The fidelity fund

Update, 26 August 2009: Justices of Appeal Buchanan and Neave agreed with Acting Justice of Appeal Kyrou in dismissing the punters’ appeal from Justice Pagone’s decision. See Vaughan v Legal Services Board [2009] VSCA 187.

Original post: The fidelity fund is one of the areas of the legislation about lawyers I have never had much to do with. The basic principle is that when lawyers steal clients’ money, or deal with it in breach of trust, a fund contributed to by all the lawyers in the state pays out the victims. We have professional indemnity insurance for negligence and other forms of civil liability, but it is not available where there is a ‘defalcation or default as defined by’ the Legal Profession Act, 2004 (or, before that, the Legal Practice Act, 1996), regardless of whether there is a claim on the Fidelity Fund (cl. 20.6(b) of the 2008/2009 policy). And we have the fund for fraud by solicitors involving trust money.

Justice Pagone’s latest decision in Vaughan v Legal Services Board [2008] VSC 200, is a case about the washup of the crimes of former Kew solicitor Julie-Ann Laird who stole millions from her clients, telling them that everything she did was protected by the fidelity fund (a detail she denied in her police interview). It is a nice, spare, judgment. She lost her practising certificate for 20 years in the Legal Profession Tribunal, and subsequently, on 1 June 2005, Justice Kellam jailed her for 7 years with a minimum of 3 and a bit (see R v Laird [2005] VSC 185). This particular case, under the Legal Practice Act, 1996, turned on whether the monies received by Ms Laird were received by her in the course of legal practice. Justice Pagone was obviously comfortably satisfied that the wrongdoing did occur in the course of or in connection with legal practice, but held against the plaintiff claimants on the fund on the basis that an exception to the availability of the fund applied. The exception was s. 208(3)(b) and excluded claims in respect of defalcations arising out of the investment of money by a solicitor that is not merely incidental to the legal practice engaged. The whole of his Honour’s analysis of whether what Ms Laird did was in the course of, or in connection with, legal practice is as follows:

‘3 The Act does not provide a definition of “legal practice”. Counsel for the Board point to the difference in language between the Act and its predecessor which has been considered in earlier cases. Section 64 of the Legal Profession Practice Act 1958, for example, provided for payment from a similar fund (the Solicitors’ Guarantee Fund) by way of compensation to persons who had suffered pecuniary loss from a defalcation committed by a solicitor in the course of or in connection with “the solicitor’s practice”. Thus, counsel for the Board contended that the difference in description of the professional activity in respect of which the respective fidelity funds were applied, indicated that the scope and meaning of “legal practice” under the Act was intended to be different from, and indeed narrower, than had been encompassed by the words “solicitor’s practice”. The Board’s submission went on to contend that the cases dealing with the meaning of “solicitor’s practice” were of no assistance in informing the meaning of the words “legal practice” in s 208(2) of the Act. I do not agree with either submission.

4 The Act requires that trust money, which may be the subject of a claim against the fidelity fund, has a sufficient connection with a “legal practice”. The meaning to be given to those words is not defined by the Act and should be given their natural meaning consistent with the way in which those words are used throughout the Act. The Act does not only provide for the payment of money from a fidelity fund but, more broadly, for the regulation of the legal profession throughout the State of Victoria. The words “legal practice” appear throughout the Act in many different contexts and should not be understood or given a narrow meaning. In Solicitors’ Liability Committee v Gray[1] Lockhart J said about the scope of the practice of a solicitor:

There are many decided cases on the question of what constitutes the practice of a solicitor. We were referred to a large number of them in the course of argument and in the written submissions of counsel for both parties. What is important, however, is to remember that we are considering the scope of the practice of a solicitor in the 1990s, in particular in Australia. The scope of a solicitor’s practice has widened considerably in recent time, reflecting the increasing involvement of the Commonwealth Parliament, the Parliaments of the States and Territories and their respective executive governments in human affairs. Virtually nothing today is free from the influence of legislation or decisions of the executive governments and administration. Necessarily, therefore, solicitors are involved in advising their clients in these burgeoning areas of government activity, appearing for them in court cases and instructing counsel.

It is well known and has been so for many years that some solicitors accept appointments to the boards of companies including blue chip public companies. Indeed, this is expressly recognised by the insurance policy in this case in para (h) of the definition of ‘practice’ mentioned earlier. Work of solicitors in advisory matters ranges from advice in relation to complex international financial transactions to the country solicitor who advises his or her client on matters that are perhaps not strictly within the scope of the solicitor in the usual sense but include, for example, certain advice with respect to investments. The country solicitor is usually a respected figure whose advice is valued by his clients and whose wisdom is respected.

I say all this because it is important not to take a narrow view of the role of a solicitor in modern times or the scope of a solicitor’s practice. This role of a solicitor must also be reflected in the interpretation of insurance policies between the solicitor and the insurer.

There must, however, be some point reached where the solicitor ceases to engage in his practice as a solicitor and enter other areas of activity, particularly business activity. This case is an excellent example of the grey dividing line between the two.[2]

This reasoning applies with equal force to the scope of a practitioner’s or firm’s “legal practice”. I specifically reject the submissions initially put to me on behalf of the Board that the scope of legal practice was to be determined by reference to the content of a university law course entitling a person to obtain a law degree or, alternatively, by reference to the more narrow list of core subjects required as a minimum for admission to practice.

5 The scope and content of “legal practice” is a mixed question of fact and law that is not to be construed or constrained by a priori reasoning or artificial constructions. Its scope may helpfully be informed by the many decided cases about the conduct of a solicitor’s practice and, where appropriate, perhaps by expert evidence.[3] Its scope and content may alter over time as legal practices evolve and change. In this case it was contended for the Board that the trust money was not given or paid to, or received by, Mrs Laird in the course of or in connection with her legal practice but, rather, in connection with some other activity described generally as her “investment scheme”. I do not agree.

6 A difficulty in determining whether the trust moneys were given, paid or received “in the course of or in connection with” Mrs Laird’s legal practice arises from the circumstance that Mrs Laird’s investment scheme was wholly fictitious. She did receive money from Gerald Vaughan and Patricia Ralph but did so pursuant to a fictitious arrangement. Thus, for example, Mrs Laird wrote to Gerald Vaughan, who also acted on behalf of his mother under a power of attorney, saying that she had a borrower seeking funds on first mortgage security when in fact there was no-one. The plaintiffs were led to believe, and believed, that moneys they had given to Mrs Laird were then lent on their behalf as mortgagees to a borrower on the security of real estate. In fact none of that was true and the money was simply kept by Mrs Laird.

7 It is, however, common ground that I should disregard the fact that Mrs Laird’s investment scheme was fictitious and, that for the purposes of this claim, I should treat the fiction as fact. The Board did not contend that Mrs Laird’s fraud necessarily defeated the plaintiffs’ claim (that is, it did not contend that money received under a fraud could not have been given, paid or received “in the course of or in connection with” her legal practice) because, as was correctly observed on behalf of the Board, “in every defalcation it would be said that the fraudulent acts were not ‘in the course of or in connection with the legal practice’”.

8 The parties also agreed, in my view correctly, that the burden fell upon the plaintiffs to prove that the trust money had been given or paid to, or was received by, Mrs Laird in the course of or in connection with her legal practice. For the Board it was submitted that Mrs Laird’s activities in attracting funds were separate from her legal practice and therefore did not fall within s 208(2). I do not think the facts in this case support that contention sufficiently to be upheld. Mrs Laird was a solicitor and was introduced to the plaintiffs as a solicitor by their accountant who had premises nearby. Correspondence to the plaintiffs from her at all times purported to be in her capacity as a lawyer and she purported to undertake various steps for the plaintiffs as lender of a kind ordinarily undertaken by lawyers acting as solicitors for a lender. She described the responsibility of her “firm” to carry out all necessary searches and enquiries on behalf of the lender, to prepare the mortgage and all other necessary documents on behalf of the lender, to ensure that the lender obtained proper and enforceable security, and to arrange the draw down of the loan when the security had been given and that all documents were in order to give the lender proper security. She specifically said that the mortgage transaction would be carried out by her “in my business as a solicitor” and that all funds were to be negotiated through her trust account. In that context she represented that her work as a solicitor was covered by her professional and fidelity insurance. She also said that she would provide a “solicitor’s certificate” to the lender confirming that the security was binding and enforceable.

9 Most, if not all, of what Mrs Laird promised to do was, of course, fictitious and did not occur. However, upon the hypothesis that Mrs Laird was acting as she said, what was offered to the plaintiffs was relevantly in the course of, or at least, in connection with her legal practice. The words “in connection with” in the section are in addition to the words “in the course of” and extend the operation of the section. The Board sought to rely upon material the plaintiffs had not seen, which the Board maintained showed that the opportunity offered to the plaintiffs was part of a wider entrepreneurial activity undertaken by Mrs Laird that could not be regarded as being in the course of her legal practice. That material included a print-out of a Powerpoint presentation entitled “Mortgage Backed Investments” which suggests a business activity by her of a kind that, as a separate activity, might not readily be regarded as within a solicitor’s ordinary legal practice. However, it is unsafe to draw inferences from this material without evidence about the context or circumstances in which it was used. Others, who might have been aware of it, may conceivably have dealt with her in a capacity that was affected by that particular knowledge. However, the representations to the plaintiffs were that she had available opportunities arising from the legal practice, and that the transactions were at least connected with her legal practice if not in the course of it. Mrs Laird represented (even in the context of the Powerpoint presentation) that she had investment opportunities in the course of her legal practice which she offered to investors and for whom she would undertake the necessary legal work. The evidence in this case was that the plaintiffs’ payment of their money to Mrs Laird was in the course of her legal practice or, at very least, connected with her legal practice.

10 The parties did not seek to lead any expert evidence of the scope of a legal practice, but it has long been known that solicitors have access to money for investment and that some are commonly approached as a source to borrow funds. As long ago as 1888 in Dooby v Watson [4] Kekewich J said:

… I put aside those cases, which apparently are not common now, if ever they were, where the solicitor is intending to make a profit if he can, and in fact acts thoroughly as a money scrivener–where he insures the money of his clients, and so long as he fulfils that insurance, and pays the specified interest, is entitled to do the best he can for himself. A solicitor cannot under any circumstances quâ; solicitor make a bargain of that kind with his client or act in that way. I apprehend, then, that the cases in which a solicitor acts in his proper character may be divided into three classes, all of common occurrence. In the first case a solicitor receives a certain sum of money in order to invest it in a particular mortgage. His client, either on his own selection, or on the advice of the solicitor, has determined to invest a particular sum on a particular mortgage, and all the solicitor does is the legal business, receiving the money and seeing, when the proper time arrives, that the deeds are executed and the money handed over to the mortgagor. His duty in that case is simple but important, and large sums very often pass in that way. In the second case the solicitor receives money in order that he may himself find mortgages to be approved by the client. He retains the money in the meantime. He from time to time reports to his client what mortgages he has found. I use the word “mortgages” only, but of course it is applicable to other investments. He does whatever business is necessary– advises his client as to the precautions to be taken, and ultimately sees the money handed over either as a whole or in parts to the mortgagee or mortgagees. Beyond that there is a third case, equally common but distinct from the others, where the solicitor does far more than he does even in the second class–that is to say where the client, for some reason, takes little part, perhaps no part at all, in the investment. He may be abroad, as one of the cases cited here shews, the solicitor acting under a power of attorney. All the client then requires is to know that the money has been invested, and that the interest will be payable and be paid. In that case the solicitor has an onerous duty to perform, because, beyond providing the mortgages, beyond doing the mere legal business, he really undertakes the responsibility to his client of seeing that they are good mortgages, on which the money may be safely invested. That is within the ordinary duty of solicitors according to the practice of the profession, and is a more onerous duty, and one which some solicitors, I believe, decline to take.[5]

It may be, as counsel for the Board contended, that the facts in this case look more like Mrs Laird acting as a scrivener[6]; namely, a person to whom money or other property is entrusted for the purpose of lending it out to others at a profit payable to the principal but also at a commission or bonus for the solicitor. It may also be the case that the business of a scrivener is not within “the ordinary scope of the business of a solicitor”[7], but the placement of these moneys was at very least connected with Mrs Laird’s legal practice as a solicitor. It was, in my view, also in the course of her legal practice whether or not it might have been in the ordinary scope of a legal practice.

[1] (1997) 147 ALR 154.

[2] Ibid, 164-5.

[3] See Solicitors’ Liability Committee v Gray (1997) 147 ALR 154.

[4] (1888) 31 Ch D 178.

[5] Ibid, 182-3.

[6] John James, Stroud’s Judicial Dictionary of Words and Phrases (4th ed, 1974) vol 5, 2453.

[7] Ibid; Harman v Johnson (1853) 2 El & Bl 61; 118 E.R. 691.’

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