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LPLC: Form matters

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Cite as: (2008) 82(9) LIJ, p. 78

Practitioners should be warned that “all monies” mortgages may be worthless security when fraud occurs.

The recent judgment in Vella v Permanent Mortgages Pty Ltd [2008] NSWSC 505 reminds practitioners of the risks in using “all monies” mortgages when documenting loans, and that this form of mortgage is inappropriate for some transactions.

“All monies” mortgages

An “all monies” mortgage purports to operate as security for all monies due from the borrower to the lender on any account, past, present or future, rather than a specified sum. Typically, the mortgage refers to a separate loan agreement entered into between the parties detailing the terms of the loan.

The risk for practitioners arises in relation to fraudulent mortgage transactions where the registered proprietor’s signature on the mortgage and loan agreement is forged.

Under the Torrens system of title by registration, a mortgage is indefeasible even if it is forged, and can be enforced unless the mortgagee itself is guilty of fraud or wilful blindness. By contrast, a loan agreement separate from the mortgage does not enjoy indefeasibility – a forged loan agreement
is void.

Vella confirms that although the mortgage will be indefeasible, it may be worthless security because it secures nothing.1

Although Vella is a NSW decision, the principle applies equally in Victoria as there are similar Torrens system provisions under the Transfer of Land Act 1958 (Vic).

Facts

In Vella, a fraudster forged Vella’s signature on a sequence of mortgages given as security to a number of different lenders, including one for a two-month loan of $1.1 million from Mitchell Morgan Nominees Pty Ltd.

An “all monies” mortgage was prepared by Mitchell Morgan’s solicitor, together with a separate loan agreement, and sent to a solicitor (Flammia) who was purporting to act for Vella in connection with the loan.

In fact, Vella knew nothing at all about the loan. His signature on the documentation was forged by the fraudster, who had also persuaded Flammia to falsely certify having identified Vella and witnessed the signing of the documents.

Mitchell Morgan’s mortgage defined the “secured money” as being “all amounts that are or may become owing by you to the mortgagee under any agreement between you and the mortgagee now or in the future”. There was also a separate annexure to the mortgage by which the mortgagor agreed that the moneys owing to the mortgagee by the mortgagor under the loan agreement formed part of the “secured money” referred to in this mortgage.

There was nothing on the face of the mortgage, or that could be regarded as incorporated by reference, identifying a specific sum due from the lender to the borrower as being secured by the mortgage.

Vella therefore succeeded in his claim to set aside the mortgage. Although the mortgage was indefeasible, it secured nothing because the separate loan agreement was void.

Lender pursues solicitor

The lender, Mitchell Morgan, then sued its solicitor for breach of duty in preparing what had turned out to be a worthless mortgage. It argued that the solicitor should have prepared a conventional form of mortgage expressly referring to a loan of $1.1 million, and if this had been done it would have had an indefeasible mortgage entitling it to sell the property and recover the monies lent.

The lender’s claim against the solicitor was successful. The court found that the solicitor had used the “all monies” form of mortgage as a matter of rote, without advising its client that it might be rendered worthless in the event of a fraud. The solicitor should have prepared a conventional form of mortgage specifically referring to the advance of $1.1m or at least pointed out the risk of using the mortgage that was used.

Damages

The court was required to apportion the loss among “concurrent wrongdoers” under proportionate liability legislation in NSW (the Victorian equivalent is s24AI of the Wrongs Act 1958 (Vic)) and limit judgment against the solicitor to the amount that was just and reasonable having regard to his responsibility for the loss.

The solicitor was therefore held liable for only 12.5 per cent of the loss, with the fraudster taking 72.5 per cent and Flammia the remaining 15 per cent.

Lesson

The message for practitioners preparing mortgage documentation is to carefully consider the form of mortgage to use.

Because the possibility of fraud can never be entirely discounted, even with some of the more advanced checking systems now often used, financiers using “all monies” forms of mortgage will be susceptible to the mortgage being defeated.

Practitioners should warn financiers of this risk and make sure that any decision to use an all monies mortgage is with an appropriate transfer of the risk back to the financier.

In transactions where the loan is for a specified sum and finite duration, it is more appropriate to use a form of mortgage which identifies on its face the amount of the advance, date of repayment, interest rate, covenant to pay, and expressly incorporates the memorandum of common provisions.

This column is provided by the LEGAL PRACTITIONERS’ LIABILITY COMMITTEE. For further information ph 9670 2001 or visit http://www.lplc.com.au.

1. Other recent decisions in NSW involving forged mortgages have applied the same principle – see Perpetual Trustees Victoria Ltd v Tsai [2004] NSWSC 745; Chandra v Perpetual Trustees Victoria Ltd [2007] NSWSC 694; Yazgi v Permanent Custodians Ltd [2007] NSWCA 240; Provident Capital Ltd v Printy [2008] NSWCA 131. These cases are also consistent with the High Court decision of Queensland Premier Mines Pty Ltd v French [2007] HCA 53.

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