NAB v Koller
[2011] VSC 228
•1 June 2011
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
No. 7226 of 2008
| NATIONAL AUSTRALIA BANK LIMITED (ABN 12 004 044 937) | Plaintiff |
| v | |
| SABINA MICHAELA KOLLER | Defendant |
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JUDGE: | Daly, AsJ | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 24, 25 and 28 February 2011 | |
DATE OF JUDGMENT: | 1 June 2011 | |
CASE MAY BE CITED AS: | NAB v Koller | |
MEDIUM NEUTRAL CITATION: | [2011] VSC 228 | |
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CONSENT JUDGMENT – Allegation that underlying settlement agreement ought to be set aside on the grounds of mental impairment and/or unconscionable conduct.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr A. Segal | Turks Legal |
| For the Defendant | Mr R. Cook | Chadwicks – The Law Firm |
HER HONOUR:
Ms Sabina Koller (“Ms Koller”) is the registered proprietor of a property at 312 Morris Road, Hoppers Crossing (“property”). She purchased the property in 2003. It was vacant land. She and her former de facto partner, Mr Hasan Erliinoglu (“Mr Erliinoglu”), a builder by trade, had agreed that Ms Koller would purchase the property and that Mr Erliinoglu would build a home. Ms Koller entered into a loan agreement with the National Australia Bank (“Bank”) to fund the construction of the residence. On 14 August 2003, the Bank registered its mortgage over the property.
As the loan was being used to finance the construction of a dwelling, regular draw downs were made until the process of construction was complete. Interest continued to accumulate on the outstanding balance on a monthly basis. Under the terms of the loan no repayments were to be made until the balance of the loan reached the facility limit. There is a dispute about what that facility limit was intended to be, although the loan documentation shows a facility limit of $300,000.
While the evidence is a little unclear as to what precisely happened, it seems that in or about February 2008 Ms Koller and Mr Erliinoglu approached an officer of the Bank seeking to obtain further finance. Their evidence is that they were told that because they had not been making repayments on the loan and the account was in excess of the facility limit, they were not entitled to draw down more funds. On 18 February 2008, the Bank issued a notice of default under the Consumer Credit Code for $45,464. As the loan balance stood at $349,023.27 at that time, it is not entirely clear how this amount was calculated. Ms Koller did not pay the outstanding amount and on 26 June 2008 the Bank made a demand under the terms of the mortgage. The demand was not satisfied.
This proceeding was issued on 11 July 2008. On 2 October 2008 Ms Koller filed a defence (through her then solicitor, Mr Stephen Byrne) alleging that the Bank was not entitled to issue a default notice as loan repayments were only to commence one month after the loan was fully borrowed, but that the loan was never fully borrowed.
The proceeding continued through the usual interlocutory steps during the course of late 2008 and early 2009. On 20 March 2009, Mr Byrne ceased to act as Ms Koller’s solicitor. Further directions were made, and on 29 August 2009 a mediation was held between the Bank and Ms Koller. Mr Tim McFarlane, a well known and experienced mediation practitioner, was the mediator.
The matter was not settled at mediation. The mediation took about two hours and was attended by Ms Koller and Mr Erliinoglu. Mr Erliinoglu spoke on behalf of Ms Koller in the joint session, which was relatively short. The mediation was adjourned on the basis that the Bank would arrange for a valuation of the property and consider whether to make an offer to Ms Koller. It was envisaged that offers would be made through the mediator. The parties agreed to adjourn a scheduled directions hearing to 6 October 2009 to allow ongoing discussions between the parties.
Discussions did indeed continue. At least one offer from Ms Koller was communicated to the Bank’s solicitors through the mediator. There were also some telephone conversations between Mr Erliinoglu and Ms Jacqueline Giuliani, the solicitor from Turks Legal handling the matter for the Bank. The terms of the offers and counter offers were also documented in a series of letters from Turks Legal to Ms Koller.
There were two issues which were the subject of the offer and counter offer: the amount that would be payable by Ms Koller to the Bank in full and final settlement of its claim and the time for payment. The final piece of correspondence from Turks Legal (reproduced below) indicated that the Bank and Ms Koller had reached agreement on the following terms: that by 8 January 2010, Ms Koller would pay the Bank of $362,000 (“settlement sum”), the Bank’s mortgage would be discharged, and the proceeding would be dismissed with no orders as to costs. The settlement sum would have to be raised by either refinancing of the property or a sale of the property. If Ms Koller failed to pay the settlement sum, the Bank would enter judgment against Ms Koller.
On 30 September 2009, Ms Giuliani sent the following documents to Ms Koller by express post: a letter which stated as follows:
“We refer to our telephone discussion with Hasan Erliinoglu today, 30 September 2009.
The bank has instructed us that it is prepared to provide you with an extension of time until 8 January 2010 to settle this matter on the condition that:
(1)the settlement sum of $360,000 is increased to $362,000 to represent additional interest will accrue on the home loan; and
(2)the terms of settlement executed and returned to us by 12 noon on 5 October 2009.
. . .
The above outlined offer which is the bank’s final offer is open for acceptance by 12 noon on 5 October 2009 and must be accepted by execution and return of the enclosed terms of settlement and consent to judgment.
The consent to judgment will be held in escrow by the bank pending payment of the settlement sum by 4pm on 8 January 2010.”
The letter enclosed a form of terms of settlement which, including the execution page, was four pages in length (“Terms of Settlement”), a document titled “Consent to Judgment” (“Consent Judgment”), and a document headed “Legal Advice Waiver” (“Waiver”). A copy of the letter, the Terms of Settlement signed by Ms Koller, the Consent Judgment signed by Ms Koller and the Waiver signed by Ms Koller were returned to Ms Giuliani by facsimile on 5 October 2010 at 1.40 pm. Mr Erliinoglu witnessed Ms Koller’s signature on each document.
There was an irregularity in Ms Koller’s execution of the Terms of Settlement. Instead of signing in the box adjacent to the execution clause, Ms Koller signed her name in a box which was specified as the place for a solicitor to execute a certificate. No solicitor executed the certificate: instead, she signed the Waiver.
No payment was made by Ms Koller before 8 January 2010 or at any time. On 27 January 2010, the Consent Judgment was filed with the Court and orders were made on 1 February 2010. Ms Giuliani arranged for a warrant of possession to be filed with the Court on 10 February 2010 and arrangements were made with the Sheriff’s Office for execution in the week commencing 26 March 2010. However, on 5 March 2010, Ms Koller engaged Chadwicks – The Law Firm (“Chadwicks”), who commenced corresponding with Turks Legal on an open and on a without prejudice basis. On 26 March 2010, Chadwicks, on behalf of Ms Koller, issued the summons which is the subject of the present trial.
The summons sought the following orders:
(1)that the default judgment entered on or about October 2009 be set aside;
(2)that execution on the judgment be stayed pending further order of the Court; and
(3)that the plaintiff pay the defendant’s costs of the proceeding, including the costs of this application.
At the first return date of the summons on 9 April 2010, Associate Justice Mukhtar determined that the issue as to whether the judgment ought to be set aside should be subject to a full trial, albeit in the existing proceeding, and gave directions for the filing and service of points of claim and defence and the filing and service of affidavits, and stayed execution of the warrant of possession.
The proceeding was originally fixed for trial in November 2009. An adjournment was sought and granted in order to enable Ms Koller to file and serve medical evidence regarding her condition at the time that she signed the Terms of Settlement and Consent Judgment.
Ms Koller’s points of claim state as follows:
“The defendant will seek to impeach the judgment entered herein on 1 February 2010 for the following reasons:
1.The plaintiff obtained the judgment by taking surreptitious or unconscientious advantage of the defendant when she was a person unable to judge or properly judge for herself by reason of weakness, inexperience, necessity, ignorance or impaired faculties.
PARTICULARS
(a)The defendant and her advisor Hassan Erliinoglu are persons of limited business experience.
(b)The defendant and her said advisor are of foreign background.
(c)The defendant and her said advisor had a limited ability to understand the English language.
(d)To the knowledge of the plaintiff the defendant and her said advisor did not obtain legal advice before settling the proceeding.
(e)In the circumstances the plaintiff ought to have ensured that the defendant obtained legal advice before settling the proceeding.
(f)To the plaintiff’s knowledge, and in any event, at the time the defendant settled the proceeding –
(i)she had a medical condition, namely Bipolar Disorder, for which she was taking medication which affected her memory and affected her emotionally and psychologically;
(ii)she did not understand the nature of the document she signed on 5 October 2009;
(iii)she could not have rationally assessed whether it was in her interests to sign an important legal document on 5 October 2009;
(iv)she was not able to rationally understand and assess the alternatives to signing an important legal document on 5 October 2009.
(g)At the time the proceeding was settled the plaintiff knew that the defendant’s defence had real substance.
(h)At the time the proceeding was settled the plaintiff knew that the defendant had little choice to execute the Terms of Settlement because if she did not agree to execute the Terms of Settlement the plaintiff would proceed to enter judgment for a considerably larger sum of money than that for which judgment was entered.
(‘the oppressive and/or unconscionable conduct’).
2.The oppressive and/or unconscionable conduct on the part of the plaintiff was misleading and deceptive conduct which occurred in the course of trade or commerce in breach of the provisions of the Trade Practices Act 1974 section 52 and any agreement based thereon is liable to be set aside.
3.Alternatively the oppressive and/or unconscionable conduct on the part of the plaintiff was conduct which was contrary:
(a)to sections 12CA or 12CB of the Australian Securities & Investments Commission Act 1992 Cwth; or
(b)the general law
and consequently the consent judgment herein should be set aside.
3A.Alternatively the consent judgment document herein should be set aside on the grounds of the doctrine of non est factum.
PARTICULARS
The defendant repeats the particulars subjoined to paragraph 1 hereof.”
The Bank’s points of defence are as follows:
“To the Defendant’s Amended Points of Claim the Plaintiff says as follows:
1. As to the allegations made in paragraph 1 the Plaintiff says as follows:
(a) the pleading is embarrassing and ought be struck out;
(b)it otherwise denies each and every allegation made in paragraph 1.
2. As to the allegations made in paragraph 2 the Plaintiff says as follows:
(a)the pleading is embarrassing and ought be struck out;
(b)it otherwise denies each and every allegation made in paragraph 2.
3. It denies each and every allegation made in paragraph 3.
3A. It denies each and every allegation made in paragraph 3A.”
Accordingly, the issue for determination is whether the Consent Judgment ought to be set aside on the basis that the Bank took unconscientious advantage of Ms Koller’s mental health problems to obtain Ms Koller’s agreement to settle the proceeding, and in particular, on terms which provided for the entry of judgment in favour of the Bank if the settlement sum was not paid by the due date.
The assertion that the Bank took unconscientious advantage of Ms Koller because she and Mr Erliinoglu were of foreign background and had a limited ability to understand the English language was not strongly pressed at the trial.
Evidence
Ms Koller relied upon an affidavit sworn by her on 7 April 2010, a further affidavit sworn by her on 8 November 2010, an affidavit sworn by Mr Erliinoglu on 7 April 2010, and a report prepared by Dr Alan Jager, a psychiatrist, on or about 24 December 2010. Ms Koller also tendered a bundle of medical records from the Mercy Hospital in Werribee regarding her admission to that hospital on 8 October 2009.
The bank relied upon two affidavits of Ms Giuliani, the first sworn on 8 April 2010 and the second sworn on 23 April 2010 in reply to the affidavits sworn on Ms Koller’s behalf on 7 April 2010.
At my request, the Bank tendered a bundle of bank statements in respect of Ms Koller’s loan account with the Bank. Each of Ms Koller, Mr Erliinoglu and Ms Giuliani were cross-examined on their affidavits. The Bank did not seek to cross‑examine Dr Jager.
In her affidavit of 7 April 2010, Ms Koller deposed as follows:
“1.I depose to the following matters from my own knowledge save as otherwise indicated.
My upbringing and medical condition
2.I was born in Austria and moved to Australia when I was fifteen years of age.
3.I did not complete any education higher than a Victorian year nine equivalent. I do not easily understand complicated business transactions.
4.I have been diagnosed with bipolar disorder. I do not work at present because of my condition and have not done so for about six months. I simply find that at present ‘I cannot keep anything in my head.’
5.I am currently on medication which, inter alia, affects my memory and my emotional and psychological states. The medication which I take, seraquel and lithium, has been prescribed for my depression and psychosis. It is strong. When I take it I find that I cannot concentrate properly and find it difficult understanding complex matters. I have also been given electric shock treatment for my condition. I can remember at the time of the mediation in this proceedings, when I was on my medication, being so stressed that I was going into psychosis. After signing the ‘settlement documents’ I refer to later in this affidavit I was hospitalised for about two weeks for my condition.
The creation of the relationship between myself and the Bank
6.I am the sole registered proprietor of the land situated at 312 Morris Road, Hoppers Crossing in the State of Victoria. The land may be more specifically identified as Lot 1368 on Plan of Subdivision 326075A, Volume 10160 Folio 359 (‘the property’).
7.Around 2003 my long term defacto partner Mr Hasan Erliinoglu (‘Hasan’) and I decided to purchase the property. It was then vacant land. At the time I personally had enough money to buy the property outright.
8.Hasan is a builder by trade, so it was our plan that once we had purchased the vacant land that Hasan would build a home there. It was to be a property for us both to live in, though the property was registered in my name as I contributed the money to buy it.
9.In order to build the house we needed to obtain finance and we entered into an agreement with the plaintiff in or around August 2003 whereby the plaintiff would lend me and I would borrow from the Bank a sum of up to $500,000.
10.We borrowed the money through one of Hassan’s associates. He was a finance broker employed by the plaintiff. Hassan arranged the loan through the broker and I was not involved to any particular extent with the negotiations. However I was told by Hassan that we had in effect a line of credit up to $500,000 and that initially we were not required to pay interest on this amount, which could capitalise until we had drawn down the whole amount of the loan. At that stage interest would be payable.
11.I signed some documentation at the time the loan was arranged with the Bank. I do not have copies of this documentation which was not given to me or to Hasan. I signed it on the basis of what I had been told by Hassan. I am told by my solicitor, Mr Twidale, and verily believe, that he has asked the solicitors for the Bank for copies of the Bank’s discoverable documents, but these have not been given to him. He has also told me that the Court file in this matter has been mislaid – and I have not been able to show him any Court documents.
12.At the time of entering into the loan, I did not:
(a)receive any independent legal advice regarding the loan;
(b)have a full understanding of what the ramifications were of entering into the loan or indeed what the actual terms of the loan were.
Progress of the loan
13.Hassan then set about building the house and I made regular draw downs to fund the building works. At this time, and for the next year or two, I never received any demands from the Bank to make interest payments. Nor was I told anything by any officers of the Bank to dissuade me from my understanding that we were not required to pay back any principal or interest on the loan until such time as the loan facility had been fully drawn down. Hassan would simply check the accounts on the internet regularly and note that the draw downs and the monthly facility had been fully drawn down. Hassan would simply check the accounts on the internet regularly and note that the draw downs and the monthly interest payments were debited to the account.
14.After the property had been built, during 2008, Hassan and I approached the Bank again for a further draw down. We wanted to borrow another $60,000. At this time we went to the Werribee Branch of the National Bank but we were told by the manager there that as we had not been paying interest on the loan we were not entitled to draw down more funds. Hassan explained about the agreement we had reached with the Glenroy branch of the Bank through the broker and we were sent to the Glenroy branch to discuss the matter with the manager there.
15.On approaching the Glenroy branch of the Bank we were told that the manager who had originally dealt with our loan had been transferred to Sunshine. We were told that interest had accrued to an amount of approximately $60,000 and we had to bring this amount up to date before we could draw down further funds on our loan. This, of course, was contrary to the agreement we reached with the Bank at the time the loan was arranged. Until we approached the Werribee Branch of the Bank we had no idea that the Bank was requiring us to actually pay interest. I do not currently have access to $60,000 to pay the interest.
16.Both Hassan and I were astounded by these developments. During the period up until 2008 when we sought this further draw-down we had received no notices of default, no request to pay interest or any other communications at all from the Bank about being in default with our loan.
Signing of consent orders
17.I originally retained the firm of Peter Burn as my solicitor in this proceeding. A Court ordered mediation was fixed for October 2009. Before this, however, Mr Burn wanted significant funds before he would represent us at the mediation. We did not have enough funds to employ him. So we went to the mediation by ourselves. Mr Burn formally withdraw as our solicitor in about June or July 2009.
18.At the mediation Mr Tim McFarlane was the mediator. Hassan undertook negotiations on my behalf with Mr McFarlane. I did not understand very much at all about what was happening at the mediation and, as I have noted, was very stressed by the whole affair and went into psychosis.
19.The Bank was obviously aware that I was not legally represented. I also believe the Bank was and is aware of my medical condition.
20.Nevertheless, the Bank required me to sign terms of settlement containing what I understand to be a consent to default judgment.
21.In fact the matter did not ‘settle’ at the mediation. The Bank wanted to arrange for a valuation of the property. After this valuation was obtained in October 2009 I was required to sign a series of documents. Three of these documents are the terms of settlement, a consent to judgment and legal advice waiver (‘the settlement documents’). Copies of the settlement documents with my signature are produced and shown to me at the time of swearing this affidavit and marked ‘SMK1’. It was not explained to me at the time what a ‘legal advice waiver’ was. I was simply told to sign the documents by Hassan, and I did so following his instructions. He witnessed my signature. I had really no alternative to sign the documents as I was told that if I did not the Bank would enter judgment for possession against me and would claim a much larger sum of money against me. In any event I was sick and stressed.
22.When signing the documents at no time did I:
(a)Receive any independent legal advice regarding the documents.
(b)Have a full understanding of what the ramifications were in signing the documents.
I have now been told that if my version of events leading up to the signing of the loan documents had been accepted by the Court I could have a right to have the documentation set aside or at least reworded. I did not know this at the time of the mediation. Hasan did not tell me this, neither did the mediator. Had I known that I was effectively “in the right” I certainly would not have signed any documentation allowing a judgment for possession to be obtained against me.
23.In light of my medical condition and complete lack of understanding of the legal ramifications of the documents I signed, I ask that the judgment entered pursuant to the consent provided to the court on or about 1 February 2010 to be set aside.”
Ms Koller’s affidavit of 8 November 2010 primarily dealt with matters relevant to the adjournment of the trial and other interlocutory matters. However, at paragraph 3 of her affidavit she deposed as follows:
As noted in my previous affidavit I was in no condition to rationally approach the settlement of this proceeding during the period referred to in early October, or indeed, at the time of the mediation when I was also in a stressed condition. I have no particular recollect at all of the circumstances in which the “consent terms” were returned to the plaintiff or indeed the circumstances in which I signed them.
Mr Erliinoglu deposed as follows:
“1.I am the defacto partner of Sabina Michaela Koller, the plaintiff in this proceeding.
2.I have read Sabina’s affidavit sworn this day in this proceeding. Insofar as I am mentioned in that affidavit I believe that what has been said by Sabina about me is true and correct. I confirm that:
(a)I negotiated the original loan on her behalf through a finance broker who was acting on behalf of the National Australia Bank when the original loan was negotiated.
(b)Sabina and I were told by the broker that the loan was entered on the basis that we were entitled to capitalise interest until such time as the whole advance of $500,000 was made. Only at that stage was interest payable. It was only on this basis that I had Sabina sign the loan documents.
(c)Until we visited the Bank in 2008 to seek to draw down further funds from Sabina’s loan both Sabina and I were under the impression that we did not have to pay interest on the loan and that interest would simply accrue until such time as we reached our limit of $500,000.
(d)Until we visited the Bank then the Bank had not asked us to make interest payments or suggested we were in default under the loan, but had just capitalised the interest as we had anticipated would happen.
3.I confirm that at the time negotiations were taking place with Mr McFarlane during the mediation Sabina was very upset and stressed. During the mediation it was I who was principally engaged in discussions with Mr McFarlane on Sabina’s behalf. I was not aware that had our version of events been accepted by the Court we may have been able to defend the court action brought against us by the Bank. Had we known this our whole approach to the mediation would have been different and we would have sought to enforce our rights. At the mediation and in the negotiations afterwards the Bank was ‘pressuring’ us to settle, saying that if we did not sign the terms they would be going to enter judgment against us and claim a much larger amount of money than was mentioned in the ‘settlement terms’. We felt we had no alternative but to comply with their demands.
4.Sabina is now in a most unfortunate position because of the attitude taken by the Bank. In this regard I have received a valuation on the property to the effect that it is worth in excess of $500,000. It should therefore be an easy matter to refinance the Bank’s loan. However, because judgment has been entered against Sabina this has affected her credit rating and made it basically impossible for her to obtain finance. Had judgment not been entered and had our version of events been accepted Sabina’s credit rating would not have been affected at all and it would have been a simple matter for us to obtain refinancing.
5.In the circumstances in my view the Bank has been unfairly pressuring Sabina to ‘settle’ this case and has not given her the opportunity to properly reflect on her rights or to get proper legal advice. Sabina’s position has also been prejudiced because of her illness which has had a great effect on her, particularly in the last few months.
6.I also had difficulty in dealing with the Bank in this proceeding. I was born in Cyprus and my command of English is not very good, particularly when discussing technical or business matters.”
Dr Jager is a psychiatrist, having previously held the post of Director of Forensic Medical Health Services in Tasmania, and Deputy Director of the Dandenong Area Mental Health Service. He had a 45 minute interview with Ms Koller in late December 2010 and reviewed a medical report prepared by Associate Professor D. Stevenson, which in turn was based on the medical records produced to the Court. Dr Jager’s report stated (in conclusion):
“In response to your specific questions:
1.Your client did not have the mental capacity to have signed important legal documents on 05/10/2009.
2.Because she was in the midst of a manic episode with disorganised and illogical thoughts, she would not have understood the nature of the documents she signed on 05/10/2009.
3.Because of her manic state and disturbed thinking she would have not been able to rationally assess whether or not it was in her interests to sign an important legal document on 05/10/2009.
4.Because of her manic state and disordered thoughts she would not have been able to rationally understand and assess the alternatives to signing an important legal document on 05/10/2009.
5.I have read the Expert Witness Code of Conduct and agree to be bound by it.
6.I have made all of the inquiries I believe to be desirable and appropriate and have not withheld any matters of significance from the Court.
Associate Professor Stevenson is the Director of Clinical Services at Mercy Mental Health. On 26 October 2010 he wrote a letter which was referred to in Dr Jager’s report. The contents of the letter are reproduced below:
“Dear Mr Twidale
Re: Sabina Koller
I refer to our previous correspondence of 14th October as well as 26th August 2010.
Ms Koller’s file has now been received and reviewed.
Ms Koller has a well established diagnosis of Bipolar Disorder. She was referred to our service 1st October 2009 with clinical features compatible with a relapse of her illness. She was presenting with manic symptoms in the context of medication non-adherence. She was deemed suitable for home treatment and was commenced on Lithium Carbonate and Quetiapine. She showed some improvement with these interventions, however later deteriorated with symptoms of paranoia emerging. It was elected at this stage that she be admitted to the inpatient unit for further management. She was admitted on 8th October 2009 as an involuntary patient to the Werribee Mercy Psychiatric Inpatient Unit. At this stage, her illness had progressed to that of manic relapse with psychotic features.
She was maintained on Lithium Carbonate and the dose of Quetiapine was gradually increased. She showed a steady recovery as an inpatient and was discharged on 23rd October 2009. She was discharged to the care of Broadmeadows Crisis Assessment & Treatment Team for ongoing treatment and her private psychiatrist.
While it is clear from her medical record that Ms Koller was psychiatrically unwell at this time, there is no reference in her clinical records to her signing documents relating to her personal financial affairs. There is mention in the records that a stress at the time of her admission was related to the bank wishing to repossess one of her properties.
As mentioned in my last correspondence, the focus of our inpatient management is on controlling and treating the psychiatric illness. Records did not indicate any type of assessment performed regarding Ms Koller’s capacity to understand the consequences of her signing any document.”
Associate Professor Stevenson’s letter appears to be an accurate summary of the primary medical records tendered to the Court.
Ms Giuliani’s first affidavit of 8 April 2010 deposed as to the procedural history of the Bank’s claim against Ms Koller, including the course of the proceeding.
Further, Ms Giuliani deposed that on 30 March 2009 she had a telephone conversation with Mr Stephen Byrne (Ms Koller’s solicitor), who informed her that Ms Koller had listed the property for auction on 29 March 2009 and in the light of the forthcoming auction there was no point convening a mediation. The following day she received a facsimile from Mr Byrne which stated as follows:
We refer to the above and further to our conversation of yesterday, enclose herewith the exclusive auction authority you requested.
As we discussed we see little point in mediating next week and think it worthwhile in adjourning the directions hearing to a date after auction when we will know more about our client’s respective positions and whether the Supreme Court remains the appropriate jurisdiction to litigate any remaining controversies between them.
Please seek instructions and let us know. Thank you.
On 6 March 2009 Ms Giuliani forwarded the following letter to Mr Byrne:
We confirm that the Bank is prepared to allow your client to auction the security property located at 312 Morris Road, Hoppers Crossing and discharge the Mortgage on the condition that:
(1)the total amount owed pursuant to the Mortgage inclusive of interest and legal costs, is repaid to the Bank at settlement;
(2)settlement is to take place within 30 days of the Contract of Sale being executed; and
(3)the enclosed Consent Judgment is to be executed and returned to us by 12.00 noon on 12 March 2009, and will be held in escrow pending payment of the total amount owed to the Bank at settlement.
As at 5 March 2009 the total amount owed to the Bank pursuant to Mortgage was $387,270.25.
In the event that you are agreeable to the above and you execute and return the Consent to Judgment to us by 12.00 noon on 12 March 009, the Bank has instructed us to consent to an adjournment of the directions hearing to a date convenient to the Court after the auction.
The Bank otherwise reserves its rights and entitlements pursuant to the mortgage.
Ms Giuliani deposed that on 13 March 2009 she had a telephone discussion with Mr Byrne, who informed her that he was pleased with the approach outlined in the above letter, requested that the settlement period be increased from 30 days to 90 days and requested that the consent to judgment reflected the total amount owed as at the proposed settlement date. She responded by letter which reflected her instructions that the Bank was prepared to provide Ms Koller with an increased settlement period of 60 days and that as at 22 May 2009 the total amount owed to the bank pursuant to the mortgage would be $400,405,69. Ms Giuliani deposed that later that day she had a telephone discussion with Mr Byrne who informed her that he was awaiting his client’s instructions in relation to the Bank’s proposal.
On 19 March 2009 Ms Giuliani wrote to Mr Byrne as follows:
We refer to your discussion with the writer on 16 March 2009, and to the writer’s subsequent voicemail message of today, 19 March 2009.
In view of the upcoming auction on 21 March 2009 we require you to execute and return the consent to judgment to us by 12.00 noon tomorrow, 20 March 2009.
In the event that you fail to return the consent to judgment to us by 12.00 noon tomorrow, we will contact the Court to immediately have the matter re‑listed for a directions hearing to seek orders relating to pre‑trial preparation such as Court Books and Outlines of Evidence.
On 23 March 2009 Ms Giuliani received a letter from Mr Byrne dated 19 March 2009 which enclosed a Notice of Practitioner Ceasing to Act dated 20 March 2009. She deposed that on the same day she had a telephone discussion with staff of Westwood First National Real Estate who informed her that the property was not sold at auction on 21 March 2009.
Ms Giuliani deposed that between 23 March 2009 and 28 August 2009 (the date of the mediation) she spoke to Ms Koller on three occasions (on 7 May 2009, 20 May 2009 and 19 June 2009). She deposed as follows:
On each occasion Ms Koller:
(a)had no difficulty speaking English and making herself understood;
(b)did not sound unduly stressed or upset about the subject litigation or security property;
(c)did not appear to have any difficulty understanding the nature of the discussion and always responded appropriately; and
(d)did not suggest or mention that she was unwell or having health issues.
On 25 March 2009 Ms Giuliani arranged for a letter to be forwarded to Ms Koller by express post, which included the following:
We note that
(a)the property was not sold at auction on 21 March 2009;
(b)the consent to judgment was not executed and returned to us prior to the auction; and
(c)a directions hearing is scheduled to take place at 10.00am 31 March 2009.
The bank is prepared to provide you with an extension of 30 days within which to sell or re-finance your home loan with the bank on the condition that you execute and return to us the consent to judgment enclosed by 12 noon on 30 March 2009. In the event that you are not prepared to sell the property or re‑finance the loan within 30 days, orders will be made by the Court in relation to mediation and trial preparation at the directions hearing, in respect of which additional costs will be sought from you.
Ms Giuliani deposed that on 28 April 2009 she received telephone messages from Ms Koller who (a) stated that she intended to make application for finance with a lender; and (b) requested the total amount outstanding to the Bank. On the same day, Ms Giuliani sent a facsimile to Ms Koller in the following terms:
We refer to your telephone messages of today 28 April 2009 in which you requested a current pay out figure. We confirm that as at today’s date the total amount outstanding to the bank is $393,519.93, inclusive of interest and legal costs. Interest continues to accrue on the total amount owed at the rate of 5.24% per annum and legal costs continue to be incurred. In view of the above please contact the writer to arrange a mutually convenience (sic) time and date for settlement and upon confirmation of same we will attain a final pay out figure from the bank.
Ms Giuliani deposed that on 7 May 2009 she had a telephone conversation with Ms Koller, who informed her that she had applied for finance with a lender but had not yet received a response, but anticipated that the lender would provide a response to her application for finance within a week. On 20 May 2009 she had a further telephone discussion with Ms Koller who informed her that the lender had not yet gotten back to her, however, she anticipated she would have a response from the lender within the next couple of days and would contact her within the next couple of days to confirm if finance had been approved. On 29 May 2009 Ms Giuliani received a letter by facsimile from Mr Erliinoglu enclosing a letter of conditional finance approval for $450,000 from Pirella Property Finance to enable Mr Erliinoglu to purchase the property.
On 2 June 2009 Ms Giuliani confirmed by way of letter that the directions hearing scheduled for 2 June 2009 had been adjourned to 7 July 2009. On 17 June 2009 she had a telephone discussion with Ms Koller, who informed her that Mr Erliinoglu had not yet received unconditional finance approval from Pirella Property Finance to purchase the property from her. On the same day she sent a fax to Ms Koller which stated as follows:
We refer to:
(a)our letter dated 2 June 2009 and
(b)to your telephone discussion with the writer on 17 June 2009.
We understand that:
(i)Hasan Erliinoglu is yet to obtain unconditional finance approval for the sum of $450,000; and
(ii)a court judgment has recently been entered against Mr Erliinoglu which may hamper his prospects of obtaining unconditional finance approval.
In view of the above, in the event you fail to provide proof of unconditional finance approval by close of business on 24 June 2009, we will ensure that orders are made at the next directions hearing requiring a mediation to take place.
The Bank otherwise reserves its rights and entitlements pursuant to the mortgage.
On 19 August 2009 she sent a fax to Ms Koller confirming that a mediation had been booked in accordance with the orders made on 7 July 2009 for 28 August 2009 at Turks Legal’s offices at 9.30am. Ms Koller, as requested, confirmed the mediation appointment by returning the duplicate copy of the letter and signing to indicate her agreement to pay half of Mr McFarlane’s mediation fee.
Ms Giuliani deposed that the following occurred at the mediation on 28 August 2009:
Mediation took place on 28 August with:
(a)Mr McFarlane of McFarlane Legal was engaged as mediator;
(b)the Bank represented by Peter Fieldhouse, Senior Legal Counsel, Helen Tran, Portfolio Specialist, and myself; and
(c)Ms Koller was present and supported by Mr Erliinoglu;
The proceeding was not resolved at mediation. The mediation was conducted in the following format:
(a)firstly, an initial joint session of the parties was convened at which the parties were required to outline their respective positions; and
(b)secondly, the parties were directed into separate sessions, with each party in different meeting rooms.
During the initial joint session of the mediation:
(a)Mr Erliinoglu and Ms Koller appeared to understand me when I outlined the Bank’s claim and position;
(b)Mr Erliinoglu principally spoke on behalf of Ms Koller and had no difficulty speaking English and making himself understood;
(c)Ms Koller mainly sat silently, nodding occasionally while Mr Erliinoglu outlined her defence and position;
(d)Ms Koller did not appear unduly stressed, upset, overwhelmed or unwell, nor did she state that she felt stressed, upset, unwell or overwhelmed;
(e)the Bank was not made aware of any health concern or medical issues in relation to Ms Koller; and
(f)neither Ms Koller or Mr Erliinoglu informed me or any representative of the Bank, or anyone else in my presence that Ms Koller was suffering from a medical condition.
At no time during the mediation, whether during joint session or separate session, did the Bank “pressure” Ms Koller to settle the proceeding. In fact, the proceeding was not resolved at mediation and was concluded on the basis that
(a)Ms Koller would permit a Bank valuer to access the Security Property to complete a sworn valuation of the Security Property;
(b)upon receipt of the sworn valuation, the Bank would attempt to progress settlement negotiations by making an offer to Ms Koller; and
(c)any intended offer made by the Bank would require Terms of Settlement and Consent to Judgment to be executed by Ms Koller and accordingly, it was strongly suggested that she obtain legal advice in relation to same.
On 15 September 2009 Ms Giuliani forwarded a letter to Ms Koller by express post in the following terms:
We refer to our letters of 1 and 7 September 2009.
As you are aware a sworn valuation of the security property at 312 Morris Road, Hoppers Crossing was recently completed by a certified valuer engaged by the Bank.
In view of the sworn valuation obtained, we are instructed the bank is prepared to make the following final offer of settlement:
1.You pay the bank $365,000 in full and final settlement of the proceeding (“Settlement Sum”).
2.The Settlement Sum be paid by 4.00pm on 30 November 2009.
3.In exchange for payment of the Settlement Sum
(a)the Bank will provide you with a duplicate Certificate of Title and Discharge of mortgage and
(b)the Bank will discontinue proceedings against you.
The above outlined offer is open for acceptance by 4.00pm on 28 September 2009 and must be accepted by execution and return of the enclosed Terms of Settlement and Consent to Judgment.
The Consent to Judgment will be held in escrow by the Bank pending payment of the settlement sum by 4.00pm on 30 November 2009.
We strongly suggested that you
(1) obtain legal advice prior to executing Terms of Settlement and Consent to Judgment; and
(2)execute the terms of settlement in the presence of a solicitor.
Notwithstanding the above in the event that you are prepared to execute the Terms of Settlement without seeking legal advice and having the document witnessed by a legal practitioner, we require you to exercise the legal advice waiver annexed to the Terms of Settlement.
Ms Giuliani deposed that on 21 September 2009 she had a telephone conversation with Mr McFarlane, who made a counter offer on behalf of Ms Koller. On 25 September 2009 she forwarded a letter to express post in the following terms:
We refer to your counter offer made through Tim McFarlane on Monday 21 September 2009.
The Bank has instructed us that:
(1)it is unable to accept your counter offer to pay $350,000 in full and final settlement given the sworn valuation obtained by the Bank; and
(2)it is unable to accept an amount less than $360,000 in full and final settlement of the proceeding Settlement Sum.
In view of the above we have realised that the Terms of Settlement forwarded to you by letter dated 15 September 2009 to reflect the Settlement Sum of $360,000.
The remainder of the letter reflected the terms of the earlier letter, save that the date for acceptance of the Bank’s offer was extended to 2 October 2009.
Ms Giuliani deposed that on 30 September 2009 she had a telephone conversation with Mr Erliinoglu, who made a further counter offer on behalf of Ms Koller. On the same day she arranged for a letter to be forwarded to Ms Koller by express post which stated as follows:
We refer to our telephone discussions with Hasan Erliinoglu today, 30 September 2009.
The Bank has instructed us that it is prepared to provide you with an extension of time until 8 January 2010 to settle this matter on the condition that:
(1)the Settlement Sum of $360,000 is increased to $362,000 to represent additional interest which will accrue on the Home Loan; and
(2)the Terms of Settlement are executed and returned to us by 12.00 noon on 5 October 2009.
The remainder of the letter was essentially in the same terms as previous correspondence.
Ms Giuliani deposed that at approximately 1.40pm on 5 October 2009 she received by facsimile the executed Terms of Settlement, Consent Judgment and Waiver. Finally, Ms Giuliani deposed to the fact that Ms Koller failed to comply with the Terms of Settlement by 8 January 2010, following which she arranged for the Consent Judgment to be filed with the Court and arranged for the Sheriff’s office to commence enforcement proceedings.
Ms Giuliani deposed that during July 2009 she obtained a copy of the Occupancy Certificate with respect to the development of the dwelling on the property from Wyndham City Council, which was dated 26 March 2007. Finally, Ms Giuliani deposed that she had been instructed by Ms Tran of the Bank and believed that since the inception of the loan, only one payment had been made by Ms Koller in reduction of the home loan, and that as at 9 April 2010 the total amount owing to the Bank by Ms Koller pursuant to the home loan mortgage (exclusive of the Bank’s legal costs) stood at $405,055.40.
On 23 April 2010 Ms Giuliani swore a further affidavit in response to the affidavit sworn by Ms Koller on 7 April 2010. She deposed that on 29 September 2009 and 30 September 2009 (about a week prior to the execution of the Terms of Settlement and approximately four weeks after the mediation), she had telephone discussions with Mr McFarlane and Mr Erliinoglu. She deposed as follows:
During my telephone discussion with Mr McFarlane on 29 September 2009 referred to in paragraph 5(a) hereof, Mr McFarlane informed me and I verily believed that:
(a)Ms Koller and Mr Erliinoglu had informed him they were going overseas during early October 2009; and
(b)in view of Ms Koller and Mr Erliinoglu’s upcoming trip overseas Ms Koller had requested that the Terms of Settlement be amended to provide her with an additional 30 days within which to comply with the same.
During my telephone conversation with Mr Erliinoglu on 29 September 2009 I was informed by Mr Erliinoglu and verily believed that:
(a)he and Ms Koller were going overseas during early October 2009 for a period of six weeks,
(b)in view of he and Ms Koller’s trip overseas, Ms Koller would not be in a position to finalise finance in order to comply with the Terms of Settlement until after their return from overseas.
On 30 September 2009 I had a further telephone discussion with Mr Erliinoglu during which Mr Erliinoglu informed me that:
(a)he and Ms Koller originally arranged to go overseas during August 2009 for six weeks and had postponed their trip until 7 October 2009 in an attempt to resolve this matter prior to going away;
(b)he and Ms Koller were going overseas on 10 October 2009 and returning on 12 November 2009;
(c)he and Ms Koller were unable to further postpone their trip overseas; and
(d)he and Ms Koller had obtained conditional finance approval and required an additional 30 day indulgence from the date proposed to ensure that unconditional finance approval was granted.
As a direct result of the telephone conversations with Mr McFarlane and Mr Erliinoglu on 29 and 30 September 2009, … the Terms of Settlement ultimately executed by Ms Koller on 5 October 2009, were forwarded to her by express post on 30 September 2009.
As requested, the Bank tendered a bundle of bank statements showing the entire history of the loan account from 20 January 2004 to 16 November 2010. The bank statements did not show any legal costs incurred by the Bank in respect of the proceeding being debited to the account. The statements demonstrate that draw downs were made on 20 January 2004, 9 February 2004, 10 March 2004, 28 April 2004 and 8 July 2004, and that as at 8 July 2004 the account balance was $246,446.58. Apart from interest charges, no further drawn downs were made from the account. Apart from a cheque for $437.60 on 4 November 2004 and what appears to be a bank error (which was reversed), no amounts were credited to the account over the life of the loan.
The statements show that the account balance breached the facility limit of $300,000 on 31 January 2006. It appears that no action was taken by the Bank to notify Ms Koller that the facility limit had been reached and that she was required to commence repayments of principal and interest in accordance with the terms of the loan contract. By March 2007 (the approximate date of the issue of the Certificate of Occupancy) the account balance was $326,605.53. By 31 January 2008, the balance of the loan account was $346,617.72, that is, an amount slightly larger than referred to in the default notice issued by the Bank in February 2008. By the time of the mediation in August 2009, the loan balance had reached the sum of $389,379.59 and by 30 September 2009 (the date of the letter executed by Ms Koller) the balance of the account had reached $391,112.49. By 31 December 2009 (just before the date due for settlement) the balance had reached $398,447.56. There is no independent evidence available as to the value of the property.
The Bank also tendered letters from Turks Legal to Ms Koller dated 1 September 2009 and 5 September 2009 confirming the adjournment of the directions hearing scheduled for 8 September 2009 to a date after 30 September 2009, file notes of conversations between Ms Giuliani and Mr Erliinoglu on 29 September and conversations between Ms Giuliani and Mr McFarlane on 21 and 30 September and ASIC records which showed that Ms Koller was a director of SMK Developments Pty Ltd between 13 June 2003 and 30 September 2010, that she is the beneficial owner of all shares in that company, and that between 23 August 2010 and 30 September 2010 the company was subject to a strike out action.
Finally, the Bank tendered copies of pages from Mr Erliinoglu’s passport which showed that he arrived in Cyprus on 7 October 2009 (which, given the time difference between Australia and Europe, is consistent with him departing Australia on either 6 October 2009 or 7 October 2009.)
Cross-examination of witnesses
Each of Ms Koller, Mr Erliinoglu and Ms Giuliani were extensively cross-examined on their affidavits. Ms Koller did not present as a reliable witness. She was unable to recall matters she positively deposed to in her affidavit sworn on 7 April 2011 and was abrupt and argumentative with the Bank’s counsel. She could not recall conversations or documents except for the conversations she had except with Mr Erliinoglu in 2003 regarding the terms of the loan and with Bank officers in February 2008. Her recollection of these conversations was apparently better than her recollection of conversations she had or of documents addressed to her in 2009. Her answers were generally non‑responsive. She attributed this to her past and ongoing mental health problems.
She gave evidence that she did not remember seeing any of the correspondence with Turks Legal in September 2009, and did not have any recollection about what occurred at the mediation. She gave evidence that despite a reference in her affidavit to “going into psychosis” at the mediation, she did not exhibit any of the behaviours consistent with that description, but rather that she “withdrew into herself”.
This may be one of those cases where a witness has been disadvantaged by having a trial on affidavit, in that Ms Koller went straight into cross‑examination upon an affidavit prepared some ten months prior to the hearing: she may have fared better had she been taken through the documents and relevant evidence in court. However, Ms Koller’s blanket denial of any memory of any of the relevant events (including receiving correspondence, instructing her solicitors, conversations with Ms Giuliani, the attendance of the Bank valuer, the failed auction of the property and even attending the mediation) in my view cast serious doubt upon Ms Koller’s willingness to even engage with the relevant events, in particular her understanding of and response to the written correspondence from the Bank’s solicitor between the date of the mediation and the date of the execution of the Terms of Settlement.
In her oral evidence Ms Koller failed to recall matters referred to in her affidavit of 7 April 2010 or gave evidence which was contradictory to the evidence she gave in her affidavit sworn on 7 April 2010. Her response to being alerted to those contradictions was to say that she was confused, or that the effect of her condition and her medication upon her recollection varied from time to time.
Importantly, Ms Koller was not able to cogently refute any of the evidence given by Ms Giuliani in her affidavits and oral evidence regarding her dealings with Ms Koller and Mr Erliinoglu leading up to the mediation and during the negotiations which followed the mediation.
In light of the fact that Ms Giuliani deposes to having had a number of telephone conversations with Ms Koller regarding refinancing the loan during the course of 2009, and that Mr Erliinoglu gave evidence that he discussed all substantial decisions with Ms Koller,[1] her evidence that she has no recollection of any correspondence, discussion or decision lacks credibility.
[1]See, for example, Mr Erliinoglu’s evidence at T148, 20-21, T154, 27-30, T156, 27-31, 7, T162
I found Mr Erliinoglu to be a generally reliable witness. While it is apparent that he has been aggrieved by the conduct of the Bank, in particular by its conduct demanding repayment of substantial funds without notifying Ms Koller that periodic repayments were required to commence, he was generally direct in response to counsel’s questions and gave helpful and responsive evidence in relation to Ms Koller’s condition and circumstances leading up to the execution of the Terms of Settlement on 5 October 2009.
One conclusion which I can draw from the oral evidence given by Ms Koller and Mr Erliinoglu is that they are both intelligent, confident and, in the context of English not being the first language of either, quite articulate. Neither of them give the impression of being easily pressured or bullied in the conduct of their affairs.
One matter upon which both Ms Koller and Mr Erliinoglu gave evidence about was an allegation (not pleaded or referred to in their affidavits) was an allegation that they were unable to refinance the loan after the execution of the Terms of Settlement because the Bank told the prospective lender it wanted to take possession of the property. The relevant extracts of that oral evidence is set out below:
[COUNSEL] “Then Ms Giuliani says in her affidavit that there was a further telephone conversation with you on 7 May in which you said that you had applied for finance with a lender, however had not received a response and that you anticipated that the lender would provide a response to her application for finance within a week; do you recall that conversation?”
[MS KOLLER] “Not that conversation, no, but what I do recall is that we did – we found someone to lend us the money to pay the bank, however the bank were so gracious as to tell the lender no, we don’t want to settle, we want to take possession of the property, that I do remember, yes, that sticks in my head.[2]
[2]T81, 8-20: this assertion was also repeated at T130, 18-21.
Mr Erliinoglu gave evidence as follows:
After the terms were faxed back to the bank what steps did you or Ms Koller take to try to obtain the payout figure?---Trying to refinance it.
And who were you trying to refinance with?---I got one guy, his name is George Eid, I talk to him and he was going to organise the finance for me, then he was dealing with so many companies to get the loan for us.
But you weren’t able to obtain the refinance?---We got the finance, we got the approval, then George Eid said to me they rang up the bank to have a settlement agreement and the bank people said we’re not willing to settle, we’re taking possession of it, that’s what George Eid said to me.
He told you the bank didn’t want to settle with you, they wanted the house?---That’s right, I believe you got it on your file as well, the date and discussion time everything, I put it on the paper because that was a serious thing to say.
Can you show me where you say that is in your affidavit?---It’s not in my affidavit, it’s maybe somewhere, I give it to my solicitor the day I had the discussion.[3]
[3]T162-163 – there was also reference to this issue at T164, 4-10, and T169-170.
Ms Koller and Mr Erliinoglu (the latter in particular) appear to have a firm belief that the Consent Judgment against Ms Koller was as a result of the Bank’s conduct in refusing to deal with a subsequent financier. However, Mr Eid was not called to give evidence, and no documents were tendered to back up this assertion. It is not outside the realms of possibility that the Bank’s attitude was advanced as a reason by a potential lender reluctant to advance finance to Ms Koller and/or Mr Erliinoglu for other reasons.
Ms Giuliani was also a reliable witness. If she was asked questions she did not know the answer to or required speculation she honestly answered that she did not know. She answered directly and responsively the questions of Ms Koller’s counsel regarding her perception of the Bank’s conduct even if such answers may not have been perceived to have been helpful to the Bank’s cause. Her demeanour and presentation suggests that while she is quite capable of being firm she does not have an overbearing or aggressive manner.
Submissions
Counsel on behalf of Ms Koller submitted that the Consent Judgment ought to be set aside because it was obtained by reason of unconscionable conduct on the part of the Bank, either under the general law or under statute. Alternatively he submits that the doctrine of non est factum, or the principles relating to a person with impaired mental capacity should be applied to impeach the Terms of Settlement and Consent Judgment. He submitted that the following conduct of the Bank was unconscionable and/or misleading and deceptive:
(a)the Bank advised the Ms Koller to obtain a solicitor when in the circumstances they knew they could not afford a solicitor;
(b)they dealt with Mr Erliinoglu when they knew that they should have been dealing with Ms Koller. They took no steps to ascertain the extent of the authority and the extent of the understanding she had of the conduct Mr Erliinoglu was engaging;
(c)they accepted the terms of settlement document which had not been properly executed;
(d)the Bank should not have accepted the terms of settlement document in the manner it was presented. It was clear that on the terms of settlement document a solicitor was required to be present when the consent to judgment form was signed and this did not occur;
(e)the Bank deal with Ms Koller in circumstances where the Bank ought to have been sure she understood the transaction she was entering and ought to have ensured that she obtained independent legal advice as to the effect of the documentation. The Bank knew she was not a businesswoman, knew that she was not involved at the time of mediation and it knew that Mr Erliinoglu was acting as the principal in circumstances where Mr Erliinoglu’s business interests were clearly involved;
(f)the Bank knew or ought to have known that it had not complied with the Consumer Credit Code at the time of mediation and negotiations to settle the proceeding;
(g)the Bank was wrong in informing the plaintiff’s broker that the Bank was not interested in re-financing as it intended to take possession of the property in circumstances when it knew or ought to have known that Ms Koller anticipated re-financing at the time that she or Mr Erliinoglu agreed to the terms of settlement;
(h)the various acts were against the backdrop of the clear inequality of bargaining power between the parties;
(i)the Bank’s only real concern was to get itself out of a position in which it ought not to have found itself;
(j)the Bank had been wrong in that it did not send out any reminder notices when the first of the part-payments allegedly fell due;
(k)the Bank was wrong in that it knew that officers of the Bank had not complied with normal bank procedures;
(l)the Bank had informed Ms Koller that if she did not sign the consent form they would be entering judgment for a larger sum in the sum referred to in the terms of settlement;
(m)Ms Koller was sick and could not understand the transaction because of her medical condition; and
(n)the Bank in this proceeding has offered no evidence or witness as to the merits of its main claim against Ms Koller.
Counsel for the Bank accepted that, in exceptional circumstances, a judgment based upon a consent order may be set aside or varied, in particular, where the party said to be bound by the consent judgment can impeach the agreement upon which the consent judgment was based. However, it was submitted that the relevant factual inquiry was concerned with the circumstances surrounding the settlement agreement, not all of the circumstances relevant to the substantive dispute between the parties.[4]
[4]Paolacci v Capital Finance Aust Ltd [2009] VSC 31, [35].
The Bank submitted that the critical issue to be determined is whether the Bank knew or ought to have known of Ms Koller’s medical condition at the time the Terms of Settlement were executed. The Bank submitted that Ms Koller must show actual knowledge, and not merely constructive knowledge on the part of the Bank. However, in any event, the Bank submitted that even on a less restrictive interpretation of the applicable test, the evidence has not revealed any facts and circumstances that would have indicated to an honest and reasonable person that Ms Koller lacked the mental capacity to understand the consequences of entering in to the Terms of Settlement.
The Bank submitted that setting aside an agreement on the basis of the doctrine of non est factum imposes a very heavy onus upon a person seeking to impeach that agreement, and that the evidence before the Court could not discharge that onus. Ms Koller was a director of the family company, and was accustomed to dealing with banking transactions and paperwork. She recalls being told to sign the Terms of Settlement. Mr Erliinoglu’s evidence was also inconsistent with Ms Koller’s reliance upon that doctrine.
Further, the Bank submitted that the evidence fails to justify a finding that:
(a)Ms Koller was unable due to mental impairment, to understand the Terms of Settlement at the time she executed the document; and
(b)the Bank knew or ought to have known of the impairment.
Similarly, counsel submitted even if the Bank knew or ought to have known of Ms Koller’s impairment, Ms Koller cannot justify any assertion that the Bank took unconscientious advantage of her condition so as to justify a finding of unconscionable conduct. He noted that the Terms of Settlement provided for a significant discount upon the Bank’s total claim.
Counsel for the Bank submitted there was no obligation imposed upon the Bank to ensure that Ms Koller received legal advice. The principles in Yerkey v Jones[5] and Garcia v National Australia Bank Limited[6]which impose an obligation upon lenders to ensure that certain classes of persons giving sureties are fully informed of the potential consequences of providing those sureties do not apply, as Ms Koller was not a volunteer.
[5](1939) 63 CLR 649.
[6](1998) 194 CLR 395.
Finally, the Bank submitted that in any event, there would be limited utility in setting aside the Consent Judgment, as Ms Koller has failed to demonstrate an arguable defence in the substantive proceeding.
Conclusion
The Consent Judgment should not be set aside, as there is no basis to impeach the settlement agreement between the Bank and Ms Koller on the basis of non est factum, unconscionable conduct (either in equity or statutory unconscionability) or on the basis that Ms Koller had not obtained legal advice before settling the proceeding. The evidence is that some days after signing the Terms of Settlement and returning them to Turks Legal, Ms Koller suffered a mental health crisis which was sufficiently severe to warrant her hospitalisation for a period of some two weeks. This occurred on 9 October 2008, some four days after the Terms of Settlement and Consent Judgment was executed.
While there was no direct evidence from her treating psychiatrist in relation to her condition during the days leading up to 5 October 2009, this uncontested evidence would at least raise a question about whether Ms Koller was in a position to understand the consequences of the documents she signed on 5 October 2009. Her capacity to understand the consequences of signing the settlement documents was certainly put in issue by Dr Jager’s report, although the weight to be given to his evidence must be limited by the fact he is relying upon a reconstruction of documents and a history given by Ms Koller rather than his contemporaneous observations of Ms Koller.
However, there is highly probative circumstantial evidence to the contrary. Mr Erliinoglu gave evidence that he discussed the communications that he had been having with Ms Giuliani and the mediator with Ms Koller and would not have made any decisions without her agreement. As indicated above, I consider that Mr Erliinoglu’s evidence, while to some extent coloured by his grievances towards the Bank, was generally reliable. Ms Koller had been involved in discussions with the Bank and Ms Giuliani over the course of the proceeding, and while she was not experienced in complicated matters of business, had engaged in financial transactions on her own behalf and on behalf of Mr Erliinoglu in the past. Mr Erliinoglu felt sufficiently comfortable about Ms Koller’s mental state to be able to depart on an overseas trip. No doubt he would not have done so had she been exhibiting the symptoms of psychosis that Ms Koller referred to in her written and affidavit evidence, and which led her to her admission to hospital. The letter enclosing the Terms of Settlement and Consent Judgment was not an isolated communication: it was the culmination of a series of communications between the Bank’s solicitors and Ms Koller and Mr Erliinoglu over a period of some weeks. It was the third iteration of such a document, with the only material changes to the covering letter and the Terms of Settlement being the amounts payable to the Bank, the time for payment, and the due date for the return of the executed documents. Further, the evidence demonstrates that Ms Koller would have been aware, by the end of the mediation at the latest, that the Bank was only prepared to reach agreement with Ms Koller on terms which would require Ms Koller to sell or refinance the property to pay out the Bank, failing which the Bank would recover possession of the property.
On balance I find that it is more likely than not that Ms Koller did understand the consequences of signing the Terms of Settlement and Consent Judgment.
In any event, it is absolutely clear from the evidence that there was no basis for finding that the Bank was aware of Ms Koller’s mental health problems from the time of the inception of the loan in 2003 until 7 April 2010, when Ms Koller’s affidavit in support of her summons was served. As previously indicated, Ms Giuliani’s evidence is reliable and was not seriously challenged. Ms Koller and Mr Erliinoglu confirm that they never informed the Bank of Ms Koller’s health issues and indeed vigorously defended their position in not doing so. Indeed, the evidence suggests that there was nothing that would even put a reasonable person on enquiry regarding Ms Koller’s mental state even if that would be sufficient to impeach the settlement agreement in any event.
I agree with counsel for the Bank that the law did not impose any obligation upon the Bank to ensure that Ms Koller obtained legal advice before settling the proceeding. Ms Koller was not a volunteer. The settlement sum involved a substantial discount upon the Bank’s claim. At the time of the proposed settlement date, 8 January 2010, the balance of Ms Koller’s loan account was just short of $400,000 (not including legal costs). However, the Bank had agreed to accept $362,000 upon a re-financing or sale of the property. There was no suggestion that the funds advanced by the Bank had not been utilised by Ms Koller for the purposes of making improvements to the property or that she received no benefit from the funds. Further, while the Bank’s conduct in failing to advise Ms Koller when she was required to commence making repayments of principal and interest on the loan account could not be held out as an example of best practice, Ms Koller gave evidence that Mr Erliinoglu regularly checked the accounts and it is tolerably clear that at the time of the issuing of the default notice the loan account was out of order, and that the prospects of Ms Koller making out a good defence at trial were not high.
Ms Koller seeks to set aside the Terms of Settlement and the Consent Judgment upon the grounds of mental impairment and/or the unconscionable conduct of the Bank in obtaining Ms Koller’s agreement to the Terms of Settlement.
While the evidence demonstrates that Ms Koller was suffering from some degree of mental impairment in the period leading up to the execution if the Terms of Settlement and Consent Judgment, this is not of itself sufficient grounds for setting aside the Consent Judgment.
The legal position with respect to incapacity is similar to the principles of unconscionability. The focus must be on the exploitative advantage taken by the other party rather than on the unfairness of the transaction to the person seeking to impeach the transaction.[7] It is clear from the authorities that in order for a person to set aside a transaction on the grounds of impairment that person must show that the party seeking to enforce the agreement knew or ought to have known of the impairment or other special disadvantage of the other party.[8] In this case the evidence can lead to no other finding than that the Bank was unaware of Ms Koller’s condition, and that there was nothing in Ms Koller’s demeanour or communications with the Bank or its solicitors after her solicitor had ceased to act which ought to have alerted the Bank to her mental health problems.
[7]See: Davis Contract: General Principles at 7.3.600.
[8]See Gibbons v Wright (1954) 91 CLR 423, 441.
While it is generally the case that a finding of unconscionable conduct also requires some knowledge of a party’s special disadvantage, I accept that the doctrine of unconscionable conduct (in particular, as it is expressed in its various statutory formulations) is sufficiently flexible to provide relief for a party in the absence of actual or constructive knowledge of that party’s special disadvantage on the part of the party seeking to enforce a contract. However, it would be necessary for Ms Koller to establish that the Bank had engaged in conduct which involved a deliberate act that is morally repugnant and is irreconcilable with what is right or reasonable.[9] Mere inequality of bargaining power is not enough.[10]
[9]ACCC v Allphones Retail Pty Ltd (2009) 253 ALR 324 at 113.
[10]ACCC v Berbaris Holdings Pty Ltd (2003) 214 CLR, 51, 11.
An examination of the evidence regarding communications between Ms Koller (and her former solicitor) and the solicitors for the Bank leading up to mediation, during the mediation and after the mediation do not lead me to the conclusion that there has been any untoward conduct on the part of the Bank, and certainly not conduct which was so unreasonable, unfair or thuggish as to warrant the finding that the Bank acted unconscionably. Ms Koller and Mr Erliinoglu gave evidence that they felt pressured to agree to the Bank’s offer on the basis that if they did not agree then judgment would be entered against them for a much larger amount. However, there is no evidence of such statements being made to them directly by the Bank officers or Ms Giuliani at the mediation (or on some other occasion).
Indeed, the evidence of Mr Erliinoglu in particular suggested that he and Ms Koller felt under pressure for other reasons: in particular the advice given to them by Mr Byrne and other unnamed solicitors that their defence was doomed to fail and that the Bank would ultimately take possession of the property, and Mr Erliinoglu’s own experience of dealing with unpaid creditors in the past.
In any event, the position of the proceeding would be that if no settlement was reached the parties would simply proceed to trial. No summary judgment application had been made or foreshadowed by the Bank. Accordingly, the “pressure to settle” felt by Ms Koller and Mr Erliinoglu appears to have been as a result of the circumstances in which they found themselves, not the conduct of the Bank.
Of course, Ms Koller faced the risk if she failed to settle at or after mediation that the Bank would ultimately be successful at trial and additional interest and costs would be visited upon her. That is a risk facing most litigants. Advising the other party of such a risk cannot of itself amount to bullying or overbearing conduct. It is correct that the tone of the Bank’s written communications with Ms Koller was formal, and imposed deadlines for the acceptance of the Bank’s offers. However, the deadline of 5 October 2009 made sense on the basis that there was a hearing date set for 6 October 2009, at which time there would need to be either a further adjournment or directions for preparing the matter for trial. No doubt the Bank was keen to avoid incurring further costs if possible. Further, the deadline was consistent with the evidence that Mr Erliinoglu (and, to the belief of Ms Giuliani, Ms Koller as well) was travelling overseas on or about 7 October 2009, and wanted to resolve the matter by then.
Turning to the submissions made by Ms Koller’s counsel regarding the asserted unconscionable conduct of the Bank, I consider that either the asserted conduct was not made out by the evidence, or could not, in the circumstances of the current case, amount to unconscionable conduct.
In particular:
(a)the evidence shows that while Ms Giuliani assumed that Mr Byrne had withdrawn because of unpaid legal fees, she did not have direct knowledge of Ms Koller’s financial circumstances. In any event, it is difficult to see how advising an opposing party to obtain legal advice can amount to unconscionable conduct;
(b)The Bank’s solicitors did deal with Mr Erliinoglu, consistently with Mr Erliinoglu’s representation of Ms Koller at the mediation. However, Ms Giuliani had on occasion spoken to Ms Koller during the course of the proceeding, all correspondence was addressed to Ms Koller, and she signed all of the settlement documents. There was no suggestion that any settlement agreement was for the benefit of Mr Erliinoglu rather than Ms Koller;
(c)the irregularity in the execution of the Terms of Settlement does not invalidate the document: indeed in her oral evidence Ms Koller indicated she would sign the document in the same place if it were put before her today;
(d)there was no requirement that the Terms of Settlement and the Consent Judgment be executed before a solicitor;
(e)there was no legal obligation upon the Bank to ensure that Ms Koller understood the consequences of the settlement agreement and/or obtain legal advice. Ms Koller was not a volunteer. There was no evidence that the transaction was for the benefit of Mr Erliinoglu’s business interests. In any event, I have found that it was more likely than not that Ms Koller did understand the consequences of the settlement agreement;
(f)given that the primary focus of this trial is the circumstances surrounding the settlement agreement, the Bank’s compliance with the Consumer Credit Code in 2008 is of tangential relevance. In any event, no such non‑compliance was established;
(g)the assertion that the Bank informed the finance broker engaged by Mr Erliinoglu that it was not interested in refinancing the property because it intended to take possession is uncorroborated hearsay. That does not mean that Ms Koller and Mr Erliinoglu do not have a genuine belief that this occurred;
(h) mere inequality of bargaining power is not, of itself, a basis for setting aside the Consent Judgment;
(i)the submissions that “The Bank’s only real concern was to get itself out of a position in which it ought not have found itself” is a proposition that is unsupported by any evidence;
(j)I agree that if it was indeed the case that the Bank failed to notify Ms Koller when her repayments under the loan were due to commence this is not a good business practice. However, the evidence is that Mr Erliinoglu did regularly check the account balance on the internet. In any event, an enquiry into the circumstances surrounding the settlement agreement is not required to traverse all of the outstanding issues in dispute, and this complaint was not made in Ms Koller’s pleadings;
(k)there was no evidence that the Bank knew it was wrong in that it knew that officers of the Bank had not complied with normal banking procedures: if it did know, it is uncertain as to what would flow from that;
(l)the evidence does not establish that the Bank or its solicitors informed Ms Koller that if she did not sign the Consent Judgment for a larger sum than in the Terms of Settlement: the best evidence available is that Mr Koller was told this by Mr Erliinoglu and her previous solicitor. In any event, any such statement would not, of itself, usually amount to unconscionable conduct in the absence of any knowledge on the part of the Bank or its representatives of any special impairment or disadvantage on the part of Ms Koller;
(m)while Ms Koller suffered a mental health crisis after the execution of the Terms of Settlement, I have found she more likely than not understood their terms and consequences, but in any event, the Bank had no notice of her health problems; and
(n)the Bank was not, for the purposes of this application, required to prove the merits of its substantive claim against Ms Koller.
According, the application in Ms Koller’s summons filed on 26 March 2011 will be dismissed. I will hear the parties on the question of costs. However, having received the relevant affidavits regarding the question of who ought to pay the Bank’s costs of the adjournment on 25 November 2010, there is no basis for making an order that the costs be borne by Ms Koller’s solicitors rather than by Ms Koller herself, which in any event will no doubt will be recoverable from the sale of the property under the terms of the mortgage.
I propose to make the following orders:
1.The defendant’s summons filed 26 March 2010 be dismissed.
2.The defendant pay the plaintiff’s costs of and incidental to the adjournment on 1 September 2010 on an indemnity basis.
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