First Mortgage Securities (No 9) Ltd v Smith & Ors

In 1987 and 1988 FMS made two loans to Mr and Mrs Smith. In total they were £139,500. The terms were rather complicated. I hope that it will not be necessary for me to analyse them in any detail. There were, as I said in the overview, two legal charges: one for each loan, but both of them related to the house at 34 Park Place, Cheltenham.

Over the next five years it is at least possible that arrears arose. I state the position in that cautious way because, in more detail, FMS certainly said that arrears arose and, as I will explain, Mr and Mrs Smith did not dispute that at the time. However, Mr Smith has more recently made further investigations which have led him to say that FMS was quite wrong and that on a proper interpretation of the complicated terms of the mortgages there were, or at least there may have been, no arrears. However, the matter was certainly not perceived that way in 1992.

On 4 February 1992 FMS applied to the County Court for a possession order under the mortgages, and the court made the order in principle. The court was presented with statements of the mortgage account by FMS and the statements undoubtedly showed arrears. Mr Smith says now that they were wrongly calculated. I do not think that I need give a definitive decision myself at this stage about whether they were wrongly calculated or not. I am content to proceed on the basis that they were, or at least might have been. Mr Smith tells me that he opposed the application for a possession order but he was not able, at that stage, to dispute FMS's figures. I interpolate that I cannot possibly blame him for that. I very much doubt that I would have felt myself in any better position to dispute the figures if I had been in his place at the time. In the circumstances the district judge made a possession order, but he suspended it on conditions of a fairly routine nature as to payment of arrears, payment of current instalments and the like.

Mr and Mrs Smith did not appeal against the possession order.

Although I do not have any detailed information about the passage of events over the next two or three years it seems fairly clear that by 1995 the arrears were not being cleared. Certainly on 18 September 1995 a warrant for possession of the property was issued by the Court in favour of FMS. A detail which I mention now, having noticed it in the papers, is that in a statement of claim of 1998, to which I have not yet come in this account of the facts, there is an averment that a possession order was made on 30 March 1995. I do not think that the papers which I have include a copy of that possession order. The detail probably does not greatly matter. There certainly was the suspended possession order of 1992 to which I have referred. There certainly was the warrant for possession of 18 September 1995, to which I have referred. There may or may not have also been a second possession order made on 30 March 1995.

Pursuant to the warrant for possession, bailiffs attended at the premises. They took possession of the property and they delivered possession of it to FMS. Mr and Mrs Smith were no doubt unhappy about the position but, as Mr Smith said to me, being law-abiding citizens they had no choice in the circumstances. They handed over the keys of the property and moved out. They have not occupied the property since. There was no appeal by Mr and Mrs Smith against anything which the Court ordered in 1995.

FMS, having taken possession of the property in those circumstances and thus being a mortgagee in possession, advertised the house for sale at £149,500. In 1995 a Mr Russell purchased the house at that price. He had himself raised a borrowing from a bank. The bank caused the property to be valued. The bank's valuer valued it at £145,000. I mention those details because the papers which I have read include assertions by Mr Smith that the sale by FMS to Mr Russell was in some way colourable and at a demonstrable undervalue. Given the figure at which the house was valued by Mr Russell's lending bank, I do not think that I can accept those assertions. That is not to say that Mr Smith does not sincerely believe them.

After the sale to Mr Russell there were still arrears owing on the mortgage of just under £60,000, or at least those arrears were still owing on FMS's own figures. By now Mr Smith says that FMS's figures were wrong and, as I have said earlier, I am prepared to assume for the purposes of this judgment that indeed that was or may have been so. Nevertheless FMS was proceeding at the time that there were still arrears owed to it. In March 1998 it commenced a High Court action against Mr and Mrs Smith claiming its alleged arrears. The present case is in fact that High Court action, but it has gone through a considerable number of changes and modifications since March 1998.

In 2000 or thereabouts Mr Smith, no doubt motivated by the money claim which FMS was still pursuing against him and his wife, commissioned two expert reports, each of which considered and reviewed FMS's calculations of the interest and other liabilities which arose under the mortgages and which therefore constituted the alleged arrears. Both reports said that there were numerous errors in FMS's calculations. I infer that when Mr Smith had had the opportunity to consider those reports he began to explore the possibility of re-opening the possession order or orders which had been made against him several years before, and seeking to claim back possession of the house.

In July of 2002 Mr Russell put the house on the market. In August of 2002 Mr and Mrs Bedford contracted to purchase it from Mr Russell for £474,000. Before the exchange of contracts Mr Smith had contacted the Bedfords' solicitors and warned them that he was proposing to claim that the house still in truth belonged to himself, or to himself and his wife. (I interpolate here that at a date which I do not know exactly Mr Smith suffered the tragedy of the death of his wife. Henceforth I shall refer simply to him.) Reverting to the point that Mr and Mrs Bedford's solicitors had been warned of Mr Smith's claim, I record that the contract of sale between Mr Russell of the one part and Mr and Mrs Bedford of the other contained an indemnity from Mr Russell to Mr and Mrs Bedford should Mr Smith succeed in overturning the title to the property which Mr and Mrs Bedford were acquiring. Mr Smith fairly points out to me that in the circumstances Mr and Mrs Bedford went into the purchase with their eyes open to the risk. However, I think that Mr Smith would accept that his claim to recover possession of the property does not acquire any added strength in law from the existence of the indemnity.

I return at this point to the High Court claim which FMS had brought against Mr Smith. There have clearly been a number of amendments to the pleadings. Since I only have before me the pleadings in their presently amended form I cannot be certain of the exact details of the amendments: how many there were, when exactly they were made, and matters of that sort. However, I think it is sufficient for me at this stage to record two matters. The first is that Mr Smith filed a defence contesting FMS's claim for further arrears of just under £50,000. The second is that Mr Smith counterclaimed against FMS for a substantial sum of damages. He also counterclaimed for an order setting aside the order or orders for possession, which had been made against him and his wife in 1992 and possibly also in 1995.

On a date which may appear exactly in the papers but which at present I do not have at my fingertips, FMS was struck off the Companies Register. In consequence of that step a district judge made a consequential order to strike out the counterclaim which Mr Smith had put forward against FMS.

Mr Smith appealed against the district judge's order. The matter came before Mr Justice Neuberger. If I have followed correctly there were at least two hearings before Mr Justice Neuberger. At one of them the judge ordered FMS to be restored to the register in order that Mr Smith should be able to pursue his counterclaim against it. A corollary of FMS being restored to the register was that the district judge's order, which had struck out the counterclaim against FMS, must have been set aside. There is no doubt that there is before me today a live counterclaim by Mr Smith against FMS. FMS, having been restored to the register, therefore existed again as a legal person. It still does so exist but it has taken no active part in any of the legal proceedings which have followed down to the stage of the hearing before me today.

The second of the hearings before Mr Justice Neuberger of which I know was on 18 December 2003. He was not prepared to proceed solely against FMS on Mr Smith's counterclaim for the possession order, or orders, to be set aside. The judge made the point that third party rights had arisen and he thought it appropriate that the third parties who might otherwise be affected should be joined as parties to the action. It turned out that those third parties were Mr and Mrs Bedford. Mr Smith therefore joined Mr and Mrs Bedford as Part 20 defendants.

What I have said so far more or less brings matters up to date, but I should add two further points;

I mention in passing that a second case to which Mr Smith refers, and as to which I am impressed by the researches which he has been able to undertake, is Prentice v Hereward Housing Association [2001] All ER Com 900. That case is, however, slightly different because, if it is considered carefully, it will be seen that the case, as it came before the Court of Appeal, was in fact itself an appeal from the earlier decision which was said to have been obtained by fraud. However, the Odyssey case certainly does carry the proposition that, if an earlier Court decision has been obtained by the fraud of the party who obtained it, it is vulnerable to being set aside on an application as opposed to on an appeal.

However, in my judgment Mr Smith does not have a seriously maintainable case that the orders of the district judges in the County Court in 1992 and 1995 could be set aside in the manner in which the earlier decision in the Odyssey Re (London) Ltd case was. In Odyssey Re (London) Ltd the managing director of the party which had succeeded in proceedings around 1990 had given perjured evidence; that is to say, he deliberately and consciously lied to the Court. I appreciate that Mr Smith has asserted, for example in his skeleton argument, that, when in 1992 FMS presented its statements of arrears to the district judge in Cheltenham County Court, FMS also was committing perjury. The basis for what Mr Smith says is that the two experts to whom I have referred have written reports to the effect that the statements of arrears were wrong. Let me assume that the statements of arrears were indeed wrong. It simply does not follow that they were wrong in a perjured way. That is to say, it does not mean that FMS presented the statements of Mr and Mrs Smith's mortgage accounts and arrears to the Court well knowing that they were false. Witnesses can get things wrong, particularly in areas where detailed calculations are required.

In this case I have looked at the reports on which Mr Smith relies. They certainly suggest that the calculations which FMS had prepared, and most of which seem to have come out of its computerised system, rather as one would expect, were incorrect in a number of respects. They may well have been incompetently prepared. However, the most that the reports could be said to imply is that FMS operated and used inadequate systems, and had staff who were prone to error. They do not suggest that FMS set out to give fraudulent and false evidence to the Court. In the interest of time I will refer specifically only to a handful of passages in the first of the reports which appears in Mr Smith's very well presented bundle of materials. This is a report by Mr Brown, a chartered accountant. Many of Mr Brown's comments identify detailed respects in which he observes that the calculations which have been carried out differ in some respect or other from the calculations required by the mortgage deeds. For example:

I am sure that Mr Brown is right in that respect, but manifestly a difference of that nature between what the mortgage deeds provided for and what emerged from the operation of FMS's computerised systems cannot be any form of indication that FMS was perjuring itself when it gave evidence to the Court. There are other detailed propositions of a similar nature. I notice also that paragraph 8(h) of the report reads:

In one paragraph Mr Brown says the balance figure at a particular date should be calculated by the addition of four figures which produce a total of £185,038.16. However, he says, it is shown as £185,036.16. There is a £2 error. Mr Brown says that that throws doubt on the integrity of the spreadsheet compilation. That strikes me as a perfectly good point, but is not remotely the sort of thing which leads one to suppose that FMS was giving perjured evidence to the district judge.

There is a summary at the end of Mr Brown's report which begins as follows:

I accept that the word "misled" is capable in some contexts of meaning deliberately deceived. However in the context of the whole of that paragraph it is perfectly clear that what Mr Brown is saying is that FMS incorrectly interpreted the terms of its loans. It therefore gave evidence of arrears which were owing in circumstances where the evidence was wrong. I cannot see any basis at all in the report for Mr Smith's preferred analysis, which is that FMS gave perjured evidence to the district judge. It seems to me that these are clear examples of the normal sort of situation where an order made by a Court might well have been varied on appeal. They are not circumstances analogous to those in the Odyssey Re (London) Ltd case where earlier orders had been obtained by fraud.

I apologise for having taken some time on that part of the case. It is however of some importance because it appears to me that the first step in Mr Smith's case against Mr and Mrs Bedford, namely that the possession orders made by the district judge in 1992 and 1995 are liable to be set aside, is incorrect. For that reason alone I consider that Mr Smith's claim against Mr and Mrs Bedford cannot succeed, and that Mr and Mrs Bedford should be entitled to the summary judgment order which they seek. However, I will assume that I might be wrong in what I have said so far, and that it is at least arguable that a Court in 2005 might think that the orders which the district judges made for possession in 1992 and 1995 could be set aside. Even if that was so it would not help Mr Smith against Mr and Mrs Bedford. I am sure that it would help him considerably in a claim for damages against FMS. However, that will be no comfort to him because of course FMS has no funds to meet a claim for damages.

The matter which I have before me at present is the claim between Mr and Mrs Bedford and Mr Smith, not the claim between FMS and Mr Smith. In relation to Mr and Mrs Bedford's application for summary judgment I make a number of points. This takes me into somewhat technical areas of property law where Mr Smith, I fear, has misunderstood the position. In general I have been very impressed by the diligence with which Mr Smith has researched these matters and by the careful, clear and moderate way in which he has expressed his points. Unfortunately there are aspects of property law which are irretrievably against him and I will try to explain what they are.