Antonio Flores’ Blog

Try to guess what is it that the following have in common: an electrical company from Alicante, a cement subcontractor from Valencia, a real estate company from the Balearics, the Spanish Inland Revenue, the Spanish Social Security, 6 banks and 65 employees (2 of which guard an empty plot), on the one side, and 150 consumers that were hoping to acquire Spanish off-plan property on the other.

You guessed right: they are all registered with the courts on occasion of a voluntary company administration arrangement of a large Alicante-based property developer, San José Construcciones, hoping to perhaps get paid some money back over the course of a number of years.

The above scenario, however normal it may appear to be these days, hides a fundamental legal flaw that brings into question, once again, a legal system that has routinely failed to protect those who deserved the utmost protection: consumers.

Such flaw can be inferred from the controversial fact that the first group of creditors are hoping to get paid with the monies of the second group, the buyers, who should have had their deposits bank-guaranteed or insured pursuant to a Franco time law, the Ley 1968/57 Act, that was specifically enacted to avoid the situation they are now in.

In this case-study the irony (or irritation) is that BBVA, the second Spanish bank in size, is queuing up to try to grab a chunk of the money they are supposed to have been guaranteeing in the first place, since they provided a collective bank guarantee to underwrite deposits on a 120-unit development, deposits on which they profited handsomely for the developer’s mortgage and various commissions were being paid out of these. Crazily enough, this bank will only agree to “voluntarily” comply with its mandatory obligation after some arm-twisting, which involves lawyers and legal action.

Another surprising aspect of this all is the fact that criminal case-law states that no developer can use consumers’ down payments for anything else but building the contractually agreed property, and this excludes real estate commissions, admin staff salaries, pocket money…etc. As there is not one brick on the plot, helping consumers get their monies back should be a priority of any property developer, particularly where many lawyers have found that the criminal route can render results (many developers are serving prison terms for this), not the least where the developer has broken the law so blatantly.

Financially ailing developers are probably too traumatized by what has happened and can only hope the market will recover one day (and that lawyers will not press too hard). On the contrary banks shirking their legal, and ethical, responsibilities towards trusting property buyers (Spanish and foreign alike) has to now come to an end, particularly where abundant bank-guarantee case law is invariably favouring consumers and banks are seemingly getting unlimited funding from the Spanish State.

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Adaptation of the post originally written for the Olive Press – The Banks Are to Blame.

Antonio Flores Litigation, Property Bank Guarantees in Spain, BBVA, Ley 1968/57, litigation against spanish developers, San José Construcciones

Reading the Times yesterday, I spotted a funny short article written by David Robertson and Deborah Haynes about the British Army’s SA-80 assault rifle. According to the paper, it has been upgraded several times but its long history of problems has led the military to christen it “the civil servant”, because it does not work and cannot be fired.

This quote came to mind when being asked for a second opinion in respect of the case of Urbanizadora Costa Palatinum/Proyectos Antele, another failed project by a developer which I can group with many others that dot the costas and which I dub the “civil swindlers”, because they get paid from you to do something, they do nothing, and there is little prospect of realistically getting any funds back, since they have no equity on their assets and no interest whatsoever in refunding, even though the funds should be in some bank account (with Proyectos Antele, in Venezuela it would appear).

As 30 or so purchasers are being dragged around civil courts pointlessly (for this developer now says he has none of the monies), and considering that nothing has been built on a plot they already owned prior to exchanging contracts, as part of my legal inquest into the death of the development, I would like to ask the developers one straight question: where is the dosh matey?
To not make this post too long, I will quote some examples why Spanish top judges are in disagreement of the activities carried out by developers who do just that (i.e. take money, not build, spend money elsewhere and blame the market) and who are upgraded, from the term “civil swindlers”, to a more adequate “criminal misapropriators”.

Antonio Flores Litigation, Property, Scams bank guarantees, Bank Guarantees in Spain, litigation against spanish developers, Ocean View Properties, Ricardo Miranda, spanish developers

It is once again the opportunistic intuition of few: with the increasing number of property scandals in Spain, particularly those relating to failed off-plan investments, we are seeing how the legal profession is being invaded by so-called property action groups, which have started orchestrating aggressive and unethical campaigns of client poaching throughout the web and other platforms.

Among others, I can cite Spanish Property Action Group, Finca Parcs, Bulgaria-Property-Action-Group, Ramirez and Ramirez, organized and managed by non-legal professionals who cross pretty much every line when it comes to legal solicitation. The following prohibitions are flouted with ease by the below groups:

1. Payment of referral fees: The first “irregularity” is blatant: these groups are selling legal services when they are not lawyers. This means, in practical terms, that the lawyers working for or with them are incurring in the illegal practice of setting up referral fee  agreements, more ordinarily called “kick-backs”. The Spanish Legal Professional Rules and Regulations specifically ban referral fees, allowing only fee-splitting agreements either between lawyers or between professionals within the same area of work (economists, financial advisors etc.). Article 19 of the Disciplinary Legal Code stipulates that lawyers will not be able to pay, demand or accept commissions or retribution from other lawyers, or any other person, for referring clients. If these groups are run by non-legal professionals, clearly they are taking a neat kickback from whoever they designate to file their cases, or vice versa.
2. Utilization of third parties by lawyers to circumvent the provisions of the Disciplinary Legal Code. This is clearly the case with Finca Parcs: the latter is displaying a fierce and embarrassing campaign of client solicitation through various websites, where it is claimed that the group is legally represented by MC, director of CLL, and DCG Juridico, which consist of legal professionals including the father and two bothers of the former, who is also assisted by a Catedrático (translated here as a Civil Law Professor) from the University of Seville, as if this was going to make any difference.
3. Utilization of illegal publicity to gather clients: particularly objectionable is the August 2010 “Press Release” by Finca Parcs, in clear breach of article 7e) of the aforementioned code: “It is deemed as illegal client solicitation to approach, either directly or via third parties, victims of accidents or misfortunes that lack full and calm freedom to choose a lawyer as a result of a personal or collective misfortune. Yes, clients need to be advised of their rights and yes, clients need legal advice when dealing with tragedies affecting their lives. But, clients do not need to be solicited directly by attorneys/lawyers/solicitors when they are grieving or dealing with the results of a tragic event. Clients should reach out to these professionals when they are ready to do so and they should not be besieged and bombarded by those seeking to profit from their misfortune.
4. To generically or specifically encourage litigation: This is clear of all the above legal action groups, because it is their business! One example can be seen with Finca Parcs, for they have introduced an element of deceit and untruthfulness in their tormenting sales pitch: according to them, and the legal representation they have retained, abundant case law supports the unheard situation of banks being liable for clients’ deposit, regardless and irrespective of whether a bank guarantee line was ever approved by them or special accounts where used. According to the pitch, banks are always liable for refunding down payments made in respect of a failed off-plan project, for the simple (and simplistic) reason that the developer opened a bank account for them to operate: this is the essence of their strategy and their soon-to-achieve huge court windfall success, on the basis of some case law that as of yet, in spite of numerous requests, no lawyer has had sight of, unless they were referring to an isolated ruling of the Court of First Instance in Madrid (not deemed case law) where a bank is forced to indemnify a property buyer, on a failed development, since such funds were borrowed by the buyer from the developer’s bank (and hence, should have ensured that such funds were paid into a special account, protected by a guarantee, and not a normal account, in breach of the 57/1968 Act).  This ruling, which has already been analysed on a previous post, cannot be relied upon as applicable case law or jurisprudence unless it is ratified by a superior Court. Should this happen, not even then it could be of general application due to the very particular set of circumstances that surround the case.
5. Promising the achievement of results that are not exclusively dependent upon the activity of the lawyer that is publicising himself, and using means and expressions, audio-visual or in writing, that are discrediting, denigrating and scornful of the Legal Profession, the Justice and its symbols. The Spanish Property Action Group knows a bit about this, when advertising (or those of their undisclosed lawyers, for that matter) their “Get Your Money Back” seminars. They then go on to claim that people have lost their life savings or retirement funds and are all victims of the illegal activities or unscrupulous developers and the lawyers representing them, and promise, in return for a fee, a miraculous formula to recover this money (without even establishing, as one has to do, the legal position of these people they are pitching to!). The Action Group then state that those involved know how to recover funds because they have already done successfully and know the pitfalls to avoid: realistically, can anyone possibly envisage a more disgraceful and indecent way to make money?
6. All of the above in one. Finally, a special bullet point has to be dedicated to fraudulent companies known as ‘recovery rooms’, a particular type of boiler roooms specialised in fraud recovery fraud, which use registered lawyers to add appearance of legitimacy. The most prominent one is currently Ramirez and Ramirez Asesores (www.specialist-lawyers.com). Its owner, Fabian Ramirez Marcelo, an ex-timeshare reseller, in spite of the domain name he uses for his activities and his total detachment from the legal profession (as an astronaut orbiting the earth can possibly be), considers his Fuengirola recovery room, of all places, to be a specialist leading firm. But not any firm: one that cold calls thousands of victims of all sorts of scams, their names and numbers on illegal lists (sucker lists) bought in the black market, purporting to be leading lawyers in the matter and promising a quick result through the courts. Needless to say, never do these clients get anywhere because never the cases are followed up: all they do is fill out a form, take it to the courts or the police, ensure they get a stamp on it and then on to rip off the next one. The lawyer they allegedly use, Damian Vazquez, seems to not remember who Fabian Marcelo is, and when asked about his connections with Ramirez and Ramirez, claims that only occasionally has he collaborated with them. Two other lawyers I contacted also appeared to be losing memory fast when our conversation went into detail. Needless to say, again, Ramirez and Ramirez falls foul of all the above bullet points, their activities being dismissive of the most elementary rules of decency and honesty.

Antonio Flores Litigation, Property, Scams ambulance chasers, Bank Guarantees in Spain, Bulgaria-Property-Action-Group, Finca Parcs, litigation against spanish developers, property action groups, Ramirez and Ramirez, Ramirez and Ramirez Abogados, Ramirez and Ramirez Asesores, Spanish Property Action Group

It’s not been quite like the search for Bin Laden, but we have been scouring all case law databases for the last couple of years trying to find any ruling that would point to the direction of the banks’ liability to refund property buyers, in the event of developers falling foul of their obligations to refund deposits, where the latter had accounts opened with the former and were using them to trade in property, irrespective of whether bank guarantees were available or special accounts opened at all, these being the 2 main obligations developer’s had, in accordance to the 57/1968 Act on Off-Plan Property Down Payments (Ley 57/1968, de 27 de julio, reguladora de las percepciones de cantidades anticipadas en la construcción y venta de viviendas).

One very web-active colleague that was initially admitting to having the evasive case law but was reluctant to disclose it (we still don’t know if they really have any of it), is instead now hinting that there was something to that effect, always in a vague but nonetheless “mercantile” manner, so as to no doubt monopolize the information and release it with a big bang when the time was right (all very strange, really). A website with a pretended interest in helping thousands who have lost thousands to rogue developers also claimed this case law existed but my insistent requests to have a copy of such ruling were left unresponded.

And then, just by chance, we have come across a ruling, written up by the Judge in charge of Court of First Instance number 54 in Madrid, that finds a bank responsible of being irresponsible and forces it to repay a buyer who bought into a development that was never completed. We have asked for a copy of the ruling from our Madrid colleague who, as we expected, has kindly and promptly acceded to forward us one, after the long-weekend, that is. Once we have received it, we will discuss it, as it has the potential to set a precedent that can make banks responsible in any event, where they consented developers to use their accounts to trade in property, without securing the deposits that were being paid into those accounts by customers. In the ruling, the Judge determined that the bank manager, who knew the buyer personally, had lent him the deposit that was to be invested with the developer, who was also his client. The Judge found the developer’s bank (and buyer’s lender) morally responsible because it knew that the loan was to be used to buy a property, and consented that the loan was paid directly into the developer’s account, which, known to the bank, did not comply with the 57/1968 Act. Indeed, all very incestuous!

It is soon to draw conclusions but I can say that:

• The ruling has not been appealed, presumably to avoid the inevitable publicity it would attract if it went to a higher judicial instance, in this case, the Provincial Audience (quoting my colleague).
• The case is specific, in that the bank assisting the developer was also the lender for the buyer, perfectly knew that the funds were going to be used as a deposit for offplan property, and allowed these funds to be lodged in one of their accounts.
• According to our Madrid colleague, barring error or omission, there is no known case law on the matter (note that a ruling of a Court of First Instance is not deemed as case law).

Another consequence of this rulling is that a developer may force banks to advance funds to complete unfinished developments as, if unprotected buyers can find solace in this doctrine, so should the developer (although that’s another story altogether).

This ruling can be the beginning of the end of the nightmares many bona fide buyers have and are going through. My advice is, in any event, to apply caution and prudence, until we can get hold of it (ruling) and have it read, dissected, interpreted and, ultimately, draw reasoned and balanced conclusions on how to proceed.

It should be stressed that this is a very specific case, with a very particular set of circumstances that render it unique, and cannot be considered of general application against all banks and developers (at least with what we have so far). Each case we come across needs to be analised thoroughly and clients advised that losing it will almost invariably attract subtantial legal costs (and certainly where a claim is deemed to be “reckless”).

Documents

• Judge Rulling Sentencing Bank to Refund Moneys not Secured With Bank Guarantee (pdf – 1.44Mb.)

Antonio Flores Litigation, Property bank guarantees, Bank Guarantees in Spain, ley 57/1968, litigation against spanish developers, spanish developers, special accounts

Unlike the developer, buyers at Casa Toro (Álora – Málaga) can now feel relieved. Zurich Investments has decided to refund down payments paid towards their properties through the firm Lawyers of Spain (now Lawbird Legal Services) to 22 clients (after having lost a few in this rather tortouos legal itinerary to marauding ambulance-chasing lawyers who lie in ambush on legal-gossip websites).

Although the properties were correctly completed, these were on an untimely fashion and so buyers decided to pull out on grounds of delayed completion. As the Romans quite rightly used to say, pacta sunt servanda, or “pacts are to be observed”, which Zurich has applied correctly, since they provided to a collateral security in the event of the default.

One is left wondering, and to me still remains a mystery, about the situation that now unfolds: will Zurich chase the developer for repayment, or is the risk covered non-refundable? Will the developer have himself some side collateral? Presumably Zurich cannot just walk away being out of pocket for around €900,000 and allow the developer to resell the properties to third parties but then again, the developer may well argue that that Zurich paid out in breach of their contract, on grounds of insufficient delay.

I dont want to come about as frivolous, but I just can’t be bothered about who picks up the debris : I just want to jump on the AVE high speed train to Madrid to collect 22 checks for our ever-patient clients!

Antonio Flores Litigation, Property ambulance chasers, Bank Guarantees in Spain, Casa Toro, property in alora

I may be stretching the concept of misappropriation a bit too far, more so when criminal laws are always to be interpreted restrictively, but the absence of a bank guarantee has landed the property developer of our case study in jail after being given a two year prison sentence, a term that could have been avoided if he had done what he was supposed to do, guarantee the funds paid on account of the purchase price.

The Supreme Court has ratified an earlier ruling by the Appeal Courts in Madrid where the developer was sentenced because the deposit he received was not destined to cancelling the mortgage loan on the property, as promised. The 2010 ruling, in peseta denomination (which means that the claim was lodged prior to 2002!), describes the facts leading to the 2-year prison term ruling:

1. Property developer sells off-plan villa for 24 million pesetas.
2. Payment plan establishes that 8 million pesetas are to be paid upfront and 16 million pesetas on completion, paid in cash or alternatively by taking over the mortgage facility offered by the developer’s lender.
3. Nearing completion, the developer fails to finish the works, and, consequently, buyers are advised to complete at the earliest as unfolding events cast serious doubts on the developer’s financial solvency.
4. Buyers find out that the developer’s mortgage is of 19 million pesetas and not the figure of 16 million pesetas. Still, the latter is unable to refund the 3 million pesetas the buyer has overpaid, or redeem the mortgage down to 16 million, as he is underfunded.
5. Developer is not only unable to reduce the mortgage to 16 million pesetas but he cannot finish the works.

As a consequence of the above, the buyers sued in Court, as they felt swindled by the developer (clearly!). He was sentenced in 2002 for aggravated misappropriation (by reason of it being related to property). Seven years later, the Supreme Court understands that there is no reason to uphold the appeal and maintains the original ruling. Additionally, the developer was forced to pay damages, these being the sums lost to the developer plus interest.

However, if the developer had guaranteed the down-payments by offering an irrevocable bank guarantee or insurance policy, the buyers would have not had a chance to pursue the matter criminally because a refund would have been immediately available (especially as the license of occupancy was not issued at the time of closing). Nevertheless, by breaking statutory civil laws, he found himself in the hands of a prosecuting lawyer, a criminal prosecutor and uncompromising judges.

This ruling opens the door to heavier scrutiny on the use of deposits paid to developers, to the point that if they are used for purposes unrelated to, strictly speaking, the construction of property, criminal cases can be easily brought.

We have been informed that the developer of Los Monteros Hill Club incurred in such practice, causing at least one buyer to lose hundreds of thousands of euros, as the full purchase price was handed over but was not used to cancel the outstanding loans on the properties.

Antonio Flores Litigation, Mortgages, Property bank guarantees, Bank Guarantees in Spain, litigation against spanish developers, Los Monteros Hill Club, spanish developers

Zurich Insurance, one of the leading insurance companies in Spain through its ACC Seguros y Reaseguros branch, has refused to pay the sum guaranteed on an insurance policy to a client of our firm on the basis that the developer had stopped all works as it was put into Administration. This dangerous situation, which we would all think is the number one reason for a bank guarantee and/or insurance policy to exist is precisely the impediment put forward by Zurich to say “I´m sorry, we can’t”.

Zurich did attend the payment of just under 40 checks to clients of this firm on the Larsol development as it was not going to be finished, although the developer is still operating. Conversely the above developer, Nadalsol, even though technically insolvent, may be finalizing the works at Medina Golf Residencial Granada, though with a significant delay.

Zurich has decided not to pay based on the following:

1. That the recent Insolvency Act precludes them from paying out on the policy as it would jeopardize their right to reclaim this sum from the developer in a separate recourse action, as the insolvency administrators could argue that the execution was unduly granted.
2. That as we extended the validity date of the policy (which we did, just in case) we also inadvertently extended or agreed to a new completion date for the property bought on contract (The funny thing here is that the validity of insurance policies and bank guarantees for the purpose of guaranteeing funds are never limited in time, except by the license of occupancy, according among other to a most recent ruling by the AP Madrid 27th Dec. 2007).
3. (That perhaps they have ran out of money!).

Well, none of the arguments can be sustained for the following:

1. Argument 1: Because the relationship between the Insurer and the Consumer is autonomous from the vicissitudes affecting the developer as the latter is not party to the contractual relationship.
2. Argument 2: Because it is plain daft and stupid! How can extending the maturity of a insurance policy relate to a completion date for a property?

It is extremely frustrating when trying to explain disappointed investors that a company like Zurich Insurance will look for any excuse on the book to try to not abide by the clear wording of consumer protection laws on off-plan purchases which envisaged the protections specifically for cases of insolvency.

So if Zurich does not pay, who will then in this current climate?

Antonio Flores Litigation, Property Bank Guarantees in Spain, larsol, Medina Golf Residencial, Nadalsol, Zurich Insurance