Credit Union and Mutual Law Blog from Langes+

Who is entitled to the surplus proceeds of sale by the first mortgagee?

2009-11-13T06:19:26+10:00

In Bofinger v Kingsway Group Limited [2009] HCA 44, the High Court of Australia decided that the guarantors of a mortgage were entitled to be repaid money they paid to the first mortgagee before the surplus proceeds of the first mortgagee's sale of the properties (about $700,000) were paid by the first mortgagee to the second mortgagee.

The guarantors claimed that the first mortgagee in paying the surplus to the second mortgagee was obliged to account to them as constructive trustee for the surplus and was liable to pay equitable compensation for paying the surplus to the second mortgagee.

The guarantors were the husband and wife directors of the borrower company which was in liquidation. They gave guarantees to the first, second and third mortgagees.

Normally a guarantee will contain a clause which stops guarantors claiming rights (including rights of subrogation to repayment of money paid under the guarantee) against the debtor in competition with the creditor.

The High Court noted that the wording of the guarantee in favour of the second mortgagee failed to exclude the right of subrogation in respect of payments to the first mortgagee (as against the second mortgagee) with the guarantors having the benefit of any doubt about the construction of the guarantee.

It was also relevant that the second and third mortgagees in agreeing to the sale by the first mortgagee had not protected their position by obtaining an agreement from the guarantors and first mortgagee expressly excluding the guarantors' rights to repayment by the first mortgagee.

NSW Mortgage duty changes

2009-11-12T15:51:40+10:00

Revenue Ruling DUT 39 deals with Changes to Mortgage Duty. Although issued on 9 November it took effect from 1 July 2009.

Internet banking and ADI points of presence

2009-11-12T15:46:23+10:00

Which ADI's offer internet banking and what online services are offered?

Curiously, APRA does not obtain separate data on internet banking other than incidentally in its ADI Points of Presence publication. The publication focusses on branches due to its historical origins as a report on regional and rural banking.

The workbook identifies “non face-to-face” customer contact by ADI’s which comprise service channels which provide no face-to-face services, for example internet and telephone banking but not internet banking separately. There are several ADI's that split their internet banking facilities out as a separate service channel. But this is generally not the case.

CUA v Lyons: recovery of moneys advanced to customer by mistake

2009-11-11T08:05:00+10:00

In Credit Union Australia Ltd v Lyons [2009] NSWSC 1188 CUA obtained judgment for money advanced to its customer Mrs Lyons under a $300,000 line of credit account, together with interest. The line of credit account was initially secured by registered mortgages, but those mortgages were discharged in 2006 when the loan was re-financed by a third party lender.

By administrative oversight the line of credit account was not closed when the mortgages were discharged. The borrower was able to draw on the account back to its original overdraft limit. It was only when that limit was again exceeded in 2008, and CUA made attempts to obtain repayment, that the relevant officers then dealing with the borrower appreciated that the account was in fact totally unsecured.

In October 2008 CUA served a notice of default on the borrower requiring repayment of what was called the “over limit amount” of then $5,531.55. CUA then threatened to enforce the mortgage if the default were not remedied. However, CUA had no mortgage to enforce.

The defendants are husband and wife. The husband held a power of attorney from his wife who was the borrower. The borrower was seriously injured in a car accident and was suffering from brain damage and was not capable of attending to her own affairs.

The judge said the wife as the borrower was clearly liable for the amounts drawn under the line of credit account, together with interest at the rates provided for in her loan agreement with CUA.

CUA also obtained an order against the husband for money he withdrew and deposited to his account with Westpac totalling $81,700. But it failed to regain its security aganst the properties. The judge ordered a charge on those properties subject to the rights of the new mortgagee which had advanced $805,000.

The judge said:

"22 As I have said, it is clear that the plaintiff allowed drawings on the line of credit account because it was acting under a mistake, and an important mistake, that the account was still secured. There is no direct evidence that either the first defendant or the second defendant was aware of that mistake. As I have said, the defendants have not appeared and so of course they have not put on any evidence. However, it was a term of the agreement on the opening of the line of credit account that it would be secured by mortgages initially over the Hazelbrook property, and subsequently over both the Hazelbrook property and the Ferguson Road, Springwood property.

I infer that the second defendant knew or understood that the further drawings on the account were permitted only by error...

25 I infer that the drawings from the first defendant’s line of credit account which were applied to the second defendant’s account with Westpac, and those which were applied in reduction of the loans secured by mortgages, were drawn by the second defendant acting under power of attorney. His knowledge and understanding of the plaintiff’s mistake, when acting for the first defendant as her agent, would be imputed to her. Hence I infer that both defendants had actual knowledge, or at least imputed knowledge in the case of the first defendant, that the drawings were permitted by the plaintiff by mistake.

26 In those circumstances, and possibly, in the case of the second defendant, even if he had not had such knowledge, the second defendant is liable in an action for restitution, or as it would formerly have been characterised, in an action for money had and received, for the drawings permitted by the plaintiff by mistake, which were applied for his benefit. ...

29 The moneys received by the defendants from the accounts, with knowledge that they were permitted to be drawn as a result of mistake, when the moneys were paid without any consideration passing from the defendants to the plaintiff other than the original promise made by the first defendant in her loan agreement, were at that time impressed with either a constructive or resulting trust in favour of the plaintiff. ..

30 Those moneys were not used as contributions to the purchase price of properties acquired by the first defendant. I do not accept that the plaintiff is entitled to declarations that properties of the first defendant are held by her on trust for the plaintiff. However, as certain of the payments can be traced as having been used to reduce the mortgage debts secured over the properties at Great Western Highway, Springwood, and Great Western Highway, Hazelbrook, the court may treat those lands as charged with the payment to the plaintiff of the amounts so applied. ..

31 There is no evidence that the interests of innocent third parties would be adversely affected by an order charging those lands. The charge will not affect the rights of the registered mortgagees to exercise their power of sale, and will not affect the interests of any other person having prior security over the property without notice of the plaintiff’s claim. It would be against good conscience for the defendants to be permitted to receive any surplus proceeds of sale of the property, free of the plaintiff’s claim for repayment, where the plaintiff’s money was applied to reduce the mortgage debts. That charge should also secure interest on the moneys so applied at the contractual rate."

APRA Chair at Abacus 09

2009-11-10T05:31:08+10:00

APRA Chair John Laker's address to the Abacus Convention on 9 November (download here) included 2 issues that were of concern to mutual ADI's: the impact of the new liquidity requirements and the future of the government deposit guarantee.

His address was titled "Mutuals after (my emphasis) turbulent times".

Key points were:

he emphasised the importance of doing the basics of "bread and butter banking" well: in the last 2 years no CUBS breached the capital standards and no CUBS exited under force majeure. CUBS continue to earn solid profits.
Liquidity, asset quality and capital remain key issues.
Good governance and board quality are also important.
For friendly societies he mentioned benefit fund solvency and capital.
He noted the continued reduction in the number of CUBS and the increased scale of larger credit unions.
He noted the global influence on local standards regarding liquidity, capital and remuneration.
In respect of the government deposit guarantee he distinguished the core guarantee (under $1M) which is locked in until October 2011 from the large deposit guarantee and discussed the relevance of what other countries were doing.

How organisations can be different

2009-11-10T05:13:14+10:00

If you want to be different, how specialised can you get?

This video is about a Los Angeles shop that specialises in "soda pop" but does not sell Pepsi.

The owner shows a passion for, and knowledge of, his product that is infectious.

Worth watching. Could it apply to financial services? Via Seth's Blog.

Can a lender rely on a solicitor's certificate of advice given to a borrower's attorney?

2009-11-06T06:57:10+10:00

The elderly are frequent users of powers of attorney. But how far can lenders go in allowing attorneys to act on behalf of borrowers who would normally require a certificate of independent legal advice? Should a lender always accept a certificate of legal advice given to the attorney of the borrower and not the borrower personally?

No, according to the NSW Court of Appeal in Spina v Permanent Custodians Limited [2009] NSWCA 206. In that case the son of an 86 year old Italian woman with no income living in a nursing home mortgaged his mother's home, her only asset, as security for a $400,000 loan using his enduring power of attorney for her. The bulk of the loan was for her son's benefit. The transaction was varied to relieve the mother of liability to repay monies she did not receive: her debt was reduced to $76,000.

There was no evidence that the mortgagor was incapacitated. The mortgagee obtained a certificate that the son had received independent legal advice, but did not obtain one to the effect that the mother had received such advice. In fact, she had not. The son signed the loan documents and mortgage as attorney.

The mortgagee’s lending guidelines were not observed when making the loan.

Judge Young's comments are noteworthy:

"Decisions of this and other courts over the last 30 years have shown that transactions where a third party puts up his or her house as guarantor for a child or niece or nephew’s business purposes are ones in which the guarantor needs to be seen personally and needs to understand the ramifications of the transaction or else it may be set aside...

Indeed, these matters were recognised by the lender in its operations manual. The present situation was not quite like a surety giving a mortgage over her property in respect of another person’s borrowing; it was a joint borrowing, but the facts and circumstances on the application form show that the transaction was very similar to a guarantor situation. There was no material that has been put to us to show that Angelina was connected with the business or with the investments that were proposed to be made. Her son held a power of attorney and was signing documents for her. The situation cried out for someone to actually talk to Angelina face to face...

The lender sought to obtain a certificate of independent advice. Had the finding been that Angelina was not capable intellectually of understanding the transaction, it may be that the statutory declaration made by the donee of her power of attorney might have sufficed. However, if the situation was that there was no reason to suspect Angelina’s intellectual capacity, a certificate by the donee of the power of attorney was worthless. What had to be obtained was material to show that the donor of the power of attorney fully understood what was happening, and that was never obtained. Instead, the lender and its Queensland solicitors accepted the statutory declaration of the donee which referred only to advice given to that donee...

In my view in the present set of circumstances, if a lender is to rely on independent legal advice being given to the borrower, the latter herself must receive the independent legal advice.

Of course, the position would be different if the borrower were clearly incapable, or if the transaction were clearly for her benefit, or if the transaction was a purely commercial one with no flavour of possible influence from or benefit to some relative or friend.

It is difficult for me to agree that a reasonable person would not see a “red light” when considering the scenario that the application for finance was being made:
(a) by an 86 year old retired lady;

(b) by her son as her attorney;

(d) over the 86 year old’s major asset;

(e) where there was no material to show the lady personally had been given legal advice;

(f) where, if the son died or was unable to repay the loan out of his income, the lady’s home was at risk."

Abacus Convention

2009-11-01T14:01:00+10:00

Next week (9 November) I'll be on the Gold Coast for the Abacus Convention. If you're going, please introduce yourself. Or, if you want to organise a time to meet, email me at djacobson@langes.com.au.

I'll be arriving on the Monday morning and leaving on Wednesday afternoon.

Most of the Langes partners will be there: Richard Joice will be at the Race Day on Saturday and the Golf Tournament on Sunday. Please say hello.

‘Penalty’ fees case – win for Credit Union

2009-10-21T11:24:21+10:00

On 12 October 2009 the Magistrates Court of South Australia delivered a judgment in favour of Police Credit Union (South Australia) in a case relating to fees which were alleged to be ‘penalties’ – Sedlaczek v Police Credit Union Ltd. Langes+ acted for the credit union in relation to the matter.

Facts

Between 1998 and 2007 the plaintiff operated a deposit account with the credit union. The account had no credit facility attached to it. The account terms provided that the plaintiff should not overdraw the account, but if the credit union chose to honour transactions by the plaintiff which overdrew the account, such as direct debits and cheques, then it would charge the plaintiff a fee. The credit union charged such fees on 26 occasions over a period of almost 6 years. They amounted to $455.00 in total. On each occasion the credit union sent the plaintiff a letter advising her that a fee had been charged.

The claim

Some time after closing the account the plaintiff contacted ‘Bankbeaters’, in response to publicity suggesting that fees of this type could be recovered from financial institutions, and she later commenced legal proceedings against the credit union. She claimed that she was entitled to recover the fees because:

They were not properly chargeable under the terms of the contract;
They were ‘penalties’ at common law;
The charging of the fees was unconscionable conduct under section 57 of the Fair Trading Act 1987 (SA) and sections 12CA, 12CB and 12CC of the ASIC Act 2001 (C’th); and
The charging of the fees amounted to misleading and deceptive conduct.

The decision

Deputy Chief Magistrate Dr Andrew Cannon rejected all these claims.

In relation to the claim that the fees were penalties, His Honour found that, while the fees were imposed for breach of contract, the plaintiff had failed to prove that the fees were so disproportionate to the actual costs incurred by the credit union as a consequence of the breaches as to amount to penalties.

His Honour also found that while the account terms were not negotiable and were unilaterally imposed by the credit union, there was no pressure upon the plaintiff to choose the credit union as her banker instead of other institutions. She chose the credit union. Its contract terms and fee structures were made known to the plaintiff and were ‘available and quite easy to understand’. His Honour went on to say that the credit union had ‘acted consistently … in a principled way’.

For more information or for advice on responding to similar claims contact Shannon Adams, Partner, on 08.8168.9601

Referring borrowers to financial counsellors

2009-10-16T08:54:48+10:00

The Financial Hardship Principles issued by Abacus state that credit unions will (where appropriate and subject to availability) provide details about external financial counselling services (para. 7).

The Mutual Banking Code of Practice states that a credit union will have procedures in place to ensure members are referred to a financial counselling or similar service in appropriate cases (subject to availability) (clause 24.2).

Where can you find out about financial counsellors?

The Abacus website refers members to -
• the Commonwealth Financial Counselling Directory
• the Australian Financial Counselling and Credit Reform Association

Here are some suggested actions for credit unions:
• create a separate webpage on your website for financial hardship/assistance and include details of how members can contact a financial counsellor;
• include details in FSG or financial hardship brochures or newsletters;
• make available at branches copies of the Abacus brochures on managing credit and related material.