Australia: Indefeasibility and fraud: a silver bullet or a poisoned chalice?

Last Updated: 9 December 2010
Article by Amber Warren

The recent decision of the NSW Supreme Court in MDN Mortgages Pty Limited v Caradonna [2010] NSWSC 1298 provides further comfort for lenders that an allegation of fraud will not necessarily compromise the lender's position as a mortgagee.


In November 2004, MDN Mortgages Pty Limited (MDN) advanced a loan of $320,000 to Caradonna Investments Pty Limited (Company) secured by, among other things:

  • a personal guarantee signed by Maria Antonietta Caradonna (Mrs Caradonna) on account of the Company (Guarantee); and
  • 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 Limited (Magney).

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 Mortgage.

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 follows:

"...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 Borrower..."

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 Company;
  • 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 2001 mortgage.

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.

Personal Equity

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 unconscionability?

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 circumstances because:

  • MDN did not owe Mrs Caradonna a duty to protect her from her son;
  • 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.

For more information, please contact:


Amber Warren

t (02) 9931 4897


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