HW v DL [2018] NZLCRO 26 (19 March 2018)

Last Updated: 30 March 2018

	LCRO 242/2014
CONCERNING	an application for review pursuant to section 193 of the Lawyers and Conveyancers Act 2006
AND
CONCERNING	a determination of [Area] Standards Committee [X]
BETWEEN	HW Applicant
AND	DL Respondent

DECISION

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

Introduction

[1] Mr HW (the applicant) has applied for a review of a decision by [Area] Standards Committee [X] (the Committee) to take no further action in respect of his and his mother’s complaints about the respondent.

Background

[2] Mr HW and his mother owned property as tenants in common.1 The property was subject to a mortgage to [Bank 2], which secured an advance to Mr HW when the property had been purchased. The respondent had acted for Mr HW and his mother at that time.

[3] In April 2011, Mr HW and his business partner (Mr TM) contracted to buy a business and applied to [Bank 1] for funding. This was approved on the basis that

1 Mr HW as to 40 per cent, Mrs HW as to 60 per cent.

Mrs HW transferred her interest in the property to Mr HW. The respondent was not acting for Mr HW and Mr TM in relation to the purchase of the business.

[4] At the time, Mrs HW was in [country] and unable to personally sign the necessary documentation. The broker engaged by Mr TM and Mr HW to assist them in the search for funding, arranged for Mrs HW to execute a Power of Attorney whereby she appointed Mr TM’s wife (Mrs NQ) her attorney.

[5] The broker provided the respondent with a fax copy of the Power of Attorney. Her signature had been witnessed by a Notary Public in [country] and a fax copy of the certification by the Notary was also provided. In addition, the broker provided the respondent with a fax copy of a letter of authorisation, which, translated into English, reads:

I, ([Mrs HW]) confirm that my share (3/5) of the ownership in the property at [address] should be transferred to my son, ([Mr HW]).

I confirm again that I will not object the transfer (to [Mr HW]) at all. Dated 11 April 2011

Signed by [Mrs HW].

[6] Mrs HW’s interest in the property was transferred to Mr HW, the mortgage to [Bank 1] registered and funds advanced. The advance was used to repay the existing [Bank 2] loan and the balance ($197,191) was credited to Mr HW’s account with [Bank 1].

[7] In August 2012, the [Bank 1] borrowing was refinanced through [Bank 2]. The respondent did not act for Mr HW at that time.

[8] Mr HW says he did not realise the property had been transferred into his sole name until September 2013, when he uplifted his file, or a copy, from the respondent.

[9] Mr and Mrs HW lodged their complaint on 29 January 2014.

The complaint and the Standards Committee decision

[10] The Committee identified the issues to be addressed as being that Mr DL (the respondent) had:2

2 Standards Committee determination (2 October 2014) at [7].

(a) failed to properly advise them on the Bank’s refinancing terms, requiring the transfer of the property to [Mr HW]’s sole name, and for the borrowing to be in joint names with Mr TM;

(b) prepared a Power of Attorney for [Mrs HW] to sign in favour of [NQ] (“Mrs NQ”) and used the Power of Attorney to transfer the property without informed instructions; and

(c) failed to advise them to each obtain independent legal advice.

[11] In their complaint dated 29 January 2014, Mr and Mrs HW noted that by transferring her interest in the property to Mr HW, Mrs HW had become liable for gift duty in [country] in the sum of $150,000. They believe they suffered a total loss of $910,000 made up as follows:3

1. $450,000 — Mrs HW’s cash contribution to the property
   

2. $160,000 — Mr HW’s cash contribution to the property 3. $150,000 — duty
   4. $100,000 — other finance company
      
   5. $50,000 — compensation for emotional harm, stress and time to deal with this matter.
      

[12] The Committee addressed the three issues raised by the complaint together. It said:4

The Committee noted and accepted Mr [BA]’s explanation that Mr [DL] had explained the relevant transactions and documents to the parties before these had been executed by those involved. The Committee was also satisfied that Mr [DL] had done what could reasonably have been expected of him, by comparing the signatures between the Power of Attorney and the Letter of Authorisation, especially given the fact the Power of Attorney had been executed and notarised by a Notary Public, and that Mr [DL] would have had no reason to believe these documents were not authentic. These documents had also been shown to [Mr HW] at the meeting.

The Committee further noted that Mr [TM] had waived his right to independent legal advice and that [Mrs HW] had been represented by Mrs [NQ], authorised under Power of Attorney, and that a Letter of Authorisation had been prepared and provided to Mr [DL] for the transfer.

The Committee was of the view that, based on the evidence before it, it seemed unlikely that [Mrs HW] and [Mr HW] would not have known about the loan being in joint names of [Mr HW] and Mr [TM], or about the special condition that required the property to be transferred into the sole name of [Mr HW]. While it is not the role of the Committee to establish the authenticity of documents, clearly a Power of Attorney and Letter of Authorisation had been prepared and these documents appeared to have been signed by [Mrs HW]. As already stated, this would also have been a reasonable conclusion for Mr [DL] to reach.

3 It is difficult to comprehend how the “cash contributions” to the property can be considered to have been lost, but that is of no relevance to the review.

4 Above n 2 at [24]–[26].

[13] Having made these observations, the Committee then determined, pursuant to s 138(2) of the Lawyers and Conveyancers Act 2006 (the Act), to take no further action in respect of the complaints.

Application for review

[14] Mr HW has applied for a review of the Committee’s determination. He submits:

• (a) he was not provided with independent legal advice;
  
• (b) the respondent simply told him where to sign and did not explain the documentation;
  
• (c) the authorisation from his mother is a forgery; and
  
• (d) the respondent did not explain what was authorised in the A&I forms. He was under the impression it was a simple refinance to change banks rather than also a transfer of the property.
  

[15] In response Mr BA has submitted for the respondent:

• (a) the parties were referred to the respondent by their mortgage broker;
  
• (b) the respondent was provided with copies of the Power of Attorney and all supporting material by the broker;
  
• (c) the respondent did not prepare the Power of Attorney;
  
• (d) the respondent compared the signatures on the documentation and concluded they were Mrs HW’s signatures;
  
• (e) the respondent explained all documentation to the parties, which included specific advice about highlighting the special condition about the transfer of the property;
  
• (f) he advised Mr TM to obtain independent legal advice, which was declined;
  
• (g) he sent a compendium of documents to Mr HW following the conclusion of the transaction, including a post-registration search of the title to the property, together with copies of the signed documentation; and
  
• (h) factual aspects of the complaint are fundamentally incorrect.

Review

Delegate

[16] The review progressed by way of a both party hearing in Auckland on 28 February 2018 attended by Mr HW, who was represented by Mr RJ, and the respondent, who was represented by Mr BA. An interpreter was also in attendance to assist Mr HW.

[17] The hearing was conducted by Mr Vaughan acting as a delegate duly appointed by the Legal Complaints Review Officer (LCRO) pursuant to cl 6 of sch 3 of the Act. Mr Vaughan has been delegated to report to me and the final determination of this review as set out in this decision is made following a full consideration of all matters by me after receipt of Mr Vaughan’s report and discussion.

The conflict of interests

[18] The Committee only obliquely addressed the conflict of interests arising between the various parties when it addressed the failure by the respondent to decline to act for all parties.

[19] Rule 6.1 of the Lawyers and Conveyancers Act (Lawyers: Conduct and Client Care) Rules 2008 (the Rules) provides:

A lawyer must not act for more than 1 client on a matter in any circumstances where there is a more than negligible risk that the lawyer may be unable to discharge the obligations owed to 1 or more of the clients.

[20] Rule 6.1.1 only allows a lawyer to act for more than one party with informed consent from each if there is a less than negligible risk the lawyer will be unable to discharge obligations to each party.

[21] The question to be addressed therefore becomes:

Was there a more than negligible risk the respondent may have been unable to fulfil his duties to each party?

[22] If there was, the respondent should have declined to act (at least for all but one) of the parties.

[23] The exercise to be undertaken is to consider what was involved for each party to the transaction and what the documentation for that party involved.

Mrs HW

[24] Mrs HW owned three-fifths of the property. The existing borrowing secured against the property was owed by Mr HW. Given the importance of the documents to be signed, the respondent had a duty to Mrs HW to ensure that she appreciated the effect of the documents that were being signed on her behalf by Mrs NQ.

[25] The respondent relied on the letter of authorisation provided to him by the broker in which Mrs HW (purportedly) acknowledged the transfer of her interest to Mr HW. Quite apart from the suspicion of (and allegation by) Mr HW and Mr RJ (on behalf of Mrs HW) that the letter is a forgery, there were many matters that needed to be addressed and the consequences discussed with Mrs HW. In the first instance, the transfer needed to be documented in some way. The transfer was either a gift, or could have been construed as a “sale” to Mr HW with an acknowledgement by him that he owed the “sale price” to his mother.

[26] A discussion with Mrs HW needed to include inquiry as to whether there were other family members who were being deprived of a share of their mother’s assets by the transfer. At the review hearing, it seemed to the Review Officer, that the respondent was unsure whether Mrs HW had a spouse or other children.

[27] Mr and Mrs HW say in their complaint, that Mrs HW incurred gift duty in [country] amounting to some $150,000. Even if Mrs HW had been adamant she wanted to proceed with the transfer, the transaction could have been structured in a way to avoid that. It may even have been possible to negotiate with the bank to restructure the loan so that the bank obtained the security required without the need to transfer ownership of the property.

[28] At the review hearing, the respondent stated that he thought Mr HW was “a sort of trustee for Mrs HW”. That was a somewhat disturbing comment to make. In the circumstances, it was not sufficient for the respondent to assume a “sort of” relationship. A lawyer’s role is to make sure his or her client is fully advised as to the effect of a transaction and the options available to achieve a particular outcome.

[29] At the review hearing, Mr RJ said that Mrs HW had stated it is likely the transaction would not have proceeded if she had been advised that the documentation included a transfer of her interest to Mr HW. She and Mr HW say that they thought they

were signing documents to refinance the loan to provide additional funds for the business purchased by Mr HW.

[30] The respondent did not fulfil his duties to Mrs HW.

Mr HW

[31] The respondent was not acting for Mr HW in relation to the business purchase. Mr HW says he did not realise the documentation included a transfer of his mother’s interest in the property to him. The A&I signed by Mr HW does not, on the face of it, include any indication that it authorised a transfer of the property. Where the form provides for details of the base document to be inserted it merely states — “Loan agreement and discharge of mortgage”.

[32] While the loan agreement contained a requirement that the property be transferred to Mr HW alone, that is not, in itself, sufficient to document the transfer of the property. A discussion with Mr HW as to how this was going to be achieved would have highlighted the bank’s requirement. Clearly, Mr HW needed to have advice, independently of his mother, as to how this was going to be achieved.

[33] Mr HW also needed to be aware of the consequences of default in payment of the loan. A discussion with Mr HW as to his ability to meet the payments would have involved some discussion as to how the business relationship between Mr HW and Mr TM was structured and Mr HW’s entitlement to drawings from the business to meet his obligations to the bank.

[34] Mr HW would not have been able to discuss these matters fully in Mr TM’s presence and the respondent was not able to discharge his obligations to Mr HW in these circumstances.

Mr TM

[35] The respondent says he suggested to Mr TM that Mr TM should have independent advice. He says his concerns arose because the [Bank 1] advance was being paid into an account which only Mr HW had signing authority for, whilst Mr TM was assuming all liability as a joint borrower.

[36] Mr TM declined to take independent advice. Mr TM could not acknowledge he needed independent advice in Mr HW’s presence as, by doing so, it would indicate to Mr HW that Mr TM doubted his integrity to apply the funds towards the purchase of the business.

[37] There was a more than negligible risk that the respondent was unable to discharge his obligations to Mr TM.

Mrs NQ

[38] The respondent did not act for Mrs NQ. However, as Attorney, Mrs NQ executed documents which deprived Mrs HW of her interest in the property. This was a significant transaction which, if Mrs NQ did not fully understand it, or, if she did not have sufficient direction from Mrs HW, would have exposed Mrs NQ to serious consequences. The respondent had a duty to Mrs NQ to ensure she understood the full import of the documents and had appropriate directions from Mrs HW.

[39] Another issue which arises with regard to the Power of Attorney is that the respondent initially acted on receipt of a faxed copy of the document and a faxed copy of the certificate from the Notary. At the review hearing, the respondent advised the original Power of Attorney and certificate were brought to the meeting where all documents were executed and Mr RJ confirmed that his clients accepted the validity of the documents.

[40] However, the appointment of Mr TM’s wife as Attorney should have raised questions in the mind of the respondent such that it further increased the requirement to ensure that Mrs HW understood exactly what it was Mrs NQ was signing on her behalf.

Conclusion

[41] A clear conflict of interests arose between Mrs HW and her son, such that there was a more than negligible risk that the respondent would be unable to fulfil his obligations to both. At the review hearing Mr RJ submitted that if Mrs HW and her son had presented in person at the respondent’s office, he would have been obliged to

require one of them to take independent advice. I agree. This was not a situation where the respondent could apply the provisions of r 6.1.1.

[42] There was also a more than negligible risk that the respondent could not fulfil his duties to both Mr HW and Mr TM in relation to the obligations each was assuming. It would have been a simple matter to require Mr TM to take the documents to the lawyer who was acting for them in the business transaction. That lawyer would have known what documentation the two had entered into in their business relationship which would have enabled that lawyer to be sure that Mr TM was not being disadvantaged. By requiring Mr TM to take independent advice the respondent would then have been free to offer full and frank advice to Mr HW, if only to ensure that he was sufficiently protected to enable the obligations to the bank to be met so that the property was not at risk of being seized by the bank pursuant to its security.

[43] The respondent has failed in his duties to the parties and is in breach of r 6.1 of the Rules. This constitutes unsatisfactory conduct pursuant to s 12(c) of the Act.

[44] Having reached this conclusion, it follows that the Committee determination of issues (a) and (c) are reversed. With regard to issue (b), it is clear from the document itself that it was not prepared by the respondent.5 As noted above the complainants accept the Power of Attorney has been validly executed by Mrs HW.6 Mr RJ, on behalf of Mrs HW, says she did so on the understanding the document was to be used to execute the loan documentation only. This issue becomes subsumed into the finding that the respondent failed to fulfil his duties to Mrs HW in this regard by acting for all parties in the transaction.

Penalty

[45] Mr RJ submits that Mr DL’s conduct was at the graver end of the scale of unsatisfactory conduct.7 The consequences, particularly for Mrs HW, have been significant. In this regard, he refers to the fact that Mrs HW has incurred gift duty in

5 The document has been prepared in handwriting.

6 At [38].

7 In this section of the decision the respondent is referred to as Mr DL.

[country]. No evidence of that has been provided and it is not a factor taken into account when determining penalty.

[46] Mr RJ acknowledged, on behalf of his clients, that they were not seeking compensation in any form for their losses. That cannot be satisfactorily achieved through the complaints process in any event and no findings are made or views expressed as to the consequences of Mr DL’s conduct. Although Mrs HW (through Mr RJ) says that the transaction would in all likelihood not have proceeded had she fully understood the impact of the documentation, the possibility that the transaction would have proceeded cannot be discounted.

[47] Mr RJ advised that his client’s motivation for pursuing this matter was to ensure that Mr DL did not let other clients down in the same way in the future. At the time, the events occurred the respondent had had some 11 years’ post admission experience. He should have been alert to the situation that was developing.

[48] By way of mitigation, Mr BA pointed out the compressed timeframe of two to three days within which Mr DL was required to document the bank’s instructions. Although it has not been stated, it is assumed that it was necessary to complete the transactions within this timeframe to enable the contract for the business purchase to be settled.

[49] In the context of the time constraints, Mr DL accepted the “authority” from Mrs HW at face value. If Mr DL had declined to act, as has been held in this decision he ought to have, it presumably would have meant that Mr HW and Mr TM would have been exposed to consequences in terms of the business purchase.

[50] The respondent was under pressure.

[51] He acknowledged at the review hearing that he now understood he should not have acted for all parties, and if faced with the scenario now he would recognise his difficulties and decline to act.

[52] Mr DL’s acknowledgement is sufficient to meet the applicant’s expectation. In the circumstances, I do not consider there is any need to impose anything by way of penalty. The finding of unsatisfactory conduct against Mr DL should be sufficient to act as a reminder to him in the future of his professional obligations.

[53] However, in accordance with the Costs Orders Guidelines issued by this Office, there will be an order that Mr DL pay the costs of this review.

Decision

1. Pursuant to s 211(1)(a) of the Lawyers and Conveyancers Act 2006, the determination of the Standards Committee to take no further action in respect of the complaints by Mr and Mrs HW are reversed.
   
2. Mr DL’s conduct constitutes unsatisfactory conduct pursuant to s 12(c) of the Lawyers and Conveyancers Act 2006 by way of the breach of r 6.1 of the Lawyers and Conveyancers Act (Lawyers: Conduct and Client Care) Rules 2008.
   
3. Pursuant to s 210 of the Lawyers and Conveyancers Act, [Mr DL] is required to pay the sum of $1,600 by way of costs to the New Zealand Law Society by no later than 19 April 2018
   

DATED this 19th day of March 2018

D Thresher

Legal Complaints Review Officer

In accordance with s 213 of the Lawyers and Conveyancers Act 2006 copies of this decision are to be provided to:

Mr HW as the Applicant Mr DL as the Respondent

Mr RJ and Mr SW as the Applicant’s Representatives Mr BA as the Respondent’s Representative

[Area] Standards Committee [X] New Zealand Law Society