Trail commissions not as vulnerable as first thought

The new State and Federal proportionate liability provisions will have a significant impact on the outcome of disputes between funders and originators. These provisions allow defendants even when sued in contract to point to share the blame with other wrongdoers without the need to join them to the proceedings.

 

3 February 2008

Recent developments have brought into sharp focus the law relating to loan origination deeds. There has been very little litigation concerning these agreements up until now. This is because in the past negotiated settlement has been the norm due to the desire of both parties not to damage ongoing mutually profitable relations. Those commercial imperatives have now evaporated. The motivator for both sides is to salvage as much money as they can from a terminal relationship.

The main cause for dispute arises when a funder claims indemnity for shortfalls and deducts the claimed monies directly from trail commissions. Failure by funders to particularise claims for indemnity has been a common complaint and this in turn has led to difficulty in claiming the losses through the originator’s PI cover. In Yes Home Loans v AFIG Wholesale [2008] NSWSC 1017 the court noted:

The total amounts claimed in the three Notices to Indemnify is $1,353,206. The amounts claimed are not the subject of any adjudication by a court. GE have been reluctant to provide to the plaintiffs any details of the “claims” or the documents relating to the borrowers’ defaults.

GE was relying on a set-off clause in origination agreement that gave it authority to apply trail monies to debts owed to it by the originator. Where there is a set-off clause the party claiming to suffer damages need not obtain judgement against the other side but can simply take the money. It is an example of the old adage that possession is nine tenths of the law.

If a funder refuses to provide proper particulars of the loss it can be very difficult for the originator to pursue a claim against its professional indemnity insurance. It is often necessary to use court processes to provoke a cross-claim so that P/I cover is triggered.

The typical grounds for a notice to indemnify (claim for damages) is if the funder suffers a shortfall and the LMI declines cover. In Yes Home Loans the court noted that Genworth in declining a claim wrote to the funder:

We are of the view that material misrepresentations have been made in connection with the process of validation of the loan application details.

Such misrepresentations typically have to do with the borrower’s employment details.

Unnoticed by most funders was that in 2004 a scheme of proportionate liability was introduced at the State and Federal level wherever damages were payable for a failure to take reasonable care. It seems to have gone unnoticed because none of the major funders attempted to contract out of this law in NSW. The scheme applies to a:

“Claim for economic loss in an action for damages (whether in contract, tort or otherwise) arising from a failure to take reasonable care.”

In such cases:

“The liability of a defendant is limited to an amount reflecting that proportion of the damage or loss claimed that the court considers just having regard to the extent of the defendant’s responsibility for the damage or loss.”

In determining proportionate liability:

“the court must have regard to the comparative responsibility of any concurrent wrongdoer who is not a party to the proceedings and it does not matter that a concurrent wrongdoer is insolvent, is being wound up or has ceased to exist or died”.

In applying this legislation to a claim for indemnity by a funder there are multiple potential concurrent wrongdoers, including:

  1. The introducing broker who may have falsified or acquiesced in the borrower misrepresenting his income;
  2. The borrower who will normally have fraudulently conspired to misrepresent his employment status or income;
  3. The borrower’s employer who may have agreed to help his employee out by agreeing to misrepresent the borrower’s income;
  4. An imposter who posed as the borrower’s employer or a real person/company that falsely claimed to employ the borrower;
  5. The valuer who may have negligently valued the property and is therefore a link in the chain of events that led to the loss;
  6. The funder’s solicitor who may have negligently used an all monies mortgage and is therefore a link in the chain of events that led to the loss;
  7. The LMI who may have negligently agreed to insure when the paper work did not comply with its own criteria is therefore a link in the chain of events that led to the loss.

The million dollar question is what weight will the court give to the various concurrent wrongdoers. In Chandra v Perpetual Trustees Victoria Ltd1 the proportionate liability provisions were applied so as to apportion liability at 90% to Mr Pan, the forger, and only10% to Mr Miller, the forger’s solicitor who had unwittingly assisted the fraud. Justice Bryson noted:

Mr Pan acted deceitfully in pursuit of a large monetary advantage which he gained; Mr Miller was deceived and conducted an apparently small piece of professional work in a way which fell short of appropriate skill. I consider it just, having regard to the extent of his responsibility, that Mr Miller’s liability be limited to 10 per cent of the plaintiffs’ loss.

In the course of his judgement His Honour also cited with approval an article by Matthew Bransgrove entitled “Mortgage Law: What can solicitors do to reduce mortgage fraud?” in the Law Society Journal, November 2004.

Chandra was considered in another mortgage fraud case, Vella v Permanent Mortgages Pty Ltd2 The Judge held that in a case of forgery the persons perpetrating the forgery should bear the great majority of the responsibility for the loss. His Honour then ordered that Hunt & Hunt who were negligent pay 12.5%, Caradonna (the fraudster) set at 72.5% and that of Flammia (a corrupt solicitor) set at 15%.

It follows that if an originator can show that the funder’s loss was caused partly by the fraudulent activity of another party then the originator can be expected to pay no more than 10-12% of the claim. If there is another negligent-but-honest party involved (for example the LMI or the valuer) that amount would be split between the two. Thus an originator confronted with a claim for indemnity for $100,000 should be able to reduce it down to somewhere between $5-10k depending on the facts.

1 [2007] NSWSC 694

2 [2008] NSWSC 505

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