England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM ORDER OF HIS HONOUR JUDGE WALTON

		Royal Courts of Justice Strand London WC2 Tuesday, 22nd May 2001

1. LORD JUSTICE ROBERT WALKER: This is an appeal by Mrs Sandra McDonnell from an order of His Honour Judge Walton made in the Newcastle upon Tyne County Court on 10th November 2000. By his order the judge directed that Mrs McDonnell and the other defendants should give possession to the claimant, Mortgage Express Ltd, of a house at 11 Granada Close, Whitley Bay, Tyne and Wear. Mrs McDonnell has been represented today by Mr Rajah of the Bar Pro Bono unit. The court is very grateful to Mr Rajah and the Royal Courts of Justice Citizens Advice Bureau for their assistance. The order was made against three defendants, Mr Keith Robson who is Mrs McDonnell's brother, Mr Paul McDonnell her husband, and Mrs McDonnell herself.
2. The proceedings for possession were commenced in 1991, over nine years ago. The very protracted course of the proceedings has been the result of several factors, including the increasing complexity of the matter. Regrettably the sequence of events has involved dishonesty on the part of Mr Robson and Mr McDonnell. It has probably also involved dishonesty, or at the very least serious breaches of professional duty, on the part of a former solicitor, Mr Alan Bownes, who was acting at one stage both for Mr Robson and Mortgage Express in the matter. Mr Bownes was struck off the Roll of Solicitors on 30th June 1994. Mrs McDonnell claimed in a witness statement that three solicitors who successively acted for Mr Robson had all been struck off the roll. That may be so, but it has been verified only in the case of Mr Bownes.
3. I can summarise the essential facts from the judgment which I gave when I granted permission to appeal in this case. In the early 1980s Mr McDonnell was in difficulties financially. He was unemployed. His previous business was being investigated by the Inland Revenue. He knew that he would be unable to obtain a mortgage himself. In 1984 he acquired a house at 5 Woodburn Way (all the houses in question are at Whitley Bay in Tyne and Wear) with a mortgage obtained in the name of a Mr Atkinson. Mr McDonnell falsely signed documents in Mr Atkinson's name. He did the same a few years later (using the equity he had obtained from the sale of 5 Woodburn Way) in order to acquire 62 Queen's Road. It was acquired with a mortgage in the name of his brother-in-law Mr Robson, who has from time to time worked overseas in Libya. Again, Mr McDonnell falsely signed in Mr Robson's name. In 1990 he pleaded guilty to forgery and received a suspended custodial sentence.
4. Meanwhile, in late 1888 or early 1989, Mr Robson and Mrs and Mrs McDonnell agreed to sell their two properties, 62 Queen's Road and 5 Mulberry, Red House Farm, in order to acquire 11 Granada Close as a sort of joint enterprise. Unfortunately, it was a joint enterprise which has gone very badly wrong. It was acquired in the sole name of Mr Robson with money provided approximately as follows: £23,500 from 62 Queen's Road; £9,500 from 5 Mulberry; £55,000 from a mortgage loan from Midland Bank, making a total of £88,000 which covered the purchase price of £87,000 together with expenses. The solicitor, Mr Bownes, acted for Mr Robson and Mortgage Express. When she appeared in person at the permission hearing Mrs McDonnell told me that Mr Bownes did not act for her husband or herself, but it seems very likely that he must have had funds of theirs in his client account and that he knew Mr and Mrs McDonnell and their children were going to live in the house. However he did not disclose that in his report on title and, in doing so, was in breach of duty to Midland Bank. However worse was to come.
5. Mr Robson fell out with the McDonnells. He evicted them from the house and changed the locks. On 24th April 1989 the McDonnells obtained a without notice order in the North Shields County Court enabling them to return to the property. On 3rd May 1989 undertakings were given pending trial (a trial which was in the event postponed for an extraordinary length of time) in order to determine beneficial ownership. In October 1989 Mr Bownes started to act for Mr Robson alone. That may have involved him in further conflict of interest.
6. Again, worse was to come. In August 1990 Mr Bownes assisted Mr Robson to remortgage the property, 11 Granada Close, to Mortgage Express. In doing so he gave a false certificate and undertaking as to title. The remortgage was for no less than £120,150. A substantial part of it went to Midland Bank in order to pay off its charge. The rest appears to have been used by Mr Robson for his own purposes, although there were no clear findings about that. The charge to Mortgage Express seems to have been an "all monies" charge.
7. In December 1990 Mr and Mrs McDonnell learned of the remortgage. They had, by then, solicitors acting for them who were certainly honest, and appear from the correspondence to have been reasonably competent, although they did not at that time take any energetic action. They simply wrote to Mortgage Express, announcing that their clients had an interest in the mortgaged property. By March 1991 the mortgage was £5,000 in arrears. It appears today that Mr Robson made three payments under the Midland Bank mortgage but no more than that. In November 1991 Mortgage Express started proceedings for possession. In April 1992 these proceedings were consolidated with the existing proceedings - that is the McDonnells on one side and Mr Robson on the other side - as to beneficial ownership. In June 1992 the solicitors for Mortgage Express started pressing Mr Bownes' firm over his apparent breach of professional duty, but matters moved very slowly. It was only in 1993 that the Solicitors Indemnity Fund became involved and in 1994 Mr Bownes was struck off the roll. There were long delays while the position of Mr Bownes was investigated, considered and discussed.
8. Eventually, in 1997 the proceedings made some progress again. There was apparently an agreement between the Solicitors Indemnity Fund and Mortgage Express that they would be bound by the findings of fact made at trial. The judge had a very difficult case to try. The matter had been going on for a very long time. The judge had to decide who was telling the truth. He also had to decide difficult questions of law as to the effect of the doctrine of illegality on this confused situation, and also the effect of the doctrine of subrogation under which an apparently valid mortgage granted to Midland Bank had been paid off with part of the money raised by a questionable mortgage in favour of Mortgage Express.
9. It was accepted that, apart from illegality and subrogation, if the McDonnells had an equitable interest in the house it would be an overriding interest under Section 70 (1) (g) of the Land Registration Act 1925 (binding Mortgage Express, which would be left to its remedy against the Solicitors Indemnity Fund standing in the shoes of Mr Bownes).
10. At trial Mr Robson did not appear at all. Mr and Mrs McDonnell appeared in person. Mr McDonnell gave evidence. The judge found that he would not accept the evidence of Mr McDonnell unless it was corroborated. Mrs McDonnell did not give evidence. The judge said of her position:

"So far as Mrs McDonnell is concerned, she indicated that she did not wish to give evidence and of course she is quite entitled to that position. She did draw my attention in a short statement to the length of time it has taken for the proceedings to reach this stage. She has put a statement into court emphasizing the distress which the long continuation of these proceedings has caused and a point is also made about the knowledge of a solicitor acting for the claimants at the time the claimants' charge was effected."

11. I say in parenthesis that is a reference to Mr Bownes.

"I should make the point generally about Mrs McDonnell's position that although she is a separate defendant she has not throughout the long history of the case attempted to put forward a separate case to that of her husband and, likewise, in what has been said to me in the course of the hearing, there has been no attempt to say that her position is in any way distinct and different from Mr McDonnell's."

12. The skeleton argument put forward for Mortgage Express at trial did not argue that Mrs McDonnell had no interest because it was all in her husband, and her own witness statement - produced by Mrs McDonnell, but I think subsequently and not placed before the judge - referred to her having spent £25,000 of her own money on what is described as a granny flat built on to 11 Granada Close. This money came from her own half-share of a restaurant business at Whitley Bay.
13. The judge held that the illegality tainting the transaction shut out any claim by Mr and Mrs McDonnell to an equitable interest. In reaching that conclusion, he distinguished the decision in the House of Lords in the important case of Tinsley v Milligan [1994] 1 AC 340, a case about two women who shared a flat which was in the name of only one of them and who engaged in deception in order to obtain maximum social security benefits. The judge went on to say that if that were wrong, Mortgage Express would be entitled to be subrogated to the rights of Midland Bank, which did bind the McDonnells as they had agreed to the original mortgage in favour of Midland Bank. On this point the judge referred to and relied on the case of Equity & Law Homes v Prestridge [1992] 1 All ER 909.
14. In this court Mr Rajah has on Mrs McDonnell's behalf challenged the judge's view about Tinsley v Milligan. The judge distinguished the House of Lords' decision in that case in that it was concerned with property acquired for an unlawful purpose (or more precisely, acquired in a manner which served the unlawful purpose of cheating on social security benefits) whereas this case was concerned with what the judge called money "from an unlawful source" - by which he meant the earlier mortgages which produced a profit both from 5 Woodburn Way and from 62 Queen's Road.
15. Mr Rajah has submitted that the essential point was that the profit was money which belonged to the McDonnells, even if they had acquired it in a disreputable way, and that all the McDonnells had to prove was that Mr Robson was not the true beneficial owner of 11 Granada Close, and that they had contributed money to its purchase (£24,000 initially and, it is said, further money for the granny flat, although this received only a passing mention in the judgment below and then in the context of an agreement that it should be built rather than the fact that expenditure had actually been incurred on it).
16. In support of these submissions Mr Rajah relied on the recent decision of this court in MacDonald v Myerson, 26th January 2001 EWCA CIV 66. He might also have relied on, and he did refer in passing to, a reported decision of this court which was followed in MacDonald v Myerson and that is Halifax Building Society v Thomas [1996] Ch 217. Both those cases concerned mortgages which had been obtained fraudulently, and in one case through a blatant and large-scale mortgage fraud, but where the mortgage lender had been paid off in full. The judgment of Lord Justice Peter Gibson in Thomas clearly demonstrates why in such a situation the mortgage lender cannot claim that the fraudster has been unjustly enriched at his expense and cannot claim to recover the surplus as money for which the fraudster is accountable as a trustee. Lord Justice Glidewell put the same point pithily at page 229 when he said:

"The position that a wrongdoer should not be allowed to profit from his wrongs has an obvious attraction. The further proposition, that the victim or intended victim of the wrongdoing, who has in the event suffered no loss, is entitled to retain or recover the amount of the profit is less obviously persuasive."

17. MacDonald v Myerson shows the same principle applying when the profit was in the hands of the fraudster's own solicitors and held on their client account.
18. Mr Patrick Darby for Mortgage Express has supported the judge's conclusion on this point, arguing that in Tinsley v Milligan the illegality lay in the purpose for which the property had been acquired in Mrs Tinsley's name, not in the source of the funding. That is a point of difference but it is not a significant distinction. Indeed, if anything it makes this a stronger case. The money which the McDonnells put into the acquisition and improvement of 11 Granada Close was quite simply their money, and it was no part of Mortgage Express's pleaded case, nor did it appear in the course of the hearing, that the acquisition of 11 Granada Close involved any new illegality on the part of the McDonnells or either of them.
19. Mr Darby has also submitted in his written skeleton argument that there was no evidence that Mrs McDonnell (as opposed to her husband) had any interest in 5 Woodburn Way or 62 Queen's Road. That appears to be so, but there was some evidence that Mrs McDonnell has paid £25,000 out of her own money for the improvement of 11 Granada Close. The judge referred throughout his judgment to the claim that Mr and Mrs McDonnell had an interest in the property, making no distinction between them. He did not make more detailed findings because on the view he took it was unnecessary to do so. In his oral submissions Mr Darby very fairly accepted that it was a matter of taking the interest of the McDonnells as a whole in dealing with this point.
20. Mr Darby has also made some detailed and interesting submissions as to the position under the Human Rights Act 1998. He has pointed out that Mrs McDonnell did have the benefit of legal aid from 1992 to 1999 although she and her husband were eventually unrepresented at trial. However, Mr Rajah made it clear that he does not rely on these points at all, so I need say no more about them.
21. On the issue of illegality I consider that Mr Rajah is right in relying on MacDonald v Myerson (to which I would add Halifax Building Society v Thomas). The money which the McDonnells put into 11 Granada Close was their money. In the circumstances the case falls within the principle stated by Lord Browne-Wilkinson (with whom Lord Jauncey and Lord Lowry agreed) in Tinsley v Milligan [1994] 1 AC 340 at page 376:

"I therefore reach the conclusion that, although there is no case overruling the wide principle stated by Lord Eldon, [in Muckleston v Brown (1801) 6 Ves 52, 65-9] as the law has developed the equitable principle has become elided into the common law rule. In my judgment the time has come to decide clearly that the rule is the same whether a plaintiff founds himself on a legal or equitable title: he is entitled to recover if he is not forced to plead or rely on the illegality, even if it emerges that the title on which he relied was acquired in the course of carrying through an illegal transaction."

22. Similarly, Lord Browne-Wilkinson said at page 377 at the end of the speech:

"There are many cases where a plaintiff has succeeded, notwithstanding that the illegality of the transaction under which she acquired the property has emerged: see, for example, Bowmakers Ltd v Barnet Instruments Ltd [1945] KB 65 and Singh v Ali [1960] AC 167. In my judgment the court is only entitled and bound to dismiss a claim on the basis that it is founded on an illegality in those cases where the illegality is of a kind which would have provided a good defence if raised by the defendant. In a case where the plaintiff is not seeking to enforce an unlawful contract but founds his case on collateral rights acquired under the contract (such as a right of property) the court is neither bound nor entitled to reject the claim unless the illegality of necessity forms part of the plaintiff's case."

23. Where does that leave the case as a whole? At one stage it appeared possible that it might not make any practical difference, because Mr Rajah has not sought to challenge the judge's analysis (at page 12 of his judgment) of the position on subrogation, if he were wrong on illegality.
24. Under the doctrine of subrogation Mortgage Express is entitled to be treated as if it had Midland Bank's security for the principal, interest and costs which were paid off in August 1990 out of the advance by Mortgage Express, and for further interest on that sum. Mortgage Express's security takes priority to Mrs McDonnell's interest to that extent. It does not take priority to her interest to the extent of the money which Mortgage Express advanced to Mr Robson and which he used for any other purpose. This court has been told that about £56,000 was due to Midland Bank in 1990 and that the total indebtedness notionally covered by that security has more than doubled, to about £127,000. The court has also been told that the house is worth about £175,000, and Mrs McDonnell thinks that some modest expenditure on it could significantly increase its value; but £175,000 is a working figure to take. On that basis there plainly will be some equity - although I use that phrase not in a technical sense - left after the rights under the doctrine of subrogation have been satisfied.
25. There seems to be no prospect of Mrs McDonnell being in a position to obtain relief in the form of a suspended possession order under Section 6 of the Administration of Justice Act 1970 or Section 8 of the Administration of Justice Act 1973. Mr Rajah did not raise that as a possibility. It seems plain therefore, that there must be an order for possession at some date in the near future. That will be followed by a sale and reimbursement of Mortgage Express under rights of subrogation.
26. What is to be done with the balance? That raises questions of equitable accounting on which there was some discussion in this court. It is plainly not possible for this court to solve all those questions, much as we would like to dispose of this very long running and painful matter as quickly as possible. It seems that if the parties - by which I mean Mortgage Express and the McDonnells - are unable to agree, it may be that the matter will have to go back to Newcastle upon Tyne County Court to be further considered by the circuit judge or, if he thinks fit to remit it to a district judge, by a district judge.
27. In order to try and assist the parties to a possible settlement and in order to emphasise to them - although I am sure it does not need to be emphasised - it is not in the interests of either side for this long running litigation to incur further costs, it seems that there are three possible issues that arise on equitable accounting.
28. The first point is whether the judge did - in a passage in which he used the words "I would have been disposed to find" or some such words - intend to make a definite finding as to the proportion of 76 per cent and 24 per cent which he then mentioned in his judgment. It seems to me that it is probably not open to this court finally to decide that point. But for my part I think it is possible that the judge was merely expressing a view on matters on which he had not heard full evidence and argument rather than intending to make a definite finding of fact. The judge did express a provisional view which it may be difficult to dislodge and the parties should not be encouraged to litigate that issue furhter. I emphasise that the 76/24 per cent was the eventual split of ownership at which the judge was inclined to arrive, before any question of equitable question arose. That brings me to the second and third points, where the original split may possibly be varied.
29. The second point is that if the granny flat - which, as I mentioned, had only a passing reference in the judgment - was indeed constructed and has added significantly to the value of the property, that would appear to be, although I would decide nothing on the point finally, a matter that ought to be taken into account in equitable accounting.
30. The third point is one which was barely, if at all, raised in argument before this court but I think it right to mention in order that the parties should be able to focus on all possible issues and, I hope, resolve the matter. This point arises from the position of Mr Robson after Granada Close had been acquired in his name, on any view, both as trustee and (for some interest) asbeneficiary. A trustee who also has a partial beneficial interest and is guilty of breach of trust must, in all normal circumstances, pay out his co-beneficiaries in full before he is entitled to take anything in respect of his beneficial interest. If Mr Robson was in that position the question may arise whether Mortgage Express, so far as it claims as an equitable assignee by way of charge of Mr Robson's interest, is in any better position. The court has heard no argument on that point so I do no more than draw attention to it.
31. In short, therefore, I would allow this appeal on the issue of illegality and I would deal with the further points which may arise in the manner which I have just indicated.
32. LORD JUSTICE THORPE: I am in complete agreement.
33. THE PRESIDENT: I agree with the judgment and that this appeal should be allowed. Consequently, the appeal is allowed.
Order: Appeal allowed