A husband and wife mortgaged their pizza shop (registered) and home (unregistered) to secure a short term loan with interest at 8% per month (96% per annum) which they defaulted on. The lender obtained judgment against the husband but the wife claimed that her signature was forged.
The court believed the wife that her signatures were forged. The court found that the unregistered mortgage over the home was therefore void lacking as it did the protection of indefeasibility conferred by registration, but that the mortgage over the shop was protected and would not lose that protection unless actual involvement in the fraud could be proved against the lender or its agent.
The case law on what amounts to fraud for the purpose of defeating the indefeasibility of a registered instrument are a little hazy.
All the cases say there must be some element of dishonesty or moral turpitude on the part of the registered proprietor or its employees and/or agents, however the application of that rule has led to different results in similar situations.
This case was a nail biter because of the way the documents were executed. In the end the court decided to avoid determining the question either way. This was because the lender lost for another reason. The reason was their mortgage was an all monies mortgage.
When an all monies mortgage is forged the lender loses everything automatically. The Court noted:
The courts of New South Wales and New Zealand have generally adopted the approach that, in circumstances where the underlying instrument is forged and there is no separate express covenant to pay contained in the registered mortgage itself, but rather reference to an ‘agreement’ in either the mortgage or the memorandum of common provisions the covenant to pay had nothing to operate on. Therefore, the registered mortgage ‘secured nothing’.
The lender then argued that it was entitled to be subrogated to the rights of the mortgagee it paid out (this doctrine allows it to stand in the shoes of the party it paid out and assume their rights). This was allowed in relation to the principal but that mortgage also had an extortionate interest rate and the judge would not have a bar of it commenting:
It can hardly be consistent with equitable principle to allow the lender to assume the benefit of a mere contractual entitlement of a stranger which is, on its face, ‘extravagant, exorbitant or unconscionable’. While the question of whether the first loan was enforceable or whether the interest chargeable under the first loan was a penalty was not the subject of pleadings or evidence, a rate of six per cent per month, is so far outside the range of usual commercial lending rates that it would no doubt be considered an unenforceable penalty in the absence of special circumstances.
The court awarded interest at the statutory rate, currently 10.5% pa.
The court also noted that if the loan had been enforceable, then the wife would have been entitled to compensation under section 110 of the TLA but only after the joint tenancy was severed and only the difference between the amount of the forged loan and the amount paid out on the first loan because no claim against the Registrar can be made for amounts owing to the lender under the principles of subrogation. The court against would have ordered statutory interest.