Elliott May Lawyers Blog

Case Reviews - October Issue

2010-10-13T23:38:36+00:00

Mortgage Fraud

Perpetual Trustees Victoria v English & Anor [2010] NSWCA 32

In the recent matter of Perpetual Trustees Victoria v English & Anor [2010] NSWCA 32, the Supreme Court of New South Wales was once again required to consider the enforceability of a registered mortgage that had been fraudulently executed by a co-owner.

The Facts

The registered mortgagee, Perpetual Trustees Victoria (Perpetual), applied for an order for possession of land registered jointly to Mr. and Mrs. English. The application relied on a default in repayment of amounts said to be secured by the registered mortgage (Mortgage) in favour of Perpetual. The estranged wife, Mrs. English, denied any liability on the basis that her husband had forged her signature on the mortgage.

There was no dispute between the parties that the registered mortgage conferred an indefeasible title in favour of Perpetual. However, the extent of the interest created by the mortgage was in issue. In order to determine the extent of the interest, the court was required to consider the construction of the mortgage documents.

The Judgment

Claim against Mrs. English

The Mortgage contained an “All Moneys” clause which referred to all amounts payable under a “Secured Agreement”. In interpreting the definition of “Secured Agreement”, the Court of Appeal held that the Mortgage did not secure any monies due by Mrs. English as there was no valid “Secured Agreement” due to the fact that the loan agreement required the signature of all persons to whom the offer was made.

Claim against Mr. English?

Despite the findings in relation to Mrs. English, the Court of Appeal held that it would be unfair for Mr. English as the perpetrator of a forgery to escape liability on the basis that his forgery rendered the documents void. Consequently, Perpetual was able to access Mr. English’s equity in the mortgage property.

This decision is a further reminder to all legal advisors and financiers of the perils associated with relying on “All Moneys” clauses in a mortgage.

Case Review - September Issue

2010-09-14T06:26:36+00:00

Securities Law Case Reviews

Balanced Securities Limited v David Thomas [2010] QDC 337

In the matter of Balanced Securities Limited v David Thomas [2010] QDC 337, Elliott May was successful in securing judgment on behalf of its financier client against a guarantor for the costs incurred in defending an unsuccessful action brought by a borrower after the loan had been repaid in full.

The Facts

The plaintiff, Balanced Securities, advanced $7,200,000 to Joelco Pty Ltd (Joelco). The loan was guaranteed (Guarantee) by David Thomas, the sole director of the borrower.

After the loan had been repaid in full, the borrower commenced proceedings against Balanced Securities to recover monies it alleged were not due to Balanced Securities when the loan was discharged. Chief Justice de Jersey dismissed the proceedings after a 2 day trial and ordered the borrower to pay Balanced Securities’ costs on the indemnity basis.

After Balanced Securities’ costs were assessed in the sum of $113,515.37 it commenced proceedings to recover the debt against David Thomas pursuant to the Guarantee.

David Thomas defended the claim on the following grounds:

1. That upon a proper construction of the Guarantee, it terms did not extend to the monies claimed by Balanced Securities as its costs incurred in defending Joelco’s action were not monies secured under the facility agreement;

2. That his obligations under the Guarantee were discharged upon Joelco repaying the loan in full.

The Judgement

Justice Dorney QC rejected Mr. Thomas’ defence and entered judgment against him in the sum of $113,515.37 stating:

“But to make things clear, I do not accept that, applying the proper interpretation principles that apply to guarantees, taking into account the interpretation clauses in the Facility Agreement itself and then applying both those generally to the objective theory of contract, the guarantee would be limited to the fixed time when principal, interest, damages and other moneys were asserted to have been first paid, especially where there existed later disputation about whether that payment of principal, interest, damages and other moneys was “in full”

The facts in this case are highly unusual and the judgment makes it clear that a guarantor’s obligations may continue on well after the loan has been repaid and the facility discharged.

Property Law Case Reviews

Fletcher V Kakemoto [2010] Qld Conveyancing Reports

The Supreme Court of Queensland recently had to decide upon whether a prospective purchaser is required to sign a new warning statement or re-sign the original warning statement on each occasion that changes are made to a proposed contract before it is submitted to a vendor.

Facts

The purchaser expressed interest in making an offer on an apartment to the marketing agent of the property. The purchaser was told by the agent that the cooling off period would have to be waived when making the offer. The agent prepared the necessary documentation so that the purchaser could make an offer and then explained the relevant parts before the purchaser firstly signed the warning statement and then the contract. Subsequently the vendor required some amendments to the special conditions of the contract. These changes were explained to the purchaser by the agent wherein the purchaser’s attention was again drawn to the warning statement however it was not re-signed by the purchaser. The purchaser provided the certificate from the purchaser’s lawyer waiving the cooling off period at this time. Further changes to the special conditions were requested by the vendor. These were inserted into the contract and were initialled by the purchaser. The Vendor then signed the contract for the first time.

The purchaser subsequently purported to terminate the contract asserting amongst other things that they had not re-signed the warning statement when the amendments were made to the contract and thus the relevant provisions of the Property Agents and Motor Dealers Act 2000 had not been complied with. Namely, sections 366B(4) and 366D (3). The purchaser submitted that the alterations made were such that it was in fact a new contract. The vendor argued that the purchaser was not entitled to terminate the contract because the amended contract was in all relevant respects, the document originally signed by the purchaser.

Decision

The court found that the purchaser was not entitled to terminate the contract. The court noted that the circumstances which played out at the meeting where the amendments were signed by the purchaser, were such that they should be categorised as, in the main, a “tidying up” of the proposed relevant contract in a form which could be put to the vendor. Even though the document was prepared by the vendor’s real estate agent (and then subject to some further changes), it still amounted to an offer being made by the purchaser.

The court concluded that a prospective purchaser is not required to sign a new warning statement or re-sign the original warning statement on each occasion that the purchaser makes any changes to a proposed contract before it is submitted to the vendor for signing.

ASIC release guidance for credit licensees about responsible lending obligations

2010-03-03T04:09:26+00:00

ASIC has this week released regulatory guidance for credit licensees about the responsible lending obligations in the National Consumer Credit Protection Act (National Credit Act). ASIC's Regulatory Guide 209 Credit licensing: Responsible lending conduct obligations (RG 209) has been developed to help industry understand ASIC’s expectations in relation to their responsible lending obligations as credit licensees.

The release of this regulatory guide is part of ASIC’s effort to provide early guidance to assist credit licensees to comply with their responsible lending obligations on the commencement of the National Consumer Credit regime in July 2010. The responsible lending conduct obligations will apply to brokers and some lenders from 1 July 2010.

The responsible lending obligations are key new requirements under the National Credit Act. RG 209 takes into account feedback from individual industry participants, industry organisations and consumer representatives following the release of a consultation paper on responsible lending last year (Consultation Paper 115 Responsible lending)

'The responsible lending obligations are important obligations under the National Consumer Credit regime and are new to industry', ASIC Commissioner, Dr Peter Boxall said.

'This guidance will assist industry and consumer groups understand our expectations about meeting the responsible lending obligations. We will continue to work with industry organisations and consumer representatives to provide further clarity and guidance if and where necessary', Dr Boxall said.

RG 209 is designed to help credit licensees and credit licence applicants to:

develop arrangements and systems to meet their responsible lending obligations; and
understand what ASIC expects when assessing whether licensees are complying with their responsible lending obligations.

RG 209 recognises that the responsible lending conduct obligations in the Credit Act are designed to work in a flexible way and that it is the credit licensee’s responsibility to put in place arrangements to comply with the responsible lending conduct obligations. RG 209 is principles based guidance that is designed to apply to a wide range of scenarios. ASIC will continue to assess the need for further guidance following the commencement of the regime.

ASIC has also released a feedback report on the consultation process: see Report 191 Response to submissions on CP 115 Responsible lending (REP 191).

Mortgagees beware!

2009-11-17T05:47:36+00:00

Mortgagees beware - the recent High Court decision in Bofinger v Kingsway Group Limited [2009] HCA 44 allowed guarantors to claim equitable compensation from the first mortgagee and in so doing placed them ahead of the second and third mortgagees.

Facts

B & B Holdings Pty Ltd (Borrower) carried on business as a real estate developer. The Borrower obtained finance from three lenders, all of whom took mortgages over the same lots owned by the Borrower. A first ranking mortgage was granted to Kingsway Group Pty Ltd (Kingsway), a second ranking mortgage to Reckley Pty Ltd (Reckley) and a third ranking mortgage to John Skehan (Skehan).

Each of the three loans was guaranteed by Mr and Mrs Bofinger (the Bofingers), both of whom were directors of the Borrower. Each guarantee was in turn secured by first, second and third mortgages over the Bofinger's family home and an investment unit belonging to them.

After the Borrower defaulted, the Bofingers voluntarily sold their 2 lots and applied the net proceeds of sale of around 1,500,000 in reduction of the Kingsway debt. After settlement of the sale of the Bofinger's 2 lots, all three mortgagees still retained registered mortgages over lots registered in the name of the Borrower, B&B Holdings Pty Ltd.

Kingsway subsequently exercised its power of sale over some of the lots mortgaged by the Borrower and applied the net proceeds towards discharging all of the Borrower's indebtedness to Kingsway. Kingsway then paid the surplus sale proceeds to Reckley as second mortgagee. Kingsway also delivered to Reckley the certificates of title to 2 unsold lots belonging to the Borrower along with a discharge of Kingsway's mortgage for both lots.

The guarantor's claim

The Bofingers claimed that Kingsway ought to have accounted to them rather than the second mortgagee in relation to the surplus sale proceeds so that they could recoup what they had previously paid to as guarantors in respect of the Borrower's indebtedness to Kingsway. The theory underlying the Bofinger's claim was that Kingsway has distributed the surplus in breach of a constructive trust by which the surplus was held for them.

The Bofingers, by reason of the fact that they had sold their own properties and applied the proceeds in reduction of Kingsway's debt, claimed to be entitled, as guarantors of that debt, to the benefit of the security (i.e. the surplus proceeds and unsold properties) held by Kingsway after its debt had been discharged in priority to Reckley (and Skehan) pursuant to the principles of subrogation in equity and s 3 of the Law Reform (Miscellaneous Provisions) Act 1965 (NSW).

The High Court decision

On 2 November 2009, the High Court held that the surplus money was indeed held by Kingsway on constructive trust for the Bofingers. The High Court stated:

"On 8 February 2006 the first mortgagee was obliged in good conscience both to account to the appellants for surplus moneys and securities it held and not to undertake or perform any competing engagement in that respect without prior release by the appellants. These obligations were fiduciary in character. In respect of its misapplication of the surplus moneys and securities and the consequent loss to the appellants the first mortgagee is to be treated as a constructive trustee to the extent that it must account to the appellants as a defaulting fiduciary."

Impact of the decision

In view of the decision:

Lenders will need to look at the drafting of their guarantee documents, particularly the no-competition clause, being the clause that is designed to stop guarantors claiming subrogation and other rights against the debtor in competition with the creditor;
Secured lenders who receive payments from guarantors will need to take care when distributing the proceeds of security or discharging security.

Please contact us should you wish us to review your loan facility documentation in light of the above decision of the High Court of Australia.

For more information or for assistance with reviewing your policies and procedures, please contact us on 1300 112 484.