Forgery and the danger posed by “all monies” mortgages

A recent NSW Court of Appeal decision clarifies the law in relation to forged mortgages. Over the last few years there has been a string of cases which have refused to enforce mortgages using “all monies” drafting in cases involving fraud. The principle has gone from being theoretical to now being endorsed by the Court of Appeal.

 

25 September 2007

On 12 September 2007 the Court of Appeal handed down it long awaited decision in the case of Sabah Yazgi v Permanent Custodians Limited [2007] NSWCA 240 which spells out the law on forged mortgages and so called all monies mortgages.

An all monies clause is used by lenders as a convenience. The registered mortgage states that it secures all monies owed by the borrower to the lender. This then allows the active provisions (the term, the amount, the interest rate etc) to be included in a separate unregistered agreement (usually a deed of loan or facility agreement). Lenders find this arrangement very flexible as the loan can be re-drawn, varied or supplemented without disturbing the registered mortgage and getting solicitors involved.

The problem with all monies clauses is that beginning with Perpetual Trustees Victoria Limited & Anor v Tsai in 2004 there has been a spate of lower court decisions including Printy v Provident Capital Ltd (2007), Chandra v Perpetual Trustees Victoria Ltd & Ors (2007) where these arrangements have been held not to give the lender guaranteed title to the land if a forgery is involved. Usually under the Torrens System if a mortgage is forged the lender can still sell the land and recover the debt. The innocent owner of the land is left to sue the Torrens Assurance fund for compensation. This quality is known as indefeasibility and is the reason why title insurance in Torrens countries is not mandatory as it is in other countries (because the state effectively guarantees title).

In Tsai, Chandra and Printy the single court judges held that although the all monies mortgages were indefeasible they secured nothing unless read in conjunction with the deed of loan. As the deed of loan was a forgery (and not registered) the indefeasible mortgage secured nothing and the borrower was entitled to a discharge without paying anything. Industry observers had been speculating that these decisions were wrong and the Court of Appeal would set things straight once it had occasion to decide the issue. That occasion arose in Yazgi.

Mr Yazgi forged his wife’s signature on both the mortgage and on the deed of loan. It was agreed by all parties that the property had to be sold and that the lender would have access to the husband’s half of the property. The question in dispute was whether the wife’s half of the proceeds could be used to payout the loan. The trial judge held the all monies clause secured the husbands debt (which was the entire debt) against both of the owner’s interest. This was based on interpreting “any agreement which you” as meaning both of them separately.

The Court of Appeal overturned the trial judge holding that on proper interpretation the mortgage did not charge the wife’s interest in the property. The Court ordered the property be sold by a trustee and the wife be refunded her equity in the property less half of the payout figure of the genuine mortgage which was paid out by the forged mortgage. The court cited the cases of Tsai, Chandra and Printy with approval and has therefore put to bed any hope that all monies mortgages can be used to acquire indefeasibility.

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