Re Magarey Farlam Lawyers Trust Accounts (No 4)

[2007] SASC 344

SUPREME COURT OF SOUTH AUSTRALIA

(Civil: Application)

RE MAGAREY FARLAM LAWYERS TRUST ACCOUNTS (No 4)

[2007] SASC 344

Judgment of The Honourable Justice Debelle

25 September 2007

PROFESSIONS AND TRADES - LAWYERS - ACCOUNTS AND TRUST MONEY - STATUTORY PROVISIONS - TRUST ACCOUNTS

Misappropriation of trust moneys - application pursuant to Legal Practitioners Act 1981 seeking directions as to disbursements of moneys remaining in trust accounts - trust account ledgers manipulated to conceal misappropriation - transfer of moneys from one trust ledger to ledger of another - supervisor directed to make payment of moneys - direction does not affect rights of client to recover from another client any amount claimed to be consequence of misappropriation.

Legal Practitioners Act 1981 s 44, s 45, referred to.

RE MAGAREY FARLAM LAWYERS TRUST ACCOUNTS (No 4)
[2007] SASC 344

Civil

1. DEBELLE J.        On 4 September 2007 I gave directions to the supervisor of the former practice of Magarey Farlam Lawyers to distribute monies remaining in the trust account of the firm.  I said that I would publish reasons for those directions.  These are the reasons.  

2. Magarey Farlam Lawyers (“Magarey Farlam”) was a firm of solicitors practising in Adelaide. It had commenced business on 1 July 2001. It was a successor to the firm of Magarey and Magarey. On 1 August 2005, the Council of the Law Society of South Australia, acting pursuant to s 44 of the Legal Practitioners Act 1981, resolved to appoint a supervisor of the trust accounts of Magarey Farlam. The partners of Magarey Farlam continued to practise after the appointment of the supervisor. On 1 February 2006, the Council of the Law Society acting pursuant to s 45 of the Legal Practitioners Act resolved to appoint a manager of the practice of Magarey Farlam.  The firm thereafter ceased to practise.  The partnership has dissolved.

3. Both the appointment of the supervisor and of the manager were occasioned by the fact that an employee of Magarey Farlam, Mr W B Willoughby, had made misappropriations from the trust accounts of the firm.  It is common ground that the partners of the firm were not knowingly implicated in the wrongdoing.  They were unwitting instruments in Mr Willoughby’s fraudulent dealings. 

4. The fraudulent dealings in the trust accounts led to questions as to where the loss occasioned by the misappropriations should fall.  On 18 January 2007, I published reasons for deciding, among other things, that, with the exception of certain specified clients, the monies in the trust accounts of Magarey Farlam should be distributed according to the balances shown in the trust account ledgers as at 1 August 2005.  On 2 February 2007, orders were made giving effect to those reasons and the monies held on trust had been distributed to the clients with the exception of the specified clients.  The specified clients were identified in Schedule A to the orders made on 2 February 2007.  They are called “the Schedule A clients”. 

5. The reasons for judgment published on 18 January 2007 contain an account of the misappropriations and the means by which they were effected.  I refer to those reasons and to the extent necessary incorporate them in these remarks.  For present purposes, it is sufficient to note the following facts.

   1The total amount misappropriated was approximately $4.5 million.

   2The misappropriations were confined to the trust accounts of 42 separate clients which include the Schedule of Clients.

   3In the case of some misappropriations, part of the dealings by which the misappropriation was affected involved the transfer of money by journal entry from the trust account ledger of one client to the trust account ledger of another.

   4There were nine clients who were adversely affected by a transfer of monies out of their trust ledger to the trust ledger of another.  Those clients were exempted from the orders made on 2 February 2007.  They are the Schedule A clients.  They were excluded from the order in case there were claims by or against those clients in relation to the monies transferred out of the trust account ledger for each.  No claims have been made by or against any of the Schedule A clients.

   5The money held in the trust ledger accounts of each of the Schedule A clients in either a trust account or a Gimalo account is as follows:

Client	T1, T2 or T3	Gimalo (Bank A/c)	Amount
The G Wilson Family Trust	T1	C/W Bank	1,201.10 552.16
GW & GG Wilson Pty Ltd	T1	74.91
The Wilson Provident Fund	T1	482.28
Moonaree Pastoral Co	T1	Bank SA	2,059.08 500.73
The Lilltodd Trust	T1	14.83
The Estate of J Brook	T1	379.87
The Estate of Lillian Todd	T1	1,326.21
Wartaka Pastoral Co Pty Ltd	T1	Bank SA	5,147.73
The Estate of DB Pettitt	T1 T3	Bank SA	1,583.62 18,385.16 11,415.42

6On 4 May 2007, Mr J Clarke the solicitor for the supervisor, wrote to the 42 clients whose money had been misappropriated or to the legal representative of each stating that the supervisor had not received any claim by or against any Schedule A client.  In that letter, Mr Clarke gave notice that should the supervisor not receive within 28 days notice of any claim to the money in the trust account of each of the Schedule A clients, the supervisor would apply for directions that the money held in trust together with all accruals thereon be paid to each of the Schedule A clients in accordance with the table in paragraph 5 above.  The letter stated that the effect of such directions would be to treat the Schedule A clients in the same way as all other clients of Magarey Farlam, namely, that they be paid in accordance with the amount shown as due to each in the trust account ledgers or in the accounts of Gimalo together with any accruals. 

7None of those 42 clients have given notice of a claim.

The affidavit evidence in the proceedings determined on 18 January 2007 suggested that there might be claims between the Schedule A clients for the recovery of money wrongfully transferred from one trust account ledger to another.  However, the fact that none of the Schedule A clients has given notice to the supervisor of an intention to bring that claim suggests that none intend to make such a claim.  The only persons who would make a claim against a Schedule A client is another Schedule A client. 

1. It is against that background that the supervisor applied by notice for specific directions dated 24 August 2007 for declarations that the money standing to the credit in the trust ledgers of the Schedule A clients is held on behalf of those clients and for directions as to the payment of that money to the Schedule A clients.  The notice for specific directions, the affidavit in support, and the proposed minutes of order have been served on each of the 42 clients.  The manager of Magarey Farlam consents to this course.

2. The amounts held on trust for all of the clients except the estate of DB Pettitt is very small.  Whatever doubts might exist as to who is truly the beneficial owner of those amounts, the cost of determining that issue would clearly be considerably greater than the amount at stake.  There are, in short, sound commercial reasons for directing that the small balance in the trust ledger of each client sound be paid to that client.  As no claim has been made against the estate of DB Pettitt, there is no reason why a direction should not be made that that amount be paid to it. 

3. It is relevant to note also that some of the 42 clients of Magarey Farlam who lost money in consequence of the misappropriations have instituted proceedings against Magarey Farlam to recover the individual losses.  Those clients include Schedule A clients who suffered loss because of the fraudulent transfer from the trust account ledger of one client to the trust account ledger of another.

4. I do not think it is appropriate to make the declarations which the supervisor seeks.  Instead, it is sufficient if I give directions to the trustee authorising her to pay the amount shown in the trust account ledger of each client to the respective client at the same time preserving the entitlement of each of the Schedule A clients to recover from another. 

5. I am very conscious that this might be a somewhat irregular course.  At the same time, it is necessary to adopt a practical common sense approach to what is otherwise an intractable problem.  The commercial realities dictate that directions should be made.  It brings finality to the matter.  I am encouraged to take this course because, while I direct the supervisor to act in this way, it does not preclude any subsequent claim by any of the Schedule A clients against another. 

6. For these reasons I made the following orders on 4 September 2007:

   1That within 21 days of this order the Supervisor write to the clients listed in Schedule A of this order (“the Schedule A clients”) or to their legal representatives informing them of this order and requesting their written direction for the payment of the moneys held on behalf of each client in a trust account or held in a Gimalo account.

   2That within 65 days of this order or within 21 days of receiving a client’s written direction, whichever is the later, the Supervisor pay in accordance with the said written direction the moneys due to each client out of a trust account or a Gimalo account.

   3If the Supervisor does not receive any written direction from a client or that client’s legal representative within 90 days of this order, the Supervisor shall be at liberty to pay to that client the moneys due out of a trust account or a Gimalo account.

   4This direction does not affect in any manner whatsoever the respective rights of any client of either Magarey & Magarey or Magarey Farlam Lawyers to recover from a Schedule A client any amount claimed to be due in consequence of any improper dealing with the money of each such client in a trust account or in a Gimalo account by William Brenton Willoughby or by any person at his request or direction.

   5Liberty to apply.