Another case on mortgage fraud, but are you listening?

A two lenders loaned on the same property, to the same fraudster but experienced different results when they attempted to enforce their mortgages. One was able to enforce his mortgage and the other had its mortgage declared a nullity. The only difference was the drafting method adopted.

 

24 April 2007

The clear message from the decision is that all monies mortgages are dangerous. They deny the lender the benefit of indefeasibility. All monies mortgages are those that fail to state the variable information (principal, interest rate, term etc) and instead refer to an extraneous document such as a deed of loan.

Instead of a deed of loan you should be using a mortgage which states the principal, interest rate and expiry date in its registered provisions. On 30 March 2007 the NSW Supreme Court delivered its decision in Printy vs Provident Capital Limited & Anor [2007] NSW 287. The case confirmed law that had already been clearly spelt out by Chief Justice of the Equity Division in Perpetual Trustees Victoria Ltd v Tsai [2004] NSWSC 745.

In Printy, an American tourist bought a property near the lower Hawkesbury river. He allowed friends to stay in it free of rent so long as they paid the council rates and maintained the property. Unfortunately they were not good friends and when he returned to Australia in 2005 he discovered the property had been fraudulently mortgaged to Provident Capital (as 1st mortgagee) and Bruce Jones and Robert McDonagh (as 2nd mortgagee) using a replacement CT.

Outraged, Mr Printy commenced proceedings in the Supreme Court. The results were stark:

  • 1st Mortgage to Provident Capital was found to have failed to secure any money (they did their dough).
  • 2nd Mortgage to Jones & McDonagh was found to be a valid mortgage (and found to secure the funds advanced)

The Provident mortgage referred to a extraneous document (the deed of loan) which because of forgery was held to be a nullity. The Jones & McDonagh mortgage was complete within itself and so was found valid.

Provident Capital lost a principal amount of $550,000 because their documents were not optimised to protect them from fraud. Had they taken the simple precaution of adding an annexure “A” to the mortgage defining their loan’s parameters, then the story would be quite different. How different? Would Mr Printy, the innocent victim of the fraud, have lost his house?

The answer is, ‘No’. Had Provident won and Mr Printy lost, he would have been entitled to recover compensation from the Torrens Assurance fund (and use it to pay our the mortgage). The Torrens Assurance fund is designed to compensate anyone (lender or owner) who is cheated out of a registered interest by fraud. It is a scheme whereby the State insures title.

Provident was not able to claim from the fund because they were not cheated out of an interest (because no valid interest was registered). By using a deed of loan and an all monies mortgage they effectively failed to take out insurance, even though the policy was free!

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