Fraud in transfer of land, loan agreement converted into a sale

THE REPUBLIC OF UGANDA

IN THE HIGH COURT OF UGANDA AT KAMPALA

 [LAND DIVISION]

CIVIL SUIT NO. 239 OF 2009 CONSOLIDATED WITH

CIVIL SUIT NO. 298 OF 2010

1. AMRATLAL PURSHOTTAM BHIMJI  
2. NARMADABEN  PURSHOTTAM :::::::::::::::::::::::::::: PLAINTIFFS

VERSUS

1. GIAN SINGH BHAMBRA
2. NIZARALI HAMIRANI         
3. CRAIG IAN MIRANUS
4. REGISTRAR OF TITLES ::::::::::::::::::::::::::::::::::::::: DEFENDANTS

BEFORE: HON. MR. JUSTICE BASHAIJA K. ANDREW

Case summaries

Brief facts

Gian Singh Bhambra (hereinafter referred to as the “1^st Defendant”) advanced a sum of US $530,000 to one Sameer Bhimji. A Memorandum of Understanding (MoU) to that effect was executed on 10/04/2007. The said Sameer Bhimji is a grandson of the 1^st Plaintiff and acted in the interest of the Plaintiffs. The loan was to be paid back within a period of six months from the date of the signing of the MoU together with interest of 12% all amounting to US$609,500.

Sameer Bhimji offered two properties comprised in Plot 5 and Plot 3 Clement Hill Road, Kampala as security for the loan.  The 1^st Defendant duly lodged caveats on both titles to secure his interest therein. One of the terms under the  MoU was that the transaction was not a sale and that the 1^st Defendant would not at any time take possession of the properties but would allow the Plaintiffs’ family to remain in occupation until the loan was fully paid.

The six months’ period lapsed and the 1^st Plaintiff defaulted on the payment of the amount due. The parties immediately thereafter, through their respective lawyers, commenced negotiations on how the loan should be paid. Through a series of negotiations the parties eventually agreed that Plot 5 be sold to M/s. Sharp Electronic Technologies Ltd; a buyer identified by the Plaintiffs at a price of US $510,000, and the balance of US $170,000 was to be secured by the 1^st Plaintiff handing over the title for Plot 3 to the 1^st Defendant to register a legal mortgage on it.  The balance was to be paid within eight months from the date of registration of the legal mortgage and in default to attract 12% interest per annum.

As the negotiations were on going, it was discovered that the 1^st Defendant had already transferred Plot 5 to himself without the knowledge of the Plaintiffs. He subsequently sold the same to Nizarali Hamirani (hereinafter referred to as the “2^nd Defendant”). It was also discovered that when the certificate of title for Plot 3 was surrendered to the 1^st Defendant to register a legal mortgage pursuant to the terms of the negotiations, he instead lodged it for transfer also to himself. The 1^st Plaintiff’s lawyer Mr. Muwanga Sebina Hussein, however, managed to withdraw it from the Department of Land Registration, and the 1^st Plaintiff lodged a caveat thereon.

The Commissioner for Land Registration (hereinafter referred to as the “4^th Defendant”) later demanded that Mr. Muwanga Sebina Hussein returns the title. The said lawyer instead told the 4^th Defendant to directly contact the 1^st Plaintiff who now had the title in the UK. The 4^th Defendant then dismissed the 1^st Plaintiff’s caveat and refused to register the 2^nd Plaintiff’s caveat to protect her interest in the matrimonial property, and cancelled the title to Plot 3 and issued a special certificate of title and registered the 1^st Defendant as the proprietor. The 1^st Defendant then sold Plot 3 to Craig Ian Miranus (hereinafter referred to as the 3^rd Defendant”). All this time the 1^st Plaintiff’s family was in occupation of Plot 3 where they still reside up to now, and they filed this suit.

Bonafide purchaser- good faith – imputed knowledge of fraud on the purchaser-

Evidence- proof of facts- hearsay evidence

Land law -caveat- whether the registrar of titles has powers to remove a caveat minus notifying the caveator.

Mortgage- creation of mortgage- an equitable mortgage created by deposing a land title with the lender.

Mortgage- equity of redemption- a mortgage transferring the land to himself and selling to another person.

.

Mortgage – procedure for dealing with the mortgaged property.

Issues

1.  Whether the 1^st Defendant’s action of transferring the suit properties into his name, and subsequent transfer to the 2^nd Defendant (Plot 5) and 3^rd Defendant (Plot 3) was fraudulent, and/or illegal.
2. Whether the 4^thDefendant actions of transferring the properties in the Defendants’ names was lawful.
3. If the answer to the 1^st and 2^nd issue is in the affirmative, whether the Defendants are entitled to any refund of the money from the Plaintiffs and if so how much?
4. If the issues in (1) and (2) above are answered in the affirmative whether the 1^st Plaintiff is entitled to mesne profits in respect of Plot 5 from September 2008 to date.
5. Remedies available to the parties.

Held

1. From the facts it is clear that an equitable mortgage was created under the MoU (Exhibit P1) when the 1^st Defendant advanced a sum of money to the 1^st Plaintiff against the security of the suit properties. This falls within the ambit of Section 129 of the Registration of Titles Act (Cap 230) to the effect that;
2. It is the established law that an equitable mortgage is duly created when a transaction has the intent but not the form of a mortgage, and which a court of equity will treat as a mortgage. The threshold issue in an action seeking imposition of an equitable mortgage is whether the plaintiff has an equitable remedy at law.
3. Even if the MoU did not specifically state so, the law would naturally presume the terms to exist inherently in the nature of any equitable mortgage, and the essence is to preserve the mortgagor’s inviolable right of equity of redemption.
4. I cannot find a clear case of trickery and sharp practices than this. It is evidently clear that all along the 1^st Defendant harbored ill intentions of taking over the properties and was never genuinely interested in the recovery of his debt. This could not be any clearer than in the transfer of Plot 5 to himself and then selling it at US $350,000 - a price of his own choice - to the 2^nd Defendant; which was by far less than the price offered by the buyer identified by the 1^st Plaintiff. There is no doubt that 1^st Defendant employed manipulation, trickery, and dishonest means to defraud the 1^st Plaintiff of the property.
5. Apart from the proven fraud, evidence shows that the 1^st Defendant also committed illegal acts. This can be seen in the transfer to himself of the property which he well knew was the subject of an equitable mortgage. The established principles of a mortgage are that “once a mortgage always a mortgage” and a mortgagee cannot impose any “clog or fetter on equity of redemption”
6. It is trite law that the terms of an agreement could not act as a fetter or clog on the borrower’s right of equity of redemption.
7. If the 1^st Defendant wished to sell security, his remedy was in applying to court for an order to foreclose the 1^st Plaintiff’s right of redemption anytime after the breach of the covenant to pay. This is a requirement under Section 8. (1) of the old Mortgage Act (Cap229) under whose legal regime the MoU was crafted. Upon the application the court would determine the amount due and fix a date not exceeding six months from the date of the failure to pay within which the 1^st Plaintiff would pay the amount due and if he failed to redeem the security would be sold.
8. Section 9 (supra) set out an elaborate procedure that had to be complied with in a sale by foreclosure. It was by public auction on terms approved by the court, and the sale would not take place until the expiration of thirty days from the date of the order of foreclosure. Prior to the sale the mortgagee would give to the mortgagor reasonable notice, being not less than thirty days, of the date and the place of sale. Failure to give notice, though not affecting the validity of the sale, would render the mortgagee personally liable for any loss caused thereby. Most importantly, the mortgagee was specifically precluded from purchasing the mortgaged property at the sale unless the purchase by the mortgagee or his or her nominee was approved by the court.
9. I agree with Mr. Andrew Kibaya’s submissions that the 1^st Defendant opted for the “self – help” method, and the law regards the transfer of the property by such means as ineffective because it is illegal. Needless to emphasize that the transfer was also void because it was used as a clog on the mortgagor’s right of equity of redemption.
10. I hasten to add that the terms of the MoU were effectively superseded by the subsequent negotiations; which fundamentally modified the terms as to payment. By going for negotiations than to enforce the terms of the MoU, it meant that the 1^st Defendant opted out of his right to insist on strict compliance with terms of MoU.  His conduct therefore amounted to a waiver and would thus act as estoppel. He could not later be seen to renege on the negotiated terms to enforce payment in strict compliance with the terms of the MoU.
11. With this wealth of knowledge on the property the 2^nd Defendant could not be a bona fide purchaser for value without notice.
12. Regarding 3^rd Defendant, he too appears from the evidence to have had actual and imputed knowledge of the material facts pertaining to Plot 3 prior to purchasing of the same. For instance, by his own admission the 2^nd Defendant who testified on behalf of 3^rd Defendant stated that he knew of the mortgage arrangement that existed between the 1^st Defendant and the 1^st Plaintiff. Being legally well advised, the 3^rd Defendant cannot plead ignorance of the law. Proper inquiry would inevitably inform him that this was an equitable mortgage and that the 1^st Defendant precluded from transferring the property to himself without a court order of foreclosure. The 3^rd defendant was aware of all material facts surrounding the property, but nonetheless went ahead to purchase the same. There could be no bona fides on his part too.
13. A bona fide purchaser is one who buys property for value without notice of another’s claim to the property and without actual or constructive notice of any defects in or infirmities, claims, or equities against the seller’s title; one who has in good faith paid valuable consideration for property without notice of prior adverse claims. A bona fide purchaser does all that is reasonably possible and necessary in his or her power to find out about all material facts pertaining to property before he or she could commit him or herself to purchase the same. To be a bona fide purchaser one must have done due diligence and exercised caution before entering into a transaction of the nature that would ultimately be binding upon him or her.
14. I am acutely alive to the position that a bona fide purchaser can obtain a good title from a proprietor who previously got registered through fraud and illegality arising out of the fraud. The illegality in this sense is not of a statutory nature but flows from common law principles upon the fraud. However, as was held in David Sajjaaka Nalima v Rebecca Musoke (supra) before a purchaser can claim protection as a bona fide purchaser without notice of the fraud under Section 181of the Registration of Titles Act (supra) he or she must act in good faith. If he or she is guilty of fraud or sharp practice, that person ceases to be innocent and therefore loses the protection.
15. I only need to add for emphasis that fraud must attributable to the transferee either directly or by necessary implication. It means that the transferee must be guilty of some fraudulent act or must have known of such act by somebody else and taken advantage of such act. Further, the fraud which must be proved in order to invalidate the title of a registered proprietor for value if he buys from a person who obtained title through fraud must be brought home to the person whose registered title is impeached or to his agents. A fraud by persons from whom he claims does not affect him unless knowledge of it is brought home to him or his agents.
16. In this case I cannot but find that there is ample evidence proving that knowledge of the fraud was brought home to the 2^nd and 3^rd Defendants. They were well advised that the property was a subject of an equitable mortgage not constituting a sale or transfer to the 1^st Defendant from whom they derived title. Plot 3 was occupied by the Plaintiffs’ family which should have reasonably aroused suspicions, but the Defendants refrained from making inquiries for fear of learning the truth. Therefore, fraud maybe properly ascribed them and they cannot not be protected under Section 181of the Registration of Titles Act (supra).
17. Where a fact in issue needs to be proved the general rule is that the evidence of the witness who is alleged to have witnessed the fact must be adduced by the very witness. When a statement is made to a witness by a person, who is himself is not called as a witness; such evidence is inadmissible particularly where the object of the evidence is to establish the truth of what is contained in the statement. The rule against hearsay, in the strict sense, is that a witness who proves the out-of-court statement has no personal knowledge of the facts stated therein and a party against whom the statement is tendered has no opportunity of cross-examining its maker.
18. It is worth emphasizing that where hearsay evidence is admitted, the admissibility is a matter of substantive law, and in considering whether to admit the hearsay evidence or not, courts are guided by the “threshold reliability test". This requires that the circumstantial indicators or guarantees of reliability be present to completely avoid instances such as where the statement is likely to be fabricated or inaccurate as opposed to true or accurate.
19. I find that in as much as the taking of the title from the Lands Office by PW1 could have been irregular, the 4^th Defendant was clothed with no power to dismiss the caveat duly lodged by a registered proprietor on a title claiming interest therein without following the due process. Basically, the circumstances for cancellation of the certificate of title under Section 91 of the Land Act (Cap 227) did not exist in this case. Cancellation would arise if the title was illegally or wrongfully obtained; or illegally or wrongfully retained by a person other than the lawful registered owner. In this case the 1^st Plaintiff - the registered proprietor – did not illegally or wrongfully obtain the title nor was he illegally or wrongfully retaining the title. As a matter of fact, as the lawful registered proprietor the 1^st Plaintiff was entitled to retain the title.
20. It is the established law that a decision which affects a party taken without according the party opportunity to be heard in his or her own defence cannot stand as the decision would be contrary to the principles of natural justice.

The suit was allowed with the following orders;

1. It is declared that the 1^st Defendant was not entitled to transfer, or in any way deal with Plots 3 and 5, Clement Hill Road, Kampala. 
2. It is declared that the transfer of Plot 5 and 3 Clement Hill Road, Kampala by the 1^st Defendant to the 2^nd and 3^rd Defendants respectively is illegal and void ab initio.
3. It is declared that the 2^nd and 3^rd Defendants have no legal claim or right in respect of Plots 5 and 3 Clement Hill Road, Kampala, and are not entitled to possession of the same.
4. It is declared that the 4^th Defendant had no authority to cancel the title to Plots 3 Clement Hill Road, Kampala or issue a special certificate of title for the same to the 1^st Defendant.
5. It is  declared that the 4^th Defendant wrongly and illegally cancelled the 1^st Plaintiff’s name as registered proprietor of Plot 3 Clement Hill Road, Kampala, and entered the 1^st Defendant’s name, and later the 3^rd Defendant’s name as registered proprietor thereof improperly and illegally.
6. The 4^th Defendant is directed to cancel all instruments of transfer in respect of Plot 3 Clement Hill Road, Kampala, and Plot 5 Clement Hill Road, Kampala and reinstate the 1^st Plaintiff as registered proprietor thereof.
7. The 3^rd Defendant and/or his agents are restrained from evicting the 1^st Plaintiff and the rest of their family from the suit property, transferring or in any other way dealing with Plots 3 Clement Hill Road, Kampala.
8. The 1^st Plaintiff is directed within a period of three months from the date of this judgment to refund the sum of US $680,000 to the 1^st Defendant against whom the 2^nd and 3^rd Defendants would be entitled to recover their respective refunds from.
9. In event of default by the 1^st Plaintiff on (h) above, the 1^st Defendant will be at liberty to apply to court for an order of foreclosure.
10. The Plaintiffs are awarded costs of the suit.