Fraud as an exception to indefeasibility of title can only be applied if fraud can be 'brought home' to the bank
In Spiliotopoulos v National Australia Bank Limited  NSWSC 971, the Supreme Court of New South Wales confirmed the principle that fraud as an exception to indefeasibility of title can only be applied where the fraud can be ‘brought home’ to the Bank.
The plaintiff sought to set aside a registered mortgage on the grounds that the signature of a witness who attested the plaintiff’s signature had been fraudulently applied, and alleged that as the bank had not engaged in normal banking practice by failing to discuss the mortgage with him; they had notice of the fraud. The Supreme Court dismissed the plaintiff’s claim and held that the plaintiff could not prove that the bank had knowledge of the alleged fraud, as a failure to comply with internal policies was not enough to meet this threshold, and affirmed that the principle that fraud as an exception to indefeasibility only applies when the fraud can be ‘brought home’ to the bank.
Arthur Spiliotopoulos (plaintiff) is the registered proprietor of 52 Russell Street, Greenacre. He is also, together with his wife, Sofia Spiliotopoulos, the registered proprietor of 47 Russell Street, Greenacre. Ms Jackson, at Mrs Spiliotopoulos’s request, attested Mr Spiliotopoulos’s signature on a mortgage in favour of National Australia Bank (the Bank) secured over 52 Russell Street, Greenacre. The loan funds obtained from the mortgage were used for the construction of two duplexes on 47 Russell Street, Greenacre. One of the duplexes was sold for $600,000, and Mr and Mrs Spiliotopoulos remain the owners of the remaining duplex.
Mr Spiliotopoulos brought proceedings relating to the registration of a mortgage over his property against the Bank and Ms Jackson.
Issue facing the Supreme Court
The plaintiff alleged that Ms Jackson fraudulently attested to his signature on the mortgage, as the plaintiff did not sign the mortgage in her presence. The plaintiff did not allege that the Bank participated in the fraud. Rather, the plaintiff contested that the Bank obtained the mortgage with notice of and by reason of fraud.
The plaintiff contended that the mortgage was defeasible for the purposes of s 42(1) of the Real Property Act 1900 such that he was entitled to have the mortgage removed from the title of his property on the following basis:
- The Bank did not meet with Mr Spiliotopoulos or explain the effect of the mortgage to 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
- The Bank obtained the mortgage by reason of a fraud committed both upon itself and Mr Spiliotopoulos by reason of the Bank’s internal policies not being complied with.
In order for the mortgage to be set aside on the basis pleaded, the plaintiff 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. The Court held that if the plaintiff could not establish that a consciously dishonest act could be brought home to the Bank, the Bank’s title will be indefeasible.
Claim against Ms Jackson
The statement of claim submitted by the plaintiff was badly pleaded and did not sufficiently make out a claim against Ms Jackson for fraud. The Court dismissed this claim.
Claim against the Bank
The Bank was successful in arguing that the plaintiff 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, it would not establish the requisite knowledge on behalf of the bank to amount to fraud. The Court reasoned that the plaintiff would need to show evidence that the Bank proceeded to registration of the mortgage, either having committed a fraud upon the plaintiff or having knowledge that someone else had committed fraud. The Court concluded that the plaintiff did not provide any evidence to support his claim.
Furthermore, the Court clarified that a failure to comply with internal policies and procedures would not be sufficient to elevate the Bank’s conduct to a participation in Ms Jackson’s alleged fraud, and the possibility that the Bank officer who dealt with the mortgage may have discovered the fraud had they conducted a meeting with the plaintiff would not be sufficient to amount to the Bank being on notice of the fraud, so as to constitute an exception to the Bank’s indefeasible, registered title.
The Bank also contended, in the alternative, that the plaintiff’s claim for damages and equitable compensation must fail on the basis that he suffered no loss in connection with the entry into the mortgage. Mr Spiliotopoulos received the benefit of the money secured by the bank’s mortgage as the loan funds were used for the construction of properties of which the plaintiff was a joint owner, hence the plaintiff could not be found to have suffered any loss and would not be granted damages or equitable compensation even if they were able to establish a cause of action.
This case affirms that fraud will not affect a registered proprietor’s interest unless the mortgagee has actively participated in the fraud or the knowledge of the fraud able to be ‘brought home’ to the mortgagee. Further, a bank’s failure to comply with its own internal policies and procedures is not sufficient to elevate its conduct to fraud.
Additionally, as the plaintiff nevertheless received and benefitted from the funds advanced under both loan agreements the plaintiff had not sustained any loss and the Court cannot grant damages or compensation to the plaintiff.
Gary Newton, Partner
Henry Yuan, Law Clerk