Forged mortgage and loan documents give rise to a mortgage which secures nothing

Submitted by Andrew Kirby and Kieran Hickie

Perpetual Trustees Victoria Limited v Xiao & Others

Justice Hargrave has declined to follow the earlier decision of Justice Pagone in Solak v Bank of Western Australia Ltd [2009] VSC 82. The cases involved the construction of a registered “all monies” mortgage which included a forged mortgage document and a forged loan agreement. Justice Hargrave followed New South Wales Court of Appeal decisions in holding that the mortgage effectively secures nothing because the underlying loan documents had been forged.

The case involved a married couple; the first defendant (Ms Xiao) and the second defendant (Mr Fitzgerald). Mr Fitzgerald required finance to make an investment in a Chinese restaurant in Burwood. He was the registered proprietor of a property in Vermont, however he had a poor credit history and knew that he was unlikely to get finance in his own name. He therefore transferred the Vermont land to Ms Xiao, subject to a “re-transfer” document and a deed of trust which were contested at trial.

Mr Fitzgerald then went about obtaining finance from the plaintiff through a mortgage originator, Capital Securities (Aust) Pty Ltd (Capital). Mr Fitzgerald obtained a loan in the name of Ms Xiao from the plaintiff lender that was secured over the Vermont property. Justice Hargrave found that Ms Xiao was a pawn in Mr Fitzgerald’s fraud, in that he had forged numerous documents associated with the obtaining of the finance from the plaintiff.

There was a subsequent default on the loan and the plaintiff took steps to enforce its mortgage. Justice Hargrave considered himself bound to follow the reasons of the New South Wales Court of Appeal in Perpetual Trustees Victoria Ltd v English and Anor [2010] NSWCA 32 and Perpetual Trustees Victoria Ltd v Cox [2014] NSWCA 328 where the relevant mortgage and loan documents were in similar terms. The New South Wales decisions held that, whilst the mortgage document may have had indefeasibility under the Torrens legislation, the mortgage secured nothing as the loan documentation had been forged.

The case involved a married couple; the first defendant (Ms Xiao) and the second defendant (Mr Fitzgerald). Mr Fitzgerald required finance to make an investment in a Chinese restaurant in Burwood. He was the registered proprietor of a property in Vermont, however he had a poor credit history and knew that he was unlikely to get finance in his own name. He therefore transferred the Vermont land to Ms Xiao, subject to a “re-transfer” document and a deed of trust which were contested at trial.

Mr Fitzgerald then went about obtaining finance from the plaintiff through a mortgage originator, Capital Securities (Aust) Pty Ltd (Capital). Mr Fitzgerald obtained a loan in the name of Ms Xiao from the plaintiff lender that was secured over the Vermont property. Justice Hargrave found that Ms Xiao was a pawn in Mr Fitzgerald’s fraud, in that he had forged numerous documents associated with the obtaining of the finance from the plaintiff.

There was a subsequent default on the loan and the plaintiff took steps to enforce its mortgage. Justice Hargrave considered himself bound to follow the reasons of the New South Wales Court of Appeal in Perpetual Trustees Victoria Ltd v English and Anor [2010] NSWCA 32 and Perpetual Trustees Victoria Ltd v Cox [2014] NSWCA 328 where the relevant mortgage and loan documents were in similar terms. The New South Wales decisions held that, whilst the mortgage document may have had indefeasibility under the Torrens legislation, the mortgage secured nothing as the loan documentation had been forged.

In Solak v Bank of Western Australia Ltd [2009] VSC 82, Justice Pagone reached a contrary conclusion to the New South Wales decisions on the basis of a construction of the mortgage, memorandum of common provisions and loan agreement, which all defined the mortgage/borrower as “You” and “You” was in each case the forger purporting to be Mr Solak.

Justice Hargrave declined to follow the Solak decision on the basis that it was plainly wrong.

However, Justice Hargrave went on to find that Ms Xiao held the loan on trust for Mr Fitzgerald. His Honour also found that Mr Fitzgerald was liable to Perpetual for defrauding it. The combined effect of these conclusions was that while the mortgage secured nothing and was held on trust by Ms Xiao for Mr Fitzgerald, Perpetual was entitled to have the value of the land applied in discharge of Mr Fitzgerald’s liability to it as a fraudster.

In obiter dicta Justice Hargrave also found that Ms Xiao did not authorise Mr Fitzgerald to sign the loan agreements and she could not ratify the loan agreements as they were forged. Justice Hargrave also found that the plaintiff was not prevented from enforcing the loan by reason of unconscionable conduct by Capital as the mortgage originator or itself.

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