Law Society of New South Wales v Rex

[2003] NSWADT 36

CITATION:	Law Society of New South Wales v Rex [2003] NSWADT 36
DIVISION:	Legal Services Division
PARTIES:	APPLICANT The Council of the Law Society of New South Wales RESPONDENT David Richmond Rex
FILE NUMBER:	012016
HEARING DATES:	12/08/2002, 30/08/2002, 5/09/2002
SUBMISSIONS CLOSED:	09/05/2002
DATE OF DECISION:	02/28/2003
BEFORE:	Brennan JWF - Judicial Member; Norton S SC - Judicial Member; Bennett C - Member
APPLICATION:	Professional Misconduct - gross negligence and delay/gross delay/delay
MATTER FOR DECISION:	Principal matter
LEGISLATION CITED:	Consumer Credit (NSW) Act 1995 Legal Profession Act 1987 Legal Profession Regulation 1994
CASES CITED:	NSW Bar Association -v- Jobson 2002 NSWADT 171NSW Bar Association -v- Thomas 2002 NSWADT 195Law Society of NSW -v- McElvenny 2002 NSWADT 166Myers -v- Elman 1940 AC 282In re Mayes and The Legal Practitioners Act [1974] 1 NSWLR 19Allinson -v- General Council of Medical Education and Registration 1894 1QB 750Law Society of NSW -v- Bannister 1993 4 LPDR 24Walsh -v- Law Society of NSW [1999] 164 ALR 405Law Society of NSW -v- Foreman (1994) 34NSWLR408Jonsson -v- Arkway Pty Limited 2000 NSW FTT2Ex parte Attorney General for the Commonwealth;Re A Barrister and Solicitor 1972 20 FLR234In re A Solicitor 1972 1WLR 869In re WC Moseley 1925 42 WN 44
REPRESENTATION:	APPLICANT P Boyd, solicitor RESPONDENT J Blackman, barrister
ORDERS:	That the legal practitioner is guilty of professional misconduct.

1. An Information was filed in the Tribunal by the Council of the Law Society of New South Wales (“the Society”) informing the Tribunal that the Council claims that David Richmond Rex (“the practitioner”) while practising as a solicitor was guilty of professional misconduct.

2. The complaint alleges that the practitioner had been guilty of gross negligence and the gross negligence is particularised by allegations that the practitioner:

i. Failed to obtain specific lending authorities in breach of Regulation 55 of Division 5 of the Legal Professional Regulation 1994 ;
ii. Lent $1,850,000 on the registered security of 338 lots to finance the purchase of 699 lots at a contract price for the 699 lots of $1,500,000 and failed to have any record to establish that the mortgagee clients were advised of the relationship of the advance to the purchase price of the land;
iii. Took as registered security for the advance of $1,850,000 a mortgage over only 338 of the 669 purchased, being 48.35% of the lots purchased and failed to disclose this to the mortgagee and contributors.
iv. Failed to obtain a valuation commissioned for the mortgagee and contributors in the first North Arm Cove mortgages and relied on a valuation provided by the borrower and prepared for the vendor to the borrower.
v. Failed to make written disclosure to the lenders as to the nature of the land over which the security was taken as to the absence of services, the poor condition of roads and the fact that zoning prohibited building on the land and was not likely to be changed to permit building on the land.
vi. Having asserted that he advised each lender verbally of the nature of the proposed security he failed to record in writing in any form the date and content of such conversation with any of the lenders.
vii. When after concern was expressed by Trust Account Inspectors he sent specific lending authorities to contributors yet failed to then explain the details of the transaction and the nature of the security to the mortgagee Flamanda and to the contributors.
viii. Failed to make provision in the loan agreement for partial release of lots from the security if sales were made and failed to provide in the loan agreement for moneys from sales to be available to mortgagees.
ix. Granted partial discharges of mortgage on sale of lots when no right to such was given in the mortgages or in the loan agreement to the mortgagor and failed to be aware of prices at which lots had been sold and failed to secure some or all of the proceeds of sale of lots for the benefit of the mortgagees.
x. Failed to take advantage of provisions of the loan agreement to better secure the rights of the mortgagees.
xi. Failed to obtain a valuation to support the second advance.
xii. Lent $500,000 on the second advance to finance the purchase of 113 lots at $500,000 and failed to have any record to establish that the mortgagee clients were advised of the relationship of the advance to the purchase price of the land.
xiii. Failed to take a further deed of charge to secure the second advance.
xiv. Failed to take a deed of personal guarantee and indemnity from the promoters to further secure the second advance.
xv. Asserted in epitomes of mortgage for the second advance that a guarantee was held from the promoters when such was not in fact the case.
xvi. Failed to hold a general lending authority required by Clause 55 of the Legal Profession Regulation 1994 in respect of 14 mortgage advances.
xvii. Failed to hold a specific lending authority required by clause 55 of the Legal Profession Regulation 1994 in respect of 10 mortgage advances.
xviii. Failed to comply with the requirements of Consumer Credit Card (adopted by the Consumer Credit (NSW) Act 1995 ).
xix. Failed to obtain adequate valuations with respect to five mortgage advances.

3. The Complaint was filed by the Society following a determination by the Society on 14 December 2000 pursuant to Section 137 (2) of the Legal Profession Act 1987 (the Act) to accept the complaints against the solicitor being made notwithstanding that they related to conduct which occurred more than three (3) years prior to the resolution which contained that determination. Section 137 (1) of the Act provides that complaints cannot be made more than (3) years after the conduct alleged has occurred unless a determination is made under that section that:

“a. It is just and fair to deal with the complaint having regard to the delay and the reasons for the delay; or
b. The complaint concerns an allegation of professional misconduct and it is in the public interest to deal with the complaint.”
The section continues:
“(3) A determination under this section:
………
(b)In the case of a complaint made by a Council – is to be made by the Council.
(4) A determination made under this section is final and cannot be challenged in any proceedings by a complainant or the legal practitioner concerned.”

4. The Council carried out all the relevant investigations and enquiries and sought submissions from the practitioner’s legal representatives on the question of the exercise of the discretion under Section 137(2) and those submissions were received from the solicitors’ representatives before the determination of 14 December 2000 was made.

5. It appears to the Tribunal material at the outset to stress that this complaint is one alleging professional misconduct only. It very much goes to the heart of the practitioner’s case for the Tribunal to determine firstly whether the conduct complained of constitutes professional misconduct or might more properly be described as unsatisfactory professional conduct and secondly whether the Tribunal has the power to make a finding of unsatisfactory professional conduct after consideration of material before it when the complaint alleges professional misconduct and professional misconduct only.

6. Clearly those issues and the extent to which they arise can only be addressed after consideration of all the facts established and said to justify any adverse finding in relation to the practitioner’s conduct.

Reply:

7. The practitioner filed a reply on 30 August 2001 in which he denied professional misconduct by reason of gross negligence but admitted unsatisfactory professional conduct and asserted that his conduct did not amount to a substantial or consistent failure to reach reasonable standards of competence or diligence.

8. On the specific allegations the reply:

1(a) Admitted that no specific lending authorities were obtained in relation to the mortgages particularised;
1(b) Asserted that the practitioner obtained oral approval from twenty one of the lenders, invested on behalf of another as Trustee of an estate, spoke with a parent of three persons, two of whom were minors in the belief that the funds were the funds of the parent, the son of an elderly lender whom he believed to have management of the affairs of the lender, invested on behalf of another lender under unlimited enduring Power of Attorney, spoke to the husbands of three female lenders in the belief that the husbands had power and authority to provide instructions on behalf of their wives, the secretary of an organisation and a director of a company, a trustee of a fund and of an estate and acted on the basis that he had specific instructions never to write to one client in relation to such matters.
2.(a) Admitted taking a security over 338 lots only of those purchased and did not advise the lenders of the relationship of the advance to the purchase price.
2.(b) Says that he had by way of additional security an unregistered security over a further 172 lots with a right to register that mortgage, a registered floating charge over the assets of the borrower with personal guarantees of the two principals, one of whom was a practising solicitor.
3.(a) Admitted the matters alleged but claimed that he had the additional security referred to in Paragraph 2(b).
4. Admitted the matter alleged but said that he further relied on letters dated 15 and 18 November respectively from an estate agent and a registered valuer and a statement of assets and liabilities of each of the guarantors and a statement of the financial position of the borrower company.
5.(a) Admitted the matters alleged but said that he made an oral disclosure to the lenders previously identified in relation to the first count of each of the matters which he is alleged to have failed to have disclosed as well as disclosing to the lenders the limited use to which the land could then be put under the present zoning.
6. Asserted that he did have such a list of lenders with dates noted according to the date of disclosure but could not locate the list.
7. Admitted the matter alleged but said that he did not provide written explanations as he already had obtained oral approval from the lenders specified in reply to the first count.
8. Admitted the matter alleged but asserted that provision for partial release was not in the best interests of lenders and the arrangement enabled him to control what, if any, releases and repayments occurred and provided his lenders with an ongoing return on their investment without whole or partial repayment of principal
9. Admitted the grant of partial discharges but denied that this was done without enquiry as to the prices achieved and says that he made assessments of the continuing security based on information supplied to him on 2 September 1999 by another solicitor of the prices realised.
10. (a) Denied the allegation but admitted the mortgage was not registered as at the date of the investigation of his affairs by Mr Donovan on behalf of the Society and asserted the unregistered mortgage was registered on 6 July 1998.
11. Admitted that he failed to obtain a valuation for the second advance and in making that advance relied upon letter of 15 November 1996 from the borrower’s real estate agent and copies of letters from Grech Partners Solicitors in reporting on recent sales of lots.
12. Admitted.
13. Admitted but the practitioner asserted that when making the advance he considered the existing additional securities being a floating charge over the assets of the mortgagor and the personal guarantees of Vincent and Henry Grech provided security for the second advance though he admits that the drafting of the mortgage document did not achieve the purpose of providing that floating charge or the personal guarantees.
14. Admitted, subject to the same beliefs and errors as applied to the 13th ground.
15. Admitted but subject to the same beliefs and errors as applied to the 13th ground.
16. Admitted.
17. Admitted.
18. (a) Admitted in relation to four specified mortgages but denied on the basis that the Consumer Credit Code was not applicable to any of the other mortgages.
19. (a) Admitted in relation to four mortgages but denied in relation to a fifth. The practitioner provided other explanations in relation to his alleged failure to obtain adequate valuations in respect of five other mortgages.

9. Although not strictly in reply as a form of pleading the practitioner further went on in the document to raise further matters more in the nature of submissions but which are worth detailing as they are indicative of the practitioner’s state of mind and knowledge and his level appreciation of his professional responsibilities.

10. The practitioner asserted that the complaints fell into a number of categories. The complaints relating to the two mortgage transactions which covered 15 of the 19 complaints involved, he asserted:

(a) Inexplicable and inexcusable errors of judgment in relation to valuation issues;
(b) Negligence in relation to the preparation and issue of documentation; and
(c) A breach of regulation 55 of the Legal Profession Regulation by failing to obtain specific lending authorities in the form required.

The remaining complaints he asserted fell into two categories:

i. Negligence in relation to proper consideration of the application of the Consumer Credit Code (one complaint); and
ii.Breaches of Regulation 55 of the Legal Profession Regulation 1994 by failing to obtain general and specific lending authorities in the forms required by that Regulation (3 complaints).

11. The practitioner further asserted:

i. He was unable to properly explain and justify his conduct;
ii. He deeply and sincerely regretted the conduct and said it was inconsistent with his manner and professional conduct over many years;
iii. There was no dishonesty or unfaithful conduct;
iv. He did not act for the borrower or guarantors and acted in what he thought was the best interests of the lenders.
v. His practice history having been admitted in 1965, becoming a little later a Partner in his father’s firm and commencing practice on his own account at Katoomba in 1990.
vi. Throughout his career he has conducted a relatively large mortgage practice in a professional and competent manner observing the highest levels of honesty and integrity consistent with his duties to his clients.
vii. He had suffered ill health since before 1996 which he asserted may have been a factor in relation to his conduct and failure to deal with the consequences of his conduct in a timely and proper manner.
viii. He had extremely limited financial circumstances.
ix. His decision based on the conduct complained of his state of health, age and financial circumstances that he should no longer practise as a principal and intended to work as a Consultant.

12. So, in summary, the first ten complaints related to an advance of $1.85million to North Arm Pty Limited and the matters complained upon are basically admitted by the practitioner. Complaints 11-15 are similarly admitted with an explanation and they relate to a second advance of $500,000 to North Arm Pty Limited. The sixteenth and seventeenth allegations relate to failure to comply with Regulation 55, which is admitted. The eighteenth complaint relates to a failure to comply with the requirements of the credit code concerning nine mortgages of which four were admitted and the last count relates to failure to obtain adequate valuations on five mortgage transactions of which four were admitted.

13. On 26 March 1998 David Francis Donovan was appointed by the Council of the Law Society to investigate the affairs of the practitioner and his report dated 4 June 1998 with two volumes of appendices constituted the main documentary material before the Tribunal. The Society relied upon Mr Donovan’s Affidavit, together with an Affidavit of Mr Raymond Collins sworn 14 June 2001 and oral evidence from Barry James Murdoch. Mr Donovan was called for cross-examination.

14. On behalf of the practitioner reliance was placed upon three Affidavits of the solicitor who also gave oral evidence and ten additional Affidavits, two from Frederick William Henry and one Affidavit from each of Geoffrey William Snell, Mavis Lorraine Spooner, Mark Gregory Squire, Douglas Hamilton McLelland, Deirdre Glove, Deborah Mary Henville, Frederick Cunliffe and Vallex Blackford.

15. The evidence of Mr Donovan remained intact after cross-examination and his report established the basic material on which all of the complaints were founded. Mr Collins’ Affidavit admitted by consent established the procedural matters necessary to establish jurisdiction including matters relating to the exercise of discretion under Section 137(2). There was one matter of concern in that correspondence attached to Mr Collins’ Affidavit which were relative to the jurisdiction of the Tribunal referred to Schedules and copies of those Schedules were not amongst the material before the Tribunal. Oral evidence from Mr Murdoch from the Law Society resolved that issue to the satisfaction of the Tribunal and the Schedules were then exhibited and established that the balance of the procedural requirements had been satisfied.

16. The practitioner moved in 1990 to Katoomba where he established his practice. He brought with him from Sydney his mortgage lending practice and most of his clients moved their mortgage work with him to Katoomba. In May 1998 the solicitor held 76 mortgages which secured loans of $16,886,000.

17. The information relates to a number of these mortgages but clearly the bulk of the evidence concerned three advances to North Arm Property Marketing Pty Limited as mortgagor made by Flamanda Pty Limited a client of the practitioner and the practitioner as trustee for various contributor clients.

18. The first of these mortgages dated 29 November 1996 secured an advance of $1,850,000 provided as to $400,000 by Flamanda Pty Limited and the balance by the practitioner’s contributor clients which was secured over 338 lots of vacant land at North Arm Cove, Port Stephens. All lots in this mortgage and the other two mortgages were unserviced and the zoning prohibited the erection of a residence on the individual lots. The initial mortgage advance was to fully fund the purchase by North Arm Property Marketing Pty Limited of 699 lots of vacant land at North Arm Cove at a price of $1,500,000.

19. The second mortgage of these three mortgages was also dated 29 November 1996 and it was unregistered at the time of the Donovan investigation. It was a collateral mortgage to secure the same advance of $1,850,000 and related to a further 172 lots of vacant land also at North Arm Cove. This mortgage was subsequently registered.

20. The third of these mortgages was dated 19 September 1997 and was registered over a further 113 lots of vacant land at North Arm Cove. It secured and advance of $500,000 of which Flamanda Pty Limited provided $10,000 and seven contributor clients of the practitioner the balance of $490,000.

21. Mr Donovan in his report identified 35 contributors of the moneys advanced by the practitioner as part of the principal sum of the first two mortgages. His evidence that the advances were made without the necessary specific lending authorities already referred to is not disputed. It is noted that after concerns were expressed by the Trust Account Inspectors an effort was made to rectify these omissions after the event by later obtaining the authorities. The terms of Regulation 55 are quite clear as to form (in writing in or to the effect of specific forms) and as to time. Regulation 55 (1) reads:

”55 (1) If a loan is to be, or is, secured by a mortgage and a solicitor acts for the mortgagee, the solicitor must not, whether alone or by an associate or otherwise, cause or permit the application to the loan of:

(a) any money to which section 61(1) of the Act applies; or
(b) any money that is advanced, or to be advanced on the advice of the solicitor or an associate,
unless the solicitor has previously obtained from the person for whom or on whose behalf, the money is to be applied an authority in writing that is in or to the effect of Form 6 or 7.”

The Tribunal finds that to suggest that these omissions can be rectified after the event or excused by an oral authority is to make a mockery of a regulation clearly intended to protect the public.

22. The practitioner held Power of Attorney at the time of the loan from two of seven of the contributors to the third of the North Arm mortgages and a general lending authority dated July 1988 from one of the contributors but there were no specific lending authorities obtained at the time the advance was made.

23. Mr Donovan’s evidence on these issues included the following:

” After concern was expressed by the Trust Account inspectors Mr Rex obtained specific lending authorities from the majority of the contributors to the first advance and to the second advance.”

24. Mr Donovan also reproduced a letter to one of the contributors dated 26 February 1998 and confirmed that a review of the files indicated that a letter in the same terms was sent out to each contributor with a specific lending authority. The terms of the letter, omitting formal parts, was:

”Re: Mortgage investment North Arm Property Marketing Pty Limited.
On checking my records I note I omitted to obtain from you a specific lending authority with respect to the advance to the above company.
I am enclosing such authority and should be glad if you would sign where indicated and return to me in the enclosed envelope.”

25. The initial mortgage advance for $1,850,000 was sought from the practitioner by Mr Henry Grech, Solicitor, of Blacktown to fully fund the purchase by the mortgagor of 704 lots of vacant land at North Arm Cove for the price of $1,500,000. Mr Donovan’s evidence was that “the residue of the advance was to meet costs and disbursements and go to the borrower” . The advance was approved on 9 November 1996. The practitioner was offered and received from the borrower a fee of $30,000 for arranging the loan and carrying out the legal work for the lenders on the transaction. Grech Partners, Solicitors of Blacktown, acted for the borrower.

26. At a date on which Mr Donovan could not ascertain the solicitor was given a valuation report of Herron Todd White dated 20 October 1995. This valuation was about twelve months old at the time and had been obtained by Australian Property Project Marketing Pty Limited (“APPM”) apparently in the context of its purchase of 1231 rural/residential lots at North Arm Cove Estate. APPM was the vendor to North Arm Property Marketing Pty Limited, the mortgagor in the three mortgage transactions referred to in the first fifteen particularised allegations of gross negligence.

27. The valuation indicates that the allotments were part of an old subdivision of the North Arm Cove Estate. The fact that the land remained vacant some seventy years after subdivision is one of many factors that should have alerted the practitioner, with his long experience as a mortgage practitioner of the need for caution as he was in a high risk area of lending. The security was such that under Regulation 55 the practitioner clearly required a specific lending authority being obtained from each contributor before the advance was made. A General Lending Authority (“GLA”) is required to be in or to the effect of Form 7 the first three clause of which simply demonstrate that in committing his clients to these advances, the practitioner was at best accepting high risk security which meant he was required to obtain specific lending authorities in advance from each lender. Those first three paragraphs of the GLA are in the following terms:

”1. Any mortgage securing a loan, in which any part of my/our money is invested, must be a first registered mortgage.
2. The total principal sum secured by any mortgage must not exceed an amount equivalent to 66% of the value of the security .
3. The property comprising the security must be improved urban or suburban land on which all structures and buildings are satisfactorily completed and capable of immediate use or occupation and no money is to be applied to a loan that is to be advanced by progressive payments.”

28. The valuation, in turn, which of course included more allotments than were covered by the mortgage stated, inter alia:

”Under the draft scheme all lots will be zoned Non-Urban 1(a) which provides 40 hectare or 100 acre minimum lot sizes. Consequently all the lots, apart from three, i.e. two village lots and one large acreage lot (over 200 acres or two legal blocks) are non-conforming and at this time building permits will not be issued. Council confirmed that any re-zoning is unlikely in the foreseeable future”

The valuation reported that some of the allotments fronted main bitumen sealed and easily accessed gravelled roads but that:

“ a substantial number of the subject blocks, however, are located in areas where the roads have not been maintained and form generally level to steep and heavily overgrown bush blocks……… vehicular access to a large percentage of the subject blocks are in poor condition or completely overgrown and in some instances impassable. Wingen Street, Ballina and Casino Crescent are not made……”

29. The valuation further stated:

”Due to the adverse publicity and council’s resistance to support a re-zoning an extensive and high profile marketing campaign will be required by appropriately experienced agents to successfully realise the balance of the lots.”

30. The 1995 Herron Todd White valuation was a realisable value of $1,000,000 for a total of 1165 lots which the evidence indicates were similar to the lots over which mortgages were taken by the practitioner. The valuation was reached after taking into account holding charges, advertising and selling expenses per lot, provision for profit and risk and other specified associated expenses. One allotment included in the security was given a separate value of $20,000. It is apparent that the land was being purchased for resale as individual allotments and the valuation recognises this. It is absurd to suggest that this valuation could for a moment encourage the practitioner to think that he was taking adequate real estate security for advances ultimately totalling $2,350,000. In addition, there was the security of the floating charge over the assets of the borrower as far as the first mortgage was concerned but no evidence was produced by the practitioner to suggest that this was significant security. In addition, there were personal guarantees of Henry and Vincent Grech but there was no indication that the assets listed were checked in any way as to ownership or value. The obvious inadequacy of the mortgage security should have been recognised by the practitioner on reading the valuation. The practitioner proceeded notwithstanding the 1995 valuation where basic prudence demands that in such a situation he check the ownership and value of the guarantors’ assets, although the prime issue should have been did the land value adequately secure the moneys advanced. Clearly it did not.

31. The guarantors’ assets included an unsupported value attributed to the legal practice of Grech Partners of $800,000. This is a very high value for a one principal legal firm operating in Blacktown and Parramatta. The reliance by the guarantors on such a value should as a matter of commonsense have invited some investigation by the practitioner of the value of the practice and the values of other listed assets. The personal guarantee and the charge were taken only to secure the first mortgage, not the additional advance of $500,000 on the 1997 mortgage.

32. The practitioner also was also provided with a letter from Herron Todd White dated 18 November 1996. This letter referred to the 1995 valuation and it asserted that there had been 155 settled sales in the previous twelve months at an average price of $11,750 per block, which was slightly higher than the average price adopted in the 1995 valuation which for the smaller lots averaged $8,795 for 1165 lots prior to profit, risk factor, holding and marketing expenses. The valuer went on to assert:

”Assuming continuation of the high profile marketing program by appropriately experienced agents and the provision of adequately and maintained graded road access, the minimum valuation average price of $8,795 is at least sustainable over what should be expected an extended marketing/realisation program.”

The Tribunal finds this letter does not assist the practitioner. The letter ignores holding charges and fails to identify the allotments sold nor to relate the allotments to the security being provided for the loan already approved at the date of the letter.

33. The practitioner also had a letter from Elders Real Estate of Parramatta, the agents for the vendors to North Arm Property Marketing Pty Limited confirming that they had settled 155 sales of land at North Arm Cove over the preceding twelve months at an average sale price of $11,727 and expected to achieve higher average prices for the balance of the land. The letter is addressed to the practitioner and is dated 15 November 1996. It carries no more weight than the letter of Herron Todd White of 18 November and raises the same concerns about the practitioner.

34. The Tribunal finds it ludicrous that a practitioner of then over 30 years’ experience in this area would seriously suggest that this letter even in part satisfied his obligations to his clients in relation to ensuring that the loan was adequately secured against property of sufficient value to protect his clients’ interests.

35. The practitioner did not have a current valuation when he agreed to make the advance on 9 November 1996. He wrote to another solicitor three days later and said:

”I am currently awaiting a valuation but I believe that the 500 lots will value at an average of not less than $12,000. This equates to $6,000,000.”

36. The Tribunal regards it as fair to find this vacant non-residential unserviced land was a speculative investment and that the only evidence of value available to the practitioner at the time he made the loan is that of Herron Todd White dated 20 October 1995 which looks realistically at the security on a realisation basis, taking into account holding and other expenses. The valuation was a year old and it was not a valuation obtained by the practitioner and without specific and informed instructions from his contributors it was not an independent valuation upon which he could prudently rely. It appears that in writing to the other solicitor on 12 November the Respondent in these proceedings, while using the word “valuation” was referring to some other concept. This is, indeed, most surprising from a practitioner with the long experience of Mr Rex, with the large portfolio of mortgages which he controlled.

37. On 29 November 1996 settlement of the purchase of land by North Arm Property Marketing Pty Limited was completed and the first advance of $1,850,000 made. A Deed of Charge was registered, as was the first mortgage. The Deed of Guarantee and Indemnity was provided to the practitioner. The second unregistered mortgage was not so appropriately handled in that at that time or some time before the Donovan report was prepared one of the titles in the second mortgage security which was collateral to the first loan was found to be missing. Ultimately, following the investigation by Mr Donovan, that Certificate of Title was found or replaced and the second collateral mortgage was registered. It appeared up to the time of the investigation 45 lots had been sold and released from the first and registered security without any payment having been made in reduction of the mortgage debt.

38. At this point it is relevant to note Mr Donovan’s quotation from the Contract dated 14 November 1996 for the purchase of the land by North Arm Property Marketing Pty Limited in which Special Condition 11 stated in part:

”The purchaser is aware and fully accept that there are no sewerage, water, gas, electricity, telephone or other services connected or supplied to the property and that the vendor does not know whether and, if so, when any such services shall be available.”

39. The borrower had entered into a second Contact to purchase either 109 or 113 lots from the same vendor on the same date for $500,000 with a settlement deferred until 1 December 1997. The practitioner was approached for loan funds of $500,000 to complete the second Contract in September 1997. He agreed to provide the funds but no further valuation was sought by him, nor was any provided by Mr Grech and the advance was made by him on 19 September 1997. There was no further deed of charge over the borrowing company and no further deed of guarantee and indemnity from Messrs Grech. The solicitor was paid costs of $10,000 for arranging the second advance and for the legal work on that mortgage.

40. In his report Mr Donovan did an analysis of the purchase price paid for the individual allotments by North Arm Property Marketing Pty Limited and reported of his questioning of the practitioner as to the obvious minimum valuation amounts that could applied and how this could be justified to support the advances that were made. It is clear there was no response or explanation from the practitioner.

41. In his first and most detailed Affidavit, the practitioner fixed the first approach to him for the North Arm mortgage advances to be about October 1996. He deposed to then phoning a number of clients and telling each of them the amount of the loan, the proposed 3 year term, the proposed interest rate of 11% and that the property which was to be offered as security comprised about 900 lots of vacant land that could not be built upon, there was no building approval and that the land could only be used to grow olives and also for camping for 2 months in the year. He then proceeded to produce correspondence in relation to two proposed contributors. The first was a letter dated 5 November 1996 in which briefly he advised that he was seeking $2,000,000 for the purchase of 800 lots of land which on recent sales had sold on average at $12,500 which gave a gross return of $2,000,000 which he suggested was the only manner in which the value could probably be determined. The second set of correspondence was with another solicitor from whom he sought $200,000 and to whom he provided, amongst other things, the 1995 valuation of Herron Todd White and the letter from Elders Real Estate together with replies to a questionnaire. It is apparent that in neither case did the practitioner draw in his correspondence attention to the fact that the land could not be built on, that there was no building approval, and it could only be used to grow olives and also used for camping for 2 months in the year.

42. The practitioner further deposed to having looked at the value of the security offered on three different perspectives. He defined these as being the valuation of the land, the likely selling prices for the lots being offered as security and the net asset position of the guarantors, Messrs Grech.

43. He deposed to requesting a valuation but then accepting the letter from Herron Todd White which was dated 18 November 1996 as an update valuation and a warranty from Messrs Grech and the mortgagor company that the value of the lots offered as security was not less than $6,000,000. This warranty was documented in the Loan Agreement which also provided in effect that if the practitioner became concerned about the value of the lots held as security at any future time he could obtain a valuation at the borrower’s cost. If that valuation of the remaining secured lots was less than $4 million additional real estate security was to be provided to bring the first mortgage security up to $4 million. In addition, the practitioner placed reliance on the statement of assets and liabilities of Messrs Grech but asserted his subsequent realisation that he “should not have approached the issue of valuation in this manner without much clearer disclosure to and written instructions from my lender clients”.

44. The 1995 valuation does make reference to the value of some specific lots including Lots 544 to 554 DP13358 which were small parcels separately valued in 1995 at $200,000 which formed part of the security for the advance of $500,000 on mortgage dated 19 September 1997 (“the third mortgage security”). It would be a large time-consuming task to relate the valuation which in Schedule 3 lists all lots with title references to the lots being purchased, only some of which were then subject to mortgage. It was clear that the practitioner did not undertake that exercise. The “update” of 18 November 1996 is only at best in general terms for land in the area which, from the 1995 valuation, clearly covers a fairly wide spectrum of differing allotments. No reason appears to be advanced for excluding some part of the lands purchased from the security for the mortgage advance. The initial advance did not secure lots 544 to 554. The only valuation evidence was twelve months old, had uncertain applicability to the security offered and provided a net realisable value of $1,000,000 for 1,165 lots.

45. The manner in which the practitioner addressed his duty to properly secure moneys advanced on mortgage by his clients filled the Tribunal with grave concern. This was not a one-off transaction. The practitioner ran a mortgage practice. The practitioner’s approach, to say the least, was cavalier. The initial advance is for a large sum of money from a large number of contributors who were entitled to look to the practitioner to protect their interests. The practitioner knew, or ought to have known, that the valuation obtained by the vendor to his proposing borrower some twelve months previously did not satisfy his obligations to his clients. The practitioner proposed to seek a valuation but somehow this requirement disappeared and he was placated with other documentation, including the rather preposterous valuation warranty already referred to. The advances were completed promptly and there is no issue that in bringing the first advance of $1.825 million to settlement and indeed the later advance of $500,000 to completion, the practitioner failed in a number of significant respects to properly protect the interests of his lender clients where they clearly were entitled to rely upon him to take the proper steps to protect them.

46. In his first Affidavit, the practitioner was quite frank as to his failings in relation to the additional advance of $500,000. He realised he was advancing the entire purchase price, said that he would normally require additional security but believed that personal guarantees of Messrs Grech and a registered Charge over the assets of the borrowing company would be sufficient additional security. He did not obtain an updated valuation for the new lots and accepted that he was wrong. He kept a list of contributors but no notes of the advice given. He failed to obtain personal guarantees from Messrs Grech for this additional advance and he failed to obtain a charge over the company’s assets. Some of his statements in the epitome were wrong in important respects.

47. In his Affidavit, the practitioner also deposed to a conversation with one of the contributors on 20 October 1999 in which he read a draft letter he proposed to send to all lenders concerning a possible extension of the loan for another twelve months. In light of his evidence of his explanations given to his clients, that draft letter is extraordinary. This letter, of course, follows the investigation and the Donovan report and also some visits from Trust Account inspectors. It purports to offer more information and, indeed, it contains essential details that a client or prospective contributor might reasonably have expected to receive before being asked to make the advance. The text of the draft letter was annexed to the practitioner’s first Affidavit tendered by his Counsel and admitted into evidence.

48. The 1995 valuation by Herron Todd White was of a residual/affordable in one line value of $1,000,000 reflective of marketing holding costs profit legal and stamp duty expenses. This was not a valuation of the lots if sold in one line of $1,000,000 as suggested by the practitioner for indeed that, while most realistic, is not what the valuation said. The $1,000,000 was calculated after taking the legal expenses, advertising expenses, marketing charges, rates and other outgoings on each allotment over a period of time to cover marketing. If the practitioner believed that $1,000,000 was the value of the land if sold in one line, as his draft letter asserts, then his conduct in committing his collection of 42 contributors to these loans was clearly reckless and reprehensible.

49. The practitioner admitted that he failed to obtain the proper lending authorities as reported by Mr Donovan. He believed that discussing the respective loans with the clients excused him from updating his authorities and he then asserted:

”I would have been aware of the Regulation, had I thought about it.”

He further explained that he obtained from all but one client “specific oral instructions that they wished to participate in the loan on the basis proposed in the light of the risks I told them about. I overlooked obtaining their written instructions in the appropriate form.”

50. His Affidavit concluded with various information on his financial and health situation and advised the Tribunal as he had in his Reply of his intention to request a restricted Practising Certificate and said he had made arrangements for his practice to be taken over and of his engagement on a short-term basis as a Consultant.

51. The two additional Affidavits of the practitioner covered firstly an update of his financial position and secondly some corrections and clarifications of his two earlier Affidavits.

Respondent’s oral evidence:

52. The practitioner gave oral evidence to supplement his three Affidavits and was cross-examined.

53. The practitioner did not recall using the term “risk” in discussing the loan arrangements with potential contributors for whom he acted. He said he mentioned the use to which the land could be put: caravans two months a year and being able to grow figs and grapes on the land.

54. The practitioner was asked about the assets and liabilities statement of Henry Grech and in particular whether he ever considered taking a mortgage over the two nominated properties, but he had not done so.

55. When asked whether he discussed the valuation of the legal practice of $800,000 with Henry Grech the practitioner said in reply:

” I don’t think so.”

To the further question:

”Did you make any enquiry as to whether he owned these properties?”

he replied:

”Not at the time.”

This issue was clarified later when the practitioner stated that some 2 or 3 years later he did in fact check whether those properties were owned after a Law Society officer expressed a concern there was a scam involved. He said:

”I thought it is time perhaps that I, in fact, checked to see if these properties are in fact owned.”

56. The Affidavit and the oral evidence of the practitioner were clear in terms that he had explained the nature of the security to his lenders who contributed to the mortgage. In submissions the Society sought to criticise the practitioner for not calling corroborative evidence from some of the contributors to confirm that he had given those explanations. The Tribunal’s view is that on this issue the evidence of the practitioner is unchallenged. It does not rest all that comfortably beside the practitioner’s draft letter of 19 October 1999 where the practitioner says, amongst other things “I would like to fill in some more information with regard to this mortgage.”

57. The credit of the practitioner has been established to the satisfaction of the Tribunal by the large number of supporting Affidavits as to his character. It is for the Society to establish its case but it does not appear to have seriously challenged the fact that these oral explanations were given for it did not call any of the contributors, nor did it require for cross-examination Ms Love whose evidence included the fact that she was one of the contributors to the North Arm Cove mortgage. Ms Love asserts, amongst other things, that she had “recovered all the moneys that were lent on my behalf” although it is apparent to the Tribunal that payments were made to achieve that recovery by LawCover. From the evidence it is not clear whether LawCover itself has yet been fully reimbursed for moneys paid out to satisfy the North Arm Cove mortgages involved in this matter. On this issue the Tribunal finds that the practitioner did, on the evidence before it, advise the contributors of the limited uses to which the land could be put. The Tribunal is not satisfied that the practitioner properly explained to each of his contributors the risk involved in making the loan arrangements proposed.

Affidavits filed in support of the practitioner by third parties.

58. Frederick William Henry, a solicitor with over thirty years’ experience in conveyancing and mortgage matters and who had for a period acted for the practitioner in these proceedings swore two Affidavits in support of the practitioner. He was also the solicitor acting for LawCover Pty Limited in relation to claims made against the practitioner concerning the North Arm Cove Mortgage advances.

59. Mr Henry deposed that all claims bar one had been satisfied, that claim being denied by LawCover on the basis that the client had independent legal and financial advice at the time the loan was made. Mr Henry deposed to the entitlement of that claimant to share pro rata moneys recovered from the borrower, the guarantors and the sales of the remaining properties secured by the loan advance. Mr Henry also deposed that in his professional opinion the mortgage documents and the Deed of Charge and the Deed of Guarantee and Indemnity were effective in relation to the initial mortgage advance of $1,850,000. He also reported of negotiations with Messrs Grech for payments in satisfaction of their obligations under the guarantee and expressed the view that there were reasonable prospects of LawCover recovering most, if not all, of the amounts paid to lender claimants; interest and costs and of the outstanding claimant recovering most, if not all, of her outstanding loan advance plus interest.

60. His second Affidavit annexed a fresh valuation of the residual allotments securing the mortgage advances and Mr Henry expressed even more strongly the opinion that all moneys due would be recovered.

61. An impressive batch of Affidavits in support of the practitioner, not only as to his character, but as to his professional expertise were also before the Tribunal.

62. Geoffrey Snell, a retired solicitor of Malua Bay, deposed that he had known the practitioner for about 60 years and worked with him in the practitioner’s father’s office. Mr Snell has had a long and continuing relationship with the practitioner and had referred clients of his own to the practitioner for mortgage investments. Mr Snell expressed without reservation his belief in the practitioner’s integrity and honesty and his high professional standards. Mr Snell felt the practitioner was almost naïve in his assumptions as to the professional standards of other practitioners and this had led him to his involvement in these proceedings where his actions were an aberration, albeit over a period of years and out of keeping with his concern for properly protecting his clients.

63. Mavis Spooner, Solicitor, also swore an Affidavit. She, like Mr Snell, had been supplied with relevant information on the proceedings by Counsel for the practitioner. With that knowledge she contemplated employing the practitioner in her firm, irrespective of the outcome of these proceedings. She regarded any errors of judgment that he had made as such that they were unlikely to be repeated and she made clear her strong belief in the practitioner’s integrity and honesty. The reference she provided indicated that she had known him for ten years and that she regarded him as professionally always upholding the honour of the profession, being one of the “few remaining traditional gentlemen and scholars”. In her view, he is held in high regard amongst his colleagues in the Blue Mountains.

64. Mark Gregory Squire, Solicitor, swore an Affidavit on behalf of the practitioner. He deposed to being informed of the issues in these proceedings by Counsel for the practitioner, and to having known him for over thirty years and to having been articled to him at the firm conducted by the practitioner’s father. Mr Squire gave his reference as principal of the firm of Boulton Julian Squire and spoke glowingly of the practitioner as “inspirational”, a man who provided “classical training” and established “a strong professional foundation “ for the deponent’s career.

65. Douglas Hamilton McLelland, a Chartered Accountant with 26 years of practice behind him, also provided an Affidavit verifying a reference. He also deposed to having been informed by the practitioner’s Counsel of relevant material in relation to these proceedings. Mr McLelland deposed to knowing the practitioner for over thirty years as a friend and professionally as a solicitor, having mutual clients with him and being a joint trustee with him for two disabled clients. He referred to the practitioner’s insight and wisdom in assisting Mr McLelland in personal difficulty and of his impeccable record for honesty and professionalism.

66. Deirdre Love, Solicitor, also swore an Affidavit in support of the practitioner. Ms Love deposed to having been informed of the relevant circumstances by Counsel for the practitioner and acknowledged that she was one of the contributors to the North Arm Cove mortgage. She asserted that she had complete trust in the practitioner as a solicitor as well as in his integrity. She met the practitioner in November 1969 when she was working for his father’s firm and was employed as his secretary for a period of about three years. She wrote in the most glowing terms of him as a man of fine character whose honesty could never be called into question. She has had business dealings with him over a long period of years.

67. Deborah Mary Henville similarly swore an Affidavit detailing information she had been provided with by the Counsel for the practitioner. Ms Henville is a solicitor admitted in 1968 and she has known the practitioner since 1998 when she commenced to work part time for him. She deposed to her respect and admiration for him and of his honesty and integrity.

68. An Affidavit was also filed by Frederick Cunliffe, a medical practitioner who has treated the practitioner as well as being his client. He deposed to being informed of the allegations in these proceedings and attached two references. Dr Cunliffe wrote of his respect and regard for his patient and detailed a series of illnesses. He concluded his first report having detailed medical problems that the practitioner had experienced in the seven or eight years prior to 2001 and stated:

”Considering these matters together with the pressure of work, this has almost certainly contributed to his lapses of judgment”.

He clarified his opinion in the second report dated 10 January 2002 by asserting:

”I do not think that his condition is such as to influence his ability to act as a solicitor.”

69. The practitioner also relied upon the Affidavit of Vallex Blackford who had known him for a period of about forty six years and who had worked as a secretary in his father’s firm. Although now retired for about ten years, she had maintained contact with the practitioner and recommended relatives and friends to him and wrote of his competence and willingness to give his clients time and attention. This faith in him was indicated by her having him as an executor of her Will.

70. None of the witnesses who swore Affidavits in support of the practitioner were called for cross-examination. These witnesses covered a range of his peers and his clients some of whom had known him virtually since school days, professional colleagues of long-standing and some he had met in more recent years, a medical practitioner who had treated him and long term clients. The evidence of those witnesses is of very real assistance to the Tribunal.

Section 137(2) Determination

:

71. The relevant terms of the section have already been set out above. On behalf of the practitioner it was submitted that the Tribunal had the option only of finding professional misconduct established or dismissing the complaint. This submission was put on the basis that under Section 137(4)(b) the complaint must concern an allegation of professional misconduct. It is submitted that, on that basis, that unless there is professional misconduct established, the Tribunal has no further jurisdiction. The Tribunal rejects that submission on the basis that, while an allegation of professional misconduct is required to found jurisdiction, once that jurisdiction is established by the relevant determination that is, in this case, by determination of the Society, then the jurisdiction is established for all purposes relevant to these proceedings. The Tribunal has full capacity to exercise its powers to determine the issues before it including the capacity to make findings of unsatisfactory professional conduct to the exclusion, if that be the case, of any findings of professional misconduct.

72. The determination has been made within the terms of Section 137(4). This is final. Once the Tribunal has jurisdiction to deal with a complaint, it is a full jurisdiction, not in any way inhibited, by any limitation flowing from Section 137 so as to confine the hearing to the issue of whether professional misconduct alone has been established.

73. It is the responsibility of the Tribunal to determine whether the conduct that is established in relation to the practitioner is such that it constitutes professional misconduct or unsatisfactory professional conduct.

74. In NSW Bar Association –v- Jobson [2002] NSWADT171 one of the issues was whether a letter from the barrister constituted misleading the Professional Conduct Committee and the Bar Council so as to constitute either professional misconduct or unsatisfactory professional misconduct The Tribunal in that matter quoted with approval from Riley’s (NSW) Solicitors’ Manual at Para 35,695.10 in relation to the definition of unsatisfactory professional misconduct in terms that the legislative definition:

”…does not purport to be exhaustive. The conduct described by the definition appears to refer mainly to the relationship of legal practitioner and client. Other professional conduct involving a departure from the standards of reasonably competent legal practitioners in other professional relationships might constitute unsatisfactory professional conduct. That might occur as a result of a practitioner’s default in the performance of a professional duty or responsibility to an extent that falls short of professional misconduct.”

75. In Jobsons’s case there was a confrontation between a barrister and the legal representatives of two other parties. There was clear evidence of physical confrontation and, at least, a technical assault by the barrister upon one solicitor. There was, at least, some most unprofessional and coarse language used by the barrister to describe his opponent in front of witnesses which he admitted. Some other and more inappropriate language was alleged but the barrister did not recall it.

76. The Tribunal in Jobson’s case concluded on this issue:

”In the Tribunal’s view, conduct involving a departure from standards of responsibility expected of a practitioner in dealing with his or her professional opponents can constitute unsatisfactory professional conduct (to the extent that it falls short of professional misconduct). In the Tribunal’s view that is an appropriate finding in this case. The practitioner himself conceded that his conduct went beyond his own personal bounds. It seems beyond doubt that his conduct was inappropriate and unprofessional in the sense of involving a departure from accepted standards of conduct towards another practitioner. The conduct clearly occurred in connection with the practitioner’s practice of the law. The Tribunal does not believe that the practitioner’s conduct amounted to professional misconduct.”

77. In another recent decision of NSW Bar Association –v- Thomas [2002] NSWADT 195 this Tribunal had to deal with a complaint alleging two counts of professional misconduct against a barrister. The first complaint was that he appeared for the accused at a trial whilst intoxicated so that that hearing was unable to proceed and the second was that in the same matter on the following day the barrister was intoxicated or otherwise incapable as a result of his earlier intoxication of appearing for the same accused so that the trial was again unable to proceed. The Tribunal found as a matter of fact that the barrister was not instructed to appear on the second of the two days and accepted his explanation as to his conduct on the first occasion in the context of marital discord and a possible effort at self-prescription to overcome or cope with alcohol dependency. For the purposes of the outcome in this matter the Tribunal when faced with two counts of professional misconduct dismissed one of the complaints and determined that the facts on the other matter amounted not to professional misconduct but to unsatisfactory professional conduct.

78. Finally, on this issue, in Law Society of NSW –v- McElvenny [2002] NSWADT 166 the complainant Society sought the removal of the practitioner’s name from the Roll for alleged professional misconduct in that he was alleged to have sworn a false Affidavit either with knowledge or reckless indifference.

79. In McElvenny the Tribunal referred to the solicitor’s submission in para 64 that “the inadvertence of making a false Affidavit does not constitute professional misconduct.” In Myers –v- Elman [1940 AC 282] the solicitor on the record acted negligently in the conduct of his client’s affairs. Viscount Maugham [at 288] said:

”a solicitor may be struck off the rolls or suspended on the grounds of professional misconduct, words which have been properly defined as conduct which could reasonably be regarded as disgraceful or dishonourable by solicitors who are of good repute and competency. Mere negligence, even of a serious character, will not suffice”.

80. Reynolds & Hutley JJA said in Re Mayes & the Legal Practitioners Act [1974] 1NSWLR 19 at 25 in reference to the statement by Viscount Maugham:

”Despite this dictum there is no reason in principle why conduct which can be classified as negligent cannot amount to professional misconduct”.

81. The Court of Appeal in that matter [Mayes supra] held that a solicitor who failed to supervise the conduct of his partner who misappropriated Trust moneys had acted with reckless carelessness amounting to wilful failure to comply with Trust account provisions and that this constituted statutory professional misconduct. Reynolds & Hutley JJA also held that the solicitor’s abdication of his joint responsibility was professional misconduct at common law.

82. The practitioner in McElvenny’s case raised as justification his complete reliance of the advice of another solicitor experienced in litigious matters. There was some conflict between the evidence of the practitioner and his expert litigator and the Tribunal accepted the evidence of the practitioner where the two were inconsistent. The Tribunal found that the practitioner was not aware that the amended defence in the relevant proceedings was false in a material respect when the practitioner signed the Affidavit of Verification and that he did not deliberately swear a false Affidavit and had no intention to deceive. The conduct established was clearly serious but less serious than that of the practitioner in Law Society of NSW –v- Foreman (1994) 34NSWLR 408 where the affidavit referred to documents known to have been fabricated leading to a finding of professional misconduct.

83. The Tribunal in McElvenny’s case had an admission by the practitioner that his conduct amounted to unsatisfactory professional conduct and found that he had acted recklessly when he verified the amended defence without reading it. The Tribunal found that formulation of professional misconduct so often quoted from the decision in Allinson –v- General Council of Medical Education and Registration 1894 1QB750 had not been established but that on the requisite standard of proof the solicitor was guilty of unsatisfactory professional conduct by carelessly making an Affidavit which was admittedly incorrect.

84. The Tribunal finds accordingly that it has the capacity to make a finding of unsatisfactory professional conduct notwithstanding that the information alleges professional misconduct. Indeed, the role of the Tribunal goes further. It has supervisory aspects which are not necessarily limited or confined by the orders sought by the complainant. Indeed, in The Law Society of NSW –v- Bannister 1993 4LPDR24 the Court of Appeal found that the then Legal Profession Disciplinary Tribunal erred in imposing a fine upon the practitioner following a finding of professional misconduct where the Society had not urged that his name be removed from the Roll. The Court of Appeal found the solicitor’s conduct showed him to be unfit to practise and that the protection of the public required that his name be removed from the Roll.

Gross negligence allegation:

85. The information particularises 19 grounds that are alleged to constitute gross negligence. Some of those paragraphed items detailed facts and circumstances which it could be said by themselves found a complaint of professional misconduct or unsatisfactory professional conduct. There are others, however, which it is convenient now to dismiss from further consideration where the matter particularised does not in the Tribunal’s view constitute gross negligence. Adopting the paragraph numbers from the Information, the Tribunal finds as follows:

v. Absence of written disclosure.
The Tribunal finds that there is no obligation such as to constitute gross negligence for the practitioner to fail to make written disclosure to the lenders of inter alia the absence of services, road condition, prohibitions against building and the uncertain future zoning of the land. The totality of the evidence of the practitioner is in terms that he made these disclosures orally to his clients. This evidence was not challenged and is accepted by the Tribunal. Common sense and good practice suggest strongly that the practitioner should in these circumstances have carefully recorded in writing to each lender the details that he ultimately proposed to provide in his draft letter of 19 October 1999. The advantages of protecting his own position, ensuring an understanding by the client and, indeed, as some protection to his insurers of the written confirmation are obvious. The Tribunal does not consider that the failure of the practitioner to make that disclosure in writing constitutes gross negligence and further insofar as it is relied upon as constituting a separate ground of professional misconduct or unsatisfactory professional conduct, it is dismissed.

vi. Failure to record in writing conversation dates and contents:
The Society alleges gross negligence by the practitioner in his failure to record in writing the date and content of conversations with the lenders. The practitioner’s obligation is to make the disclosure and give the appropriate advice. The evidence before the Tribunal is that he did this orally. A letter of advice, properly written, should avoid misunderstandings and provide protection against misguided claims in the future. The Tribunal, however, finds that while it would be sensible, appropriate and wise for the practitioner to have written such letters, it can find no basis for suggesting that he had an obligation to do so and that his failure cannot itself found a complaint relating to his conduct. This ground is also dismissed.

vii. Failure to explain transaction and security when sending lending authorities to contributors:
The intervention of the Trust Account Inspectors occurred after the event of the practitioner failing to obtain specific lending authorities. If there is any concept that this omission could be rectified after the event then that error can be readily ruled out by a simple reading of the Regulation 55:
”55(1) If a loan is to be, or is, secured by a mortgage and a solicitor acts for the mortgagee, the solicitor must not, whether alone or by an associate or otherwise, cause or permit the application to the loan of:
(a) any money to which section 61(1) of the Act applies; or
(b) any money that is advanced, or to be advanced on the advice of the solicitor or an associate, unless the solicitor has previously obtained from the person for whom or on whose behalf the money is to be applied an authority in writing that is in or to the effect of Form 6 or 7.”
The Tribunal would emphasise “solicitor must not….. unless the solicitor has previously obtained from the person….. an authority in writing……” Later authorities proposed and in fact sent could not paper over and cover the problem. It already existed and insofar as a defence of his conduct occurred, the conduct was completed before the Trust Account Inspector’s advice was given. Paragraph vii. of the complaint does not of itself disclose any conduct which in the view of the Tribunal could satisfy either a complaint of professional misconduct or a complaint of unsatisfactory professional conduct. The Tribunal is mindful of its obligation to confine its findings to the complaints particularised [see Gleeson CJ in Walsh –v- Law Society of NSW (1999) 164 ALR 405 in relation to a finding of Powell JA in the Court of Appeal where the Chief Justice said at para 36:
”Powell JA proceeded to make a number of observations (many of them collected as numbered conclusions) which were outside the complaints before the Court of Appeal, in terms of the issues raised by the grounds of appeal and cross-appeal. Some were also outside the particulars of those complaints which remained alive.”]

Further in relation to another finding by Powell JA in relation to the appellant’s comprehension of the fiduciary duties Gleeson CJ found:

”This finding went beyond the particulars of any of the complaints relevant to that conduct.”

86. Fifteen of the matters particularised relate to the North Arm Cove mortgages so there remain twelve matters to be further considered. For simplicity’s sake, the Tribunal will again follow the numbering from the information:

i. Specific Lending Authorities:
The failure to obtain specific lending authorities is admitted. The obligation is a mandatory one. This is not some mere technicality: it is a matter basic to the obligations of a practitioner carrying on a mortgage practice and it was an obligation about which the practitioner had no option. Indeed, he recognised this. This is not a one-off occurrence thought a one-off breach of such a regulation would be a serious matter. This is a failure to comply with the regulation of profound importance in the regulation of the Profession and of protection of the public. This regulation is clearly designed to protect the public and regulate the conduct of mortgage practices. The practitioner’s failure to comply with this requirement is not simply careless, forgetful or stupid. It is a gross failure to comply with the fundamental requirement of the type of practice that he was running, namely a mortgage practice. It is not resolved by some indication of long-term, friendly client relations. The requirements are simple and clear and the practitioner has ignored them recklessly, carelessly and the Tribunal find that it amounts to a wilful failure to comply. It is a serious matter and, in the view of the Tribunal, satisfies at the very least the complaint of gross negligence.

ii.
The advance of $1.85m on the security of 338 lots to finance the purchase of 699 lots at a contract price of $1.5m is nothing short of extraordinary. The Tribunal finds that such a proposition, if made to any person with limited financial knowledge, would sound alarm bells that were quite deafening. The contributors were entitled to expect that their interest in investing in contributory mortgages through this practitioner would be carried on in a way that would protect their investment. The practitioner admits the advance on the security alleged and admits that he did not advise the lenders of the relationship between the purchase price and the advance. His approval of the advance on 9 November 1996 was an extraordinary decision made by an experienced practitioner with practice in the area of mortgage lending for many years. There is no adequate explanation to justify his conduct which the Tribunal finds is totally alien to his responsibilities to his clients. At the very least, this conduct the Tribunal finds amounts to gross negligence as alleged by the Society.

iii.
This count related to the practitioner’s taking registered security over only 338 of the 669 lots purchased and of his failure to disclose this to the mortgagee and the contributors. It is, in part at least, a repetition of a second count and ignores the fact clearly established that there was a second unregistered mortgage further securing the moneys advances, this being over a further 172 lots. The Tribunal finds that the facts correspond sufficiently with the matters relied upon under the second count so as to be repetitious and that it is not appropriate to make a separate finding on this complaint.

iv.
The practitioner’s failure to obtain a valuation and his reliance upon a valuation provided by the borrower raises slightly different issues. The practitioner’s evidence was that he relied upon other factors, apart from the matter of valuation, including recent sales evidence, personal guarantees of Henry and Vincent Grech and a floating charge over the assets of their company. Before the actual advance was made he did obtain a letter from the valuer which, to some extent, updated the valuation referred to, it being over twelve months old at the time. The Tribunal finds that it was negligent of the practitioner not to obtain an arms-length valuation of the security before agreeing to make the advance. This, indeed, is not simple negligence, it cannot be described as a mere oversight. It was a positive course of action that the practitioner took and the course he took which was clearly patently wrong and professionally unacceptable. In the view of the Tribunal this certainly constitutes gross negligence as particularised It goes beyond the matter of a misjudgement and reflects totally unacceptable carelessness and failure to take basic steps to protect his clients’ interests. The Tribunal finds that the practitioner’s actions in relation to the valuation issue constitute professional misconduct.

viii.
The Information further complains of the practitioner’s failure in the loan agreement to provide for partial release of the lots in the security and for the loan agreement to provide for sale proceeds to be made available to the mortgagors. This is an obvious inadequacy in the documentation which one would not expect from a practitioner of this experience. A large subdivision intended to be sold off by allotments in an orderly manner over a period of time to achieve a profit clearly calls out for a mortgage that provides for a clear programme for lots to be released and the mortgage debt reduced appropriately as the security reduces. It is a question of competence and it is clearly negligent for the solicitor not to have covered this fundamental issue. It is not, in the Tribunal’s view, sufficient to base a finding of its own of unsatisfactory professional misconduct or to be classified as gross negligence.

ix.
The Information complains of the practitioner granting partial discharges without reduction of the debt and of his failure to ascertain details of sales or provide protection to the mortgagees on the reduction of the security. This flows from the inadequacy of his documentation but by realising security without reduction of the mortgage debt the practitioner simply reduced the value of the mortgage security. This is fundamentally a voluntary act of the practitioner without authority or justification contrary to his clients’ interests. The Tribunal finds that this series of acts constitute gross negligence.

x.
The tenth ground alleged that the practitioner failed to take advantage of the provisions of the loan agreement to better secure the rights of the mortgagees. This was particularised by reference to the lenders’ entitlement to register the unregistered mortgage procuring the initial advance of $1.875m at any time. The loan was arranged on the basis that this mortgage could be unregistered with the capacity to register which was in due course exercised by the practitioner. At the time of the Donovan inspection, one of the Certificates of Title was missing so that for a time the practitioner was not, until that deed was replaced, able to register the mortgage. The Tribunal accepts that the evidence establishes that for some period of time the practitioner did not hold one of a large number of a Certificates of Title. He may have settled the advance and failed to take possession of the one Certificate of Title. There is nothing to suggest that this is the case or any evidence of how the Certificate of Title was either lost or missing and the evidence does not take the matter any further. The Tribunal does not have sufficient material before it on this issue to determine whether there was any negligence by the practitioner but is clearly in a position to be satisfied that there is no evidence of gross negligence as far as this issue is concerned and certainly no question of professional misconduct or unsatisfactory professional conduct.

xi.
The eleventh count alleges that the practitioner failed to obtain a valuation to support the second advance. This was the advance of $500,000 to fully finance the purchase of 113 lots at the purchase price of $500,000. The practitioner admits the failure and seeks to justify his failure to obtain a valuation by his placing reliance on the 1996 valuation of land in the estate and the update of that valuation obtained by him from the valuer in 1996 where reliance is placed on sales over twelve months, the letter from the real estate agent detailing sales in the twelve months to November 1996 and letters from Grech Partners reporting on settlement of sales and the prices achieved. The Tribunal forms the view that the solicitor simply went way outside his area of competence and acted on the basis that he was entitled to make his own determination of value. The Courts of this country have long recognised the professional expertise of qualified valuers and the law recognises the entitlement of Trustees and others to rely upon valuations obtained by them for various investments. Valuation is outside the area of expertise of a professional solicitor. It is an expert area of endeavour requiring particular qualifications and experience. The practitioner’s obligation was to protect the interests of his clients who were the contributors of the loan and they were entitled to rely on him taking the appropriate action to protect their interests. In failing to obtain a valuation, he breached his obligation. This is a serious breach by a practitioner experienced in this area. A solicitor cannot prudently, in conducting a mortgage practice, make an advance to fully finance a purchase let alone do so without even obtaining expert independent advice on the valuation of the security. It can hardly be thought that such an advance was prudent for, if the market determines the value, then the value was no more than the purchase price and it is hard to see how the interests of the contributing mortgagees were being properly looked after. The practitioner has failed to discharge his obligations to his clients in a serious manner and the Tribunal finds this constitutes at the very least the gross negligence alleged by the Society.

xii.
This complaint has two components being the lending of $500,000 to purchase property at a price of $500,000 and secondly failing to keep any record to establish that the mortgagee clients were advised of the relationship of the advance to the purchase price. The Tribunal was of the view that a prudent practitioner would maintain a record to show that his clients were aware that they were funding the purchase 100%. That is a matter of common sense and protection. However, the Tribunal finds that the obligation of the practitioner is to advise his clients of the relationship of any advance to the purchase price. The complaint is not that he failed to advise but that he failed to have a record to establish that he had so advised the clients. In advising his clients he fulfilled his obligation; in failing to maintain a record of the advice he put himself at risk of further dispute and allegations but that is not in the Tribunal’s view negligence, nor gross negligence nor conduct that could amount to unsatisfactory professional conduct or professional misconduct. Although the facts are admitted by the practitioner, the Tribunal finds that they do not constitute gross negligence as particularised.

xiii.
The complaint is that the practitioner failed to take a further Deed of Charge to further secure the second advance. In his first Affidavit, the practitioner deposed in paragraph 33 to his belief “that the further advance would be covered by the personal guarantees of the principals and the fixed and floating charge over the borrower company”. Indeed, in the mortgage to secure the advance of $500,00 there are references to the agreement of 29 November 1996 and the Tribunal accepts that the practitioner thought at the time that the Deed of Charge and indeed the guarantee is extended to this additional advance. This complaint is admitted. The practitioner’s misunderstanding of the Law led to his failure to properly protect his clients’ interests in the manner which he intended to do. He failed to acquaint himself with the legal effects of the documentation and in a matter of this nature that failure constituted gross negligence.

xiv.
This ground relates to the failure of the practitioner to take a deed of personal guarantee and indemnity from the promoters. It is admitted and it is of the same nature as the previous complaint. The Tribunal finds that this is also an example of gross negligence by the practitioner.

xv.
This complaint relates to the false assertion in the epitomes of mortgage for the second advance that personal guarantees were held. It is admitted. The epitomes were false and misleading. The Tribunal accepts that this conduct is a consequence of practitioner’s own inadequate knowledge of the applicable law and it also is another example of gross negligence of the practitioner in the conduct of his practice.

xvi.
The investigation of Mr Donovan extended beyond the North Arm Cove matters but this complaint related to the practitioner’s failure to obtain general lending authorities required under Clause 55 of the Legal Profession Regulation 1994 in respect of fourteen separate mortgage advances. The complaint is admitted. The obligation under the Regulation is mandatory. The authority is required in advance and it must be in writing. The practitioner was required to have that authority in writing before the advance was made. The regulation of mortgage practices is dependent upon compliance with these regulations and for the solicitor to fail to comply with this requirement in a situation that he was an experienced practitioner conducting a mortgage practice is singularly astonishing. The allegation is of gross negligence and the Tribunal is satisfied that this is established in this instance.

xvii.
This ground related to failure to hold specific lending authorities in relation to ten mortgages as required under Clause 55. These are matters outside the North Arm investigation and the complaint is admitted. At its lowest, this conduct constitutes gross negligence and the Tribunal so finds without seeking to classify it in a more serious category by itself, bearing in mind the comments of the High Court in Walsh –v- Law Society of NSW [1999] 164 ALR 405.

xviii.
This complaint alleges that the practitioner failed to comply with the requirements of the Consumer Credit Code in relation to a number of mortgages. The evidence related to five mortgages and the complaint in relation to one particularised mortgage was not pressed. Admissions were made by the practitioner in respect of four mortgages. It is clear from the decision of the then Fair Trading Tribunal of New South Wales in Jonsson –v-Arkway Pty Limited 2000 NSW FTT 2 that the code applied to transactions entered into before the relevant date of 1 November 1996 where there were variations in those mortgages after that relevant date. The evidence in the disputed matters is not sufficient to enable the Tribunal to make the finding but the Tribunal finds in relation to the four admitted matters that the practitioner failed to properly protect his clients’ interests by breaching the requirements of the Consumer Code and that this constitutes gross negligence as claimed by the Society.

xix.
The final complaint related to the allegations that the practitioner failed to obtain adequate valuations in respect of five mortgage advances that were quite separate from the North Arm Cove lendings. The material before the Tribunal indicates in relation to the five separate mortgages:


i. The lender’s financial advisor from a major firm of accountants instructed the practitioner that a valuation was not required.
ii. In an arm’s length transaction involving the financing of a home purchase $53,000 was advanced on a purchase price of $123,500.
iii. In another arm’s length transaction $80,000 was advanced on a home unit purchase of $280,000 after the lender’s financial advisor from a major accounting firm inspected the property and approved the loan.
iv. The practitioner relied in another matter on an update in writing from a second valuer without a final valuation for a variation of an existing advance from $200,000 on a valuation of $300,000 to the increase of the debt to $250,000 on a licensed valuer’s “kerbside valuation” of $380,000.
v. The final lender informed the practitioner that the lender relied upon its own independent advice on the security before advancing $550,000 on a purchase price of $800,000.

The Tribunal finds that the practitioner’s conduct in each of these matters was reasonable. It would have been prudent for the practitioner to obtain valuations and in the absence of valuations clear written instructions from his mortgagee clients. The Tribunal rejects the matters particularised as not justifying a complaint and finds no evidence on this issue of the gross negligence alleged.

Conclusion:

87. The Society’s complaint alleges professional misconduct on the grounds of gross negligence in nineteen particularised instances. The Tribunal has dismissed eight of those allegations. The definitions of professional misconduct and unsatisfactory professional conduct in Section 127 of the Act are not exclusive but they are each defined to include various forms of conduct and there remains as well conduct which at common law constitutes professional misconduct or unsatisfactory professional conduct. The Society’s claim is based on a series of acts described as gross negligence constituting professional misconduct when viewed together.

88. The authorities make it clear that professional misconduct takes many forms as the following decisions illustrate:

Lord Denning MR in re A Solicitor 1972 1WLR 869 at Page 73 said:
”….Mr Owen for the solicitor challenges the finding of professional misconduct. Mr Owen has quoted cases to show that professional misconduct should only be found when the solicitor has been guilty of conduct which is disgraceful or dishonourable and is such as to be condemned by his colleagues in the profession. I do not think that definition is exhaustive. In my opinion, negligence in a solicitor may amount to a professional misconduct if it is inexcusable and is such as to be regarded as deplorable by his fellows in the Profession.”
In re WC Moseley 1925 42WN 44 at 46 Street CJ in delivering the unanimous decision of the Court said:
”I agree that mere neglect or delay in the transaction of a client’s business does not necessarily amount to misconduct of such a character as to be punishable by the Court in the exercise of its disciplinary jurisdiction but it may do so and each case must depend upon its own circumstances. It may be difficult sometimes to know where to draw the line but wherever it should properly be drawn, I think that, in the present instance, the neglect was of such a character and took place in such circumstances as to carry the case well over it and into the region of professional misconduct.”

Later at 47 the Court said:

”The profession of a solicitor, having regard to the privileges which solicitors enjoy and the relations in which they stand to the Court and to the public, is one of great importance. Not only is the attainment of proper standards of general and legal education insisted upon before anyone can be admitted to the ranks of the profession, but, in addition to this, as officers of the Court they are subject to its disciplinary jurisdiction, and those who prove themselves unfit to be on the Roll may be removed from it. It is essential that the Court should have this power for the protection both of the public and of the profession, and it is essential, in the interests of both that it should not shrink from exercising it in a proper case. Competent solicitors of good reputation should not be required to meet as professional brethren men whose dishonourable conduct has proved their unfitness to be members of an honourable profession.”

89. In Ex parte Attorney General for the Commonwealth; Re A Barrister and Solicitor 1972 20FLR 234 the practitioner faced an allegation of professional misconduct. Fox, Blackburn and Woodward JJ said at 255:

”The acts of omission and commission involved were further than mere negligence. On the other hand we do not take the view that the solicitor acted disgracefully or dishonourably. His errors arose from inexperience, mistakes of law, and a general lack of understanding of a solicitor’s duty to his clients.

90. Having reviewed the facts and the law the Tribunal is comfortably satisfied that when viewed together the eleven findings of gross negligence clearly establish the complaint of professional misconduct against the practitioner. His conduct has not been disgraceful and his integrity is clearly established. It is extraordinarily sad to find that his long years in the profession should now be coloured by the consequences of his gross negligence in these matters but his own conduct has left the Tribunal no alternative than to make the finding of professional misconduct. The facts and findings have been set out in great detail and the Tribunal has formed the view that together these matters clearly establish professional misconduct at common law. The totality of the findings is overwhelming. The negligence found against the practitioner was deplorable and inexcusable.

91. In terms of the statutory, non-exclusive, definition in S127 of professional misconduct:

“(1) For the purposes of this Part, ‘professional misconduct’ includes:
(a) unsatisfactory professional conduct, where the conduct is such that it involves a substantial or consistent failure to reach reasonable standards of competence and diligence, or……..”

The many failings detailed above represent both a substantial and a consistent failure to reach reasonable standards of both competence and diligence. The Tribunal’s findings against the practitioner are clear and most serious and no purpose would be served by repeating those matters now for the Tribunal finds that the conclusion it has reached is inevitable after the facts and circumstances have been rather exhaustively analysed. Professional misconduct has been established both in the common law sense and in the terms of S127(a) of the Legal Profession Act.

Re-Listing:

The Tribunal, having made these findings, this matter will now be re-listed on a date convenient to the Tribunal and the parties to hear submission on the orders to be made in consequence of the Tribunal’s findings and in relation to the Society’s application for costs.