Negligent Solicitors Firm Cannot Rely On Illegality Defence Despite Mortgage Fraud By The Claimant

The Court of Appeal has ruled that there was a genuine public interest in ensuring a conveyancing solicitors' client could recover damages for negligence on the facts of this case despite the client instructing the solicitors as part of a plan to commit mortgage fraud.

Ms Maria Grondona v Stoffel & Co [2018] EWCA Civ 2031

Background

The defendant solicitors, Stoffel & Co, admitted failure to register the relevant forms (a transfer of the property, cancellation of existing charges and registration of the new charge) at the Land Registry when acting for the claimant purchaser, Maria Grondona, of a flat in Surrey. Grondona defaulted on her mortgage payments and the lender, Birmingham Midshires, sought to enforce its security but was unable to do so as a result of the registration error.

Birmingham Midshires brought proceedings against Grondona in order to obtain a money judgment. She defended the claim and brought a Part 20 claim against Stoffel & Co for an indemnity and/or a contribution. The law firm defended the Part 20 claim on the basis that although it was negligent and in breach of contract, Grondona could not recover damages because the purpose of the mortgage transaction was fraudulent and therefore the illegality principle known as ex turpi causa applied.

The background to the transaction was as follows. The property was owned by a business associate of Grondona's, a Mr Cephas Mitchell. Grondona and Mitchell entered into a contract which provided that Grondona would have a mortgage loan for the property in her name and Mitchell would pay the mortgage and deal with all other financial matters on the property. In return she would receive 50% of any profit on the future sale of the property. Grondona then purported to purchase the property from Mitchell for three times the amount that he had paid for it just a few months earlier. She did this with the assistance of an advance from Birmingham Midshires. In effect Grondona was obtaining further finance for Mitchell on a property he already owned and on terms that he would not personally have been able to obtain due to his poorer credit history. It was nonetheless the intention of all parties for the advance to be secured by a charge over the property.

High Court judgment

At first instance, the judge, HHJ Walden-Smith, held that Grondona had participated in a mortgage fraud to deceive Birmingham Midshires. She misrepresented on the mortgage application form that the purchase was not...