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Impact of Fraud on Mortgage Enforcement

thursday, 4 march 2010amber warren, senior associate, gadens lawyers

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issues1. typical scenarios involving fraud 2. statutory basis of indefeasibility3. torrens assurance fund4. historical landscape5. case study 1: van den heuval6. case study 2: english7. claims against third parties8. case study 3: qureshi9. case study 4: hoey10. conclusion

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typical scenarios

category 1

• impersonator or rogue forges mortgage

• effect of this fraud: – “all moneys” mortgage loses the effective benefit

of indefeasibility (subject to restitution)– forged mortgage which states amount of

principal + obligation to repay in the mortgage itself remains indefeasible

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typical scenarios

category 2

• co-mortgagor forges mortgage

• effect of this fraud: – “all moneys” mortgage may lose the effective

benefit of indefeasibility, subject to terms– forged mortgage which states amount of

principal + obligation to repay in the mortgage itself remains indefeasible

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statutory basis of indefeasibility

• s.42 of the Real Property Act 1900 “…. the registered proprietor for the time being of any

estate or interest in land recorded in a folio of the Register shall, except in the case of fraud, hold the same, subject to such other estates and interests and such entries, if any, as are recorded in that folio, but absolutely free from all other estates and interests that are not so recorded”

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torrens assurance fund

• s129 of the Real Property Act 1900

“Any person who suffers loss or damage as a result of the operation of this Act in respect of any land, where

the loss or damage arises from…the person having been deprived of the land, or of any estate or interest

in the land, as a consequence of fraud…is entitled to payment of compensation from the Torrens

Assurance Fund.”

• some exceptions

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the historical landscape• Perpetual Trustees Victoria Limited v Tsai [2004]

NSWSC 745• Yazgi v Permanent Custodians Limited [2007]

NSWCA 240 • Provident Capital Limited v Printy [2008] NSWCA• Perpetual Trustees Victoria Limited v Cipri & Anor

[2008] NSWSC 1128

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case study 1 – van den heuvalfacts• husband and wife registered proprietors• gambling debts• husband forges wife’s signature• funds advanced to husband only• mortgagee had no notice of the fraud• mortgage default

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case study 1 – van den heuval

claims

• mortgagee claimed possession of the property

• wife claimed mortgage unenforceable

• wife joins registrar-general and makes claim for torrens assurance fund compensation

• dispute regarding wife’s loss

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case study 1 – van den heuval

findings• mortgage enforceable• mortgagee entitled to possession of property• wife entitled to torrens assurance fund

compensation• compensation limited to her interest in the land• compensation includes costs

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case study 2: english

facts

• estranged husband forges wife’s signature

• husband received the benefit of the loan

• mortgagee had no notice of the fraud

• mortgage default

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case study 2: english

claims

• mortgagee claimed possession of the property

• wife claimed mortgage unenforceable

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case study 2: english

findings

• construction of the contract and enforceability ultimately came down to the definition of “I”

• mortgagee was unsuccessful

• case provides a good summary or other fraud decisions

• matter is on appeal

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claims against third parties

• solicitors

• witnesses

• accountants

• brokers

• mortgage managers and intermediaries

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case study 3: qureshifacts• company borrowed $7M• accountant provided certifications of financial

position and financial statements to mortgagee in support of loan application

• money dissipated• company liquidated• fraudulent directors absconded

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case study 3: qureshi

claims

• lender claimed damages against accountant for misleading, deceptive, negligent and fraudulent conduct

• accountant claimed that, like the lender he was also duped by the fraudsters

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case study 3: qureshi

findings

• Accountant liable to the lender for damages of – $150,914.38 being the money received by him

from the initial advance– $3,082,046.02 in general damages– $150,000 in exemplary damages

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case study 4: hoey

facts

• less than half of loan funds advanced went to benefit of mortgagor

• mortgage originator signed the direction to pay, which resulted in funds being disbursed to a third party

• the fraudster had absconded

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case study 4: hoey

claims

• mortgagor and mortgagee made claims against the mortgage originator pursuant to the Trade Practices Act and the Fair Trading Act

• mortgage originator admitted sending documents to the mortgagee but denied that they constituted representations that the information in them was true

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case study 4: hoey

findings

• the cross claims of the mortgagor and the mortgagee succeeded

• the mortgage originator was ordered to pay the mortgagor $255,236.91

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conclusion

• a mortgage which contains a covenant to pay a specific amount remains the best protection for a mortgagee against fraud

• the enforceability of mortgages which do not contain a covenant to pay a specific amount will turn on their construction

• the Courts are increasingly willing to look to the failings of third parties to compensate innocent parties for losses arising from fraud