Bank found guilty of failing to fulfil its obligations to guarantee advance payments

In a recent judgement, a Madrid Court of First Instance has condemned Banco Santander for failure to fulfil its obligations by guaranteeing the advance amounts received in the field of construction.

The Court of First Instance no. 36 of Madrid, in its judgement 103/2020 of 24 July, fully upholding the claim, declared that Banco Santander must compensate, due to the lack of diligence of Banco Popular, more than 300,000 euros in principal and interest, to some affected parties who paid such amount to a management company for the purchase of a house in Madrid, which was never built.

In addition, the bank must add to this amount all the legal interest generated since the amounts were paid, plus the costs incurred in these proceedings.

On 27 April 2007, the plaintiff's father signed a contract with the company to join a development project to be developed in the residential area of the Valdefuentes neighbourhood, in the Hortaleza district of the city of Madrid, where a building with 121 homes was to be constructed, handing over to the manager, who would subsequently deposit in Banco Popular, the sum of more than 200,000 euros for the purchase of a home, garage and storeroom.

On the other hand, despite being aware of the destination of the money deposited in the current account opened in the name of the Community of Owners, Banco Popular did not provide the special protection indicated in the repealed Law 57/1968, of 27 July, on the receipt of sums advanced in the construction and sale of dwellings and did not require the manager to present the insurance or guarantees provided for in the aforementioned regulations.

Ana Botín, current executive chairwoman of Santander (Source: Público)

Thus, in the plaintiff's opinion, the financial institution must answer for its lack of diligence, given that the construction did not begin and there is no liquidity in the account of the Community of Owners, having allowed the funds deposited by the co-owners to be transferred to accounts held by the management company and destined for uses other than the purchase of the plot and the construction of the development.

As a result of this, the plaintiff is bringing the present proceedings with the intention of obtaining a Judgment recognising and ordering the defendant to pay the sum of 202,116.65 euros, plus legal interest from the filing of the lawsuit and the costs of the proceedings.

For its part, the defendant financial institution (Banco Popular, now Banco Santander) contested the claim on the following grounds:

First, it raises the pleas of res judicata and lack of locus standi of the plaintiff on the ground that it has not accepted the inheritance of the deceased.

It submits that the applicant's father signed the contract with the fund manager in his capacity as co-owner and self-promoter, without the bank being a party to it.

He questions the reality of the payments said to have been made on account of the price of the property, made either in favour of the plaintiff or in favour of the Community of Property Owners' Association, as well as the use to which the property was put.

It argues that there was no guarantee or surety issued by Banco Popular to guarantee the repayment of the sums paid, nor was there any financing or loan for the acquisition of the land or the subsequent development of the disputed development.

It maintains that the duty of the banks to demand the existence of guarantees to allow a developer to open a current account in which advances are to be received is only applicable with regard to accounts opened by developer entities and in the present case it is a case of a self-promotion, excluded from Law 57/68 and without liability for the defendant.

Madrid Court of First Instance No. 36

Once the objection of the defendant regarding the lack of legal standing of the plaintiff (second ground of law) has been dismissed, the Judge of the Court of First Instance no. 36 of Madrid recognises that the plaintiff, "contrary to the criteria set out by the plaintiff bank, cannot be considered a self-promoter, cannot be considered a self-promoter, as she limited herself to joining a Community of Assets, as this was the route she was told to take in order to acquire a property in the development she was interested in, and to empower the plaintiff in order to be able to proceed with the development without any inconvenience, without taking any action that could cast doubt on the fact that the real and sole promoter was the plaintiff company".

The Court also interpreted that "the application of Law 57/1968 cannot be excluded because there is a Community of Owners because, in order to extend protection to all persons who advance money for the construction of their homes, the first additional provision of Law 38/1999 established that 'the aforementioned regulations shall apply to the development of all types of housing, including those that are carried out under the regime of a community of owners or cooperative society'". In relation to this last point, the Magistrate-Judge refers to the SAP of Madrid 335/2017, of 13 July.

With regard to the liability of the bank for not demanding the guarantees that the Law imposes on developers, in the fourth ground of law of the judgment, the Judge declares that, in order to appreciate this, it is not necessary for the deposits to have been made into the special account referred to in art. 1 of Law 57/1968, since the liability of the financial institution "extends to all those amounts, paid into one or more accounts, which are intended for the construction of the dwellings".

Finally, with regard to the legal interest, the defendant considers that it should be imposed as from the date of the summons or from the date of the lawsuit, but not from the date of delivery of the sums, since they had no prior knowledge of the situation. On the other hand, the Magistrate-Judge recalls in the sixth legal ground of the judgement that, on this point, the provisions of section c) of the First Additional Provision of the aforementioned Law 38/1999 are applicable, according to which the guarantee comprises the "sums paid plus the legal interest in force until the time when the refund is made effective". In other words, in its opinion, this provision "does not admit any other reading than that the purpose of the guarantee is the full economic indemnity to the purchaser with regard to the payments on account, including the civil fruits of those payments on account from the time of delivery until their return, since, otherwise, the purchaser would suffer a prejudice contrary to the purpose of the rule consisting of the loss of those civil fruits which represent the legal interest referred to by law".

Therefore, the Court of First Instance no. 36 of Madrid fully upheld the claim and ordered Banco Popular Español (now Banco Santander) to compensate the plaintiff in the amount of more than 300,000 euros between principal and interest, for breach of Law 57/68, plus legal interest since the amounts were paid and the costs incurred in these proceedings.