Hilton v Gray[2007] QSC 401

SUPREME COURT OF QUEENSLAND

1. Douglas J:  This story is set in the demimonde of low finance, of high interest, short term loans granted by demanding lenders to desperate borrowers.  Mr Hilton, one of the plaintiffs, is a mortgage broker, private lender and investor.  He was formerly a Sydney solicitor.  He and his wife, Katherine Briscoe, the other plaintiff, believed they were lending money to the first defendant, Mr Gray, to be lent on to Mr Gray’s step daughter, the fourth party Shella Lonergan.  Mr Gray knew nothing of the loan.  In fact Mrs Lonergan, the parties agree, forged Mr Gray’s signature to the mortgage and used the money for her own purposes.  Most of it went to a company called Sonik Securities & Investment Pty Ltd of which more anon. 

2. The plaintiffs want their money back with interest. Mr Gray does not wish to pay it to them and nor does the third party, the State of Queensland, which is responsible for compensating Mr Gray under s. 188 of the Land Titles Act 1994.  The State of Queensland also conducted Mr Gray’s defence, in effect as his insurer.  The second defendant, the Registrar of Titles who lodged a caveat over the land will abide the order of the Court.  Mrs Lonergan took no part in the proceedings. 

3. The important factual issue to determine is whether knowledge of the forgery, or a state of mind amounting to reckless indifference as to whether the mortgage was forged, can be imputed to the plaintiffs because of the behaviour of their agents. The people said to be the plaintiffs’ agents are their solicitors, Hickey Lawyers, and a “facilitator”, a Mr Sultan, another former solicitor, who at the time of the trial was awaiting sentence in a prison in New South Wales on a charge of making false use of documents. 

4. Mr Sultan introduced the transaction to Mr Hilton. He was a facilitator in the sense that he would be contacted by people requiring short term bridging loans and would put them in touch with private lenders such as Mr Hilton. Mr Hilton admitted that Hickey Lawyers were his agents but denied that allegation in respect of Mr Sultan.

5. The amendments to the Land Title Act 1994 introduced in s. 185(1A) and s. 11A requiring reasonable steps to be taken to ensure the person who executed the instrument as mortgagor is identical with the person who is, or who is about to become, the registered proprietor of the lot or the interest in a lot as a necessary condition to obtaining an indefeasible title did not affect this transaction. 

Details of the transaction

6. Mr Hilton had previously lent money to a man called Kasim Schedue as well as to Sonik Securities. They were both behind in their interest payments. The loan to Mr Gray was, Mr Hilton believed, to be on-lent to Mrs Lonergan to pay off Sonik Securities, as he told Hickey Lawyers in an email of 14 April 2005. He admits that those solicitors were his agents and, in that email, told them that “Maya from waynes(sic) office is best to liaise with”, something relied on by the State as evidence that Wayne Sultan was his agent also. Mr Hilton did about 20 to 30 such transactions in Queensland during 2005.

7. Hickey Lawyers were told initially, probably by Mrs Lonergan, that a solicitor called Mr Joseph Ho was acting for Mr Gray. Ms Nicole Capper at Hickey Lawyers was handling the transaction as a paralegal. She had been admitted as a solicitor in New South Wales at the time but was not then admitted in Queensland.  She was working under the general supervision of Mr Mark Lacy, a partner of the firm.

8. A draft set of documents was emailed to Mr Ho. He printed them but he was not instructed to act on behalf of Mr Gray. He saw Mrs Lonergan, told her he would need to see Mr Gray and was told by her that her parents wanted to see a solicitor in the city for reasons of convenience. He told Nicole Capper on 22 April 2005 that he had not been instructed to act. That was two days after the documents had been returned to Hickey Lawyers by Mrs Lonergan, apparently executed, and one day after the mortgage was registered on 21 April 2005.

9. Mr Ho also told Nicole Capper on 22 April 2005 that he had not signed the independent solicitor’s advice contained in the collection of documents. She had not picked up that fact before completing the transaction and arranging for the registration of the mortgage. She was embarrassed that she did not pick up the fact that the independent solicitor’s certificate was unsigned and felt sick when she realised later, on 14 July 2005, that a fraud had been perpetrated on her client.

10. Mr Hilton had been asked initially to lend $100,000 as a first mortgage on a property said to be worth $300,000-$400,000, but the amount lent became $176,000. The loan was made on 20 April 2005 and disbursed as follows:

1. $22,399 to a joint bank account in the names of Shella Anastasia Lonergan and Paul John Lonergan, her husband;

2. $125,000 to a bank account in the name of Sonik Securities, in repayment or reduction of a loan Mrs Lonergan owed to Sonik Securities;

3. $17,600 to the plaintiffs as a prepayment of interest;

4. $8,000 to Mainvista Pty Ltd, a company associated with Mr Sultan, as a broker’s fee;

5. $2,935 to Hickeys Solicitors for solicitors’ costs and outlays on the transaction. 

11. No money was paid to or for the benefit of Mr Gray.

12. The mortgage charged Mr Gray’s land with the “repayment/payment” to the plaintiffs of all sums of money referred to in item 5 which itself referred to the definition of “Secured Money” in the schedule. “Secured Money” included the principal sum lent, “including interest”. There was no interest rate recorded in the mortgage and, because of the forgeries of Mrs Lonergan, there were no valid loan agreements or other contracts between the plaintiffs and Mr Gray; Porter v Latec Finance Pty Ltd (1964) 111 CLR 177, 195; Shogun Finance Ltd v Hudson [2004] 1 AC 919.  The amount of the principal was recorded in the mortgage as $176,000.

13. There was a second advance increasing the principal from $176,000 to $206,000 on 24 May 2005. An amendment to the mortgage reflecting that fact was registered on 10 June 2005. Between the initial loan and the second advance Mr Lacy discussed with Mrs Capper the need to obtain the signed independent solicitor’s advice. Eventually two advices purportedly signed by a solicitor called Jacinta Rose and each dated 24 May 2005 were produced by Mrs Lonergan. One referred to the mortgage and the other to the variation. No solicitor of that name was admitted to practice in Queensland but Hickey Lawyers did not check the name or discover that fact until some time later.

14. The loan was for a brief period, two months. It was not repaid on 20 June 2005 when it was due and, about that time, Mrs Lonergan began to make excuses for the failure to repay. Mr Hilton gave instructions to issue a notice of exercise of power of sale if repayment was not made by 28 June 2005. On 29 June 2005 an email purportedly sent by Mr Gray, made further apologies and excuses for the failure to repay the loan. That document actually came from the same email address as Mrs Lonergan used, a point that was not picked up by anyone until Mr Hilton realised it early in the morning of 14 July 2005. He then became concerned that he had been the victim of a fraud and asked Mrs Capper and Mr Lacy for advice in a facsimile of that date and in later emails.

15. Mr Lacy and Mrs Capper then checked the witnessing of the documents that had apparently been executed by Mr Gray and verified the identity of the justice of the peace whose name appeared on the documents. That justice of the peace assured Mrs Capper that she recalled the name Gray and did not witness signatures unless the person was able to produce some form of photo identification. The justice of the peace confirmed that in her oral evidence. That aspect of the fraud remained a mystery. Perhaps the explanation is that Mrs Lonergan co-opted a man with a false identification document in her stepfather’s name to assist her in her fraud.

16. The police were notified when the fraud was discovered and, at the time of this trial, Mrs Lonergan was facing criminal charges. Until 14 July 2005 neither Mr Lacy nor Mrs Capper suspected that the loan documents had been forged.

17. Hickey Lawyers’ internal procedures designed to help detect and avoid the fraudulent execution of documents had not been followed fully in this transaction. No photo identification had been provided to them and Mrs Capper had not realised that an independent solicitor’s advice had not been provided originally. Neither she nor Mr Lacy appear to have sought appraisals of the property or confirmation of the value of the property although Mr Hilton said that he needed two good appraisals in his email of 14 April 2005 and Mr Sultan indicated in his letter to Mr Gray, c/- Shella Lonergan, by email on 15 April 2005 that one of the conditions of the loan was confirmation of the value of the security.

18. There was an appraisal addressed to Mr Gray on Hickey Lawyers’ file from a real estate agent which Mr Lacy agreed was of limited worth. There was also a document purportedly recording a debit balance in a line of credit available to Mr Gray which did not appear to be authentic even on a superficial examination and could not have been relied on to prove any debt balance owing on the first mortgage on the property. Mrs Capper had not obtained proper evidence of the first mortgage debt before the second mortgage was entered into; nor had Mr Lacy. In fact the compliance with the standards that Hickey Lawyers set for themselves in their own procedural guidelines and in the pre-settlement letter sent to Mr Hilton of 19 April 2005 can only be described as poor.

19. Apart from the other matters to which reference has been made before the loan was settled on 20 April 2005, there were later instances where matters of detail were either not noticed or overlooked. For example, the independent solicitor’s advices contained superfluous and inaccurate references to a “Baker Family Trust” that had nothing to do with Mr Gray and the identity of “Jacinta Rose”, the alleged solicitor whose forged signature appeared on the independent solicitor’s advice was not checked although that could have been done easily by checking the Queensland Law Society Diary, that society’s website or by checking by telephone with the society. Their lax attitude was also reflected in the willingness of Mr Lacy to assert that the plaintiffs were not in the business of making loans and did not provide credit as a part of their normal business activities in letters to the Office of State Revenue relevant to the transactions dealt with in this matter. Those statements seemed quite at odds with the history of the firm’s work for the plaintiffs during 2004 and 2005. No doubt the Office of State Revenue is in a position now to investigate that matter further.

20. Neither Mrs Capper nor Mr Lacy picked up the minor detail that a witness recorded that a relevant statutory declaration had been signed at Coopers Plains rather than in the city. Mr Ho indicated to Mrs Capper on 22 April that the city would have been the likely location of the execution of the documents on what had been told to him. I place no significance on that fact. 

21. Mr Lacy described his job as simply the preparation of the loan documents as, he said, Mr Hilton made his own commercial decisions. Mr Hilton’s evidence at p. 53 ll. 30-42 suggests that he did make such a commercial decision on this occasion. He decided on 19 April 2005, for example, that he did not need a valuation but asked for photos of the property and confirmation of a value appraisal from Mr Sultan.

22. Mr Lacy was also lax about the characterisation of the loan as one having a commercial purpose. If it had such a purpose, then he believed that a standard declaration under the Consumer Credit code would suffice, but he did not consider at all carefully whether a loan to Mr Gray to be lent on to his step daughter for her own purposes could validly be described as one having a commercial purpose. He acknowledged he should have made further inquiries about that issue.

23. Nor did he focus significantly on identifying an “exit strategy” should the loan go bad, something that did concern Mr Hilton and which, he conceded, Mr Sultan would know that he wanted as a condition of the advance. That was in fact recorded as a condition in the letter by Mr Sultan addressed to Mr Gray c/- Stella Lonergan dated 15 April 2005.

Did Hickey Lawyers lodge the mortgage documents recklessly not caring whether they were properly executed?

24. It seemed to me that in their dealings with Mr Hilton and notionally with Mr Gray through Mrs Lonergan, Mr Lacy and Mrs Capper were acting honestly, if incompetently, rather than recklessly not caring whether the mortgage documents were properly executed or not. This seems to me to be the appropriate analysis of their behaviour in respect of the $30,000 second advance also. By the time that was made on 26 May 2005 the forged independent solicitor’s certificates had been obtained, even if more than a month after Mrs Lonergan promised to provide them, but neither Mr Lacy nor Mrs Capper had yet realised the fraud being perpetrated by Mrs Lonergan.

25. Mrs Capper also explained her failure to try to contact Mr Gray directly because she believed it was not uncommon for a mature child to help her parents with business procedures such as these. It was something she did for her own parents. The address to which Mrs Lonergan said the documents were to be sent was a post office box although Hickey Lawyers did have Mr Gray’s personal address available on their file. His telephone numbers were not listed in the directory. It seems clear, however, that neither Mr Lacy nor Mrs Capper at that stage felt that the circumstances were such as to alert them to the need to contact Mr Gray directly.

26. The two versions of the nature of the transaction recorded by the solicitors in ex. 4 at pp. 17 and 26 were also relied on by the defendants to argue that they were turning a blind eye to the potential for fraud. The first, on 14 April 2005, was that it was a loan for Mr Gray to on-lend to pay off Mr Schedue. The second, on 15 April, was that it was a loan to relatives of Mr Schedue “for the purpose of lending to Sonik/Schedue to reduce the Sonik/Schedue loans.” The variance may reflect an attempt to allow the transaction to be characterised as a business loan to take it out of the regulatory regime appropriate for consumers but that does not seem to me to lead to the conclusion that those solicitors should have realised the basically fraudulent nature of the application.

27. In my view the evidence does not warrant the conclusion that they were reckless rather than careless in accepting what was presented to them by Mrs Lonergan at face value. The documents had been witnessed by a justice of the peace, something relied on in particular by Mr Lacy when he was taxed with the fact that the independent solicitor’s letter had not come back signed when the advance was made. He felt that, by then, his client had a properly executed mortgage which had been registered which led him to the view that his client’s interests were protected.

28. To conclude that they were reckless rather than careless would, in my view, be the result of applying the benefits of hindsight to the analysis of a not especially remarkable but fast moving transaction at the time.

Did Mr Sultan connive at Mrs Lonergan’s fraud?

29. Mr Sultan had also acted as a facilitator for the four loans made to Mr Schedue and Sonik Securities. He considered himself to be independent of both borrower and lender. The form signed by the applicant for finance in this case included an acknowledgement that a company for which Mr Sultan worked, Nation Finance Pty Ltd, had not acted as the applicant’s agent. He described Nation Finance as a private moneylender. His mandate fee, or that of another company associated with him, Mainvista Pty Ltd, commonly came out of the loan moneys advanced. That occurred in respect of the loan the subject of these proceedings also.

30. He was approached by Mrs Lonergan, apparently acting for her step father, but an email of 14 April 2005 sent by her to him also may be interpreted as a request for bridging finance by her and her husband. It referred to Mr Lonergan’s property at Coopers Plains being indebted to another company in the amount of $496,900 on a value of $500,000 when Mr Gray’s property was said to be encumbered to $60,000 only on a property valued by her at $995,000.  In that email she proposed a one month loan. 

31. It was suggested to Mr Sultan that he changed the identify of the borrower from Mr and Mrs Lonergan to Mr Gray but he denied that and pointed to a form apparently signed by Mr Gray as identifying him as the real borrower. He said that he relied on what he was told by Mrs Lonergan to form the belief that Mr Gray was the borrower. He also relied on the checks he expected would be done by solicitors for the borrower and the lender. His experience with Mr Hilton was that he required borrowers to use solicitors.

32. He was aware that some desperate borrowers may engage in deception but was not alerted to that possibility by his communications with Mrs Lonergan. Curiously, but, in my view, only coincidentally, on the evidence available to me, the charge of which he was convicted recently in New South Wales related to his use of a forged mortgage to induce another man to settle a loan to the prejudice of the registered proprietor of the mortgaged land. A claim against the equivalent New South Wales insurance fund maintained by their Registrar of Titles had also been made in that case. 

33. Although one could infer from the circumstances of the approach by Mrs Lonergan to Mr Sultan, that the email of 14 April 2005 proposed a loan to Mr and Mrs Lonergan with the property of Mr Gray offered as a collateral security and that it would have been facilitated by making Mr Gray the borrower rather than a guarantor because of the amount of equity he had in his property, I do not think that it is appropriate to conclude that Mr Sultan restructured the loan for that purpose, anticipating that Mr Gray’s signature would be forged, rather than Mrs Lonergan realising it herself and then forging Mr Gray’s signature to the application.

34. In my view there is no reliable evidence from which I could conclude that Mr Sultan turned a blind eye to any potential for fraud in the transaction. He was a facilitator and introduced the borrower to the lender in circumstances where he was told by Mrs Lonergan that her stepfather was to be the borrower and where he was entitled to expect that any necessary checking of the identity of the borrower would occur because of the involvement of solicitors and the necessity for documents to be witnessed. The mere fact that his own conviction shows that he knows how to defraud the system, temporarily at least, goes nowhere near establishing that he connived at Mrs Lonergan’s fraud or turned a blind eye to it.

35. His evidence that he was told by Mrs Lonergan that her father was going to borrow the money to help her out is consistent with what she told Mrs Capper and Mr Ho. The logical inference is that it was Mrs Lonergan who devised the fraudulent scheme and lied to everybody else.

Agency of Mr Sultan

36. I have already referred to Mr Hilton’s email of 14 April 2005 where he told Hickey Lawyers that “Maya from waynes(sic) office is best to liaise with”.  That is relied on by the defendants as evidence that Wayne Sultan was Mr Hilton’s agent. Mr Hilton did about 20 to 30 such transactions in Queensland during 2005 some of which were introduced by Mr Sultan.  Other evidence relied on to establish that Mr Sultan was acting as Mr Hilton’s agent included ex. 15, a facsimile addressed by Mr Sultan to Mrs Capper where Mr Sultan said “we have been requested by [Mr Hilton] to arrange for your firm to prepare the necessary documentation in respect of” the loan.  That can be criticised, and was, as an effort by Mr Sultan to elevate his own status in the operation. 

37. There was also evidence that Mr Hilton used to chase up Mr Sultan, had dealt with him between 15 and 20 times in 2004 to 2005, that Mr Sultan was a private moneylender using Mr Hilton to fund his loans, that there was no negotiation between them about interest rates and that it was Mr Sultan’s job to obtain appraisals for Mr Hilton and sometimes his job to get evidence of any prior mortgage debt. Mr Hilton also instructed Hickey Lawyers to insert a clause dealing with Mr Sultan’s mandate fee in the documentation.

38. The late Mr Perkins, in his written submissions on the agency issue, said this:

“60.The Defendants bear the onus of proving that Sultan was the agent of the Plaintiffs in this transaction.  The Law of Agency, G E DalPont, Butterworth 2001 at [1.7] p 10.  The evidence relevant to the issue of the notice of the relationship between the Plaintiffs and Sultan includes the following:

(a)Mr Hilton at T25 ll 40-26 1 35:  in particular that Sultan introduced the transaction to the Plaintiffs;  Sultan had no authority on behalf of the Plaintiffs in respect of the transaction;  Mr Hilton considered the proposal independently before deciding to proceed with it;  and

(b)Sultan “facilitated” the transactions (or brought the parties together).  He would be contacted by a would-be borrower and he would contact one of a number of private lenders (T156 ll 1-30);

(c)Sultan’s remuneration was paid to his company Mainvista Pty Ltd from the loan moneys of the borrower;  even though the payment went directly from the Plaintiffs or Hickeys to the broker (T25 l55 – 26 l15);

(d)Sultan’s remuneration was not a matter of negotiation between the Plaintiffs and Sultan, it was none of the Plaintiffs’ business:  T 52 ll 22-40.  It was a matter between Sultan and the borrowers.

(e)Sultan provided some details of the transaction to the solicitor, though not instructions on the Plaintiffs’ behalf (T106 ll 19-38, Ex. 4 pp 18) and Nicole Capper liaised, to some extent, with Sultan’s office;

(f)The Plaintiffs would ask the broker to contact the borrowers if they became overdue, to chase them up, to see what was going on:  T40 1 53 – 41 1 2;  T164 1 10 – 165 1 28, sometimes because of Sultan’s relationship with the borrower;

(g)the broker would sometimes negotiate some of the terms with the Plaintiffs:  T42 1 47 – 43 1 5;

(h)Sultan’s role would include obtaining appraisals, and details of prior debts from the borrower:  T49 ll 16-21;  Ex. 15;  T158 ll 25-45;

(i)Sultan considered himself fairly independent of both lenders and borrowers (t166 ll 10-25); and his application for (Ex, 4 p 23) disclaimed any agency on behalf of the borrowers, (although that from or how the parties described their relationship could not be decisive of the point whether in fact there was any agency between the borrowers and the broker, the Law of Agency, by Dal Pont, at pp 7-8).

61. It is not significant that Hickeys referred to Sultan or his company as the Plaintiffs; agent in one letter in another transaction.  They cannot clothe Sultan as the Plaintiffs’ agent, and they have not proved themselves to be particularly careful or accurate in any event.  Further, as Dixon J observed of the word ‘agency’ in Colonial Mutual Life Assurance Society Ltd (1931) 46 CLR at 50, no word is more commonly and constantly abused than the word “agent”.

62. On first principles it is submitted that one factor to take account of is whether the relationship was one of agency is to consider whether Sultan was in the position of a fiduciary of the Plaintiffs, whether Sultan owed the Plaintiffs any fiduciary duties.  It is submitted that it has not been proved that he was their fiduciary, or owed them any fiduciary duties.  His relationship to the Plaintiffs was an independent one, albeit that when he did introduce a loan proposal to the Plaintiffs that they accepted, he had certain functions he was expected to fulfil, including obtaining certain information from the borrowers (e.g. appraisals/debt details), liaising between the borrowers and the lender’s solicitors, and on occasion finding out the position with respect to repayment.  None of these obligations bear the hallmarks of a fiduciary obligation (although, of course, there are fiduciary relationships other than agency).

63. The question whether Sultan is the agent of the Plaintiffs does not depend upon whether or not he was the agent for the borrowers.  There was little exploration in the evidence of the characteristics of his relationship with borrowers.

64. At to general principles, the Court is referred to the discussions in the Law of Agency (supra) at pp 5-8, regarding the scope of agency and the preference for substance over form.  In particular:

(a)in order to establish an agency relationship it is not enough to show that Sultan did work at the request of the Plaintiffs for the Plaintiffs’ benefit:  Colonial Mutual Life Assurance Society Ltd v Producers & Citizens Co-operative Assurance Co of Australia Ltd (1931) 46 CLR 41 at 48 per Dixon J;  and

(b)if the right by virtue of which Sultan acts in transactions involving the Plaintiffs is an independent right Sultan already possesses, then he is not the agent of the Plaintiffs:  The Law of Agency (supra) at [1.4], p 6.”

39. He characterised Mr Sultan as a finance broker whose main function was as a negotiator or intermediary which did not make him the plaintiffs’ agent; see Custom Credit Cooperation ltd v Lynch [1993] 2VR 469, 486-487 and DalPont at pp 26-27. 

40. Were it necessary, I would conclude that Mr Sultan was not the plaintiffs’ agent; see also Micarone v Perpetual Trustee (1999) 75 SASR 1, 123 at [632] where Debelle and Wicks JJ said:

“A finance broker in a transaction of this kind is prima facie the agent of the borrower: Morlend Finance Corp (Vic) Pty Ltd v Westendorp [1993] 2 VR 284 at 308 and that is so notwithstanding that the broker may receive a commission from the lender: Custom Credit Corp Ltd v Lynch [1993] 2 VR 469 at 486 to 487; Octapon Pty Ltd v Esanda Finance Corp (unreported, Supreme Court NSW, 3/02/89). The position may, of course, differ according to the individual circumstances of each case.” 

The fraud exception to indefeasibility

41. The real dispute about the plaintiffs’ rights was focussed on whether the fraud exception to the protection afforded to the registered proprietor by s. 184(3)(b) of the Land Title Act had been enlivened by the conduct of Mr Lacy and Mrs Capper as the plaintiffs’ admitted agents or by that of Mr Sultan.  On the factual findings I have made, Mr Sultan has not been shown to have acted fraudulently nor to have been the plaintiffs’ agent. 

42. The question then is whether what I have characterised as the careless conduct of Hickey Lawyers can be attributed to the plaintiffs to defeat the rights they would have otherwise. There is also a question whether any conduct, at least of Mrs Capper, could be treated as fraud by the registered proprietor; see the discussion by Batt JA in Russo v Bendigo Bank Ltd [1999] 3 VR 376, 392.  His Honour was in the minority on that issue and it is not necessary for me to enter into that debate because of my factual findings. 

43. The failure to talk to the justice of the peace is not evidence of fraud; see Young v Hoger [2001] QCA 453 at [26].  Their other conduct did not amount to fraud either for the reasons expressed by me earlier.  The test is described in the similar decision of Young v Hoger at [11] (footnotes omitted):

“[11] There is no dispute that, as against the first respondent, the subject mortgage was procured by forgery. However it became registered with the consequence that the appellants' title as mortgagees became indefeasible unless ‘there has been fraud by the registered proprietor, whether or not there has been fraud by a person from or through whom the registered proprietor has derived the registered interest’. It is accepted by the appellants that fraud by the registered mortgagee includes fraud by its agent and that Parker was relevantly the appellants' agent. It is also common ground that fraud in this context includes wilful blindness, an abstention from inquiry for fear of learning the truth, and possibly reckless indifference in other respects but that, in either case, it must amount to actual dishonesty.”

44. Mr Clarke SC’s strongest submission in this context was that it was necessary for the plaintiffs to prove that the instrument their solicitors presented for registration was produced with an honest belief that it was a genuine instrument and that any agent who presented the instrument must have such a belief. In this context he referred me to the useful discussion by Tadgell J in Australian Guarantee Corporation Ltd v De Jager [1984] VR 483 at 494-499. 

45. He focussed his submission on Mr Lacy whose conduct he described as recklessly indifferent. He drew attention to the failures to comply with the firm’s standard procedures and the tasks identified particularly by their own correspondence and the too ready delegation of much of the work to the inexperienced Mrs Capper. This he pointed out occurred in the context of money being lent to a category of borrowers who might be thought of as desperate.

46. For the reasons I have expressed earlier, however, none of this amounted, in my mind, to actual dishonesty or moral turpitude; see Pyramid Building Society (in liq) v Scorpion Hotels Pty Ltd [1998] 1 VR 188, 192-194 where Hayne JA in usefully summarising the authorities said:

“In Assets Co., Ltd. v Mere Roihi, the Privy Council said, at 210:

    … by fraud in these Acts is meant actual fraud, i.e., dishonesty of some sort, not what is called constructive or equitable fraud — an unfortunate expression and one very apt to mislead, but often used, for want of a better term, to denote transactions having consequences in equity similar to those which flow from fraud. Further … the fraud which must be proved in order to invalidate the title of a registered purchaser for value … must be brought home to the person whose registered title is impeached or to his agents. Fraud by persons from whom he claims does not affect him unless knowledge of it is brought home to him or his agents. The mere fact that he might have found out fraud if he had been more vigilant, and had made further inquiries which he omitted to make, does not of itself prove fraud on his part. But if it be shewn that his suspicions were aroused, and that he abstained from making enquiries for fear of learning the truth, the case is very different, and fraud may be properly ascribed to him. A person who presents for registration a document which is forged or has been fraudulently or improperly obtained is not guilty of fraud if he honestly believes it to be a genuine document which can be properly acted upon.

The decision in Assets Co., Ltd. has stood for many years and it is clear that for the purposes of s. 42 "fraud" means actual dishonesty or moral turpitude: see, e.g., Butler v Fairclough (1917) 23 C.L.R. 78 at 90 and 97; Stuart v Kingston (1923) 32 C.L.R. 309 at 329 and 356; Bahr v Nicolay (No. 2) at 614 per Mason C.J. and Dawson J. and at 631-2 per Wilson and Toohey JJ.; Grgic v Australian and New Zealand Banking Group Ltd at 221 per Powell J.A. Further, although it is clear that what was said in the Assets Co., Ltd. case is not to be read as saying that all kinds of equitable fraud stand outside the statutory concept of fraud, proof of dishonesty is essential. In Latec Investments Ltd. v Hotel Terrigal Pty. Ltd. (1965) 113 C.L.R. 265 Kitto J. held that a collusive and colourable sale by a mortgage company to its subsidiary was a plain case of fraud there being "pretence and collusion in the conscious misuse of a power" — a "dishonest course": see 113 C.L.R. at 274. But in that, as in other cases in which fraud has been found, there was actual dishonesty and it is that which Scorpion sought to demonstrate in this case.

Of course, fraud may take various forms. Registering an instrument which the registering party knows is forged is an obvious example. But that was not the case which Scorpion sought to make on the trial of this action or on the hearing of the appeal before us. Rather, the fraud alleged against Pyramid was said to be a reckless indifference to the truth of the document which it tendered for registration.

In support of this contention, counsel for Scorpion placed particular emphasis upon the decisions of Tadgell J. in Australian Guarantee Corp. Ltd. v De Jager [1984] V.R. 483 and Mandie J. in Beatty v Australia and New Zealand Banking Group Ltd. [1995] 2 V.R. 301. In both cases it was found as a fact that a person employed by the mortgagee had signed an instrument of mortgage as a witness to the affixing of the signature by one of the mortgagors when in fact that witness had not seen the mortgagor sign the document. Thus in both cases the employee of the mortgagee knew that the document contained a false statement — that it had been executed by the mortgagor in the presence of the person who had signed as witness. In each case it was held that the mortgagee was guilty of fraud within s. 42 of the Transfer of Land Act.

In my view no such case was made out here. There was, in this case, no evidence that Pyramid, or anyone acting on its behalf, knew that the witness to the affixing of the mortgagor's company seal was not a director of the company (if in fact that was so). There was no evidence that Pyramid, or anyone acting on its behalf, knew that the execution of the mortgage had not been authorised by Scorpion (if that was so). It was not suggested to Carr (the solicitor who had acted for Pyramid in the mortgage transaction) that he had chosen not to make enquiries about these (or any other) matters because he feared what he might find out. Again, no such case was made out.

The expressions "reckless indifference" and "wilful blindness" are useful shorthand expressions to describe some kinds of cases of fraud. As the classical exposition by Lord Herschell in Derry v Peek (1889) 14 App. Cas. 337 at 374 shows, fraud can be proved by showing that a false statement has been made without belief in its truth or, "recklessly, careless whether it be true or false". But as was said in the Assets Co., Ltd. case, the mere fact that a person might have found out fraud if further enquiries had been made does not of itself prove fraud. The enquiry is an enquiry for actual dishonesty not for want of due care.” 

47. The other inferences reasonably open and most likely in this case are that the solicitors were careless. In those circumstances I should not conclude that they acted fraudulently in the sense that they were recklessly indifferent to the outcome or presented for registration instruments without any honest belief that they were genuine.

Do the plaintiffs have a claim for a debt?

48. The plaintiffs’ submission was that the registered mortgage’s covenants charging Mr Gray’s land with repayment of the principal of $206,000 were effective to require that payment be made by Mr Gray and, in the case of default, enlivened their rights to claim judgment for that sum plus interest. Alternatively they argued that they were able as registered mortgagees to exercise their power of sale to obtain payment of that sum.

49. Their claim for judgment for the money sum was based on the covenant in the mortgage charging the land with the “repayment/payment” to the plaintiffs of the secured money which included the principal sum lent of $206,000, “including interest”. It was said to be a term or condition which delimited or qualified the estate or interest of the mortgagee or was otherwise necessary to assure their estate or interest; see PT Ltd v Maradona Pty Ltd (1992) 25 NSWLR 643, 678-679. In respect of a mortgage, validation of the personal covenant to pay in New South Wales was supported by the provisions of s 52(1) of the Real Property Act 1900 (NSW) which assured the right to sue upon the mortgage debt.

50. Section 74 of the Land Title Act provides, not quite as explicitly as the New South Wales legislation, that:

“A registered mortgage of a lot or an interest in a lot operates only as a charge on the lot or interest for the debt or liability secured by the mortgage.”

51. Nevertheless the debt secured here is described in the mortgage in terms that define the amount owed and charge the land with its repayment. It has been proved that the sum was paid and has not been repaid. Clauses 17.1 (4) and (21) of the mortgage also give the mortgagee the power to institute proceedings for the payment of the secured money. It seems to me that the approach adopted by Helman J in Atlantic 3-Financial (Aust) Pty Ltd v Deskhurst Pty Ltd [2005] 1 Qd R 1, 9 at [22] applies here.  His Honour said:

“…the plaintiff's claim … can rely on the indefeasibility of the registered interest of the mortgagee under the principal mortgage, which it acquired as sub-mortgagee. That indefeasibility extends to the second defendant's covenant to pay the mortgagee under the principal mortgage the $150,000 on or before 20 October 1989: Mercantile Credits Ltd v. Shell Co. of Australia Ltd (1976) 136 C.L.R. 326 at 343 per Gibbs J.; PT Ltd v. Maradona Pty Ltd (1992) 25 N.S.W.L.R. 643 at 676–679; and Pyramid Building Society (In liquidation) v. Scorpion Hotels Pty Ltd [1998] 1 V.R. 188 at 196 per Hayne J.A., with whom Brooking and Tadgell JJ.A. agreed. The mortgagee's right to recover the debt is included in the rights rendered secure by registration as that would be necessary to assure to the mortgagee its estate or interest in the land: PT Ltd v. Maradona Pty Ltd, at 679.”

52. His Honour’s view is also consistent with that of the Court of Appeal in Parker v Mortgage Advance Securities Pty Ltd [2003] QCA 275 at [6] that the indefeasibility obtained on registration of the mortgage included the covenant to repay the mortgage sum. 

53. The view expressed in passing in Grgic v ANZ Banking Group Ltd (1994) 33 NSWLR 202, 224 that the mortgagor there was not liable on the personal covenants in the mortgage does not seem to me to be consistent with the indefeasibility that should attach to the covenant to repay in a registered mortgage; cf. the view of Young CJ in Eq in Perpetual Trustees Victoria Ltd v Tsai (2004) 12 BPR 22,281; [2004] NSWSC 745 where his Honour said:

“[13] There is no doubt at all that under the Torrens system a forged mortgage which might be a nullity under the old system title when registered without fraud is fully efficacious as conferring on the mortgagee the interest in land described in the mortgage. It is often said in a shorthand way that the mortgagee gets an indefeasible interest. However, as Campbell J said in Small v Tomasetti [2002] NSW Conv R 56,011 at p 58,306 [9]:

‘Notwithstanding that registration confers indefeasibility on a mortgagee there is still a question, “Indefeasibility for what?”’

[14] The cases show in order to answer his Honour's question that to some extent what is protected will depend on the exact wording of the Real Property Act in each State. Thus, interstate cases must be considered with some care: Caleo Bros Pty Ltd v Lyons Bros (Aust) Pty Ltd (1980) 1 BPR 9496 per M McLelland J.

[15] Ordinarily a guarantee is sufficiently close to the mortgage to be protected ( Consolidated Trust Pty Ltd v Naylor (1936) 55 CLR 423 , 434–5) as is a personal covenant to repay ( P T Ltd v Maradona Pty Ltd (1992) 25 NSWLR 643 at 681; Pyramid Building Society v Scorpion Hotels Pty Ltd (1998) 1 VR 188 per Hayne JA (with whom Brooking and Tadgell JJA agreed) and Parker v Mortgage Advance Securities Pty Ltd [2003] QCA 275).

[16] However, one must be very careful about these wide statements. First of all, the question to a great degree will depend on the wording of the covenant concerned. Secondly, Powell JA in Grgic v Australian and New Zealand Banking Group Ltd (1994) 33 NSWLR 202 at 224, made the statement with which Meagher and Handley JJA agreed, that, notwithstanding indefeasibility, a personal covenant which is contained in a forged document is not enforceable.

[17] Mr Donaldson SC, who appeared for the first respondent, put to me that that statement was odd and dealt with something that did not form part of the argument and must be considered as obiter dicta. I consider that a considered statement of that nature in a Court of Appeal decision is something that I must take to be binding upon me. That statement is also consistent with first principles that the reason why the personal covenant is considered to be part of the package of rights protected by the indefeasibility principle is that it maps out or may map out the extent of the quantum of the interest of the mortgagee in the land and in that sense is closely related to title requiring it to be considered as to limiting the rights (sic). That seems to be what Giles J is saying in Maradona (above) at 681. See also what Bryson J said in Challenger Managed Investments Ltd v Direct Money Corp Pty Ltd [2003] NSWSC 1072 at [52–53].”

54. The passage in [16] was recently referred to in another decision in the New South Wales Court of Appeal for the proposition that: “It was common ground that because of the forgery, the personal covenant contained in the mortgage was not enforceable”; see Sabah Yazgi v Permanent Custodians Limited [2007] NSWCA 240 at [13].  On one reading of Young CJ’s statements in the second half of [17], however, one could be forgiven for thinking that he was disagreeing with Powell JA.

55. In my view I am required by principle and local authority to decide that the terms of this mortgage, when it was registered, established an indefeasible right in the mortgagees to bring proceedings for repayment of the debt existing from the advance of the $206,000.

Right to claim interest

56. The plaintiffs also claim that they are entitled to claim interest on that debt of $206,000 from either 20 June 2005 or from the service of the notice of exercise of the power of sale on 1 August 2005. Mr Perkins opted for the later of those dates in his oral submissions. It is inappropriate, in my view, to award interest from the earlier date in respect of an obligation of which Mr Gray was unaware. The definition of the secured sum includes interest but no rate is specified in the mortgage and the collateral agreements were forged. There is, however, a right to claim interest in proceedings for the recovery of money, including proceedings for debt, under s. 47 of the Supreme Court Act 1995 which should extend to the plaintiffs’ claim for this debt which, on my view, is a right properly incidental to the registered mortgage.  There was no dissension from the view that the appropriate of interest was 10 per cent per annum. 

Exercise of the power of sale

57. The alternative relief available to the plaintiffs under the mortgage is to exercise their power of sale of the land. That was the approach adopted in Grgic v ANZ Banking Group Ltd where the registered proprietor was held not to be liable on the personal covenants in the forged mortgage and the available remedy to the registered mortgagee was limited to recovery of possession of the land; see at 224.  The issue became relevant there because the value of the property on the sale was likely to be less than the sum secured against it.  It seems unlikely that such a factual problem will arise here from what I was told. 

58. If I were to adopt the approach in New South Wales then Mr Clarke SC submitted that the practical effect would be that Mr Gray would be required to redeem the mortgage to retain his interest in the land.  That may be a useful form of order to make in any event on the assumption that the State will compensate him for the fraud that has been perpetrated. 

Orders

59. In the circumstances it is my view, therefore, that the plaintiffs are entitled to relief. They claim, amongst other relief, an order for recovery of possession of the property and judgment against Mr Gray for the sum of $206,000, together with interest. I propose to make such orders but to stay them pending the taking of an account of what is required to be paid on Mr Gray’s behalf to redeem the mortgage and the passage of a reasonable time to allow the payment of the amount thus established. The amount would be the principal sum of $206,000 with interest at 10 per cent per annum since 1 August 2005. I shall hear further submissions as to the appropriate form of orders, including what should happen to the caveat in the interim, and costs.