The recent decision of the NSW Supreme Court in MDN
Mortgages Pty Limited v Caradonna  NSWSC 1298 provides
further comfort for lenders that an allegation of fraud will not
necessarily compromise the lender's position as a
In November 2004, MDN Mortgages Pty Limited
(MDN) advanced a loan of $320,000 to Caradonna
Investments Pty Limited (Company) secured by, among other
a personal guarantee signed by Maria Antonietta Caradonna
(Mrs Caradonna) on account of the Company
a mortgage granted by Mrs Caradonna (Mortgage)
over her home at Bonnyrigg (Property).
The Company was controlled by Mrs Caradonna's son. The loan
proceeds were used to pay out a prior mortgage over the Property
(Prior Mortgage) held by Magney Mortgages Pty
Mrs Caradonna defended MDN's claim for possession of the
Property on the basis that she did not sign the Guarantee, the
Mortgage and the Prior Mortgage.
Mrs Caradonna conceded that she signed an earlier mortgage,
granted to Magney in September 2001.
Having considered the evidence, the Court accepted that, while
the Mortgage was indefeasible, Mrs Caradonna's signature on it,
the Guarantee, and the Prior Mortgage were forged.
The Court was left to determine a number of complex issues.
Construction of the Mortgage
On the correct construction of the Mortgage, was MDN
entitled to an order for possession?
Consistent with previous authorities, the Court confirmed that
MDN's entitlement to an order for possession pursuant to the
Mortgage was dependent upon the construction of the terms of the
The Facility Agreement between MDN and the Company (which the
Court found to be enforceable) was a collateral agreement,
identified in but not incorporated into the Mortgage.
The wording of the memorandum to the Mortgage was as
"...this mortgage is granted
as security for...the obligations of the Borrower pursuant to
facility agreement between it and the Mortgagee of even date...and
the mortgage debt shall include all monies actually or contingently
payable to the Mortgagee by the Mortgagor or the
The Court held that, as a matter of construction, MDN was
entitled to an order for possession as:
the Facility Agreement was enforceable against the
the Company was indebted to MDN; and
the Mortgage secured a debt owed by the Company to MDN.
Could MDN be subrogated to the position of Magney in
relation to the September 2001 mortgage?
While the relief claimed was not ultimately required, the Court
considered MDN's alternative claim that it was entitled to be
subrogated to the position of Magney in relation to the September
In finding that MDN was entitled to be subrogated, the Court
referred to the principle established in Ghana Commercial Bank
v Chandiram that a discharged mortgage is nevertheless kept
alive for a party who repays the debt secured by it.
Did Mrs Caradonna have a personal equity which could operate
as an exception to indefeasibility?
Mrs Caradonna asserted that she had a personal equity which
operated as an exception to indefeasibility, as MDN produced the
certificate of title without her consent, rendering its enforcement
of the Mortgage unconscionable.
While acknowledging that the certificate of title was produced
without Mrs Caradonna's consent, the Court found that MDN's
conduct could not be classified as unconscionable as MDN had no
knowledge of the absence of consent.
Should the Mortgage be set aside on the grounds of
Mrs Caradonna claimed that MDN's conduct amounted to wilful
blindness, because it knew that the security being offered for the
loan was the home of an elderly pensioner.
The Court held that MDN's conduct was reasonable in the
MDN did not owe Mrs Caradonna a duty to protect her from her
from MDN's perspective, Mrs Caradonna was willing to
provide the Mortgage;
MDN made it a condition of the loan Mrs Caradonna obtain
independent legal advice, and it appeared on the face of the
documents that she had; and
following settlement, MDN sent a letter to Mrs Caradonna
confirming the loan advance.
The decision is a reminder to lenders that, just as the
registration of a mortgage in not always a silver bullet, an
allegation of fraud is also not always a poisoned chalice.
An allegation of fraud in respect to a registered mortgage must
always be considered with reference to the particular facts of the
matter, and the content of the documents concerned.
Lenders may consider purchasing title insurance to safeguard
against the potential losses associated with mortgage fraud.
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