Failing to Give a Bank Guarantee Lands Property Developer in Jail
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:
- Property developer sells off-plan villa for 24 million pesetas.
- 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.
- 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.
- 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.
- 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.
What about lawyers losing Bank Guarantees? Can they also be jailed?
Hello Allison,
Jailing a lawyer for losing a bank guarantee seems a rather harsh measure although I´m sure that the beneficiary of it may look at it differently! Jokes aside, bank guarantees are registered in a special registry within the issuing bank (Registro Especial de Avales) which means that even if the original is lost you can still pursue the bank for it as it does not cease to be valid (only the issuing of the occupancy license renders it invalid).
You may however have to bring an action against the bank if they fail to attend to your petition.
Hello Aflores
I feel very lucky to have stumbles upon you. We represent several owners with properties in the Los Monteros Hill club. It’s a extremely nice development, and as I understand it has had an interesting time of late. If I may ask a question ? Would the property concerned be allowed to be written into the land registry and the appropriate taxes paid. Not even sure what happened to Abacon Delta or if they would still be the owner?
Hello Charles,
The property concerned has been registered but with the Land Registry but with an existing mortgage for which a payment was initially made. This payment was used for other purposes by the owner and hence the clients lost exactly the outstanding capital amount. I have not tracked down Abacon Delta but I doubt they are still around or have any assets worth considering.
I think it is correct that the developer was jailed for deliberately acting contrary to the requirements of LEY 57/68. There are hundreds, if not thousands of innocent purchasers of off-plan Spanish property who have suffered or are currently suffering various types of Bank Guarantee abuse due to a number of corrupt developers and negligent banks, lawyers & agents.
The Banks & Savings Banks are guilty of gross negligence and a complete lack of professional due diligence. They funded the developers, knowingly accepted the off plan deposits and failed in their obligations under LEY 57/68 Article 1.2 to ensure the funds were secured in a Cuenta Especial and to issue or to verify the existence of the corresponding Bank Guarantee or Certificate of Insurance.
The Banks and Savings Banks are the guardians of LEY 57/68 and were the vehicle through which the illegalities were allowed to take place.
Kind regards
Keith
Bank Guarantees in Spain / Finca Parcs Action Group
Hi, we have been in touch before,
I keep hearing the term “Due Diligence” and “in the clients best interest”,and reference,to various laws,but if a so called reputable Spanish law firm decide to ignore the Unauthorized Organizations information sheet which clearly names a certain insurance company as issued by the DGS,and place substantial amounts of a clients money with said insurance company as bank guaranties(who happen to be insolvent etc), and said insurance company along with the developer subsequently go bankrupt,what happens to our money under Spanish law,My so called professional Law firms response was “oops sorry not my fault”is that it right is that legal,I am absolutely disgusted by so called Spanish Law
Where is the due diligence???????
John,
There already 2 rulings against lawyers, that we know of (and have the full rulings), where the Courts determined that by not obtaining a bank guarantee those lawyers had failed to act with a professional duty of care in relation to the instruction received from their clients and as such, we found guilty of professional negligence and obliged to compensate the clients.
One of such rulings refers to Compagnie des Guaranties but interestingly, it does not go into the validity of the document but rather in the failure by the lawyer to claim on the policy in a timely manner, as if there was any money to be made out of the bogus sheet of paper!
The second one simply found the firm guilty of not attaining a bank guarantee for the customer nor attempting to do so.
This would not be applicable to cases where the lawyers, for example, had ensured that a collective bank guarantee was in place but then failed to secure an individual one: the reason for this is that lawyers are not expected to chase a particular document although they are expected to ensure that the “master agreement” is in place.
I have had a case where the bank had the individual bank guarantee in the drawer of his desk and refused to give it to me, quoting “orders from high above” (I refer to Cajamar Eliviria branch office, Marbella). Under these circumstances, one cannot say that lawyers have failed their clients since, if one goes to Court, a favourable ruling against the bank will be attained. And if this proves not to be the case, then time to the take the lawyer to task! (and that would be me!!).