Australia: When Can Fraud On A Mortgage Be Brought Home To The Bank?

Last Updated: 16 August 2017
Article by Louise Massey and Brian Smith

In a significant decision, that will be good news for lenders, the Supreme Court of New South Wales has confirmed the principle that fraud as an exception to indefeasibility of title only applies where the fraud can be 'brought home to the Bank'.

In Spiliotopoulos v National Australia Bank Limited and Ors [2017] NSWSC 971,the borrower was seeking to set aside a registered mortgage on the grounds that the signature of a witness had been fraudulently applied, a fact which the bank was alleged to have been on notice of. On the application of the bank, the court dismissed the borrower's claim. The court found that the borrower could not prove that the bank had knowledge of the alleged fraud, and affirmed the long standing principle that fraud as an exception to indefeasibility only applies when the fraud can be 'brought home to the bank'. A failure to comply with internal policies is not enough to meet this threshold.

The claim against the bank

Mr Spiliotopoulos brought proceedings relating to the registration of a mortgage over his property. The bank, being the registered mortgagee, and the witness who attested to Mr Spiliotopoulos' signature upon the registered mortgage, sought to have the proceedings against them dismissed.

Against the bank, Mr Spiliotopoulos argued that the registered mortgage was defeasible for the purpose of section 42(1) of the Real Property Act 1900 (NSW) such that he was entitled to have the mortgage removed from the title of his property on the following basis:

  1. the bank did not meet with Mr Spiliotopoulos or discuss the mortgage with him and therefore did not obtain the mortgage in the normal course of banking practice and did not obtain the mortgage without notice of the fraud; or alternatively
  2. the bank obtained the mortgage by reason of a fraud committed both upon itself and Mr Spiliotopoulos by reason of the bank's policies not being complied with.

In order for the mortgage to be set aside on the basis pleaded, Mr Spiliotopoulos needed to establish that he was defrauded out of his interest as registered proprietor and that the fraud was the bank's own, in the sense that it could be brought home to the bank. Importantly, Mr Spiliotopoulos did not allege that the bank participated in the fraud.

The bank's application for dismissal

The bank referred to the accepted definition of fraud from Assets Company Ltd v Mere Roihi [1905] AC 176 where the Privy Council [at 210] stated "the fraud which must be provided in order to invalidate the title of a registered purchaser for value... must be brought home to the person whose registered title is impeached or to his agents."

The bank successfully argued that Mr Spiliotopoulos was not able to establish that a consciously dishonest act could be brought home to the bank, as the registered proprietor of the interest. The bank submitted that even if the underlying facts pleaded against it were made out, that did not establish the requisite knowledge on behalf of the bank to amount to fraud.

More fundamentally, however, the bank argued that Mr Spiliotopoulos had not suffered any loss as the result of the registration of the mortgage upon his title.

The Court ultimately agreed with the bank's submissions, finding that: 

  1. The fraud was not brought home to the bank:

    Mr Spiliotopoulos failed to establish that the bank proceeded to register the mortgage having defrauded Mr Spiliotopoulos out of his interest as a registered proprietor or that it had knowledge that someone else had done so. Non-compliance with internal policies and procedures (which was not established in the case) is irrelevant in establishing the bank was on notice of a fraud.
  2. The Plaintiff had not suffered any loss as the result of the registration of the mortgage upon his title:

    Mr Spiliotopoulos received the benefit of the money secured by the bank's mortgage and no loss was established.

The take away

This case affirms that fraud will not affect a registered proprietor's interest unless knowledge of the fraud is brought home to it. Further, a bank's failure to comply with internal policies and procedures is not sufficient to elevate its conduct to fraud.

It will be interesting to see how parties will plead their cases going forward in an attempt to establish that a bank is on notice of a fraud.

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