KBC Bank might be back on hook over Byrne case
THE High Court must reconsider its dismissal of contributory negligence by KBC Bank over multi-million losses suffered by it after struck-off solicitor Thomas Byrne defaulted on €25m loans.
The decision by the Supreme Court yesterday addresses important issues about applying a defence of contributory negligence and the duties of banks to shareholders in advancing loans.
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 Supreme Court said.
KBC was last year awarded €17.7m 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 separate loans.
The High Court's Judge Brian McGovern rejected claims of contributory negligence by KBC over allegedly not checking out the creditworthiness of Mr Byrne or of developer John Kelly, Hunter's Moon, Kilquade, Co Wicklow, before agreeing to give them loans of some €9m and €16m respectively between 2005 to 2007.
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 if two properties accounting for €20m of Mr Kelly's net worth were owned by him and failed to investigate Mr Byrne's "extraordinary" claims of being worth €32m and earning €12m income in 2006, including €4m from his small practice and €4m for consultancy services.
BCM appealed the rejection of contributory negligence by KBC but not the finding of negligence, although it complained the High Court appeared to have wrongly imputed dishonesty to the firm and solicitors.
Yesterday, in response to BCM's concerns that the High Court judgment appeared to imply it "misled" the bank, which it denied, the Supreme Court's 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".
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, he said.
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.
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 taking the view any prior want of care by KBC was irrelevant, he said.
The case will now go back before the High Court for it to decide whether there was contributory negligence by KBC in light of that assessment.