RHG Mortgage Corporation v Baira [2011] NSWSC 520

A husband and wife started a joint business. To obtain start up capital they borrowed on their parents’ homes. For several years the business prospered exceedingly well. Then they decided to refurbish the business and to raise the additional capital required they refinanced the loans over their parents’ homes.

Some time later the business became insolvent and the mortgages went into default. The lender sought possession of the guarantor parents’ homes. The parents (on both sides) responded by claiming they did not speak English and did not know what they were signing. To give credibility to their defences they accused the introducing broker of never having met them and also of falsely preparing the finance application forms. They cross-claimed against the broker, and in response the lender also cross-claimed against the broker. Bransgroves lawyers successfully defended the hapless broker.

Problems with English
One of the guarantors, while admitting that a solicitor explained the mortgage and guarantee document to her, complained that the solicitor did not speak Italian. The Judge gave this short shrift because “her command of English in the witness box was considerable.”

Another guarantor also claimed to have a limited understanding of English and pointedly giving evidence through an interpreter. Although he had been in Australia since 1954 and worked for the government for most of the intervening period he claimed that he had worked in a gang of Italians. The Judge was scathing:

I find it hard to believe that for 33 years part of the operations of the Garden Island Naval docks were conducted in Italian to the extent that he did not achieve fluency in English. While it can be appreciated that a witness may be more comfortable speaking in his first language, his claim to limited English was deceitful.

One of the parents claimed that she was simply signing documents presented to her by her daughter, being ignorant of their content, simply being told that these were documents wanted “by the bank”. However, the Judge zeroed in on the fact that the guarantor required the borrowers to sign a deed:

  1. Prohibiting them from employing a relative whom she did not like;
  2. Giving her access to accounting and financial records;
  3. Giving her rights to enter, operate or sell the business upon default by the borrowers.

The Judge found that there was a contradiction between her behavior in requiring this deed and the “unlikely proposition that for years and years she signed many documents in blithesome ignorance of what she was doing”.

The barrister for the guarantors referred to cases where entrepreneurial or dishonest children persuaded a parent or parents to risk their homes and the Court had set aside the mortgages. However, the Judge felt these had no application because:

The parents were not induced to offer their properties in aid of a perceptibly risky enterprise or to one, examination of which would have revealed the seeds of failure. Instead, in this case, the guarantors were content to use their properties in circumstances where all the appearances of prosperity existed and this appearance was confirmed by the fact past commitments had been met.

Meetings with the broker
Brokers should carefully consider the Judge’s findings on this question and the guidance it gives for them. He said:

The broker had a meeting with the borrower on 2 December 2005. The guarantor not only denied that meeting, but denied she had ever met the broker. This denial was a falsity, and I would assess it as a brazen attempt to avoid the consequences of her own actions.

The broker’s diary had an entry for the appointment but more significantly there are pages of hand written notes of the meeting which are entirely consistent with the broker’s version of the meeting. If, as the borrower now asserts, there was no such meeting, it is implied that the broker has invented the content of it as recorded in the notes. However, no allegation of fraud of any kind appears in the pleadings. Moreover, the notes contain personal detail about the borrower including her driver’s license, Medicare and passport numbers together with expiry details.

No credible proposition was advanced as to why the broker would act dishonestly in brokering these loans. No doubt he would receive commission at established rates but he was not shown to have any special relationship with the husband and wife. Indeed, the broker’s statement that in the overall conduct of his business these were relatively small transactions was neither challenged nor contradicted.

It is unnecessary for me to restate the detail in the file notes. Their existence and their content are destructive of the borrower’s credibility in denying that the meeting had happened. This leads me to reject her evidence generally and so I do not accept her denials in relation to her signatures. I am satisfied that those signatures were in fact made by her. 

Another of the other guarantors also claimed not to have met with the broker. The Judge was equally unconvinced:

The fact that he and the other guarantor made similar denials does not add strength to the claims of them. Once again, there are handwritten notes by the broker of his meeting with which fortify his evidence that he did have the meeting. I reject the claims that there had been no meeting with Famularo. A lie of this magnitude about a critical fact extinguishes his credibility wherever it is contradicted by the evidence of the broker.

The broker’s honesty
Everything in the end turned upon the broker keeping detailed file notes. The judge made this clear:

The broker was an impressive witness whose testimony as to events and circumstances was persuasively compatible with the pattern of recorded activity and documentation.

The broker’s liability
The Judge concluded that the claims against the broker must fail if his evidence was believed. He accepted the broker’s truthfulness and commented:

Nothing will be served by chronicling the various misrepresentations the borrowers claimed the broker made. I find he made no such misrepresentations. I accept his evidence that his function as a broker was to find a potentially willing lender and to assemble and forward the documentation required by that lender. He was not, as between himself and the would-be borrower, an investigator of the truth of the information conveyed to him by that would-be borrower.

The Judge also rejected any suggestion that the broker had a duty to investigate the information given to him by the borrowers and guarantors:

It was not the task of the broker to investigate his clients. The broker acted in accordance with what he had been told. It was not his task to challenge the truth of the information.

It was pointed out that the broker was forwarded a rates receipt which showed a pensioner discount. That was entirely inconsistent with what the broker had been told but his task was not that of a forensic investigator and I accept his evidence that he did not notice this item as, obviously, no one else “further up’ the line did, as it could reasonably be predicted that identification of the guarantor by the lender as a pensioner would have led to refusal of the loan.

Unjustness under the Contracts Review Act
The Judge did not find any unjustness. He concluded:

The parents had been content for years to offer their properties to secure facilities for husband and wife’s business enterprises. They did so knowing that they ran a successful business with very high cash turn over and trading profits. They all represented to the broker that they had substantial income, which, if true, must have been derived from the cash flows emanating from the business.

That the guarantor trusted her daughter and son-in-law does not does not equate with an absence of financial shrewdness. The conversation, denied by her, which she had with the broker showed she had an accurate understanding of the total loans she was guaranteeing. She was able to respond to broker’s skepticism about the willingness of St George Bank to release its security.

Brokers should protect themselves by keeping detailed file notes of their meetings, or better still video or audio recording them.

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