One51 chief in 'legal and financial nightmare'

BACKGROUND:An attempt to create a tax-efficient deal has led a family to be held liable for a €25m loan

BUSINESSMAN PHILIP Lynch, his wife Eileen and their four children are involved in a “legal and financial nightmare”, the Commercial Court was told this week by one of their barristers, Michael McDowell SC.

The family is locked in a huge courtroom battle that involves AIB and leading law firms LK Shields and Matheson Ormsby Prentice. The case opened on Tuesday and could run for two weeks or more.

McDowell told the court that Lynch set out in 2006-2007 to cut his children into a €25 million property deal in a way that was tax-efficient for them and would not involve any liability for the family over and above the property to be purchased.

However, what has transpired is that all the children have become jointly and severally liable for €25 million owed to AIB.

“Contrary to all of their expectations, [they] ended up with a massive liability, which would bankrupt any of them if called in by the bank,” he told Mr Justice Michael Peart when opening the case.

The family is claiming the two law firms had a duty of care to them in relation to the nature of the security associated with a loan secured from AIB and are seeking indemnities from them against any debt asserted by the bank.

(Mr Lynch’s relationship with Larry Shields of LK Shields goes back to the mid-1980s.)

The family also claims they are not personally liable to the bank for the €25 million plus interest debt that is at the heart of the case. The bank says the family are personally liable.

The two law firms claim their duties in the transaction were not as is being asserted by the Lynch family.

Lynch is chief executive of the One51 group but the case is one of personal investment. The court was told that in March 2007, Ernst Young Business Advisors wrote that Lynch expected his income that year to be €1.5 million.

“From information made available to us by Mr Lynch, we can confirm that he has net assets in excess of €48 million,” the letter stated.

The deal which is at the heart of the case was suggested to Lynch by developer Gerry Conlan. An internal AIB document linked to the loan application for the deal stated that Conlan’s net worth at the time was €190 million.

The court heard that Conlan is now believed to owe AIB hundreds of millions of euro.

Conlan developed the Millennium Park business park in Co Kildare some years ago. Along with developer Dermot O’Rourke, he sold 400 acres associated with the park in 2006 for €320 million.

Lynch had dealings with Conlan in the context of the sale but did not join the consortium of purchasers because he did not want to get involved in joint and several guarantees with the others involved.

In 2006, Conlan was also involved in a deal to buy land at Kilbarry, Co Waterford. He suggested to Lynch that they buy the land together. Lynch put up half of the €5 million deposit on a deal that was to cost €25 million in total. The buyers expected the lands to be rezoned and to increase in value.

Lynch thought the deal had great potential and decided to include his children. For tax reasons, it was decided they should be co-borrowers of any money loaned to buy the land.

The lands were rezoned in the autumn of 2006, while the deal had yet to be closed, and jumped in estimated value to €40 million.

Conlan had engaged Matheson Ormsby Prentice when setting out to buy the land and it continued to work on the transaction. LK Shields was engaged by the Lynch family to advise them about their joint ownership aspects of the deal.

One of Lynch’s children, Judith Whelan, armed with power of attorney for her parents and siblings, signed the key loan documentation on February 8th, 2007.

According to McDowell, the previous day Lynch had contacted Conor Gunne, a colleague of Conlan, and said that the loan would have to be without personal recourse and confined to the Waterford lands. Lynch was in London conducting business.

At 9.33am, Whelan signed the documentation, while LK Shields forwarded a communication it had received from AIB to an executive in One51.

The e-mail read in part: “I now attach the latest version of the AIB facility letter. Please note that a further version should be following later this morning. This is to reflect the fact that the bank now only requires legal recourse against the property being their security for the loan. They no longer require any legal recourse as against Philip, Gerry or the Lynch children.”

However, despite late changes to the documents, the bank argues that the loan agreement signed by Whelan left intact a general obligation on the borrowers that was unlimited as to recourse. It said it never misrepresented at any time the terms under which the money was being advanced.

Matheson Ormsby Prentice has said it was not acting for the Lynch family in relation to the terms of the finance arrangements and it understood LK Shields was.

LK Shields has said the finance security issue was one for Matheson Ormsby Prentice. It said it was never told by the Lynch family that the loan had to be non-recourse.

As well as Judith Whelan, the other Lynch children are Therese, Philippa and Paul Lynch.