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Ex turpi causa: Solicitors liable for negligence despite mortgage fraud

10/10/2018

Grondona v Stoffel & Co [2018] EWCA Civ 2031

Stoffel & Co acted for Ms Grondona in the purchase of the leasehold interest in a property from her associate, Mr Mitchell. The firm negligently failed to register the transfer, the discharge of an existing mortgage and Ms Grondona’s mortgage with Birmingham Midshires. Ms Grondona fell into arrears and Birmingham Midshires, unable to enforce its security, instead obtained a money judgment against Ms Grondona. Ms Grondona claimed damages from Stoffel & Co for negligence or breach of contract.

The firm defended the claim on the basis that Ms Grondona’s purchase was a sham transaction; Ms Grondona had posed as the owner of the property in order to secure mortgage finance for the benefit of Mr Mitchell on terms on that he would not have been able to obtain due to his poor credit history.

The judge at first instance rejected Stoffel & Co’s argument that as Ms Grondona was a participant in an illegal mortgage fraud, she was precluded from recovering against the firm on the basis of the illegality principle (the defence of ex turpi causa). Whilst the judge at first instance found that Ms Grondona and Mr Mitchell had indeed been involved in a scheme designed to deceive the bank into making the advance, the test in Tinsley v Milligan [1994] AC 240 was not met because it was the solicitors’ failure that had caused the loss and Ms Grondona did not have to rely on the illegality in question in order to prove her claim.

On appeal it was accepted that this test had been overruled by the Supreme Court in Patel v Mirza [2016] UKSC 42 and that the Court of Appeal had to apply the Patel decision to the facts. Before doing so, however, the Court overturned two findings of fact by the first instance judge; firstly that the mortgage application and agreement was a sham, and secondly that there was no intention that Ms Grondona would become the legal owner of the property.

The Court of Appeal found that whilst the mortgage application was fraudulent in that it contained a number of misrepresentations, this did not result in it being a sham transaction. Ms Grondona intended to borrow the money secured by way of a legal charge on her registered legal title to the property and Birmingham Midshires likewise intended to lend the money secured in such a way. The bank had no knowledge of the misrepresentations or the intentions of Ms Grondona and Mr Mitchell and accordingly, as between Birmingham Midshires and Ms Grondona the transaction was not a sham and was clearly intended to take effect.

The Court of Appeal also found that even though the sale agreement between Mr Mitchell and Ms Grondona was tainted with illegality, there had been a genuine intention to transfer the legal ownership of the property to Ms Grondona.

The Court applied the criteria in Patel v Mirza and considered whether there was any reason why Ms Grondona should not be entitled to recover damages in respect of Stoffel & Co’s negligent failure to register her title to the property at the Land Registry as a result of the illegal purpose of the transaction as between her and Mr Mitchell.

Whilst accepting that mortgage fraud was “a canker on society”, the Court of Appeal considered that there was no public interest in allowing negligent conveyancing solicitors to escape liability because “of the happenstance that two of the clients for whom they act are involved in making misrepresentations to the mortgagee financier.”

Gloster LJ commented that “ On the contrary, it seems to me that there is more likelihood that mortgage fraud would be avoided if solicitors appreciate that they should be alive to, and question, potential irregularities in any particular transaction. Moreover, the premise that it would assist the fight against mortgage fraud if mortgagors involved in making false representations to mortgagees were unable to recover if their solicitors were negligent in failing to register the mortgagee's security seems, to say the least, questionable.”

The Court of Appeal found that there was a public interest in ensuring that clients who use the services of solicitors are entitled to seek civil remedies for negligence/breach of contract against a defendant arising from a legitimate and lawful retainer which was entered into between them, in circumstances where the client was not seeking to profit or gain from her mortgage fraud.

The Court found that so far as proportionality was concerned, similar considerations applied. It accepted submissions made on behalf of Ms Grondona that it would be entirely disproportionate to deny her claim for the following reasons:

  1. Birmingham Midshires had raised no complaint against her on the grounds of fraud, but had adopted the transaction;
  2. The solicitor at Stoffel & Co. did not allege fraud in his witness statement;
  3. Ms Grondona did not seek to evade her obligations under the Birmingham Midshires charge and remained legally personally responsible for any sums not paid to Birmingham Midshires as a result of a sale of the property;
  4. Ms Grondona’s illegal conduct was not central, or indeed relevant, to the otherwise proper and legitimate contract of retainer with Stoffel & Co or indeed to Ms Grondona’s claim against the firm but was “simply part of the background story”;
  5. In pursuing a claim in negligence against the solicitors, it was not Ms Grondona’s intention to profit from the fraud, but to obtain funds to discharge or reduce her liability to Birmingham Midshires; and
  6. In the circumstances, there was no risk that the enforcement of her claim would undermine the integrity of the justice system.

Ms Grondona was therefore permitted to recover damages in respect of Stoffel & Co’s negligence, limited to the sum that would have been raised on a forced sale of the property had the transfer and charge been registered (rather than a sum calculated by reference to her ongoing debt obligation to Birmingham Midshires).

It is understood that Stoffel & Co are contemplating an appeal. They may look to challenge the Court of Appeal’s finding that the solicitors’ retainer was proper and legitimate when its main purpose, from the point of view of Ms Grondona and Mr Mitchell, was to facilitate a fraud. Taking a step back, however, one can see the logic of the Court’s decision, particularly in terms of the outcome it produced for Birmingham Midshires and given that the solicitors failed abjectly to deal with the basics of the conveyancing.

Rachel Blair
Senior Associate
E: rblair@keoghs.co.uk

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