Council of the Law Society of New South Wales v Coombes

Council of the Law Society of New South Wales v Coombes - [2015] NSWCATOD 108 - NSWCATOD 2015 case summary — Zoe

The alleged breach of S 264 of the LP Act

As the events giving rise to the alleged breach of s264 of the LP Act took place before the transaction giving rise to the misappropriation allegation and the breach of s263, we will deal with the s 264 breach first. S 264 provides that: 1. A law practice must keep in permanent form trust records in relation to trust money received by the practice' 1. The law practice must keep trust account records: 2. in accordance with the regulations, and 1. in a way that at all times discloses the true position in relation to trust money received for or on behalf of any person, and 2. in a way that enables the trust records to be conveniently and properly investigated or externally examined, and 3. for a period determined in accordance with the regulations. 4. A maximum penalty of 100 penalty units is prescribed for a contravention of each subsection.
The particulars (at paragraph 10) alleged breaches of s264 (2)(a) (b) and (c) of the LP Act. At the commencement of the hearing we were informed by Ms Groenewegen appearing for the Law Society, that the breach of s264(2)(c) was no longer pressed. The relevant facts are set out below.
In July 2012 the Law Practice was the subject of a trust account inspection. The Law Society's Trust Accounts Inspector identified and discussed with the Solicitor, breaches of Clauses 61, 62, 68-69 and 72 of the Legal Profession Regulation 2005 ("the Regulations"). Clause 61 requires trust receipts to be prepared as soon as possible after the receipt of trust money, clause 62 specifies the details of trust cheques that must be included on bank deposit forms. Clauses 68 - 69 require cash receipts and payment transactions to be recorded within 5 working days, and clause 72 requires bank reconciliation and trial balance reports to be prepared within 15 working days of the end of each month.
Following this inspection the Solicitor retained Ms Stephenson of Stephenson Marks, Accountants at Grafton, an External Examiner approved by the Law Society, to conduct an external examination of the Law Practice for. Ms Stephenson reported that for the period 1 April 2012 - 31 March 2013, the trust account records continued not to be kept in accordance with the Regulations. She identified a breach of clause 72, as well as breaches of clauses 65(2)(b), 66(3), 82 and 88(3) of the Regulations.
On 29 August 2013, a File Verification was conducted by a Trust Accounts Inspector appointed by the Law Society. This Inspector noted that none of the breaches identified by the Law Society in the July 2012 report had been addressed, and identified further breaches of clauses 59 and 88(2) of the Regulations. The Solicitor was directed to forward to the Inspector the trust bank statements, cash receipts and payments book, bank reconciliations and trial balances for the months August - November 2013, within a month of the end of each month, to ensure future compliance by the Solicitor.
On 13 October 2013 that Trust Accounts Inspector forwarded an email to the Solicitor to inform him that after reviewing the trust records for August 2013, improvements needed to be made to the bank reconciliations. He also pointed out that some of the deficiencies identified in his File Verification report from August 2013, still had not been rectified.
On 18 November 2013 the Inspector again sent an email to the Solicitor stating that although there were still some outstanding issues the trust records for September and October 2013 were "good". In relation to the outstanding matters, directions were given by the Trust Accounts Inspector as to how those issues could be resolved.
The evidence in support of these matters was contained in the report exhibited to the affidavit of James Sofiak dated 12 December 2014. In his Reply and in his Amended Reply filed just prior to the hearing of these proceedings, the Solicitor admitted the substance of these allegations, although he took issue with some of the detail. In particular in paragraph 6(c) of the Amended Reply, the Solicitor clarified that the External Examiner, Ms Stephenson provided two reports to the Solicitor, not one, and in the second report dated 16 August 2013, noted that: Subject to any exceptions noted in item 6 of this Report, I am of the opinion that all necessary trust records were produced to me as requested and for the purpose of the external examination and that the records were kept in such a way that enables the records to be conveniently externally examined. No doubt it was this that prompted the Law Society not to press the breach of s264(c).

[5]

The purchase of the Ryan Street property by the Solicitor

The other two complaints against the Solicitor arise out the purchase by him of an investment property. On 23 September 2013 he entered into a contract to purchase the property, 268 Ryan Street, South Grafton for $150,000. At exchange he paid a deposit of $7,500. On 23 October 2013 the Solicitor then drew trust cheque #0200019 for $3,760 payable to the Office of State Revenue ("the Trust Cheque") and forwarded it together with the contract, the transfer and a certified copy of his driver's licence to City Agents in Sydney requesting them to cause the contract and the transfer to be stamped. The documents were stamped by the Office of State Revenue on 25 October and trust account was debited $3,760 on 30 October 2013, on presentation of the Trust Cheque.
The Report annexed to Mr Sofiak's affidavit, states that when he drew the Trust Cheque, the Solicitor had not deposited any of his own funds into the trust account. On 18 November 2013 the Law Society's Trust Accounts Inspector, in the course of reviewing the Solicitor's end of month trust records for October, informed the Solicitor that there was an anomaly in the trust records because the Trust Cheque had not been presented. On the same day the Solicitor's secretary Ms Petch, also alerted him to the fact that the Trust Cheque had not been posted. In late November or in early December Ms Petch again questioned him about the need to deposit funds into the trust account to match the amount of the Trust Cheque.
It appears that notwithstanding these prompts he received from the Trust Accounts Inspector and from his secretary in November, the Solicitor did not examine the trust account records until 4 December 2013, when he deposited a cheque from his office account to cover the deficiency. Some days after 4 December, he then contacted the Law Society's Trust Accounts Inspector and informed him what had happened.
Paragraph 21 of the Particulars records that the Solicitor sent an email dated 12 December 2013 to the Trust Accounts Inspector in which he said: The stamp duty had to be paid ($3760) for the purchase of a house by me. It was nothing to do with a client. It was an investment property for myself. The OSR do not accept personal cheques, but they will accept a solicitor trust account cheque. That's why the cheque was written. I do not know why I thought it ok to write the cheque, when I did not have any funds of mine in the trust account. I know that is not permitted, and I know it is a very important rule to abide by…. I understand that I essentially used someone else's money for my own purpose…..

[6]

The Solicitor's evidence

The Solicitor in his Amended Reply admitted these basic facts. However in paragraph 19b, he asserted that at the time he signed the Trust Cheque, he: 1. did so in haste; 2. did not intend to steal money owned by his clients; 3. intended to pay for the stamp duty using his own funds; 4. had sufficient funds; 5. had sufficient funds of his own to pay the stamp duty; 6. intended to put his own funds into trust before the Trust Cheque could be sent in the mail to (his) agent for the purpose of paying stamp duty and before it was cashed by the OSR; 7. given his intention at subparagraph (v) above, he failed to appreciate that signing the Trust Cheque before physically putting his own funds into his trust account could have the consequence that the stamp duty would be paid by monies in trust belonging to his clients.
The Solicitor's affidavit dated 1 June 2015 set out his evidence about these matters. He gave an account of a conversation with Ms Petch on 23 October 2013 to the following effect: JP: Greg, before you go to Court we need to send the contract and transfer to the agent to attend to stamping. I need to send that today to be certain that we'll get the documents back for settlement on 4 November. The duty is $3,760. Me: Okay JP: You'll need to give me a trust account cheque. The OSR will not accept an office cheque. Me: It's not going by mail until this afternoon? JP: Yes Me: I will put funds in trust when I get back from Court.
He also set out a further conversation with Ms Petch on 19 November 2013 as follows: JP: Did you see the email from Greg Livermore (The Trust Accounts Inspector) yesterday? I haven't posted the Trust Cheque that he referred to because you haven't put the funds in trust. Me: Julie there is no way I would have forgotten to put funds in trust. It just would not happen. The funds will be there. Look again. I have to get to Court. And another conversation on 3 December to the following effect: JP: Greg I have to post the cheque, I've reviewed the accounts. I cannot see where you replaced the funds from trust. Me: I"ll have a look tomorrow
The Solicitor also set out in his affidavit how busy his practice was during this period. In the week commencing 28 October 2013, he was in Court all day for three days. The following week two weeks he was in court all day every day. He had 17 matters listed in either the Local Court or the District Court. One of those matters was a jury trial which resulted in a hung jury and a retrial commencing the following Monday 11 November. He also conducted 3 District Court Appeals during this period without counsel. After court and at lunchtime he conferred with clients or prepared for his appearances the following day. He said that he was unable to attend to matters at the office whilst he was in Court.
The Solicitor was cross examined by Ms Groenewegen, but not in relation to these matters, save that he did concede that although he did not do so, he would have been able to access his office and trust account details on his mobile telephone when out of the office. Ms Petch also swore an affidavit corroborating the terms of her conversations with the Solicitor about the Trust Cheque.
At the time the Application was filed, it was part of the Law Society's case that the Solicitor had used trust account funds to pay his stamp duty because he had reached the overdraft limit of $25,000 on his office account. Paragraphs 28 -33 of the Application set out the particulars supporting this allegation, including details of debits and credits into the office account during the relevant period.
The Law Society did not press this point at the hearing. We were told that when the Law Society first investigated this matter it had been under the impression that the overdraft limit was only $20,000. Subsequently the Law Society had also become aware that the Solicitor had another account with the ANZ Bank which was in credit. Thirdly, it accepted the Solicitor's evidence that some of the payments from the Solicitor's office account could have been deferred, and the stamp duty could have been taken from that account, without the overdraft limit being exceeded.

[7]

The alleged breach of S263 of the LP Act

We will deal first with the allegation that these matters gave rise to a breach by the Solicitor of s 263(1) of the LP Act. That sub section relevantly requires a legal practitioner associate of a law practice to give written notice to the Law Society Council as soon as practicable after becoming aware that there is an irregularity in any of the practice's trust accounts. The general purpose of s 263 appears to be to oblige persons, including third parties such as legal practitioners in other law practices, to bring trust account irregularities to the attention of the Law Society Council. The expression legal practitioner associate, when used in s263(1), includes a sole practitioner.
The Law Society submitted that as a sole practitioner, the Solicitor was deemed to have constructive knowledge of any irregularity in the Law Practice's trust account. In order to comply with section 263(1), it said that the Solicitor should have notified the Law Society that the amount of $3,760 had been withdrawn from the trust account as soon as he drew the Trust Cheque, or at least when it was presented. Alternatively if actual knowledge of the irregularity was required, as soon as practicable after he was alerted to the anomaly by Ms Petch on 18 November 2013, and at the latest on 4 December 2013 when he deposited his own funds. In fact he only notified the Law Society on 10 December.
We have some doubts as to whether the concept of constructive knowledge can apply to an alleged breach of s263. However, in our view after 18 November 2013, the Solicitor was in breach of the section. Even if he was not aware of the cause of the irregularity until 4 December, that did not absolve him from his obligation to make the notification as soon as he was aware that there was an irregularity. The previous errors and omissions in his trust account record keeping which had been brought to the Solicitor's attention by the Trust Accounts Inspectors and External Examiners in the prior trust account audits, should have made him all the more alert to his obligation to comply with this provision.
In the circumstances we find the breach of s263 to be established, and that this amounts to professional misconduct.

[8]

The allegation of the misappropriation of trust monies

We now turn to the more serious allegation said to arise from the payment by the Solicitor of the Trust Cheque - that being the misappropriation of trust monies. There was no substantive dispute between the parties as to the sequence of events outlined above. However there was significant disagreement as to whether what had occurred amounted to the misappropriation and specifically whether the conduct involved elements of dishonesty on the Solicitor's part.
The Law Society accepted that it was required to establish an element of dishonesty in its misappropriation claim. Ms Groenewegen drew a distinction between conduct which was subjectively dishonest, and conduct which might be considered to be objectively dishonest - that is conduct that may be regarded as dishonest by ordinary people. Even if the Solicitor in this case did not intend to act dishonestly, it was sufficient to establish the misappropriation ground, that the Solicitor intended to do the acts complained of and those acts would be regarded as dishonest by reasonable persons.
This proposition is succinctly expressed in the following passage from Bell J's decision in Brereton v Legal Services Commissioner [2010] VSC 378 at [53], as follows: in neither the criminal nor the civil context is it necessary to establish that the person subjectively knew or believed that the actions concerned were dishonest. What must be established is that the person subjectively intended to do the acts which are said to be objectively dishonest by the ordinary standards of reasonable and honest people.
We were also referred to the decision of the High Court of Australia in Daly v Sydney Stock Exchange Limited [1986] HCA 25, where Gibbs J said that defalcation need not require dishonesty even where the defalcation occurs by means of misappropriation. That decision involved a claim for defalcation under section 97(1) of the Securities Industry Act 1975, and concerned a different statutory context. It did assist us in this matter.
There are nevertheless some decisions of the Administrative Decisions Tribunal, as Ms Groenewegen conceded, which have held that an element of subjective dishonesty is required to make out a claim of misappropriation. We were referred to the following passage in the Council of the Law Society of NSW v Simpson [2011] NSWADT 242: In our opinion if in a disciplinary application, the Law Society…. seeks to rely on misappropriation as a ground for establishing misappropriation at common law, it should at the very least anticipate the possibility that a definition of misappropriation incorporating "dishonesty" or some comparable mental element will be applied to the facts of the case.
Ms Groenewegen submitted that notwithstanding the decision in Daly, and the test outlined in Brereton, she would attempt in this case "to scale the higher threshold proposed in Simpson", by establishing that the Solicitor did have the relevant mental element.
Ms Castle agreed with Ms Groenewegen that there were different lines of authority on what constituted misappropriation. These decisions were probably not reconcilable. She accepted that the Solicitor's conduct here was at the least careless and could even be characterised as reckless, an expression that the Law Society had adopted in its own submissions, but this was not sufficient to establish either subjective dishonestly on his part, or even conduct which an objective person might consider to be dishonest, according to the Brereton test
One of the difficulties in determining what the appropriate test should be, is that the expression misappropriation was not found in the LP Act, nor is it used in the Uniform Law. The expression misappropriation of trust funds is commonly used by the Law Society and equivalent bodies in the other states, as a ground for a finding of professional misconduct, but it does not fit entirely comfortably, as Ms Castle submitted, within the regulatory framework. The expression default, not misappropriation, is used in the LP Act and the Uniform Law in relation to trust monies. It is defined as the failure to pay or deliver money where the failure arises from an act or omission that involves fraud or other dishonesty, and is the trigger for a claim under the Fidelity Fund.

[9]

What is the appropriate test

In our view the appropriate test for dishonesty is that explained by Bell J in Brereton. The test has also been applied in recent decisions of the Administrative Decisions Tribunal: Council of the Law Society of NSW v Clapin [2011] NSWADT 83, Council of the Law Society of NSW v Pizzinga [2012] NSWADT 211, and Council of the Law Society of NSW v Nicholls [2012] NSWADT 222. In Clapin, the Tribunal upheld two of the three matters where the solicitor was alleged to have misappropriated trust monies. In relation to the third matter, where the solicitor withdrew trust funds on account of his costs in contravention of the Regulations, the Tribunal found that the necessary mental element, in accordance with the test in Brereton, was not made out, although his conduct was still to be regarded as seriously improper [at 226].
In Pizzinga, the Tribunal found that the solicitor had intended to make false trust account entries which he knew to be wrong, although according to his evidence, it was never his intention to misappropriate trust monies. The Tribunal held that ordinary and decent people would consider this conduct to be dishonest.
Most recently in Legal Services Commissioner v Kumar [2013] NSWADT 34, and at [2014] NSWCATOD 45, a further decision involving the misappropriation of trust monies, the Administrative Decisions Tribunal and subsequently this Tribunal held that the solicitor's conduct in directing a trust cheque in the amount of $12,000 to pay a personal debt, involved deliberate dishonesty on his part. Brereton does not appear to have been cited, but this may have been because the finding was one of deliberate - that is subjective dishonesty, which on any view would have supported the misappropriation ground.
Kumar went on appeal [2015] NSWCA 161, where the Tribunal's findings were upheld, and the finding of deliberate dishonesty confirmed. At paragraph 61, Leaming JA said in relation to this finding: These conclusions (of deliberate dishonesty) are not inconsistent with a genuinely held belief that the $12,000 was only a small fraction of the proceeds of settlement, and would only be taken for a short period of time, and was expected to be repaid speedily, perhaps in such away that Mr Malik would ever know…….. Lest there be any doubt about it, even a temporary use by Mr Kumar of his client's funds without prior approval amounts to serious and deliberate dishonesty. That is precisely the sort of conduct which is antithetical to the trust and confidence which is required by a solicitor with custody of his or her client's money.
This paragraph, particularly the middle sentence, could be taken to set out an even broader statement of what constitutes trust account misappropriation. However in our view, this paragraph must be read in the context of the overall finding by the Court of Appeal that the solicitor's conduct amounted to deliberate dishonesty. It was in this context that Leaming JA said that these mitigating factors set out in the passage cited above, did not detract from the dishonesty.
In our view where there is no finding of deliberate or subjective dishonesty, and the Tribunal is to required to consider whether ordinary and decent people would consider particular conduct in relation to the trust account, dishonest, it is appropriate for the Tribunal to consider matters of this nature.
Our decision to apply the Brereton test in relation to dishonesty means that Ms Groenewegen is not required to scale the higher threshold, as she described it to us. We should add that even if we are wrong in this regard, our conclusion is that the evidence does not in any event support a finding of deliberate or subjective dishonesty on the part of the Solicitor. The Solicitor made no attempt to conceal what he had done, although knew he was under scrutiny from the Law Society's trust accounts inspectors. Also relevant is the Law Society's decision to abandon its case that the Solicitor did not have funds of his own with which to pay the stamp duty. This in contrast to Kumar where there was a finding that the Solicitor applied the $12,000 trust cheque to meet a pressing debt.
We will therefore proceed on the basis that we need first to consider whether the Solicitor intended to do the acts which are the subject to the complaint and secondly whether ordinary and decent people would regard these acts as dishonest.

[11]

Were the acts dishonest by the standards of ordinary and reasonable people

The Solicitor's position, again from paragraph 19b of his Amended Reply, was that although the knew that he had not put his own money into the trust account at the time he wrote the cheque, it was always his intention to do so, and in fact he thought he had done so. .As we noted above, the Solicitor gave an account in his affidavit, of conversations with his secretary which supported the view that he indeed thought he had paid in his own money. Ms Petch corroborated those conversations in her own affidavit. He also gave evidence as how busy his practice was during this period. We are inclined to accept this evidence.
In her submissions Ms Castle also drew our attention to the fact that the butt of the Trust Cheque accurately recorded that the cheque had been drawn to pay stamp duty for the Solicitor's property purchase and it noted the number of the office file which the Solicitor had opened for the purchase. This was further evidence, it was submitted, that the Solicitor intended at all times to use his own money.
Nevertheless the fact that the Solicitor did not actually check the position for himself until 4 December 2013 is, to us, evidence of extreme inadvertence and even reckless conduct on his part. The question is would this be regarded as dishonest.
Ms Groenewegen submitted that a member of the public for whom a solicitor holds money on trust, is entitled to expect that those monies will not be used even unintentionally for unauthorised purposes. Thus the Solicitor's conduct was not free from deceit and untruthfulness and would be viewed as objectively dishonest.
Our view is that when all the evidence is taken into account, ordinary and decent people would accept that the Solicitor's conduct fell short of dishonesty. The conduct can be distinguished from the conduct which was found to be dishonest in Clapin, Pizzinga and in Kumar. It follows that the Law Society's ground of complaint against the Solicitor alleging the misappropriation of trust monies must be dismissed.

[12]

What is the appropriate penalty

Notwithstanding the differences of opinion between the parties as to whether there should be a finding of misappropriation, there was common ground as to what the appropriate penalty should be. Having accepted the Solicitor's evidence that he had sufficient funds of his own to pay the stamp duty, the Law Society conceded that the removal of the Solicitor's name from the roll was not necessary and a reprimand was more appropriate.
Although we have not upheld the misappropriation ground, the Tribunal regards the Solicitor's conduct in relation to the Trust Cheque as improper and even seriously so, adopting the words used by the Tribunal in Clapin to describe the conduct that it found fell short of dishonesty. Had the Law Society elected not to proceed on the ground of the misappropriation in relation to the Trust Cheque, but on the ground of reckless conduct, it is likely that this would have been upheld, and that we would have regarded this to be professional misconduct on the Solicitor's part.
Given our views on this issue and our findings of professional misconduct in relation to the Solicitor's breaches of ss 263 and 264 of the LP Act, we have give considered whether a further penalty, such as a fine, might also be warranted. In the end we have come to the view that a reprimand alone is appropriate.
There are three additional factors which led us to this conclusion. First an affidavit dated 2 June 2015 was filed from Mr Michael Benson, a CPA practising at Grafton, who said that he had been engaged by the Solicitor since September 2014 to ensure that his trust account was compliant with the LP Act and the Regulations. Mr Benson said that he was confident that that trust account and office accounts were being administered in accordance with the Act and the Regulations.
Secondly we were informed that the Solicitor now has a junior solicitor in his employ which should assist him in his court matters and allow him to devote more time to the necessary administrative matters involved in running his Law Practice.
Finally we were told that the Solicitor had enrolled in a course entitled Legal Trust Accounting - NSW run by the Legal Bookkeepers Institute, and had already completed one of the six modules involved in that course. The Law Society informed us that the course was an appropriate one for the Solicitor to attend. Had the Solicitor not enrolled in this course voluntarily, we would have ordered that he undertake a course of this kind, in addition to our other orders.

At a glance

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Judgment (15 paragraphs)

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Cases Cited (5)

Cited By (9)