Lenders can have more certainty around their obligations under the Credit Contracts and Consumer Finance Act (CCCFA) after the Supreme Court today found by unanimous decision that GE Custodians (GE) had no culpability in the ‘Bartles - Blue Chip’ case.
This Brief Counsel looks at the judgment and at its implications.
The full Court said the result was “hard for the Bartles” (a retired couple who became victims of the Blue Chip collapse), but that it would be “quite wrong to hold GE culpable” given that:
- the Bartles were throughout being given advice by a lawyer whose independence must be accepted, and
- GE had no reason to suspect that the loans were in breach of reasonable standards of commercial practice.
To apply the oppressive conduct provisions of the CCCFA in such circumstances, therefore, would require lenders to take responsibility for matters of which they neither knew nor should have known.
“They would be unable to proceed on the basis of what borrowers chose to reveal to them, and would have to conduct an investigation into the affairs of the borrowers lest there be something which might render the transaction liable to reopening.
“They would have to decline to lend at all or to incur additional expense which would certainly be passed on to the borrowers, regardless of the fact that the borrowers were being advised by a lawyer.
“That would be inefficient in economic terms and productive of unfairness to lenders if they failed to discover something which was later found to make the loan oppressive.”
Accordingly, the Court allowed GE’s appeal.
Keen to use the equity in their freehold Whangarei home to supplement their pension income, the Bartles borrowed $630,000 to buy an apartment in Auckland in a transaction which was heavily weighted in Blue Chip’s favour and in which any return to the Bartles was reliant upon the Auckland property market continuing to rise.
GE loaned them the money through Tasman Mortgages Ltd (TML) under an out-sourcing system in which all of the functions traditionally undertaken by the lender were entrusted to TML apart from the decision to make the loan, the loan documentation and the actual advance.
The loans were made under a “Fast doc” or “asset lending” arrangement. These are typically provided to self-employed investors who may be unable to provide proof of income and rely on the borrower having sufficient equity to support the loan and signing a declaration of ability to pay.
The Supreme Court
The Supreme Court said the real question was whether a credit contract could be oppressive if the lender had no knowledge of “matters external to it which might otherwise lead the court to the view that there was oppression”. The relevant issue, therefore, was what GE knew about the Bartles and their dealings with Blue Chip.
Even if a lender knew of circumstances that might cause it to consider that borrowing is imprudent, the lender will be excused from inquiry if it is aware that the borrower is being advised about the transaction by an independent lawyer.
It is not for the lender to question the competence or independence of the lawyer -
“unless the lender or its agent already has knowledge of circumstances which render the lending in breach of reasonable standards of commercial practice the credit contract on which the borrower had independent legal advice should not be treated as oppressive…”.
The Court found that GE knew that the Bartles were of retirement age and that the loans were made without regard to their income, but “…that would not in itself make the loan oppressive in the sense of being in breach of reasonable standards of commercial practice.”
The Court decided that the Court of Appeal had come to a different view on the question of oppression because two members of the Court had treated the Bartles’ lawyer as if he wasn’t independent. Because of this, the Court of Appeal said that GE had failed properly to assess the loans and securities.
The Court said that the Bartles, while “deserving of much sympathy”, had put their faith in Blue Chip and their chosen lawyer and had expressly disavowed reliance on GE. “It would make bad law if they could now hold GE responsible for what has occurred.”
Chapman Tripp’s comments
The Supreme Court’s judgment
, while clearly a very difficult one for the Bartles, will be a relief for lenders concerned that the Court of Appeal’s finding placed an onerous burden on them. Today’s decision makes it clear that lenders are not responsible “for matters of which they neither knew nor should have known
”. It also reinforces the importance of ensuring that borrowers obtain independent legal advice.
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