New Zealand Law Society - Lawyers Complaints Service: Censured for breaching nominee company rules

Lawyers Complaints Service: Censured for breaching nominee company rules

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A lawyer, A, who was “responsible lawyer” for a lawyers nominee company has been censured and fined $5,000 for failing to adhere to the rules applying to nominee companies.

The lawyers standards committee found that A had been guilty of misconduct under the Law Practitioners Act 1982 for conduct before 1 August 2008 and guilty of unsatisfactory conduct under the Lawyers and Conveyancers Act 2006 for conduct after 1 August 2008.

In January 2009, the mortgagor of a nominee mortgage in which the complainant, Ms B, had funds invested failed to make payment of an interest instalment. The mortgagor had previously sought an extension of the date for repayment, due in October the previous year. The defaults continued and ultimately the nominee company sold the property for less than the amount the nominee company had advanced. Consequently, all investors in the mortgage suffered a loss of principal.

Ms B, who had invested $48,000 as part of a total loan of $475,000, lost $10,012.80 of her principal.

A’s failings spanned a number of years and included:

  • failing to provide adequate advice and information in relation to the investment, particularly in relation to some risks known to A;
  • completing lending before the required authorities had become available;
  • not disclosing that the house on the property straddled a neighbouring property (it being unlikely A was not aware of this);
  • writing to Ms B recommending she make a further investment of $28,000 (increasing her original investment of $20,000) without advising Ms B that the mortgage was already in default;
  • failing to advise contributors that the lender was technically in default and instead advising that the borrower had requested an extension;
  • discharging the nominee company mortgage and allowing it to be replaced with a mortgage to a mortgage management company without informing the investors in the nominee company loan of $88,000, which became an unsecured loan;
  • not gaining the prior consent of investors in the nominee company loan before the discharge and its subsequent replacement as a second mortgage;
  • providing investors a valuation that did not comply with the nominee company rules;
  • sending Ms B a number of letters that assured her that her investments were safe, but the letters did not comply with the nominee company rules; and
  • failing to obtain the authority of investors to entering a settlement with the estate of the mortgagor’s widow.

As well as the censure and fine, the standards committee ordered A to pay Ms B $10,012.80 in compensation for her loss of principal and pay the Law Society $2,500 costs.

The committee also ordered publication of A’s name. However, the Legal Complaints Review Officer (LCRO) reversed this decision.

The LCRO noted a lack of written reasons by the standards committee for its name publication decision. Having considered all the factors, the LCRO said that the impact on the persons identified would be “far greater than the requirement to publish [A’s] name for the protection of the public”.

Both A and his firm said that they had decided not to continue with contributory lending. The LCRO made an order publishing A’s name to the Law Society Inspectorate, so that it could provide an independent check that A’s assurances were adhered to.

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