The Law Society has succeeded in closing down the practices of two solicitors and freezing their accounts but needs to do more, writes Ian Long
The business affairs of Thomas Byrne and Michael Lynn have undermined the trust that solicitors enjoyed for many years. If the Law Society and the courts do not deal with allegations of wrongdoing against the two solicitors, the legal profession will be seen to have failed to protect their clients from an abuse of trust.
The Law Society has succeeded in closing down their practices and freezing their accounts but needs to do more. The solicitors have allegedly misappropriated clients' funds and failed to comply with solemn undertakings to financial institutions.
However, neither of them has been convicted of any criminal offence. If the allegations are true, Byrne and Lynn have abused their positions in a system based on trust.
They seem to have raised multiple loans in suspicious circumstances and been allowed to act for themselves in providing security to raise huge amounts of money from most, if not all, of the main financial institutions in Ireland.
They borrowed on a massive scale. And they did so in a way that had to arouse suspicion. The figures are frightening, even in post-Celtic Tiger Ireland. Thomas Byrne, based in Walkinstown, is alleged to owe €36 million to at least three financial institutions on foot of loans that were apparently secured on 20 properties in the Dublin area and elsewhere.
One of the institutions, IIB Bank, stated in an affidavit filed in court that 12 of the properties offered as security already had mortgages on them in favour of other institutions. IIB is suing Byrne for € 9 million and has been unable to contact him.
Michael Lynn, based in Blanchardstown, may owe even more. He borrowed more than € 25 million since January this year from various banks and is now said to owe at least € 71 million arising from these and previous borrowings. In one case where First Active is suing him for €5.1 million, it states in an affidavit that Lynn may have sold three properties and failed to repay mortgages on them. In a case brought by Permanent TSB, a former employee of his firm claims that the signature on a "solicitor's undertaking" is not hers.
The solicitor's undertaking is the key document in a system designed to speed up the process of buying and mortgaging a house. An undertaking is a solemn promise that a solicitor gives to a financial institution. The solicitor undertakes to certify the title to the property in question and to mortgage it to the bank as security for the loan.
In return, the institution agrees to advance funds before the mortgage has been put in place. In legal terms this creates a contract between the parties as well as what is called an "equitable mortgage" over the property, but above all it creates a relationship based on trust. It places the solicitor in almost total control of the transaction. Financial institutions accept an undertaking for two reasons - a solicitor is regulated by the Law Society and must hold indemnity insurance. Ultimately they trust solicitors to do what they say they will do.
The system that Byrne and Lynn seem to have abused is referred to as the "certificate of title" system and was set up in 1999 by agreement between the Law Society and the main financial institutions. The objective was to make it faster and easier to draw down a mortgage to complete the purchase of a house.
I was one of a group of solicitors appointed to represent the institutions to negotiate the terms of the scheme. The society's representatives and ourselves agreed to put in place a scheme based on a set of standard documents. One of them, as we have seen, is the solicitor's undertaking. The other documents include the certificate of title and a set of guidelines for solicitors. The system has worked well over the last eight years.
However, any system based on trust is open to abuse. A solicitor determined to use the certificate of title system for certain purposes can exploit a very large gap. The gap is the absence of any central record of solicitors' undertakings that would enable a financial institution to make sure that a property is not subject to another undertaking from another solicitor, or indeed the same solicitor. (There is a register of solicitors' undertakings given on behalf of limited companies but no equivalent for undertakings on behalf of individuals.)
A simple way for a solicitor to obtain more than one mortgage on the same property is to give more than one undertaking. The financial institutions in receipt of these undertakings will not know about each other until it is too late and the loans have issued.
It is significant that the only financial institution pursuing Byrne and Lynn that seems to have good security is Anglo-Irish Bank which insists on a mortgage in place prior to loan issue. Anglo-Irish Bank may be owed €4 million by Thomas Byrne and € 13 million by Michael Lynn but at least it has good security. It does not normally lend on the basis of a solicitor's undertaking.
As well as breach of the public trust, the recent allegations have undermined the confidence of the banks in the role that solicitors play in the mortgage process. They are looking again at their acceptance of solicitors' undertakings in general, and in particular where solicitors act for themselves and give an undertaking on their own behalf in their own transaction.
There is an obvious conflict of interest in a solicitor giving a solemn undertaking in a transaction where he or she has a vested interest in the outcome.
The banks are the key players here. House purchasers may create the demand but the banks control the money supply and ultimately decide who buys what. If they don't lend, or make borrowing more difficult, purchasers can't buy and vendors can't sell. The housing market has enough to contend with at the moment. It does not need a question mark over the integrity of professionals at the interface between lenders and borrowers.
Unlike the Irish Credit Bureau which requires the various lenders to pool information about customers - to establish creditworthiness and to prevent fraud - the certificate of title system does not require them to pool their resources in the same way.
Neither does it oblige the Law Society to share information with the lenders. Only when all concerned co-operate in this way, can the banks and the public believe they have no need to fear. And no need for any more solicitor jokes.
• Ian Longis a partner with Philip Lee Solicitors, Dublin, specialising in banking and finance