A recent unanimous decision of the New South Wales Court of Appeal in Spina v Permanent Custodians Limited (2009) NSWCA 206 highlights the risks faced by lenders who consider that independent legal advice with respect to loan and security documents given to the appointed attorney under a power of attorney, rather than to the donor personally, is acceptable.
Angelina Spina was an elderly widow of Italian heritage with limited ability to speak, read or write English. She owned her home at Cherrybrook, which was her only significant asset. However, due to failing health, she lived in a nursing home for some years, during which her home was rented out.
In 2003, Angelina granted an enduring power of attorney to her son, Michael. This was made in accordance with the then applicable section 163B of the Conveyancing Act 1919. Under it, Michael was authorised to execute an assurance or other document, or do any other act, whereby a benefit was conferred on him. The powers given to him were not subject to any other limitations and the document was registered at the Department of Lands.
Michael owned a company which carried on business as a wholesaler of tropical fruits, trading as Action Fruit Supply. He had arranged various loans for that business over a number of years, including a loan from NAB for $152,000 made to Michael and Angelina as co-borrowers, which was secured by a mortgage over Angelina's Cherrybrook home.
Michael's broker arranged the relevant loan from Permanent Custodians for $400,000 to Michael and Angelina as co-borrowers for the apparent purposes of refinancing the NAB loan, acquisition of future investment and costs. However, while part of the loan funds were to be applied towards the discharge of the NAB mortgage, the majority of the funds were actually applied for Michael's business purposes.
The loan agreement and mortgage over Angelina's property were signed by Michael both in his own right and also on Angelina's behalf under the enduring power of attorney. He received independent legal advice both in his own right and also, separately, in his capacity as attorney from solicitors purporting to act for Angelina and he made two distinct statutory declarations acknowledging the legal advice respectively given in those capacities.
What had the Supreme Court decided?
At first instance, Hammerschlag J found for Permanent Custodians, with the greater part of his judgment relating to the effect of the Power of Attorney Act 2003 which, in his view, operated to permit Michael to properly bind Angelina by signing as her attorney in the circumstances (despite clearly receiving a substantial personal benefit from the transaction).
In relation to Angelina's alternative claims for relief under the Contracts Review Act and on the ground of unconscionable conduct, he held that the facts did not justify the granting of relief. This was largely based on his Honour's acceptance that the advice given to Michael in his capacity as Angelina's attorney was sufficient to prevent her from establishing that she was in a position of special disadvantage in respect of her dealings with Permanent Custodians.
What did the Court of Appeal decide?
In a unanimous decision, forcefully delivered by Young JA, the Court of Appeal overturned Hammerschlag J's judgment and found for Angelina's estate (Angelina having since passed away) in respect of the claim for relief under the Contracts Review Act 1990. The court held that the mortgage signed on behalf of Angelina by Michael was partially void – to the extent that it related to more than one half of the amount needed to discharge the NAB loan. The mortgage was accordingly to be varied to the effect that Permanent Custodians could only enforce it in respect of 76/400ths of the moneys secured by it.
The power of attorney issue was not the subject of appeal and the unconscionable conduct issue didn't need to be determined, given the Contracts Review Act finding.
Interesting points to note
While the primary judge appeared to accept that independent legal advice given to an attorney was to be treated on the same footing as independent legal advice given direct to a donor (Angelina) and that this accordingly represented a significant obstacle to the success of Angelina's Contracts Review Act and unconscionability arguments, the Court of Appeal firmly rejected this. The court said that, in the present set of circumstances, if a lender is to rely on independent legal advice being given to the borrower, the latter herself must receive the independent legal advice.
Young JA did, however, concede that the position might be different if:
- Angelina was clearly lacking mental capacity, or
- the transaction were clearly for her benefit, or
- the transaction was a purely commercial one with no flavour of possible influence from or benefit to some relative or friend.
His Honour was also uncompromising in his view of the primary judge's findings on the facts. Hammerschlag J had said that, even leaving aside the fact that there had been legal advice, he did not consider it would be reasonable for him to find on the facts before him that the lender had knowledge of any special disability or knowledge of facts that would have raised that possibility in the mind of a reasonable person in its position. In stark contrast to this, Young JA said: "it is difficult for me to agree that a reasonable person would not see a 'red light' when considering the scenario that the application for finance was being made:
- by an 86 year retired lady;
- by her son as her attorney;
- in circumstances where the son took a benefit;
- over the 86 year old's major asset;
- where there was no material to show the lady personally had been given legal advice;
- where, if the son died or was unable to repay the loan out of his income, the lady's home was at risk".
It is arguable that, at least in part, Angelina's role in this transaction could be viewed as being closer to a conventional guarantor than a borrower, and that the Court of Appeal's ultimate decision partially reflects this.
What lessons can be taken from this case?
In light of this decision, it is suggested that lenders who are content to rely on legal advice being given to an attorney, rather than the donor, personally, where the attorney has signed loan and mortgage documents for the donor, will be accepting the risk that a court will not consider that advice sufficient to successfully repel attacks of the type made in the facts of Spina, on its security documents.
At one end of the scale, the risk will be particularly significant where the facts include considerations similar to those summarised by Young JA as "red light" activators. However, at the other end, it will be considerably less - for example, where the donor lacks mental capacity at the time the mortgage is signed (assuming the power of attorney is an enduring power of attorney) or where the transaction is clearly for the donor's benefit, to the exclusion of the attorney's.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.