Capital One Securities Pty Ltd v Soda Kids Holdings Pty Ltd
[2014] VSC 168
•24 April 2014
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
S CI 2011 00644
| CAPITAL ONE SECURITIES PTY LTD (ACN 125 836 160) | Plaintiff |
| V | |
| SODA KIDS HOLDINGS PTY LTD (ACN 138 693 937) and ORS (Schedule of parties attached) | Defendants |
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JUDGE: | GINNANE J | |
WHERE HELD: | Melbourne | |
DATES OF HEARING: | 26-30 August, 2-3 September 2013 | |
DATE OF JUDGMENT: | 24 April 2014 | |
CASE MAY BE CITED AS: | Capital One Securities Pty Ltd v Soda Kids Holdings Pty Ltd and Ors | |
MEDIUM NEUTRAL CITATION: | [2014] VSC 168 | |
LOAN – Action to recover moneys alleged to be owing under loan agreement – Whether variation of earlier loan agreement – Whether demands valid – Guarantee – Mortgage – Whether moneys lent secured under mortgage – Reference to Consumer Credit Code.
UNCONSCIONABLE CONDUCT defence – Principles in Garcia’s Case and Amadio’ Case – Statutory unconscionability – Fair Trading Act 1999 (Vic) s 8A.
PAYMENT to third parties – Whether with intention to defraud creditor – Whether made bona fide and for consideration – Property Law Act 1958 (Vic) s 172(1).
KNOWING RECEIPT of property – Whether creditor had equitable interest in money paid to third party.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr I Upjohn | Lewenberg &Lewenberg |
| For the Fourth Defendant For the Fifth Defendant The Sixth, Seventh and Eighth Defendants | Mr R Cook Mr D G Robertson Self-represented | Darroll Nelson Katherine Moorehouse-Perks |
SCHEDULE OF PARTIES
| CAPITAL ONE SECURITIES PTY LTD (ACN 125 836 160) - and - | Plaintiff |
| SODA KIDS HOLDINGS PTY LTD (ACN 138 693 937) | First Defendant |
| SODA CHILDREN PTY LTD (ACN 138 693 900) | Second Defendant |
| SAFARI PEAK PTY LTD (ACN 132 769 558) | Third Defendant |
| JOSEPHINE MANNELLA | Fourth Defendant |
| ROCCO MANNELLA | Fifth Defendant |
| PAUL DENARO | Sixth Defendant |
| NADIA DENARO | Seventh Defendant |
| ANTONIETTA STASI | Eighth Defendant |
HIS HONOUR:
The plaintiff (“Capital One Securities”) is a money lender. It sues the first three defendants for the sum of $200,000, plus interest, that it claims that it lent them under a document described as an Acknowledgement and Agreement dated 19 July 2010. I will refer to that document as the second loan agreement, because there was an earlier loan agreement, which is of significance in this case. I will refer to that earlier loan agreement as the first loan agreement.
The first three defendants “Soda Kids Holdings”, “Soda Kids”[1] and “Safari Peak”, conducted or were associated with a children’s clothing business known as “Soda Kids” that was operated, at least in part, by Mrs Josephine Mannella (Mrs Mannella), the fourth defendant, from a shop in Moonee Ponds.
[1]By order of Macaulay J made on 15 August 2011, the name of the second defendant was changed to Soda Children Pty Ltd (ACN 138 693 900). However, the parties continued to refer to it as “Soda Kids” and I shall apply that practice.
The first three defendants were de‑registered as companies because they did not pay fees due to ASIC. They no longer exist as legal entities. Mrs Mannella, who was their director, decided not to pay those fees.[2]
[2]T 290.
Capital One Securities continued its claims against the other defendants.
Mrs Mannella has worked in the fashion industry for 25 years and is married to the fifth defendant, Mr Rocco Mannella (“Mr Mannella”). On occasions in this judgment, I refer to Josephine and Rocco Mannella, jointly, as the Mannellas.
Capital One Securities sues the Mannellas pursuant to guarantees and under a mortgage over their Pascoe Vale home, which it contends were securities for the repayment of moneys advanced under the second loan agreement. It claimed possession of their home pursuant to the mortgage. However, the National Australia Bank, which held a first mortgage over the property, took possession of and sold it.
The Mannellas deny that they have any liability to Capital One Securities under the guarantee or mortgage. Mr Mannella also relies on principles of unconscionability to set aside those securities if he was otherwise liable under them.
The other defendants against whom Capital One Securities has continued claims are Ms Nadia Denaro (the sixth defendant), who is Mr and Mrs Mannella’s daughter, and Mr Paul Denaro (the seventh defendant) who is married to Nadia Denaro and is the Mannella’s son-in-law. The eighth defendant was Ms Antoinette Stasi, who is Mrs Mannella’s sister. Capital One Securities sought judgment for $150,000 against the Denaros and Ms Stasi under s 172 of the Property Law Act1958 (Vic) (“the Act”). It alleged that the Denaros received that sum, which came from the proceeds of sale of the Soda Kids business on 18 March 2011, from the Mannellas with the intention of defeating Capital One Securities’ interest in those proceeds as a creditor. It then claimed that the Denaros paid that sum to Ms Stasi and that it could claim that sum under s 172 from her.
Capital One Securities also claimed that the Denaros and Ms Stasi received the sum of $150,000 with knowledge of Capital One Securities’ equitable interest in it, that they were liable in equity for knowing receipt of it and that it could recover that sum from them.
After Ms Stasi and her husband, Mr Albert Stasi, had given evidence at the trial, Capital One Securities dropped its claim against her. The case under s 172 thereafter proceeded against the Denaros. They defended the claim and represented themselves, with Ms Denaro making final submissions on both their behalves.
There were many issues argued in the proceeding, but the principal questions were:
(a) Did Capital One Securities loan $200,000 under the second loan agreement to the first three defendants?
(b) Was the second loan agreement too uncertain to be enforceable?
(c) What “securities”, if any, secured the advances made under the second loan agreement?
(d) Was there a default by the first three defendants under the second loan agreement and were demands required and made under that agreement?
(e) Were the Mannellas liable under guarantees and the mortgage for sums owing under the second loan agreement?
(f) Has Mr Mannella established that Capital One Securities engaged in unconscionable conduct in connection with his entry into the second loan agreement, guarantee and mortgage and if so can he rely on that conduct as a defence to Capital One Securities’ claim against him?
(g) Did Capital One Securities have an entitlement to recover $150,000 from the Denaros under s 172 of the Property Law Act1958 or in reliance on a knowing receipts claim?
The complexities in Capital One Securities’ claim against the Mannellas have been caused in substantial degree by uncertainties concerning the effect of Capital One Securities’ loan and security documents. Counsel for Capital One Securities submitted that the arguments relied on by the Mannellas were technical and without substance, but ultimately I have decided that some of them have significance.
The second loan agreement
I will next set out the terms of the second loan agreement under which Capital One Securities sues the Mannellas.
WHEREAS:
A.By a Loan Agreement dated 25 September 2009 the Lender agreed to advance funds to the Borrower from time to time on the terms of the said Loan Agreement and the securities therein referred.
B.The Guarantor agreed to guarantee the obligations of the Borrower under the said Loan Agreement.
C.The Borrower has sought the advance of further funds from the Lender and the Lender has agreed to make a further advance to the Borrower on the terms herein set out.
D.The Guarantor acknowledges the further advance to be made by the Lender to the Borrower and agrees to guarantee the obligations of the Borrower with respect to the said further advance.
THE PARTIES HEREBY AGREE AS FOLLOWS:
1.The Lender agrees to advance to the Borrower the further sum of $200,000 (“the Further Advance”) and shall pay the same at the Borrower’s direction.
2.The Further Advance shall be made by the Lender as soon as practicable after registration of a mortgage over the security property of the Guarantor.
3.The Borrower and Guarantor and each of them acknowledge and agree that:
(a)the Further Advance is made by the Lender pursuant to and on the same terms and conditions as the Loan Agreement;
(b)the Further Advance shall be and is governed by the terms of the Loan Agreement; and
(c)the securities given by the Borrower and Guarantor and each of them shall apply to and secure the Further Advance made pursuant to this Acknowledgement and Agreement.
Much argument centred on the meaning of the term “the securities” contained in clause 3(c).
An understanding of the purpose and meaning of the second loan agreement requires examination of the history of the financial dealings between Capital One Securities and the Mannellas. That history commences with the first loan agreement entered into on 25 September 2009.
The first loan agreement of 25 September 2009
In 2009, Mrs Mannella conducted the Soda Kids business with Ms Daniela Bussolaro.
By the first loan agreement dated 25 September 2009, Capital One Securities agreed to loan the initial sum of $150,000 to Soda Kids Holdings, Soda Kids, and Safari Peak. Clause 2.2 provided:
The Borrower acknowledges that in addition to the Advance, the Lender may provide further Financial Accommodation if requested to do so by the Borrower. Any further Financial Accommodation to be provided to the Borrower by the Lender shall be governed by the provisions of this Loan Agreement.
The purpose of the advance was to provide working capital for the children’s clothing business of the borrowers.
Capital One Securities advanced sums to the three companies under the first loan agreement, totalling $500,000. The sum of $150,000 was advanced on 25 September 2009 and the further advances were $150,000 made on 7 October 2009 and $200,000 made on 19 October 2009.[3]
[3]CB 636.
The guarantees of Mrs Mannella and Ms Bussolaro under the first loan agreement
The first loan agreement provided for the borrowers to provide security in the form of directors’ guarantees given by Mrs Mannella and Ms Bussolaro, and a deed of charge given jointly and severally by the guarantors and the three companies. The guarantors guaranteed that the borrowers would perform all their obligations under the agreement and agreed to pay on demand any amount which the lender was entitled to recover from the borrowers under the first loan agreement. The guarantors also indemnified the lender against all loss resulting from the lender having entered into the agreement, whether from the borrower’s failure to perform its obligations under it or from the agreement being or becoming unenforceable against the borrower.
The borrowers referred to in the guarantee were Soda Kids Holdings, Soda Kids Pty Ltd and Fashion Logistics Pty Ltd (trading as Soda Kids). Fashion Logistics Pty Ltd was not a party to the first loan agreement, Safari Peak was named as the third of the three company borrowers, but nothing appeared to turn on that point.
The charge given under the first loan agreement
Clause 9 of the first loan agreement contained a charge in the following terms:
SECURITY
9.1In order to secure repayment to the Lender of the Advance and any Outstanding Monies payable under this agreement, the Borrower and the Guarantor jointly and severally:
(a) agree to provide the Security;
(b)hereby charge all of their beneficial interest in any real and personal property (including all property acquired after the date hereof) in favour of the Lender whether or not a demand has been made on the Borrower or the Guarantor;
(c)authorise and consent to the Lender taking all actions necessary to give effect to this security including the lodgement of a caveat upon title to any real property registered in the name of the Borrower or Guarantor. The Borrower and Guarantor hereby irrevocably appoint the Lender and any person appointed by the Lender severally the attorney of the Borrower and Guarantor with power to execute, sign, seal and deliver (which delivery may be subject to such terms and conditions as the attorney thinks fit) such documents as may be necessary to give effect to this security.
All of the principal and nearly all of the interest due under the first loan agreement were repaid, by the end of May 2010.[4]
[4]T 74, 83, 109, 169, 256, CB 1092-1093.
Mr Mario Merlo
The first loan agreement was prepared by Mr Mario Merlo, a solicitor who conducted a legal practice under the name Alliance Legal. He acted for Capital One Securities. Towards the end of 2009, Mr Tom Karas, who is a director of Capital One Securities, introduced Mr Merlo to the Mannellas and he acted for them in respect of particular commercial transactions.
The loan agreement of 2 February 2010
In February 2010, Capital One Securities signed a further loan agreement with the Mannellas and Ms Bussolaro.[5] It provided for Capital One Securities to loan the sum of $420,000 to the Mannellas and to Ms Bussolaro for six months. Mrs Mannella needed this sum to repay a loan, which was secured by a mortgage over her parents’ home.
[5]CB 602.
The loan did not proceed as the Mannella family raised the amount required from other sources, mainly from other family members. However, the securities that Capital One Securities contends that the Mannellas granted at the time of, or soon after, signing the February 2010 loan agreement are important.
The Mannellas and Ms Bussolaro signed the February 2010 loan agreement after meeting with Mr Dominic Esposito, a solicitor, at his office in Carlton. He witnessed their signatures.
The February 2010 loan agreement provided that the borrowers would grant a charge in favour of the lender as security (clause 12). That charge was given “to better secure the payment of the Borrower of all monies due and owing by the Borrower to the Lender pursuant to the Loan Agreement”. It was attached to the loan agreement and it operated over the borrowers’ homes and all their real and personal property.
The Mannellas and Ms Bussolaro each made a statutory declaration on 2 February 2010, which stated:
1.I am the Borrower named in the certain loan and security documents in favour of Capital One Securities Pty Ltd A.C.N. 125 836 160 relating to property at Pascoe Vale, 3044 & Donvale, Vic, 3111.
2.I have received independent legal advice regarding the loan and security documents referred to in paragraph 1.
3.After receiving that advice I have freely and voluntarily signed the following documents where necessary:
Loan Agreement between Lender and Borrower.
Mortgage over property situated at Pascoe Vale & Donvale.
Mr Esposito witnessed their signatures on the Declarations. Mrs Mannella said that he explained the meaning and effect of the mortgage and told her that a second mortgage “went onto” the home and secured part of the loan they were taking. However, she never received a copy of the Memorandum of Common Provisions that formed part of the mortgage.[6]
[6]T 265.
Mrs Mannella was not present when Mr Esposito advised her husband about the mortgage. She said that she left it up to him to decide if he would mortgage the house.[7]
[7]T 285.
The loan agreement of 2 February 2010 made no reference to the Mannellas and Ms Bussolaro giving a mortgage over their homes.
It is not entirely clear when the Mannellas and Ms Bussolaro signed the mortgages of their properties despite the terms of their declarations of 2 February 2010. Ms Bussolaro’s mortgage was dated 2 February 2010.[8] The Mannellas’ mortgage was dated 1 March 2010,[9] which, on one view, might suggest that it was being given in connection with a Deed of Variation of that date, which extended the repayment date of the first loan and which is described below. Mrs Mannella’s affidavit sworn in connection with injunction proceedings supports that conclusion,[10] although her evidence at the trial suggested that she signed the mortgage at Mr Esposito’s office on 2 February 2010.[11] The Mannellas’ mortgage was not registered until 3 August 2010,[12] apparently because Mr Mannella did not sign his counterpart of the mortgage until some months after March 2010.[13]
[8]CB 599
[9]CB 1017.
[10]CB 637 [13].
[11]T 382.
[12]T 97, CB 992.
[13]T 191, 226.
Mr Mannella’s outline of evidence states that he signed papers for the loan when he was asked to do so. These papers included a Deed of Charge, Declaration under the Consumer Credit Code concerning the purpose of the loan, a Direction to pay, the Statutory Declaration and covenants that formed part of the mortgage. He stated that he signed these documents so that he and his wife could obtain a loan to pay off the loan over his mother-in-law’s house.[14] He also stated that his wife told him that the loan was in default and that they had to borrow money to pay off that loan and:
For this reason, I attended at a solicitor’s office in Rathdowne Street, Carlton with Josephine and with her then business partner, Daniella Bussolaro. The solicitor asked the three of us to sign the papers, which we did. He did not give me any explanation of the meaning or effect of the papers. I could not read them. I thought that they related only to a loan to pay off my mother-in-law’s house.
A few days after signing the papers in Rathdowne Street, Josephine told me that the loan would not proceed and that we urgently needed to get finance from somewhere else to save her mother’s house. She then arranged a loan from Michael J Barone, solicitor, and also arranged for family members to contribute extra money to pay off the loan over my mother-in-law’s house. I signed papers for this loan when I was asked to do so. [15]
[14]CB 1070.
[15]Ibid.
In his evidence at trial, Mr Mannella was much less certain about what he had signed.
I consider that the most likely course of events was that the Mannella’s mortgage was executed on 2 February 2010, was dated 1 March 2010 and was registered on 3 August 2010.
Mrs Mannella said that Mr Merlo told her that because the loan of February 2010 did not proceed nothing would be charged against her home.[16]
[16]T 263.
The Mannellas argued that the mortgage ceased to have legal effect once the February 2010 loan did not proceed.
Evidence of Mrs and Mr Mannella
It is appropriate at this point of the judgment to state my conclusions concerning the weight that I can give to the evidence of Mrs and Mr Mannella as it was the subject of attack in the final submissions of Capital One Securities.
There were a number of unsatisfactory aspects of Mrs Mannella’s evidence, which lessens the weight that can be given to it. She sought to discredit parts of the affidavit that she had sworn in opposition to the continuation of the injunction granted on 18 March 2011 and which is described below. She said she believed there was a conspiracy involving Mr Karas, Mr Merlo and Mr Zita, who acted for them in connection with the injunction proceeding, to convey wrong information in her affidavit. Mr Zita, of the office of John V Hayes & Co, had replaced Mr Merlo as solicitor for the Mannellas for the purposes of contesting the injunction application. Mr Merlo had previously acted for both Capital One Securities and the Mannellas. Mrs Mannella was in Court on 23 March 2011, when the injunction application again came before Habersberger J.
Before me, Mrs Mannella gave evidence that when she swore her affidavit of 25 March 2011, she was not aware that there was a second mortgage over the property.[17] But in her affidavit, Mrs Mannella stated that she and her husband had agreed to provide a second mortgage over their home in return for Capital One Securities extending the time for the repayment of loans made to Soda Kids.[18]
[17]T 304.
[18]CB 637 [13].
Mrs Mannella said she never discussed the contents of her affidavit with her husband, although she stated in the affidavit that she was authorised to swear it on his behalf.[19]
[19]T 378.
Mrs Mannella’s emails to Mr Karas in 2011 and her negotiations about her repayment of the loan of $200,000 suggest that she did not dispute her liability to Capital One Securities until after this proceeding was commenced.
She identified her signature and her husband’s on the mortgage documentation. She tried to depart from her affidavit about the mortgage and said that she told Mr Zita that there was no second mortgage.
There were a number of matters that also reflected adversely on Mr Mannella’s credit. In his defence he admitted that he and his wife had signed the second loan agreement, but then in evidence denied that he had. He admitted that the signature looked like his. He denied that he had signed the Deed of Variation.
Mr Mannella was cross-examined about the accuracy of statements that he made in the forms that he completed in order to withdraw sums from his superannuation account. In the forms, he indicated that he had currently ceased work and intended never to work for more than 10 hours per week again. These statements were untrue.[20] Before me, he gave evidence that he is still working and was when he completed the forms. He said that he signed the forms containing these statements because he was under pressure. He was granted a certificate under s 128 of the Evidence Act 2008(Vic) in respect of these answers. The statements reflect adversely on his credit.
[20]T 464.
Mr Zita filed an appearance on behalf of both the Mannellas, but Mr Mannella said that Mr Zita was not acting for him.[21]
[21]T 421.
It appears that the Mannellas never disputed their signing of the second loan agreement until this proceeding was well advanced.
I consider that I should give limited weight to the evidence of the Mannellas concerning whether they had signed the Deed of Variation and the second loan agreement.
Capital One Securities’ witnesses
No attack was made in final submissions by any defendant on the evidence of Mr Karas on any matter of fact. Issues were raised in cross-examination of Mr Merlo concerning his involvement in the sale of the Soda Kids business and I deal with that matter at a later point.
The Deed of Variation dated 1 March 2010
The next event in the chronology of Capital One Securities’ case is a Deed of Variation dated 1 March 2010. Capital One Securities alleges that it was made between the same parties as the first loan agreement, save that Mr Mannella signed it as an additional guarantor. The Deed of Variation extended the time for repayment of the first loan to 21 March 2010.
Mr Merlo prepared it while he was acting for Capital One Securities and the Mannellas.[22]
[22]T 95.
In her affidavit, Mrs Mannella described the circumstances giving rise to this Deed as follows:
Pursuant to the first loan agreement, the loan was due and payable to the plaintiff by the first, second and third defendants on or before 25 December 2009.
The first, second and third defendants were unable to make the said repayments by the due date.
As a result of this, Ms Bussolaro and my husband and I agreed to provide a second mortgage over our home in return for the plaintiff agreeing to extend the time required for the repayment of the loans. The mortgage is dated 1 March 2010, however, it was not registered until 3 August 2010. My husband and I believed from conversations I had with Karas that the mortgage will be discharged when the loan was repaid.
The loan of $500,000 plus accrued interest of $100,000 was repaid in full by way of instalments between December 2009 and May 2010…
In May 2010, Bussolaro and I decided that we would sever our business relationship.
On 9 June 2010 I incorporated Massimo Designs Pty Ltd (now known as Rolla Kids Pty Ltd) to operate the retail business…
In July 2010, I agreed to make a partial payment of $200,000.00 to Bussolaro as part of the full payment required to be made to Bussolaro.
In order to pay Bussolaro, the plaintiff lent me the further sum of $200,000 on the same terms as the first loan agreement being the second loan agreement dated 19 July 2010 as exhibited by Karas in his affidavit and marked TK-3 and TK-4. I have been advised that these funds were advanced to Bussolaro.
On 13 September 2010, a new company called Soda Kids Pty Ltd (ACN 146 306 050) was incorporated… The shareholder is Mannella Designs Pty Ltd (ACN 118 637 586). The Director of this company is my husband the fifth defendant and me…
Soda Kids Pty Ltd (ACN 146 306 050) is not a party to these proceedings and no orders have been made against it.[23]
[23]CB 637-638.
The Deed of Variation recited that the borrower was in breach of the first loan agreement by not repaying the loan on or before 25 December 2009. It also recited that in consideration of the lender agreeing to hold off enforcement of its rights under the first loan agreement and the security, the guarantor and the additional guarantor had agreed to provide the additional security. The lender had agreed to hold off from enforcing its rights under the loan agreement and the security and to extend the time for repayment of the loan subject to the terms and conditions of the Deed.
The additional security was a registered second mortgage in favour of the lender over the guarantors’ (ie Ms Bussolaro’s and the Mannellas’) properties.
The Guarantors were defined as Mrs Mannella and Ms Daniela Bussolaro and the Additional Guarantor as Mr Mannella.
The Mannellas objected to reliance on this Deed of Variation because it was not referred to in the pleadings. However, it is necessary to refer to it to provide the context in which the term “security” contained in the second loan agreement is to be interpreted.
The relevant parts of clauses 4.2 and 5 of the Deed of Variation stated:
4. GUARANTEE
4.2The Additional Guarantor agrees to guarantee the obligations of the Borrower to the Lender under the Loan Agreement and this Deed and to provide the Additional Security to better secure repayment of the Loan to the Lender.
5. SECURITY
5.1In order to secure repayment to the Lender of the Loan and any monies payable under the Loan Agreement, the Borrower, the Guarantor and the Additional Guarantor jointly and severally
(a) agree to provide the Security and the Additional Security;
(b)hereby charge all of their beneficial interest in any real and personal property (including all the property acquired after the date hereof) in favour of the Lender whether or not a demand has been made on the Borrower, the Guarantor or the additional Guarantor;
The term “security” was defined to mean the security given by the Borrower and the Guarantor pursuant to the terms of the first loan agreement.
The evidence about the signing of the Deed of Variation
Mr Merlo gave evidence that he saw Mrs Mannella and Ms Bussolaro sign the Deed of Variation, but not Mr Mannella.[24] Mr Mannella’s signature was witnessed by Ms Laura Trumino, who was an employee of Soda Kids and that fact suggests that he signed it at the Soda Kids’ business premises. Mr Mannella denied that he had signed documents in front of Ms Trumino.
[24]T 227.
Mrs Mannella gave contradictory evidence about whether she signed the Deed of Variation. She said that the signature on it did seem to be her signature. She said that she had first seen a signed copy of the Deed at the trial. She said that the only security that she and her husband gave over their home was that which they provided when they met with Mr Esposito in February 2010.[25] She said that she definitely did sign a second mortgage at Mr Esposito’s office.[26] Mr Merlo charged her for drafting the Deed of Variation.[27]
[25]T 258.
[26]T 308.
[27]T 323.
I find that Mrs Mannella did sign the Deed of Variation. I base that conclusion on Mr Merlo’s evidence and some of Mrs Mannella’s own evidence.
Mr Merlo did not explain the Deed of Variation to Mr Mannella.[28] He assumed that Mr Esposito would have explained it to him. Mrs Mannella said that she had not asked her husband to sign the Deed.[29]
[28]T 228.
[29]T 286.
Mr Mannella denied that he signed the Deed of Variation,[30] or that he had signed it in the presence of Ms Trumino. She was not called to give evidence.
[30]T 408, 427.
Mr Mannella’s evidence of his signing of documents was as follows. He made a statutory declaration at Mr Esposito’s office which referred to him giving a mortgage. He remembered attending Mr Esposito’s office in Carlton with his wife and Ms Bussolaro for a meeting that lasted 10 to 15 minutes,[31] for the purpose of obtaining a loan of $420,000 to pay a debt secured by mortgage over his parents in-law’s home. However, the loan did not proceed. When he gave the mortgage he understood that his wife’s business was unable to service its loans and he agreed that he knew that his parents-in-law’s house was “on the line”.[32] He knew in July 2010 that his wife’s business was not going well. His wife would come home crying and they argued.[33] She told him that Ms Bussolaro was giving her a hard time and she wanted to end their business relationship.
[31]T 404–405.
[32]T 444.
[33]T 414.
Mr Merlo said that he was advised by Mr Karas that, while Mrs Mannella had signed the mortgage, he was “chasing Josie for some time” to have it signed by Mr Mannella.[34] However, Mr Esposito witnessed the signature of both the Mannellas on the mortgage on 2 February 2010.
[34]T 226.
Mr Mannella knew that Capital One Securities would rely on the documents that he signed.[35] However, he also said that he did not think his house would be security for the loan and he did not intend to give any mortgage over it.
[35]T 446.
I am unable to give any real weight to Mr Mannella’s denial of signing the mortgage and the Deed of Variation. I find that he did sign those documents. He made a statutory declaration which referred to him signing a mortgage. The Deed of Variation gave the Mannellas the additional time that they required to repay the moneys advanced under the first loan agreement. There is evidence, which I have accepted, that Mrs Mannella signed the Deed of Variation.
Deed of Settlement of 5 July 2010
By about May 2010, the amounts totalling $500,000 loaned by Capital One Securities under the first loan agreement had been repaid.[36]
[36]T 87.
The second loan agreement under which Capital One Securities’ claim is brought came about because Mrs Mannella required $200,000 for the initial payment required under a Deed of Settlement by which she had purchased Ms Bussolaro’s interest in the Soda Kids business.[37]
[37]CB 535, T 88.
The Deed of Settlement was dated 5 July 2010 and made between Mrs Mannella, Ms Bussolaro, Soda Kids, Soda Kids Holdings, Safari Peak and J & D Fashion House Pty Ltd. It was drawn by Alliance Legal, which acted for all parties except for Ms Bussolaro.[38] It stated that:
H.Mannella and Bussolaro are in dispute and are no longer willing to operate together the Business or the activities of Safari, Soda Kids, Holdings or Fashion House.
I.Mannella and Bussolaro have agreed to terminate their business relationship on the terms set out in this agreement.
[38]T 189.
Under the Deed of Settlement, Ms Bussolaro agreed to sell and Mrs Mannella agreed to buy “the Sale Shares for the Sale Share Price free of Security Interests and other third party rights.” The Sale Shares were: 50 ordinary shares in each of Fashion House, Soda Kids and Soda Kids Holdings and 2 ordinary shares in Safari Peak registered in the name of Ms Bussolaro. The Sale Share Price was $500,000 payable as to $200,000 within 24 hours of receipt of finance through State Securities Pty Ltd and the balance as soon as practicable thereafter but no later than three months after the date of execution of the Deed.
The evidence suggests that Mrs Mannella was confident that investors in China, with whom she had made contact, would provide funding for the operation of her business and that from that funding, she would be able to repay the $200,000, which was to be loaned by Capital One Securities, and also pay the balance of the money owing to Ms Bussolaro under the Deed of Settlement. [39]
[39]T 189 -190.
Mr Merlo’s letter of 15 July 2010
On 15 July 2010, Mr Merlo wrote a letter addressed to the Mannellas and Mr Karas concerning a proposed further loan of $200,000 by Capital One Securities to the three companies stating in part that:
We confirm that Capital One Securities Pty Ltd has agreed to advance the further sum of $200,000 to the above companies as borrowers on the same terms and conditions and subject to the same securities as given under the previous loan agreement dated 25 September 2009 (“the earlier loan”) as varied by deed dated 1 March 2010 (“the variation”). Josie and Rocco have agreed to guarantee the obligations of the companies and to provide a mortgage over their home as part of the security.
We confirm that the purpose of the loan is to assist the companies and Josie to meet their obligations under the proposed settlement with Daniela Bussolaro.
If the parties agree, we propose to prepare a simple document pursuant to which the parties acknowledge and agree that the further advance of $200,000 is made pursuant to the terms of the earlier loan, the variation and securities given pursuant to these documents. [40]
[40]CB 533.
The letter disclosed that Alliance Legal was acting for all parties.[41] At that point Mr Merlo was acting for Capital One Securities, Soda Kids, Safari Peak and the Mannellas. He did not act for the Soda Kids entities and the Mannellas in the Supreme Court proceedings and ceased acting for the Mannellas in about April or May 2011.[42]
[41]Ibid.
[42]T 174,185.
The Mannellas said that they did not receive this letter.[43] MrMannella said that his wife read letters that they received at their home and she had not read anything like the 15 July 2010 letter to him.[44]
[43]T 339, 410.
[44]T 410.
Mr Merlo’s evidence about whether he signed the letter or sent it to the Mannellas was unclear.[45] I do not consider that his evidence supports the conclusion that he did send the letter to the Mannellas.
[45]T 173.
The second loan agreement
I have previously set out the terms of the second loan agreement, the Acknowledgement and Agreement. The loan made under that agreement has not been repaid.[46] The second loan agreement did not expressly refer to the Deed of Variation of 1 March 2010.
[46]T 75.
The advance under the second loan agreement
One issue in the proceeding concerned whether Capital One Securities, rather than some other company, had loaned the $200,000.
The $200,000 was paid by cheque dated 6 September 2010 drawn by Primary Capital Group Pty Ltd (“Primary Capital Group”) as trustee for the Plesiotis Family Trust.[47] State Securities Pty Ltd, which was controlled by Mr Karas, obtained the funds. Capital One Securities is the trustee or nominee for Primary Capital Group. On occasions, Primary Capital Group lends funds to Capital One Securities.[48]
[47]T 102.
[48]T 55.
At Mr Karas’ request, Mr Merlo drafted a Declaration of Trust dated 6 September 2010, to which Capital One Securities and Primary Capital Group (as trustee for the Plesiotis Family Trust) were parties.[49] The Declaration of Trust recited that Primary Capital Group had provided $200,000 to the Trustee, Capital One Securities, and that the Trustee was to hold the $200,000 loan and all income and proceeds of that loan upon trust for Primary Capital Group absolutely. The document gave Primary Capital Group the comfort of Capital One Securities’ acknowledgement that the moneys advanced under the second loan agreement were in fact Primary Capital Group’s moneys.[50]
[49]CB 560, T 206.
[50]T 206.
On 6 September 2010, Primary Capital Group authorised Capital One Securities to pay the sum of $200,000 to Daniela Bussolaro.[51]
[51]T 100–102.
The Mannellas were described as “Guarantor” in the second loan agreement, but the description was clearly intended to refer to both of them. Under clause 1.2(a) of the first loan agreement, words importing the singular include the plural and vice versa.
As previously stated, the amount of $200,000 was paid by Capital One Securities by cheque dated 6 September 2010[52] drawn by Primary Capital Group in trust for the Plesiotis Family Trust and payable to Ms Bussolaro.[53]
[52]CB 611, Ex M.
[53]T 60–61.
Mrs Mannella said that, while Mr Karas did offer to pay the $200,000 directly to Ms Bussolaro, she did not ask him to do so.[54] She said that she kept asking Mr Merlo if Ms Bussolaro had been paid and requested that he show her some written proof in writing that she had been paid. He produced a fax saying that she had been paid.
[54]T 344.
Ms Bussolaro gave evidence that in September 2010, she received the money in part satisfaction of Mrs Mannella’s obligations under the Deed of Settlement.[55] She is still owed $300,000 under that Deed.
[55]T 124–125.
Did the Mannellas sign the second loan agreement?
Mrs Mannella agreed that she signed the second loan agreement,[56] but said that she did not pledge her house as part of the loan transaction and that she was unaware where the money loaned under the agreement was going.[57] She did not ask her husband to sign the second loan agreement, or advise him about signing it.[58]
[56]T 259, 341-342.
[57]T 260–262.
[58]T 286–287.
Mr Mannella denied that he had signed the second loan agreement[59] and said that the signature appearing on it was a fraud. This assertion by Mr Mannella is significant and, as I have previously stated, casts doubt on the reliability of his evidence, because his defence admits that he signed it.
[59]T 411, 413, 430.
I find that both Mrs Mannella and Mr Mannella did sign the second loan agreement.
Mr Merlo’s Fees Agreement of January 2011
Mr Merlo prepared an Agreement in January 2011 about the fees that he contended that the Mannellas owed him. It contained an acknowledgement that the Mannellas were presently indebted to Mr Merlo for legal services in the order of $100,000. The agreement sought to add all moneys payable to Mr Merlo to the debt secured by the mortgage given to Capital One Securities.
Mr Merlo gave evidence that between 25 September 2009 and June 2010 he charged the Mannellas, the Soda Kids companies and Mannella Designs “something in the range of half a million dollars.”[60] His costs agreement allowed for a loading of 50 per cent. He said that the work involved numerous litigation matters and a massive dispute in relation to the retransfer of a trademark. The bill about which he gave evidence was for the sum of $188,000, but he agreed to settle it for $150,000 and the Mannellas paid $40,000. When he ceased to act, he did not pursue them for his fees, but they sought to have his costs assessed and engaged another lawyer.
[60]T 182.
In the middle of January 2011, he went to the Mannellas’ home to have them sign the Fees Agreement. Mr Mannella queried him about the level of the fees and appeared not to realise how many matters Mr Merlo had acted in for them. Mr Merlo was positive that they signed the Fees Agreement on the night that he went to their home.[61] He was concerned that the costs owing to him were blowing out. He placed a caveat on the title of the Mannellas’ home, but he wanted the additional security that the Fees Agreement would provide.
[61]T 176-177.
Mrs Mannella denied signing the Fees Agreement.[62] Mr Merlo gave evidence that his recollection was that the document was actually signed but that he had misplaced the original.[63]
[62]T 327.
[63]T 176.
On 31 January 2011, Mr Merlo emailed Mrs Mannella seeking the original of the Fees Agreement that he had sent her “recently”.[64] They did not provide any such document.
[64]CB 187.
On 2 February 2011, Mr Merlo wrote to the Mannellas stating:
Agreement for Security for our costs
We refer to the above matter and confirm receipt of duly executed Agreement for security of legal costs due to Alliance Legal.
We confirm that the Agreement acknowledges that in addition to securing any monies owed to Capital One Securities Pty Ltd, the mortgage held by Capital One Securities over your home also secures all legal fees and disbursements payable by you to our firm.
We enclose a copy of the duly executed Agreement for your records.[65]
[65]CB 190.
No copy of the signed Fees Agreement was produced in evidence. However, I find that the Mannellas did sign it. There were clearly discussions held about the fees that Mr Merlo was charging. It is improbable that Mr Merlo would have sent communications in the terms to which I have referred if the Fees Agreement had not been signed.
The new Soda Kids – Soda Kids 146
The next matter of significance was the incorporation of a new Soda Kids company. Mr Merlo gave evidence that Mrs Mannella asked him for advice about how to protect her business as she was being sued and she was close to signing leases for two new shops. He told her that she may have to go bankrupt, but that if she was to continue the business the ideal structure would be to set up new companies.[66] They decided to set up a new Soda Kids company ACN 146 306 050, which was incorporated on 13 September 2010 and which I will refer to as Soda Kids 146 to distinguish it from the existing Soda Kids company, which I will refer to as Soda Kids 138. Mr Mannella, but not Mrs Mannella, was appointed a director of Soda Kids 146.
[66]T 221.
On 10 September 2010, Soda Kids 138 changed its name to Soda Children Pty Ltd, but retained its existing ACN. These corporate changes gave the Mannellas the option of becoming bankrupt but having the business structure continue.[67]
[67]T 195 cf Mrs Mannella’s evidence at T 270.
Mrs Mannella’s evidence was that Safari Peak operated and leased the Moonee Ponds shop,[68] although at one point she said that an entity named Fashion Logistics had leased it.[69] In May 2010, she and Ms Bussolaro decided to sever their business relationship and on 9 June 2010 Massimo Designs, later Rolla Kids, was registered and commenced to operate the retail business.[70]
[68]T 269, CB 640.
[69]T 266.
[70]CB 637.
In October or November 2010, Mirvac Funds Ltd, the landlord of the Moonee Ponds shop, re-entered the premises.[71]
[71]CB 769.
Mr Mannella in his affidavit, stated that in October 2010, “his company” Soda Kids 146 commenced business from the same Moonee Ponds shop on a month to month basis.[72] Mrs Mannella’s evidence differed. She stated that in October 2010 she agreed to set up business with Joanna Fashions Pty Ltd and that they operated the business until 18 January 2011. She said that since that date, the business has been owned and operated by Soda Kids 146, but that the leases for the various shops are held by other entities.[73]
[72]CB 690 [12].
[73]CB 640.
The Sale of Business Agreement 3 March 2011
In 2011, the Mannellas instructed Mr Merlo to prepare a contract by which Soda Kids 146 as vendor would sell the Soda Kids Moonee Ponds business to M&E Fashion Pty Ltd. This was despite the fact that Mr Merlo considered that Safari Peak owned the lease and business of the Moonee Ponds store.[74]
[74]T 196.
The contract was dated 3 March 2011.[75] The sale was conditional on the landlord issuing a new lease of the Moonee Ponds shop which permitted its use for the retail sale of baby wear, children’s clothing and accessories, shoes and baby care products. The sale price was originally $180,000, but was reduced to $170,000. The price was divided between plant, fittings, chattels and fixtures and stock. The vendor licensed the purchaser to operate under the unregistered business name “Soda Kids Moonee Ponds” and to use all trademarks owned by the vendor or associated entities. The purchaser acknowledged having been advised by the vendor that ownership of and the right to use the trademarks were presently in dispute and that a determination of the dispute by IP Australia was pending.
[75]CB 714.
Mrs Mannella gave evidence that immediately upon selling the business, Soda Kids 146 entered into a buy back arrangement with the purchaser for a sale price of $180,000. Clause 2 stated that that price would be paid in instalments by Soda Kids on a weekly basis up to 14 March 2013 and a final payment of $36,000 would be made on or before 8 September 2013.[76]
[76]CB 639.
It was put to Mr Merlo in cross-examination that the contract was an absolute fraud against the purchaser[77] and that he had facilitated the fraud, in that Soda Kids 146, had no right to sell the business. He answered that question after a certificate under s 128 of the Evidence Act2008(Vic) was granted to him.[78] He did not agree with the proposition or allegation and stated that he was instructed to prepare the documents and that the purchaser had got what it paid for.[79]
[77]T 213.
[78]T 219.
[79]T 218.
Mr Merlo, when asked whether he thought that any of the existing companies were breaching their obligations under the charges by Soda Kids conducting the business, answered “absolutely I did”.[80] He said that the business was owned by Safari Peak and not by either of the Soda Kids companies.[81]
[80]T 196.
[81]Ibid.
The evidence concerning Mr Merlo’s involvement in the sale of the Soda Kids’ business by Soda Kids 146 was left in an unsatisfactory state. Mr Merlo had acted for both Capital One Securities and the Mannellas. As I later find, the fact that Soda Kids 146 sold the Soda Kids business and received the proceeds of sale means that Capital One Securities’ claims against the Denaros for the recovery of the $150,000 cannot succeed.
Mr Mannella had joined Mr Merlo as a defendant to his counterclaim, but he had ceased to be a party prior to trial.
The issues that Mr Merlo’s actions may have raised were not explored in final submissions and in those circumstances it is not appropriate that I make any findings about them.
The unsigned agreement of March 2011
Mr Merlo gave evidence that in March 2011, the Mannellas came to see him and told him that they had just been to a meeting with Mr Karas, which had not gone well. They had previously agreed to pay Mr Karas $70,000 within seven days, but then told him that Mrs Mannella could only pay him that amount from the sum that they would receive from the sale of the Moonee Ponds business. Mr Karas arrived at Mr Merlo’s office and after a discussion with the Mannellas they agreed that they would pay him an amount of money from the proceeds of the sale of the business.
A written agreement was prepared but it was never executed.[82] It provided that the Mannellas were indebted to Capital One Securities in the sum of $237,833.00, which was secured by a mortgage over their Pascoe Vale property. It recited that Soda Kids had sold its Moonee Ponds business for the sum of $170,000. It recited that Capital One Securities had issued proceedings in the County Court against, inter alia, the Mannellas seeking orders for the repayment of the amounts owing under the second loan and for possession of the property. It also recited that Capital One Securities alleged that it was entitled to apply to receive all of the sale proceeds and had threatened to apply to the County Court for injunctive orders.
[82]T 179.
The agreement provided that Soda Kids and the Mannellas irrevocably agreed to:
(a)deposit (or cause to have deposited) the Sale Proceeds [of the Moonee Ponds business) directly into the trust account of DKL Lawyers to be set up in the name of Alliance Legal and to disburse such proceeds strictly in accordance with the terms of this agreement;
(b)pay to Capital One on or before 4pm on 11 March 2011 the sum of $57,833.00 calculated as follows:
(i)$33,333.00 being payment of the arrears of interest up to and including 23 March 2011;
(ii)$4,500.00 legal costs pursuant to the Loan; and
(iii)$20,000.00 being prepayment of the interest under the Loan up to and including 23 June 2011.
(c)pay to State Securities on or before 4pm on 11 March 2011 the sum of $20,000.00 in full settlement of the Invoice Debt;
(d)pay $50,000 to Alliance Legal on or before 4pm on 11 March 2011 in reduction of the Legal Fees Debt from the Sale Proceeds;
2.Josie and Rocco agree that the Mortgage will continue to secure the Loan and the Legal Fees Debt until each are paid in full or further agreement.
3.Josie and Rocco agree to repay to Capital One in full the balance of the Loan on or before 23 June 2011 either through a refinance or the sale of the Property.
4.Subject to Soda Kids, Josie and Rocco complying with their obligation as set out in paragraphs 1 and 3 herein, Capital One will take no further steps in the County Court Proceedings pending the repayment of the balance of the Loan by 23 June 2011.
5.In the event of a breach of any of the terms of this Agreement the parties shall be at liberty to enforce any of their rights.[83]
[83]CB 1033.
The injunction of 18 March 2011
Capital One Securities commenced this Supreme Court proceeding on 15 February 2011.
That day, Mrs Mannella sent an email to Ms Cheema, a solicitor with Capital One Securities’ solicitors, Lewenberg & Lewenberg, which I will set out in the terms in which it was sent:
My name is Josephine Mannella I have been served with a writ on 1st March, 2011 can you please confirm the amount outstanding plus interest what’s in the writ does not seem correct to me please confirm immediately.[84]
[84]CB 1015.
Mr Karas gave evidence that in March 2011, Mrs Mannella told him that the purchasers had pulled out of the purchase of the Soda Kids business and therefore possibly she was unable “to come up with that arrangement to pay the loan”.[85] She did not dispute the amount of principal or interest that was claimed. However, he found out that the sale was proceeding and therefore he sought an injunction to restrain the disbursement of the proceeds of sale.
[85]T 77.
In March 2011, Mr Karas advised Mr Merlo that Capital One Securities was going to Court to obtain an injunction to restrain the distribution of the sale proceeds of Mrs Mannella’s business. Mr Merlo told Mrs Mannella of this development.
On 18 March 2011, upon Capital One Securities’ ex parte application, Habersberger J made an ex parte injunction binding the first five defendants.[86] Paragraph 1 of the order stated:
1.Each of the Defendants is restrained whether by themselves or their servants or agents from distributing or disbursing from the net proceeds of sale (after deduction of selling costs and any agents’ commission) of the business known as “Soda Kids Moonee Ponds” an amount not exceeding $231,282.04 until 4.30pm on 23 March 2011 or further order of the Court.
[86]CB 306.
At 11.05am that morning, Lewenberg & Lewenberg solicitors informed Mr Merlo that they had obtained an injunction.[87] At Mr Karas’ suggestion, Mr Merlo then telephoned Mrs Mannella and asked her if the settlement of the sale had occurred. His note recorded the following conversation at 11.08am:
[87]T 174.
- Have you settled yet?
- Doing it now?
-Advised Tom has just rung and advise got injunction freezing the proceeds of sale.
- Already gone.[88]
[88]CB 141.
Mr Merlo gave evidence that he phoned Mrs Mannella at about 11.08am and:
[A]sked her whether she had settled the matter yet because she was doing the settlement herself with the Chinese purchaser. She advised me that she was doing it at that point in time. I confirmed to her that Tom had rung to say that they had obtained an injunction but I hadn’t seen the orders and I was told that the proceeds are already gone, which is what the ‘already gone’ refers to.[89]
[89]T 175.
In fact, the sum of $150,000 of the money received at settlement was paid into the Denaros’ bank account and later disbursed at the direction of Mr Mannella. I discuss this event further when dealing with the claim against the Denaros.
Email of 29 April 2011
On 29 April 2011, Mrs Mannella emailed Mr Karas promising him payment of $100,000.[90] Her email stated (using the words contained in the original):
Hi Tom,
I have been tried to ring.
I refer to the meeting that we had last week and I confirm that you want? Take any further action against me if I’m able to pay you out $100,000 in the next couple of week.
The Chinese have funds available will not release funds until they have the lease of the shop for Moonee Ponds which is fair enough Mario is negotiating with Mirvac to get the lease there will be no problem.
Can you please confirm that you are ok with this.[91]
[90]CB 1189, T 75-76.
[91]CB 1189.
The Mannellas’ defence to Capital One Securities’ claims
The Mannellas relied on a number of arguments by way of defence, some of which went to Capital One Securities’ proof of its claim. Although the Mannellas were separately represented, their submissions substantially overlapped, or one adopted the submissions of the other. They argued that unless there was a liability under the second loan agreement and under the guarantee, they had no liability under the mortgage. I will consider the issues that their submissions raised.
Did Capital One Securities loan $200,000 under the second loan agreement to the first, second and third defendants?
The Mannellas argued that the $200,000 paid to Ms Bussolaro in 2010 was not paid by Capital One Securities as “Trustee for Capital Superfund” as the second loan agreement stated, but by Primary Capital Group in trust for the Plesiotis Family Trust, and not at the request of Mrs Mannella but by way of loan to Ms Bussolaro. The moneys advanced were not beneficially owned by Capital Superfund as the second loan agreement stated. On that argument, the $200,000 advance that Capital One Securities sought to recover was not an advance under the second loan agreement and the guarantees and mortgage did not apply to it.
Capital One Securities responded that the second loan agreement recited that the lender was Capital One Securities Pty Ltd (as trustee for the Capital Superfund) ACN 125 836 160. Capital One Securities did advance the $200,000, even though the sum was initially provided by Primary Capital Group. Mrs Mannella’s guarantee was given in consideration of Capital One Securities having made the advance.
I have previously set out the facts concerning the advance of the $200,000.
I do not accept the Mannellas’ argument on this issue. Capital One Securities arranged for the payment of the $200,000 to Ms Bussolaro at the request of Mrs Mannella. The $200,000 was advanced to Ms Bussolaro at the direction of Mrs Mannella on behalf of the first three defendants in order to make the first payment required under the Deed of Settlement. It is not material that the cheque came from Primary Capital Group. The advance was a loan by Capital One Securities made under the second loan agreement.
The Declaration of Trust of 6 September 2010 established that Capital One Securities held the $200,000 loan upon trust for Primary Capital Group absolutely. The reference in the second loan agreement to Capital One Securities “as trustee for the Capital Superfund” whether accurate or inaccurate does not affect the validity of the loan.
There was considerable attention given in the proceeding to when Ms Bussolaro signed the Deed of Settlement and received the $200,000. However, the evidence was clear that she did receive that sum in about September 2010.[92]
[92]T 124.
Was the second loan agreement too uncertain to be enforceable?
The Mannellas argued that the second loan agreement was too uncertain to be enforceable. There was a series of arguments advanced in support of that position.
The first argument was that the securities referred to in the first loan agreement, the guarantee and the charge, and the mortgage dated 1 March 2010, did not apply to the $200,000 loaned under the second loan agreement.
Mr Mannella argued that he was not liable under the second loan agreement because on its proper construction it did not contain any guarantee by him. The second loan agreement purported to apply the terms of the first loan agreement. He was not a party to the first loan agreement and he had not given a guarantee in respect of the obligations created by it. Merely labelling him as “the Guarantor” was not sufficient given that the second loan agreement was based on an existing guarantee (recital B) and purported to extend the previous guarantee (recital C).
Mr Mannella contended further that the recitals to the second loan agreement were wrong. Ms Bussolaro was not a party to the second loan agreement and therefore could not be bound by its terms. He argued that the second loan agreement was not enforceable, and he was not a party to the first loan agreement. The security under the second loan agreement was defined and only included the securities given under the first loan agreement, being those described in Item 6, being the guarantees and the charges. Mr Mannella had given no security under the first loan agreement.
I should add that I consider that the fact that Ms Bussolaro was not a party to the second loan agreement and did not give a guarantee in respect of it does not invalidate that agreement or the securities given under it. The Mannellas knew that Ms Bussolaro was not a party to the second loan agreement.
Capital One Securities relied on the statement in recital B of the second loan agreement, that the guarantor agreed to guarantee the obligations of the borrower under the loan agreement. In addition, recital D of the second loan agreement stated that the guarantor acknowledged the further advance to be made by the lender to the borrower and agreed to guarantee the obligations of the borrower with respect to the further advance. In context, the reference to the guarantors must mean the Mannellas. The term guarantor was recorded after the name of Rocco Mannella, but it was clearly intended to refer also to Mrs Mannella.
Mr Mannella had also given a guarantee under the Deed of Variation. The Mannellas were named as the guarantors in the opening section of that Deed, which listed the parties to it.
The Mannellas contended that their mortgage only intended to provide security for the loan of $420,000 that was proposed in February 2010, but which did not proceed.
I consider that the first loan agreement and the Deed of Variation have to be read together with the second loan agreement in order to interpret the latter document. The second loan agreement is to be read in the context of the circumstances known to the parties, which included the existence of the first loan agreement and the Deed of Variation and the securities given in connection with them.[93] The parties knew that the purpose of the second loan agreement was to provide further loans to the Mannellas’ companies, but again secured by guarantees and mortgages. The second loan agreement was a short form agreement that sought to incorporate or draw on provisions in the first loan agreement by stating that the further advance was made by the Lender pursuant to and on the same terms and conditions as the first loan agreement and that it was governed by the terms of the first loan agreement. It did not refer to the Deed of Variation, but it contained a clause stating that the “Guarantor”, meaning the Mannellas, agreed to guarantee the obligations of the borrower with respect to the further advance.
[93] See International Air Transport Association v Ansett Australia Holdings Ltd (2008) 234 CLR 151,[8] per Gleeson CJ.
The term “securities” appearing in clause 3(c) of the second loan agreement means all the securities given under or in connection with the first and second loan agreements, and included the Additional Guarantee and mortgage given under the Deed of Variation. The Deed of Variation has to be read with the first loan agreement which it varied. The second loan agreement should be read as referring to the first loan agreement as varied by the Deed of Variation.[94]
[94]Tallerman and Company Pty Ltd v Nathan’s Merchandise (Victoria) Pty Ltd (1957) 98 CLR 93, 144.
The first loan agreement envisaged that there could be additional advances made under it. Clause 3(c) of the second loan agreement provides that the securities given by the Borrower and Guarantor and each of them shall apply to and secure the Further Advance made under the second loan agreement. The securities that had been granted to secure the advances under the first loan agreement also secured sums advanced under the second loan agreement.
I consider that the reference to “securities” in the second loan agreement includes the guarantee given by Mrs Mannella under the first loan agreement and the guarantees and the mortgage that are referred to in the Deed of Variation.
If there was an advance under the second loan agreement, was there a default by the first three defendants under it?
The Mannellas submitted that Capital One Securities was not entitled to recover the amounts that it claims until it served the notices required by the first loan agreement on the relevant defendants.
The second loan agreement does not state when the moneys loaned under it became repayable.
The first loan agreement provided that the moneys were repayable within three months, on 25 December 2009, a date that was extended by the Deed of Variation to 21 March 2010. That date obviously could not apply to the $200,000 advanced under the second loan agreement, which was dated 19 July 2010.
The first loan agreement deals with default in clause 5, which states that if an event of default occurs, the money secured, at the lender’s option, becomes immediately due and payable on demand, and the lender may determine when it demands payment of the moneys secured. Clause 5.3 provides that the demand made by the lender under clause 5 must be made in the form of a notice given to the borrower. Clause 10 requires that that notice must be signed by an officer or solicitor of the lender and be served in accordance with the provisions of clause 10.2.
The Mannellas’ argument was that, if the second loan agreement had effect and the moneys were advanced on the same terms and conditions as the advances under the first loan agreement, clauses 5 and 10 applied to the advances under the second loan agreement and had to be served in compliance with their terms.
Capital One Securities argued that there was no requirement under either loan agreement for a demand before the principal and interest became due and payable and placed reliance on clauses 3 and 4.
I will next set out the notices or demands that Capital One Securities did serve.
The terms of the demands
The first demand was dated 21 December 2010 and addressed to Soda Kids Holdings, Soda Kids, Safari Peak, Soda Children and to the Mannellas. It was headed “Notice to Pay Pursuant to Section 76 of the Transfer of Land Act 1958”.[95] It was accompanied by a letter from Lewenberg & Lewenberg which stated:
We confirm that we act on behalf of Capital One Securities Pty Ltd and enclose herewith by way of service Notice to Pay.
[95]CB 616-619.
The opening paragraphs of the recital of that document stated:
TAKE NOTE THAT you are in default in performance of your obligations under the mortgage dated the first day of March 2010 (“the Mortgage”) entered into between you and (“the Mortgagee”) by failing to repay to the Mortgagee on the Due Date referred to in the Mortgage the Principal Sum as defined in the Mortgage and all interest and other money payable under the Mortgage.
TAKE NOTICE that consequent upon the default under the Mortgage, the Secured Moneys as defined under the registered mortgage secured by Mortgage Number AH403045Y dated the 1st day of March 2010 (“the Mortgagee”) by you in favour of the Mortgagee with respect to Certificate of Title Volume 8689 Folio 505 are due and payable.
The Notice then stated that “you” are continuing to become indebted to the Mortgagee with respect to interest, legal costs and expenses set out in the Memorandum of Common Provisions (“MCP”) AA342. The Notice gave the recipients 14 days to remedy the default. The document was not signed.
The MCP that applied to the mortgage was not that numbered AA342, but that numbered AA690.
Counsel for Mr Mannella submitted that the Notice was not valid because it referred to a “Due Date” when there was no such date. The Notice referred to the wrong MCP. The Mannellas contended that if no valid demand was made, no debt could be recovered under the guarantees.
The second demand
The second notice of demand was dated 11 January 2011 (“the Second Notice”).[96] It does bear a signature in the form of the printed name of Lewenberg & Lewenberg, who were Capital One Securities’ solicitors. The relevant parts of the Second Notice state:
[96]CB 624-625.
RE: MONIES DUE TO CAPITAL ONE SECURITIES PTY LTD
SECURED BY REGISTERED CHARGE NUMBERS:
SAFARI PEAK PTY. LTD. – 1865053
SODA KIDS HOLDINGS PTY. LTD. – 1865055
SODA CHILDREN PTY. LTD. - 1865054
We refer to the above loan secured by a Charge and we note that the borrowers guarantors remain indebted to the creditor.
We further note that the debtors have failed and refused and continue to fail and refuse to repay the monies due and payable.
Having regard to the above we are instructed to advise that we have instructions to enforce the debtor’s indebtedness to the company by executing the security for the debt.
Unless the amount due and payable together with interest and costs is paid by 4.00 p.m. on Thursday the 13th January, 2011 our instructions are to appoint Estate Agent to move to sell the property provided as security.
We note that the amount payable is the principal sum, interest up to 11th January, 2011 in the sum of $228,717.47 and daily thereafter at the rate of $547.75 and legal costs to date payable to the creditor pursuant to terms of the loan agreement $1,540.00 inclusive of GST.
Yours faithfully
Lewenberg & Lewenberg
The second notice or demand was addressed to the first three defendants, Soda Kids 146 and to Mrs Mannella.
The Mannellas at one point challenged that the demands had been served, but I accept that the affidavit of service of Ms Rebecca Tedesco, which was relied on by Capital One Securities,[97] is sufficient to prove service.
[97]T 699.
The Mannellas argued that the Second Notice was not a demand under the guarantee or mortgage. It could only have been served on 11 January 2011 and failed to give the recipients a reasonable time to comply with it by requiring that the amount due together with interest and costs be paid by 13 January 2011.
Consideration of submissions concerning the demands
Where a loan is repayable on demand, in the absence of any other requirement in the agreement, it is repayable immediately and no written demand is required.[98]
[98]Ogilvie v Adams [1981] VR 1041.
However, clause 5.3 of the first loan agreement, as applicable to the second loan agreement, required that moneys due had to be demanded by a written notice. The second loan agreement therefore required that the demand for repayment of the loan be made in the particular manner set out in clause 10. Compliance with that requirement was a precondition to the first three defendants’ liability for the amount loaned.[99]
[99]Tricontinental Corporation Ltd v HDFI Ltd (1987) 21 NSWLR 689.
Capital One Securities served no notice that specifically demanded amounts owing under the second loan agreement. The two notices of demand referred to above were in the case of the first notice apparently made under the mortgage and the provisions of s 76 of the Transfer of Land Act 1958 (Vic) and in the case of the second notice apparently given under the charge.
The amounts loaned were repayable on demand, but a demand had to be made in accordance with the requirements of clause 5.3 of the first loan agreement which requires that a notice be given to the borrower. The notice so given must be signed by any officer or solicitors of the lender and served in accordance with clause 10.2.
No demands were made under the loan agreements as required under the first loan agreement, the terms of which governed the second loan agreement.
A demand had to be made under the loan agreements in order for the loans to become repayable. As no demand was made under the second loan agreement, no right to recover any debt existed. Therefore, no liability under the guarantees or the mortgage came into existence.
Capital One Securities’ case against the Mannellas therefore fails.
For the sake of completeness, I will consider whether there was a requirement to make demands under the guarantees and the mortgage and whether Capital One Securities complied with such requirements.
Demands under the guarantee
Mrs Mannella’s first guarantee was contained in clause 8 of the first loan agreement. Clause 8.1(b) provides that the guarantor, in consideration of the lender, having made the advance to the borrower at the guarantor’s request:
(b)must pay on demand any amount which the Lender is entitled to recover from the borrower under this Agreement;…[100]
[100]CB 433.
Mr Mannella’s first guarantee was given under the Deed of Variation of 1 March 2010. Clause 4.2 provides:
The Additional Guarantor agrees to guarantee the obligations of the Borrower to the Lender under the Loan Agreement and this Deed and to provide the Additional Security to better secure repayment of the Loan to the Lender.
In my opinion, the terms of Mr Mannella’s guarantee given in the Deed of Variation applied to loans made under the first loan agreement.
The second loan agreement also stated in recital D:
The Guarantor acknowledges the further advance to be made by the Lender to the Borrower and agrees to guarantee the obligations of the Borrower with respect to the said further advance.
The terms of paragraph 5 of Capital One Securities’ further amended statement of claim suggested that it was suing on the guarantees given under the second loan agreement in recital D.
However, counsel for Capital One Securities stated in final submissions that it primarily relied on Mr Mannella’s guarantee contained in clause 4.2 of the Deed of Variation[101]and relied on the guarantee given in recital D of the second loan agreement in the alternative.[102]
[101]T 682.
[102]T 688.
The terms of a guarantee have to be applied strictly.[103] If a demand is required for liability under a guarantee to exist, then there must be proof that the demand has been made before liability exists.[104]
[103]Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549,561.
[104]O’Donovan, The Modern Contract of Guarantee, pp10,3112-10,3113, Bradford Old Bank v Sutcliffe [1918] 2 KB 833, Re Taylor v Century 21 Real Estate Corporation (1995) 130 ALR 723 and Netglory Pty Ltd v Caratti [2013] WASC 364 [306].
No demand was made under any guarantees given by the Mannellas. Mr Mannella’s guarantees given under the Deed of Variation and the second loan agreement did not require a demand in order for him to be liable under them. Mrs Mannella’s guarantee given under the first loan agreement did require a demand. I would not read the further guarantee contained in recital D of the second loan agreement as dispensing with that requirement, as that further advance under the second loan agreement was governed by the terms of the first loan agreement.
Demands under the mortgage
The mortgage dated 1 March 2010 stated that “the provisions contained in each annexure to this cover sheet and the Memorandum of Common Provisions retained by the Registrar of Titles in No.AA690 (‘Memorandum’) are incorporated in this mortgage”.
Clause 5 of the MCP provides the “secured money” that is the moneys secured by the mortgage, are all that money that the mortgagor for any reason owed now or in the future under a “credit contract”, under a “related guarantee” or under clause 39 (“You must pay reasonable enforcement expenses”). “Credit contract” and “related guarantee” are defined terms.
Clause 37.1 of the MCP provided that it is a default under the mortgage if any of the following occur without the mortgagee’s consent in writing:
(a)any part of the secured money is not paid when that part falls due and payable.
…
Clause 38, which is headed “Our rights and powers if a default occurs” provides in part:
38.1If a default occurs, and after we comply with any notice or other requirements under legislation (for example; legislation regulating a mortgagee’s exercise of its powers of sale and the requirements under section 80(2) and 85 of the Consumer Credit Code), then
(a)we may require you to pay all or any part of the secured moneys immediately; and
(b)we or a receiver or an attorney may exercise any of our rights.
38.2 For the purposes of the Transfer of Land Act 1958:
(a)7 days is the period for which a default referred to in section 76 of the Transfer of Land Act 1958 must continue before we may serve the notice mentioned in that section; and
(b)7 days is the period for which a default must continue after serving that notice and before we can exercise the power of sale given by section 77 of the Transfer of Land Act 1958.
The 7 day period replaces the one month period specified in s 76(2) and s 77(2) of the Transfer of Land Act1958 (Vic).
I consider that notices of default were required to be served under the mortgage, at least because of the requirements of s 76 of the Transfer of Land Act 1958 (Vic).
Conclusion regarding demands
As I have previously stated, a demand was required under the loan agreements and no valid demand was made. Demands were required under Mrs Mannella’s guarantees, but not under Mr Mannella’s. However, because there was no debt recoverable under the second loan agreement, no amount could be recovered under the guarantees.
The first demands or notices were served under the mortgage, but they had a number of defects which resulted in them being invalid. The first notice was not signed and referred to the wrong MCP. It also did not identify the “Due Date”. The second notice does not appear to have been served under the mortgage, but under the Deed of Charge.
The result of all this is because no debt is currently recoverable under the second loan agreement, no sum can be recovered from the Mannellas under the guarantees or the mortgage.
Alternative argument, did the mortgage, in any event, secure any sum owing under the second loan agreement or guarantees?
The Mannellas relied on an alternative argument in respect of the mortgage. This was that even if there were sums owing under the second loan agreement or guarantees, those debts were not secured by the mortgage. This was because moneys advanced under the second loan agreement were not “secured” money as defined in the MCP, which formed part of the mortgage. Capital One Securities had incorporated the wrong MCP, that is MCP AA690, into the mortgage. MCP AA690 was intended to apply to loans to which the provisions of the Consumer Credit Code applied. Capital One Securities had not complied with the requirements of that Code that must be observed before a debt can be recovered.
Capital One Securities submitted that MCP AA690’s reference to the terms of the Consumer Credit Code did not mean that the provisions and requirements of that Code applied. Rather, the MCP was to be applied according to its terms, which might include provisions of the Code which were expressly incorporated, but not the remaining requirements of the Code.
Mrs Mannella argued that the term “secured money” as contained in and defined by MCP AA690 did not secure the moneys advanced under the second loan agreement.
Consideration of this argument requires reference to the terms of MCP AA690.
Clause 1.1 of the MCP is headed “What is the mortgage?” and states:
1.1As the owner of the property, you mortgage the property as security for payment of the secured money. (The secured money is defined in clause 5.)
The term “secured money” is defined as follows:
5.1The secured money is all money that, for any reason, you owe us now or in the future:
(a) under a credit contract;
(b) under a related guarantee; and
(c)under clause 39 (“You must pay reasonable enforcement expenses”).
I do not consider that the second loan agreement was a credit contract within that part of the definition of “secured money” in the MCP, because credit was not being provided to the Mannellas. Rather, it was being provided to the first three defendants.
Under the MCP, the term “related guarantee”, which forms part of the definition of “secured money”, is defined to mean:
(u)“related guarantee” means a guarantee or guarantee and indemnity (entered into now or in the future) in which you agree to guarantee or guarantee and indemnify us concerning a debtor’s liability under a credit contract.” Clause 50.1(u).
Capital One Securities relied on the term “related guarantee”.[105] It argued that the guarantees given by the Mannellas were “related guarantees” within the definition of “secured money”.
[105]T 719.
Capital One Securities submitted that the term “credit contract” meant a credit contract with the debtor. The debtors were the first three defendants. The Mannellas disputed that proposition and relied particularly on the use of the word “you” in the definition of “credit contract”.
Clause 50 of the MCP is entitled “defining and interpreting this agreement”. It provides that credit contract means:
any agreement (whether entered into now or in the future) in which we provide you with credit (as defined in the Consumer Credit Code).
Clause 4(1) of the Consumer Credit Code defines “credit” to mean:
For the purposes of this Code, credit is provided if under a contract –
(a)payment of a debt owed by one person (the debtor) to another (the credit provider) is deferred; or
(b)one person (the debtor) incurs a deferred debt to another (the credit provider).
Clause 5 of the Code defines “credit contract” to mean:
a contract under which credit is or may be provided being provision of credit to which this Code applies.
In my opinion, the moneys due under the second loan agreement were not due under a “related guarantee”. There was no guarantee or indemnity in which “you”, that is the Mannellas, agreed to guarantee or guarantee and indemnify “us”, that is Capital One Securities, concerning a debtor’s liability under a credit contract. I do not consider that the three corporate defendants were “debtors” under a credit contract, because when the definition of “credit contract” is applied, it cannot be said that Capital One Securities provided credit to which the Consumer Credit Code applied.
It was not argued that loans provided were a deferred debt within the meaning of clause 4(1) of the Consumer Credit Code, probably because the loan, being for commercial purposes, was not governed by the provisions of the Code.
The consequence of my conclusion is that the $200,000 loan advanced under the second loan agreement was not “secured money” to which the mortgage applied. Therefore, for this reason also, Capital One Securities cannot rely on any rights arising from the mortgage in respect of the non-payment of moneys advanced under the second loan agreement and not paid by the Mannellas under the guarantees.
This conclusion is not surprising because MCP AA690 appears to have been drafted to apply to loans to which the Consumer Credit Code applied. That was also the position in Vouzas v Sibonna Nominees Pty Ltd,[106] where Ferguson J considered a mortgage which also incorporated the provisions of MCP AA690. The mortgage in that case had been given by parents to support their son’s business dealings. Ferguson J noted the concession by counsel for the mortgagee “that the terms in the MCP were manifestly inappropriate”[107] and stated:
The mortgage provided that it was security for the amount owing by Mr and Mrs Vouzas to Sibonna. By virtue of clauses 5.1 and 6.1 of the MCP, for them to owe any “secured money”, there had to be an underlying credit contract or guarantee entered into between them and Sibonna that created an obligation to pay and that set out how and when any secured money was to be paid to Sibonna. At the time of entry into the mortgage, no such agreement existed.”[108]
[106][2011] VSC 261.
[107][2011] VSC 261 at [92].
[108][2011] VSC 261 at [94].
The Court of Appeal dismissed an appeal from the judgment of Ferguson J. Warren CJ stated:
Before the trial judge, it was common ground that the terms of the mortgage incorporating the MCP were manifestly inappropriate for the transaction. It was also common ground that, at the time the mortgage was executed, there was no separate document that could meet the definition of a credit contract and that no monies had been advanced to the respondents.[109]
[109] Sibonna Nominees Pty Ltd v Vouzas [2013] VSCA 369[9], Tate JA and Kyrou AJA agreeing.
The amount claimed
The Mannellas argued that the notices recorded an incorrect amount as owing. There was a dispute about the charging of interest on the amount advanced under the second loan agreement. Even if the wrong amount was claimed, the notices would not be invalid on that ground alone.[110]
[110]See Bunbury Foods Pty Ltd v National Bank of Australasia Ltd (1984)153 CLR 491 and Whild v GE Mortgage Solutions Ltd [2012] VSC 212.
I should add that Mr Karas was cross-examined about the amount that Capital One Securities claimed to be owing under the second loan agreement and the inclusion of interest on the amount owing.[111] This issue was not developed in final submissions, but I see no basis in the second loan agreement to justify the capitalising of interest.[112]
[111]T 566, 606 and Exhibit DD.
[112]Cf David Leahey (Aust) Pty Ltd v McPherson’s Ltd [1991] 2 VR 367, 383.
Mr Mannella’s unconscionability defences
I have found that Capital One Securities’ claims against the Mannellas fail.
However, Mr Mannella relied on various unconscionability defences and counterclaims and they were argued in detail. I will therefore consider them and state my conclusions.
Mr Mannella counterclaimed seeking relief in respect of the loan and security documents that he had signed.[113] He pleaded that if he executed the Deed of Variation and second loan agreement, or if the mortgage secured moneys advanced under them, the guarantee of those obligations and the mortgage to the extent which it secured those moneys, were given as the result of unconscionable conduct by Capital One Securities and could not be enforced against him. He sought orders setting aside the mortgage and the second loan agreement to the extent that it bound him.
[113]Mr Mannella’s amended counterclaim was dated 19 November 2012 and named seven defendants.
In the first instance, Mr Mannella relied on the principles of unconscionable conduct stated in Garcia v National Australia Bank Ltd(“Garcia’s Case”).[114]
[114](1998) 194 CLR 395 [31].
Mr Mannella pleaded the following matters that he alleged Capital One Securities knew, or with the use of reasonable diligence, could have ascertained:
(a)the first three defendants were controlled by Mrs Mannella and Ms Bussolaro or after July 2010 by Mrs Mannella only;
(b)he was not involved in the business or the companies and was a volunteer;
(c)he did not understand the purport or effect of the loan agreements, the mortgage or the MCP and received no proper explanation of them;
(d)he had little education or knowledge of English;
(e)he had no experience of financial transactions;
(f)Mr Esposito was not independent, in the sense of providing independent advice when they met on 2 February 2010;
(g)the loan agreement was drawn by Mr Merlo when he was acting for both parties;
(h)when he executed the loan agreement, he was upset and distressed about his wife’s financial situation; and
(i)the advance under the loan agreement was highly disadvantageous and had an interest rate of 40%.
In Garcia’s Case,[115] Gaudron, McHugh, Gummow and Hayne JJ stated with reference to the decision in Yerkey v Jones[116]:
It holds further, in the second kind of case, that to enforce it [the guarantee] against her if it later emerges that she did not understand the purport and effect of the transaction of suretyship would be unconscionable (even though she is a willing party to it) if the lender took no steps itself to explain its purport and effect to her or did not reasonably believe that its purport and effect had been explained to her by a competent, independent and disinterested stranger. And what makes it unconscionable to enforce it in the second kind of case is the combination of circumstances that: (a) in fact the surety did not understand the purport and effect of the transaction; (b) the transaction was voluntary (in the sense that the surety obtained no gain from the contract the performance of which was guaranteed); (c) the lender is to be taken to have understood that, as a wife, the surety may repose trust and confidence in her husband in matters of business and therefore to have understood that the husband may not fully and accurately explain the purport and effect of the transaction to his wife; and yet (d) the lender did not itself take steps to explain the transaction to the wife or find out that a stranger had explained it to her.
Submissions about the Garcia defence
Mr Mannella’s submission
[115](1998) 194 CLR 395, 408-409; cf Kranz v National Australia Bank Ltd (2008) 8 VR 310.
[116](1939) 63 CLR 649.
Mr Mannella argued that his circumstances at the time he signed the documents satisfied each of the matters described in Garcia’s Case. He contended that he had difficulty reading documents written in English and had no involvement in his wife’s business. No independent person had explained the meaning or significance of the documents to him.
Capital One Securities relied on the fact that Mr Mannella had previously provided securities over his home in order to obtain finance for Soda Kids businesses and contended that he was actively involved in his wife’s businesses.
Consideration of Mr Mannella’s Garcia defence
The first issue under the Garcia defence is whether Mr Mannella has established that he did not understand the purport and effect of the security documents that he signed. In State Bank of New South Wales v Chia,[117] Einstein J stated that an understanding of the “purport and effect” of the transaction includes, at least, an understanding of the fact of liability, the general extent of liability, and the possible consequences of default. However, it was insufficient that the person misunderstood or failed to appreciate the degree of risk associated with the transaction, or the improvidence or lack of wisdom of the uses to which the moneys would be put. The person’s misapprehension must be of a matter material to the liability of the creditor.
[117](2000) 50 NSWLR 587 at 600-601.
Mr Mannella is aged 61 and was born in Italy. He left school when aged 11, and commenced work in a garage as an apprentice motor mechanic. He arrived in Australia with his family when he was aged 14. For many years he has worked for his brother-in-law as the general manager of a window shutter business and at the time of trial was supervising staff.[118]
[118]T 398-400, 484.
Mr Mannella can read Italian text a little, but not English. In answer to the question “how well do you speak English, would you say?”, Mr Mannella stated, “Well, I don’t know. Normal. Why, what’s that.” He said that he did not understand legal words in English.[119]
[119]T 399.
He had lived with his wife in their Pascoe Vale home for 25 years and they had used it as security to borrow money on a number of occasions.[120]
[120]T 466-467.
Mrs Mannella said that her husband can speak, but not read, English, but not complicated English.[121] She said that he did not understand business matters. He only helped her in the business with tasks like unloading containers.
[121]T 273-274.
Ms Denaro said that she often assisted her father as he lacked a deep understanding of the English language and was unable to read or write English.[122]
[122]T 493.
In contrast was the evidence of Ms Bussolaro and Mr Merlo. Ms Bussolaro said that she used English when she spoke to Mr Mannella, although she can speak Italian fluently.
Mr Merlo gave evidence of his dealings with Mr Mannella about business issues. Mr Mannella was the shareholder and director of Mannella Designs (“Mannella Designs”) which owned the trademarks, labels and designs of the items sold by Soda Kids Moonee Ponds.[123] He has been its director since 3 March 2006 and owns 99 of its 100 shares.[124] Mr Mannella also owned Massimo Designs Pty Ltd, which changed its name to Rolla Kids Pty Ltd.
[123]T 230, CB 662.
[124]T 449.
Mannella Designs became embroiled in a trademark dispute with Oriental Wands, which was a business owned by Chinese investors, concerning the use of trademarks that were used in the Soda Kids business. The details of this dispute were not clear, but what evidence there was suggested that Mrs Mannella and Ms Bussolaro had assigned or transferred trademarks to the investors in a business arrangement that did not proceed. They, or Mr Mannella, sought their return.
Mr Merlo gave evidence that during the trade mark dispute Mr Mannella signed a five page statutory declaration and that Mr Mannella understood its contents. That declaration was not in evidence. Mr Merlo said:
He certainly read documents I put in front of him, asked questions about them, had lots of queries. If he can’t read English, he did a good job of disguising it.[125]
[125]T 231.
He also said that when he visited the Mannellas at their home to discuss his bill for legal fees, on the occasion described above, that Mr Mannella read the bill and asked questions about it.
Mr Karas said that he met Mr Mannella a couple of times and they spoke in English. Mr Mannella told Mr Karas that he supported his wife and wanted to get rid of Ms Bussolaro from the business because she was causing him a lot of grief. He wanted to ensure that the loan from Capital One Securities proceeded because their house was on the line.[126]
[126]T 78.
Mr Mannella disputed that he had read the statutory declaration.[127] He said that his wife always handled their financial matters and that she arranged the finance to enable the purchase of their family home.[128]He denied involvement in the management of his wife’s business or the buying and selling of stock for it.[129]
[127]T 402.
[128]T 401.
[129]T 402-403.
I accept that Mr Mannella understood in a general sense the obligations that a loan and mortgage might impose. He understood that the purpose of the mortgage of his home that he signed in February or March 2010 was to provide security for the proposed loan of $420,000. He and Mrs Mannella had used their home as security for loans previously. However, the critical question is whether he was aware of the effect of the Deed of Variation and the second loan agreement with its incorporation of the securities previously provided. There was no evidence that Mr Mannella understood, or received an explanation of those documents, or was informed that the mortgage or guarantee might secure moneys advanced under the second loan agreement or that the second loan agreement incorporated the securities given under the Deed of Variation. There was no evidence that Mr Mannella received a copy of the MCP.
Mr Mannella has established that he did not understand that the effect of his guarantees and mortgage, when combined with the second loan agreement, was to secure amounts loaned under the second loan agreement.
The next issue is whether Mr Mannella was a volunteer. He argued that he was when he signed the guarantees and mortgage and that he received no consideration for giving those securities.
Mr Mannella did provide financial support to his wife’s business. He obtained the following amounts from his superannuation account to help pay her business debts and for mortgage payments on their home. On 2 May 2010, he withdrew $40,000 from his superannuation.[130] On 14 May 2010, he withdrew a further $30,000 and in August 2010 he withdrew $20,000.[131] He also gave her $20,000, being amounts received as payment in lieu of his long service leave entitlement.
[130]T 443.
[131]T 443-444.
A person who receives a direct and immediate benefit from giving securities is not a volunteer within the meaning of the Garcia principle. Mr Mannella received a direct and immediate financial interest from the guarantee and mortgage, as he owned trademarks for products that his wife sold in the business. The loans assisted Mrs Mannella to continue the business from which Mr Mannella stood to receive direct financial benefit. Later in 2010, he became the sole shareholder and director of Soda Kids 146 which eventually took over the operation of the Soda Kids business.
Mr Mannella has not established that he was a volunteer who might claim the benefit of the unconscionability doctrine discussed in Garcia’s Case.
The next issue is whether Capital One Securities should have known that Mr Mannella reposed trust and confidence in his wife. Mr Karas knew that Mr Mannella was mortgaging his share of the matrimonial home to help his wife’s business, which was in poor financial circumstances. He must have known that the business was substantially run by Mrs Mannella and that Mr Mannella, as he undertook other employment, was likely to rely on his wife for information about its day-to-day operations.
It should have been clear to Mr Karas that Mr Mannella placed trust and confidence in his wife in the conduct of Soda Kids’ business affairs.
The next issue is whether Mr Mannella received an explanation of the loan agreement, guarantee and mortgage. There was no evidence that anyone explained the Deed of Variation or second loan agreement to Mr Mannella.[132] Nor was there evidence that anyone else did. Mr Karas’ evidence was that he was unaware whether Mr Mannella had received financial advice about signing the second loan agreement.[133]
[132]T 228.
[133]T 105.
Mr Mannella by his statutory declaration of 2 February 2010, stated that he had received independent legal advice in respect of the mortgage that he and his wife granted to secure the proposed loan of $420,000, but that statement did not mean that he had received independent legal advice about the second loan agreement, the guarantee or mortgage.
Conclusion on the Garcia defence
The Garcia defence only applies to instruments of suretyship, which operate to a wife’s or husband’s advantage or which confer a voluntary benefit on them.[134]
[134]Elkofairi v Permanent Trustee Co Ltd [2002] NSWCA 413; Narain v Europa (Pacific) Pty Ltd (2009) 26 VR 387 [44]-[45] and Bank of Western Australia Ltd v Abdul [2012] VSC 222 [83]-[86].
If it had been necessary to decide the matter, I would have found that Mr Mannella had not established that it would be unconscionable for Capital One Securities to rely on his guarantee applying the principles discussed in Garcia’s Case. He has not established that he was a volunteer. He received direct benefits from the Soda Kids business, in which he had invested a substantial sum of money.
Mr Mannella’s Amadio defence
Mr Mannella also argued that it would be unconscionable for Capital One Securities to be permitted to rely on the security documents that he had signed because he was under a special disability of the kind to which the principles discussed in Commercial Bank of Australia Ltd v Amadio[135] (“Amadio’s Case”) applied. He argued that he had no experience of business and finance, was a man of little education and could not read English, let alone complicated or legal words in English. He said that he did not understand and was incapable of understanding the second loan agreement and the mortgage, and that the period in which he signed them was a very stressful one given his wife’s extreme business difficulties and the degeneration of her relationship with her business partner. If he did sign the documents, he did so for the benefit of his wife and without receiving any payment or other consideration himself. The interest rate on the loans was high.
[135](1983) 151 CLR 447.
Capital One Securities disputed that Mr Mannella was under any special disability. He had given unequivocal evidence that he had not signed the second loan agreement, so no weight could be given to circumstances premised on the assumption that he had signed it.
Conclusion concerning Mr Mannella’s Amadio defence
To be able to rely on the principles discussed in Amadio’s Case, Mr Mannella must establish that he was under a disability which was sufficiently evident to Capital One Securities to make it prima facie unfair or unconscionable for it to be allowed to rely on the guarantee. If that were established, Capital One Securities would have to establish why the guarantee should not be set aside by proving that there was a proper basis for an assumption that he had received adequate advice about the legal documents that he signed.
I would have found that the Amadio defence has not been established. Mr Mannella has not established that he was under any special disability. As I have previously found, he was not a volunteer. He had previously granted a number of mortgages. Capital One Securities had no knowledge that he suffered from any special disability.
Statutory unconscionability
Mr Mannella also relied on the provisions of s 8A of the Fair Trading Act 1999 (Vic). Section 8A(1) prohibited a person, in trade or commerce, in connection with the supply or possible supply or acquisition or possible acquisition of services from another person from engaging in conduct that was, in all the circumstances, unconscionable. Section 8A(3) referred to matters to which the Court may have regard in determining whether s8A(1) has been breached. No separate submission was directed to this issue, or to the particular matters which are set out in s 8A(3), although some of them, eg that contained in s8A(3)(c), were dealt with in the arguments about the Garcia defence.
The reasoning which I have given in rejecting the defences based on the principles in Garcia’s Case and Amadio’s Case applies equally to the defence based on s 8A of the Fair Trading Act 1999 (Vic). I would have found that a defence based on s 8A of the Fair Trading Act had not been established.
The claim against the Denaros under s 172 of the Property Law Act 1958
Capital One Securities’ claim against the sixth and seventh defendants, Nadia and Paul Denaro, is made under s 172 of the Property Law Act, which provides:
(1)Save as provided in this section, every alienation of property made, whether before or after the commencement of this Act, with intent to defraud creditors, shall be voidable, at the instance of any person thereby prejudiced.
(2)This section shall not affect the operation of a disentailing assurance, or the law of bankruptcy or insolvency for the time being in force.
(3)This section shall not extend to any estate or interest in property alienated for valuable consideration and in good faith or upon good consideration and in good faith to any person not having at the time of the alienation, notice of the intent to defraud creditors.
In my opinion, this claim fails because the $150,000 which Capital One Securities seeks to recover was received by Soda Kids 146 and not by Soda Kids 138. Capital One Securities was not a creditor of Soda Kids 146, nor did it hold any charge over its property. Capital One Securities had no rights against Soda Kids 146.
This point was only the subject of real debate during final submissions, although it had been discussed by Macaulay J in his judgment on 15 August 2011, which is referred to below. Near the end of the trial, Capital One Securities sought to amend its statement of claim to contend that Soda Kids 146 was subject to an equitable obligation to Capital One Securities in respect of the sum of $168,000. That point had not been pleaded and after objection was made by the Mannellas and the Denaros, the application to amend was not pressed.
Despite my conclusion, I set out the factual circumstances of the claim by way of explaining the conclusion that I have reached.
Capital One Securities’ claim is that the Mannellas alienated $168,000, which they had received from the sale of the business on 18 March 2011, by paying $150,000 to the Denaros with the intent to defraud it. The remaining $18,000 was used to pay staff wages and other commitments.[136] Capital One Securities argued that the Denaros were volunteers who let the Mannellas use their bank accounts to spirit away the sum of $150,000 knowing of the desperate financial circumstances of Mrs Mannella’s business.
[136]T 271.
The Mannellas argue that they transferred the $150,000 to the Denaros without knowing of the injunction granted by the Court on 18 March 2011.
It is convenient and appropriate to describe again the circumstances of the Mannellas payment of the $150,000 to the Denaros.
In early 2011, the Mannellas were negotiating with Mr Karas about repaying the loan made under the second loan agreement.
On 27 January 2011, Mrs Mannella emailed Mr Karas stating:
I refer to the meeting that we had last week and I confirm that you want take any further action against me if I’m able to pay you $100,000 in the next couple of weeks.
Mrs Mannella met with Mr Karas in early March 2011 and told him that the purchasers of the Soda Kids business from China had pulled out of the purchase and that she would not be able to “come up with” with the money to repay the loan. She did not dispute that the debt was owing.[137]
[137]T 76-77.
A draft agreement between the Mannellas and Capital One Securities was prepared in March 2011. I have referred to its terms previously.
Soda Kids 146 sold the business and assets of its Moonee Ponds store to M&E Fashion[138] for the sum of $180,000, which included stock to the value of $60,164.12. Settlement of the sale of business took place on the morning of 18 March 2011 when M&E paid Soda Kids 146 an amount of $168,000, by electronic transfer paid into Soda Kids 146’s bank account.
[138]The evidence did not establish whether M & E Fashion was connected to Fashion Logistics.
Mr Merlo gave evidence that at 11.08am on 18 March 2011 he telephoned Mrs Mannella and asked her if she had settled the sale of the business. She was at the bank where she was undertaking the transfer of funds. She told him that she had settled the sale of the business and that the money was gone.
The settlement sum of $168,000 was deposited to the Soda Kids 146 account and the Mannellas withdrew it straight away.[139] The sum of $150,000 was withdrawn by bank cheque payable to the Denaros and paid into their bank account. The bank cheque was obtained at about 11.59am.[140] Mrs Mannella said that she withdrew $18,000 in cash. She said that she and her husband decided who should be paid the $150,000.[141]
[139]T 359. The evidence did not establish why only $168,000 of the purchase price was paid at settlement.
[140]T 361. See Mr Farini’s evidence T 162.
[141]T 364, 359.
Mrs Mannella understood that Mr Karas was threatening to obtain an injunction, but considered that it had no bearing on the sale of the business.[142] She said that she relied on Mr Merlo’s advice that the sale of the business by Soda Kids 146 was lawful, because Capital One Securities did not have as security a charge over Soda Kids 146’s property. She said that she would not have proceeded with the sale if she had been advised that she could not.[143]
[142]T 357.
[143]T 366.
She received a copy of Habersberger J’s order at about 6pm on the afternoon of 18 March 2011.[144]
[144]T366-367.
A later application to the Court by Capital One Securities seeking orders that the Mannellas be punished for contempt for having contravened the injunction was dismissed by Macaulay J on 15 August 2011.[145] His Honour also dismissed an application by Mr Mannella to discharge the injunction granted against him on 18 March 2011.
[145]Capital One Securities Pty Ltd v Mannella (Unreported, Supreme Court of Victoria, 15 August 2011).
Mrs Mannella initially gave evidence that she did not remember the phone call from Mr Merlo at 11.08am, but her later evidence was that she vaguely remembered that he had called but she did not recall the words that he used.[146] She said that she was very upset with Mr Merlo because he had told her that he had a conflict of interest, which prevented him from acting for them in the Supreme Court proceedings and she thought that he was passing on Mr Karas’ threats to them.
[146]T 350, 353-355.
Ms Denaro gave evidence that she was not involved in her parents’ business and had no knowledge of their dealings with Capital One Securities. She did not consider it unusual for her father to ask her to disburse funds for him. She often helped him as he was unable to read or write English.
Ms Denaro said that her father asked if the $150,000 could be paid into her bank account.[147] He was very distressed and asked her to disburse the funds, but also said that her mother would give her instructions about where to pay them. In accordance with his demands, Ms Denaro paid the $150,000 as follows:
[147]T 487ff.
(a) $40,000 to Mr Merlo on 18 March 2011 in payment of her parents’ account for legal fees.[148]
[148]T 232.
(b)$40,000 to Antoinette and Albert Stasi (her aunt and uncle),
(c)$35,000 to Michael Yen, who had supplied goods to Mrs Mannella’s business,
(d)$31,000 in cash and cheques over a period of time. This enabled her father to make payments which included wages ($8,000), enabled the payment of interest on her grandfather’s (Mr Tortomano) loan ($6,000) and the payment of interest on her parents’ National Australia Bank loan ($12,000).
(e)$5,000 for living expenses for her and Paul.
These amounts total $151,000.
Ms Denaro gave evidence that in June 2009, she and her husband had lent $80,000 to her mother and Ms Daniela Bussolaro. That sum came from compensation that Paul Denaro received following a motor bike accident and from redrawing on their home mortgage.[149] She considered that the $5,000 that she and Paul received from the $150,000 was in part-repayment of that loan of $80,000.
[149]T 490.
Ms Denaro said that she knew the $150,000 was her father’s, but he was at work and could not attend the bank to transfer the money. She knew that the Soda Kids’ business was being sold and that two employees who were to receive payment from the $150,000 were working in her father’s business.[150] She had many conversations with her father about the $150,000 as he wanted her to make specific payments from it. Her evidence was that she believed that her father would not have allowed her to make the payments if she would thereby have “incriminated” herself, that is breached the law.
[150]T 517-519.
Ms Denaro said that she was not aware of Tom Karas, or his company or that she was taking money that may have belonged to him. However, in later evidence she said that she learned something of Mr Karas by searching the internet.[151]
[151]T 516, cf T 513.
She said that she had no intention of defrauding Capital One Securities.
Ms Denaro had been hospitalised for about six months from November 2010. She had previously operated her own retail shop and sold clothing using her mother’s labels, but she closed it when she fell ill. She was aware that her mother and Ms Bussolaro were in a business dispute, that her mother was under financial pressure and that her parents might lose their home. She knew that her mother had promised her grandparents that she would help save their house and that they had mortgaged it as security for loans.[152] She was unaware that Mr Yen was chasing her mother for payment. She knew that Ms Bussolaro was supposed to receive $500,000.
[152]T 503.
Ms Denaro gave evidence that her husband Paul Denaro had no knowledge or understanding of the steps that she took to distribute the $150,000.
Mr Denaro did not give evidence, although he attended the first day of the hearing.
Submissions about Capital One Securities’ claim under s 172 of the Property Law Act 1958
Capital One Securities submitted that the Mannellas had alienated the $150,000 with intent to defraud it by paying the sum to the Denaros. The Denaros were volunteers and had not provided valuable consideration. Nor had they acted in good faith, as they had notice of the Mannellas’ desperate financial circumstances. They therefore could not rely on the defence contained in s 172(3).
Ms Denaro submitted that she and her husband had acted in good faith with no intention of defrauding Capital One Securities. She believed that the money received was her father’s as he had sold the business. Part of the money had gone to Mr Merlo. Ms Denaro said that she would have expected Mr Merlo to refuse to accept it and inform her father if it was incorrect to receive it.
Conclusion concerning Capital One Securities’ claim under s 172 of the Property Law Act
I consider that Capital One Securities’ claim against the Denaros must fail because the $150,000 was obtained from Soda Kids 146’s bank account pursuant to the Sale Agreement. It was Soda Kids 146 that sold the business and was paid the money from which the $150,000 came. Capital One Securities had not pleaded a claim against Soda Kids 146.
If Soda Kids 138, instead of Soda Kids 146 had received the $168,000, I would have found that Capital One Securities had established its claim under s 172(1) of the Property Law Act to recover from the Denaros the sum of $150,000 paid to them. The Mannellas were being pressed by Mr Karas for repayment and their actions on 18 March 2011 can only be viewed as an attempt to avoid the sale proceeds that they received going to Capital One Securities. It was sufficient for a claim to be made under s 172(1) that they had an intention to hinder, delay or defeat Capital One Securities’ claim.[153]
[153]Marcolongo v Chen (2011) 242 CLR 546.
I would have found that the Denaros had not made out the defence provided by s 172(3). I do not consider that the Denaros established that they provided good consideration for the $5,000 that they received. There was no evidence presented about the $80,000 loan they contended that they had made to Mrs Mannella and Ms Bussolaro.
Paul Denaro did not give evidence.
In addition, I would have found that the Denaros had not established that they acted in good faith. They provided no plausible explanation of why they understood that their parents were using their bank account to pay debtors when Mrs Mannella’s own business was in desperate financial circumstances. Lack of good faith can be inferred from a failure to make inquiries which might reasonably have been expected to be made.[154]
[154]Official Trustee in Bankruptcy v Mitchell (1992) 38 FCR 364.
However, because it was Soda Kids 146 and not Soda Kids 138 which received the purchase price from which the $150,000 paid to the Denaros came, Capital One Securities’ claim cannot succeed.
This point might appear unmeritorious, but the Court can only decide the case on the issues pleaded.[155]
[155]Banque Commerciale SA,En liquidation v Akhill Holdings Ltd (1990) 169 CLR 279.
Capital One Securities’ knowing receipts claim
Capital One Securities’ other claim against the Denaros is a knowing receipt claim. This claim as pleaded is that the Denaros received the $150,000 with knowledge, actual or constructive, of Capital One Securities’ equitable interest in it and that they are liable in equity for knowing receipt of it under the first limb of Barnes v Addy.[156]
[156](1874) LR 9 Ch App 244.
In order to succeed in such a claim, a plaintiff must establish that trust property, or property acquired through breach of fiduciary duty, has been received by the defendant in the knowledge that such property was received in breach of trust or fiduciary duty.[157] The Mannellas knew of the financially distressed state of the Soda Kid’s business. When Mr Mannella requested the details of their bank account and paid money into it, they should have known that another person might have been entitled to receive the $150,000.
[157]See P. Young, C. Croft and M. Smith, On Equity, P456.
Conclusion on Capital One Securities’ knowing receipt claim
This claim fails for the same reason as the claim based on s 172 of the Property Law Act does. Capital One Securities has not pleaded or proved that it has any equitable or other interest in the sum of $168,000 that binds Soda Kids 146. In addition, I do not consider that Capital One Securities has established that the Denaros had actual or constructive knowledge that the payment of the $150,000 to them was in breach of trust or fiduciary duty.
Conclusion
Capital One Securities’ proceeding fails. It has not established its claims against the Mannellas or the Denaros.
I will hear the parties about the appropriate form of orders.
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