CBA v Jovanovic (No 5) - [2007] SADC 53

DISTRICT COURT OF SOUTH AUSTRALIA
(Civil)
CBA v JOVANOVIC & ORS (No 5)
[2007] SADC 53
Judgment of His Honour Judge Lee
16 May 2007
MORTGAGES - MORTGAGES AND CHARGES GENERALLY - REMEDIES OF THE MORTGAGEE - SALE UNDER POWER - MODE OF EXERCISE OF POWER
FINAL ORDERS - INTEREST - COSTS
Final orders made on claim and counterclaim in favour of mortgagor and guarantors to reflect adjustments to accounts with bank of mortgagor, after taking into account hypothetical auction of mortgaged property, and findings that auction price would have been $870,000 and settlement would have occurred on 12 August 1997 - consequence of incompetency of mortgagor to instruct solicitors for part of period of litigation discussed - orders also made with respect to pre-judgment interest and costs.
Corporations Act 2001 (Cth) s 420A; District Court Act 1991 s 39, referred to.
Cretazzo v Lombardy (1975) 13 SASR 4; Danish Mercantile Co Ltd v Beaumont (1951) Ch 680; Halsbury's Law of England (Re-issue) Vol 44, considered.

CBA v JOVANOVIC & ORS (No 5)
[2007] SADC 53
Introduction

On 30 November 2006, I decided that my answer to the question posed by the Full Court, namely what price would have been obtained for the freehold title of the property had the bank appointed an agent, conducted a proper marketing campaign and put the freehold title of the property to the market, should be the sum of $870,000. In the final paragraph of my reasons, I invited counsel to address me on the orders which should be made to finally dispose of the proceedings. Having received further evidence and counsels’ submissions, I am now in a position to make final orders. The orders will relate to the claim and counterclaim, and to pre-judgment interest and costs.
I do not propose to go over the background again. I refer to my reasons of 30 November 2006. I will continue to describe the plaintiff to the claim as the Bank, the defendants to the claim and the plaintiffs to the counterclaim as Mr and Mrs Jovanovic and the other plaintiff to the counterclaim as Fortson. I will deal with the orders to be made under separate headings.
Orders on the claim and counterclaim
The debt owed by Mr and Mrs Jovanovic to the Bank under their guarantee derived from accounts that Fortson as the principal debtor had with the Bank. The state of those accounts as at 12 August 1997, which was the date of settlement on the sale by private tender of the property, was:
Overdraft cheque account  $157,206.77
Fixed rate term account  $659,838.70
Total  $817,045.47
The overdraft cheque account includes expenses incurred by the Bank with respect to the sale by private tender. Since that sale was declared by the Full Court to be unlawful in the sense that the Bank did not comply with its obligation under s420A of the Corporations Act 2001 (Cth), those expenses should be added back as credits to the account. The expenses were as follows:
5 June 1997           Knight Frank (valuation)              $1,517.00
30 June 1997         Legal costs  $   755.00
30 July 1997          Ernst & Young report                   $1,955.70
30 July 1997          Mark Esau’s costs
  (request for documentation)        $   183.40
19 August 1997     Ferrier Hodgson
  (controllers documents)              $   822.00
26 August 1997     Legal costs  $   620.00
Total  $5,853.10
The property was sold to Roclin Pty Ltd (Roclin) for $800,000, of which $620,000 was lent to Roclin by the Bank. The vendor’s statement for 12 August 1997 shows that, after adjustments for rates and taxes and other charges, the net amount payable by Roclin was $775,516.01, being a deposit of $15,000 and the balance due at settlement of $760,516.01.
So the adjusted actual net debit balance of Fortson as at 12 August 1997 becomes $35,676.36, being the balance on the statements of $817,045.47, less the expenses of sale of $5,853.10, less the net proceeds of sale of $775,516.01.
I need now to move from the actual to the hypothetical. I have decided, as I have said, that if the Bank had sold the property by appointing an agent, conducting a proper marketing campaign and putting the property to the market, the price would have been $870,000, or $70,000 more than the actual price that was obtained. This means that Fortson is entitled to a credit of $70,000 less the expenses that would have been incurred by the Bank in association with the sale. The following expenses are agreed:
Agent’s commission (2% of $870,000)  $17,400
Advertising costs  $ 3,000
Legal costs of obtaining possession  $ 3,000
Total  $23,400
I will allow the further sum of $600 to represent legal and conveyancing costs of the sale.
So, against the abovementioned adjusted actual net debit balance of $35,676.36, and to reflect the result of the hypothetical auction, Fortson is entitled to a credit of $46,000 ($70,000 less $24,000).
For the purpose of assessing whether any and what interest would have accrued in favour of any and which party, I need to decide when settlement on the hypothetical auction would have occurred. Counsel for the Bank argued that a notional settlement date should be fixed at 12 November 1997 upon the footing that the Bank would have issued a possession summons in mid-May 1997, which is when the Bank embarked upon the process of private tender. For reasons which follow, I do not agree.
It is apparent from a letter which the Bank wrote to Fortson on 21 November 1996 that Fortson had been in default for some time and that the parties had agreed on an interim proposal whereby Fortson would make an immediate lump sum payment of $20,000 to the overdraft cheque account and payments of future instalments when due to the fixed rate term account. After confirming the proposal in the letter, the Bank said:
If these arrangements break down the Bank will immediately commence recovery action for the arrears on the Fixed Rate Term Advance.
The arrangements were not met by Fortson, and the Bank wrote to Fortson again on 21 January 1997 noting Fortson’s advice that it wished to enter into negotiations for the sale of its interest in the hotel to the Govadaricas. The Bank then said:
If the cheque account is not in order or a definite contract for sale of your interest in the Hotel is not held by 21 February 1997, the Bank may commence mortgagee action.
In an internal memorandum of the same day, the bank officer in charge of the accounts noted that she had been advised that Mr Jovanovic would not be attending a meeting scheduled for that day to discuss a private sale with the Govadaricas. The officer noted the advice of Mr Jovanovic’s solicitor that his client would accept $1.5M and advice from the solicitor for the Govadaricas that his client will reject the offer. The officer then wrote:
This is a frustrating development. Recommend we now write to our client and advise that we require clearance of the excess in the A/A by 21/2/97 otherwise the account is to be placed in reduction and mortgagee action commenced. If RTA instalment 1/2/97 is to be met when due.
In a further internal memorandum of 12 February 1997, after summarising further discussions with the parties, the bank officer noted that an offer by the Govadaricas had been rejected on 7 February 1997 by the Jovanovics “who now demand a public auction of the Hotel”.
I have reached the conclusion that, if the Bank had been aware at all relevant times of its obligations under s420A of the Corporations Act, it would not have given the attention that it did to the prospect of a private sale, and it would not have deferred the issue of a notice of demand and a summons for possession beyond January or February 1997. The issue of a possession summons in January or February 1997 would not have precluded the Bank from continuing discussions with the Jovanovics and the Govadaricas in the hope, albeit slender, of achieving a private sale acceptable to Mr and Mrs Jovanovic.
There is no reason in the evidence to apprehend that the progress of a possession summons to a final order would have been delayed beyond May or June 1997. Then there would have been the need for the implementation of that order, an advertising campaign, an auction and the provision of a one month period for the purchaser to settle with the Bank.
As I have said, all this is in the realm of the hypothetical, and it is difficult to be entirely confident about what might have happened had the Bank been aware of its statutory obligation. In the end, I have decided to adopt the date of the actual settlement, namely 12 August 1997, as the date upon which settlement on the hypothetical sale would have occurred. On this approach, the earlier mentioned amount of $46,000 would have been credited to the accounts on 12 August 1997, leaving a balance in favour of Fortson at that date of $10,323.64 ($46,000 less $35,676.36).
Counsel for Fortson submitted that an early discharge fee had not been proved, but it is too late to make that submission now. The Bank did not seek to substantiate every debit in the accounts at the trial. That was because, by concession of counsel for the Jovanovics and Fortson at that time, quantum was not an issue between the parties. In those circumstances, I make the assumption that proof of a particular debit would have been forthcoming at the trial if it had been called for.
In the result, the Jovanovics are entitled to a dismissal of the claim and Fortson is entitled to judgment for $10,323.64 on the counter-claim. As for pre‑judgment interest, pursuant to s39 of the District Court Act 1991 I award a lump sum instead of interest of $7,000.
Orders for costs
Both sides are seeking orders for costs in their favour. Although the action in this court has a long history of interlocutory proceedings before the masters and hearings before two judges, counsel for Fortson has persuaded me that I should take a global approach and not make differential orders with respect to separate stages of the action. Counsel has also persuaded me that the Jovanovics and Fortson should receive 90% of their costs of the action. Obviously enough, by “action” I do not mean to include the stages of the action which have already been made the subject of definitive costs orders.
In arriving at these conclusions, I make the following comments:
1.It is common ground that the three issues at stake before the primary judge were with respect to the hotel business, the newsagency and the mode of sale. The Jovanovics failed on the first and second of those issues, both before the primary judge and before the Full Court. They contended unsuccessfully that the Bank’s exclusion of the hotel business from the sale was a breach of duty, and they sought unsuccessfully to recover losses with respect to the newsagency. Nevertheless, those issues were subsidiary to the mode of sale issue. Had the Bank sold the property in compliance with its obligations under s420A for a price of $870,000, the action in this court would not have been necessary.
2.There was a considerable degree of overlapping of evidence with respect to the three issues. It is common ground that the only persons who gave evidence exclusively with respect to the first and second issues were the witnesses Ellery and Crase, and that they occupied three of the 13 days of evidence at the trial before the primary judge.
3.The order of the Full Court was that the Bank pay to Fortson and the Jovanovics 80% of their costs of the appeal. Doubtless the order was designed to reflect the Full Court’s view of the time that was spent before the Full Court on each of the issues, given that Fortson and the Jovanovics succeeded on the mode of sale issue and failed on the hotel business and newsagency issues. I agree with counsel for Fortson that more than 80% of the interlocutory proceedings in the action concerned the mode of sale issue. In other words, had Fortson and the Jovanovics chosen not to raise the hotel business and newsagency issues in the defence and counterclaim, more than 80% of the interlocutory proceedings would have been concerned with the mode of sale issue in any event.
4.The costs of the trial before the primary judge must be considered upon the footing that Fortson and the Jovanovics failed on the hotel business and newsagency issues (as they did before the primary judge and the Full Court), but should have succeeded on the mode of sale issue (as they did before the Full Court). However the time before the primary judge is apportioned between the hotel business and newsagency issues on the one hand and the mode of sale issue on the other, I need to bear in mind the observations of Jacobs J in Cretazzo v Lombardy (1975) 13 SASR 4 at 16:
But trials occur daily in which the party, who in the end is wholly or substantially successful, nevertheless fails along the way on particular issues of fact or law. The ultimate ends of justice may not be served if a party is dissuaded by the risk of costs from canvassing all issues, however doubtful, which might be material to the decision of the case. There are, of course, many factors affecting the exercise of the discretion as to costs in each case, including in particular, the severability of the issues and no two cases are alike. I wish merely to lend no encouragement to any suggestion that a party against whom the judgment goes ought nevertheless to anticipate a favourable exercise of the judicial discretion as to costs in respect of issues upon which he may have succeeded, based merely on his success in those particular issues.
Those observations are especially pertinent here. The Bank initiated the action and sued for an alleged shortfall. In challenging the action on the ground that the property should not have been sold by private tender, Fortson and the Jovanovics were justified in canvassing all issues, without having necessarily to meet in full the costs of issues upon which ultimately they were unsuccessful. And, in relation to the mode of sale issue, they were justified in asserting that the Bank was in breach of its equitable as well as its statutory duty, even though their ultimate success was in relation to the statutory duty.
5.The successful applications of Fortson and the Jovanovics to the primary judge to disqualify himself and to me to adduce further evidence were opposed by the Bank.
6.I hold the view that the resolution of the opposing applications for costs should not depend, in the final adjustment of the accounts, upon which party owes what sum to the other. As I have said, the dominant issue, without which recovery proceedings in this court would not have been necessary, was the unlawful sale of the property by the Bank.
7.An order which requires a taxing officer to separately assess the costs of particular issues and applications would further complicate and delay and add further expense to the finalisation of proceedings which already have a long history of protracted and uncompromising disputation on both sides.
An incidental matter
Before I turn to the formal orders, I need to deal with a submission that counsel for the Bank made with respect to the competency of Fortson to instruct its solicitors for part of the period of the litigation.
It is common ground that, between 14 May 2004 and 12 October 2005, Fortson was without directors eligible to act in that role. Counsel for the Bank submitted that Fortson is not entitled to the benefit of any order with respect to work done by its solicitors in that period.
Although in October 2005 the Bank sought a winding up order in the Federal Court and, pending the outcome, an adjournment of the proceedings in this court (eventually the Bank was unsuccessful in both applications), it did not, at any time in the period in question, seek a stay in this court on that ground. The point should have been raised promptly, if raised at all, by way of an application for a stay, and it is too late to raise it now. I refer to a discussion of relevant principles in Danish Mercantile Co Ltd v Beaumont (1951) Ch 680 and Halsbury’s Laws of England (Re-issue) Vol 44 at para 132.
The decision of the defendants to engage separate representation was, in my opinion, an appropriate response to the challenge to Fortson’s competency. It is true that the separate representation of the defendants continued after the challenge had failed and the defect was cured, but there was no overlap of any consequence in the representation. I consider, therefore, that the Jovanovics and Fortson should both be covered by costs orders during the periods that they were separately represented.
Final Orders
In the result, the final orders are as follows:
1.With respect to the claim, judgment for Mr and Mrs Jovanovic.
2.With respect to the counterclaim, judgment for Fortson against the Bank in the sum of $10,323.64, together with a lump sum instead of interest of $7,000.
3.With respect to such part of the claim as is not already the subject of definitive costs orders, the Bank to pay to Mr and Mrs Jovanovic 90% of their costs to be taxed if not agreed.
4.With respect to such part of the counterclaim as is not already the subject of definitive costs orders, the Bank to pay to Fortson 90% of its costs to be taxed if not agreed.