MR XB and MR XC v [A North Island] Standards Committee

 
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[2013] NZLCRO 30

LCRO 207 & 208/2012

Concerning an application for review pursuant to section 193 of the Lawyers and Conveyancers Act 2006

a determination of [A North Island] Standards Committee

Between
MR XB and MR XC
Applicants
and
[A North Island] Standards Committee
Respondent

The names and identifying details of the parties in this decision have been changed.

Decision
Introduction
1

Mr XB and Mr XC have applied for a review of the determination by [A North Island Standards Committee] that their conduct constituted unsatisfactory conduct as defined in s 12(c) of the Lawyers and Conveyancers Act 2006, by reason of breaches of the Act, and the Lawyers and Conveyancers Act (Trust Accounts) Regulations 2008.

2

The facts giving rise to the determination by the Standards Committee to conduct an own motion enquiry reveal an unusual mingling of trust account and firm funds as well as an unusual alignment by a lawyer with the interests of his client.

Background
3

I have taken the liberty of incorporating the facts as recorded by the Standards Committee, and then by Mr BA in submissions on behalf of the Standards Committee, in full into this decision. It is necessary to record these to enable readers of this decision to have a full understanding of the matters with which this decision is concerned.

4

The Standards Committee wrote: 1

5
    Sums of $61,359 and $20,000 were transferred from a trust ledger that was in the name of the client to the ledger in the name of [Law Firm 1] on 30 October 2009. Although the [Law Firm 1] ledger recorded that the project was in the name of the client, the payment of the client's funds from the client's ledger left an unclear audit trail. 6. The funds were transferred pursuant to a written authority dated 23 October 2009 (the authority) which reads as follows: To whom it may concern: I (name of client) for myself personally and on behalf of my company (name of company) hereby authorise you to transfer funds to the trust account for [Law Firm 1] to protect my company's funds from possible seizure. The moneys owing to [Law Firm 1] and [Mr XB] personally are to be repaid from the sale proceeds and disbursed according to these instructions. 7. [Law Firm 1] advised that they acted for Mr XE and his company. They had acted for the client for many years. The business operated by the company was struggling financially. [Law Firm 1] acted for Mr XE in a number of matters and were given a charge over the assets of the company. In addition, Mr XB had advanced $25,000 to the company and took a charge securing that loan. The client and the company obtained independent legal advice, the advance was made and the security was given. 8. During the latter part of 2008 and all of 2009 the business deteriorated. [Law Firm 1] advised their client that he could not continue in business because his company was insolvent. The client found a buyer for the business for a price which was insufficient to cover the secured creditors. The price was accepted. 9. An agreement was reached with the secured creditors as follows: a. The first secured credit was to receive payment in full; b. [Law Firm 1], as second secured creditor were to receive $70,723.90 plus GST (including disbursements); c. The third charge holder was to receive $54,500 (discounted from $70,000); d. The fourth charge holder was to receive $4,450 (discounted from $7,500); e. The fifth charge holder (Mr XB) was to receive $10,000 (discounted from $25,000); 1 Standards Committee Decision dated 18 July 2012 at [5–15]. f. The sixth charge holder, the Bank of New Zealand, was to receive no funds but would receive moneys paid to the Bank by eftpos; g. The landlord was to be paid in full (as consideration for the consent to the assignment of the lease); and h. A company renting the security cameras was to be paid in full (to avoid the removal of the cameras). 10. As the settlement date approached: a. A former business associate of the client alleged that he had an interest in the business; b. There were threats of injunction; c. The former business associate put undue pressure on the landlord; d. Approaches were made by the former business associate to the prospective business purchaser and the purchaser's solicitor with a view to have the purchaser resile from the agreement; and e. The client was unable to pay such basic expenses as the power and telephone, which were liable to be disconnected. The client was concerned that the purchaser would have an opportunity to cancel the purchase agreement. For that reason Mr XB then advanced further moneys and paid for these services to continue. It is not known whether the client received independent advice before these further loans were made. 11. It was decided that for the sake of transparency, it would be better to put what in effect would be [Law Firm 1]'s fee (as negotiated with the other creditors) into a separate matter account. The ledger in the name of [Law Firm 1] re. the client was opened and the sum of $61,359.71 (being all the funds available) was transferred to that account together with the sum of $20,000 being the stock take figure. [Law Firm 1] advised that it was clear that there would be a significant refund when the stock taking was carried out. 12. [Law Firm 1] advised the Inspector that the client was well aware of what [Law Firm 1] were doing and signed the authority. He was also aware that the fees that [Law Firm 1] would recover would be much less than what they were owed and understood that the payments which were to be made would be made out of what in effect would have been [Law Firm 1]'s fees. 13. [Law Firm 1] advised that except for the sum of $4,000, the payments made from the account were in accordance with the arrangements made with the client. By mistake the ledger was debited with the payment of $4,000 to [Trust Account 1] for the purchase of shares in Law Alliance NZ. This payment should have come from [Law Firm 1] office account and [Law Firm 1] advised that the sum of $4,000 was to be journalled back and that $4,000 was to be applied on account of the fees owing to [Law Firm 1]. 14. There is, however, another unexplained payment of$30,000 to [Trust Account 2] made on 2 November 2009. The narration read “to transfer funds for repayment”. A search of that company discloses that the shareholders and directors are [Mr XB] and Mr XF. The reasons for this payment are shown neither in the Inspector reports nor in any response from [Law Firm 1]. As at 13 January 2010 the following payments had been made from the account: a. [Trust Account 2] $30,000 b. [Mr XB] $24,081 c. Refund stock figure overpaid $9,364 d. [Trust Account 2] $4,000 e. [Company 1]— payment of guarantee $6,000 f. [Law Firm 1] — to pay fees $7,900 $81,345
5

The unusual issues which are revealed from these facts are:

  • i. The creation of an account in the name of the firm within the firm's trust account to hold funds other than the firm's float or in suspense; and

  • ii. The degree of involvement with the client's affairs leading to a situation where Mr XB personally funded his client to enable a sale transaction to proceed. Although it did not happen in this instance, such a degree of involvement will inevitably result at some stage in a lawyer who conducts his practice in this way coming into conflict with his client's interests.

The own motion investigation and the Standards Committee determination
6

The facts of this matter were noted by, [a New Zealand Law Society audit inspector], during a routine inspection of the firm's trust records. Following a consideration of the response by the firm to the issues raised by [the inspector], the Standards Committee determined pursuant to s 130(c) of the Lawyers and Conveyancers Act 2006 to conduct an own motion investigation.

7

In response to the notice of hearing, Messrs XB and XC provided further submissions together with an affidavit from Mr XE in which Mr XE confirmed Mr XB's responses to the Standards Committee and that all actions were taken on his instructions.

Having...

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