An insecure defence

A farmer got no joy from claiming he did not have to pay what he owed his bank because of possible securitisation — the sale of a loan

When debt problems force people off long-held family farms, no-one blames those involved for trying every way to avoid the blow. But one increasingly popular route isn’t working and only adds to a debtor’s legal costs. This strategy challenges a bank’s standing to demand repayment of loans.

It is based on allegations that the debt was securitised by the bank concerned, which, if proved, would mean it had no standing to pursue the matter. Dedicated Facebook pages, websites and other media proclaim the success of individual cases in which debtors have taken this point, but in fact none has ultimately succeeded.

This week, in a case involving Eastern Cape farmer Sidney Birch and his FirstRand Bank loan, Judge Elna Revelas trawled through a list of SA cases in which this securitisation defence was tried — and found that they had all failed.

When Birch came financially unstuck in 2012, he and the bank agreed terms that were made an order of court: he was to repay R2.5m plus interest between January 2013 and December 2014. If he was unable to meet any of the scheduled payments the entire remaining debt became due.

However, after paying less than R1m his finances were exhausted, and now the bank wants the rest of its money. But instead of capitulating, Birch went on the offensive, asking the court to rescind earlier court orders over payments and saying that he wanted to serve a “notice to produce documents” on the bank.

Birch told the court he had agreed to the initial order and had paid as best he could. Then he heard about the securitisation defence and it occurred to him that the loan agreement between him and the bank might have been sold — securitised — by the bank, meaning it would then have no standing to act against him for the outstanding money. If he had known about this possibility at the time, he said, he would not have agreed to the order.

The trustees who offered surety for Birch’s loan claimed that the bank likewise had no standing to recover the money from the trust. They also claimed that as they had no knowledge of the 2012 agreement between the bank and Birch they could not have been party to the order — an argument dismissed by the court.

Dealing with Birch’s application to make the bank “produce documents” the judge said whether he was entitled to such an order depended entirely on the “viability” of his securitisation defence. A court would have to be convinced that the application was not simply a “fishing expedition”. However, as Birch wanted, among other things, the bank’s securitisation ledger “with all certified copies thereof”, the bank’s securitisation portfolio and a complete set of all transaction documents relating to the bank and its securitisation participants, the judge concluded that fishing was exactly what Birch had in mind.

The judge said Birch’s attorney, Bev Carruthers, had “created a veritable cottage industry around defending debtors” in this way. Carruthers said she wanted all the original documents related to the case to compare them with copies. Any unusual features and discrepancies would, according to Carruthers, indicate that the bank, despite its denial, had securitised the loan.

The judge then revisited the growing list of cases where a similar defence was raised and concluded that scrutiny of documents such as Carruthers had in mind would be of no help as the courts had uniformly turned down such attempts, one judge calling claims of bank fraud in such matters “outlandish”.

“Securitisation appears not to be a defence at all” in previous cases, she said, and it was definitely of no help to a debtor where the existence of a loan agreement was not in doubt.

The judge thus refused, with costs, Birch’s attempt to have the bank “produce documents” and to have the original court order set aside.