The Privy Council's recent decision in Garet O Finlayson and another v Caterpillar Financial Services Corporation (The Bahamas) has charted a clear course for mortgagees and their duties when realising security. In a case that saw a luxury yacht at the centre of a high-value dispute, the Board has provided guidance as to what constitutes a "makeover" that discharges mortgagees' duty to achieve the "best price reasonably obtainable." The consistent ruling across all court levels provides much-needed clarity for lenders, borrowers, and practitioners alike and makes plain that the law does not require a mortgagee to yacht for gold.
Background
The facts are as striking as the vessel itself. In 2001, Caterpillar Financial Services Corporation (the Lender) issued a loan to Kurc Limited (the Borrower), secured against the 147-foot mega yacht, Maratani X. The appellants, Garet O Finlayson and Mark G Finlayson (the Guarantors), stood as guarantors. The Borrower defaulted on the loan in 2015. The Lender repossessed the yacht, only to find it in a state of significant disrepair and unseaworthy. Despite spending over $700,000 on repairs, the Lender was unable to restore the Maratani X to seaworthy condition. Ultimately, the yacht was sold "as is, where is" (which was a contractual term) for $2.7M in December 2016. After deducting expenses, there was a shortfall of $4.2M, which the lender sought to recover from the Guarantors.
The Guarantors' arguments - a sinking feeling?
The Guarantors' case was anchored in the allegation that the lender had failed in its duty as mortgagee. They argued that the Lender should have undertaken further repairs to make the Maratani X seaworthy, which would have enabled a sale at a much higher price and potentially enough to clear the entire debt. They pointed to valuations suggesting that, if the yacht could pass a sea trial, it might have fetched as much as $4.6M. In their view, the Lender's decision to sell "as is" was unreasonable and resulted in a sale at an undervalue.
Anchoring in reasonableness
At every judicial level, the courts rejected the Guarantors' arguments. They held that the duty of a mortgagee to take reasonable steps to obtain the best price reasonably does not to require an embark on a programme of significant improvements or renovations.
The Privy Council affirmed these findings. The Board was clear: the mortgagee's duty is one of reasonableness, not perfection. There is no obligation to spend further sums to improve the asset for sale, even if such improvements might, in theory, yield a higher price. The duty is to act prudently and commercially, taking into account the asset's actual condition and the realities of the market at the time of sale.
Interestingly, the Privy Council also clarified the burden of proof is placed upon the mortgagor (or guarantor) to prove any alleged breach of this duty, unless there are special circumstances such as a sale to a related party, which might give rise to a conflict of interest.
Key Evidence: No Yacht to Stand On
The Lender's decision to sell "as is" was made after spending over $700,000 on repairs and considering the risks and costs of further work. Internal correspondence showed that bringing the yacht to sea trial conditions would have required at least another $500,000 and several months' delay, with ongoing holding costs and the risk that the vessel might still fail. Whilst refusing to spend a further $500,000 alone may be considered unreasonable, particularly as these costs could be recovered, this decisions shows that the risk of a successful (in this case, seaworthy) repair is a significant factor.
Mortgagees can be reassured that their duty is to act reasonably, not to embark on costly renovations or speculative improvements. Borrowers and guarantors, for their part, must be prepared to provide clear and credible evidence if they wish to allege a sale at undervalue.
For practitioners, the case is a reminder of the importance of documentary evidence such as broker correspondence, valuations, records of the asset's condition and the sale process. They are all critical in demonstrating the reasonableness of a mortgagee's actions. Ultimately, the law does not require a mortgagee to yacht for gold; it requires only that they act prudently, commercially and reasonably in balancing risks against the costs and the circumstances.
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.
