The evidence, although inconclusive, strongly suggested that the broker forged a drawdown request sent to the lender’s solicitor. The money was transferred, as per the direction, to a bank account under the broker’s control. As the borrowers did not obtain the benefit of the loan, the bank was not granted possession.
On appeal the bank made three independent arguments. Firstly, that, notwithstanding the fraudulent direction, the debt was, on the proper construction of the mortgages, secured (an indefeasibility argument). Secondly, the borrowers had, by their subsequent conduct, ratified the drawdown. Thirdly, that the primary judge erred in failing to find that the direction had been signed by the husband.
Bransgroves has been warning lenders for some time about the risks of lending with “all monies mortgages”. That is, if the external loan agreement is forged then the mortgage secures nothing. The Court in this case noted that you must go beyond just having the facility amount in the schedule to the registered mortgage and examine the drafting of the mortgage as a whole to see exactly what the mortgage secured.
On this basis the Court reasoned:
- there was no free standing obligation to repay the full facility amount. Rather there were repeated references to the memorandum which contained a regular “all monies” structure incorporating a separate facility agreement;
- the use of the word “repay” limited the reach of the covenant to repaying what the boorrwers had actually borrowed, not to paying that which the lender had been duped into advancing to the fraudster.
- the loan provided a 30 year term for the borrowerss to repay the monies that they actually received, therefore it would be “commercial nonsense” to accept an interpretation that made them liable to pay, on demand, monies they had never actually received;
- that supposing the bank or it solicitors mistakenly (rather than as a result of the broker’s fraud) advanced the monies to another party. In those circumstances it would impossibly strain the wording of the covenant to oblige the borrowers to repay that amount, and there is no valid reason why a different construction would apply in the circumstances of the broker’s fraud.
The Court also noted that the loan had not been ratified because the borrowers did not have full knowledge of all of the material facts. That included knowing that a forged direction to pay had been used to divert funds to the brokers account.
Accordingly, the bank was unsuccessful and the appeal was dismissed.
A properly drafted mortgage could have protected the lender in this case. We are mortgage experts and have procedures for avoiding fraud. Call Bransgroves to discuss purchase of our security documents license or for us to act on your advances.
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