Mortgage fraud, illegality and negligence: lessons to be learnt

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The background: the mortgage fraud

In 2000, Mr Mitchell and Ms Grondona came to an arrangement about several residential properties. Mr Mitchell had a poor credit history, so Ms Grondona signed an agreement with him, promising to take out mortgage loans in her name, on the understanding that he would:

  • Pay all the monthly mortgages payments
  • Manage the tenants, financial issues, and repair works for each property
  • Decide when to sell them, and then pay Ms Grondona 50% of the profit when he did.

In 2002, Mr Mitchell bought the long leasehold interest in one property for £30,000, using money that BM Samuels Finance Group had advanced him. Three months later, as agreed, he sold the property to Ms Grondona for £90,000 – three times the price – which she paid for using £75,600 loaned from Birmingham Midshires.

This was fraudulent for several reasons: it wasn’t a sale on the open market; Ms Grondona didn’t use her own money to pay for the deposit, she used Mr Mitchell’s; and, as per their agreement, Mr Mitchell would essentially own the property. The whole purpose of the exchange was for Ms Grondana to be ‘clothed with the legal title to the property’, purely to allow Mr Mitchell to obtain finance.

The solicitors’ errors and Ms Grondona’s claim

Stoffel & Co were the solicitors acting for both Mr Mitchell (as the seller), and Birmingham Midshires (as the buyer’s lender).  At the heart of this case was their failure to register at the Land Registry the TR1 (transferring the property from Mr Mitchell to Ms Grondona), the DS1 (releasing BM Samuels’ charge over the property) and Birmingham Midshires new charge.

As a result, Mr Mitchell remained the registered proprietor of the property. When he died in 2014, the property was sold on behalf of BM Samuels to satisfy the debts he’d accrued to them.

Ms Grondona then defaulted on her payments to Birmingham Midshires, who brought a claim against her. She claimed that Stoffels had been negligent by not registering the transfer. Birmingham Midshires then amended its claim to as to pursue the solicitors directly.

Stoffels claimed that, because Ms Grondona’s purchase was fraudulent in the first place, she shouldn’t be able to sue them for failing to protect it. The legal point was ‘ex turpi causa non oritur actio (which we all know is Latin for “from a dishonorable cause an action does not arise”).

The court cases

The first instance judge found in favour of Ms Grondona – ruling that Stoffels had been negligent, and had to pay her damages as a result, regardless of her illegal activity.

Stoffels appealed – but the Court of Appeal upheld the original decision. The court found that Ms Grondona had applied for the mortgage purely on behalf of Mr Mitchell – to allow him to access more favourable rates – and that she had no intention of owning or managing the property herself. But, these illegal features were irrelevant to the fact that the solicitors had an obligation to Ms Grondona that they had not fulfilled.

Even though mortgage fraud was described by the court as a ‘canker on society’, as a matter of public interest principle, solicitors should not be able to avoid their professional obligations. The Court of Appeal thought siding with the solicitors here would amount to ‘overkill’. . .

As a result of the ruling, Ms Grondona has received almost £80,000 in damages from Stoffels, enough to cover the loan that she owed Birmingham Midshires..

Lessons to be learnt

It’s unusual that Stoffels had acted for both Birmingham Midshires, and Mr Mitchell: surely there was a conflict of interest (although this point was not discussed within the judgment). There is no suggestion that Stoffels were aware of Ms Grondona’s fraudulent intentions but the fact that Ms Grondona had bought the property for three times what it’d been sold for just three months earlier should’ve raised a loud alarm bell..

Being alive to the prospect of fraud is key for any lender and its solicitors. While not exhaustive, other warning signs may be any of the following:

  • The buyer seems oddly uninterested in the progress of a transaction, perhaps indicating that they will not be the real owner/occupier
  • Both the seller and buyer are private companies and a review of the list of directors or shareholders of both suggests the transaction may not be at arms-length
  • The seller has owned the property for less than six months.

The case – which is being further appealed –  is clearly of interest to solicitors but is also a stark reminder to our lender clients of how mortgage fraud commonly works.