Moffitt, Frances --- "Ethics must be part of your trust account's dna" [2014] PrecedentAULA 30; (2014) 123 Precedent 4

• In the Council of the Law Society of NSW v Simpson,12 Peter Kaiser Simpson was the subject of a disciplinary application by the Council of the Law Society of New South Wales alleging that he had been guilty of professional misconduct.
• The Law Society contended that the solicitor had breached ss254 and 255 of the Act; that he was guilty of misappropriation and delay in the payment of disbursements due to third parties; and that he had failed to supervise his employees. In respect of the solicitor’s failure to supervise his employees, the Tribunal noted:
• ‘... two employees to whom the Solicitor entrusted many aspects of the management of the firm’s accounts had relatively low-level qualifications in accountancy and relatively little experience. This adds weight to the contention that his failure to supervise their work adequately amounted to a serious abdication of his professional responsibilities.’13
• The Tribunal was satisfied that the Law Society had established three grounds that were both advanced in the application and admitted by the solicitor; namely, breach of s254 of the Act, breach of s255 of the Act and failure to supervise.
• The Tribunal found that the solicitor’s overall conduct involved a ‘consistent failure to ... maintain a reasonable standard of competence and diligence within the meaning of s497(1)’.
• The Tribunal was further satisfied that the relevant conduct of the solicitor amounted to professional misconduct as defined in s498(1) and s140(5) of the Act. However, the solicitor denied the grounds alleging misappropriation.
• The Law Society argued that authorities including Law Society of New South Wales v McCarthy,14 and Council of the Law Society of New South Wales v Doherty15 considered that the conduct of the solicitor amounted to misappropriation, as he was ultimately responsible for the payments.
• The evidence established that the solicitor had been unaware of relevant aspects of his staff’s conduct regarding the payment of disbursements and that he believed that the monies that were deposited into his office account were quite properly payable in that manner. The Tribunal concluded that the solicitors’ conduct did not amount to misappropriation.
• ETHICAL AND PROFESSIONAL OBLIGATIONS
• Despite receiving trust money, a small number of solicitors concoct ways to obviate the need to open a trust account. Perhaps they believe that the laws don’t apply to them; or they don’t want to do the work associated with handling trust money; or perhaps they think that they won’t get caught. Whatever their reasons, they abandon their ethical and professional obligations by intentionally placing client’s money directly into an account other than a trust account.

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ETHICS MUST BE PART OF YOUR TRUST ACCOUNT’S DNA

By Frances Moffitt

What is this thing we call ethics? Metaphorically, ethics is a double helix, comprising one strand rules and another strand good character; the sequence of bases on one strand determining the sequence of bases on the other strand.

When the strand of good character is missing or impaired, ethics can no longer exist. It is then that rules are broken, legislation is ignored, falsehoods are created and dishonesty flourishes.

In his Essays published in 1627, Sir Francis Bacon wrote about falsehoods. He espoused that falsehoods bring down, debase or degrade the honour of a person’s nature:

‘It will be acknowledged even by those that practice it not, that clear and round dealing is the honour of man's nature; and mixture of falsehood is like alloy in coin of gold and silver, which may make the metal work the better, but embaseth it.’ ^[1]

Falsehoods involving trust money and solicitors’ trust accounts can degrade the profession and bring it into disrepute.

Dishonest and disreputable conduct, the subject of rule 5 of the New South Wales Professional Conduct and Practice Rules 2013 (the Solicitors’ Rules), underpins the proposition that dishonest falsehoods, made by a solicitor, diminish the public confidence in the administration of justice and may also determine that the solicitor is not a fit and proper person to practise law.^[2]

Trust account falsehoods are among those most damaging to public confidence. In Law Society of New South Wales v Jones, Street CJ (with whom Reynolds and Samuels JJA agreed) remarked that:

‘Reliability and integrity in the handling of trust funds are fundamental prerequisites in determining whether an individual is a fit and proper person to be entrusted with the responsibilities belonging to a solicitor. Members of the public, many of them wholly inexperienced and unskilled in matters of business or of law, inevitably must put great faith and trust in the honesty of solicitors in the handling of moneys on their behalf. The Court must ensure that this trust is not misplaced.’^[3]

TRUST MONEY – A FIDUCIARY NOTION

In s243 of the Legal Profession Act 2004 (NSW) (the Act), trust money is defined as ‘money entrusted to a law practice in the course of or in connection with the provision of legal services’. While the word ‘entrusted’ is not defined in the Act, the Oxford Dictionary provides that to entrust something to another means to ‘put something into the person's care and protection’.^[4]

Consequently, the inclusion of the word ‘entrusted’ in the definition of ‘trust money’ expands its meaning to include a clear fiduciary notion. A fiduciary relationship is simply a legal or ethical relationship of trust between two or more parties. Typically, ‘a fiduciary’ has duties to judiciously account for money held for another person.

The nature of a solicitor’s falsehood involving trust money is such that one breach often leads to another. A single act of misappropriation, for example, will often be followed by an attempt to obscure the transgression by making further falsifications in the trust records provided to clients, auditors, trust account investigators and even disciplinary tribunals.

In Council of the Law Society of NSW v Bradfield, the Administrative Decisions Tribunal (the Tribunal) heard that the solicitor had camouflaged his trust account misappropriations by falsifying his trust records.

‘On receiving money for investment, the Solicitor would sometimes give the investor a receipt, but most commonly an epitome of mortgage. These epitomes represented that the money had been lent, on terms requiring the payment of interest, to one or more specified persons, and that the borrower(s) had granted a mortgage of specified land as security. In most cases, the representation that the money had been lent was false, to the knowledge of the Solicitor. In almost all cases, the representation that the borrower(s) had granted a mortgage was also false, to the knowledge of the Solicitor.’^[5]

OBLIGATIONS ON PRINCIPALS OF LAW PRACTICES

Before solicitors in NSW are permitted to receive and disburse trust money, they are required to practise as a principal of a law practice. That is, a sole practitioner, a partner in a law firm, or a legal practitioner director of an incorporated legal practice.^[6]

Section 250 of the Act imposes an obligation on principals of law practices, jointly and severally, to ensure that trust money received and disbursed by the practice is dealt with in accordance with the Act and the Legal Profession Regulation 2005.

Although principal(s) may delegate the administrative function of keeping accounts and records to another party or parties, the responsibility to ensure that the deputised functions are carried out correctly, remains with the principal(s).

As explained by the Full Australian Capital Territory Supreme Court in Re Somes.

‘ Each partner has a responsibility for the safeguarding of the trust account. This calls for some active participation by each partner in the system of control... The correct approach of partners to trust account affairs is that they should regard themselves as a group whose members are individually and collectively determined to safeguard the trust account. With that outlook we would expect that each partner would not only not resent his dealings with the trust account being overseen by other partners, but would actively seek and gratefully accept such supervision.’ ^[7]

Similarly, in Re Mayes, Hardie JA explained that the solicitor, despite having trusted his partner, had shown:

‘... complete indifference to the performance of his statutory obligations in relation to the trust account sufficient to make him guilty of professional misconduct’.^[7]

PROFESSIONAL SANCTIONS

Professional misconduct at common law is conduct by a lawyer in their professional capacity which would reasonably be regarded as disgraceful or dishonourable by [the lawyer’s] professional brethren of good repute and competency.^[8]

While professional misconduct is also defined in the Act, the statutory concept is ‘neither exhaustive nor intended to restrict the meaning and application of misconduct at common law’.^[9]

Under the Act, if a disciplinary tribunal finds that a solicitor has knowingly contravened a key trust accounting obligation – for example s254(1) or s255(1) – or was recklessly careless in that regard, it is highly likely that such conduct would reasonably be regarded as disgraceful or dishonourable by professional brethren of good repute and competency and would therefore constitute professional misconduct at common law.

A failure to comply with trust accounting obligations may be professional misconduct because it involves a substantial or consistent failure to reach or maintain a reasonable standard of competence or diligence, as defined in s497(1)(a) of the Act or, if not a substantial or consistent failure, unsatisfactory professional conduct as defined in s496 of the Act.

Conduct capable of being unsatisfactory professional conduct or professional misconduct is stipulated in s498(1) and includes, at s489(1)(a), ‘conduct that contravenes the Act, the regulations or the legal profession rules’.

In the Council of the Law Society of NSW v Pizzinga, the solicitor claimed that he had not intended to intermingle trust funds:

‘He said in his affidavit that his purpose was to ensure that cleared funds were available for completing the purchase... a transaction in which time was of the essence.’ ^[10]

The Tribunal found, however, that having regard to the terms of s498(1)(a) of the Act, breaches of s260 of the Act amounted to unsatisfactory professional conduct.^[11]

Section 260 prohibits the intermixing of trust money with any other money (unless authorised by the Law Society Council). Articulated in s260 is the principle that a law practice is required to specifically particularise and separately record the receipt and disbursement of trust money.

MISAPPROPRIATION

Allegations of professional misconduct involving trust money are, of course, very serious. When those allegations include misappropriation they become significantly more serious.

In the Council of the Law Society of NSW v Simpson,^[12] Peter Kaiser Simpson was the subject of a disciplinary application by the Council of the Law Society of New South Wales alleging that he had been guilty of professional misconduct.
The Law Society contended that the solicitor had breached ss254 and 255 of the Act; that he was guilty of misappropriation and delay in the payment of disbursements due to third parties; and that he had failed to supervise his employees. In respect of the solicitor’s failure to supervise his employees, the Tribunal noted:
‘... two employees to whom the Solicitor entrusted many aspects of the management of the firm’s accounts had relatively low-level qualifications in accountancy and relatively little experience. This adds weight to the contention that his failure to supervise their work adequately amounted to a serious abdication of his professional responsibilities.’^[13]
The Tribunal was satisfied that the Law Society had established three grounds that were both advanced in the application and admitted by the solicitor; namely, breach of s254 of the Act, breach of s255 of the Act and failure to supervise.
The Tribunal found that the solicitor’s overall conduct involved a ‘consistent failure to ... maintain a reasonable standard of competence and diligence within the meaning of s497(1)’.
The Tribunal was further satisfied that the relevant conduct of the solicitor amounted to professional misconduct as defined in s498(1) and s140(5) of the Act. However, the solicitor denied the grounds alleging misappropriation.
The Law Society argued that authorities including Law Society of New South Wales v McCarthy,^[14] and Council of the Law Society of New South Wales v Doherty^[15] considered that the conduct of the solicitor amounted to misappropriation, as he was ultimately responsible for the payments.

It was contended on behalf of the solicitor that the Tribunal, in a recent decision made in disciplinary proceeding under the Act, had ruled that ‘dishonesty is a necessary element’ in any charge of misappropriation. Counsel for the solicitor cited Council of the Law Society of New South Wales v Clapin,^[16] and also the principal authority on which the Tribunal’s decision in Clapin was based which was the judgment of Bell J in the Victorian Supreme Court case of Brereton v Legal Service Commissioner.^[17]

In the latter judgment, Bell J reasoned as follows:

‘For reasons which I will give when I consider the issue of dishonest belief, it is a very different thing to say that a person had a dishonest belief or “well knew” something on the one hand, and that a person “ought to have known” something on the other. The two states of mind are of a different order and legal character and mark the boundary between incompetent or negligent administration on the one hand and misappropriation on the other.’^[18]

The Tribunal reasoned that the mismanagement of funds by the solicitor’s firm was directly attributable to the solicitor’s own conduct.^[19] However, the solicitor claimed, without opposition by the Law Society:

‘... that he was unaware, until the [trust inspector] spoke to him on 8 September 2009 of three crucial aspects of his firm’s management of funds received by it. These were (a) a number of disbursements that had become due and payable by his firm had not been paid;(b) there had been delay in the payment of disbursements and (c) employees of his firm had entered into arrangements on the firm’s behalf each of which had the consequence that payments of fees to them were not made when they fell due.’^[20]

The Tribunal held that:

‘Even according to the relatively broad description of “misappropriation” accepted by Young JA in Council of the Law Society of New South Wales v Doherty,^[21] this “honest belief” of a claim of right would seem to operate as a sufficient defense to a charge of misappropriation.’^[22]

The evidence established that the solicitor had been unaware of relevant aspects of his staff’s conduct regarding the payment of disbursements and that he believed that the monies that were deposited into his office account were quite properly payable in that manner. The Tribunal concluded that the solicitors’ conduct did not amount to misappropriation.
ETHICAL AND PROFESSIONAL OBLIGATIONS
Despite receiving trust money, a small number of solicitors concoct ways to obviate the need to open a trust account. Perhaps they believe that the laws don’t apply to them; or they don’t want to do the work associated with handling trust money; or perhaps they think that they won’t get caught. Whatever their reasons, they abandon their ethical and professional obligations by intentionally placing client’s money directly into an account other than a trust account.

The matter of the Council of the Law Society of New South Wales v Fay Marie Nicholls^[23] concerned a solicitor who did not operate a trust account and deposited and inter-mixed trust monies in an office account, breaching ss254 and 260 of the Act.

The Tribunal’s analysis of misappropriation in these circumstances includes the following:

‘... the principal that monies, received by a solicitor from or on behalf of a client and which are not intended to become the beneficial property of the solicitor, are subject to fiduciary obligations on the part of the solicitor.

In this context, for a solicitor to apply or disburse trust money inconsistently with the terms under which it was received can be viewed as a fiduciary breach and it is no defence that the client suffered no loss as a result of the breach or that the solicitor acted with bona fides or honestly.

...the current matter is distinguishable on its facts from Simpson, in that the Solicitor is a sole practitioner and therefore had personal knowledge of her Firm’s accounting practices.’^[24]

The Tribunal concluded that the solicitor’s evidence and submissions indicated a lack of appreciation of her obligations in relation to the management of trust monies. It found that it was irrelevant that the solicitor could have replenished her office account from other sources of funds.^[25]

The Tribunal considered that the relevant facts were that the solicitor wrongly deposited the monies into her office account; and failed to exercise proper vigilance to ensure that the balance of her office account did not fall below the amount of the trust monies in it.

The Tribunal was satisfied that:

‘the deposit of trust monies into the office account was a deliberate act on the solicitor’s part and not an act of mere inadvertence and that her actions in subsequently operating on her office account, such that its balance fell below the total of the trust monies, were similarly deliberate and not acts of mere inadvertence on her part. In doing so, she converted the trust monies to her own use.’^[26]

Without any subjective dishonest intention, the solicitor operated the office account so that its balance fell below the amount of trust monies in the account, amounting to misappropriation. On this basis the Tribunal found the solicitor guilty of professional misconduct.

TRUST ACCOUNTING MUST BE APPLIED ETHICS

Reliability and integrity in the handling of trust monies remain essential prerequisites for fitness to practice. A finding that a person is not a fit and proper person to remain on the roll of lawyers can flow from a contravention of any of the important trust accounting duties.^[27]

Clearly, there is a myriad of legislation and rules designed to regulate the way that solicitors conduct their professional lives. The community, however, has a legitimate expectation that all solicitors will handle trust money ethically, honestly and with integrity, not only because they are bound by legislation, but because it is in their character to do so.

Ethics, particularly as applied to trust accounting, has to be about something more than a set of rules or pages of legislation. It must include a personal commitment by all solicitors to do what is honest and right by the law, clients, colleagues and the community.

Frances Moffitt is a solicitor in the Professional Standards Department at the Law Society of NSW. Her forthcoming CLE presentations for the Law Society will focus on the 2013 Solicitors’ Rules, communication with clients, compliance driving profit, and limiting the scope of the retainer. She is an adjunct lecturer at the College of Law in Sydney. PHONE [phone] EMAIL [e-mail].

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^[1] Francis Bacon, The Essays, Oregon State University. Accessible at oregonstate.edu/instruct/phl302/texts/bacon/bacon_essays.html accessed 14 May 2014.

^[2] New South Wales Professional Conduct and Practice Rules 2013 (Solicitors’ Rules).

^[3] Law Society of New South Wales v Jones (1977) NSWCA 333 at [10].

^[4] Oxford Dictionaries Language matters. Accessible at www.oxforddictionaries.com/definition/english/entrust accessed 14 May 2014.

^[5] Council of the Law Society of NSW v Bradfield [2012] NSWADT 49 at [29].

^[6] Section 4 – definition of law practice - Legal Profession Act 2004.

⁷ Re Somes (1979) 32 ACTR53 at [70].

^[7] Re Mayes [1974] 1 NSWLR 19 at [22].

^[8] Allinson v General Council of Medical Education and Registration [1984] 1 QB 750, 763.

^[9] G Dal Pont, Lawyers’ Professional Responsibility (4th ed, 2010), 523.

^[10] Council of the Law Society of NSW v Pizzinga [2012] NSWADT 211 at [120].

^[11] Ibid at pp25-6.

^[12] Council of the Law Society of NSW v Simpson [2011] NSWADT 242.

^[13] Ibid at [54].

^[14] [2003] NSWADT 198.

^[15] [2010] NSWCA 177.

^[16] [2011] NSWADT 83.

^[17] [2010] VSC 378.

^[18] Council of the Law Society of NSW v Simpson [2011] NSWADT 242 at [31] - quoting Bell’s judgment in Brereton at [39].

^[19] Ibid at [45].

^[20] Ibid at [37].

^[21] [2010] NSWCA 177 at [41].

^[22] Council of the Law Society of NSW v Simpson [2011] NSWADT 242 at [45].

^[23] Council of the Law Society of New South Wales v Fay Marie Nicholls [2012] NSWADT 222.

^[24] Ibid at [30]–[32].

^[25] Ibid at [37].

^[26] Ibid at [35].

^[27] Council of the Law Society of NSW v Maloney [2012] NSWADT 259.