Loan book buyer statute barred in $4 mil mortgage debt recovery

Borrowers under a private $320k loan have successfully defended their mortgagee’s $4 mil recovery action claim by operation of the 12-year limitation period that applies to debt recovery claims.

mortgage agreement errorAllanna, James and Gladys Price granted mortgages in July 1998 over two parcels of land to secure a one year loan from Law Partners Mortgages Pty Ltd.

The borrowers’ default after a 12 month extension, led to a mortgagee sale of one of the secured properties for $116k in 2001, the greater portion of which was allocated to interest and costs with only $50k received in reduction of principal.

The balance due together with interest as at April 2001 – after which no further payments were made – was $270k.

In June 2017 Christine and Kerry Spoor – who acquired the debt in their capacity as trustees of a pension fund – issued notices demanding the borrowers pay the more than $4 mil loan balance then said to have accumulated at 16.25% compound interest.

The borrowers contended the 12-year limitation period in Limitation of Actions Act – s 13 for recovery actions for land and s 26 regarding monies secured by mortgage – was a complete defence to the mortgagee’s demands.

And by operation of s 24 – they claimed – the mortgagee’s interest in the land had in fact “been extinguished”.

Not so, asserted the debt holder who countered that – by covenant in the security documentation – the borrowers were precluded from raising a limitation defence because they had contracted not to do so in the security documentation.

The dispute ultimately came before Justice Jean Dalton in the Supreme Court in Brisbane in October 2018.

Her honour had no difficulty in accepting that a party to an agreement can contract away the right to plead a limitation defence in sections 13 and 26.

“The court would not interfere simply because one party had been foolish or improvident,” she explained. “In fact there are numerous case examples in Queensland upholding contracts not to plead the limitation period”.

She noted though that in relation to land, the LAA provided in addition to the s 13 bar against the right to recover monies or entry into possession, s 24 (1) resulted in “the extinction of title”.

Because that provision went further than simply time barring a recovery, “it is not possible to exclude its operation by contract,” she wrote.

It followed then, that the debt holder was entitled to recover the debt – as distinct from recovering possession of the secured land – if the borrowers’ covenant concerning “restrictive legislation” did indeed prevent them from pleading a limitation defence.

The problem for the mortgagee was that – while the clause in the mortgage was probably intended to cover the situation they argued for – it was poorly expressed.

There was neither a reference to the Limitation of Actions Act nor a specific surrender on the part of the borrowers of any right to plead a limitation bar.

What the clause did was to exclude statutory provisions and mortgagor “powers, rights and remedies” that might “curtail, suspend, postpone, defeat, or extinguish” the rights of the mortgagee.

In her honour’s view, the words “curtail, suspend, postpone or extinguish” were of no use to the mortgagee’s argument because the LAA did none of those things to its powers, rights or remedies but rather operated only to prevent recovery if a limitation defence was pleaded.

Even if one were tempted to construe the clause less strictly so as to interpret “curtail” – by reference to the manner in which the LAA operated – so as to bring it within the purview of the “restrictive legislation” clause, it was – at best – ambiguous.

That being so Justice Dalton considered herself entitled to call in to operation – “as a last resort” – the contra proferentum rule to construe the clause narrowly, rather than in the wider fashion argued for by the debt holder.

The debt recovery was thus defeated as being out of time and leaving the borrower free and clear of any repayment obligations.

Spoor & Ors v Price & Ors [2019] QSC 53 Dalton J, 12 April 2019

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