Adelaide Bank v Carnemolla

[2008] NSWSC 1117

CITATION:	Adelaide Bank v Carnemolla [2008] NSWSC 1117
JUDGMENT DATE :	28 October 2008
JURISDICTION:	Common Law
JUDGMENT OF:	Harrison AsJ
DECISION:	(1) The judgment entered on 31 July 2008 is set aside in so far as 1/SP63270 is concerned. (2) Expedition is granted. (3) Costs are reserved. (4) The matter is listed for a Status Conference on 5 November 2008 before the Registrar at 9.00 am.
CATCHWORDS:	SET ASIDE DEFAULT JUDGMENT
LEGISLATION CITED:	Contract Review Act 1980 Trade Practices Act 1974 Uniform Civil Procedure Rules 2005
CATEGORY:	Procedural and other rulings
PARTIES:	Adelaide Bank Limited (Plaintiff) Sebastian Carnemolla (First Defendant) Lucia Carnemolla (Second Defendant)
FILE NUMBER(S):	SC 15001/2007
COUNSEL:	P N Khandar (Plaintiff)
SOLICITORS:	MacGillivrays (Plaintiff) Youth & Enterprise Legal Centre (Defendants)

IN THE SUPREME COURT
OF NEW SOUTH WALES
COMMON LAW DIVISION
POSSESSION LIST

ASSOCIATE JUSTICE HARRISON

TUESDAY, 28 OCTOBER 2008

15001/2007 - ADELAIDE BANK LIMITED v
SEBASTIAN CARNEMOLLA
JUDGMENT (Set aside judgment)

1 HER HONOUR: By notice of motion filed 3 October 2008 the first and second defendants seek: firstly, a stay of the plaintiff’s enforcement proceedings 15001/07 in relation to premises at Lots 1 and 2 SP63720 Smithfield; secondly, that the judgment entered in favour of the plaintiff on 31 July 2008 be set aside pursuant to Rule 36.15 of the Uniform Civil Procedure Rules; thirdly, in the alternative to the second order above, that the judgment entered in favour of the plaintiff on 31 July 2008 be set aside pursuant to the Rule 36.16(1) of the Uniform Civil Procedure Rules; fourthly, in the alternative to the second and third orders above, that the judgment entered in favour of the plaintiff on 31 July 2008 be set aside pursuant to Rule 36.16(2)(a) of the Uniform Civil Procedure Rules; sixthly, that an amended defence be filed within 14 days of the making of these orders.

2 The plaintiff is the Adelaide Bank Limited (Adelaide Bank). The first defendant is Sebastian Carnemolla. The second defendant is Lucia Carnemolla. Mr and Mrs Carnemolla are husband and wife. The plaintiff relied upon the affidavit of Samuel Pearlman dated 3 September 2008 and an affidavit by Mr Carnemolla dated 4 December 2007. The defendants relied upon the affidavits of Lucy Carnemolla dated 1 September 2008 and two by their solicitor Lisa Paraska dated 29 August 2008 and 23 September 2008.

3 On 31 July 2008 I ordered that Mr and Mrs Carnemolla’s defence be struck out. I further ordered that Adelaide Bank have possession of the land described in the Schedule to the statement of claim and entered judgment that Mr and Mrs Carnemolla pay to the plaintiff the sum of $987,057.71.

4 Lots 1 and 2 are two units. The family live in Lot 1. The defendants’ application to set aside the judgment does not relate to Lot 2. The application and proposed defence relates only to Lot 1. A writ of possession has been issued in relation to Lot 2.

Background

5 On 21 December 2004, the loan agreement and investment loan were secured by mortgages over Lots 1 and 2 of SP63700. On 18 January 2005, the plaintiff advanced to the defendant the amount of $867,000. On 25 July 2007, the plaintiff issued a demand and a s 57(2)(b) notice to the defendants.

6 A brief court history of the case management of these proceedings is set out below.

7 On 2 October 2007, the plaintiff filed a statement of claim. On 22 October 2007, the defendants filed a defence. On 1 November 2007, the defendants sought to replead their defence. On 26 November 2007, the plaintiff filed a notice of motion seeking to strike out the defendant and for summary judgment. On 11 December 2007, the motion came before me for hearing. The defendants sought an adjournment, which I granted. The motion was stood over to 15 February 2008 with any amended defence to be filed by 8 February 2008.

8 On 14 February 2008, the plaintiff received an email from the solicitor who was funded by Legal Aid. The plaintiff consented to an adjournment of the motion until 20 March 2008.

9 On 19 March 2008, the plaintiff was contacted by the defendants’ solicitor who advised that arrangements were being made to appoint a tutor for Mr Carnemolla. On 20 March 2008, the motion came before Registrar Bradford. Mr Rolinson of Counsel appeared on behalf of Mr Carnemolla and Mrs Carnemolla appeared in person. The Registrar made orders that the consent to act as tutor be filed by 17 April 2008, the amended defence to be filed by 8 May 2008 and the motion was stood over to 22 May 2008.

10 On 15 April 2008, the defendants’ solicitor advised that cogent instructions had been possible from Mr Carnemolla. On 14 May 2008, the solicitor advised that Counsel’s advice as to prospects was being sought and stated that Mr Carnemolla did not need a tutor and that Mrs Carnemolla was separately represented. On 21 May 2008, the defendants’ solicitor requested a 14 day adjournment so that Legal Aid could consider a grant of aid for Mr Carnemolla. Mrs Carnemolla’s solicitor advised that provisional grant had been made for her. The plaintiff consented to the adjournment.

11 On 22 May 2008, the motion went before Registrar Bradford who ordered an amended defence to be filed by 5 June 2008 and stood the matter over to 12 June 2008 for directions. On 29 May 2008, Mr Carnemolla filed an affidavit attaching a report of Dr Menendez dated 16 April 2008.

12 Dr Mendez, Mr Carnemolla’s consulting psychiatrist, in his letter dated 16 April 2008, addressed “Whom It May Concern” wrote:

“This letter is written at the request of Mr Carnemolla. It is handed over to him and it is to be used in any capacity he considers necessary during his legal procedures.
Mr Carnemolla is a patient of mine. He is compliant with Treatment and he attends his appointments. He has expressed his desire to have an active role during his legal procedures. I do not object to this. I think he is entitled to have his day in court and to have the opportunity to present his case personally.”

13 On 12 June 2008, before the Registrar, the defendant appeared in person and advised the Registrar that Legal Aid had been refused and sought an adjournment to appeal the Legal Aid decision. The defendants were ordered to file and serve affidavits as to the status of the Legal Aid appeal by 26 June 2008 and the matter was stood over for further directions to 3 July 2008.

14 On 3 July 2008, at the directions hearing before the Registrar, the defendants did not file any affidavits concerning the progress of the grant of Legal Aid. The matter was referred to me for hearing. I granted a further adjournment and ordered the defendants to file and serve an amended defence and affidavits as to status of the Legal Aid appeal by 30 July 2008.

15 The matter was relisted before the Registrar on 31 July 2008. On 31 July 2008, Registrar Bradford referred the matter to me for hearing. My extempore reasons were:

“By notice of motion filed 27 November 2007 the plaintiff, Adelaide Bank Limited, seeks that the defence filed 22 December 2007 on behalf of both defendants be struck out and summary judgment be entered. The defendants have admitted they are in default of the mortgage, and the plaintiff by statement of claim filed 2 October 2007 seeks possession of two properties, lots 1 and 2 in strata plan 63720.

The defendants filed a defence on 22 October 2007 but it does not plead any grounds of defence. The defendants have filed voluminous affidavits which I have read, and have sought and been granted a number of adjournments in these proceedings which the Federal Court proceedings against E-Bay were heard. They were alleging defamation against E-Bay. In June 2008 the proceedings in the Federal Court were dismissed. However I do acknowledge that there is an appeal against this decision on foot.

On the last occasion I made it clear that it was the last adjournment, and requested that the defendants file an amended defence. Legal Aid has been refused and no amended defence has been filed. Today, as before, the defendants have put one of the units on the market and have offered to pay $2300 per month payment for the front unit. However I have explained to Mr and Mrs Carnemolla that I have no power to impose these conditions on the bank.

In any event according to the most current affidavit filed by the bank the defendants as at today owe the sum of $987,057.71, and the value of both properties together will realise an estimate of between $560,000 and $660,000. In other words, there is a large shortfall.

I propose to make the orders in accordance with the notice of motion. I strike out the defence filed 22 October 2007 and it is adjudged that the plaintiff have possession of the land as described in the schedule in the statement of claim.”

16 I also made an order that the defendants pay to the plaintiff the sum of $987,057.71.

The situation since judgment was entered on 31 July 2008

17 The defendants are now legally represented. Ms Lisa Paraska, the defendants’ solicitor deposed (Aff 29/09/2008) that on Thursday 21 August 2008, Mr and Mrs Carnemolla visited the Youth and Enterprise Legal Centre in respect of these proceedings. During that meeting, it became apparent to Ms Paraska that Mr Carnemolla lacked legal capacity and could not provide her with adequate or coherent instructions about the possession proceedings.

18 Mr Carnemolla’s wife says (Aff 01/09/2008) that her husband was born in 1944 and was involved in a work accident in 1989 when he fell off a 5 metre roof. Since then, she has observed that he has developed some unusual behaviours and can be difficult to communicate with, because he does not seem to understabd what she is saying, and often has a faraway look in his eyes. He repeats himself often. Her husband was diagnosed with schizophrenia by Dr Ali (now a deregistered psychiatrist) in about 1999. Later he was treated by Dr Menendez, who confirmed the diagnosis of schizophrenia. Currently, Mrs Carnemolla’s husband is taking a number of medications, including Abilify, an antipsychotic mediation.

19 The family is in dire circumstances. Their son Paolo was born in 1975 and lives with them. In 1979, when Paolo was at preschool he was still unable to speak and it was discovered that he had an intellectual disability. Even now, Paolo is only able to utter short sentences, such as “water” when he is thirsty. Although he is now 33 years of age, Mrs Carnemolla says that he has the mental age of a 10 year old. They have tried sending him to speech therapy session and other remedial treatment but unfortunately, he cannot improve very much. In 2006, their daughter Lisa Carnemolla was diagnosed with bipolar disorder as well as schizophrenia, and takes Ativan for anxiety and Risperdal to treat her psychosis. Lisa has also tried to hold down a job, but due to mental illness she is also on a disability pension. Mrs Carnemolla receives treatment for anxiety and depression and cares for her husband, Paolo and Lisa.

20 Returning to the meeting between Mr and Mrs Carnemolla and their solicitor on 21 August 2008, it became apparent to the solicitor that Mrs Carnemolla had left financial matters up to her husband Mr Carnemolla for the whole period of their marriage, which commenced when she was 17 years of age. Mrs Carnemolla appeared from her conversations about the subject mortgage to have lower than average levels of financial literacy, but did not appear to lack legal capacity to instruct his solicitor. Mrs Carnemolla verbally agreed to act as Mr Carnemolla’s tutor.

21 Ms Paraska further deposed that as Mr and Mrs Carnemolla appeared to be extremely distressed about the proceedings at the meeting, and as they had brought their granddaughter Kiara with them who was unfortunately ill and crying so loudly that it was impossible to discuss the proceedings, a further meeting was arranged for Monday 25 August 2008.

22 On or about 23 August 2008, Ms Paraska spoke with the family’s psychiatrist, Dr Jose Menendez, who expressed his concerns about the extreme distress that the Carnemolla family would likely suffer if they were forced out of their family home at xxxxxxxx, Smithfield. Dr Menendez confirmed that he would appear as an expert witness in any proceedings brought to assist the Carnemolla’s, and that he had not been informed by Mr Carnemolla of the possession proceedings until 19 August 2008, when Mr Carnemolla consulted him as part of his ongoing psychiatric treatment program. Dr Menendez now holds that the opinion that Mr Carnemolla lacked the capacity to instruct a solicitor, but said that Mrs Carnemolla, despite having significant anxiety and depression, was able to give instructions.

23 On 27 August 2008 Ms Paraska spoke with a forensic psychiatrist, Associate Professor Robert Kaplan, about the Carnemolla family, and about concerns that Mr Carnemolla lacked the capacity to instruct solicitors. Dr Kaplan agreed to provide a psychiatric assessment of Mr Carnemolla.

The report of Associate Professor Kaplan

24 Associate Professor Kaplan, a forensic psychiatrist, in his report dated 22 September 2008 stated that Mr Carnemolla has a delusional disorder. This is a severe psychiatric condition dominated by paranoid delusions, usually of a conspiracy against the claimant. Such individuals have a preoccupation with what they believe is their victimisation or persecution leading them to go to extraordinary lengths, especially with litigation to protect themselves. Such individuals often present a calm and orderly front to the world, may seem rational when talking about other subjects, and are initially convincing. However, they are obsessive to an extraordinary degree, cannot be shaken from their delusional beliefs and constantly increase the stakes to quantify the extent they believe that they are being victimised.

25 Dr Kaplan continued that this is consistent with Mr Carnemolla’s presentation. He has interpreted every event involving EBay and the subsequent court hearings in a delusional fashion, now including the Attorney General and a worldwide Internet conspiracy. Mr Carnemolla believes he is constantly stalked and is unsafe at home.

26 Dr Kaplan concluded that Mr Carnemolla, as a result of a Delusional Disorder, is unable to manage his own affairs. He would not be able to safely instruct a solicitor, participate in litigation or control his finances, and there is a strong recommendation that with the cooperation of his psychiatrist, this matter might be passed to an appropriate third party, such as the Guardianship Board.

27 Dr Kaplan’s report also states that he has concerns about Mr Carnemolla’s deteriorating mental state. The possibility that he may take extreme action, at a cost to himself, his family, people involved in litigation or members of the public, leading to the direst consequences, cannot be excluded.

28 Of importance is that Mr Carnemolla consulted Dr Ali about his psychiatric state in 1999. Associate Professor Kaplan referred to this and said that:

“Noting the family history of psychotic disorder and that he was treated by antipsychotic medication by Dr Aly, this is strongly suggestive that Mr Carnemolla had a paranoid or psychotic disorder at that stage. This has forensic implications, namely that Mr Carnemoll’s mental state when he commenced trading in EBay and took out mortgages must be regarded as disturbed.”

29 Hence, there is psychiatric opinion to suggest that Mr Carnemolla may have been under a legal disability when he signed the loan and mortgage documents in 2004.

30 The defendants’ solicitor submitted that when the defence was struck and judgment entered, was done so irregularly, at least as regards Mr Carnemolla, pursuant to Rule 7.17 of the Uniform Civil Procedure Rules

Proposed amended defence

31 Mr and Mrs Carnemolla made submissions that they admit ostensibly executing a mortgage but deny that Adelaide Bank is entitled to rely on the terms of the mortgage in their entirety. Mr and Mrs Carnemolla formally deny receiving the default notice under section 80 of the Consumer Credit Code and deny that the notice complied with section 80 of the Code. The defendants deny that the Adelaide Bank are entitled to possession of Lot 1. However the substance of the defence (which more properly should be contained in a cross-claim) raises issues of unconscionable conduct and undue influence, contravention of the Trade Practices Act 1974 (Cth) and the Contracts Review Act 1980.

32 Essentially, the defendants contend that prior to entering the mortgage, they dealt with Leon Angelpolous who was an agent for the plaintiff. They allege:

(a) Angelopoulos unduly influenced Mr Carnemolla by representing to him that he was “like a father” to Angelopoulos;

(b) Angelopoulos engaged in unconscionable conduct when he represented to Mr Carnemolla that the mortgage was in his best interests;

(c) Angelopoulos engaged in unconscionable conduct when he deliberately dissuaded the Carnemolla’s from seeking independent legal advice;

(d) Angelopoulos engaged in unconscionable conduct when he induced the Carnemollas’ signatures on the mortgage by representing to them that even if they could not keep up repayments on the investment properties, they could remain in their home, provided they could make the repayments on their home;

(e) Angelopoulos ensured the Carnemolla’s entry into the loan notwithstanding that it was patently clear that they would be unable to repay the loan;

(f) Angelopoulos engaged in unconscionable conduct when he proffered the mortgage and loan documentation to the Carnemolla’s for signature without requiring them to read or understand the documentation;

(g) Mr Carnemolla’s mental incapacity is such that it was unconscionable of Angelopoulos to persuade him to enter into the mortgage and loan;

(h) Mrs Carnemolla’s lack of understanding and obvious reliance upon Mr Carnemolla in financial affairs in all the circumstances made it unconscionable for Angelopoulos to procure her signature on the documentation without ensuring that she understood the nature of the transaction, and Angelopoulos in fact took steps to ensure that she did not understand the true nature of the mortgage transaction;

(i) Angelopoulos accepted a cash payment of some $5000 or $6000 from the Carnemolla’s by way of commission and did not issue a receipt for that payment;

(j) Angelopoulos completed or caused to be completed tax returns for Mr Carnemolla which was negligently, falsely or otherwise incorrectly filed our in the following respects:

(i) They contained an ABN which did not match the business name given;
(ii) The contact name “Ali Adam Khan” appearing on the tax returns, was and is a person wholly unknown to the Carnemolla’s;
(iii) The tax agent noted on the tax returns, Practice One Pty Ltd, is a company entirely unknown to the Carnemolla’s;
(iv) The amounts displayed on the tax returns are fictitious and were not drawn from any information given by the Carnemolla’s;
(v) The income amounts displayed on the tax returns exceed $2 million and are far in excess of the real amounts expended by the Carnemolla’s.

33 As regards Mrs Carnemolla, Ms Paraska deposed that she appears to have a defence to the possession proceedings pursuant to the Contracts Review Act, unconscionability, and especially considering her instructions, that she entered into the subject mortgage because her husband asked her to, without reading it, and without the benefit of legal advice. In short the defendants say that the plaintiff relied upon its agent, Mr Angelopoulos and did not carry out the proper checks as to employment, capacity and the ability to repay the loan.

34 If this had been an application to have a default judgment set aside or had this application been made within 14 days after I delivered judgment, I would have set my earlier judgment aside because it is a very serious step to deny the defendants a real opportunity to have a trial on its merits. In my view they have not had a trial on the true merits of their case. I am satisfied that they have an arguable defence and that they were not in a position to afford legal representation. However, do the rules permit judgment to be set aside in these circumstances?

The relevant rules

35 Rule 7.17 of the Uniform Civil Procedure Rules 2005 reads:

“Non-appearance of person under legal incapacity:

(1) Subject to subrule (2), the plaintiff in proceedings against a defendant who is a person under legal incapacity may take no further step in the proceedings following service of the originating process until a tutor has entered an appearance on behalf of the defendant.

Note: If no such appearance is entered, the plaintiff may apply to the court under rule 7.18 for the appointment of a tutor of the defendant, or for the removal and appointment of such a tutor.

(2) …”

and Rule 36.15 reads:


“General power to set aside judgment or order:

(1) A judgment or order of the court in any proceedings may, on sufficient cause being shown, be set aside by order of the court if the judgment was given or entered, or the order was made, irregularly, illegally or against good faith.

(2) …”

36 The defendants also relied on rule 36.16. However, the notice of motion was filed on 3 October 2008, which is outside the 14 day period specified in (3A) and (3B). Judgment was recorded on the system on 31 July 2008 (see Ex 1). Hence, judgment was entered on 31 July 2008. Rule 36.4 reads that a judgment, unless the Court otherwise orders, is to have been entered in the case of a Court that uses a computerised court record system when it is recorded on the system. It is my view that rule 36.16 does not have application.

37 Counsel for the plaintiff opposed the application. He submitted that the defendant has been given time to obtain medical evidence as to his disability as there had been nine adjournments granted, an earlier medical report of Dr Menendez suggested that Mr Carnemolla did have the requisite mental capacity and the report of Dr Menendez should be preferred over that of Associate Professor Kaplan. The plaintiff’s counsel also submitted that Mr Carnemolla acknowledged that he owed the money because in his affidavit dated 4 December 2007, Mr Carnemolla stated:

“g) We are confident to beat eBay INTERNATIONAL AG with the new evidence supplied in our amended Statement of Claim DATED 29/5/08. The proceeds will pay all the amount owing to the ADELAIDE BANK LTD including the interest.”

38 Finally, Counsel for the plaintiff submitted that the defendants may not have the loan set aside under the Contracts Review Act. The relief granted under the Contracts Review Act is discretionary. The outcome will depend on the resolution of the facts and circumstances at trial.

39 I accept that during the case management of these proceedings in March there was the concern by Mr Carnemolla’s solicitor expressed as to whether Mr Carnemolla needed a tutor to the plaintiff’s solicitor. However, on the next occasion namely 14 May 2008 the defendants’ solicitor informed the plaintiff’s solicitor that Mr Carnemolla did not need a tutor. The current medical evidence expresses real doubt that Mr Carnemolla had the requisite mental capacity to firstly, enter into the loan agreement and mortgage; and secondly, give proper instructions as to the conduct of these proceedings. For this Court these considerations are fundamental and decisive. Mrs Carnemolla relied on her husband to conduct the litigation. It is my view that the defendants ought not be deprived forever of a chance of defending themselves. At the very least the judgment has been entered irregularly on 31 July 2008. It should be set aside in so far as 1/SP63720 is concerned.

40 As there is little equity in the property, it is in both parties’ interests if these proceedings are heard and determined as soon as possible. Hence, I grant expedition. Costs are reserved.

The Court orders

(1) The judgment entered on 31 July 2008 is set aside in so far as 1/SP63720 is concerned.

(2) Expedition is granted.

(3) Costs are reserved.

(4) The matter is listed for a Status Conference on 5 November 2008 before the Registrar at 9.00 am.
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