This decision encompassed three related cases which were heard together. All three involved a company known as Streetwise Property. Streetwise was a property developer and finance broker. Streetwise conned three couples into mortgaging their homes and investing the money with it: in actuality the money was embezzled. In each case, Streetwise went to Tonto Home Loans for the funds wearing it’s broker hat. Tonto acted as a mortgage manager for Permanent Trustee Company, and in two of the three cases Permanent loaned the funds through the agency of Tonto while in the third, Tonto loaned its own funds. When the lenders sued for possession the defrauded investors cross-claimed, seeking to have the mortgages set aside pursuant to the Contracts Review Act
The Judge found there was an oral agreement between Streetwise and Tonto to the effect that:
- Tonto would not contact borrowers until after the loan had settled;
- All loan application and other documentation given to borrowers would be branded with Streetwise’s name even if they in fact came from Tonto;
Streetwise would have “absolute administrative control” of the loan applications.
The court found that in all three cases Streetwise not only defrauded the borrowers by having them borrow money and give it to Streetwise on false pretences, but also made fraudulent misrepresentations to Tonto by fabricating the borrower’s financial particulars to satisfy the lender’s requirements. Another key finding was that Streetwise was Tonto’s agent in dealing with the borrowers. In making this finding, Justice Price acknowledged that “a finance broker is… prima facie the agent of the borrower” however the position “depends upon the individual circumstances of each case”. He then found that the circumstances of the present case justified departure from the general rule. In particular, under its agreement with Streetwise, Tonto completely entrusted to Streetwise all pre-settlement dealings with the borrower. Streetwise thus owed a duty in these dealings to Tonto and hence was acting as Tonto’s agent. As Tonto was Permanent’s agent, Streetwise was found also to be the agent of Permanent.
With the conclusion that the mortgagees knew (through the knowledge of Streetwise as agent) that none of the borrowers could repay the loans, it was a small leap to find that each of the loans constituted “asset lending”, that the asset lending was unconscionable, that the contracts were unjust, and that relief should be granted under the Contracts Review Act by setting aside the mortgages. One borrower still had to repay $50,872.60 and interest at 6.95 % due to a prior mortgage being paid out by the Tonto loan, however this represented the only benefit that flowed to any of the borrowers.
The main implication of this decision is that lenders should ensure that neither themselves nor their originators enter into agreements with brokers in the nature of that between Tonto and Streetwise without complete confidence in the broker in question. The agreement put the mortgagees in a position where it was next to impossible to verify the financial circumstances of the borrowers due to an agreement not to contact the borrowers; yet the consequence of the arrangement was that the broker was effectively being appointed the mortgagee’s agent and hence the mortgagee would be fixed with the knowledge of the broker. Effectively, Tonto and Permanent put themselves at the mercy of Streetwise’s honesty (and suffered the consequences).