Legal Practitioners Conduct Board v Peter David Kerin No. SCGRG 95/2474 Judgment No. 5687 Number of Pages 10 Professions and Trades Lawyers

[1996] SASC 5687

COURT IN THE SUPREME COURT OF SOUTH AUSTRALIA DUGGAN J

CWDS
Professions and trades - lawyers - misconduct, unfitness and discipline - practitioner found guilty by Legal Practitioners Disciplinary Tribunal of various charges of unprofessional conduct arising out of a mortgage practice conducted by him - investors desposited funds to be invested in loans secured by mortgages - tribunal found that the mortgage practice was part of the practitioner's legal practice - findings by tribunal of failure to deposit monies in trust account, transfers of funds without rendering accounts and failure to advise clients to seek independent legal advice in situations where the practitioner's interests conflicted with theirs. Appeal by Legal Practitioners Conduct Board against fine of $4,000 upheld - held that matter called for a recommendation that disciplinary proceedings be commenced against the practitioner in the Supreme Court.

HRNG ADELAIDE, 17 June 1995 (sic) #DATE 5:7:1996 #ADD 28:10:1996
Counsel for appellant:     Mr D Quick QC with Mr B O'Brien
Solicitors for appellant:    Margaret A Bonesmo
Counsel for respondent:     Mr D Smith
Solicitors for respondent: Wallmans

ORDER
Appeal allowed.

JUDGE1 DUGGAN J The respondent in this appeal is a legal practitioner who was found guilty of various charges of unprofessional conduct for which he was fined the sum of $4,000. The appellant, the Legal Practitioners Conduct Board, prosecuted the charges before the Legal Practitioners Disciplinary Tribunal (the tribunal). Although the notice of appeal challenged certain findings of the tribunal in relation to some particulars of the allegations of unprofessional conduct, that aspect of the appeal has been abandoned now and the only ground of appeal left for decision is that which complains of the decision to fine the practitioner. According to the appellant, the tribunal erred in the exercise of its discretion in adopting this course. Instead, so it was argued, the tribunal should have recommended that disciplinary proceedings be commenced against the practitioner in the Supreme Court pursuant to s82(6)(a)(v) of the Legal Practitioners Act, 1981 (the Act).
2. The appellant was charged on two complaints each of which alleged particular instances of unprofessional conduct. Most of the allegations arise out of a mortgage practice which the practitioner conducted. The tribunal's findings in relation to the mortgage practice are set out in detail in its reasons for decision and it is convenient to quote them. After recording the fact that the practitioner was 34 years of age and that he resigned from a firm of solicitors in late 1987 to set up practice as a sole practitioner, the tribunal continued:
    "The practitioner formed a practice company known as Peter
    Kerin Nominees Pty Ltd. That company carried on the practice
    under the name of Peter Kerin and Associates. The practitioner
    was employed by the company. He and his wife were its
    directors.

The practitioner's father, Mr Kevin Kerin, was a partner of
    Reilly Ahern and Kerin for many years. In the late 1960s, he
    established a mortgage practice which he conducted in addition
    to his solicitor's practice. His modus operandi was to receive
    moneys from investors for the purposes of investment in
    contributory mortgages. Pending investment, the moneys were
    placed on deposit in a money market call account with a bank or
    other financial institution.

Mr Kevin Kerin had an arrangement with Mr Richardson of McRostie
    Landbrokers under which he contributed to various mortgages
    arranged by Mr Richardson. On being approached by a prospective
    borrower, it was Mr Richardson's practice to value the property
    offered as security and make the usual preliminary searches and
    enquiries. He would then approach Mr Kevin Kerin to see whether
    he would be prepared to participate, along with other investors,
    in a contributory mortgage. The mortgages in question were
    always first mortgages. The principal sum lent generally did
    not exceed two thirds of the valuation placed on the property by
    Mr Richardson, but in some cases, where the borrower was well
    known and had a proven track record, the limit was extended to
    75% of the valuation.

In contributing to a mortgage, it was Mr Kevin Kerin's practice
    to utilise funds provided by persons who invested moneys with
    him. These persons were generally described as relations,
    friends and clients. He was not in the business of promoting
    the services of his mortgage practice to the public at large.     If a suitable contributory first mortgage was available, the
    funds were lent under that mortgage in the name of Mr Kevin
    Kerin as trustee for various of his investors along with other
    contributors who were clients of McRostie Landbrokers. In the
    early stages of the practice, a declaration of trust was
    executed in relation to each contribution to a mortgage. Later,
    the practice was streamlined by the execution of what has been
    described as a composite declaration of trust in the front of a
    Mortgage Register in which the details of the mortgages and the
    contributions to them were entered.

Where it was not possible to place funds on a first mortgage
    investment, those funds were placed in a money market account
    with one or other of the banks in Mr Kevin Kerin's name. These
    moneys were available at call.

It was Mr Kevin Kerin's practice to charge a commission of 3% on
    interest earned on investors' funds laid out on mortgage
    security. He also charged a procuration fee on the grant of a
    new mortgage. This fee was payable by the borrower. It was
    generally of the order of 1% of the amount lent and was shared
    equally between himself and Mr Richardson. Mortgages were
    generally of a short term nature, say two years, but in any case
    where a mortgage was for a longer term, a higher procuration fee
    was charged. In relation to the money market account, a fee of
    1% per annum of the funds invested was charged and deducted from
    the interest earned.

In early 1988, Mr Kevin Kerin had decided to retire from
    practice. He and the practitioner agreed that the practitioner
    would take over the mortgage practice as from 1 July 1988. In
    the first six months of 1988, the practitioner worked closely
    with this father in relation to the business with a view to
    becoming familiar with its operations as from the takeover date.

Whereas Mr Kevin Kerin held mortgages in his name, the
    practitioner decided to form a proprietary company to conduct
    the business. The company was known as Montana Investment
    Corporation Pty Ltd ("Montana"). The practitioner and his wife
    were the directors of the company. There were five shares on
    issue, four of which were held by the practitioner and one by a
    company known as C.I. Day Holdings Pty Ltd which held the share
    on trust for the practitioner.     The practitioner said in evidence that when he took over the
    mortgage business from his father, he contacted all investors
    other than those overseas to explain that he had taken over the
    business and said that at that time he also explained the
    commissions payable in respect of mortgages and the money market
    account, although nothing appears to have been said about the
    procuration fees. Contact in each case was made personally at
    the practitioner's office or by telephone. We have no reason to
    disbelieve the practitioner on these matters, although it is
    unfortunate that the arrangements were not confirmed by letter
    or made the subject of even a diary note. There were a number
    of investors who resided overseas and who were friends of Mr
    Kevin Kerin. The practitioner arranged with him to contact
    those persons and explain the position on visits overseas.

When Montana took over the mortgage practice from the
    practitioner's father, the value of the fund was of the order of
    $3.5 million. The practitioner maintained that it has been
    dwindling in value since.

The process of taking over the mortgage practice was attended
    with the minimum of formality. Nothing seems to have been put
    in place in the form of a notice to investors or even an
    internal memorandum from which an inference might be drawn as to
    the true nature of the arrangements between Montana and its
    investors. No declaration of trust was executed by Montana or
    even thought necessary when it took over the mortgage practice
    or at any time subsequently. No trust bank account for Montana
    appears to have been opened in order to keep investors' money,
    as trust money, separate and apart from Montana's own funds.     The mortgage business was carried on at the practitioner's
    office at 118 King William Street, Adelaide, where he conducted
    his solicitor's practice. Investors were in the habit of
    telephoning or consulting him there in relation to the mortgage
    practice. His staff did work from time to time in connection
    with the mortgage practice. This would include banking, the
    preparation of mortgages and mortgage discharges, general
    correspondence and answering the telephone.

Many of the records in relation to the mortgage practice were
    kept at the practitioner's home as he and his wife did much of
    the work of writing up the books and making interest
    calculations after normal business hours and at weekends.

Montana used a letterhead in which its registered office was
    that of the practitioner's practice. It also used the same post
    office box number, telephone and facsimile."
3. Counsel for the practitioner conceded before the tribunal that the mortgage practice was an integral part of the practitioner's practice and the tribunal found that Montana was owned and managed by the practitioner as part of his legal practice. The tribunal also found that a solicitor and client relationship existed between the practitioner and investors in relation to the mortgage practice. There was a further finding that Montana was a trustee of the funds given to it for investment and that the relationship between Montana and the investors was that of trustee and cestui que trust.
4. The allegations of misconduct are set out in the two complaints in an awkward fashion, but it is convenient to discuss them in six categories. In each of these cases the practitioner either pleaded guilty to, or was found guilty of, the conduct alleged.
1 First Complaint - paragraph 11A The failure to deposit investment monies in a trust account as required by s31 of the Act
There was a plea of guilty to this charge. It was based on the practitioner's failure to place the monies paid in by investors in the mortgage practice into his trust account during those periods when the monies were not employed in investments. It was not alleged that the practitioner's failure emanated from a desire to deprive the Law Society of the interest to which it was entitled by reason of s57A of the Act. He simply continued to operate in the same way in which his father had done. However it was argued by the appellant that the effect of the practice was to deprive clients of the protection afforded by the trust account regulations and it in fact deprived the Law Society of the benefit of the deposit of these funds while investments were being arranged.
2 First Complaint - paragraphs 3, 3A, 7A and 8A Failure to disclose to clients the full extent of the profit made by Montana and failure to advise them to obtain independent advice
This charge was based on the fact that Montana charged borrowers a procuration fee and the practitioner did not advise his clients of that fact. Nor did he tell them that this was a matter upon which they might seek independent legal advice. This also was an aspect of the scheme at the time he took it over from his father.
3 First Complaint - paragraphs 7A and 8A The making of unsecured advances of clients' monies to companies in which the practitioner had an interest and when that interest was not disclosed
The transactions which form the basis of this charge are summarised in the first complaint as follows:
    "(a) On 15th day of August 1991 Montana made an unsecured loan
    of $27,000 to C.I. Day Enterprises Pty Ltd. At the time of the
    loan the practitioner held shares in that company.
    (b) On the 2nd day of April 1992 Montana made an unsecured loan
    of $20,000 to the Day Corporation Pty Ltd. At the time the
    practitioner held shares in that company.
    (c) On the dates listed below in the left hand column Montana
    made unsecured loans in the amounts listed below in the right
    hand column to Peter Kerin Nominees Pty Ltd. At the time Peter
    Kerin Nominees Pty Ltd was the practice company of the
    practitioner and in which the practitioner held the majority of
    shares.
        Dates         Amounts
         5/2/92        $ 5,400.00
         6/2/92        $13,000.00
         1/5/92        $ 3,000.00
        21/1/93        $ 9,100.00
        12/2/93        $15,000.00
        25/2/93        $10,000.00
         8/3/93        $10,000.00"
According to the case for the appellant, an inference can be drawn from the course of dealing with these clients that they did not authorise unsecured loans and that their understanding was that any investments would be by way of mortgage. This was not a feature of the practice when it was operated by the appellant's father.
4 First Complaint - paragraphs 7A and 8A The deposit of monies received from clients in the course of the practitioner's legal practice into the account of Montana and not, as was required into his trust account
The particulars of this charge were set out in the first complaint as follows:
    "(a) On the 12th day of September 1990 the practitioner
    held $182,665.71 on trust for the beneficiaries of the estate of
    M.J.V. Daly, and on that date, the practitioner invested that
    amount in Montana's SBSA money market account. That investment
    was redeemed on the 5th October 1990. During the period in
    which that amount was so invested interest was derived by
    Montana.

(b) On the 14th day of December 1990 the practitioner held
    $60,817.05 on trust for the beneficiaries of the estate of N.D.
    Cox and on that date, the practitioner invested that amount in
    Montana's SBSA money market account. That investment was
    redeemed on the 11th March 1991. During the period in which
    that amount was so invested interest was derived by Montana.

(b)(ii) On the 20th day of December 1990 the practitioner held
    a further $57,369.48 on trust for the beneficiaries of the
    estate of N.D. Cox and on that date, the practitioner invested
    that amount in Montana's SBSA money market account. The
    investment was redeemed on the 11th March 1991. During the
    period in which that amount was so invested interest was derived
    by Montana.

(c) On the 25th January 1991 the practitioner held $26,399.18
    on trust for S and S Chiefari and on that date, the practitioner
    invested that amount in Montana's SBSA money market account.
    That investment was redeemed on the 31st January 1991. During
    the period in which that amount was so invested interest was
    derived by Montana."
These monies were not part of the practitioner's mortgage practice. The circumstances of the various transactions as alleged by the appellant are summarised in the appellant's written submissions:
    "(i) The estate of Daly.
    $182,665.71 was received on the 12th September 1990 and
    deposited in Montana on that day. It was not transferred to the
    Trust Account of the practitioner until 5th October 1990. The
    interest earned on the deposit by Montana was not credited to
    the estate of Daly and the accounts of the practitioner and
    Montana do not disclose what happened to it. The Practitioner
    said that he was authorised, orally, to make the deposit in
    Montana and subsequently received written instructions to do so
    and that he was instructed to credit the interest received
    against legal fees due to him with respect to the administration
    of the estate. This set off (interest as against fees) was not
    identified in the Practitioner's accounts.

(ii) The estate of Cox.
    In December 1990 the Practitioner received two sums totalling
    $118,186.53 as part of the estate of Cox. Those sums were
    placed in Montana until 11th March 1991, i.e. for a period of
    just under three months, and during this period Montana received
    interest on that deposit. The interest earned was calculated at
    $3,199.22. No documents were produced by the Practitioner to
    suggest that the estate received that interest or was given
    credit for it.

(iii) The Chiefari Conveyance.
    In January 1991 the Practitioner received a cheque for
    $26,399.18 payable to a third party as part of a conveyancing
    transaction. The Practitioner negotiated that cheque by
    depositing it in the account of Montana where the proceeds
    remained for six days. Montana did not account for the interest
    received."
5 First Complaint - paragraph 16 The appropriation of $20,000 standing to the credit of a client's account with Montana and the transfer of the amount into the practitioner's firm account as payment for professional fees without the rendering of an account
The practitioner pleaded guilty to this charge. This client placed monies with the practitioner which had then been invested through Montana. During this period the client was charged with a criminal offence. The practitioner acted as solicitor in the matter and briefed counsel to appear at the trial. On 28th June 1991 $20,000 was withdrawn from the client's account with Montana and deposited in the practitioner's account in payment of legal fees. No account was rendered at the time as is required by s41 of the Act. An account was rendered on 29th August 1991 after another solicitor had been retained to act for the client in respect of an appeal in the criminal matter. It would appear that the practitioner was entitled to claim fees at least to the extent of the monies deducted. The gravamen of the misconduct was the failure to render an account.
6 Second Complaint - paragraphs 14(a) and 14(b) Failure to advise of a conflict of interest which the practitioner had between his financial interest in Montana and his duty towards his clients and failure to advise his clients that they should seek independent advice.
(The Rimington Loan) 5. The circumstances of this charge arise out of the mortgage practice. The tribunal's findings are summarised in their reasons for decision as follows:
    "On or about 1 October 1990, the practitioner organised a
    syndicate of investors to lend $235,000 as a contribution to be
    made in the name of Montana in a loan totalling $540,000 to Mrs
    Janet Rimington. The total loan of $540,000 was secured by a
    first mortgage over a property situated at Hutt Street,
    Adelaide. Some 7 of the practitioner's investor clients named
    in paragraph 2 of the complaint were involved.

We find that at all material times in relation to the Rimington
    loan there was a solicitor and client relationship between the
    practitioner and the investors. This is so notwithstanding that
    the loan was made using Montana as the vehicle for that purpose.
    As we have already found, the mortgage practice conducted
    through the instrumentality of Montana was an integral part of
    the practitioner's practice.

Mrs Rimington defaulted in the payment of interest in November
    1990. Mr Richardson from McRostie Landbrokers contacted the
    practitioner and suggested that the arrears of interest would be
    paid shortly. In fact, the arrears were paid in December.

Mrs Rimington defaulted again in the payment of interest in
    February 1991. Mr Richardson again approached the practitioner
    and suggested that the default was of a temporary character.

On each default, the practitioner continued to remit payments to
    the investors.     The practitioner made the point that he had in the past on
    occasions advanced interest payments to investors where
    borrowers had defaulted on the basis that the borrowers were
    suffering no more than a temporary shortage in liquidity and
    that they would be in a position to make up the arrears shortly.

The arrears of interest in respect of the Rimington loan were
    not paid and after a period of four or five months, the
    practitioner formed the view that the arrears would not be made
    up and that proceedings to enforce the mortgage would be
    necessary. Neither the practitioner nor his father had ever
    encountered a serious default on the part of a borrower, so that
    the Rimington experience was new.

The particulars of the complaint of unprofessional conduct in
    relation to the Rimington matter are set out in paragraph 14 of
    the complaint.

As to paragraphs 14(a) and (b), we are satisfied that the
    practitioner did not disclose the procuration fees to the
    Rimington investors. The failure to disclose these fees
    amounted to unprofessional conduct on his part. We are also
    satisfied that the practitioner did not advise the investors in
    the Rimington mortgage that they should seek independent legal
    advice before placing the moneys on mortgage. Such failure
    amounted to unprofessional conduct.

However, the failure to advise those fees and the failure to
    advise that independent legal advice be obtained in relation to
    the Rimington transaction are nothing more than specific
    instances of more general findings of unprofessional conduct
    referred to in paragraphs 7A and 8A of the first complaint."
6. The appellant has pointed out that the tribunal directed its attention to only one aspect of the conflict of interest, namely, the failure to disclose procuration fees. As the tribunal pointed out this was no more than a series of specific instances of the general conduct alleged in paragraphs 7A and 8A of the First Complaint. However, according to the argument for the appellant, a serious aspect of the practitioner's conduct in relation to this transaction is that he deducted the amounts which he had credited previously to the accounts of the various contributors without suggesting they receive advice on the matter. It is true that the interest had not been paid by the borrower to Montana but amounts were paid by way of interest to the contributors in anticipation that the borrower would remedy her default. Mr Quick QC pointed out that there may be some dispute about the liability of the contributors to the subsequent deductions and the practitioner acted in a way favourable to his own interest by deducting the amounts and paying them into his own company Montana. It was a clear case, said Mr Quick, for the contributors to be advised that they should seek independent legal advice. After reading the transcript of the proceedings before the tribunal I am satisfied that these allegations were put before it in argument and they are within the terms of the complaint. Mr Quick has argued that they were overlooked by the tribunal and it does seem that this is a possibility. In my view it is no answer to say that the relationship between the practitioner and the investors was restricted to trustee and cestui que trust and that no further duty was owed. I think there was a clear duty to advise the investors to seek independent legal advice at this second stage and that the failure to do so amounted to unprofessional conduct.
7. Before addressing the exercise of the tribunal's discretion there is one other matter which calls for consideration. The practitioner admitted the conduct alleged in paragraph 7.2 of the first complaint. This was part of the behaviour which was alleged in paragraph 7A to be unprofessional conduct. I have summarised the circumstances surrounding this charge in the section which I have numbered 4 above where I deal with the allegations in relation to the estates of Daly and Cox and the Chiefari conveyance. When the practitioner was giving evidence about these matters he stated that he had the authority of his clients to deposit the monies in Montana. At the conclusion of the defence case the appellant applied to lead evidence in rebuttal of those assertions. The tribunal refused the application. After the tribunal had announced its findings on the allegations of misconduct and entered upon consideration of the orders they should make in consequence, the matter was again raised and the appellant applied to call evidence to rebut the assertions of the practitioner. This application was refused also.
8. The appellant complains of the refusal to allow the evidence on the latter occasion. According to the argument, the situation is analogous to that which arises on a plea of guilty in the criminal court where evidence may be called on circumstances of mitigation or aggravation. (Law v Deed (1970) SASR 374). This analogy has a superficial attraction but I am in some doubt as to its applicability to these circumstances. There was an allegation of unprofessional conduct in the opening paragraph of each complaint and there followed a series of paragraphs giving particulars of that allegation. At various stages in the list of particulars it was alleged that the practitioner was guilty of unprofessional conduct by reason of certain of the preceding paragraphs. Earlier I described the formulation of these charges as awkward and the method which I have just described was mainly responsible for this problem.
9. However that may be, it must be recognised that an allegation of unprofessional conduct often arises out of a series of transactions or incidents which cannot be stated with the same facility as the familiar and well-established ingredients of a criminal offence. It is important, therefore, that the precise nature of the conduct alleged should be apparent from the particulars.
10. When regard is had to the particulars in paragraph 7.2, the gravamen of the charge appears to be that the practitioner did not account to his clients for the interest which was received by Montana. Allegations are made in other parts of the complaint that the practitioner should have advised the clients to seek independent advice. However if it was to be part of the appellant's case that the clients referred to in paragraph 7.2 did not authorise the placement of the monies in Montana in the first place, then that serious allegation should have been alleged in the complaint. Looked at in one way it is obviously a circumstance of aggravation. However but I think it is more than that; it should have been alleged as a particular of the charge. Although it arose in the present case by reason of the evidence of the practitioner, I think that to allow the evidence at this late stage of the matter would have altered substantially the nature of the charge which the practitioner had been called upon to face.
11. In these circumstances I think the tribunal was correct in refusing to allow the evidence to be given.
12. I return then to the principal issue in the appeal. Section 82(6) of the Act provides:
    "(6) If after conducting an inquiry under this section the
    Tribunal is satisfied -
    (a) that a legal practitioner is guilty of unprofessional
    conduct it may exercise any one or more of the following powers:
     (i) it may reprimand the legal practitioner;
     (ii) it may order the legal practitioner to pay a fine not
    exceeding a division 5 fine;
     (iii) it may, by order, suspend the right of the legal
    practitioner to practise the profession of the law for a period
    not exceeding three months;
     (iv) it may order that the legal practitioner must not,
    during a period stipulated in the order (but not exceeding six
    months) practise the profession of the law otherwise than in
    accordance with conditions stipulated in the order;
     (v) it may recommend that disciplinary proceedings be
    commenced against the legal practitioner in the Supreme Court;
    or
    (b) that a former legal practitioner was, while he or she
    remained a legal practitioner, guilty of unprofessional conduct,
    it may order the former legal practitioner to pay a fine not
    exceeding a division 5 fine."
13. More extensive powers are given to the Supreme Court by s89 of the Act. The tribunal did consider recommending that disciplinary proceedings be commenced against the practitioner in this court, but decided that "a suitable penalty in respect of the proven conduct can be imposed by the Tribunal".
14. In my view the conduct proved against the practitioner calls for the consideration of issues extending beyond that of penalty. The wider powers vested in this court reflect its important protective role and I am of the opinion that the circumstances of this case justify consideration by the court in its exercise of that role. I am not to be taken as expressing the view that any particular action by the court is indicated. However I am of the opinion that the tribunal erred in the exercise of its discretion not to recommend the commencement of disciplinary proceedings in this court.
15. The misconduct established before the tribunal consisted of failure to observe fundamental requirements of legal professional practice including trust account procedure, the rendering of accounts and the manner in which conflicts of interest are to be approached. All of these procedures exist as safeguards for the protection of clients and I think it is important that this court should at least consider whether there is any need for the exercise of its wide protective powers in this case.
16. For these reasons the appeal will be allowed, the order imposing the fine of $4,000 will be set aside and in lieu thereof there will be a recommendation that disciplinary proceedings be commenced against the legal practitioner in the Supreme Court.