Practice Watch

by Felicia S. Folk, Practice Advisor
Trust obligations of the lawyer

In general, lawyers are extremely careful about their trust obligations, but it is important to remember the following points when dealing with other people’s money:

  • Lawyers have a historical reputation for integrity that may be easily damaged by a small number of dishonest or reckless members of the profession.
  • Lawyers and their clients must continue to be able to rely on the word of other lawyers to do business and to achieve settlements. That is really all that an undertaking is — the giving of one’s word.
  • No client has a right to demand that a lawyer do anything repugnant to the lawyer’s own sense of honour and propriety.

Rule 3-51.1 on cash received by lawyers

As reported in the May-June Benchers’ Bulletin, Law Society Rule 3-51.1 prohibits lawyers from accepting $10,000 or more in cash, other than when the lawyer receives the funds from a law enforcement agency; pursuant to a court order; in the lawyer’s capacity as executor of a will or administrator of an estate; or as professional fees, disbursements, expenses or bail.

The rule specifically prohibits the receipt of $10,000 or more in cash in a single transaction or the receipt of two or more cash amounts in a 24-hour period that total $10,000 or more. If a lawyer were to accept, over time, a series of cash deposits into the lawyer’s trust account, amounting to more than $10,000 to be used for a single transaction, this would amount to a breach of the Rule and could ultimately lead to discipline proceedings.

You should be aware that the Law Society intends that there will be serious consequences for any lawyer who does not comply with the cash transaction prohibition.

In addition, be aware that the Law Society intends that there will be serious consequences for any lawyer who assists clients to launder money. A lawyer will have no defence to a charge of professional misconduct if the lawyer is wilfully blind to the reasons that a client is conducting business in cash and making cash deposits to the lawyer’s trust account.

Paying out on mortgages

On the payout of private mortgages, it is prudent for a lawyer to ensure that money is released only when there is an executed discharge in a lawyer’s hands. You may request that the executed discharge be sent to you on your undertaking to pay the funds immediately upon receipt. You may agree to pay the funds on the other lawyer’s undertaking to provide the discharge immediately upon receipt. It is not prudent, however, to pay the funds directly to a private lender before an executed discharge has been received either by you or by the private lender’s own lawyer. While lawyers face potentially serious consequences for breaching an undertaking, there is no express sanction against a private lender who fails to provide a discharge upon receipt of payment.

Reports to the Law Society filed by lawyers under Rule 3-89 respecting mortgage discharge failures indicate that some lawyers seem to take insufficient precautions when dealing with payouts on private mortgages.

Please note that filing mortgage discharge failure reports is not optional. A BC lawyer is required to report to the Law Society the failure of a mortgagee to provide a registrable discharge of mortgage within 60 days of the closing date of a mortgage transaction under Rule 3-89(b)(i). A BC lawyer must also report the failure of another lawyer or a notary to provide satisfactory evidence that he or she has filed a registrable discharge of mortgage as a pending application at the Land Title Office within 60 days of the closing date of a mortgage transaction under Rule 3-89(b)(ii).

Having an exit strategy for money in your trust account

Before you accept money in trust, be clear about the conditions under which that money will leave your trust account, and that you know to whom to pay the money. Some lawyers have found themselves holding trust funds indefinitely, caught between competing parties demanding funds or being unsure to whom to return funds.

For example, you can avoid having a deficiency holdback sitting in your trust account for months or even years after a closing by being careful about what instructions you initially accept about holding the funds. If you give an undertaking carelessly, you may find yourself dealing with an unhappy purchaser client who demands money you are holding in trust because a vendor still has not remedied deficiencies to the satisfaction of your client, or at all. How do you close a conveyancing file without breaching your undertaking "to hold money in trust until deficiencies are remedied" when there is no time limit on your obligation?

When used properly, undertakings can expedite otherwise cumbersome transactions. When used improperly, undertakings can be the source of expensive and burdensome problems.

If you undertake to hold funds until deficiencies are remedied, include a mechanism to deal with the deficiency holdback in the event the vendor does not do the work or there is a dispute about the quality of the work. You might want to set out circumstances under which you may pay the disputed amount into court after a certain date as an acceptable fulfilment of your undertaking, or provide some other means of relieving your firm of obligations with respect to a deficiency holdback. You should discuss with your client the possible outcomes and reach a clear understanding about what your role might be in the event of a dispute over the holdback, and when your role as solicitor in a conveyancing transaction will end.

If you undertake to hold funds until the happening of any event, include an alternative in case the event does not take place (i.e., if the undertaking or conditions cannot be met).

If a group of individuals would like you to hold money for a cause, for an individual or for an organization, be sure you make clear, before accepting funds, what you will do with them if the stated purpose for which you are holding the funds cannot be fulfilled.

In any matter, before you agree to hold funds until some condition has been met, consider what will happen if the condition is never met. In other words, ensure that you have an exit strategy for money that you agree to hold in your trust account.

Deemed directors’ liability for tax debts

As noted in the May-June Benchers’ Bulletin, the provincial government recently introduced directors’ liability under the Social Service Tax Act, the Hotel Room Tax Act, the Motor Fuel Tax Act and the Tobacco Tax Act. When you are advising your corporate clients about this new and potentially onerous obligation on directors, be aware that a larger circle of individuals than the directors may need legal advice.

Bill 34, the Provincial Revenue Statutes Amendment Act, provides that deemed directors may also be held liable for a corporation’s tax debts. A deemed director is a person who performs the function of a director, even though not a member of the board of directors.

To be deemed a director, it is not necessary to perform all the functions of a director. Section 102.2(4) of the Act expressly states that a person who merely performs some of the functions of a director is deemed to be a director for purposes of section 102.1. The person is liable for whatever taxes the corporation should have collected or remitted during the time the person was deemed to be a director.

Be aware that, if the corporation and a director overpay the tax, they are entitled to a refund pro rata with the amounts paid in, but a director will receive a refund only if he or she applies for it. Since a director will not know if another director has paid in, it may be that no director will know an overpayment has been made. And, because liability is joint and several, one director may be held liable for the entire underpayment. Unlike provisions in federal statutes, there is no rule expressly allowing one director to collect from the others.

It is strongly recommended that you review the Act, in particular the sections that provide for "deemed directors." You will want to determine to whom you should be providing legal advice and to whom you should be recommending independent legal advice on this new legislation.

You might wish to discuss with your clients reviewing their insurance for non-director executives, and ensuring that director and officer policies are endorsed appropriately to include anyone who might be a "deemed director" under the provincial legislation.

Correction: succession planning

In the January-February Benchers’ Bulletin, this column did not make it clear that the recommendation to provide a power of attorney to another lawyer is an important aspect of planning for your sudden disability — not your death. Upon death of the donor, a power of attorney is, of course, no longer valid. Also, the column ought to have made it clear that if, in your will, you name an executor who is not a lawyer, you should recommend to your executor a designated lawyer to wind down your practice.

Agreement to indemnify is not insured

It appears that some institutional clients are asking lawyers to indemnify them for any losses arising out of breaches of the new privacy legislation. Lawyers are cautioned against entering into any such agreements. As the BC Lawyers Professional Liability Insurance Policy provides coverage for negligence, not contractual breaches, lawyers expose themselves to an uninsured risk in agreeing to indemnify any client.