Firm owes client at least $1m

If a law firm had a proper process to check conflicts of interest, it may have avoided paying a client as much as $1.5 million.

Horse trainer Jeffrey Lynds has successfully sued Manawatu law firm Fitzherbert Rowe, after alleging its failure to declare a conflict of interest ended with him losing money on a bad business deal.

The legal action played out for more than a year before High Court judge Justice Jillian Mallon delivered her 94-page judgment in June, but the genesis of the case goes back decades. Lynds had trained horses belonging to dairy farmer Robin Mitchell since the 1970s. They went into business together in 1988, combining some interests and expanding the horse business.

Their key interaction for the legal action, known as ‘‘the pegasus transaction’’, was a loan taken out to finance the purchase of two stallions. Lynds committed to borrowing the money on the basis Mitchell was financially sound, but Mitchell’s dairy business was heavily in debt, unable to meet loan payments without finance.

Mitchell used some joint venture funds to cover his dairy business’ loan defaults. The joint venture became unable to pay its loans, so it was restructured into a company. Mitchell withdrew from the partnership at that stage and died before the company went into liquidation in 2015.

Various partners at Fitzherbert Rowe acted for Mitchell when he restructured his dairy business, as well as Mitchell’s major lender, Lynds, and Lynds’ and Mitchell’s partnership.

Lynds believed Fitzherbert Rowe knew about Mitchell’s financial problems at the time of the pegasus transaction. He said that created a conflict of interest, which should have led to it going to him for informed consent, telling him he was entitled to independent legal advice due to what the firm knew.

He wanted to recover losses he and the restructured business suffered as a result of the pegasus transaction, which he claimed were as much as $5.5m. Fitzherbert Rowe denied any conflict, saying the firm was acting for Mitchell and Lynds jointly and had not been asked to advise on the wisdom of the transaction.

It also denied having information about Mitchell’s financial situation at the time of the pegasus transaction that would have influenced Lynds’ decision, but admitted it would have had to tell Lynds it could not act on the transaction if it had had it.

The firm said any compensation to Lynds, if it was in the wrong, had to be offset by Lynds’ negligence from entering into the agreement.

The judge found Fitzherbert Rowe breached the ‘‘double employment rule’’ – meaning its duty to one client could conflict another – at the point Lynds and Mitchell were about to sign the transaction.

‘‘It does not appear that Fitzherbert Rowe had a system by which conflict checks were carried out before instructions were accepted,’’ the judge said. ‘‘Had they had such a system and carried out a conflict check before accepting the instructions [about the transaction], there would have been the opportunity to seek and obtain Mr Lynds’ informed consent.’’

The judge found further conflicts arose, as Fitzherbert Rowe partners had learned more about Mitchell’s financial situation. Lynds was unlikely to have bought the stallions if he had that information, the judge said.

Mallon said her ‘‘guesstimate’’ at Lynds’ compensation figure landed between $1m and $1.5m, but she asked the parties sort it themselves.