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November 2010 (2)

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Case name	Serious Organised Crime Agency v Szepietowski
Neutral citation	[2010] EWHC 2570 (Ch)
Legal points	Proceeds of Crime Act 2002 – Mortgages - Marshalling
Facts	Mrs S was the registered proprietor of two properties – Ashford House, the matrimonial home, which was subject to a second charge to Nat West Bank, and Claygate Properties, a portfolio of investment properties, which was subject to first charges to Nat West Bank. The charges were in ‘all-monies’ form. The assets of Mrs S and her husband were frozen by interim receiving orders under the Proceeds of Crime Act 2002. Subsequent proceedings were compromised by a consent order and deed of settlement, whereby the Trustee for Civil Recovery transferred the Claygate Properties to Mrs S subject to her executing a legal charge in favour of SOCA. The Claygate Properties were subsequently sold at a sum sufficient to discharge the sums due to the Bank but leaving only £1,324.16 in satisfaction of the sums due to SOCA (£5.375M). SOCA sought to invoke the principle of marshalling on the basis that there was (a) a single debtor (Mrs S); (b) who owed debts to two creditors (the Bank and SOCA); (c) the Bank was able to enforce its claim against two securities (Claygate Properties and Ashford House); (d) whereas SOCA was confined to its security over Claygate Properties. In those circumstances it was argued that SOCA has an equity to require the Bank to be treated as having satisfied itself so far as possible out of Ashford House, and by a process akin to subrogation, SOCA should be entitled to enforce the Bank’s second charge against Ashford House to the extent of its shortfall. The court had to deal with a preliminary issue of whether the compromise agreement implicitly excluded Ashford House from bearing any part of Mrs S’s liability to the Bank and if so whether it precludes the operation of marshalling.
Held	As a matter of construction there was nothing explicitly or implicitly which prevented SOCA from relying on the principle of marshalling in relation to Ashford House. The principles to be applied were considered in BCCI International SA (No.8) [1996] Ch 245 (CA) and [1998] AC 214 (HL). In particular, in the Court of Appeal, Rose LJ (p 271F) said: “The doctrine of marshalling applies where there are two creditors of the same debtor, each owed a different debt, one creditor (A) having two or more securities for the debt due to him and the other (b) having only one. B has the right to have the two securities marshalled so that both he and A are paid so far as possible. Thus is a debtor has two estates (Blackacre and Whiteacre) and mortgages both to A and afterwards mortgages Whiteacre only to B, B can have the two mortgages marshalled so that Blackacre can be made available to him if A chooses to enforce his security against Whiteacre.” Here, the settlement deed created a debt due from Mrs to SOCA in respect of the sums to be secured on the Claygate Properties. The “two debts” condition was therefore satisfied. As an equitable remedy, there were no obstacles to SOCA’s claim to be subrogated to the Bank’s second charge over Ashford House.
Comment	Marshalling is an equitable remedy. It applies where the owner of two properties, X and Y, mortgages them both to lender A, and then mortgages one, say Y, to lender B. When A seeks to recover its debt, B can require that it does so first out of X. For commentary, see Fisher & Lightwood’s Law of Mortgage, 13th Edition, para 45.8 etc

Case name	Mortgage Express v Sawali
Neutral citation	[2010] EWHC 3054 (Ch)
Legal points	Mortgages – Extent of Solicitor’s Duty to give Disclosure of Borrower’s File
Facts	ME applied for delivery up of a number of files held by S, a solicitor, as successor to a predecessor firm which had acted for ME and the borrowers. S accepted that he was obliged to deliver up those parts of the files for which his predecessor had been retained by ME but said this did not extend to the entire file since parts belonged to the borrowers, and parts were covered by legal professional privilege.
Held	Where a solicitor is retained by a lender/borrower in a mortgage transaction, two separate retainers are created. There is no implied waiver of confidentiality or legal professional privilege by the borrower in favour of the lender nor any implied authority for the solicitor to make disclosure to the lender of documents passing between the borrower and the solicitor (Nationwide Building Society v Various Solicitors [1999] PNLR 52, reflected in para 8(c) SRA’s guidance to Rule 4 Solicitors Code of Conduct 2007). ME relied on a declaration entered into by the borrowers when they applied for their loans “I/WE declare and agree that …17. I/WE irrevocable authorise my/our conveyancer to send their entire file relating to the whole transaction (not just the loan) to you at your request”. Despite arguments to the contrary, this clause was unambiguous, irrevocable and binding on both borrower and lender. Solicitors owe lenders a ‘Bowerman’ duty – to report information which a reasonable solicitor would realise might have an effect on the valuation or some other ingredient of the lending decision (Mortgage Express Ltd v Bowerman [1996] 2 All ER 836. As a matter of ‘commercial commonsense’ clause 17 was essential to make the transaction work. The clause was construed as a clear waiver of privilege. Order for delivery up of entire files.
Comment	It would appear that issues about the nature and extent of a solicitor’s disclosure obligation when acting for a lender and borrower could easily be resolved by a clear and unambiguous declaration/authority by the borrower to deliver up the entire file on request. It is not clear from the case report what Mortgage Express was looking for, but typically, disclosure of the borrower’s part file may provide useful information about the circumstances in which the loan agreement and mortgage were executed, often heading off forgery and possibly undue influence claims.