Several years later, the trust’s business venture failed. By this time, the couple had separated. Another lender, as second mortgagee, initiated a mortgagee sale of the property. The bank, as first mortgagee, took all of the sale proceeds, but there was still a shortfall of $50,000. Soon afterwards, Logan was declared bankrupt, leaving Kiri solely responsible for the shortfall. The bank began action to recover the $50,000 from Kiri under the terms of her guarantee.

Our investigation

Logan complained to us that the bank failed to conduct due diligence on the trust. Had it done so, it would have discovered that he was neither a trustee nor a beneficiary of the trust. He said the bank also failed to give him a copy of the trust deed. Furthermore, it had indemnity insurance, which it should have used to claim the shortfall. Alternatively, he said the bank should have pursued the professional trustee for the shortfall. Also, his lawyer failed to explain the guarantee documents before he signed them, so he was unaware he had become a guarantor.

We explained to Logan that the bank was not obliged to conduct due diligence; it simply needed to establish that the trust had enough security for the loan and the means to make repayments. It did not have to give Logan a copy of the trust deed. Indeed, doing so might have breached the trust’s right to confidentiality. The bank had taken out only fire insurance over the property, not indemnity insurance.

The central issue was the guarantee. Logan and Kiri, not the professional trustee, had given the guarantee. Logan and Kiri's lawyer had sent the bank a certificate stating that he had explained the guarantee to them. The bank was entitled to rely on this. Every document Logan signed on the day he met with the lawyer clearly indicated he was signing in the capacity of guarantor. He had also signed an acknowledgment that the full obligations of the guarantee had been explained to him.

Outcome

We didn't uphold Logan's complaint.