Borrowers in arrears are resorting to increasingly creative arguments as to why they do not have to repay their loans and why lenders have no right to enforce against them. Some have even argued that the loans were illegally made and that they are entitled to recover from the lender all repayments made. The recent High Court decision in Thomas Kearney v KBC Bank Ireland plc and John Reynolds (in which we acted for the Defendants) may finally put to bed a series of emerging themes in unmeritorious lay litigant banking litigation.
Background to Proceedings
The Plaintiff, Mr Thomas Kearney, was a property investor/developer. Between November 2004 and 2007 he obtained six loans from KBC Bank Ireland plc ("the Bank") to finance the purchase of various buy-to-let properties in Ireland and the UK. The loans were secured to the Bank by way of mortgages.
When the Plaintiff failed to repay the loans following service of letters of demand in August 2012, the Bank appointed receivers over the secured properties. In September 2012, the Plaintiff issued plenary proceedings against the Bank and its former CEO ("the Defendants") making what the High Court described as a series of "diffuse" claims. He alleged fraud, extortion, illegal creation of currency, breach of duty of care and unjust enrichment, and sought various reliefs including damages for "all payments and interest unlawfully stolen" by the Defendants. The Defendants brought a motion to strike out the proceedings on the basis that they disclosed no reasonable cause of action and were frivolous, vexatious and bound to fail.
As the Plaintiff's claims did "not easily lend themselves to being summarised", the Defendants distilled the claims insofar as possible and their summary was adopted by the Court. Essentially, the Plaintiff claimed that the Bank:-
- failed to prove that the Plaintiff entered into a binding loan agreement;
- engaged in the illegal creation of currency;
- had no entitlement to enforce the loans following their securitisation;
- breached the Central Bank Asset Securitisation document by failing to obtain the Plaintiff's consent to the securitisation of his loans;
- was not entitled to appoint a receiver without a court application;
- is or was insolvent; and
- fraudulently misrepresented matters in relation to a UK property development to unjustly enrich itself and had a conflict of interest when lending.
In a reserved judgment delivered on 16 May 2014, Mr Justice Birmingham dismissed each of the above claims and made an order striking out the Plaintiff's proceedings. The Judge addressed each argument in turn and his comments are of relevance to any financial institution involved in litigation with a lay litigant.
Proof of Binding Loan Agreements
The Court noted that Plaintiff had repeatedly called on the Bank to provide him with copies of the contract binding both parties, stating that he would be "more than happy to pay any and all amounts... lawfully owe[d]" if such documentation existed. Although the Bank provided the Plaintiff with copies of signed and witnessed facility letters, mortgages, account statements and redemption statements, the Plaintiff refused to accept these as sufficient, claiming that he was entitled to proof in the form of a sworn 'validation of debt document'.
Birmingham J found that there could be absolutely no doubt as to the contractual basis for the loans and stated that "even if there was some issue in relation to the form of contract which there does not appear to be, that would not necessarily relieve the plaintiff of the liability to repay the loans."
Illegal Creation of Currency
The Plaintiff alleged that the Bank did not advance a loan to him, but rather that it created currency. Birmingham J noted that a similar argument had been advanced in other recent cases and he dismissed it outright as "fanciful" and "completely devoid of merit." He commented that "[q]uite simply the plaintiff drew down funds and thereby took on the responsibility to repay. What the source of these funds was matters not a whit."
Entitlement to Enforce Loans Following Securitisation
The Plaintiff argued that the Bank had no entitlement to enforce loans which it had securitised as it was no longer a "real party of interest" to the loan.
The Court noted that only two of the Plaintiff's six loans had in fact been securitised. Further, in accepting the facility letters and in executing the mortgages, the Plaintiff had acknowledged the Bank's right, as expressly set out in the terms and conditions, to securitise the loans without seeking further consent from, or providing notice to, him. Birmingham J concluded that "there is no doubt whatever, but the plaintiff consented to the transfer of the mortgage, without further reference to him, including transfer by way of securitisation."
Birmingham J also agreed with the Bank's submission that on securitisation, only the equitable interest in the loan facilities and the mortgages was transferred to the special purpose vehicle and that the Bank retained the legal title. Accordingly, the Court concluded that "the Bank is clearly entitled to enforce the loan facilities and the security for same".
Failure to Comply with Central Bank Asset Securitisation Document
The Plaintiff contended that the Bank had failed to comply with the Central Bank of Ireland Asset Securitisation document, which the Bank denied. Birmingham J held that even if this was the case, such a failure would "not serve to render invalid the loan agreements" as the Asset Securitisation document is a voluntary, not a statutory, code. Birmingham J held that an alleged failure to comply with a non-statutory voluntary code cannot be used as a sword by a borrower to "invalidate a transaction and secure an exemption from repaying monies that he has borrowed."
Unlawful Appointment of Receivers
The Plaintiff submitted that in circumstances where the relevant mortgages referred to the Conveyancing Acts 1881-1911, which were repealed by the Land and Conveyancing Law Reform Act 2009, the power of sale did not arise and the appointment of a receiver was consequently "in contravention of the repealed Act and thus unlawful."
It was clear to the Court that what the Plaintiff was seeking to do was to bring himself within the Start Mortgages v Gunn line of authority. However, Birmingham J noted that the Start Mortgages v Gunn decision is not relevant to the entitlement to appoint a receiver under a deed of mortgage or charge. He referred to the decision of Laffoy J in Kavanagh and Lowe v Lynch and Feeney J in McEnery v Sheahan where it was held that the rights and liabilities of the parties to a security document are a matter of construction and are unaffected by the repeal of the Conveyancing Acts.
Accordingly, Birmingham J dismissed the argument that the repeal of the Conveyancing Acts provided the Plaintiff with a sword "capable of striking down agreements freely entered into and obliterating an obligation to repay loans that were drawn down."
Solvency of the Bank
The Court held that the solvency of a financial institution does not have any impact or effect on the validity or enforceability of loan arrangements and mortgages entered into between a borrower and the financial institution: a borrower's obligation to repay remains in force whether or not the financial institution is solvent.
The Plaintiff's pleadings were littered with what the Judge described as "allegations of extraordinary seriousness," including theft, deception, breach of duty/care, misrepresentation, causation and fraud, perjury, attempted extortion and counterfeiting, to name a few. These claims were not particularised in the manner required by the Rules of the Superior Courts. Birmingham J indicated that ordinarily he would not strike out proceedings where the deficiencies arose as a result of a lay litigant not knowing what was expected of him and where the pleadings were capable of amendment. However, in the instant case, it was clear that the allegations were made "without any sense of probity or responsibility whatever."
The Plaintiff also alleged that the Bank had funded a development in the UK while at the same time funding his acquisition of units in the development and that this gave rise to a conflict of interest. The Court concluded that even if the Bank had funded the development (which was denied) and had put the Plaintiff in funds to purchase units in that development, no cause of action would arise.
The Court made an order striking out the Plaintiff's claims against the Defendants, describing the proceedings as "so unmeritorious indeed as to amount to an abuse of process." Costs of the application were subsequently awarded to the Defendants.
This is the first occasion on which the High Court has struck out a claim of this nature brought by a lay litigant. The judgment is an important precedent for all lenders currently considering enforcement options against borrowers who suggest they have no obligation to repay loans they have drawn down. It also sends a clear message to lay litigants that the courts will not tolerate vexatious arguments seeking to invalidate lending transactions freely entered into in an attempt to avoid having to repay borrowed monies.
This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.