Rod Cameron, Hicksons: CASE STUDY - Mortgage enforcement

This address represents a brief summary of the law relating to the issues raised and should not be relied on as a substitute for professional

advice. Specific legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any

losses incurred as a result of reliance on this address. © Hicksons 2013

Mortgage Enforcement Update

3 October 2013

Address by Rod Cameron

© Hicksons 2013 Slide 2

Overview

• Stay applications – relevant factors in recent cases

• Unjust contract defences – trends in recent cases

• Proportionate liability – impact on enforcement and related claims


Stay applications

• Where a lender is enforcing a mortgage through a court a borrower

may make an ‘11th hour’ attempt to stop or delay the process, often

by seeking a stay of a possession judgment or order

• On a stay application the court must weigh up the interests of all

parties to determine what is fair and reasonable and what is in the

interests of justice:

• the borrower must be afforded reasonable opportunity to put a case

• the lender must be allowed to enforce its rights without undue delay

• NSWSC Practice Note SC CL 6 sets out procedures for stay

applications in NSWSC and provides a useful guide for other

jurisdictions


Hargraves Secured Investments v Poole [2012] NSWSC 1612, Garling J, 21 December 2012

• Default judgment entered

• Borrowers applied for stay of writs and setting aside of default

judgment

• Compromise agreement allowed borrowers 120 days to sell

property with consent judgment to be held by lender pending expiry

• Borrowers applied for stay of judgment on grounds lender:

• breached compromise agreement by notifying local council that

mortgagee in possession by lodging change of address

• failed to promptly provide payout figure

• should allow borrowers to complete negotiations for a wind farm


Hargraves Secured Investments v Poole (continued)

• Court found no breach of compromise agreement, no delay in

providing payout figure and, balancing interests of judgment, no

basis to grant another stay in light of earlier agreement


BNY Trust v Shepherd [2013] NSWSC 51, Harrison As J, 7 February 2013

• 68 year old lady unable to read or write, duped by step daughter

into borrowing to on-lend

• Multiple default notices and enforcement notices intercepted by

step daughter who paid arrears a number of times however in April

2012 step daughter told lender she would no longer be assisting

• Borrower applied for stay of enforcement, setting aside of

judgment and opportunity to file a defence


BNY Trust v Shepherd (continued)

• Court held:

• technical deficiencies on default judgment application (incorrect

identification of occupants and lack of details of sources of

knowledge in affidavits) minor and did not go to substance of

dispute – did not justify stay

• proposed defence was bona fide and delay, whilst 5 years and

presumably would cause some prejudice, not sufficient to prevent a

fair trial to both parties – did justify stay

• Default judgment set aside and borrower allowed 14 days to file

defence


Ozden & anor v CBA [2013] VSCA 195, Robson AJA, Hansen JA, 2 August 2013

• Borrowers defended possession proceedings unsuccessfully at

first instance

• Borrowers appealed and applied for stay

• Court of Appeal noted:

• special circumstances required to depart from ordinary rule

successful litigant entitled to benefits even if appeal pending

• special circumstances likely if necessary to prevent successful

appeal being nugatory


Ozden & anor v CBA (continued)

• Court held:

• Borrowers sentimental attachment to family home where children

borne not special circumstances

• Borrowers had not been fully frank in disclosing their financial

circumstances in evidence

• Court dismissed stay application


Windlock v V & M Davidovic [2013] NSWSC 1320, Davies J, 12 September 2013

• Judgment for possession 23 July 2012

• Discussions resulted in March 2013 agreement that writ could be

issued but would not be enforced until after 26 June 2013

• Borrower subsequently requested stay of writ on the basis:

• need to relocate business from security property

• potential offer for purchase of security property

• borrower agreement to pay 6 months rent in advance

• borrower had equitable right based on conversations with lender


Windlock v V & M Davidovic (continued)

• Court held:

• No legal or equitable right to remain in property demonstrated

• Effect on third parties caused by borrower’s failure to act

• No certainty regarding potential sale

• Court dismissed stay application


Unjust contract claims • Contracts Review Act 1980 (NSW) s7

Where contract unjust at the time it was made, the Court may, if it considers it just:

• refuse to enforce any or all of the contract

• declare the contract void, in whole or in part

• vary the contract in whole or in part and/or vary or terminate a land instrument

• National Credit Code s76

Where credit contract unjust at the time it was entered into or changed, the Court

may reopen the credit contract and:

• reduce the amount payable by the borrower

• set aside or vary the credit contract

• order discharge of any mortgage

• make orders for the benefit of the parties

• make ancillary or consequential orders


Unjust contract claims (continued)

• Borrowers can seek to avoid or vary loan contracts and mortgages

alleging that the contract was unjust

• Frequently such cases involve allegations that the borrower has

been conned into the loan contract by a son, daughter or close

friend


First Mortgage Management v Pittman [2012] NSWSC 1332, Garling J, 1 November 2012

• Borrowers were 2 elderly brothers, uneducated, unsophisticated,

living a subsistance lifestyle

• Margot Locke was a neighbour and property developer –

befriended the borrowers – described by court as manipulative,

greedy, exploiter of the vulnerable and thoroughly discreditable

• Locke convinced borrowers to borrow money secured by

mortgages over their properties for her development projects

• Locke dealt with lender and arranged for her solicitor to provide

‘independent’ legal advice to borrowers to meet lending

requirements


First Mortgage Management v Pittman (continued)

• Court concluded the loan contracts were unjust when made for the

following reasons:

• material inequality in bargaining power between lender and

borrowers

• no negotiation about terms – presented by Locke as ‘fait accompli’

• no reasonable opportunity for borrowers to negotiate or reject

terms, given documents sent to lawyers nominated by Locke

• neither borrower able to reasonably protect their own interests

• lender’s superior and dominant position not rectified by legal advice

because it was not of substance and was not independent of Locke

• borrowers’ legal advice did not meet and could not have met

lender’s requirements of independence


First Mortgage Management v Pittman (continued)

• borrowers’ legal advice did not explain the terms and their legal and

practical effect

• loan structure – LVR and interest rates meant all equity likely to be

quickly consumed by interest

• reliance on development proceeds problematic because no legal

obligation on Locke to make any repayment and lender made no

enquiries regarding its nature and extent

• lender failed to comply with lending manual

• borrowers received no direct financial benefit


Provident Capital v Naumovski [2013] NSWSC 40, Garling J, 8 February 2013

• Husband and wife borrowers immigrated from Macedonia in 1968,

husband only 2 years formal education and spoke only basic

English, wife no formal education and spoke practically no

English, neither could read or write

• Home purchased in 1993 unencumbered until 2004 when

mortgaged to secure loan to assist daughter and son-in-law fish

and chip shop business. Loans were refinanced in 2006 and 2007.

Refinance loans went into default and refinancing lender claimed

possession under mortgage or restitution for payout of previous

loans

• Borrowers claimed that loans were unjust and claimed against

their solicitors (negligence) and Registrar General (Torrens

Assurance Fund)


Provident Capital v Naumovski (continued)

• Court did not accept borrowers or their daughter as truthful

witnesses

• Court was satisfied on solicitor’s evidence that before signing the

2006 and 2007 documents the borrowers received and understood

the explanation of the documents given by the solicitors

• Court determined that the transactions were not unjust:

• loans did not result from fraud by daughter

• parents consciously provided financial support to daughter knowing

potential consequences

• transaction was financially unwise but not unjust

• loan was an asset lend but that did not necessarily mean unjust


Provident Capital v Naumovski (continued)

• even though lender was not aware of the circumstances, the

product was a low doc product and lending guidelines regarding

serviceability required only self certification of income and

affordability

• Court held that the borrowers’ solicitors:

• in 2006 and 2007 were not negligent in advising the borrower using

their daughter as translator

• in 2004 were negligent in advising the borrowers without a

translator but the borrowers’ deliberate conduct entering into the

refinancing transactions broke any chain of causation with the loss


Provident Capital v Papa [2013] NSWCA 36, Allsop P, Macfarlan JA, Sackville AJA, 28 February

2013

• Divorced female 61-year-old Sicilian immigrant at son’s request

borrowed $700,000 plus a subsequent advance of $125,000 to

assist son with purchase of equipment and working capital for gym

business – loan secured by mortgage over borrower's home from

which she conducted her business

• Loan introducer arranged solicitor for borrower and son

• Gym business failed, lender took proceedings for possession

• Borrower cross claimed alleging loan contracts unjust and alleging

negligence of solicitor caused loss


Provident Capital v Papa (continued)

• At first instance Fullerton J found the loan introducer was the

agent of the lender and the loan contracts were unjust and reduced

liability by amounts applied to gym business and dismissed

borrower’s cross-claim against solicitor



• On appeal court allowed lender’s appeal against borrower and

borrower’s appeal against solicitor, finding:

• the loan introducer was not the agent of the lender however the

loan introducer’s knowledge was relevant to unjustness

• loan contracts were not unjust:

• borrower applied for a low doc loan

• public interest does not necessarily require asset lending to

be proscribed or even deterred – if lender is satisfied

borrower is able to make the decision or has received

appropriate advice public interest will ordinarily have been

satisfied



• lender was not completely unconcerned about servicing

because lender required borrower declaration of affordability,

undertook credit checks and required borrower to get

independent legal advice

• lender entitled to assume independent legal advice would be

proper

• lender was not aware borrower suffered any disability

• borrower’s solicitor negligent and liable for the borrower’s loss:

• failed to advise borrower of risks

• failed to advise borrower to obtain independent financial

advice


Williams v CBA [2013] NSWSC 335, Pembroke J, 3 April 2013

• Guarantee and mortgage to support bank facilities provided to son

• No default, demand or claim for possession

• Guarantor took proceedings alleging guarantee and mortgage

unjust

• In 2007 when guarantee and mortgage entered into guarantor was

76 years old


Williams v CBA (continued)

• Court determined guarantee and mortgage were not unjust noting:

• age itself not a disabling condition

• not enough that guarantor obtained no personal benefit other than

moral satisfaction of paternal benevolence

• lender not required to investigate motives of guarantor or

relationships with other children (unless put on notice)

• ordinarily sufficient if lender ensures guarantor understands

transaction, comprehends legal effect and agrees

• lender must ensure guarantor understands independent legal

advice is desirable and guarantor has opportunity to obtain


Karamihos v Bendigo & Adelaide Bank [2013] NSWSC 172, Pembroke J, 8 March 2013

• Husband and wife borrowers elderly migrants from Greece

• Highly geared with history of frequent refinancing

• Lender credit policy stated borrowers’ age must be considered and

if elderly exit strategy available for loan

• In loan application borrowers asserted separate commercial

property securing separate $750,000 loan was worth $2 million

• No independent legal or financial advice


Karamihos v Bendigo & Adelaide Bank (continued)

• Court held:

• Borrowers probably couldn’t read or understand representations in

loan documents that independent legal and financial advice

recommended

• Lender reliance on borrowers’ estimate of commercial property

value (being the exit strategy) unreasonable

• Public interest required protection of aged borrowers not able to

look after themselves

• Court determined loan and mortgage contract unfair – reopened to

put borrowers in same position they would have been in if they had

not taken on the increased borrowings on the new loan terms.

© Hicksons 2013

PTVL v Belcastro (No 2) [2013] NSWSC 1189, Adams J, 30 August 2013

• Husband and wife borrowed funds by low doc loan to support

fencing business they had bought into

• Repayments made from 2003 to 2008

• Borrower wife defended claim for possession alleging loan and

mortgage contract were unjust


PTVL v Belcastro (No 2) (continued)

• Court determined loan and mortgage were not unjust noting:

• public interest had to be taken into account – keeping people to

their bargains

• public interest also required protecting the vulnerable and

promoting suitable lending systems

• borrowers in this case knew the nature of the transaction

• borrowers in best position to assess viability of business

• no imbalance of power other than usual lender/borrower

• no indication necessity to resort to security was inevitable

• lender not bound to carry out detailed investigation of borrowers’

ability to carry through plan for repayment


Proportionate liability and mortgage

enforcement

• Proportionate liability not usually relevant to a lender claim against

a borrower seeking to enforce a mortgage

• However mortgage enforcement can lead to other claims, eg

against mortgage brokers, borrower’s solicitors, lender’s solicitors

and valuers – proportionate liability can dramatically impact on the

outcome of such claims


Vella v Mitchell Morgan [2008] NSWSC 505, Young CJ in Eq, 28 May 2008

• Caradonna fraudulently obtained CT’s owned by Vella

• Caradonna with assistance of Flammia (Caradonna’s solicitor)

applied in Vella’s name to Mitchell Morgan for a loan offering

Vella’s Enmore property as security

• Flammia misrepresented to Hunt & Hunt (Mitchell Morgan’s

solicitors) that he had witnessed Vella signing the mortgage

documents

• Mitchell Morgan advanced just over $1,000,000 and registered the

mortgage


Vella v Mitchell Morgan (continued)

• Caradonna took the money

• Vella challenged the enforcability of the loan and mortgage

• Mitchell Morgan cross claimed against Hunt & Hunt

• The mortgage drafted by Hunt & Hunt used only an all moneys

clause such that it only secured money payable by Vella to Mitchell

Morgan


Vella v Mitchell Morgan (continued)

• At first instance Young CJ in Eq determined:

• Vella having not signed the loan agreement and not being party to

the fraud, owed no money to Mitchell Morgan such that the

mortgage secured nothing

• Hunt & Hunt was liable to Mitchell Morgan for negligent preparation

of the mortgage

• Caradonna and Flammia were concurrent wrongdoers with Hunt &

Hunt

• The responsibility for Mitchell Morgan’s loss was apportionable

72.5% to Caradonna, 15% to Flammia and only 12.5% to Hunt &

Hunt


Mitchell Morgan v Vella [2011] NSWCA 390, Bathurst CJ, Giles JA, Campbell JA, Macfalan JA,

Sackville AJA, 15 December 2011

• The Court of Appeal determined:

• Young CJ in Eq was wrong

• The damage caused by Caradonna and Flammia was the

advancing of funds which would not otherwise have been advanced

• The damage caused by Hunt & Hunt was the lack of the benefit of

the security which should have been available

• As Caradonna and Flammia did not cause the same damage as

was claimed against Hunt & Hunt, Caradonna and Flammia were

not concurrent wrongdoers

• Accordingly Hunt & Hunt’s liability could not be apportioned with

Caradonna and Flammia and Hunt & Hunt were liable to Mitchell

Morgan for 100% of the loss


Hunt & Hunt v Mitchell Morgan [2013] HCA 10, French CJ, Hayne J and Kieffel J, contra Bell J and

Gageler J, 3 April 2013

• High Court determined:

• Court of Appeal was wrong

• Loss or damage, in the context of economic loss means harm to

economic or property interests

• The loss claimed by Mitchell Morgan against Hunt & Hunt was not

clearly pleaded but was held by the High Court to be the inability to

recover the loan

• That was the same as the loss caused by the fraudsters

• Accordingly the fraudsters were concurrent wrongdoers with Hunt &

Hunt such that Hunt & Hunt was only liable for the portion of loss

caused by Hunt & Hunt (held at first instance to be 12.5%)


Perpetual v CTC Group (No 2) [2013] NSWCA 58, Macfarlan JA, Meagher JA, Barrett JA, 20 March 2013

• CTC was a loan originator

• CTC failed to exercise reasonable care to identify a borrower and

ensure the making of the loan application was authorised – the

loan application and the execution of the loan documents was

fraudulent

• Perpetual claimed against CTC for its loss based on CTC’s failures

• CTC argued there were concurrent wrongdoers being the JP’s who

incorrectly witnessed the execution of the loan documents and

Resimac who reviewed the loan application


Perpetual v CTC Group (No 2) (continued)

• The Mortgage Origination Deed (‘MOD’) provided that CTC

indemnified Perpetual and Resimac against any loss arising from

breach by CTC of its warranties or obligations under or arising

from the MOD or failure to perform any obligations under the MOD

• Perpetual argued that the proportionate liability regime did not

apply because the parties had contracted out of the regime by the

indemnities in the MOD


Perpetual v CTC Group (No 2) (continued)

• The court held that the indemnity under the MOD was expressly

inconsistent with the proportionate liability regime and as the

parties had contracted out of that regime proportionate liability did

not operate in respect of the claim

• The court said:

• the legislation does not require the parties to use any particular

form of wording to contract out

• no reference needs to be made to the legislation

• all that matters is that the contractual indemnity is inconsistent with

the legislation



losses incurred as a result of reliance on this address. © Hicksons 2013



losses incurred as a result of reliance on this address/document/paper [etc] by those relying solely on this address/document/paper [etc]

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This was a presentation by Rod Cameron of Hicksons.

If you require any further information, please contact:

Rod Cameron, Partner

Direct Telephone +61 2 9293 5407

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Email [email protected]

Rod Cameron, Hicksons: CASE STUDY - Mortgage enforcement

Economy & Finance

Transcript of Rod Cameron, Hicksons: CASE STUDY - Mortgage enforcement