Citigroup v Middling [2015] NSWSC 221

A borrower on a disability pension was conned by a loan originator to borrow against his home to make an investment that would pay off his remaining mortgage of $15,000 and give him a good return. The originator included false documents in the loan application for $240,000, including a false valuation. The investment was made, however the return was not sufficient to pay the interest.

This loan was then refinanced by Citibank using false documentation again. However the over borrowings were not re-invested on the borrower’s behalf but misappropriated at or after the refinance.

The borrower claimed that the original lender was liable for the fraud and misappropriation of loan monies by the originator on the grounds he was their agent, that the lender’s conduct was unconscionable and the mortgage were unjust. 

The court noted that all of the borrower’s claims apart from the Contracts Review Act claim, depended upon the originator being found to be the lender’s agent. 

The court found that the originator was not the lender’s agent because it had a choice as to which lender to submit an application to and so was not acting on the lender’s behalf when preparing the loan application but on his own account. The provision of false information regarding income and employment by the originator and persuading the borrower to borrow $200,000 more than he had originally wanted to borrow could not be imputed to the lender. The misappropriation was done as the borrower’s investment adviser and agent. The court found no unconscionable conduct on the part of the lender. 

The court found no unjustness under the Contracts Review Act, largely on the basis that the borrower knew he had signed a loan for $240,000 and had authorised the loan payments and the lender was just as much a victim of the originator’s fraud.

The lender had not been aware that the borrower’s income was insufficient to service the interest on the loan and had received an acknowledgement that the borrower had chosen not to obtain legal advice. The court also noted that the fact that the returns on the investment did not cover the interest did not mean that the lender had engaged in asset lending.

The court noted that the borrower had not pleaded that the lender had failed to comply with its own guidelines, which would have alerted it to the risks. In any event, any claim was statute barred because more than 2 years had elapsed since the original loan and mortgage and the original lender was not a party to the original possession proceedings brought by Citibank, so the borrower’s claims for relief were not in proceedings against it but arose out of a cross claim. The court noted that the extended limitation period is only available by way of a shield rather than as a sword so therefore not on a cross-claim. 

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