Solicitor must compensate bank for €250k loan cheque

THE Supreme Court has ruled a solicitor must compensate a bank because he released to a client a €250,500 loan cheque from the bank to buy lands in breach of an undertaking to first obtain a priority charge in favour of the Bank over the property.

However, because Bank of Ireland Mortgage Bank (BOIMB) itself negligently provided loan facilities in August 2003 on the basis of an overvaluation of the lands at Banane, Meelin, Newmarket, Co Cork, the court ruled it was not appropriate to order the solicitor to repay the Bank the full €250,500 amount of the loan monies released and instead directed the case return to the High Court to assess what compensation is due.

The court had heard a bank approved valuer in autumn 2003 valued the lands, described as “a rushy field with a labourer’s cottage” in remote Co Cork, at €295,000 and they were valued in June 2006 at €140,000.

In her November 2006 High Court decision rejecting the Bank’s compensation claim, Ms Justice Mary Laffoy said the case exposed “a serious risk” to the integrity of the lending system for residential mortgages, put in place to avoid the need for a third solicitor in a sale.

She noted BOIMB had up to August 2006 advanced some €2.2 billion on such residential mortgage loans with practically all of those secured on solicitors undertakings and most of the other main lenders operated the same way.

BOIMB had brought its case against solicitor Daniel Coleman, practising as Coleman & Company, Main Street, Ballinrobe, Co Mayo, seeking compensation over Mr Coleman’s failure to honour an undertaking of September 15, 2003.

That undertaking provided Mr Coleman was not to release €250,5000 paid to him by the Bank, in his capacity as solicitor for John Lane, Sarsfield Drive, Ballinasloe, Co Galway, without Mr Lane having executed a mortgage in favour of the Bank over the property being purchased.

In her High Court decision, Ms Justice Laffoy noted Mr Coleman accepted he had breached his undertaking in having not perfected the client’s title to the lands or the Bank’s security.

She also noted the borrower defaulted on instalment repayments and the Bank had reported “apparent irregularities” in this and other mortgage transactions to the Garda Bureau of Fraud Investigation. While the nature of the alleged irregularities were not disclosed to the court, they related to applications for mortgages introduced to the Bank by the same mortgage broker, the judge said.

Mr Coleman’s file about the transaction was removed from his office in June 2004 by gardaí. The bank wrote to Mr Coleman in October 2004 seeking precise details of the transaction and he replied he could not give that information as gardaí had the file. He said he could complete the security once he got the file.

In seeking compensation for the full sum of €250,500 plus interest, the bank asked the High Court to invoke its inherent jurisdiction over solicitors, as officers of the court. The High Court ruled that was not the correct approach to the exercise of that jurisdiction as (1) the bank would not have obtained the full security even if the undertaking were adhered to and (2) it was still open to Mr Coleman to fulfil the undertaking.

Giving the Supreme Court decision, Mr Justice Hugh Geoghegan agreed there must be regard to the undertaking as a whole, not just the particular obligation within it. There must also be regard to the maintenance of the integrity of the lending system.

While it would be appropriate in some cases to order a solicitor who defaulted on an undertaking to repay the entire sum involved, that was not appropriate here as the bank, by its own negligence and independently of any connection with the solicitor’s default, provided loan facilities on an overvaluation of the property. There was also no evidence the solicitor was party to any fraudulent conduct.

Mr Justice Geoghegan disagreed there was no justification for awarding any compensation on grounds the transaction could still be completed. Completion has since been effected with the title now in order and the bank’s security in place.

Given the breach of undertaking, compensation should be assessed and the court would allow the bank’s appeal to that extent, he said. This was an appropriate exercise of the court’s inherent discretion over solicitors as officers of the court.