Background

The law firm employing the lawyer acted on behalf of a company which had entered into an agreement to purchase land and prepared a subdivision plan for future development.

The company offered options to purchase sections of the property. The law firm held the option fee payments on trust as stakeholder. It recorded the receipt of the option fees from the various option holders together in one ledger. 

When it came time for the company to pay an additional deposit for the property, it asked the lawyer to transfer “the money out of the trust account” for that payment. The lawyer accordingly transferred the amount required for the deposit from the money the firm held as stakeholder, to the vendor. The lawyer mistakenly considered that this was authorised under the option agreements, and the payment was authorised by a partner of the firm. Later, the lawyer made a further payment from the money the firm held as stakeholder to the client, at the client’s request, authorised by a different partner in the firm.

When the partner responsible for supervising the matter became aware of the payments, he questioned the lawyer about them. The supervising partner concluded that the payments were not authorised by the option agreements and should not have been made. The lawyer and the partner discussed that a caveat against dealings with the property should be lodged, however this did not occur. The company client was asked to refund the payments to the firm.

More than 18 months later, at the scheduled settlement date, the company client had not refunded the payments nor was it able to settle the purchase of the property. The vendor cancelled the sale and purchase agreement. The firm, as the stakeholder, was bound to refund the option fees to the option holders. However, the lawyer did not advise his supervising partner nor anyone else in the firm that the agreement had been cancelled or that the firm was responsible for the repayment.

In response to enquiries from option holders, the lawyer sent out letters to some of the option holders, hoping to reassure them. In those letters, he said that the firm “continue[d] to hold sufficient funds to pay you should that be necessary”. Even though the sale and purchase agreement had been cancelled, he also said, “We presume you still wish to exercise the option…”

When the firm became aware of the facts and the letters that had been sent by their employee, it made a confidential report about the lawyer’s conduct to the Law Society.

Discussion

The Standards Committee considered a range of issues, being the receiving and pooling of funds; payments out of the stakeholder funds (in breach of the option agreement); not replacing the funds immediately; not registering a caveat; failing to inform option holders that the sale and purchase agreement had been cancelled; and the letters sent by the lawyer.

The Standards Committee considered that having a single ledger for all the option holders’ funds was “not the best practice” and “may have contributed to the events that followed”. It said that, had the funds been receipted into separate ledgers, it “would have been clear that the funds were being held in trust for the individual Option Holder, instead of creating the impression that this was on behalf of [the company client]”. The Committee also considered this was not in accordance with the requirements of Trust Account Regulations which requires that all payments and transfers of trust money be recorded in a trust account ledger with a separate ledger account for each client. However, the Standards Committee concluded that, as the lawyer had followed the firm’s procedures in that regard, “an individual disciplinary response…was not required” on this point.

The Committee was concerned about several of the other issues (for example, that the lawyer did not register a caveat over the property, as instructed by his supervising partner) but focused in particular on the letters the lawyer sent to some option holders. It considered whether, by sending those letters, the lawyer had breached what is now r 10.9 of the Conduct and Client Care Rules.[1] That rule states that a lawyer must not engage in conduct that is misleading or deceptive or likely to mislead or deceive anyone on any aspect of the lawyer’s practice.

The lawyer acknowledged that the letters were sent with his full knowledge that there were insufficient funds available and that the development was no longer going ahead. However, he did not consider the letters to be misleading. This was on the basis that he had hoped that the development could be ‘resurrected’ based on assurances provided by the company client.

The Standards Committee disagreed.

Standard Committee’s determination

The Committee concluded that the lawyer had breached r 10.9, in sending out the letters containing information and assurances that the lawyer knew to be false.

The Committee said it had given “serious consideration” to referring the matter to the Disciplinary Tribunal as possible misconduct. It said:

It is a significant concern that a lawyer admits to having provided false information to key stakeholders, and placed trust account funds at risk. 

However, the Committee determined that the lawyer’s conduct constituted unsatisfactory conduct under s 12(c) of the Lawyers and Conveyancers Act 2006 (Act). In coming to that decision, the Committee noted that all option holders had since been refunded and the lawyer was no longer practising. Because of the particular circumstances, the Committee said its determination “should not be taken as a precedent [that such conduct would not reach the, more serious, level of misconduct] for future disciplinary cases in which a lawyer knowingly provides false information…in breach of Rule [10.9].“

The Committee censured the former lawyer, fined him $12,500 and ordered him to pay $2,000 towards costs.

Supervising partner

The Committee also investigated the conduct of the partner who had supervisory responsibilities over the lawyer in the particular matter. It considered that conduct in the context of what is now r 11.1(b) of the Conduct and Client Care Rules.[2] That rule provides that a lawyer practising on their own account must take all reasonable steps to ensure that the conduct of persons employed by their law practice “is at all times competently supervised and managed” by a lawyer who is qualified to practise on their own account.

The Committee noted that the supervising partner had reviewed and advised on the trust accounting arrangements it had criticised in the decision relating to the employed lawyer. It also considered that, once the partner found out about the erroneous payments, he should have followed up and provided support to ensure that a caveat was registered and the payments refunded at an early stage.

The Committee determined that the partner had breached what is now r 11.1(b) and that that conduct constituted unsatisfactory conduct. It censured the partner, fined him $10,000 and ordered him to pay $1,000 towards costs.

Law Society note: Lawyers dealing with money received for or on behalf of any person should always be aware of their trust accounting obligations under ss 110 to 116 of the Act (as well as those in the Trust Account Regulations). In particular, under s 110(1)(b) a lawyer must hold such money exclusively for that person to be paid only as that person directs. It is an offence to knowingly act in contravention of that subsection.

[1] At the time of the conduct, the rule was r 11.1 under the version of the Conduct and Client Care Rules as at 1 July 2016.

[2] At the time of the conduct, the relevant rule was r 11.3 under the version of the Conduct and Client Care Rules as at 1 July 2016.