THE HIGH COURT
[2013 No. 2040 S.]
BETWEEN
DANSKE BANK A/S
PLAINTIFF
AND
PATRICK AND BRIDGET McGEENEY
DEFENDANTS
DECISION of the MASTER of the HIGH COURT, 10th December, 2015
1.
Does anybody now remember the media and political controversies which
broke when banks and building societies were first beginning to sell off their
underperforming mortgages to unregulated private property investors? This hitherto
foreign trade came hard on the heels of the offloading of their underperforming
portfolios by NAMA, and by Anglo (later IBRC, later again IBRC in “special”
liquidation).
2.
At the time, the concerns were about whether the Code of Conduct on
Mortgage Arrears would continue to be observed by the new mortgagee/investors.
Also, at the time, efforts by individual mortgagors to be allowed to bid for their own
mortgages were, in some cases, dismissed out of hand as just too difficult to organise:
it was, we were told, easier to sell them in bundles. In a sense these are the historical
origins of this case.
3.
Given that we now have a public housing shortage it is sobering to realise that
the State could have – probably should have – bought up this distressed housing
stock, at the time, at knock-down prices, instead of losing them to the unregulated and
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sometimes unaccountable private investment funds. Indeed, it may not be too late to
do so via compulsory acquisition legislation.
4.
Mr. and Mrs. McGeeney got a term loan from National Irish Bank in 2007.
They fell into arrears and, realising they needed to address the problem, (and with the
bank’s agreement) placed the Ballybofey house on the market in 2012 through the
agency of Charlene Patton in Stranorlar, quoting a price of €120,000. In August,
2012, they had an offer of €90,000 but the bank would not consent. Instead, in
January, 2014, the bank appointed a receiver.
5.
All that the bank is able to tell us is that the sum of €52,575 has been credited
to the defendants’ account following the sale of the house in July, 2014. Mrs.
McGeeney has investigated further and obtained some details from the Property
Registration Authority including the fact that the purchase price recorded on their file
was €60,800. On that basis, Mrs. McGeeney calculates that the receiver’s
commission and expenses must have been almost 15% of the sale price, and she notes
that her agent had quoted her 1%. She is looking for answers. Her husband is quite
ill. They are both elderly, on a pension, and unable to afford the services of a legal
team. The actions of the bank and the receiver have caused them distress.
6.
On a very mundane level, the McGeeneys are questioning how it was that the
price agreed for the house by the receiver is stated to be €60,800, when they had been
offered €90,000 two years earlier. Actually, although they have not yet adverted to it,
the issue may be much more fundamental, namely, what is the evidence that such was
the price actually paid by the new owners, and how was the particular price identified
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for this particular property, and whether there was any market place information
guiding same, and whether the price realised was actually more than now represented,
or was the whole process of pricing the portfolio a sham exercise.
7.
Of course, the McGeeneys are also questioning the receiver’s charges. If they
were charged €9,000, almost 15%, for six months “work” by the receiver, what was
the total sum deducted by the receiver in respect of a portfolio of 400 plus properties –
can the receiver seriously stand over a two million plus euro fee? If not, why are the
McGeeneys charged 15%? At the very least the law accepts that the mortgagor is
entitled to an account from its agent the receiver and a full account in this case
necessarily involves, in respect of each of the properties in the portfolio, a complete
breakdown of price, commission and expenses.
8.
If the reality is that the receivership is but a device to shield the mortgagee
from claims by the mortgagor, and that the receiver appointed is no more than a clerk
acting under the direction of the mortgagee, surely no such commission should be
chargeable to the mortgagor’s account. There is a compelling case for review by the
court of the level of commission allowed in any instance where it is apparent that the
receiver’s role was, at best, incidental. The extent of the receiver’s actual
engagement with and work in the discharge of his duties is yet another issue which, if
disputed, must involve discovery of documents.
9.
I have some sympathy for the view that the unaccountable receivership is a
licence for theft. The law cannot avert its gaze: a receiver, whether a receiver with
power of sale or merely to collect rents etc., must discharge his responsibilities bona
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fide and without fraud. That is the theoretical position. In practice, mortgagors
anecdotally report grievances against receivers ranging from surprisingly low sale
prices through failure to respond to queries, menaces and worse.
10.
But the practicalities and cost of litigation act as a de facto carte blanche for
receivers when individual mortgagors voice their concerns and the whole is a classic
scenario in which, absent access to the courts at reasonable cost, justice demands
regulation of receivers in the now familiar model of regulation by a statutory agency.
11.
In this case it is the bank which is suing and it adopts the view that questions
or issues concerning the receiver are not defences to the case. They rely on the
submission that the receiver is the agent of the borrower under Section 24(2) of the
Conveyancing Act 1881. This decision seeks to explore whether that submission is
correct in law. If not, the receiver, who was appointed by the bank, will be treated as
the bank’s agent and vicarious liability may be a stateable basis on which the
McGeeneys can defend the bank’s claim.
12.
Apart altogether from the question of the receiver’s acts or defaults (and the
linked issue of whether the bank might be vicariously liable) the McGeeneys may
have also identified circumstances in this case in which the plaintiff bank might be
liable to them not just as an agent’s principal but as an actor on its own behalf: any
portfolio sale suggests hands-on involvement by the bank. The notion that the
receiver could have negotiated himself (with a company not registered until two
weeks before the sale) the sale of a 400 unit property portfolio in a couple of months
is a bit farfetched.
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13.
Ordinarily, a mortgagee owes its mortgagor a duty to act without negligence
if/when it takes possession of the security property or when it sells same. And a
receiver appointed by the mortgagee owes the same duty, no more and no less.
14.
Reflecting the Common Law position at the time of writing, Coote on the Law
of Mortgages (1912 ed.) states that:
“the power of sale being given to the mortgagee for his own benefit, it follows
that if he exercises it bona fide for that purpose without corruption or
collusion with the purchaser, or such wilful or reckless impropriety as to be
tantamount to fraud, the Court will not interfere even though the sale be very
disadvantageous, unless, indeed, the price is so low as of itself to be evidence
of fraud.”
“An action will lie, at the suit of the mortgagor, against the mortgagee for
fraudulent or unreasonable exercise of the power; and the mortgagor is
entitled to substantial damages.”
“A mortgagee is chargeable with the full value of the mortgaged property
sold, if, from wilful or reckless want of care and diligence, it has been sold at
an undervalue.”
though a footnote observes that:
“(earlier) reported decisions appear to have proceeded on a stricter view of
the fiduciary character of a mortgagee than would now be recognized.”
15.
In the old Irish case of Hibernian Bank v. Yourell (No. 2) [1919] 1 I.R. 310,
O’Connor M.R. confirmed that a receiver acts in a fiduciary capacity:
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“He must be faithful to the mortgagor. He must act in his interest; he must
protect him against claims which are unsustainable. He must not assume
liabilities which cannot be enforced against his principal”.
16.
In regard to a receiver appointed under s. 19 of the 1881 Act Coote states that
“he will not be liable for involuntary losses which may occur in the proper discharge
of his duty; of course, however, he will be liable for losses which may arise by reason
of his own misconduct.”
17.
Under the heading “Appointments under Statutory Powers”, the leading
modern text (Kerr on Receivers, 17th ed.) has this to say:“The mortgagor can maintain an action for an account against the receiver as
his agent… He will be liable in respect of gross or wilful negligence and…if
he is proposing to exercise any of his powers negligently in e.g. a sale at one
price when a better offer is available for acceptance or if he is causing
unnecessary injury to the property, he may be restrained from such exercise by
the court.
Similarly, if the mortgagee interferes so as to procure the receiver to take a
course of action such as putting pressure upon him to effect a too-speedy sale.
(Standard Bank v. Walker [1982] 1 WLR 1410).
Where the statutory powers are extended, the mortgage should expressly
provide that the receiver is to be regarded as agent for the mortgagor: in the
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absence of an express provision, he may be held to be agent for the
mortgagee. It is a question of construction in each case.”
18.
So much for the conventional view of the general situation. Many borrowers
complain of a sale by a receiver at an undervalue, and leave Court without redress.
There is, however, more to this case and a closer examination of the legal position is
called for in the following circumstance. Mrs. McGeeney, when she visited the
Property Registration Authority to enquire regarding the supposed sale of the house
was handed a certified copy of a Declaration of Trust by the new registered owners
thereof and the declaration includes not only the McGeeney house but perhaps in
excess of four hundred other properties. It is not too much of an assumption that all
of these were acquired, in one single transaction, from the plaintiff and its receiver: in
short the acquisition of a portfolio of distressed property. If the McGeeneys can prove
this (and this Declaration of Trust is credible evidence suggesting that more
documentation will enable them to do so) they may have the building blocks of
“arguable” defences of the low threshold variety defined by the Supreme Court in
Ryanair v. AerRianta, as follows:
A.
The sale price realised for their property was never individually
contracted, but was bundled.
B.
The commission and expenses will not stand up to inquiry, having
been “notionally” entered up property by property.
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C.
The receiver played no active role in the sale process, his appointment
having been designed only to claim the benefit of s. 24(2).
D.
Unless expressly so provided in the deed of mortgage, s. 24(2) does not
apply to the sale by a receiver under non-statutory powers, (“receiver” in the
subsection is one appointed “under the s. 19 power in that behalf conferred by
this Act” (s. 24(1)); alternatively.
E.
Section 24(2) is an exclusion of liability clause prohibited by the EU’s
unfair consumer contract terms Directive 93/13/EEC. (In the Oceano Grupo
Editorial SA case (C244/98) the ECJ ruled that a national court may determine
of its own motion whether a term of contract is unfair notwithstanding that the
issue has not been raised by the parties).
F.
The sale was to a joint venture involving the bank, one way or another.
G.
The “sale” was an accountancy driven device by the bank “selling” to a
special purpose vehicle off balance sheet (along with the 400 others
listed).
The Declaration of Trust is a public record and I am attaching it to this Decision.
19.
The Common Law position with regard to a receiver appointed with power of
sale is that the sale must be conducted with the same care towards the mortgagor as is
demanded of a mortgagee. Where want of care, or worse, is found to have occurred
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the issue will be whether or not the receiver acted as agent of the mortgagee (in which
case the mortgagee would be liable as principal) or as agent for the mortgagor.
20.
Section 24(2) of the 1881 Conveyancing Act provides that a receiver is to be
deemed an agent of the mortgagor, but that express legal construct only applies to the
receiver’s power specified in Section 19 – a list which does not include the power of
sale – so if the receiver is to be the agent of the mortgagor when effecting a sale, there
has to be a specific term to that effect in the mortgage deed. In the case of the
McGeeneys’ mortgage, clause 6(3)(11) gives a receiver power “to sell the mortgaged
property in such manner and generally upon such terms as he thinks fit” but this is
listed as a power “additional” to the powers conferred on him by the 1881 Act. (The
duty as to price obtained etc. may thereby be somewhat less onerous than the position
at Common Law above described) but nowhere in the mortgage deed here is there a
provision to extend the operation of the section 24(2) legal agency to these
“additional”, non-statutory, powers. In the absence of any such term in the mortgage
deed, the receiver will be treated as agent of the mortgagee/lender in regard to any
function not listed in the 1881 Act.
21.
In this particular case the mortgagee, in the body of its deed poll 17/1/14
appointing the receiver, adds, for good measure, the following recital:
“It is noted that the receiver… is agent of the mortgagor and, so far as is
necessary (?), shall be attorney of the mortgagor and the mortgagor alone
shall be responsible for his acts.”
A recital in a deed poll is a statement of asserted fact, the mere statement of which is
neither probative of its truth or contractual status.
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This recital does not tally with the legal position in this case. There is no question of
the receiver enjoying the status of attorney for the mortgagor, and neither is he the
agent of the mortgagor if he exercises the mortgagee’s power of sale, which power is
not listed in the 1881 Act. The recital is, in short, an actionable misrepresentation on
the part of the plaintiff bank. It was rather late in the day for the bank to try to
unilaterally protect its position. If the receiver’s actions have unlawfully caused the
defendants loss, the bank, as the receiver’s principal, will be liable.
22.
This reading of the legal position – to the effect that the receiver, when he is
selling, is agent for the bank/mortgagee - is borne out by other terms in the mortgage
deed, namely, that in regard to his “additional” (non-s. 19) duties, as receiver he may
charge commission etc. not as provided for in the 1881 Act for the Statutory functions
(currently fixed by S1 no.655 of 2010 at no more than 5% “for remuneration and in
satisfaction of all costs incurred”) but “such sums as the Bank may prescribe.” (clause
6(3)(v)).
23.
When receivers fail to act as the law requires, are mortgagees still shielded by
s. 24(2) of the 1881 Conveyance Act? The legal fiction deeming the receiver,
appointed by a mortgagee, to be the agent of the mortgagor may be rebuttable.
Stronger argument than that may be found in re-reading the small print of the
mortgage deed in the context of modern consumer law. Even an express clause in the
deed, re-iterating the Statutory agency fiction, may be regarded as an exclusion of
liability clause (liability for the receiver’s acts) which may or may not survive
exposure to the modern approach to applicability and enforceability of such clauses in
a consumer contract. In particular, where the mortgage makes no express reference
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either to the 1881 Statute or to the particular section, no consumer could be expected
to inform himself as to the small print of a nineteenth century statute. The net effect
of section 24(2) is counterintuitive: consumer law principles demand that a
consumer’s attention be drawn to the unprotected risk he is expected to bear if the
mortgagee appoints a careless receiver.
24.
In Director General of Fair Trading v. First National Bank Plc. [2002] I A.C.
481 Bingham L.J. outlined the position under the Directive as follows:
“A term is unfair if it causes a significant imbalance in the parties’ rights and
obligations under the contract to the detriment of the consumer in a manner or
to an extent which is contrary to the requirement of good faith. The
requirement of significant imbalance is met if a term is so weighted in favour
of the supplier as to tilt the parties’ rights and obligations under the contract
significantly in his favour. This may be by the granting to the supplier of a
beneficial option or discretion or power, or by the imposing on the consumer
of a disadvantageous burden or risk of duty.
The requirement of good faith in this context is one of fair and open dealing.
Openness requires that the terms should be expressed fully, clearly and
legibly, containing no concealed pitfalls or traps. Appropriate prominence
should be given to terms which might operate disadvantageously to the
customer. Fair dealing requires that a supplier should not, whether
deliberately or unconsciously, take advantage of the consumer’s necessity,
indigence, lack of experience, unfamiliarity with the subject matter of the
contract, or weak bargaining position.”
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25.
Leaving consumer law aside, we could also usefully turn attention to whether
the mortgagee and his agent the receiver are engaged in some type of joint venture.
When the appointment of a receiver appears to occur at or around the date of the sale
of the mortgaged property by the mortgagee in possession, the issue as to what exactly
is the nature of the “sale” which the receiver supposedly conducted must also be
addressed. If, for example, the purchasers were in some way limiting their downside
risk by securing finance from the vendors (or some source of finance associated with
the vendor) in a deal by which the finance provided is to be at very favourable rates,
or to be non-recourse altogether to the vendors personally, would that be a sale in any
real sense? More of a joint venture between the vendor (or finance fund) and the
purchaser under which risk (and therefore beneficial ownership) is being shared? The
low price achieved on the McGeeney property suggests that both parties were
conscious of a significant upside and, in turn, one might reasonably infer that the deal
is a joint venture. Even if at arm’s length, a receiver would be on constructive notice
and in breach of his (and his principal’s) duty to the mortgagor if he knowingly agreed
terms on such a basis without any attempt to bring the property to the market place.
26.
Furthermore, when the sale is by a receiver with power of sale and the
purchaser has all the appearance of a tenderer pre-selected by the mortgagee, we have
all the hallmarks of a Maple 10 golden circle and the involvement of the mortgagee
(and/or the minimal role of the receiver in setting up the deal) points to a strong legal
case for joint and several liability to be shared by the mortgagee and his receiver if the
sale price knowingly undervalues the security property.
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27.
Some may regard the scenario above described as fanciful but I have had
before me several employees of a bank (not the plaintiff in this case) who have sworn,
in different cases and apparently independently, that they were induced to take out
buy-to-let mortgages on non-recourse terms. And of course we now have the Siteserv
inquiry into write-offs by NAMA in which the parallels are striking: NAMA acting
as mortgagee/receiver, the McGeeneys in the part of the State, borrowing to acquire
the asset and now apparently short changed (or so it is alleged).
28.
We cannot rule out another possibility. Given what the country’s regulated
banks have been through in the recent past, might there be an ulterior motive in the
sale of portfolios of loans to non-regulated entities (the law might call them
“venturers” rather than the slightly more offensive term “vulture funds”) actually owe
their existence of the efforts of the banks/mortgagees to assemble (and perhaps
directly fund, or indirectly) men of straw “venturers”, investing none of their own
wealth, to front off balance sheet special purpose vehicles? We would, of course, all
be happier if such were not the case, but concerned enough at the possibility to allow
Mr. and Mrs. McGeeney to raise it as a defence to the bank’s case here. Why should
the McGeeneys be forced to contribute to the joint venture (either for the benefit of
the speculators or for the bankers) the €37,000 plus difference between what they
could have got for the Ballybofey house and the price actually realised (in a rising
market two years later) as part of a 400 property portfolio of distressed assets sold on
15th July, 2014, to Finsbury Circle Nominee Limited in trust for Northern Trust
Fiduciary Services (Ireland) Limited in its capacity as trustee of Finsbury Circle Real
Estate Fund, a sub-trust of Davy Opportunity Trust Fund (an “umbrella” fund)?