Judge favours family in HSBC loan dispute
The potential sale of a family home has been halted after the Court of Appeal found a bank had not done enough to protect its owners.
HSBC Bermuda had sought to sell the Warwick home, which was put up by father and son Keith James and Keimon Lawrence as collateral so a friend could buy a business.
But Sir Christopher Clarke, the President of the Court of Appeal, said that the bank had not done enough to protect itself from the risk that Mr James had “undue influence” over his son.
Sir Christopher added, in a judgment dated June 19: “Subject to any further argument, it seems to me that the bank should undertake not to sell and, if it does not, we should order that the bank be restrained from selling the property until further order of the Supreme Court.”
The Supreme Court heard that Mr James and Mr Lawrence had signed on as guarantors for a loan from HSBC Bermuda to Alexander “Jerry” Ming and used their home as collateral to buy a business.
The court heard Mr Ming had approached Mr James and offered to pay him $50,000 a year for eight years in exchange for his guarantee.
Under the agreement, Mr James would use his property in Warwick as collateral, but the property was co-owned by him and Mr Lawrence, his son.
Mr Lawrence, who would not have received any money from Mr Ming under the agreement, was said to be concerned about the plan and warned that Bermuda was approaching a recession.
However, the court heard he was eventually persuaded by his father to sign on.
They met the bank, which required an “opinion from a reputable attorney confirming that the terms of the guarantee had been explained to Mr James and Mr Lawrence”.
Mr James, Mr Lawrence and Mr Ming together met a lawyer, who had been recommended by Mr Ming, and the deal was approved.
But Mr Ming failed to pay back the loan. The father and son were ordered to pay the bank $3,609,666 in 2017 and the bank was given permission to sell their house on Tribe Road No 6 in Warwick.
Mr James and Mr Lawrence called on the court to halt the sale.
They argued in part that Mr Lawrence had been unduly influenced by his father to enter into the agreement and the bank did not take sufficient steps to protect his interest and make sure he received adequate legal advice.
Chief Justice Narinder Hargun, in a November 15 judgment, found Mr James and Mr Lawrence had “no meritorious defence” to the bank's claim under the guarantee.
But the Court of Appeal said the Chief Justice had not considered a previous judgment that had found banks needed to take additional steps when a relationship between a debtor and a surety was not commercial.
Sir Christopher said: “In the present case, so far as the bank was aware, the relationship between the debtor and both sureties was non-commercial.
“It was, therefore, put on inquiry as to whether there was any undue influence.
“Since — unbeknown to the bank — the relationship between Mr James and Mr Ming was commercial, Mr James could not rely on the doctrine of undue influence, but Mr Lawrence could.
“Further the bank is put on inquiry, where the relationship between debtor and surety is on its face non-commercial even if the undue influence relied on is by one surety against another.”
The appeal judge said the principle was “of particular importance” in a case when a father intends to guarantee a large sum to assist a friend and the co-guarantor is his son, who has no reason to agree other than to oblige his father.
Sir Christopher said the bank should have communicated directly with Mr Lawrence and told him they would require a lawyer to explain to him the nature of the documents and not move forward until they hear from Mr Lawrence directly.
He said: “Moreover, it seems to me that he should have been asked, or at least invited, to nominate an attorney who was completely separate from Mr Ming or his father, but was told that the attorney could be the same attorney as was acting for either of them if that is what he preferred.”
The Court of Appeal also found that the bank was required to provide financial information to the solicitor, but did not do so.
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