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Lenders can have more certainty around their obligations under
the Credit Contracts and Consumer Finance Act
(CCCFA) after the Supreme Court today found by unanimous
decision that GE Custodians (GE) had no culpability in the
'Bartles - Blue Chip' case.
This Brief Counsel looks at the judgment and at its
implications.
The decision
The full Court said the result was "hard for the
Bartles" (a retired couple who became victims of the Blue Chip
collapse), but that it would be "quite wrong to hold GE
culpable" given that:
the Bartles were throughout being given advice by a lawyer
whose independence must be accepted, and
GE had no reason to suspect that the loans were in breach of
reasonable standards of commercial practice.
To apply the oppressive conduct provisions of the CCCFA in such
circumstances, therefore, would require lenders to take
responsibility for matters of which they neither knew nor should
have known.
"They would be unable to
proceed on the basis of what borrowers chose to reveal to them, and
would have to conduct an investigation into the affairs of the
borrowers lest there be something which might render the
transaction liable to reopening.
"They would have to decline to lend at all or to incur
additional expense which would certainly be passed on to the
borrowers, regardless of the fact that the borrowers were being
advised by a lawyer.
"That would be inefficient in economic terms and productive of
unfairness to lenders if they failed to discover something which
was later found to make the loan oppressive."
Accordingly, the Court allowed GE's appeal.
The background
Keen to use the equity in their freehold Whangarei home to
supplement their pension income, the Bartles borrowed $630,000 to
buy an apartment in Auckland in a transaction which was heavily
weighted in Blue Chip's favour and in which any return to the
Bartles was reliant upon the Auckland property market continuing to
rise.
GE loaned them the money through Tasman Mortgages Ltd
(TML) under an out-sourcing system in which all of the
functions traditionally undertaken by the lender were entrusted to
TML apart from the decision to make the loan, the loan
documentation and the actual advance.
The loans were made under a "Fast doc" or "asset
lending" arrangement. These are typically provided to
self-employed investors who may be unable to provide proof of
income and rely on the borrower having sufficient equity to support
the loan and signing a declaration of ability to pay.
The Supreme Court
The Supreme Court said the real question was whether a credit
contract could be oppressive if the lender had no knowledge of
"matters external to it which might otherwise lead the
court to the view that there was oppression". The
relevant issue, therefore, was what GE knew about the Bartles and
their dealings with Blue Chip.
Even if a lender knew of circumstances that might cause it to
consider that borrowing is imprudent, the lender will be excused
from inquiry if it is aware that the borrower is being advised
about the transaction by an independent lawyer.
It is not for the lender to question the competence or
independence of the lawyer - "unless the lender or its
agent already has knowledge of circumstances which render the
lending in breach of reasonable standards of commercial practice
the credit contract on which the borrower had independent legal
advice should not be treated as oppressive...".
The Court found that GE knew that the Bartles were of retirement
age and that the loans were made without regard to their income,
but "...that would not in itself make the loan oppressive
in the sense of being in breach of reasonable standards of
commercial practice."
The Court decided that the Court of Appeal had come to a
different view on the question of oppression because two members of
the Court had treated the Bartles' lawyer as if he wasn't
independent. Because of this, the Court of Appeal said that GE had
failed properly to assess the loans and securities. See our
previous
Brief Counsel.
The Court said that the Bartles, while "deserving of
much sympathy", had put their faith in Blue Chip and
their chosen lawyer and had expressly disavowed reliance on GE.
"It would make bad law if they could now hold GE
responsible for what has occurred."
Chapman Tripp's comments
The
Supreme Court's judgment, while clearly a very difficult
one for the Bartles, will be a relief for lenders concerned that
the Court of Appeal's finding placed an onerous burden on
them.
Today's decision makes it clear that lenders are not
responsible "for matters of which they neither knew nor
should have known". It also reinforces the importance of
ensuring that borrowers obtain independent legal advice.
The information in this article is for informative purposes
only and should not be relied on as legal advice. Please contact
Chapman Tripp for advice tailored to your situation.
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Serving multiple statutory demands for various parts of a single debt could be found to be an abuse of process.
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