Our finance litigation experts bring you the latest on the cases and issues affecting the lending industry.
Supreme Court confirms lender's right of subrogation to unpaid vendor's lien
We first reported on the case of Bank of Cyprus PLC v Menelaou, in July 2013 from which the details of the case can be seen. Briefly, the bank agreed to release its charges on one property owned by Menelaou's parents so it could be sold and monies freed up to purchase another property (Great Oak Court) and upon which the bank would have a charge. The purchase of Great Oak Court was in Menelaou's name. She had had no knowledge of the charge until she came to sell her property. Menelaou had never signed the charge, rendering it unenforceable, and sought to have it removed from the title. That would leave the bank with no security for the parents' debts.
The bank argued that Menelaou had been unjustly enriched and sought an equitable charge by way of subrogation to an unpaid vendor’s lien over Great Oak Court. The Court of Appeal agreed that without the release of the charges, Great Oak Court would not have been bought and there was therefore a sufficient causal connection to hold that Menelaou had been enriched at the bank's expense. The bank was therefore entitled to be subrogated. Menelaou appealed.
The Supreme Court agreed with the Court of Appeal. It held the sale of the parents' property and the purchase of Great Oak Court were part of one scheme involving the bank throughout. There did not have to be a direct payment from the bank to Menelaou but there must be a sufficient causal connection between the loss to the bank and the benefit to Menelaou. There was: the value of the property without a charge on it was significantly greater to Menelaou at the expense of the bank which had been left without any security. Menelaou had been unjustly enriched at the bank's expense. The bank was entitled to be subrogated to an unpaid vendor's lien on the property which was enforceable by sale.
Things to consider
The fact that Menelaou did not know of the circumstances that had caused her enrichment to be unjust was no defence and did not alter the fact that she had been unjustly enriched or the extent of it. Fault on the part of the person unjustly enriched was not required
Receivers owe no duty of care to bankrupt mortgagor
The Court of Appeal has reaffirmed the position that a receiver does not owe a duty of care to a bankrupt who has no interest in the equity of redemption.
In Purewal v Countrywide Residential Lettings Ltd and others, the defendants were appointed as receivers by Purewal's mortgage lender over his rental property. Purewal was made bankrupt. The receivers insured the property which suffered a leak which caused considerable damage. The receivers did not make an insurance claim. Purewal carried out repairs to the property at his own expense and following his discharge from bankruptcy, the property, subject to the mortgage, was re-transferred to Purewal. He then brought a claim against the trustee for the cost of the repairs alleging breach of duty in failing to make an insurance claim on their policy.
At first instance the county court held that there was no duty of care owed to Purewal by the receivers. Any repairs carried out by him were done as a volunteer without the trustee's agreement as Purewal did not own the property at that stage. It would be inequitable to make the receivers responsible for such repairs which had not been requested or authorised. Even if a claim had been made, there was no obligation to apply any monies received on repairs as such monies would almost certainly have been paid to the mortgagee in reduction of the mortgage debt.
The Court of Appeal upheld the first instance decision. It held receivers owe a duty only if and to the extent that a mortgagor retains an interest in the equity of redemption and when a mortgagor is made bankrupt, that equity vests in the trustee. There was no authority that the receiver owed a duty to the bankrupt mortgagor and there was no justification for imposing such a duty. The bankrupt's ultimate entitlement to any surplus in the bankruptcy did not require the imposition of a duty on the receivers to anyone other than the trustee.
Things to consider
This is a useful reminder as to where duties lie following bankruptcy. The fact that the property was subsequently transferred back to Purewal following discharge was irrelevant as he was bankrupt at the time the alleged duty arose and so had no standing to bring a claim.
Beware of inappropriate use of insolvency procedure
The High Court has once again restated the principle that where a debt is disputed insolvency proceedings should not be used to force a disputing debtor to pay up and argue about it later.
In Coilcolor Ltd v Camtrex Ltd, Camtrex served a statutory demand in relation to outstanding invoices. Coilcolor disputed the sum owing alleging some of the goods were defective. Camtrex argued that its terms and conditions formed the basis of the contract between the parties. These precluded set-off and excluded liability for defects unless notified within seven days of delivery, which had not occurred. There was a dispute as to whether those terms and conditions were incorporated.
The High Court, in restraining the presentation of the winding-up petition, held that although there was a strong argument that Camtrex's terms and conditions did apply, there were difficult considerations of contractual interpretation of those terms and conditions which were not suitable to be dealt with in insolvency proceedings.
The court made it clear that winding-up is a discretionary remedy and where it appears that it is being used as a threat to impose pressure to pay, the court is more likely to give the benefit of any doubt as to whether there is a genuine dispute or cross-claim to the debtor - which it did in this case.
Things to consider
Often it is only when a statutory demand is served as a precursor to the presentation of a winding-up petition that a dispute over a debt arises. If it is clear that there is a genuine dispute, and not just a mere assertion or a cloud of groundless objections, it would be unwise to continue with the insolvency procedure due to the likelihood of an adverse costs order being made against the creditor. A more cautious, though lengthy, approach would be to issue proceedings and seek summary judgment. It might prove cheaper in the long run.
No second bite at the cherry
The court considers it in the public interest to ensure that repeat litigation on the same point and the same material is avoided.
This was the High Court's finding in the case of Harvey v Dunbar Assets Plc, a case which we previously reported on in September 2013. The earlier proceedings related to a statutory demand served in relation to a guarantee signed by Harvey and others (first statutory demand). Harvey had sought to set aside the first statutory demand on the basis of promissory estoppel in that Dunbar's representatives had told him the guarantee was a mere formality and Dunbar would never enforce it.
This argument was expressly abandoned prior to the Court of Appeal hearing which set the statutory demand aside on other grounds. Dunbar then issued a second statutory demand based on the same liability under the guarantee. Harvey applied to set it aside again raising the promissory estoppel point and sought to adduce new evidence in the form of statements from other Dunbar customers alleging they had been told the same thing.
The High Court held there was no direct authority on whether earlier arguments in relation to an earlier statutory demand could be repeated in respect of a subsequent statutory demand. The court concluded that absent a change of circumstances or special reasons, a debtor could not reiterate arguments presented earlier or raise arguments which could have been raised earlier but were not or which were abandoned. It was an abuse of process and not in the public interest to allow repeat litigation on the same point and same material. The statutory demand would not be set aside.
Things to consider
The court is always conscious to avoid further time, money and precious court resources being wasted on a second hearing of the same abandoned point on the same material whether in insolvency proceedings or otherwise.
Solicitors' breach of duty did not cause lender's loss
The court has found that solicitors were in breach of their duty to the lender to report on the disparity between a purchase price and a valuation but that that breach did not cause the lender's loss.
In Goldsmith Williams Solicitors v E.Surv Ltd, E.Surv surveyors sought a contribution from Goldsmith Williams Solicitors (Goldsmith) in relation to a payment made by E.Surv settling a claim by a mortgage lender for negligent valuation of a property.
A borrower purchased a property in September 2005 for £390,000. E.Surv valued it in November 2005 for re-mortgage purposes at £725,000. The borrower advised E. Surv that the purchase price six months earlier was £600,000. The borrower applied for a re-mortgage in December 2005 telling the lender he had purchased the property for £450,000 in October 2005. Goldsmith were instructed by the borrower and the lender. Goldsmith obtained details of the actual purchase price but failed to pass that information on to the lender. The borrower defaulted and the lender suffered a loss. Its claim against E.Surv was settled for £200,000. E.Surv sought a contribution from Goldsmith.
At first instance the court held Goldsmith was under a duty to advise the lender of facts that might have a material bearing on the valuation. Had it done so, the lender would have referred back to the valuer who would have revised the valuation and no loss would have been suffered. Goldsmith was ordered to make a contribution of £100,000 plus interest and costs. Goldsmith appealed.
The Court of Appeal held the starting point to determine the solicitors' duty was the express terms of the retainer which included the Council of Mortgage Lenders Handbook. There was nothing in the retainer or Handbook that excluded or was inconsistent with the imposition of the Bowerman duty (Bowerman Express Ltd v Bowerman & Partners ) on Goldsmith. That duty is one of disclosure of non-confidential facts which a reasonably competent solicitor ought to have realised would have a material bearing on the valuation or lending decision. The discrepancy between the actual purchase price and valuation brought in to question the adequacy of the lender's security and Goldsmith was in breach in failing to advise the lender of it.
However, on causation, the court found that the lender was already in possession of information as to the purchase price (albeit incorrectly said to be £450,000) which strongly suggested that the valuation was excessive. There was no evidence before the court at first instance as to whether knowledge of a purchase price of £390,000 would have made any difference to the underwriters' decision to lend when a purchase price of £450,000 had not. The two figures were not materially different and there was no evidence that the lender would have acted any differently. The court allowed the appeal on causation.
Things to consider
The decision re-affirms the Bowerman duty on solicitors to report non-confidential information which a reasonably competent solicitor would realise might have an effect on valuation or the lending decision and this includes discrepancy in purchase price put forward by a borrower to the lender.
Interpreting a standstill agreement
Parties to anticipated litigation may enter into a standstill agreement to stop time running for the purposes of limitation. Whether that standstill agreement applies to a particular cause of action will depend upon how widely the relevant clause has been drafted.
The Court of Appeal in Mortgage Express (an unlimited company) v Countryside Surveyors Ltd, had to determine whether such an agreement included a claim in deceit. In its letter before claim, Mortgage Express had alleged claims for breach of contract and in negligence against Countryside in relation to 49 valuations and had reserved their right to amend the allegations or raise additional ones. The parties then entered into a standstill agreement. When proceedings were issued they also included a claim for fraudulent misrepresentation and/or deceit in relation to 41 of the valuations. Countryside argued that those claims were not covered by the standstill agreement and so they had a limitation defence.
The definition of the word "dispute" in the standstill agreement covered "any claim or claims directly or indirectly arising out of or in any way connected with" the alleged negligent valuations. The court at first instance held the claim in deceit was not covered by the standstill agreement.
The Court of Appeal disagreed. The standstill agreement had to be construed as any other contract by looking at the language used and ascertaining what a reasonable person would have understood the parties to have meant with all the background knowledge reasonably available to the parties at the time of the contract. The parties would have known that a claim based on fraud and dishonesty was different to one based on negligence and breach of contract. No deceit claim had been raised at the time of the standstill agreement but the letter of claim specifically reserved the right to raise additional claims. The term "dispute" was drafted in very wide terms and the court held that a deceit claim fell within claims arising or "in any way connected with" the matters raised and so fell within the suspension provisions.
Things to consider
Parties need to consider very carefully what they intend to include or exclude in a standstill agreement. The claiming party will clearly want the wording used to be as wide as possible so any claims not formulated at the time of the agreement can subsequently be included.