Impact of Fraud on Mortgage Enforcement

1. Impact of Fraud on Mortgage Enforcement thursday, 4 march 2010 amber warren, senior associate, gadens lawyers

2. issues • typical scenarios involving fraud • statutory basis of indefeasibility • torrens assurance fund • historical landscape • case study 1: van den heuval • case study 2: english • claims against third parties • case study 3: qureshi • case study 4: hoey • conclusion

3. typical scenarios category 1 • impersonator or rogue forges mortgage • effect of this fraud: • “all moneys” mortgage loses the effective benefit of indefeasibility (subject to restitution) • forged mortgage which states amount of principal + obligation to repay in the mortgage itself remains indefeasible

4. typical scenarios category 2 • co-mortgagor forges mortgage • effect of this fraud: • “all moneys” mortgage may lose the effective benefit of indefeasibility, subject to terms • forged mortgage which states amount of principal + obligation to repay in the mortgage itself remains indefeasible

5. statutory basis of indefeasibility • s.42 of the Real Property Act 1900 “…. the registered proprietor for the time being of any estate or interest in land recorded in a folio of the Register shall, except in the case of fraud, hold the same, subject to such other estates and interests and such entries, if any, as are recorded in that folio, but absolutely free from all other estates and interests that are not so recorded”

6. torrens assurance fund • s129 of the Real Property Act 1900 “Any person who suffers loss or damage as a result of the operation of this Act in respect of any land, where the loss or damage arises from…the person having been deprived of the land, or of any estate or interest in the land, as a consequence of fraud…is entitled to payment of compensation from the Torrens Assurance Fund.” • some exceptions

7. the historical landscape • Perpetual Trustees VictoriaLimited v Tsai [2004] NSWSC 745 • Yazgi v Permanent Custodians Limited [2007] NSWCA 240 • Provident Capital Limited v Printy [2008] NSWCA • Perpetual Trustees Victoria Limited v Cipri & Anor [2008] NSWSC 1128

8. case study 1 – van den heuval facts • husband and wife registered proprietors • gambling debts • husband forges wife’s signature • funds advanced to husband only • mortgagee had no notice of the fraud • mortgage default

9. case study 1 – van den heuval claims • mortgagee claimed possession of the property • wife claimed mortgage unenforceable • wife joins registrar-general and makes claim for torrens assurance fund compensation • dispute regarding wife’s loss

10. case study 1 – van den heuval findings • mortgage enforceable • mortgagee entitled to possession of property • wife entitled to torrens assurance fund compensation • compensation limited to her interest in the land • compensation includes costs

11. case study 2: english facts • estranged husband forges wife’s signature • husband received the benefit of the loan • mortgagee had no notice of the fraud • mortgage default

12. case study 2: english claims • mortgagee claimed possession of the property • wife claimed mortgage unenforceable

13. case study 2: english findings • construction of the contract and enforceability ultimately came down to the definition of “I” • mortgagee was unsuccessful • case provides a good summary or other fraud decisions • matter is on appeal

14. claims against third parties • solicitors • witnesses • accountants • brokers • mortgage managers and intermediaries

15. case study 3: qureshi facts • company borrowed $7M • accountant provided certifications of financial position and financial statements to mortgagee in support of loan application • money dissipated • company liquidated • fraudulent directors absconded

16. case study 3: qureshi claims • lender claimed damages against accountant for misleading, deceptive, negligent and fraudulent conduct • accountant claimed that, like the lender he was also duped by the fraudsters

17. case study 3: qureshi findings • Accountant liable to the lender for damages of • $150,914.38 being the money received by him from the initial advance • $3,082,046.02 in general damages • $150,000 in exemplary damages

18. case study 4: hoey facts • less than half of loan funds advanced went to benefit of mortgagor • mortgage originator signed the direction to pay, which resulted in funds being disbursed to a third party • the fraudster had absconded

19. case study 4: hoey claims • mortgagor and mortgagee made claims against the mortgage originator pursuant to the Trade Practices Act and the Fair Trading Act • mortgage originator admitted sending documents to the mortgagee but denied that they constituted representations that the information in them was true

20. case study 4: hoey findings • the cross claims of the mortgagor and the mortgagee succeeded • the mortgage originator was ordered to pay the mortgagor $255,236.91

21. conclusion • a mortgage which contains a covenant to pay a specific amount remains the best protection for a mortgagee against fraud • the enforceability of mortgages which do not contain a covenant to pay a specific amount will turn on their construction • the Courts are increasingly willing to look to the failings of third parties to compensate innocent parties for losses arising from fraud