The judgement in Nolan v MBF Investments Pty Ltd [2009] (Nolan) caused some media excitement in June 2009 for Justice Vickery’s quoting of Daryl Kerrigan’s iconic ‘its not a house, it’s a home’ speech from the Castle in his judgement.
Beyond the headlines, the decision was a potentially important one for mortgagees. For the first time a court held that the interests of a mortgagor which a mortgagee can be required to consider when exercising its power of sale included a non-economic interest, that in occupying the family home.
Although specifically concerned with the interpretation of section 77(1) of the Transfer of Land Act 1958 (Vic), the decision is likely to influence claims by mortgagors in connection with the common law duty of good faith imposed on mortgagees exercising a power of sale applicable in other jurisdictions.
One of the key open questions following Nolan was whether courts would extrapolate from it a general obligation on mortgagees to protect the family home from being sold where the mortgagee could be repaid entirely or substantially from other sources.
This question was considered in Perpetual Trustee Ltd v Baranov [2010] VSC18 (Baranov), the first case to judicially consider Nolan. The answer was an explicit rejection of the argument that Nolan established a principal of the supremacy of a persons home from the unnecessary actions of a mortgagee and a reminder of the importance of clear drafting in protecting mortgagee’s rights.
The facts of Baranov, stated briefly, are as follows. A number of securities (including a mortgage over the family home) were granted by Mr Baranov, or companies controlled by him, in favour of the plaintiff (the custodian of a mortgage fund).
The securities were linked by a deed of cross-collateralisation (DOCC). The DOCC provided, among other things, that the mortgagee was entitled to enforce each security without reference to any other and without first having to resort to its rights under any other security.
In defending the application for summary judgement Mr Baranov raised a number of issues going to both the entitlement of the mortgagee to exercise its rights under the securities and to the manner of their exercise. However, heavy reliance was placed on the decision in Nolan.
In particular, it was argued that, as the aggregate value of the security properties other than the family home was enough to fully repay the mortgagee or, in a worst case, enough to repay the amount owing to an extent that would allow Mr Baranov to use the family home as security to raise sufficient finance repay the balance owing, Nolan required the mortgagee not exercise its rights against the family home.
Mukhtar AsJ emphatically rejected this argument, stating:
In my view Nolan does not stand for the proposition that where a mortgagee has a choice of securities to enforce, and a homeowner gave the mortgagee the freedom to realise whichever security the lender wanted, the mortgagee is constrained to spare a person’s home if satisfaction can be obtained by realising another available security…
Nolan stands for the proposition that “interests” can include a home occupation interest. But a sale of a person’s home can be in good faith even if it involves selling a person’s home instead of another security. What made the sale in Nolan not in good faith was evidence that the mortgagee was acting irrationally, recklessly and illogically and above all not in conformity with its legal and sales advice.
In addition to the ‘irrational, reckless and illogical’ actions of the mortgagee in Nolan, Mukhtar AsJ identified a number of other basis on which the facts in Baranov could be distinguished from those in Nolan. These may provide some signpost as to how the courts will seek to apply Nolan.
First, the seemingly important distinction that the family home in Baranov had not been sold at the time of the proceedings (and therefore section 77(1) of the Transfer of Land Act was not relevant). Mr Baranov argued that the nexus between a mortgagee entering into possession and exercising its power of sale was such that Nolan ‘reaches back’ to the claim for possession. However this was not addressed directly in the judgement, and remains an open question.
Second, unlike in Nolan, the securities in Baranov were not granted by Mr Baranov only in his individual capacity, but also by corporate vehicles established and controlled by him. Mukhtar AsJ dismissed the argument that he should pierce the corporate veil, given the potentially different interests of each of the vehicles and the consequential requirement to effectively preference the interests of one mortgagor (Mr Baranov) over the others to protect the family home.
Third, and perhaps most importantly, Mukhtar AsJ held that nothing in Nolan required the displacement of the clear agreement by Mr Baranov under the DOCC to allow the mortgagee to unilaterally determine the order of enforcement of the securities subject to that document.
As a decision of an Associate Justice hearing an application for summary judgement, care should be in assessing the influence of the decision in Baranov. However, some clear markers were laid in Baranov that might reasonable be expected to be followed by the courts in considering the scope of the decision in Nolan. In particular:
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where, as is often the case in small businesses, securities are granted by owners in their personal capacity as well as by the corporate vehicles, the decision in Nolan is unlikely to apply;
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a clearly drafted provision which sets out the rights of a mortgagee to sell its security properties in the order they choose is likely to be given effect to; and
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the decision in Nolan needs to be seen in the context of its facts, particularly the ‘irrational, reckless and illogical action of the mortgagee’, as Mukhter AsJ put it, and the lack of good faith this may have evidenced. A lack of good faith will not be imputed just because there may have been another option available to a mortgagee other than selling the family home.
Author: Martin Irwin