Laffoy comments may affect BOSI distressed mortgages

Comments by a Supreme Court judge on a matter of law could have implications for many hundreds of distressed mortgages loaned by the former Bank of Scotland (Ireland).

At the end of 2010 a cross-border merger took place between Bank of Scotland Ireland (BOSI) and Bank of Scotland. As a result, BOSI ceased to exist. Since then, some of the mortgage business of the former BOSI has been sold on to other international finance companies, while the rest of the loans remain on the books of Bank of Scotland.

In the course of her ruling in the recent case of Kavanagh versus McLoughlin, Ms Justice Mary Laffoy raised an issue surrounding the fact that Bank of Scotland (Ireland) remained the registered owner of charges over mortgaged properties even though it ceased to exist in 2010.

The legal situation is the only way in which the charge on the property can be transferred to a new owner is through an application by the registered owner. But as Bank of Scotland (Ireland) ceased to exist as of December 31th, 2010, it raises the possibility there is no legal way that a transfer could be effected.

In her comments, Ms Justice Laffoy said: “I am satisfied that, absent any specific statutory provision relieving Bank of Scotland [the new owner] from the mandatory obligation of becoming registered as owner of a charge in respect of which it wishes to exercise any of the powers conferred . . . it must become registered as the owner of the relevant charge on the relevant folio, if it wishes to exercise the statutory powers conferred.”

The bank entered the Irish market a decade ago and was an aggressive lender of mortgages, a significant minority of which became distressed.

The comments were obiter dicta or "by the way" because they did not relate to the questions on which the decision turned. However, such comments still carry influence in terms of interpreting the laws.

The implication of the ruling for potentially hundreds of distressed mortgages of the former Bank of Scotland (Ireland) was discovered by lawyers working for New Beginnings, the group led by barrister Ross Maguire to advocate on behalf of holders of mortgages in distress or in arrears.

While Bank of Scotland or other companies now owned the former Bank of Scotland (Ireland) loans, the now defunct bank was still the registered owner of the charge. Under the law, the transfer of the charge to a new owner requires the application to be made by the registered owner. As the registered owner no longer existed, New Beginning lawyers concluded the Laffoy judgment raised the possibility that difficulties might arise when Bank of Scotland (Ireland) or the other financial institutions moved to enforce their charge over a distressed property following a court case.

The matter has yet to be tested in the Courts.

Vincent P Martin, a barrister with expertise in this area (and a co-founder and former member of New Beginnings), said the comments of Ms Justice Laffoy had highlighted problems where the charges could only be effective if they were transferred to the new owners Bank of Scotland, and others. But legally, he said, only the registered owner could do this and that was Bank of Scotland (Ireland) which no longer exists.

“Ms Justice Laffoy said it was potentially significant, well beyond the scope of the case. In my view, it is hugely significant and has the potential to extend a lifeline to borrowers whose mortgages are in distress.

“It will take at least two years for this to be sorted out,” he said, pointing out that Bank of Scotland Ireland had been one of the most aggressive players in the market.

He said an option for Government was to introduce amending legislation to facilitate such transfers. “I wonder does the Government have the appetite to adopt this course of action, to come to the rescue of hedge funds which now own those loans?” he asked.

In a response, the Department of Justice said it had been advised by the Property Registration Authority that its administrative decision has been revised in the light of the comments by Ms Justice Laffoy and there were no legislative implications arising.