Tendency evidence in solicitor’s negligence case

Vaccaro v Flammia [2008] NSWSC 1322 is a tantalizing case about the admissibility of tendency evidence of dishonesty against a solicitor and about issue estoppel arising from earlier cases brought by others against the same solicitor.  It was decided against the uniform evidence legislation which has been introduced into Victoria by the Evidence Act, 2008 (Vic.), yet to commence.  The tantalization which is an incident of this being only an interlocutory decision will be consummated if the matter goes to trial.

The solicitor’s clients left a certificate of title with him for safekeeping.  He kept it in ‘a tin’ in the back room of his practice.  Someone took it without the clients’ authorization and raised $400,000 by forging their signatures on a mortgage.  The clients did not receive any of the money.  The witness which the mortgage instrument suggested had witnessed it did not exist.

The first the clients knew of the mortgage was when they received a writ seeking possession of their property from the mortgagee.  They sued the solicitor, alleging a negligent failure to keep their deed secure.  But by then he had gone bankrupt and his practising certificate had been suspended.  The clients sought to join his professional indemnity insurer, LawCover, to their professional negligence action, pursuant to a provision peculiar to NSW which allowed them to do so.  The issue for determination on that application was whether an arguable case that the solicitor was liable and that LawCover was liable to indemnify him could be established.

LawCover resisted the application on the basis that the circumstantial evidence of dishonesty by the solicitor was so overwhelming that it was unarguable that the dishonesty exclusion in the policy would be available to LawCover to deny indemnity under the policy, rendering their addition futile.  Because the dishonesty exclusion was very widely drawn, so that it applied even if dishonesty by the solicitor was an indirect cause of the loss, the issue boiled down to whether it was arguable that the solicitor had been merely negligent in failing to prevent the unauthorized taking of the certificate of title, as opposed to being dishonest.
Another client of the solicitor was a convicted fraudster, and the solicitor’s cousin.  It was clear that the fraudster had in Vaccaro v Flammia been involved in procuring the $400,000 on the security of the forged mortgage, purporting to deal with the lender on behalf of the clients.  It was also clear that before that occurred, the solicitor had in fact run the fraudster’s finance business for him while he was in jail for forging group certificates and that their out of hours mobile phone conversations were frequent.  The fraudster was regularly in the solicitor’s office, and had access to the non-client areas, where the deeds were kept in ‘a tin’.

Before LawCover opposed this application for its joinder, it had already won round one with the solicitor in another case.  Another judge had there made findings that the solicitor and the fraudster were in cahoots in relation to another transaction such that LawCover was entitled to deny indemnity.  That transaction preceded the removal of the certificate of title in this case.  In round one, the solicitor did not give evidence.  Instead, he put himself into bankruptcy.  Furthermore, before the application in Vaccaro v Flammia was heard, a second judge had made findings about the solicitor in a third case.  The conduct in that case came after the removal of the title.  There, the solicitor had attested to having witnessed forged signatures in another transaction in which his cousin was the mastermind fraudster.

So LawCover relied on tendency evidence which it said showed ‘a pattern of dishonest and fraudulent conduct between [the solicitor] and [the fraudster], before and after the [controversial] mortgage’.  It said that the fact that the solicitor had been in cahoots with a fraudster in transactions both before and after the controversial transaction in Vaccaro v Flammia was retrospectant and prospectant circumstantial evidence that the solicitor was involved in the fraud perpetrated by the cousin in the controversial transaction.  The question of admissibility was deferred to the trial judge.  Chief Justice Young merely noted that even assuming the evidence was admissible, it left arguable the proposition that this particular fraud did not involve the solicitor, in the context of no other evidence implicating the solicitor in the transaction.

LawCover also argued that the clients were bound by the findings of one of the other cases to which the solicitor and LawCover had both been parties.  The argument went that the clients’ rights against LawCover were no better than the solicitor’s rights against it.  So the clients were in a sense claiming on LawCover derivatively through the solicitor.  That made them the solicitor’s privy for the purposes of issue estoppel.  Chief Justice Young accepted that proposition, and accepted that the clients were estopped from denying that prior to the controversial mortgage, the solicitor knew his cousin had been jailed for forgery and that knowing that, the solicitor had in fact engaged with his cousin in separate fraud.  But that was just one bit of circumstantial evidence, the admissibility of which fell to be determined by the trial judge.

All in all, the judge said, even if LawCover’s arguments were accepted, the picture of the solicitor’s dishonest involvement in the transaction with which Vaccaro v Flammia was concerned fell short of making unarguable the proposition that the solicitor, along with his clients, was the victim of the fraudster on this occasion.  That is of course a very different finding from the one which will be required on the Briginshaw version of the balance of probabilities at trial.

LawCover asserted unspecified dishonesty, relying on assertions of dishonest conspiracy between the solicitor and his cousin made by the clients themselves in correspondence to the Fidelity Fund and the police.  They were said to be admissions by the clients.  But it did descend into particularity for one allegation of dishonesty.  It said that the solicitor must have dishonestly failed to fulfil his fiduciary obligation to disclose to the clients, in the context of them entrusting him to keep their deed safe that ‘far from being a place of safe keeping, [his] office was in fact an office operated by a fraudulent solicitor, and a venue at which overt acts in relation to frauds had previously been committed by [him] acting with [the fraudster].’  A bit of a stretch, that one, and the judge rejected it.

LawCover also argued that the application to add it as a defendant was an abuse of process.  It said it was against public policy for the clients to say to the Fidelity Fund (on which they had made a claim) that their loss was occasioned by the solicitor’s fraud (a sine qua non of a claim on the Fund) whilst contending against LawCover that the taking of the certificate of title resulted from the solicitor’s negligence rather than with any dishonest involvement by him.  The insurer failed on this argument.  Chief Justice Young said:

‘the evidence rises no higher than the [clients] (who do not have direct knowledge of the true facts) bringing proceedings in negligence against [the solicitor] and LawCover based upon the professional indemnity policy, whilst there remains on foot a claim on the Fidelity Fund.  The [clients] wish to pursue a claim in negligence against [the solicitor].  Because of evidence concerning [the solicitor’s] dishonest conduct on other occasions, there is suspicion concerning the nature of his involvement in events affecting the [clients’ certificate of title].  However, there is not, at this time, any clear and unequivocal evidence that [the solicitor] acted dishonestly or fraudulently in that respect.  It does not seem to me that the conduct of the [clients] constitutes an abuse of process.  To have alternative claims on foot (when the true facts are not known) does not, in my view, constitute a case of approbating and reprobating.’

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