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New Zealand Legal Complaints Review Officer |
Last Updated: 2 August 2024
LEGAL COMPLAINTS REVIEW OFFICER
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Ref: LCRO 71/2022
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CONCERNING
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an application for review pursuant to section 193 of the Lawyers and
Conveyancers Act 2006
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AND
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CONCERNING
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a decision of the [Area] Standards Committee [X]
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BETWEEN
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OM
Applicant
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AND
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NT
Respondent
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The names and identifying details of the parties in this decision have been changed
DECISION
[1] The applicant, Mr OM, has applied for review of a determination of the [Area] Standards Committee [X] (the Committee) dated 4 April 2022 in which it made a finding of unsatisfactory conduct against him in relation to a failure to place client funds on interest-bearing deposit.
Background
[2] The applicant is the sole director of incorporated law firm, [Law Firm]. He acted for the respondent, Mr NT, and his wife, Ms EW, on the sale of their home.
[3] The applicant issued a letter of engagement to his clients dated 1 July 2020. Relevantly to this review, it included the following provisions:
Engagement
We are pleased to act for you in respect [of] your affairs with regard to: The Sale of the above property.
The retainer is limited to those matters described above. Unless specifically stated, it does not include resource management advice, tax advice and advice on financial and commercial aspects of the matter.
Costs
Our charges and expenses are $899.00 inclusive GST & Disbursements. We will inform you if it will become apparent that our estimate is likely to be exceeded by for example signing additional documents required by the bank such as a Guarantee, Deed of Nomination, or Trustee involvement.
...
Trust Accounting: We operate a trust account. All money received from you or on your behalf will be held to your credit in our trust account.
Unless it is not reasonable or practicable to do so, when we hold significant funds for you for more than a short period of time we will place them on call deposit with a bank registered under section 69 of the Reserve Bank of New Zealand Act 1989. Interest earned from call deposits, less withholding tax will be credited to you.
[4] The respondent’s and Ms EW’s relationship had come to an end. There was a dispute between them regarding the division of relationship property. The respondent’s lawyer regarding that matter was Mr SG. Ms EW’s lawyer regarding the relationship property matter was Mr DC.
[5] On 30 July 2020, there was a series of emails between Mr DC and Mr SG which evidenced that:
- (a) Mr DC had just become aware of the sale transaction and believed Mr SG must have been acting on it;
- (b) Mr DC asked Mr SG, if he was the conveyancing solicitor, to note that the sale proceeds were relationship property and to hold them in his trust account pending further direction from the parties in the form of a separation and division of relationship property agreement or Court order;
(c) Mr SG responded that he was also not aware of the sale transaction and did not know who was acting on it;
(d) The fact that the applicant was acting on the sale was established (presumably by Mr SG enquiring of the respondent and then informing Mr DC);
(e) Mr DC then wrote formally to the applicant referring to the sale transaction settling the following day and relevantly stating:
The proceeds from the property sale are considered relationship property. At this stage, a division of relationship property has not been agreed. [The respondent] has instructed [Mr SG].
Please note Ms EW’s instructions that the sale proceeds are to be held in your trust account awaiting an agreement on dividing relationship property or a court order determining the distribution of the sale proceeds.
...
I would be grateful if an undertaking could be provided confirming that the sale proceeds will be held in your trust account as requested. Once I receive the undertaking, I will send through Ms EW’s executed A&I form.
(f) There was then a telephone conversation between Mr DC and the applicant, following which Mr DC sent the applicant an email stating:
Thank you for confirming that the funds will be held in your trust account pending resolution of the relationship property matters.
[6] The sale transaction settled on 31 July 2020. The respondent issued a tax invoice for the fixed fee of $899.00, including GST and disbursements, and a trust account statement in respect of the transaction, both dated that day. The closing balance on the trust account statement, after deduction of the $899.00 fee and water rates of
$400.00, was $480,902.27.
[7] Also on 31 July 2020, the respondent emailed the applicant stating:
Please transfer all balance amount after settlement into my lawyer’s trust account so my lawyer and [Ms EW’s] lawyer can deal after that.
[8] The applicant had already given his undertaking to Mr DC the previous day (presumably without instructions from the respondent) and was therefore unable to comply with the respondent’s request without Mr DC’s consent, which he does not appear to have sought.
[9] On 10 August 2020, the respondent sent an email to the applicant relevantly stating:
I have emailed you twice before & this is my third email to transfer my property settlement funds to my lawyer’s trust account as I was the owner of the [property].
I am not asking you to transfer fund into my account as my lawyer & [Ms EW’s] lawyer will sort it out.
I am requesting you to transfer funds into my lawyer’s trust account ASAP. ([Mr SG]).
It is also your duty to inform my Relationship Property lawyer of the sale proceeds and what Deposit you made on it.
If I don’t [hear] from you then unfortunately I will have to go to the Law Society to sort this matter out. You unnecessarily delayed to Transfer funds even though initially the other lawyer had consented for my lawyer to hold funds.
[10] On the copy of that email provided to the Committee, there is a handwritten note:
Mr NT was very threatening and was trying to force payment to be made to him without agreement from both parties.
[11] The two previous emails referred to in the first paragraph of that email were not produced in evidence. There is no evidence that Mr DC had consented to the transfer of funds to Mr SG.
[12] On 7 November 2020, Mr SG sent the applicant an email, copied to Mr DC, stating:
Please release the amount of [$220,000] to our Trust Account, can you please advise what interest has accrued to the total amount held by you on behalf of our client?
[13] Mr SG either attached or followed up with an emailed letter stating:
As per the enclosed correspondence you are requested to immediately release [$220,000] of the funds that you are holding on our client’s behalf, [the respondent].
Our Trust Account details are enclosed.
[14] The “enclosed correspondence” was a letter from Mr DC to Mr SG dated 4 November 2020 in which a proposal was made for an interim distribution of funds on certain conditions but there was no reply to that proposal from Mr SG.
[15] There is nothing on the Committee’s file indicating any response from the applicant to Mr SG’s question about the amount of interest accrued.
[16] Mr DC responded to Mr SG’s email letter as follows:
I would have thought the appropriate way forward was for you to confirm your client’s acceptance of my client’s settlement offer.
Once confirmed, a settlement agreement should be executed before joint instructions to [the applicant] to release the funds.
There is still a dispute at this stage until a settlement agreement is executed.
[The applicant] – I would be grateful if you could hold the funds until we can sort out the agreed pathway forward.
[17] The next relevant item of correspondence provided by either party is an email from the applicant to Mr DC, Mr SG, Ms EW and the respondent dated 8 December 2020 at 6:47 am stating:
Everybody,
We want out of this immediately as we are the ones caught in the middle.
We do not have an interest bearing Trust Account as we do not hold funds on behalf of any clients.
We were told these funds would be in our Trust Account for a few days following settlement and were instructed to hold the funds until we received instructions as to where they were to be paid.
We have never received any instructions.
We want them out of our Trust Account today and you can nominate an account for the funds to be placed in.
We need to hear from both parties as to such an arrangement and account details today.
[18] Mr DC responded at 6:59 am, relevantly stating:
I will need to talk to [Mr SG] about the shift of the funds. I wasn’t aware that the funds were not being held in an interest bearing account.
[19] Mr SG responded at 8:40 am, relevantly stating:
Now that both the parties have agreed; please draft out an agreement for parties to sign and as the Trust Account details for our client is already there; funds can be remitted to our account with the balance due to our client.
Have no idea (sic) why we were never informed about the monies not being deposited in an IBD1 account? The clients have lost their few extra dollars.
Story ends here!
[20] Ms EW responded at 9:58 am, relevantly stating:
The story does not end here. Who would be responsible for the loss? I would have no idea of where the money should be held and that is why we had the lawyers acting on our behalf to sort out all the legalities and to put things into right direction. (sic)
1 Interest-Bearing Deposit, the technical term for the trading bank account in which a solicitor holds clients’ funds in trust in bulk on interest-bearing call deposit.
For me, as a single mother, I would like to have every single dollar which I am entitled to and would not like to [lose] it because it was not handled right.
I would like this to be sorted on urgent basis please. I would not hesitate to escalate it further if needed.
[21] The respondent responded at 10:08 am, relevantly stating:
I am going to the Law Society to make a complaint as why my money was not deposited into the term deposit to earn interest on it.
* Whoever is responsible will have to pay for it.
* [Mr DC] you have delayed the process too.
Mr [DC], we want our money into our accounts today & complete an agreement & sent to my lawyer please.
[22] That afternoon, Mr DC emailed all of the participants advising of Ms EW’s consent to funds being transferred to Mr SG’s trust account and held in an interest- bearing account pending execution of a separation agreement and stating “the issue of identifying the loss, if any, from the funds not being held in an interest bearing account will need to be examined and relief sought in due course”. Mr SG responded in similar vein.
[23] The applicant replied:
We deny we are at all responsible for any delays in this matter. We acted in the sale of the property and were instructed by both vendors that the dispute between them would soon be settled and told to hold the proceeds of sale ready to pay out as soon as advised. Any delay since then is the responsibility of the parties concerned and their advisers. Being caught up in the dispute between the parties has cost us many hours of work over and above the flat fee paid on settlement and we will be invoicing both vendors for this.
[24] Mr SG responded:
Whatever you are planning to do is an after thought (sic). You never informed us that you are holding funds in a non interest basis (sic). Our client reserves his right to complain about your negligence and failure to act prudently.
[25] The funds were duly transferred to Mr SG’s trust account on 18 December 2020.
[26] On 18 December 2020, the applicant issued a trust account statement to the respondent and Ms EW. The opening balance on the statement was $481,157.00, which was $254.73 more than the closing balance of the previous statement.
[27] The statement recorded the deduction from the funds held in trust of the sum of
$1,575.00 for:
Our fee over and above our sale fee negotiations between the Vendors involving many emails and phone calls in endeavouring to resolve the issues between the parties.
and payment of the balance. The date of the deduction and the date of payment of the closing balance were not recorded on the statement.
[28] The applicant did not issue a tax invoice for the fees he deducted.
The complaint
[29] The respondent’s complaint is dated 9 February 2021. He complained about the applicant’s failure to pay interest on the money held in trust and the additional
$1,575.00 fee. The outcomes he sought were a refund of the $1,575.00 and the payment of interest on the funds held in trust.
[30] The applicant provided an initial written response to the complaint. He stated, in summary, that:
- (a) he was shocked and indignant about the complaint;
- (b) he had acted for the couple for some years involving a number of sales and purchases without complaint;
- (c) a member of his staff had gone far beyond the requirements of a solicitor- client relationship to assist the respondent and advise him during a very difficult and emotional time for him, involving many hours of attendances;
- (d) “...we were advised by [the couple] that although they were separating things were amicable and the settlement funds were to be held in our trust account and distributed equally between them. We advised both of them we did not operate an IBD account and were assured this did not matter as the funds were soon to be distributed”.
- (e) in the circumstances, the additional fee charged was “more than reasonable” (meaning, I think, very reasonable).
[31] The Standards Committee obtained the applicant’s file and reviewed it.
The Standards Committee’s decision
[32] The Committee considered there were three issues to inquire into, namely:
[33] On the first issue, the Committee found that the applicant’s fees were fair and reasonable to both parties for the purposes of r 9 of the Rules and determined to take no further action on that aspect of the complaint.
[34] On the second issue, the Committee found that the statement dated 18 December 2020, which set out the fees to be charged, was sufficient to comply with reg 9 of the TA Regulations and determined to take no further action on that aspect of the complaint.
[35] On the third issue, the Committee found that the applicant had breached s 114 of the Act and determined that this constituted unsatisfactory conduct on the applicant’s part. It found that the respondent and Ms EW had suffered loss by reason of the applicant’s failure to place the funds on interest-bearing deposit, calculated a sum equal to the interest that would have been earned on the sale proceeds if they had been placed on interest-bearing call deposit at a rate of 2 per cent p.a. and ordered the applicant to pay compensation of that amount to be divided between the respondent and Ms EW.
[36] The Committee also fined the applicant and, in doing so, stated that it “...imposed a higher fine due to [the applicant’s] previous disciplinary history”, which it did not specify. It also made a modest costs order.
Application for review
[37] In his application for review dated 15 April 2022, the applicant challenged:
- (a) the finding of breach of s 114 of the Act;
[38] In relation to the breach of s 114 of the Act, the applicant argued that:
- (a) it was not “reasonable or practicable” to place the funds on interest- bearing deposit, for the purposes of s 114; and
- (b) he had explained to his clients that he did not operate an IBD account and was “...at all times...acting on instructions from my clients...” in not placing the funds on interest-bearing deposit.
[39] In his written submissions, the applicant expanded on the last point, stating that:
...at all times I acted in accordance with my client’s instructions. [My clients] have never refuted the fact that they instructed me to act as I did and in the circumstances and at their request “it was not reasonable or practicable” to create and deposit the funds in an IBD account. ... [A] conversation with the ADLS auditor confirmed that because of the low interest rate payable and the costs of creating and administering such an account in those times it was often not feasible to create one especially when the clients had requested the proceeds of sale to be divided equally and paid to them. At all times the money was held in our trust account and no request was ever made to place the funds in an IBD account but we were constantly advised the matter was to be settled and the funds distributed equally between them. No mention was ever made of an IBD account until some time later when the two barristers became involved and we were advised the amounts of any distribution were to be disputed. ...
[40] I used a minute giving the applicant opportunity to adduce evidence and submissions supporting his points on review and the respondent opportunity to respond.
[41] The respondent did not respond to any correspondence regarding the review process.
[42] The review progressed by way of an applicant-only hearing on 4 July 2024 attended by the applicant and counsel.
Nature and scope of review
[43] The nature and scope of a review have been discussed by the High Court, which said of the process of review under the Act:2
... the power of review conferred upon Review Officers is not appropriately equated with a general appeal. The obligations and powers of the Review Officer as described in the Act create a very particular statutory process.
The Review Officer has broad powers to conduct his or her own investigations including the power to exercise for that purpose all the powers of a Standards Committee or an investigator and seek and receive evidence. These powers extend to “any review” ...
... the power of review is much broader than an appeal. It gives the Review Officer discretion as to the approach to be taken on any particular review as to the extent of the investigations necessary to conduct that review, and therefore clearly contemplates the Review Officer reaching his or her own view on the evidence before her. Nevertheless, as the Guidelines properly recognise, where the review is of the exercise of a discretion, it is appropriate for the Review Officer to exercise some particular caution before substituting his or her own judgment without good reason.
[44] The High Court has also described a review by this Office in the following way:3
A review by the LCRO is neither a judicial review nor an appeal. Those seeking a review of a Committee determination are entitled to a review based on the LCRO’s own opinion rather than on deference to the view of the Committee. A review by the LCRO is informal, inquisitorial and robust. It involves the LCRO coming to his or her own view of the fairness of the substance and process of a Committee’s determination.
[45] Given those directions, the approach on this review, based on my own view of the fairness of the substance and process of the Committee’s determination, has been to consider all of the available material afresh, including the Committee’s decision, and provide an independent opinion based on those materials and the applicant’s submissions at hearing.
The issues
[46] The issues for consideration in this review are:
- (a) What were the applicant’s relevant regulatory and contractual obligations?
- (b) Did the applicant have instructions not to place the funds on interest- bearing deposit?
- (c) Is s 114 of the Act inconsistent with s 110 of the Act?
2 Deliu v Hong [2012] NZHC 158, [2012] NZAR 209 at [39]–[41].
3 Deliu v Connell [2016] NZHC 361, [2016] NZAR 475 at [2].
(d) Was it impracticable, in terms of the applicant’s instructions, for the applicant to place the funds on interest-bearing deposit?
(e) Was it not reasonable, in terms of the applicant’s instructions, for the applicant to place the funds on interest-bearing deposit?
(f) Was it not reasonable, for any other reason, for the applicant to place the funds on interest-bearing deposit?
- (g) If the applicant breached s 114 of the Act, did that breach warrant a finding of unsatisfactory conduct?
- (h) If the applicant breached s 114 of the Act, was the Committee’s compensation order appropriate?
- (i) Did the applicant breach reg 9 of the TA Regulations and r 9.3 of the Rules?
- (j) Does any other aspect of the Committee’s decision call for comment?
Discussion
(a) What were the applicant’s relevant regulatory and contractual obligations?
[47] Section 114 of the Act relevantly provides as follows:
It is the duty of every practitioner...to ensure that, wherever practicable, all money held on behalf of any person by that practitioner...earns interest for the benefit of that person, unless—
(a) that person instructs otherwise; or
(b) it is not reasonable or practicable (whether because of the smallness of the amount, the shortness of the period for which the practitioner...is to hold the money, or for any other reason) for the practitioner...to invest the money, at the direction of the person for whom the money is held, so that interest is payable on it for the benefit of that person.
[48] The applicable provision of the applicant’s letter of engagement is quoted at paragraph [3] above. It is consistent with his regulatory obligation.
[49] The Committee commented as follows:4
As a Trust Account Supervisor [the applicant] would have completed a monthly reconciliation in accordance with his obligations. The obligation to earn interest on funds held in trust is a key obligation and requires active consideration by the
4 Standards Committee determination (4 April 2022) at [37].
practitioner. [The applicant] would have certified each month that he was complying with his trust account obligations. [The applicant] maintains that he advised the parties that the firm did not operate any interest bearing deposit accounts. However, that position is in obvious conflict with the firm’s letter of engagement.
[50] The Committee found that there was no evidence that the applicant’s clients had instructed otherwise or that it was not reasonable or practicable for him to invest the money.
(b) Did the applicant have instructions not to place the funds on interest-bearing deposit?
[51] The applicant’s first argument before the Committee was that his clients had “instructed otherwise”. He produced no documentary evidence to corroborate the alleged instruction. His terms of engagement are inconsistent with any advice by the applicant that he did not operate an IBD account and there is no documentary evidence that the applicant advised his clients of this.
[52] Nor is there any documentary evidence of any communication from any person involved as to the nature or scope of the relationship property dispute and how long it might take to resolve other than Mr DC’s initial written advice on 30 July 2020 that “...division of relationship property has not been agreed”.
[53] Mr DC’s initial letter to Mr SG on 30 July 2020 records his instruction that “Ms EW does not know who the conveyancing solicitor is and she will be making further enquiries of Mr NT”. This seemed to indicate that the applicant did not have any instructions from Ms EW. I tested the applicant about this at hearing. He confirmed that his instructions on all transactions from the couple were always from Mr NT. His counsel did not pursue the argument that the applicant had been “instructed otherwise”.
[54] This was prudent, as the issue of the funds not having been placed on call deposit was clearly raised by Mr DC. The implication is that Ms EW was not conscious of the matter until that point. Having been alerted to the matter, however, her immediate reaction, which was supported by the respondent (their emails are 10 minutes apart), was that they were missing out on interest that should have been earned. The immediacy and consistency of these reactions is inconsistent with any suggestion that the matter had previously been discussed with them.
[55] In my view, if a lawyer is going to rely on the specific statutory exception of “client instructions” to counteract the statutory obligation to place client funds on interest- bearing deposit and a contractual commitment to that effect undertaken in the lawyer’s
terms of engagement, it is incumbent on the lawyer to produce evidence of those instructions. Here, there is none.
[56] At the risk of stating the obvious, it is also incumbent on a lawyer not to make a submission to a standards committee for which he knows there is no factual basis. Whatever the couple’s previous practice had been for giving legal instructions, the applicant knew they were separated or separating and he was not in a position to rely on any instructions that might have been given by one and not the other.
(c) Is s 114 of the Act inconsistent with s 110 of the Act?
[57] For the review hearing, the applicant advanced a fresh argument through counsel based on s 110(1)(b) of the Act, which relevantly provides that “[a] practitioner who...receives money for ... any person ... must hold the money, or ensure the money is held, exclusively for that person, to be paid to that person or as that person directs”.
[58] His argument, in summary, was that the obligation under s 114 “...to place funds on IBD must follow the primary obligation [under s 110] to follow clients’ instructions” and the necessary implication of s 110 is that one must have client instructions to place funds on IBD.
[59] In a sense, the argument was a complete reverse of the argument advanced before the Committee, which was based on having been “instructed otherwise” under paragraph (a) of s 114. Be that as it may, I do not consider the suggested interpretation of s 110 to be tenable. Sections 110 and 114 are properly read together and are consistent with each other.
[60] The whole point of s 114 and the IBD mechanism is that client funds can and should be placed on call deposit without need of express client instruction.5 Client funds within an IBD account remain under the control of the lawyer. They continue to be “held” by the lawyer for the purposes of s 110 and are not “paid” to any person under that section until withdrawn from IBD and disbursed from the trust account.
[61] Section 110 became applicable at the point the respondent instructed the applicant to pay the funds to Mr SG. The applicant had already been instructed by Ms EW via her counsel to hold the funds in trust and had given an undertaking to that effect. Even if he had not given the undertaking, his obligation under s 110 was to hold the funds until directed otherwise by both the respondent and Ms EW. The applicant
5 See paragraph 6.2 of the Lawyers Trust Accounting Guidelines.
quite properly met his obligation under s 110 and continued to do so until December 2020 when he paid the funds to Mr SG as directed by both parties through their lawyers.
(d) Was it impracticable, in terms of his instructions, for the applicant to place the funds on interest-bearing deposit?
[62] The applicant argued that it was not “practicable” in terms of s 114(b) for the funds to be placed on interest-bearing deposit. He made no submissions to the Committee regarding the impracticability of placing the funds on interest-bearing deposit, other than the statement that his firm did not operate an IBD account.
[63] On review, the applicant initially submitted that “...in discussions with a Law Society auditor it was agreed that the low interest rate and the cost of setting up IBD accounts made them unworthwhile”. This may well be so from a lawyer’s perspective, as the resulting commission income is negligible. In my view, this does not mean that it is impracticable to comply with the statutory requirement.
[64] The comment about the low interest rate arguably relates to reasonableness rather than practicability. I do not consider, however, that the fact that the interest earned at a low interest rate will be modest means that it is thereby impracticable to put funds on deposit.
[65] I record my surprise that any specialist conveyancing firm could operate without having an IBD account. Necessary implications include that:
- (a) the firm does not hold deposit monies;
- (b) the firm does not accept instructions to act as a stakeholder;
- (c) the firm does not undertake estate administration work.
[66] The applicant’s evidence at the review hearing was indeed that, at the relevant time, his firm did none of these things. He said that the firm was at that time purely a transactional conveyancing firm and that, in normal circumstances, client money never stayed in the trust account longer than overnight. He added that the firm had very recently begun to undertake subdivision work and, as a consequence, had established an IBD account to manage deposit money. I record that the service offering on the firm’s web site is consistent with that evidence.
[67] At the review hearing, counsel advanced an alternative argument that the applicant’s bank does not have a process enabling an IBD account ledger for a couple
because the bank electronic workspace can accept only one IRD number. I have independently ascertained that this is correct (for the particular bank).
[68] Counsel submitted that this potentially puts the lawyer in a difficult position because the interest income and consequent RWT deduction are then credited by the bank and therefore the IRD to one of the two individuals and not the other. He suggested that the lawyer could be exposed to a complaint from either party for, in effect, distorting their respective income and tax positions. He also submitted that publication of this decision in anonymised form might help clarify the matter.
[69] It is not my function to express technical opinions on matters that are properly the province of the NZLS Inspectorate or the Property Law Section. It is not inappropriate to make some observations, however.
[70] Counsel did not suggest he was aware of any instance of a client making a complaint against a lawyer for the stated reason. I am not aware of any such instance either.
[71] I observe that any interest income earned in this instance would have been relationship income on a relationship asset and part of “the pot” for appropriate division in a relationship property context and that such income and tax credits are, as matter of course, able to be adjusted by way of transfer in individuals’ income tax accounts with the IRD.
[72] If the circumstances are such that the lawyer considers there might be an issue, it would undoubtedly be prudent to explain the perceived income and tax crediting issue to the clients and request their instructions and/or to note when reporting (e.g. on the trust account statement that initially records the interest credit and RWT deduction) that the credit and deduction will be reported by the bank against the specified IRD number. The client(s) will of course receive an RWT deduction certificate for that specified IRD number in due course.
[73] On my enquiries, it seems to be not uncommon in circumstances where joint funds are to be divided for a firm to obtain instructions to split the funds for IBD purposes although, in that scenario, the firm would need to take care to record in its trust account system that the funds remain joint funds requiring the authority of both individuals before they can be paid out of the trust account.
[74] Given that the applicant’s evidence was that he was instructed that the couple intended to distribute the funds equally between them,6 this might well have been the
6 See paragraph [30(d)] of this decision.
sensible course to take if the applicant had been concerned at the time about the IRD number issue, although that was not in fact the case.
[75] Alternatively, the funds could be invested in the joint names and the IRD number left blank, which is the default position anyway if for any reason the firm does not have either client’s IRD number. RWT is then deducted at 45%, the client will receive an RWT deduction certificate in the joint names in due course and the individuals can apply the credit as they think fit in their tax returns.
[76] In my view from a professional conduct perspective, in summary:
- (a) the perceived administrative issue does not constitute a sufficient basis for the statutory obligation under s 114 to be avoided on the grounds of impracticability;
- (b) RWT is a withholding tax, not a terminal tax, and its deduction is not determinative of any individual’s income tax position;
- (c) income tax administrative compliance and the filing of accurate tax returns are the client’s (or clients’) responsibility;
- (d) the lawyer’s primary responsibilities are:
- (i) under s 114, to ensure the funds earn interest (subject to the exceptions); and
- (ii) under s 110, to pay them out to the client or as directed.
(e) Was it not reasonable, in terms of his instructions, for the applicant to place the funds on interest-bearing deposit?
[77] The applicant’s second argument before the Committee was that it was not “reasonable” in terms of s 114(b) for the funds to be placed on interest-bearing deposit. The sum involved was material; about $481,000. He submits that it was not “reasonable” because his clients advised him that the funds were only to be held “for a few days”. His initial evidence was that:
... We advised both Vendors that we did not operate any IBD accounts and both were adamant the distribution of the proceeds of sale would happen forthwith. We were completely unaware they had engaged barristers and were disputing the disposition of the funds and the funds were paid out as soon as instructions were received from their respective barristers.
Attached copies of emails between the barristers recording this and other correspondence from our file which may assist the committee.
[78] The first difficulty with this evidence is, as the applicant conceded at the review hearing, no such discussion had been held with Ms EW. I do accept his evidence that the respondent had told him before settlement that the parties were separating. I also record that, in his submissions to the Committee, the respondent did not dispute the applicant’s evidence about the expected short timeframe.
[79] Context is undoubtedly important, however. It seems that the respondent normally controlled the couple’s property and financial affairs. I think it more likely than not that the respondent simply expected the applicant to transfer the funds to Mr SG’s trust account when the respondent directed him to do so, which he duly sought to do on 31 July 2020. Mr DC’s intervention on 30 July 2002 prevented that.
[80] The second difficulty is that the email correspondence provided by the applicant does not evidence any communications from or with the respondent and/or Ms EW about the matter or any expectation on the part of the lawyers, Mr DC and SG, about any timeframe to resolution of the relationship property dispute. On the contrary, the necessary implication Mr DC’s letter of 30 July 2020 was that the route to resolution of the dispute had yet to be determined. It follows that no assumption could reasonably be made about the probable timeframe for determining it.
[81] There is then no correspondence from the applicant to either of the lawyers seeking either an estimate of the likely timeframe to resolution or any update on progress as time passed.
[82] The correspondence makes clear that the respondent was trying to pressure the applicant to transfer the funds to Mr SG and the applicant was, quite properly, resisting that pressure until he had instructions from both of his clients. Of note, however, is the respondent’s comment about the applicant’s alleged duty to inform Mr SG of “what Deposit you made on it” (being the sale proceeds). This was 10 days after settlement. The language difficulty aside (English was not the respondent’s first language), the respondent’s expectation (or his lawyer’s expectation expressed through him) of the funds being on interest-bearing deposit seems clear.
(f) Was it not reasonable, for any other reason, for the applicant to place the funds on interest-bearing deposit?
[83] For the above reasons, I find that there is no evidence to support the applicant’s assertion either that:
- (a) his clients had “instructed otherwise”; or
(b) it was not “practicable” to ensure that the funds earned interest; or
(c) it was “not reasonable”, in terms of his instructions, to ensure that the funds earned interest.
[84] I consider that the default position for any lawyer holding client funds, as reflected in the applicant’s terms of engagement, is that the lawyer places the funds on interest-bearing call deposit unless an active decision is made not to do so for one of the reasons specified in s 114 of the Act.
[85] Failure to comply with a statutory obligation regarding the handling of client funds without reasonable excuse will normally constitute unsatisfactory conduct. Before that conclusion is reached, however, I am required to be mindful of the direction of the High Court that although the Rules must be interpreted as specifically as possible, they must also be applied as fairly and sensibly as possible.7
[86] The consequence of the Committee’s finding of breach of s 114 of the Act and determination of unsatisfactory conduct for that reason was that the Committee considered it appropriate for the applicant to compensate his clients for that omission. The Committee determined a compensation sum of several thousand dollars calculated by applying a notional interest rate of 2 per cent p.a. It did not state the basis on which it decided that such a rate was appropriate.
[87] My immediate reaction on reading the decision was that the rate was manifestly excessive. Bank interest rates generally during 2020, the first Covid-19 year, were as low or lower than they had been in living memory. At my request, the applicant has produced evidence from his bank that it would have paid interest at a notional rate of
0.05 per cent p.a. at the relevant time; that is, one 20th of one per cent, not half a per cent. I have made my own enquiries to verify that evidence independently. I accept it.
[88] In addition, the applicant would have been entitled to charge a commission on the interest earned. On my own enquiries, a typical law firm commission rate at the relevant time was 10 per cent. This would need to be deducted from the amount of any compensation ordered to be paid.
[89] I would also give the applicant the benefit of the doubt as to his understanding of his clients’ wishes for the first 10 days after settlement up to receipt of the respondent’s email of 10 August 2020, which is consistent only with an expectation of the funds being on interest-bearing deposit.
7 Wilson v Legal Complaints Review Officer [2016] NZHC 2288 at [43].
[90] The funds were ultimately paid out on 18 December 2020. With the benefit of hindsight, my calculation of a resulting compensation sum is just $78.30 ($481,157.00 x 0.05% x 132/365 x 0.9). This is an inconsequential sum or, as Mr SG aptly put it, “the clients have lost their few extra dollars”.
[91] Although hindsight is relevant and useful, it is not necessarily the most appropriate lens. The applicant’s duty needs to be assessed initially at the point he should have considered the issue. As I have already commented, there was no indication from either Mr DC or Mr SG about any timeframe to resolution of the relationship property dispute and it follows that no assumption could reasonably be made about the probable timeframe for determining it.
[92] This applies both ways, however. The applicant could not necessarily assume the matter would be resolved promptly but neither could he be expected to assume it would take a long time, particularly if the respondent had indeed assured him that the separation was amicable. The Lawyers Trust Accounting Guidelines current at that time relevantly stated:8
Where the amount of interest likely to be earned is minimal compared with the administrative cost, you may decide that it is not reasonable or is impracticable to deposit the trust money in an IBD account.
[93] The Lawyers Trust Accounting Guidelines current at the date of this decision now state:9
Where the anticipated interest is minimal compared to (sic) the administrative costs, it may be deemed not reasonable or practical (sic) to deposit the trust money into an IBD account.
[94] As already stated, I do not necessarily agree with the suggested impracticability aspect for this reason; putting funds on call deposit is perfectly straightforward and involves minimal administrative cost. I do agree with the guidance as to unreasonableness, however.
[95] I agree absolutely with the Committee’s comment quoted in paragraph [49] and particularly that the firm’s actual practice did not accord with the unequivocal statement in its terms of engagement. I accept also that the Committee formed a genuine view in good faith that the issue was material in terms of detriment to the clients.
[96] In the circumstances, however, and despite rejecting the arguments advanced by the applicant before and at the hearing, the conclusion I reach is that the “not reasonable” exception to the obligation in s 144 of the Act was objectively applicable.
[97] Having reached that conclusion after the review hearing, I then received from counsel for the applicant a copy of the firm’s Trust Account Review Report for the period 1 February to 31 May 2021 (at which time interest rates were marginally higher than they were in mid-2020 but still exceptionally low). The report relevantly commented that:
- (a) the firm did not then operate an IBD account and that this was “...commensurate with the nature of your practice and the current climate of low interest rates”;
- (b) the duty to ensure client monies earn interest “...is not strict; judgement may be required”;
- (c) If there ever arises an interest of interest being foregone, you are expected to advise your client of your inability to place monies on IBD, and instructions should be recorded”.
[98] These comments serve to reinforce the propriety of the conclusion I had already reached. It is unfortunate that the Committee was not provided with a copy of the report.
(g) If the applicant breached s 114 of the Act, did that breach warrant a finding of unsatisfactory conduct?
[99] This question falls away.
(h) If the applicant breached s 114 of the Act, was the Committee’s compensation order appropriate?
[100] This question also falls away.
(i) Did the applicant breach reg 9 of the TA Regulations and r 9.3 of the Rules?
[101] The Committee’s discussion of the issue of the applicant’s debiting of fees from funds held in trust is surprising. Rule 9.3 of the Rules provides that:
A lawyer who wishes to debit fees held in trust or to receive funds to cover fees in advance must comply with the requirements of regulations 9 and 10 of the Lawyers and Conveyancers Act (Trust Account) Regulations 2008.
[102] Regulation 9 of the TA regulations relevantly provides that:
...
(2) If fees are debited under subclause (1)(a), an invoice must be delivered or posted to the person who has a legal or beneficial interest in the trust account to be debited before or immediately after the fees are debited.
...
[103] The Committee found that the trust account statement dated 18 December 2020, which set out the fees to be charged, was sufficient to comply with reg 9 and, on that basis, the applicant was entitled to deduct his fees from funds held in trust.
[104] With due respect to the Committee, it does not have a discretion to waive compliance with reg 9. The trust account statement was not an invoice. The applicant did not issue an invoice. He therefore breached reg 9 and consequently r 9.3 of the Rules. This is a black-and-white issue. I am in fact surprised that any trust accounting system would allow a deduction for fees to be processed without data entry of an invoice reference.
[105] Aside from that, the Committee has taken the jurisdictionally dubious course of purporting to review the fairness and reasonableness, for the purposes of r 9 of the Rules, of a non-existent bill of costs.
[106] If the Committee meant to indicate that the failure to issue an invoice was not material in the context of the consumer protection purpose of the Act because the respondent and Ms EW were in fact informed of the amount of fees to be deducted, then I do not disagree with it. That is rather a different thing from saying that the issuing of a trust account statement is “sufficient to comply with the regulations”. It is not.
[107] I find that the applicant breached reg 9 of the TA Regulations and r 9.3 of the Rules.
(j) Does any other aspect of the matter call for comment?
[108] I appreciate that the applicant feels considerably aggrieved that longstanding clients have, from his perspective, turned on him. This is unfortunate. I also acknowledge his upset firstly, that the complaint was made despite the firm’s consistent emotional and personal support for the respondent and secondly, at the explicit racist jibe made by the respondent in introducing the complaint (which I have refrained from recording in this decision). The applicant’s expressed indignation is understandable.
[109] In relation to the second matter, the aggressive and unusual phraseology used in the relevant email, the hyperbole and the typeface leave me in no doubt that the applicant is correct to surmise that the respondent himself did not write the email, apart from the last three lines. He is nevertheless responsible for it being sent in that form.
[110] Be that as it may, these are matters pertaining to the relationship between the applicant and his former clients. They do not alter the importance of the applicant’s compliance with his regulatory obligations in relation to the handling of clients’ money and the operation of a trust account.
[111] There is then the matter of the $254.73 discrepancy between the closing and opening balances of the two trust account statements. Counsel advised that the water rates paid were $145.27, not $400.00. No explanation was offered for the error or, more importantly, why the correction and consequent credit entry were not recorded in the second trust account statement. I struggle to understand how any competent conveyancer can prepare a trust account statement without starting from the closing balance of the previous one.
Decision
[112] Pursuant to s 211(1)(a) of the Act, the decision of the Committee is reversed as to:
- (a) the finding of breach of s 114 of the Act;
- (b) the determination of unsatisfactory conduct for that reason;
- (c) the order for payment of the fine determined by the Committee;
- (d) the order for payment of the costs determined by the Committee;
- (e) the order for payment of compensation determined by the Committee; and
- (f) the Committee’s findings that the issue of a trust account statement was sufficient to comply with reg 9 of the TA Regulations and that the applicant was entitled to deduct fees from the funds held in trust.
[113] I find that the applicant breached reg 9 of the TA Regulations and consequently r 9.3 of the Rules. The primary issue for me to consider is whether this warrants a determination of unsatisfactory conduct. It is trite that not all breaches of the Rules require such a determination.
[114] I have a concern that the combination of the debiting of fees without issuing an invoice, the decision not to operate an IBD account and thereby preclude compliance with s 114 of the Act and the issuing of an incorrect trust account statement indicates a casual attitude on the applicant’s part to trust account accuracy and regulatory compliance. Compliance with trust accounting requirements is not optional.
[115] In contemplating the most appropriate outcome of this review, I obtained and read previous disciplinary decisions relating to the applicant’s professional conduct. Previous disciplinary history is relevant in principle if it relates to conduct of a similar kind to the conduct in question. This is because where similar conduct is repeated, it demonstrates a failure to learn from the past.10
[116] At standards committee level, the applicant has been the subject of three adverse decisions relating to, respectively, the withholding of client funds without authorisation, persistent failure to comply with the e-dealing regulations and breach of an undertaking. Two LCRO decisions relate to conduct that is of no relevance to the present circumstances. There is one Disciplinary Tribunal decision relating principally to a serious trust account regulatory compliance issue.
[117] It would be unfair to describe this history as indicative of a pattern of conduct analogous to the issues in this review but it would not be unfair to observe that the applicant has displayed intermittent laxity in his regulatory compliance relating to the operation of his trust account and associated poor professional judgement.
[118] I infer that the Committee took some of these previous determinations into account in its assessment of appropriate disciplinary orders, having found unsatisfactory conduct, and consider that it was right to do so. Those orders were premised on the finding of breach of s 114 of the Act, which I have reversed for the reasons set out in this decision.
[119] Counsel asked me to take into account that the applicant has been practising for many decades and is not in good health, the implication being to allow him some leeway. For the first reason, he also ought to know better and to be more careful. So, this is a neutral factor.
[120] Counsel also submitted as to the importance of the “primary” obligation to comply with s 110 of the Act. There is no doubt that the applicant did the right thing in
10 Hart v Auckland Standards Committee No 1 of the New Zealand Law Society [2013] NZCA 673 at [25].
that regard, despite persistent and improper pressure from the respondent to do the wrong thing. His judgment in that respect was sound.
[121] The conclusion I reach is not to make a determination of unsatisfactory conduct arising from the breach of reg 9 and r 9.3 or from the issue of an incorrect trust account statement, principally because the former was not an issue raised by the respondent in his complaint and the latter was a matter that had been overlooked by the Committee.
[122] I nevertheless recommend that the applicant promptly review his firm’s practices, staff education and quality control procedures in relation to knowledge of the Act and the TA Regulations and specifically invoicing, preparation of trust account statements and compliance with s 114 of the Act. I note also that the New Zealand Law Society will receive a copy of this decision.
[123] We are no longer in a low interest rate environment. An active decision needs to be made not to put material client funds likely to be held for a material length of time on interest-bearing deposit. A prudent lawyer would ensure that reasons for not doing so are documented.
[124] Where an adverse finding is made, costs will be awarded in accordance with the Costs Orders Guidelines of this Office. The issues raised in this review have been reasonably straightforward but the applicant’s submissions have required me to consider his previous disciplinary history and a relatively brief applicant-only hearing has been required.
[125] Pursuant to s 210(1) of the Act, I order the applicant to pay costs in the sum of
$1,500.00 to the New Zealand Law Society. I record that this order effectively incorporates $1,000 for the review process and the $500 that was ordered by the Committee on its inquiry that I am obliged to reverse by reason of reversing the Committee’s unsatisfactory determination regarding the s 114 issue, giving the applicant the benefit of various doubts and not making a finding of unsatisfactory conduct.
[126] The costs amount is to be paid within 30 days of the date of this decision and I confirm that the order may be enforced in the civil jurisdiction of the District Court pursuant to s 215 of the Act.
Publication
[127] Section 206(1) of the Act requires that every review must be conducted in private. Section 213(1) of the Act requires a Review Officer to report the outcome of the
review, with reasons for any orders made to each of the persons listed at the foot of this decision.
[128] Pursuant to s 206(4) of the Act, a Review Officer may direct such publication of his or her decision as the Review Officer considers necessary or desirable in the public interest. “Public interest” engages issues such as consumer protection, public confidence in legal services and the interests and privacy of individuals.
[129] Having had regard to the issues raised by this review, I have concluded that it is desirable in the public interest that this decision be published in a form that does not identify the parties or others involved in the matter and otherwise in accordance with the LCRO Publication Guidelines.
DATED this 22ND day of July 2024
FR Goldsmith
Legal Complaints Review Officer
In accordance with s 213 of the Act, copies of this decision are to be provided to: Mr OM as the applicant
Mr HL as the applicant’s counsel Mr NT as the respondent
[Area] Standards Committee [X] New Zealand Law Society
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