By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A delinquent mortgage borrower has successfully slashed the damages awarded to a BISX-listed bank by more than $101,000 after the Supreme Court deemed the ‘penalty on interest’ to be “impermissible”.

Renaldo Toote, the acting Supreme Court registrar, in an April 30, 2025, ruling cut the debt claimed by Bank of The Bahamas from $664,220 to under $563,000 after Mark Oscar Gibson Senior, who had defaulted on his loan repayments, argued there was no clause in the mortgage agreement that permitted the lender to levy a penalty on unpaid interest and principal.

Setting out the background to his damages calculation, Mr Toote said: “Mr Gibson was an existing customer of the bank when, in or about November 2006, he applied for and obtained a commercial loan in the amount of $80,000. This loan was subsequently consolidated with his then-existing mortgage obligation, resulting in a total indebtedness of $305,855.66.

“The restructured mortgage agreement provided for repayment over a 20-year term, with interest accruing at a rate of 8 percent per annum. Monthly payments were fixed at $2,558.30. By letter dated December 9, 2011, the bank alleged that Mr Gibson had fallen into arrears and demanded repayment of the outstanding sums.”

Bank of The Bahamas alleged that these sums had increased from $300,744 at December 9, 2011, to $664,220 as at April 11, 2025. The purported debt had thus more than doubled in 13 years, with the latter figure including loan principal worth $283,570; interest on the overdue principal of $72,145; past due interest of $201,715; a late fee of $5,551; and the ‘penalty on interest’ of $100,875; and $363 in accrued interest.

“A central issue in this assessment is whether the bank is legally entitled to impose a penalty or capitalise arrears on both principal and interest following the defendant’s breach of the mortgage agreement,” Mr Toote said.

“The Defendant, Mr Gibson, contends that there is no clause within the mortgage agreement that permits the bank to impose a penalty on unpaid principal or interest, and argues that the amounts now claimed by the bank exceed what is legally or contractually recoverable.”

Jamal Davis, the attorney representing Bank of The Bahamas, argued that the mortgage agreement’s clause four “authorises the bank to capitalise overdue interest and treat such capitalised sums as part of the principal, thereby attracting further interest. He maintains this process does not amount to a penalty but is a contractual mechanism of debt accrual”.

Mr Gibson, according to Supreme Court records, appears to have a history of mortgage delinquency. Senior justice Deborah Fraser, in an April 4, 2025, verdict ordered him to vacate a property mortgaged to Commonwealth Bank which was awarded $314,133 in damages. In both cases he sought to use evidence from accountant Milford Lockhart, whose work was not given much credence by Mr Toote.

“I did not find Mr Lockhart’s evidence beneficial to the defendant’s case,” the acting registrar wrote. “Under cross-examination, he admitted that he had erroneously calculated the amortisation period as 347 months when it ought to have been 240 months in accordance with the terms of the mortgage agreement.

“Mr Lockhart further conceded that his analysis was one-sided, having been conducted without full disclosure of the defendant’s breach of contract, and thus could not accurately reflect the proper state of indebtedness. He also highlighted that the mortgage agreement contained capitalisation clauses and not penalty clauses, and that this distinction was material in determining the bank’s rights under the agreement.

“I find support in the approach adopted by senior justice Fraser where she, too, found Mr Lockhart’s evidence lacking in independence and rigor due to an incomplete understanding of the loan’s history. As in that case, Mr Lockhart here relied heavily on amortisation assumptions and failed to include the defendant’s own admitted breaches, making his conclusions unreliable for the purpose of determining indebtedness.”

Still, Mr Toote said prior Supreme Court rulings on the same mortgage loan agreement ‘clause four’ had established that it “permits the capitalisation and compounding of arrears, but did not equate that right to an automatic entitlement to claim unspecified penalties”

And while Mr Davis argued that the increase in debt owed by Mr Gibson was simply the outcome of the agreed contractual method for calculating it, Mr Toote added: “It must be reiterated, however, that capitalisation inherently involves adding unpaid interest to the principal balance of a loan, thereby accruing further interest on the enlarged sum.

“Given this definition, it remains unclear why the bank seeks a separate cost designated explicitly as a ‘penalty on principal’ if such amounts are indeed capitalised and already accruing interest as per clause four. 

“It is particularly significant that the bank has not offered any coherent or satisfactory explanation as to why it adopted the terminology ‘penalty on principal’ rather than consistently using ‘capitalisation’, as stipulated in the mortgage agreement, particularly if the two are indeed one in the same,” Mr Toote added.

“This lack of clarity undermines the bank’s position and creates confusion as to whether the sums in dispute constitute genuine capitalised arrears or impermissible penalty charges, especially while the bank failed to justify how the fees were formulated.”

The Supreme Court acting registrar added that Bank of The Bahamas “neither clearly pleaded nor adequately justified the imposition of separate penalty charges as distinguished from capitalisation, as explicitly defined within the mortgage agreement. Without a specific pleading clearly setting forth these allegations, it remains improper and unjust to allow recovery based on an un-pleaded claim.

“Accordingly, consistent with the principles enunciated in the cited authorities, this court finds that the claimant’s claim for penalties or any sums characterised ambiguously without adequate contractual support or explicit pleading is impermissible and cannot be sustained.”

As a result, Mr Toote eliminated the $100,875 ‘penalty on interest’ from the damages awarded to Bank of The Bahamas.