Columbus Capital has benefitted from a Federal Court ruling that Pioneer Mortgages' failure to prevent numerous fraudulent redraws of mortgages by one of its formerly trusted senior employees amounted to a breach of Pioneer's contract with Columbus. The Pioneer employee, Tupeia Dando, arranged redraws from loan accounts of three borrowers. The funds were transferred by Pioneer First (the lender of record) to an account in the name of Dando's husband, when the borrowers had not requested or authorised the redraws.  The fraud occurred over several years leading up to when Columbus acquired the loan book that included mortgages managed by Pioneer.  An estimated pool of A$2.2 billion mortgages from the Origin wholesale mortgage origination business was sold by ANZ to Columbus in 2012. Columbus said it has not been able to recover the bulk of the funds fraudulently obtained by Dando.In court, lawyers for Pioneer argued that the wrongful conduct by the firm's former customer services manager was not authorised, nor part of her normal duties. They described Columbus as embarking on "a program of self-help" by stopping payment of management fees to Pioneer after being told of the systemic fraud.In addition, Columbus decided to impose an annual facility fee of $399 on Pioneer First borrowers.  Pioneer sought an injunction, which was refused, and also claimed damages for alleged losses caused by Columbus' alleged misconduct in imposing the fee. The Court was not convinced and, apart from a win by Pioneer on one small technical point that had no effect on the overall outcome, the judgment confirms the decision by Columbus to cease paying servicing and admin fees to Pioneer. Not much has changed there, as Columbus has already stopped.It is also likely that Columbus will exercise its right - confirmed by yesterday's court judgment - to insist that Pioneer take on the defrauded mortgages at their notional value.And, although not addressed by the Court in any detail, one sidebar to the decision is that Stephen Stefanowicz, a director of Pioneer and guarantor for any of the firm's obligations prior to 14 August 2013, may be liable to make good any shortfall in funds.The parties have been given extra time to discuss how the judgment will be put into place over the next week.