We have previously reported on the trial judge’s decision in this case.
The trial judge found the borrowers were the victims of a fraudster but as the lender was found to have engaged in pure asset lending the judge set aside the mortgage in its entirety.
The lender found this grievously unjust as a large portion of the monies advanced were used to pay out an existing mortgage. Thus the borrower, who had heavily mortgaged property before the lender came along, was granted a windfall gain by the trial judge as the decision left the borrowers with a clear title.
The trial judge held that St George Bank Ltd v Trimarchi NSWCA 120 was authority for the rule, that where an unjust loan is used to discharge a mortgage loan which was itself unjust, the discharge of the earlier loan does not constitute an unwarranted benefit to the borrower. He then found that case applied:
In summary, I conclude that since the earlier mortgages were in substance third party mortgages, and they had the features to which I have drawn attention, they were unjust within the meaning of the Contracts Review Act and accordingly, the fact that the First Mortgage moneys went to repay, at least in part, the earlier loan which itself replaced earlier loans, was not a benefit to the borrowers, because each of those loans was unjust, and because of that conclusion, it follows that the discharge of the loans, by incoming lenders, did not amount to any benefit to the borrowers of a kind which necessitates any credit to be given.
The Appeal Court held that although the judge made a finding that the earlier mortgage was unjust it was necessary for him to make a finding that it would have been set aside before he could invoke Trimarchi.
The Appeal Court then considered whether such finding could have been made. The answer was based on the scant evidence available on the earlier transactions it could not:
It follows that there is no sound basis for determining whether the second mortgage and the discharge of the third mortgage made the borrowers better or worse off. There is also no sound basis for determining what would have happened had the respondents refused (or been advised to refuse) to enter into the second Mortgage.
An even stronger argument is that no finding can be made that, if the borrowers had taken action the first Mortgage or to have it declared unenforceable they would have succeeded in obtaining relief.
The Appeal Court then considered who bore the onus in Trimarchi style defences and decided it lay with the borrower.
The borrowers bore the onus of establishing the facts justifying an exercise of discretion in their favour. Once the lender adduced evidence that funds advanced to the respondents were used to discharge existing mortgages over the Land, the borrowers had to establish facts justifying orders relieving them from the obligation to repay those earlier moneys.
Due to the availability of the Trimarchi defence Bransgroves recommends that lenders consider using special purpose vehicles.