Civil and Administrative Tribunal New South Wales Medium Neutral Citation: Law Society of NSW v Shehadie [2016] NSWCATOD 46 Hearing dates: 25 February 2016 Date of orders: 20 April 2016 Decision date: 20 April 2016 Jurisdiction: Occupational Division Before: K P O'Connor, AM, ADCJ, Deputy President R Dawson, Senior Member J Schwager, General Member Decision: 1. The Tribunal finds the respondent guilty of professional misconduct. 2. The matter is to be listed before the presiding member for the making of directions for the further hearing in relation to the appropriate disciplinary order. Catchwords: PROFESSIONAL DISCIPLINE – Legal Profession –regulated mortgage – run out mortgage - breaches admitted – solicitor for vendor – diversion of purchaser's deposit to an office account pending settlement – whether misappropriation in the circumstances – held misappropriation – characterisation of misconduct – held professional misconduct. Legal Profession Act 2004, s 255, s 479(1), Sch 8, cl 6(3), s 497. Legislation Cited: Legal Profession Act 2004 Cases Cited: Allinson v General Council of Medical Education and Registration [1894] 1 QB 750 Brereton v Legal Services Commissioner [2010] VSC 378 Briginshaw v Briginshaw [1938] HCA 34; (1938) 60 CLR 336 Council of the Law Society of NSW v Coombes [2015] NSWCATOD 108 Peters v R [1998] HCA 7; (1998) 192 CLR 493 Category: Principal judgment Parties: Council of the Law Society of New South Wales (Applicant) Michael John Shehadie (Respondent) Representation: Counsel: B Tronson (Applicant) C Webster SC (Respondent) Solicitors: Foulsham & Geddes (Respondent) File Number(s): 1520115 REASONS FOR DECISION 1. The Tribunal has before it an application by the Council of the Law Society of New South Wales (the applicant) for an order that Michael John Shehadie, a solicitor (the respondent), be removed from the Supreme Court roll of local lawyers. The application is made pursuant to the Legal Profession Act 2004 (LPA), the law applicable at the relevant times. 2. The first three grounds for the application concern the respondent's compliance with provisions regulating (1) work as a solicitor in respect of regulated mortgages, (2) notices to clients who take over as lenders in respect of run-out mortgages and (3) a vendor's solicitor responsibilities in respect of the purchaser's deposit pending settlement. The fourth ground refers to the same circumstances as the third ground, and charges the respondent with misappropriation. The charge of misappropriation relates to his actions in securing control of the purchaser's deposit pending settlement, and placing the purchaser's deposit monies in a practice account other than the statutory trust account in the period prior to settlement. The respondent has admitted that he breached the three statutory provisions. The charge of misappropriation is denied. This was the central area of contest before us. 3. Our decision is that the charge of misappropriation is proven, for the reasons that follow. We find the respondent guilty of professional misconduct, for the reasons that follow. The Tribunal will reconvene to consider the question of the appropriate disciplinary order. Material before Tribunal 1. The Tribunal had before it a substantial body of documentary evidence relating to the events of December 2010 and January 2011. The applicant's material comprised: affidavit of Anne-Marie Foord, manager, professional standards department, filed 29 June 2015, exhibiting the history of the investigation (AMF1); affidavit of Chandra Sivakumar, trust account investigator, filed 29 June 2015 exhibiting his 2013 report prepared pursuant to LPA s 270 relating to release of the conveyancing deposit (CS1). The respondent's material comprised: affidavit of the respondent, filed 18 September 2015, providing a detailed explanation in relation to the events under notice, and exhibiting records relating to charges 3 and 4 (MJS1); six affidavits from practising solicitors or barristers providing testimonials as to the respondent's fitness (these will be further considered at the next stage of hearing); and copy of an application for the respondent's wife (Elizabeth Michie) to be granted a partner practising certificate. The respondent gave oral evidence and was cross-examined. No other witnesses were called or required. Background 1. The respondent was admitted to practice on 11 February 1977 at the age of 23. There are some differences between the applicant and the respondent as to his practice history. What is clear is that he has practised as a principal for most of his career in what we understood to be a small, family practice, presently located in Pitt Street, Sydney. In 1978 he became a partner in that practice, then conducted by his father-in-law, Mr Michie. It was renamed Michie Shehadie, and continues to bear that name. Since 1989 he has been the sole principal. The practice has always had a substantial involvement in conveyancing. It had a busy mortgage lending element for many years. 2. The charges laid against the respondent relate to three transactions brought to notice by a routine trust account examination in 2013. They all concern his handling of monies in connection with conveyancing and mortgage transactions. 3. A solicitor is required by the LPA to observe various standards in relation to the work performed in connection with 'regulated mortgages'. A 'regulated mortgage' is defined generally to cover all mortgages (subject to certain exceptions, set out in s 477(1)). The main exception is a mortgage under which the lender is a financial institution. 4. As from 7 September 2001, the applicable law banned a solicitor from negotiating the making of a regulated mortgage or acting in respect of a regulated mortgage. This rule was continued by the LPA and is found at s 479(1): (1) A solicitor must not, in the solicitor's capacity as solicitor for a lender or contributor, negotiate the making of or act in respect of a regulated mortgage. 1. The rule is subject to a number of exceptions, none of which is relevant to this case, as the parties agree. 2. This prohibition was introduced in response to a number of major losses by clients who entrusted funds to solicitors for mortgage lending. The major claims which resulted threatened the liquidity of the Fidelity Fund, the compensation scheme for members of the community who suffer losses due to the dishonesty of solicitors. 3. The new law dealt separately with the future involvement of solicitors in mortgages that they had lawfully negotiated and were entered into prior to 7 September 2001. These mortgages are defined as 'run out mortgages'. 4. Two of the admitted charges (charge 1, charge 2) concern conduct in relation to either a regulated mortgage or a run out mortgage. Charge 1: 1. The first charge relates to the respondent's involvement in a transaction that took place in 2011, and involved a regulated mortgage. 2. On 31 March 2011 the respondent advanced $70,000 to Mr Michael Taouk, secured by registered mortgage over a property owned by Mr Taouk, located in Prestons. In October 2011 Mr Taouk requested a further loan. The respondent procured a source for the funds, being a client, Albert Ayoub, and $200,000 was lent, secured by first mortgage over the same property. The loan to the respondent was discharged. 3. The respondent has admitted a breach of s 479(1). 4. Section 479(6) provides: (6) A contravention of this section is capable of being professional misconduct. 1. We will deal with the characterisation of the conduct found proven later in these reasons. Charge 2: 1. There are a number of provisions in the LPA limiting the work that a solicitor can do in respect of a 'run out mortgage' (as explained, a pre-7 September 2001 regulated mortgage). Clause 6 of Schedule 8 of the LPA relates to substitution of a lender or contributor under a run-out mortgage. Relevantly to this charge, sub-clause (3) provides: (3) If a client entrusts or proposes to entrust money to a solicitor for the purpose of substituting a lender or contributor under a run-out mortgage, the solicitor must give the client a notice in writing that advises the client: (a) of the effect of clause 7 (No claims against Fidelity Fund by substitute lenders), and (b) that the solicitor is not required to have fidelity insurance in respect of the run-out mortgage. 1. On or about 1 June 2001, two clients, Mr Michael Taouk and Mr Jamal Taouk, mortgaged land they owned at Casula to Guarantee and Agency Corporation Pty Ltd. There is no dispute that this was a run-out mortgage for the purposes of the LPA. In or about early 2003 the mortgage was transferred to another lender, and later that year transferred again to a new lender, Ms Edith Louise Laube. After her death, the respondent lodged a transmission application on or about 4 August 2011 transferring the mortgage to himself in his capacity as executor of Ms Laube's estate. A client of the respondent, Ms Madeline Zappia, entrusted funds to the respondent with a view to becoming a lender or contributor under the mortgage. On or about 4 August 2011, the respondent acting for Ms Zappia and on his own behalf, transferred the mortgage from himself as executor to Ms Zappia and himself (in his capacity as trustee of the staff superannuation fund of his practice) as tenants in common, in specified proportions. 2. The respondent admits that he breached cl 6(3) by failing to give Ms Zappia written notice to the effect that she would be entitled to make a claim against the Fidelity Fund for the purpose of obtaining compensation for a pecuniary loss if the claim related to the mortgage, and that he was, as her solicitor, was not required to have fidelity insurance in respect of the mortgage. 3. On or about 11 October 2011 the respondent acted for both Ms Zappia and another client, the previously-mentioned Mr Ayoub in transferring Ms Zappia's interest in the mortgage for the sum of $428,000. He admits that he again breached his obligation to give Mr Ayoub a cl 6(3) notice. 4. Clause 6(5) provides: (5) A contravention of this clause is capable of being professional misconduct. 1. We will deal with the characterisation question later in these reasons. Charges 3 and 4: 1. As previously noted, the respondent admits Charge 3 but denies Charge 4, the very serious charge of misappropriation. The charges have as their context dealings between the respondent and an established client. He acted as solicitor in relation to a conveyancing transaction in which the client was the vendor. Contemporaneously, he lent the client a substantial sum to help him meet land tax liabilities on various properties he owned. We will begin by outlining the events of December 2010 and January 2011, which underlie the charges. 2. Events of December 2010: The respondent acted for the vendor, Mr Daniel Ellis, in respect of the sale of land at Rozelle for a consideration of $2,500,000. The contract of sale was dated 3 December 2010. The settlement date was 14 January 2012. On 13 December the vendor's real estate agent in accordance with its legal obligations placed the deposit monies ($250,000) in a segregated interest bearing bank account. 3. On 14 December 2010 the respondent lent Mr Ellis, $240,000 to enable him to pay outstanding land tax on several properties that he owned that fell due on 31 December 2010. On 15 December 2010 the respondent gave an oral direction to the vendor's real estate agent to arrange with the bank for the deposit monies to be transferred to the solicitor's statutory trust account, named 'Michie Shehadie and Company Trust Account' held by the National Australia Bank at branch BSB 082-067 Account No 50-908-7188 ('STA'). The estate agent complied with the direction, with the result that the bank on 15 December 2010 transferred the sum of $181,269.18 (the deposit monies less the agent's commission plus two day's bank interest ($19.18)) to the STA. The respondent proceeded on 16 December 2010 to draw a trust account cheque in respect of the whole of the sum transferred, and deposited it into a separate firm account, named 'Michie Shehadie Money Market Trust Account - Cash Management Account', held by Westpac at branch BSB 032-024 Account No 64-1626 ('CMA'). On 17 December he transferred the sum to another firm account named 'Michie Shehadie & Co" held by Westpac at branch BSB 032-024 Account No 64-1626, referred to in the proceedings as either the Business Cash Reserve Account or the Cash Reserve Account ('BCRA'). 4. Events of January 2011. On 12 January 2011 the respondent lent the vendor a further $114,190.07 for the purpose of paying land tax on his properties for the year 2011. 5. It will be seen that the total amount lent by the respondent to vendor, Mr Ellis, for land tax repayment purposes was therefore $354,10.07, i.e. $240,000 plus $114,190.07. On or before 14 January the respondent prepared a statement (see his affidavit, paras [112] and [113]) in which he calculated the amount owed to him. He started with the $240,000 (14 Dec to 15 Dec and deducted from it the amount of $181,269.18 (16 Dec 10), which was the amount transferred to the STA following his oral direction, then added (10 Jan 11) the further amount lent, to show a total of $172,920.89 (sic) as the principal remaining due to him. The calculation attributed interest to him at 8 per cent, for the balances at different stages of the period covered, in total $567.73 After settlement of the sale, the respondent deducted the total of these two amounts ($173,488.62) from his ledger entries. Charge 3: 1. Breach of s 255(1) may give rise to a conviction. Section 255(1) provides relevantly: 255 Holding, disbursing and accounting for trust money (1) A law practice must: (a) hold trust money deposited in a general trust account of the practice exclusively for the person on whose behalf it is received, and (b) disburse the trust money only in accordance with a direction given by the person. Maximum penalty: 50 penalty units. 1. The respondent admits that by transferring the monies from the statutory trust account to the Cash Management Account he ceased to hold trust money exclusively for the person on whose behalf it was received, and disbursed the money without a direction to that effect given by that person. 2. A breach of an offence provision may give rise to a finding of unsatisfactory professional conduct or professional misconduct, regardless of whether a conviction is imposed: s 498(2). Charge 4: 1. As already noted, the respondent admitted the particulars of the first three charges. While admitting a number of the factual particulars of charge 4, he disputed charge 4 insofar as it alleged dishonest conduct in relation to the use of trust funds. 2. The formal charge is that the respondent 'misappropriated entrusted funds'. The main particulars of the charge appear at paras [44] and [45], in similar terms to the summary we have given of the events of January 2011. In addition the particulars refer to parts of the history of the events of December, 2010. 3. There was some debate as to what is meant by 'misappropriation', and whether, in particular, the term carries a connotation of dishonesty or purposeful misuse. The Macquarie Dictionary (4th ed. 2005) definition of 'misappropriate' is '1.to put to a wrong use. 2. To apply wrongfully or dishonestly to one's own use, as funds entrusted to one.' It will be seen that the first meaning merely speaks of an act where a thing is put to a 'wrong use', whereas the second focuses on use for one's own benefit, and introduces expressly the element of dishonesty. 4. It is accepted that the legal meaning of misappropriation carries the connotation of a wrongful, dishonest use. Further in disciplinary proceedings of the present kind, it is accepted that the prosecutor must show that the respondent knowingly engaged in the conduct of concern, and that the conduct was dishonest. There has been debate as to whether the prosecutor must show that the respondent knew that the conduct in which he or she had intentionally engaged was dishonest, or is it enough to show that regardless of his or her belief in that regard, it would be regarded as dishonest, viewed objectively. 5. In Brereton v Legal Services Commissioner [2010] VSC 378 Bell J examined closely what is required by way of proof of dishonesty in a misappropriation case. His Honour emphasised that the general law (both civil and criminal) in dealing with proof of dishonesty does not go so far as to require that the defendant knew at the time of the conduct that what he did was dishonest. Proof of 'subjective' dishonesty in that sense is not required. Bell J said (some footnotes omitted): 53 While an allegation of dishonesty requires consideration of the person's mental state, in neither the criminal nor the civil context is it necessary to establish that the person subjectively knew or believed that the actions concerned were dishonest. What must be established is that the person subjectively intended to do the acts which are said to be objectively dishonest by the ordinary standards of reasonable and honest people. Thus the course to be adopted in determining whether conduct is dishonest was explained by Toohey and Gaudron JJ in Peters v R [1998] HCA 7; (1998) 192 CLR 493] as follows:[ 503-504] In a case in which it is necessary for a jury to decide whether an act is dishonest, the proper course is for the trial judge to identify the knowledge, belief or intent which is said to render that act dishonest and to instruct the jury to decide whether the accused had that knowledge, belief or intent and, if so, to determine whether, on that account, the act was dishonest ... If the question is whether the act was dishonest according to ordinary notions, it is sufficient that the jury be instructed that that is to be decided by the standards of ordinary, decent people. 54 The steps involved in this formulation are: (1) identify the knowledge, belief or intent which is said to render the acts dishonest; (2) determine whether the accused (or defendant in the civil context) subjectively had that knowledge, belief or intent; and (3) determine whether, on that account, the acts were objectively dishonest according to the standards of ordinary and decent (that is reasonable and honest) people. 55 When applying these principles in a civil case, the civil standard of proof on the balance of probabilities applies. Of course, where the allegation in a civil case is of misappropriation, a high standard of probability is required, due to the gravity of the allegation.[Briginshaw v Briginshaw [1938] HCA 34; (1938) 60 CLR 336, 361-363 per Dixon J] In a criminal case, the criminal standard of proof beyond reasonable doubt applies. 1. In disciplinary proceeding of the present kind, therefore, the three steps to which Toohey and Gaudron JJ refer, and reiterated by Bell J at para [54] apply. It will be seen that those steps draw a clear distinction between the understanding of the defendant when engaging in the conduct and the characterisation of that understanding. Commonly, evidence will establish a state of knowledge, belief or intent in relation to the conduct under notice, and the issue will then be (step three) whether the proven state of understanding can fairly and properly be found to be dishonest. In making that finding the tribunal of fact will look at the totality of the evidence, and apply the standards of the community to what has been put to it by the defendant in that regard. 2. The Tribunal recently approved and adopted Bell J's analysis in Council of the Law Society of NSW v Coombes [2015] NSWCATOD 108 at [36]-[43], and described the approach to be adopted as follows: We will therefore proceed on the basis that we need first consider whether the Solicitor intended to do the acts which are the subject to (sic) the complaint and secondly whether ordinary and decent people would regard these acts as dishonest. 1. It will be seen that the Tribunal conflated the first two steps set out by Bell J at [54] of his reasons, and described his third step as the second matter to be considered. Applicant's Evidence and Submissions 1. The applicant relied on the particulars of evidence given in support of the earlier charges, and submitted that the respondent 'intentionally' took the various steps we have outlined (see para [46] of the application), thereby satisfying the first part of the Coombes formulation. 2. The applicant then contended that those acts were done without the knowledge, authority or direction of the purchaser (para [47]), and they comprised a 'wrongful use' of the purchaser's monies, and were inconsistent with the purchaser's rights (para [48]). Therefore the use made by the respondent of the monies was 'objectively dishonest: that is dishonest by the standards of ordinary decent [reasonable and honest] people' (para [49]), thereby satisfying the second part of the Coombes formulation. 3. The application at para [50] invited the Tribunal to make five specific findings as to the respondent's state of knowledge, i.e. he knew that: (a) the contract did not contain any clause providing for the release of the deposit; (b) that the trust account deposit that took place on 15 December 2010 obliged him to hold the monies exclusively for the purchaser pending completion of the sale; (c) that he had no authority from the purchaser to disburse the money in the way he did; (d) that absent, the agreement of the purchaser, he had no entitlement to obtain and use the purchaser's monies; and (e) that the use and diversion of the purchaser's entrusted monies was wrong. At para [61] the applicant invited the Tribunal to make a finding that the solicitor's acts as described in para [46] were 'subjectively dishonest', and at [62] that in the circumstances described in paras [46]-[50], the solicitor 'misappropriated' the purchaser's entrusted monies. 4. In further support of its case, the applicant referred to further conduct by the respondent at paras [51] to [59] of the application beyond that to which we have already referred. 5. The first of these instances concerned the settlement transaction of 14 January 2011. The respondent admitted that the purchaser's solicitor handed the respondent an order on agent authorising the vendor's agent to release the deposit to the vendor and to account to both parties for their equal shares of the interest earned on the deposit. The respondent admitted that he failed to inform the purchaser's solicitor and the purchaser of his actions in arranging the release and disbursement of the deposit monies a month before. 6. The second of these instances referred to the respondent's responses to questions asked of him or matters raised with him by the applicant's officers in the course of their investigation of his conduct. Notably, the respondent advised the applicant on 6 November 2012 that the purchaser's funds were 'retained in my trust account but the book entries you refer to occurred'. The 'book entries' are the ledger records showing transfers to the CMA and the BCRA. The applicant pressed the respondent for further details, and in particular how the deposit amount was repaid to the vendor on settlement, and the remittance details for the payment; and for further details of the deposit remitted by the vendor's estate agent to the STA on 15 December 2010. The respondent failed to respond to these further requests for information. 7. The applicant sought a finding that the solicitor 'attempted to conceal from the purchaser, the purchaser's solicitor and the [applicant] the nature of his dealings with the purchaser's monies'. The Respondent's Evidence and Submissions 1. The respondent swore an affidavit dated 18 September 2015, gave oral evidence and was cross-examined. 2. In his affidavit he referred in detail to his personal history, the history of his practice, its heavy involvement in conveyancing and mortgage lending, and the demands on the fidelity fund that flowed from the massive failures of some solicitor's mortgage practices during the 1990s. He referred to the changes in the law that required solicitors to wind down mortgage practices with a lending side. He referred to the regular trust account inspections to which he, like all solicitors, were subject, and his good record in that regard. He claimed that that he had been told by an inspector in the early '00s that it had to stop negotiating mortgages and run them out, and that it was only acceptable to lend out relatives' money not clients' money. (Mr Ayoub, for example, referred to in connection with charges 1 and 2 was a cousin.) He said that advice was repeated to him by another inspector in 2009. 3. He referred to bookkeeping practices that he adopted when he had been active in negotiating mortgages and obtaining funds to lend to clients. He had operated two accounts – the STA, and another account - the CMA, where he routinely placed deposit monies and they earned interest. He treated the CMA as a 'controlled money account' and managed it on a trust account basis. He said that he always accounted for interest to vendors and purchasers as appropriate. He said that he ceased to hold conveyancing deposits in the CMA after receiving advice from a trust account inspector in 2009 that this was 'no longer' permitted' and that he needed to set up separate bank accounts to hold deposits. In cross examination he conceded that it was thoughtless of him not to obtain an independent opinion in relation to that advice. He then went on to refer in some detail to the circumstances of each of the matters that has given rise to the charges, the Taouk 2011 regulated mortgage (charge 1), the run out mortgage of 2001 and later events (charge 2) and the Ellis transaction (charges 3 and 4). He gave very detailed evidence in relation to each of these matters. 4. It is unnecessary to canvass that detail for the purposes of these reasons. He has admitted the contraventions the subject of charges 1, 2 and 3. 5. While the affidavit contains considerable additional detail as to the Ellis transaction, it adds little to what we have already recited. The bare bones of what happened are clear. The respondent's case in reply is found in final three paragraphs of the affidavit. 6. We will set out the first two of those paragraphs in full: 121. I had no dishonest intent when I withdrew the balance of the deposit from my trust account and deposited it into the Cash Management Account. I had no wilful or deceitful intent to misappropriate the money. I had no reason to believe that the sale of the property would not proceed to completion after the Christmas holidays in 2010. I was motivated not by self-interest but by a desire to assist Mr Ellis. 122. My actions in arranging for the agent to pay the balance of the deposit into the trust account and then transferring it into the Cash Management Account and from there into the Business Cash Reserve Account were not motivated by self-interest. My motivation at all times was to assist Mr Ellis to settle the sale of the property by ensuring there were sufficient funds available to pay his land tax liabilities, to discharge the mortgage and to reduce the interest he was paying on the loan of $240,000. 1. The final paragraph expresses remorse for his actions, and embarrassment over his breaches. Assessment 1. In his evidence at hearing, the respondent frequently referred to the three accounts – the STA, the CMA, and the BCRA globally as trust accounts. When pressed he eventually conceded that there was only one true trust account, the STA, and that the other accounts (even though they stood separate from the practice's ordinary office accounts) were, like ordinary office accounts, under his control and direction, and did not accrue 'trust account' interest. The importance of the latter point lies in the fact that trust account interest is required by law to be used for community purposes, the most well known use being in support of the Public Purpose Fund. In contrast, any interest earned by other accounts will find its way to the account holder who is free to elect whether to credit that interest to any person for whom the money might be held, or to retain the benefit of that interest. 2. There was some contest in the case as to whether the respondent realised that the deposit monies were subject to a release clause under the contract. In our view, it was incumbent on the respondent before issuing the direction that he gave to the estate agent to satisfy himself in that respect. It is normal for there to be no release of the deposit prior to completion with the deposit to be held by the agent as stakeholder. Neither the agent nor the respondent had any right to do what they did. To give an agent a direction of this kind was a serious step. We were not satisfied either from his affidavit, or his oral evidence that the respondent had any appreciation of the gravity of taking a step of that kind, without carefully checking his authority and without communicating the source of his authority to the estate agent. 3. In our view, the respondent, in securing control of the deposit monies in the way he did, was motivated by the desire to protect his personal position as a lender. The December loan and the January loan amounted together to just over $350,000. He sought to secure to his control at the earliest opportunity the first $189,000. 4. In our view, there can be no doubt that the respondent 'intended' to engage in the acts of which he is accused (the first part of the test for misappropriation). 5. He was a highly experienced solicitor, with, in our view, a clear understanding of the constraints that applied to statutory trust accounts as compared to other practice accounts, both under general law and under the regulatory law that applied to him as a solicitor. His bank account arrangements reflected a lack of acceptance of the importance of adhering to those constraints and of the duty of a solicitor to ensure that all monies received in trust are held strictly in accordance with the law. We are satisfied that a competent solicitor would understand that practices that involve the diversion of trust monies to accounts other than a statutory trust account are wrongful. We consider that a competent solicitor would have recognised that it was wrongful. 6. His evidence was that he had a set of bookkeeping arrangements whereby he kept separate from the ordinary trust account certain parcels of trust monies for the sake of clarity and ease of administration. That, in our view, was unacceptable. It is up to the solicitor to configure his or her trust account arrangements in a manner which is legally compliant, whether it involves one global account or a series of linked, separately labelled accounts, or some other arrangement acceptable to the regulator. It is not open to a solicitor to strike a local arrangement that he or she regards as sufficient. It is of no relevance to this matter that the respondent has never committed a defalcation. 7. We consider that 'ordinary and decent people' would regard his actions as 'dishonest'. We base this conclusion on the following factors: (a) he had no right under the contract to issue the oral direction, and should have checked the contract in that regard; (b) he diverted the funds at the first opportunity from the STA to accounts he wholly controlled the CMA, and later to the BCRA; (c) these were accounts that he could operate without trust account restrictions; (d) he gave a description to the transfer from the trust account that reflected an application of the funds to his personal benefit (Parsons Street Repayment of Land Tax Loan, 'Parsons Street' being a shorthand reference to a development company in which Mr Ellis was a co-director with two others); (e) he failed to reveal what he had done to the beneficiary of the monies for the time being, the purchaser, or to the purchaser's solicitor (a breach of professional standards in its own right); (f) he took the benefit of some of the interest earned on the funds; and (g) he failed to inform the purchaser or the purchaser's solicitor of his actions as part of the settlement (leaving uncorrected the (orthodox) understanding held by the purchaser's solicitor, reflected in the order to agent he issued at settlement, that the funds had remained in the vendor's agent's trust account in the intervening period). 1. In getting in the deposit, when he was not the stakeholder (and could not have been, as the agent was nominated as stakeholder in the contract), he thereby appropriated the funds for a purpose that was not contemplated by the contract and without the knowledge or consent of the purchaser. In transferring the funds to the CMA and the BCRA, he was appropriating the funds for the purpose of partially repaying his loan to the vendor, as the descriptors for those transfers clearly show; 2. In transferring the funds to the CMA and then to the CRA at interest, he was appropriating the funds for the purpose of earning interest at a higher rate to assist in repaying the interest on his loan to the vendor; 3. In these circumstances, properly categorized, each appropriation was a misappropriation of the deposit funds (which should to have been held by the agent until completion) and the solicitor knew it. 4. We do not accept his explanation that he was 'mistaken' about his right to hold the deposit as the vendor's solicitor, given his long experience. Nor do we accept that had the contract been terminated and the right to the deposit became an issue, he would have awaited events and, if necessary, interpleaded and paid the money into court. Having appropriated the money, it had become intermingled with his own loan (and the other monies in his CRA) and it would be difficult, if not impossible, to resist a claim of right by the vendor that the loan was partially repaid and those monies should stand to his credit. 5. We have reached our conclusion based on the primary events, those of December 2010 and January 2011, including the conduct to which the applicant referred on the day of settlement (14 January 2011). 6. We were asked to make a further finding (active concealment) in relation to the adequacy of the respondent's replies to the questions asked of him in November, 2012 about the way interest on the deposit money was accounted for at settlement, and the details of the remittance to the vendor. We do not consider it necessary to make a finding in that regard in order to dispose of the first stage of these proceedings. However, we accept that a respondent's cooperation with the investigation or otherwise is a matter relevant to the next stage of the proceedings – the making of any disciplinary order. 7. The respondent has consistently denied that he acted in a knowingly dishonest way in behaving as he did in relation to the deposit monies. A practitioner facing the serious charge of misappropriation of trust funds would, we think, not readily concede subjective dishonesty, with the connotation of moral turpitude that such a finding carries. 8. The respondent, according to his own evidence, had traditionally employed arrangements for the management of some of the monies held in trust that involved diversion to special practice accounts that were separated from the ordinary office accounts. He saw those arrangements as permissible, and for him they had a precedent in practices adopted in the era when the firm had a busy mortgage lending arm. He also saw as relevant to the question of his honesty the fact that no monies were withheld by him. In that sense he had properly and honestly accounted for the funds. He contrasted his circumstances with a number of cases where the practitioner diverted substantial sums to their own use. 9. While the respondent's case differs in that way, we note that the respondent stood to gain in respect of the interest component by placing the deposit monies into a non-trust account under his control, and depriving the purchaser of that sum. We note that the respondent did, ultimately, recognise this consequence of his action. He later calculated the interest lost to the purchaser, and, belatedly, sent the purchaser a cheque for that amount. 10. We share the applicant's scepticism over the satisfactoriness of the respondent's explanation. 11. Nonetheless we have decided not to go so far as making a finding that he acted with 'subjective' dishonesty, with its grave implication for his character and reputation. For the reasons given earlier, it is sufficient to decide this case by reference to the steps set out by Bell J an adopted by the Tribunal in Coombes. Characterisation of Conduct 1. Section 497 of the LPA provides: 497 Professional misconduct 1. For the purposes of this Act: professional misconduct includes: (a) unsatisfactory professional conduct of an Australian legal practitioner, where the conduct involves a substantial or consistent failure to reach or maintain a reasonable standard of competence and diligence, and (b) conduct of an Australian legal practitioner whether occurring in connection with the practice of law or occurring otherwise than in connection with the practice of law that would, if established, justify a finding that the practitioner is not a fit and proper person to engage in legal practice. (2) For finding that an Australian legal practitioner is not a fit and proper person to engage in legal practice as mentioned in subsection (1), regard may be had to the matters that would be considered under section 25 or 42 if the practitioner were an applicant for admission to the legal profession under this Act or for the grant or renewal of a local practising certificate and any other relevant matters. 1. Section 496 provides: 496 Unsatisfactory professional conduct For the purposes of this Act: unsatisfactory professional conduct includes conduct of an Australian legal practitioner occurring in connection with the practice of law that falls short of the standard of competence and diligence that a member of the public is entitled to expect of a reasonably competent Australian legal practitioner. 1. Section 498 sets out various circumstances which may are capable of being professional misconduct or unsatisfactory professional conduct. Relevantly to this case, s 498(1)(a) covers 'conduct consisting of a contravention of this Act, the regulations or the legal profession rules'. The Act also includes specific provisions declaring particular types of contravention to be capable of being professional misconduct Charges 1 and 2 in this case fall into that category, while Charge 3 falls under s 498(1)(a). 2. It will be seen that both of the primary definitions (ss 497, 496) are not exhaustive. Consequently the common law understanding of professional misconduct is preserved with the elaborations found in ss 496-498. The common law understanding is usually traced to the Court's interpretation in Allinson v General Council of Medical Education and Registration [1894] 1 QB 750 at 763 of the meaning to be given to the statutory expression, 'infamous conduct in a professional respect', i.e. conduct 'which would be reasonably regarded as disgraceful or dishonourable by [the practitioner's] professional brethren of good repute and competency'. 3. In this case, the respondent substantially admitted the matters alleged in relation to charges 1 (acting as solicitor for a vendor in respect of a regulated mortgage) and 2 (failing to give clients taking over as lenders under run-out mortgages notices of their limited rights of claim in relation to professional negligence or related losses). We have found both charges proven. Charge 3 (vendor's solicitor failing to hold deposit monies in the trust account for the purchaser, disbursing those monies when not entitled to do so without a direction given by the purchaser) and Charge 4 (misappropriation) had as their context two transactions involving his client Ellis. The first was his loan to Mr Ellis, the second was the sale of the Rozelle property owned by Mr Ellis. The respondent admitted Charge 3, but denied the more serious charge of appropriation. We have found charge 4 proven. 4. In each instance the conduct was unsatisfactory in that it fell short of the standard of competence and diligence that a member of the public is entitled to expect of a reasonably competent Australian legal practitioner. A member of the public is entitled to expect that a practitioner who undertakes work in mortgage lending or conveyancing will have a proper understanding of the special rules that apply to those areas of practice, and in particular rules, the breach of which, may expose the clients to risk of loss. The respondent had in the years prior to 2001 a busy practice that involved mortgage lending. He should, we think, have been particularly alert to the restrictions that have since applied to solicitors who chose to lend money to clients on mortgage or in handling matters that involve run-out mortgages. We do not accept as credible his suggestion that the new law made some distinction between lending practices that involved relatives as against non-relatives. In our view, this was a self-serving attempt to justify of the conduct brought under notice by these proceedings. 5. The conduct with which Charge 4 was concerned demonstrated an indifference, at worst, or a limited appreciation, at best, of the risk that conflicts of interest present to proper practice, and to public confidence in the profession. A competent solicitor would, we consider, have realised that there was the potential for a conflict between his interest in securing payment of the personal loan he made to his client and his obligation to handle in a disinterested and detached way the movement of monies in the contemporaneous conveyancing transaction in which he was acting for that client as vendor. He did not act in a disinterested and detached way in diverting the purchaser's deposit from the agent's trust account, and placing it in a practice account under his control. He acted in his own interest. In the process, he deprived the purchaser of the usual protections that attach to deposit monies pending completion. We have found misappropriation. We are satisfied that the conduct involves a substantial failure to reach a reasonable standard of competence and diligence, and amounts to professional misconduct. 6. The charges have all been found proven. Viewed as a whole all the charges proven warrant a finding of professional misconduct. Order 1. The Tribunal finds the respondent guilty of professional misconduct. 2. The matter is to be listed before the presiding member for the making of directions for the further hearing in relation to the appropriate disciplinary order. I hereby certify that this is a true and accurate record of the reasons for decision of the Civil and Administrative Tribunal of New South Wales. Registrar DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 20 April 2016