Avoiding issues with Loan Agreements between family members

A property in North Parramatta was owned by Fabian and his wife, Mina, as tenants-in-common in equal shares.

The plaintiff, Fabian’s brother, Sergio, sought orders for:

• Possession of the land;
• Judgment against the defendant (Mina) for approximately $145,000 (including interest);
• Mina to sign a mortgage; and
• Mina to pay Sergio’s costs.

The plaintiff’s claim

Sergio contended that he entered into a mortgage with Mina as security for an amount of $107,500 advanced by Sergio to Mina in 2010. Mina denied that any such agreement was created, instead contending that the Deed is a “sham” contract created and procured by Sergio and Fabian in order to give the appearance of a loan between Sergio and Mina, when none had actually occurred.

As at 2007, Fabian was the owner of a 50% interest in the property, and a friend owned the other 50%. Fabian subsequently purchased the other 50% interest from his friend. In or about 2008, Mina was keen to have her name recorded on the property’s title.

In or about 2010, Fabian sold a 50% interest to Mina – Sergio alleged that Mina funded this acquisition by taking out 3 loans (including a $107,500 loan from Sergio). Mina contended that she was not aware that she was taking on any such debt to Sergio.

Evidence was submitted to the Court by all parties in relation to the movement of monies between various accounts at or around the time of settlement.  Each party alleged that any alleged loan or movement of monies between Sergio and Mina was pursuant to a business refinance arrangement, was a refinance for asset protection purposes, and was to complement the main mortgage.

There was also disputed evidence presented regarding the signing of the subject Deed – the parties all alleging that the Deed was prepared by the relevant law firm on behalf of certain parties, but not others, and whether or not legal advice was sought or indeed provided at the time of signing.

There was no affidavit evidence of the responsible lawyer before the Court as to the signing of the Deed, although evidence was given by a solicitor working with the responsible lawyer, but she could not depose as to the circumstances of signing because she did not have any memory of the events of that day – and presumably no file notes of any such attendances.

Relationship difficulties

In or about 2014, following their move from Sydney to Argentina, Mina and Fabian faced marital difficulties.  At about this time, Sergio started sending emails to Mina regarding the alleged debt owed to him.

Court’s decision

The plaintiff, Sergio, carried the evidentiary burden of establishing on the balance of probabilities that the Deed was valid, that the money transferred was a loan, and that the loan was to Mina, as opposed to Fabian. The Court considered each of the 3 possible alternatives.

The Court was not satisfied that Mina willingly entered into a loan whereby she agreed to be personally liable to repay Sergio $107,500.  The Court had difficulties in accepting Sergio’s evidence, even suggesting that some of the emails put into evidence were not genuine and that they had been fabricated (referring to the authority of Briginshaw v Briginshaw).  The Court noted that the financial relationship between the brothers was so “intertwined and complicated”, and concluded that Mina was never informed or understood that she was to be personally liable for the loan from her brother-in-law to “buy” her share in the property.

Was the Deed a “sham”?

The Court referred to the decision of Esanda Ltd v Burgess (1984) 2 NSWLR 139 where the Court noted that 2 conditions were generally required for a transaction to be found to be a “sham”:

• When parties to an agreement disguise the nature of the transaction they intend to carry out by casting it into a form which makes it appear to third parties as a different kind of transaction evidence is receivable to show the whole of the transaction;
• Although such a transaction attracts the description ‘sham’ and the document or documents in some cases will be wholly inoperative, one or more of the documents concerned may be operative according to its true nature … that is, subject to its true nature being given effect, its terms will be operative between the parties.

Mina alleged that the document was a “sham” orchestrated between Sergio and Fabian for the purpose of creating a future ability of Sergio to denude Mina of her half share in the property.

The Court was not satisfied that the Deed was a sham:

1. The document was intended to operate as a mortgage and by all accounts, did operate as a mortgage;
2. There was no evidence that there was a common intention between the parties that the document does not create the legal rights and obligations that it purported to create;
3. Mina was unable to establish that the alleged sham was a ruse orchestrated by the brothers for the purpose of creating a future ability of Sergio to denude Mina of her half share in the property.

Deceit

Mina alleged that her signature on the Deed was obtained by deceit, and therefore the Deed was void.

The Court reviewed the elements required to establish the tort of deceit (as per Magill v Magill (2006) CLR 226) namely, that:

1. The defendant made a false representation;
2. The defendant made the representation with the knowledge that it was false, or that the defendant was reckless or careless as to whether the representation was false or not;
3. The defendant made the representation with the intention that it be relied upon by the plaintiff;
4. The plaintiff acted in reliance on the false representation; and
5. The plaintiff suffered damage which was caused by reliance on the false representation.

The Court noted that there was no evidence that Mina had suffered any damage caused by reliance on any false representation, and therefore it was not satisfied that the tort of deceit had been established.

Compliance with Section 38(1) of the Conveyancing Act

Section 38(1) of the Conveyancing Act requires every deed to be signed as well as sealed, and shall be attested by at least one witness not being a party to the deed.  The Court was satisfied that the requirements of this section were satisfied.

Court’s finding

The Court found that the Deed was valid, that it was not a “sham”, and that the tort of deceit was not established.  Therefore it held that the 2010 loan did validly take place, noting “the fact that the expectation would be that [Mina’s] husband, rather than she, would be ultimately liable for it, does not mean that it is not a valid Deed based on the arguments put before [the Court].”

But had the loan been repaid?

Mina’s alternate argument was that even if the Court was satisfied that a valid mortgage existed between Sergio and her, the loan had been repaid.  The Court considered the credibility of the evidence presented by the parties – and in some instances, the lack of evidence thereof – and concluded that whilst it was satisfied that there was a loan, it was not satisfied that Sergio had discharged his onus of establishing that it had not been repaid based on the bank records and other evidence presented to the Court.

Writ of possession

The Court then considered the alternate relief sought, in the nature of a writ of possession of the property.  It noted that the property was held as tenants-in-common in equal shares, whereby the owners share the right to possession of the land, even if one of them chooses not to exercise that right.  It noted that both Mina and Fabian still shared possession of the land and any action for possession of that land should have joined both of them as parties.

The Court referred to the statement made by the Full Federal Court in News Ltd v Australian Rugby Football League Ltd:

“Where the orders sought establish or recognise a proprietary or security interest in land, chattels or a monetary fund, all persons who have or claim an interest in the subject matter are necessary parties. This is because an order in favour of the claimant will, to a corresponding extend, be detrimental to all others who have or claim an interest.”

Conflict of interest

The Court frowned upon the relevant law firm, noting that it acted for both the mortgagor and the mortgagee of the relevant share in the property, in breach of the professional obligations outlined in rule 11 of the relevant Solicitor Conduct Rules.

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It is imperative that any parties to a financial transaction – particularly in the nature of lender and borrower – reflect the terms of the transaction in properly executed legal documentation, and in particular, that all parties obtain independent legal advice regarding their respective rights and obligations under the agreement. Further, all and any advances made pursuant to the agreement, both by way of the original loan amount and repayments of the loan, should be made in accordance with the terms of the agreement, and the parties should maintain adequate documentation regarding any such movement of monies.

For information on the case listed above - Sergio Andres Chocron v Mina Onkoud [2019] NSWSC 1823