A husband wanted to purchase a restaurant but had a bad credit rating so he transferred his home to his wife and then forged her signature on the mortgage to finance his purchase. The loan went into default and the lender claimed possession.
The court found that the wife was a pawn in her husband’s fraud and her defence was a near continuation of that.
The court noted the mortgage was an all monies mortgage and indefeasibility extended only to the covenant for payment in the mortgage, which referred to amounts owing under the loan. Because the loan was a forgery the mortgage secured nothing.
The court next considered whether or not, the wife, held the legal and beneficial title to the house on a resulting trust for her husband. In this regard, the court noted:
- Where a person transfers land to another without any consideration, equity presumes that the property is held by the transferee on a resulting trust for the transferor.
- Where, as here, a husband transfers land to his wife without monetary consideration, there is a rebuttable presumption that the husband intended to convey both the legal and beneficial interest in the land to his wife.
- This in turn may be rebutted by evidence of a ‘definite intention’ by the husband to retain the beneficial title in the land. A definite intention may be proved by evidence which satisfies the ordinary standard of proof, the balance of probabilities.
- Evidence of the parties’ acts and statements before or at the time of the transfer, ‘or so immediately after it as to constitute a part of the transaction’, are admissible to prove a definite intention. Subsequent declarations are admissible as evidence only against the party who made them, and not in his favour.
The main evidence of the husband’s definte intention to retain the beneficial title to the land, was to be found in:
- Instructions he gave to his solicitor that he “wanted to have a situation where the property would be transferred back to him”;
- The fact that he had earlier used a fraudulent valuation of the land in an attempt to borrow more than the land was worth. Such conduct wholly inconsistent with an intention to give Ms Xiao the beneficial interest in the land so that she may treat it as her own.
Having found that the wife held the legal and beneficial title to the house on a resulting trust for the husband, the court also found the husband liable for his fraud for the full amount outstanding under the loan. Accordingly, the husband’s beneficial interest in the land was available to the lender in execution of its judgement against the husband for fraud.
It should be noted, that this did not give the bank a charge over the property and the bank will have to line up with other creditors of the husband.
The court next dealt with the wife’s argument that the loan was unconscionable in as much as the Perpetual’s business model created a structural risk of fraud, and that the use of such a business model falls within the notion of moral obloquy required for statutory unconscionability.
This contention was based on the contractual arrangements between Perpetual, Interstar and originators, which involve the delegation to originators of tasks such as identifying prospective borrowers, collecting relevant information from them, and completing and submitting loan applications. Although originators are, under the contractual arrangements, obliged to comply with a detailed Lending Manual, they are remunerated by commission in respect of submitted loan applications that are approved, which increases the prospects of fraudulent conduct or sloppy lending practices. This risk is increased further by interposing a trust manager (Interstar) between Perpetual and the originator, and the existence of contractual arrangements between Interstar and originators like Capital which entitle Interstar to rely upon the accuracy of the information provided by the originator when determining whether to put a loan application forward for Perpetual’s final approval.
To this the court responded:
I do not accept that the creation of structural risk by such a business model constitutes the necessary ‘moral obloquy’ required for a finding of statutory unconscionability.
The judge found support for this in the case of Tonto Home Loans Australia Pty Ltd v Tavares which we have previously reported on.