Timely reminder as to concerns surrounding impact vulnerabilities and independent legal advice

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.