9 March 2012

A fictional purchase can come back for very real bite

The message: Solicitors acting for lenders could pay a heavy price for carelessness.

The case: The Court of Appeal has confirmed that defrauded lenders may be able to recover all their losses from their solicitors, following the case of Lloyds TSB Bank v Markandan & Uddin (09.02.12).

In 2007, the defendant solicitors acted on behalf of the bank in relation to a £742,500 loan to a Mr Davies to be secured on a property in London. The loan was part of an elaborate fraud: the property’s owners were abroad and were not involved in any sale, the bank obtained no security, and the fraudsters disappeared with its money. The dispute centred on who should bear responsibility for the loss of the money.

The background was that a mortgage application, with all supporting documentation, was submitted to the bank on behalf of a Mr Davies.

A loan of £977,500 was sought on the basis of a purchase price of £1.15m. Mr Davies was to pay the balance of £172,500.

Valuers were instructed and the fraudsters organised an inspection of the property, but the valuers only thought it was worth £825,000.

Accordingly, the bank was only prepared to lend £742,500 — 90% of its value. Extraordinarily, the bank proceeded, despite being told the price had gone down by £325,000, and it did not tell the defendant solicitors.

The fraudsters then made themselves out to be the London branch office of a genuine firm of solicitors in Luton. They claimed to be acting for the property’s owners, corresponded with the defendant using forged notepaper and provided a fictitious bank account to which the defendant remitted the loan monies. They told the defendant that Mr Davies had paid the balance direct to them.

The defendant should have been suspicious when told the balance had been paid direct by Mr Davies. However, it argued the bank should bear some responsibility for agreeing to the loan.

The bank argued that the defendant’s release of the funds constituted a breach of trust, as its terms provided that monies could only be released on a proper completion of the purchase. On this basis, the defendant would have to bear all the loss, as any contributory negligence by the bank 
is irrelevant where there was a breach of trust, rather than just negligence or breach of contract.

The defendant said the funds were only held on trust for the purchase and that they had only been released for the purported completion of the purchase, so there was no breach of trust.

At first, the judge held the defendant liable for breach of trust, as it had released the funds without obtaining all documentation from the owners’ supposed solicitors. But the Court of Appeal said the vital issue was whether the completion was genuine. The solicitors were only entitled to release the funds to complete a lawful contract. They could not claim there was no breach of trust, as they completed a fictional purchase, where there was no contract in the first place.

The court said there was nothing unfair in holding solicitors liable for breaches of trust resulting from fraudulent representations, as a competent solicitor could rely on section 61 of the Trustee Act 1925, which gives a court the discretion to relieve solicitors from such a liability where they have acted with reasonable care. However, the defendant solicitors could obtain no such relief, as they had been too careless.

Despite the bank’s failures in proceeding with the loan, it was entitled to full repayment of the loan monies and any interest owed.

Summing up: Lloyds TSB Bank v Markandan & Uddin

  • Lloyds TSB agreed to loan a Mr Davies £742,500 towards the purchase of a property
  • Solicitors acting for the bank did not realise the loan was part of an elaborate fraud and paid the loan to the fraudsters
  • The court found the defendants to have been careless and the bank was entitled to full repayment of the loan.

 

First seen in Property Week, 3 March 2012

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