Marino Law | Gold Coast Law Firm

Mortgagee’s reasonable steps not so reasonable

In C & F Nominees Mortgage Securities Ltd v Karbotli & Ors [2020] VCC 987 (the “Proceedings”) the County Court of Victoria has determined that a mortgagee of a mortgage procured by fraud failed to take reasonable steps as required pursuant to section 87A of the Transfer of Land Act 1958 (Vic) (the “TLA”) to verify the authority and identity of the mortgagor to ensure that the person executing the mortgage as mortgagor was the same person who was the registered proprietor of the land the subject of the mortgage.

As a consequence of the mortgagee’s failure to comply with its obligations pursuant to section 87A of the TLA, in accordance with sections 87(3)(b) and 103(1) of the TLA, the Registrar of Titles can now be ordered to remove the mortgage from the title rendering that mortgage void pursuant to section 87A(5) of the TLA. Orders to that effect will shortly be submitted to the Court.

The result represents a substantial victory to our client Ms Issa, as was noted by His Honour Judge Macnamara.

Facts

By mortgage registered on 3 April 2017, Hend Karbotli, also known as Hind Issa (“Ms Issa”), mortgaged a property in Bullen, Victoria (the “Property”) to secure a principal sum of $800,000.00 advanced by C & F Nominees Mortgage Securities Ltd (“C & F”) to Mazop Pty Ltd (“Mazop”), a company operated by Ms Issa’s son James Karbotli.

Mazop ultimately defaulted in the payment of principal and interest to C & F. As a consequence of Mazop’s default, on 22 November 2017, C & F issued a Notice to Pay that was not complied with by Ms Issa. Accordingly, C & F commenced the Proceedings against Ms Issa claiming that, amongst other things, it was entitled to possession of the Property pursuant to sections 78 and 81 of the TLA.

In her defence and counterclaim, Ms Issa argued that she did not sign, or authorise anybody else to sign, the mortgage to C & F.  Ms Issa claimed that the mortgage was fraudulently signed by her son without her knowledge. Ms Issa argued that C & F failed to take the reasonable steps to verify her identity as required at section 87A of the TLA such that the mortgage was void. In the alternative, Ms Issa claimed that if C & F did in fact comply with its obligations at section 87A of the TLA, she was entitled to be compensated by the Registrar of Titles pursuant to section 110 of the TLA in circumstances where she would have lost the Property as a consequence of fraud.

Forgery

Ms Issa gave evidence at the trial that she did not sign the mortgage. That evidence was not challenged during cross-examination. There was also unchallenged evidence from a handwriting expert to the effect that the signature on the mortgage was not Ms Issa’s. Based on those matters, His Honour Judge Macnamara proceeded on the basis that Ms Issa’s signature on the subject mortgage was a forgery.

Reasonable Steps

C & F argued that it had complied with its obligations at section 87A of the TLA. In doing so C & F relied upon:

  • material generated by a “100-point check” being a copy of the biographical page of Ms Issa’s passport, a copy of Ms Issa’s Medicare Card and a copy of Ms Issa’s expired driver’s licence;
  • various documents such as a certificate of insurance, bank statements and statements from the Australian Taxation Office; and
  • a solicitors certificate from Stephen Picken, a practising solicitor in Queensland at the time.

His Honour held that the documents at (a) and (b) above enabled C & F to establish that Ms Issa was a real person whose name had been variously recorded over the years. However, His Honour determined that, in themselves, those documents were incapable of establishing that Ms Issa was the person who purported to execute the mortgage.

The document that C & F relied upon to establish that Ms Issa was in fact the person who purported to execute the mortgage was the solicitor’s certificate at (c) above. In that certificate, Mr Picken certified that:

  • he had been asked to interview Ms Issa;
  • he had explained to Ms Issa, before she signed the requisite documents, the general nature and effects of the documents including the risk of loss of any security property;
  • Ms Issa had stated to him that she:
    • understood the general nature of the documents; and
    • was signing the documents freely and voluntarily and without pressure from any other persons; and
  • it appeared to him that Ms Issa had understood the general nature of the documents.

There was unchallenged evidence at trial that Mr Picken had not in fact conducted a face to face interview with Ms Issa. Despite that admission, C & F argued that it was entitled to rely on the representations contained in the certificate.

His Honour determined that reliance on the certificate was not a reasonable step pursuant to section 87A of the TLA. In reaching this conclusion, His Honour noted that the certificate was not framed for the purposes of verifying a mortgagor’s identification. In this regard, the certificate contained no representations that the person signing the mortgage was one in the same as the registered proprietor. The certificate was framed for the purposes only of establishing that the mortgagor had been given advice as to the nature of the documents she was signing and that she understood that advice.

Based on the above matters, His Honour determined that C & F did not comply with its obligations at section 87A of the TLA.

Mortgage Secures Nothing

In her defence, Ms Issa also argued that the mortgage, on its proper construction, secured nothing. Ms Issa argued that the covenant to repay any debt to C & F was premised upon the money having actually been advanced to, and received by, Ms Issa, being the borrower on the face of the mortgage. Ms Issa further argued that in circumstances where no money was actually advanced to her, there was simply nothing to which the alleged debt could attach.

After reviewing a number of relevant authorities, His Honour agreed with the above arguments.

Indemnity Claim

Pursuant to section 110 of the TLA, the Registrar of Titles is liable to indemnify any person who suffers loss or damage a consequence of being deprived of an interest in land.

Given the findings with respect to section 87A of the TLA, His Honour held that he did not have to address the broad issue of indemnity as Ms Issa had not been deprived of the Property by fraud. However, His Honour considered that a question remained as to whether Ms Issa could recover the outlay by way of costs which she had made in the proceeding to the extent that they are not recoverable from C & F.

During the trial the Registrar argued that, pursuant to section 110(3)(b) of the TLA, it was only required to indemnify Ms Issa with respect to costs incurred in the proceeding if the Registrar had in fact consented to her defending those proceedings. The Registrar argued that it had not provided that consent.

Ms Issa argued that, prior to defending the Proceedings, she had written to the Registrar pursuant to section 87A(3)(b) of the TLA asking that the mortgage be removed from the title to the Property in circumstances where the mortgage had been fraudulently executed and where C & F had failed to comply with its obligations at section 87A of the Act. In response to that request, the Registrar advised Ms Issa that it was a matter for the courts to decide whether section 87A of the TLA had been complied with and that the Registrar’s discretion to remove the mortgage would not be exercised.

Ms Issa argued that the Registrar’s response constituted an acquiescence to her defending the proceeding such that the Registrar had in fact consented in accordance with section 110(3)(b) of the TLA. His Honour agreed with Ms Issa’s arguments and determined that any unrecoverable legal costs incurred by Ms Issa could form part of any relief claimed by her pursuant to section 110(3)(b) of the TLA. In this regard His Honour noted that any such indemnity was partially dependent on the costs order to be made in the Proceedings and that the parties should be entitled to make further submissions and perhaps adduce further evidence following the publication of his reasons.

C & F also claimed that if the Court determined that it had not complied with section 87A of the TLA, it was entitled to be indemnified pursuant to section 110 of the TLA in circumstances where it would suffer a loss as a consequence of the mortgage being set aside. C & F argued that it was a victim of a sophisticated fraud. In response to this claim, the Registrar argued that, pursuant to section 110(3)(a) of the TLA, it was not required to indemnify C & F for any loss in circumstances where that loss was substantially caused by its own  neglect. His Honour agreed with the Registrar’s arguments and refused C & F’s claim for indemnity.

Implications

The decision is a timely reminder to financiers of the importance of taking appropriate steps to verify the identity of parties entering into mortgage transactions. This is particularly so given the significant financial consequences that can flow in circumstances where a mortgage is held to be void.

This decision also confirms that any unrecoverable legal costs that a party incurs as a consequence of a fraudulent mortgage being registered on title can form part of an indemnity claim pursuant to section 110 of the TLA. However, to be eligible for such a claim, the Registrar of Titles must first consent to the commencement or defence of the proceedings.

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