Legal Services Board v Forster
[2017] VSC 279
•7 June 2017
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMON LAW DIVISION
S CI 2009 6947
| IN THE MATTER of an Application by the Legal Services Board for the appointment of a Receiver for the Law Practice of DAVID FORSTER, an Australian legal practitioner trading under the name HOLLOWS LAWYERS, pursuant to s 5.5.1 of the Legal Profession Act 2004 BETWEEN LEGAL SERVICES BOARD (ABN 82518945610) | Plaintiff |
| and | |
| DAVID FORSTER | Defendant |
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JUDGE: | EMERTON J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 2 May 2017 |
DATE OF JUDGMENT: | 7 June 2017 |
CASE MAY BE CITED AS: | Legal Services Board v Forster |
MEDIUM NEUTRAL CITATION: | [2017] VSC 279 |
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RECEIVERSHIP OF A LEGAL PRACTICE — Appointment of receivers to law practice pursuant to Legal Profession Act 2004 s 5.5.1 — Receivers commenced and then settled a proceeding to recover amounts taken in breach of trust —Distribution of settlement sum to former clients of the law practice.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr P Corbett QC with Ms C van Proctor of Counsel | Hall & Wilcox |
| For the Defendant | No appearance |
HER HONOUR:
On 12 April 2010, Noel Batrouney and Andrew Lyle were appointed as joint and several receivers of the law practice conducted by David Forster, Hollows Lawyers (‘Law Practice’). The appointment of the receivers was made pursuant to s 5.5.1 of the Legal Profession Act 2004 following an audit of the trust account of the Law Practice by the Law Institute of Victoria.
The receivers were ordered to review the files of the Law Practice relating to proceedings against the Commonwealth of Australia brought by persons who had been on board HMAS Melbourne at the time of its collision with the HMAS Voyager (‘Melbourne clients’). The receivers were ordered to ‘ensure that all irregularities in relation to trust money, trust property or the affairs of the practice have been fully identified and rectified and, in particular, that all trust deficiencies have been properly restored’.[1]
[1]Justice Emerton, Court Order in Legal Services Board v Forster S CI 2009 6947, dated 12 April 2010 [2].
On 13 February 2012, the receivers commenced a proceeding in the Court on behalf of certain Melbourne clients seeking to recover from Mr Forster an amount of just under $7 million (the ‘recovery proceeding’). The complex procedural history of the recovery proceeding is detailed in a judgment of the Court in 2016 varying a freezing order made over Mr Forster’s assets.[2]
[2]Batrouney v Forster [2016] VSC 393 [2]-[4].
On 14 December 2016, the receivers informed the Court that the parties to the recovery proceeding had executed a deed pursuant to which a settlement sum of about $1.8 million would be paid by Mr Forster to the receivers for distribution to former clients of the Law Practice.
On 7 February 2017, the receivers applied to the Court for approval of their proposal for distribution of the proceeds of the Settlement Sum. The Court noted and approved the receivers’ proposal and made orders for the notification of former clients of the Law Practice.
At a final hearing on 2 May 2017, the receivers confirmed that the final amount of the Settlement Sum was $1,811,209.13 following the payment of $531,209.13 from an interest bearing account into Hall & Wilcox’s trust account. The receivers sought directions from the Court, pursuant to s 359 of the Legal Profession Uniform Law, for:
(a)the final allocation and distribution of the Settlement Sum to be made in the manner that had been proposed and according to a settlement distribution spreadsheet;
(b)the payment of amounts owing to unresponsive clients and the balance of the funds held in the Law Practice trust account to the Legal Services Board.
The receivers also foreshadowed that they would seek a further direction in relation to the destruction of the remaining files for the purposes of winding up the Law Practice and in order to facilitate termination of the receivership.
On 2 May 2017, the Court made orders as follows providing for the distribution of the Settlement Sum to the relevant Melbourne clients:
1. Pursuant to section 359 of the Legal Profession Uniform Law, the Court directs the receivers of the legal practice formerly known as Hollows Lawyers to distribute the proceeds of the Settlement Sum received from the Defendant as follows:
(a) Firstly, by payment to former clients of the Law Practice in the manner proposed and amounts proposed (subject to any necessary minor adjustments) in paragraphs 10 and 11 of the affidavit of Noel James Batrouney sworn 1 May 2017 and calculated in the revised settlement distribution spreadsheet that is exhibit ‘NJB-20’ to that affidavit;
(b) Secondly, by payment of the amounts (subject to any necessary minor adjustments) owing to ‘unresponsive clients’ (as defined in paragraph 10 of the affidavit of Jacob Uljans affirmed 3 February 2017) to the Legal Services Board in the manner proposed in paragraphs 29 and 30 of the affidavit of Noel James Batrouney sworn 21 April 2017; and
(c) Thirdly, by payment of the balance of trust account (account number 38-0167 BSB 033-272) to the Legal Services Board in the manner proposed in paragraph 47 of the affidavit of Mr Batrouney sworn 21 April 2017.
I now set out briefly my reasons for making those orders.
The manner in which the receivers proposed to distribute the Settlement Sum and the procedure followed by them for the notification of the relevant Melbourne clients was set out in the following affidavits:
(a) affidavits of Noel James Batrouney filed 21 April 2017 and 1 May 2017; and
(b) affidavits of Jacob Paul Uljans, a Senior Associate at Hall & Wilcox assisting the receivers, dated 3 February 2017 and 8 February 2017.
Mr Uljans’ affidavit made on 3 February 2017 identified a total of 54 Melbourne clients who were the subject of the receivers’ claims against Mr Forster pursuant to the Second Further Amended Statement of Claim filed on 7 November 2013 in the recovery proceeding.[3]
[3]Legal Services Board v Forster (S CI 2012 00732).
These Melbourne clients fell into a number of categories:
(a) 21 clients were allegedly charged twice by the Law Practice for the same disbursements (double disbursement clients);
(b) Eight clients were allegedly charged professional fees by the Law Practice on a time costed basis plus uplift when the client fee agreement provided for the charging of professional fees in accordance with the Supreme Court Scale plus uplift (scale fee agreement clients);
(c) Another 23 clients were allegedly charged double disbursements and professional fees on a time costed basis when the client fee agreement provided for the charging of professional fees in accordance with the Supreme Court Scale (double disbursement and scale fee agreement clients);
(d) One client had not signed any fee agreement with the Law Practice but was charged professional fees on a time costed basis plus uplift (no fee agreement client);
(e) Another client was charged both double disbursements and professional fees on a time costed basis in the absence of a fee agreement.
The receivers proposed to allocate the Settlement Sum among the relevant Melbourne clients taking the following steps:
(a)a calculation of each client’s entitlement to recover amounts from Mr Forster in respect of his breaches of trust;
(b)less an amount calculated by reference to the legal fees likely to have been recoverable the Law Practice had those breaches not occurred; and
(c)the distribution of the Settlement Sum on a pro rata basis by reference to each Melbourne client’s net claim on the funds.
Mr Uljans exhibited to his affidavit a spreadsheet setting out the amounts the receivers had determined to be notionally owing, and payable, to each of the relevant Melbourne clients having regard to their particular circumstances. This involved determining both the amount recoverable as a result of the breach of trust affecting the client and the professional fees notionally chargeable by the Law Practice to each of the relevant Melbourne clients.
In calculating the professional fees notionally chargeable by the Law Practice, the receivers acknowledged that each double disbursement client, scale fee agreement client and double disbursement and scale fee agreement client retained the right to have the bills issued to them by the Law Practice taxed. However, the receivers formed the view that it would be extremely expensive and time-consuming to have each client file independently taxed for the purpose of determining fees notionally chargeable. As an alternative to taxing each client bill, the receivers considered it appropriate to apply a fixed rate reduction to the professional fees originally charged by the Law Practice as follows:
(a) a 40% reduction of professional fees charged for relevant Melbourne clients who entered into a scale fee agreement with the Law Practice; and
(b) a 30% reduction of professional fees charged for relevant Melbourne clients who entered into a time costed fee agreement with the Law Practice.[4]
[4]Affidavit of Jacob Paul Uljans, dated 3 February 2017 [27].
According to the receivers, these reductions reflect the likely reduction that would be applied to the professional fees billed by the Law Practice upon a taxation. The receivers formed this opinion based on their own experience of taxations and on the basis of costing reports that the Legal Services Commissioner had commissioned from Mahlab Costing Pty Ltd and Blackstone Legal Costing in 2010 in respect of a small number of Melbourne client files. These reports were attached as exhibits to Mr Uljans’ affidavit dated 3 February 2017.
The receivers determined that the Law Practice had a notional liability to the double disbursement clients who, subject to disentitling factors, were entitled to participate in the distribution of the Settlement Sum if:
(a) the amount actually transferred by the Law Practice from trust to pay billed professional fees (fees paid) exceeded the amount of professional fees that would have been chargeable following a notional taxation of those fees (fees notionally payable); or
(b) the amount of the double disbursements exceeded the difference between the fees paid and the fees notionally payable.[5]
[5]Ibid [30].
The receivers determined that the Law Practice had a notional liability to the scale fee agreement clients if the fees paid exceeded the fees notionally payable.
For relevant Melbourne clients who were double disbursement and scale fee agreement clients, the receivers determined that the Law Practice had a notional liability to them if either or both of the following conditions were met:
(a)the fees paid exceeded the fees notionally payable; or
(b)the amount of the double disbursements exceeded the difference between the fees paid and the fees notionally payable.
Three Melbourne clients received compensation payments from the Fidelity Fund in connection with fees charged by the Law Practice. As a result, the amount determined by the receivers to be notionally owing to these clients by the Law Practice was reduced by the amount of the payment from the Fidelity Fund, in order to avoid double compensation.
A number of relevant Melbourne clients who had paid money into trust on account of disbursements either did not receive any payment from the Law Practice following settlement with the Commonwealth, or received payments totalling less than the client originally paid into trust. Although several clients who received no payment out of the settlement with the Commonwealth agreed to waive their entitlement to damages in order to preserve their pension entitlements, the receivers formed the view that this did not disentitle them from being reimbursed for funds they paid into trust.
The receivers identified eight ‘unresponsive clients’, being Melbourne clients who did not respond to attempts to contact them but who are also entitled to participate in the distribution of the Settlement Sum.[6] The total amount owing to these clients is approximately $308,640.32. The receivers intend to arrange for the payment of the unclaimed amounts to the Legal Services Board, to be held by the Board for the benefit of the unresponsive clients. The Legal Services Board has informed the receivers that it will pay any money that remains unclaimed at the end of the relevant period to the Registrar of Unclaimed Money in accordance with Unclaimed Money Act 2008.[7]
[6]Affidavit of Noel James Batrouney, dated 21 April 2017.
[7]Ibid [30].
As at the date of Mr Ulman’s affidavit made on 3 February 2017, the receivers calculated the total notional amount payable to relevant Melbourne clients to be $2,368,203.58.[8] The Settlement Sum was $1,808,792.92, with the consequence that a pro rata distribution would yield a 76 per cent return to the relevant Melbourne clients of the notional amount payable to them.[9]
[8]Ibid [45].
[9]The amount available for distribution was later adjusted to $1,811,209.13, including $531,209.13 in interest: Affidavit of Noel James Batrouney, dated 1 May 2017, [8], [9].
A pro rata distribution of the Settlement Sum accords with the method commonly used for the distribution of mixed trust funds among a number of beneficiaries. In Hannon v Zindilis,[10] McMillan J referred to the various approaches for the allocation of trust moneys and observed that the pari passu or pro rata approach ‘suits cases where there are a large number of contributors where the whole body bears the loss, rather than a particular individual’.[11] In my view, it is an appropriate method of allocating the funds available for distribution in this case.
[10][2016] VSC 723.
[11]Ibid [24].
I turn to consider the procedure followed by the receivers to inform the relevant Melbourne clients of the settlement and the proposed distribution of the Settlement Sum and the opportunities given to them to query and challenge the proposed distribution.
Following the hearing on 7 February 2017, the receivers notified the former clients of the Law Practice of the settlement and the proposed form of distribution. The notification included a copy of the Court’s orders made on 7 February 2017 pursuant to which any person who wished to adduce evidence, make submissions or otherwise participate in the hearing in respect of the final allocation and distribution of the Settlement Sum was required to file a notice of appearance and to provide the receivers with a written statement of their interest and details of their proposed participation in the final hearing.
Of the 53 letters that were sent to the relevant Melbourne clients, 44 were confirmed by Australia Post as having been delivered and signed for. The remaining nine letters were returned undelivered. The address of one client was subsequently updated and a further copy of the letter was sent to that client at their correct address.
Following the initial mail-out, the receivers reviewed the proposed distribution detailed in the client settlement spreadsheet and made some corrections. This resulted in some adjustments to the spreadsheet and further communications with the affected persons.[12]
[12]These matters are deposed to in the affidavits of Mr Batrouney dated 21 April 2017 and 1 May 2017.
No notices of appearance or statements of interest and participation were received. However, further inquiries were made by persons on behalf of three former Melbourne clients. There were communications between the receivers and the individuals in question, which resulted in the provision of further information to those persons.
The daughter and executor of the estate of one of the Melbourne clients requested a meeting with the receivers. At that meeting, the executor was given a copy of all the accounting documents in respect of her father’s matter, as well as other information.
The executor attended the final hearing to make submissions to the Court. She did not assert that there had been any error in the calculations relating to her father’s entitlement or that the distribution method was unfair. Rather, she expressed concerns about a number of important matters, including the circumstances giving rise to the receivership in the first place and the psychological cost to her father of his dealings with the Law Practice. The executor expressed concern about the apparent lack of regulation in relation to ‘open-ended’ fee agreements and the difficulties for the lay person in understanding the regime for the imposition and adjustment of legal fees. These concerns raised important questions of policy. A senior officer of the Legal Services Board was present in Court to hear these concerns.
I am satisfied that the Melbourne clients were properly notified of the settlement and the proposed distribution scheme and given an adequate opportunity to make any concerns they had known to the receivers and to the Court.
For the reasons I have previously given, I am also satisfied that the method of allocation and distribution is fair and appropriate.
Accordingly, I consider the orders made by the Court on 2 May 2017 give rise to a satisfactory resolution of the recovery action brought on behalf of the Melbourne clients.
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