Jarrett v Commissioner for Consumer Affairs No. Dcaat-99-337
[2000] SADC 56
•11 July 2000
JARRETT V COMMISSIONER FOR CONSUMER AFFAIRS
[2000] SADC 56
Judge Herriman
Administrative Appeals Division
This is an appeal under section 37 of the Conveyancers Act 1994 (“the Act”) against a determination of the respondent (“the Commissioner”) relating to the appellant’s claim for compensation for actual pecuniary loss and legal costs arising out of the fiduciary default of a conveyancer.
BACKGROUND
In April 1995, G.C. Growden Pty Ltd ACN 007 948 834 (“the Conveyancer”) held $10,000 on the appellant’s behalf. Prior to then, there had been dealings between the parties whereby the Conveyancer had invested the appellant’s moneys on various first mortgage securities.
On 27 April 1995, the Conveyancer wrote to the appellant, proposing that it invest that $10,000 as a part-contribution to a loan to one Adair Black (“Black”) to be secured by a registered first mortgage over property at Paracombe (“the Land”) for a term of one year, at an interest rate of 13 per cent, rising to 18 per cent in the event of default. That proposal further stated, inter alia:
(1)... that the value of the property was $625,000 and the total amount of funds to be advanced and secured by the proposed contributory mortgage was $395,000;
“Credit History: Growdens have completed a current satisfactory credit enquiry”; and
that the purpose of the loan was to “assist purchase of Commercial Nursery” .
The appellant accepted the loan proposal and, in due course, all funds were advanced and Mortgage No. 7918967 was registered on the Land, the appellant being described as one of the several contributing mortgagees.
In September 1995, the appellant consented to a second mortgage being registered over the Land.
On 7 May 1996, Black requested an extension of the term of the mortgage, but the appellant did not agree to that and requested the return of his investment.
By responding letter of 23 July 1996, the Conveyancer invited the appellant to execute and return documents relating to his withdrawal from the investment and sought further directions as to reinvestment of that sum. The appellant executed and returned those documents, but it appears the Conveyancer did not then act upon his instructions and the principal remained invested in the subject mortgage. Payments of interest under that mortgage had been maintained up till that time and they continued until November 1996, when they ceased.
On 14 November 1996, the Conveyancer informed the appellant that Black was in arrears and that it was taking “the measures required to instigate legal action to sell the security property should this prove necessary”.
Soon after that time, the Conveyancer went into receivership and management of the loan was taken over by Heine Mortgage Administration Pty Ltd (“Heine”).
Ultimately, Heine advised the appellant that the forced sale market value of the Land was $225,000, whereupon he authorised Heine to accept an offer to purchase it for $245,000. The co-mortgagees did likewise and, in the event, following sale of the property on 25 May 1998, the appellant received the sum of $4,984.74 as his share of the realisation of the security and after deduction of sale and associated expenses.
Since these events, the appellant has learned:
(1)... that on 7 July 1993, Black, whose full name was in fact Ian Adair Black and not Adair Black, had entered into a Deed of Arrangement under Part X of the Bankruptcy Act;
that at or about the time of the loan, Black was, or had recently been, in gaol;
that at or about the time of the loan, Black was experiencing personal and financial difficulties;
that all of these matters were known to the Conveyancer at the time the loan was made.
Subsequent to the above events, the Conveyancer went into liquidation and it appears to be accepted that Black has no assets.
In consequence of that chain of events, on 15 February 1999 the appellant claimed compensation under section 32 of the Conveyancers Act on the grounds that the conduct of the Conveyancer, in proposing the loan to the appellant well knowing of the above matters and not disclosing them, amounted to a fiduciary default within the meaning of that section. Had those matters been disclosed, the appellant said, he would not have authorised the making of the loan. He contended that he was induced to authorise it because of the matters contained in the Conveyancer’s proposal letter of 27 April 1995.
The Original Claim
The appellant presented a claim to the respondent, saying, inter alia:
“51.... In the circumstances ... I have lost:
(a).... The shortfall in the principal of my investment namely $5,015.26.
(b)The interest that would be earnt by me on the investment from and including November 1996 until May 1998 [ie the date of forced sale] of $150.00 per month (18 months) totalling $2,700.00 (being at the default rate of 18 per cent per annum).
(c)... Interest on the shortfall from May 1998 until the present date (and also at the default rate) being $75.23 per month (10 months) totalling $752.29.
(d)Legal costs to take legal advice, and to prepare this claim, of $1,500.00”
The total asserted loss was therefore $9,967.55, plus interest running at $75.23 per month from that time.
As a preliminary matter, there can be no doubt (and the appellant later conceded this) that that part of the appellant’s claim relating to continuing interest from 15 February 1999 until 15 March 2000 is not maintainable. Sub-section 39(2) of the Act operates to deny a claimant any interest upon an entitlement to compensation for a period of 12 months from the date of lodgment of the claim. It follows that whatever be the amount to which the appellant is entitled by way of compensation, interest will only run on it from about 15 February 2000.
The Commissioner’s Response to the Claim
There appears to have been some subsequent correspondence between the parties and, on 9 August 1999, the Commissioner wrote advising that he had determined that the appellant was entitled to claim compensation under the Act, but that he considered that the amount payable was $4,955.29, a figure which he later corrected to $5,015.26. His reasoning was that compensation under section 32(2) of the Act was limited to the “actual pecuniary loss suffered” and that that loss was the capital sum invested by the appellant, namely, $10,000, less moneys recovered of $4,984.74, hence the sum of $5,015.26. Although his letter did not specifically state it, it was clear from all that preceded and followed, that the Commissioner took the view that any entitlement of the appellant to interest under the mortgage, accruing between November 1996 (the time of the original default in payment of mortgage interest) and May 1998 (the time of foreclosure and sale), did not come within the description of “actual pecuniary loss” and was thus not compensable under the Act. It was apparent that the Commissioner also took the same view about the interest claim made by the appellant for the period after May 1998 and up to the time of the claim (15 February 1999) and, further, about the appellant’s claim for reimbursement of his legal costs incurred in presenting his compensation claim.
The Commissioner went on to hold that the forced sale proceeds received by the appellant under section 32(2) of the Act, had first to be applied in reduction of the “actual pecuniary loss” (i.e. the sum of $10,000) and that the appellant could not seek to apply them against his lost interest and other costs, before reducing principal.
The Appeal
In this appeal, the appellant contends that his “actual pecuniary loss” should have been assessed by the Commissioner as including:
(a).... his legal costs incurred in making the claim;
(b)interest (the appeal document did not explicitly contend for this, but impliedly it did, and, in any event, the argument before me proceeded on the footing that this was a matter of dispute).
The appellant further contended that if, indeed, the Commissioner’s determination was correct and the expression “actual pecuniary loss” did not include interest which had accrued under the mortgage, or the costs of maintaining a claim for compensation, then the Commissioner had, in any event, wrongly applied the realised sum ($4,984.74) against the capital loss, when under clause 28 of the mortgage, or at the appellant’s option, those proceeds were to be applied, first, towards outstanding interest and costs. Had the Commissioner properly applied clause 28, he said, the effect would, of course, have been to substantially reduce the amount the Commissioner could set off against what he said was the actual pecuniary loss.
The Commissioner’s Response to the Appeal
In response to the appeal, the Commissioner relied upon Schofield v Consolidated Interest Fund (1988) 49 SASR 546, saying that he was precluded from paying any of the claimed interest and costs, as they did not amount to “actual pecuniary loss”.
As to the appellant’s contention that he was, in any event, entitled to appropriate the sale proceeds as he chose and that he had or that he wished to apply them, first, in payment of interest and costs, the Commissioner argued that the appellant had not, in his claim or elsewhere, purported to exercise any such right and, indeed, it should be inferred from paragraph 51 of his claim (quoted above) that he had elected to apply those funds first against principal. Further, the Commissioner responded that the sale proceeds should be applied only against what had been determined by him to be the actual pecuniary loss “because the principal sum was used to purchase the land in question and therefore the land represented the principal sum as converted into real property. It follows, therefore, that when the land into which the principal sum had been converted was sold, proceeds from the sale should be treated as reductions of the loss of the principal sum”.
I queried the rationale for this latter contention at the hearing, particularly as it was apparent from the documentation that the principal sum had not, indeed, been “used to purchase ... land”. On that point, the Commissioner properly conceded that this submission was in error. His counsel then confined her response to this contention, to the grounds:
(1)... that the appellant had not in fact elected to appropriate the moneys in the way he now claimed; and
that the Commissioner was not bound by the provisions of the mortgage and was entitled to apply them against outstanding principal.
The Law
The Commissioner relied upon Schofield (supra) and, as well, on Public Trustee v The Attorney-General & Anor, unreported, Supreme Court of South Australia, [1999] SASC 420, Dobcol Pty Ltd v Law Institute of Victoria [1979] VR 393 and Re Queensland Law Society Incorporated [1995] 1 Qd R 381. The appellant also referred to Schofield, but for the purposes of distinguishing it.
I was later informed that an appeal against the decision in Public Trustee v The Attorney-General & Anor had been lodged and shortly listed for hearing and, at the request of the parties, I delayed delivering my reasons until it had been determined. That has now occurred and I have referred to Full Court Judgment No. [2000] SASC 184 in that matter. The lead judgment was delivered by Gray J. As I read it, His Honour found:
(1)... that the Legal Practitioners Act 1981 (there under consideration) provided a scheme for compensation arising from “fiduciary or professional default”, and that that expression carried a very wide meaning, including as it did by definition, “any wrongful or negligent act or omission ... in the course of the practice of the ... practitioner ...”;
in most of the cited cases, the trigger for entitlement (eg “fiduciary default” in Schofield (supra), “defalcation” in Dobcol (supra), “stealing or fraudulent misappropriation” in Queensland Law Society (supra)), carried a much more restricted meaning, such that those cases were readily distinguishable;
that the reasoning adopted in those cases, that the term “actual pecuniary loss” had to be read as limiting a claim “to the subject matter of the defalcation” (i.e. a capital sum), “loses its force when the extended definition of fiduciary or professional default (in the Legal Practitioners Act 1981 - my insertion) is considered” (p.8).
Separately, His Honour pointed to a distinction between moneys which in that case had been deposited in a non‑interest-bearing trust account and those which had been invested in an interest-bearing account in the name of the administrator of the relevant estate. Each separate fund had been the subject of fraudulent conversion by the solicitor in question.
His Honour commented (at p.7):
“A loss of an entitlement to interest is no more than a loss of an income stream. Losses of an income stream have been treated as compensable and are pecuniary losses. If they are actual in the sense of existing, present and real, then they are actual pecuniary loss.
As observed earlier, there is a distinction between the trust money and the investment account money. There was no present or existing entitlement to interest on the trust money ... The investment accounts carried an entitlement to the capital sum and interest ... The entitlement to ongoing interest was existing in fact, present, and in every sense real.”
Further, His Honour commented (at p.12):
“Those accounts were existing choses in action giving rise to then existing present and real entitlements to interest. The actual pecuniary loss was the loss of the entitlement to capital and interest.”
Having noted those matters, I pause to observe that the relevant statutory scheme under consideration here is the Conveyancers Act 1994. It is not dissimilar to the legislation under review in Schofield’s case, namely, the Land and Business Agents Act (SA) 1973. The relief afforded by both statutes is contingent upon actual pecuniary loss being suffered as a result of a “fiduciary default” and the respective definitions of the latter term are quite similar.
Although Gray J in Public Trustee (supra), in one sense invited a reconsideration of the meaning of the expression “actual pecuniary loss” in so far as it related to the loss of “an income stream”, I am unable to disassociate that conclusion from his other observations as to the disparities between the legislation he was considering and the legislation applicable in this case, as well as in Schofield. Olsson J, who had decided Schofield’s case, formed part of the Full Court in Public Trustee and concurred with the reasoning of Gray J, adding some remarks that perhaps encourage the view that, even speaking generally, the loss of an income stream may well be described as an actual pecuniary loss.
Of course, the factual circumstances in Schofield were different from those under consideration in Public Trustee (supra) in that they concerned, not an existing investment in an income stream, but a fiduciary’s failure to invest in it. Even in Dobcol and Queensland Law Society (supra), the defaults in question were the misappropriations of moneys from solicitors’ trust accounts and the losses sought to be recovered were consequential in nature.
DISCUSSION
In this case, the appellant sought to rely upon the distinction between the failure to make an investment or a misappropriation of a non‑interest-bearing fund, on the one hand, and the misappropriation of an interest-bearing fund, on the other. He said that the relevant fiduciary default was not a failure to invest moneys placed with the Conveyancer for that purpose or, indeed, a misappropriation of such moneys, but a breach of fiduciary duty in the advice provided to the appellant and which led to the making of the investment. The consequence of that default, so it was contended, was that the plaintiff became destined to lose both principal and interest or, to adopt the phrase used in Public Trustee (supra), an “income stream”.
The appellant contended that both principal and interest losses had therefore arisen directly or “actually” from the relevant default.
The Commissioner’s response was that “the actual subject matter of the fiduciary default” was the amount that the appellant had chosen to invest (i.e. the principal sum) and not the earnings which it might in future have attracted. That contention loses some of its gloss in the light of the comments I have quoted above from Public Trustee, although I also keep in mind the differing legislative provisions conferring the entitlement to claim.
Having considered those submissions and the authorities, I have come to the conclusion that the key to a proper determination of this dispute is found in the issue of causation. It appears to have been accepted between the parties that the acknowledged fiduciary default in this instance lay in the advice tendered by the Conveyancer to the appellant as to the prudence of the investment, advice which the Conveyancer well knew to be flawed. That default occurred in April 1995 and was acted upon by the appellant by May 1995. The Commissioner accepted the submission that had true disclosure been made, the appellant would not have proceeded with the investment. The subject matter of the default can only have been the moneys then held by the Conveyancer on behalf of the appellant, namely, the principal sum of $10,000. Of course, once the investment was authorised and made, interest payments were expected by the appellant and were indeed received during the projected term of the mortgage. What the appellant did not know, of course, was that the investment was doomed, because even at the time it was made, the borrower had no other realisable funds and the land securing the mortgage was obviously worth a great deal less than had been suggested in the Conveyancer’s proposal.
It is arguable, although it was not so contended before me, that there was, in any event, an intervening fiduciary default on the part of the Conveyancer which was the effective cause of the capital loss, namely, the acceptance of instructions from the appellant to terminate the loan, his implied representation to Mr Jarrett that he was doing so and his failure to complete that. At that point, interest payments were up to date and, had the Conveyancer completed his undertaking, it is possible no loss might have been sustained by the appellant, the remaining contributors being left to bear it. If that were so, the subject matter of that default (if, indeed, there were found to be one) would still have been the failure to return to the appellant the sum then repayable to him, namely, the principal of $10,000.
For these reasons, I am satisfied that the default occurred in May 1995, that its subject matter was the $10,000 capital investment and that the “actual pecuniary loss” was the diminution in value of that sum. I therefore find that the determination of the Commissioner to the effect that the appellant’s loss of interest under the mortgage does not come within the description of “actual pecuniary loss”, is a correct one.
I turn, then, to the second line of argument advanced by the appellant.
How should the respondent have treated the moneys recovered by the appellant on the forced sale of the security?
It is accepted that the appellant recovered the sum of $4,984.74 upon the forced sale of the subject property. In his determination, the Commissioner applied that amount against the amount he had determined to be the actual pecuniary loss, namely, $10,000, and thus determined that the appellant should recover against the fund the sum of $5,015.26.
In doing so, the Commissioner purported to act under section 32(2) of the Conveyancers Act, which is in the following terms:
“(2).... The amount of a claim cannot exceed the actual pecuniary loss suffered by the claimant in consequence of the fiduciary default less any amount that the claimant has received or may reasonably be expected to recover (apart from this Division) in reduction of that loss.”
The appellant contends that, if the Commissioner’s determination as to the calculation of the actual pecuniary loss is correct, it must logically follow under that section of that Act, that only amounts recovered “in reduction of” that principal sum can be set off against the amount due to him. He then says that the Commissioner was not (either under that section or at all) entitled to apply the whole of the moneys recovered against principal, because they were not all “received ... in reduction of ...” principal. He argued that the recovered moneys were, or at least should be treated as having been, applied first in satisfaction of outstanding interest and only after that had been done, towards reduction of the principal sum.
In support of that contention, he put the following submissions:
(1)... There is nothing in the Act which authorises the Commissioner to determine that any moneys recovered from the Conveyancer or any third parties should first be appropriated in reduction of principal.
Section 135 of the Real Property Act 1886, as amended, provides that the proceeds of a mortgagee sale shall be applied, firstly, in payment of sale expenses; secondly, “In payment of the moneys which may then be due or owing to the mortgagee or encumbrancee”; thirdly, in payment of subsequent mortgages etc. Clearly, the expression “moneys which may then be due or owing” includes both principal and interest. There is nothing in the Real Property Act requiring that the principal debt be first discharged.
Section 50 of the Law of Property Act 1936, as amended, is in similar terms, albeit that it describes as ranking behind the costs of sale, the “discharge of the mortgage money, interest and costs and other money (if any) due under the mortgage”.
Finally, but most importantly, clause 28 of the subject mortgage itself provided:
“28.... The Mortgagee shall have the sole power of appropriating any moneys paid by the Mortgagor to the Mortgagee or which may be received by the Mortgagee on account of the Mortgagor either towards any moneys which shall be owing or payable by the Mortgagor to the Mortgagee or for which the Mortgagor is responsible or liable to the Mortgagee (either as principal or surety or otherwise) whether secured or unsecured or in or towards any moneys owing or payable under this security and in such order of priority as the Mortgagee shall in his absolute and sole discretion think fit with power to vary such appropriation and so that failing such appropriation by the Mortgagee or until such appropriation shall be made any such moneys paid by the Mortgagor or received by the Mortgagee as aforesaid shall be applied firstly in or towards any unsecured debt or liability of the Mortgagor; secondly in or towards any costs or expenses of the Mortgagee (whether provided for herein or not); thirdly in or towards any payment made by the Mortgagee under or by virtue of this security or under any power or authority herein contained; fourthly in or towards any interest due or payable hereunder and fifthly in or towards payment of the principal moneys hereby secured and so that the Mortgagor’s power of appropriation is hereby negatived ...” (the emphasis is mine.)
......... Here, the appellant says that, in the absence of any discretionary decision appropriating the moneys recovered in any other way, they must under the clause be applied, first, in satisfaction of outstanding interest and, only after that has been satisfied, in payment of principal. In consequence, the amount here available to discharge principal is the sum remaining from recovered moneys after satisfaction of the interest debt.
In response to that contention, the Commissioner argued that the provisions of the relevant legislation and, in particular, the mortgage itself, did not bind him in terms of the determination he was called upon to make under the Conveyancers Act.
I have considered carefully the terms of Part 4 Division 3 of the Act and I have had regard, as well, to the terms of the subject mortgage and the provisions of the Real Property and Law of Property Acts. It appears to me that, in making his determination, the extent of the Commissioner’s discretion to reduce the actual pecuniary loss is to take account of moneys recovered “in reduction of” the actual pecuniary loss. In this instance, I have found that the amount of that actual pecuniary loss is $10,000. What, then, were the moneys which were recovered “in reduction of” that amount?
The Commissioner has sought to apply all recovered moneys against outstanding principal, whereas the appellant contends that the provisions of the mortgage apply so that the only moneys to be applied towards principal are those remaining after satisfaction of the interest debt.
I am not persuaded that there is any merit in the Commissioner’s stance. Nothing in that part of that Division of the Conveyancers Act confers upon him any liberty to disregard the mortgage and to treat recovered moneys in the way he has purported to do. Conversely, there is the quite specific provision in the mortgage providing that (in the lack of any specific appropriation) the interest liability will be discharged before any principal debt.
Next, he drew attention to paragraph 51 of the appellant’s original claim and contended that the wording of that paragraph clearly implied that the appellant had chosen to appropriate the recovered moneys against principal.
I was not persuaded by the latter argument. True it is that the wording of paragraph 51 of the claim does carry that implication, but against it are the following factors:
(1)... the appellant is only one of a number of contributing mortgagees and it is doubtful that he can be held to his individual attitude to appropriation (if, indeed, paragraph 51 is to be regarded as expressing it);
on the facts, it is apparent that the appellant had not at any prior time sought to appropriate the recovered moneys in any particular way and, accordingly, in the absence of evidence of any discretionary exercise on his part, or that of the group of mortgagees generally, the terms of clause 28 should be followed and those moneys should be treated as having been applied, first, in reduction of interest and then in reduction of principal;
whilst clause 28 permitted the appellant to vary any appropriation, I do not regard the wording of paragraph 51 as a purported variation. Even if the appellant could act unilaterally and without the consent of his co‑mortgagees, the moneys had long since been received. If I am wrong in that, however, it clearly remains open to the appellant to further exercise his discretion under clause 28 and vary that appropriation as and when it suits him so as to apply the recovered moneys, first, in payment of interest. By the time the matter came before me, it can be inferred that he was contending that would be done by him were it necessary.
I therefore find that the Commissioner’s determination was wrong in so far as it sought to apply recovered moneys first against principal. I find that only the balance of recovered moneys left after satisfaction of the interest debt can or should be applied in reduction of the appellant’s actual pecuniary loss. (I understand that the costs and expenses of the forced sale, which rank even higher in priority than interest or principal, have already been allowed by the Commissioner.)
I will not here carry out the required calculations. They should be able to be resolved by the parties, and I will hear further submissions on this.
The Appellant’s Legal Costs of and Incidental to the Claim against the Fund
The appellant claimed that the Commissioner was at liberty to pay his costs of and incidental to the preparation of his claim on the Fund and should have made a determination to pay them. At the least, he said, that by virtue of section 34(2)(b) of the Act, the Commissioner ought to have afforded him the opportunity to make submissions on that point.
I have had regard to the provisions of section 31(2) of the Act. True it is, as the Commissioner contended, that the several powers of Fund expenditure set out therein largely relate to the Commissioner’s costs in administering the Fund and paying claims, but I do not read them as preventing the Commissioner, in particular circumstances, from paying some costs incurred by an applicant for compensation. It is not difficult to envisage circumstances where, in the course of processing a claim or administering the Fund, the Commissioner might choose to indemnify an applicant for his legal costs in undertaking some particular enquiry or even, perhaps, some cause of action for a recovery which the Commissioner might deem it advisable to pursue. Such a step might be doing no more than enabling the Commissioner to properly fulfil his statutory function under the Act.
Having said that, I find it difficult to envisage circumstances whereby the Commissioner could, consistently with his powers and duties under the Act, simply agree to pay the applicant’s ordinary legal costs incurred in presenting a claim. Were it intended that those costs be compensated as a matter of course, it can be expected that the legislation would have specifically provided for their payment. There is no such provision of this kind in the Act.
Whilst I am, therefore, satisfied that the Commissioner might, in certain circumstances, elect to indemnify some part of an applicant’s legal costs, I am not satisfied that, consistent with his duty to administer the Fund, he would be justified in paying the ordinary costs of preparation of a claim, such as were here incurred by the appellant.
To the extent that the appellant was not afforded an opportunity to make submissions on his claim for legal costs, it might be that the Commissioner could be mildly criticised, but it appears that, in the particular circumstances of this case, it is most unlikely he would have been so persuaded, in any event.
Interest Since the Date of Sale
The appellant properly conceded before me that the question of the appellant’s entitlement to that interest was governed by section 39 of the Act. Nothing more need be said about that.
CONCLUSION
I therefore quash the determination of the Commissioner in so far as he assessed the quantum of the appellant’s actual pecuniary loss at $5,015.26 and, after hearing from the parties as to the appropriate recalculation of that loss, I will substitute an appropriate determination.
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