Commonwealth Bank v A Boumelhem - [2007] FMCA 730

FEDERAL MAGISTRATES COURT OF AUSTRALIA

COMMONWEALTH BANK v A BOUMELHEM

[2007] FMCA 730

BANKRUPTCY – Creditor’s petition – where debtor seeks dismissal of the petition – whether debtor has shown ‘other sufficient cause’ pursuant to s.52 Bankruptcy Act – where debtor asserts breach of fiduciary duty by Bank – whether Bank’s duty of care extends to circumstances where an offer is ignored and property subsequently sold for a lesser sum to the offeror – consideration of relief available to debtor – adjournment.

Bankruptcy Act 1966, s.52

Totev v Sfar [2006] FCA 470
Re James; Ex parte Carter Holt Harvey Roofing (Australia) Pty Ltd (No 2) (1994) 51 FCR 14
International Alpaca Management v Evsar [1999] FCA 72
St George Bank v Helfenbaum [1999] FCA 1337
Re Player (1962) 19 ABC 277
Re Schmidt; Ex parte Anglewood Pty Ltd (1968) 13 FLR 111
Ling v Enrobrook Pty Ltd (1997) 74 FCR 19
Commonwealth Bank of Australia v McDonald [1999] FCA 984
Gomez v State Bank of New South Wales Limited [2002] FCA 442

Applicant:

COMMONWEALTH BANK OF AUSTRALIA

Respondent:

AMIN BOUMELHEM

File Number:

SYG 3647 of 2006

Judgment of:

Raphael FM

Hearing date:

26 April 2007

Date of Last Submission:

26 April 2007

Delivered at:

Sydney

Delivered on:

22 May 2007

REPRESENTATION

Counsel for the Applicant:

Mr S Aspinall

Solicitors for the Applicant:

Henry Davis York

Solicitors for the Respondent:

V F Stanizzo Lawyers

ORDERS

Petition adjourned to 20 June 2007.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
SYDNEY

SYG 3647 of 2006

COMMONWEALTH BANK OF AUSTRALIA

Applicant

And

AMIN BOUMELHEM

Respondent

REASONS FOR JUDGMENT

Narrative

This proceeding is the hearing of a bankruptcy petition against Amin Boumelhem. There is also an application for a sequestration order against Jamal Boumelhem which was heard concurrently, the evidence in the one case being agreed to be evidence in the other. The grounds of opposition to the making of sequestration orders were the same for both respondents.
In 1998 the respondent obtained a loan from the applicant secured by a mortgage over a property: Lot 192 in DP 30577 known as 69 Robert Street Dapto, NSW, 2530. The respondent was unable to maintain payments on the loan in a manner satisfactory to the applicant which, on 9 December 2004, obtained judgment for possession of the land together with a money judgment in the sum of $373,420.48 plus costs. Between the time of obtaining the judgment and October 2005, when possession was obtained, certain moneys were paid by the respondent to the applicant in reduction of the debt and the respondent made a number of attempts to refinance the property or find a purchaser for it to pay out the loan. The efforts made by the respondent, including the payments made to the bank, resulted in two stays of execution upon the warrant for possession.
At all relevant times Mr Boumelhem employed as his solicitor Lionel Kramer of Horowitz & Bilinsky. On 17 October 2005, the day before the sheriff was due to take possession of the property on behalf of the bank, Mr Kramer rang Messrs Henry Davis York and spoke to Emma Dwyer, the solicitor acting on behalf of CBA at that firm. He requested a stay of execution on the basis that his client had executed a transfer to his daughter and was hoping to have a refinance within the next two weeks. Ms Dwyer responded:
“I said that I had not got instructions in this matter but that the bank’s normal policy was not to stay the eviction unless a full discharge was anticipated and/or sale of the property effected or an unconditional letter of refinance provided with a set settlement date. I suggested that if his client was serious about obtaining a stay of the eviction that any one of those items be provided to the bank in support of his request to stay the eviction.”
Following that discussion Horowitz & Bilinsky wrote to Henry Davis York:
“As explained our client is in the process of applying to refinance the property. We understand that it will take the incoming financier a further two weeks to process our client’s application.
Alternatively our clients are disposed to passing the transfer of the property to their daughter Louwan Boumelhem and she in turn will make an application for a mortgage to be registered in favour of the National Australia Bank in which case your client will be paid out. …”
This fax was responded to again on 17 October:
“The bank will not stay the eviction scheduled for 1.00p.m. tomorrow. Should your clients be able to provide an unconditional letter of refinance and a set settlement date for the refinance by noon tomorrow the bank will reconsider your client’s request to stay the eviction.”
On the following day Horowitz & Bilinsky faxed to Henry Davis York a loan application – approval in principle from Homeside Lending to Ms Louwan Boumelhem. The amount of the loan was $395,000.00 but the document was clearly not an unconditional offer because it stated:
““An approval in principle” is NOT an offer to enter into a loan contract with us. Ultimately we manually review all loan applications and take into account the various criteria in the loan application form. Therefore we may in our absolute discretion decline an application even though it appears to meet the relevant serviceability criteria.”
This offer did not impress the bank and the writ of possession was executed.
On 2 November 2005 a further letter was written by Horowitz & Bilinsky to Henry Davis York. It stated:
“We are instructed that our clients have found a purchaser interested in buying the property your client recently took possession of. We understand that the bank has no objection to our client entering into a contract for the sale of the property but it is clear that your client’s consent will be needed.
Accordingly we ask you to kindly confirm whether your client has any objection in principle. We are instructed that the selling price will be $435,000.00.
Your early responses would be appreciated.”
That letter was not responded to and it would appear that the offer to purchase did not go any further because it was not again referred to in correspondence.
On 28 November 2005 a further letter was written by Horowitz & Bilinsky:
“We refer to the above matter and advise that our client is in a position to obtain a financing company to assist him. Accordingly we are instructed to offer, on behalf of our client, as we hereby do, the sum of $340,000.00 to discharge your mortgage and to extinguish the indebtedness of our client to you.”
This letter was an offer to settle the entire debt for an amount considerably less than that which was outstanding. It was not replied to.
On 1 December 2005 Horowitz & Bilinsky wrote again to Henry Davis York:
“We refer to the above and in particular to our letter to you of 28 November, 2005 to which you have as yet not responded. Kindly note that if our clients offer is not accepted on or before the close of business on 2 December, 2005 it is withdrawn. …”
There was then a telephone attendance between Mr Kramer and Ms Dwyer. Ms Dwyer told Mr Kramer:
“I said that at this stage the bank would not be considering his client’s offer as his client did not provide any type of documentary proof that a refinance approval had been given. I suggested that his client arrange for an unconditional letter of approval for a refinance to be forwarded to me so that I could provide that to the bank so that they could properly consider the offer made by his client.
Mr Kramer said that it wasn’t sufficient just to have the letter with the offer in it. I confirmed that it was not sufficient and that the bank wouldn’t consider any offer unless it was an unconditional letter of approval provided in support. …”
There was another conversation between Mr Kramer and Ms Dwyer on 6 December 2005 which appeared to be almost a repeat of the earlier conversation which Mr Kramer apparently did not recall. The requirement for an unconditional letter of offer was repeated in relation to any offer by the debtor to refinance the loan and the bank’s solicitors pointed out that the bank was unlikely to accept an offer that was $40,000.00 less than the amount owed.
Nothing further occurred until 13 January 2006 when Horowitz & Bilinsky wrote again to Henry Davis York:
“We refer to the above matter and advise that our clients have a purchaser interested in taking over the property of which you are now in possession. We enclose herewith:
1.   Preliminary loan approval from Integral Home Loans Pty Limited in terms of which they are prepared to advance an amount of $306,850.00. We are instructed that Mr Nassar has a further $28,150.00 and he accordingly offers $335,000.00 for the property.
2.   Valuation from Valuers Illawarra indicating the market value of $323,500.00.
3.   Market appraisal by Ray White dated 16 November 2005.”
The preliminary loan approval indicated that the borrower was one Steve Nassar and the loan amount was $306,850.00. The document which was faxed to Henry Davis York was one page of two and the second page was not faxed. Looking at the first page one obtains the clear impression that this was more than an “in principle” loan approval because one of the major requirements of the borrower was a valuation and a valuation made out to the financier Integral Home Loans Pty Limited (or more accurately Integral Financial Pty Limited) was also attached. The final document was a market appraisal from Ray White sent to Mr Boumelhem indicating that the value of the property was between $308,000.00 and $316,000.00 but that marketing should start at $320,000.00. This was the first letter received by the bank’s solicitors which indicated the name of a purchaser, provided more than just an indicative offer of finance and was accompanied by a valuation that had clearly been paid for by someone and which corresponded with the sales advice given to the debtor about the value of his house. It was not responded to by Messrs Henry Davis York.
The evidence as it came out at hearing was that the offer was made by Mr Nassar who was Mr Boumelhem’s son-in-law. He told the court that it was a genuine offer but that the finance side of the arrangements had been made by Mr Boumelhem on his behalf. This appears to have included paying for the valuation. Mr Nassar told the court that Mr Boumelhem had told him that the bank was not interested and that was why he did not press the matter any further at that stage.
In March 2006 the bank put the property up for auction. It had received two valuations, one on 30 November 2005 which suggested a current market value of $260,000.00 and a forced sale value of $240,000.00, the other on 22 December 2005 with a value of $290,000.00 and a forced sale value of $260,000.00. Before the auction the reserve price was set at $290,000.00 with authority to negotiate down to $260,000.00. I have no evidence as to what occurred in the auction rooms, in particular as to whether there was bidding from any of the group of persons who had gone around to see the property but in the end result the property was sold at auction to Mr Nassar for $260,000.00. Mr Boumelhem argues that the bank breached its fiduciary duty to him as mortgagee by selling the property at an undervalue. He argued that if the property had been sold to Mr Nassar in January for $335,000.00 his indebtedness to the bank would be significantly less. He also claimed that the bank was bailee of certain property of his consisting of a barbecue and outdoor furniture with a value of $1,895.00. The applicant also argued that the calculations which the respondent had made wrongly failed to credit him with a payment of $19,380.00 which was the balance of the deposit paid to the agent less fees. The cross examination of Mr Boumelhem went through the payments made by him to the bank based upon the relevant bank statements. I am satisfied that Mr Boumelhem did not make an additional payment of $19,380.00 that was not credited, there was only payment of this sum which was mistakenly noted in the bankruptcy notice as having been made on 12 April 2005 when it was in fact made on 12 April 2006. The evidence, including the written evidence, indicated that the bank had given Mr Boumelhem many opportunities to remove his goods from the premises. I have considerable doubt as to whether a claim in bailment would succeed but in his final submissions Mr Aspinall for the bank indicating that excluding any accrued interest on the debt of $106,620.00 if Mr Boumelhem had made out his claim concerning the breach of fiduciary duty and the bailment damages there would still be owed to the bank the sum of $17,485.00.

Discussion

The grant of a sequestration order is governed by s.52 Bankruptcy Act 1966 (Cth) which relevantly states:
“[52]   Proceedings and order on creditor's petition
            (1)     At the hearing of a creditor's petition, the Court shall require proof of:
(a) the matters stated in the petition (for which purpose the Court may accept the affidavit verifying the petition as sufficient);
(b)     service of the petition; and
(c) the fact that the debt or debts on which the petitioning creditor relies is or are still owing;
and, if it is satisfied with the proof of those matters, may make a sequestration order against the estate of the debtor.
. . .
(2)     If the Court is not satisfied with the proof of any of those matters, or is satisfied by the debtor:
(a)     that he or she is able to pay his or her debts; or
(b)     that for other sufficient cause a sequestration order ought not to be made;
it may dismiss the petition.”
It was not submitted on behalf of the debtor that he was solvent. I have no evidence whatsoever of the debtor’s financial position. The debtor’s claim merely was that it was the sale of the property at an undervalue that led to his insolvency and that if the property had been sold at its proper value to Mr Nassar there would be no debt due by the debtor to the creditor. As it became clearer that the debtor could not make out his claim for the $19,380.00 payment and that the claim in bailment was at the very least problematical the submissions moved towards a more general exercise of discretion based upon what was now the small - $17,485 – amount that might be truly owed by the debtor to the creditor which he might have been in a position to pay.
The task before the court considering whether there is “other sufficient cause” under s.52 was set out by Allsop J with his Honour’s usual erudition in Totev v Sfar [2006] FCA 470, a decision on appeal from this court. In that case his Honour considered the authorities in some detail at [36]-[45] and included significant extracts from the most relevant cases. At [37] his Honour opined:
“[37] On proof of the matters in s 52(1) of the Act, the Court will generally proceed to make an order for sequestration. It is for the debtor to persuade the Court that the public interest in the dealing with the insolvent debtor and the rights of individual creditors are outweighed by other considerations
. . .
[40] It is for the debtor to show ‘other sufficient cause’. A claim sounding in money by the debtor against the petitioning creditor may amount to such other sufficient cause. The matter was examined by the Full court in Ling v Enrobrook Pty Ltd (1997) 74 FCR 19 [His Honour then set out an extract from pages 25-26 of Ling].”
His Honour then considered Re James; Ex parte Carter Holt Harvey Roofing (Australia) Pty Ltd (No 2) (1994) 51 FCR 14; International Alpaca Management v Evsar [1999] FCA 72 and St George Bank v Helfenbaum [1999] FCA 1337 before saying:
“[44] . . . what is clear is that the fact that there has been an act of bankruptcy does not make the claim by the debtor against the petitioning creditor irrelevant. It should be examined to assess whether it can be said that there is sufficient evidence to show that it is a real claim which is likely to succeed. Also relevant is the stage of the litigation, the length of time for its vindication and any other relevant matters. . . In some circumstances it may be difficult to assess the likelihood of success of the debtor’s claim. All the authorities show that central to the showing of ‘other sufficient cause’ for the purposes of s 52(2)(b) is the question of the prospects of success. The case is not tried in the bankruptcy court, but the material is examined for the purpose alluded to by Gibbs J in Re Schmidt; Ex parte Anglewood Pty Ltd (1968) 13 FLR 111 at 115-116. As Olney J identified in Re James, if a likelihood of success can be demonstrated, that may justify a refusal of a sequestration order. Alternatively, the circumstances may reveal a claim of a character and nature in which likelihood of success cannot be predicted with accuracy but in the circumstances the petition should be dismissed or an adjournment of the petition should be granted”.
In the instant case there are two important matters to bear in mind. The first is that although the debtor asserts a breach of fiduciary duty on the part of the bank, no proceedings have been commenced. The court sitting in bankruptcy cannot make any authoritative finding upon that claim. The second is that it is clear from the authorities that where a debtor has a claim that is less than the amount of the petitioning creditor’s judgment debt the court will require the debtor to pay the difference between the judgment debt and the amount likely to be recovered on the claim: Re Player (1962) 19 ABC 277 at 282; Re Schmidt; Ex parte Anglewood Pty Ltd (1968) 13 FLR 111 at 115-116; Ling v Enrobrook Pty Ltd (1997) 74 FCR 19 at 25-26, Commonwealth Bank of Australia v McDonald [1999] FCA 984 at [11]; Totev (supra) at [43]. The debtor in the instant case made no reference to these authorities and did not make any offer to pay any amount into court.
A mortgagee’s duty on sale in New South Wales was considered by Full Bench of the Federal Court. Ryan, Carr and Conti JJ in Gomez v State Bank of New South Wales Limited [2002] FCA 442:
“[24] By way of underlining the implications and significance of the factors propounded in [21-22] above, Senior Counsel for Dr Gomez submitted that the primary judge applied the wrong legal tests or standards, and that the approach which her Honour should have taken was that which had been enunciated in Cuckmere Brick Co Ltd v Mutual Finance Limited [1971] Ch 949, and followed subsequently in the United Kingdom in a number of cases including most recently Medforth v Blake [2000] Ch 86. Those cases examine the proposition that, in exercising its power of sale, a mortgagee owes a duty to the mortgagor to take reasonable care to obtain a proper price for the property. It was acknowledged on behalf of Dr Gomez, however, that the New South Wales courts have consistently imposed on a mortgagee the less stringent duty of acting in good faith in the exercise of the power of sale, and not to act in reckless disregard of a mortgagor's interests. That formulation of the duty has been applied in at least the Supreme Court of New South Wales, since the decision of the High Court in Pendlebury v Colonial Mutual Life Assurance Society Limited (1912) 13 CLR 676, which had applied the earlier English test articulated in Kennedy v De Trafford (see [19] above). However it was submitted on behalf of Dr Gomez that it has been open for the High Court of Australia to adopt the test in Cuckmere since that case was decided by the Court of Appeal in England in 1971. In Forsyth v Blundell (1973) 129 CLR 477 and Commercial and General Acceptance Corporation Limited v Nixon (1981) 152 CLR 491 it had been unnecessary to choose between the two approaches. For instance in Forsyth at 506, Mason J said:
"It will be seen that the conclusion which I reach is that A.S.L. was in breach of its duty to the mortgagors in that it exercised its power of sale without taking reasonable steps to obtain a proper price and in doing so acted otherwise than bona fide, that is recklessly, not caring whether the price obtained was in the circumstances a proper price or not. Accordingly, I need not consider the vexed question whether the mortgagee's duty is merely to act bona fide or whether, in addition, he is bound to take reasonable precautions to obtain a proper price."
. . .
[26] We agree with the recent observations of Einstein J in State Bank of New South Wales Ltd v Chia & Anor (2000) 50 NSWLR 587 at [878] that "the Cuckmere test has no currency in New South Wales", and consider that, for the reasons already explained, the conclusions of the primary judge in relation to the sale of each property in question render academic for present purposes the controversy about the proper formulation of the principle. However, there is much to be said for the view of Menzies J in Forsyth at 481 that the Pendlebury test (and therefore the earlier De Trafford test in England) on the one hand, and the Cuckmere test on the other hand, may not be incompatible. That view has been elaborated as follows in Medforth at 101-102 in the joint judgment of Sir Richard Scott VC and Swinton and Tuckey LJJ:
"The duties imposed on a mortgagee in possession, and on a mortgagee exercising his powers whether or not in possession, were introduced in order to ensure that a mortgagee dealt fairly and equitably with the mortgagor. The duties of a receiver towards the mortgagor have the same origin. They are duties in equity imposed in order to ensure that a receiver, while discharging his duties to manage the property with a view to repayment of the secured debt, nonetheless in doing so takes account of the interests of the mortgagor and others interested in the mortgaged property. These duties are not inflexible. What a mortgagee or a receiver must do to discharge them depends upon the particular facts of the particular case. A want of good faith or the exercise of powers for an improper motive will always suffice to establish a breach of duty. What else may suffice will depend upon the facts. Tse Kwong Lam v Wong Chit Sen [1983] 1 WLR 1349 is a very good example. The fact that the mortgagee had an interest in the purchasing company placed the mortgagee under an obligation to show that a proper price had been obtained. This was an obligation more onerous than would otherwise have been required. It is true that Lord Herschell in Kennedy v De Trafford [1897] AC 180 expressed the duty on the mortgagee in terms much less onerous than the terms in which Salmon L.J. expressed the duty in the Cuckmere Brick case. That does not make the two cases inconsistent with one another. The facts that constituted the mortgagors' complaints were different. And the duty in equity appropriate to have been owed by a mortgagee selling in 1888 is not necessarily of the same weight as the duty appropriate to have been owed by a mortgagee selling in 1967. Equity is at least as flexible as the common law in adjusting the duties owed so as to make them fit the requirements of the time."”

The best argument that could be put for the debtor is that the bank ignored the offer from his son-in-law. Had it not done so, he says, a sale would have been achieved at an amount substantially above what was eventually paid. The argument put by the bank is that it was entitled to ignore the offer by Mr Nassar because it did not come directly from Mr Nassar but through the debtor’s solicitors and should be taken in the context of the previous “offers” made through that firm. The bank had made it clear to the solicitors that they were not interested in anything other than an offer that was backed by a firm commitment to finance. If Mr Nassar’s offer was looked at in this context it did not measure up. The bank was therefore entitled to ignore it.
Whilst I accept that the bank would naturally be sceptical about any offer put forward through the debtor’s solicitors, there were a number of important differences about this offer. Firstly the purchaser was named and the bank would not have known that Mr Nassar was the debtor’s son-in-law. Secondly there was what I would describe as more than an indicative offer of finance (although admittedly only one of the two pages was sent). The offer of finance was backed up with what I consider to be a genuine valuation notwithstanding the concerns expressed by counsel for the bank about the signature only appearing on one page. If the valuation was not genuine it was created by the debtor himself and the bank has put forward no evidence of that. In any event, the situation cannot be looked at in the light of information that now exists; it must be looked at in the light of the information that the bank would have had when it saw the offer. What should it have done about that? In my view the bank should have done something. It should have requested more details about the offer, perhaps put forward some conditions upon which it would permit the debtor to sell, such as contracts to be exchanged within a particular time, a full 10% deposit to be paid and evidence of an unconditional offer of finance to be provided within a particular time.
Both of the valuations which the bank had obtained were for sums less than the amount of the valuation produced by the debtor, but the later one was certainly within a reasonable margin of error - $290,000.00 to $323,500.00. I am of the view that in failing to follow up the bank could be held by a court to have breached its duty of care to the borrower. I do not think this is the end of the matter. Although Mr Nassar said in evidence that he was prepared to pay $323,500.00 for the property he appears also to have accepted the word of his father-in-law that the bank was not interested. In any proceedings between the debtor and the bank this aspect of the matter would have to be probed in some detail. It is also known that the property was marketed before auction. If Mr Nassar was that anxious to purchase the property for $323,500.00 why did he not make an offer at that stage through the agent? Perhaps he was keen enough to purchase the property so it is not an unreasonable inference to draw that by this stage he thought he could get it for far less than he might originally have paid. The unchallenged evidence of Mr Nassar’s affidavit of 7 March 2007 was that he did speak with Mr Boumelhem after he made the first offer asking what the situation was and was told that the bank had not responded. He spoke to Mr Boumelhem again in February and got the same advice. The first open for inspection of the property was 4 February and the auction was on 4 March. I believe that the better assessment of all the available evidence, including the unchallenged affidavits, is that after the negative response to his original offer Mr Nassar decided to proceed through the normal channels with the agent and the auction and there is nothing whatsoever sinister in his not contacting the bank demanding that they respond to the offer that he put through his father-in-law. He tells that he went to the auction, which was poorly attended, and picked up the property for $260,000.00.
$260,000.00 may have been the true value of the property. It is certainly within the range of the two valuations obtained by the bank. The question that the appropriate court would then have to decide is whether the bank’s duty of care extended to a situation where an overvalued offer was ignored and the property sold for the true value. I am of the view that it would be open to a court to make such finding and for this reason would be inclined to provide some assistance to the debtor. But the debtor has not commenced any proceedings and in any event still owes at least $17,485.00. However, I am prepared to give the debtor his chance. I will adjourn the hearing of the petition for 28 days. If prior to the adjourned hearing on 19 June 2007 the debtor pays to the creditor in cleared funds the sum of $17,485.00 and serves upon the creditor a fully particularized Statement of Claim out of the District Court of New South Wales I will hear argument as to whether the petition should be further adjourned pending the outcome of the proceedings or whether it should be dismissed. In the event that the payment is not made or the proceedings have not been commenced I will, subject to the provision of up-to-date affidavits of debt and search, make the orders requested by the creditor because in both of the proceedings herein mentioned I am otherwise satisfied of the matters required by s.52. I will hear the parties as to costs at the adjourned hearing.

I certify that the preceding twenty-two (22) paragraphs are a true copy of the reasons for judgment of Raphael FM

Associate:

Date: 22 May 2007