Michalopoulos v Perpetual Trustees Victoria Ltd

[2010] NSWSC 1450

CITATION:	Michalopoulos v Perpetual Trustees Victoria Ltd & Anor [2010] NSWSC 1450
HEARING DATE(S):	15-18 February 2010; 22-25 February 2010
JUDGMENT DATE :	16 December 2010
JURISDICTION:	Equity
JUDGMENT OF:	White J
DECISION:	Counsel for the 2nd defendant to bring in short minutes of order in accordance with reasons.
CATCHWORDS:	CONTRACTS – where plaintiffs mortgaged home to secure loan for speculative property investment – plaintiffs induced by representations made by property developer to whom they were introduced by their son – plaintiffs in position of special disadvantage – plaintiffs signed incomplete loan documents – loan documents completed by plaintiffs’ agent with materially false statements as to plaintiffs’ occupation, financial position and loan purpose – mortgage originator submitted loan application to finance company to arrange loan – no proper verification of details in loan documents – plaintiffs signed further loan documents containing false statements – plaintiffs defaulted and refinanced with different lender to avoid foreclosure – second loan application contained materially false statements and not properly verified – portion of proceeds of second loan disbursed without plaintiff’s authority - TRADE PRACTICES – whether lender engaged in unconscionable conduct in contravention of ss 51AA, 51AB or 51AC of Trade Practices Act 1974 (Cth) - CONTRACTS – whether loan “unjust” under Contracts Review Act – whether lender through agent should have known of false statements in loan applications – whether lender through agent should have known of plaintiffs’ position of disadvantage – whether lenders engaged in “pure asset lending” - CONTRACTS – whether mortgage originator engaged in misleading or deceptive conduct in contravention of s 52 of Trade Practices Act by submitting documents containing false representations to lender - CONTRACTS – whether breach of solicitor’s retainer to disburse loan proceeds otherwise than in accordance with plaintiffs’ directions - TRADE PRACTICES – whether property developer and plaintiffs’ son engaged in misleading or deceptive conduct in contravention of s 42 of Fair Trading Act
LEGISLATION CITED:	Contracts Review Act 1980 (NSW) Trade Practices Act 1974 (Cth) Australian Securities and Investments Commission Act 2001 (Cth) Civil Procedure Act 2005 (NSW) Fair Trading Act 1987 (NSW)
CASES CITED:	Accom Finance Pty Ltd v Mars Pty Ltd [2007] NSWSC 726; (2007) 13 BPR 24,729 Perpetual Trustee Co Limited v Khoshaba [2006] NSWCA 41; (2006) 14 BPR 26,369 NMFM Property Pty Ltd v Citibank Limited (No 10) [2000] FCA 1558; (2000) 107 FCR 270 Permanent Trustee Co Limited v O’Donnell [2009] NSWSC 902 Re Hampshire Land Co [1896] 2 Ch 743 Beach Petroleum NL v Kennedy [1999] NSWCA 408; (1999) 48 NSWLR 1 Nathan v Dollars & Sense Finance Ltd [2007] NZCA 177; [2007] 2 NZLR 747 Dollars & Sense Finance Ltd v Nathan [2008] 2 NZLR 557 Beach Petroleum NL v Johnson (1993) 115 ALR 411 Begbie v State Bank of New South Wales Ltd (1994) ATPR 41-288 Commercial Bank of Australia Limited v Amadio (1983) 151 CLR 447 Elkofairi v Permanent Trustee Co Limited [2002] NSWCA 413; (2003) 11 BPR 20,841 Riz v Perpetual Trustee Australia Limited [2007] NSWSC 1153 Andrews v Racken Pty Ltd [2007] NSWSC 1010 Attorney General (NSW) v World Best Holdings Limited [2005] NSWCA 261; (2005) 63 NSWLR 557 Kowalczuk v Accom Finance Pty Ltd [208] NSWCA 343; (2008) 252 ALR 55 Conkey & Sons Limited v Miller (1977) 51 ALJR 583; (1977) 16 ALR 479 Vink v Schering Pty Ltd (1991) ATPR 41-064 PSL Industries Ltd v Simplot Australia Pty Ltd [2003] VSCA 7 South Sydney District Rugby League Football Club Limited v News Limited [2000] FCA 1541; (2000) 177 ALR 611 Garnac Grain Company Incorporated v HMF Faure & Fairclough Ltd [1968] AC 1130 Micarone v Perpetual Trustees [1999] SASC 265; (1999) 75 SASR 1 Permanent Mortgages Pty Ltd v Vandenbergh [2010] WASC 10 Permanent Trustee Company Limited v O’Donnell [2009] NSWSC 902 Bartle v GE Custodians Ltd [2010] NZCA 174 Tobin v Broadbent (1947) 75 CLR 378 Sweeney v Howard [2007] NSWSC 852; (2007) 13 BPR 24,381 Freeman & Lockyer (A Firm) v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 Butcher v Lachlan Elder Realty (2004) HCA 60; (2004) 218 CLR 592 Murphy v Overton Investments Pty Limited [2004] HCA 3; (2004) 216 CLR 388 March v E & MH Stramare Pty Limited (1991) 171 CLR 506 Winnote Pty Ltd (in liq) v Page [2006] NSWCA 287; (2006) 68 NSWLR 531 Trust Co of Australia v Perpetual Trustees WA Limited (1997) 42 NSWLR 237 Carew Counsel Pty Ltd v French [2002] VSCA 1; (2002) 4 VR 172 Midland Bank plc v Cox McQueen [1999] EWCA Civ 656 Mercantile Credit Company Limited v Fenwick [1999] EWCA Civ 778 UCB Corporate Services Limited v Clyde & Co [2000] 2 All ER (Comm) 257
PARTIES:	Theodoros Michalopoulos (1st Plaintiff; and cross-defendant on 1st & 2nd cross-claims) Aspasia Michalopoulos (2nd Plaintiff; and cross-defendant on 1st & 2nd cross-claims) Perpetual Trustees Victoria Limited (1st Defendant; and cross-defendant on 2nd cross-claim; cross-claimant on 3rd cross-claim) Permanent Custodians Limited (2nd Defendant; and cross-claimant on 1st & 2nd cross-claims) National Lending Solutions (Cross-claimant on 4th cross-claim; cross-defendant on 2nd cross-claim) The Mortgage Group (NSW) Pty Ltd (Cross-claimant on 5th cross-claim; cross-defendant on 2nd, 3rd, 4th & 5th cross-claims) Stefan Allan (Cross-defendant on 3rd & 5th cross-claim) Dennise Allan (Cross-defendant on 3rd & 5th cross-claim) Jeremy Allan (Cross-claimant on the 5th cross-claim) James Michalopoulos (Cross-defendant on 3rd & 5th cross-claim)
FILE NUMBER(S):	SC 2006/259872
COUNSEL:	Plaintiffs: M W Young 1st Defendant: J E Thomson 2nd Defendant: B J Burke The Mortgage Group: I Griscti National Lending Solutions: N Kabilafkas
SOLICITORS:	Plaintiffs: Bransgroves Lawyers 1st Defendant: Kemp Strang 2nd Defendant: Hicksons Solicitors The Mortgage Group: Gilchrist Connell National Lending Solutions: Mallesons Stephen Jaques

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

WHITE J

Thursday, 16 December 2010

2006/259872 Theodoros Michalopoulos & Anor v Perpetual Trustees Victoria Ltd & Anor

JUDGMENT

1 HIS HONOUR: On 2 May 2003, the plaintiffs (Mr and Mrs Michalopoulos) borrowed $600,000 from the first defendant (“Perpetual”) on the security of a registered first mortgage over their property at Birrell Street, Queens Park. On 11 April 2006 the plaintiffs borrowed $750,000 from the second defendant (“Permanent”). About $606,000 of the advance was used to discharge the Perpetual loan. The plaintiffs have defaulted in making repayments on the Permanent loan.

2 The plaintiffs claim that the conduct of Perpetual in entering into the first loan and taking the first mortgage over the Birrell Street property was unconscionable as a result of which they suffered loss and damage. They seek to recover from Perpetual the sum of $600,000 which they borrowed, plus moneys paid by them from their own pocket to pay interest and costs. They contend that they did not receive any benefit from the first loan or the first mortgage.

3 The plaintiffs contend that the second loan from Permanent and the mortgage over the Birrell Street property given by them to Permanent were unjust contracts at the time they were made within the meaning of s 7 of the Contracts Review Act 1980 (NSW). They seek orders that the second loan and the second mortgage be declared void and that Permanent be required to provide an executed discharge of mortgage. They also seek orders that Permanent refund moneys paid by them from their own resources in connection with the second loan.

How the claims arise and the issues

4 The plaintiffs borrowed $600,000 from Perpetual in order to make an investment in a property development at North Parramatta. They were induced to do so by representations made to them by a Mr Stefan Allan that the development would provide a return which would allow the principal and interest on the loan to be repaid and yield a profit to them. The investment opportunity was made known to them by their son, James Michalopoulos. The borrowing of $600,000 was to include a sum to cover the required repayments until the returns from the North Parramatta development were received.

5 The moneys borrowed were paid to Stefan Allan. Shares in a company owning the development and units in a unit trust were issued to the plaintiffs and to James Michalopoulos’ company, Distinctive Events Pty Ltd (“Distinctive Events”). The plaintiffs received no return from the development. By 2005 James Michalopoulos believed that much of the money received by Stefan Allan had not been applied towards the development.

6 Stefan Allan agreed to meet the interest payments on the first loan. The moneys raised by the plaintiffs and paid to Stefan Allan included moneys for this purpose. Until February 2005 Stefan Allan either made the interest payments or paid moneys to the plaintiffs or to James Michalopoulos to cover the interest payments. From February 2005 he stopped making the payments. The loan with Perpetual fell into default. On 22 June 2005 Perpetual obtained judgment for possession of the Birrell Street property and judgment for the then outstanding debt of $629,536.04. The plaintiffs were given notice by the sheriff to vacate the property. To avoid eviction the plaintiffs paid $40,897.25 on 19 August 2005. The payment was made from an account of the Michalopoulos Family Trust of which the plaintiffs were trustees. Thereafter Mrs Michalopoulos transferred money from her savings account into the Family Trust account, and from there direct debits were made to pay the interest on the loan.

7 The plaintiffs took advice from a solicitor, Mr Nicholas Karefylakis in about December 2005. On 22 December 2005 Mr Karefylakis advised that the plaintiffs should commence proceedings immediately against all possible defendants. The plaintiffs did not take that advice. In January 2006 Stefan Allan advised the plaintiffs that the North Parramatta development was finished, but the units were slow to sell. Mr Allan advised the plaintiffs to refinance and borrow an extra $150,000 to cover interest for at least two years whilst the units were sold. The plaintiffs took his advice. On 11 April 2006 they borrowed $750,000 from the second defendant (Permanent). $606,189.68 was paid to Perpetual to discharge the first loan. Perpetual’s mortgage was discharged. Permanent took a registered first mortgage over the property to secure its loan. $100,000 was paid from the balance of the loan proceeds to a company called Australian Secured Fund Pty Ltd (“Australian Secured Fund”). That company was controlled by Mr Allan. $39,377.32 was paid to the plaintiffs. The balance of the loan was applied in payment of stamp duty, registration fees and other costs and expenses. The plaintiffs say they gave no authority for the sum of $100,000 to be paid to Australian Secured Fund.

8 The plaintiffs pressed Stefan Allan to make the payments on the mortgage. On 18 July 2006 Mr Allan forwarded a cheque drawn on Mortgage Fund (NSW) Pty Ltd for $45,000. The cheque was dishonoured. The plaintiffs made monthly payments on the second loan up to 11 October 2006. Stefan Allan made two payments directly to Permanent: one in June 2006 and the other in November 2006. The plaintiffs commenced these proceedings on 24 November 2006 and have not made any payments of interest or repayments of principal since that time. Permanent seeks judgment for the debt outstanding on the loan and judgment for possession.

9 In their statement of claim the plaintiffs sought declarations and orders pursuant to s 7(1)(b) of the Contracts Review Act in respect of both the first loan and the first mortgage to Perpetual and the second loan and the second mortgage to Permanent. Perpetual pleaded that the judgment of 22 June 2005 created an estoppel which precluded the plaintiffs from contending that the first loan and the first mortgage were void. No steps had been taken to set aside the default judgment. Although the judgment was given in default of appearance, it conclusively determined that the first mortgage was not void ab initio and created a judgment debt (Accom Finance Pty Ltd v Mars Pty Ltd [2007] NSWSC 726; (2007) 13 BPR 24,729 at [41]). This was accepted by counsel for the plaintiffs. The plaintiffs did not press their claim for relief under the Contracts Review Act. At the hearing, they amended the statement of claim and claimed damages against Perpetual pursuant to s 51AA, s 51AB or s 51AC of the Trade Practices Act 1974 (Cth). They allege that Perpetual engaged in unconscionable conduct that occasioned loss or damage in that they incurred the debt of $600,000 to Perpetual and the obligation to pay interest and costs without receiving any benefit from the first loan or the first mortgage.

10 Perpetual was the trustee of trusts known as Millennium Trusts through which funds are raised to be lent on first mortgage security under programs provided by Interstar Wholesale Finance Pty Ltd (now called Challenger Mortgage Management Pty Ltd). According to Mr Graeme Wort, the Head of Originator and Mortgage Services of Challenger Mortgage Management Pty Ltd, that company is a wholesale finance company which arranges loans from Perpetual as trustee of the Millennium Trusts to borrowers who apply through third parties known as mortgage originators. According to Mr Wort, Challenger Mortgage Management Pty Ltd and Perpetual are parties to trust deeds along with a financial institution which finances the trusts. No trust deed was tendered. In the present case the plaintiffs’ loan application was submitted to an associated company of Interstar Wholesale Finance Pty Ltd, Interstar Securities (Australia) Pty Ltd (“Interstar”), by The Mortgage Group (NSW) Pty Ltd (“The Mortgage Group”). The Mortgage Group is a cross-defendant. It was a party to an agreement called a Loan Origination and Management Agreement with Interstar. The recitals to the Loan Origination and Management Agreement state that Perpetual and Interstar had established mortgage-backed securities programs for the purpose of, amongst other things, investing in mortgage loans and other assets, and that Interstar assisted Perpetual in the management of such programs. The Loan Origination and Management Agreement sets out The Mortgage Group’s obligations in submitting loan applications to Interstar and carrying out credit checks. The plaintiffs contend that The Mortgage Group was Perpetual’s agent and that its knowledge is to be imputed to Perpetual.

11 The Mortgage Group occupied a similar position in relation to Permanent. Permanent is a trustee of a mortgage fund known as ARMS II. Australian Mortgage Securities Ltd (“AMS”) is the trust manager for Permanent. It delegated its functions to AFIG Wholesale Pty Ltd (“AFIG”). Pursuant to that delegation AFIG exercises certain of the powers and discretions and obligations that AMS has as trust manager for Permanent. On 6 April 2005 AMS, AFIG and The Mortgage Group entered into an agreement called the AFIG Wholesale Correspondent Deed whereby The Mortgage Group was permitted to submit loan applications to AFIG and was required before doing so to undertake certain processes to verify the application and make a credit assessment. The plaintiffs contend that The Mortgage Group was an agent of Permanent and its knowledge should be imputed to Permanent.

12 Stefan Allan was a director of The Mortgage Group up to 15 January 2003. The other director was his brother, Jeremy Allan. After Stefan Allan retired as a director, Jeremy Allan was the sole director of The Mortgage Group. According to Jeremy Allan, he and his brother had a falling-out in around December 2002 and he, Jeremy Allan, bought out Stefan Allan’s shareholding in The Mortgage Group and became the sole director of the company. He deposed that at the same time, The Mortgage Group wound up its mortgage broking business and instead started a new business as a mortgage originator and mortgage manager for Interstar.

13 Until December 2002 Jeremy Allan and Stefan Allan were in partnership conducting a business called The Property Group. Jeremy Allan described the business of The Property Group as being the sale of property on behalf of developers, apparently like a real estate agent, but without a real estate agent’s licence (T368). He said that he ceased his involvement in the business of The Property Group in December 2002 when he and his brother went their separate ways.

14 Although served as a cross-defendant Stefan Allan did not appear. No party called him to give evidence. He has not given evidence to rebut the allegations of fraud made against him, but that because he elected not to appear and defend his actions.

15 The loan applications signed by the plaintiffs in the form they were submitted by The Mortgage Group in April 2003 to Interstar, and in the form in which they were submitted by The Mortgage Group to AFIG in March 2006, contained materially false information. The type of loan applied for was what Interstar called a “Latinum loan” and what AFIG called a “Fastdoc” loan. These loans were described in the respective operations manuals as being available to self-employed borrowers. In each case the borrowers were not required to provide verification of their stated income (other than any PAYG income). The stated intention was that the loans be available for self-employed borrowers who were unable to provide current financial statements or income tax returns. A self-employed borrower who could provide verification of his or her income and who otherwise qualified for a loan could borrow at lower interest rates than applicable to “Latinum” or “Fastdoc” loans.

16 The plaintiffs were not self-employed. Mr Michalopoulos was employed at Telstra until December 2005. Mrs Michalopoulos retired from working for Telstra on 22 December 2001. They also had tax returns from which their income could have been verified. However, their income was insufficient to meet the repayments on either a $600,000 loan or a $750,000 loan. In the year ended 30 June 2003 their combined income before tax was a little over $60,000.

17 In 2003, the loan application forms as provided to The Mortgage Group, and submitted by The Mortgage Group to Interstar, stated that the plaintiffs were self-employed and carried on a business of drycleaners, and that each of the plaintiffs earned an income of $100,000 per annum. These statements were false. The loan application forms also stated that the purpose of the $600,000 loan was to refinance an existing loan of $600,000 taken out by the plaintiffs with The Property Group. This statement was also false. There was no such loan. The loan application forms containing these statements bear the plaintiffs’ signatures. It was their evidence that they were rushed into signing the application forms by Stefan Allan who told them that the forms were blank and would be completed by him. The plaintiffs say that they were not shown what they were asked to sign. The plaintiffs gave evidence that they were presented with a bundle of papers and told where to sign. As they appended their signatures to each page, the page was turned over and they could not see what they were signing.

18 The plaintiffs signed some documents in relation to the application for the second loan in January 2006. Parts of the documents submitted for the second loan application were evidently produced by someone, presumably Stefan Allan, whiting out parts of the earlier loan application and writing in different information. The second loan application also contained false statements that the plaintiffs were self-employed and carried on a dry-cleaning business. It falsely stated that Mr Michalopoulos’ income was $200,000 per annum. (Mrs Michalopoulos was stated not to have an income.) The application for the second loan stated that the purpose of the loan was partly to refinance the loan from Perpetual (which was true) and partly to finance expenditure of a “personal domestic or household nature”, which was false.

19 The plaintiffs contend that the lenders, through their agent The Mortgage Group, knew, or at least should have known, that the loan applications contained the false statements. They contend that the lenders, through The Mortgage Group, knew, or should have known, that the loan was taken out primarily for the benefit of Stefan Allan and that the loan application did not correctly record the purpose of the loan, the income of the borrowers or their prior business experience. The plaintiffs contend that they were under a number of disadvantages with respect to entering into the loans by reason of problems with language, education, financial experience, and by having been prevailed upon by their son James, who was in business with Stefan Allan. The plaintiffs say that they suffered a significant disadvantage or disability by the trust they placed in Stefan Allan and were vulnerable to his persuasion. They contend that the lenders, through The Mortgage Group, knew, or should have known, of such disadvantage.

20 In the case of the Perpetual loan, the plaintiffs contend that Perpetual, through its agent, took unconscientious advantage of their disability. The plaintiffs say that the Permanent loan was unfair in the circumstances in which the contract was entered into. In relation to both loans the plaintiffs plead that the defendants engaged in the practice of “pure asset lending”, namely, lending money without regard to the plaintiffs’ ability to repay by instalments in the knowledge that adequate security was available in the event of default. In relation to both loans the plaintiffs plead that the lenders, through their agent, knew that the loans were taken for the purpose of an improvident and speculative investment.

21 Perpetual and Permanent deny these allegations. The defendants contend that the plaintiffs either knowingly misrepresented their income, occupation and the purpose of the loan, or were recklessly indifferent to the truth of whatever information Stefan Allan might insert in the forms they signed. The defendants and The Mortgage Group deny that The Mortgage Group knew, or had notice, that any of the statements in the loan application forms were false or that the loans were taken for an improvident and speculative investment.

22 There is a separate issue concerning the disbursement of $100,000 from the proceeds of the second loan to Australian Secured Fund. The plaintiffs were given leave to amend their particulars of their allegation that the second loan and the second mortgage (to Permanent) were unjust contracts within the meaning of s 7 of the Contracts Review Act by adding as a particular that the sum of $100,000 was paid to Australian Secured Fund without the plaintiffs’ authority. The plaintiffs did not plead an independent cause of action apart from the Contracts Review Act in relation to the allegedly unauthorised payment.

23 The allegation that the payment was made without authority had been flagged in particulars. Permanent brought a cross-claim against the solicitor retained to act for it on the loan to the plaintiffs. The solicitor is National Lending Solutions Pty Ltd (“National Lending Solutions” or “NLS”). Permanent alleged that it was a term of the solicitor’s retainer that it not disburse the proceeds of the loan other than in accordance with the plaintiffs’ instructions. National Lending Solutions disbursed the sum of $100,000 to Australian Secured Fund on the instructions of The Mortgage Group. Permanent alleged that if it is unable to recover any sum from the plaintiffs as the result of a finding that part of the proceeds of the advance were disbursed otherwise than in accordance with the plaintiffs’ instructions, then it is entitled to recover from National Lending Solutions the amount which it is otherwise not entitled to recover from the plaintiffs.

24 Both Perpetual and Permanent filed cross-claims against The Mortgage Group. National Lending Solutions also claims indemnity from The Mortgage Group if it is liable to Permanent. Perpetual and The Mortgage Group also filed cross-claims against James Michalopoulos, Stefan Allan and Dennise Allan. Dennise Allan is Stefan Allan’s wife. She was employed on a casual basis by The Mortgage Group. There was no appearance by Stefan Allan or Dennise Allan. James Michalopoulos made no submissions. He gave evidence in the plaintiff’s case.

Further Background Information – The Role of James Michalopoulos

25 After earlier failed business ventures, James Michalopoulos became involved in the finance industry in about April 2002. From about that time he worked with a Mr Hans Schmidt in a business involving training people to become accredited mortgage brokers. He was paid a commission for the number of prospects he persuaded to attend seminars. He attended some of the seminars himself. James Michalopoulos deposed that in 2002 he learned a great deal about the mortgage business. From about the beginning of 2003 James Michalopoulos with Mr Schmidt carried on the business of providing training services for potential financial brokers. James Michalopoulos’s role was to recruit the brokers. They registered a business name “The Mortgage Academy” under which they carried on business through their respective companies. James Michalopoulos owned the shares in Distinctive Events which was one of the partners in the business. James Michalopoulos deposed that the partnership carried on business under the name The Mortgage Academy for about four to six months commencing in the beginning of 2003. He became familiar with the various criteria applied by Interstar for its lending programs (T35).

26 In about February 2003 James Michalopoulos was introduced to Stefan Allan. Stefan Allan told him that he had two very good properties in North Parramatta for which he had submitted development applications and that he was looking for “seed capital” to get the development applications through and to get construction underway. Stefan Allan told him that he would be able to obtain finance for the rest of the development. Stefan Allan told him that he, Stefan Allan, was experienced and successful in the property development business as well as having been involved in finance broking. Stefan Allan told him that he now left finance broking to his brother Jeremy. Stefan Allan said that he would put together a feasibility study showing a detailed cash flow and profit analysis for the project. James Michalopoulos said that his parents had some equity in their house they might draw on if the deal were a good one. In a later meeting Stefan Allan told James Michalopoulos that he could make James’ parents equity shareholders and, as a back up, would provide them with a guarantee of a 25 percent return on their money over the course of the project.

27 In early March 2003 Stefan Allan provided the plaintiffs and James Michalopoulos with what James called “a pile of documents relating to the project including plans”. Amongst the documents were documents called a “Project Feasibility Study”. These projected a gross profit on the property at Bellevue Street, North Parramatta (involving the construction of six units) of $887,000 and a net profit on a development at Bowden Street, North Parramatta (involving the construction of nine townhouses) of $1,171,180. The “feasibility studies” consisted of nothing more than single-page documents containing estimates of projected sales and one-line statements of expenses.

28 In March 2003 Stefan Allan met Mr and Mrs Michalopoulos with James Michalopoulos. In the course of that meeting Stefan Allan told them that all units in the development would be pre-sold before construction commenced and that there would be no risk in getting the profit out at the end. He said that there was already $1 million of equity in the project, so that the plaintiffs would not be at risk if they mortgaged their house to raise capital to invest in the project. He said that he would personally guarantee the return of the plaintiffs’ principal plus a 25 percent return. In answer to a question from Mr Michalopoulos as to how the interest on a borrowing by the plaintiffs would be paid, Stefan Allan said that:

“ We will borrow more than we need for the project and I will pay the interest with the surplus. That way you won’t have to worry about the mortgage at all until the project is finished then it will be paid back. ”

29 After the loan was drawn down on 2 May 2003 Stefan Allan provided documents to Mr and Mrs Michalopoulos and James Michalopoulos to record their investment in the project. These included documents headed “Undertaking to Investment”. These recorded that the plaintiffs had made investments of $600,000 with companies called Blue Star Property Holdings Pty Ltd and Lords Holdings Pty Ltd, which were described as the developers of the properties at Bowden Street and Bellevue Street North Parramatta. The “undertakings” were signed by Mr and Mrs Michalopoulos, by Mr Allan in his personal capacity, and by Mr Allan for each company. They included terms that “For the duration of the development ... the Investor [Mr and Mrs Michalopoulos] is willing to invest $600,000”. Mr Allan was named as the company’s “representative”. Each undertaking included a term that:

“ The Investor understands the representative may elect to use the funds for any matter it seems as Personal or Business at the total discretion of the representative. The investor agrees irrevocably. ”

30 Each undertaking included a term that the investor was entitled to 15 percent of the total project profit with a minimum of 25 percent per annum return on the investment. It included some other terms which are incomprehensible (e.g. “1.4 The investor agrees any interest payment made by the representative or ‘DLP’ will be deducted from the overall principal and interest” and “1.8 The representative and its company Blue Star Property Holdings Pty Ltd ..., also undertake that any option the development at ... Bowden Street, North Parramatta pass resolution and nominate the investor as the new option holder. 1.9 The investor agrees that 1.8 is only enforceable if the expire is not resolved, unless otherwise stated in writing by the investor.”) Mr Allan also provided copies of caveats signed under the common seal of Blue Star Property Holdings Pty Ltd and Lords Holdings Pty Ltd by which those companies consented to the plaintiffs’ lodging a caveat claiming an interest in the properties as “Equity interest & investment in company development known as ‘Bowden Street North Parramatta’ or ‘Bellevue Street North Parramatta’”.

31 In addition, the plaintiffs were issued with 15 shares in Blue Star Property Holdings Pty Ltd (representing 15 percent of the capital of that company) and were given a certificate that they held 15 units in a trust of which Lords Holdings Pty Ltd was trustee.

32 After the loan settled James Michalopoulos worked with Stefan Allan on the developments.

33 Prior to the first loan being taken James Michalopoulos became aware of at least some of the requirements of lenders. He denied knowing that his parents would not be eligible to satisfy the lending criteria for a proposed loan of $600,000. I do not accept that denial. He admitted in cross-examination that he knew that a lender would require to be satisfied that his parents could afford to meet the payments under the loan and he was aware that they were not in a position to do that (T37). He said that he was quite baffled as to how his parents could get the loan (T49) but accepted Stefan Allan’s assurance that there was an over-borrowing to cover interest and that his parents would not need to cover any of the interest payments and the loan would be repaid through the development (T49). I consider that James Michalopoulos was aware that the reason application was made for a “Latinum declaration loan”, that is, a loan in which his parents’ income would not need to be verified, was because the loan amount sought to be borrowed would not have been available had a true statement of his parents’ income been provided.

34 However, it does not follow that because this was a matter known to James Michalopoulos that it was also known to his parents. Nonetheless, as will be seen, I am satisfied that Mr and Mrs Michalopoulos signed the loan applications knowing that the information to be provided in the application as to their income and the purpose of the loan was false.

35 It emerged in cross-examination of Jeremy Allan that The Mortgage Group paid commission to James Michalopoulos or on his direction for the first loan to his parents. The commission paid was 0.5 per cent or $3,300 including GST.

36 Jeremy Allan gave inconsistent evidence about how the loan application was referred to The Mortgage Group. He gave evidence in cross-examination (T381-382) that he was aware that it was a requirement for access to the Latinum loan programme that the borrowers were unable to provide financial statements or taxation returns. He did not take any steps himself to ensure that that was the case in the instance of the plaintiffs. When asked why not, Jeremy Allan said:

“ Under the introducer agreement with my brokers, I deal with them and they deal with the clients and they all went through extensive training so everything you see here is everything they knew anyway, it is part of my product parameters and part of our, just part of our product parameters and the steps they needed to take. ”

He called the broker an “accredited introducer”. Initially Jeremy Allan said that the accredited introducer in the case of the plaintiffs’ application for a loan by the plaintiffs was The Mortgage Fund (Australia) Pty Ltd. He named six people, including Stefan Allan and James Michalopoulos as being the directors or partners of that company. That company was not incorporated until 31 March 2004. His ultimate position was that Distinctive Events was an accredited introducer to The Mortgage Group and introduced the plaintiffs’ loan application to The Mortgage Group.

37 Under clause 3.3 of The Mortgage Group’s Loan Origination and Management Agreement with Interstar, The Mortgage Group agreed not to sub-contract or arrange for any person (other than its employees) to attend to any of its obligations under the agreement without Interstar’s written consent. No consent, written or otherwise, was given by Interstar to The Mortgage Group’s appointing Distinctive Events or James Michalopoulos or The Mortgage Fund (Australia) Pty Ltd as an accredited introducer.

Signing of application and related documents for the Perpetual loan

38 Mr and Mrs Michalopoulos signed loan documents for the first loan on two separate occasions. The first occasion was on 11 April 2003. According to Mr and Mrs Michalopoulos and James Michalopoulos, the forms were blank and Stefan Allan said that he would fill out whatever needed to be filled out in the office. Some parts of the forms were filled out by James Michalopoulos that evening. This included details of his parents’ names, addresses and driver licence numbers. The plaintiffs say, and I accept, that when they signed the part of the form which set out the purpose of the proposed loan, the part was blank. The plaintiffs signed a page headed “Latinum Declaration of Financial Position”. This part of the form included a section requiring the completion of the borrowers’ occupations and income. The document stated that the plaintiffs’ occupation was that of drycleaner and that they were both self-employed having a net income of $100,000 each. The plaintiffs and James Michalopoulos say, and I accept, that these parts of the form were left blank when they signed it. The plaintiffs left it to Stefan Allan to fill in these details. They were aware that in signing the declarations they were personally certifying the truth of the information to be inserted.

39 Another part of the form (which was not signed or initialled by the plaintiffs) contained a section for a statement of the plaintiffs’ occupation and income. I accept the plaintiffs’ evidence and James Michalopoulos’ evidence that that section was not completed at the time the form was signed.

40 Another page of the form, which was signed by Mr and Mrs Michalopoulos, was headed “Statement of Assets and Liabilities”. James Michalopoulos filled out some of the items, namely, the statement of assets for sections headed “Home”, “Car”, “Furniture, jewellery etc”, and “Superannuation funds”. These were all of the assets of substance of the plaintiffs and had a total value of $1,745,000. He left the total blank. He left the section for liabilities blank. The plaintiffs had no liabilities. Mr and Mrs Michalopoulos signed the declaration with the totals of assets and liabilities left blank. Subsequently, someone, I infer Stefan Allan, added in a box for “Business value” an amount of $200,000 and described the business as “cleaning”. He also included as a liability a debt of $600,000 said to be owed under an existing mortgage to The Property Group with monthly payments of $5,000. He completed the totals. These statements were false.

41 The result was that the loan application documents submitted to The Mortgage Group contained false statements:

(a) that the plaintiffs had a gross income of $100,000 each;

(b) they were self-employed and had carried on a dry-cleaning business for 10 years;

(c) the business had a value of $200,000; and

(d) the purpose of the loan was to refinance an existing mortgage of $600,000 to The Property Group under which they made monthly payments of $5,000.

42 On 16 April 2003 the loan application containing these statements was submitted by The Mortgage Group to Interstar. The loan was approved by Interstar. After Interstar approved the loan further documents were prepared by its settlement agent (in this case First Title Secure). These included the mortgage and numerous other documents, including one entitled “Applicant’s Financial Summary”, and others addressed to The Property Group entitled “Request to Provide Payout Statement”, “Discharge Notice” and “Undertaking to Make No Further Drawings”. All of the documents were signed by the plaintiffs on 29 April 2003. The plaintiffs say that they signed these documents without reading them. Mr Michalopoulos said that Stefan Allan obtained his and his wife’s signatures and held the documents in a bundle so that the top of half of the pages were obscured as they were required to sign at the foot of the relevant pages. Mr Michalopoulos also said that on this occasion Stefan Allan told him that he would fill in what was needed (T224). Mrs Michalopoulos also suggested that the “Applicant’s Financial Summary” was blank (T148, 149). I reject that evidence. Whatever may have been the position with the documents filled out by Stefan Allan, the documents signed on 29 April 2003 were not prepared by him but by First Title Secure. They were not blank and were not completed by Stefan Allan after the plaintiffs signed.

43 The “Applicant’s Financial Summary” stated:

“ Loan Amount: $600,000
You have provided to the Lender details of your current income, expenses, and commitments together with details of your assets and liabilities. These details have been used in the Lender’s assessment of your loan application and your ability to meet your obligations in relation to the loan.
Set out below is a summary of these details and we request that you confirm that these figures are a complete and accurate summary of your current financial situation. If there is an error in the details set out below, you must advise the Lender immediately. ”

There was then a table of expenses and income. The expenses included:

“ Income tax $71,760 .”

The income was described as:

“ Salary (gross pre-tax) $200,000. ”

Immediately above the plaintiffs’ signatures in bold type was the following sentence:

“ I/We declare that the above is a complete and accurate summary of my/our current financial position and I/we believe that I/We can meet my/our obligations under the loan. ”

44 I do not accept the evidence of either plaintiff that they were not able to see, or did not see, the figures for income and expenses shown on the financial summary which they declared by their signatures to be accurate. Mrs Michalopoulos’ evidence was that she could not understand the words on that page. Mrs Michalopoulos was an unsatisfactory witness. She was understandably upset by the circumstances of the loan and the failure of Stefan Allan to meet his promises. That coloured all her evidence. Her answers were frequently unresponsive and in some cases, in my view, deliberately so. From time to time she professed an inability to understand or even to see the words on documents before her. Whilst English is not her first language I am satisfied that she was able to understand the table of expenses and income and that she understood she was declaring it to be accurate.

45 In the case of the Applicant’s Financial Summary, I am satisfied that both she and Mr Michalopoulos saw and understood that they were declaring that they had a combined income of $200,000 per annum. The fact that they were prepared to sign the document containing that representation corroborates an inference which I might not otherwise have been prepared to draw that when the plaintiffs signed the initial loan application they expected that Stefan Allan would include false statements as to their income on the form. The plaintiffs were both aware that they did not earn sufficient income to service the loan. They were relying upon Stefan Allan’s assurance that the amount borrowed would be sufficient to cover interest payments until the loan was repaid from the proceeds of the property development. The effect of Mr Michalopoulos’ evidence, particularly when cross-examined in relation to the second loan, was that whilst he understood that his and his wife’s income would be insufficient to make the loan repayments, and whilst he would expect that a lender would need to be satisfied that the borrowers had the capacity to repay the loan, nonetheless he assumed that Stefan Allan would provide truthful information to the lenders to explain how the loan repayments would be met, that is, by using part of the advance to pay interest and repaying the loan from the proceeds of the property development. However, I do not accept that evidence. If that were the position, Mr and Mrs Michalopoulos would not have signed the financial summary on 29 April 2003 which contained the false statement of their income. I conclude that they were aware that the loan would be obtained by false statements being made to the lender about their income.

46 A further indication that the plaintiffs knew that the loan application would contain false statements is the manner in which the Statement of Assets and Liabilities was filled out on 11 April 2003. The document as ultimately filled out stated that the plaintiffs’ assets had a value of $1,950,000 and that they had a liability of $600,000 to The Property Group. According to the plaintiffs and James Michalopoulos, the values of assets were discussed and completed at the meeting at the plaintiffs’ house when James Michalopoulos and Stefan Allen were present. The items completed stated values of their home ($1,250,000), motor vehicles ($15,000), furniture, jewellery etc ($150,000), savings at bank ($30,000) and superannuation funds ($300,000). The sum for the total value of assets was left blank and the column for liabilities was also left blank. As I have said, subsequently Stefan Allan added a value of $200,000 for the value of a cleaning business and included the liability of $600,000 to The Property Group. There is no explanation as to why, after the values of all of the plaintiffs’ assets were set down, the sum to be filled out as the total of the assets was left blank. I conclude that the plaintiffs expected Stefan Allan to add to the document otherwise than by completing the total. He could only do so by adding false information.

47 There is corroboration for this conclusion in the form signed by Mr and Mrs Michalopoulos on 29 April 2003 directed to the Manager, The Property Group, requesting a payout statement, stating that its loan was to be refinanced by Perpetual and requesting it to prepare necessary discharge documents, and undertaking to The Property Group that the plaintiffs would make no further drawings. Mr Michalopoulos’ evidence was that the documents were folded over in such a way that it was not possible to see what was on the top half of the page, and this, coupled with the speed with which their signatures were required, meant that he did not know what he was signing. That explanation cannot apply in relation to the document headed “Undertaking to Make No Further Drawings”. That document did not occupy a full page. Mr and Mrs Michalopoulos’ signatures were placed just below the statement addressed to The Property Group authorising and directing it to allow “no further drawings to be transacted on the following account(s)”. I do not see how they could have signed that page without reading what was above their signatures, even if that was a possibility in relation to some of the other documents.

48 I conclude that the plaintiffs were aware that the loan was obtained through a false statement to the lender that the loan was to be used to discharge their liability to The Property Group.

49 James Michalopoulos knew that a lender would not be prepared to make a loan of $600,000 to his parents if a true statement were made as to his parents’ income. In cross-examination he accepted that he knew that lenders needed to be satisfied that the borrower could afford to meet the payments under the loan. He was driven to accept that it was evident to him that his parents were not in the position to satisfy a lender that they could service a $600,000 loan (T37). Having regard to his exposure to the finance industry, it is probable that James Michalopoulos was aware that the “low doc” loan that his parents were taking was not designed for applicants in their position, and that the true purpose of moneys being invested in a property construction in apartments and townhouses would not be an approved purpose for that type of loan. Despite his denial I consider that he understood that the reason the application form was not completed before his parents was because, if the true position were revealed, he knew the loan would not be approved.

The Mortgage Group’s assessment of the loan application

50 It was part of the plaintiffs’ pleaded case that both Jeremy Allan and Stefan Allan were agents of The Mortgage Group and that Stefan Allan’s knowledge was to be attributed to The Mortgage Group and through it to the lenders. In final submissions counsel for the plaintiffs accepted that only Jeremy Allan was acting for The Mortgage Group and only his knowledge should be attributed to it in relation to either the first or second loan (T531). That concession was rightly made. Stefan Allan’s involvement with The Mortgage Group as a director of the company up to 15 January 2003 undoubtedly raises an inquiry as to whether he had a continued involvement with the affairs of the company. Jeremy Allan denied that he did. According to Jeremy Allan they parted their ways. Whilst Jeremy Allan was in many ways an unsatisfactory witness, there was no evidence that Stefan Allan did have any such continued involvement.

51 Counsel for the plaintiffs did not submit that the knowledge or conduct of James Michalopoulos should be attributed to The Mortgage Group and via it to the lenders, and no such case was pleaded. Again, counsel was correct in adopting this position. Although Jeremy Allan appeared to have regarded an accredited introducer as an agent for The Mortgage Group to carry out part of the obligations of The Mortgage Group in assessing a loan application, and although he said that James Michalopoulos or his company, Distinctive Events, was the accredited introducer for the plaintiffs’ loan, even if that led to James Michalopoulos’ conduct and knowledge being attributed to The Mortgage Group, it would not lead to its being attributed to Interstar or the lenders because the subcontracting out of The Mortgage Group’s functions was prohibited without the written consent of Interstar and no such consent was forthcoming.

52 Jeremy Allan deposed that the loan application form and the “Latinum Declaration of Financial Position” were complete when they were received at the office of The Mortgage Group in mid April 2003. (The Latinum Declaration of Financial position was the document that stated amongst other things that the plaintiffs’ occupation was that of drycleaner, and that they were both self-employed having a net income of $100,000 each: see para [38] above.) I accept that evidence. It is consistent with the plaintiffs’ evidence that Stefan Allan said that he would complete the form, that he should do so, and submit a completed form to The Mortgage Group.

53 Stefan Allan’s wife, Dennise Allan, worked on a casual basis for The Mortgage Group. She prepared a memorandum addressed to Stefan Allan dated 15 April 2003 asking for a number of items which she said had been discussed with Jeremy Allan. These included a request for a provision of “Letter of Conduct” and “is [sic] Borrowers Self-employed, please provide full details of current employment of Borrowers”. The following day Stefan Allan provided a memorandum to The Mortgage Group enclosing what was called a “letter of conduct” from The Property Group. In response to a request for details of the borrowers’ employment, he said “Borrowers operate & manage a very successful cleaning (commercial) business”. The letter of conduct from The Property Group stated “The above applicant [Mr and Mrs Michalopoulos] is in debt to our firm for $600,000. The transaction interest payments have been conducted in a very satisfactory matter [sic]. If you need any further assistance please do not hesitate to contact the undersigned.” The document was signed by Stefan Allan.

54 Jeremy Allan took the documents at face value. He said that he had no indication that the information provided by the plaintiffs that they earned $100,000 per annum each was incorrect. He said that he was unaware that the plaintiffs had no loan through The Property Group that was to be refinanced.

55 Jeremy Allan accepted that The Mortgage Group had an obligation to Interstar to satisfy itself that the borrowers were unable to provide financial statements or taxation returns. Latinum loans were only intended for borrowers in that position (T388). The effect of his evidence was that he relied on the broker or “accredited introducer”, that is, James Michalopoulos, to verify that.

56 Given his acceptance that this was a matter that needed to be checked, The Mortgage Group was in breach of its duties to Interstar in not carrying out the check itself. As James Michalopoulos or his company had not been approved by Interstar under clause 3.3 of the agreement, it was a breach by The Mortgage Group to delegate that task to James Michalopoulos or his company. However, that is of only indirect relevance to the plaintiffs’ claim.

57 Interstar’s Guidelines Manual provided that if a borrower were able to provide current financial information and taxation returns, Interstar would consider a request to convert the loan to a Standard Program loan resulting in a reduced interest rate for the borrower. Nonetheless, Jeremy Allan’s failure to check that the plaintiffs were persons for whom the Latinum program was designed does not justify drawing an inference that he was aware that the Latinum loan was being applied for because that loan could be procured through false representations as to income. He simply did not carry out any checks.

58 The Interstar Guidelines Manual required The Mortgage Group physically to meet a borrower and satisfy itself beyond doubt as to the borrower’s identity (Clause 5.1.1). Jeremy Allan knew of the borrower’s identity because of his previous introduction to the plaintiffs on a social occasion. Jeremy Allan appeared to accept that the Interstar Guidelines Manual also required that The Mortgage Group verify the accuracy of the borrowers’ names, addresses, telephone numbers and occupations (although the manual in fact required only the verification of such information concerning not the borrowers, but parties involved in introducing the borrower to the mortgage group (Exhibit GW1, p 56)). Jeremy Allan said that he did check the accuracy of the statement in the application of the plaintiffs’ occupation by carrying out an Australian Business Number search. That was a search that showed the Michalopoulos Family Trust had an Australian Business Number. It did not indicate anything other than that the plaintiffs had a family trust. It did not establish or verify the fact that they were self-employed or conducted business as drycleaners. Jeremy Allan did not speak to James Michalopoulos about his parents’ occupation.

59 Jeremy Allan had met Mr and Mrs Michalopoulos on a brief social occasion before the application was submitted. He did not interview either of them. He did not carry out any check to verify their stated income. However, the nature of the program was such that it would not be expected that such verification would be available, other than by the applicant’s confirming orally what was inserted on the application form.

60 The reason Jeremy Allan gave for requesting full details of “current employment of Borrowers” was that he had a credit report dated 15 April 2003 which showed Mr Michalopoulos as having been employed from 1 September 1990 by “Telecom”. This was contradictory to the information on the loan application form. Jeremy Allan asked Stefan Allan what Mr Michalopoulos did at Telecom and what he did as being self-employed. Stefan Allan responded by saying that Mr Michalopoulos used to work for Telecom, but did not work for Telecom anymore and was self-employed. Jeremy Allan made no further inquiry but relied upon Stefan Allan’s statement to that effect, as recorded in Stefan Allan’s memo of 16 April 2003.

61 The statement in the loan application that might be expected to have concerned Jeremy Allan was that the purpose of the loan was to refinance a $600,000 debt owed by the plaintiffs to The Property Group. The Property Group was a business in which Jeremy Allan had been involved up to about four months before he received the loan application. He knew that up to that time no loan of $600,000 had been made to the plaintiffs. The business then carried on had not involved the lending of money on mortgage. (T397). However, Jeremy Allan said (and I accept) that in the past Stefan Allan had been in the business of providing short-term loans and it would not be out of character for him to have changed the business of The Property Group. Jeremy Allan had had no information about the business after he had resigned in December 2002. There was a bank account that remained in the name of Jeremy Allan and Stefan Allen trading as The Property Group, but Jeremy Allan had no involvement with the account after his resignation.

62 At the time, Jeremy Allan distrusted his brother. He said that in April 2003 his brother had a practice of misleading him or not telling him the full story (T462). In cross-examination he was asked whether he did not think it worth checking the fact that a business of The Property Group that had been conducting “second tier real estate business” was now supposedly lending out money. His response was “No, because he wouldn’t have told me the truth anyway. He would have just told me what he wanted to tell me.” (T462). Jeremy Allan and Stefan Allan worked in close proximity to each other. Stefan Allan had an office in the offices occupied by The Mortgage Group. As noted above, Jeremy Allan employed Stefan Allan’s wife on a temporary basis.

63 Jeremy Allan made no inquiry about the stated loan from The Property Group. One part of the loan application form stated that the property to be mortgaged was owned by the plaintiffs without a mortgage and had been so owned for two years. It would be inferred from that part of the form that the debt of $600,000 for which refinance was sought was not a debt for which there was security by way of mortgage over the house. Elsewhere the $600,000 debt to The Property Group was described as an existing mortgage liability and not as a personal loan. The plaintiffs’ statement of assets and liabilities showed no assets which might explain the purpose of a $600,000 loan from The Property Group. On the other hand Jeremy Allan was not cross-examined on the issue of whether the plaintiffs’ statement of assets cast doubt on their having assumed a liability within the previous four months of $600,000 to The Property Group. Nor was he cross-examined on the apparent inconsistency in that liability being described as an existing mortgage and not as a personal loan, when the loan application form stated that the property was owned, but not mortgaged. It might be that these were details he simply did not notice.

64 Whilst there are grounds for suspicion that Jeremy Allan knew that the stated purpose of the loan was false, and although I do not consider Jeremy Allan to be a witness of credit, there is not enough to justify a finding that Jeremy Allan knew that the purpose of the loan was falsely stated or was recklessly indifferent to the truth of the statement. He obtained written verification from his brother that the plaintiffs owed a debt of $600,000 to The Property Group and that interest payments on the loan had been made satisfactorily.

65 Jeremy Allan admitted that in April 2003 he knew that his brother Stefan was involved in property development (T478-479). It was squarely put to him that he knew that the purpose of the plaintiffs’ loan was to raise money to go into that property development. He denied having that knowledge. There is no evidence that he had such knowledge. If that were a fact known to him, it is likely to have been discussed with James Michalopoulos. James Michalopoulos gave no evidence of any such discussion, although he gave evidence for his parents.

66 Dennise Allan signed a direction on 1 May 2003 on behalf of The Property Group directing payment of $496,000 to The Property Group and $96,000 to one “George Elias”. In final submissions (in contrast to his opening submission) counsel for the plaintiffs did not submit that Dennise Allan’s knowledge should be attributed to The Mortgage Group. Nor was that a case pleaded or particularised.

67 The plaintiffs and James Michalopoulos assumed that the proceeds of the loan had been paid to Stefan Allan. The payment was made to him or at his direction.

68 Jeremy Allan was aware that the plaintiffs spoke little English and that their son James spoke on their behalf. He gave no thought to their ability to read English (T457).

69 In short, Jeremy Allan knew that the loan was being arranged for the plaintiffs by Stefan Allan and their son James. He knew that Stefan Allan was involved in a property development and that James Michalopoulos was working out of the same office as Stefan. He knew that the plaintiffs had few English skills and were reliant on others to explain documents to them. He considered that Stefan was untrustworthy. He did not know that information on the loan application was false, but he made no worthwhile inquiry other than to Stefan to ascertain whether it was true.

70 The Mortgage Group did not breach the Loan Origination and Management Agreement in making such limited inquiries. Relevantly that agreement provided:

“ 5.1 The Originator agrees that, in the process of originating proposed Loans, the Originator will:
(a) submit Applications to Interstar;
(b) carry out credit checks of Applicants through an approved credit bureau;
(c) provide Applicants with written correspondence setting out the proposed terms of a Loan;

207 Whether James Michalopoulos engaged in trade or commerce in conduct that was misleading or deceptive or likely to mislead or deceive in contravention of s 42 of the Fair Trading Act turns on the definition of “conduct” in s 4(4) of the Act. Section 4(4) provides:

“ 4 Definitions
(4) In this Act:
(a) a reference to conduct is a reference to an act or a refusal to act, including in either case an act that constitutes, or would but for the refusal constitute, making or giving effect to a provision of a contract or arrangement, arriving at or giving effect to a provision of an understanding, or requiring or entering into a covenant,
(b) a reference to refusing to do an act includes:
(i) a reference to refraining (otherwise than inadvertently) from doing the act, and
(ii) a reference to making it known that the act will not be done, and
(c) a reference to a person offering to do an act, or to do an act on a particular condition, includes a reference to the person making known a willingness to accept applications, offers or proposals for the person to do the act or to do that act on the condition. ”

208 The effect of s 4(4)(a) and (b)(i) is that a person may engage in conduct by refraining, otherwise than inadvertently, from doing an act. In my view James Michalopoulos refrained, otherwise than inadvertently, from disclosing to The Mortgage Group the true employment status and income of his parents. He thereby engaged in misleading and deceptive conduct in breach of s 42. His conduct was in trade or commerce.

209 Further, I consider that James Michalopoulos was knowingly concerned in the plaintiffs’ contravention of s 42 of the Fair Trading Act. On any view the plaintiffs signed documents in blank knowing that their signatures were required in order to testify to the correctness of the information. They expected Stefan Allan to fill out the form with incorrect information. They engaged in misleading and deceptive conduct. That conduct was in trade or commerce. James Michalopoulos had sufficient knowledge of the lender’s requirements to know that the loan would not be approved were the application to be filled out correctly. He was knowingly concerned in the plaintiffs’ breach of s 42. On either basis, he is also liable to pay damages to The Mortgage Group in the same quantum as the damages The Mortgage Group is liable to Permanent. Of course, The Mortgage Group is not entitled to double recovery against Stefan Allan and James Michalopoulos.

210 The Mortgage Group did not cross-claim against the plaintiffs.

211 It may seem curious that the perpetrator of the fraud, Stefan Allan, is liable only to The Mortgage Group and only for the amount that The Mortgage Group is liable to pay Permanent. That, however, is the result of decisions taken by the plaintiffs and Permanent not to sue him.

Conclusions

212 The plaintiffs’ claim against Perpetual will be dismissed. As between Permanent and the plaintiffs it will be declared that the principal amount owing under the contract of loan is $650,000 and not $750,000. Otherwise the claims of the plaintiffs against Permanent will be dismissed. Permanent is to bring in a calculation of the mortgage debt accordingly. It is entitled to an order for possession of the Birrell Street property.

213 Permanent’s cross-claim against National Lending Solutions and against Perpetual will be dismissed. Its claim against the plaintiffs in the second cross-claim will also be dismissed. Permanent is entitled to damages against The Mortgage Group in the amount of $100,000 plus interest calculated at the lower rate under the loan contract. It is not entitled to interest under s 100 of the Civil Procedure Act 2005 (NSW) on that award of damages.

214 The third cross-claim of Perpetual will be dismissed.

215 The fourth cross-claim of National Lending Solutions will be dismissed.

216 The fifth cross-claim of The Mortgage Group against Dennise Allan will be dismissed. The Mortgage Group is entitled to damages against James Michalopoulos and against Stefan Allan in the same amount as it is liable to pay to Permanent. The cross-claim brought by Jeremy Allan will be dismissed.

217 I will stand the proceedings over to a convenient date for counsel for Permanent to bring in short minutes of order in accordance with these reasons. I will then hear argument on costs and on whether there should be a stay of execution of a writ for possession.

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