Philip Rainey QC and Tim Polli win in the Supreme Court

The Supreme Court this morning handed down judgment in Bank of Cyprus v Menelaou.

The facts were relatively simple: Mr and Mrs Menelaou were heavily indebted to the Bank, both directly (for circa £2.2 million) and as guarantors of their various companies. They had granted two charges over their family home, Rush Green Hall, as security for the debts. In 2008 they arranged to sell their home for £1.9 million and purchase a smaller family home, Great Oak Court, in the name of one of their daughters, Melissa, for just under £1 million. After contracts on the sale and purchase were exchanged, they approached the Bank and asked the Bank to agree to the arrangement. The Bank agreed with some reluctance, but on condition that they received £750,000 of the proceeds of sale; and also that they received a third party charge over Great Oak Court to secure Mr and Mrs Menelaou’s debts. The transactions completed on 12 September 2008, the purchase price of Great Oak Court being funded with the proceeds of sale of Rush Green Hall. Forms DS1, discharging the mortgages over Rush Green Hall, were provided by the bank on 13 October 2008.

In about 2010, Mr and Mrs Menelaou asked Melissa to sell Great Oak Court. Melissa’s case is that it was then that she discovered the charge over Great Oak Court. Her case was that she had known nothing about any arrangement between her parents and Bank, and that she had not signed the charge. She issued proceedings seeking a declaration that the charge was void and an order that it be removed from the register of Great Oak Court. The Bank counterclaimed for a declaration that it was subrogated to an unpaid vendor’s lien over Great Oak Court, relying on Banque Financière de la Cité v Parc (Battersea) Limited [1999] 1 AC 221.

The Bank’s counterclaim failed at trial. The trial Judge found that the Bank had no proprietary interest in the proceeds of sale of Rush Green Hall, and so the “traditional” approach to subrogation failed; and also that Melissa had not been enriched at the Bank’s expense and so any broader claim in unjust enrichment also failed. In the Court of Appeal the Bank succeeded, the Court concluding that, whether or not the Bank enjoyed any proprietary interest in the proceeds of sale of Rush Green Hall, Melissa had been enriched at the Bank’s expense and the Bank was entitled to succeed in unjust enrichment. Melissa appealed to the Supreme Court.

The Supreme Court dismissed Melissa’s appeal, with four of their Lordships finding that subrogation to a prior discharged security was available as a remedy to reverse unjust enrichment, whether or not the Bank had any security interest in the proceeds of sale of Rush Green Hall. The Bank did not have to show that the money used to discharge the unpaid vendor’s lien was money to which it had a proprietary claim. Lord Carnwath agreed that the appeal should be dismissed, but preferred to do so solely on the basis that the Bank had a proprietary interest in the proceeds of sale of Rush Green Hall, and could therefore trace money to which it had a proprietary claim into the discharge of the unpaid vendor’s lien.

The Supreme Court judgment is required reading for all unjust enrichment and mortgage lawyers, with their Lordships judgments considering (but not necessarily deciding) such diverse issues as the basis of the House of Lords’ decision in Banque Financière de la Cité v Parc (Battersea) Limited [1999] 1 AC 221, the extent of a mortgagee’s title to the proceeds of sale of the security property, and whether some initial proprietary interest is required in order for a proprietary remedy to be available to reverse unjust enrichment.

Philip Rainey QC and Tim Poll represented the successful Bank in the Supreme Court (Tim Polli having represented the Bank alone at trial and in the Court of Appeal).

The Supreme Court press release is available here and full judgment is available here.