Solicitors’ Fraud and Aggregation – Lord Bishop of Leeds v Dixon Coles and Gill (A firm) & Ors and Guide Dogs for the Blind Association v Box & Ors
November 2020On 28 October 2020, the High Court considered applications for summary judgment in the related cases of Lord Bishop of Leeds v Dixon Coles and Gill (A firm) and Guide Dogs for the Blind Association v Box. Both relate to a solicitor’s theft of client monies and consider issues of Partners’ liability, limitation and, perhaps most significantly, aggregation in cases of fraud.
The case has significant implications for solicitors’ Professional Indemnity insurers and may impact on the approach adopted at future renewals.
The Facts
The fraudster solicitor, Linda Box, was one of three equity partners at law firm Dixon Coles & Gill (“DCG”). Her Partners in the firm were Mr Gill and Mrs Wilding.
In December 2015, Mr Gill discovered that Mrs Box had made a series of unauthorised payments from the firm’s client account. Subsequent investigations revealed significant and long-term thefts of client funds, amounting to over £4 million. DCG closed in 2016.
In 2017, Mrs Box pleaded guilty to 12 offences of theft, fraud and forgery. She was sentenced to seven years in prison.
DCG held the minimum permissible level of Professional Indemnity insurance cover of £2m with HDI Global Speciality SE (HDI). The victims of Mrs Box’s frauds subsequently brought claims against Mr Gill and Mrs Wilding, and against HDI. Mr Gill and Mrs Wilding claimed under the Policy in respect of their liability for those claims. There was no suggestion in the judgement that they were in any involved in the fraud.
The Claims
The victims of Mrs Box’s fraud fell into two categories:
- The Lord Bishop of Leeds (“the Bishop”) and the Leeds Diocesan Board of Finance (LDBF). DCG had a long association with the church, acting for the Bishop of Wakefield and the Wakefield Diocesan Board of Finance (whose assets later vested in the Diocese of Leeds). Mrs Box was Registrar of the Diocese of Wakefield until 2005.
- The residuary beneficiaries (all charitable bodies) of the will of Mr Ernest Scholefield dated 15 July 2005 (“the Scholefield claimants”). Mrs Box was co-executor of the will, with Mr Gill, and carried out the administration of the Scholefield estate.
The Bishop and LDBF issued proceedings against DBG, Mrs Box and HDI. They alleged that, as equity partners in DCG, Mr Gill and Mrs Wilding were liable for money that went through DCG’s client account and other losses sustained by Mrs Box’s wrongful acts. The Bishop and LDBF applied for summary judgment for an account from Mr Gill and Mrs Wilding and a declaration that HDI should not be able to aggregate the various claims
The Scholefield claimants issued proceedings against Mr Gill and Mrs Wilding for money allegedly misappropriated from the Scholefield estate by Mrs Box, on the basis that both should bear responsibility for Mrs Box’s fraudulent actions. They applied for summary judgment for a declaration that HDI could not aggregate their claims with those of other clients or entities.
The Judgment
Obligation to account
To succeed in their application for summary judgment for an account from Mr Gill and Mrs Wildings, the Bishop and LDBF needed to demonstrate that DCG had no real prospect of successfully challenging the facts or matters upon which they relied in support of their application. The key issue for the court to consider was whether Mrs Box’s involvement in the thefts from the Bishop and LDBF was with Mr Gill and Mrs Wilding’s authority and/or in the ordinary course of the DCG’s business. The thefts can be summarised as follows:
- The red ledger frauds
This was a ledger in Mrs Box’s handwriting that contained a number of disputed transactions for the benefit of the Bishop and LDBF, but which they did not recognise. Mr Gill and Mrs Wilding claimed to have no knowledge of the matters recorded in the red ledger. - The DBG ledger
This was a DBG firm ledger containing spurious transactions unrelated to any matter in which Mrs Box or DCG were specifically instructed. - The conveyancing transactions
There were eight conveyancing transactions where Mrs Box was instructed in her capacity as a Partner of DCG which show a number of payments out, ostensibly to or on behalf of the Bishop and LDBF, but which are unrecognised. Subject to a potential limitation defence (see below) Mr Gill and Mrs Wilding accepted an obligation to account for these misappropriated funds on the basis that “conveyancing was, of course, four-square within the firm’s business”.
These documents viewed together show systematic and long-term theft by Mrs Box. They also evidence that some funds were stolen from the Bishop or LDBF through DBG’s client account; others were not.
In considering the question of Mr Gill and Mrs Wilding’s liability for Mrs Box’s wrongdoing under the terms of Partnership Act 1890, His Honour Judge Saffman relied on the judgment of the House of Lords in Dubai Aluminium Co Limited v Salaam [2003]. In the judgment it was said:
“the wrongful conduct must be so closely connected with acts the partner or employee was authorised to do that, for the purpose of the liability of the firm…the wrongful conduct may fairly and properly be regarded as done by the partner while acting in the ordinary course of the firm’s business.”
Applying this guidance, the court drew an interesting distinction between the red ledger frauds on the one hand, and the DCG ledger on the other. It concluded that there was a reasonable argument (that could be run at trial) that the red ledger frauds were not carried out by Mrs Box “in the ordinary course of the firm’s business” and that Mr Gill and Mrs Wildings should not therefore be liable for those frauds. Rather Mrs Box had personally taken on the custody and administration of property belonging to LDBF by virtue of her close personal friendship with the Bishop. It was sufficiently arguable (to beat a summary judgement application) that she was acting not as a Partner of DCG but “on a frolic of her own”.
In contrast, the court felt that setting up the DBG ledger (in the name of a genuine client of the firm) and transacting through it was itself in the “ordinary course of business of a solicitor” and was not “outside the apparent authority of a partner”. As such, the court held that the Bishop and LDBF were entitled to summary judgment for an account in respect of the DBG ledger, because there was no real prospect of the court at trial concluding otherwise.
Limitation
As noted above, Mr Gill and Mrs Wilding accepted their obligation, in principle, to account for the missing proceeds of sales of land from the eight conveyancing transactions. The court therefore went on to consider the limitation defence raised in relation to of four of those transactions.
The claim form in respect of the conveyancing transactions was issued on 25 September 2018. Mr Gill and Mrs Wilding argued that any claim for money misappropriated before 25 September 2012 was therefore time barred due to the 6-year period in which to claim as set out in the Limitation Act 1980. This would apply to four of the eight conveyancing transactions in dispute.
LDBF relied on s21 (1) (a) of the Limitation Act 1980, which provides that no period of limitation will apply to any action brought by a beneficiary under a trust where fraud/fraudulent breach of trust “to which the trustee was a party or privy” can be shown.
The Bishop and LDBF argued that Mr Gill and Mrs Wilding were “party or privy” to the fraudulent breach of trust perpetrated by Mrs Box because the Partnership Act fixes them with liability notwithstanding their personal innocence. As such, they would not be able to take advantage of the protection of the Limitation Act in respect of the claims arising from Mrs Box’s fraud because no limitation period would apply.
It is evident that, where the conveyancing transactions were concerned, Mrs Box was acting within the scope of the ordinary business of the firm or within the scope of her apparent authority. The court therefore agreed with the Bishop and LDBF and concluded that DGB did not have any reasonable basis on which to argue that a limitation defence would succeed.
Aggregation
In considering this important issue, the court looked at the Solicitors Minimum Terms, which at clause 2.5 state:
2.5 One claim
The insurance may provide that, when considering what may be regarded as one claim for the purposes of the limits contemplated by clauses 2.1 and 2.3:
a) all claims against any one or more insured arising from:
i. one act or omission;
ii. one series of related acts or omissions;
iii. the same act or omission in a series of related matters or transactions;
iv. similar acts or omissions in a series of related matters or transactions
and
b) all claims against one or more insured arising from one matter or transaction will be regarded as one claim.
The policy definition of a ’claim’ includes an obligation on an insured firm and/or any insured to remedy a breach of the SRA Accounts Rules.
One act or omission
HDI argued that the claims for indemnity in respect of losses caused by Mrs Box should be treated as “one claim” under section 2.5 above or, alternatively, as one series of related acts or omissions and thus deemed “one claim” pursuant to MTC 2.5(a) (ii). In either case, only one limit of indemnity of £2 million would then apply (leaving Mrs Gill and Mr Wilding personally exposed anything over that sum). HDI contended that DGB’s obligation under rule 7.1 of the SRA Accounts Rules (to reconstitute the client account promptly on discovery of fraud) was a single, indivisible, obligation arising from only one act or omission, namely Mrs Box’s dishonest conduct.
The other parties argued that the claims by each separate client were separate claims, each of which should have the benefit of its own indemnity cover of £2 million. The SRA Glossary refers to “an obligation on an insured firm to remedy a breach of the SRA Accounts Rules…. and the obligation to remedy such breach shall be treated as a civil liability….”
Accordingly, the applicants argued that the use by the SRA of the singular, indefinite article could only mean that each breach is a separate breach.
The court concluded that the actions of Mrs Box, perpetrated over a number of years, could not be considered one act. HHJ Saffman drew an analogy with the process of building a housing estate:
“The building of each house is a different act. There may be a single intention to build a housing estate in the same way that Mrs Box may have had the single intention of stealing as much money as possible but each house, and each theft, must, in my judgment, be a different act although they may be taken with a view to accomplishing one ultimate objective.”
The court thus concluded that each misappropriation was a separate breach of SRA rule 7 and thus a separate claim for the purposes of clause 2.5.
A series of acts or omissions
When considering whether the various thefts constituted a series of acts or omissions sufficient to be treated as “one claim” under clause 2.5 (a) (ii), the court paid heed to the findings of the Supreme Court in AIG Europe Ltd v Woodman [2017]. HHJ Saffman noted Lord Toulson’s comments on the meaning of the word “related”:
“Use of the word “related,” implies that there must be some interconnection between the matters or transactions”, by which he meant, “they must in some way fit together”.
The applicants all argued that there was insufficient “interconnection” between the various thefts. Each client or estate sustained its own separate loss and “each act that plundered money from them was a wholly different act from the act which plundered money from other entities”.
HDI contended Mrs Box’s conduct was a series of related acts. It argued that the required “interconnection” resulted from “her ongoing determination to raid the firm’s client account”. Mrs Box engaged in substantial ‘teeming and lading’ to conceal the misappropriated finds, by moving funds between client ledgers or other funds, obscuring deficits in probate estates and crediting incoming client funds to different ledgers in order to conceal shortfalls elsewhere. HDI’s case was that all the claims arose from the related acts of dishonesty, the overreaching connection being the teeming and lading that Mrs Box carried out:
“Mrs Box was not suddenly deciding on a given day that she would embark on a new course of dishonest conduct. She had, a long time ago, clearly determined to treat the contents of the client account as her own and covered her tracks from time to time as she considered necessary. This amounts to an adequate unifying factor within the terms of the aggregation clause consistent with the limit of indemnity and the deemed claim provision (contained in the Glossary)”.
The court concluded that there was no unifying factor sufficient to unite the various thefts for aggregation purposes. What caused the financial losses to the two sets of applicants in this case were separate thefts from each of them. Teeming and lading was a way of concealing the thefts, not a unifying factor.
“It was not Mrs Box’s dishonesty which was the proximate cause of their loss. Dishonesty is not an act; it is a state of mind. What caused these claimants’ losses were the individual thefts from them. True it is that these were motivated by dishonesty but it is the “acts” that matter, not the motivation for the “acts”. These acts resulted in different losses to different clients. There cannot, in my view, be said to be a single loss because I am satisfied that the acts of theft were not related on a proper construction of MTC 2.5(a) (ii)”
As such, HDI would not be able to aggregate the claims.
Comment
This case is of great interest to Insurers and Solicitor insureds alike. It provides confirmation of a Partner’s responsibility for the fraudulent acts of a co-partner under the Partnership Act 1890, as well as guidance on the application of the exception for breach of trust set in in section 21 of the Limitation Act. Perhaps of most interest, however, is the court’s conclusion that HDI was not able to aggregate the various claims on the policy arising from Mrs Box’s frauds. Claims arising from solicitors’ frauds are rarely confined to one client or one theft; the decision will therefore raise issues as regards Insurers’ future exposure to such claims. It is likely that the decision, unless successfully appealed, will also affect the level of solicitors’ premiums in an ever hardening Professional Indemnity insurance market.
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