HIGH COURT JUDGMENT/KBC Bank Ireland plc -v- BCM Hanby Wallace
Neutral citation: (2012) IEHC 120
High Court
Judgment was delivered on March 16th, 2012, by Mr Justice Brian McGovern.
Judgment
A firm of solicitors which told a bank its instructions with regard to undertakings for a property transaction had been complied with when they had not was liable for damages and could not claim contributory negligence.
Background
KBC Bank retained solicitors BCM Hanby Wallace to act for it in loan transactions concerning solicitor Thomas Byrne (later struck off the Roll of Solicitors for dishonesty) and a client of his, John Kelly. In August 2005 the bank loaned Mr Kelly €4.9 million, increased a month later by €1 million, and in December of that year issued a facility letter for a further €9 million. In August 2007 the bank also agreed to lend Mr Byrne €9 million.
In relation to all the loans it retained BCM Hanby Wallace to investigate the title and obtain a first fixed charge over 30 properties advanced as securities for the loans. It obtained a first charge on three of the properties, but for the rest accepted undertakings from Mr Byrne which were not complied with. It had not obtained the authority of the bank to accept the undertakings, however.
The partner in the firm who was dealing with the bank agreed he released deeds where no mortgage was registered, and accepted he should have made inquiries before accepting undertakings, but argued this was common practice at the time and was regularly done. Under cross-examination, he accepted that if the bank had known the true position concerning the security, it would not have issued the second or subsequent loans. The partner had stated security was in place when it was not, and the firm accepted it had acted negligently and in breach of duty.
The issue now was how to assess damages. The bank was seeking damages to compensate for the loss of the money loaned.
Decision
“On any view of the evidence, the defendant’s breach of duty was egregious,” Mr Justice McGovern said. “It seems to me that they go far beyond mere omission with regard to the obtaining of security for the bank in respect of the loans. In reality, the breach of duty goes so far as to amount to a deception on the part of the defendant because it was aware that the required security was not in place, but led the bank to believe that it was.”
During the trial, a significant amount of evidence was given concerning contributory negligence on the part of the bank due to its failure to carry out proper inquiries into the claims concerning the business affairs of Mr Kelly and Mr Byrne.
For example, Mr Byrne claimed to have an income in 2006 of approximately €12 million. The purported income included €4 million annually as a consultant to French fashion houses, but this was unsupported by any documentation.
The defendants argued the bank was obliged, under EU law, to have effective processes in place to manage risks.
After examining some of the evidence concerning Mr Byrne and Mr Kelly, Mr Justice McGovern said the plaintiff “was somewhat careless in its appraisal of the borrowers”, as a number of facts were available that ought to have raised suspicions about the true financial worth of the borrowers and their reliability.
The undisputed evidence was that if the defendant had acted in line with the bank’s instructions, none of the loans would have proceeded. The proximate cause of the loss was the defendant’s act in failing to comply with instructions and releasing the funds to the borrower where it knew or ought to have known it was acting against its instructions. The funds were released after the plaintiff had sought and obtained confirmation that it would not release them until security was in place.
“No bank which retains the services of a professional, such as a firm of solicitors, should have to check into those assurances before releasing the funds,” he said. “It was entitled to rely on these assurances, and it did so.” The loss to the plaintiff was the amount of the loans advanced, along with the costs of funding them. Counsel would return to the court with figures, less any repayments made and/or the value of any secured property the bank obtained.
The full judgment is on courts.ie.
Michael Collins SC, Maurice Collins SC; and Paul McGarry BL, instructed by Arthur Cox, for the plaintiff; Paul Gallagher SC, John Gleeson SC and Una Tighe BL, instructed by Ronan Daly Jermyn, for the defendant