Lender's mortgage defeated without knowledge of fraud
Ordinarily the fact that a borrower's signature is forged on a mortgage would not, in the absence of fraud by the lender, affect the lender's ability to rely on the mortgage once it was registered. 'Indefeasibility' of a mortgage once it has been registered is one of the key protections for lenders.
In Perpetual Trustees Victoria Ltd v Xiao1 the Supreme Court of Victoria has resolved conflicting authorities and concluded that where the loan agreement on which a lender relies is forged, the lender cannot rely on its registered mortgage, even in circumstances where the lender had no knowledge of the fraud.
- The Court departed from earlier Victorian Supreme Court decisions which had found that a lender's title obtained on registration of a mortgage was not defeated unless the lender was involved in or knew about the fraud.
- The decision does not affect the indefeasibility of mortgages where the covenant to pay is found in the mortgage rather than any underlying loan agreement.
- The Court preferred New South Wales and New Zealand authorities that consider that mortgages in such circumstances secure nothing because there is no 'secured agreement' and therefore no 'secured money'.
- Ultimately, the lender was entitled to have recourse to the fraudulent party's beneficial interest in the land. However, without that finding the lender would have been left with an unsecured claim against the fraudulent party.
- Whilst the mortgage originator acted unconscionably, the lender was found not to be liable for the originator's actions.
The Perpetual decision
The factual background was complicated and involved numerous parties. In simple terms:
- the wife was born in China and on moving to Australia met the husband. She gave evidence that she spoke limited English and relied on her husband
- the husband transferred certain property to her as part of a strategy to obtain finance in her name
- Perpetual Trustees Victoria Ltd (Perpetual) made loans without any direct dealings with the husband or the wife. Perpetual was the trustee of a number of trusts and invested funds using a trust manager who in turn used a mortgage originator. The originator dealt directly with the husband, but failed to verify that the wife was the borrower or the accuracy of the loan application
- the husband acted fraudulently in obtaining the loans. He did not tell the wife he was obtaining the loans, he forged her signature on the loan documents, mortgage and related documents and otherwise falsified the loan application
- the originator assisted the husband by falsely witnessing the wife's signature and providing a valuation prepared by the husband to the trust manager when it knew the husband was not independent
- the loan went into default and the lender sought possession of the property.
Importantly for lenders, the Perpetual decision resolves a conflict of authority regarding the extent of a lender's security in circumstances where the loan agreements and mortgages are obtained by fraud. Relevantly:
- in the absence of fraud by a lender, the lender has the benefit of the mortgage once it is registered. However, that protection extends only to the covenant for payment contained in the mortgage
- the mortgage provided that it was given in consideration of and to secure loans, advances or financial accommodation provided by Perpetual to the borrower (the wife). However, no loans were provided by Perpetual to the wife as she was unaware of the loan documents and they were forged
- the thrust of the earlier New South Wales' decisions was that, where the loan agreement on which the lender relies is forged and therefore void, there is no 'secured agreement' and therefore no 'secured money', being the terms commonly appearing in common provisions. In particular:
- in Perpetual Trustees Victoria Ltd v English & Anor 2, the New South Wales Court of Appeal considered that a mortgage secured nothing where a husband forged his wife's signature on the mortgage and loan agreement as there was no agreement between the lender and the borrower at the time the mortgage was executed
- in Perpetual Trustees Victoria Ltd v Cox 3, the Court of Appeal in New South Wales held that a mortgage secured nothing, even though the mortgage itself was not forged. The court considered that it was sufficient that a direction to draw down one of three facilities under the terms of the mortgage had been forged.
- In contrast, in Solak v Bank of Western Australia Ltd 4, the Supreme Court of Victoria had reached a contrary conclusion on the basis that the reference to 'you' in the mortgage, memorandum of common provisions and loan agreement was the forger purporting to be the registered owner of the property
- prior to this, in Vassos v State Bank of South Australia 5, the Supreme Court of Victoria held that title obtained on registration of a forged mortgage cannot be defeated on the grounds of fraud if the mortgagee was not a party or privy to the fraud. In Pyramid v Scorpion Hotels 6, the Court of Appeal followed the Vassos decision, albeit in slightly different circumstances
- the Perpetual decision rejected the earlier Victorian cases and adopted the New South Wales position.
Perpetual was ultimately saved as the court considered that it could have recourse to the husband's beneficial interest in the property in recovering the debt. This was because the court considered that the husband retained a beneficial interest in the property after it was transferred.
Trying to address the deficiencies in its case, Perpetual argued that the wife had authorised the husband as her agent to sign the loan agreements, had ratified the loan agreements or should be estopped from denying that the mortgage secured repayment of the loans. Perpetual was unsuccessful on those grounds. In particular, the court confirmed that a forged agreement is a nullity and is incapable of ratification.
The court also referred to the decision of the Court of Appeal of New South Wales in Tonto Home Loans Australia Pty Ltd v Tavares7 in considering whether Perpetual acted unconscionably through the actions of the trust manager and mortgage originator. Ultimately, whilst the court had no hesitation in concluding that the originator acted unconscionably, Perpetual itself did not act unconscionably and was not liable for the originator's actions.
Of concern for lenders, the decision emphasises that the benefit of a registered mortgage can be lost even where a lender has no knowledge of any fraud. Perpetual was left effectively unsecured and was saved only by a finding that the husband retained a beneficial interest in the land.
Beyond this, the decision is also a warning for lenders who use third party mortgage originators. The court rejected legal criticisms of Perpetual's business model and the trust manager's failure to make inquiries with the originator about the loan. However, in practice the originator's conduct caused Perpetual to lose the benefit of its mortgage. Fraud is often very hard to detect, but lenders need to ensure their systems minimise the risk of loans being granted in circumstances such as these.
1.  VSC 21
2.  NSWCA 32
3.  NSWCA 328
4.  VLC 82
5.  2 VR 316
6.  1 VR 198
7.  NSWCA 309
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