NIB wins summary judgment against builders

THE HIGH Court has ruled that National Irish Bank is entitled to summary judgment for some €37 million against Durkan New Homes (DNH), a couple and another company over failure to repay loans given for a large housing development at Cabinteely, Co Dublin.

Mr Justice Peter Charleton found in favour of the bank yesterday against DNH, Don and Marian Casey, of Woodbrook, Beech Park, Cabinteely, and Tullycross Developments Ltd, but directed that no orders would be made until after he hears the defendants’ application for a stay on his decision next week. Don and Marian Casey are directors of Tullycross Developments.

The judge will consider interest and costs issues next Thursday.

In a statement, DNH said it had “no comment” to make on the judgment.

The bank had sought summary judgment for €37.1 million under two separate but related loan agreements of March 2006.

It claimed one loan agreement for €29.46 million related to DNH, with offices at Ranelagh, Dublin, and to Don and Marian Casey, of Woodbrook, Beech Park, Cabin-teely, (the DNH agreement), while the second loan agreement for €7.64 million related to Tullycross, with a registered office care of O’Donnell Sweeney Solicitors, Earlsfort Terrace, Dublin.

The €29.4 million loan was to refinance existing loans on land and for the purchase of houses so as to make up a large site at Beech Park, Cabinteely. It was proposed that 11 or 12 suburban houses would be bought and then knocked down, a large site would then be assembled, and planning permission sought to build hundreds of houses.

The loan terms included full repayment some two years and six months after the first drawdown. The €7.64 million loan to Tullycross was on the same terms.

The bank had claimed the effect of cross-guarantees meant all four defendants had a liability for the €37 million sum, but the defendants argued they had paid interest by the loans’ repayment date of September 2008, and the bank’s claim was limited to securities on certain properties.

The bank rejected these claims. It said the loan agreements provided that the value of the property securing the loan had to be at least 70 per cent of the loan and, when both loans were taken together, this meant the value of the property could not drop below €53 million.

The bank became concerned about the value of the property in summer 2008, and it was subsequently valued at €45 million.

In those circumstances, the bank alleged that the defendants’ debts under the loan agreements had, by late September last, exceeded 70 per cent of the combined value of the properties specified in the agreements, and it was entitled to repayment of the full amount sought.

In his decision, Mr Justice Charleton found the defendants had failed to make out a defence to the summary judgment application. He rejected claims that the relevant contracts were effectively a term loan and that, having paid the interest, the defendants simply had to make the property available to fulfil their contract.

He said the intention of the sides was to be discerned from the language of the loan facility letter, and there was nothing in the guarantee contracts or mortgage documents which altered his view of those intentions.

This was a carefully drafted contract agreed against the background of serious borrowing for development purposes.

Once the ratio of the defendants’ borrowing to security did not breach the 70 per cent limit, the bank only had recourse to the security set out in the contract, he pointed out. This meant the value of the property could not fall below €53 million, and there was no dispute, on the repayment date of September 30th, 2008, that the value of the property had declined to €45 million.

In those circumstances, NIB was entitled to judgment for €37 million jointly and severally against all of the defendants, he ruled.

Cross-guarantees: what it all means

THE PHRASE "cross-guarantee" is set to keep a lot of people awake at night in coming months. In this context, it means that banks have loaned money against two or more securities on the same property.

For example: bank A gives a €30,000 loan secured against a given property, while bank B is owed €20,000, secured against the same property. There is no problem with this once the property is worth more than €50,000. Difficulties only arise if its value falls to less than that.

The High Court ruled yesterday that Durkan New Homes, Tullycross Developments and its directors, Don and Marian Casey, were liable for €37 million given in two separate loans secured against the same development site in Cabinteely, Co Dublin.

The bank gave two separate loans in 2006, on condition that if the total debt exceeded 70 per cent of the site's value, then the money had to be repaid. The subsequent collapse in property values meant that the loan exceeded this limit.

In many cases, it is likely that two or more banks have given loans secured against the same properties to developers, often with terms limiting their own ability to to call on their security.

According to solicitor Barry Lyons of commercial law firm Lyons Kenny, the first bank to give a loan against the property is entitled to be repaid first. This has obvious consequences for lenders who are second and third in the queue.

It also has consequences for the proposed National Asset Management Agency (Nama).

Overseas-owned banks not covered by the Government guarantee scheme are not included in the Nama process, but cross-guarantees could see them being dragged in. Lyons notes this will be a crunch issue facing the agency when it is up and running.

– BARRY O'HALLORAN