Bank West advances $37M on dodgy presales and ‘suffers major losses’, but that was not the end of the woes…
This was a dispute between Bank West who held the first mortgage and the former owner of the property who provided vendor finance in return for a second mortgage.
The development was a failure and Bank West, who had advanced $37M, ‘suffered major losses’, the second mortgage was wiped out.
The second mortgagee sought redress against Bank West. Essentially, arguing that in the process recklessly making its disastrous investment it took down the second mortgagee with it.
It claimed that the bank had breached implied terms of the deed of priority to exercise reasonable care to protect the interests of subsequent mortgagees.
The judge decided it was not reasonable or equitable to expect the bank to assume legal liability for a failure to protect its own interests.
The judge’s reasoning is to be commended as logical. The following is an extract of what he said, it is a complete rebuttal of the increasing tendency of the law to second guess commercial decisions made by lenders. In fact, if you think about it, it is actuall an indictment of the whole ‘responsible lending’ regime set out in the National Credit Code:
One might readily accept that Bank West should be expected to protect its own interests. It is an entirely different matter to argue that it has an implied obligation to another party to protect its own financial interests. If Bank West is not to be taken to be the best judge of its own interests, how would its own interests be determined from time to time as it went about making loans? For example, the bank might consider that it is in its interests, and also in the interests of its customer, to advance further monies in the interests of completing a development. Its customer may plead with it to do so. An objective and retrospective assessment, however, may lead to the conclusion that the decision to lend further money was not in the bank’s interests.
The second mortgage lender next claimed that the Bank had a duty to do all such things as were necessary to allow the second mortgage lender to have the benefit of recovering the second priority amount. The court agreed but found that the only benefit the bank promised was that any surplus proceedings would be paid to it. The bank did not promise that there would be a surplus.
Finally, the second mortgage lender brought a claim in negligence, alleging:
Bank West owed the plaintiffs a duty to exercise the care and skill of a reasonably competent and prudent banker (or, alternatively to act in good faith and not recklessly) in and about its making loans for the development of the resort on Fitzroy Island.
The judge found that such a claim in negligence might actually get up but was poorly pleaded. Accordingly, he struck it out but gave leave for the second mortgage lender to re-plead the claim and go to trial on it.
Click here to read the full judgment.