Morrison v 180 Capital Finance Pty Ltd (No. 2)
[2012] VCC 1162
•23 August 2012
| IN THE COUNTY COURT OF VICTORIA | Revised Not Restricted |
AT MELBOURNE
CIVIL DIVISION
COMMERCIAL LIST
Case No. CI-10-01905
| JOSEPH MORRISON | |
| and OTHERS (as per the attached Schedule) | Plaintiffs |
| v | |
| 180 CAPITAL FINANCE PTY LTD | |
| Defendant | |
| and (by Counterclaim) | |
| 180 CAPITAL FINANCE PTY LTD | Plaintiff by Counterclaim |
| and JOSEPH MORRISON | |
| AND OTHERS (as per the attached schedule) | |
| JOSEPH MORRISON | |
| and OTHERS | Defendants by Counterclaim |
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JUDGE: | HIS HONOUR JUDGE GINNANE | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 16-17 April 2012 - Final written submissions received 1 May 2012 | |
DATE OF JUDGMENT: | 23 August 2012 | |
CASE MAY BE CITED AS: | Morrison & Ors v 180 Capital Finance Pty Ltd (No. 2) | |
MEDIUM NEUTRAL CITATION: | [2012] VCC 1162 | |
REASONS FOR JUDGMENT
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Catchwords: CONTRACT – guarantee given by former de facto partner – whether unconscionable conduct by lender - Yerkey v Jones and Garcia v National Australia Bank principles
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff and First, Second and Third Defendants by Counterclaim | Mr J D Catlin | Sofra Solicitors Pty Ltd |
| For the Defendant 180 Capital Finance Pty Ltd | Mr A W Smith | Yates Beaggi Lawyers |
| For the Fourth Defendant by Counterclaim | Mr C R Northrop | GSM Lawyers |
SCHEDULE OF PARTIES
| JOSEPH MORRISON | Plaintiff |
| and | |
| YANADALE SERVICES PTY LIMITED | Second Plaintiff |
| and | |
| LUBERN PTY LTD | Third Plaintiff |
| v | |
| 180 CAPITAL FINANCE PTY LTD | Defendant |
| - AND - | |
| 180 CAPITAL FINANCE PTY LTD | Plaintiff by Counterclaim |
| v | |
| JOSEPH MORRISON | First Defendant by Counterclaim |
| and | |
| YANADALE SERVICES PTY LIMITED | Second Defendant by Counterclaim |
| and | |
| LUBERN PTY LTD | Third Defendant by Counterclaim |
| and | |
| DEBRA ELLEN CASTELLANO | Fourth Defendant by Counterclaim |
HIS HONOUR:
1 On 20 December 2011, I delivered a judgment in this proceeding, which decided that the inclusion of the higher interest rate, which was 8 per cent per month and therefore 96 per cent per annum, contained in the Loan Facility Agreement between the first plaintiff and the defendant contravened the provisions of s51AB of the Trade Practices Act 1974. I decided that the appropriate order was to vary that Loan Facility Agreement to delete the higher interest rate.
2 The parties have agreed to an order to give effect to that judgment by varying the Loan Facility Agreement.
3 The facts with which my judgment dealt were as follows: 180 Capital Finance Pty Ltd (“180 Capital Finance”), the defendant and plaintiff by counterclaim, loaned $50,000 to Mr Joseph Morrison, the first plaintiff, on 22 April 2008 for a term of 165 days. Mr Morrison, Yanadale Services Pty Ltd (“Yanadale”), Lubern Pty Ltd (“Lubern”) and Ms Debra Castellano signed guarantees and indemnities (“guarantees”) and other documents in respect of the loan. Mr Morrison and the other three guarantors are the defendants to 180 Capital Finance’s counterclaim.
4 Mr Morrison did not repay the loan by the due date. The central issue in the proceeding is what sum, if any, Mr Morrison and the other guarantors, are obliged to repay to 180 Capital Finance.
5 Ms Castellano, who had lived in a de facto relationship with Mr Morrison until about January 2008, was separately represented.
6 The proceeding was commenced by Mr Morrison, Yanadale and Lubern in June 2009, in the Magistrates’ Court at Shepparton, seeking orders that the interest component in the Loan Facility Agreement was null and void and of no effect against Mr Morrison. 180 Capital Finance filed a defence.
7 In November 2009, 180 Capital Finance commenced proceedings against the plaintiffs in the District Court of New South Wales. It applied unsuccessfully to the Magistrates’ Court at Shepparton to stay the proceeding commenced in that Court.
8 The Magistrates’ Court proceeding was transferred to this Court in May 2010.
9 In August 2010, the parties agreed to stay the proceedings in the District Court of New South Wales.
10 On 1 December 2010, 180 Capital Finance filed an amended counterclaim joining Ms Castellano as fourth defendant and seeking to enforce a guarantee that she had executed on 22 April 2008. Judge Anderson made orders that there be a preliminary determination of the issues concerning the validity of the interest rate, but those orders were subsequently varied by an order that all issues be determined at the trial.
11 When the trial commenced on 28 July 2011, Ms Castellano applied to amend her defence to the counterclaim to raise two additional defences, one of which was the equitable defence of unconscionable conduct described in Yerkey v Jones[1] and Garcia v National Australia Bank Ltd.[2] The other defence introduced was not ultimately relied on and need not be further mentioned.
[1](1939) 63 CLR 649
[2](1998) 194 CLR 395
12 The amendment application was put by Ms Castellano’s counsel with an acknowledgement that 180 Capital Finance would be entitled to reasonable time to consider and respond to the amendment, but that Ms Castellano could not pay the costs of an adjournment. Counsel suggested that I hear and determine the issues in respect of the enforceability of the interest rate and defer the remaining issues, including those raised in the proposed amended defence. This was the course initially ordered by Judge Anderson, although that order was varied.
13 I decided to adopt that course for reasons that I gave on 28 July 2011. It had the probable effect of requiring two hearings, but that likelihood was balanced against the application by Ms Castellano to raise the unconscionable conduct defence. I informed counsel that the evidence that was received by the Court during the first hearing could be relied on during the second hearing. Counsel for Ms Castellano was present only during part of the first hearing and did not make any submissions about the enforceability of the interest rate in the loan agreement entered into by Mr Morrison.
14 Ms Castellano claimed an indemnity from Mr Morrison as debtor for any sum she is obliged to pay to 180 Capital Finance. She also claimed contribution from the other guarantors, Yanadale and Lubern, in respect of any sum that she is obliged to pay to 180 Capital Finance. These claims were not disputed by Mr Morrison, or the other guarantors.
15 The hearing of the proceeding resumed on 16 and 17 April 2012.
16 The hearing principally concerned the guarantees, that were among the security documents that Mr Morrison, Yanadale, Lubern and Ms Castellano executed, or signed on 22 April 2008.
17 Ms Castellano relied on the second limb of the principles described in Garcia’s case, which was stated to be:
“[Yerkey v Jones] holds further, in the second kind of case, that to enforce [a guarantee] against [the wife] if it later emerges that she did not understand the purport and effect of the transaction of suretyship would be unconscionable (even though she is a willing party to it) if the lender took no steps itself to explain its purport and effect to her or did not reasonably believe that its purport and effect had been explained to her by a competent, independent and disinterested stranger. And what makes it unconscionable to enforce it in the second kind of case is the combination of circumstances that: (a) in fact the surety did not understand the purport and effect of the transaction; (b)the transaction was voluntary (in the sense that the surety obtained no gain from the contract the performance of which was guaranteed); (c)the lender is to be taken to have understood that, as a wife, the surety may repose trust and confidence in her husband in matters of business and therefore to have understood that the husband may not fully and accurately explain the purport and effect of the transaction to his wife; and yet (d) the lender did not itself take steps to explain the transaction to the wife or find out that a stranger had explained it to her.”[3]
[3](supra) at [31]
18 The rationale for the principle is that equity will not permit a party having a legal right to exercise it in such a way that the exercise amounts to unconscionable conduct. [4]
[4]Garcia (supra) at [32]
Do the principles apply to relationships other than married couples?
19 The first issue was whether the principles applied in Garcia could extend to relationships other than married couples or could apply to de facto relationships. There are conflicting authorities on this issue.[5]
[5]See Liu v Adamson [2003] NSWSC 74 at [23] and the cases discussed in Kranz v National Australia Bank Ltd (2003) 8 VR 310 at [24]-[34]
20 In Kranz v National Australia Bank[6], the Victorian Court of Appeal decided that the rule was not restricted to the relationship of husband and wife, but that
“the principle stated by the High Court in Garcia would make it unconscionable for a bank to enforce a guarantee given by a volunteer if it has not explained the situation to the grantor, and does not know that an independent person has done so, if the bank knows that there was a relationship of trust and confidence between the guarantor and the debtor whose debt has been guaranteed.”[7]
[6](2003) 8 VR 310
[7](supra) at [31] per Charles JA
21 Applying that approach, I proceed on the basis that the equitable defence can apply to close personal relationships, where trust and confidence exist. [8]
[8]Cf Australia & New Zealand Banking Group Ltd v Alirezai [2004] QCA 6.
Ms Castellano’s involvement with Mr Morrison
22 Ms Debra Castellano gave evidence that in 1993 after a family law property settlement, she purchased a property in Traralgon.
23 She first met Mr Morrison in 1995 and that year they commenced living together at her Traralgon property.
24 Ms Castellano has two children, a daughter aged twenty-three and a son aged twenty, who resided with Ms Castellano and Mr Morrison. Mr Morrison has two children, who are aged twenty-three and seventeen. They resided with their mother for some years, but would stay with Ms Castellano and Mr Morrison every second weekend and every school holidays.
25 In 1996, Mr Morrison, who is a construction project manager, moved to New Zealand to take up employment. Ms Castellano and her children accompanied him. In early 1997, when the job was completed, they returned to Traralgon.
26 Mr Morrison then worked in Darwin for six months and Ms Castellano returned to full time work. When Mr Morrison returned to Traralgon in mid to late 1997, he resumed living with Ms Castellano.
27 In 1998, Mr Morrison obtained work in Kalgoorlie and Ms Castellano and her children moved with him. Ms Castellano obtained employment in Kalgoorlie. Mr Morrison’s children visited Kalgoorlie for holidays.
28 They all returned to Traralgon in September 1998 and resided with Ms Castellano’s parents, because her house was rented.
29 In the same year they purchased an investment property in Traralgon.
30 Mr Morrison obtained employment in Sale and Ms Castellano and her children accompanied him. Ms Castellano obtained employment in Sale.
31 In 1999, Mr Morrison obtained employment in Melbourne and for a time lived in a motel in Altona. He returned to Sale on weekends and every second weekend would bring his children with him.
32 In 2000, Mr Morrison and Ms Castellano and her children moved to a property at Altona Meadows. Her children went to school there and Ms Castellano again secured employment. Soon after, Mr Morrison’s son commenced to live with them and then, later in 1999 or 2000, Mr Morrison’s daughter did also.
33 In 2001, Mr Morrison and Ms Castellano purchased a home at Point Cook in their joint names.
34 In about 2002, Ms Castellano and Mr Morrison and Lubern purchased properties at Buchanan Road, Bunbartha in the Goulburn Valley to operate a dairy farm. The properties had two titles. One title was of the land on which a farm house stood. It is the smaller allotment and Mr Morrison and Ms Castellano purchased it in their own names.
35 The other title was the land on which the dairy cattle and a milking shed were located. This land was purchased by Lubern.
36 The dairy cattle were leased through Cowbank Pty Ltd, which was a specialised stock company. At the end of the lease, Yanadale became owner of the cattle.
37 Some of the purchase moneys for the Bunbartha properties came from Mr Morrison’s mother and Ms Castellano and Mr Morrison also used superannuation money that they had available.
38 Ms Castellano said that Mr Morrison had a lifelong dream to own a farm. He had grown up on a farm and knew quite a lot about farming. It was in his blood.[9]
[9]T 462
39 Mr Morrison and Ms Castellano engaged managers to do the day to day running of the farm, but they worked on the farm on holidays and other breaks.
40 The income earned from the farm was adversely affected by the drought that deepened after the purchase of the properties, but Mr Morrison and Mr Castellano decided to keep the farm going.
41 To help Mr Morrison, Ms Castellano sold her original property at Traralgon and used the proceeds of sale to assist in the running of the farm.
42 On 1 February 2005, an administrator was appointed to Lubern. The largest proofs of debt lodged were: $364,895 by Banksia Mortgages Pty Ltd, $161,100.31 by Banksia Securities Pty Ltd and $101,522.56 by the Deputy Commissioner of Taxation.
43 Ms Castellano attended a meeting of creditors of Lubern on 8 February 2005. She lodged a proof of debt in the sum of $45,000, for the debt owing to her for the funds she advanced to Lubern, when she sold her original Traralgon property.
44 Mr Morrison told a creditor’s meeting that Lubern’s profit had been affected to “the tune of $200,000 approximately” due to the drought and abnormal costs such as extra feed, water and the cost of a replacement bore.[10]
[10]Further Court Book 358
45 When Lubern was placed into administration, Ms Castellano spoke with Mr N Hill of the firm, Harrison’s Insolvency about the voluntary administration process. She considered that she understood that process in general terms. She understood that if Lubern had gone into liquidation, she may have been personally liable for its debts. [11]
[11]T 482
46 On 21 March 2005, the creditors resolved that Lubern enter into a Deed of Company Arrangement (“DOCA”), which provided for the directors, Mr Morrison and Ms Castellano to make 34 monthly payments to the administrator totalling $236,000 between November 2005 and December 2007.
47 On 13 July 2007, the DOCA was varied, to provide that the total of the monthly payments was $246,000, with payments commencing in November 2005 and ending on 15 August 2007 with a final “balloon payment” of $188,000.
48 Yanadale was formed at the time that Lubern was placed into administration. It was the entity used to provide Mr Morrison’s services as a construction manager and to receive the income from his work. He received a high income from his work, in 2005, between $20,000 and $24,000 a month. Previously, the farm income and the income that Mr Morrison received from his work was paid to Lubern.
49 By 2007, Mr Morrison and Ms Castellano’s relationship was under stress, not least because of the financial pressure on them. Mr Morrison was very attached to the farm. It was important to him to regain control of Lubern, as he did not want to lose control of the farm.[12]
[12]T 90
50 Ms Castellano said that because of the pressure that Mr Morrison was under, it was difficult for her to end their relationship and accomplish her objective of separating their finances.
51 At that time, Ms Castellano and her two children and Mr Morrison’s daughter were living at the Point Cook property. Mr Morrison’s daughter continued to reside there until 2011, when she commenced studying at university.
52 Mr Terry Sofra, who was an accountant in Shepparton, advised Mr Morrison about his financial position. Ms Castellano attended a meeting with Mr Morrison and Mr Sofra on 12 November 2007, at which an action sheet with twelve items to be addressed was prepared.[13] These included farm equipment that needed to be purchased and restructuring the debt. She said that she did not completely agree with some decisions that were made at that meeting and she sent Mr Morrison an email on 15 November 2007 containing her “concerns” about the items contained in the action sheet.[14] She expressed concern that she was the only director of Yanadale and that, if Mr Morrison did not become a director, she would be the only person liable for changes and that she “ was not prepared to legally take this debt on in my own name.”[15]
[13]Second Further Court Book 241-242
[14]Second Further Court Book 244B
[15](Supra)
53 In late 2007 and early 2008, Mr Morrison and Ms Castellano faced difficulties making the final payment due under the DOCA. If it was not paid, the administrator was proposing to put Lubern into liquidation.
54 It seems that during this period Mr Morrison sent emails to Ms Castellano proposing a restructuring of finances, which included selling the Point Cook property.[16]
[16]Second Further Court Book pps 180-184
55 During this period, of late 2007 or early 2008, perhaps in response to Mr Morrison’s refinancing proposal, Ms Castellano sent a document to Mr Morrison and Mr Sofra. It is necessary to set significant parts of this document, as it gives context to Ms Castellano’s views about her financial relationship with Mr Morrison. In part, the document stated:
“Cap history debt and do not enter future debt and of commitments in your name.
If you sign any future restructure in your name to Yanadale you will be legally liable.
As I understand it if I sign this director’s guarantee I will be legally liable for money that currently I have and are given no control, say or input into.
At any time Joe can and has removed funds from Yanadale which legally leave me in debt…
I understand that I now given my circumstances I need to protect my interest going forward and leaving myself open to this proposal is not in my financial best interest.
I do however understand and see what you are both saying that the total outcome is reliant on my signing, however please understand that signing this also leaves me legally liable if this turned sour.
I am concerned about the tax debt that I have in my name of $30,000 and I’m also aware that I have a car in my name which has a $50,000 loan attached that I alone legally am liable, given what the proposal I need to take all my out goings and possible change of events in our personal relationship in to consideration.
The one thing that I have come to understand is the only guarantee is that there is no guarantee.
I also have 3 children to look after, and I’m not sure what our future holds and given any sudden changes to our relationship that will no doubt bring great changes to my future financial outgoings…
I recommend that I remove myself from Yanadale and allow you to restructure as suits yourselves and recommendations.
…
I see this as a merry-go- round of finances that has and still continues to put pressure on an already pressured relationship and family that is sadly falling apart with children involved. To me this is very much about integrity.
This can limit my personal opportunity to borrow [in] the future, given which ever way [our] relationship goes…together or not my name needs to be clear from a bad credit rating as is may well be all I come out with. At least that enables me to rebuild. If I sign myself to this and things go wrong I too have to enter low doc loans, higher interest rates and a financial future on the back burner I cannot afford to carry. This will only take me longer to work through.
I need to be mindful that my future regardless I will have 3 teenagers.
Yanadale buying the assets from Lubern at market value will automatically reduce in value as if I was to sell them I would not receive what you want Yanadale to purchase them for.
I understand that in purchasing the asset some of them come with an already incurred debt, so you’re asking me to take on a debt in my name…
I am aware that this reduces that amount owing overall, and I understand that without this structure change neither of us would end up with anything, however do you understand what my concerns are for my and or our financial future.” [17]
[17]Second Further Court Book 185-186
56 In early January 2008, Mr Morrison and Ms Castellano ended their de facto relationship, but their children continued to live at the Point Cook property. Mr Morrison continued to visit the property regularly.
57 Ms Castellano spoke to a friend, Ms T Kyle, who was a mortgage broker, about obtaining finance to assist with the final DOCA payment, but nothing eventuated.
58 Mr Morrison continued to seek finance and contacted 180 Capital Finance, who offered to lend him $50,000 for 165 days. The details of Mr Morrison’s attempts to obtain finance are set out in the judgment of 20 December 2011. This amount of money was sufficient, with other funds that he had available, to make the final payment due under the DOCA.
59 In March 2008, Mr Morrison told Ms Castellano of the offer of finance and requested her to guarantee the loan, as 180 Capital Finance required. Mr Morrison told her that he had spoken to Mr Jay Onley, who is head of sales of the 180 Capital Group, and who had told him that he could help him with the $50,000 loan and with refinancing the farm after the DOCA payments were completed.
60 Mr Morrison wanted to obtain the funds to pay the amount due under the DOCA, to remove the administrator and enable him to continue with the farm. Ms Castellano and Mr Morrison would then be able to separate their finances.
61 In early April 2008, Ms Castellano and Mr Morrison received a document from 180 Capital Finance entitled an “Offer of Short term Finance” for the Principal Advance of $50,000. The document commenced with the recital that 180 Capital Finance:
“offers to the Borrower a Loan Facility on terms and conditions to be incorporated into a formal Loan Facility Agreement, and summarised below, and other terms as contained in or varied by any document issued by the Financier to the Borrower from time to time.”
62 The document described the purpose of the Principal Advance as follows:
“The Principal Advance is strictly provided for business or investment purposes and any other purpose the Financier consents to in writing.
63 Under the heading “Interest Rate on the Principal Advance”, it stated:
“For so long as there is default under the Loan Facility, the interest rate on the Principal Advance will be 4% per month (‘Interest Rate’). In the event of default under the Loan Facility Agreement the interest rate is and shall remain 8% per month (‘Specified Rate’) until all amounts due under the Loan Facility Agreement are repaid. All interest will be payable on the Repayment Date. The Financier may elect to capitalise any interest as when it sees fit.”
64 The document stated under the heading, “Documents and Security in the form prepared by the Financier”, that the Financier might require any, or all, of the following to be executed:
1. The Loan Facility Agreement.
2. Director Guarantees.
3. Third Party Guarantees
4. Fixed and Floating Charges granted by the Guarantors in favour of the Financier.
5. Real Property Mortgage granted by the Borrower and/or Guarantor in favour of the Financier. [18]
[18]Court Book vol 1 p 511
65 The Offer contained a number of conditions precedent to the Principal Advance including;
“The obligation of the Financier to make the Principal Advance is subject to the following conditions precedent (unless otherwise waived by the Financier):
…
5. the Borrower, Mortgagor and Guarantor obtain independent legal advice with respect to all formal loan documentation in relation to the Loan Facility.”
66 On 1 April 2008, Mr Morrison sent Ms Castellano an email stating:
“Deb, I need you to support me with this. The idea is that 180 Corporate will provide short term finance of approximately $50k to make up the deficit to pay out the DEED. They will then require within 165 days for this loan to be paid out to them and will in the mean time secure a full refinance package for the loans on the farm, hopefully at a reduced rate of interest.
At this time I haven’t even considered changing the ownership of the land, but I may do as part of our settlement, as much as I don’t want to do this. We need to discuss but it is not critical now. The main thing is to get this over the line.
As I said yesterday cowbank has been paid through a loan from a friend of Leos and mine, so effectively Yanadale owns the herd. I have a loan application into Landmark for the re-finance of the herd which will raise $95k.
I have bought a new tractor as we discussed with Terry and will sell the existing tractor on cash back as part of the deal, which will give me $25k. I am at present trying to re-finance the vat, topper, fert spreader, and other equipment to raise a further $30k.
All going well this will give me $150k. Then with 180 Corporate tipping in $50k I can pay out the DEED.
Please sign and fax these documents to Jay Onley on … .”[19]
[19]Second Further Court Book 201
67 Ms Castellano told Mr Morrison that she could not understand why he would want her to enter into a financial document, when they were separating and in light of the fact it has taken them so long to do so. His attitude was that he only thing he wanted to do was to keep his farm. He told her that he could not afford to default on the loan and promised her that he would not.[20] Her evidence was that she did not wish to sign the security documents and told him that she did not want to support anything that he did at that time and that she did not want to go ahead with signing the documents.[21]
[20]T470
[21]T467
68 She said that she ripped up documents that Mr Morrison provided her, but it is not clear which documents they were.[22]
[22]T 469
69 Ms Castellano gave evidence that Mr Onley telephoned her and said that Mr Morrison had asked him to call, because she was not happy to pay or she wasn’t happy to sign the documents. Mr Onley said that the proposal was “a loan, simple as that, of $50,000 for 165 days” and then Ms Castellano would be able to assist Mr Morrison to refinance the farm debt in the companies’ names. She told him that they were separating and it wasn’t something that she wanted to go ahead with.[23] She gave evidence that she did not have a lengthy conversation with Mr Onley, because it was something she was not willing to do.[24]
[23]T468 and T491
[24]T 491
70 Mr Onley gave evidence, at the first hearing, that he spoke to Ms Castellano on several occasions in the period March to 16 April 2008. She told him that she had received legal advice, that she was not to sign documentation and that the conversation went along the lines that she had bailed Mr Morrison out of problems before and was not prepared to assist in this process.[25]He described his understanding of her relationship with Mr Morrison as being “that they were separated and had kids”.[26]
[25]T210
[26]T 210
71 Ms Castellano denied that she told Mr Onley that she had received legal advice. There was no evidence that she had received any such advice.
72 On 16 April 2008, Mr Morrison, Mr Onley and Mr Sofra exchanged a series of emails relating to the Offer of Short Term Finance[27]as follows. Mr Onley emailed Mr Morrison stating:
[27]The emails of 16 April 2008 are at Court Book 205A-205J
“Please deposit the balance for the 2 valuations of $1050 into the attached bank account details ASAP.
What needs to be occur is all documents as per the document check list to be sent to us including Original Offer doc and ID Photographs or scan for Debra.
We will then send you Loan Facility Agreement and mortgages to sign once returned we lodge our security and the funds will be available the next day.
The process takes 3-5 days for mailing.
As you can see this now down to the wire.
Let me know how you go with Debra.”
73 Shortly thereafter, after an email from Mr Sofra as to the status of the loan and referring to the “need to act quickly now”, Mr Onley replied:
“The valuation has been completed (890k for land and 950K with shed) and the refinance exit is very close.
However Debra has refused to sign the loan documents from 180.
Joe is currently working on this but it is causing major delays as we have been ready to go since last week but cannot do anything until this issue is resolved.
Also how is the lapse of caveat going from your end?”
74 Mr Sofra replied to Mr Onley that he would speak “to Deb today” and that Mr Onley may need to speak to Mr Morrison’s solicitor, Mr Tony Sofra. It appears that Mr Sofra met with Ms Castellano that day.
75 Mr Morrison replied to Mr Onley:
“Jay, I posted the originals to Deb on Monday and will ensure they have been signed and sent on Friday, I can’t do this any earlier unless Deb agrees to do it for me today. I believe I have copied all the other requirements to you.
I will need to arrange for someone to sign the documents on my behalf as I return to Adelaide late on Monday the 21st and to site at 0600 on Tuesday. How do you want me to handle this?? It would be good if the docs were in Melbourne on the weekend for me to sign and return.
I think Deb is coming around, she has just amateur advise from friends not to sign which is a problem.”
76 Three and a half hours’ later, Mr Morrison emailed Mr Onley stating:
“Jay, Deb has agreed to sign the forms and will have them witnessed tonight by her trusting friend and faxed to you overnight or first thing tomorrow morning. I will be in Melbourne on Friday morning and have the originals signed etc and return them with the other docs provided they arrive at ….Point Cook before then.”
77 An hour and a half later, Mr Sofra emailed Mr Onley stating:
“Deb has now signed and we need an answer - I do not want to go into next week without some security.
I do have someone ready to take the deal over.”
78 Still later on 16 April 2008 Mr Morrison emailed Mr Onley:
“Jay Deb will fax the other 4 pages through now. If you have any problems with this please ring her on…”
79 Ms Castellano could not recall signing the Offer of Short Term Finance. The document is dated 17 April 2008 and her signature was witnessed by Ms Suzanna Spark, who also witnessed the security documents on 22 April 2008 and who gave evidence, that is referred to below.
80 There was no evidence whether Ms Castellano kept a copy of the Offer of Short Term Finance document, or sought advice about its terms.
81 Ms Castellano gave evidence that Mr Sofra, rang her at about that time and said that Mr Morrison had told him that she was refusing to sign the documents and that he did not think that she understood the severity of the consequences, if she did not sign. They would lose everything and would go bankrupt. The evidence of the emails referred to previously suggests that this conversation occurred on 16 April 2008.[28]
[28]T 468
82 When Ms Castellano separated from Mr Morrison in January 2008, she sought her own accountancy advice from Ms S Campbell, who was an accountant in Ballarat. She asked Ms Campbell what she could do “moving forward from the position she was in”. Ms Campbell told her that the arrangement proposed by Mr Morrison was not ideal, but that she would “be damned if you do and damned if you don’t”. It was not clear from the evidence, when Ms Castellano consulted Ms Campbell, it may well have been after she received the Offer of Short Term Finance. It is also not clear whether they discussed the terms of the proposed loan, or why Ms Campbell considered that Ms Castellano was “damned if she did”, which presumably was meant to refer to the consequences of her signing the security documents.
Signing the Guarantee
83 Ms Castellano gave evidence that she signed the guarantee under enormous duress, stress and pressure. She said that there were constant phone calls from Mr Morrison and calls from Mr Onley and Mr Sofra, telling her that if she did not sign them, she would have nothing.
84 Ms Castellano arranged for a friend, Ms Suzanna Spark, to come to her home in Point Cook, first thing on 22 April 2008 and witness her signature on the documents. Ms Spark gave evidence. She has been a friend of Ms Castellano for eight years. Mr Morrison arrived at the home soon after Ms Spark. He brought documents for Ms Castellano to sign. He was pretty rushed and there was a lot of pressure and stress in the room. Ms Castellano described him as quite rattled and frantic and stressed and tense. He told her where to sign and initial. The three of them sat at the table in the front dining room and Ms Castellano and Mr Morrison signed the documents and Ms Spark witnessed their signature.
85 Ms Castellano signed mortgages of the properties at Bunbartha and Point Cook, the guarantee and indemnity and the notice to complete. She also signed a Declaration by Guarantor for Borrower, which included the following paragraphs:
“ 4. I acknowledge that prior to signing the Guarantee and Indemnity (‘Guarantee’) I was advised by the Lender that it would be in my best interests to obtain independent financial and independent legal advice in relation to the financial and legal implications arising from the Guarantee before I signed the Guarantee.
5 I confirm that on the recommendation of the Lender, I obtained independent financial advice and independent legal advice.”[29]
[29]Court Book 611
86 Almost exclusive attention in the second hearing was directed at whether the guarantee and guarantee was enforceable.
87 Ms Castellano said that she was aware that giving a guarantee meant that if something went wrong, or if Mr Morrison did not pay the debt, she would be liable for it.[30] She said she had never signed a guarantee previously. She did not read the documents in full. Ms Castellano’s understanding was that she was guaranteeing a loan for $50,000 for 165 days with Mr Morrison assuring her he would not default on it. If he did, she would have to pay out the remainder of the loan.
[30]T 472, 485
88 The definition of “guaranteed moneys” in the guarantee included:
“All moneys which now or in the future is owing (actually or contingently).[31]
[31]Court Book 556
89 After Ms Castellano had signed the documents at the Point Cook property, she and Mr Morrison then went to a local pharmacist to make a statutory declaration that 180 Capital Finance required.
90 The relevant parts of that statutory declaration are as follows:
Paragraph 2 stated that Ms Castellano was aware that:
(a) If the Borrower fails to make any payment on time, I, as the guarantor, will be liable to remedy that failure, and that could involve me in payment to the Lender of all amounts owed by the Borrower to the Lender including principal, interest, default interest and the Lender’s costs of rectifying the default;
(b) If, as the guarantor, I fail to remedy any failure by the Borrower to comply with the terms and conditions of the loan in any way, including the obligation to pay principal, interest, default interest, or other charges:
·the Lender can sue me personally;
·.the Lender can take possession of my property secured to the Lender and sell it to recover the amount owing together with interest and other costs, including solicitor’s costs, costs of selling the property and the costs of maintaining the property; and
·if the proceeds of sale from my property are insufficient to satisfy the debt to the Lender, the Lender can sue me for the deficit capital;
(c) the Lender can exercise its rights against me as the guarantor even if it has not pursued the Borrower;
(d) my liability under the loan documents is unlimited and may be affected by cross guarantees; and
(e) by making a Statutory Declaration verifying the giving of the advice I am making a statement having the force of an Oath which can be relied upon by the Lender.
91 Paragraph 3 stated that Ms Castellano had had ample opportunity to seek legal advice in relation to, and freely and voluntarily sign, the security documents.
92 Paragraph 4 stated that Ms Castellano had not relied on any representations, conduct or any information given by any person representing or associated with the Lender in relation to the loan and security documents and an acknowledgment that the terms of the loan and the security documents represented the only provisions which would apply in relation to any amounts owed by the Borrower to the Lender and the guarantee provided by her.
93 Paragraph 6 stated:
“I acknowledge that the interest rate applicable in relation to the loan is that rate determined in accordance with the relevant Loan Facility Agreement. Rates specified in any other documentation relating to the loan are only applicable in the event that the Lender is prevented from relying on the rates determined in accordance with the Loan Facility Agreement.”
94 Ms Castellano said that she did read the statutory declaration before she signed it, but that she did not completely understand it.
95 Mr Morrison gave no detailed evidence of his dealings with Ms Castellano to obtain her signature to the guarantee and loan documents.
96 On 8 May 2008, 180 Capital Finance sent copies of the security documents to Ms Castellano.
97 Ms Castellano said that it was only in December 2011, that she understood that the guarantee meant that she was liable for any default by Mr Morrison in connection with any refinancing arrangements that he made with 180 Capital Finance. She said that if she had known that, she would not have signed the document in “any way, shape or form” as she was seeking to separate her finances from Mr Morrison.[32]
[32]T 472
98 Ms Castellano gave evidence that she only became aware that Mr Morrison had defaulted on the loan with 180 Capital Finance when she received legal letters from solicitors. 180 Capital Finance sent a letter dated 18 February 2009, headed “Letter before legal action seeking the sum of $108,384.46”. She then received a solicitor’s letter of 31 May 2009. At that point Mr Morrison told her that everything was under control and in the hands of Mr Sofra.
99 The voluntary administration of Lubern came to an end when the last payment due under the DOCA was made in May 2008 and the administrator retired.[33]
[33]T 224
100 Ms Castellano continues to reside at the Point Cook property with her son. She is employed as a store manager.
The relationship of Ms Castellano and Mr Morrison in April 2008
101 The first issue to determine is whether the relationship of Ms Castellano and Mr Morrison was of the character that was capable of attracting the equitable defence described in Yerkey v Jones and Garcia’ s Case.
102 Ms Castellano and Mr Morrison did not marry, but lived together as husband and wife between 1995 and 2008. Their children from other marriages lived with them. The Point Cook property was purchased in 2001 in their joint names and they commenced to live in it. Ms Castellano relocated her home on a number of occasions, because Mr Morrison needed to move for his work commitments.
103 They jointly acquired one of the farming properties and acquired the other property through Lubern, as Mr Morrison wished to pursue a farming venture. The financial difficulties that led to the requirement for the loan arose from the conduct of that farm.
104 180 Capital Finance argued that at the time that the guarantee and indemnity was entered into, the parties were separated. They were no longer in the relationship that was the basis of Ms Castellano’s reliance on the principles in Garcia and Yerkey v Jones. The evidence establishes that 180 Capital Finance took steps to lend money, knowing that the relationship did not exist.
105 In Garcia, Gaudron, McHugh, Gummow and Hayne JJ stated:
“We consider that the only question of notice that arises is whether the creditor knew at the time of the taking of the guarantee that the surety was then married to the creditor. Other questions of notice do not intrude.”[34]
[34](Supra) at 411 [40]
106 Ms Castellano relied on the fact that all documents prepared by 180 Capital Finance gave the same address for her and Mr Morrison. Mr Onley regarded them as separated, but that they had “kids”.[35] When they separated, it was not a complete and immediate separation. They kept in contact and Mr Morrison’s daughter continued to live with Ms Castellano until she commenced university in 2011.
[35]T 210
107 I accept Ms Castellano’s submission that her separation from Mr Morrison in January 2008, was not a complete and immediate breaking of the relationship. The influence from the relationship lasted.
108 I consider that the relationship of Mr Morrison and Ms Castellano, even in April 2008, was a close personal one and was one of mutual trust and confidence. I accept Ms Castellano’s submission that 180 Capital Finance was aware that the relationship, even in April 2008, was one in which Mr Morrison believed he could influence her. The emails of April 2008 between Mr Morrison, Mr Sofra and Mr Onley demonstrate that Mr Onley knew that the relationship was sufficiently alive, for Mr Morrison to still be able to attempt to persuade Ms Castellano to sign the loan documents.
109 The following comments of Daubney J, in Dowdle v Pay Now For Business Pty Ltd[36], although made on a summary judgment application, are relevant:
“I would not be prepared to find, on a summary basis, that the fact that Mr and Mrs Dowdle had separated is necessarily fatal to reliance on the Garcia principles. Whilst in many circumstances, separation is likely to bring an end to the relationship of trust and confidence that exists between the parties to a marriage, this is not necessarily always so. One can readily conceive of an ‘amicable separation’ in which there continues to be a close relationship involving a significant degree of trust. (Equally, I should add, one can easily conceive of a married couple who continue to reside together but whose relationship is, in fact, poisonous and completely devoid of trust and confidence.) Furthermore, a separation is, by definition, not irreversible. For the law to assume that that the trust that exists between a married couple automatically dissolves the moment cohabitation ends would be artificial. Are the courts to assume, in the case of temporary separations, that the Garcia principle applies one week while the parties are cohabitating, but ceases the next when they are not, only to revive a month later when the parties are wholly or partially reconciled? This aspect of the relationship between the Plaintiff and Mr Dowdle clearly requires investigation at trial.”[37]
[36][2008] QSC 224
[37](Supra) at [35]
110 The observations of Daubney J are equally applicable to couples in de facto relationships, who have recently separated.
111 I will next consider the four issues identified in the second limb of Garcia, bearing in mind, that the ultimate question is whether the conduct of the lender was unconscionable.
Issue1: Did Ms Castellano understand the purport and effect of the transaction?
112 In respect of this issue Ms Castellano must establish that she did not understand the purport and effect of the transaction. In State Bank of New South Wales Ltd v Chia, Einstein J stated:
“An understanding of the ‘purport and effect’ of the transaction includes, at least, an understanding of the fact of liability, the general extent of liability, and the possible consequences of default: Yerkey v Jones (at 689). However it is not productive of an equity that the wife misunderstood or failed to appreciate the degree of risk associated in the transaction, or the improvidence or unwisdom of the uses to which the money will be put: Yerkey v Jones (at 686). Further the wife’s misapprehension must be of a material matter: Bank of Victoria v Mueller (at 648); that is, material to the liability the creditor wishes to impose upon the wife.”[38]
[38](2000) 50 NSWLR 587 at 600-601.
113 For a creditor to avoid the possibility that the transaction will not be enforceable against the surety, the creditor will need to either take steps to explain the effect and purport of the transaction sufficiently, or to have reasonably believed that the purport and effect had been explained by a “competent, independent and disinterested third party”.[39]
[39]Garcia supra at 411 [41] and Young, Croft and Smith, On Equity, 327
114 Ms Castellano’s evidence was that she believed the guarantee was for a short term loan of $50,000 that would be repaid within 165 days. Mr Morrison told her that and he sent her an email to that effect. Mr Morrison was receiving substantial income as a construction manager. She did understand that she would be liable for the $50,000 loaned by 180 Capital Finance, if Mr Morrison defaulted in repaying it. However, she was not aware of the interest rates of 48 per cent per annum or 96 per cent per annum and therefore of the consequences of any default by Mr Morrison in repaying the loan. Her guarantee extended to all liabilities: past, present and future; and thus exposed her to a wide financial liability.
115 180 Capital Finance argued that Ms Castellano had agreed in evidence that she understood the purport and effect of signing a guarantee, including her liability if Mr Morrison defaulted on the loan facility. She received advice from her accountant, Ms Campbell, and a friend, Ms Kyle, who was a mortgage broker, prior to signing the guarantee.
116 Mr Onley gave evidence, in the first hearing, that he explained the transaction and the guarantee to Ms Castellano and spoke to her on several occasions. She told him that she had received legal advice that she was not to sign the documentation, that she had bailed Mr Morrison out of problems before and was not prepared to assist in this process.[40] Mr Onley’s evidence in cross-examination included:
“Q: So you were telling Mr Morrison that he was going to be paying the equivalent of 96 per cent per annum if he did not pay on time … ?---
A: Yes, that is correct.
Q: The 165 thousand … ?---
A: This was explained to Debra Castellano.”[41]
[40]T210
[41]T 232 L30- T233, L1-3
117 Ms Castellano’s evidence in cross-examination was:
“Q:You said you spoke to Jay Onley prior to the signing of the guarantee?---
A:Jay Onley phoned me, that’s correct.
Q:It’s the case isn’t it that in that conversation he explained to you the interest rates that were being applied in respect of this short term loan facility, is that correct?---
A:No, that’s not my recollection.
Q: When you say it’s not your recollection, you don’t recall?---
A: That’s correct.
Q: So you can’t say one way or the other?---
A: I recall Jay Onley calling me because Joseph had asked him to call me because I wouldn’t sign the documents.
Q: It’s the case isn’t it, that when you spoke to Mr Onley he also explained to you the terms of the loan facility, do you agree with that proposition?---
A: He explained that it was a $50,000 loan for 165 days, full stop. We did not discuss interest rates, I don’t recall. I didn’t have that lengthy conversation with Jay Onley because it wasn’t something I was willing to do.
Q: So you don’t recall when you discussed with him, no discussion with him that you told him you had take advice and the advice was not to enter into the arrangement. Did you or did you not say that?
A: I didn’t – the only advice I had received would have been from my accountant, and my friend Tracey, the mortgage broker.
Q: And that would have been advice in relation to---?
A: As to whether I shared that with Jay, you’re asking me to recall something that was a long time ago. To say yes or no, it’s – I don’t recall, I can only tell you what I recall.”[42]
[42]T 491- 492
Q: I understand that’s fine. So it is the case that you sought advice from your accountant about this transaction that led to the signing of this guarantee?---
A: Seeked advice, in what terms do you mean by that?
Q: You said that if you had spoken to Jay Onley about advice you would have been talking about your accountant. I am asking, did you ask your accountant for advice about this guarantee?
A: I asked my accountant what I could do moving forward from the position I was in, because when Joseph and I separated, I then needed my own accountant, so I said to her ‘what can I do moving forward’ so the advice was – the advice I was seeking at that that time was what can I do to free myself, or to move forward? I was after my own accountant, and this seemed, I felt like the understanding of stuff was out of my depth, and she said, ‘Based on the information you are sharing with me today you are going to be damned if you do or damned if you don’t.”
HIS HONOUR: That was Ms Campbell was it?---
A: Correct.
Q: As I understand your evidence, you only spoke to Jay Onley once, is that what your evidence is? ---
A: Correct.
Q: If I said to you Jay Onley said that he had spoken to you on several occasions, you would disagree with that proposition?---
A: Yeah, I would disagree, I can’t recall.
Q: And if I also said to you that you advised Mr Onley that you had sought legal advice as well as financial advice, you would disagree with that proposition?---
A: I completely disagree with that. I did not seek any legal advice. I wish I had.
Q: So, if you don’t recall discussing the interest rate with Mr Onley you wouldn’t recall any discussion about negotiating the rate of interest either, would you?
A: I didn’t. It wasn’t my loan to negotiate. It wasn’t my loan to negotiate. It wasn’t my loan. Why should I have such a conversation? No.
Q: What you are telling me now is what you think happened not what you know happened, that’s right, isn’t it?---
A: I know I didn’t discuss interest rates, it wasn’t my loan.”[43]
[43]T 491-493
118 I find that Ms Castallano understood the effect of a guarantee. So much is clear from her email of April 2008 to Mr Morrison and Mr Sofra and from her evidence. That understanding by itself does not prevent reliance on the equitable defence.[44] The question for decision is whether she understood the nature and effect of this transaction.
[44]See Garcia ( supra) and Agripay Pty Ltd v Byrne [2011] QCA 85 where the surety understood the nature of a guarantee but still succeeded in relying on the defence.
Browne v Dunn
119 Counsel for 180 Capital Finance relied on the rule in Browne v Dunn[45] and pointed to the fact that Mr Onley had not been challenged about the accuracy of his evidence that he had explained the interest rate to Ms Castellano. It has to be borne in mind that Ms Castellano took little part in the first stage of the hearing in this proceeding. However her counsel did briefly cross-examine Mr Onley, not on this issue, but on an issue which was not ultimately pursued.[46]
[45](1893) 6 R 67
[46]T 266-267
120 180 Capital Finance suggested that there was vacillation in Ms Castellano’s evidence concerning the information, that she received from Mr Onley and the advice she received about the effect of the guarantee. It also referred to her statutory declaration and the fact that she understood the necessity to tell the truth.
121 A breach of the rule in Browne v Dunn does not mean that the Court can disregard Ms Castellano’s evidence: see Bulstrode v Trimble.[47] The extent of Ms Castellano’s understanding of the purport and effect of the guarantee was always in issue and was identified as an issue in the second further amended defence to counterclaim and the reply to it. The interest rate was very high. The question whether Ms Castellano understood the rate was an obvious issue. 180 Capital Finance chose to call no evidence about that issue and now relies on brief evidence arising in cross-examination. It did not seek to lead further evidence and made no application to recall witnesses. I do not consider that 180 Capital Finance will suffer any unfairness, if I rely on Ms Castellano’s evidence and if I decide not to accept Mr Onley’s evidence on this matter. I doubt that the rule in Browne v Dunn has been breached, but even if it has been, I consider that I should take the evidence into account, but also take into account that Mr Onley was not challenged on his evidence on this point.
[47][1970] VR 340 and see Seymour v Australian Broadcasting Commission (1977)19 NSWLR 219,225 and the authorities discussed in Darmanin v Cowan [2010] NSWSC 1118 [99]- [128]
Application by 180 Capital Finance to amend its reply to Ms Castellano’s defence to counterclaim
122 In final submissions, counsel for 180 Capital Finance sought leave to file an amended reply to the second further amended defence to the amended counterclaim. The amendments were to record admissions to allegations in Ms Castellano’s final version of her defence to the counterclaim, that she and Mr Morrison commenced living as husband and wife in a de facto relationship in mid-1995 and that they separated in January 2008. It also sought to include an amendment to paragraph 7G(b) to state that it:
“Repeats and relies on paragraph 7E(b) of the Reply at which time on at least one (1) of those occasions Jay Onley spoke to the Fourth Defendant by Counterclaim and explained the transaction”.
Paragraph 7E (b) pleads that 180 Capital Finance:
“admits Jay Onley spoke to the Fourth Defendant by Counterclaim twice.”
123 The parties filed written submissions about this application. Ms Castellano opposed it, on the basis that it alleged for the first time that the loan transaction was explained by Mr Onley to Ms Castellano and that this allegation had not been ventilated in evidence. The evidence that Mr Onley gave about his conversation with Ms Castellano did not provide any detail of the explanation that he provided to her.
124 I allow this amendment. It reflects the evidence that given at the first hearing by Mr Onley.[48] Ms Castellano was cross-examined about the number of contacts that she had with Mr Onley. He was cross-examined by counsel for Ms Castellano during the first hearing, but the equitable defence was not then being argued. All parties knew that the evidence in the first hearing was evidence in the second hearing. Any party could have sought to recall Mr Onley during the second hearing.
[48]See the authorities discussed in Civil Procedure – Victoria pps 4143-4144
Conclusion on issue one
125 I prefer Ms Castellano’s evidence that Mr Onley did not tell her the interest rate payable under the Loan Facility Agreement. Mr Onley’s brief evidence about explaining the interest rate to Ms Castellano does not provide a sound basis for concluding that he provided instruction about the loan transaction to Ms Castellano. I take into account that Mr Onley was not challenged about his evidence, but it was only given in cross-examination and did not respond to the question he had been asked. It is probable that Ms Castellano, who was weighing up the risks of the loan, would have queried it, if she had become aware of it. There is no evidence that Ms Castellano did ever question the interest rate.
126 I accept Ms Castellano’s evidence that she did not understand the very high interest rate that would apply if there was a default in repayment of the loan.
127 I find that Mr Onley did not give any real explanation to Ms Castellano of the interest rate in the Loan Facility Agreement. I also accept her evidence that she did not know that it was an all moneys mortgage.
128 To understand the purport and effect of the guarantee, it was necessary for Ms Castellano to understand the interest rate payable under the Loan Facility Agreement.
Conclusion on issue one
129 Ms Castellano has established that she did not understand the purport and effect of the guarantee.
Issue 2: Was Ms Castellano a volunteer?
130 Ms Castellano argued that she received no direct benefit from the giving of the guarantee. The fact that she had been a director of Lubern was not enough to confer a benefit on her. She was not shareholder. She was appointed a director on 21 March 2000. She ceased being a director on 20 June 2006. She was appointed a director of Yanadale on 31 January 2005 and ceased to be a director on 25 January 2008.
131 180 Capital Finance’s pleading that Ms Castellano was not a volunteer is as follows:
(a) it denies that the sole or only purpose of the Loan Transaction was for the benefit of Morrison to allow him to retain the dairy property;
(b) the purpose of the Loan was to further pay out the DOCA for Lubern;
(c) Ms Castellano was a director of Lubern between 8 March 2000 to 26 June 2006;
(d) the DOCA could not be effectuated unless the loan was advanced by 180 Capital;
(e) if the DOCA was not effectuated Lubern would have been wound up in insolvency;
(f) if Lubern was wound up in insolvency Ms Castellano may have been liable for insolvent trading pursuant to s588G of the Corporations Act 2001.
132 Little attention was directed to Ms Castellano’s claim to be owed $45,000 by Lubern. The evidence does not establish, however, that as at April 2008 that there was any prospect of Ms Castellano would be repaid that debt, if Lubern continued to operate.
133 The authorities establish that in order for a surety not to be a volunteer the benefit to them from the transaction must be direct and immediate. Where the transaction is not ex facie for the benefit of the wife, then the onus will lie on the party seeking to enforce the security to show that the wife was not, relevantly a volunteer.[49]
[49]See State Bank of New South Wales Ltd v Chia (2000) 50 NSWLR 587 at 600-602 and Bank of Western Australia Ltd v Abdul [2012] VSC 222 at [58]
134 In Cranfield Pty Ltd v Commonwealth Bank[50], Mandie J considered that a wife, who had signed a guarantee, had no beneficial interest in the company which received the loan and which was the alter ego of her husband. His Honour stated that:
“Her transaction with the CBA was voluntary in the sense that [she] obtained no direct or immediate gain from the bill discount facility or other obligation of Cranfield which she guaranteed (see Garcia at 31)[51]
[50][1998] VSC 140
[51][1998] VSC 140 at [104]
135 In Agripay Pty Ltd v Byrne,[52] McMurdo P stated that to exclude a wife, who had given a guarantee, from the category of volunteer, in the sense discussed in Garcia, she must receive a direct or immediate gain from the transaction that she guaranteed. Her Honour stated that the prospect of any profit to the wife in that case was speculative and that even, if she did receive some modest benefit, it was likely to be neither direct nor immediate. In that case, the wife had guaranteed her husband’s loan of funds to invest in a tax scheme. The lender argued that a superannuation fund, for the joint benefit of the husband and the wife, would have benefited the wife if the investments eventually became profitable. It also argued that the family household would have benefited, in the short term, from the avoidance of the husband’s tax problems and eventually from the profits likely to be earned from the scheme. The Court upheld the defence of the wife.
[52][2011] QCA 85 at [11]
136 In Garcia, the husband conducted a business through a company that bought and sold gold. The wife was a director of that company. The wife gave guarantees in favour of the bank, three of which guaranteed repayment of debts owed by the company. The wife was a director and a shareholder, but the company was the husband’s creation and he was in complete control of it and the wife was not directly involved in it, although she stood to gain an advantage if the business prospered.
137 It is not material that the business produces a benefit, which incidentally accrues generally to the family, a member of which has given the guarantee. However, where the borrowing (or part of it) is to finance the home of which the guarantor is a joint owner, she will not be a volunteer.
138 Ms Castellano gave evidence that when Lubern was placed into administration, it owed her $45,000, because part of the proceeds of sale of her Traralgon property were used to fund it. She received income from Lubern for directors’ fees or wages, on a regular basis. She understood that if a DOCA was not entered into or completed, in respect of Lubern, she may have been personally liable for its debts.
139 She also received income from Yanadale, whilst she was a director of it.
140 180 Capital Finance relied on the fact that Ms Castellano received money from both Lubern and Yanadale, while she was a director and afterwards. She admitted that some of the income that she received was derived from the farm and from Mr Morrison’s income from his business as a building construction manager. She understood that the money lent by 180 Capital Finance was used to make the final payment under the DOCA. If that payment was not made, Lubern was likely to be placed into liquidation. She may have been liable, as a director, for breach of s 588G of the Corporations Act 2001 because Lubern had engaged in insolvent trading. She feared bankruptcy if the DOCA payments were not made.
141 Ms Castellano was unsure whether she had been issued with a notice by the Commissioner of Taxation, as a director, requiring her to pay moneys owing by Lubern.
142 Ms Castellano argued that there was no proof that she avoided any personal liability by signing the guarantee.
143 It was not shown that Ms Castellano could not have been sued under the DOCA itself. Her potential liability under s 588G of the Corporations Act in respect of directors duties to prevent insolvent trading would have depended on proof of insolvency in the period ending June 2006, when she ceased to be a director and there was no such evidence. She ceased being a director of Lubern twenty two months before signing the guarantee. She was not a shareholder in either Lubern or Yanadale. However, she considered that the loss of Lubern would result in a financial loss to her and that she faced bankruptcy. Why this outcome might occur, was not established on the evidence. It was not established that she had any direct involvement in the business as at April 2008.
144 The process by which Ms Castellano would have suffered any direct financial loss, or loss of benefit, or been subject to liability, if Lubern was placed into liquidation was not made clear by the evidence. The potential of an action against her for damages, or other liability, for contravention of s588G of the Corporations Act, was speculative. It would have required proof that Lubern was trading whilst insolvent at a point proximate to the signing of the guarantee. Under s 588G of the Corporations Act, it has to be proved that the director had reasonable grounds for suspecting insolvency.[53]
[53]Cf ASIC v Plymin (No 1)[2003] VSC 123
Conclusion on issue two
145 On its face, the loan conferred no direct benefit on Ms Castellano. The onus was therefore on 180 Capital Finance to establish that she received a direct and immediate gain from the loan. I do not consider that it has.
146 Ms Castellano should therefore be regarded as a volunteer.
Issue 3: Should 180 Capital Finance have known that Ms Castellano reposed trust and confidence in Mr Morrison?
147 Ms Castellano argued that 180 Capital Finance was aware of her relationship with Mr Morrison. Mr Onley’s evidence suggested that that was the case. He understood that they had separated. However, the loan documents used the same address for them both. The evidence of her telephone conversations with Mr Onley showed that 180 Capital Finance was aware that she was reluctant to sign the guarantee and other loan documentation. Mr Morrison believed she could be brought around to sign them. This was shown by Mr Morrison’s email of 16 April 2008.
148 Ms Castellano submitted, that Mr Onley appreciated that she was reluctant to sign the guarantee other documents and that Mr Morrison and Mr Sofra were taking steps to try and get her to sign them. Mr Onley was aware of Ms Castellano’s relationship with Mr Morrison and knew that the documents were signed in the absence of an independent explanation being provided to her. Her counsel referred to the statement of White JA in Agripay with reference to a woman, who provided a guarantee of her husband’s loan, that:
“No matter how intelligent she might have been, the emotional pressure that she felt at the time that the transactions were entered into was of a kind for which in part the rule has been developed and in respect of which the appellant could easily have dealt.”[54]
[54](Supra) at 66
149 180 Capital Finance, through Mr Onley, was aware that Mr Morrison still had influence over Ms Castellano and might be able to change her mind.
150 Mr Morrison told Mr Onley in the email of 16 April 2008, that Ms Castellano had just amateur advice from friends and that he thought that he could influence her.
151 180 Capital Finance argued that Ms Castellano knew and understood that the purposes of the monies under the advance was to be applied to the final payment due under the DOCA and if this was not paid, Lubern would be placed into liquidation.
152 The facts reveal the following. Ms Castellano was concerned for Mr Morrison, even though their de facto relationship had ended. She wanted to end their financial relationship. Her concern for Mr Morrison extended to his emotional distress about the prospect of losing the farm. He and Mr Sofra and Mr Olney pointed out to her the consequences of her not signing the documents. She considered that she might suffer financial consequences, if she did not sign them. She sought her own advice and was well aware of the consequences of signing a guarantee.
153 I am not satisfied that Ms Castellano made her decision to sign the document because of her trust and confidence in Mr Morrison. She sought her own advice and made her own assessment of the risks that she was taking.
154 However, the question identified by Garcia is whether 180 Capital Finance is to be taken to have known or understood, or should have known, that Ms Castellano placed trust and confidence in Mr Morrison in matters of business and therefore to have understood that he may not fully and accurately explain the purport and effect of the transaction to her. The evidence suggests that Mr Onley considered that Mr Morrison had some influence over Ms Castellano. However the fact that 180 Capital Finance knew that Ms Castellano, initially, refused to sign the Offer of Short Term Finance Document and that she was receiving advice from friends and others suggest that it did not know, that she placed trust and confidence in him in the manner discussed in the authorities. The evidence suggests that Ms Castellano was listening to a number of persons and grappling with a difficult decision, which was affected by a number of considerations, one of which was pressure from Mr Morrison. At the highest, the evidence suggests that 180 Capital Finance hoped that Mr Morrison would be able to persuade Ms Castellano to change her mind and sign the documents. However the evidence suggests that 180 Capital Finance knew that ultimately Ms Castellano would make the decision.
155 Ms Castellano gave no evidence of obtaining advice from friends, or others, between 16 April 2008, when she signed the Offer of Short Term Finance and 22 April 2008, when she signed the guarantee and loan documents.
156 Ms Castellno was under considerable pressure from Mr Morrison to sign the guarantee and other documents, but that does not establish that she placed trust and confidence in him. Her case was not based on illegitimate duress, undue influence or the principles in Amadio.[55]
[55] Commercial Bank of Australia v Amadio (1982) 151 CLR 447
157 The facts place this case some distance from a situation where a guarantor signs the guarantee and loan documents, with little or no opportunity to obtain advice and relying on what the debtor, who had influence over them, tells them. Ms Castellano had some time to consider the details of the loan. About a week passed between the time when she received the Offer of Short Term Finance and the signing of the guarantee and loan documents. She arranged for Ms Spark to witness her signature on two occasions. She accompanied Mr Morrison to a pharmacist to sign a statutory declaration.
158 Ms Castellano might have relied on Mr Morrison’s financial capacity to repay the loan, but that reliance is not usually protected by the Yerkey v Jones principles, as it involves particular considerations about the risk of the venture about which the surety must make an assessment. I refer to the passage in Einstein J’s judgment in State Bank of New South Wales Ltd v Chia,[56] which I have set out above.
[56](2000) 50 NSWLR 587 at 600-601
159 The evidence suggests that Ms Castellano made her own judgment and decision, rather than reposing trust and confidence in Mr Morrison. She was aware of the risks of continuing to maintain a financial relationship with Mr Morrison. The fact that Ms Castellano was under considerable pressure from Mr Morrison does not establish that she placed trust and confidence in him.
160 Ms Castellano saw benefits in the final DOCA payment being made and Lubern ceasing to be subject to it, as otherwise, Mr Morrison, and in an indirect way she, would lose everything, including the farm in which she had invested money.
Conclusion on issue three
161 Ms Castellano has not proved that 180 Capital Finance knew, or should have known, or is to be taken to have known, that she placed trust and confidence in Mr Morrison in matters of business or in respect of this particular transaction.
Issue 4: Did 180 Capital Finance take steps to explain the transaction to Ms Castellano or to find out that a stranger had explained it?
162 Mr Onley and Mr Sofra spoke with Ms Castellano in the circumstances described previously. She was provided with the Offer of Short Term Finance. However the difference in the two interest rates and the fact that the interest rates are expressed at a monthly rate, means that the document is hardly a clear statement of the very high annual interest rates applicable.
163 As previously stated, I accept Ms Castellano’s evidence that Mr Onley did not explain the interest rate to her. She was clear that she did not know about the interest rate. The terms of interest were striking, but no particular attention was paid, to them, perhaps because it was considered that Mr Morrison would repay the loan.
164 Ms Castellano has established that 180 Capital Finance did not take steps to explain the transaction to Ms Castellano, or to find out that a stranger had done so. She received no adequate explanation of the extent of her potential liabilities under the guarantee, particularly in respect of the interest rate under the loan, from 180 Capital Finance or, from any one else to the knowledge of 180 Capital Finance.
165 I do not consider that Ms Castellano’s declaration and statutory declaration are decisive on this issue. Statements in pro forma documents that the lender requires to be signed, but which do not reflect what actually occurred, have no evidentiary weight.
Conclusion on issue four
166 180 Capital Finance took no steps to explain the transaction to Ms Castellano or find out that a stranger had explained it to her.
Issue 5: Would the enforcement of the guarantee be unconscionable?
167 Each of the four matters considered above are part of the determination of the issue identified in Garcia’s Case: whether to enforce the transaction would be unconscionable. I deal with that issue next.
168 I have found that Ms Castellano’s relationship with Mr Morrison, when she signed the guarantee and other loan documents, was capable of attracting the equitable principles on which she relies, that she was a volunteer and that 180 Capital Finance took no steps to explain the transaction to her, or have a disinterested stranger do so.
169 Despite these findings, I consider that Ms Castellano has not established that she placed trust and confidence in Mr Morrison in the manner identified in the authorities, or that 180 Capital Finance is to be taken to have understood that she did. As previously stated, I accept that Mr Morrison placed pressure on Ms Castellano to sign the guarantee and other documents and that she was confronting a very difficult situation. However, ultimately, I consider that, after some deliberation and after speaking with a friend and an adviser, Ms Castellano made her own decision, that it was in her interests to sign the guarantee and other documents. The evidence to which I have referred, does not establish that her decision was a result of placing trust and confidence in Mr Morrison to explain, or advise her, about the transaction, or that Mr Onley of 180 Capital Finance might have thought that to be the case. Rather placed in a difficult situation, she acted on her own assessment of where her own best interests lay. Those interests included her own financial future, the position of the children for whom she had responsibility, as well as the position of, and wishes of, Mr Morrison.
170 The evidence leads to the conclusion that Ms Castellano made her own decision to sign the guarantee and other documents. It also leads to the conclusion that 180 Capital Finance had no reason to think that Ms Castellano would not make her own decision, although it considered that Mr Morrison, as well as Mr Onley and Mr Sofra, might be able to play a part in obtaining her decision to sign the documents.
171 In those circumstances, the usual contractual principle applies that a person is bound by the terms of the contract that she signs: Toll(FCGT) Pty Ltd v Alphapharm Pty Ltd.[57]
[57](2004) 219 CLR at [57]
172 I note that the fact that I found in my first judgment that the inclusion of the interest rate was unconscionable conduct, does not mean that 180 Capital Finance’s enforcement of the guarantee is unconscionable. The parties have agreed that the appropriate order to give effect to my first judgment is to vary the provisions of the Loan Facility Agreement. The guarantee signed by Ms Castellano still applies to the amount owing under the Loan Facility Agreement as varied.
173 I also note that the principles in Yerkey v Jones and Garcia’s Case appear not to apply to instruments other than guarantees, unless they are in substance contracts of suretyship.[58]
[58]Elkofairi v Permanent Trustee Co Ltd [2002] NSWCA 413; Narain v Euroasia (Pacific) Pty Ltd (2009) 26 VR 387 at [44]-[45] and Bank of Western Australia Ltd v Abdul [2012] VSC 222 at [83]-[92]
Conclusion on issue five
174 Ms Castellano has not established the defence that 180 Capital Finance’s reliance on the documents signed by her would be unconscionable.
175 I will hear the parties as to the steps required to complete this proceeding.
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