Perpetual Trustees Victoria v Malouf [2012] NSWSC 1119

The son borrowed money on the security of his parent’s house. The parent’s attended their son’s solicitor’s office and his mother transferred her interest to her son and the father and son then granted a mortgage over the house to secure the loan to the son. The documents were not explained to the parents and they did not obtain independent legal advice. The son then on lent those monies but did not take proper security, owing to his solicitor’s negligence. The on-loan went into default, causing default on the loan secured by the parent’s house. The solicitor ceased practising. The lender sued for possession and the parents and son cross-claimed against the solicitor and sought to join the solicitor’s insurer, LawCover to the proceedings. The cross-claims were heard and the application to join LawCover was refused because the event giving rise to the claim, namely the loss suffered by the parents occurred before the insurance policy was taken out. The son now seeks to join LawCover to the proceedings.

The question for the court was whether the event giving rise to the claim occurred before the policy was taken out. The court found a breach of contract claim open on the evidence, and found that the loss occurred at the time of breach, namely when the loan was made, which was before the policy was taken out. Likewise, in relation to a negligence claim which was pleaded, the loss occurred at the time that recoupment became impossible. The court found that since the borrowing was inextricably linked to the on-lending, the relevant time was when recoupment from the on-lending became impossible. The approach adopted by the court was:

Recoupment becomes impossible when “it becomes reasonably ascertainable by objective evidence” that sale will result in a loss. A valuation is an expression of opinion, albeit informed opinion, but standing alone is insufficient to amount to objective evidence that makes it reasonably ascertainable that a loss will result.

The court found that recoupment became impossible when it became reasonably ascertainable that there was insufficient equity in the assets of the son’s borrowers to discharge the on-loan. In this case, the assets were insufficient to discharge the senior creditor’s debt, and this was known when the first of two identical properties was sold, which was before the policy was taken out.

The court refused to give the son leave to join LawCover because it had no liability.

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