Noble v Law Society of New South Wales

[2000] NSWSC 487

CITATION:	Noble & Anor v Law Society of New South Wales [2000] NSWSC 487
CURRENT JURISDICTION:	Common Law
FILE NUMBER(S):	SC 10114/99
HEARING DATE(S):	29-30 May 2000
JUDGMENT DATE:	5 June 2000
PARTIES :	Derek Hugh Noble & Farlmist Pty Limited v Law Society of New South Wales
JUDGMENT OF:	Michael Grove J at 1

COUNSEL :	J. Simpkins (Plaintiff) J. Gleeson (Defendant)
SOLICITORS:	P.W. Turk & Associates (Plaintiff) A.S. Brown (Defendant)
CATCHWORDS:	Legal Practitioners - Solicitor - Failure to Account for Money - Claim on Fidelity Fund - Interest
LEGISLATION CITED:	Legal Profession Act 1987
DECISION:	Orders to be made.

THE SUPREME COURT
OF NEW SOUTH WALES
COMMON LAW DIVISION

MICHAEL GROVE J

Monday 5 June 2000

10114/99 - DEREK HUGH NOBLE and FARLMIST PTY LIMITED v LAW SOCIETY OF NEW SOUTH WALES

JUDGMENT

1 HIS HONOUR : This is an appeal pursuant to s90D(3)(a) of the Legal Profession Act 1987 against a decision to partly disallow a claim upon the Fidelity Fund administered by the defendant (the Society). For the purposes of the issues litigated in the appeal, no distinction was drawn between the personal and corporate plaintiffs and I will likewise treat them as a unity in the person of Mr Noble.

2    By its relevant committee, on 26 November 1998 the Society resolved that the conduct of the plaintiff’s former solicitor MacDonald in the application of the sum of $529,225.13 was dishonest and that a claim against the Fund by the plaintiff be allowed in the sum of $478,164.13 with 8 percent interest from 20 August 1996 to that date and that a claim by Susan Noble (the former wife of the plaintiff) be allowed in the sum of $53,755.93 with interest at 5 percent from 31 October 1996 to date. By resolution on 24 February 2000 the plaintiff’s claim was further allowed in the sum of $3,500 and some interest enhancements to various parcels of money as specified. Payment from the Fund to the plaintiff was initially authorized at a rate of 50¢ in the dollar and later increased to 75¢ in the dollar.

3    The plaintiff’s claim was lodged in two quantified sums, the first $719,458.24 and the second, $68,143.28. The second part is acknowledged by the plaintiff to relate to the same subject matter as the separate claim by Susan Noble and, given the resolution in respect of that claim, the second part of the plaintiff’s claim is not sought to be sustained in the appeal. The essence of the plaintiff’s claim is that pecuniary loss was suffered by reason of the failure to account for money by MacDonald.

4    The issues in the appeal have been narrowed as a result of the acceptance by the Society that it does not require the plaintiff to establish existence of an entitlement and it contests elements of the plaintiff’s claim by reference to specific arguments relating to fact and applicable principles.

5    The amended summons filed on 12 May 1999 does not, of course, take into account the subsequent resolution on 24 February 2000.

6    The resolution in November 1998 followed a report dated 13 October 1998 by Miss Sue Gabor (whom I infer to be a solicitor in the employ of the Society), the content of which was substantially derived from the report of Miss Sayer, a chartered accountant who had been appointed receiver of MacDonald’s practice. The plaintiff retained Mr Calabro a chartered accountant of Brisbane, Queensland and he has analysed Miss Sayer’s report and, in the context of it, expressed views in a report of his own and during his attendance for cross examination at the hearing. The discrepancy between the plaintiff’s claim and the Society’s allowance emerges from the approaches and conclusions manifest in what I will refer to without courtesy titles and for convenience as the Gabor, Sayer and Calabro reports.

7    MacDonald commenced to act as a solicitor for the plaintiff in approximately 1983. He practised in various partnerships up until the appointment of the receiver, but it is unnecessary to chronicle these nor every transaction in respect of which the solicitor acted although reference to some of them will need to be made. In very broad overview, it is apparent that the plaintiff retained MacDonald’s professional services for the buying and selling of his own residential property, the buying and selling of boarding houses, sites for demolition and/or development, both commercial and residential as well as for divorce and property settlement upon dissolution of his marriage to Susan Noble. The plaintiff was also both a borrower and a lender of mortgage funds. The entries in books of account of the dishonest solicitor are in the circumstances inevitably suspect and the colloquialism that on occasions Peter was being robbed to pay Paul was apt. The impression emerges that sometimes the plaintiff was Peter, sometimes Paul.

8 It is common ground that the nature of the appeal is governed, naturally first by the terms of the Legal Profession Act and then by s75A of the Supreme Court Act and Part 51A of the Rules of Court. No challenge was made to the Society’s submission that the total of claim allowed to the present is $580,254.86 and that the onus is on the plaintiff to prove entitlement to anything above that sum.

9    The plaintiff’s claim was postulated upon the receipt by MacDonald of the proceeds of the sale of a property at Mangrove Mountain in about 1991 which were to be invested at interest and the combined fund drawn upon as needed and particularly to develop a commercial property at Erina. Proceeds from the sale of the latter were received in December 1995 and, in a sense, the issues arise out of the failure to account for these but, of course, there was not a simple defalcation from these funds and it will be necessary to make some reference to what I might call past and intermediate transactions. That various transactions took place is common ground and, as I have said, nothing will be gained by attempting to construct a complete chronicle.

10    The contested claims were itemized by the plaintiff in ten separate amounts. Two of these have been conceded and others are dependent upon determination of the same matters of principle. I will deal with the matters as itemized.

11    Item 1 : Fees Variance on Erina sale.
Calabro detected that although the plaintiff had been given an account for $2,506.63, Sayer had determined that $2,215.04 was drawn by MacDonald. The variance of $291.59 is conceded as an effective enhancement of the resultant Sayer accounting.

12    Items 2, 3, 4 and 10 : Interest
Section 79C(1) of the Legal Profession Act defines the meaning of pecuniary loss to include:

“(c) interest that, but for the failure to account, would have been received by a claimant, calculated to the date on which the claim succeeds, being interest at a rate that does not exceed the rate prescribed by the Supreme Court Rules in respect of unpaid judgments as at that date.”



13 The date upon which the claim has succeeded has reference in this case to the resolution of amounts claimable by the plaintiff on 26 November 1998 and 24 February 2000 respectively and, in the event that further amounts are found to be claimable, to the date of judgment. The Supreme Court Rules prescribed rates are from 1 September 1998 to 29 February 2000: 9.5 percent: and after 29 February 2000: 10 percent.

14    With commendable cooperation the parties through counsel have agreed that I should determine the dispute between them on these items in principle in anticipation that consequential accounting calculations can be made.

15 In the absence of other factors, regulation 21 under the Legal Profession Act prescribes an interest rate of 5 percent. Gabor noted previous resolution to, as a general rule, pay interest at the rate of 8 percent on MacDonald claims relating to his mortgage lending practice and her recommendation to adopt that practice was implemented. It was said that the Society selected that rate as representative of the return that would be expected if money were placed for such investment with a reputable solicitor. It was contended that there was no evidence adduced that rates in excess of that could be obtained, save the representations of the defaulting solicitor which could not provide a sound basis for demonstrating that the Society’s determination was erroneous. It was contended that the evidence did not show that MacDonald was earning the asserted rates of 12 to 14 percent as any payment to the plaintiff at such rates was effectively made by misappropriation of his own funds.

16    However Gabor had reported, without qualification, that the plaintiff received interest of between 12 and 14 percent until 20 August 1996. This is consistent with, by way of example, the letter from MacDonald to the plaintiff of 12 March 1996 reporting that $597,000 funds were held as to $400,00 on ninety days call at 14 percent and $197,000 on thirty days call at 12 percent.

17    There is also evidence by way of an epitome of mortgage in respect of the transaction to Brown (which I identify but need not elaborate) of mortgage investment at 17 percent reducible to 14 percent for due payment. It may be, as counsel for the Society pointed out, that interest payment from Brown did not come in but the existence of the transaction is some evidence of the availability of potential borrowers ready to contract to borrow at the rates represented by MacDonald. The mortgage interest payable by the plaintiff for borrowings from Kirkland was set at 15 percent reducible to 12 percent for due payment.

18    Whilst it is plain that the conduct of MacDonald deprives him of classification as a reputable solicitor, the relevant misconduct was his failure to account and that does not inhibit the conclusion which I reach that the rates contracted for and by his clients reflect a real market. Whether that market was general or whether it was simply a niche market is not germane. Its existence and the participation of the plaintiff’s money in it, is.

19 On the balance of probability, I find that the plaintiff would but for the conduct of MacDonald have received interest at rates of 12 percent and upwards. The indemnity for such pecuniary loss will be “capped” by reference to the rates in Schedule J to the Supreme Court Rules.

20    Items 5 and 6 : Legal Fees
Two amounts are identified in the Calabro report, being $2,803 drawn by MacDonald for costs in connection with the sale of the Erina property and $1,404.50 in connection with a lease. Calabro’s opinion as to the former was that it represented unauthorized withdrawal in the absence of any associated memorandum of fees and as to the second, the plaintiff’s contention was that there should have been funds in the account at the relevant time to meet those fees.


21    The plaintiff further contended that there was no evidence that MacDonald was authorized to draw either amount. The plaintiff acknowledged in cross examination that he appreciated that fees would be incurred in respect of the transactions. No proposition was advanced against the sums representing proper fees for the work involved. The drawings were appropriately recorded in the ledger accounts. I would infer from the evidence that the relationship between the plaintiff and MacDonald implied necessary authority, subject to passing information in due course as to the comings and goings of funds. It is true that there is no evidence of express authority for MacDonald to pay himself the particular fees but I am far from satisfied that to do so was outside of the scope of the arrangements between them. I am unpersuaded that the Society was in error in dealing with the sums as proposed in the Gabor and Sayer reports.

22    Item 7 : Interest Regarding Wenlan Transaction
This matter was resolved in favour of the plaintiff by the resolution of 24 February 2000.

23    Item 8 : Payment to Ferraro in Discharge of Mortgage.
Item 9 : Alleged Duplication of $50,000 Deduction in Sayer Report.
Before turning to Items 8 and 9 in more detail I should express some observations and findings. The determinations of foregoing items did not require reference to the credibility of the plaintiff’s evidence in the proceedings.


24    Calabro testified that he had asked the plaintiff for tax returns and bank statements and was told in respect of both that they were not available. None was produced at the hearing nor was any other document or record of any sort, yet the plaintiff asserted that he had had such records. In his evidence he mentioned he kept a record of his finances with MacDonald and also referred to “internal audit” and “monthly statements”. He said that he did not know where these (assumed to be documents) were now or when they were lost or destroyed but he said that the internal audit was still in existence “inside myself”.

25    I recognize that the plaintiff’s peripatetic lifestyle may not be conducive to maintaining large volumes of records. His son’s home on the coast north of Brisbane is, I gather, a sort of base and address for postal receipt whilst the plaintiff lives in a (mobile) caravan presently parked in Byron Bay but not in any established caravan park. He said that he has “to keep moving in my life in these last years” but I gather that the only imperative has been choice. I record these facts not as a criticism of chosen lifestyle but to indicate that I have not ignored the circumstances when I conclude that the absence of any document whatever or any acceptable explanation for total absence of them provokes a finding that the evidence of the plaintiff is not to be accepted unless corroborated or acknowledged as accurate.

26    I should add reference to an associated matter. In an unresponsive answer to a question about the secretaryship of the corporate plaintiff he mentioned signing blank forms for MacDonald. I took this matter up as I wished to clarify what were the nature of such forms. The plaintiff said that they were blank forms which allowed him to move money from one borrower to another. I do not understand this answer as the solicitor could accept money coming in and, for that matter, could sign a mortgage on behalf of a mortgagee. In recapitulating what I recollected the plaintiff to have said, I assumed that the documents signed in blank had been left with MacDonald whilst the plaintiff proceeded on his travels. The transcript shows that what he said was that blank forms were posted to him which he signed and sent back. He thought he was in Cairns at the time. He was hardly incommunicado and, indeed, he said that he signed documents posted to him in connection with MacDonald’s possession of the common seal of the corporate plaintiff. I am not prepared to conclude that any document relevant to the present issues came into existence after the plaintiff had endorsed his signature upon a blank form. In this regard I make particular reference to the variation of mortgage document increasing the principal sum owed by the plaintiff to Kirkland to $165,000.

27    I turn to Item 8 concerning the mortgage to Ferraro. In paragraph 65 of his affidavit the plaintiff deposed to a conversation with MacDonald said to have taken place in early 1993. Without reciting the entire content, there is unambiguous reference to the plaintiff asserting and MacDonald acknowledging that he is holding $40,000 accrued interest and $60,000 capital from the sale of the Mangrove Mountain property. The plaintiff wanted $60,000 to buy a motor vehicle. MacDonald is reported to have said that the accumulated interest was available but that the capital had been lent. It was suggested that $20,000 be borrowed from another client Ferraro and that any interest payable would be met from the interest earned on the capital which had been loaned.

28    The plaintiff was cross examined about this. Despite the express terms of his affidavit (after agreeing about the $40,000 accrued interest the plaintiff said “You are also holding $60,000 capital” - my emphasis) he claimed that he was not saying that MacDonald was holding $100,000 but only a total of $60,000. MacDonald’s records shows payments of $10,000 and $50,000 to a motor dealer in February and March 1993. There is also an entry of the receipt of $20,000 borrowings from Ferraro.

29    The MacDonald ledgers show $15,000 was paid to Ferraro on 9 May 1994 and $10,000 on 14 March 1996. $5,000 is taken to be representative of interest.

30    It was not suggested that these payments were not made but there was argument as to the approach to tracing the sources from which they were made. The Society contended, in short, that the plaintiff had not proved that MacDonald held other funds in 1994 which should have gone to repay the Ferraro debt. The plaintiff pointed to the conversation with MacDonald when he was seeking funds for the motor vehicle arising out of which the borrowing from Ferraro emerged. I will not repeat the contradiction perceptible between the affidavit and oral evidence. Whilst money was owed to Ferraro, MacDonald acted in other transactions for the plaintiff and I do not need for present purposes to set out the detail of the Jowett, Koutsos and Moylan transactions either as disclosed on the face of the MacDonald records or as analysed by the accountants. The plaintiff contended that, insofar as Ferraro was paid from the proceeds from the Erina sale, there was no authority so to do. I am not persuaded to deal with the matter on that basis. As earlier indicated, I find that the long relationship between the plaintiff and MacDonald came to include implied authorities. The evidence indicates that the plaintiff was content to allow MacDonald to exercise his discretion subject to the plaintiff’s “internal audit” of which lastmentioned no evidence has been produced. Nor, as also earlier mentioned, has there been any production or elaboration of what was conveyed to the plaintiff in what he called the “monthly statements”.

31    I am satisfied that the repayment to Ferraro was a proper disbursement from funds held by MacDonald on behalf of the plaintiff. However, I consider that the payment of the interest component should be treated differently. I accept that part of the plaintiff’s testimony that when MacDonald suggested taking out the loan because the plaintiff’s capital fund had been lent out (irrespective of what the actual capital amount loaned was) he was told that interest earned and interest payable would cancel each other and that nothing would be involved as far as the plaintiff was concerned because the matter would be absorbed in the bookkeeping. This evidence about “contra” of interest had a ring of truth about it and I am conscious that I am treating it as an exception to my stated general approach to the plaintiff’s credibility.

32    The payments to Ferraro having been made in the parcels mentioned, I understand the claim of the plaintiff to have been dealt with accordingly and the argument has therefore been directed to the alleged error by Sayer in deducting $10,000. The $15,000 which specifically included interest was not, in her accounting, deducted. For the reasons outlined, I am of a view that in the overall claim the plaintiff should be entitled to indemnity in respect of the $5,000 interest component.

33    The final item of $50,000 had its origin in a mortgage over a home unit originally owned by the plaintiff and Susan Noble. It was purchased in 1986 and mortgage finance was obtained. At the end of 1987 as part of divorce arrangements, the plaintiff covenanted to transfer that property into the sole ownership of Susan Noble free of mortgage encumbrance. This did not happen. The Gabor report noted the receipt of separate claims by the plaintiff and Susan Noble and recommended disallowance of part of the plaintiff’s claim which was said to have duplicated the claim by Susan Noble. The plaintiff pointed to the submission of his claim in two parts, the abandonment of the second part and argued that therefore there was no duplication.

34    The plaintiff submitted that the cause of the difference could be found in the treatment by Sayer of the Koutsos and Moylan transactions. Sayer had noted that interest received from Koutsos was not reinvested but misappropriated mostly in payments to another, I assume another client of MacDonald. However she added:
“Mr Noble has not made a claim in relation to the interest of $29,333.26 but I am not able to trace the payment to Farlmist or the reinvestment of this sum. I have requested Mr Noble to provide information in relation to the payment of interest on this loan as any such payment would likely affect another claimant.”
35    In respect of Moylan, Sayer reported:
“The sum of $8,400.00 paid to D.M. & E.C. Maes was a misappropriation of the funds of Farlmist as it represented interest due to the company.
As mentioned previously I cannot trace interest paid on the loan by Moylan and paid to Farlmist. The fact that interest due on discharge amounted to $8,400.00 shows that the mortgagor prior to that date had obviously paid interest which does not appear to have been paid to Farlmist although Farlmist has not claimed that interest.
Mr Noble has not included in his claim interest paid on the loan to Koutsos and to Moylan which by the time the loans were repaid would amount to approximately $50,000.00.”

36    I see the essential question as whether I should find differently from the Society’s stance that the plaintiff has not demonstrated that he has not received the sums shown as received by MacDonald but not shown in his books as being paid to the plaintiff. It is the nature of the situation that MacDonald’s books are suspect. Counsel for the Society expressed a suspicion that the plaintiff may have been paid in cash for motives of taxation revenue evasion. I do not make a finding to that effect but I am unpersuaded to act upon the unsupported testimony of the plaintiff particularly as I would expect that records which he has claimed to have had, have neither been produced to the receiver, his own accountant nor to the Court.

37    The evidence does not enable me to conclude what has happened in detail even as a matter of probability and I find that the plaintiff has failed to make out this item of claim.

Summary

38    For ease of reference I schedule my conclusion on the various aspect of claim:

(a) Net proceeds from Erina sale - agreed adjustment of $291.59;
(b) Interest to be calculated in accordance with schedule J to the Supreme Court Rules in lieu of 8 percent;
(c) Claims of unauthorized drawing of legal fees rejected;
(d) Interest on Wenlan transaction - resolved in favour of the plaintiff by resolution of 24 February 2000;
(e) Ferraro payment - adjustment for interest component of $5,000; and
(f) Alleged duplication of $50,000 deduction rejected.


39    I direct the parties to bring in Short Minutes of Orders giving effect to the above findings.

40    The matter will be fixed for a date upon which orders will be made including orders for costs. In default of agreement submissions as to costs can be made on that date.
**********

Last Modified: 09/26/2000