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LPLC: A matter of trust

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Cite as: Cite as: March 2012 86 (03) LIJ, p.73

Practitioners need to be clear about purpose when holding trust money. 

Practitioners know that trust money is not their property, nor is it held for their benefit. However, practitioners should be wary of any misconception that trust money is necessarily held on their client’s behalf, even if the funds were paid by the client. It depends on the terms of the trust on which the money is paid into a practitioner’s trust account.

Although this may seem commonsense, we often see instances where a practitioner loses sight of the basis on which trust money is held and releases it without proper authority, under the direction of someone other than the person entitled to the money. Often some pressure is exerted on the practitioner by the client.

Example 1: A practitioner acted for a manufacturer in a dispute with a stockist over alleged debts due to the manufacturer, including some relating to a rejected consignment. To resolve the dispute, the parties agreed on delivery of the consignment, with the manufacturer client to be paid a specified amount from money lodged by the stockist in trust with the practitioner.

The agreement was vague and a further dispute arose as to whether the goods that the client proposed to deliver in purported discharge of its obligations were what the stockist had agreed to receive and pay for.

The client took the goods to the stockist’s shipping agent, who, under instructions from the stockist, refused to accept them. Nevertheless, the client deemed delivery to have been effective by its attempt.

The practitioner was directed by the client to pay it the money held in trust. Taking the client at its word that the goods had been delivered and notwithstanding knowledge of the further dispute, the practitioner released the money.

In fact, the goods had not been “delivered” and the client was not entitled to the money. Consequently, the practitioner faced allegations of breach of trust.

Example 2: Practitioners should ensure they exercise due caution when acting in matters involving parties who are family, friends or business partners.

A practitioner represented a woman in a matrimonial property dispute.

During the marriage, the client had borrowed a sum of money from a relative.

A consent order was made regarding distribution of the net proceeds of sale of the former matrimonial home and included provision for the relative to be repaid. Pursuant to the order, two cheques – one for the client’s share of the proceeds and another for the amount of the debt – were deposited into the practitioner’s trust account.

The practitioner subsequently released those funds to the client on her oral assurance that she would repay the debt to the relative. Although the order provided that the debt was the client’s sole responsibility on payment of the money into the trust account, the practitioner found herself defending a claim by the relative when the debt was in fact not repaid by the deceptive client.

Example 3: A practitioner advised a client on a joint venture to subdivide and develop a property. The arrangement involved a co-investor providing cash while the client would undertake construction and borrow the balance of the necessary funds under a facility guaranteed by the co-investor.

The client took longer than anticipated to complete construction. Eventually, the parties agreed that the client would sell his share of the property to the co-investor, with a specified amount (being most) of the balance funds to be used to reduce the facility.

The balance funds were paid into the practitioner’s trust account. The practitioner did not see the signed agreement but, on the client’s instruction, arranged for each party to sign an authority relating to disbursement of the funds. The authority signed by the co-investor required that the funds be applied to payment of the facility, although the client’s authority did not.

Meanwhile, the client’s bank informed the practitioner of its preference that all funds be deposited into the client’s cheque account, whereupon the bank could make a distribution to the facility account. When obtaining the client’s authority to make such payment into the cheque account, the practitioner told the client that further disbursement into the facility account was required.

Despite that advice, the funds were not applied in reduction of the facility and the client threatened voluntary bankruptcy. The co-investor alleged that the practitioner became trustee of the balance funds and failed to distribute them in accordance with the co-investor’s authority. Litigation against the practitioner ensued.

Conclusion

It is critical that a practitioner, from the outset, obtains written authority that ensures the terms of the trust are clear and unambiguous as to the: person(s) for whom money is held; purpose for which money is held; triggering event or circumstances entitling the beneficiary to receive the funds; and authority/direction required (from whom and when) for the practitioner to disburse the funds.

In the event of being uncertain about any of the above, a practitioner should seek assistance from a colleague, LIV, Legal Practitioners’ Liability Committee or counsel before paying out trust money. In certain situations, a practitioner may need to apply for a court order.

The LIV has published guidelines for releasing money from trust. Containing practical examples, they serve as a useful reminder for all practitioners and can be found at www.liv.asn.au/PDF/Practising/Ethics/ReleasingMoneyTrustGuidelines.




This column is provided by the Legal Practitioners’ Liability Committee. For further information ph 9672 3800 or visit www.lplc.com.au.

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