This week featured the case of P WHELAN & ORS V AIB PLC & ORS where the family of Philip Lynch of One51 fame are suing AIB and two firms solicitors on foot of Loan documents and a Guarantee on a €25.3 loan signed by Philip Lynch`s daughter Judith Whelan arising out of a joint venture purchase of 86 acres of lands at Kilbarry, Waterford in February 2007 – see http://bit.ly/eSUv0A . The family claim that they entered the loan on the basis that AIB`s recourse was confined to the lands at Waterford and that effectively the Bank would not be entitled to sue the family members arising out of any default on the loan. AIB contends that it is entitled to €25.3 judgment orders against all of the plaintiffs and another person involved in the joint venture, Gerard Conlon. The Lynch family are suing the Bank and also the 2 firms of solicitors involved in the purchase / loan transaction. Philip Lynch told his daughter Judith Whelan, the day before she called to her solicitors to sign the loan documents, that he would not proceed with the deal if AIB had recourse to him for the loan. She states that she believes that she signed documents on the basis that AIB would have recourse only to the property purchased – see http://bit.ly/g3ta3q .
The initial bank Facility Letter contained a clause confining recourse to Mr Lynch and Mr Conlon. In an amended Facility Letter, signed by Ms Whelan, this clause was deleted and Ms Whelan`s Affidavit, opened to the Court at the start of the Hearing, – see http://bit.ly/dR5DdP – records that the family`s solicitors stated that the amended AIB letter was “to reflect the fact that the bank now only requires legal recourse against the property being their security for the loan – they no longer require any legal recourse as against Philip, Gerry or the Lynch children”.
The land had been rezoned and, at the time of purchase, the value of the lands had jumped to an estimated value of €40m. The bank subsequently valued the lands at €75m. Apparently they are now worth €4m.
A non-recourse loan is a loan secured on a property but where the borrower is not personally responsible for the loan. That is, if the borrower defaults on the loan the lender`s recovery is limited to the property on which the loan was borrowed. The difference between the value of the property and the amount loaned by the lender becomes a loss to the lender. While most people may find it hard in the current climate to believe that loans of this nature were made in better times, this kind of madness did go on during the peak of the property market in Ireland. In fact, a Google search on “non recourse loan” on the 13th March 2011 brings up a Link to AIB Loans at http://www.aib.ie/personal/loans/Personal-Loan?gclid=CI247Ku4zKcCFQRP4QodBUSmDg .
Non recourse loans were particularly familiar to the US domestic loans market but in circumstances where an insurance policy was taken out by the bank to cover the eventuality of the borrower falling into arrears and the bank being entitled, in those circumstances, to claim the excess of the value of the loan over the value of the property under the insurance policy. Unfortunately, when non recourse loans found their way into the lending market in Ireland during the Celtic Tiger everyone, Banks and borrowers included, forgot about the insurance policy! There will be many more of these cases before the Irish Courts. We already know that that former Anglo-Irish Bank director Willie McAteer received a non recourse loan of €8m – see http://bit.ly/hRasD5 – , not to mention the “golden circle” loans totalling €300m also issued by the same bank – see http://bit.ly/i8Zagm .
In the meantime, householders are regularly before the Courts where banks are obtaining Ejectment Orders to put them out of their family homes for failure to maintain their payments. And after they have been put out of their homes, will they suffer the ignominy of being pursued for the arrears on the loan still due over and above the value of the property? Two different worlds!