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[2003] QCA 275
appellant. Appeal allowed; order of primary judge of 20 November 2002 set aside; appellant granted leave to institute proceedings to set aside the mortgage of 19 January 1999; respondent to pay appellant's...
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An 81 year old woman mortgaged her house to secure a $34,500 loan which was paid to a third party. After default, she sought leave to sue the mortgagee (in liquidation) to set the mortgage aside, alleging lack of capacity and unconscionable conduct. The Court of Appeal held there was an arguable case of lack of capacity, but more importantly found the mortgagee knew several facts (elderly mortgagor, loan paid to third party, mortgage was her only asset, no apparent income, high interest rate) which should have prompted inquiry; failure to inquire could amount to unconscionable conduct creating an equity to defeat indefeasibility. The appeal was allowed and leave to commence proceedings granted (paras [5]–[15]).
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Mrs Lorna Salome Parker, an 81 year old pensioner and the registered proprietor of a house at 3 Williams Street, Buderim, executed a registrable mortgage in favour of Mortgage Advance Securities Pty Ltd to secure $34,500 (para [2]). Although the mortgage was granted by Mrs Parker, the advance was paid to a third party, described as Stumer, apparently to fund his business. The mortgage was registered on 27 May 1999 (para [2]). After default, the mortgagee served notice of exercise of power of sale (about 22 March 2000) (para [3]).
Mrs Parker sought leave under s 471B of the Corporations Act to commence proceedings against Mortgage Advance Securities (then in liquidation) to set aside the mortgage on two alternative grounds: that she lacked the legal capacity when signing the mortgage (non est factum), and that the loan and mortgage were obtained by unconscionable conduct (para [1], [4]). The primary judge refused leave on the basis there was not a serious question to be tried. The Court of Appeal (Davies, Williams and Jerrard JJA) allowed the appeal, set aside the primary judge's order and in lieu granted leave to institute proceedings to set aside the mortgage (orders at para [15]).
Two primary legal obstacles emerge from the judgment.
First, registration under the Land Title Act confers indefeasibility of title upon the registered mortgagee (para [6]). That indefeasibility is ordinarily defeated only by fraud attributable to the registered proprietor or by an equity arising from the act of the registered proprietor (para [6]). Accordingly, even an arguable non est factum claim by an unregistered party will often be insufficient to set aside a mortgage where registration has occurred, unless an equity can be shown against the registered mortgagee itself.
Second, unconscionability can found such an equity. The legal test adopted is the orthodox Amadio/Bridgewater line: the plaintiff must establish the defendant had knowledge or means of knowledge of some condition affecting the plaintiff's ability to make a judgment in her own best interest and that the defendant took unconscionable advantage of that condition (para [11]; citing Commercial Bank of Australia v Amadio and Bridgewater v Leahy in fn 6). The Court examined the facts known to the respondent and concluded those facts were sufficient to make it arguable that the respondent ought to have made further inquiry rather than simply relying on a broker and a solicitor's certificate; failing to inquire about whether the appellant acted independently of the third party (Stumer) could constitute unconscionable conduct that created an equity binding the registered mortgagee (paras [8]–[15]).
On the evidence, there were two psychiatric reports supporting incapacity, albeit with timing weaknesses (Dr Mulholland did not see the appellant until December 2000, after an additional stroke in January 2000) (para [5]). The Court considered the non est factum issue arguable, but emphasised that the more serious obstacle to relief was the indefeasibility principle; consequently, establishing an equity against the registered mortgagee (by unconscionability) was the critical question (paras [5]–[7]). Given the constellation of facts known to the respondent, the loan being paid to a third party, the borrower being elderly and a pensioner, the mortgage being over her only asset, absence of income to service the loan, and the high interest rate, the Court held a serious question to be tried existed as to whether the respondent's conduct was unconscionable in failing to inquire further (paras [8]–[15]). That meant the primary judge erred in refusing leave.
Before this decision, the established landscape in Australian equity and Torrens title law was:
What Parker does in practice is reaffirm the gatekeeping function of indefeasibility while emphasising that where the registered mortgagee knew facts which, objectively viewed, should have prompted inquiry into the mortgagor's vulnerability, the failure to make such inquiry may raise an arguable case of unconscionability sufficient to found an equity against the mortgagee and therefore to defeat indefeasibility at the leave stage (paras [6], [11], [14]). In other words, Parker is a practical example applying Amadio and Bridgewater to the problem of a registered mortgage taken over an elderly person's sole asset where funds were routed to a third party.
The Court did not, and need not, finally decide whether unconscionability of this type definitively gives rise to an equity under s 185(1)(a), that issue was noted as arguable and referred to other authorities (para [7], fn 4), but it did treat the question as sufficiently arguable to warrant granting leave.
Para [6]: "Such indefeasibility is subject only to fraud by the registered mortgagee and to any equity arising from the act of the registered mortgagee."
Plain English: Once a mortgage is registered, the mortgagee's title is usually secure and cannot be challenged except if the mortgagee itself acted fraudulently or if there is some equitable reason, tied to the mortgagee's actions, that makes the registered title vulnerable.
Para [11]: "What the appellant must show ... is knowledge or means of knowledge ... and unconscionable advantage taken ..."
Plain English: To succeed in equity, the borrower must show the lender knew (or should have known) the borrower was vulnerable in a way that affected her judgement, and the lender exploited that vulnerability.
Para [14]: "It is therefore arguable ... that the respondent ... was unconscionable ... without making inquiry ..."
Plain English: Given what the lender knew (elderly borrower, money paid to another person, mortgage as only asset, no income, high interest), it is reasonable to argue the lender should have checked whether the borrower was acting under pressure and that not doing so could be unfair enough to overturn the mortgage.
Para [5]: "There was some medical support ... two reports ... weaknesses ... did not see appellant until December 2000 ..."
Plain English: There is medical evidence saying the borrower may have lacked capacity when signing, but the evidence has timing problems because the expert examined her long after the signing and after another stroke.
Parker is most directly engaged where the following elements appear:
Where those facts are present, Parker suggests a court should be willing to find that a serious question to be tried exists about unconscionable conduct creating an equity that could defeat indefeasibility.
Parker itself relies on and applies established High Court authorities (Amadio and Bridgewater) and references other state and territorial decisions when discussing the scope of equities affecting registered title (paras [6], [7], [11], fn 2–6). The Court did not purport to overturn or materially change the tests from Amadio/Bridgewater; rather it applied them to the particular factual matrix, reinforcing the proposition that objective indicia known to a lender can give rise to a duty to inquire and, if ignored, can found an arguable equitable claim.
Practitioners should read Parker as confirming that at the leave-to-sue stage under s 471B a careful factual assessment is required: a plausible evidentiary foundation for capacity defects and a set of facts which, if proven, could make a lender's conduct unconscionable are sufficient to warrant permitting litigation to proceed against an insolvent lender even where registration has occurred.
Because Parker was concerned with the grant of leave rather than a final determination, it is modest in its legal pronouncements. Later courts considering final relief will require fuller factual and legal development; Parker is therefore most often cited to show what sorts of factual configurations may get a litigant over the threshold to litigate.
Does unconscionable conduct of the kind alleged in Parker always or only sometimes give rise to an equity against a registered proprietor sufficient to defeat indefeasibility under s 185(1)(a) of the Land Title Act? Davies JA explicitly treated that as arguable without finally deciding the full scope of s 185(1)(a) in this context (para [7], fn 4). The precise boundary remains fact-specific and potentially contestable on final hearing.
What is the precise content of the lender's duty to inquire? Parker identifies circumstances that should prompt inquiry (paras [9]–[15]) but does not specify exact investigatory steps. Future cases will need to elaborate when reliance on intermediaries (brokers) and solicitor certificates becomes insufficient.
How will courts balance conflicting medical evidence about capacity when the primary medical assessments post‑date the transaction? Parker accepts the existence of weaknesses in timing yet still treated capacity as arguable (para [5]). The evidentiary threshold for non est factum at interlocutory stages versus final hearing remains an area for clarification.
To what extent does an improperly executed solicitor's certificate reduce the mortgagee's ability to rely on it as protection against claims of unconscionability or lack of capacity? Davies JA noted defects in the certificate and said the respondent made no attempt to ascertain independence from the third party (paras [12]–[14]). Future courts may further explore the weight to be given to such certificates.
Finally, because Parker granted leave under s 471B, the ultimate determination of whether an equity exists, and whether the mortgage should be set aside, was left for trial. That leaves open the factual outcome and the boundaries of equitable relief in the intersection of Torrens title and unconscionability.
Conclusion: Parker v Mortgage Advance Securities is a useful, fact-driven example of how courts will approach claims seeking to defeat the protection of registration where an elderly mortgagor's only asset is used to secure a loan paid to a third party. It confirms that when objective indicia of vulnerability and improvidence are known to a lender, failure to make reasonable inquiry can found an arguable case of unconscionability sufficient to allow proceedings to be commenced despite the shield of indefeasibility.
McCullough Robertson (Brisbane) as town agents for Middletons Solicitors (Melbourne) for the respondent
[1] DAVIES JA: This is an appeal against the refusal of an application for leave pursuant to s 471B of the Corporations Act 2001 to commence proceedings against the respondent, a company in liquidation. The order refusing leave was made on 20 November 2002.
[2] The appellant was at all relevant times the registered proprietor of a house property at 3 Williams Street Buderim. On 16 April 1999 she executed a registrable mortgage over the property to the respondent to secure an advance of $34,500. The advance was apparently in fact made to a man called Stumer with the appellant's consent. The mortgage was registered on 27 May 1999.
[3] There was default in repayment of the money advanced and on or about 22 March 2000 the respondent served a Notice of Exercise of Power of Sale on the appellant in respect of the land.
[4] The action which the appellant sought leave to commence against the respondent, which is now in liquidation, was one to set aside the mortgage either on the ground that she did not have the legal capacity to execute the mortgage (non est factum) or on the basis that the deed of loan and the mortgage which secured it were obtained by unconscionable conduct. The learned primary judge was not satisfied that, on either basis, the appellant established that there was a serious question to be tried.[1]
[5] There was some medical support for the contention that, at the time the appellant executed the mortgage she did not have the mental capacity to understand it, namely two reports from Dr Mulholland a psychiatrist dated 14 December 2000 and 10 October 2002 although, as counsel for the respondent has pointed out, there are some weaknesses in this evidence not the least of which is that Dr Mulholland did not see the appellant until December 2000, more than a year and a half after the transaction sought to be set aside and, in the meantime, the appellant had apparently suffered a second stroke in January 2000, her first stroke upon which Dr Mulholland's report was based having occurred in January 1999.
[6] Nevertheless in my opinion the appellant would have an arguable case, on the evidence so far adduced, that when she executed the mortgage she did not have the mental capacity to understand it. A more serious problem is that, unless the claim based on unconscionability succeeds, the respondent, on registration of the mortgage, obtained indefeasibility of title as mortgagee and that that indefeasibility included the covenant to repay the mortgage sum and the power of sale conferred on a mortgagee under s 83 and s 84 of the Property Law Act 1974: Land Title Act 1994 s 78.[2]
[7] Such indefeasibility is subject only to fraud by the registered mortgagee[3] and to any equity arising from the act of the registered mortgagee.[4] Whatever may have been the conduct of others involved in the transaction which gave rise to the execution of the mortgage, it was not even contended that there was any fraud attributable to the respondent. Nor, unless there is some equity against it arising from unconscionable conduct on its part,[5] was there any equity against it. It is to that question that I now turn.
[8] It may be accepted that the respondent did not know anything of the appellant's mental state at the time she executed this mortgage. Nor was it submitted that there were facts from which it ought to have known this. The appellant's contention was rather that it was arguable that there were facts known to the respondent on the basis of which it was unconscionable of it to proceed to enter into the loan transaction and take the mortgage from the appellant without making further inquiry which would have revealed that advantage had been taken of her vulnerability.
[9] Those facts known to the respondent were, according to Mr Diehm, who appeared for the appellant, the following:
1. that the whole of the loan was to be paid to Stumer, apparently to be spent on Stumer's new panel shop (Stumer was a panel beater);
2. that the only security for the loan was to be provided by the appellant and by her daughter Ms Hume, but not by Stumer notwithstanding that he owned real property which could have been mortgaged;
3. that the loan, totalling $34,500 was to be advanced on that security notwithstanding that Stumer disclosed having $20,000 in cash;
4. that the appellant was 81 years of age and a pensioner. She was also described in the application as an investor but the only asset which she owned was the house property the subject of the mortgage;
5. that it did not appear that the appellant had any income which could service the loan; and
6. that the loan was to be at an interest rate of 28 per cent reducible only to 20 per cent for prompt payment.
[10] On the basis of those facts Mr Diehm submitted that this was known by the respondent to be an improvident loan secured by a mortgage of a very old woman of her only asset. Moreover, he submitted that the above circumstances in which it was obtained arguably required further inquiry by the respondent before taking such a mortgage.
[11] The relevant principles applicable to these facts are not in doubt. What the appellant must show, in order to succeed in her claim, is knowledge or means of knowledge by the respondent of some condition or circumstance affecting the appellant's ability to make a judgment in her own best interest, and unconscionable advantage taken by the respondent of that condition or circumstance.[6]
[12] Mr Clothier, for the respondent, relied heavily on a certificate provided to the respondent from a solicitor, who was independent of the respondent, to the effect that the mortgage was executed in her presence; that she explained the effect of the mortgage to the appellant before it was executed by the latter and that the appellant stated to her that she had read the document, understood its effect and her obligations under it, approved the conditions of the document and signed the document voluntarily; that she explained to the appellant that to understand the risk in giving the mortgage she should have an understanding of the financial accommodation which the mortgage secured and advised her to obtain independent financial advice; and that to the best of her knowledge, information and belief the appellant signed the mortgage voluntarily having appeared to understand its terms and after stating to her that she did understand its terms.
[13] The form of the certificate gives some cause to doubt the care with which the certifier satisfied herself about any of the above matters. It was in a standard form, appropriate whether the borrower was male or female or a company. And it was incorrectly executed, the solicitor signing only as a witness to the signature of the appellant. Nevertheless Mr Clothier pointed out, accurately, that the respondent had no direct contact with the appellant in this transaction, it having been handled through a broker and, in those circumstances he submitted, the respondent was entitled to rely upon this certificate from the solicitor notwithstanding its defects.
[14] It is true that the certificate was provided by a solicitor whom the respondent knew was independent of it. But what the respondent did not know, and made no attempt to ascertain, was whether that solicitor was independent of Stumer. The transaction had about it the hallmarks of one in which a person, weakened at least by age, was prevailed upon by a younger and stronger person to mortgage her property in an improvident way for the benefit of that younger and stronger person. It is therefore arguable, in my opinion, that the respondent, knowing what it did, was unconscionable in proceeding with the transaction which included the mortgage without making inquiry as to whether the appellant had entered into this transaction independently of any influence exerted over her by Stumer.
[15] For that reason I think that the learned primary judge erred in refusing the application.
2. Set aside the order made by the learned primary judge on 20 November 2002.
3. In lieu grant the appellant leave to institute the proceedings against the respondent to set aside the bill of mortgage granted by her to the respondent on 19 January 1999.
4. Order that the respondent pay the appellant's costs of the application to the learned primary judge and of this appeal to be assessed.
[16] WILLIAMS JA: I have read the reasons for judgment of Davies JA and agree with what he has said, and with the orders he proposes.
[17] JERRARD JA: I have read the judgment of Davies JA and respectfully agree with his reasons and proposed orders.
[1] It being common ground that that was the correct test. See Vagrand Pty Ltd (in liquidation) v Fielding & Ors (1993) 41 FCR 550.
[2] Mercantile Credits Ltd v Shell Co of Australia Ltd [1976] HCA 9; (1976) 136 CLR 326 at 343; PT Ltd v Maradona Pty Ltd (1992) 25 NSWLR 643 at 675 - 679; Pyramid Building Society (in liq) v Scorpion Hotels Pty Ltd [1998] 1 VR 188 at 196.
[5] It is an arguable question whether unconscionability, or unconscionability of the kind said to arise here, gives rise to an equity against the respondent. As to the meaning of s 185(1)(a) see Tara Shire Council v Garner & Ors [2002] QCA 232; see also LHK Nominees Pty Ltd v Kenworthy [2002] WASCA 291; Full Court, Supreme Court of Western Australia, 23 October 2002.
[6] Commercial Bank of Australia Ltd v Amadio & Anor [1983] HCA 14; (1983) 151 CLR 447 at 462, 466, 476 - 477; Bridgewater v Leahy [1998] HCA 66; (1998) 194 CLR 457 at [39], [40], [75], [76].
Parker
Mortgage Adavance Securities P/L [2003] QCA 275
(1983) 151 CLR 447
(1998) 194 CLR 457
(1993) 41 FCR 550
(1976) 136 CLR 326
(1992) 25 NSWLR 643
Appeal allowed; order of primary judge of 20 November 2002 set aside; appellant granted leave to institute proceedings to set aside the mortgage of 19 January 1999; respondent to pay appellant's costs of the application and of the appeal (paras [15]).