First Mortgage Managed Investments Pty Limited v Pittman
[2014] NSWCA 110
•07 April 2014
Court of Appeal
New South Wales
Case Title: First Mortgage Managed Investments Pty Limited v Pittman Medium Neutral Citation: [2014] NSWCA 110 Hearing Date(s): 6, 7 November 2013 Decision Date: 07 April 2014 Before: Beazley P at [1];
Gleeson JA at [2];
Sackville AJA at [3]Decision: 1 Appeal allowed in part.
2 Direct the parties to file within 14 days agreed short minutes of order giving effect to these reasons for judgment.
3 In default of agreement:
(a) the appellant (FMI) file and serve within 14 days proposed short minutes of order, together with brief written submissions in support;
(b) the respondents file and serve within a further 14 days their proposed short minutes of order, together with brief written submissions in support.
4 There be no order as to the costs of the appeal.[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]
Catchwords: Contracts Review Act 1980 - whether finding that loan contract and third party mortgages were unjust should be upheld - whether primary Judge erred in declaring the loan contract and mortgages to be wholly unenforceable - whether allowance should have been made for moneys used by the borrowers to discharge existing mortgages - whether the earlier mortgages were themselves unjust Legislation Cited: Contracts Review Act 1980 Cases Cited: Collier v Morlend Finance Corporation (Victoria) Pty Ltd [1989] ANZ ConvR 515; 6 BPR 13,337
Elkofairi v Permanent Trustee Co Ltd [2002] NSWCA 413; 11 BPR 20,841
Esanda Finance Corporation Ltd v Tong (1997) 41 NSWLR 482; (2002) 11 BPR 20,841
Fox v Percy [2003] HCA 22; 214 CLR 118
House v The King [1936] HCA 40; 55 CLR 499
S H Lock (Australia) Ltd v Kennedy (1988) 12 NSWLR 482
St George Bank Ltd v Trimarchi [2004] NSWCA 120
Perpetual Trustee Co Ltd v Khoshaba [2006] NSWCA 41; 14 BPR 26,639
Provident Capital Ltd v Papa [2013] NSWCA 36; 84 NSWLR 231
Vadasz v Pioneer Concrete (SA) Pty Ltd [1995] HCA 14; 184 CLR 102
Warren v Coombes [1979] HCA 9; 142 CLR 531Category: Principal judgment Parties: First Mortgage Managed Investments Ltd (Appellant)
Basil James Pittman (First Respondent)
Rex Neil Webster (Second Respondent)Representation - Counsel: Counsel:
AG Bell SC / KS Howe (Appellant)
TF Robertson SC / JE Lazarus (Respondents)- Solicitors: Solicitors:
Bransgroves Lawyers (Appellant)
Brock Partners Lawyers (Respondents)File Number(s): 2012/396832 Decision Under Appeal - Court / Tribunal: Supreme Court - Before: Garling J - Date of Decision: 01 November 2012 - Citation: First Mortgage Managed Investments Ltd v Pittman [2012] NSWSC 1332 - Court File Number(s): 2008/288217
JUDGMENT
BEAZLEY P: I agree with the reasons of and the orders proposed by Sackville AJA.
GLEESON JA: I agree with Sackville AJA.
SACKVILLE JA: This appeal arises out of loans made by the appellant ("FMI") to the first respondent ("Mr Pittman") and the second respondent ("Mr Webster"). FMI and the respondents entered into a Loan Agreement in 2006 pursuant to which FMI advanced to the respondents the sum of $1,900,000 ("2006 Loan Agreement"). The loan was secured by first mortgages over three properties owned by Mr Pittman or by the respondents jointly. In 2008, the 2006 Loan Agreement was varied to increase the amount of the loan to $2,025,000 ("2008 Variation").
The primary Judge (Garling J) found that both the 2006 Loan Agreement and the 2008 Variation were unjust when made and, pursuant to s 7 of the Contracts Review Act 1980 ("the Act"), declared them to be unenforceable: First Mortgage Investments Ltd v Pittman [2012] NSWSC 1332 ("Primary Judgment"). FMI appeals against that decision, contending that the finding that the 2006 Loan Agreement and the 2008 Variation were unjust should be set aside. FMI also contends that the primary Judge erred in making no allowance for a financial benefit FMI says that the respondents received from the 2006 FMI mortgages. The benefit is said to be the amount of $1,172,713.04, used by the respondents to discharge loans from third parties secured by mortgages over the respondents' properties.
Background
The Proceedings
FMI's loans to the respondents were secured by first mortgages over three properties located at Kurrajong Heights. The three properties were referred to by the parties as Lots 8, 9 and 23 (together "the Land"). At all material times, Mr Pittman was the registered proprietor of Lots 8 and 23, while the respondents were joint proprietors of Lot 9.
The respondents defaulted under the 2006 Loan Agreement and in November 2008 FMI commenced proceedings against them. FMI sought possession of the Land and judgment for $2,135,179.26, being the amount of the debt due under the 2006 Loan Agreement, as varied in 2008.
The respondents filed a defence and cross-claim against FMI, advancing a number of contentions. For present purposes, their principal claim was that the 2006 Loan Agreement, the 2008 Variation and associated mortgages (together the "FMI Mortgage") were "unjust" within the meaning of s 9 of the Act.
The respondents filed two additional cross-claims. One was against Ms Locke, a neighbour of theirs who, as the primary Judge found, acted fraudulently in relation to the transactions. Ms Locke filed a defence, but did not appear in the proceedings.
The second of the additional cross-claims was against a firm of solicitors, Christopher M Edwards ("the Firm"). A solicitor employed by the Firm, Ms O'Callaghan, gave what was supposed to be independent advice to the respondents in relation to the FMI Mortgages. The respondents ultimately settled their claim against the Firm for breach of duty for the sum of $200,000, inclusive of costs.
The hearing before the primary Judge took place over five days in July 2011. Oral submissions were made on 9 August 2011. Judgment was not delivered until 1 November 2012, some fifteen months later. The primary Judge essentially found in favour of the respondents.
The primary Judge found (at [372]) that each of the 2006 Loan Agreement and the 2008 Variation, of which the mortgages over the Land were a direct consequence, was unjust at the time it was made and would be unjust to enforce. In determining the appropriate relief pursuant to s 7(1) of the Act, the primary Judge rejected FMI's submission that the Court should not set aside the 2006 Loan Agreement, but should vary it to reduce the amount owing by the sum applied to discharge the earlier loan ("Flamanda Mortgage") ($1,172,713.04, plus interest). His Honour took this course because he found (at [409]-[410]) that the Flamanda Mortgage and all previous loans secured over the Land were "unjust", notwithstanding that the earlier mortgages had been discharged prior to the respondents entering into the Flamanda Mortgage. It followed (at [413]) that the fact that part of the moneys lent by FMI to the respondents were used to discharge the Flamanda Mortgage (which itself replaced earlier loans secured over the Land) was not an "unwarranted benefit" to the respondents.
The primary Judge considered, however, that the settlement of $200,000 received from the Firm was a benefit to the respondents, as was a small amount paid out of the FMI Loan by way of reimbursement for council rates.
His Honour declared pursuant to s 7 of the Act that the 2006 Loan Agreement and associated mortgages were unenforceable and ordered that FMI take the necessary steps to discharge the mortgages. His Honour made consequential orders required to give effect to his findings as to the benefits to be taken into account in granting relief. The cross-claim against Ms Locke was dismissed, presumably because the respondents succeeded in obtaining relief against FMI. The orders made by his Honour are set out below (at [99]).
The Appeal
FMI appeals against the decision of the primary Judge. It contends that the primary Judge erred:
in finding that the FMI Mortgage was unjust; and
in any event, in making orders that relieved the respondents of the FMI Mortgage without requiring them to account for the benefit they received from the discharge of the Flamanda Mortgages.The respondents belatedly sought leave to file a notice of contention, the terms of which were not formulated until after the hearing of the appeal had concluded. The matters raised in the notice of contention are as follows:
"1. ...his Honour ought to have found that the respondents did not obtain any unwarranted benefit as a result of the funds lent by FMI in December 2006 to discharge the Flamanda mortgages, because the Flamanda mortgages, and each of the [preceding] Obelisk, Forrest Knoll and National Mutual mortgages, were themselves unenforceable and/or liable to be set aside....
2. His Honour ought to have found that:
(a) at least $500,000 out of the funds lent by FMI in December 2006 was used to repay a loan provided by Moranon to Ms Locke, secured by the Moranon mortgages, and related transaction costs;
(b) the respondents obtained no unwarranted benefit from the repayment of that obligation owed by Ms Locke or from the discharge of the Moranon mortgages, because they were only providing security in support of a loan to Ms Locke; and
(c) ... the respondents obtained no unwarranted benefit in any event from the discharge of the Moranon mortgages because the Moranon mortgages were themselves unenforceable and/or liable to be set aside...."
Paragraph 2(a) of the notice of contention recognises that the primary Judge erred in finding that the sum of $1,172,713.04 was applied to discharge what his Honour described as the "Flamanda Mortgages". As I explain later (at [189]-[192]), it was ultimately common ground on the appeal (although not until written submissions were filed after the hearing had concluded) that only the sum of $653,089.28 was used to discharge the Flamanda Mortgage. The balance of $512,465.70 (after allowing for $7,008.06 in various fees) was used to discharge a separate loan to Ms Locke by Moranon Pty Ltd ("Moranon") and SC Heath & Sons Pty Ltd ("Heath"). That loan, referred to on the appeal as the "Moranon Mortgage", was secured by second mortgages over the Land, although those mortgages appear not to have been registered. The primary Judge disregarded the discharge of the Moranon Mortgage as a benefit to the respondents because he found (at [228]) that Moranon and Heath had not in fact advanced any moneys to Ms Locke or any of her companies. Both parties accepted on the appeal that, contrary to his Honour's finding, Moranon and Heath did advance $500,000 to Ms Locke and that the loan was discharged out of the moneys advanced to them by FMI.
I have concluded that the primary Judge's finding that the FMI Mortgage was unjust should be upheld. However, I have also concluded that FMI's appeal should be upheld to the extent that the respondents should account for the benefit they received from applying the moneys advanced by FMI to the discharge of the Flamanda Mortgage and the Moranon Mortgage.
Contracts Review Act
The relevant provisions of the Act are as follows:
"7 Principal relief
(1) Where the Court finds a contract or a provision of a contract to have been unjust in the circumstances relating to the contract at the time it was made, the Court may, if it considers it just to do so, and for the purpose of avoiding as far as practicable an unjust consequence or result, do any one or more of the following:
(a) it may decide to refuse to enforce any or all of the provisions of the contract,
(b) it may make an order declaring the contract void, in whole or in part,
(c) it may make an order varying, in whole or in part, any provision of the contract,
(d) it may, in relation to a land instrument, make an order for or with respect to requiring the execution of an instrument that:
(i) varies, or has the effect of varying, the provisions of the land instrument, or
(ii) terminates or otherwise affects, or has the effect of terminating or otherwise affecting, the operation or effect of the land instrument.(2) Where the Court makes an order under subsection (1) (b) or (c), the declaration or variation shall have effect as from the time when the contract was made or (as to the whole or any part or parts of the contract) from some other time or times as specified in the order.
...9 Matters to be considered by Court
(1) In determining whether a contract or a provision of a contract is unjust in the circumstances relating to the contract at the time it was made, the Court shall have regard to the public interest and to all the circumstances of the case, including such consequences or results as those arising in the event of:
(a) compliance with any or all of the provisions of the contract, or
(b) non-compliance with, or contravention of, any or all of the provisions of the contract.(2) Without in any way affecting the generality of subsection (1), the matters to which the Court shall have regard shall, to the extent that they are relevant to the circumstances, include the following:
(a) whether or not there was any material inequality in bargaining power between the parties to the contract,
(b) whether or not prior to or at the time the contract was made its provisions were the subject of negotiation,
(c) whether or not it was reasonably practicable for the party seeking relief under this Act to negotiate for the alteration of or to reject any of the provisions of the contract,
(d) whether or not any provisions of the contract impose conditions which are unreasonably difficult to comply with or not reasonably necessary for the protection of the legitimate interests of any party to the contract,
(e) whether or not:
(i) any party to the contract (other than a corporation) was not reasonably able to protect his or her interests, or
(ii) any person who represented any of the parties to the contract was not reasonably able to protect the interests of any party whom he or she represented,
because of his or her age or the state of his or her physical or mental capacity,
(f) the relative economic circumstances, educational background and literacy of:
(i) the parties to the contract (other than a corporation), and
(ii) any person who represented any of the parties to the contract,
(g) where the contract is wholly or partly in writing, the physical form of the contract, and the intelligibility of the language in which it is expressed,
(h) whether or not and when independent legal or other expert advice was obtained by the party seeking relief under this Act,
(i) the extent (if any) to which the provisions of the contract and their legal and practical effect were accurately explained by any person to the party seeking relief under this Act, and whether or not that party understood the provisions and their effect,
(j) whether any undue influence, unfair pressure or unfair tactics were exerted on or used against the party seeking relief under this Act:
(i) by any other party to the contract,
(ii) by any person acting or appearing or purporting to act for or on behalf of any other party to the contract, or
(iii) by any person to the knowledge (at the time the contract was made) of any other party to the contract or of any person acting or appearing or purporting to act for or on behalf of any other party to the contract,
(k) the conduct of the parties to the proceedings in relation to similar contracts or courses of dealing to which any of them has been a party, and
(l) the commercial or other setting, purpose and effect of the contract.(3) For the purposes of subsection (2), a person shall be deemed to have represented a party to a contract if the person represented the party, or assisted the party to a significant degree, in negotiations prior to or at the time the contract was made.
(4) In determining whether a contract or a provision of a contract is unjust, the Court shall not have regard to any injustice arising from circumstances that were not reasonably foreseeable at the time the contract was made.
(5) In determining whether it is just to grant relief in respect of a contract or a provision of a contract that is found to be unjust, the Court may have regard to the conduct of the parties to the proceedings in relation to the performance of the contract since it was made.
16 Time for making applications for relief
An application for relief under this Act in relation to a contract may be made only during any of the following periods:
(a) the period of 2 years after the date on which the contract was made,
(b) the period of 3 months before or 2 years after the time for the exercise or performance of any power or obligation under, or the occurrence of any activity contemplated by, the contract, and
(c) the period of the pendency of maintainable proceedings arising out of or in relation to the contract, being proceedings (including cross-claims, whether in the nature of set-off, cross-action or otherwise) that are pending against the party seeking relief under this Act."
The Participants
The primary Judge made findings concerning the parties to the relevant transactions and others who played a part in them. The following is a brief summary drawn primarily from his Honour's account.
FMI, an unlisted public company, was the manager of an investment scheme which obtained funds from the public and lent them on the security of first mortgages over land. The loans were inevitably for a short period (in the present case two years) and were interest only loans. First Mortgage Investments Pty Ltd was the mortgage manager of FMI. His Honour saw no need to distinguish between the corporate entities. Nor do I. I therefore use the abbreviation "FMI" to refer to either or both entities.
Mr Wilson was at all material times the Director and Lending Manager of FMI. He had the day-to-day conduct of the FMI Loan file and was responsible for much of the internal documentation relating to the FMI Loan. Mr Wilson gave evidence and was cross-examined.
Mr Pittman was born in 1938 and has lived all his life at Kurrajong Heights. He left school at 16. In 1964, he inherited Lot 8 under his grandmother's will and in 1965 he purchased Lot 23. In about 1972, he and Mr Webster jointly purchased Lot 9, which adjoined Lot 8. Mr Pittman, along with Mr Webster, has lived on Lot 8 for his entire life.
Mr Pittman's sole income at the relevant times was from the sale of fresh fruit produce grown on Lot 8. His Honour found (at [15]-[16]) that Mr Pittman's "commercial experience has been almost non-existent" and that prior to the borrowings involved in the present case, he had never taken out a mortgage or had anything other than "rudimentary" commercial dealings. Mr Pittman's earnings were very modest, he and Mr Webster between them having an income less than $30,000 per annum at the date of the hearing.
Mr Webster was born in 1943 and, like Mr Pittman, left school at 16. He worked for 30 years as a labourer and at the time of the trial did odd jobs. The only land Mr Webster ever owned was Lot 9, in which he had the joint interest with Mr Pittman. Apart from a loan to purchase that property, he had never borrowed money. The primary Judge described (at [23]) Mr Webster as an "entirely unsophisticated and simple man" who had "no commercial knowledge or sense at all".
Both respondents gave evidence and were cross-examined at some length. His Honour found (at [84]) that at no stage did the respondents have any financial interest in Ms Locke's property development projects. They knew nothing about the prospects of success for those projects nor about Ms Locke's financial position.
Ms Locke, as I have noted, was joined to the proceedings as cross-defendant but did not appear at the trial. She became a neighbour of the respondents in about 1990 and commenced a friendship with Mr Pittman and his mother (Mrs Webster). After Mrs Webster's death in 1994, Ms Locke visited the respondents regularly.
Ms Locke did not give evidence. Nonetheless, his Honour found (at [31]) that Ms Locke was an "apparently sophisticated, charming and somewhat beguiling woman", who engaged in land development in a number of places, including Silverdale and Camden, in an area near the Razorback Range. His Honour considered (at [34]) that Ms Locke was "manipulative, greedy and an exploiter of the vulnerable". The respondents were no match for her.
From 2004, Ms O'Callaghan was a conveyancing solicitor employed by the Firm. Between late 2004 and October 2006 she was instructed by Ms Locke in connection with matters concerning Ms Locke's property interests. His Honour found (at [38]) that Ms O'Callaghan "was in all respects, Ms Locke's solicitor". Nonetheless, Ms O'Callaghan gave advice to the respondents before they executed the 2006 Loan Agreement and the associated mortgages. She also gave them advice with respect to the 2008 Variation.
Ms O'Callaghan gave evidence. The primary Judge found (at [40]) that she was a "manifestly honest" witness, although not "wholly reliable" in her recollection. A reading of her evidence indicates that she readily acknowledged that she failed to comply with the duty of care she owed to the respondents in a number of important respects.
The Earlier Transactions
It is convenient to set out, in summary form, a chronology of the transactions affecting the Land which the respondents entered into before executing the 2006 Loan Agreement and associated mortgages. The earlier transactions are relevant because, as I have noted, the respondents' case, accepted at trial, was that each of these transactions was unjust at the time it was entered into. The account is again based largely, although not entirely, on the findings of the primary Judge. In particular, it has been necessary to add some information concerning the Moranon Mortgage.
National Mutual Mortgage
Shortly after the respondents' mother died in early 1994, Ms Locke asked the respondents "in a somewhat forceful manner" to assist her with a subdivision at Springwood by mortgaging part of the Land (at [177]). Ms Locke assured the respondents that she would pay the loan and interest and that they would not be at risk. Mr Pittman took the respondents to see a solicitor, Mr Vaughan, whom they had not previously met (at [178]). Both respondents trusted Ms Locke and made no inquiries about the financial details or the security they were to provide (at [179]).
The respondents borrowed the principal sum of $172,500 from National Mutual on the security of a first mortgage over Lot 8. Both executed the mortgage, although only Mr Pittman was the registered proprietor of Lot 8. The National Mutual loan agreement was not in evidence, so that its precise terms are not known. However, the primary Judge inferred (at [189]) from other material that the loan was for a short term and was repaid in March 1995.
The primary Judge found (at [190]) that the respondents obtained no financial benefit from the National Mutual Mortgage. Both knew that there might be some ultimate risk, but accepted Ms Locke's assurances that all would be well. In the result, everything she promised came to fruition, thus increasing their level of trust in her.
Forrest Knoll / Obelisk Mortgages
Over a period of several years commencing in October 1994, Forrest Knoll Nominees Pty Ltd ("Forrest Knoll"), which was renamed Obelisk Securities Pty Ltd ("Obelisk") in 1996, lent considerable sums to Ms Locke on the security of mortgages executed by the respondents ("Forrest Knoll/Obelisk Mortgage"). After the mortgages were executed, there were seven transactions, the effect of which was to increase the principal sum and adjust the term of the loan or the interest rate. On at least one occasion, the respondents executed a deed guaranteeing an additional advance by way of a variation of the mortgage.
The respondents entered into the Forrest Knoll/Obelisk Mortgage on 6 October 1994. Forrest Knoll was named as the mortgagee and the loan was for $910,000, repayable in six months. All three Lots comprising the Land were mortgaged, together with two unrelated lots owned by Ms Locke (Lots 305 and 306). Each mortgage granted by the respondents was collateral with the other mortgages, including those granted by Ms Locke. The interest rate was 14.25 per cent per annum, increasing to 25 per cent in the event of default. The mortgage over Lot 8 was initially subject to the National Mutual Mortgage, but the latter was discharged in March 1995.
Ms Locke attended to all dealings with Forrest Knoll and paid all expenses. The respondents' signatures to the documentation were witnessed by a solicitor who gave them little, if any, advice about the transactions. In each case, the meeting with the solicitor was short and he simply ensured that the documentation had been correctly signed. Neither Mr Pittman nor Mr Webster left the meeting with "any clear understanding ... of the true effect of [the] mortgages" (at [199]). Nor did the respondents pay for the solicitor's services. The same procedure was used for the later variations to the mortgage, with the same results so far as the respondents' understanding of the transactions was concerned.
The primary Judge set out in a table (at [203]) the variations to the Forest Knoll/Obelisk Mortgage over the period from 23 March 1995 to 18 October 1997. On 18 October 1997, the Forrest Knoll/Obelisk Mortgage, by this stage securing a principal sum of $1,650,075, was extended for six months until 23 March 1998. However, it appears that the Forrest Knoll/Obelisk Mortgage was subsequently extended beyond that date, since it was not discharged until 24 November 1998. The last variation of this Mortgage provided for an interest rate of 13.5 per cent per annum (increasing to 17.5 per cent in the event of default). This was a reduction from the original interest rate of 14.25 per cent per annum (originally increasing to 25 per cent in the event of default).
In addition to the Forrest Knoll/Obelisk Mortgage, on 18 October 1996 the respondents guaranteed a loan of $155,000.00 from Forrest Knoll (by now Obelisk) to Ms Locke (at [208]). The loan, which was for a period of three months, was secured by mortgages over the land, subject to the other encumbrances.
Ultimately, these arrangements with Forrest Knoll/Obelisk were discharged on 24 November 1998, when the loans were partly refinanced through a group of lenders collectively described by the primary Judge as "Flamanda". His Honour found (at [210]) that there was little about the Forrest Knoll/Obelisk transactions which gave the respondents:
"any real understanding of the reality of the risks that they were facing, the obviously deteriorating financial position of Ms Locke, and the true notion of the legal obligations which they were exposed to. On the contrary, I am satisfied that, for Mr Pittman and Mr Webster, the frequency and regularity of the transactions, accompanied by a relatively routine and somewhat perfunctory exercise involving Mr Holzman [the solicitor] at the time the documents were signed, would have created a sense of comfort, and a sense of inevitability, by which I mean that they seemed to conclude that what was happening was normal, without risk, and that which was to be expected."
Flamanda Mortgage
On 24 November 1998, the respondents mortgaged the Land to Flamanda to secure a loan of $660,000.00 (at [212], [214]). The Flamanda Mortgage recorded that the mortgagor (or mortgagors):
"acknowledge[d] receipt of the sum of $660,000 lent by the Mortgagees at the request of [Ms Locke] testified by her being a party hereto and executing these presents."
Neither Ms Locke nor any of her companies provided security to support the Flamanda Mortgage, although Ms Locke was named as a guarantor in the mortgage of each Lot. However, the effect of the refinancing of the Forrest Knoll/Obelisk Mortgage (and presumably the sale of some of Ms Locke's properties) was that the mortgages previously granted by Ms Locke's companies in support of loans to the respondents were discharged.
The primary Judge found (at [219]) that in November 1998 Ms Locke took the respondents to see the solicitor for Flamanda who, quite properly, referred them to another solicitor in Katoomba, Mr Mitchell. The meeting with Mr Mitchell took place in Ms Locke's presence (at [221]). Mr Pittman described Ms Locke "as being quite pushy and very insistent". His Honour recorded that:
"Mr Pittman said the only advice he received from Mr Mitchell was to the effect that it should be alright to sign the documents."
His Honour accepted (at [222]) Mr Pittman's evidence that he felt he had no choice but to sign the documents. Mr Pittman received no moneys from Flamanda and, so far as he was concerned, Ms Locke was obliged to repay the loan and the Land was not at any real risk.
The primary Judge made the following findings (at [223]):
"The evidence does not enable me to find that Mr Mitchell gave any thorough explanation to Mr Pittman and Mr Webster about their obligations. Since Ms Locke was in the room whilst such advice as he gave was delivered, it is unlikely that he gave any real advice, independent of Ms Locke, to enable Mr Pittman and Mr Webster to rationally assess the position in which they found themselves. The explanation he gave, did not result in Mr Pittman and Mr Webster having any real understanding of the true nature and affect of the transactions, and, in particular, the risks which they were assuming."
There was only one variation to the Flamanda Mortgage, which occurred on 5 May 1999 (at [216], [224]). The effect was to increase the principal sum from $660,000 to $720,000. The interest rate remained ten per cent per annum (13 per cent in the event of default). His Honour found (at [225]) that the respondents received no legal advice when the variation documents were executed.
It appears that Flamanda had made loans to Ms Locke or her companies, independently of the Flamanda Mortgage (which, of course, was secured over the Land). By 2000, Ms Locke had fallen into arrears with her mortgage loans. The primary Judge found (at [240]) that a number of cheques had been dishonoured. At this stage, Flamanda had provided three loans, each supported by different securities. These were summarised by his Honour as follows:
Remony Farm : $568,000
Mount View : $ 49,492
Pittman and Webster : $625,000The apparent reduction in the principal owing under the Flamanda Mortgage is not explained in the evidence.
Ms Locke experienced further cash flow difficulties in 2001 and 2002. During this period she arranged borrowings of $50,000 to enable arrears of interest on the Flamanda Mortgage to be paid (at [243]). The primary Judge found (at [244]) that by July 2002, Ms Locke had decided to repay loans for which she or her companies were responsible from land sales, but not to repay the moneys secured by the Flamanda Mortgage. Flamanda, apparently on the basis of information supplied by Ms Locke, regarded the Land as part of Ms Locke's "property portfolio" (at [246]).
Correspondence between Flamanda and Ms Locke in late 2005 showed that Ms Locke was in default of interest payments and that projected sales would not discharge the indebtedness (at [249]-[250]). The primary Judge summarised (at [255]) the position as follows:
"This necessarily incomplete picture which was not disclosed to Mr Pittman and Mr Webster shows a financial position which was apparently deteriorating and doing so consistently over a number of years. It shows regularly, and for lengthy periods, that Ms Locke was in default in respect of interest obligations for loans which she had initiated."
The Moranon Mortgage
On 1 March 2006, Mr Jones of Moranon wrote to Ms Locke at Forest Group Pty Ltd ("Forest") one of her companies. The letter noted that Ms Locke had sought further funds amounting to $350,000. Among a number of other conditions, Mr Jones said that Moranon would require a second mortgage over the Land "on which there is now a 1st mortgage of $620,000 and we have a letter of agreement to this effect from the [Pittman and Webster] people". A letter of 9 March 2006 from Moranon makes it clear that Forest was in default under a loan from Moranon, which was apparently secured over a property known as "Kingsview".
On 28 June 2006, Ms Locke wrote to the respondents saying that she required an additional loan of $500,000 to develop the Razorback site and achieve a "total payout". She assured the respondents that the interest on the loan "on your property" had been met "and would be met no matter what". Ms Locke said that sales had been slow from the Silverdale development, but Razorback was a "premium market". She was "certain that this loan will be totally repaid within nine months". The letter offered to pay the respondents $20,000 "for the benefit payable when the loan is signed."
On 27 August 2006, Mr Heath wrote on Heath letterhead to Ms Locke at Forest. The letter recorded that unsecured loans to Forest (presumably from Moranon and Heath) totalled about $500,000. The letter included the following passage:
"As further security we intend to proceed with the establishment of a 2nd mortgage over Pittman & Webster for $500,000 for a period of 12 months. Unless our lawyers say otherwise we will take your word that there is no difficulty with this being done by either Pittman or Webster and therefore we will not delay the 'Kingsview' settlement with the awaiting of the formality of its production."
On 11 October 2006, Mr Jones wrote to Ms Locke stating that second mortgage documents would be sent "directly to Pittman and Webster for their signature and also yours, before a solicitor". The letter stated that interest on the existing loan was outstanding from 1 June 2006 and that it was "important that this interest be brought up to date from any figure that you receive from either refinancing or selling Remony farm".
On 16 October 2006, the solicitors acting for Moranon and Heath wrote a letter addressed to Ms Locke, Mr Pittman and Mr Webster. It is not clear whether a single letter was sent to Ms Locke or whether three separate letters were sent to each of the addresees. The letter included the following:
"We have been instructed to prepare a loan agreement and mortgages in respect of a loan facility to [Ms] Locke provided by our clients.
Security for the loan to Ms Locke is to be provided by Messrs Pittman and Webster over their [Land].
The mortgage will rank second in priority upon registration to the existing mortgage to Flamanda ...
At this stage, we forward the Loan Agreement and Mortgage documents in draft, and subject to our clients' further instructions, for your consideration. It will be necessary for each of Ms Locke, Mr Webster and Mr Pittman to obtain independent legal advice from each other. We shall require certificates from the Borrower, Mortgagors, and independent solicitors in the form attached herewith."
On 29 October 2006, prior to the execution of the Moranon Mortgage, Ms Locke wrote a letter to the respondents witnessed by a Justice of the Peace. In that letter, she stated that she would pay "all moneys, including interest for the loan advance ... until the loan is repaid in full".
On 5 November 2006, Ms Locke wrote to the respondents promising to pay Mr Pittman $5,000 for "the period of six months that the properties will be further used for the loan". If the loan exceeded the six month period, she would pay an extra $10,000 to Mr Pittman.
On 6 November 2006, the respondents each signed an acknowledgement that he had received legal advice from Mr Mitchell concerning the loan and security documents relating to the loan from Moranon and Heath to Ms Locke. Each of the respondents also signed a statutory declaration before Mr Mitchell. The declaration stated that Mr Webster and Mr Pittman were third party mortgagors for Ms Locke as the borrower and that each of them had received "independent legal advice regarding the loan and security documents". Mr Mitchell certified in a letter dated 8 November 2006 that he had interviewed the respondents and had given advice "in terms of Rule 45.6". This rule requires a solicitor to advise a proposed signatory of all matters that the solicitor, in exercising the professional skill and judgment called for in the circumstances of the particular case, considers appropriate.
The respondents executed the mortgage documents in favour of Moranon and Heath on 6 November 2006, although the documents are dated 9 November 2006. It seems that the second mortgages granted by the respondents were over all three lots comprising the Land. The respondents acknowledged that the mortgages were security for the loan facility to Ms Locke, referred to in the Loan Agreement between the respondents, Ms Locke, Moranon and Heath, the principal amount of which was not to exceed $500,000.
Both Mr Pittman and Mr Webster gave rather vague evidence in their affidavits about the second meeting with Mr Mitchell. The primary Judge merely said (at [228]) that:
"Mr Pittman is unable to give any useful evidence about what occurred, other than that he does not recall any real advice being given to him with respect to the documents."
The primary Judge said (at [230]) that he was not prepared to find that:
"Mr Pittman and Mr Webster gained any true understanding of the nature and effect of the loan and mortgage transactions and the real risks of what their exposure was in undertaking these transactions in underwriting Ms Locke, with the provision of the security of their home and property."
Although it is not entirely clear, it seems that this finding was intended to extend to the advice given by Mr Mitchell on 6 November 2006. No doubt his Honour did not consider it necessary to go into further detail about this meeting because, he had concluded that Moranon and Heath had not advanced any moneys to Ms Locke. As I have noted (at [16]), the parties were in agreement that that conclusion was erroneous.
The FMI Mortgage
Ms Locke had dealings with FMI prior to November 2006, which did not involve loans secured over the Land. One of the documents Ms Locke provided to FMI was in connection with an application for a loan to Skyfarm Pty Ltd ("Skyfarm"). The document, dated 12 September 2006, set out what purported to be a statement of Ms Locke's assets and liabilities. It included a 275 acre parcel of land at Razorback owned by Forest, said to be worth $3,600,000. Forest's assets were also said to include a five acre lot at Silverdale, valued at $2,250,000. According to the statement, the Razorback land was subject to a mortgage of $2,300,000, and the Silverdale land was subject to a mortgage of $1,345,000. The statement did not suggest that either of the respondents had any interest in the Razorback or Silverdale developments.
The first proposal to FMI concerning the Land was in a letter of 1 November 2006 from Ms Locke to Mr Wilson. She said that she proposed to refinance the existing loans over the Land (Lot 23 being misdescribed as Lot 10). According to the letter, the Land was "owned in our private names, not a company". One purpose of the loan was said to be to pay out a private lender owed $1,200,000. Ms Locke requested a loan based on an LVR (loan to valuation ratio) of 70 per cent.
On 3 November 2006, an exchange of emails occurred between Mr Wilson and Ms Locke (at [55]-[56]):
"[Wilson] These lots, PR Data, shows them in different names, but of course that is not always correct. Please confirm that they are all in the name of Skyfarm.
[Locke] Hi David, you are correct, the names will be Basil James Pittman and Rex Neil Webster. These two people are the borrowers."
This was apparently the first that FMI learned of the respondents' proposed role in the transaction.
On 6 November 2006, FMI issued a letter of offer addressed to the respondents (at [57]). The offer was for a loan of $2,030,000 at an interest rate of 10.75 per cent per annum if interest was paid promptly. The term of the loan was to be 12 months, with interest payable monthly in arrears. As the primary Judge found (at [58]), FMI knew nothing of the respondents, yet was prepared to lend them over $2 million, conditional only on the Land meeting a specified minimum value.
On 8 November 2006, each of the respondents signed a printed acceptance form incorporated in the letter of offer. Their signatures were not witnessed and the document was returned to FMI by Ms Locke (at [66]). The respondents also signed a declaration under the Consumer Credit Code stating that the credit to be provided "is to be applied wholly or predominantly for business purposes". The declaration was witnessed by a Justice of the Peace (at [62]).
The documents provided by the respondents to FMI included a Statement of Personal Particulars and an Asset and Liability Statement. The primary Judge found (at [67]-[68]) that the respondents signed these documents before they were fully completed and it was Ms Locke who filled in the details.
The Statement of Personal Particulars was false in a number of respects. Most importantly, it recorded Mr Pittman's net weekly income as $5,000 and Mr Webster's as $4,000. In fact, they earned about $30,000 per annum between them ($600 per week) (at [68]).
The primary Judge referred (at [71]) to the contrast between the respondents' Statement of Personal Particulars and their Asset and Liability Statement:
"the Statement of Personal Particulars presented a picture of two elderly gentlemen who had lived all of their lives on the land in question and who were said to be earning on a net basis, a little under $470,000 pa. Yet, the Asset and Liability Statement suggests that they own only a very modest amount of furniture and farming equipment of indeterminate age, three motor vehicles, one of which was 35 years old, and they only had a total of $36,000 in cash and savings."
His Honour pointed out (at [72]) that the Asset and Liability Statement recorded no liabilities, despite one stated purpose of the loan being to discharge existing liabilities, including the Flamanda Mortgages.
Lots 8, 9 and 23 were valued by FMI in November 2006 for the following amounts (at [88]):
Market Sale Forced Sale Lot 8 $1,030,000 $910,000 Lot 9 $790,000 $700,000 Lot 23 $970,000 $850,000 Total $2,790,000 $2,460,000
On 1 December 2006, FMI sent a letter to the Firm, enclosing documents to be executed by the respondents. At this stage, the respondents had not given instructions to the Firm (at [77]). However, Ms Locke had dealt with the Firm over a period of years. The primary Judge rejected (at [79]) a contention by FMI that Mr Webster nominated the Firm as his solicitors.
Between 1 December and 6 December 2006, a number of communications passed between Ms Locke and Ms O'Callaghan at the Firm. His Honour inferred (at [81]) that there was a comfortable pre-existing relationship between the two.
On 6 December 2006, the respondents attended the Firm's offices and were seen by Ms O'Callaghan (at [86]). Ms Locke was present throughout (at [148]). At the conference, the respondents each signed what the primary Judge described (at [109]) as a "pro forma document", in which they acknowledged receiving advice from their solicitor on a number of matters relating to their obligations under the loan documents. These included the consequences of a failure to comply with any of the terms of the loan, specifically the obligation to pay principal and interest.
At the meeting with Ms O'Callaghan on 6 December 2006, each of the respondents also signed a statutory declaration which acknowledged that they had been required to obtain independent legal advice in respect of the security documentation relating to the advances. The respondents stated that the purpose of the business and investment loan from FMI was:
"To refinance initial loan with balance to complete the subdivision at 'Razerback' [sic] between Camden and Picton."
The declaration recorded that FMI was relying on the truth of the matters stated by the respondents for the purposes of advancing moneys to be secured by mortgages over the Land.
The primary Judge made a number of findings about the advice given by Ms O'Callaghan. He found (at [141]) that, despite the acknowledgements signed by the respondents, Ms O'Callaghan did not give advice or prudent advice on the following matters:
"(a) the absence of any written agreement, or documentation recording any obligations or arrangements between them and Ms Locke;
(b) the absence of any form of security being given to them by Ms Locke to protect their interests; and
(c) most particularly, that there was no benefit at all in entering into the transaction, and that it was contrary to their interests to enter into it."
His Honour also found (at [143]) that any advice given by Ms O'Callaghan was not independent of Ms Locke because of the pre-existing relationship between Ms Locke and the Firm. The result was that Ms Locke's interests were preferred to those of the respondents (at [144]).
The Loan Agreement was dated 15 December 2006. It recorded the respondents as the borrowers and FMI as the lender. The loan amount was $2,030,000 and the repayment date was the second anniversary of the Drawdown Date. The purpose of the loan was that stated in the statutory declaration signed by the respondents. The Land to be provided as security was specified. The establishment fee payable was $22,500.
The primary judge summarised (at [149]) the features of the 2006 Loan Agreement:
"(a) the Loan Agreement was in a standard form produced by First Mortgage;
(b) Mr Pittman and Mr Webster were named as borrowers;
(c) the loan amount was $1.9M [not the sum stated in the Loan Agreement];
(d) the interest rate was 15.95 per cent which was reduced to 10.75 per cent if instalments were paid on time, and if there was no default in the repayment of the loan;
(e) the entire loan was due to be repaid two years after the loan was drawn down;
(f) the security provided included the three first registered Mortgages over the property of Mr Pittman and Mr Webster; a Bill of Sale over all of their plant and equipment, chattels and machinery in and about the mortgaged properties; a Deed of Assignment of rentals in respect of one of the mortgage properties and according to clause 17.1 of the Loan Agreement, as further security, the borrowers by the execution of the Loan Agreement charged "all freehold and leasehold interest in any land or any part of any land, which the Borrower is the registered proprietor or lessee or which the Borrower may acquire";
(g) the mortgages secured the Deed of Loan. ...;
(h) each mortgage was collateral to and interdependent with the Loan Agreement and the mortgages given over the other parcels of land."
The primary Judge made these additional observations:
"150 The terms of the loan actually being made included the pre-payment of interest for a period of 12 months. This meant that some of the provisions about timely payment, and default, were inapplicable until the second year of the loan.
151 The Loan Agreement appeared to be one carrying a fixed repayment sum and a fixed rate of interest. However, clause 6 of the Loan Agreement dealt with increased costs and required the borrower to compensate the lender on demand if the lender determined that a "directive" directly or indirectly increased the lender's costs of providing the loan, reduced any amount received or receivable by the lender or the lender's effective return in connection with the loan, or reduced the lender's return on capital allocated to the loan, or its overall return on capital.
152 In short, the borrower agreed to underwrite the lender's return on capital to ensure that the lender received the return on capital fixed by the terms of the Loan Agreement."
The bulk of the drawdown of $1,900,000 was disbursed as follows (at [91]):
(a) First Mortgage for fees and performance $52,685 (b) First Mortgage for 1 year's interest in advance $204,250 (c) Payments to or on behalf of Flamanda Pty Ltd (the outgoing lender) $1,172,563 (d) Rates and miscellaneous expenses $2,262 $1,431,760
The balance of $468,240 was paid to one of Ms Locke's companies, Total Property Developments Pty Ltd. (The amount of $2,262 paid in respect of rates and miscellaneous expenses was held to be a benefit to the respondents and the subject of an adjustment to the orders made by the primary Judge.)
As I have noted, (at [16] above), the finding that $1,172,563 was paid to or on behalf of Flamanda was not correct, in that it overlooked that part of that sum was used to discharge the Moranon Mortgage. The amount applied to secure the discharge of the Moranon Mortgage (which involved unregistered mortgages over the Land) was $512,465.70.
The primary Judge identified the "essential features" of the advance by FMI to the respondents (at [94]):
"(a) The loan sum was about 72% of the valuation obtained by First Mortgage on a market basis. The rate [sic] was about 80% on a forced sale basis.
(b) Those valuations recognised and revealed that the market for the sale of the security properties was past its peak and was likely to be slow.
(c) The interest payments were unaffordable for Mr Pittman and Mr Webster, whose total annual income could not have paid two month's interest payments.
(d) Neither Mr Pittman, nor Mr Webster, had, apart from the secured land, any other assets which could have been used to pay the loan."
From 26 November 2007 until late January 2008, Ms Locke negotiated with FMI to increase the amount of the loan. In doing so, as his Honour found (at [262], [263]), Ms Locke simply invented some responses to queries in order to assist her application. On 9 January 2008, Ms Locke wrote a letter, purportedly on behalf of the respondents, seeking an extension of the loan for six months and an increase in the loan sum to $2,050,000 (at [269]). On 24 January 2008, FMI, in a letter sent to the Firm, in substance accepted the proposal, except that the approved loan amount was $2,025,000. There was no explanation in the evidence as to why the letter was not sent directly to the respondents (at [273]).
On 4 February 2008, the respondents met again with Ms O'Callaghan in the presence of Ms Locke (at [298]). According to the primary Judge, Ms O'Callaghan could not give independent advice to the respondents as she regarded Ms Locke as her client and not the respondents (at [299], [300]). His Honour found (at [300]) that Ms O'Callaghan gave no "real or substantive advice" on this occasion and saw her role as merely to witness signing of the documentation sent by FMI. Consequently, the variation was entered into by the respondents without the benefit of independent legal advice or explanation of the documents (at [303]).
The additional drawdown, after substantial fees, amounted to approximately $125,000, all of which went to pay interest, including interest in advance (at [274]). As was pointed out in the course of argument in this Court, interest on the FMI Mortgage was never paid by the borrowers except out of borrowed funds.
The Primary Judgment
Some of the findings made by the primary Judge have already been referred to. His Honour made other important findings concerning the respondents' understanding of the FMI Mortgage and as to FMI's conduct leading up to the transaction.
The Respondents' Understanding
The primary Judge found (at [17]) that Mr Pittman was an honest and truthful witness, but that he had an imperfect recollection of some events. On the whole, his Honour accepted Mr Pittman's evidence. Mr Webster, too, was an honest witness (at [25]), but had little memory of the relevant events. His Honour had a "real sense" that from time to time Mr Webster did not understand the questions he was being asked to respond to when he made concessions against his interest.
His Honour said (at [161]) that he took into account that the respondents' evidence sometimes suffered from a general lack of commercial sophistication and understanding of some of the concepts involved in the transactions. His Honour later added (at [162]) this observation:
"In cross-examination both of them, I thought, made admissions against their interests. Those admissions have to be examined carefully because of the potential for a misunderstanding by the witnesses of the time at which they had particular knowledge, or the time at which they had a particular understanding, because it is quite clear that by the time they came to give evidence, they had a far greater knowledge of what had transpired."
The primary judge made the following findings concerning the respondents' understanding of the FMI Mortgage:
"165 Both Mr Pittman and Mr Webster gave evidence, which I accept, that their understanding was that Ms Locke was responsible for repaying the money, that they were not the borrowers, that Ms Locke's property was secured to support the loan and that, at best, they were providing a security which was not the first security to be called upon by the bank, and further the security was being provided in circumstances where it was most unlikely to be called upon.
166 Both Mr Pittman and Mr Webster, who gave evidence to this effect in their affidavits, which I accept, did not understand that they were the only borrowers on the First Mortgage loan, they did not understand that they had the obligations on the First Mortgage loan to which I have earlier referred. They did not know that Ms Locke was not a party to the loan, nor that she was not liable to First Mortgage with respect to the particular loan. They did not understand that Ms Locke had no legal obligations to do any of the things which she promised them she would do.
167 It is clear that neither of them understood that they were the borrowers. They each had an understanding that their property was being used as security, in effect of last resort, but their understanding was a long way from that which an average person would understand about all of the ramifications and conditions of this particular loan transaction and the mortgages which were to secure the loan. They did not have the benefit of appropriate advice to assist in their understanding.
168 Mr Pittman thought that, with respect to the First Mortgage loan, Ms Locke would be arranging for the payout of it and that, in a worst case circumstance, if Ms Locke did not abide by her commitment to pay out the loan, he understood that First Mortgage could take his land. But the context for this understanding was, based upon such reassurance and blandishments which Ms Locke had given them, that he believed that there was no realistic prospect of the security being called upon, and that Ms Locke would be responsible for and was capable of, attending to all of the obligations to First Mortgage. Mr Pittman had no concept, or belief, that there was any real risk that his property may be taken by First Mortgage.
169 Mr Webster specifically rejected the proposition that his understanding in December 2006 was that First Mortgage could sell his land without first resorting to Ms Locke's land. Mr Webster understood that the land was being mortgaged to First Mortgage, but not that Ms Locke had no legal obligations with respect to the loan and mortgage. On the contrary, he understood that Ms Locke was legally obliged to repay the funds in full. He did not comprehend that he was a borrower.
170 Neither Mr Pittman nor Mr Webster read through the documents. Time was not sufficient, and their education was inadequate, as were their reading skills. They were given no understanding of the nature and effect of these documents, nor the substance of the transactions prior to signing the various documents.
171 They did not know of the interest rate on the loan, and both denied that Ms O'Callaghan had explained to them the rate of interest. I accept their denials particularly having regard to the fact that interest was being prepaid, that is, deducted by First Mortgage from the capital sum of the loan, and they were not to get any of the moneys from the loan. There was no good reason why they needed to know the interest rate on the loan, unless and until the loan expired without repayment of the principal, or else it fell otherwise into default. It is for that reason that I do not think that Ms O'Callaghan explained what the interest rate was, and I do not accept her evidence to that effect.
172 Both Mr Webster and Mr Pittman knew sufficient of the concept of a mortgage and a security that if a loan was ultimately in default, a lender "...could take possession of [the] property and sell the property to recover the amount owing ...". But that understanding was, in the context of this loan, and the information which they had, seen by them as theoretical only, or entirely hypothetical and not, in reality, remotely likely to happen. Based on what they had been told this was not an unreasonable view for each of them to hold.
173 Of importance to these conclusions about the state of mind of Mr Pittman and Mr Webster, was the fact that Ms Locke was present throughout the only discussions about the loan and mortgage. Her presence would have inhibited Mr Pittman and Mr Webster from freely asking questions of Ms O'Callaghan, and would also, I am satisfied, providing ongoing comfort and reassurance to them of the extent of her involvement."
FMI's Conduct
The primary Judge found (at [311]) that FMI had breached its Prudential Lending Manual ("Manual") in a number of respects:
"(a) The application for the loan was not received from either the borrower or a financial broker;
(b) There was no record made in the credit analysis report noting the "borrower's exit strategy";
(c) Letter of offer of the loan was not sent to the borrower - it was sent to Ms Locke."
Furthermore, Mr Wilson had confirmed (at [312]) that:
"First Mortgage regarded the completion and sale of the development lots as being the first source of repayment, although he claimed that First Mortgage had no information at all about the development, including the number of lots, their anticipated date of completion, their actual completion and their sale. He agreed that the statement of assets and liabilities provided by Mr Pittman and Mr Webster did not include as an asset any share in any of the developments which he understood were being undertaken, and which he claimed were being undertaken by them as joint venturers."
FMI did not challenge those findings in this Court, but it did challenge the primary Judge's findings as to FMI's understanding of the purpose of the loan. The findings are as follows:
"317 It seems that First Mortgage proceeded on the basis that the subdivision at Razorback, at least, was a joint venture between Ms Locke on the one hand, and Mr Pittman and Mr Webster on the other. Mr Wilson agreed that at no time was there any document, nor any reference in a document, which related to, or recorded that, the subdivision being conducted by Ms Locke was a joint venture, or, to use another term favoured by First Mortgage, a shared development, with either or both of Mr Pittman and Mr Webster.
318 Mr Wilson asserted in his evidence that First Mortgage proceeded on the basis that it was a joint venture solely because of what he was told by Mr Pittman and Mr Webster in telephone conversations which he said that he had on or about 1 December 2006.
319 Importantly, Mr Wilson accepted that if the purpose of the loan "... didn't fit in with what we thought was appropriate, we would not have done the loan".
320 The two telephone conversations which were said to be the basis for the conclusion that Mr Pittman and Mr Webster were engaged in a joint venture of land subdivision, do not allow such a conclusion to be rationally drawn.
321 It is apparent from the conversation, as set out in Mr Wilson's affidavit, the terms of which he adhered to in his cross-examination, that although he had no document prior to the conversations suggesting that the subdivision and development project was a joint venture, it was he who first suggested that there was a joint venture to Mr Pittman and Mr Webster. However, the contemporaneous file note to which I have earlier referred, contains nothing which suggests that the phrase joint venture was used, nor that there was any basis for concluding what any such joint venture involved. I do not accept that First Mortgage had any basis from either of these conversations to draw a meaningful conclusion, upon which to base the provision of a very large loan, that Mr Pittman and Mr Webster were engaged in a joint venture property development with Ms Locke.
322 This is not a sufficient basis for First Mortgage to have relied upon as identifying the purpose of this business loan. It did not comply with the lending manual. Particularly as, so far as the evidence demonstrates, there was no basis for any conclusion that the subdivision was a joint venture.
323 As well, I am satisfied that there was no material available to Mr Wilson which enabled him to conclude that the development would be completed within the 12 months of the loan, and hence, the loan could be repaid. The basis for this satisfaction is twofold. First, as he ultimately accepted in cross-examination, there was no basis in either of the two conversations for such a conclusion. Secondly, he accepted that there was no document with which he was provided that would support such a conclusion. This was of particular importance because in his affidavit Mr Wilson deposed to the fact that the application for a loan was viewed on the basis that the "shared development" was "...to be completed prior to the expiry of the loan".
...
325 Accordingly, I would conclude that there could have been no reasonable belief, on the part of First Mortgage, that there would have been sufficient funds to repay the loan prior to the expiry of it other than from the sale or other realisation of the secured property of Mr Pittman and Mr Webster. It is to be remembered that these properties were the only assets of value and sole residence, and sole source of income, for Mr Pittman and Mr Webster."
(The primary Judge was in error in stating (at [323]) that the loan was for 12 months. As he had previously found (at [93]), the term of the loan was two years.)
The finding that the respondents received no benefit from the discharge of the Flamanda Mortgage was made without reference to the fact (as the parties have agreed) that the FMI Mortgage loan was used in part to repay the moneys advanced pursuant to the Moranon Mortgage and to secure a discharge of the second mortgage over Lot 9 (and perhaps the other two Lots). The finding was therefore based on a false assumption. The falsity of that assumption vitiates the exercise of the primary Judge's discretion as to the relief to be granted pursuant to s 7(1) of the Act.
In view of these conclusions, it is not necessary to consider whether the primary judge's exercise of discretion miscarried because (as FMI submitted) he failed to take account of what was said to be the inadequacy of the respondents' pleading. However, I am inclined to the view that the issues were sufficiently identified to justify his Honour addressing the arguments advanced on behalf of the respondents notwithstanding any deficiencies in the pleadings.
Re-exercise of Discretion
Since the primary Judge's exercise of discretion in relation to the grant of relief miscarried, it is necessary for this Court to exercise the discretion afresh. As the respondents used the funds advanced by FMI to discharge two distinct loans, it is appropriate to consider each separately.
Accounting for the Moranon Mortgage
The primary Judge made no finding that the Moranon Mortgage was unjust, nor that the respondents could have successfully applied to set aside the loan agreement and the unregistered mortgages executed by the respondents in favour of Moranon and Heath. I have interpreted his Honour's conclusion (at [230]) that neither of the respondents gained a true understanding of the nature and effect of the various transactions as intended to apply to the Moranon Mortgage. However, this does not necessarily establish that the Moranon Mortgage was unjust at the time the respondents entered into it or that they would have succeeded had they applied under the Act for a declaration that the Mortgage was unenforceable.
The evidence as to the circumstances surrounding the Moranon Mortgage appears to have been sparse. This may have been because the parties did not appreciate at the trial that the respondents used part of the moneys advanced by FMI to discharge the Moranon Mortgage. If the parties did appreciate that fact, they paid little attention to the significance of that transaction or of the advice given to the respondents in respect of it.
The documentary evidence to which I have referred (at [55]) suggests that Mr Mitchell (the solicitor) gave the respondents independent advice in relation to the Moranon Mortgage and that that advice extended to all matters that a solicitor, exercising professional skill and judgment, would consider appropriate. Mr Mitchell was not called at the trial to give evidence. Accordingly, he was not challenged on the accuracy of the certificate he signed and he was not asked about the declarations signed by the respondents confirming that they had received independent advice. Contrary to the opinion expressed by the primary Judge (at [411]), no inference can be drawn against FMI by reason of its failure to call Mr Mitchell. If anything, as the respondents' former solicitor, he was more closely associated with them than with FMI.
As the primary Judge indicated, the respondents' evidence about their 2006 meeting with Mr Mitchell was vague. Mr Pittman gave affidavit evidence that Ms Locke had taken Mr Webster and him to see Mr Mitchell a couple of months before they saw Ms O'Callaghan in connection with the FMI Mortgage. Mr Pittman said that Mr Mitchell gave an explanation of certain parts of the mortgage documents, but he (Mr Pittman) could not remember which parts. He also said that Mr Mitchell gave no advice concerning "the merits of the transaction", although he was not asked to expand on the meaning of that phrase. Mr Webster's memory of the meeting with Mr Mitchell was "hazy" and he could not recall whether Mr Mitchell gave any explanation or legal advice.
Clearly Mr Mitchell provided some advice to each of the respondents concerning the Moranon Mortgage, but the precise nature of that advice was not made clear by the evidence. Mr Pittman's rather vague evidence does not permit an affirmative finding to be made that, contrary to Mr Mitchell's certification, the latter failed to give the advice reasonably to be expected of an independent solicitor in the circumstances. Nor is it clear what role, if any, Ms Locke played in any meetings that took place between Mr Mitchell and the respondents.
It is true that the primary Judge found (at [223]) that in 1998 Mr Mitchell did not give a "thorough explanation to the respondents about their obligations under the Flamanda Mortgage and that it was unlikely that he gave any real advice, independent of Ms Locke, to enable [the respondent] to rationally assess the position in which they found themselves". It is not clear whether this was intended to be a finding that Mr Mitchell failed to comply with his duty of care or whether his Honour was simply concentrating on the respondents' lack of appreciation of the risks they were assuming under the Flamanda Mortgage. In any event, findings about Mr Mitchell's conduct in 1998 cannot fill in evidentiary gaps relating to the advice he gave in 2006 to the respondents in relation to an entirely separate transaction.
An important element in the respondents' claim that the FMI Mortgage was unjust was that Ms O'Callaghan could not give them genuinely independent advice because of her prior association with Ms Locke and that FMI was aware, or should have been aware, of Ms O'Callaghan's lack of independence. There is nothing in the evidence to justify a finding that Moranon or Heath, or their representatives should have considered that Mr Mitchell was not in a position to give the independent advice he certified that he had given (and that they acknowledged having received).
No doubt there can be circumstances in which a loan contract will be held to be unjust, even though the lender wrongly believes that a borrower has received independent advice. But in the absence of more detailed evidence as to the information known or available to Moranon and Heath, I do not think the respondents have established any basis for concluding either that the respondents did not receive genuinely independent legal advice about the Moranon Mortgage or that Moranon had any reason to suspect that they had not received such advice.
It is true that Moranon must have appreciated that the respondents were granting a third party mortgage to secure a loan to Ms Locke or her companies. Among other documentation, the declaration signed by the respondents refer to them as third party mortgagors. But in the absence of other evidence, this is not enough to establish that the Moranon Mortgage was unjust, or that it was liable to be set aside or declared unenforceable. The respondents did not point to any evidence that Moranon was aware or should have been aware that they did not sufficiently understand the nature of the transaction they were entering or were unable to sufficiently appreciate the risks that they were assuming.
It is also important to appreciate that the primary Judge made no finding that FMI had any basis for appreciating that the Moranon Mortgage was unjust or that it was liable to be set aside in legal proceedings instituted by the respondents. Nor was this Court taken to evidence that would justify such a finding. While this is not necessarily determinative of the extent of the relief to which the respondents are entitled, it militates against concluding that the respondents should be wholly relieved of the obligation to repay moneys due by them under the FMI Mortgage.
As I have explained, the test of whether the respondents should be wholly relieved from their obligation to repay the moneys advanced pursuant to the FMI Mortgage, including the moneys used by them to discharge the Moranon Mortgage, depends upon whether such relief is required to avoid the unjust consequences of the FMI Mortgage. For the reasons I have given, the respondents have not shown that they should be relieved of the obligation to repay the moneys advanced by FMI, insofar as these moneys were used to discharge the Moranon Mortgage.
Accounting for the Flamanda Mortgage
In one respect the respondents' claim to be relieved from the obligation to repay FMI the moneys used to discharge the Flamanda Mortgage is stronger than their claim to be relieved from the obligation to repay the moneys applied to discharge the Moranon Mortgage. This is because the primary Judge found that the Flamanda Mortgage was unjust at the time the respondents entered into it, but made no such finding in relation to the Moranon Mortgage. His Honour made the finding that the Flamanda Mortgage was unjust partly because Mr Mitchell's explanation of the respondents' obligations did not enable them to obtain a real understanding of the true nature and effect of the transaction.
As FMI submitted, one difficulty in the respondents' path is that the primary Judge made no finding that, had they brought proceedings against Flamanda, they would have obtained orders setting aside the Flamanda Mortgage. A finding that a contract was unjust when made does not necessarily mean that the contract would have been set aside or declared to be unenforceable. In the present case, for example, the primary Judge made no finding that Ms O'Callaghan or Mr Mitchell should have advised the respondents in 2006 to institute proceedings to set aside the Flamanda Mortgage or, if such advice has been given, the respondents' would have acted on it.
(The position is complicated by the possibility that if the Flamanda Mortgage had not been refinanced, Flamanda might have taken action against the respondents to enforce the Mortgage. Had this occurred, the respondents could have filed a cross-claim seeking relief under the Act. Such a cross-claim would not have encountered the limitation difficulties identified by FMI because s 16(c) of the Act permits a cross-claim to be filed during "the period of the pendency of maintainable proceedings arising out of or in relation to the contract". There was, however, no evidence as to what would have happened had Flamanda taken enforcement action against the respondents.)
There is, in my opinion, a more fundamental difficulty in the respondents' path in supporting the orders made by the primary Judge. The Flamanda Mortgage was entered into on 24 November 1998 to secure a loan of $660,000. On the same day, the Forrest Knoll/Obelisk Mortgage was discharged. Immediately prior to discharge of that Mortgage, the respondents' Land secured an indebtedness that appears to have been no less than $1,650,000. Thus the effect of the discharge of the Forrest Knoll/Obelisk Mortgage and the entry into the Flamanda Mortgage seems to have been that the amounts secured on the Land was reduced from $1,650,000 to $660,000. (The Flamanda Mortgage was subsequently varied to increase the loan to $720,000, but only about $660,000 was ultimately required to procure its discharge.)
I infer that it is likely that the discharge of the Forrest Knoll/Obelisk Mortgage and the refinancing of only part of the debt came about because Ms Locke or her company sold some of the development lots or took other measures to reduce the level of indebtedness secured over the Land. It also appears that Ms Locke was careful to ensure that her assets (including those of her companies) became unencumbered as the result of the refinancing, while the Land continued to provide security for the reduced loan. But there was no evidence as to the value of the land Ms Locke or her companies previously provided by way of security to support the Forrest Knoll/Obelisk Mortgage. Nor was there any evidence as to whether the respondents' overall financial position was improved or made more precarious by the November 1998 transactions. It is possible that the Flamanda Mortgage simply replaced the Forrest Knoll/Obelisk Mortgage and that the respondents' financial position remained essentially the same, but the evidence does not allow such a finding to be made.
It follows that there is no sound basis for determining whether the Flamanda Mortgage and the discharge of the Forrest Knoll/Obelisk Mortgage made the respondents better or worse off. There is also no sound basis for determining what would have happened in November 1998 had the respondents refused (or been advised to refuse) to enter into the Flamanda Mortgage. A fortiori, no finding can be made that, if the respondents had taken action in 2006 to set aside the Flamanda Mortgage or to have it declared unenforceable (whether by initiating their own proceedings or filing a cross-claim in response to proceedings commenced by Flamanda), they would have succeeded in obtaining relief.
I should add that I did not understand Mr Robertson to persist with the submission that once a finding of injustice is made in favour of a claimant for relief, a legal or evidentiary onus shifts to the other party to show why a full measure of relief should not be granted. Mr Robertson acknowledged in oral argument that any "onus" was merely tactical and not legal or evidentiary. In my opinion, that acknowledgment was correct. The respondents bore the onus of establishing the facts justifying an exercise of discretion in their favour. Once FMI adduced evidence that funds advanced to the respondents were used to discharge existing mortgages over the Land, the respondents had to establish facts justifying orders relieving them from the obligation to repay those moneys. In my opinion, they did not do so.
Relief
For the reasons I have given, the respondents have not shown that orders relieving them of all their obligations under the FMI Mortgage are either necessary or appropriate to avoid the unjust consequences of the FMI Mortgage. On the evidence, the respondents, despite the injustice of the FMI Mortgage, derived benefits from the discharge from both the Moranon Mortgage and the Flamanda Mortgage. The orders in their favour under s 7(1) of the Act should require them to account for the benefits they received from the FMI Mortgage. Those benefits can be quantified at $1,172,713.04.
Conclusion and Orders
FMI has failed in its challenge to the finding that the FMI Mortgage was unjust when entered into. However, it has succeeded in establishing that the primary Judge's discretion as to the grant of relief miscarried. FMI has also succeeded in establishing that the respondents should not be relieved of their obligation under the FMI Mortgage to repay that portion of the moneys advanced which they used to discharge the Moranon Mortgage and the Flamanda Mortgage. Thus FMI's appeal succeeds in part.
There are several ways in which the orders made by the primary Judge can be modified to give effect to the conclusions I have reached. For example, the orders might provide for a declaration that the mortgage over one of the lots is unenforceable, while leaving the mortgages over the other two lots on foot to secure repayment of the sum of $1,172,713.04, plus the appropriate amount of interest. An alternative may simply be to modify the FMI Mortgage to reduce the amount due to $1,172,713.04, plus interest. The parties should have the opportunity to agree on the form of orders.
Since each of the parties has enjoyed some success on the appeal, there should be no order as to the costs of the appeal. I also think that the costs orders made by the primary Judge should not be disturbed.
The orders I propose are as follows;
(1)Appeal allowed in part.
(2)Direct the parties to file within 14 days agreed short minutes of order giving effect to these reasons for judgment.
(3)In default of agreement:
(a)the appellant (FMI) file and serve within 14 days proposed short minutes of order, together with brief written submissions in support;
(b)the respondents file and serve within a further 14 days their proposed short minutes of order, together with brief written submissions in support.
(4)There be no order as to the costs of the appeal.
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