A Cairns solicitor who followed instructions that countermanded an earlier “irrevocable” direction to pay a clients’ house sale proceeds to clear a $200k loan debt, has been sued by the creditor for ignoring the earlier direction.
Gordonvale couple, Sharna and Hans Rauch had negotiated a resolution of a retail lease dispute by persuading their landlord to accept an irrevocable authority directed to the solicitor to pay the debt to its lawyers from the proceeds of sale of their home.
The authority was not required to be signed by the debtors’ Grafton St solicitor Robin Smith, who they also engaged when a sale of their home was signed up at $495k, 18 months later in February 2007.
Just before settlement the couple instructed Smith to direct the buyers to pay the net proceeds of $215k – after payment of sale expenses and mortgage debt – into their own Westpac account.
They cautioned Smith not to forewarn his nearby colleagues,Williams Graham Carman who represented the landlord.
Discovering it had been left high and dry, FTV Holdings – a Melbourne based commercial property developer – pursued the Rauchs but recovered just $33k out of their bankrupt estates.
FTV turned to Smith personally to pay the $182k shortfall for allegedly facilitating the sellers’ breach of contract and breach of trust.
The Supreme Court ruled the irrevocable authority was a binding contract but that the breaches were those of the sellers. Smith had not been a trustee and was not otherwise liable in equity or at law because the settlement proceeds did not pass into his possession.
On appeal, further causes of action were argued. Accepting that the sellers owed a fiduciary duty by reason of the irrevocable authority – arising from the promise to pay out of a specific fund coming into their hands – the court had to decide the solicitor’s responsibility for having participated in their breach by merely complying with their instructions.
Smith – ruled the appeal judges – was in the category of a “stranger” who could nevertheless be held equally liable with his clients, if his facilitation included receipt of the trust property; or his assistance was “dishonest or fraudulent”.
Liability for having received the trust property was eliminated because there was no evidence that the bank cheque for the net proceeds re-directed to the sellers had in fact passed through his firm.
But had Smith been “dishonest or fraudulent” in the sense those terms are used in civil, rather than criminal proceedings?
All FTV had to establish to slot Smith on this argument was – according to the authorities cited – his actual knowledge of the clients’ “fraud”; “shutting his eyes to the obvious”; “recklessly failing to make enquiries” or “knowledge of circumstances which would put an honest and reasonable man on enquiry”.
Although the facts appeared to support a conclusion in favour of the landlord on at least one of these four criteria, no allegation of fraud, dishonesty, recklessness or “shutting of eyes” had been pleaded nor had it been previously argued. Rather, FTV’s claim, at its highest, was one of knowingly assisting the clients’ breach of trust.
Because “not all breaches of trust or fiduciary duty are dishonest and fraudulent,” the pleading of a specific allegation was an essential element of any argument leading to the outcome now contended for.
The appeal court was not prepared to allow such new allegations to be raised for the first time on appeal. It dismissed FTV’s appeal and ordered it to pay Smith’s costs of the trial and the appeal itself.