Edward Errol Johnston of Auckland

JurisdictionNew Zealand
JudgeJudge D F Clarkson,Ms R Adams,Mr J Clarke,Ms S Gill,Ms J Gray
Judgment Date19 April 2011
Neutral Citation[2011] NZLCDT 14
Docket NumberLCDT 018/10
CourtLawyers and Conveyancers’ Disciplinary Tribunal
Date19 April 2011
IN THE MATTER of the Lawyers and Conveyancers

and

IN THE MATTER of Edward Errol Johnston

[2011] NZLCDT 14

Court:

Judge D F Clarkson

MEMBERS OF TRIBUNAL

Ms R Adams

Mr J Clarke

Ms S Gill

Ms J Gray

LCDT 018/10

NEW ZEALAND LAWYERS AND CONVEYANCERS DISCIPLINARY TRIBUNAL

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.

Counsel:

Ms K Davenport and Mr Trealeaven for Standards Committee

Mr A H Waalkens QC for the Practitioner

DECISION OF NEW ZEALAND LAWYERS AND CONVEYANCERS TRIBUNAL
Introduction
1

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).

2

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.

Background
3

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.

4

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.

5

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.

6

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.

7

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 involvement in the borrowing. Notwithstanding that, counsel for the Society submitted that this was such a gross breach of Rule 1.03 and 1.06 of the Rules of Professional Conduct for Barristers and Solicitors, and Regulation 6 of the Solicitors Trust Account Regulations 1998 (“the Regulations”) that it must amount to professional misconduct. Those Rules and Regulations provide as follows:

“1.03 Rule

A practitioner must not act or continue to act for any person where there is a conflict of interest between the practitioner on the one hand, and an existing or prospective client on the other hand.

Commentary

  • (1) The rule is based on the premise that a person who occupies a position of trust must not permit his or her personal interests to conflict with the interests of those whom it is that person's duty to protect.

  • (2) The rule is intended to protect a client in situations where the interest or position of the practitioner would or could make the practitioner's professional judgement less responsive to the interests of the client.

  • (4) A practitioner may not enter any financial, business or property transactions with a client if there is a possibility of the fiduciary relationship between practitioner and client being open to abuse. This applies even if the practitioner does not propose to act for the client in the particular transactions.

  • (5) It is impossible to detail all the situations, which arise where a practitioner should not act or where independent representation or advice must necessarily be obtained under this rule. One example would be where a practitioner borrows money from a client other than a client whose normal business is lending money. It is not then enough to offer independent advice to the client. The solicitor must sever the relationship of solicitor and client in that matter and ensure that the person concerned receives independent and competent advice. If the client refuses to take independent advice, the transaction should not proceed.”

1.06 Rule

  • 1. A practitioner who advises a client on borrowing or investing must act as an independent adviser in the client's best interests.

  • 2. A practitioner may, notwithstanding rule 4.04, accept a financial or other reward by way of a fee (“the reward”) from a third party in respect of the client's borrowings or investment provided that the following conditions are satisfied:

    • (i) The nature and value of the reward is fair and reasonable.

    • (ii) The practitioner has advised the client upon relevant alternative sources of funds or investments, as the case may be.

    • (iii) The nature and value of the reward have been fully disclosed to the client.

    • (iv) The client's consent has been obtained.

  • 3. Nothing in this rule shall be construed as derogating from any of the provisions of the Investment Advisers (Disclosure) Act 1996.

Commentary

  • (1) Without limiting the general application of this rule, its provisions apply to the following circumstances:

    • (i) where one of the potential lenders to the client is a client of the practitioner or the practitioner's firm, or a solicitors nominee company of which the shares are owned by the practitioner or the practitioner's firm;

    • (ii) where one possible avenue of investment for the client is a solicitors nominee company of which the shares are owned by the practitioner or the practitioner's firm or another client of the practitioner or the practitioner's firm;

    • And practitioners must always have regard to the provisions of rule 1.04.

  • (2) The provisions of this rule may not apply where a client has, prior to instructing the practitioner, already made firm and specific arrangements independently of the practitioner for an appropriate avenue for the lending or borrowing of money.

  • (3) Practitioners are referred for further guidance, particularly in regard to the need for the fully informed consent of clients, to the judgment of the Privy Council in Clark Boyce v Mouat [1993] 3 NZLR 641.

  • (4) Nothing in paragraph 2(iv) of this rule shall require separate independent...

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