On 5 April 2007 Mrs. Papa mortgaged her home to Provident Capital. This mortgage was security for a loan of $700,000.00 and a further advance of $125,000.00. Provident Capital required Mrs Papa to obtain independent legal advice in regards to these loans and the security documents. She did obtain this advice from a solicitor, Mr George Caramanlis.
Upon Mrs Papa’s default, Provident Capital brought proceedings against her for recovery of possession of her property. She disputed this action, claiming, successfully as it turned out, that Mr. Caramanlis was in breach of his professional duty to her.
At first instance it was held that the contract was unjust and that Mr. Caramanlis was not negligent, however subsequently the decision was overturned on appeal.
The Court found that Mr Caramanlis had breached his duty to Mrs Papa and had subsequently caused her loss based upon his negligent advice in relation to the loans. It was held that whilst, “…solicitors are not ordinarily required to advise upon the wisdom of transactions in relation to which they act…”, in this case Mr. Caramanlis did not act reasonably.
The Court of Appeal stated that a reasonable solicitor would have stressed to her that by entering into these transactions her business and home could potentially become endangered. Please see my previous post on impact vulnerabilities.
The Court found that Provident Capital was entitled to assume that Mrs Papa had obtained reasonable legal advice and held that even though the legal advice was inadequate this was not the financier’s fault. Orders were then made that Mrs Papa was liable to Provident Capital and Mr Caramanlis was liable to Mrs Papa.
Zurich insurance, through their risk magazine @risk, recently pointed to a situation where an English solicitor informed them that, when she had a meeting with a wife who had been asked to remortgage the matrimonial home to secure her husband’s business debts, the wife had no idea what she was really being asked to do, i.e. put her home at risk of repossession if her husband’s business failed. After a frank discussion with the solicitor, she refused to sign the papers.
Zurich go on the say that “Sadly there are still too many co-owners in this situation who are not being properly advised (or it can’t be proved that they were properly advised) and negligence claims come in from lenders against the law firms when the business fails but repossession proves to be troublesome when the co-owner defend on grounds that they weren’t properly advised".
A few years ago if you were faced with a client looking for advice similar to the Mrs Papa situation you would think twice before acting for the client due to a potential insurance claim. Now you also need to consider the regulatory concerns around impact vulnerabilities as well as the implications of being removed off a lender panel if that lender suffers a loss. For what it’s worth my advice is to stay well clear and this applies equally to giving guarantors advice of the liabilities they are taking on.