Eiszele v Hurburgh
[2011] TASSC 65
•9 December 2011
[2011] TASSC 65
COURT: SUPREME COURT OF TASMANIA
CITATION: Eiszele v Hurburgh [2011] TASSC 65
PARTIES: EISZELE, Peter Frederick
EISZELE, Liane
v
HURBURGH, Christine Harris (as personal representative of JAMES ROBERT HURBURGH, Deceased)
WALKER, James Benson
READETT, Neil Robert
FILE NO/S: BDR 9/2001
DELIVERED ON: 9 December 2011
DELIVERED AT: Burnie
HEARING DATE: 20, 21, 22 September 2011
JUDGMENT OF: Blow J
CATCHWORDS:
Equity – General principles – Fiduciary obligations – Remedies – Equitable compensation – Solicitor and clients – Conflicting duties to different clients – Non-disclosure.
Brickenden v London Loan & Savings Co [1934] 3 DLR 465; Commonwealth Bank of Australia v Smith (1991) 42 FCR 390; Farrington v Rowe McBride & Partners [1985] 1 NZLR 83, followed.
White v Illawarra Mutual Building Society Ltd [2002] NSWCA 164; Simpson v Donnybrook Properties Pty Ltd [2010] NSWCA 229, not followed.
Aust Dig Equity [1065]
REPRESENTATION:
Counsel:
Plaintiffs: B R McTaggart
Defendants: D J Gunson SC
Solicitors:
Plaintiffs: Walsh Day James Mihal Pty
Defendants: Gunson Williams
Judgment Number: [2011] TASSC 65
Number of paragraphs: 70
Serial No 65/2011
File No BDR 9/2001
PETER FREDERICK EISZELE and LIANE EISZELE
v CHRISTINE HARRIS HURBURGH (as personal representative
of JAMES ROBERT HURBURGH, Deceased),
JAMES BENSON WALKER and NEIL ROBERT READETT
REASONS FOR JUDGMENT BLOW J
9 December 2011
The plaintiffs, Peter and Liane Eiszele, have sued their former solicitors, the partners in the firm Clerk Walker & Stops, for equitable compensation and/or common law damages, alleging breaches of duty in relation to two loan transactions in 1997. The firm's then senior partner, James Robert Hurburgh, now deceased, acted for them in relation to those transactions. The plaintiffs borrowed a total of $57,000 from a company associated with the firm, giving mortgages as security for those loans, and lent the proceeds of those loans, without security, to their daughter and her partner, who were to make monthly payments to the company. Their daughter and her partner became incapable of making any payments, with the result that the plaintiffs had to repay most of the borrowed monies, together with interest. The plaintiffs contend that Mr Hurburgh's duties required him to warn them about their daughter's partner's financial position, or else to decline to act for them, and that their losses would not have been incurred if he had not breached his duties.
The names of the daughter and her partner are Jane Butler and Mark Thulborne. Mr Thulborne was the sole proprietor of a business named M K Distributors. Under that name he carried on the business of a wholesale merchant, buying various products and reselling them to retailers. In particular, he dealt in pharmaceutical, hairdressing and cleaning products. He was a client of Clerk Walker & Stops.
Each of the then partners in that firm was a director and shareholder of the company I have mentioned. Its name was CWS Mortgage Management Pty Ltd ("CWS"). It was a "controlled fund operator" within the meaning of the Rules of Practice 1994 made under the Legal Profession Act 1993. It lent money at interest to clients of the firm, taking mortgages as security.
During 1997 the following transactions took place:
· By a contract dated "the 16th day of January 197 [sic]", Mr Thulborne and Ms Butler agreed to purchase a property at Oceana Drive, Tranmere for $140,000. The contract did not require the payment of a deposit. It contained a "subject to finance" clause. Completion was required within six months from the date of the contract.
· On 9 May 1997, at the request of Mr Thulborne and Ms Butler, the plaintiffs borrowed $31,000 from CWS on the security of a first mortgage over the plaintiffs' home at Penguin.
· On the plaintiffs' instructions, Mr Hurburgh paid the net proceeds of that loan to Mr Thulborne and Ms Butler. By that means, the plaintiffs made an unsecured loan of that money to them. The plaintiffs, Mr Thulborne and Ms Butler all signed a loan agreement dated 9 May 1997 by which Mr Thulborne and Ms Butler covenanted to pay the principal sum of $31,000 on demand, to pay interest, and to make monthly payments of at least $235 to the firm. It was arranged that those payments would be applied to the plaintiffs' mortgage debt.
· Mr Thulborne and Ms Butler used the proceeds of that loan to complete their purchase of the property at Oceana Drive.
· On 27 May 1997, at the request of Mr Thulborne, Mrs Eiszele borrowed a further $26,000 from CWS on the security of a first mortgage over a property at Queenstown owned by her alone.
· On Mrs Eiszele's instructions, the proceeds of that loan were paid to Mr Thulborne and Ms Butler, for use in connection with Mr Thulborne's business. They and both plaintiffs signed a loan agreement dated 27 May 1997 by which they covenanted to pay the principal sum of $26,000 on demand, to pay interest, and to make monthly payments of at least $225 to the firm. It was arranged that those payments would be applied to the mortgage debt secured by the Queenstown property.
In about July 1997, Ms Butler and the plaintiffs discovered that Mr Thulborne and his business were in financial trouble. Ms Butler was an employee of Mr Thulborne, and apparently did not have any ready money. Mr Thulborne's loan payments were irregular and inadequate from the start. Before long they ceased altogether. The Oceana Drive property was sold in March 1998. After the discharge of the first mortgage and the payment of the usual expenses, the net proceeds of sale were paid to CWS in reduction of the mortgage debt secured by the Penguin property. But those proceeds of sale amounted to only $15,457.31, leaving a balance of $11,514.93 owing by the plaintiffs. The full mortgage debt secured by the Queenstown property remained outstanding. Interest continued to accrue. Mr Thulborne's father made a few payments to the plaintiffs for a little while, but the plaintiffs were essentially left to make their own arrangements in relation to the two outstanding mortgage debts. Mr Thulborne and Ms Butler went bankrupt. The plaintiffs found that they could get a cheaper interest rate with the Trust Bank, and refinanced accordingly. They made payments to the Trust Bank and its successors, gradually reducing their debt over the years, until it was finally extinguished in April 2007.
In this action the plaintiffs are claiming $65,999.86, made up as follows:
Amount borrowed from Trust Bank $45,000.00 Interest paid thereon $18,876.51 Bank fees and charges $2,123.35 Total
$65,999.86
Mr Hurburgh died in 2003. His widow has been substituted as a defendant in her capacity as his personal representative.
The plaintiffs' contentions as to Mr Hurburgh's alleged breaches of duty can be summarised as follows:
·Prior to the negotiation and making of the two mortgage loans of May 1997, Mr Hurburgh had acted for Mr Thulborne, was aware of his financial position, and knew that it was not good.
·In May 1997 Mr Hurburgh acted simultaneously for Mr Thulborne and the plaintiffs in relation to the unsecured loans, and for the plaintiffs and CWS in relation to the mortgage loans.
·When arranging those transactions, the plaintiffs relied on Mr Hurburgh for confirmation or advice as to Mr Thulborne's capacity to make the required payments, and made their reliance known to Mr Hurburgh.
·Mr Hurburgh had a duty to inform the plaintiffs, as his clients, of Mr Thulborne's financial difficulties, or else to decline to act for them.
·He neither informed the plaintiffs of any of Mr Thulborne's financial difficulties, nor declined to act for them. He acted in relation to the loans without saying anything to them as to Mr Thulborne's financial position or the risks associated with making unsecured loans to him and their daughter.
Counsel for the defendants made submissions at the end of the trial to the effect that I should not accept the plaintiffs as witnesses of the truth; that I should not make a finding that they had sought any advice from Mr Hurburgh that resulted in a duty to disclose information about Mr Thulborne's financial position or send them away; and that Mr Hurburgh did not breach any such duty.
Mr Hurburgh's knowledge as to Mr Thulborne's financial position
Mr Hurburgh had acted for Mr Thulborne twice in 1996 in relation to real estate purchases and related mortgage transactions. Each purchase was financed in part by a mortgage loan from CWS, for whom Mr Hurburgh also acted.
First, Mr Thulborne purchased a unit in Sawyer Avenue, Moonah, for $88,000. CWS lent $78,000 on a first mortgage. The purchase was completed on 20 September 1996. Mr Thulborne purchased the property as a residence for his parents.
The second property was a unit in Ormond Street, Bellerive. Mr Thulborne purchased it for $110,000. CWS lent $104,500 on a first mortgage. Mr Thulborne let that property at a rental that more than covered the payments required by that mortgage.
In late 1996 Mr Thulborne gave second mortgages over both the Sawyer Avenue and Ormond Street properties to National Australia Bank Limited ("NAB"). The NAB notified CWS, and requested it to produce the certificates of title to both properties to enable its second mortgages to be registered. Mr Hurburgh received those notices. On instructions from Mr Thulborne, he arranged for the production of the titles and sent the necessary documents to the NAB to enable its mortgages to be registered. That work was completed in February 1997.
Mr Hurburgh acted for Mr Thulborne and Ms Butler on their purchase of the property at Oceana Drive, Howrah, and in relation to a mortgage given by them to CWS securing a loan of $115,000 whose proceeds were applied towards that purchase. They financed their $140,000 purchase entirely with borrowed money – from the proceeds of that loan and of the $31,000 unsecured loan from the plaintiffs. They moved into that property after completion of its purchase.
In April 1997 Mr Hurburgh took instructions from Mr Thulborne in relation to an action brought against him and his father by the Commonwealth Bank of Australia. In that action the bank claimed $11,032.40 plus interest and costs. It sued Mr Thulborne's father on the basis of a personal covenant in a mortgage, and sued Mr Thulborne as a guarantor. The claim against Mr Thulborne was eventually settled for $3,500 "all in" in December 1997. Mr Hurburgh handed that matter over to one of his partners, Mr Readett, at an early stage. His firm continued to act for Mr Thulborne in relation to that claim until after it was settled.
For the purposes of the various matters in which his firm acted for Mr Thulborne, Mr Hurburgh obtained copies of unaudited financial statements relating to Mr Thulborne's business, M K Distributors, valuations and market appraisals of the mortgaged properties, information from Mr Thulborne as to his assets, liabilities, income and expenditure, and a credit check from the Tasmanian Collection Service. The plaintiffs first came to see Mr Hurburgh on or about 2 May 1997. At that time, Mr Hurburgh had the following information relating to Mr Thulborne's financial position:
· Mr Thulborne was two months behind in his monthly mortgage payments in relation to the Sawyer Avenue and Ormond Street properties. As a result he owed CWS $930 more than he had originally borrowed.
· Both of those properties were subject to second mortgages to the NAB.
· Mr Thulborne and Ms Butler would have no equity in the Oceana Drive property following completion of its purchase.
· Mr Thulborne had no other real estate.
· His only other assets were furniture, worth an estimated $20,000, and the assets of his business, M K Distributors.
· According to an unaudited balance sheet dated November 1996, the net worth of that business was $130,873. Its assets comprised a motor vehicle ($35,000), trade debtors ($34,707), fixed assets ($59,976), stock ($7,890), and a half interest in a hairdressing business ($24,000). Its liabilities comprised a motor vehicle loan ($25,000) and trade creditors ($2,810).
· An unaudited profit and loss statement for the five months ending 30 November 1996 showed that the profits of the business were a little over $5,000 per month, or 30.6% of sales revenue. However Mr Thulborne estimated his income from the business to be about $7,000 per month or $85,000 per annum.
· Mr Thulborne had initially sought a mortgage loan of $126,000 from CWS to finance the purchase of the Oceana Drive property. That was 90% of its purchase price. A valuer engaged by Mr Hurburgh had advised that the security value of the property was $140,000, ie the same as its purchase price. However Mr Hurburgh was unable to arrange mortgage insurance for $126,000. The mortgage insurer was willing to provide cover only for a loan of $115,000, which was about 82% of the security valuation and purchase price. As a result, CWS had become unwilling to lend Mr Thulborne more than $115,000.
· Mr Thulborne was being sued by the Commonwealth Bank for $11,032.40 plus interest and costs.
· Mr Thulborne had gone bankrupt in 1992. He was discharged from that bankruptcy in 1995.
· In April 1996 a plaintiff named Lorraine A Kossmann had sued Mr Thulborne for an alleged debt of $1,530.
By the time of the $26,000 mortgage loan to Mrs Eiszele on 27 May 1997, Mr Thulborne was one month further behind in his mortgage payments in relation to the Sawyer Avenue and Ormond Street properties.
There is uncontradicted and unchallenged evidence from the plaintiffs that Mr Hurburgh did not ever say anything to them about Mr Thulborne's financial position or any aspect of it. I accept that evidence.
It is obvious that Mr Thulborne's indebtedness had reached the stage where he was not able to contribute any significant amount towards the purchase price of the Oceana Drive property from his own funds, had exhausted his capacity to borrow from his bank, was unable to borrow the full purchase price from CWS, and needed to resort to requesting a $31,000 unsecured loan from the parents of Ms Butler, who was both his new partner and his employee. The riskiness or otherwise of making such a loan to him depended on the dependability or otherwise of his business and the income it generated. I infer that those facts were readily obvious to Mr Hurburgh.
Both plaintiffs gave evidence to the effect that Mr Thulborne approached them in late May 1997, within weeks of the making of the first relevant loan, requesting a further loan of $26,000. Mrs Eiszele gave evidence that he said he wanted to borrow the money to expand his business. Mr Eiszele gave evidence that Mr Thulborne said he was getting stock in and had to pay for it urgently. However Mr Hurburgh's file reveals only that on 23 May 1997 he took instructions in relation to a mortgage loan of $25,000 plus costs for the purpose of a business loan to Mr Thulborne and Ms Butler. Once again, I infer that it was readily obvious that the riskiness or otherwise of making the requested loan depended on the dependability or otherwise of Mr Thulborne's business and the income it generated. If he needed to borrow a further $25,000 for business purposes, any solicitor representing the intended lender could be expected to be alert to the possibility that Mr Thulborne needed to go more deeply into debt in order to maintain the solvency of his business.
The plaintiffs' conversations with Mr Hurburgh
Both plaintiffs gave evidence at the trial. In their evidence they gave inconsistent accounts of the critical conversation with Mr Hurburgh that occurred when they saw him on or about 2 May 1997.
Mrs Eiszele gave evidence first. Her evidence-in-chief as to the enquiries made of Mr Hurburgh was to the following effect. Their daughter and Mr Thulborne told the plaintiffs in March 1997 that they had looked at Oceana Drive, and that they needed $30,000 as a "deposit". Mr Thulborne told them that Mr Hurburgh was his solicitor, that he was fully aware of his financial situation, and that "he would be the best one for us to go and see because he would be the one to say that Mark was able, financially, to repay the loan", ie the proposed loan of $30,000. She discussed the proposal with her husband. They decided to accept the offer of an appointment being made for them to see Mr Hurburgh. They told Mr Thulborne, and went to see Mr Hurburgh. They had not met him before. She said to Mr Hurburgh "that Mark Thulborne has made us aware that you are aware of his financial situation and you would be able to say if it was possible, a viable proposition, that there was enough finances for Mark Thulborne to pay the loan". Her husband enquired in the same manner. Mr Hurburgh did not say "ay or nay". He did not state that there was "a problem with finances". He did not say anything. She believed that, if there was a problem with "the finance being paid back", Mr Hurburgh would have told them that there was a problem and that they could not "do the loan".
In the course of her cross-examination, Mrs Eiszele said a number of things about this conversation that she had not said during her evidence-in-chief. At one point she said she asked Mr Hurburgh whether, with MK Distributors and Mr Thulborne's finances, the finances were there to repay the loan. She said she told Mr Hurburgh that Mr Thulborne had asked her to come and see him and discuss with him whether Mr Thulborne would be able to repay the loan if it was given to him. A little later, she said she told Mr Hurburgh, "We have come to see you because Mark Thulborne says that you are aware of his financial situation and you would be able to give a yes or a no as to whether he could repay the loans [sic]." (At that stage only one loan was contemplated.) A little later, Mrs Eiszele gave evidence to the effect that Mr Hurburgh said that there was enough equity in Sawyer Avenue.
Mrs Eiszele gave evidence that she saw Mr Hurburgh again in relation to the $26,000 loan secured over her Queenstown property, but that there was not a lot said at that time. She said there was no discussion, and that the papers were drawn up for them to sign.
Mr Eiszele's evidence was to the following effect. In about April 1997 he had a discussion with Mr Thulborne regarding the purchase of a house in Oceana Drive by him and Ms Butler. Mr Thulborne suggested he lend him some money so they could pay a "deposit" on the house, and said that, if he had any queries about any concern, Mr Hurburgh was the chap who handled anything to do with his financial matters, and that "when I went to Mr Hurburgh he'd tell me". He and his wife discussed the matter, arranged an appointment to see Mr Hurburgh, and went to see him. He had not met Mr Hurburgh before. They went to see Mr Hurburgh about the first $30,000 loan "for him to tell me that Mark was able to repay that loan and to get information off him to see if Mark had enough in the business to cover the loan". He "asked Mr Hurburgh if there was enough money in Mark's business to cover the loans [sic] and he said there was".
Mr Eiszele's evidence in relation to the $26,000 loan secured over the Queenstown property was to the following effect. He asked Mr Hurburgh whether he believed that there was enough money in Mr Thulborne's business and the two houses that he had to cover the two loans. Mr Hurburgh told him that there was enough because the business was going pretty well, and that Mr Thulborne could cover those loans. No papers were signed at that stage. He and his wife went back within a couple of days, and signed papers on that later occasion.
Under cross-examination, Mr Eiszele adhered substantially to what he had said in his evidence-in-chief in relation to his conversations with Mr Hurburgh.
Mr Hurburgh's files contained no notes of any conversations with the plaintiffs. There is no suggestion that anyone else from his firm was present at any such conversation. There was evidence that Mr Thulborne and Ms Butler were present for the critical conversations, but neither of them gave evidence at the trial.
In view of the various inconsistencies in the plaintiffs' evidence as to their conversations with Mr Hurburgh, I think it possible that both of their memories have become inaccurate. It may be that each of them gave evidence on the basis of reconstruction, without any true memory as to what was or was not said. It may even be that, to some degree, either or both of them were being dishonest. I say that because of some evidence that was given by Mr Eiszele, under cross-examination, and without prompting, to the effect that Mr Thulborne's father made several cash payments after they refinanced with the Trust Bank. Those payments should have been deducted from the sum claimed by the plaintiffs, but they were not. The writ in this action was issued some ten years before the trial. One would think that, at least at some stage during that decade, one of the plaintiffs might have remembered those cash payments and mentioned them to their solicitors. Evidently that did not happen. As a result, I think it is reasonable to suspect that one or both of the plaintiffs made a dishonest decision to keep quiet about those payments, in order to inflate their claim.
Because of the unreliability of the plaintiffs' evidence, I am not satisfied that either of them ever asked Mr Hurburgh anything about Mr Thulborne's financial position. I am prepared to infer that, in relation to each loan, they were concerned as to whether Mr Thulborne might be unable to make his monthly payments, and that they saw it as part of Mr Hurburgh's role to somehow protect or advise them as to any such risk. However I am not able to make a finding as to what, if anything, either of them said by way of making known to Mr Hurburgh that they were relying on him.
Fiduciary duties
The plaintiffs contend that when Mr Hurburgh acted for them in relation to the relevant mortgage and loan transactions, his duties to them conflicted with his duties to Mr Thulborne and Ms Butler, and also with his personal interests as a member of his firm and as a director and shareholder of CWS.
Plainly Mr Hurburgh was acting both for the plaintiffs and for Mr Thulborne and Ms Butler. It was in the interests of Mr Thulborne and Ms Butler to obtain the proceeds of the two unsecured loans, the first so that they could complete their purchase of the Oceana Drive property, and the second because Mr Thulborne evidently needed the proceeds for the purposes of his business. The plaintiffs stood to gain nothing by making those loans. It was in their interests not to make them if there was an unacceptable risk that they would suffer losses as a result. It was in the interests of Mr Thulborne and Ms Butler for Mr Hurburgh's information about Mr Thulborne's financial position to be kept confidential, lest disclosure of that information or some of it might deter the plaintiffs from proceeding with one or both of the mortgage and loan transactions. It was in the interests of the plaintiffs for that information to be disclosed to them, since they had an interest in knowing how risky the unsecured loans were likely to be, and might have decided not to proceed if fully informed as to Mr Thulborne's financial position.
It was in the interests of Mr Hurburgh for the transactions in question to proceed. His firm stood to benefit from the legal fees associated with the purchase of the Oceana Drive property, the two mortgages, and the two unsecured loans. CWS stood to benefit to the extent of the income that it would derive as a result of the making of the mortgage loans and the collection of mortgage payments. For reasons stated below, I think that it is not significant that Mr Hurburgh and CWS stood to benefit from the transactions proceeding.
As the solicitor for the plaintiffs, Mr Hurburgh was a fiduciary, and owed them certain fiduciary duties, the scope of which depended on the circumstances of the case: Maguire v Makaronis (1997) 188 CLR 449 at 463 – 464. When a solicitor acts for both parties to a transaction, he or she has a fiduciary duty to disclose to one party any material facts within his or her knowledge relevant to that party's interests, including facts relating to the other party: Clark Boyce v Mouat [1994] 1 AC 428 at 437; McKaskell v Benseman [1989] 3 NZLR 75 at 87; Mortgage Express Limited v Bowerman & Partners (a firm) [1996] 2 All ER 836 at 842.
There are a number of reported cases in which equitable relief has been granted against solicitors who have acted for parties with different interests and breached their fiduciary duties by not disclosing information to one client. Farrington v Rowe McBride & Partners [1985] 1 NZLR 83 was one such case. It concerned a firm of solicitors who had acted both for the plaintiff, who invested $30,000 in a contributory mortgage loan to a land development company, and for that company. The New Zealand Court of Appeal held that the firm had breached its fiduciary duty to the plaintiff by not disclosing certain material facts to him. Richardson J said the following, at 90:
"A solicitor's loyalty to his client must be undivided. He cannot properly discharge his duties to one whose interests are in opposition to those of another client. If there is a conflict in his responsibilities to one or both he must ensure that he fully discloses the material facts to both clients and obtains their informed consent to his so acting …
And there will be some circumstances in which it is impossible, notwithstanding such disclosure, for any solicitor to act fairly and adequately for both.
But the acceptance of multiple engagements is not necessarily fatal. There may be an identity of interests or the separate clients may have unrelated interests. In some circumstances they may even be able and prepared to look after their own interests. Such cases seem straightforward so long as it is apparent that there is no actual conflict between duties owed in each relationship. However, the difficulty lies in determining in particular cases that there is no such conflict …".
That formulation was referred to with approval by Brennan CJ, Gaudron, McHugh and Gummow JJ in Maguire v Makaronis (above) at 465.
Mr Hurburgh did not disclose to the plaintiffs the facts known to him about Mr Thulborne's financial position. He owed Mr Thulborne a duty of confidentiality, and was therefore precluded from disclosing any of that information without his consent. There is no evidence that that consent was sought. It is quite clear that no such consent was given. Mr Hurburgh could perhaps have told the plaintiffs that he was unable to disclose anything about Mr Thulborne's financial position; that they should seek independent advice about Mr Thulborne's financial position and the wisdom of the proposed transactions; and that he could do no more than attend to the formalities should they choose to proceed. There is no suggestion that he said anything of that nature. There is no suggestion that the plaintiffs were prepared, let alone able, to look after their own interests so far as investigating Mr Thulborne's financial position was concerned. In the circumstances, therefore, Mr Hurburgh was in a position where he had a duty to the plaintiffs to reveal what he knew about Mr Thulborne's financial position, and a duty to Mr Thulborne not to do so. As that conflict was not resolved, he was obliged not to act for the plaintiffs, but he did act for them in relation to the transactions concerning the two loans.
It follows that Mr Hurburgh breached his fiduciary duty to the plaintiffs by acting for them when the relevant mortgages were given, the relevant loan agreements were entered into, and the relevant loan funds were advanced, without disclosing to them the facts known to him in relation to Mr Thulborne's financial position.
In my view Mr Hurburgh did not have a duty to advise the plaintiffs not to proceed with those transactions. Whether or not there is a duty to advise on the wisdom of entering into a particular transaction depends on the circumstances of the case: Haira v Burbery Mortgage Finance & Savings [1995] 3 NZLR 396 at 406; Beach Petroleum NL v Kennedy (1999) 48 NSWLR 1 at par[187]. The plaintiffs had nothing to gain from these transactions. The first unsecured loan was a favour to Mr Thulborne and their daughter. The second was essentially a favour to Mr Thulborne alone. It was a matter for the plaintiffs to decide whether, in relation to either unsecured loan, there was an unacceptable risk that Mr Thulborne would default. In those circumstances, Mr Hurburgh's duty extended only so far as to require him to disclose all information available to him that might reasonably be expected to have a bearing on their willingness to proceed with each loan.
I am not satisfied that there was any material non-disclosure as to the benefits that Mr Hurburgh's firm and CWS would receive if the mortgage and loan transactions proceeded. Obviously the professional practice of the firm and the mortgage lending business of CWS were carried on with a view to profit. I do not have evidence as to what disclosure, if any, was made to the plaintiffs about the remuneration of the firm or CWS. If the extent of the information disclosed as to the remuneration of those entities was less than ideal, I have no reason to think that the non-disclosure might have made any difference to the plaintiffs proceeding with the relevant transactions, or that the non-disclosure caused or contributed to the plaintiffs' losses in any way.
It follows that the defendants cannot be liable to pay equitable compensation to the plaintiffs otherwise than on the basis of a material non-disclosure by Mr Hurburgh of information about Mr Thulborne's financial position. The plaintiffs contend that they have suffered a loss as a result of a material non-disclosure of such information.
On a claim for equitable compensation based on a breach of fiduciary duty, certain common law principles do not apply. As Street J (as he then was) put it in Re Dawson (deceased); Union Fidelity Trustee Co Ltd v Perpetual Trustee Co Ltd [1966] 2 NSWR 211 at 215, "Considerations of causation, foreseeability and remoteness do not readily enter into the matter." The New South Wales Court of Appeal succinctly stated the law in Australia as to the availability of equitable compensation in Beach Petroleum NL v Kennedy (above) at par[432], as follows:
"The authorities on this matter have recently been reviewed in O'Halloran v R T Thomas & Family Pty Ltd (1998) 45 NSWLR 262 at 272-273. The law in Australia was there held to be as stated by Lord Browne-Wilkinson in Target Holdings Ltd v Redferns [1996] 1 AC 421 at 439:
'… Equitable compensation for breach of trust is designed to achieve exactly what the word compensation suggests: to make good a loss in fact suffered by the beneficiaries and which, using hindsight and common sense, can be seen to have been caused by the breach';
and by McLachlin J in Canson Enterprises Ltd v Boughton & Co (1991) 85 DLR (4th) 129 at 163:
'… it is essential that the losses made good are only those which, on a common sense view of causation, were caused by the breach'."
However, when determining, using hindsight and common sense, whether a loss has been caused by a breach of fiduciary duty, or what loss has been caused by such a breach, Australian courts are, in some situations, bound to apply a rule that was articulated by Lord Thankerton, delivering the judgment of the Privy Council, in Brickenden v London Loan & Savings Co [1934] 3 DLR 465, in the following passage at 469:
"When a party, holding a fiduciary relationship, commits a breach of his duty by non-disclosure of material facts, which his constituent is entitled to know in connection with the transaction, he cannot be heard to maintain that disclosure would not have altered the decision to proceed with the transaction, because the constituent's action would be solely determined by some other factor, such as the valuation by another party of the property proposed to be mortgaged. Once the Court has determined that the non-disclosed facts were material, speculation as to what course the constituent, on the disclosure, would have taken is not relevant."
For reasons that I state below, I am not able to make findings as to what course the plaintiffs would have taken if Mr Hurburgh had made full disclosure to them of his information about Mr Thulborne's financial position. I could only speculate as to what course they would have taken. If the passage I have quoted from Brickenden represents the law in Australia and is applicable on the facts of this case, I need not make any finding as to what course they would have taken. It is therefore necessary to consider the applicability or otherwise of what was said in Brickenden.
It was submitted to the High Court in Maguire v Makaronis (above) that Brickenden should not be followed, or alternatively that the passage quoted should be interpreted as meaning only that the Privy Council would not speculate in relation to a causation issue. The majority (Brennan CJ, Gaudron, McHugh and Gummow JJ) distinguished Brickenden, and reached no conclusion in relation to that case. Kirby J held that it should be followed. There is no other High Court authority as to the applicability or otherwise in Australia of what was said in that case.
However there have been numerous cases in which other Australian courts have followed and applied Brickenden, including two decisions of intermediate appellate courts: Commonwealth Bank of Australia v Smith (1991) 42 FCR 390 (Davies, Sheppard and Gummow JJ); Gemstone Corporation of Australia Ltd v Grasso (1994) 62 SASR 239 (Matheson, Prior and Olsson JJ). It has also been followed in a series of New Zealand cases: Farrington v Rowe McBride & Partners (above) (Court of Appeal); Bank of New Zealand v New Zealand Guardian Trust Co Ltd [1999] 1 NZLR 664 (Court of Appeal); Amaltal Corporation Ltd v Maruha Corporation [2007] 3 NZLR 192 (Supreme Court); Premium Real Estate Ltd v Stevens [2009] 2 NZLR 384 (Supreme Court).
The New South Wales Court of Appeal distinguished Brickenden in Beach Petroleum NL v Kennedy (above). In an important passage at par[440] their Honours said:
"It is important to emphasise that the proposition on which reliance is placed refers only to an act of non-disclosure by a fiduciary of 'material facts which his constituent is entitled to know in connection with the transaction'. The central word in the formulation in Brickenden is the word 'material'. Before applying the principle, it is necessary to identify a fact which is 'material' in the requisite sense. Once a fact is so identified, the principle establishes that the defaulting fiduciary will not succeed in an argument that, even with disclosure of this material fact, the transaction would still have gone ahead."
In my view the facts known to Mr Hurburgh concerning Mr Thulborne's financial position, and not disclosed by him to the plaintiffs, were material, since their disclosure would be likely to have resulted in the plaintiffs not going ahead with either of the relevant transactions. Disclosure would have resulted in the plaintiffs learning that Mr Thulborne, who gave the appearance to them of being a successful businessman, had mortgaged his assets to the maximum possible extent, was behind in his mortgage payments, was being sued for small debts, and was dependent on unsecured loans from them in order to complete the purchase of his new home and meet business expenses. The plaintiffs, though both in employment, were neither wealthy nor high earners. Disclosure might well have made a difference to their decisions about mortgaging their properties to borrow money to lend to Mr Thulborne and their daughter.
In White v Illawarra Mutual Building Society Ltd [2002] NSWCA 164, it was held in the New South Wales Court of Appeal that Brickenden applies only to non-disclosure cases involving conflicts between interest and duty, and not in non-disclosure cases involving conflicting duties to different parties. That case concerned a breach of fiduciary duty by a solicitor in failing to disclose to one of his clients that another of his clients would benefit from a mortgage loan transaction. The plaintiff failed at first instance, and unsuccessfully appealed. The principal judgment in the Court of Appeal was delivered by Powell JA, who said nothing about Brickenden being inapplicable to cases involving a fiduciary with conflicting duties. However Hodgson JA dealt with that issue in a short concurring judgment, and Hamilton J agreed both with Powell JA and the additional remarks of Hodgson JA. Hodgson JA analysed the facts in Brickenden, which concerned the non-disclosure by a solicitor to his client of benefits that he would receive if she entered into a mortgage loan transaction. After setting out the passage from Brickenden that I have quoted above, his Honour said, at pars[144] – [145]:
"In my opinion, this statement applies to cases (such as Brickenden itself) where the fiduciary obtains an undisclosed benefit from a transaction, and the question is whether, had the benefit been disclosed, the beneficiary would have given informed consent to the fiduciary having that benefit; and it is authority for the proposition that the fiduciary cannot maintain that the beneficiary would have given that consent. Whether the proposition applies in all such cases is a matter of some controversy, which need not be addressed here: however, I would venture to suggest that it does apply in all cases where the beneficiary is seeking, not damages, but the recovery from the fiduciary of the benefit received …".
The present case is not such a case. What was not disclosed to Mrs White [the appellant and former client] was not a benefit to Mr Grogan [the solicitor], but a matter relating to another client to whom Mr Grogan also had a duty: this was a case, not of conflict of interest and duty, but of conflict of duty and duty. Although the Brickenden principle has been applied to such cases (see Beach Petroleum NL v. Kennedy [1999] NSWCA 408; (1999) 48 NSWLR 1 at 92, citing Commonwealth Bank of Australia v Smith [1991] FCA 375; (1991) 42 FCR 390 and Farrington v Row [sic] McBride & Partners [1985] 1 NZLR 83), it is my opinion that, in such cases, the beneficiary must prove that, but for the non-disclosure, he or she would not have entered into the transaction: Beach Petroleum at 93, Target Holdings Ltd v Redferns [1995] UKHL 10; [1996] 1 AC 421."
That judgment was cited with approval and followed by Young JA, with whom Hodgson and Macfarlan JJA agreed, in Simpson v Donnybrook Properties Pty Ltd [2010] NSWCA 229 at par[100]. However, as the reference to Commonwealth Bank of Australia v Smith in the passage quoted indicates, the Full Court of the Federal Court in that case proceeded on the basis that Brickenden applies to cases of conflicts of duty and duty, as did the New Zealand Court of Appeal in Farrington v Rowe McBride & Partners.
I think that I should follow Commonwealth Bank of Australia v Smith, and not follow the decisions of the New South Wales Court of Appeal in White and Simpson, for the following reasons:
· Although Brickenden was a case about a conflict between interest and duty, there was nothing in the language used in the judgment of the Privy Council in that case to suggest that the relevant principle did not apply to cases involving conflicting duties to different parties. The passage that I have quoted referred in general terms to the situation when "a party, holding a fiduciary relationship, commits a breach of his duty by non-disclosure of material facts, which his constituent is entitled to know in connection with the transaction".
· There is no reason in principle why fiduciaries, in breach of their duties of disclosure, should receive different treatment from courts of equity depending on whether their conflicts were between interest and duty or between one duty and another duty.
· No reason for taking different approaches in the two different categories of cases is apparent from the judgments in the New South Wales Court of Appeal in White or Simpson.
· It was not suggested in either of those cases that the judgment of the Full Court of the Federal Court in Commonwealth Bank of Australia v Smith was plainly wrong. See Australian Securities Commission v Marlborough Gold Mines Limited (1993) 177 CLR 485 at 492; Farah Constructions Pty Ltd v Say Dee Pty Ltd (2007) 230 CLR 89 at par[135].
· As I have said, the New Zealand Court of Appeal also followed Brickenden in a case about conflicting duties in Farrington v Rowe McBride & Partners (above).
It follows that this is a situation in which equity intervenes "not so much to recoup a loss suffered by the plaintiff as to hold the fiduciary to, and vindicate, the high duty owed to the plaintiff": Maguire v Makaronis (above) at 465. For the reasons stated, I am satisfied that the plaintiffs are entitled to recover equitable compensation. They should receive compensation for the losses suffered by them as a result of entering into the transactions in question. No other basis for quantifying their compensation would be appropriate.
Common law claims
The plaintiffs have claimed damages for negligence and breach of contract. It is common ground that Mr Hurburgh and his firm owed them contractual and non-contractual duties to exercise reasonable care, skill and diligence in advising and acting for them in respect of each of the relevant transactions. The plaintiffs claim that those duties were breached in various respects, which can be summarised as follows:
· Failing to advise them to seek independent legal advice, and of the reasons why such advice would be desirable.
· Failing to advise them that it was in their bests interests not to proceed with any of the transactions.
· Failing to advise them of the risks of proceeding with the transactions.
· Failing to disclose information about Mr Thulborne's and Ms Butler's financial circumstances.
· Failing to advise them to make independent enquiries as to Mr Thulborne's and Ms Butler's financial circumstances.
· Advising them not to prove as creditors in Mr Thulborne's subsequent bankruptcy.
Some of these assertions have no merit at all. There was no evidence that the plaintiffs were advised not to prove as creditors in Mr Thulborne's subsequent bankruptcy. There was no evidence that the plaintiffs were not fully aware of their daughter's financial circumstances. It was so obvious that the plaintiffs had nothing to gain from the transactions that their solicitors had no obligation to tell them that it was in their best interests not to proceed.
I accept that Mr Hurburgh had a duty to make it clear to the plaintiffs that, in the event of Mr Thulborne and their daughter not maintaining the minimum monthly payments to CWS, it would be their responsibility to ensure that those payments were made, failing which CWS could sell their home and/or the Queenstown property. I am not satisfied that Mr Hurburgh failed in his duty to explain those things. Certainly Mr Eiszele, in the course of his evidence, displayed complete ignorance as to the nature of a mortgage. However it by no means follows that Mr Hurburgh did not provide an adequate explanation of the proposed transactions when his duties required him to do so in 1997.
However I am satisfied on the balance of probabilities that Mr Hurburgh breached his duties of care by failing to advise the plaintiffs to seek independent legal advice, and independent advice relating to the wisdom of the proposed transactions.
I need not make a finding as to whether Mr Hurburgh's common law duties required him to say anything to the plaintiffs about Mr Thulborne's financial circumstances. I need not go into the question of whether he had a common law duty to breach the duty of confidentiality that he owed to Mr Thulborne.
The plaintiffs contend that, but for Mr Hurburgh's negligence and his breaches of contractual duties, they would not have proceeded with any of the relevant transactions, and that their losses were therefore caused by Mr Hurburgh's negligence and breaches of contract.
The defendants' primary contention is that Mr Hurburgh did not breach any of his contractual and non-contractual duties. More significantly, they contend that any such breaches were inconsequential, in that the plaintiffs would have proceeded with the relevant transactions in any event.
For the purposes of their claims for damages, the plaintiffs bear the burden of establishing on the balance of probabilities that their losses were caused by negligence and/or breaches of contract on the part of Mr Hurburgh. Their counsel has submitted that I should find in their favour on this point, having regard to the following evidence:
· Mrs Eiszele gave evidence that she would have obtained independent advice if Mr Hurburgh had suggested that she do so, and that she would have made further enquiries as to Mr Thulborne's financial circumstances if Mr Hurburgh had suggested that she do so.
· Both plaintiffs gave evidence that they would not have proceeded with either of the loans if advised of the various matters that Mr Hurburgh did not disclose.
· Both plaintiffs gave evidence that they were concerned about Mr Thulborne's capacity to make the required payments, and that that was their primary reason for going to see Mr Hurburgh.
· There was evidence that, during the short period between the two relevant transactions, there was a similar transaction between the plaintiffs and their son, Stephen. Their son asked them for a loan of $10,000 so that he could have an urgent operation as a private patient in another State. They borrowed that money from CWS, giving a second mortgage over their home, and lent the proceeds of that loan to their son, in precisely the same way that they lent the proceeds of the other loans to their daughter and Mr Thulborne. Their son signed a loan agreement. Mr Hurburgh prepared all the documents and did all the conveyancing. Counsel for the plaintiffs submitted that the formal agreement with their son indicates that they were not the type of people who would "just bail their daughter out".
· There was evidence that the plaintiffs provided no further financial assistance to their daughter after Mr Thulborne's business encountered financial difficulties and failed.
However there was other evidence that tends to suggest that the plaintiffs were very ready to place their trust in Mr Thulborne, to the extent that Mr Eiszele went to work for him, and that both plaintiffs went to live in the same house with him and their daughter.
Mr Eiszele had worked for APPM as a boilermaker/welder and as a clerk of works, but was made redundant in 1991 or 1992. Mr Thulborne offered him a job working in his warehouse and as a delivery driver. After coming to Hobart and looking at the warehouse, Mr Eiszele accepted that offer, and commenced work in about March 1997, several weeks before the first of the transactions that are the subject of this case.
Following the completion of the purchase of the Oceana Drive property, both of the plaintiffs lived at that property for several months. Mr Thulborne, Ms Butler and her children lived upstairs. The plaintiffs lived downstairs from about May 1997 to October 1997.
I am not prepared to attach any weight to the plaintiffs' evidence that they would not have proceeded with the transactions if advised of the various matters that Mr Hurburgh did not disclose. No doubt they now believe that they would not have proceeded. However I think the misfortune that subsequently befell them has probably had an enormous effect on what they now think they would have done in that hypothetical situation. I also attach very little weight to the fact that they entered into a formal loan agreement with their son. When they borrowed from CWS and lent the proceeds to their son, they simply copied the formalities that had been adopted in relation to the first transaction involving Mr Thulborne and their daughter. That gives little indication as to how willing they would have been to risk lending their money to someone other than their son. Similarly, I do not regard as significant that they provided no further financial assistance to their daughter after the failure of Mr Thulborne's business left them substantially out of pocket.
Independent advice could and should have resulted in the plaintiffs learning that Mr Thulborne had registered second mortgages to the NAB, and that he had been bankrupt from 1992 until 1995. The plaintiffs might also have learned that Mr Thulborne was being sued by the Commonwealth Bank and Ms Kossmann. The plaintiffs or their advisors would probably have undertaken some investigation of the financial aspects of Mr Thulborne's business. Any such investigation might well have been inconclusive. Mrs Eiszele gave credible evidence at the trial to the effect that, after the loan transactions took place, she assisted in relation to the books of the business, and found that proper financial records had not been kept. One can only speculate as to the possible outcomes of any investigation of Mr Thulborne's affairs by the plaintiffs or on their behalf. Mr Thulborne might have provided figures that could not be verified, or might have become unco-operative. The plaintiffs could well have found themselves in a situation where they essentially had to choose between (a) proceeding with a requested loan transaction without being able to find out how big a risk they were taking, and (b) refusing to proceed, and thereby disappointing their daughter. With the benefit of independent advice, it is more likely that they would have refused to proceed with the second transaction than the first. An urgent desire for funds for business purposes is likely to have suggested to any independent advisor that they were being asked to take too big a risk. But the decisions were decisions for them, and blood is thicker than water.
I am not in a position to make a finding as to whether the plaintiffs would have proceeded with either of the mortgage loans from CWS or either of the unsecured loans to Mr Thulborne and their daughter if Mr Hurburgh had suggested that they obtain independent advice. Even if the plaintiffs had been given every piece of information that Mr Hurburgh had about Mr Thulborne, I am unable to say what course they would have taken in relation to each of the relevant transactions. In my view the plaintiffs' common law claims must fail on the basis that they have not established on the balance of probabilities that any breaches of duty on the part of Mr Hurburgh caused or contributed to the loss that they suffered.
Quantum of the plaintiffs' loss
The plaintiffs have established that they paid to the Trust Bank and its successors every cent of the $65,999.86 that they are claiming. However they must not recover that amount in full because of the evidence that some of the money so paid was received by them from Mr Thulborne's father. There is no precise evidence as to how much money came from him.
When Mr Eiszele first gave evidence about those payments, he said he thought they were payments of about $500 each, that he could not remember how many payments there were, that he thought there were only three or four, and that he really only knew about two. Mrs Eiszele was recalled for further cross-examination about those payments. She conceded that they amounted to at least $1,000. She said she was unable to say any more than that. She gave evidence to the effect that those payments ceased in or about November or December 1999, but that she could not say exactly which month they ceased. The bank statements were tendered, but there is nothing in them that sheds any light on this issue.
Mr Eiszele's evidence suggests that as much as $2,000 of the monies paid by the plaintiffs to the Trust Bank and its successors did not come from the plaintiffs' own funds. Mrs Eiszele's evidence was vaguer. Since the plaintiffs bear the onus of proof in relation to the quantum of their loss, I will proceed on the basis that they have established all but $2,000 of their claim on the balance of probabilities. On that basis, I am satisfied that, as a result of entering into the transactions to which this action relates, they suffered losses of $63,999.86.
Conclusion
For these reasons, judgment will be entered for the plaintiffs against the defendants for $63,999.86.
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