Special Compensation Fund claims

Edward Kenny

Formerly of Vernon, BC

Called to the Bar: May 15, 1972

Ceased membership for non-payment of fees: January 1, 1999

Custodian appointed: January 15, 1999

Admitted professional misconduct: October 1999 (see December 1999 Discipline Digest)

Special Compensation Fund Committee decision involving claim 1999011

Decision dates: February 4, 2004, July 7, 2004, March 3, 2004, June 9, 2004, September 29, 2004

Reports issued: October 5, 2004

Claimant: Company J

Payment approved: $399,900.00

Mr. Kenny acted as a fiduciary and lawyer for an American company, Company J, in relation to its funds in an investment program by another client of Mr. Kenny, Company M. In 1997, Mr. Kenny entered into an agreement with Company M, an Ontario company registered extra-provincially in BC, to act as trustee for investor funds and to hold bonds as security for investor capital and profits in relation to an investment program by Company M.

The sole director of Company M was Mr. P. The shareholders of Company J wanted to invest in Company M’s program. Mr. P introduced them to Mr. Kenny as a possible lawyer to act as a fiduciary for Company J in its investments with Company M. Company J entered into an agreement with Mr. Kenny and claimed it entered into the investment structure because it was secured through the professional legal services of Mr. Kenny, its fiduciary, who was fully covered for any insurance claims with respect to errors and omissions on his part.

In 1997, the shareholders of Company J made an initial investment of $1,500,000 USD by placing the funds in Mr. Kenny’s trust account. As part of the agreement between Mr. Kenny and Company J, the capital of Company J’s investment was to remain under Mr. Kenny’s direct control in his trust accounts, regardless of whether the funds were involved in the project. The money for the initial investment came from the three shareholders of Company J through funds they’d obtained outside of the activities of the company. One of the shareholders, Mr. D, later pleaded guilty to income tax evasion in the United States in 1999. In his plea agreement, Mr. D acknowledged that much of the money he had earned through brokerage fees was funds that should never have been transferred to him because the money was obtained after the principals of another company defrauded victims. The evidence did not suggest that Mr. D knew of or participated in the fraud. Of the money initially invested in Company M’s project, a portion originally came from Mr. D’s brokerage fees obtained from defrauded victims.

Company J invested more funds in the project via Mr. Kenny over the course of approximately one year, which was the time it was actively involved in Company M’s investment project. During that time, Mr. Kenny made profit payments to Company J and from time-to-time Company J would instruct Mr. Kenny through amended letters of agreement or new letters outlining how Mr. Kenny was to handle its funds.

In May 1998, Company J made several unsuccessful attempts to contact Mr. Kenny. Mr. Kenny responded to Company J the following month with a faxed message. In July 1998, Company J wrote to Mr. Kenny and said it was increasingly alarmed because it felt he and Mr. P were no longer returning phone calls. By October 1998, Company J filed a statement of claim in Vancouver against Mr. Kenny.

The Special Compensation Fund Committee has the discretion to require the claimant to obtain a judgment, but can exercise its discretion with special regard to the likelihood of recovery. The Committee noted that on January 29, 1999 Mr. Kenny filed an assignment in bankruptcy. The Committee therefore determined it was not necessary to require the claimant to exhaust its civil remedies.

The Committee considered in detail whether Mr. Kenny received the funds in his capacity as a lawyer. The Committee noted that in several pieces of correspondence and other documents Company J referred to Mr. Kenny as a “contracted fiduciary” rather than a lawyer. Mr. Kenny represented to the claimant that he would hold its funds in trust. The Committee concluded that had he not been a lawyer, Mr. Kenny would not have been in a position to represent that the monies in his trust account were protected by the rules of the Law Society. Therefore, the Committee determined Mr. Kenny did receive the claimant’s funds in his capacity as a lawyer.

The Committee also found that Mr. Kenny sent Company J’s money to financial institutions without Company J’s consent. Further, despite a provision in the agreements between Company J and Mr. Kenny that said the funds could only be released to specifically rated banks and then only in exchange for security of a certain kind, Mr. Kenny went ahead and sent the money to non-approved banks without receiving any form of security. The Committee concluded that even after he knew the money was no longer in his control, Mr. Kenny continued to mislead Company J, and in the circumstances the Committee found that Mr. Kenny had misappropriated or wrongfully converted the funds.

The Committee observed that notwithstanding the fact that a claim may be eligible for payment from the Special Compensation Fund, s. 31 of the Legal Profession Act provides the Committee with a broad discretion to make full compensation, partial compensation or no payment at all. In exercising its discretion, the Committee observed it must keep in mind the fundamental purpose of the Fund, which is to assist innocent victims where there has been theft by dishonest lawyers. Its purpose is not to act as an insurer for highly speculative or questionable investment schemes.

The Committee concluded the shareholders of Company J were sophisticated business people who freely participated after having accepted representations from Company M and Mr. P about returns of more than 500%. The Committee determined the proposed return from the investment was so unrealistic that any prudent investor would have recognized it was a somewhat risky endeavour. It noted that, even knowing that Mr. Kenny was Company M’s lawyer, the main concern of the shareholders seemed to have been whether Mr. Kenny was entitled to practise and whether he had errors and omissions insurance. Therefore, the Committee deduced the claimant was well aware of the questionable nature of the investment scheme and was looking for an indemnity to cover its risk in the form of Mr. Kenny’s professional liability insurance and/or the Special Compensation Fund.

Further, in exercising its discretion, the Committee noted that $1,400,000 USD of the amount claimed came from fees received by one of the shareholders, Mr. D, which were monies obtained from defrauded investors in the United States. After taking into account all of these factors, the Committee exercised its discretion to pay the claim in part, and it approved a payment of $399,900 from the Fund to Company J.

Re: A Lawyer*

* The lawyer is not identified as this claim was denied.

Special Compensation Fund Committee decision involving claim 20020001

Decision date: October 12, 2005

Report issued: October 28, 2005

Claimant A

Claim of $435,000 denied

Claimant A owned a property in Surrey, which he rented to two tenants. According to A, the tenants failed to make required payments. The claimant issued an eviction notice in April 1999, and that same month the matter went before an arbitrator at the Residential Tenancy Branch. The tenants applied to have the eviction notice set aside, but their application was dismissed.

The claimant initiated a BC Supreme Court action against the tenants for debt and breach of contract, and A obtained a default judgment. The tenants then retained the lawyer. The lawyer’s firm had A’s default judgment set aside on the grounds the matter fell within the exclusive jurisdiction of the Residential Tenancy Act.

The lawyer maintained a trust containing the funds the tenants were obligated to pay to A. In April 2000, a judge dismissed A’s BC Supreme Court action and ordered that the $5,525 being held in trust by the lawyer’s firm be paid to A and his wife. The judge also ruled the tenants were entitled to their costs of the action, which could be deducted from the money held in trust by the lawyer’s firm.

The tenants’ costs exceeded the amount held in trust, and consequently there was no money left to pay A. The claimant then failed to make mortgage payments on the property. He claimed it was because of the tenants’ failure to pay and the lawyer’s failure to provide him with the funds from the trust. The mortgagee foreclosed on A’s property and it was ultimately sold.

The claimant then launched another action in BC Supreme Court against the lawyer and the lawyer’s firm for fraudulent misrepresentation, breach of trust, breach of fiduciary duty, negligence, interference with contractual relations, conversion and misappropriation of funds. The claimant launched a second action against the tenants, their sons, the lawyer, the lawyer’s firm and others for damages arising from an alleged fraudulent conveyance. A also filed a third action against the tenants and their sons for unlawful “detainer” of A’s property. All were dismissed as mere reiterations of the original action dismissed by the court in April 2000. The court further declared the claimant a vexatious litigant.

The Special Compensation Fund Committee noted the lawyer administered the trust funds according to the terms of the court order. Therefore, while A may believe he sustained a loss, it was not the result of misappropriation or wrongful conversion by a member of the Law Society. Accordingly, A’s claim was denied.

Re: A Lawyer*

* The lawyer is not identified as this claim was denied.

Special Compensation Fund Committee decision involving claim 1999004

Decision date: July 6, 2005

Report issued: October 31, 2005

Claimant A

Claim of $50,000 USD plus interest denied

The claimant entered into a Commitment Letter in December 1997, which was addressed to the lawyer. The lawyer was identified as the project lawyer in an investment opportunity related to the purchase and sale of banking instruments. Pursuant to the Commitment Letter, the lawyer was named as the person to pay funds to and A forwarded $100,000 USD to the lawyer. Shortly thereafter, the lawyer returned $50,000 USD to A, but the balance was never returned.

Section 31(5)(b) of the Legal Profession Act states the Benchers must not make payment out of the Special Compensation Fund where “the claim for payment was made more than 2 years after the facts that gave rise to the claim were known to the person making it.”

The claimant’s application for payment from the Fund was received on April 5, 2005. In it, he stated he discovered his loss upon receipt of a letter dated January 7, 1999 from the custodian of the lawyer’s practice.

The Special Compensation Fund Committee noted the importance of avoiding an unduly narrow and technical view of the statutory requirements. Such an approach is contrary to the spirit and purpose of the Fund, which is to reimburse persons adversely affected by the dishonesty of individual members and to promote the public’s perception of the honor and integrity of the legal profession. After considering the explanation provided by A, the Committee found there was an excessive and unjustifiable delay in A’s application to the Fund, which was made six years after he discovered his loss. The Committee concluded that because the application was made more than two years after the facts that gave rise to the claim were known to A, it was outside the statutory limitation set out in section 31(5)(b), and was therefore not compensable from the Fund. Accordingly, A’s claim was denied.

Re: Two Lawyers*

* The lawyers are not identified as this claim was denied.

Special Compensation Fund Committee decision involving claims 1999051 and 1999071

Decision date: December 7, 2005

Report issued: February 8, 2006

Claimant A

Claim of $40,500 plus interest denied

Claimant A advanced $70,000 to Construction Company H. The funds were secured by a second mortgage over certain property. The mortgage documents were prepared by A’s lawyers. Either A or his lawyers prepared an additional document for signature by the principal of Company H, Mr. B. It declared there were no outstanding or unsatisfied judgments, proceedings or other claims pending against Company H.

Mr. B attended the firm of the two lawyers named in the claim, and one of the lawyers, who did not work in the conveyancing department, was asked to witness Mr. B’s signature on the mortgage documents. Although Mr. B’s signature on the declaration did not need to be witnessed, the lawyer signed as a witness on that document and the other mortgage documents as well, where necessary. The lawyer did not, however, review the declaration Mr. B signed. All the documents were then sent to the firm’s conveyancing department. The second of the two lawyers named in the claim worked in that department.

After the funds were advanced, A became aware that an action had been commenced against Company H just weeks before he provided the funds. Subsequently, the first mortgagee foreclosed on the property on which A held the second mortgage. There being insufficient equity in the property, A suffered a loss of approximately $41,000. The claimant then filed an application with the Special Compensation Fund alleging the two lawyers misappropriated his money. He alleged the declaration signed by Mr. B was false, and that the lawyers were aware of the action having been filed and ought to have told him. The claimant said, had he known, he would not have advanced the funds.

There was no evidence provided to the Special Compensation Fund Committee regarding whether or not the lawyers’ firm received A’s funds. However, because A’s mortgage was registered in second position, as it ought to have been, the Committee noted that it appeared the firm had received them and paid them out to the appropriate party.

The Committee found no evidence of misappropriation or wrongful conversion of A’s funds by the two lawyers or any member of the Law Society. Therefore, while A may have suffered a loss, the Committee found he had not met the requirements to be compensated by the Fund, and the claim was denied.