GS v YF [2018] NZLCRO 53 (26 June 2018)

Last Updated: 23 July 2018

	LCRO 241/2014
CONCERNING	an application for review pursuant to section 193 of the Lawyers and Conveyancers Act 2006
AND
CONCERNING	a determination of the [Area] Standards Committee [X]
BETWEEN	GS Applicant
AND	YF Respondent

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

DECISION

Introduction

[1] Mr GS has applied for a review of the determination by [Area] Standards Committee [X] (the Committee) in which the Committee made two findings of unsatisfactory conduct against Mr GS and imposed a fine of $3,000. In addition, Mr GS was ordered to pay the sum of $1,000 by way of costs to the New Zealand Law Society.

[2] Mr YF (together with his parents and two siblings) guaranteed advances by ABC Finance Limited (AFL) to DEF Funds Ltd (DFL). Mr GS acted for DFL and the issue involved in the complaint required a consideration of what duties Mr GS owed to Mr YF.

[3] It is also relevant to this complaint that the registered office of DFL was at Mr GS’ office and the loan documentation also provided that Mr GS’ office was the address for service of any Notices to be served on the guarantors.

Background

[4] DFL was the trustee of the GHI Trust which was the owner of a farm in [town].

[5] DFL had a single director, Mr JM, who was the accountant for Mr and Mrs YF snr. Companies Office records show that DFL had a single shareholder, NOP (Holdings) Limited. The sole director of this company is Mr GS and the shares in that company are held jointly by Mr GS and Mr KL, who is also a lawyer.1

[6] DFL arranged a loan from AFL. The loan was to be guaranteed by Mr YF, his parents and his two siblings. The guarantee by the siblings was limited to their interest as beneficiaries of the GHI Trust.

[7] Mr GS was instructed to act for DFL.

[8] The loan documentation was prepared by [Law firm 1] and sent to Mr GS for execution. The advance was secured by a mortgage over property owned by the Trust, as well as General Security Agreements (GSA) over property, stock and [company] shares owned by Mr and Mrs YF snr.

[9] Mr and Mrs YF snr attended at Mr GS’ office for the purpose of executing the documentation in their capacity as guarantors and the GSA over their personal assets.2

[10] Having attended to that, Mr GS gave Mr and Mrs YF snr the documents that needed to be signed by their three children, as guarantors. That included a document entitled Acknowledgement of Guarantor addressed to GS Law and prepared by Mr GS. In this document, the guarantors provided various acknowledgements, details of which are referred to in the Review section of this decision.

[11] All documents, including the Acknowledgement by the guarantors, were executed and returned to Mr GS. The Acknowledgement of Guarantors document is dated 11 June 2011, but it is not clear whether this is the date on which Mr and Mrs YF snr signed the documents or a later date.

[12] It seemed that delays occurred in uplifting the advance and on 21 July 2011, [Law firm 1] proposed extensions to the commencement and repayment dates of the loan. Without discussing the amendments to the dates with his clients, Mr GS responded

1 These facts have been ascertained by searching Companies Office Records. If they are not correct it has no effect on this decision. For this reason, it has not been considered necessary to seek confirmation of the information from Mr GS.

2 The Committee determination refers to Mr and Mrs YF snr as trustees of the GHI Trust and as directors of DFL. This is not correct.

on 22 July 2011: “My clients and guarantors confirm acceptance of the points in the email below”.

[13] The loan fell into default. A Notice of Demand pursuant to s 119 of the Property Law Act 2007 (PLA) was served at Mr GS’ office at 4.27 pm on 29 November 2011 and a member of Mr GS’ staff (Ms QR) subsequently confirmed receipt of the notice.

[14] It is accepted, and acknowledged, that Mr GS did not advise Mr YF (the complainant) or his siblings of the fact that the Notice had been served.

[15] Mr GS also personally acknowledged receipt of another Notice served at his office on 24 January 2012 by the receiver appointed under the GSA. The Notice advised that the receiver had taken possession of the collateral and that the collateral would be sold if the default was not remedied.3

[16] The Notice specifically referred to the fact that the advance was guaranteed by Mr YF and his siblings. Mr GS still did not advise Mr YF or his siblings directly that the loan was in default.

[17] Litigation challenging the validity of service of the Notices on the guarantors ensued, in the context of which Mr GS’ conduct in connection with the execution of the documents and service of the Default Notices became known, giving rise to Mr YF’s complaints.

[18] Mr YF’s complaints were summarised by the Committee in the following manner:4

• That Mr GS, without expressly advising Mr YF, in effect acted for Mr YF in his capacity as guarantor for a loan relating to his family’s farm and made Mr GS’s offices his address for service
  
• That Mr GS had conflicting duties in acting for the lender and Mr YF’s family and/or Mr YF and he did not obtain Mr YF’s informed consent nor advise him to seek independent legal advice
  
• That Mr GS negligently, and in breach of duties to Mr YF, failed to notify Mr YF of the PLA Notice
  
• That Mr GS should have, but failed to, notify Mr YF of a notice served on the borrower company under s 128(1) of the PLA
  
• That Mr GS agreed to a crucial change to the terms of the loan, on Mr YF’s behalf and without Mr YF’s consent
  

3 ‘Collateral’ is the property secured by the GSA.

4 Standards Committee determination, 7 October 2014 at [6].

[19] In addition to reference to advice concerning the s 128 Notice, the Committee should have included reference to advice concerning service of the s 119 Notice, but the basis of the complaint is the same — namely, that Mr GS did not advise Mr YF of the fact that a Notice of Default had been served at his office.

[20] Inclusion of some of the content of Mr YF’s complaint provides a clearer understanding of the issues:

• ... I have never had any form of communication with Mr GS. I have never spoken to him on the phone. I have never communicated with him via email or post and I have never met him in person ...
  
• ... When the facility agreement was presented to me for signing my parents were under pressure to return the document quickly and I was only able to briefly skim its contents.
  
• ... I was unaware that the document itself attempted to remove my rights to be served (as guarantor) in person under s 121 of the Property Law Act 2007. In that agreement, GS Law was indicated as the place where notices should be served.
  
• On 29 November 2011, the finance company that had provided the loan (for family farm) served notice to me as guarantor, under s 119/s 121 of the Property Law Act 2007, to the offices of GS Law. There is evidence that notice was served and that GS Law acknowledged receipt of the notice and accepted service on my behalf as one of five guarantors. I had no knowledge whatsoever that these notices had been served on GS Law. I was completely unaware of any default on the loan. Mr GS never made any attempt to contact me about the notice that he had received.
  
• ... because of Mr GS failing to tell me about the notice I remained unaware of its existence until well past its remedy date ...
  
• ... I feel that Mr GS has failed to provide me, his client by way of the facility agreement, with the proper duty of care.
  
• Mr GS through the facility agreement became my lawyer in the eyes of finance company providing the loan, however I never instructed Mr GS, nor did I wish to employ his services. ...
  

The Standards Committee determination

[21] The Committee accepted that:5

Mr GS had not acted for Mr YF in any true sense. Mr GS’s clients had been Mr and Mrs YF Sr, in their capacity as trustees and directors of the borrower trust and company respectively. The remaining guarantors, including Mr YF, had not asked Mr GS for advice. It seems clear that, in relation to Mr YF (and the other remaining guarantors), Mr GS’ role was limited to facilitating the guarantee being put in place on the instruction of his clients, Mr and Mrs YF Sr.

...

5 At [11], [15]. Mr and Mrs YF snr were not trustees of the GHI Trust or directors of DFL.

Mr GS did not owe solicitor-client duties to Mr YF and therefore there was no breach of duty in that sense. Mr GS did not have an obligation to Mr YF to adequately advise him, as asserted by Mr YF. Mr YF could have sought advice from a lawyer; he did not do so.

[22] The Committee’s concerns centred on the content of the Acknowledgement of Guarantor document prepared by Mr GS and given to Mr and Mrs YF snr to be signed by Mr YF and his siblings with the loan documentation.

[23] The Committee noted that the Acknowledgement said:

... that Mr GS had already explained certain things to the persons signing the acknowledgement. It said, for example, “We have had the guarantee explained to us...” and “[GS] has advised us that he has a conflict of interest...” (emphasis added). That was patently incorrect so far as Mr YF was concerned. Mr GS had never spoken or otherwise communicated with Mr YF directly.

[24] The Committee continued:6

... it was inappropriate for [Mr GS] to seek signatures from the guarantors on the factually incorrect (other than vis a vis Mr and Mrs YF Sr) form of acknowledgement. It was not appropriate to purport to advise or disclose by stating that such advice had previously been given or disclosure previously made. The Committee considered that Mr GS’s conduct in doing so fell short of the standard of diligence that a member of the public is entitled to expect of a reasonably competent lawyer. The Committee also considered that Mr GS’s conduct would be regarded by lawyers of good standing as being unacceptable.

[25] The Committee determined that Mr GS’ conduct amounted to unsatisfactory conduct pursuant to ss 12(a) and (b) of the Lawyers and Conveyancers Act 2006 (the Act).

[26] Mr YF had complained that Mr GS had never advised him about his conflict of interest. In this regard Mr YF was under the impression that Mr GS had acted for AFL as well as for the borrower, DFL, and the guarantors. That is not correct. [Law firm 1] acted for AFL.

[27] However, the Committee proceeded to address Mr YF’s complaint on the basis as made — that Mr GS had acted for AFL and the borrower — and determined that Mr GS had advised Mr and Mrs YF snr of the conflict and they had consented to him continuing to act.

[28] The Committee did not address the conflict that did arise between the borrower and guarantors, and whether or not Mr GS had dealt with that issue.

6 At [18].

[29] Having concluded that Mr GS did not act for Mr YF the Committee determined to take no further action in respect of Mr YF’s complaints that Mr GS did not notify him of the service of the default notices.

[30] The Committee then addressed Mr YF’s complaint that Mr GS had agreed amendments to the terms of the loan on behalf of the borrower and the guarantors without instructions, and reached the view that Mr GS’ conduct in doing so constituted unsatisfactory conduct.

Review

Delegation

[31] The review progressed by way of a both party hearing in Auckland on 29 May 2018. Mr GS was accompanied by a support person. Mr YF attended by telephone.

[32] 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. The LCRO has delegated Mr Vaughan 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 default notices

[33] The Committee determined to take no further action with regard to Mr YF’s complaints that Mr GS had not advised him of the fact that the default notices had been served. The Committee reached this view on the basis that Mr GS did not act for Mr YF and owed no solicitor/client duties to him.

[34] There is no copy of the AFL loan facility agreement on the Committee’s file and no copy has been provided on review. It is acknowledged that s 204 of the Act provides this Office with the option of calling for a copy of the document. However, alternative means of ascertaining the content of the document has been obtained by a review of the High Court decision in [Case name].7 Although the Court in Dorbu confirmed the principle that a judicial officer must form his or her own opinion on the evidence as presented,8 that does not prevent acceptance of the evidence provided to, and accepted by, [Judge] in that judgment.

7 [Citation removed]

8 Dorbu v Lawyers and Conveyancers Disciplinary Tribunal HC Auckland CIV-2009-404-7381, 11 May 2011.

[35] Evidence was provided to the Court that after the PLA Notice was served on 29 November 2011 at Mr GS’ office, he sent a copy to Mr YF snr. The Default Notice was referred to subsequently in email and telephone conversations between Mr GS and Mr YF snr, reinforcing the fact that Mr YF snr was aware of the Notice.

[36] There is no evidence available on which to base a decision as to whether or not Mr YF snr imparted any information about the existence of the Default Notice to his children. However, Mr YF snr gave evidence to the Court that his sons had access to his and his wife’s emails, and Mr and Mrs YF snr relied on their sons to “let them know of anything of consequence that had been emailed to them”.9

[37] The Court accepted that Mr GS had forwarded the Property Law Act notice to Mr YF snr by email and it is therefore reasonable to assume that at least one of their sons would have seen the email. Indeed, one of their daughters-in-law (Ms ST) subsequently telephoned Mr YF snr about the demand.

[38] In summary therefore, Mr and Mrs YF snr knew of the Property Law Act Notice and at least one of their sons also knew of it. On a balance of probabilities therefore, it is likely Mr YF also knew of the existence of the Default Notice.10

[39] The decision on review to take no further action with regard to this aspect of Mr YF’s complaint has been reached on the grounds that, on a balance of probabilities, Mr YF and/or his siblings were aware of the default Notices, and Mr and Mrs YF snr were definitely aware of their existence. This reasoning is preferred to the reasoning of the Committee that Mr GS had no duty to Mr YF because there was no solicitor/client relationship, but the outcome is the same.

[40] The issue as to whether or not Mr GS owed a duty to Mr YF is addressed in the next section of this decision.

Did Mr GS have a duty to Mr YF?

[41] The Facility Agreement included the following clause:

11.5 Service of Process

(a) Each Borrower and Guarantor irrevocably appoints the registered office of the Borrower as its registered office for the time being in New Zealand to receive, for it and on its behalf, service of process in any Proceedings in New Zealand and any notices under section 119 and 121 of the Property Law Act 2007. Such service shall be deemed completed on delivery to the

9 [Citation removed].

10 The standard of proof required.

Borrower (whether or not forwarded to and received by the appointing Borrower or Guarantor)

(b) Nothing in this clause 11.4(e) shall affect the right to serve process in any other manner permitted by law.

[42] The registered office for DFL was at Mr GS’ office. This meant that Mr GS’ office became the address for service on the guarantors. Notwithstanding that the Court subsequently held that service of the Notices was invalid, this does not alter the fact that, on the basis of the documents as signed, Mr GS assumed an obligation to the guarantors.

[43] This is somewhat reinforced by the words used by Mr GS in the Acknowledgement of Guarantor document which Mr GS prepared and included with the documents to be signed by the guarantors. This document included the following acknowledgements:

4. [GS] has advised us that he has a conflict of interest given that he is acting for the Borrower and the Lender and that as a result [GS] may not be able to disclose to us his full knowledge as to the transaction or might not be able to advise us in a way which might conflict with the interests of the Borrower.
   
5. [GS] has advised us as Solicitor for the Borrower, to take independent legal advice before we execute the Guarantee. [GS] has offered to arrange independent legal advice for us.
   
6. Despite the above advice, we record and hereby instruct that we do not wish to obtain legal advice. Given this instruction to [GS] we acknowledge [GS] has advised us not to sign the Guarantee as guarantor.
   
7. We record that we are seeking the services of [GS] to ensure that the borrowing from the Lender is given proper effect. We are not seeking advice from [GS] as to the wisdom of our signing the Guarantee as guarantor.
   
8. We have advised [GS] that we shall freely and voluntarily execute the Guarantee.
   
9. We acknowledge our liability is joint and several which means that the Lender can pursue either or both of us to recover the money that is owing the Lender as well as any costs incurred by the Lender.
   
10. This acknowledgement has been signed by us prior to our executing the Guarantee.
    

[44] The content of this Acknowledgment proceeds on the basis that Mr GS was acting for Mr YF. That is inconsistent with the finding by the Committee that there was no solicitor/client relationship.

[45] The Committee’s determination of unsatisfactory conduct by Mr GS is based on the Committee’s view that “it was inappropriate for [Mr GS] to seek signatures from the

guarantors on the factually incorrect (other than vis a vis Mr and Mrs YF Sr) form of acknowledgement”.11

[46] For the reasons expressed above, the finding on review, is that Mr GS did have a duty to Mr YF. Mr GS did not directly advise Mr YF of the fact that the Default Notices had been served. This constitutes unsatisfactory conduct pursuant to s 12(a) of the Act.

[47] Mr GS has also breached a number of the Lawyers and Conveyancers Act (Lawyers: Conduct and Client Care) Rules 2008 (the Rules):

• (a) rule 3 — promotion of client interests;
  
• (b) rule 6 — competence and client service;
  
• (c) rule 7 — disclosure of information; and
  
• (d) rule 11 — duties to former clients
  

The conflict of interests

[48] Mr YF complained that Mr GS was conflicted because he acted for AFL and DFL. The Committee determined there was no unsatisfactory conduct on the part of Mr GS because Mr and Mrs YF snr consented to him continuing to act.

[49] [Law firm 1] acted for AFL. In addition, Mr and Mrs YF snr could not consent on behalf of DFL. DFL was the owner of the farm as trustee for the GHI Trust. The sole director of DFL was Mr and Mrs YF’s accountant, Mr JM and there is no evidence of consent from Mr JM.

[50] However, the Committee did not address the conflict that arises between a borrower and guarantors of a loan. There is no need to include a detailed discussion of this conflict which is (or should be) well known to all lawyers acting for a borrower and the parties are referred to the discussion on this point in the text Ethics, Professional Responsibility and the Lawyer.12

[51] This conflict between borrower and guarantor was not raised by the complainant, but that is understandable, as a lay person cannot be expected to be aware of the finer points of the law.

11 Standards Committee determination, above n 4. at [18].

12 Duncan Webb, Kathryn Dalziel and Kerry Cook Ethics, Professional Responsibility and the Lawyer (3rd ed, LexisNexis, Wellington, 2016) at [7.16].

[52] Mr GS’ attempts to legitimise his continuing to act for the borrower and the guarantors, are based on the fact that the guarantors all signed the Acknowledgment document. There is no evidence from Mr and Mrs YF snr as to what advice they received before signing the Acknowledgment, but Mr GS did meet with them directly and, neither of them have joined the complaint.

[53] The complaint, and now this Review, centres on Mr GS’ conduct and advice (or lack thereof) to Mr YF. The Acknowledgment document was given to Mr and Mrs YF snr with all documentation to be signed by their children. Mr GS did not speak to any of the children directly.

[54] The term “informed consent” is defined in r 2 of the Rules. It means:

consent given by the client after the matter in respect of which the consent is sought and the material risks of and alternatives to the proposed course of action have been explained to the client and the lawyer believes, on reasonable grounds, that the client understands the issues involved.

[55] Mr GS did not personally provide any explanation to Mr YF.

[56] The need for personal and direct communication is reinforced by the authors of Ethics, Professional Responsibility and the Lawyer, they say:13

Any consent to a lawyer continuing to act in the face of a conflict of interest must be given freely and the client must be made fully aware of the consequences of such consent. It must be more than a mere giving of an opportunity to seek independent advice. The person giving the consent must be of full capacity and capable of understanding the problems of a conflict of interest. In particular, it is important that the client understand that this may mean the lawyer will not be able to fully disclose all information relevant to the matter in hand to the client or be unable to advise effectively on matters which affect the other client’s interests.

[57] “Informed consent” as defined in the Rules, or as expanded on in the text referred to above, can not in any sense, be said to have been achieved by Mr YF’s signature to the Acknowledgment document. Mr YF cannot have read the Acknowledgment, either at all, or with any degree of understanding. The statements made in that document were clearly untrue.

[58] Regardless of the degree of understanding held by Mr YF, Mr GS was not able to proceed on the basis that he had positively advised Mr YF of the obligations he was undertaking — he had never met or spoken to Mr YF or his siblings.

[59] Therefore, even if is accepted that Mr GS could have acted for the guarantors with their consent (which it is not), Mr GS is nevertheless in breach of r 6.1.1 in that he

13 At [7.4] citing Taylor v Schofield Peterson [1999] 3 NZLR 434 (HC).

did not obtain informed consent from Mr YF and his siblings. This constitutes unsatisfactory conduct pursuant to s 12(c) of the Act.

The amendments to the terms of the loan

[60] Mr GS agreed to an alteration to the terms of the loan without instructions. He argued that the amendment to the terms of the loan would “presumably benefit DFL”. Whether or not it was to the benefit or detriment of the borrower is irrelevant. A lawyer cannot agree variations to a contractual document on behalf of a client without instructions.

[61] In this case, Mr GS confirmed the amendments “on behalf of his clients and the guarantors”. His statement to [Law firm 1] went beyond carelessness — it was untrue. DFL had one director — Mr JM. Mr GS had not discussed the amendments with Mr JM. Nor had he discussed the amendments with any of the guarantors.

[62] This constitutes a breach of a number of the Rules and is also conduct a lawyer of good standing would consider to be unacceptable.14

[63] Mr GS’ conduct is unsatisfactory conduct pursuant to ss 12(b) and (c) of the Lawyers and Conveyancers Act.

Decision

[64] Pursuant to s 211(1)(a) of the Lawyers and Conveyancers Act 2006, the findings of unsatisfactory conduct by the Standards Committee are reversed, and replaced with a single finding of unsatisfactory conduct pursuant to ss 12(a), (b) and (c) of the Act.

[65] The somewhat contradictory outcome of this review is acknowledged. On the one hand, a finding has been made that Mr GS did not fulfil his duties to Mr YF in the capacity of client.

[66] On the other hand, findings have also been made against Mr GS on the basis that he should not, in any circumstances (even with consent) have acted for Mr YF and the other guarantors, although a special case may have been able to be made for Mr and Mrs YF snr. Even then, they would need to have been independently advised. The Acknowledgment document did not, in any event, amount to “informed consent”.

14 For example. rr 10, 11.1

Penalty

[67] The Committee imposed a fine of $3,000 and ordered Mr GS to pay $1,000 costs. Given the apparent gaps in Mr GS’ understanding of the conflict of interest which arises as between borrower and guarantor, it would be in his interests to ensure he take steps to fill in that gap. Section 156(1)(m) of the Act empowers a Standards Committee or this Office to order that a lawyer undertake practical training or education.

[68] Mr GS is a senior practitioner who has been in practice for many years. He has the support of Ms UV who accompanied him to the review hearing. It is up to Mr GS to take steps to ensure he recognises any conflict situation that arises in the course of his practice and to either discuss issues with Ms UV or any other practitioner, and/or decline to accept instructions in circumstances where he is unclear about any Professional Standards issues that may arise.

[69] In imposing the fine, the Committee observed that “it was entitled, at penalty stage, to take into account Mr GS’ disciplinary history”.15 On review, Mr GS objected to the Committee having reference to his “disciplinary history”. It is not necessary to address this issue.

[70] On review, the findings against Mr GS have been modified to a single finding of unsatisfactory conduct. The facts giving rise to Mr YF’s complaint are such that a penalty by way of a fine is the appropriate penalty to impose, and a fine of $3,000 is appropriate in the circumstances.

[71] Pursuant to s 211(1)(a) of the Lawyers and Conveyancers Act 2006 the fine of

$3,000 imposed by the Standards Committee is confirmed.

Costs

[72] Although the findings of the Standards Committee have been modified on review there remains a finding of unsatisfactory conduct against Mr GS. In the circumstances, the costs ordered to be paid by Mr GS remains appropriate. Pursuant to s 211(1)(a) of the Lawyers and Conveyancers Act 2006 the order for payment of costs in the sum of $1,000 to NZLS is confirmed.

15 Standards Committee decision, above n 5, at [36].

Costs on review

[73] On review, the finding of unsatisfactory conduct by Mr GS, has been confirmed on different grounds as provided in this decision. Pursuant to s210(1) of the Lawyers and Conveyancers Act 2006 and the Costs Orders Guidelines issued by this Office, Mr GS is ordered to pay the sum of $1600 to this Office by no later than 26 July 2018.

DATED this 26TH day of June 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 GS as the Applicant Mr YF as the Respondent

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