In a recent decision, the Supreme Court of New South Wales declared that Citigroup was entitled to an equitable mortgage over a mortgagor’s property – notwithstanding that it had mistakenly released all securities over the mortgagor’s property some years earlier.[1]  The Court held that the mortgagors knew of the bank’s mistake, and could not take advantage of it to avoid their loan obligations.

A link to the decision is available here.

A “casual error in a solicitor’s office”

This case concerned a loan advanced by Citigroup to Guy and Eunice Wernherd.  To secure that loan, Citigroup took cross-collateralised mortgages over three properties owned by the Wernhards.  In 2012, the Wernhards wished to sell one of their three properties, and Citigroup agreed on the basis that the proceeds of sale would be used to reduce their loan. However, due to a “casual error” on the part of Citgroup’s solicitors, all three securities over all three properties were released, instead of one.

In 2013, the Wernhards sold a second property, without advising Citigroup.  They deposited some of the proceeds of sale into an overdraft account, but did not tell Citigroup that those funds were the proceeds of sale. The deposited funds were then used from time to time to make interest payments on loans on other Citigroup accounts.

Citigroup did not realise its mistake until 2016, and it then demanded the reinstatement of its security over the sole remaining property owned by the Wernhards – their family home.  The Wernhards refused.  As a result, Citigroup suspended the Wernhards’ re-draw facility on their accounts.

Equitable relief for mistake granted

Citigroup argued that it was entitled to an equitable mortgage over the Wernhard’s remaining property on the basis that it had made a unilateral mistake.  To establish a right to this relief, Citigroup needed to establish that the Wernhards knew or had reason to know of the mistake.   This was admitted by the Wernhards during the proceedings, and the Court held that in those circumstances, it would be against good conscience for the Wernhards to avail themselves of the legal advantage they had obtained, namely the unencumbered right to their property.

In reaching its decision, the Court rejected a number of arguments advanced by the Wernhards, attacking the lending practices, record keeping and general conduct of Citigroup.  In each case, the Court considered that the Wernhards’ arguments were either unsupported by evidence or otherwise “ineffective as a defence”.  The Court also rejected cross-claims made by the Wernhards relating to:

• losses they say they suffered as a result of the suspension of their re-draw facility. The Court held that Citigroup was “justified in suspending the Wernhards’ accounts as they were in breach of the loan agreements”.
• alleged breaches of the National Credit Act 2010. The facts did not support a claim for non-compliance with that Act.

Accordingly, the Court made orders reinstating Citigroup’s security over the Wernhards’ remaining property – on condition that Citigroup provide an account of all interest and other charges on the loan facility, and all amounts credited to the loan facility.  It was important, the Court noted, for it to understand the precise amount outstanding under the relevant loans.

Our view

This case contains important points for both banks and mortgagors.  Banks must take care to avoid erroneously releasing securities due to the risk that the secured property will already have been disposed of.  Conversely, mortgagors cannot opportunistically take advantage of errors such as that made by Citigroup and expect to avoid their loan obligations.  If they act inconsistently with their loan obligations by disposing of security, they can expect consequences, including the suspension of access to funding.

If you have any questions in relation to this issue and how it may affect you or your organisation, please contact one of our experts:

Footnotes

[1] Citigroup Pty Ltd (ACN 004 325 080) v Wernhard [2019] NSWSC 132.