Introduction
In a recent High Court decision of Ms. Justice Stack1, judgment in the amount of €11.6 million was entered in favour of Everyday Finance DAC pursuant to two personal guarantees provided to its predecessor in title, Allied Irish Banks plc, despite the fact that the Court determined that the transactions were improvident and that the guarantees were executed under undue influence, without the benefit of adequate legal advice. The decision provides a useful analysis of the application of complex legal concepts which lenders may encounter in defended enforcement proceedings.
Facts
Everyday sought liberty to enter summary judgment against the Defendant on foot of two guarantees executed on 25 May 2007 (the "Guarantees") by the late John Flood, deceased (the "Deceased") in favour of its predecessor in title, Allied Irish Banks plc (the "Bank"). The Defendant was the widow of the Deceased and was sued in her capacity as legal personal representative. In addition to the Guarantees, the Deceased executed an "all sums due" Deed of Charge (the "Charge") over lands comprised in Folio 5536F County Meath (the "Folio"), in respect of which the Deceased was the sole registered owner. These lands comprised approximately 59 acres of quarry lands (which was run by the Deceased until his retirement in 1994 when it was taken over by his son, David Flood), 12 acres of unexploited agricultural lands and a substantial dwelling house which was, up to the death of the Deceased, the family home of the Deceased and the Defendant. At the time of execution of the Charge, it does not appear to have been appreciated by the Bank, the Deceased or the solicitor who gave independent legal advice to the Deceased in relation to the execution of the Charge, that the family home was comprised in the lands registered in the Folio.
The Guarantees were provided in respect of borrowings by the Flood Partnership (David Flood, together with his brothers Tom and Alec Flood) for the purchase of a development site in Sutton (the "Sutton Site"). The first guarantee was in the amount of €1.5 million and was provided in respect of an Overdraft Facility in the amount of €1.5 million to the Flood Partnership for working capital and the second guarantee was in the amount of €10 million and was provided in respect of a loan facility to Tom and Alec in the amount of €12.7 million, for the purchase of the Sutton Site. Notably, it was a special condition of both facilities that the Deceased would obtain independent legal advice prior to providing the Guarantees. The Charge and a letter of guarantee in the sum of €10 million was executed by the Deceased on 2 May 2007 having taken advice from Mr. Martin Cosgrove ("Mr. Cosgrove") of AB O'Reilly, Dolan & Co Solicitors. However, amendments were made to the loan facility, which meant that the Deceased again attended the offices of AB O'Reilly, Dolan & Co on 25 May 2007 to execute fresh letters of guarantee, this time meeting with Mr. Niall Dolan ("Mr. Dolan") solicitor, who is now deceased. Ultimately, the entire property development scheme failed, and the security was called in.
Defence
The application was defended on a number of grounds, based on factual assertions contained in affidavits sworn by David Flood, which could be summarised as follows:
(a) that the Deceased lacked capacity on the date he executed the Charge and Guarantees and so they were voidable as against Everyday;
(b) that the Deceased was unduly influenced by David Flood to execute those documents and/or those transactions constituted an unconscionable bargain or improvident transaction.
The Court examined David Flood's affidavits and those of Ms. Meade (the Relationship Manager at the Navan Branch of the Bank) in considering the above defences and its key findings are detailed below.
Capacity
The current law relating to capacity is that "a contract made by a person who lacks capacity is valid unless the other party to the contract knew or ought to have known of the incapacity, in which case it is voidable"2. The only evidence put forward by the Defendant on this issue was that of David Flood, who asserted that Ms. Meade met the Deceased at a meeting in the Navan Branch on 16 April 2007 and that she should therefore have been aware of the Deceased's alleged lack of capacity. David Flood also gave evidence that he told Ms. Meade on 23 February 2007 (when he indicated that the Deceased would provide the security) that his father was unwell. However, on the basis of the contemporaneous documentary evidence before it, the Court preferred Ms. Meade's evidence that she never met the Deceased at any time and that David Flood never told her that his father was unwell. As a result, the Court found that the Bank had no actual or constructive notice of any alleged incapacity on the part of the Deceased. Further, in any event, on the basis of medical evidence proffered by Everyday (together with evidence from the Defendant's family and Mr. Cosgrove) the Court found that the Deceased did not lack capacity at the time of execution of the Guarantees and the Charge.
Undue influence
Rather unusually, David Flood asserted that the Guarantees could not be enforced by Everyday because he pressurised the Deceased to such an extent that the Deceased did not exercise his own independent will and judgment in relation to the Guarantees. The Defendant pleaded both actual and presumed undue influence in her Defence.
(i) Actual undue influence – to amount to actual undue influence, the Defendant had to show on the balance of probabilities that David Flood engaged in wrongful conduct by pressurising the Deceased into providing the Guarantees. In support of this proposition, David Flood gave evidence that he attended at the consultations between the Deceased and Mr. Cosgrove on 2 May 2007 and Mr. Dolan on 25 May 2007, that he was present in the relevant solicitor's offices on both days, that he spoke for the Deceased and was of the view that the Deceased did not understand what was going on. However, this evidence was vigorously denied by Mr. Cosgrove and Everyday also produced the contemporaneous attendance note of Mr. Dolan (who is now deceased) which explicitly stated that he saw the Deceased alone. The Court did not accept David Flood's evidence and concluded that there was no evidence of any actual undue influence exercised by David Flood on the Deceased to get him to sign the Guarantees and execute the Charge.
(ii) Presumed undue influence – the Court therefore had to consider whether the nature of the relationship between David Flood and the Deceased was such as to give rise to a presumption of undue influence and, if so, whether that presumption had been rebutted. The Court took the view that the circumstances in which David Flood managed the Deceased's post, financial affairs and bills gave rise to a presumption that he had influence over the Deceased. Further, the short timeline within which the Guarantees and the Charge were executed lead the Court to conclude that David Flood controlled the sequence of events by which the Deceased executed these important documents.
Rebuttal of the presumption of undue influence
The onus was then placed on Everyday to rebut the presumption. It argued that the actions of the Deceased were not as a direct result of undue influence on him, on the basis that the Court rejected David Flood's evidence that he was in the consultation room with the Deceased when executing the documents. However, this argument was not accepted by the Court in circumstances where the evidence showed that the Deceased placed trust and confidence in his son. There was also no evidence that the Deceased ever turned his mind to the value of the quarry lands in 2007 or that he understood the Charge would extend beyond the quarry lands to his family home.
Independent and adequate legal advice
The Court therefore had to consider whether the Deceased had received adequate independent legal advice in relation to the transactions. It was not concerned that the same firm of solicitors acted for the company which was incorporated by David Flood to run the quarry business (the "Company") or that the Flood Partnership had paid for the fees for the advice given by that firm to the Deceased, in circumstances where those solicitors did not act for the Flood Partnership in the acquisition of the Sutton Site. However, the Court did find that both solicitors fell short in their advice to the Deceased, in circumstances where the advice was given without a full understanding of the Deceased's assets, the extent of his wealth or whether he had any other source of income outside of the rent he received from the Company in respect of a lease over part of the Folio. Further, Mr. Cosgrove did not take up a copy of the title documentation with a view to ascertaining where the Deceased lived. Accordingly, the Court found that the Deceased could not have been advised as to whether the transactions were in his interest or that the Bank could have recourse to his assets, other than the quarry, to satisfy the Guarantees.
Unconscionable bargain
The Court then had to consider whether the parties to the transactions had unequal bargaining positions and whether the weaker party (in this instance the Deceased) had not been adequately protected, such that the transactions were unconscionable. The Court found that in circumstances where the quarry lands were valued at €3.5m less than the combined amount of the Guarantees in May 2007 and the Deceased believed that the Bank would only have recourse to those lands, the execution of the Guarantees were improvident transactions.
Did the inadequate legal advice affect the validity of the Guarantees?
While the Court found that the Bank was "put on enquiry" (in circumstances where a very substantial sum of money was being advanced to acquire a development site, the Deceased was not a member of the Flood Partnership and there was no conceivable benefit to the Deceased from executing the Charge and the Guarantees), it also found that the Bank did take reasonable steps by at all times requiring the Deceased to obtain independent legal advice in satisfaction of the conditions attached to the loan offer. Further, any documentation or correspondence relating to the Charge and Guarantees was sent by the Bank to the Deceased and/or Mr. Dolan directly, and there was no suggestion that Ms. Meade could possibly have known that the Deceased's post was opened and dealt with by David Flood. The Court found that the Bank was entitled to rely on the correspondence from an independent firm of solicitors that the Deceased had received appropriate legal advice and that he understood what he was doing.
Comment
The decision is a clear and reasoned one and provides a good roadmap as to the issues which should be considered by lenders and/or their legal advisors when assessing claims of capacity, undue influence and unconscionable bargain.
Footnotes
1. Everyday Finance DAC v. Joan Flood [2024] IEHC 252
2. The Court cited the UK decision of Imperial Loan Co. v Stone [1892] 1 Q.B. 599 and the more recent decision of the UK Supreme Court in Dunhill v Burgin (Nos.1 and 2)[2014] 1 W.L.R.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.