Abstract

This article analyses a Supreme Court of Queensland case, Romano v Chapple, in which the principal of Burns & Associates Solicitors acted for the successful plaintiff in a five week trial. This case deals with the situation where a solicitor fraudulently misappropriated trust monies. It also deals with the liability of the honest partners in a law firm for such fraudulent misappropriation.

Key Points

1. Clients have rights in the general law to recover monies that have been fraudulently misappropriated by their solicitor or any other professional adviser.
2. In addition, a client may have a claim on the relevant fidelity fund in the event that the client is unable to recover from the misappropriating party. R eventually recovered his losses in this case from the Fidelity Fund because C was bankrupt.
3. To prove fraudulent misappropriation, it is often of benefit to trace where the money went. If the money was used for the private purposes of the solicitor or professional, this is strong objective evidence that the monies were fraudulently misappropriated.
4. Also, evidence that other clients are victims of fraudulent misappropriation is persuasive. It is often the case that in order to conceal the fraud and meet demands from clients for their trust monies, that a fraudulent solicitor or partner will rob Peter to pay Payl, that is, they will misappropriate other trust funds to meet a demand that they cannot meet due to their fraud.
5. Documentary evidence and the paper trial is critical.
6. Even honest partners will be jointly and severally liable for the fraudulent misappropriation of monies obtained in the ordinary course of the business of the partnership.

The Facts

1. R was a client and personal friend of C.
2. C was a solicitor and partner in CS law firm.
3. R was dependent on C. C was acting in R’s numerous affairs and a critical witness in a major litigation. C was a trusted adviser.
4. R deposited substantial monies into the CS trust account, often being surplus monies from numerous property transactions.
5. R’s trust monies were withdrawn from the CS trust by or at the direction of C. These funds were used to invest in properties and businesses which on their face were wholly or partly owned by C. Also, some of these trust monies were used by C to pay his interest bills.
6. There were no written signed trust account authorities authorising C or CS to withdraw R’s trust money for the above purposes.
7. R claimed that C had fraudulently misappropriated R’s trust monies without authority.
8. C denied liability, contending that he had R’s authority to effect the withdrawal transactions for the purpose of ensuring that these assets would not be available for R’s creditors, as R was experiencing financial difficulties
9. R commenced legal proceedings and made a claim on the Fidelity Fund
10. R applied for summary judgement, but C swore and affidavit stating that he had R’s authority to deal with the monies in the way he did.
11. R went bankrupt.
12. The Supreme Court proceeding continued against C’s law firm partners, the recipients of R’s trust money. The controllers of the Fidelity Fund reserved their decision on whether R’s claim was valid pending a determination of the court on the merits.
13. C’s law firm partners did not act with impropriety. They argued they were not jointly and severally liable relying on s71 Trusts Act.

Decision

1. The court held that C was liable for the monies fraudulently misappropriated. The court also held that the partners in the law firm, although honest, were jointly and severally liable for C’s fraudulent misappropriation.
2. With respect to C, the following was said.
3. The Court held that C exploited his professional and personal relationship to systematically fraudulently misappropriate R’s money.
4. The Court held that ‘fraudulent misappropriation connotes dealing with R’s trust money without authority, thus depriving R of the use of that money. ‘Fraudulent misappropriation’ also connotes dealing with R’s money contrary to R’s instructions
5. The court emphasised the fact that C had no written authority. Also, C had no corroborating documents despite C swearing that such documents existed in his summary judgment affidavit. Further, there was evidence which showed that C had fraudulently misappropriated trust monies from his trusting relatives.
6. With respect to the law firm partners, the following was said.
7. Relying on ss14 and 15 of the Partnership Act, the court held that C’s partners were jointly and severally liable for C’s fraudulent misappropriation. The monies fraudulently misappropriated by C came from monies received by C as a partner of the law firm in the ordinary course of the firm and then misappropriated.
8. Section 71 of the Trusts Act did not apply to exclude the partners from liability because this section only applies to the partners in their capacity as trustees under the Trust Accounts Act, not to their obligations as partners under the Partnership Act