High Court must revisit ruling on KBC Bank

The Supreme Court has ruled the High Court must reconsider its dismissal of contributory negligence by KBC Bank over multimillion losses suffered by it after a property developer and struck-off solicitor Thomas Byrne defaulted on €25 million in loans.

The three-judge court’s judgment addresses important issues about applying a defence of contributory negligence and the duties of banks to shareholders (not to others) in advancing loans, including to investigate the financial standing of borrowers.

Contributory negligence may be established on evidence a bank failed to manage its business in accordance with sound administrative and accounting principles as required by EU regulations on the licensing and supervision of credit institutions, the court said.

KBC was last year awarded €17.7 million damages against Dublin law firm BCM Hanby Wallace (now Byrne Wallace) after the High Court found "egregious" negligence by the firm in ensuring KBC had security for the loans. The bank sought security on 30 properties and got it on three, and the court found "multiple failures" by the firm repeated across four loan transactions.

Creditworthiness check
Mr Justice Brian McGovern rejected claims of contributory negligence by KBC over allegedly not properly checking out the creditworthiness of Mr Byrne or John Kelly, Hunter's Moon, Kilquade, Co Wicklow, before agreeing to give them loans of some €9 million and €16 million respectively between 2005 to 2007. KBC was entitled to rely on assurances from professionals retained by it, he said.

The solicitors claimed the effective cause of the bank’s loss was its own failure to assess the borrowers and to supervise loan transactions.

Among several claims of contributory negligence, it was alleged KBC failed to verify two properties apparently accounting for €20 million of Mr Kelly’s net worth were owned by him and failed to investigate Mr Byrne’s “extraordinary” claims of being worth €32 million and earning €12 million in 2006, including €4 million from his small practice and €4 million for consultancy services to “French fashion houses”. The latter claim was “highly questionable” and turned out to be bogus, the High Court noted.

BCM appealed the rejection of contributory negligence by KBC but not the substantive finding of negligence against it, although it complained the High Court appeared to have wrongly imputed dishonesty to the firm and individual solicitors.

'Intentional dishonesty'
Yesterday, in response to BCM's concerns the High Court judgment appeared to imply it "misled" the bank, which it denied, Mr Justice Nial Fennelly stressed that judgment "cannot and should not be read as attributing any intentional dishonesty or deliberate misleading to any partners or officers of the firm".

On the contributory negligence issue, he said it was not the law firm’s task to check the financial reliability of the borrowers and the High Court was mistaken in finding no contributory negligence by KBC on grounds the borrowers’ own acts were not a “proximate” cause of the bank’s loss.

KBC’s decision to lend to Mr Byrne and Mr Kelly was “effective” cause, combined with the negligence of the solicitors, of the loss suffered by the bank, he said, noting the High Court described KBC as “somewhat careless” in its approach to the loans.

While the solicitors’ negligence in not ensuring security was clearly a direct and proximate cause of KBC’s loss, there was an issue whether it was the “only effective cause” and the High Court erred in apparently taking the view any prior want of care by KBC was irrelevant.

It was important to distinguish between the two types of contributory negligence alleged against KBC – want of care in making the decisions to lend and failing to verify or supervise the solicitors’ performance of their duties, he said.

The High Court will later decide whether there was contributory negligence by KBC in light of the Supreme Court’s assessment of the law.