Hubble-Marriott v Voon
[2022] VSC 152
•29 March 2022
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMON LAW DIVISION
TRUSTS, EQUITY AND PROBATE LIST
S ECI 2022 00846
| MARIKA HUBBLE-MARRIOTT AS MANAGER OF THE LAW PRACTICE OF ROLAND LIT JEN VOON (ABN 67 849 568 437) TRADING AS LLOYD MERIDIAN LEGAL | Plaintiff |
| v | |
| ROLAND LIT JEN VOON | Defendant |
---
JUDGE: | Moore J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 18 March 2022 |
DATE OF JUDGMENT: | 29 March 2022 |
CASE MAY BE CITED AS: | Hubble-Marriott v Voon |
MEDIUM NEUTRAL CITATION: | [2022] VSC 152 |
---
LEGAL PRACTICE – Trust accounts – Manager appointed to legal practice – Trust account and office account of legal account frozen – Manager seeking direction from the court to settle clients’ conveyancing transactions – Application pursuant to Rule 54.02 of the Supreme Court (General Civil Procedure) Rules 2015 – Hannan v Zindilis (2016) 51 VR 178.
---
APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr S Senathirajah QC with Ms L Kirwan | Lander & Rogers |
| For the Defendant | No appearance |
HIS HONOUR:
On 18 February 2022, the plaintiff was appointed by the Victorian Legal Services Board (the Board) under s 334 of the Legal Profession Uniform Law[1] as manager of the law practice known as ‘Lloyd Meridian Legal’ (the law practice). The defendant had been the sole operator of the law practice prior to the plaintiff’s appointment.
[1]The Legal Profession Uniform Law is contained in schedule 1 of the Legal Profession Uniform Law Application Act 2014 (Vic).
The plaintiff was appointed manager of the law practice after two clients of the law practice lodged claims for compensation against the Fidelity Fund maintained by the Board (the claimants). Those claims were lodged on 7 February 2022. The claimants allege that, since 2014, they had deposited substantial funds into the law practice’s trust account in respect of a number of property transactions and migration applications and that $591,633.92 of these trust moneys have been withdrawn without their authorisation (the alleged trust account deficiency).
After these claims were made, the Board appointed a compliance auditor in relation to the law practice. The defendant was given until 16 February 2022 to either meet with the Board, or to engage with the compliance auditor. The defendant did not respond to these requests within the stipulated time; the plaintiff was then appointed as manager of the law practice.
Upon her appointment on 18 February 2022, in light of the claims made on the Fidelity Fund and the allegation that funds had been withdrawn from the law practice’s trust account without authorisation, the plaintiff took steps to freeze the operation of the law practice’s trust account (the trust account) and general office account (the general office account). The plaintiff also opened a further trust account for the law practice for future trust transactions which may be processed during the period of her management (the new trust account).
As at February 2022, the law practice was conducting about 266 active conveyancing files and held $2,370,870.62 in the trust account.
On 16 March 2022, the plaintiff filed a summons and originating motion seeking the Court’s direction and/or approval under r 54.02 of the Supreme Court (General Civil Procedure) Rules 2015 (the Rules) to make certain payments from the trust account. The application came before me in the Practice Court on 18 March 2022, at which time I granted leave for the plaintiff to file a further summons in which she sought direction and/or approval under r 54.02 of the Rules in relation to a further proposed payment from the law practice’s trust account.
At the conclusion of the hearing on 18 March 2022, I made orders substantially in the form sought by the plaintiff in her summonses including the following:
7.The Court directs and approves the Plaintiff making payments from the trust account (Trust Account) of the law practice formerly conducted by the Defendant trading as Lloyd Meridian Legal (the Law Practice) to the New Trust Account (as defined in her affidavit dated 15 March 2022) comprising the funds held on trust for each of the seven clients of the Law Practice who are party to the Priority Transactions (being those transactions referred to in paragraphs 37–81 of the plaintiff’s affidavit dated 15 March 2022) and thereafter to make payments from the New Trust Account to allow for settlement or completion of the Priority Transactions.
8.The Court directs and approves the Plaintiff making a further payment from the Trust Account of the Law Practice to the New Trust Account (as defined in her affidavit dated 15 March 2022) comprising the funds held by the Law Practice on trust for Lotus Sevenhills Pty Ltd ACN 615 204 281, who is party to the Eighth Priority Transaction (being the transaction referred to in paragraphs 10–20 of the plaintiff’s affidavit dated 18 March 2022), and thereafter to make payments from the New Trust Account to the trust account of the law practice trading as B2B Lawyers to allow for settlement or completion of the Eighth Priority Transaction.
Although the defendant was on notice of the hearing, he did not appear.[2] These are my reasons for judgment in making the above orders.
[2]There is evidence before the Court, including in confidential exhibits, which indicates that the defendant is unwell.
Preliminary matters
Under the Legal Profession Uniform Law, as manager of the law practice, the plaintiff may do all the things that the law practice might lawfully have done including: transacting any business on behalf of clients (including receiving, retaining and disposing of property); entering into, executing or performing any agreement; and dealing with trust money or trust property.[3]
[3]Legal Profession Uniform Law, s 336(1)(b)(ii), (e) and (f).
As the manager of the law practice, the plaintiff is a trustee of the moneys held in the law practice’s clients’ accounts. As stated by McMillan J in Hannan v Zindilis:[4]
A client of a law practice has a beneficial interest in money paid into the mixed fund trust account of the law practice on his or her behalf, which is supported by a charge or lien in the client’s favour.
The trust ledger is the means by which a client traces his or her beneficial interest in the trust account.[5] It is accordingly clear that the plaintiff has standing to seek directions and to obtain judicial advice from the Court under r 54.02 of the Rules.[6]
[4](2016) 51 VR 178, 184-5. See also Debelle J in Re Magarey Farlam Lawyers Trust Accounts (No 3) (2007) 96 SASR 337, [117] and the authorities there cited.
[5]Re Magarey Farlam Lawyers Trust Accounts (No 3) (2007) 96 SASR 337, [117].
[6]See Hannan v Zindilis (2016) 51 VR 178, [22] (McMillan J).
Key facts
The application for judicial advice arises in the facts and circumstances set out below.
Despite the plaintiff’s efforts, since her appointment as manager, there has been very little engagement by the defendant with the plaintiff about the circumstances of the law practice and its operations. To a considerable extent and in the context of the unfit state of the law practice’s records to which I refer below, the plaintiff has relied upon the assistance of former employees of the law practice in making urgent enquiries about the state of affairs at the law practice. The law practice has no current employees. The plaintiff considers that it is not generating income sufficient to meet its operating expenses; she has grave concerns about its solvency.
The plaintiff has ascertained that there have been significant deficiencies and non-compliance by the law practice in relation to its accounting processes, client retainers and costs agreements, client authorisations and processes for the verification of the identity of the law practice’s clients who are located overseas. Notably, these include, but are not limited to, the absence of a centralised file management system for client correspondence and documents. Files at the law practice were instead managed in an ad hoc way by reference to task lists, calendar appointments and by monitoring incoming emails and correspondence.
In relation to the alleged trust account deficiency, the trust account records show that a total of $591,633.92, through a number of transactions, was disbursed into the law practice’s general office account from the trust ledgers held by the law practice in relation to the claimants. The defendant has informed the plaintiff that these funds were the subject of a loan arrangement between him and the claimants. The plaintiff has not yet been able to verify that claim.
Based on the plaintiff’s preliminary enquiries and assuming that the balances in the claimants’ trust ledgers with the law practice are correctly recorded – that is, that the withdrawal of funds from those ledgers was pursuant to a genuine loan agreement – the trial balance of the trust account appears to balance with the reconciled trust account as at 1 January 2022.
In the limited time since she was appointed as manager of the law practice, the plaintiff has not been able to adequately investigate the matters the subject of the Fidelity Fund claim and in particular whether the sum of $591,633.92 was paid out of trust without client authorisation. She has informed the Court that, because of the unfit state of the law practice’s records and deficiencies in record keeping, beyond balancing the trust records as I have explained above, she is unable to verify the legitimacy and accuracy of the trust account with the requisite level of certainty. That task will necessitate the engagement of a forensic accountant. The plaintiff estimates that a review of individual client ledgers may take several months to complete.
However, the following specific matters do emerge from the plaintiff’s investigations to date:
(a)As I have noted, the entirety of the funds comprising the alleged trust account deficiency were transferred, at least in the first instance, from the trust account to the general office account.
(b)There is no indication that any of these funds, having been transferred to the general office account, were thereafter transferred into any trust ledgers from which funds are proposed to be applied to enable the settlement of transactions the subject of the present applications. Further, the relevant trust ledger entries the subject of the alleged trust account deficiency bear the notation ‘Return Balance’. Based on the plaintiff’s enquiries to date, no other client ledger entry, save for the claimants’, bears this notation.
(c)Aside from the claimants and the following qualifications, the plaintiff is not aware of any other complaints regarding the veracity of the law practice’s trust account or any particular trust ledger. The only other issues of which the plaintiff has become aware in relation to the law practice’s trust account concern the payment of legal costs from trust funds without bills of cost having been rendered, and the possible failure to advise clients of whether they held any funds in trust at the conclusion of their respective matters.
Circumstances of urgency
The ‘Priority Transactions’
The terms of paragraph 7 of my orders made on 18 March 2022[7] relate to seven ‘Priority Transactions’ involving clients of the law practice. In each of these transactions, the law practice acts for the purchasers of real property, whether existing or ‘off the plan’, in circumstances where the deadlines for settlement of the relevant transactions have either passed, or are scheduled to occur in the near future.
[7]See [7] above.
In relation to each of the priority transactions, the funds required by the clients of the law practice to complete those transactions are held in the law practice’s trust account. As I have noted, those funds are currently frozen.
The plaintiff has asked each of the clients involved in a priority transaction to confirm the accuracy of the amount of funds recorded as being held in the trust account on their behalf. Each client has confirmed that the amount recorded as being held in the law practice’s trust account on their behalf is correct. The plaintiff has also reviewed bank account statements for the trust account to confirm clients’ funds were in fact deposited as shown in the trust account ledger.
The plaintiff has sought to secure extensions of time for the date of settlement of each of the priority transactions. In some instances, she has been able to obtain the consent of the parties to delay settlement. The plaintiff has also informed the Court that, where settlement is overdue or has been postponed, she intends to take all reasonable steps to have an urgent settlement date set.
The plaintiff has verified the identity of each client involved in a priority transaction in accordance with required protocols and procedures.
Importantly, further to the matters referred to in [16(b)-(c)] above, the plaintiff has deposed that there is no evidence of which she is aware, nor any basis upon which to believe, that the funds which are the subject of the alleged trust account deficiency have been applied towards funds held on behalf of the clients involved in the priority transactions.
I approved the plaintiff’s application for judicial advice to permit her to pay from the trust account into the new trust account the funds held on trust for each of the seven clients who are party to the priority transactions, and to thereafter make payments from the new trust account to allow for the settlement or completion of the priority transactions. I did so because, for the reasons explained below, I consider that that course accords with established principles and the justice of the case.
In the ordinary course of events, the Court considers applications for judicial advice when the relevant facts and circumstances pertaining to a trust are established to finality. In this case, however, the Court does not have the luxury of providing direction and guidance in circumstances where all the facts are known and established. As I have outlined, because of the law practice’s deficient record keeping and file management practices, a proper investigation and understanding of the trust account and the alleged trust account deficiency is likely to take several more months.
The need to consider the application for judicial advice before all relevant enquiries and investigations are completed arises because of the risk of adverse consequences to which the clients of the law practice involved in the priority transactions will be exposed in the event that funds are not released from the trust account to permit the priority transactions to be settled in a timely way. Should those transactions fail to complete, it is readily foreseeable that those clients may be subject to significant adverse consequences including, for example, claims for breaches of contract, penalty interest and the imposition of penalties for late payment of duties. It is plainly important and desirable to seek to avoid innocent third parties being exposed to the risk of such adverse consequences. It is also the case that, if the priority transactions fail to complete as a result of funds being held in the trust account not being disbursed, the law practice will be exposed to potential claims by the clients themselves.
In these circumstances of urgency, I consider that the equities of the case justify the release of funds from the trust account in the manner proposed by the plaintiff so as to enable the priority transactions to settle. I accept the plaintiff’s evidence that there is no evidence of which she is aware, nor any basis on which to believe, that the funds which are the subject of the alleged trust account deficiency have been applied towards funds held on behalf of the clients involved in the priority transactions. That conclusion is the product of the various enquiries and prudential steps she has taken as manager of the law practice including in particular those referred to in [19]-[21] above. Although it is premature to definitively conclude that the alleged trust account deficiency has not contaminated the funds held on trust for the clients involved in the priority transactions, I have a high level of confidence that that conclusion is correct.
In Hannan v Zindilis, McMillan J examined the authorities in relation to various approaches which have been adopted by the courts to distribute mixed trust funds, including pari passu distribution, the ‘first in, first out’ rule and the ‘lowest intermediate balance rule’.[8] In the end, ‘… the remedy must be tailored to the facts of each individual case. There is no principle of universal application’.[9]
[8]Hannan v Zindilis (2016) 51 VR 178, [23]-[34].
[9]As stated by Debelle J in Re Magarey Farlam Lawyers Trust Accounts (No 3) (2007) 96 SASR 337, 373 [123].
Hannan v Zindilis concerned a shortfall in a law practice’s trust account comprised partly of payments which were not connected with any particular client account. McMillan J applied a pari passu method of distribution with the consequence that ‘all of the contributors to the fund will bear the loss in proportion to their respective contributions’.[10] Her Honour considered that this method of distribution ‘offers the most equitable distribution of the remaining trust funds given the impossibility of assigning the shortfall to any one or more clients of the law practice’.[11]
[10]Hannan v Zindilis (2016) 51 VR 178, [36].
[11]Ibid.
The present case is different: the alleged trust account deficiency relates specifically and is confined to the funds held by the law practice on behalf of the claimants. The circumstances are more closely analogous to those considered by Debelle J in Re Magarey Farlam Lawyers Trust Accounts (No 3) which concerned misappropriations from a law practice’s trust account of a total of $4.5 million over 13 years. Importantly, the misappropriations were confined to 42 of the law practice’s 250 clients. The fraud was effected by the perpetrator debiting the trust account ledgers of those 42 clients, rather than by misappropriating money generally from the law practice’s trust account.
Justice Debelle decided that the funds in the law practice’s trust account should be distributed according to the balances shown in individual client trust ledgers. Those ledgers revealed exactly what was due to each client and the misappropriations confined to specific and identifiable trust account ledgers. His Honour contrasted the position with a defalcation from a trust account where the misappropriated moneys had not been debited to any particular client. In that case ‘there is no other proper basis to distribute what remains pro rata according to the amount held by each client at the date of the misappropriation’.[12]
[12]Re Magarey Farlam Lawyers Trust Accounts (No 3) (2007) 96 SASR 337, [113] and see further at [123].
In the circumstances of urgency which I have described, the method of distribution adopted by Debelle J in Magarey Farlam Lawyers Trust Accounts (No 3) should be adopted here for essentially the same reasons. It would be inequitable for the law practice’s clients involved in the priority transactions to bear any losses associated with the alleged trust fund deficiencies because those alleged deficiencies can confidently be said to be confined to the trust ledgers related to the two claimant clients. There is no basis on the evidence to conclude that those deficiencies have contaminated the trust ledgers in relation to other clients.
The Eighth Priority Transaction
In substance, paragraph 8 of the orders made on 18 March 2022[13] approved the plaintiff paying from the trust account the funds held on trust for the client Lotus Sevenhills Pty Ltd (Lotus) (in relation to a particular transaction) to the trust account of another law practice.
[13]See [7] above.
The relevant facts are as follows. Lotus had retained the law practice to act for it in relation to the sale of a business, being the ‘Eighth Priority Transaction’. Lotus has now retained new solicitors in relation to this transaction which is due to settle on 28 March 2022. Lotus’ new solicitors have informed the law practice that their client requires the amount in the law practice’s trust account ledger in respect of the transaction in order to discharge a business loan on the settlement date in order for the transaction to settle.
Consistent with her approach in relation to the priority transactions, the plaintiff has made reasonable and prudent enquiries in relation to the eighth priority transaction. In particular, she has sought and obtained confirmation from Lotus’ new solicitor that the amount recorded in the law practice’s trust ledger in relation to the eighth priority transaction is correct. The plaintiff has also reviewed the trust accounts and bank statements to confirm that the funds transferred by Lotus for the eighth transaction were deposited as shown in the trust ledger account. She has also sighted relevant bank account statements in relation to payments out of the trust ledger for anticipated legal fees.
The plaintiff has also requested and been provided with documents necessary to verify identities relating to the eighth transaction. Although the process for the verification of identity had not yet been completed when the matter was before me in Practice Court, the plaintiff has deposed that she intends to ensure that that process is completed before any transfer of funds out of the trust account to the benefit of Lotus occurs.
I consider that the above enquiries and steps taken by the plaintiff to be reasonable and appropriate in the circumstances.
Importantly, as with the priority transactions, the plaintiff has deposed that there is no evidence or material of which she is aware, nor any basis on which to believe, that the funds comprising the alleged trust account deficiency have been applied towards the funds held on behalf of Lotus for the eighth priority transaction.
I consider that it is appropriate for the Court to authorise the plaintiff to disburse from the law practice’s trust account those funds held by the law practice in relation to the eighth priority transaction and for those funds to be paid to the trust account held by Lotus’ new solicitors. That action accords with the instructions provided by Lotus and, applying the principles and analysis which I have set out in relation to the priority transactions, there is no basis to consider that the alleged trust account deficiency has contaminated the funds held in Lotus’ trust ledger. As I have explained, the amount of funds representing the trust account deficiency is specifically referable to the two claimants. It would therefore be inequitable for Lotus to bear the apparent losses associated with that deficiency.
---
3
0