Bank´s liability on custody of off plan funds

Thanks Ads

I've got all the documentation at home and the guarantor on the pre-contract was a company name (I think), not a bank.  I would suggest that due dilligence was not carried out due to the lawyer letting us sign, and they countersigned, each page of the final contract without having a guarantor written on there. 

Also, maybe the lawyer is liable for the original deposit, as they just paid the money into the developers account without doing a proper process or creating the proper paperwork to make it clear to the bank that it was a deposit for a property.  

I understand your concern. In our opinion, when hiring a lawyer for an off plan property purchase, despite thre are direct legal liabilities of the Bank, there are  also professional responsibility  by the conveyancing lawyer to ensure that the whole mecanism of protection is in place. If the necessary guarantees were not obtained correctly, this could imply a failure on their part to fulfill their obligations, and they may indeed be liable.

Dear Maria,

More questions I'm afraid....

Would this require a joint and several claim against the Bank and conveyancing lawyer? Would the claimant have to have already proved that the Bank were not able to be made accountable due to the latest SC ruling?

The point has previously been made however that no Spanish lawyer would be willing to do this, I.e. take action against another Spanish lawyer, so realistically how could this be implemented?

Would the claim in effect be against the conveyancing lawyer's legal indemnity insurance? And wouldn't this be counter claimed by the insurer as being part of the Banks liability? Catch 22 scenario with the claimant being exposed to yet more years ( and costs) whilst the liability issues remain unresolved?

So frustrating!

No worries at all regarding the additional questions. Let me clarify:

• Would this require a joint and several claim against the Bank and conveyancing lawyer?
  No, because the responsibilities stem from different causes.

• Would the claimant have to have already proved that the Bank could not be held accountable due to the latest Supreme Court ruling?
  Yes, and it must be demonstrated that the lawyer's professional negligence resulted in the loss of funds. Each case must be individually evaluated, and it is also essential to consider the statute of limitations for these actions.

• The concern that no Spanish lawyer would take action against another lawyer
  That’s not the case. Claims can certainly be made against other lawyers, as we are all required to have professional liability insurance.

• Would the claim be against the conveyancing lawyer's legal indemnity insurance?
  Yes.

• Could the insurer counter-claim, arguing that it's part of the Bank’s liability?
  No, not if the claim is presented correctly and used as a final recourse after the failure of previous actions.

• Would this expose the claimant to more years of legal battles and costs?
  Unfortunately, yes. These types of cases can indeed take years, which is frustrating and is certainly not an ideal solution for anyone.

Hope the above helps!

Dear Maria

Thanks for answering questions on this.

Was there an actual process in place in 2008 that lawyers should have adhered to when sending initial deposits to developers?  In my case, half was sent directly to the developer and the other half was in promissory notes through the bank.  Should the bank have somehow been told that the initial deposit was for a property or was it common practice for lawyers back then to send the deposits directly to the developer? 

Do you know of any claims against lawyers due to deposits not going through a proper process that involved the bank? Or is this a new thing because of the Supreme court ruling?

Seperate to the above.  If a lawyer signs each page of a property purchase contract and doesn't say anything about the guarantor part being blank and fails to secure a bankers guarantee.  Would you say they have failed in their professional responsibility?

Thank You

Thanks Maria.

But returning to Banks liabilities....

Could it be argued that whenever a Bank agrees to establish a subrogated mortgage system with promissory note systems in place for any developer building an offplan development, that this evidence in itself would be sufficient to establish that the Bank already had knowledge that associated developer accounts must be legally bound by guarantee law? And wouldn't this evidence in itself overide any suggestion that obstacles could prevent the Bank from knowing all associated developer accounts were linked to offplan purchase?

Could this be a legal route to countering the latest SC ruling?

Ads:

The Supreme Court is adopting an extremely restrictive and formalistic interpretation that goes against the spirit of the law it applies, which is of public order and intended to protect first and second home buyers. It is imposing formal requirements that were not established by the law.

Below, I am including the translation of the key parts from the two most recent rulings on this issue, dated July 2024.

1. Supreme Court decission dated July 22, 2024

What the appellant actually disputes is whether the legal conclusion reached in this case by the sentencing court is in accordance with said jurisprudence. The conclusion was that the bank could not discern the nature of the deposits and therefore could not exercise its duty of control. The appellant, on the contrary, believes that the reality of the deposits into an account of the developer at the defendant bank, and the express indication by the payer at the time of making them of her name and the promotion, are sufficient data to infer that the bank knew or could have known that these were advance payments towards the price of a property under construction.

2. In response to this argument, it is appropriate to recall that, although the question of whether the credit institution knew or could have known about the payments—and therefore controlled them—involves a legal assessment of the bank's liability, the review of which is proper to the cassation appeal (e.g., judgments 147/2020 of March 4, 107/2021 of March 1, and 127/2021 of March 8), the cassation review of that assessment must respect the proven facts that make up the factual basis of the appealed judgment (in this sense, for example, the aforementioned judgment 127/2021), the review of which, if possible, would only be feasible through an extraordinary appeal for procedural infringement that was not filed.

In this case, the determining facts of the judgment of the sentencing court, which the appellant overlooks, are that the bank did not know of the existence of the contract nor that the development to which the appellant's property belonged was under construction; that the account into which the deposits were made was a current account opened before the purchase contract was signed; that this account was not shown to be intended to receive buyers' advance payments but was used for various purposes; and, especially, that when making the deposits, the payer did not specify that they were amounts on account of the price of a property under construction.

This last point is corroborated by the documentation provided with the lawsuit, since in none of the three receipts—for as many cash deposits—is it expressly indicated that the amount deposited in each case was in concept of payment on account of the price of a property under construction. It is true that in two of these receipts, alongside the personal data of the appellant, not the name of the development—which is what the appellant alleges—but the expression 'DIRECCION000' appeared; however, this fact does not allow us to question, in light of the aforementioned jurisprudential doctrine, the inference of the sentencing court regarding the bank's lack of knowledge that these were advance payments under Law 57/1968. If the bank did not know of the existence of the development, it is unreasonable to suppose that it could easily link that expression with the 'DIRECCION000' development to which the appellant's property belonged.

Finally, the bank's knowledge that the account holder was a developer engaged in real estate activity (a fact never disputed) is also not considered relevant by jurisprudence in similar situations, because the bank cannot be required to perform an inquisitive task on any deposit made into the developer's account (in this sense, judgment 127/2021, citing judgments 623/2019, 147/2020, and 453/2020).

3. In sum, under such circumstances, the legal assessment of the appealed judgment aligns with the jurisprudence of this chamber, since to consider, as the appellant seeks, that in this case the defendant bank necessarily knew or should have known that the amounts deposited corresponded to advance payments of the price of a property would be equivalent to extending the liability established in Article 1, Section 2 of Law 57/1968 beyond what results from said jurisprudence (judgment 838/2023).

2. Supreme Court decission dated July 15th 2024

NINTH.- In accordance with this jurisprudence, the two grounds for the appeal must be dismissed for the same reasons as those established in rulings 3/2024 and 132/2024. Specifically, the legal assessment made by the sentencing court regarding Bankinter’s inability to control the payments is based on factual findings that the appellant was unable to disprove through the procedural infringement appeal. According to these factual findings, it was not indicated to the defendant bank at the time of the deposits—there were only three, as the court found that the remaining amounts claimed were not deposited in Bankinter—the corresponding purpose of the payments, nor did the bank have the means, based on the circumstances, to know or deduce this purpose through other means. Additionally, it was acknowledged by the buyers themselves that the Bankinter account receiving the transfers was used by the developer for various purposes, such as paying suppliers. This supports the legal conclusion of the sentencing court, which is in accordance with the relevant jurisprudence. In such circumstances, Bankinter could have only known the origin of these amounts by conducting an inquisitive investigation, which is not legally required, into any deposit made into the developer's account (see recent judgments 682/2023 of May 8, 636/2022 of October 3, and 584/2022 of July 26).

As stated in the ruling of this court, 838/2023 of May 30, "to consider that in this case the defendant bank necessarily knew or should have known that the deposited amounts corresponded to advance payments for the price of a property, thereby rectifying the sentencing court's assessment, would be to extend the liability established in Article 1, Section 2 of Law 57/1968 beyond what results from the jurisprudential doctrine of this court."

Thank you Maria,

In layman’s terms….

Did the Bank in question provide the funding to the developer of the offplan development, and was that developer named in the purchase contract? 

Is it correct to say that the purpose of Ley 57/68 is to safeguard all purchasers’ deposited monies, such that in the event of developer breach of contract these monies remain protected?

Is it correct to say that from the outset, the Bank funding the developer of the offplan build would have been subjected to law Ley 57/68, and it would have been for them ( not the purchaser) to ensure that effective mechanisms were in place, such that all off plan purchasers’ deposited monies thereafter would be  safeguarded and placed into NOMINATED developer accounts?

Is it correct to surmise therefore that the burden of proof would appear to lie with the Bank, I.e. to prove that they HAD in full knowledge established nominated developer accounts linked to the offplan build, thus ensuring the required safeguarding mechanisms were being effectively managed and adhered to?

Is it correct to conclude that the Bank by its actions to date appears to be denying their safeguarding responsibilities ( with all that entails in the due diligence and management and acceptance of offplan deposited monies into their care), and are endeavouring to place the burden of proof onto the purchaser, which can only be interpreted as a callous disregard for a law intended to protect offplan purchasers’ inalienable rights?

Isn’t this conclusion by the SC ignoring the fact that the Banks’ safeguarding mechanisms and management thereafter, in place to protect have FAILED and thereby placed purchasers at undue risk? 

In effect it would appear that this SC ruling in favour of the Bank has inexplicably undermined the protective basis upon which Ley 57/68 was first formulated….. 

Is this too simplistic a conclusion to the management and safeguarding issue relating to Banks’ responsibilities that are now being challenged by this SC ruling?

Are the Bank exploiting loopholes which require closing once and for all, and doesn’t the SC have the power to rule and protect the rule of law from abuse with regard to an existing safeguarding law intended to make Banks fully accountable if their financial mismanagement is brought into question, as appears the case in this instance?

Is another appeal against this SC ruling allowed? If not, would this become the basis upon which the European Court could reevaluate their admission of an appeal?

They are two different Coury Decissions. Do you want answers on  them both? As said they are the two last ones on Law 57/68 and liability of banks holding off plan buyer´s money but there are dozens of them....

My question was a more generalised point Maria.

Given that the SC have adopted "an extremely restrictive and formalistic interpretation " in their rulings, does this mean that these rulings are now being applied as SC doctrine for all high court judiciary to adhere to?

Its difficult to comprehend how these SC rulings will impact outstanding claimants going forward, and the worry is that the Banks will now use these rulings in their ongoing legal defence to deny their legal responsibilities to effectively manage and safeguard monies according to Ley 57/68, preferring to make conveyancing lawyers and agents responsible.

It's becoming increasingly difficult to comprehend why the SC are taking the stance they appear to be taking, if it results in innocent purchasers being compromised in this way.

 In terms of comprehending the detail the following observations and questions remain....

The funding Banks presumably were legally bound according to Ley 57/68 to establish nominated developer accounts from the outset of their funding of the offplan development. Is this a correct assumption?
And these accounts in themselves would have provided the mechanism to ensure that all associated offplan purchasers deposits would be invested into these accounts and would thereby be safeguarded.

The developer nominated accounts by their creation would automatically  have established that these accounts related to offplan developments. So it's difficult to comprehend why the Banks are now suggesting they have no means of identifying which developer accounts are linked to offplan developments? 
 

Whose responsibility is it to identify where any offplan purchaser's deposit is to be effectively safeguarded? 

Is the sequence of events such that the Bank has the legal obligation to notify the conveyancing solicitor ( or agent) of the details ( I.e the nominated developer account) where all subsequent deposits are to be secured for any given offplan development?
How do deposited monies get flagged up by the Bank as being offplan deposits associated with any given developer? Have electronic transfers not had the detailed facility to cross reference offplan deposits in this regard?

Was this transfer mechanism (presumably devised by the Bank in the first place) not sufficiently robust to ensure that effective detail was in place to subsequently safeguard all deposited monies associated with offplan purchase ( to differentiate between general developer banking activity and specific offplan deposits?)

The CAM Bank had subgrogated mortgages for the development and knew the initial deposit was for one of the properties.  They should have safeguarded the money and put the correct payment mechanism in place.  The SC has set the precedent now and the banks will use this defence, as they did against us.  The banks messed up and didn't do their legal duty and they've been let off the hook.

The rulings by the Spanish Supreme Court (SC), which you described as "extremely restrictive and formalistic," are indeed significant and are Case Law at the moment—until overturned by different rulings. When the SC adopts a specific interpretation of law, it effectively becomes a doctrine that lower courts are expected to follow, especially in the absence of conflicting precedents.

This has raised valid concerns about how these rulings will impact claimants. Banks, relying on these rulings,  are of course arguing that they are not responsible for safeguarding deposits, especially as such restrictive interpretations have become the standard. This is leading to  banks distancing themselves from the obligations originally established in Ley 57/68, which was designed to protect purchasers in off-plan developments by ensuring the security of their deposits. 

Addressing Your Questions:

Were banks legally bound to establish nominated developer accounts from the outset under Ley 57/68?

Yes, under Ley 57/68, banks were obligated to ensure that developer accounts were designated for off-plan deposits. These accounts should have been clearly marked from the beginning, and the deposits associated with them should have been safeguarded. The failure of banks to properly establish and monitor these accounts is central to many of the claims made against them. They are the so-called "cuentas especiales" of Law 57/68.

Developer-nominated accounts and identification of off-plan developments:

You are correct that the creation of developer-nominated accounts should have automatically flagged them as related to off-plan developments. The notion that banks "have no means of identifying which developer accounts are linked to off-plan developments" seems contradictory to their  very basic obligations. Banks had the legal responsibility to monitor these accounts and ensure that they were safeguarding the buyers' deposits under Ley 57/68. There is Case Law to defend that the protection effect of collective guarantees issued to the developer applies even where developments are not specified.

Who is responsible for safeguarding off-plan deposits?

The responsibility for safeguarding off-plan purchasers' deposits lies primarily by Law with the bank, not the solicitor or agent. The bank receiving the deposits in the developer's nominated account under Ley 57/68 is legally obligated to ensure that the funds are properly protected. Solicitors also need to ensure that guarantees are in place as part of their professional liability, but the bank bears the primary legal responsibility. These are two different types of responsibilities.

Bank's role in notifying the conveyancing solicitor or agent:

There is no specific legal requirement for the bank to notify the conveyancing solicitor about where the deposits are safeguarded, but the bank is expected to ensure that any deposits related to off-plan purchases are protected under the developer’s guarantee scheme. Solicitors ensure contracts include bank guarantees and that they actually exist, as part of their professional liabilities, but the banks hold the core compliance responsibility.

How are off-plan deposits flagged by the bank?

In theory, bank transfers related to off-plan deposits should have been flagged electronically, either through the developer-nominated account or via a system designed to differentiate off-plan deposits from other types of transactions. If this did not occur, it may reflect a failure in the bank's internal systems, making them liable.

Robustness of the bank's transfer mechanism:

The failure to ensure that deposited monies were properly flagged as off-plan deposits could indicate that the bank's systems were insufficiently robust. Ley 57/68 mandated that developer accounts receiving off-plan deposits be clearly designated. If these systems weren't in place or properly implemented, bank negligence could be the root cause. The bank's transfer mechanism should have been fully capable of identifying and safeguarding these deposits.

Conclusion:

While the SC's restrictive rulings may complicate legal claims, the fundamental obligations of banks under Ley 57/68 to safeguard deposits should not be overlooked. These rulings may provide banks with more leeway to argue against their responsibilities, but claimants still have strong legal arguments based on the fundamental obligations set out by the law.

Regarding actions already taken, we have presented appeals before the Constitutional Court, the European Court of Human Rights, and complaints before the European Commission, with no result so far, as they have not even been admitted for consideration. It is true that some Provincial Courts have not followed the ultra-formalistic interpretation of the Supreme Court, but as of today, the prevailing doctrine favors the banks.

Since 2015, a new law has repealed Ley 57/1968 for constructions started after its implementation. The current law regulating these guarantees is Law 20/2015, of July 14, which came into effect on January 1, 2016. This law has diminished some of the guarantees that existed under the 1968 legislation, which had been solidified by case law over the years.

Thank you Maria. Informative as ever, and much appreciated.

With regard to "Regarding actions already taken, we have presented appeals before the Constitutional Court, the European Court of Human Rights, and complaints before the European Commission, with no result so far, as they have not even been admitted for consideration. "

Are these courts expected to provide a legal reasoning as to why they have not been admitted? Is there no regulatory proviso to protect the rule of law in this regard? 

Likewise, have the European Commission provided any response as to why it has not been given due consideration?

Might this lack of admission be due to time delays of some order, in which case are there no time limits to such high level appeal procedures?

Is it correct to say that the General Council of the Judiciary is the main institution of judicial self-government in Spain?
Presumably it was established to ensure the external independence of the judiciary, and in particular the independence of the judiciary vis-à-vis the executive branch of government. 
 

Therefore, if non admission of ongoing appeal to the Spanish Constitutional Court, EU Court of Human Rights  etc continues, ( i.e. hindering the ability to appeal at the highest level), might this be interpreted as being in contravention of this vital rule of independence and protection of the rule of law?
This lack of admission of appeals has the potential, if not adhered to, to question the impartiality and independence upon which the rule of law was established.

Would the General Council of Judiciary ( and Bar Associations) be supportive of your endeavours given the nature of this failure to admit appeals at the highest level, which would appear a serious challenge to the foundations of the Justice system in Spain?

P.s. So long as the Banks continue to renege on their responsibilities in this way, which in turn now sadly appears to be undermining trust in the system of justice after so many years ( decades) of ironically establishing rightful and supportive case law associated with LEY 57/68, and outstanding appeals of this nature ( at Constitutional level) remain under threat or are left unresolved, this would appear to leave the whole system of offplan purchase in Spain as a complete no go area. 

The Banks are still running roughshod over the system of justice in Spain which surely does no one any favours.