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Case report summaries

Case 1 - Hardship variation:

Mortgage repossession seemed imminent in a case where insurance claims could not be settled and the lender rejected a hardship variation application.
Amelia (not her real name) came to Legal Aid in June 2009 having been referred by Johnson J. Amelia was a self represented defendant in Supreme Court mortgage repossession proceedings. She bought her home in 2005 when she was working, but had since developed a chronic illness and was unable to work, relying on Centrelink payments. As a result she had fallen behind with her mortgage repayments and was in default.

Amelia had filed a defence and cross claim prepared by herself. Both the defence and cross claim asked the Court for a variation of the loan agreement due to hardship. This was based on her illness and relied on claims for salary continuance and total and permanent disability insurance, which if successful might pay off the loan.

Amelia’s medical condition meant that she was frequently unable to leave the house or attend to responsibilities. She had failed to turn up in Court several times. The proceedings had reached the stage where the Court was indicating an intention to strike out Amelia’s defence and cross claim and enter judgement for the lender. Unfortunately the Court was not in a position to consider a hardship variation application as Amelia had not requested a hardship variation from the lender as required under the Consumer Credit Code. Another problem was that the amount Amelia had borrowed at the time she came to see us was over the threshold amount for a hardship variation. The threshold is a “floating” threshold which is linked to the ABS Index of the cost of new houses in Sydney and changes month to month. Fortunately for Amelia the day before she had to go back to Court the threshold went up to just above the amount she had borrowed.

We wrote to the lender requesting a hardship variation under section 66 of the Consumer Credit Code. The following day I appeared in the Supreme Court and informed Johnson J that a hardship variation application had been made with the lender. The case was adjourned to allow the lender to consider the application. The lender refused on the basis that there was no firm date for the insurance claim to be finalised and there was no guarantee it would be resolved in our client’s favour. The matter came back before the Court and was adjourned on a number of occasions so that negotiations with the insurers could continue, however we were unable to resolve the insurance claims and eventually the Court struck out the defence and set the cross claim down for hearing.

Amelia’s hardship variation case relied on her insurance claims, which were inherently uncertain. The Court would effectively have to agree to a variation of the loan agreement for an indefinite period for an outcome that may or may not be favourable, which was clearly a big ask. With weeks to spare and largely due to the exceptional skills of our Barrister, we were able to successfully negotiate settlement of the insurance claims. The insurance claims were settled for $625,000 – an excellent result and more than enough to pay out the mortgage and other debts. The mortgage repossession proceedings were discontinued and the mortgage discharged.

Case 2 - From the mortgage belt:

The team efforts of a civil lawyer, the Grants Division and a private lawyer saved a family from losing its home. Matthew Hazard reports a mortgage stress story with a happy ending.
Fairfield Legal Aid acted for a wife in mortgage repossession proceedings that started in December 2006.

Our client’s husband made an investment in some property in Queensland which involved what is known as Mezzaine financing. The investment was made in 2004 using $250,000 equity taken from the family home. The couple have four children.

The company to which the investment monies were given and other associated companies went into liquidation late 2005.

The husband had received some investment advice from well-known financial advisers who were associated with loan brokers.

We sued four cross-defendants along the way. There were also parallel proceedings against one of the defendants by way of a class action in the Federal Court. Our client and her husband decided to opt out of the class action rather than discontinue against that party in the Supreme Court.

As there was a potential conflict between the husband and the wife, the husband was assigned out to private lawyers. It took several months and further memos after a grants refusal and Legal Aid Review Committee appeal to secure a grant for the husband.

The case against the lender was not strong and counsel’s advice was that we would lose if we went to hearing.

If the case had not settled then, we would have had to terminate aid and any gains against several cross-defendants would have been lost.

The case went to mediation on two separate occasions in 2009 and finished at 8pm on the last mediation. The mediator advised the client against the agreement but he was not aware of the termination of legal aid that would have followed if no settlement could have been reached.

During the mediation a successful application to Grants was made to cap the contributions which Legal Aid would recover from the husband and wife. This greatly assisted in allowing the client to agree to a deal that she and her husband could finance.

Settlement was difficult and in March 2010 a dispute arose over the interpretation of the settlement deed, which then had to be resolved in court before refinance by our client could proceed. This also allowed further time for arranging a refinance of the remaining agreed debt by our client.

Our client’s husband made several loan applications for refinance which were refused thus prejudicing any new application.

The private lawyer for the husband had to attend a fresh loan application interview to prevent the husband from scaring off the new lender with all the details of the court case which he had done in the earlier applications.

The refinance took place in April 2010 and proceedings against our clients will be discontinued shortly.

Our client, her husband and four children can now stay in the family home with only a $200,000 mortgage instead of facing a claim for $700,000 from the lender.

Case 3 - A “just and enriching” result:

Wollongong civil lawyers assist an intellectually disabled client in a landmark mortgage repossession case.
A legal team and expert comprising David Murr SC, Mark Sneddon of counsel, lawyers Margaret Pantall and Michael Sergent of our civil law practice in Wollongong and clinical psychologist Esme Nasser have achieved a landmark decision in the law regarding contracts which are unenforceable against a disabled person, and the scope of relief available under the Contracts Review Act.

Our client is significantly intellectually disabled and receives a disability support pension. He had worked for many years in coalmines on the Wollongong escarpment as an unskilled employee. His son and a mortgage broker got him to sign a mortgage contract for $200,000 over his home for a business purpose.

The son used the money to buy a business which he registered in his father's name, making his father the nominal owner. The business failed. The mortgage payments were not made.

The lender did not carry out any due diligence checks about our client’s ability to repay the loan. A number of entities including a mortgage broker, loan originator, mortgage manager and settlement agents were the intermediaries.

The Trustee in Bankruptcy was appointed over the debts of the business, obtaining an order for possession of our client's home. The mortgagee lender also sought repayment in the Supreme Court from the sale of our client's home.

Intense litigation
“The case started one day in March 2007 when I received a phone call from the distraught sister of our client,” says Michael Sergent. “ She had found documents in her brother’s home marked with words such as “mortgage”, “bankruptcy” and “repossession.” She was advised to pack them in a bag and come straight to our office.”

What followed were more than two years of frequently intense litigation.

“Within weeks Margaret was simultaneously in three courts with Mark Sneddon defending our client through his sister who had become his tutor for the proceedings,” Michael recalls. “Margaret was in the Federal Magistrates Court setting aside the bankruptcy arising from the business debts since we couldn’t otherwise defend the mortgage transaction in the Supreme Court. She was in the North Sydney Local Court setting aside default judgment also for the son’s business debts. She was in the Supreme Court putting on Notices of Motion to set up the defence of the mortgage loan.”

Illiteracy
Following the trial the Supreme Court judge accepted that our client had not understood the nature of the contract he signed and set it aside. The plea of non est factum applied – our client lacked capacity to understand the contract at all. There must be a “true consent” of the signer. However, it held he had been "unjustly enriched" and had to pay back the lender, as there was a benefit resulting from the loan, being an advance for the business.

Crucial to our defence was the expert evidence of clinical psychologist Esme Nasser. The judge had Esme and the lender’s high profile psychiatrist together “in the box.” Esme won the day with the judge accepting her opinion regarding our client’s illiteracy over that of the psychiatrist.

Unenforceable contract
The NSW Court of Appeal (Allsop P, Young JA and Sackville AJA) on the 8 July 2009 held the mortgage contract was unenforceable as the client lacked the necessary capacity to understand the contract at all. Further, if the mortgage contract (which was for business purposes) had been found valid, then the Supreme Court would have given relief under the Contracts Review Act to a disabled person incapable of contracting. It refused the mortgage company's attempt to claw back the moneys advanced to buy the business. Because $24,000 of the loan was deposited into our client’s bank account he will need to repay that amount and the legal costs of the trustees in bankruptcy. The lender has now agreed to discharge the balance of mortgage of more than $200,000 and will not be appealing to the High Court.

“Our client’s family has rallied again to his assistance and in the near future he will be accommodated in a town house right opposite his sister in a retirement village. Our client hasn’t seen his son since the business went under,” says Michael Sergent.

“This case highlights the financial and social disasters which can be caused by low doc loans and sub-prime mortgages. Often the lender does not know what the intermediaries are doing. There is a strong message here for the financial lending industry to ensure lenders themselves are informed of the circumstances of the borrower.”

“In this case the appeal judges held our client was not liable in restitution to repay the funds when the loan contract was found void and he did not in substance receive a benefit.”

This case exemplifies the tremendous determination of a great civil law team at Wollongong consisting of Michael Sergent, Margaret Pantall, Matt Turner and Angela Melouney.

The Court of Appeal awarded costs to our client.

Pullout: “This case highlights the financial and social disasters which can be caused by low doc loans and sub-prime mortgages.”