New Zealand Law Society - Lawyers Complaints Service: Fined for nominee company rule breaches

Lawyers Complaints Service: Fined for nominee company rule breaches

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A lawyer, D, has been censured and fined for breaches of both the Solicitors Nominee Company Rules 1996 and the Rules of Professional Conduct for Barristers and Solicitors in force before the implementation of the Lawyers and Conveyancers Act 2006.

In [2014] NZLCDT 70, D admitted two charges of negligence in their professional capacity of such a degree as to tend to bring the profession into disrepute.

In 2005 and 2006, D acted for a client who was interested in investing in second mortgages in order to obtain higher interest rates. The client made three investments through D’s nominee company and these were repaid. In a fourth investment, the client advanced $190,000 as a second mortgage for six months, with a priority sum of $273,000.

In April 2007, the mortgagor defaulted in payment under the first mortgage, which constituted a default under the second mortgage. The first mortgagee exercised its power of sale, and recovered its mortgage and fees associated with the sale. The second mortgagee received only $1,004.46, which was the balance remaining from the sale proceeds. The resulting loss to the second mortgagee was substantial.

D admitted failing to obtain new valuations before the fourth and final loan was made. Valuations dated 23 October 2006, over a year before the date of the investment, were used.

D adjusted the valuations downwards to take into account the decline in the property market. “That was not permissible because the rules do not permit a discretion to obtain an updated valuation of a valuation that is over a year old at the time of the investment,” the Tribunal said.

D’s admitted negligence in relation to breaches of the Solicitors Nominee Company Rules included:

  • deficiencies in the specific authority documents signed on behalf of the investor/client;
  • deficiencies in the valuations required to be provided to the client; and
  • failure to provide prompt written notice of default to the client.
  • D admitted breaches to the Rules of Professional Conduct by:
  • continuing to act for more than one party in the same matter without the prior informed consent of the investor/client;
  • failing to advise the client of a conflict or likely conflict between the interests of the lender and the borrower;
  • failing to advise the client that it should take independent advice (and arranging that advice if required); and
  • failing to decline to act further for a party where to act further would, or be likely to, disadvantage the clients involved.

The Tribunal made no orders for compensation, accepting D’s arguments about a lack of causal link between the client’s losses and D’s actions. It noted that D had undertaken to pay the client $2,500 by way of reparation. Permanent non-publication of D’s name and identifying particulars was granted.

D’s application for non-publication was based solely on the interests of the beneficiaries of a particular charitable trust with which D has a close association and is its primary fundraiser, the Tribunal noted. “All funds raised are applied without deduction for its ongoing projects for education, sponsorship and support of impoverished and disadvantaged children in an overseas country.”

The Tribunal also said it took into account D’s hitherto unblemished record, which has extended over more than two decades. D was censured, fined $3,000 on each of the two charges and ordered to pay $27,000, being 75% of the standards committee costs. D undertook not to be involved in the management or operation of any nominee company for a period of five years.

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