Charities recovering stolen legacy funds
The theft of a charity's funds by someone within the organisation is a risk that the charity's management should be able to put measures in place to avert. Indeed, the theft of a charity's funds by a third party is considerably more difficult to prevent. So what means of redress does a charity have when the worst happens?
Linda Box was the very well respected senior partner of Dixon Coles & Gill, a three-partner law firm which had been in practice in Wakefield, Yorkshire for around 200 years until its closure in January 2016. She was a probate practitioner who administered estates of deceased people both in the capacity of executrix and in the capacity of solicitor for the executors.
As executrix she will have sworn an oath to collect in the deceased's assets and then administer those assets according to the law, but often proceeded to do nothing of the sort.
Decade of misappropriation
Instead, for around a decade she misappropriated the funds of estates she was meant to be administering in line with the deceased's wishes, for her own benefit. She paid her personal credit card bills, personal tax bills, personal mortgage liabilities and liabilities owing by her husband's business from deceased people's estates.
In its judgment, when striking Linda Box off the roll of solicitors on 14 November 2016, the Solicitors Disciplinary Tribunal said her actions represented "planned, deliberate, systematic, repeated dishonesty over a long period of time".
Whilst Mrs Box produced accounts for the estates she administered, these were not always accurate. Indeed, they were often wildly inaccurate. She would not include assets that belonged to the deceased (having helped herself to some or all of those assets), or include liabilities that the deceased did not owe (to justify a reduction in estate funds).
Work of fiction
The resulting estate accounts were a work of fiction created to justify the sums Mrs Box distributed to the residuary beneficiaries who, without sight of the file relating to the administration, were completely unaware of the fraud being exacted upon them.
It was not until Christmas 2015 that one of Mrs Box's partners noticed what was going on. When covering for her over the festive season he noticed a payment from funds belonging to one of the estates Mrs Box was administering that did not seem related to the estate in question. Upon investigating further, more and more irregular payments were uncovered. The Solicitors Regulation Authority (SRA) was notified, the firm ceased practice and an insolvency process commenced.
At Leeds Crown Court on 24 March 2017, Mrs Box was sentenced to 7 years in prison for the 13 counts of theft, abuse of position and forgery brought against her, to which she had pleaded guilty, amounting to a loss to her clients and estates she was administering of in excess of £3m. These example indictments are believed to represent a fraction of Mrs Box's activities.
Clients of Mrs Box and beneficiaries of estates administered by her were notified by solicitors appointed by the SRA to intervene into Dixon Coles & Gill where it was feared they could have been a victim of fraud and those clients and beneficiaries put forward claims where those fears were confirmed. Clearly, the first port of call for any claim for redress was Mrs Box herself, but she had limited funds to offer having, it would appear, spent rather than saved the majority of the money she stole and now residing at “Her Majesty's Pleasure”.
A Criminal Compensation Order was obtained but it covered merely £2,452,440.33 of thefts. The list of clients and estates making up that total did not even include the estate that set the whole house of cards tumbling down- a theft Mrs Box admitted when before the Solicitors Disciplinary Tribunal - nor the estate from which the litigation referred to below arises, together representing further loss in the region of £750,000.
As Mrs Box was in partnership, the next opportunity for redress was a claim against her former firm. An important point to note here is that if she had been a sole practitioner this option is likely to have been out of the question, as the insurance policy covering her business would have been unlikely to have covered fraudulent acts.
In practice, as Dixon Coles & Gill was a multi-partner practice and all partners are liable for the acts of their other partners, the firm's insurer acknowledged receipt of claims arising from Mrs Box's actions and dealt with them, it is said, in chronological order based upon date of receipt of the claim, until the insurer had paid out £2m in compensation for losses suffered.
Limit of insurance
It then stopped dealing with any claims, stating that the limit of the firm's insurance had been met. Dixon Coles & Gill having the minimum level of insurance in place required to be able to practice as solicitors - £2m.
The insurer claimed at this point that it was not liable for any further claims on the basis that as all claims arising from Mrs Box's actions should be considered as one claim (that falls within the one insurance limit) on the grounds that they arose out of a series of related acts or omissions (thus fell within the definition of claims that could be “aggregated”, i.e. considered as one claim, under the terms of the insurance policy).
The good news for clients of law firms and beneficiaries of estates is that, thus far, the insurer has lost on this point both in the High Court and the Court of Appeal . HHJ Saffman sitting as a High Court judge in Leeds concluded that Mrs Box's actions over a number of years, and affecting a range of different clients and estates, did not have sufficient interconnection or unifying factor to enable them to be aggregated and thus fall within one insurance limit.
Not related actions
Despite the insurer's argument that Mrs Box's dishonesty was a sufficient link to enable it to treat all claims arising from her actions as one claim for insurance purposes, the Court of Appeal upheld the High Court's decision, concluding that although the acts flowing from Mrs Box's dishonesty were "no doubt similar", this "is not enough to make them a series of related acts for the purposes of aggregation". If it had not, consumer protection would have been severely eroded.
Currently, a client of a law firm who is prudent enough to enquire as to that firm's insurance cover would naturally conclude that the firm's insurance limit applies to their transaction with the firm alone and thus take comfort that, say, the administration of their estate would be covered by the insurance in place.
If the insurer had succeeded, that client could find any claim arising against the firm that they have, or their estate may have following their death, being aggregated with those of other clients of the firm of which the client is unaware and stretching back over many years. However, the story may not be over as the insurer is seeking permission to appeal to the Supreme Court.
If the insurer can avoid liability, clients and beneficiaries of estates administered by Mrs Box will be faced with making their claims against the partners of her former firm personally and/or seeking compensation from the Solicitors Compensation Fund managed by the SRA as the insurance of last resort in the event of a solicitor's wrongdoing. Neither of these options are attractive ones.
It is unlikely that Mrs Box's partners' assets will cover the entirety of the unmet claims – or even a significant fraction of them - and making people bankrupt as a result of wrongdoing of which they are innocent rather sticks in the craw.
Only smaller charities
However, many charities are going to find the Solicitors Compensation Fund's doors firmly shut. Following a rule change implemented on 5 July of this year, only charities with an annual income net of tax in the most recent financial year of less than £2m can apply for an award from the fund and, in the event that a charity beneficiary is small enough to qualify, no more than £5m will be paid in respect of “single or connected events” even if multiple applications are made by different claimants.
It is not difficult to see where the SRA has obtained inspiration for this rule change from. However, whilst claims by executors should still be accepted (provided the £5m cap has not been met), this is of scant comfort if the executor is the cause for the claim.
In summary, unless the Supreme Court determines otherwise (watch this space!) there should be insurance cover if an estate is defrauded by an employee or partner in a multi-partner law firm, but check the limit of that insurance if a high value estate is involved. Be particularly cautious if dealing with a sole practitioner.
Speed is of the essence
Due to the way insurance claims are handled, speed may be of the essence, so if you believe your charity has a claim, make it quickly. Above all, do not be shy about requesting documents to support estate accounts if something does not look right and do not rely on the Solicitors Compensation Fund actually acting as an insurer of last resort.
