach of Rules of Professional Conduct for Barristers and Solicitors and Solicitors Trust Account Regulations 1998 — borrowed funds from client trust account without referring client for independent advice — used enduring power of attorney to lend client's money to other clients — failed to account for trust funds and provide information to beneficiaries — failed to provide full disclosure during investigation.
The issues were whether J had engaged in misconduct and unsatisfactory conduct.
Held: It was not common practice for a lawyer to borrow funds from a client on the basis of informed consent and the declining of independent legal advice. Although the client had expressed trust and satisfaction in J, these comments went to mitigation rather than assessing whether the conduct had occurred. Having regard to the very high standard of behaviour that was demanded of practitioners in the situation of borrowing from a client, departing from it so blatantly as J had in the instance of a very large borrowing (albeit at commercial rates) amounted to professional misconduct and is more serious than the alternative charge of “conduct unbecoming” pleaded to by the practitioner.
When acting as an attorney for a client a practitioner was under a duty to act in the best interests of the donor of the power. The practitioner's fiduciary duty to the donor client was paramount. This was particularly so when the power was granted under an enduring power of attorney and the donor no longer had the mental capacity to oversee or understand what was happening with their affairs. In authorising loans to a client of his firm, J had not exercised the required level of independence in his decisions as the attorney for the donor client. Although the securities were not required to be enforced and were therefore untested, the level of security provided for the loans were not what a prudent lender should have accepted. All of the loans had run past their due dates, which placed the donor client in the position of having to act against J's other clients. J was guilty of misconduct.
J had communicated in a limited and unsatisfactory form when reporting to the executor of the donor client after her death. This amounted to unsatisfactory conduct.
There had been a lack of frankness in the information J had provided to the tribunal in its investigation, including failing to disclose an adverse professional finding against him and recklessly informing the tribunal that all loans had been repaid when they had not. Because the evidence fell short of a deliberate intention to mislead, the conduct fell into unsatisfactory conduct.
J had agreed since the proceedings to cease client to client lending. This was a significant factor when considering penalty, and had met to a great extent the purpose of protecting the public, which was part of the sanction procedure. The step taken by J to change the nature of his practice went a long way to avoiding future conflicts either between himself and clients, or client to client. J's assurance that the proceedings had had an enormous impact on him and would change the way he approached any perceived conflict in the future was accepted. There were some residual concerns about his ability to identify conflicts as soon as they arose or could be foreseen, but this could be addressed by means other than suspension. As a sole practitioner, the consequences of suspension were much worse for J than for someone whose partners could continue the practice.
J was censured and fined $3000 on the first charge, $4000 on the second charge and $6000 on the last charge. J also faced orders under s106(4)(g) LCA (make practice available for inspection); s156(1) LCA (take advice in relation to the management of practice) and s156(1)(m) LCA (undergo practical training or education) to attend the “Trust Account Supervisor Course and Assessment” course.
Mr Johnston, the practitioner, faces six charges of misconduct in his professional capacity. Two charges are laid under s.112 of the Law Practitioners Act 1982 (“ LPA”) and the remaining four charges are laid under the Lawyers and Conveyancers Act 2006 (“ LCA”). The charges were amended prior to the hearing to carry alternatives of “conduct unbecoming a barrister or solicitor, or negligence or incompetence”. In respect of the LCA the second alternative was one of “unsatisfactory conduct”. Each charge was supported by particulars and some by multiple particulars relating to a number of different transactions (i.e. charge six).
Prior to the commencement of the hearing the practitioner entered pleas of guilty as follows:
All other charges or particulars of charges were defended.
[a] Charge 1 to “conduct unbecoming”.
[b] Charge 2 to misconduct in his professional capacity.
[c] Charge 4 to unsatisfactory conduct
[d] Charge 6 (particular a) to unsatisfactory conduct.
The conduct complained of falls into three categories. The first relates to conflicts of interest, both between clients and between Mr Johnston and his clients. The second relates to his management of the affairs of a deceased client during her life acting under her power of attorney granted to him, and his actions following her death as a trustee and executor of her estate. The third area relates to Mr Johnston's conduct whilst being investigated in terms of his correspondence with the Standards Committee.
The first concerns were raised by means of a complaint by beneficiaries of the estate of Mrs McG, alleging that Mr Johnston had been very difficult to deal with, uncommunicative and had failed to account for estate funds; in particular they complained that he had lapsed in following up certain investments. Indeed, they went further to allege his handling of the investment of their aunt's funds had been reckless and unwise. In addition to investigating this complaint the Standards Committee resolved to initiate an “own motion” investigation in relation to a number of matters. That investigation uncovered some concerns that had arisen back as far as 2006. After further investigation and correspondence with Mr Johnston and his legal adviser the Standards Committee determined to lay the present charges.
Charge 1 -Own Motion Investigation pre 1 August 2008 conduct
TAKE NOTICE THAT AUCKLAND STANDARDS COMMITTEE 3 OF THE NEW ZEALAND LAW SOCIETY charges Edward Errol Johnston of Auckland, practitioner pursuant to section 112 of the Law Practitioners Act 1982 with:
(a) misconduct in your professional capacity, or in the alternative
(b) conducted unbecoming a barrister or solicitor, or in the alternative
(c) negligence or incompetence in your professional capacity, and that the negligence or incompetence has been of such a degree or so frequent as to reflect on your fitness to practise as a barrister or solicitor or as to tend to bring the profession into disrepute.
1. From May 2008 until 31 July 2008 in the management of your trust account you acted in breach of Rule 1.03 and/or 1.06 of the Rules Professional Conduct for Barristers and Solicitors and/or Regulation 6 of the Solicitors Trust Account Regulations 1998 in that you (and the trustees of your Family Trust) personally borrowed sums up to $550,000 from your clients Mr and Mrs W without referring them for independent legal advice and/or ensuring that they obtained independent legal advice and/or disclosing the full nature of your involvement in the borrowing.
In response to this charge Mr Johnston has pleaded guilty to “conduct unbecoming a barrister or solicitor”, that is alternative (b). He has filed an affidavit from his client Mr W, supporting his assertion that the W's were experienced business people with good commercial knowledge who had rejected his suggestion of independent advice from him. Mr W's affidavit (which was not challenged) confirms that Mr Johnston had represented him and his wife for 20 years and had their utmost confidence. They indicated that they were keen to invest the funds with Mr Johnston, initially for a six-month period. Mr W asserts they paid particular attention to the documents with which they were provided and that following an extension of the unregistered mortgage, that the funds had been repaid in full. Mr W affirmed that he and his wife had always felt that Mr Johnston had their best interests at heart.
What Mr W does not say, but Mr Johnston affirmed in evidence, was that the W's as well as being clients were also personal friends. Indeed Mr Johnston's own brother is a trustee in the W's family trust.
It is clear from this evidence that the Society cannot sustain the final part of the pleaded particular that the practitioner failed to disclose the full nature of his...
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