RECENT HIGH COURT DECISIONS CONCERNING SOLICITOR'S UNDERTAKINGS AND "NO TRANSACTION CASES"
On 16th March 2012 in the case of KBC Bank Plc v BCM Hanby Wallace Mr Justice Brian McGovern found that there were "egregious" and "most serious" failures on the part of law firm BCM Hanby Wallace, now Byrne Wallace, in their duty to ensure that KBC Bank had proper security for substantial loans made to property developer John Kelly and struck-off solicitor Thomas Byrne.
BCM Hanby Wallace were held liable because not only did they fail to ensure proper security was in place for the benefit of KBC Bank but they also misled KBC by either suggesting security was in place or that funds would not be released to the Borrowers until it was in place. Mr Justice McGovern stated that the breach of duty from BCM Hanby Wallace amounted to deception because they were aware the required security was not in place but led KBC Bank to believe it was in place.
- Required Security
The loans advanced to the Borrowers should have been secured on thirty properties but were secured on just three properties. KBC argued that instead of ensuring it had sufficient security BCM Hanby Wallace obtained a first legal charge in favour of KBC on only three properties and accepted undertakings from Mr Byrne, which were not complied with, to put measures in place ensuring security. The court noted that the case did not concern a single act of negligence but "multiple failures" from BCM Hanby Wallace which was repeated across four separate loan transactions. A partner of the defendants accepted that he should have made inquiries about charges on the properties before accepting any undertakings but argued that this was general practice at the time and commonly done. Given this and other admissions the court held that the defendants could not avoid findings of negligence, breach of duty and breach of contract.
- Contributory Negligence of the Bank
BCM Hanby Wallace argued that there was contributory negligence by KBC in failing to properly check out the creditworthiness of the Borrowers before loans in the amounts of €9 million and €16 million were advanced to them between 2005 and 2007. They claimed that KBC Bank were aggressively pursuing the Borrowers as clients and would have made the loans in any event.
The court did notice that KBC was "somewhat careless" in its appraisal of both borrowers before agreeing to make loans and that several facts should have aroused KBC's suspicions about the true financial worth of the Borrowers. However, the court dismissed the defendant's contributory negligence argument and held that KBC was entitled to rely on assurances from professionals retained by it and no bank which retained the services of a professional should have to check into assurances provided by those professionals. The court ruled that the undisputed evidence was if the solicitors had adhered to the bank's instructions concerning security, none of the loans would have been made and that disposed of the claim for contributory negligence.
- No Transaction Case
Justice McGovern held that KBC was entitled to damages on a "no transaction" basis in that it would not have made the loans and therefore not suffered the consequent loss if the solicitors had told it the necessary security was not in place. The court ruled that KBC is entitled to recover the full amount of the loans advanced plus certain costs and stamp duty minus the 2008 value of the three secured properties, the amount of €900,000 received from Mr Kelly, the value of another property in Co. Wexford and certain costs.
Issues relating to the exact amount of damages have been adjourned but it is estimated that damages could amount to €25 million.
It has been reported that Byrne Wallace is considering appealing the decision.
- Contrast with previous Johnston Judgment
A similar case was heard on the 1st of June 2010 by Clarke J in the High Court in the case of ACC Bank Plc v Brian Johnston, Practising under the Style and Title of Brian Johnston & Co. Solicitors
In this case the court had to consider whether it was negligent for the defendant, Mr Johnston who was the solicitor acting for ACC Bank, to have handed over loan monies to the solicitor for the borrower on the basis of an undertaking and in allowing a transaction to go ahead and the relevant monies handed over to the borrower's solicitor in circumstances where Mr Johnston ought to have been aware that there was no first legal charge in place over the property.
The Court referred to the terms of the letters of sanction and the formal letter of appointment from ACC to Mr Johnston. From the facts of the case there were four separate facilities and it appears that Mr Johnston closed the mortgage arrangements by accepting undertakings from the borrower's solicitors. The Court held that Mr Johnston was not authorised by ACC to close the mortgage arrangements by accepting undertakings from the borrower's solicitors.
The court concluded that it was negligent of Mr Johnston to release monies to the Borrower's solicitor on foot of an undertaking. The court referred to the letter of appointment which suggests that there should be a first legal mortgage or charge in place before drawdown of the monies and prior to the handing over of any monies to the borrower.
During his judgment Clarke J noted that solicitor's undertakings have come under much greater scrutiny in more recent times, in light of unfortunate events that have come under public notice concerning a number of solicitors who have failed to meet such undertakings.
It was concluded that by adopting, without permission, a different and riskier means of closing, Mr Johnston was in breach of both his general duty of care to ACC and the terms of his letter of appointment. When monies were advanced to the borrower's solicitor Mr Johnston had at no stage seen an executed transfer in favour of the borrower although he had been told by the borrower's solicitor that such existed.
The court also held that this was also a "no transaction" case so that the damages to which ACC are entitled should be based on analysing what would have occurred in the event that those transactions did not go ahead and that ACC had available to it the monies which were actually advanced to the borrower, on foot of the transactions, which monies would have been deployed elsewhere.
The order regarding the quantum of damages in favour of ACC was handed down by Clarke J on 22nd September 2011. During his judgment Clarke J was of the opinion that "no transaction" jurisprudence is primarily directed to ensuring that a plaintiff cannot recover a loss of bargain which that plaintiff may suffer by reason of a transaction not going ahead in circumstances where even had the relevant defendant not been guilty of negligence, the transaction would not have gone ahead anyway. The "no transaction" jurisprudence is designed to exclude such damages. Clarke J referred to previous case law and held that not all of the losses which may arise from the transaction going ahead may be recoverable.
Clarke J held that on the facts of the case the damages which should be awarded to ACC was the value of the security because the fact that the loan money was gone but no security was in place was the direct consequence of Mr Johnston's negligence. Clarke J considered that the value of the security was €3 million at the time the first set of transactions closed but was worth less than €1 million at the time of the judgment. Clarke J also noted that after the transactions closed a further sum in excess of €1 million was advanced to the borrower at a time when ACC believed that he remained a customer in good standing.
The amount of damages was assessed to be €2 million (amount of the loan facility was €7 million). Clarke J held that if ACC got what it bargained for, i.e. a loan to the borrower with security as per the facility letters, he was satisfied that ACC would only have recovered €2 million. Clarke J said that the balance of ACC's losses on this transaction were attributable to the fact that it was a poor lending transaction and the significant fall in the value of the lands.
Unlike the KBC case the defendant in the Johnston case did not raise the argument of contributory negligence on the part of the Bank.
It should be noted that whilst both cases have been held to be "no transaction" cases, damages in the Johnston case were calculated by Clarke J by reference to the value of the security over which ACC should have had a legal charge over. Clarke J was of the opinion that awarding ACC damages in the sum of €7 million would allow ACC to obtain a windfall gain as €7 million had been agreed to be lent against a security which, as it turns out, was worth only €3 million. Clarke J concluded that €4 million of ACC's underlying loss was attributable to the fact that it had entered into a bad loan rather than anything that Mr. Johnston did by way of failing to ensure proper security.
Judgment concerning the amount of damages in the KBC Bank Plc v BCM Hanby Wallace is awaited.
Philip O'Leary | Partner
6 Lapps Quay, Cork, Ireland