When It Goes Wrong

Sydney Morning Herald

Wednesday December 12, 2007

Anne Lampe

Investors who have taken out a loan secured by their home and applied it to a failed investment are likely to be disappointed if they try to seek relief from the lender for their loss.

In a recent landmark decision being closely studied by lenders and mortgage brokers, the NSW Supreme Court ruled against investors Omar and Amal Riz, who used their home to borrow $275,000 from Perpetual Trustee Australia through a mortgage arranged by Direct Mortgage Solutions, and subsequently plunged $150,000 of it into a Karl Suleman Enterprises investment scheme in 1999.

From a person at their solicitor's, they heard about Suleman's scheme, which promised $10,000 a fortnight if they invested $150,000. They decided to refinance their loan to participate. They used false income declarations to get the loan.

Their solicitor, Dominic David Stafford, also happened to be acting for Suleman, who is serving a seven-year jail sentence for making false statements to investors.

The Rizes spoke limited English. They had not filed a tax return since their arrival in Australia in 1977 and lived largely on Centrelink benefits totalling $28,251 a year. Omar Riz earned another $4000 a year from casual work. With the assistance of their solicitor, the pair gave Perpetual declarations they earned just over $36,000 a year.

This declaration enabled them to borrow the $275,000. They used some of it to discharge a housing loan with another bank and plunged $150,000 into Karl Suleman Enterprises. They organised to repay the loan at $20,000 a month.

Karl Suleman Enterprises failed to deliver. The Rizes couldn't meet their repayments, defaulted and then sought relief through the Legal Aid Commission, which took up their case against Perpetual and a number of other parties, including their solicitor. The Rizes argued a number of grounds why Perpetual should provide them with relief but the main one was that Perpetual should have known they did not have the capacity to repay the loan and that the financier had engaged in asset lending, which essentially means the loan can only be repaid from the sale of the asset and cannot be serviced.

The NSW Supreme Court agreed if that had been the case there might have been grounds for relief. But this was not the case here.

The court said the documents Perpetual saw showed the loan appeared to be serviceable. The Rizes had already met repayments and had not defaulted on earlier loans.

Nor did Perpetual know about the investment scheme, or need to know about it, in making its decision. The investment was entirely separate to the loan and was being pushed by parties associated with Suleman.

The court concluded: "The submission that Perpetual ought to have discovered the true position of Mr and Mrs Riz bespeaks an assumption that a lender ought to have a high index of suspicion that its borrower [or agent] is endeavouring to defraud it and is bound in the borrower's interest to be very alert for such fraud.

"A lender's failure to detect fraud by or on behalf of a borrower does not weigh significantly in favour of a finding that the consequent loan contract is unjust.

"To hold that the undetected provision of false information by or on behalf of a borrower to a lender in an attempt to obtain a loan resulted in the loan contract being unjust against the lender would be to invert commonsense, logic and justice, by protecting the wrongdoer against the victim."

The court found, however, that the borrowers had grounds for relief against their solicitor, for negligence in failing to warn them of the risk associated with the investment. There was also a conflict of interest.

They were thus awarded damages of $155,310 plus interest, representing liability incurred as a result of their lost investment that would not have occurred had they been properly advised.

They were also entitled to receive 56.5 per cent of all interest charges associated with the Perpetual loan, representing the proportion of the loan that went into the ill-fated investment.

The judgment can be read on www.lawlink.nsw.gov.au, listed under recent Supreme Court decisions.

© 2007 Sydney Morning Herald

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