Citation: Khan as Trustee for The Khan Family Trust v Hadid; Hadid v Khan as Trustee for The Khan Family Trust (No 2) [2008] NSWSC 119
Court: Supreme Court of New South Wales, Common Law Division
Date: 22 February 2008
Judge(s): Rothman J
Background
A married couple had owned their Punchbowl home since 1984. On 31 December 2002, a mortgage over their property was registered without their knowledge or consent. The mortgage purported to secure a principal debt of $130,000 in favour of a mortgagee acting through a family trust. By the time of the hearing, accumulated interest had pushed the claimed debt to over $1 million on one calculation, and to an extraordinary figure exceeding $30 million on a compound interest basis under the mortgage's own terms.
The mortgage was a forgery. The mortgagee, the trust, and those associated with them played no part in the forgery. The mortgage had been lodged by a solicitor at the direction of a mortgage manager, and a second solicitor had purportedly witnessed the homeowners' signatures on the document, despite never having received instructions from them or observed them sign anything.
The mortgagee brought possession proceedings against the homeowners. The homeowners denied the mortgage's validity and cross-claimed against multiple parties, including the solicitor who lodged the mortgage, the solicitor who witnessed the forged signatures, the mortgage broker, and others connected to the transaction. The proceedings were heard over several weeks in 2007.
Legal Issues
- Whether the registered mortgage was binding on the homeowners notwithstanding that it was a forgery, given the indefeasibility provisions of the Torrens system under the Real Property Act 1900 (NSW)
- Whether the registration of the forged mortgage was itself attended by fraud sufficient to defeat indefeasibility
- Whether a solicitor who attested a forged signature, or who represented that instructions had been received when they had not, engaged in misleading or deceptive conduct in trade or commerce under the Fair Trading Act 1987 (NSW)
- Whether the homeowners bore any duty of care to the mortgagee, the attesting solicitor, or the lodging solicitor, such that providing copies of their own documents could make them liable for losses flowing from the forgery
- Whether cross-claims against the homeowners were maintainable on any basis
Decision
Rothman J found that the mortgage was indeed a forgery and that the homeowners had not executed it. The mortgagee's claim for possession accordingly failed. The homeowners succeeded as defendants in the possession proceedings.
On the indefeasibility question, the Court's findings of fact concerning the conduct of the solicitor who witnessed the signatures (Mr Flammia) and the solicitor who lodged the mortgage and represented that he had instructions (Mr Hancock) were central. The Court found that fraud attended the registration of the mortgage, which defeated any claim to indefeasible title that the mortgagee might otherwise have asserted. Although the mortgagee was entirely innocent, the fraud of those involved in procuring registration was sufficient to deprive the registered instrument of its usual protective effect.
On the misleading and deceptive conduct claims under the Fair Trading Act 1987, the Court found that a solicitor's attestation of forged signatures, and a solicitor's representation that instructions had been received when none had been given, constituted conduct in trade or commerce capable of attracting liability. The homeowners' own cross-claims against Mrs Khan (the mortgagee) succeeded insofar as they were directed at her, but the verdicts in the cross-claims against Mr Hancock and Mr Flammia were entered in Mrs Khan's favour, reflecting that those solicitors bore responsibility for the circumstances that gave rise to both sets of proceedings.
The Court rejected entirely any suggestion that the homeowners owed a duty of care to the mortgagee, Mr Hancock, or Mr Flammia. The provision of copy documents by the homeowners, which may have been used by third parties to facilitate the forgery, did not give rise to liability. No duty existed, and even if one had, it would not have been breached in those circumstances.
Orders Made
In proceedings 10537/2003 (mortgagee's possession claim):
- Verdict for the defendants (the homeowners)
- All cross-claims dismissed
In proceedings 20052/2003 (homeowners' claims):
- Verdict for the defendant mortgagee (Mrs Khan)
- Verdict for Mrs Khan in the cross-claim against Mr Hancock
- Verdict for Mrs Khan in the cross-claim against Mr Flammia
Further directions:
- Parties to file agreed or separate orders reflecting the reasons within the timetable set
- Parties granted liberty to address on calculation of damages and costs
- Rothman J's preliminary view was that the costs of both the mortgagee and the homeowners should be borne by Mr Hancock and Mr Flammia
- Mr Hancock and American Re-Insurance Company Limited granted 14 days to file written submissions on the effect of the factual findings on the insurance cross-claim
Key Takeaways
- Fraud in the procurement of registration under the Torrens system can defeat indefeasibility even where the registered mortgagee is wholly innocent, provided the fraud is attributable to those who acted in procuring registration on the mortgagee's behalf.
- A solicitor's attestation of a forged signature, and a solicitor's representation of having instructions that were never given, were found to constitute misleading or deceptive conduct in trade or commerce for the purposes of the Fair Trading Act 1987 (NSW).
- No duty of care arose on the facts obliging homeowners to protect mortgagees, or solicitors involved in lending transactions, from losses caused by intervening criminal acts of third parties who used copies of the homeowners' documents.
- Where fraud in registration underlies a mortgage, the innocent mortgagee may be left without the protections normally afforded by a registered instrument, reinforcing the significance of fraud as an exception to Torrens indefeasibility.
- Rothman J expressed a preliminary costs view placing the burden for both parties' costs on the two solicitors whose conduct was central to the fraud, a notable indication of the Court's assessment of where moral and legal responsibility lay.
Legislation and Cases Referenced
Legislation:
- Real Property Act 1900 (NSW)
- Fair Trading Act 1987 (NSW)
- Civil Liability Act 2002 (NSW)
Cases:
- Assets Co v Mere Roihi [1905] AC 176
- Bahr v Nicolay (No 2) [1988] HCA 16; (1988) 164 CLR 604
- Breskvar v Wall [1971] HCA 70; (1971) 126 CLR 376
- Butler v Fairclough [1917] HCA 9; (1917) 23 CLR 78
- Chandra v Perpetual Trustees Victoria [2007] NSWSC 694
- Concrete Constructions (NSW) Pty Ltd v Nelson [1990] HCA 17; (1990) 169 CLR 594
- Frazer v Walker [1967] 1 AC 569
- Grgic v ANZ Banking Group (1994) 33 NSWLR 202
- Henville v Walker [2001] HCA 52; (2001) 206 CLR 459
- Hornsby Building Information Centre v Sydney Building Information Centre [1978] HCA 11; (1978) 140 CLR 216
- Masters v Cameron (1954) 91 CLR 353
- Parkdale Custom Built Furniture v Puxu Pty Ltd [1982] HCA 44; (1982) 149 CLR 191
- State Bank of New South Wales v Yee (1994) 33 NSWLR 618
- Waimiha Sawmilling Co v Waione Timber [1923] NZLR 1137; [1926] AC 101
- Yorke v Lucas [1985] HCA 65; (1985) 158 CLR 661
- And others as noted in the judgment