Many different ways to connect two points

The High Court[1] has considered the unfair debtor/creditor relationship defence and last year’s Supreme Court judgment in the consumer credit case of Plevin[2].

The claim was made by Barclays Bank Plc (the Bank) against US media lawyer, Londell McMillan for repayment of a US$540k loan with interest. The loan was made to enable Mr McMillan to make a capital contribution to his firm, Dewey & LeBoeuf LLP (the Firm).

The form of loan agreement was negotiated and agreed with the Bank by the Firm’s predecessor firm (there were later mergers).  These types of loan were common for law firms, which would negotiate terms with a number of banks for similar loans, giving the partners choice of funder.

In 2010 the loan was drawn down by Mr McMillan. In 2012 the Firm filed for Chapter 11 bankruptcy and was found to be insolvent. Mr McMillan’s was one of 220 outstanding partner loans.

Whilst the judge commended the evidence given by the Bank’s relationship director, he did not find Mr McMillan to be quite such a reliable witness.

Unfair relationship?

Mr McMillan’s arguments included a claim that the loan agreement gave rise to an unfair debtor/creditor relationship so could not be enforced (under sections 140A and 140B of the Consumer Credit Act 1974 (CCA)).

The loan documents made clear Mr McMillan was the borrower and personally liable for repayment of the loan. There was nothing which suggested anything different to that construction stated in the plain English language of the documents.

Plevin considered

The Court considered Plevin on the unfair debtor/creditor relationship defence under sections 140A and 140B of the CCA. We are reminded Lord Sumption observed in Plevin that:

  • the relationship between debtor and creditor must be unfair, often this will be because it is so one sided it limits the debtor’s ability to choose;
  • although the debtor’s hardship is of concern, matters relating to the creditor or debtor may also be relevant;
  • there may be features of the transaction that operate harshly against the debtor but it does not necessarily follow that the relationship is unfair; and
  • the unfairness must arise from one of the three categories of cause listed in the CCA: (a) the agreement or related agreement (b) the way the creditor has enforced or exercised its rights; and (c) any other actions or inactions of the creditor.

Why it’s not unfair?

A number of factors pointed towards the relationship between the Bank and Mr McMillan not being unfair. These included that:

  • the terms of the agreement were negotiated on behalf of all the partners by the Firm’s financial officers. The Bank was entitled to assume they were acting in the best interests of the partners;
  • Mr McMillan was an experienced partner in a major law firm. The Bank could reasonably expect him to understand the clear terms of the agreement and to be able to assess the financial implications. He was not a naïve or vulnerable consumer;
  • the structure of the loan was standard at the time. There was nothing in the terms as to default or recovery from partners that was unusual or unfair. The Bank was entitled to assume that, as a senior partner in a major law firm, Mr McMillan would be in a position to repay. In any event, it was envisaged repayment would ordinarily come from his partnership capital account;
  • the Bank did not know or have grounds to suspect the financial condition of the Firm. In any event, the Bank was entitled to assume that Mr McMillan as a partner had at least as much knowledge of the Firm’s financial health as the Bank;
  • the interest rate and tenor of the loan was not unusual or unfair and not disadvantageous to Mr McMillan; and
  • Mr McMillan was under no obligation to finance his capital contribution by a loan from the Bank. He was free to do so from other partner capital loan schemes the Firm had negotiated or by any other personal source of funding.

None of Mr McMillan’s arguments were found to add significant support to an argument that the relationship was unfair.

Bank burden discharged

The Bank was found to have discharged the burden of showing that the relationship was not unfair.  Mr McMillan’s other points were considered but it was held that the Bank was entitled to judgement against him.

Comment

It is interesting to see Plevin being considered. Had Mr McMillan been successful and Barclays lost the case, it could have made banks reassess their view on law firm partner loans.

For more information, email blogs@gateleyplc.com.

[1] Barclays Bank plc -v- L. Londell McMillan [2015] EWHC 1596 (Comm)

[2] Plevin -v- Paragon Personal Finance Ltd [2014] UKSC 61

See our previous blog post on Plevin here: http://talkingfinance.gateleyplc.com/?s=plevin.


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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.