FORTES AND ANOR v BANK OF NEW ZEALAND CA612/2013 [2014] NZCA 346

FORTES AND ANOR v BANK OF NEW ZEALAND CA612/2013 [2014] NZCA 346 [24 July 2014]IN THE COURT OF APPEAL OF NEW ZEALANDCA612/2013[2014] NZCA 346BETWEEN MANUEL FORTES AND GLENNISMEEGAN FORTESAppellantsAND BANK OF NEW ZEALANDRespondentHearing: 2 July 2014Court: Miller, Ronald Young and Cooper JJCounsel: D W Grove for AppellantsL A O'Gorman and D T Broadmore for RespondentJudgment: 24 July 2014 at 2.30 pmJUDGMENT OF THE COURTA The appeal is dismissed.B The appellants must pay the respondent's costs on a band A basis as for a standard appeal plus usual disbursements.____________________________________________________________________REASONS OF THE COURT(Given by Miller J)Introduction[1] The Fortes and the Bank of New Zealand fell victim to a fraud which led the Bank to lend $516,000 to buy two houses, one in Manurewa and the other in Taupō. They join issue over who should bear the loss which crystallised when the properties were later resold for a lesser sum. The Bank won a summary judgment for thedeficit in the High Court.1 The Fortes appeal, saying that there is a question for trial; whether the loan was oppressive because the Bank was on notice of facts that ought to have alerted it to the fraud.Narrative[2] Through a man named Glenn Cooper the Fortes applied to the Bank in June 2010 for a loan to purchase the two houses. He gave the Bank copies of the purchase agreements, which the Fortes had signed. The loan application was accompanied by documents intended to show that they could service the loan requested, $516,000. The supporting documents comprised agreements for sale of two existing properties – their family home at Mt Eden and an investment property at Mangere – and copies of statements of account from their existing lender, New Zealand Home Loans Ltd. Mr Cooper got the latter documents using the Fortes'internet banking password, which they gave him along with copies of their passports.[3] The Fortes signed the loan application, but they had no intention of selling their existing properties. Mr Cooper had forged the agreements for sale of those properties. It is said that he had also doctored the statements of account, although the Bank does not accept that and says the accounts were in any event immaterial to its lending decision.[4] It is also said that Mr Cooper had not disclosed that a company of his, Home Investment Group Ltd, was the vendor of the Manurewa and Taupō properties, although he signed the agreements for the vendor and Mr Grove conceded that the Fortes must have known he was the signatory. It is said that he bought the properties at distress sales and persuaded the Fortes to buy them for $645,000, far in excess of their value, although there is no evidence of the price that he bought them at; all we know is that their last rating valuations totalled $468,000 (capital value) and theTaupō property was said to have subdivision potential.[5] The agreements for sale and purchase of the Manurewa and Taupō properties1 Bank of New Zealand v Fortes [2013] NZHC 2188.provided for substantial deposits, totalling $129,000.2 In fact the Fortes never paid deposits. As Mr Grove accepted, they must be taken to have known this. Their explanation is that they never thought about it; they trusted Mr Cooper, who was a friend. He had assured them that they would profit on the transactions.[6] Mr Cooper procured a valuer, Michelle Tierney, to issue valuations supporting the purchase price. There is reason to suppose that she was not independent. The valuations were given to the Bank, from whose perspective the proposed loan apparently met normal lending criteria for loan to value ratio and loan servicing ability. The Bank says that would have been the case even without the forged agreements for sale of the existing properties, having regard to the substantial deposits that had apparently been paid and the fact that the properties were tenanted.[7] The Fortes were not existing customers of the Bank. Contrary to internal procedures designed to protect the Bank, the officer who approved the loan did not meet the Fortes in person before making the advance, or scrutinise the valuations, or obtain original bank statements, or confirm that the vendors of the Manurewa andTaupō properties were the existing registered proprietors. Nor did the officer confirm that the deposits had been paid. For summary judgment purposes, we willassume in the Fortes' favour that the Bank would have prevented the fraud had itfollowed its internal procedures.3[8] The Fortes appointed a solicitor, Alex Lee, to act for them. It appears that he was recommended by Mr Cooper, for whom he may have acted on other transactions, but the Bank had no reason to doubt his independence. In accordance with normal conveyancing practice the Bank instructed him to act for it on registration of its mortgages over the Manurewa and Taupō properties. The Bank told him that the purchase prices were $245,000 and $400,000 respectively (totalling $645,000) and instructed him to contact the Bank if the purchase prices on the settlement statement differed.2 The agreements for sale and purchase record the deposits as totalling $130,000. However, the Bank lent on the basis of deposits of $129,000.3 Krukziener v Hanover Finance Ltd [2008] NZCA 187, (2008) 19 PRNZ 162 at [26].[9] The advance was swiftly approved, the process taking just one day, and the properties were duly transferred to the Fortes. A settlement statement was issued bythe vendor's solicitors, Duncan Cotterill, and the "balance" was duly paid using the loan proceeds. As noted, the Fortes did not pay the deposits at any time, so the net result was that they acquired the properties for $516,000. The Bank having been misled about the deposits, they had been permitted to borrow the entire purchase price.[10] The Fortes promptly fell into default. It appears that Mr Cooper had also misled them about the tenancies. They have cooperated with the Bank on resale of the properties, which process left a shortfall of some $296,500. Summary judgment was given for the shortfall plus interest, being a total as at 28 August 2013 of $329,263.63.The issue[11] The Fortes wish to have the loan transactions reopened for oppression, relying on s 120(a) of the Credit Contracts and Consumer Finance Act 2003. They contend that the loan was oppressive in law because the Bank was on notice of irregularities that pointed to fraud.[12] We record that in the High Court it was suggested there was some active impropriety within the Bank, in the form of a relationship between the approving officer and an associate of Mr Cooper's. That suggestion was based on the flimsiest of evidence. It has been flatly denied by those involved. Associate Judge Christiansen rejected it4 and Mr Grove properly accepted on appeal that he was entitled to do so. Counsel approached the case on the basis that the Bank too was aninnocent victim of Mr Cooper's fraud.The law[13] It is common ground that the Bank assumed no duty of care to the Fortes, in contract or in tort. As this Court put it in Forivermor v ANZ:54 At [67].5 Forivermor Ltd v ANZ Bank New Zealand Ltd [2014] NZCA 129.[56] It is well-established that, as a general principle, a bank does not ordinarily owe its customers any general duty to furnish careful advice on business or banking transactions, whether in contract or tort, unless it specifically undertakes to do so.6 There is no authority to support Mr Thwaite's submission that the closeness of the relationship between abank and its customer gives rise to a general duty of care.7 The focus shouldbe on the question of whether a bank can be taken to have "crossed the line"and impliedly assumed the duties of an adviser in addition to those of a mere banker.8[14] So the only question is whether for purposes of s 120(a) of the Act the credit contract was oppressive, meaning "oppressive, harsh, unjustly burdensome,unconscionable, or in breach of reasonable standards of commercial practice".9 This question is answered as at the time the loan agreement was made.10 When answering it, the Court must consider all the circumstances of the agreement's making.11[15] The Fortes point to none of the usual hallmarks of oppression – power imbalance coupled with abuse by the lender, usually manifested in unfair terms or unconscionable behaviour.12 They say rather that the loan agreement was oppressive because it breached reasonable standards of commercial practice, and they seek the opportunity to prove at trial that those reasonable standards required that the Bank inquire into the possibility of fraud. In support of their claim they point to theBank's internal processes.[16] A borrower who completes a loan application ordinarily offers certain assurances: it can and will repay the loan with disclosed finance charges and expenses, and things said in the loan application about its circumstances and the transaction are true. Courts ordinarily hold that a lender may take such assurances at face value and need not inquire further, especially where the borrower was legally advised. As a general proposition, to impose a duty on lenders to go behind what6 Banbury v Bank of Montreal [1918] AC 625 (HL) at 654; Westpac Banking v McCreanor [1990] 1 NZLR 580 (HC) at 583–584; Wilkins v Bank of New Zealand [1998] DCR 520 (DC); Laws of New Zealand Banking at [38]–[40]; and EP Ellinger, Eva Lomnicka and CVM Hare Ellinger'sModern Banking Law (5th ed, Oxford University Press, Oxford, 2011) at 158–159, 162 and 736–737.7 See Bank of New Zealand v Geddes HC Auckland CIV-2008-404-8082, 28 May 2008 at [22]–[23].8 Ellinger, Lomnicka and Hare, above n 6, at 736.9 Credit Contracts and Consumer Finance Act 2003, s 118.10 Section 123.11 Section 124.12 Thomas Gault (ed) Gault on Commercial Law (online looseleaf ed, Brookers) at [4C.7.02(4)].borrowers tell them and make inquiries in the borrowers' interests would be both inefficient and potentially unfair to lenders.13[17] However, a loan may in some circumstances become oppressive because the lender knew of facts that made it so, or knew something that put it on inquiry; something that ought to have caused it to inquire about the wisdom of an advance for the borrower.14 Even then the lender ordinarily need not inquire if it knows that the borrower has taken advice from a lawyer whom the lender understands to be independent.15[18] The borrowers in GE Custodians v Bartle were a retired couple whose loan application described them as self-employed. They did not have enough income of their own to service the loan, but they declared that they did and GE Custodians did not require supporting evidence. They had taken independent legal advice. The transaction which the loan financed was one of the now-notorious Blue Chip property investment schemes. When everything fell apart they contended that the loan was oppressive because, inter alia, GE had failed to inquire into their ability to service it. The Supreme Court held that a credit contract could not be impugned as oppressive by reference to matters unknown to the lender or in respect of which it had not been put on inquiry.16 On the facts, it would be quite wrong to hold GE culpable when the Bartles were advised by an independent lawyer; rather, GE might properly rely on what they had chosen to reveal, without conducting its own investigation into the wisdom of the transaction for them.[19] We will assume for present purposes that a loan may be oppressive from the outset if the lender is on notice of facts indicating that the loan may form part of a fraud by some third party on the borrower; in other words, we assume that a loan made in such circumstances might breach reasonable standards of commercial practice. That assumption having been made, and following Bartle, the question may be framed in this way: what facts suggesting fraud did the Bank know, or was on notice of, that were not already known to the Fortes and their solicitor? If it is13 GE Custodians v Bartle [2010] NZSC 146, [2011] 2 NZLR 31 at [67].14 GE Custodians v Bartle, above n 13, at [46].15 GE Custodians v Bartle, above n 13, at [48].16 At [47].arguable that the Bank was on notice of such facts, it ought to have been denied summary judgment.What did the Bank know that the Fortes and their solicitor did not?[20] Mr Grove initially presented his case on the very straightforward basis that the Bank is liable because it failed to comply with its own internal processes for approving the loan and but for that failure the fraud would have been prevented.Counsel pointed to the Bank's failures to meet or speak to the Fortes, to get originalbank statements from their existing financier, to obtain certified copies of all of the agreements for sale and purchase, and to scrutinise the valuations, which would have revealed that the owners of those properties were not the vendors. He emphasised that all four agreements for sale and purchase were signed by Mr Cooper in one capacity or another and Mr Cooper presented the loan application to the Bank.[21] If accepted, counsel's proposition must hold the Bank liable merely because it missed an opportunity to prevent the fraud, whether or not it was on notice of anything untoward. It will be apparent from what we have already said that we do not accept that proposition.[22] When pressed as to what put the Bank on inquiry that the Fortes might be the victims of fraud, Mr Grove fell back on the fact that the vendor was not the registered proprietor of the properties. This fact, in the context of a private treaty sale, was said to raise the possibility of an hydraulic fraud sufficiently to put the Bank on inquiry. We will assume without deciding that the Fortes might adduce evidence of commercial practice sufficient to prove that, in the circumstances of the time, such fact ought to have been interpreted as notice of the possibility of hydraulic fraud.[23] However, the Bank would be on notice that it ought to inquire further only if the Fortes and their solicitor were not already aware of the same fact. They too were on notice that the vendor was not the registered proprietor of either property; indeed, they and their solicitor must have actually known that by the time the transaction settled. If inquiry was warranted because purchasers were thought to be at risk of hydraulic fraud in such circumstances, their solicitor was the natural person to makeit. The Fortes knew that Mr Cooper had arranged everything for them. Presumably they told their solicitor that. They knew he had signed the agreements for the vendors. Presumably they told their solicitor that. They knew that they had not paid deposits and were acquiring the properties for less than had been represented to the Bank. If they did not tell their solicitor that, they ought to have done.[24] This last point highlights an important feature of the case. The Fortes do not claim that the Bank was on notice of anything suggesting the deposits were unpaid, yet that is the central feature of the fraud; it allowed them to borrow the entire purchase price from the Bank. As we have observed, the evidence does not actually establish that there was an hydraulic fraud against the Fortes; although the valuations appear suspect in hindsight, we do not know by how much the sale prices exceededthe properties' worth at the time.[25] In the end, the only material fact to which Mr Grove could point that was known to the Bank but not the Fortes was the existence of the (forged) agreements for sale of their existing properties. Counsel accepted, inevitably in our opinion, that those agreements of themselves did not put the Bank on notice that anything improper was happening.[26] Accordingly, the Bank was not arguably on notice of facts suggesting fraud that were not already known to the Fortes and their solicitor. That being so, the loan agreement did not breach reasonable standards of commercial practice.Decision[27] The appeal is dismissed. The appellants must pay the respondent's costs on aband A basis as for a standard appeal plus usually disbursements.Solicitors:Daniel Overton & Goulding, Auckland for AppellantsBuddle Findlay, Auckland for Respondent