Haynes v St George Bank

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SUPREME COURT OF SOUTH AUSTRALIA

(Full Court)

HAYNES v ST GEORGE BANK A DIVISION OF WESTPAC BANKING CORPORATION; HAYNES v WESTPAC BANKING CORPORATION

[2018] SASCFC 51

Judgment of The Full Court

(The Honourable Chief Justice Kourakis, The Honourable Justice Blue and The Honourable Justice Doyle)

12 June 2018

APPEAL AND NEW TRIAL - APPEAL - PRACTICE AND PROCEDURE - SOUTH AUSTRALIA

BANKING AND FINANCE - BANKS - BANK ACCOUNTS - INTEREST, OVERDRAFTS AND ADVANCES

BANKING AND FINANCE - BANKS - LIABILITIES OF BANKS - NEGLIGENCE

MORTGAGES - MORTGAGES AND CHARGES GENERALLY - RIGHTS AND LIABILITIES OF MORTGAGOR AND MORTGAGEE

BANKING AND FINANCE - BANKS - DUTIES OF BANKS

Appeal against two judgments given in trials of related actions which were heard concurrently by a Judge of this Court.

The first of the actions (the debt action) was brought by Westpac Banking Corporation (Westpac) against Mr Haynes for an amount in excess of $1,300,000 due and payable pursuant to an overdrawn portfolio loan account and two fully drawn advances (together the loans).  The loans were made by Bank SA but it was common ground that all rights and liabilities of that entity relevant to the transaction with Mr Haynes were ultimately vested in Westpac. The Judge allowed this claim subject to the amount due and payable being adjusted.

The second action was a claim by Mr Haynes against the Bank for damages for breach of a term of the loan agreements which incorporated clause 25.1 of the Code of Banking Practice 2004 (the prudential obligation claim).  The Judge dismissed this claim.

Held, per Kourakis CJ (Blue and Doyle JJ agreeing):

1.  The Bank was not entitled to rely on the business purpose presumption and Mr Haynes had the benefit of the averment presumption (at [57]). Nonetheless, the Judge’s reasons are equally apt to make, and support, a positive finding that the credit was not provided wholly or predominantly for personal, domestic or household purposes (at [60]). In so far as it is an objective assessment of the purpose of the loan, the Judge’s conclusion is correct (at [65]).    

2.  There is no inconsistent objective evidence or glaring improbability which demands that this Court reverse the factual finding made regarding the factoring in of potential rental income from the St Peters home in calculating the CCR (at [82]).

3.  The Bank did not breach its prudential obligations by relying on a 2007 valuation of Mr Haynes' St Peters home (at [79]).

4.  The Bank did not breach its prudential obligation by taking into account potential income of Mr Haynes' partner Ms Ward (at [13] and [88]).

5.  The Judge’s ultimate conclusions on whether a prudent banker would have made the loan are plainly right (at [92]).

6.  Appeal dismissed (at [92]).

Code of Banking Practice 2004 Cl 25.1; Consumer Credit (SA) Act 1995 (SA) S 5, Sch 1; Credit (Transitional Arrangements) Act 2010 (SA); National Consumer Credit Act 2009 (Cth) Sch 1 S 5(1)(b)(i); Consumer Credit Code (Qld) Act 1994 (Qld), referred…

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Details
Case
[2018] SASCFC 51
Decision Date

CaseChat Overview and Summary

This matter concerned an appeal by Mr Haynes against findings made by a judge of the Supreme Court of South Australia regarding the liability of St George Bank. Mr Haynes had sought to recover losses he suffered in relation to a portfolio loan facility provided by the Bank. While Mr Haynes did not appeal the finding that he would have suffered his losses regardless of any breach by the Bank, he pursued an appeal against the judge's findings that the Bank had not breached a prudential obligation clause.

The central legal issue before the Full Court of the Supreme Court of South Australia was whether the Bank had breached its duty to exercise the care and skill of a diligent and prudent banker in assessing and approving Mr Haynes' application for an extended portfolio loan facility. This involved determining whether the Bank's assessment methods and its opinion as to Mr Haynes' ability to repay the extended facility were reasonable in the circumstances.

The Court, comprising Kourakis CJ, Blue and Doyle JJ, upheld the trial judge's findings. The Court reasoned that the transaction, while marginal, was within the Bank's guidelines and that Mr Haynes' entrepreneurial nature and successful track record as a customer justified a flexible approach. The Court noted that the loan was essentially bridging finance, intended to be short-term, and that Mr Haynes, as a sophisticated investor, understood the risks involved. The Court concluded that the Bank had exercised the requisite care and skill in its assessment and had not breached its prudential obligations.

Orders

Orders of the court

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Background

Background to the litigation

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Evidence

Evidence Before The Court

Mr Haynes has not appealed against that finding. The Bank contends that on that finding Mr Haynes’ appeal against the Judge’s findings on liability is futile. Strictly that is so. Even if the Bank did breach the prudential obligation clause, Mr Haynes was left in no worse position than he would have been if the clause were not breached, because he would have taken alternative finance to settle on the Longwood property. Mr Haynes did not put a case that any of those alternative finance options would have saved him from any of the loss he has suffered. Notwithstanding Mr Haynes’ failure to even attempt to clear this final hurdle, I will address Mr Haynes’ appeal against the Judge’s findings that the Bank did not breach the prudential obligation clause.The Evidence The Judge found Mr Haynes to be an intelligent and shrewd man. The Judge formed a poor view of his reliability and, ultimately, his credibility during cross‑examination. The Judge was left with the firm impression that Mr Haynes had schooled himself on certain topics which he repeatedly wished to impress upon the Court. The Judge found some of Mr Haynes’ evidence dishonest, particularly on the topics of the leasing of the Longwood property to his company, Performa Real Estate Pty Ltd (Performa), his income tax returns and his evidence concerning how he would have behaved if the Bank had obtained an updated valuation of his St Peters home lower than $1,600,000. The Judge found that Ms Ward’s evidence was of no assistance in corroborating Mr Haynes’ evidence. The Judge described Mr Robert Birt, a former senior bank manager with BankSA, called by Mr Haynes as a banking expert, as argumentative and dogmatic. The officer of the Bank who dealt directly with Mr Haynes was Mr Christopher Pole. Mr Pole was primarily responsible for assessing and recommending the approval of Mr Haynes’ application to extend the portfolio loan account credit limit. Mr Paul Davy held the position of Executive Manager, Risk and Compliance. The Judge found both Mr Pole and Mr Davy to be honest and reliable witnesses. At a chance meeting with Mr Pole in mid-2007, Mr Pole suggested that Mr Haynes transfer some of his business to BankSA. Later in 2007 he then refinanced a proportion of Mr Haynes’ NAB facilities with the Bank by taking out a portfolio loan with a credit limit of $1,700,000. At the time Mr Haynes was receiving very little by way of agency sales commissions. Mr Haynes’ income was largely from property developments, including some undertaken with Ms Ward. Mr Haynes derived rental income from some of his development properties. The rentals spreadsheet provided by Mr Haynes to the Bank on 5 June 2007 identified a very substantial shortfall in rental incomes against his expected interest commitments because the rental properties were negatively geared. However the rental shortfall was balanced by expected profits from the sale of developments. The Judge accepted that Mr Haynes was a good customer of the Bank until October 2009 and found that Mr Pole and Mr Davy had no reason to be concerned about his financial position.

Decision

Reasons for decision

KOURAKIS CJ (dissent)
That testimony was given without Mr Davy being taken to the detailed BLAST calculations. They show, as I have observed, that Ms Ward’s income was not used as a make weight for a deficiency in Mr Haynes’ financial resources.Conclusion The Judge’s ultimate conclusions on whether a prudent banker would have made the loan were as follows:[183]However, consistent with the evidence given by Mr Pole, Mr Davy, Mr Debenham and, ultimately, Mr Birt, the transaction was one that a diligent and prudent banker was entitled to assess as “bankable” when all the circumstances are considered. Further, there has been no proved failure by the Bank to have exercised the care and skill of a diligent and prudent banker in selecting and applying the assessment methods, in fact, employed and informing its opinion as to Mr Haynes’ ability to repay the extended facility.[184]By way of summary, the following matters support these conclusions. (i) The financial analysis showed the transaction to be, at worst, marginal. It was not far off, if at all, the Bank’s guideline policies.(ii) The nature of Mr Haynes’ business activities was such that it would always be extremely difficult to predict with any accuracy his financial position at future points in time. A flexible approach was called for if he was to be able to maintain his activities. What was clear is that Mr Haynes had a very successful track record over many years and had produced substantial amounts of income resulting from real estate agency commissions, property development activities, the holding of rental properties and other individual projects such as, for example, the Strathalbyn consultancy. In short, Mr Haynes was entrepreneurial and successfully so with a proven capacity to identify new sources of income.(iii) Mr Haynes had a lengthy history as a good customer of both the NAB and the Bank; a customer who had managed to service, over a number of years, portfolio loan accounts with limits equal to and, in the case of the NAB, in excess of that presently under consideration ($1,700,000).(iv) The maximum proposed borrowing was expected to be very short term. The transaction, whilst of the nature and subject to the conditions of a portfolio loan, was in reality bridging finance. The loan was drawn down in late October 2009. The overwhelming inference from the evidence of Mr Haynes and Mr Pole is that, given the circumstances at the time the loan was approved in early October, both parties would have expected Mr Haynes to be “retired” in Longwood and St Peters sold by around the middle of the following year. If so, the period of time that the maximum loan amount would need to have been serviced would have been about eight months, requiring payment in the order of $64,000 interest as opposed to $32,000 interest had the Longwood increase not been drawn down. In Mr Haynes’ overall scheme of things and meaning no disrespect, this difference of $32,000 could only be considered as “noise” in Mr Haynes’ budget.(v) Even if St Peters were to sell for less than the anticipated $1,600,000, provided it sold relatively promptly, Mr Haynes would have been no worse off from a serviceability perspective. Even if Mr Haynes “gave” the property away for say $1,000,000 within 12 months after the Longwood purchase, he would have remained the owner of Longwood with a mortgage of approximately $790,000. However, prior to the draw down Mr Haynes was obliged to service a loan of approximately $872,000, albeit as owner of St Peters with a value which Mr Haynes believed (although incorrectly) to be in the order of $1,600,000. Mr Haynes would have been left having made a poor decision in buying Longwood and may have had to put his retirement plans on hold. However, the point to be made is that, given the real (bridging) nature of the loan transaction, there was never really any doubt about serviceability provided Mr Haynes sold St Peters expeditiously. Importantly, it was not the Bank’s obligation to ensure the prudence of Mr Haynes’ overall arrangements concerning the Longwood purchase or to ensure that his retirement plans would come to fruition. The Bank did not assume any responsibility towards Mr Haynes for the value of St Peters or as to the price ultimately obtained when it came to be sold. (vi) Mr Haynes was a very experienced and knowledgeable businessman. I am satisfied that he, at all times, had a complete understanding of his financial position and fully understood and accepted the obvious risks. The Bank was entitled to treat him as a sophisticated investor who did not need to be advised as to the prudence or otherwise of his proposal.(footnotes omitted)

Ratio Decidendi

Legal Principle Established

Established by:

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