Menelaou v Bank of Cyprus Plc

The claimant is the registered freehold owner of a house at Great Oak Court, Hunsdon, Ware. She is the daughter of Parris and Donna Menelaou and in mid-2008, aged 18 and a student at nearby Hertford Regional College, lived with them and their two youngest children at Rush Green Hall, Great Amwell, a property owned by them jointly. Mr and Mrs Menelaou were engaged in property development, both in their own names and through various companies, and Rush Green Hall was subject to two legal charges in favour of the Bank of Cyprus (Athe Bank@), the defendant to this action, to support substantial borrowings, well in excess of the value of Rush Green Hall. In 2008 Mr and Mrs Menelaou decided to sell Rush Green Hall, apply some of the proceeds to buy a smaller property as a family home, gift a sum to the claimant=s elder sister to pay the deposit on a house in Enfield which she wanted to buy with her future husband, and free up capital to invest in a further development project.

Mr Menelaou=s sister was the senior partner of the solicitors firm of Boulter & Co., the third party in these proceedings. One of his brothers-in-law, Paul Cacciatore, was employed by Boulters as a legal executive. Mr Menelaou instructed Boulters, and specifically Mr Cacciatore, for the conveyancing on these transactions.

Purchasers were found for Rush Green Hall at a price of ,1.9 million, significantly less than the (direct) indebtedness of Mr and Mrs Menelaou to the Bank of ,2.2 million. On 15 July 2008 Boulters wrote to the Bank informing it that contracts had been exchanged on Rush Green Hall and requesting a redemption statement calculated to the completion date of 12 September 2008. Around the same time, Boulters received into its client account the ,190,000 deposit paid by the purchasers of Rush Green Hall.

About a week later Mr Cacciatore was informed by Mr Menelaou that he had found a new property for the family home at 2 Great Oak Court, part of a new development which was now subject to receivership, and was negotiating with the receivers. On 24 July 2008 Mr Cacciatore was instructed to act in an attended exchange of contracts with the vendor=s solicitors the same morning at a price of ,875,000. The draft contract showed A[blank] Menelaou@ as the purchaser. On the instructions of Mr Menelaou Mr Cacciatore inserted the name of Melissa Menelaou, the claimant, and after some further amendments and retyping exchanged contracts with the vendor=s solicitors, and paid over ,87,500 as a 10% deposit to the vendor=s solicitors to be held in the usual way Aas agent for the Seller@. According to the claimant, she was told by her father that Great Oak Court was being bought in her name as a gift to her on the basis that she would hold the property for the benefit of herself and her two younger siblings, and she agreed to this.

There remained the question of the Bank=s charges over Rush Green Hall which would have to be released if that sale was to go through. On 5 September 2008 Boulters wrote to the Bank enclosing a copy of their earlier letter dated 15 July 2008, which had asked for the redemption statement for Rush Green Hall, and stating:

On 10 September 2008 Boulters sent the Bank a Certificate of Title in standard form in which Boulters (a) undertook, prior to the use of the mortgage advance, to obtain in the form required by the Bank the execution of a mortgage by the claimant over Great Oak Court, and (b) confirmed that it had complied, or would comply, with the Bank=s instructions.

On 11 September 2008 Boulters sent the Bank a copy of the legal charge over Great Oak Court which it was proposed to register on completion. It purported to be signed by the claimant. It also identified the claimant as Athe Customer@, whose debts were to be secured, whereas the Bank=s requirement was that the charge should secure the indebtedness of her parents. The Bank telephoned Boulters to point out the mistake. Mr Cacciatore simply changed the names in manuscript on the charge to show Mr and Mrs Menelaou as Athe Customer@ and returned a copy so amended to the Bank.

On 12 September 2008 completion took place on both Rush Green Hall and Great Oak Court. Boulters received the balance of the price from the purchasers of Rush Green Hall, remitted ,750,000 from those monies to the Bank, and sent a further ,785,000 of those funds to the vendors of Great Oak Court to meet the 90% balance of the purchase price on that property. At the same time Boulters sent the Bank two DS1 forms of deed to be sealed by the Bank authorising the cancellation of the entries relating to the two registered charges over Rush Green Hall. In the event, the Bank did not return the DS1 forms until 13 October 2008 (Footnote: ¹).

Following completion Mr and Mrs Menelaou moved with the claimant and the two younger children to Great Oak Court. In the spring of 2010 the claimant was told by her parents that their property business was experiencing difficulties. They proposed that Great Oak Court should be sold and a smaller property purchased. The conveyancers soon pointed out that there was a registered charge dated 12 September 2008 over Great Oak Court in favour of the Bank securing the indebtedness of Mr and Mrs Menelaou.

On 2 November 2010 the claimant began the present action, claiming an order that the Charges Register be rectified by the removal of the entries relating to the Bank=s charge over Great Oak Court. In essence, her case was that:

When the trial began before me, all appeared therefore set for an unpleasant dispute on vital primary fact between Mr Cacciatore and his young niece and nephew. At an early stage, however, I observed that a decision on this dispute seemed academic, since if - as was apparently accepted - Mr Cacciatore had not sought the authority of the claimant to make the alteration to the deed, the charge would in any event cover only the probably non-existent (and in any event uninteresting) indebtedness of the claimant to the Bank rather than the substantial debts of her parents. There ensued a substantial regrouping on the part of the Bank and Boulters. The allegation that the deed was enforceable against The claimant as security for the debts of her parents was formally abandoned by Boulter and, reflexively, by the Bank as against the claimant. The Bank did so on the basis of Boulter=s further acceptance in a written Agreement that

The liability accepted by Boulters was made expressly subject to credit being given for any sums which the Bank was able to recover in mitigation of its loss pursuant to its counterclaim against the claimant. That remains the only live matter in these proceedings. In its counterclaim the Bank had contended that the claimant holds Great Oak Court on trust for the Bank or, alternatively, that the Bank is entitled to an equitable charge arising as the result of subrogation to an unpaid vendor=s lien over Great Oak Court pursuant to which from the net proceeds of sale (for which the Bank also seeks an order) there is to be paid to the Bank ,875k plus interest. Both contentions proceed on the basis that the purchase price of ,875k for Great Oak Court was paid with or from funds provided by the Bank, identified as the monies received by Boulters from the purchasers of Rush Green Hall.

In the course of the hearing, I observed that separate consideration might be required as regards the 10% deposit paid on 24 July 2008. This gave rise to considerable further argument and analysis. In particular, it led to discussion of whether recovery could be based on a wider principle of unjust enrichment in the light of, particularly, Banque Financiere v Parc [1999] 1 AC 221. The Bank and Boulters also found themselves seeking resort to such a principle as regards the remaining 90% as a fall-back position if their primary arguments should prove unviable. Though the legal theses expressly advanced in the Bank=s pleading did not go so far, I do not regard the Bank or Boulters as thereby precluded from advancing this alternative legal analysis of the undisputed facts, and in the event a large part of the argument on all sides was addressed to this question.

As I have indicated, the Bank sought initially to proceed by the well-known and long-established route of subrogation to an unpaid vendor=s lien. For this purpose the argument presupposed that the monies used to pay the purchase price of Great Oak Court belonged to the Bank, or more precisely that the Bank was the beneficial owner of those monies (the legal ownership being in Boulters, in whose client account they were lodged). On the basis of the same contention, a parallel route was also said to have been opened leading to the conclusion (with similar practical consequences) that pro tanto Great Oak Court was held by the claimant - a mere volunteer - on trust for the Bank. The premise of both these arguments, that the monies belonged to the Bank, was however strongly challenged by Mr Mark Warwick on behalf of the claimant.

As to the monies paid on completion by the purchasers of Rush Green Hall, Mr Timothy Polli for the Bank and Mr Charles Phipps for Boulters urged upon me the decision of the Court of Appeal in Barclays Bank v Buhr [2001] EWCA Civ 1223 in support of the proposition that on the sale of a charged property the charge transfers to the sale proceeds by operation of law. In particular, I was referred to the central passage in the judgment of Arden LJ where she says (at para. 45) that:

In the present case the agreement or understanding recorded in the Bank=s letter of 9 September 2008 did not address the question of ownership or even security rights in the sale proceeds of Rush Green Hall, and had no reason to do so. While the arrival of the sale proceeds from Rush Green Hall and the payment of ,785,000 to the vendors of Great Oak Court (or their solicitors) and of ,750,000 to the Bank could not have been literally simultaneous, it is unrealistic to suppose that the parties were concerned with the status of the incoming monies in any short interval between them. Critically, the agreement was concerned only with the circumstances in which the charges over Rush Green Hall would be released. So long as they remained in place, there was neither need nor reason for the Bank to have any rights over the proceeds of sale, or thereafter, since the charges were only to be released against substitute security over Great Oak Court. And should there be a defect in that substitute security, the Bank had protected itself by obtaining the undertakings given by Boulters in the Certificate of Title.

Accordingly, there was nothing to qualify - either by operation of law or as the result of agreement or understanding between the parties - the straightforward position that in receiving the sale proceeds of Rush Green Hall Boulters was acting as agent for Mr and Mrs Menelaou and held all the monies for them alone (Footnote: ²).

That position is no different in result as regards the deposit paid to the vendor of Great Oak Court on exchange of contracts, some six weeks or so before completion, even on the basis that it was paid out of the deposit received by Boulters from the purchasers of Rush Green Hall. If anything, the analysis is more starkly clear in that each of these deposits was made (a) in contemplation of a sale, not as the result of that sale, and (b) several weeks before the agreement with the Bank in early September 2008. Nor can I see any serious basis for argument that somehow on conclusion of that agreement the Bank acquired a proprietary interest in monies long since received and held by the vendor=s solicitors as agent for the vendor of Great Oak Court: indeed I do not understand any such argument to have been advanced.

I therefore conclude as regards the totality of the purchase price of Great Oak Court that it was not discharged by the use of monies belonging to the Bank. This both eliminates the claim that Great Oak Court is pro tanto held on trust for the Bank and destroys the traditional route to subrogation to an unpaid vendor=s lien.

Banque Financiere made clear that the analysis does not need to be restricted by the limits of the traditional cases concerned with subrogation to a vendor=s lien, in particular limits of a formalistic or technical nature. It is therefore not fatal that the money paid by a claimant only reaches the defendant through an interposed third party (cf Investment Trust Ltd v HMRC, [2012] EWHC 458). But that does not assist the claim in the present case, where - as I have held - the monies in question were not paid by, and did not belong to, the Bank.

The questions for the court , so far as liability is concerned, formulated at a high level of generality, are now: (1) whether the defendant has been enriched at the claimant=s expense; (2) whether such enrichment is unjust; and (3) whether there are nonetheless reasons of public policy to deny a remedy: see per Lord Hoffman in Banque Financiere at 234, and to similar effect per Lord Steyn at 227. The last of these tests will be rarely applicable and is not here. The second would in my view be completely unproblematic in the present case if the first were satisfied. Understandably, it is on the first question that the argument before me has centred.

The detriment to the Bank relied upon in the present case is its release of two charges over Rush Green Hall (worth ,1.9 million) securing indebtedness of ,1.45 million (,2.2 million less ,750,000). The benefit to the claimant is her gratuitous acquisition of Great Oak Court (albeit to be held partly in trust for her two younger siblings). The existence of both detriment and benefit does not however establish the further element that the latter should have been at the expense of the Bank. Whether a causal link between detriment and benefit is required or sufficient, and of what nature, remains little explored by both courts and academic commentators, and even less resolved. I do not intend to make a contribution to that debate beyond expressing my endorsement of the helpful examination of this area by Henderson J in Investment Trust Ltd v HMRC, [2012] EWHC 458, and it would serve no purpose if I were to attempt to do so. It is sufficient for me to say that there must in my view be something in the nature of, to use the formula proposed in Burrows, the Law of Restitution, 3^rd ed. p.66, a transfer of value from the Bank to the claimant. But here the claimant=s benefit enured and was complete on 12 September 2008, while the Bank=s detriment through the mistaken release of its charges over Rush Green Hall occurred a month later. Whether or not time=s arrow must always and with full rigour be respected in the law of unjust enrichment, I am clear that this is not a case in which economic or any other kind of reality calls for its wholesale rejection.

It has, quite correctly, not been suggested that the Bank had - as the result of some agreement - a right against the claimant to require execution of a charge and to which it could resort if the charge proved void or defective (indeed, had that been the case, the claim could have been based on that right and the resort to arguments of unjust enrichment would have been quite unnecessary). The Bank was protected against a void or defective charge by the standard solicitors= undertakings which it received from Boulters: it requires no claim in unjust enrichment. That claim is advanced solely at the behest of Boulters to relieve them from the full consequences of their breaches of those undertakings and related tortious duties. That is a poor reason for the court to pummel or manipulate the law of unjust enrichment into fashioning a remedy in the circumstances - hopefully rare - of the present case.

Accordingly, there will be judgment for the claimant with costs against the Bank, and for the Bank as against the Boulters. As between the latter two parties there will also be consequential orders as to the assessment of damages and costs as set out in paragraphs 4, 5 and 9 of the Agreement between them.