Professional Responsibility

Unit 6 Activity – Avoiding Conflicts – Case Study

1. Describe the nature of any conflict of interest/duty apparent on these facts.

Mr Presidio’s interest

It is clear from the facts that Presidio (P) has an interest in the “patronage” or “merit points” scheme with Credit Union (CU). Both by being a regular customer and referring customers (i.e. his firm’s clients) to CU, his firm receives the benefit of acting on behalf of CU as mortgagee in various home lending transactions.

The merit points scheme can be briefly described as follows:

“1 merit point  = every $10,000 deposited with CU at the call rate.

100 merit points = 1 lending transaction”

Therefore, the more frequent use of CU’s banking facility by both his firm and clients, the more businesses he will get for his firm.

Assuming P himself also uses CU’s banking facility, given the pre-existing relationship and the above mentioned scheme, CU might be more than willing to provide special personal banking benefits, e.g. favorable borrowing rates to P as a “gratitude” for him bringing them businesses. This, in effect, is an incentive for P to continue to refer clients to CU.

Presidio’s duty owed to Ms Kwan

P’s undertaking to act on behalf of Kwan (K) in carrying out her duty as an executor gives rise to a fiduciary duty.^[1] P must give his “undivided loyalty” to K.^[2]

In this case, P owes a duty to K in dealing, to her best interests, with the estate moneys as part of her duty as an executor.

Presidio’s interest vs Duty to Kwan

In this case, P was put in a position to advise the economic advantages of the way in dealing with the estate moneys (“the transaction”). The duty requires P to act in perfect good faith and tell K everything he knows about the transaction.^[3] P might have been obliged to tell K to go to another bank that offered a better rate than 2.5% p.a. but because of P’s interest in CU as mentioned, he might not have done so. Therefore, a clear conflict exists between the interests of K and that of P.

1. Has Mr Presidio breached his fiduciary obligations to the executor of the estate of the late Alison Krupp?

Breach of duty to disclose and advise

The aforementioned duty requires P to disclose his personal interest in the dealing so that the transaction is “open and fair, and free from all objections”.^[4]  Upon knowing that his own interest is in conflict with that of K’s, P is required to advise K to seek independent legal advice.^[5] 

In this case, P did not, at any stage, disclose his interest to K. In fact, it appears that P deliberately conceals his personal interest^[6] by merely telling K that “he had had many dealing with CU and found it prompt and reliable”. P had also failed to advise K to seek other alternatives that might offer a better rate. In any event, P should not prefer his own interest to that of K.^[7] As a result, without K’s knowledge, P made a gain by directing K’s funds to deposit with CU which is beyond the amount of the just and fair professional remuneration that he is entitled.^[8] 

Undue influence

It may be argued that P needs not go beyond K’s instructions to advise her on the “wisdom of the transaction”^[9] that there are better deals out there, e.g. one that pays a higher interest at 5.5% p.a. than the current deal with CU at 2.5% p.a. K is not “a client of full command of her faculties”^[10] but rather an unsophisticated client at the age of 74 with little knowledge in legal and financial matters. She clearly relies heavily on P’s assistance to deal with the estate moneys.  

The fact that P escorted K to CU to open the account and that his name was described as the “originator” indicates that P has significant influence in his dealing with K.^[11] The burden is on P to disprove such undue influence but it would be very hard for him because K had not had any independent advice.^[12]

Breach of fiduciary duties

With regard to the above circumstances, P’s failure to inform K of his own interest in CU and advise K to seek independent legal advise, and the fact that he asserted significant influence on K’s decision in the transaction amount to a breach of fiduciary duties to K.^[13] Therefore, it is irrelevant that K had suffered no loss^[14] or how favorable^[15] her investment was, or whether K would have gone for a better deal had she known about other investment alternatives.

Although breach of fiduciary is not prerequisite, P’s conduct in this case would probably amount to UPC/PM under ss 496 and 497 of LPA 2004.

1. Has Mr Presidio breached his fiduciary obligations to any other client who has placed funds at call with the Getaway Credit Union?

Duty to disclose and advice

For similar reasons mentioned above, P also has a duty to make full disclosure that identifies his personal interest^[16] to his other clients. Assuming P did make disclosure, had he obtained informed consent from his clients as to depositing the money with CU?^[17] Failure to do so amounts to a breach.

Dealing with trust moneys

Assuming the funds described as “clients” are general trust money under s 243(1) of LPA 2004, P has to hold the money exclusively for his clients^[18] and can only disburse the money as directed by his clients.^[19] He cannot, as the facts suggest, misappropriate clients’ trust money to make a gain on investments with CU. There is also doubt as to whether P has mixed his clients’ trust money with other money, e.g. his firm’s or his own money, which is prohibited under s 260, to make the investment totaling $24,650,000.