The lender advanced two loans for the benefit of a third party developer/fraudster secured on properties owned by two brothers. The lender sued for the debt owing and possession of the properties, one of which was the brothers’ home and source of income. Both brothers had no previous commercial experience in mortgages or property development and lived a primitive lifestyle with small earnings and no savings. The two unsophisticated brothers were taken advantage of by the fraudster who engaged in land development and she prevailed upon them to borrow money for her on the security of their properties. She requested the lender to send letters of offer to them and the lender made no enquiries as to their capacity to service the loan. The lender sent the loan and mortgage documentation to the fraudster’s solicitor, without checking that the brothers had retained this solicitor. The borrowers sought to set aside the loan and mortgages on the basis of a Contracts Review Act defence.
The court found the fraudster to be “manipulative, greedy and an exploiter of the vulnerable”. The court found that the fraudster completed the statement of personal particulars giving grossly inflated incomes for the brothers, and it was likely completed after she obtained the two brothers’ signatures to it in blank form. The same occurred with the asset and liability statement, which incorrectly stated no liabilities, even though the loan was to refinance an existing mortgage. The court found that this discrepancy should have raised doubts in the lender’s mind about the accuracy of the information.
The court noted that neither the lender nor the solicitor explored why the monies were to be paid to entities associated with the fraudster when the brothers were granting security over all their land. The court found that the brothers had no financial interest in the developments. The court found that the brothers did not have time to read the documents and the solicitor did not provide any proper and independent legal advice to the borrowers. The court accepted that the borrowers did not understand that they were the only borrowers and mortgagors. The court accepted their evidence that they had understood the fraudster to be the borrower and their property was being used as security of last resort because they had incorrectly been led to believe that the fraudster was offering her property as first security and there was no realistic prospect of their property being taken. The court noted that it was not the first time the borrowers had been persuaded to offer their property as security for the fraudster but the other loans had been paid out and this would not have assisted their understanding of the risks.
The court found that even on the inflated incomes falsely stated, the lender did not and could not have expected the borrowers to be in a position to repay the loan, other than from the sale of the properties. Their ability to repay on their actual incomes made repayment impossible. The court did accept the lender’s conclusion that the brothers were joint venturers with the fraudster because there was no basis to do so. The court found that the lender knew that the fraudster was not the niece of the borrowers as indicated in the application documents.
The court found the loan to be pure asset lending because the lender was not concerned with the risks of the mortgage, namely whether the development would return sufficient funds to repay the loan and whether the borrowers had any rights to the proceeds of sale of the development.
The court found that the loan and mortgages were unjust for the following reasons:
- Material inequality between the lender and borrowers;
- There was no reasonably practical opportunity for negotiation of the terms;
- The borrowers were not able to reasonably protect their own interests given their age and lack of education and commercial sophistication;
- The lender was in a superior and dominant position;
- The legal advice given was wholly inadequate and not independent;
- The properties were the sole residence and income of the brothers.
- The structure of the loan – the LVR was 80% on a forced sale – meant the entire equity in the property would be removed by the penalty interest after default.
- The lender’s primary reliance on the proceeds of the development as repaying the loan was problematic because they made no enquiries about it and had no information.
- Breaches of the lender manual were of some but limited weight
- The borrowers received no financial benefit from the loan.
The court did not regard the fact that the monies were used to discharge an existing mortgage as an unwarranted benefit to the brothers because that loan being discharged was itself unjust and liable to be set aside for the following reasons:
- The loans had the same features;
- The brothers received no financial benefit for offering their land as security;
- The brothers had no real knowledge of the fraudster’s financial position or the risk they were taking on;
- They received no independent legal advice;
- They had no real independence in considering the loan;
- The inability to repay the loan other than through a sale of properties which were their sole residence and source of earnings.
However the court found that the settlement monies received from the solicitor who they sued, after a proper deduction of legal costs, was a financial benefit and ordered that such excess should be paid to the lender because that would restore the borrowers to their former position but not give them a bonus or profit.
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This case was appealed.