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Violet Home Loans Pty Ltd v Schmidt

Violet Home Loans Pty Ltd v Schmidt

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Case Copied 25 March 2013 57 min read

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SUPREME COURT OF VICTORIA

COURT OF APPEAL

S APCl 2010 0093

VIOLET HOME LOANS PTY LTD (ACN 120 045 025)	Appellant
	v
MANFRED PETER SCHMIDT and PERPETUAL TRUSTEES AUSTRALIA LIMITED (ACN 000 431 827)	First Respondent
	Second Respondent

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JUDGES	WARREN CJ, CAVANOUGH and FERGUSON AJA
WHERE HELD	MELBOURNE
DATE OF HEARING	15 October 2012
DATE OF JUDGMENT	25 March 2013
MEDIUM NEUTRAL CITATION	[2013] VSCA 56
JUDGMENT APPEALED FROM	Perpetual Trustees Aust Ltd v Schmidt & Anor [2010] VSC 67 (J Forrest J)

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UNCONSCIONABLE CONDUCT – Mortgage originator acting as agent for lender – Fraudster supplying false application and income declaration for borrower to finance broker who submitted documents to mortgage originator and fund manager – Borrower not consciously responsible for inclusion of false information – Application and declaration contained different income figures for borrower and did not include ABN – Mortgage originator asked for ABN and stated that income figures in forms needed to be the same – Application and declaration re-submitted with reduced income figure below threshold requiring ABN – No direct contact between borrower and finance broker, mortgage originator, fund manager or lender – Employee of mortgage originator who processed application available but not called – Conduct of mortgage originator unconscionable – Orders against lender and mortgage originator accordingly – Australian Securities and Investments Commission Act 2001 (Cth) s 12CB(1); Tonto Home Loans Australia Pty Ltd v Tavares (2011) 15 BPR 29 considered.

FINANCIAL SERVICES – Supply of financial services to a consumer – Loan of type used for personal investment - Services of a kind ordinarily acquired for personal, domestic or household use – Australian Securities and Investments Commission Act 2001 (Cth) s 12CB(5).

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Appearances:	Counsel	Solicitors
For the Appellant	Mr N Lucarelli QC with Mr P Bravender-Coyle	Mingos Kay Lawyers
For the First Respondent	Dr K P Hanscombe SC with Mr S E Marantelli	Wisewould Mahony
For the Second Respondent	Mr R Moore	HWL Ebsworth Lawyers

WARREN CJ
CAVANOUGH AJA
FERGUSON AJA:

In 2004 Manfred Schmidt obtained a line of credit facility with a limit of $190,000 from Perpetual Trustees Australia Limited and gave a mortgage over his home as security for the facility. Violet Home Loans Australia Pty Ltd (‘Violet’) was the mortgage originator and manager and processed the loan application on behalf of Perpetual. Mr Schmidt borrowed the money to invest in what he thought were property developments in Carrum. He was duped into doing so by Mr Ian Maddocks, who has since been convicted of fraud. Most of the money advanced by Perpetual to Mr Schmidt was paid directly or indirectly to Mr Maddocks and was lost. The amount owing on the loan is now in excess of $450,000. In essence, the question is who should bear the loss — Mr Schmidt or the appellant, Violet Home Loans Pty Ltd (‘VHL’), that company effectively having indemnified Perpetual for any loss sustained by reason of Violet’s conduct.

The trial judge decided this question in favour of Mr Schmidt. He held…

Grounds of appeal

[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.

[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.

[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.

Consideration

[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.

[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.

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Details

Case: [2013] VSCA 56
Decision Date: 25 March 2013

CaseChat Overview and Summary

In Violet Home Loans Pty Ltd v Schmidt, the dispute centred around the conduct of a mortgage originator, acting as an agent for a lender, in processing a loan application for a borrower. The borrower had engaged a finance broker who submitted fraudulent documents, including an application and income declaration, to the mortgage originator and fund manager. The borrower was not consciously responsible for the inclusion of the false information, as the application and declaration contained different income figures and did not include an Australian Business Number (ABN). Upon discovering these discrepancies, the mortgage originator requested an ABN and informed the parties that the income figures needed to be consistent. The application and declaration were subsequently re-submitted with a reduced income figure, falling below the threshold requiring an ABN. There was no direct contact between the borrower and the finance broker, mortgage originator, fund manager, or lender throughout the process. An employee of the mortgage originator who processed the application was available but was not contacted.

The legal issues before the court involved whether the conduct of the mortgage originator was unconscionable under the Australian Securities and Investments Commission Act 2001 (Cth) and whether the loan constituted a financial service for the purposes of consumer protection laws. The court had to determine if the mortgage originator could be held accountable for the unconscionable conduct despite being an intermediary and not directly involved in the fraudulent application. The court also needed to consider whether the loan, being a type used for personal investment and ordinarily acquired for personal, domestic, or household use, qualified as a financial service under the consumer protection provisions.

The court found that the mortgage originator's conduct was indeed unconscionable, as it failed to exercise reasonable care and diligence in processing the loan application. Despite not being directly involved in the submission of the fraudulent documents, the mortgage originator was responsible for ensuring the accuracy and consistency of the information provided. The court held that the mortgage originator should have made further inquiries, particularly when discrepancies were identified, and should have contacted the employee available to process the application. The court emphasised that the mortgage originator's failure to take appropriate action constituted unconscionable conduct. Consequently, the court made orders against both the lender and the mortgage originator under the Australian Securities and Investments Commission Act 2001 (Cth) s 12CB(1). The case of Tonto Home Loans Australia Pty Ltd v Tavares (2011) 15 BPR 29 was considered relevant, as it involved similar issues of intermediary responsibility and unconscionable conduct in the context of mortgage origination.

Additionally, the court concluded that the loan in question constituted a financial service for the purposes of consumer protection laws, as it was a service ordinarily acquired for personal, domestic, or household use. This determination was crucial in establishing the applicability of the consumer protection provisions to the mortgage originator's conduct. The court's decision underscored the importance of intermediaries in the financial services sector to exercise due care and diligence to prevent and mitigate the risks of unconscionable conduct. The orders against the lender and mortgage originator reflected the court's commitment to protecting consumers from unscrupulous practices in the financial services industry.

Orders