Lawyer did most things right but ...

In the Vella case Mr Caradonna obtained the title deeds to Mr Vella’s properties and then fraudulently borrowed money by forging Mr Vella’s signature on the mortgage documents. Are there any lessons to be learned by lenders, borrowers and their lawyers?

The Lender

In January 2006, it was the policy of the lender, Mitchell Morgan, that:

1. it would only deal with a borrower represented by a “registered” practising solicitor,
    
2. the borrower’s solicitor was to certify, by reference to photo ID documents such as a passport or a driver’s licence, that he or she had identified the borrower; and
    
3. the borrower’s solicitor was to witness the borrower’s signature on all loan and mortgage documents.

Comment
This was a common, sensible and necessary procedure.

The Lawyers

The lawyer at Hunt & Hunt who had control of the matter was Mr Gabelich. He did everything that could be expected of him to identify the borrower.

1. He conducted an electronic NSW Law Society search on Mr Flammia who was the solicitor who said he was acting for the borrower. He ascertained that Mr Flammia was recorded in the records of the Law Society as having a current practising certificate.
    
2. By letter dated 16 January 2006, Mr Gabelich informed Mr Flammia that he, as solicitor for the borrower “must”:
   • witness the execution of the mortgage, loan agreement, statutory declarations and credit Code declaration as to purpose,
   • confirm in writing that he had identified the borrower; and
   • provide certified copies of, relevantly, the first page of the borrower’s passport, and both the borrower’s Medicare card and driver’s licence.  
3. On 17 January 2006, Mr Gabelich received from Mr Flammia:
   • photocopies of Mr Vella’s passport, driver’s licence and Medicare card, certified by Mr Flammia as being true copies of the original documents;
   • Loan Agreement (with the attestation “Signed, sealed and delivered by Alessio       Emanuel Vella in the presence of [Flammia]”),
   • Mortgage (with attestation “I certify that the person(s) signing opposite, with whom I am personally acquainted or as to whose identity I am otherwise satisfied, signed this instrument in my presence”),
   • Authority for Payment and to Complete Documents (with attestation “Signed, sealed and delivered by Alessio Emanuel Vella in the presence of [Flammia]”);
   • Statutory declaration (with attestation “Declared at Penrith this 17 day of January 2006 before me”);
   • Declaration of purpose (evidently signed in the presence of Flammia);
   • Declaration by borrower (with attestation “Made and subscribed by the said declarant at Penrith this 17 day of January 2006 before me”); 
4. When examining the identification documents, Mr Gabelich noticed a disparity in the names appearing on the passport, driver’s licence and Medicare card. Mr Gabelich telephoned Mr Flammia and they had a conversation to the following effect:

Gabelich: “I have received the documents in relation to the loan to Mr Vella, but there are a few issues with them. One, you have not satisfied 3(b) of the letter attached to my email. Can you confirm that you were there when the borrower executed the documents and that you identified Mr Vella as the borrower?”
Flammia: “Yes, I confirm that I witnessed the borrower’s signature and identified Mr Vella as the borrower.”
Gabelich: “I also notice that the name appearing on the passport is Alessio Vella, the name appearing on the licence is Alexia Emanuel Vella, and the Medicare card is in the name of Alex Vella. Can you confirm that Alexia/Alessio/Alex Vella are the same person?”
Flammia: “Yes, they are one and the same person.”

5.   Mr Gabelich then sent an email to Mr Flammia, attaching a letter to the
      borrower’s solicitor, the loan agreement, the mortgage, Consumer Credit
      Code declaration, authority for payment and NSW property statutory declaration for 
      execution by Mr Vella and Mr Flammia. The letter required, inter alia, that Mr Flammia
      confirm in writing that he has identified Mr Vella as the borrower and that he provided
      certified copies of identification documents.

Lawyer’s negligence

Although Hunt & Hunt had been so careful, the court said that they had been negligent in using an “all monies” mortgage, despite the fact that all monies mortgages are common.

In the case of Perpetual Trustees Victoria Ltd v Tsai, which was decided in August 2004, the plaintiff was the first registered mortgagee of property. The mortgage document included a clause which said:

“The mortgage is security for payment to you of the Secured Money and for the performance of all my obligations under the Mortgage. I agree to pay the Secured Money as and when the Secured Money becomes due and payable in accordance with the provisions of each Secured Agreement or the Mortgage.”

Like the Vella case, this was an all monies mortgage that was forged. The court said that there was no evidence that there was any obligation on the defendant/mortgagor to repay the money to the mortgagee because of the form of mortgage adopted. As the collateral agreement was forged and no money was actually lent to the mortgagor, the mortgage was indefeasible but it secured nothing.

The court in the Vella case said that the solicitor was negligent for not having taken the Tsai case into consideration:

I must ask myself whether a skilled solicitor would have known about, at least the potential problems, highlighted in Tsai and in a situation where there was a short term loan of a fixed sum would have directed his or her mind to whether a traditional form of mortgage naming an amount borrowed was preferable to an all monies mortgage and having had that thought, elected to use an all monies mortgage.

Mr Gabelich in his evidence at no stage mentions that he ever directed his attention to whether he should use an all monies mortgage or not. The inference that I draw is that he merely proceeded on the basis that the mortgage would be in his usual form and never considered the problems there may be.

Although he was justified in accepting what Mr Flammia said, he was not justified in thereby considering that there was no possibility of fraud. His duty was to protect his client or to warn against possibilities. He had two possible methods of proceeding, one which was safe and the other was subject to some risk and he chose the second, or at least he proceeded along the second path without directing his mind one way or the other as to what he should be doing.

Comment

Although Hunt & Hunt had taken all of the prudent steps to check that the borrower was identified, they were negligent because they had not considered that the decision in Tsai should have warned them not to use an “all monies” mortgage. The decision may seem harsh but it represents the current law, and any lender should use an “all monies” mortgage at their peril unless they are absolutely sure that they have identified the borrower/mortgagor.

The judge made scathing comments about lawyers who merely follow precedents, do not turn their minds to the nature of the particular transaction, and draft the documents appropriately.