In Vaughan & Anor v Legal Services Board  VSC 200, two victims of investment fraud were unsuccessful in their attempt to recover their lost money from the Legal Services Board Fidelity Fund.
Julie Ann Laird, a solicitor, told Gerald Vaughan and Patricia Ralph (the plaintiffs) that she could offer them, as investors, investment opportunities and that she would undertake the necessary legal work. The opportunities were essentially related to mortgage backed investments.
The plaintiffs transferred money to Ms Laird which she first placed into her trust account for investment in first mortgage loans on the plaintiffs' behalf. Unfortunately for the plaintiffs, Ms Laird's investment scheme was wholly fictitious and she kept the money for herself. The issue in this proceeding was whether the plaintiffs could recover the lost money from the Legal Services Board Fidelity Fund (Fund) under the Legal Practice Act 1996 (the Act).
Was legal work a primary activity?
The issue for the Court, in determining whether the plaintiffs could recover the lost money, was whether the trust money was given, paid or received 'in the course of or in connection with' Ms Laird's legal practice. If so, then the next issue was whether the plaintiffs' claim could be defeated by the exclusion provided in section 208(3) of the Act. This exclusion essentially provides that a claim does not lie against the Fund for a defalcation from the investment or reinvestment of money by a practitioner that is not merely incidental to the legal practice.
The plaintiffs argued that they paid their money to Ms Laird in the course of her legal practice, or at very least, in connection with her legal practice. All correspondence to the plaintiffs from Ms Laird purported to be in her capacity as a solicitor. She described that her firm would carry out all necessary searches and enquiries, would prepare the mortgage and all necessary documents, ensure that the lender obtained proper and enforceable security, and that all funds were to be negotiated through her trust account. On the evidence, Justice Pagone found that whether or not the investment scheme was in the ordinary scope of a legal practice, the placement of the plaintiffs' money was connected with Ms Laird's legal practice as a solicitor.
The next issue was whether the plaintiffs' claim was defeated by the exclusion in section 208(3). Justice Pagone held that the words in that section are simple and clear, and are directed to defalcations arising 'out of the investment or reinvestment of any money by' amongst others, people like Ms Laird. In his Honour's view, the provision was designed to cover the practice of investment and reinvestment of money such as that undertaken by Ms Laird.
Justice Pagone did not regard the defalcation relating to the investment or reinvestment as 'merely incidental to the legal practice' engaged in by Ms Laird. His Honour said, 'on no view of the facts am I able to regard the relationship between Ms Laird and the plaintiffs as that of solicitor and client other than in connection with the primary activity of an investment or reinvestment of funds'. Significantly, Ms Laird had not previously acted as solicitor for the plaintiffs and, it seems, met only once with Gerald Vaughan.
Ultimately, Justice Pagone held that the primary relationship between Ms Laird and the plaintiffs was for the investment of money at a profit and not under any general or specific retainer as a solicitor. His Honour found that any legal work Ms Laird undertook was, at best, incidental to the primary activity of placing funds for investment rather than vice versa.
The proceedings were accordingly dismissed and the plaintiffs were ordered to pay the costs of the Legal Services Board.
It is important for solicitors to remember that for the purposes of the Act, 'trust money' means money received by a law practice in the course of or in connection with the provision of legal services by the law practice. However it does not include money received by the law practice for or in connection with a financial service, managed fund or investment.
Further, the purpose of the Fund is to compensate clients for losses arising from defaults by law practices (or law clerks) in the handling of trust money, including fraudulent dealing, in the course of legal practice. However, the Fund does not compensate clients for defaults relating to money held by the law practice for a financial service provided by the law practice. This includes where the money is held for a managed investments scheme or mortgage financing carried on by the practice. Further, the Fund will not compensate clients for a default by the law practice, unless the money being held by the practice is in the ordinary course of, or primarily in connection with, the provision of legal services.
This limitation of the application of the Fund has particular relevance for policy wording which exclude from cover losses compensable for fidelity funds.
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