Farrell v Stephenson [2008] NSWSC 1350

A son and his wife procured transfers of his mother’s properties for little or no consideration (the transfer noted consideration of $1). No solicitors were used for the transfers and the mother never received independent legal advice. At the time the mother was elderly, suffering the early stages of Alzheimer’s Dementia, was easily manipulated and suggestible and had reduced capacity to manage her own affairs and protect her own interests.

The son and his wife then mortgaged those properties and used the money for a series of unsuccessful property investments. The residual proceeds (after the developments had been sold) were being held in a solicitor’s trust account.

The court held the properties were obtained by equitable fraud and undue influence, and that the sale proceeds being held by the solicitors could be traced so as in equity to belong to the mother.

Lenders should take note that when an issue such as this is raised surplus sale proceeds should be paid into court and not returned to the mortgagor. If this is not done, then the lender may be liable to the ultimate equitable owner of the funds.

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