Drabsch v Commissioner for Consumer Affairs No. Dcaat-02-595

DRABSCH & OTHERS v COMMISSIONER FOR CONSUMER AFFAIRS
[2003] SADC 124
Judge Trenorden
Administrative Appeals Division

The appellants have appealed, pursuant to section 37 of the Conveyancers Act 1994, against the determination of the Commissioner for Consumer Affairs upon their respective claims for compensation made under section 32 of the Conveyancers Act. The Commissioner had determined that compensation was not payable to the appellants.
Both appellants, together with others, had lent monies through GC Growdens Pty Ltd (“Growdens”), to Share Investment Concepts Pty Ltd (“Share Investment”). The total amount of the loan was $925,000, and its purpose was expressed to be “to assist purchase of land and undertake first stage of subdivision of twenty allotments”. Of the total amount of the loan, Drabsch had lent $22,000 and Rosenzweig $15,500. The claims were made as a result of the failure of the Growdens business.
The respondent Commissioner advised the appellants of his determination in identical terms, as follows:
“I refer to your claim on the Agents Indemnity Fund pursuant to the Conveyancers Act 1994.
The indemnity fund is a fund of last resort, meaning that you must first exhaust all other avenues of recovery.
I advise that your claim against the Fund is refused. The basis of my refusal is that you have not provided evidence that you have no reasonable prospect of recovering money from either the borrower, or the guarantors.
If, however, you disagree with this determination, Section 37 of the Act provides that you may appeal to the District Court. (Section 37 of the Act was set out in full).
I would respectfully suggest that you seek independent legal advice before proceeding with such an application.”
The Grounds of Appeal and Notice of Alternative Contention
The grounds of appeal, as set out in the Notice of Appeal are as follows:
“2.1That the Respondent should not have determined that the Fund was a fund of last resort.
2.2That the Respondent should not have applied a rule, namely should not have determined that the Fund was a fund of last resort, but rather should have considered the application on its merits.
2.3That the Respondent should have determined that the Appellants need not have first exhausted all other avenues of recovery before claiming against the Fund.
2.4Alternatively that –
2.4.1.the Respondent should not have required the Appellants to take action namely to sue guarantors when the same would likely be defended and would be unduly costly.
2.4.2.the Respondent should not have required the Appellants to take action namely to bankrupt guarantors when the same would be costly and was unlikely to result in any recovery to the Appellants.
2.4.3in making his determination the Respondent placed insufficient weight on information supplied to him in respect to those matters.”
The Respondent filed a Notice of Alternative Contention in which it contended as follows:
“1.That the appellants are entitled to claim against the Indemnity Fund in respect of those funds that were applied to satisfy other loans and/or for other purposes (paragraph 11.4 of the appellants’ statutory declaration).
2.That there has been no fiduciary default within the meaning of section 32 of the Conveyancers Act 1994 (“the Act”) in respect of the remaining funds.
Each of the appellants has failed to adduce sufficient evidence to prove the claims made in paragraph 11.1 of their statutory declaration and in any event the matters claimed or any act/omission in respect thereto cannot amount to a fiduciary default within the meaning of the Act;
each of the appellants knew or ought to have known the basis of the valuation and in any event the matters claimed in paragraph 11.2 of their statutory declaration or any act/omission in respect thereto cannot amount to a fiduciary default within the meaning of the Act;
the matters claimed in paragraph 11.3 of the statutory declaration of each of the appellants or any act/omission in respect thereto cannot amount to a fiduciary default within the meaning of the Act.”
The Conveyancers Act
The relevant parts of section 32 of the Conveyancers Act is set out hereunder:
“(1)Subject to this Division, a person who-
(a) has suffered pecuniary loss as a result of a fiduciary default; and
(b) has no reasonable prospect of recovering the full amount of that loss (except under this Division),
may claim compensation under this Division.
(2)The amount of a claim cannot exceed the actual pecuniary loss suffered by the claimant in consequence of the fiduciary default less any amount that the claimant has received or may reasonably be expected to recover (apart from this Division) in reduction of that loss.”
All claims for compensation arose following dealings between each of the appellants and Growdens, who were at the relevant time carrying on business in South Australia as mortgage managers and finance brokers. It was not in issue that section 32 entitled the appellants to make a claim from the Indemnity Fund in respect of fiduciary default on the part of Growdens; the latter being a mortgage financier within the meaning of clause 2 of schedule 2 – Transitional Provisions, to the Conveyancers Act. By sub-clause 2(4) of schedule 2, part 4 of the Conveyancers Act applies to;
(a) a mortgage financier as if the references therein to a conveyancer were references to a mortgage financier; and
(b)where trust money was lent to another on the security of a mortgage before 1 June 1995, to trust money received by the mortgage financier by way of payment of principal or interest or both, under that loan.
The Facts
The appeal was heard together with another appeal (Thomas, McAuley & O’Sullivan v Commissioner for Consumer Affairs), because the issues to be determined in each matter were similar. One of the questions in each case is whether there was, in the terms of the Conveyancers Act, a “fiduciary default”. In addition, if the Court holds that there was a fiduciary default within the meaning of the Act, then the question arises as to the amount of compensation to be paid in each case.
The facts are as follows:
1.Both appellants had monies on loan to a borrower known as Ambitio, when Growdens proposed on 12 December 1995 that they lend monies to Share Investment Concepts Pty Ltd (“Share Investment”).
2.In a letter dated before December 1995, Growdens had advised the appellants that the Ambitio mortgage was to be discharged on 22 December 1995. That letter contained, inter alia, the following:
“Should you wish to re-invest on another sound first mortgage security after settlement has been effected, we will be pleased to find a good investment for you.
We emphasize you should not make a firm commitment of the principal funds until they are physically repaid. Experience has shown in some instances intended settlements are delayed as borrower’s circumstances change and they wish to continue until expiry date pursuant to the mortgage agreement.”
3.The amount of $22,000 was debited to the Drabsch account in Associated Savings Pty Ltd on 27 December 1995.
4.On 22 January 1996 the amount of $22,000 was deposited in the Drabsch account in Associated Savings, with details given as “ex Ambitio A7309”.
5.On 27 December 1995 the amount of $15,500 was debited to the Rosenzweig account in Associated Savings.
6.The amount of $15,500 was deposited into the Rosenzweig account in Associated Savings on 19 January 1996, with details shown as “ex Ambitio A7309”.
7. The appellants’ (and other) monies were loaned to Share Investment and a development mortgage was entered into on 27 December 1995.
8.The purchase price of the Share Investment land the subject of the loan was $435,000.
In the matter of Auzora Pty Ltd v Andrewartha (2000) LSJS 304 Lunn DCJ found that Associated Savings was a company controlled by Graham Growden (the head of Growdens) and monies which were received from borrowers by Growdens were deposited with Associated Savings pending their application to particular loans. Where part of the borrowing was to be held back after settlement awaiting future conditions to be satisfied, such as the completion of a future stage of building work, this money was also deposited in Associated Savings, which invested its funds on the short term money market. These findings have not been disputed by either party.
Whether there was a “Fiduciary Default”
The question to be determined is as to whether the monies loaned to Share Investment on behalf of Drabsch and Rosenzweig were trust funds within the meaning of part 4 of the Conveyancers Act. If the loaned monies were trust funds, the issue is whether the appellants suffered pecuniary loss as a result of a fiduciary default. It is accepted that they suffered pecuniary loss when Share Investment defaulted on the loan, but had there been a “fiduciary default”?
The following terms are given a meaning for the purposes of part 4 of the Conveyancers Act (unless the contrary intention appears) in section 14, as follows:
“ ‘fiduciary default’ means a defalcation, misappropriation or misapplication of trust money occurring while the money is in the possession or control of –
(a)    a conveyancer; or
(b)    a firm of which a conveyancer is a member;
“trust account” means an account in which trust money is required to be deposited by a conveyancer;
“trust money”, in relation to a conveyancer, means money –
(a)   that is received by the conveyancer when acting on behalf of another in connection with a dealing with land; and
(b)   to which the conveyancer is not wholly entitled in law and in equity,
but does not include money received by a conveyancer in the course of mortgage financing.”
It is clear that at the time the loan was made, namely 27 December 1995, the funds were not physically held in trust by Growdens. They were not in the Associated Savings account. Where the funds resided is unclear, given that the Ambitio loan was due to be discharged on 22 December 1995.
However, at least as far as Rosenzweig is concerned, the evidence is that Growdens anticipated at the time of proposing that Rosenzweig lend monies to Share Investment, that the loan to Ambitio would have been discharged (on 22 December) and that the principal of $15,500 lent by Rosenzweig, would have been returned to Growdens and held in the Rosenzweig account of Associated Savings. It is likely that a similar letter went to the appellant Drabsch and that a similar situation was anticipated, but that evidence is not before me.
If the Ambitio loan monies had been repaid to the borrowers on the date the loan was due to mature, namely 22 December 1995, Growdens would have had their funds in trust, awaiting deployment to the Share Investment loan. In fact, Growdens anticipated possession of these funds, at the time of the settlement on the loan to Share Investment. The monies from the Ambitio loan were credited to the Associated Savings accounts of Rosenzweig on 19 January 1996 and that of Drabsch on 22 January 1996.
It appears to have been implicitly conceded by the respondent that the monies applied to the Share Investment loan on behalf of the appellants were in control of Growdens at the time of their application. Growdens expected to receive them within its hands upon the discharge of the Ambitio loan. Assuming the Ambitio loan was entered into prior to June 1995, the monies when received by Growdens, would have been trust monies (cl 2(2) of Schedule 2 to the Conveyancers Act).
Assuming that the appellants’ monies were trust monies in Growdens’ hands at the time of the loan to Share Investment, I am not persuaded that there was fiduciary default within the meaning of the Conveyancers Act, except as acknowledged by the respondent.
The fiduciary default alleged on behalf of the appellants was said to be constituted by:
·the inflated valuation of the land, with the result that there was insufficient security for the loan;
·the “unreliable” hypothetical development basis of the valuation that resulted in there being insufficient security for the loan; and
·Growdens’ knowledge that Share Investment was purchasing the land for only $435,000, when it was raising a first mortgage in the sum of $925,000.
There was no evidence to substantiate the claim that the “hypothetical development” approach to valuation was unsound, unreliable in the circumstances or led to an “inflated” valuation of the land. Each prospective purchaser was provided with a copy of the entire valuation report, prepared by a licensed valuer. Neither of the assertions in the first 2 dot points above have been shown to be a misapplication of the appellants’ funds and therefore a fiduciary default on the part of Growdens.
The purpose of the loan was clear to the prospective lenders, even though the purchase price of the land had not been advised. The land had been valued at $1.5 million. In the absence of any evidence that this was an unreasonable approach to valuing the land, the raising of a first mortgage in the sum of $925,000 was not a misapplication of lenders’ funds and therefore a fiduciary default.
It was conceded by the respondent prior to the commencement of the hearing that the appellants were entitled to be compensated from the Fund in respect of those monies that had been misapplied by Growdens, to satisfy other loans and for other purposes. These amounts conceded to have been misapplied were based on the findings of His Honour Judge Lunn in Auzora (above) at paragraph 20-21, and are said to be as follows:
·$10,000 of the $134,211 retained in Associated Savings for interest in advance;
·$42,000 retained in Associated Savings for payment of arrears of interest for Primrose Bay and Wexhaven;
·$73,775.51 of $75,262.48 retained in Associated Savings for unspecified purposes; and
·$1764.52 presumed to have been misapplied by the respondent.
The total amount conceded to have been misapplied was $127,540.03, of the total loan amount of $925,000.00, and the appellants are each said to be entitled to be compensated with respect to the misapplied monies, on a pro rata basis, having regard to the respective contribution of each to the total amount of the loan, submitted the appellants.
I can see no basis for adding to the amount of monies conceded to have been misapplied by Growdens. It was submitted that the retention of the amount of $134,211 as interest in advance was a misapplication of trust funds. It may have been, given the purpose of the loan, but Lunn DCJ found in Auzora that this money had been used by Growdens to pay the monthly interest instalments to the mortgagees. Accordingly, excepting the conceded amount of $10,000, the mortgagees, including the appellants, have not lost this money, even if it was misapplied.
There is no basis for finding that any other part of the loaned monies was misapplied. All other payments appear to have been expenses incidental to the purpose of the loan.
Finally, it should be noted that the appellants did not pursue the other grounds of appeal, having proceeded on the sole basis of there having been a fiduciary default on the part of Growdens.
Conclusion
Thus, the appellant Drabsch having lent $22,000 of the total of $925,000; is entitled to 2.3784% of the misapplied monies, and the appellant Rosenzweig having lent $15,500; is entitled to 1.6757% of the misapplied monies.
I would uphold the appeal to the extent conceded by the respondent.
I will hear the parties as to final orders.

[2003] SADC 124

9 October 2003