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A national champion basketballer has challenged the validity of a personal guarantee signed by his co-player attorney because it omitted any reference to the power of attorney instrument under which the signer was authorised to act.

Basketball legend and Sydney Kings coach, Shane Heal held a general power of attorney executed in Western Australia to conduct transactions on behalf of fellow “Boomer”, Matt Nielsen.

Heal signed the personal guarantee to Capital Finance for the three guarantors: himself, Nielsen and their holding company. He did so adjacent to the three execution blocks, each naming the separate guarantors.

The transaction concerns a chattel lease debt for plant and equipment at the Victoria Point Café in Queensland.

While Heal’s appointment was in general terms – “to do anything on Nielsen’s behalf that Nielsen could lawfully do by an attorney” – and he was authorised to conduct business for his colleague, Nielsen – the younger of the two champions –  claimed no knowledge of the transaction and did not authorise the signing of the particular document.

He disputed the guarantee was binding upon him because of non-compliance with s 69 (2) of the Powers of Attorney Act (Qld) that specifies:-

an instrument executed by an attorney must be executed in a way showing that the attorney executes it as attorney for the principal.

The Brisbane District Court agreed: Capital could not rely on s 69 to establish valid execution of the document by the attorney.

Capital then launched a second charge, asserting that by signing next to Nielsen’s name, Heal left no doubt of his intention such that the guarantor was therefore bound under the common law rules of “agency”.

The court concluded that the context demanded an inference of an intention by Heal, within the scope of his agency, to create a contract between Nielsen and Capital.

The signature was held to be sufficiently binding at common law regardless of the Powers of Attorney Act non-compliance: “the function of s69 (2), is to set the precondition to statutory validity of the execution, not to invalidate a signature by an attorney that does not comply with that pre-condition”, the court said.

Judgment was entered in favour of Capital Finance.

Capital Finance Australia Ltd v Nielsen [2013] QDC 183 Brisbane Kingham DCJ 16/08/2013

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The Brisbane District Court has had to adjudicate a provision in an instalment contract for the sale of land that permits the seller to retain all payments made by the buyer up to the date of contract termination in the event of buyer breach.

Kelvin Jones entered into the $32,000 buy for the 5 Cork Lane Mt Morgan home in January 2003 and was allowed into possession, on condition he kept up the $225 monthly instalments in reduction of the purchase price and interest.

The seller sold his interest to the current owner in August 2004 and a formal notice of the transfer was given to the buyer in October that year.

Jones’ fortnightly payments became erratic from early 2007 and he failed to pay rates and keep up home insurance.

Payments stopped in August 2010 and in October 2011, the owner sent a notice of default pursuant to s 72 of the Property Law Act referring to instalment arrears, unpaid rates and excess water.

A notice of termination of the contract was sent one month later after no response was received.

In January 2012,  solicitors acting on Jones’ behalf lodged a caveat but took no further action.

The owner eventually filed an application in May 2013 to confirm the contract had been duly terminated and that the payments could be forfeited.

The owner had a fundamental difficulty in its litigation, in that it could not locate any copy of the installment contract. Affidavit evidence  asserted that the contract was thought to be in a standard REIQ format and anexed a copy of the special conditions that applied.

One of the special conditions specified that the seller could retain all instalments paid after the date of termination as a result of the buyer’s breach, “as compensation to the seller for the buyer’s use and occupation of the property “.

When service of court process was attempted, the property appeared abandoned with “an overgrown yard, overflowing mailbox and have generally neglectful appearance”. Neighbours reported that Jones had “done a runner five months previously” and that police were looking for him to interview.

An order for substituted service was made in July 2013 allowing service by post and publication of the application details in the Courier-Mail. Jones did not appear at the August hearing.

Persuaded that the buyer had “clearly evinced an intention to no longer be bound by the contract”, the court ruled that Jones’ repudiation entitled the owner to validly terminate and that it be entitled to recover possession.

The court also ordered the seller retain all instalments recieved, either as a contractual entitlement or by way of reasonable compensation for Jones’ use and occupation of the property during the nearly 10 year period.

Acker v Polanski and ors [2013] QDC 187 Brisbane Smith DCJ 16/08/2013

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Motel operators who had an “overly optimistic view” of their capacity to meet loan repayments and of Suncorp’s willingness to forgive , have resisted the bank’s recovery action with allegations of unconscionable conduct in refusing to capitalise arrears during default periods throughout a 10 year loan term.

Maria and Moray Macintosh borrowed to buy the Malanda Lodge Motel in 1998. Their first application was declined because the bank considered there to be no capacity to meet any reasonable repayment timetable until they had offloaded a citrus orchard at Charters Towers.

But further discussion with their local Suncorp business banking manager, Christopher Bath, won them approval on the specific condition that the $400,000 commercial loan element of the package be repaid within six months. The other component of the loan was a $1.25 million term credit facility repayable in 10 years, interest only in the first 12 months.

This TCF loan allowed the borrower to request suspension of payments for periods up to a total of 12 months, but reserved to Suncorp the right to refuse any such requests.

A higher than expected repairs budget and reduced occupancies due to  tropical cyclones Pete in February and Rona in March 1999, made the borrowers life at Malanda difficult. They fell into arrears and they were compelled to negotiate for several extensions of both loans in the face of Suncorp default notices that were arriving regularly.

By September that year any capacity to catch up the outstanding payments had clearly vanished. The McIntosh’s proposed a re-negotiation of the loan and committed to reduce principal by $800,000 within 12 months.  This was agreed by the bank and documented by way of a deed of forbearance.

But with another two more cyclones – Steve and Tessi – in the early part of 2000, the owners had no prospect of meeting the new obligations.

By March 2000, a formal notice of demand was issued which prompted a number of countermeasures on the part of the borrowers.

They lodged a complaint with the banking ombudsman resulting in an agreement – that they were also unable to keep - to pay $11,000 monthly until all principal and interest was repaid by 28 February 2001.

Second, they alleged that manager Bath had represented the commercial loan -payment requirement within 6 months was a “mere formality” and Suncorp would never insist on repayment strictly by that date.

Third, they contended that the TCF provision allowing them to request repayment suspensions of up to 12 months implied an obligation on the part of the bank to act reasonably, to allow suspensions and that interest for such periods should be capitalised into the loan.

In such circumstances they asserted that the issue of a notice of default in March 2001 was unconscionable because it carried with it the imposition of penalty interest which would have been avoided had the “capitalisation requests” been observed or even considered on a reasonable basis.

These two contentions formed the basis of their defence to Suncorp’s recoupment claim that came before the Cairns Supreme Court in a three day trial in June.

The  court concluded that the loan documentation did not specify any capitalisation of interest would occur, merely that suspension of interest and/or principal could be applied for.

And the contention that Suncorp would waive strict compliance with the 6 month term for the commercial loan was, it ruled, “inherently implausible” given the background of other correspondence etc relating to the terms of the loan. Any extension of that loan was in any event, of minimal consequence in terms of the overall default.

Suncorp was held entitled to recover a total of $439,000 being the difference between the total owed to it and the amount of $1.61 million recovered from sale of the secured assets .

McIntosh v Suncorp-Metway Ltd [2013] QSC 255 Cairns Henry J 19/09/2013

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In April 2007 Steve and Iris Karamihos re-financed their Maroubra home with a $1.2 million loan through a finance broker with Bendigo bank.

The loan, via a mortgage manager for the bank, Mortgageport,  was said to be for capital for their Marrickville restaurant business that they had successfully operated for 27 years after their arrival in Sydney as Greek immigrants.

Bendigo “overrode” its loan age restriction policy – the borrowers were both in their 70s with obviously no prospect of repayment from recurring income during the 25 year term of the loan.

Defaults in the monthly repayments of $7.5k began in December 2008.

To accommodate Iris’s ill-health, they leased the restaurant to a “highly recommended” operator who defaulted when it became time to pay full rent in just the third month of the term. They lost their  right of recourse against the tenant because Pepetual – as mortgage manager for Australian Unity – declined to grant consent to the lease due in part to the tenancy default at the time it processed the request.

Bendigo commenced proceedings for  recovery of possession of Steve and Iris’s Maroubra home.

In their defence, the borrowers’ contended  that the loan contract and mortgage over their home were unjust for the purposes of the National Credit Code (“the Code”) and the NSW Contracts Review Act 1980.

The lower court had ruled the loan contract was “unjust” under the Code and the CRA  because it was “a bridge too far, at too late a stage in their fast-fading lives” and because the credit officer’s failure to verify the customers’ estimate of  $2 million net assets “was unreasonable, to put it at its lowest”.

It ordered that the borrowers be relieved of their liability to the Bank, other than in respect of that portion of the loan that was used to pay out the existing loan, a benefit to them of about $250k.

On appeal, the appeal judges considered the CRA was obviously applicable regardless of the purpose to which the loan funds were put. It declined to decide however whether the Code was inapplicable “because credit provided to the borrowers was not wholly or predominantly for personal domestic or household purposes”.

Such ruling was not required, it decided, because the remedy available to borrowers under the two schemes was not “materially different”.

The NSW Court of Appeal did not accept that Steve and Iris’s estimate of their net assets was erroneous. Thus the bank’s “neglect” to check its accuracy “could not bear on the justness or otherwise of the loan contract or mortgage”.

There were, according to the appeal judges, no other factors that warranted the conclusion that the loan was unjust.

The circumstances of prior loans were “as consistent with financial maturity as the converse”. The absence of independent legal or financial advice was not significant because “it was not demonstrated that financial advice would have recommended against the borrowing”. Finally, the fact that they were in their early 70s “did not in itself indicate an inability to protect their own interests”.

The earlier ruling in the borrowers was overturned and Bendigo can now recover the entire debt.

Bendigo and Adelaide Bank Ltd v Karamihos [2014] NSWCA 17

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A bank customer has tendered a one dollar “bill of exchange” redeemable at a Mullumbimby café, to delay the lender’s recovery of possession of his home and an outstanding $1 million loan.

In a novel contention, Jan Roskott claims his promise to pay contained in the “bill”, is a sufficient discharge and obliges the CBA to sue for default on that obligation, rather than maintain its proceedings under the mortgage.

Roskott – a US educated artist and performer – had taken out the loan for his Frasers Road residence in May 2006 and kept up his obligations until October 2012 when the first default notice issued.

The home is located on a ridge that commands valley, mountain and ocean views to the east towards Byron Bay and the iconic Byron lighthouse.

The “so called” bill of exchange was typed up at home and included in a text box in the centre, the figure: $1,083,754.89, representing the loan balance.

By delivering it to the bank on 30 January 2014, the self-represented borrower argues he has provided a “promissory note” to the bank and thereby discharged the loan.

Why the instrument was expressed to be “payable at and not elsewhere”, the Poinciana Café” at 55 Station Road Mullumbimby, is not clear from the court judgment.

When a similar “bill of exchange” drawn in almost identical terms, was relied upon by another distressed borrower before the same Supreme Court in 2013, it considered the instrument “plainly worthless”.

Roskott had earlier succeeded in gaining from the Financial Services Ombudsman, a six month reprieve to allow him to recruit a buyer for the home.

When that moratorium expired in January with no offers in the wind, the bank filed recovery proceedings.

The Supreme Court, unsurprisingly, saw no merit in Roskott’s invention and could see no legal defence among his curious contentions.

His defence was struck out and the bank was given leave to proceed to take possession of the home.

Commonwealth Bank of Australia v Roskott [2014] NSWSC 246

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Even as Queensland’s residential real estate market claws itself back to some respectability, the desperation of property owners still reeling from the GFC property collapse reached its apogee last month, with a contempt application brought against the judge who allowed the mortgagee to recover possession of a Sunshine Coast property.

Judge John Robertson ordered in March, that Perpetual’s July 2013 possession and debt recovery action be resolved in its favour and that the borrower pay the loan debt of $217k inclusive of interest.

Dispossessed borrower, Wayne Ralph Riggal, lodged a further application in the Maroochydore District Court to compel Robertson to appear – armed with his “Bond” and oath of office – to show cause in answer to the contempt allegations and answer “why a Tort Claim should not issue against his Bond to Purge the Contempt”.

What had been an issue in the March hearing was the validity of a so-called “promissory note” sent to Perpetual by the borrower from Mapleton Post Office so as to allegedly discharge the mortgage debt in full.

Fuelled apparently by internet gobbledygook propagated in the United States, this is at least the third instance of a similar argument coming before a state court in recent months and ranks with other equally creative contentions placed before the Court of Appeal last year.

The imaginative borrowers argue a home-made “promissory note” – not drawn on any bank - discharges the loan repayment obligation with a commitment to pay under the “negotiable instrument”.

In an “affidavit of probable cause”, his representative  Sarah Ann Wales – who the judgment explains is not a lawyer – recounts her bar table stoush with Robertson when she accused him as being “not qualified to assess a negotiable instrument”.

She then claimed on Riggall’s behalf that by failing to specify the exact deficiencies in the instrument, Robertson  had denied the borrower an opportunity to tender a modified “bill of exchange” that would have completely discharged his debt.

The application also called upon the state attorney general to issue proceedings against Robertson “quo warranto”.

Judge Long in April, ruled the “astounding” application and supporting material to be an abuse of process.

To proceed against a judge personally demonstrated, he said,  “a lack of understanding” of the fundamentals of the justice system, he said. Further, none of the relief claimed was available at law and quo warranto proceedings had been abolished as long ago as 1991.

Explaining that the only further course open to the borrower was an appeal against the March ruling, His Honour ordered the registrar should refuse allow the application to be filed.

No appeal to the substantive decision has as yet been filed and on 1 May, an enforcement warrant was issued against the property.

Perpetual Trustees Victoria Ltd v Riggall [2014] QDC 080 Long SC DCJ 11/04/2014

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A Sarina real estate agent has succeeded in holding the Bank of Queensland at bay and defeated its summary judgment application to recover $5.5 mil under a personal guarantee by alleging a breach by the bank of the Code of Banking Practice.

BOQ succeeded against Paul Wright but his agent wife Faye, was deemed to have a potential defence in recognition that women can become involved in financial guarantees only because of a personal relationship with the borrower.

She, ruled the Chief Justice of Queensland’s Supreme Court, was entitled to argue a special equity defence available in some circumstances to mitigate against so called ‘sexually transmitted debt’.

Likely to be argued on her behalf at trial, is that that had BOQ allowed a full day between presentation of the security documents and requiring them to be signed – as specified in cl 31.5 of Code of Banking Practice – the guarantee may not have been given.

In doing so she will need to overcome what the court described as a “fundamental weakness of such a defence” given that she is a shareholder with her husband in the borrower company and had been involved in a series of similar earlier transactions.

Regardless that the defence may not, in the end, prove “particularly promising for her”, Mrs Wright’s argument is an important one. The issue of “relationship debt” arising under wives’ guarantees for businessman husbands, was first ruled on by the NSW Supreme Court in 1996.

Notwithstanding the property security was sufficient to meet claim and interest, the court required that she nevertheless pay $200,000 into court to the credit of the proceeding, representing the interest due in the four months leading up to the trial.

“I regard the second defendant’s right to run the defence, should come at a price,” said His Honour.

Faye Wright’s contest will likely come to trial in August.

Bank of Queensland Limited v Wright & Anor [2014] QSC 067 Chief Justice 14/04/2014

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A mortgage lender has sued a solicitor for failing to identify a borrower at a mortgage sign up meeting after the borrower denied signing the documents or ever having met the solicitor at all.

Permanent Custodians sued solicitor Phillip Symonds and all three borrowers – siblings Tony, David and Charbel Geagea over a loan Tony had arranged for the June 2003 purchase of a $2.9 million development and in which he instructed Symonds to act.

The borrowers settled the lender’s claim by payment of $300k with the law firm persisting with their defence, denying all fault.

On request from broker Yes Home Loans, Symonds sent it a copy of the buy contract. Yes then made a loan application in all three names.

The loan documents were in due course sent for execution. At a meeting in Symonds’ Sydney office, signatures were purportedly affixed on behalf of Tony and David. Symonds IDed the signers by way of drivers’ licences and witnessed their signatures. He also certified he had given them legal advice.

When Permanent demanded arrears from the siblings, David denied signing the documents or ever attending the meeting.

Tony’s denial of the presence at the meeting of an impersonator for his brother David, was disbelieved.

“His evidence is worthless. I consider him both in terms of the content of his evidence and his demeanour to have been mendacious, dissembling and deliberately untruthful.”

Because it could not be proved either way who signed as David, Permanent was held to have failed to establish on the balance of probabilities, that Symonds had incorrectly identified the signer.

Defeated on that ground, Permanent further argued the solicitor wrongly witnessed the signature of the other sibling, Charbel who, imprisoned abroad at the time, could not possibly have been present.

But the solicitor testified he refused to witness that signature which was already present on the documents when the parties turned up for the meeting, a proposition readily accepted by Justice Stephen Rothman who considered him a “witness of truth”.

“Even in circumstances where he could easily have given uncontradicted evidence, the effect of which would have been to exculpate he and his partners from liability, Mr Symonds declined to do so.”

The third prong of Permanent’s attack was a claim that the transaction description in the heading of the law firm’s correspondence – referring to all three borrowers by name – was a representation that it acted for all three when in fact they were acting for only one.

Not so ruled the court. The description was insufficient of itself to constitute a representation to the lender that he acted for them all. It was merely a description of the transaction.

Unfortunately for our hapless practitioner, he was however eventually hung on Permanent’s fourth argument relating to his disbursement authority. By signing the authorisation to the lender’s solicitors instructing how to disburse the loan funds, he had impliedly represented that he had authority on behalf of them all.

So notwithstanding Tony Geagea’s “wrongful, tortious and criminal behaviour”, judgment was entered against Symonds and his law partners for Permanent’s loss and costs of the ten day trial.

The court left open the law firm’s entitlement to itself claim against Yes Home Loans – against whom he provisionally assessed 33% responsibility because it failed to adequately ID the borrowers and represented to Permanent that Symonds acted for all three – and of course, against Tony Geagea, as the architect of the debacle.

Permanent Custodians Limited v Geagea [2014] NSWSC 562

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A mortgagor has sued for the cash loss resulting from a mortgage’s sale of his secured property at what he claims, was at undervalue.
In a private transaction Leo Knezevic – who had operated a successful adhesives and coatings business – lent $300k to his son Peter to assist with the buy of a property at Greenfield Road, Capalaba, in April 2003.

Wizard home loans advanced $260k on first mortgage with Leo’s loan secured by second mortgage.

But just over two years later – after he and his partner Denise Whittaker had ceased day to day involvement – the company faced liquidation. In December 2005, Leo called for repayment of the loan.

A notice excising power of sale was served and vacant possession called for.

To take the home to auction, Leo engaged agent Randal Curry, who found a buyer keen to go to contract before the appointed auction date in May 2006.

With no valuation in hand, Leo accepted the agent’s recommendation that the offer price at $655k was “top dollar”. He signed up then and there.

Peter lodged a caveat in protest but – as a result of a Supreme Court order made in May 2006 – it was removed and the sale was settled.

The borrower waited almost 6 years before filing a claim and by the time the dispute came before the District Court in Townsville, Leo had recently died.

Defended by Whittaker as personal representative of Leo’s estate, she contended the sale had been properly performed.

Peter though, asserted that the worth – of $770k – attributed to it by expert valuer Alan Tully, demonstrated the measures to attract a fair market price, had clearly been inadequate.

The residence had in fact been re-sold again less than two years later, in February 2008, for $950k.

Judge Stuart Durward SC ruled that the sellers had not exercised all reasonable care in obtaining fair market value for the home.

Although it might be possible for the mortgagee’s duty to be fulfilled by private sale before auction eg to an “over exuberant purchaser”, this was not such a case. The proper course was to have consulted more widely rather than opt for a “quick sale”.

“The property should have been marketed in the customary way by auction so that the market could set the sale price” and a proper valuation obtained.

Mr Curry’s view of what was “top dollar” – although authoritative – was insufficient.

The estate was ordered to pay the borrower $115k being the difference between the actual sale price and its fair market value, plus interest of nearly the same sum again, plus legal costs.

Knezevic v Whittaker & Anor [2014] QDC 103 Durward SC DCJ 08/07/2014

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Courts continue to adjudicate high volumes of bank repossession actions that are often defended by unrepresented customers bringing extraordinary arguments in an desperate attempt to hold on to their homes.

David Waden tried to outflank a Westpac claim in Brisbane’s District Court for recovery of possession of his Burpengary property by filing separate proceedings in the Federal Court.

He had defended the earlier action by asserting payment in full by delivery to Westpac of a “bill of exchange” written up at home with a “face value” of $1.00  and “stamped” with a 5c postage stamp.

It was “redeemable” for the full amount of a $300k loan debt but only upon its “presentation” to him outside the Yatala Brewery “at 14:30 hours on Friday, 24 May 2013”. Westpac ignored the document.

Needless to say her honour judge Leanne Clare dismissed the argument and in December 2013 awarded Westpac summary judgment for $346k (debt & interest) and recovery of possession of the home.  She reasoned the loan agreement did not allow a bill of exchange as an acceptable method of payment and there was no basis for preventing the bank relying on its loan agreement to require payment when due.

The same extraordinary defence has come before numerous other courts on several other occasions in the last 18 months.

Waden’s home-made “bill of exchange” also purported to contruct a $1.3 million default obligation in the event that the bank refused to accept the “bill” in discharge of the mortgage.

It was upon such alleged default debt that Kevin Wilmink and Peter Paalvast – the purported assignees of the “bill” – brought their self-represented federal proceedings against Westpac.

Justice Annabelle Bennett sitting in Sydney dismissed the claim as misguided at best and potentially, “disingenuous”. The so called “bill of exchange” was a nonsense.

Notwithstanding this debacle, ongoing economic uncertainty means we are likely to see further desperate attempts to defeat bank obligations, on ever more outlandish grounds.

Wilmink as Trustee for the Bangarra Trust v Westpac Banking Corporation [2014] FCA 872 Bennett J 19/08/2014

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Mark Pearson made urgent application for a “stay” to prevent Pioneer Mortgages executing a warrant to recover possession of his unit at 1/296 the Esplanade Miami over which it held security.

Pioneer obtained judgment in October 2013 against Pearson “by default”, ie by reason of Pearson not filing a defence to its claim within the specified period.

Pearson  who claimed that Pioneer’s proceedings were served at an “ineffective” PO Box address - although it was indeed his and one in respect of which the lender had obtained an order of substituted service - applied to have the default judgment set aside in December.

He contended Pioneer’s loan was “unconscionable” because the transaction taken out to pay out the NAB in July 2008, was approved on the basis of income figures that had been “fudged” by his mortgage broker. He had, he claimed, signed a partly completed application that the broker amended without his knowledge and consent to “grossly overstate his income”.

He had gone into arrears as from January 2011 and made no payments since. After repossession by Pioneer, he “interfered with premises by changing locks and challenging tenants”.

Pearson asserted that because “he assumed responsibility for a debt which he could not service”, Pioneer’s conduct amounted to “asset lending”.

The District Court in December ruled against all of his arguments. It refused to set aside the default judgment because “there were no real prospects of any successful defence to the mortgagee’s claim”.

Had the deal been a consumer loan to which the Queensland consumer credit code was applicable - rather than for for business or investment purposes – Pearson may have had been entitled to hearing to determine whether or not the transaction was “unjust”.

The January court thought in relation to the appeal “its lack of merit is palpable”. It refused to grant the “stay” to prevent recovery of possession of the Miami unit on Sunday 2 February, pending the appeal’s finalization in coming months.

Pioneer Mortgages Limited v Pearson [2014] QDC 16 Brisbane Reid DCJ 31/01/2014

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Most mortgages contain a clause requiring immediate payment of all “moneys owing” should any default occur especially in relation to regular monthly instalments.

In a recent Queensland District Court decision concerning a 10 year loan over commercial property, the defaulting borrower – solicitor Toni Churnov - contended that the acceleration clause extended only to the instalment arrears, rather than to the entire principal and interest.

The default clause simply provided “If you default under this agreement we may require that you repay all the money owing to us immediately”.

Bank of Queensland contended that the amount due upon the instance of the default was the entire sum namely $357,000 and took enforcement action under the mortgage including recovery of possession on that basis.

The court agreed. “The term “money owing very clearly means the total of the facility amount which has not been repaid”.

As a second string to her bow,  borrower Churnov contended that the accelerated payment default provision – requiring as it did payment of a sum higher than would have been the case had no default occurred – constituted an illegal penalty.

The court likewise dismissed that argument explaining that a creditor who allows a debt to be repaid over time may agree to accept a lesser sum if re-paid by a particular time.  That does not mean that the acceleration of the over-time instalment in the event of default of an instalment, is a penalty.

“If a sum of money is payable by instalments and it is specified that in the event that an instalment is not paid punctually the whole sum shall immediately become payable”, the acceleration of payment is not a penalty because the debt is a “present debt”.

Judgement was entered against the borrower for arrears, interest and costs.

A Notice of Appeal has been filed.

Bank of Queensland Limited v Churnov & Anor [2013] QDC 275 Brisbane Reid DCJ 31/10/2013

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A former solicitor has sued the CBA for improperly rejecting a substantially higher offer from the ultimate buyer of a Norman Park “trophy” home auctioned in 2012.

Builder Shaun Dobson and Li Jian Shen were the directors of APH Pty Ltd which acquired the very steep but prestigious site comprising three blocks, in February 2009.

When the project reached the “disastrous” stage in August 2010, Dobson’s “grand” five-storey structure at 55 Wendell was only partly complete, with up to a further $1 million to be spent.

The other two blocks remained vacant. One of those, no 53, was sold by agent Mel Vaisey for $850k in July 2011, about two thirds of its original buy price.

Later that year, Place’s Damian Hackett pitched a $2.5 million offer for the incomplete no 55 that the owners – “hoping for a price in the mid-3ms” – rejected.

In early 2012, Can Bank appointed LJ Hooker Kangaroo Point to take both remaining blocks to their second auction.

Hackett approached Hooker’s Wendy Bell to re-pitch for his client, as did Vaisey but Bell declined to entertain the conjunction given the commission rate the bank had allowed.

Both agents made their own representations to CBA to notify they were holding an offer, but to no avail.

When Place’s client – Dr Mark Daoud and his wife Susan – made contact with Bell, they also intimated they would buy before the mortgagee auction.

Hooker’s Bell discouraged that course, given her concerns of the unknown traps in the sale of a partly completed home and the proximity of the March sale date.

The property was ultimately knocked down to Dr Daoud for just $2.2 million, $300k below what he had been prepared to pay all along.

No 51 sold in May 2012 for $655k – half its 2009 buy price.

Commonwealth sued the company, Dobson and Shen for its remaining losses of $283k.

The third director of APH was former solicitor Phillip Leach who held Shen’s power of attorney and for reasons that are unexplained in the judgement, had also guaranteed the company’s debt to the bank.

With Dobson left penniless from the failed project well before the recovery action began and Shen decamped to China, the bank went after Leach obtaining default judgement in 2012.

In an ambitious plan to avoid bankruptcy, Leach secured an assignment from Shen of his claims as against the bank for having sold both properties short.

Regrettably, Leach was unable to prove Shen’s signature on the assignment document leading to the conclusion this week, from Supreme Court Justice Jean Dalton that the purported assignment of Shen’s “chose in action” was ineffective.

His case against the bank was dismissed and to add insult to injury, he was ordered to pay its legal costs of the 3 day trial.

But had Can Bank undersold the distressed properties?

Even though she had thrown out Leach’s case, Justice Dalton examined the consequences of the Hackett and Vaisey attempts to introduce a sale at a far higher price.

But the Place offer had been conditional on Dr Daoud being satisfied that building work to date carried the requisite approvals.

In the absence of evidence at trial that the doctor had been so satisfied, the court was not convinced that even had Bell even invited a pre-sale unconditional offer from Daoud, it would have been forthcoming at any higher price.

In any event, Her Honour preferred the “very impressive” evidence of valuer Hugh Bristow who valued the site at auction date at just $2 million.

Thus the bank has successfully defended the charge concerning its duty to take reasonable care to ensure that the sale was at market price.

Leach v Commonwealth Bank of Australia [2014] QSC 295 Dalton J 08/12/2014

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A court has refused recovery of a $1.22mil debt under a registered mortgage where the borrower’s signature was forged by her husband.

The dispute arose out of the purchase by land valuer Craig Fitzgerald and his co-worker Dominic Lamanna of the “Shark Fin Inn Chinese” restaurant in Burwood in 2004.

Because of his poor credit history, Craig hatched a plan to transfer the surburban Melbourne home he inherited from his mother to his wife of three years, Nancy Xiao and borrow – unbeknown to her – his half of the buy price in her name.

He forged various documents to assist Nancy’s loan application including tax returns, a payslip, and the application itself. He falsified a valuation that inflated the value of the property.

After approval, he also forged her signature on the loan document, mortgage and directions for drawdown.

The first loan of $502k from Capital Securities as ‘originator’ via Perpetual Trustees as lender was made in June 2004 when ownership of the restaurant was transferred.

The pair installed Craig’s wife Nancy Xiao as manager but the venue did not perform as well as they had hoped.

By April 2009, they were in default.

Nancy only became aware of the scam when Perpetual sued and sought recovery of the family property to reduce the mortgage debt.

What the Victorian Supreme Court had to consider was whether the registered mortgage in favour of Perpetual was valid notwithstanding the forgery.

It ruled that there was indeed “indefeasibility” in respect of the lender’s mortgage but because the mortgage made reference to a loan agreement – rather than specifying a debt amount – such indefeasibility did not apply to the obligation to repay.

The combined effect was that the mortgage “secured nothing”.

Neither could it be said that Fitzgerald was acting within the scope of any agency in signing the mortgage on Nancy’s behalf.

“It is implausible that Mrs Xiao consented to her husband forging her signature whenever he saw fit,” ruled Justice Kim Hargrave “especially on documents such as mortgage that would extinguish equity in the family home”.

Perpetual succeeded nevertheless in establishing that the transfer of the home to Nancy for nil consideration created a trust in favour of the transferor, her husband.

It could recover at least some of its loss from him – by reason of his fraud – through debt proceedings that would see the home sold for the benefit of creditors including itself.

Perpetual Trustees Victoria Ltd v Xiao & Anor [2015] VSC 21 Hargrave J 05/02/2015

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A court ruled in December that Bank of Queensland could recover possession of two mortgaged Sunshine Coast properties supporting a personal guarantee given in favour of a family trust by owner Kym Schultz .

As someone with no direct involvement with the principal transaction, she swore being unaware she could be liable for more than the sum secured, namely for interest and costs associated with any mortgagee sale. Neither did she know, she claimed, that she could be made bankrupt if the debt was not paid in full.

An appeal was filed against the trial judge’s ruling to seek further consideration of these arguments.

To pause the bank action pending hearing of the appeal, she made an application to the Court of Appeal for a “stay”.

That contest was brought on before appeal judge Justice Robert Gotterson on an urgent basis. He agreed with Schultz that the bank’s lending officer’s explanations at the time she signed the securities supported her contentions.

He ruled there was a “significant issue on which the applicant may advance a serious argument” in connection with her state of knowledge as a “volunteer” guarantor.

Whether or not he should grant the stay depended though, on competing considerations of disadvantage that each party would suffer as a result.

In the end he decided that the costs of the sale, the triggering of potential capital gain tax liability and the facility for the bank to get an early hearing of the appeal all favoured the granting of the repossession reprieve that Ms Schultz sought.

The substantial appeal will be heard at the end of April.

Schultz v Bank of Queensland Ltd [2015] QCA 019 Gotterson JA 24/02/2015

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A taxpayer has sued the Taxation Commissioner for $450k as a result of his failure to accept a $1.00 “Bill of Exchange” to settle a $97k tax assessment.

It’s just one of the adventurous devices that creative taxpayers have used in recent times to challenge conventional tax assessments.

Phillip Atkinson received an income tax assessment in the sum of $97k on 4 July 2013.

He imaginatively “converted” the invoice to a $112.5k “negotiable instrument” promising to pay the debt in the future on terms he dictated.

The home-made “Bill” was said to be redeemable only at a restaurant-bar on the corner of Rider Boulevard and Mary St in Rhodes in Sydney’s west between 10am and 10.30 am on 16 July.

If ATO deputy commissioner Rob Ravanello failed to front at the exact time and place specified, presumably he would – on Atkinson’s construction – forfeited its value and the right to recover any tax from the taxpayer.

The extraordinary proposition had already been rejected by a Federal Court judge who considered the proceedings “frivolous or vexatious” and tossed out the claim without a hearing.

Three appeal judges agreed Atkinson’s case was “hopeless” and the inventive claim was from the world of make believe.

“No reasonable person could properly treat the argument is genuine and content that the appellant’s had a grievance they were entitled to bring to court.”

Similar “Bill of Exchange” arguments have surfaced in recent months against foreclosing bank home loan lenders. All have been struck down in the courts.

In another equally creative proposition, Queensland’s Supreme Court was challenged by serial litigant Alan Skyring who for the past 40 years has been petitioning Australian courts to permit a rehearing of his already rejected argument, that the Australian banknotes are not legal tender because gold and silver coins are the only currency referred to in the Magna Carta of 1215.

Fifty or so sets of court proceedings - that do not necessarily concern tax liability – have been commenced by Skyring (and rejected) and the list is growing.

The costs orders which he collected along the way have resulted in his bankruptcy.

Having been declared a “vexatious litigant” by Queensland’s Justice Margaret White in April 1995, he is no longer entitled to issue legal proceedings in the state without leave of the court

His latest “Quixotic” application came before Judge Martin Daubney who observed that his novel arguments were finally determined by the High Court of Australia in 1985 and Queensland Court of Appeal as recently as 2009.

The court ruled that the new action proposed was clearly “vexatious” and the court was required to dismiss his application.

Atkinson v Commissioner of Taxation [2015] FCAFC 18 Foster J, Yates J, Gleeson J 23/02/2015

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When Ai and Kris O’Neill signed a contract to buy a $360,000 residence at Ormeau, little did they know that the purchase price might not be enough to clear the sellers’ mortgage debt and literally leave their family without a roof over their heads.

That’s how this seemingly straightforward deal — the contract was signed in November 2008 – was to unfold, culminating in a verdict in their favour in Southport’s District Court for $65,000 damages.

The agreed settlement date in December arrived but the sellers could not deliver clear title because of a mortgagee payout shortfall. They requested a settlement extension to which the O’Neills consented provided they were allowed into immediate occupation.

Subsequent settlement dates came and went with the seller still unable to convince its mortgagee – Challenger Mortgage – to allow the sale to proceed.

In May 2009 the Mortgagee entered into possession of the property and ordered the O’Neills to vacate.

The buyers found a similar home for the family – at Coombabah, a litte older and with 3 bedrooms plus study as compared to four bedrooms – but at $65,000 more than the Coomera home contract price. They moved in to the Coombabah home in August 2009.

In February 2011, they filed a breach of contract claim against the sellers claiming the extra amount they ended up having to pay for the family home and expenses thrown away: legal fees, storage costs, home rental until the Coombabah home became available.

The court accepted that the substitute home was “another property of like-quality” and that the other losses “flow from the breach of the contract by the defendants”.

By the time the case came before the court on a summary judgment application, the sellers were acting on their own behalf. They did not appear in court to contest the claim when the $75,000 damages plus legal costs of the recovery proceedings were awarded against them.

O’Neill v Brown [2011] QDC 221 Samios DCJ published 30/09/2011

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In a decision that will be intently studied by the finance industry and borrowers alike, the supreme court today refused to decree that the differential between base and default interest rates are a de facto illegal “penalty” but conceded that the “well-established” rule that protects such practice “may have unsatisfactory origins” and that “the time may have arrived for it to be replaced”.

In the same ruling, the mezzanine lender to a 2009 Noosa hinterland property purchase, was found to be in breach of s 12CC of the ASIC Act and s 51AC of the Trade Practices Act because “capitalisation of interest at such a high rate imperilled any prospect that the borrowers had of being able to pay out the loan balance” and was “irreconcilable with what is right and reasonable”.

PSAL Limited – part of an “established segment of the commercial finance industry which provides customers with an alternative to traditional finance” – provided last minute two month $1.2 million finance to nurse-investor Wendy Kellas-Sharpe, as the worst of the GFC was thought to be fading, in December 2009.

The loan was on the time honoured terms of a “standard” interest rate of 7.5% per month and a “concessional” rate if payments were  made promptly – and if the borrower was not otherwise in default – of 4% per month.

Noting that the rule allowing interest rate spreads “has been recognised for more than 300 years, and has been restated in recent times by Australian courts …. and recognised by judges of the High Court” his honour decided “I do not consider that it is open to me to not follow it”.

Its commercial effect did not therefore attract the doctrine concerning the avoidance of illegal penalties in contracts.

The borrower also demanded the loan rates to be varied, claiming they were unconscionable – because of the high interest rate and the capitalisation of interest – pursuant to the ASIC Act and the TPA.

This she claimed arose from the “superior bargaining position” of the lender who had used “unfair tactics” and had “unconscionably exploited [her] necessitous circumstances …to extort from her exorbitant interest rates”.

To appreciate what follows in the contest, readers must hear more of our story.

As settlement for the Lake Cooroibah property bore down, Wendy engaged a further finance broker in a series of intermediaries to find “the cheapest interest rate possible”. Her ultimate broker Scott Wiley, executed her request in part only, warning that PSAL’s “rates won‘t be kind”.

Wendy’s intention was to refinance with a long term funder she hoped, in vain, to find during the period of the short term loan.

Evidence was that PSAL itself obtained funds – at a time when “smaller banks had withdrawn from some market segments and other non-bank lenders had tightened their credit policies – by borrowing money from investors at 30% per annum and that at the time short term rates ranged from 1.5% to 12% per month.

Given this background, the court felt comfortable in ruling that the rate of 7.5% per month was not unconscionable.

A victory for PSAL so far, but the sting was still to come in the tail.

Capitalisation at such rates “for a period of months and years” – and which yielded interest of $460,000 in just 5 months – was indeed unfair and denied the borrower “any real prospect that they had of being able to refinance the mortgage debt”.

As stated by his honour: “It would not have been unjust for that higher or default rate to be charged for a period of a few months during which time the borrowers were given a reasonable opportunity to refinance. However, continuing to charge that rate of interest, capitalised monthly, for the long period during which interest was charged at the default rate was unconscionable…. By mid-2010 the loan had ceased to be a short term loan and the capitalisation of interest at such a high rate imperilled any prospect that the borrowers had of being able to pay out the loan balance.”

Noting the broad discretion under the remedy provisions of the ASIC Act and the TPA, his honour substituted a new “default” rate of 5% in lieu of the 7.5% that had been documented and allowed capitalisation at that lower rate.

The instruction in this case is derived from the latter points on how capitalised high rates can be unfair over longer terms.

As to the penalty rate issue, it will take immense borrower desperation – and money – to battle through the appellate level to the High Court, the only forum able to reformulate judicial thinking on this pervasive issue.

PSAL Ltd v Kellas-Sharpe & Ors [2012] QSC 031 Brisb Applegarth J 28/02/2012

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The Casino NSW borrower who won a reprieve against mezzanine interest rates of 7.5% per month, has failed to stop the lender entering into possession for a mortgagee sale of her Lake Cooroibah property.

Ordered in February to pay syndicate lender PSAL Limited $1,366,330.95 – calculated by reference to a court-reduced interest rate of 5% per month – on or before 4 pm 28 March, Wendy Kellas-Sharpe filed an appeal and applied to the supreme court in Brisbane for an order preventing the lender taking the property until after three appeal judges rule on her case.

The appeal argument – that has fundamental ramifications for finance lending practices across Australia – is whether or not the differential between base and default mortgage interest rates amounts to a de facto illegal “penalty”.

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The loan was on the time honoured terms of a “standard” interest rate of 7.5% per month and a “concessional” rate if payments were made promptly – and if the borrower was not otherwise in default – of 4% per month.

Trial judge Applegarth J, conceded that the “well-established” rule that protects such practice “may have unsatisfactory origins” and that “the time may have arrived for it to be replaced”. He declined to do so on the basis that such interest rate spreads have been considered without grievance by the courts for more than 300 years.

Her application for a stay of enforcement of the February ruling was heard on 16 April and the decision published on Thursday.

Noting that “it is arguable, at least in the High Court, and perhaps in the Court of Appeal, that it should now be held that the jurisdiction to relieve against penalties does extend to an interest rate provision in the present form”, Fraser JA deciding the application, refused it only on the basis of the basis of potential prejudice from delay, to the lender.

Our heroic nurse – if she remains presistent – may yet get her redress.

But to dampen all enthusiasm and to change the economics of the fight, the lender began proceedings on 4 May, to take possession of the mortgaged property.

Kellas-Sharpe & Ors v PSAL Limited [2012] QCA 094 Brisbane Fraser JA 16/04/2012

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Unemployed re-fi borrowers – who were happy for their mortgage broker to mis-state loan application income – must give up their Currumbin Valley home after the Supreme Court last week exonerated the lender of any misconduct in its loan approval process.

Garry Moon told the court that he had suffered financial misfortune as a result his partner’s mis-deeds, stripping him of a furniture business and leaving him to carry a $465k debt to Bank West.

In 2006 he took out a 36% p.a. $125k private loan to cover the Bank West interest. In 2007 he engaged a mortgage broker to source consolidation finance, ultimately provided by Secure Funding Pty Ltd of Melbourne, where I am writing this post.

Moon completed several income statements in which he referred to his occupation as self-employed furniture manufacturer and an annual income of $115k.

In February 2009 the borrowers rented the home to a third party and then stopped payments in April that year.

Self-represented at the trial before the Supreme Court, the Moons resisted the lender’s demand for recovery of possession of the home and claimed that the broker had completed the false finance declaration, after they had signed it in blank.

The court rejected Moon’s version of events. Given that  the “evidence demonstrates that he was prepared to be dishonest to obtain a loan”, his other claims could not be considered truthful.

Even so, the borrowers contended both the lender and broker owed duties to enquire as to their ability to service the loan. Had this occurred, the loan would not have been approved and never made. This duty breached, they claimed, the transaction  was liable to be “set aside”.

Not so said the court.

For starters, as a broker is the agent of the borrower, a lender can not be visited with any sins of the broker.

Second, neither the broker nor for that matter, the lender, had done anything wrong.

“A lender does not owe a borrower a duty to give commercial advice or to investigate the ability …. to make repayments on the loan or verify information provided by the borrower”.

“It would be remarkable if a lender owed a duty to borrower to investigate an untrue statement about income for which statement the borrower was dishonestly responsible.”

Given the desperation of investors wrong-footed by the GFC and the credit crunch, these issues are likely to be exposed to further court examination.

This ruling did not address Competition and Consumer Act relief provisions nor those contained in the ASIC Act and elsewhere. Nor did it consider the issue of loan contract “penalties” which now seems a good bet to reach appellate level for re-consideration in the near future.

Secure Funding Pty Ltd v Moon & Anor [2012] QSC 244 Brisbane Peter Lyons J published 10/09/2012

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