Building society not entitled to surplus

LAW REPORT v 4 August 1995
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Halifax Building Society v Thomas; Court of Appeal (Lord Justice Glidewell, Lord Justice Simon Brown and Lord Justice Peter Gibson) 29 June 1995

A building society which had been misled by fraudulent misrepresentations into making a mortgage advance but had recovered its advance in full from the sale of the mortgaged property is not entitled on the basis of unjust enrichment to the surplus proceeds of sale.

The Court of Appeal dismissed an appeal by the society from Judge Maddocks's dismissal of its claim against the defendants, Junior Thomas and the Crown Prosecution Service.

The first defendant made fraudulent mispresentations to the society in order to obtain a mortgage to purchase a flat. When the first defendant defaulted in his payments, the society sold the mortgaged property and recouped what was due to it. It sought a declaration that it was entitled to the surplus from the sale. The CPS, who on the first defendant's conviction had obtained a confiscation order in respect of the surplus, argued that the first defendant and not the society was entitled to the surplus.

The society argued that it was entitled as against the first defendant to retain the surplus on the principle of unjust enrichment, that the first defendant had gained by committing a wrong against the society and that it would be offensive to basic concepts of justice if a fraudster were allowed to take the surplus.

Malcolm Waters (Dibb Lupton Broomhead) for the society; Geoffrey Zelin (CPS) for the CPS.

Lord Justice Peter Gibson said that the starting-point must be the first defendant's position before the confiscation order. The order only applied to the first defendant's interest. Prima facie that was governed by section 105 of the Law of Property Act 1925, which provides that the proceeds of sale should be applied in discharge of the mortgage and costs and the residue should be paid to the person entitled to the property.

The society argued that section 105 did not establish the first defendant's entitlement and the surplus was payable to the society under the mortgage conditions whereby the mortgage was security for all moneys owed by the borrower to the society. However there was nothing in the mortgage that suggested that the parties contemplated that the first defendant might incur some liability other than debt to the society. Any liability to account for the surplus was not within the scope of the conditions.

On the sale of the mortgaged property by the society, the first defendant became entitled under section 105 to the surplus and the society could not have claimed the surplus on the ground of a further liability to account being established against him in subsequent proceedings.

The society's only interest was that of a secured creditor who had fully recovered all that it was entitled to recover under the mortgage. Although the policy of the law was to view with disfavour a wrongdoer benefiting from his wrong, it could not be suggested that there was a universally applicable principle that in every case there would be restitution of benefit from a wrong. On the facts of the case the fraud was not in itself a sufficient factor to allow the society to require the first defendant to account to it.

Section 105 required the society to hold the surplus in trust for the first defendant unless a constructive trust operated in its own favour. The difficulty was that the society remained only a secured creditor. The wrongdoing of the mortgagor could not translate the mortgagee into the owner of the entire beneficial interest in the property when the mortgage had not been set aside.

English law had not followed other jurisdictions where the constructive trust had become a remedy for unjust enrichment. In considering whether to extend the law of constructive trusts to prevent a fraudster benefiting from his wrong, it was appropriate to bear in mind that Parliament had acted in recent years on the footing that without statutory intervention the criminal might keep the benefit of his crime. The argument based on constructive trust was rejected.

Lord Justice Simon Brown agreed and Lord Justice Glidewell concurred.