Bridging lender in landmark identity fraud case

Bridging lender in landmark identity fraud case:

'via Blog this'

A well-known bridging lender has failed in an attempt to make two legal firms liable for losses caused by fraudulent individuals who stole the identity of innocent property owners, reports Legal Knowledge Scotland.

The two cases were that of bridging lender Blemain Finance Ltd (vs. Balfour & Manson LLP) and Cheshire Mortgage Corporation (vs. Grandison), both of the Blemain Group. They were the victims of mortgage fraud where borrowers had applied for loans (of £203,000 in one case and £355,000 in the other), pretending to be the people registered as the owners of property over which the loans were to be secured.

The fraudulent borrowers had been able to produce evidence of their identity in the form of utility bills and driving licences to their solicitors and to the lenders. In both cases the fraudsters had approached the lender (directly in one case and via a broker in the other) before instructing their solicitors.

The lenders instructed one firm of solicitors, and the borrowers in both cases instructed their own, who carried out identity checks in accordance with normal practice. The transactions were completed and the fraudsters disappeared with the money.

The lenders sought to sue the solicitors instructed by the fraudsters who had not acted on their behalf under the principle of acting in “breach of their warranty of authority” as agents.

At an earlier stage of the case in the Outer House, after hearing all of the evidence, Lord Glennie granted absolvitor (effectively dismissal of the cases) in both actions in which the two companies were suing for significant damages against firms of solicitors who had acted for the borrowers in the loan transactions.

Lord Glennie held that the solicitors’ only representation was that they were acting for the people with whom the lenders were already engaged in a process of finalising a loan transaction.

The issue before the Inner House of the Court of Session in this appeal was whether the warranty extended further than simply the existence of authority, in order to encompass facts about his client such as whether the client was indeed who he purported to be. 

However, the Court has held, last week at an appeal court level, that all that the solicitors represented was they held instructions by certain named individuals. The Court has determined that the solicitors did not warrant that they acted on behalf of the true individuals of those names.

The judgement by the Inner House also refused the appeal against a ruling by Lord Glennie, after proof that the solicitors, who had acted in good faith, did not have to make good the losses.

The Inner House agreed that it did not follow from the rule of implied warranty of authority "that, in every case, an agent must be regarded as warranting the identity of his client and not merely the fact that he has authority to act on the client's behalf".

The lenders have been unable to recover the sums advanced. It was not contended on behalf of the lenders, nor was it found by the Lord Ordinary, that either of the legal firms in both cases had acted in anything other than good faith or that they had not understood that the borrowers had title to the subjects over which they granted the pretended security.

The decision is significant in the sense that this is the first time that a decision has been handed down by an Appeal Court in Scotland (the Inner House) on this area of the law. It confirms that there is no material difference between the law of Scotland and the law of England on this matter, and many believe it will have wide significance to practitioners north and south of the border.

The full judgement is available from Scottish Courts here.