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Defrauded Mortgage Lender Takes Debt Priority

A bank that erroneously discharged its mortgage security over a residential property owned by a fraudster has had its mistake put right by a judge. The High Court’s decision means that the bank will take top priority in a list of the fraudster’s creditors who are together owed at least £1.94 million.

A fraudulent borrower had obtained mortgage advances in respect of two leasehold flats without revealing that he owned the freehold of both properties and that his interest had already been mortgaged to the hilt. The bank’s security had been discharged in error and the issue arose as to whether it should have to stand in line with other unsecured creditors.

Subsequent to the fraudster being declared bankrupt, a Land Registry Adjudicator had refused an application by unsecured creditors to discharge a unilateral notice registered against the property by the bank. It was argued that all creditors were equally victims of the fraudster’s machinations and that the bank should not have first call on whatever could be salvaged from the property’s sale. The mortgage had been discharged due to the bank’s ‘own carelessness’ it was submitted.

Dismissing the creditors’ appeal, however, the court noted that the bank’s mistake had in one sense been induced by the fraudulent borrower who had stood to gain from the mortgage’s discharge. If the bank’s security were not recognised, the fraudster’s estate in bankruptcy would be ‘unjustly enriched’. There were no exceptional circumstances that would justify a refusal to exercise the court’s discretion to amend the land register to reflect the bank’s property rights.