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Applying funds held in trust should follow instructions given

A lawyers standards committee has found that the conduct of a lawyer, B, was unsatisfactory, when his firm took funds held on trust for two entities to pay outstanding invoices in the name of a separate but related client.

B’s firm had acted for Mr C in various of his capacities (personal, as company director, and as trustee) over a period of time. The firm was owed fees invoiced to Mr C personally. They were for work undertaken for Mr C personally and for companies and trusts where Mr C was a director or trustee.

In late 2012, Mr C instructed B to act on the sale of a property jointly owned by one of the companies and one of the trusts. B’s firm sent a letter of engagement to Mr C, referring to the two entities but addressed only to Mr C.

During discussion about the costs of the transaction, B’s firm sought approval to apply part of the proceeds of sale towards the payment of some of the outstanding fees. Mr C indicated he needed time to consider this.

Before completion of the sale of the property, Mr C advised B that he did not approve payment of the invoices from the proceeds of sale. Mr C said that the proceeds of the sale would not be his personal money, and so he could not authorise the payment.

B then wrote back to Mr C that day, advising that the firm would apply the entire proceeds of sale to the sums outstanding to the firm owed by Mr C.

The letter confirmed the firm’s view that it had a longstanding, but unwritten, arrangement with Mr C that permitted this type of deduction and that agreement was irrevocable. It also said that the letter of engagement permitted the deduction. The firm said it regarded Mr C as bound by the letter of engagement in his personal capacity, and also in his capacities as director and trustee of the two entities that owned the sale property.

After settlement, B advised Mr C that the entire proceeds of sale had been applied to outstanding invoices. Mr C complained about this action.

After looking at all the circumstances, the committee did not accept that the terms of the letter of engagement permitted the deduction that the firm made. The specific clause was expressed in general terms, and the committee said this would not have overridden the specific instructions Mr C gave, therefore the deductions were not authorised.

The committee said it was not satisfied that the standing unwritten agreement provided sufficient clarity or authority for B’s firm to deduct fees Mr C owed from the funds the firm held on behalf of the company and the trust.

Furthermore, it did not consider that B had provided sufficient evidence to show that the agreement was intended to authorise B’s firm to deduct fees in such broad circumstances, or that in doing so, Mr C had bound both the company and the trust to the terms of any such agreement.

Even if the committee was wrong about that, it was satisfied that the subsequent and clear instructions Mr C provided were sufficient to prevent the deduction of the funds that took place.

The committee also noted that the firm had been placed on notice that the beneficiaries of the trust were actually opposed to the deduction to pay the personal obligations of Mr C.

The committee was not satisfied that either the “longstanding agreement” or the letter of engagement addressed to Mr C were sufficient to override the other beneficiaries’ rights and obligations.

The committee specifically noted the firm’s correspondence prior to settlement with a bank which was owed money by Mr C in his personal capacity. The bank had asked B’s firm whether the proceeds of sale could be applied to the sums owed to it. B’s firm wrote to the bank on behalf of Mr S, advising it would be “poor practice” to complete a distribution from the trust’s funds by Mr S for his own benefit, which could be challenged by one or more of the trust’s other beneficiaries. The committee said that the point the law firm had made to the bank applied equally to the firm’s later claim for payment of the sums owed to it. As a result, the committee said, B’s conduct was unsatisfactory.

The standards committee said that the firm had taken legal advice before acting as it had. It was not a deliberate flouting of the rules as the matter related to interpretation of those rules. B was not censured but was ordered to pay $500 costs to the Law Society.

Last updated on the 3rd June 2015