O'Dea v Westpac Banking Corporation

[2019] NSWSC 1078

Supreme Court

New South Wales

Medium Neutral Citation:	O’Dea & Anor v Westpac Banking Corporation [2019] NSWSC 1078
Hearing dates:	24 July 2019
Date of orders:	24 July 2019
Decision date:	24 July 2019
Jurisdiction:	Equity
Before:	Sackar J
Decision:	Settlement Orders Made
Catchwords:	Representative Proceedings - Civil Procedure Act 2005 (NSW) s 173 - Settlement - Court Approval
Legislation Cited:	Civil Procedure Act 2005 (NSW) Contracts Review Act 1980 (NSW) Corporations Act 2001 (Cth)
Cases Cited:	ASIC v Activesuper Pty Ltd (in liq) & ORs [2015] FCA; 235 FCR 181; 105 ASCR 116 Barnes v Addy (1874) 9 Ch App 244 Botsman v Bolitho [2018] VSCA 278 Camilleri v The Trust Company (Nominees) Limited [2015] FCA 1468 Clarke v Sandhurst Trustees Limited (No 2) [2018] FCA 511 El Ajou v Dollar Land Holdings pic [1994] 2 All ER 685 Harstedt Pty Ltd v Tomanek [2018] VSCA 84 Johnston v Endeavour Energy [2016] NSWSC 1132 Lifeplan Australia Friendly Society Limited v S & P Global Inc Formerly McGraw-Hill Financial, Inc) (A Company Incorporated in New York) [2018] FCA 379 Oasis Fund Management Limited and Royal Bank of Scotland NV & Ors [2012] NSWSC 532 Petersen Superannuation Fund Pty Ltd v Bank of Queensland Limited (No 3) [2018] FCA 1842 Peterson v Merck Sharp & Dohme (Aust) Pty Ltd (No 6) [2013] FCA 447 Smith v Australian Executor Trustees Limited [2018] NSWSC 1584 Wotton v State of Queensland (No 10) [2018] FCA 915
Category:	Procedural and other rulings
Parties:	Diana Leonie O’Dea (First Plaintiff) Thomas Vaarzon-Morel (Second Plaintiff) Westpac Banking Corporation ABN 33 007 457 141 (Defendant)
Representation:	Counsel: N Kidd SC, D Meyerowitz-Katz (Plaintiffs) S Lawrance (Defendant)   Solicitors: Levitt Robinson (Plaintiffs) Allens (Defendant)
File Number(s):	2016/35575

Judgment

Procedural background

1. The matter before me was a representative proceedings brought pursuant to Part 10 of the Civil Procedure Act 2005 (NSW) (CPA).

2. The plaintiffs and the group members invested in an alleged fraudulent investment scheme run by Anthony Famularo. The defendant, Westpac Banking Corporation, is sued in its capacity as successor in law to St George Bank Limited (SGB). The plaintiffs alleged that SGB (and therefore Westpac) is liable as a result of certain dealings between SGB and Mr Famularo.

3. The proceedings commenced on 3 February 2016. The proceedings initially named Mr Famularo as the first defendant and Westpac as the second defendant. However, Mr Famularo passed away on 24 July 2016. The proceedings against Mr Famularo’s estate were discontinued by order of myself on 7 December 2017.

4. On 22 June 2018 the matter was set down for a hearing of 5 weeks commencing on 17 June 2019.

5. In August and September 2018, following extensive discovery on the part of the parties, a registration process was conducted for the mediation pursuant to class closure orders made on 2 August 2018.

6. The parties attended a mediation on 18 December 2018. The mediation did not result in an immediate settlement.

7. A proposed settlement was ultimately agreed to on 14 May 2019.

8. By notice of motion dated 12 June 2019, the plaintiffs seek approval pursuant to s 173(1) of the CPA of a proposed settlement between the plaintiffs and the defendant.

9. The matter came before me for me for approval on 24 July 2019. Having heard from the parties and a number of lay people and after carefully considering all the materials, I decided that the settlement was reasonable in all the circumstances and made orders approving the settlement. I indicated that I would subsequently provide my reasons, these are they.

Confidentiality Order

10. Alongside seeking approval of the proposed settlement, the plaintiffs also sought, pursuant to s 183 of the CPA, that the confidential counsels’ opinion be the subject of a suppression and non-publication order. This order was sought regardless of the outcome of the approval application.

11. The opinion was provided to the Court on a confidential basis, it contained material that was the subject of lawyer-client privilege belonging to the plaintiffs and which the plaintiffs did not waive.

12. There was a further confidential order sought with respect to the deed, albeit not with the settlement scheme (T2/9-12)

13. On the day of hearing, I also made the confidentiality orders sought by the plaintiff.

Factual background

The Famularo Scheme

14. The plaintiffs say that Mr Famularo at all times between 2005 and 2009 carried on a business of trading in securities and derivatives on the Australian Securities Exchange (ASX) (FASOC [5]). The plaintiffs alleged that Mr Famularo’s strategy was a hopeless investment strategy which would inevitably have lost money over time (FASOC [9]). Westpac denies this (Defence [8]-[9]).

15. In essence, the plaintiffs’ case is that the Famularo Scheme was a classic ‘Ponzi Scheme’- in that, at some time prior to 2005, Mr Famularo began to solicit ‘investments’ and thereafter used the money paid by new investors to pay ‘returns’ to his existing investors (the Famularo Scheme). In order to facilitate the scheme, Mr Famularo operated over 100 different companies (the Famularo Entities), each of which had a Cash Management Trust (CMT) account with Macquarie Bank, and most of which had one or more margin loan accounts with SGB and other lenders (FASOC [10]-[11]).

16. In order to invest in Mr Famularo’s scheme, Mr Famularo arranged to obtain mortgage-loans over the plaintiffs’ real property. Mr Famularo used the money to purchase shares in the plaintiffs’ names (FASOC [45]-[51]). These shares were then used as third party security for a margin loan with SGB held by one of Mr Famularo’s companies (FASOC [38]-[44]). It is alleged that each new investor into the Famularo Scheme was allocated to one of the Famularo Entities. Often the investor would be told that they had purchased shares in the relevant entity, and this would sometimes be reflected in the ASIC records. Investments were made either by providing Mr Famularo with cash or by providing him with shares in publically listed companies. Where shares were provided, they were lodged as security on a margin loan.

17. The plaintiffs also say that the clients’ investment funds (or margin loan advances) were generally deposited into the Macquarie CMT account of the Famularo Entity to which the client had been allocated. From there, the funds were transferred to the Macquarie CMT account of a company called Bacnet Pty Limited. Bacnet operated as a central banker of sorts for the scheme. From the Bacnet account, monies were transferred to other Macquarie CMT accounts and then paid out to various places, primarily; payments to investors, payments to margin lenders, and payments of Mr Famularo’s personal expenses. In May 2008 the plaintiffs’ shares were sold, they received no proceeds (FASOC [85]-[90]).

The relationship between SGB and Mr Famularo

18. The first contact between SGB and Mr Famularo appears to have been in about September 2004.

19. In around late 2005 or early 2006, SGB began piloting a new margin lending product known as “DIY Options” (FASOC [13]-[17]; Defence [13]-[17]). The plaintiffs say that Mr Famularo made a number of statements to the effect that he was heavily involved in developing the DIY Options product; however the extent of his actual involvement is in dispute.

20. The plaintiffs’’ pleading of SGB’s involvement with Mr Famularo relies heavily on two reports prepared by SGB in 2007; the ‘5 February 2007 Memo’ and the ‘Internal Audit Report’.

21. The 5 February 2007 Memo identifies Mr Famularo as the Bank’s “largest advisor/client using the DIY Options product with approximately $104m worth of loans within his aggregated accounts (50% shareholding or greater) and another $64m with his other clients”.

22. The Internal Audit Report identified that SGB had built up a large exposure to Mr Famularo chiefly due to his not disclosing the related nature of the Famularo St George Margin Lending (SGML) Facilitates or his controlling interest in the Famularo Entities. Further that where shareholders in the companies opening accounts with SGB were not identified as part of the account opening process, there could be increased risk of reputational damage if those shareholders were retail customers relying on an unlicensed advisor to act as intermediary for their investments.

23. The plaintiffs say that in about mid-February 2007 the response was to terminate all of Mr Famularo’s loan facilities, and that Mr Famularo agreed to do this by no later than September 2007 (FASOC [22]-[28]). The plaintiffs allege however that a number of the bank’s staff continued to engage with Mr Famularo because they did not want to lose his business. In particular, Mr Famularo was closing accounts with SGB and refinancing to a competitor of SGB known as Lift Capital. As a result Mr Famularo was permitted to continue trading with SGB. When Lift Capital went into administration in about April 2008, the Australian Financial Review, reported that a key cause of the company’s collapse were the debts owing to Lift Capital by the various Famularo Entitles. The plaintiffs allege SGB then scrambled to ascertain the Bank’s exposure to Mr Famularo, and took action to cease its involvement with him altogether.

24. In about August 2011, SGB wrote off an outstanding balance of about $466,000 remaining on several of Mr Famularo’s accounts. It appears other amounts were also written off.

The plaintiffs’ case

25. The plaintiffs bring the following causes of action against the Defendant.

Managed Investment Scheme Claim

26. The plaintiffs claim that the defendant is liable as an accessory to the various breaches by Mr Famularo of the managed investment scheme provisions in Ch 5C of the Corporations Act 2001 (Cth) (FASOC [96]-[133]).

27. In particular, the plaintiffs’ claim that the Famularo scheme was a ‘managed investment scheme’ that was required to be registered under the Corporations Act. Further the scheme wasn’t registered and wasn’t operated by a responsible entity that held an AFSL.

28. The plaintiffs allege that SGB was a person ‘involved in’, Mr Famularo’s contraventions within the meaning of s 1325(2) of the Corporations Act. They say that under 79(c) of the Act, SGB was “in any way, by act or omission, directly or indirectly, knowingly concerned in, or party to, the contravention.”

29. The remedies sought in respect of the MIS claims are available under s 1325(2) of the Corporations Act.

30. The defendant has pleaded a positive defence that the MIS clams were commenced out of time under s 1325(4) of the Corporations Act. The plaintiffs have responded to this defence by arguing; firstly that their loss was prospective (rather than actual) until the litigation between Mr Famularo and the liquidators of Lift Capital had been determined, as they could have recovered their money had Mr Famularo been successful in that litigation; and secondly if their claims were otherwise barred they could seek an order under s 1322(4)(d) of the Act extending the period in which their application could be made.

Section 911A Claim

31. The plaintiffs claim that the defendant is liable as an accessory to breaches by Mr Famularo of s 911A of the Corporations Act, the requirement to hold an AFSL when providing certain services (FASOC [96]-[133]). The plaintiffs identify s 1324 as the provision permitting a claim for such relief.

32. The plaintiffs allege that SGB knew that Mr Famularo was carrying on a financial services business and by May 2007 suspected that he was unlicensed.

Trust Claims

33. The plaintiffs claim that the defendant is liable for its involvement in breaches by Mr Famularo of his fiduciary duties to the plaintiffs and the group members, and of the consequent constructive trust on which their investments were held (FASOC [154]-[170]).

34. The trust claims are brought under the two “limbs” of Barnes v Addy (1874) 9 Ch App 244. The plaintiffs say that Mr Famularo breached his duties to the plaintiffs as trustee, and that SGB; received trust property with knowledge that it had been obtained in breach of trust; and was involved with knowledge in Mr Famularo’s dishonest and fraudulent design.

35. The plaintiffs allege that SGB received trust property through cash transfers made by Mr Famularo to SGB loan accounts and by selling third party security and causing the proceedings to be applied to the outstanding balance of margin loan accounts. The plaintiffs would need to show that SGB had knowledge that the assets it received are traceable to a breach of fiduciary duty by Mr Famularo owed to the plaintiffs.

36. The plaintiffs would need to show that SGB had knowledge of Mr Famularo’s misappropriation of the trust monies.

CR Act Claims

37. The plaintiffs claim that the mortgage-loans granted to them by SGB were ‘unjust’ within the meaning of the Contracts Review Act 1980 (NSW) (FASOC [181]-[194]). Due to the individual nature of these claims, they are not expressed as group claims. There are 22 registered group members (in addition to the two plaintiffs) who obtained loans from SGB at some stage and may therefore have similar claims.

38. When a contract is found unjust, the Court has a broad discretion under s 7 to grant relief.

39. Further, although the mortgage the subject of the claim may be found to have been unjust, borrowers who use the loan to refinance existing debt are not generally given relief under the CR Act, at least where the refinanced debt was more expensive than the new debt.

The proposed settlement

40. The proposed settlement is documented in the Settlement Deed dated 14 May 2019 (Deed) which annexed the Hardship Relief Scheme (Hardship Scheme) and a Settlement Scheme.

41. The critical terms of the Deed are as follows:

1. The defendant agrees to pay the sum of $10 million, inclusive of costs and to apply the Hardship Scheme;

2. The plaintiffs agree to release certain claims against the defendant and grant certain indemnities;

3. The defendant has the right to withdraw settlement if:

1. The Court has not made an order approving settlement by 14 May 2020; or

2. Before the “Settlement Date” (which is the date 7 days after the time for any appeal from an order approving the settlement has expired) three or more group members are given leave to, and do, opt out of the proceedings.

42. The Deed is conditional on Court approval.

Hardship Scheme

43. The Hardship Scheme only affects those group members with current St-George branded mortgages.

44. Unlike the Settlement Scheme, group members are eligible for the Hardship Scheme even if they did not register in accordance with the 2 August 2018 registration orders.

45. Under the Hardship Scheme, all eligible group members are able to have default interest and charges which have accrued on their mortgage written off, and in addition to have a six month interest-free period should they choose to sell the security property. The Hardship Scheme also permits eligible group members to apply for hardship relief.

Settlement scheme

46. The Settlement Scheme sets out the manner in which the $10 million paid by the defendant is to be distributed.

47. The plaintiffs’ solicitor is appointed as the person responsible for administering the scheme.

48. The Settlement Scheme provides that as soon as practicable after the settlement, all outstanding legal fees will be paid in an amount approved by the Court. To date the costs in this matter have been funded by voluntary contributions by the plaintiffs and some group members, under the Settlement Scheme, these costs will be reimbursed from the settlement fund.

49. In order to receive compensation from the settlement, group members must have registered pursuant to the 2 August 2018 registration orders.

50. The participating group members are subdivided into three “Claim Groups”- the Loan-Mortgage Claim Group, the Third Party Security Claim Group and the Cash Investment Claim Group. A single group member may fall into more than one of these claim groups.

51. The value of the claims in the Loan-Mortgage Claim Group is to be calculated by an independent banking expert. Where a group member has received an FOS determination, that determination will be adopted as demonstrating whether or not SGB engaged in maladministration in lending the approved loan and whether the group member suffered a loss as a result. Where no FOS determination has been obtained, the banking expert will make a determination. Where maladministration is found, the group members will be assigned a claim value calculated as the interest or additional interest paid or payable as a result of that maladministration. Group members who have accepted an FOS determination will have a claim value of nil and therefore will receive no compensation in relation to their loan-mortgage claim.

52. The value of the claims in the Third Party Security Claim and Group and the Cash Investment Claim Group are to be calculated by the Administrator. Members of the Third Party Security Claim Group will be allocated a claim value equal to the value of the security that was lodged, less refunds of capital paid to the group member. Members of the Cash Investment Claim Group will be allocated a claim value equal to the value of the cash contributions that were made less refunds of capital paid to the group member.

53. After claim amounts have been determined, group members will receive a “Primary Certificate of Loss”. There is a right of review to dispute a determination in the Primary Certificate of Loss.

54. After claim amounts have been calculated, the Administrator will distribute the settlement fund. The starting point for the preliminary entitlements:

1. For the Loan-Mortgage claims, 85% of the claim value (i.e. 85% of the interest that accrued on the mortgage);

2. For the Third Party Security Claims, 22% of the claim value (i.e. 22% of the value of the third party security less any returns of capital); and

3. For the Cash Investment Claims, 15% of the claim value (i.e. 15% of the value of the cash investments less any return of capital).

55. Pro rata adjustments will be made if necessary, depending on amount remaining in the settlement fund.

Legal principles

56. It is both necessary to lay out some of the legal principles relating to the substance of the plaintiffs claim, as well as the authorities on settlement approvals in representative proceedings.

Accessorial liability of the Defendant

57. A significant part of the plaintiff and group members claim rests upon establishing accessorial liability on the part of SGB.

58. The plaintiffs allege that SGB was a person “involved in’ Mr Famularo’s conventions within the meaning of s 1325(2) of the Corporations Act:

(2)   The Court may, on the application of a person who has suffered, or is likely to suffer, loss or damage because of conduct of another person that was engaged in contravention of a section 1325 order provision or on the application of ASIC in accordance with subsection (3) on behalf of such a person or 2 or more such persons, make such order or orders as the Court thinks appropriate against the person who engaged in the conduct or a person who was involved in the contravention (including all or any of the orders mentioned in subsection (5)) if the Court considers that the order or orders concerned will compensate the person who made the application, or the person or any of the persons on whose behalf the application was made, in whole or in part for the loss or damage, or will prevent or reduce the loss or damage suffered, or likely to be suffered, by such a person.

59. The plaintiffs further rely on the definition of ‘involved in’ in s 79 of the Act, in particular (c):

79   Involvement in contraventions

A person is involved in a contravention if, and only if, the person:

(a)   has aided, abetted, counselled or procured the contravention; or

(b)   has induced, whether by threats or promises or otherwise, the contravention or

(c)   has been in any way, by act or omission, directly or indirectly, knowingly concerned in, or party to, the contravention; or

(d)   has conspired with others to effect the contravention.

60. The principles relating to accessorial liability in this context were outlined by White J in, ASIC v Activesuper Pty Ltd (in liq) & ORs [2015] FCA; 235 FCR 181; 105 ASCR 116 at [397]-[457]. In particular, the following principles were enunciated:

1. In order for a person to be involved in a statutory contravention that person must have:

1. Knowledge of the essential elements constituting the contravention,

2. An intention to assist in the commission of the acts constituting the contravention, and

3. Engaged in conduct, by act or omission, which implicates or involves the person in the offence or shows a practical connection between the person and the offence;

2. For knowledge of the essential elements, actual knowledge is required;

3. The requisite actual knowledge must be present at the time of the contravention; and

4. A company may be knowingly concerned in a statutory contravention, and the intention and knowledge of the directing or governing mind and will of a company may be imputed to the company for this purpose.

61. As noted above, the plaintiffs further claim that SGB was involved in the breach of trust of Mr Famularo. In particular, the plaintiffs allege that under the first limb of Barnes v Addy the defendant received and became chargeable with property obtained in breach of trust. In El Ajou v Dollar Land Holdings pic [1994] 2 All ER 685, Lord Hoffman identified three elements of a cause of action of this type:

1. A disposal of assets in breach of fiduciary duty,

2. The beneficial receipt by the defendant of assets which are traceable as representing the assets of the plaintiff, and

3. Knowledge on the part of the defendant that the assets are traceable to breach of fiduciary duty.

62. Further, the plaintiffs allege that under the second limb of Barnes v Addy the defendant knowingly assisted in breach of trust or fiduciary duty. Harstedt Pty Ltd v Tomanek [2018] VSCA 84, identified four elements of this cause of action:

1. The existence of a fiduciary duty owed by the fiduciary,

2. A “dishonest and fraudulent design” on the part of the fiduciary,

3. Assistance by the third party in that design, and

4. Knowledge on the part of the third party of the circumstances constituting that design.

63. Again, the plaintiff would have to show the requisite knowledge on the part of SGB of the relevant circumstances under the Barnes v Addy claim.

Consideration of the Proposed Settlement

64. Under s 173 of the CPA, a Court must approve settlements in representative proceedings;

173 Approval of Court required for settlement and discontinuance

(1)   Representative proceedings may not be settled or discontinued without the approval of the Court.

(2)   If the Court gives such approval, it may make such orders as are just with respect to the distribution of any money, including interest, paid under a settlement or paid into the Court.

65. The general considerations applying to an approval of a settlement under s 173 were summarised by Hoeben CJ at CL in Johnston v Endeavour Energy [2016] NSWSC 1132 (at [22]-[23]);

The principles that govern an application for approval of a settlement of a group proceeding are well established:

(i)   The central question for the Court is whether the proposed settlement is fair and reasonable in the interests of the group members as a whole (Rowe v AusNet Electricity Services Pty Ltd and Ors [2015] VSC 232 at [49] – [51]; Matthews v SPI Electricity and SPI Electricity Pty Ltd v Utility Services Corporation Ltd (Ruling No 16) [2013] VSC 74 (Matthews) at [34]; Wheelahan & Anor v City of Casey & Ors [2011] VSC 215 (Wheelahan) at [57] (Emerton J) citing ACCC v Chats House Investments Pty Ltd & Ors [1996] 71 FCR 250; FCA 1119 at 258 (Branson J) (Chats House).

(ii)   There will rarely be one single or obvious way in which a settlement should be framed, either between group members and the defendants (inter partes aspects) or in relation to sharing the compensation among group members (inter se aspects) – reasonableness is a range and the question is whether the proposed settlement is within that range (Darwalla Milling Co Pty Ltd v F Hoffman-La Roche & Ors Ltd (No 2) [2006] FCA 1388; 236 ALR 322 at 336 [40] (Jessup J) (Darwalla).

(iii)   It is not the task of the Court to “second-guess” or go behind the tactical or other decisions made by the plaintiff’s legal representatives, but rather to satisfy itself that the decisions are within the range of reasonable decisions according to the known circumstances and the reasonably perceived risks of the litigation (Matthews, Darwalla, see also Pharm-a-Care Laboratories Pty Ltd v Commonwealth of Australia (No 6) [2011] FCA 277 at [22] (Flick J) (Pharma); Modtech Engineering Pty Ltd v GPT Management Holdings Ltd [2013] FCA 626 at [12] (Modtech) (Gordon J).

(iv)   In assessing the fairness and reasonableness of a proposed settlement the court relies heavily upon the candid, frank and confidential opinions provided to it by the plaintiff’s legal representatives requiring them to disclose the factors which were material to the decision to accept the settlement (Thomas v Powercor Australia Limited [2011] VSC 614 at [18] (Beach J) (Powercor); Wheelahan at [75]; Rod Investments (Vic) Pty Ltd v Abeyratne & Ors [2010] VSC 457 at [11] and [18] (Almond J) (Abeyratne); Lopez v Star World EnterprisesPty [1999] ATPR 41 – 678 at 42 – 670; [1999] FCA 104 (Finkelstein J) (Lopez).

(v)   The factors adopted in Williams v FAI Home Security Pty Ltd (No 4) [2000] 180 ALR 459; [2000] FCA 1925 (Williams) indicate some of the considerations typically relevant to an assessment of an application for approval. As Goldberg J pointed out in Williams, this is a useful but not exhaustive guide. Those considerations are:

(vi)   (A)    The complexity and duration of the litigation.

(vii)   (B)   The reaction of the class to the settlement.

(viii)   (C)   The stage of the proceedings.

(ix)   (D)   The risks of establishing liability.

(x)   (E)   The risks of establishing damages.

(xi)   (F)   The risks of maintaining a class action.

(xii)   (G)   The ability of the defendants to withstand a greater judgment.

(xiii)   (H)   The range of reasonableness of the settlement in light of the best recovery; and

(xiv)   (I)   The range of reasonableness of the settlement in light of all of the attendant risks of litigation.

(xv)   The factors in Williams are largely directed to the reasonableness of a compromise inter partes. They are, however, also relevant to a consideration of the agreements reached with the insurance intervenors. The procedure should likewise be fair and reasonable “inter se”.

(xvi)   An important consideration is whether group members were given timely notice of the critical elements so that they had an opportunity to take steps to protect their own position if they wished. Once appropriate notice is given, the absence of objections or other response action from group members is a relevant consideration in support of the settlement and all its elements (Dorajay Pty Ltd v Aristocrat Leisure Ltd [2009] FCA 19 (Stone J) (Aristocrat); Abeyratne at [22]; Horsham at [15], [25).

(xvii)   Where a group member objects to the settlement, an important question is whether the objector is prepared to assume the role and risks of being lead plaintiff. It is easy for group members who face no adverse costs risk to want a plaintiff to fight to the very end. The weight to be given to objections will diminish where the objector is unwilling or unable to take on all of the economic and other burdens which the plaintiff otherwise bears (Wong v Silkfield [2000] FCA 1421 at [24] – [30] (Spender J)).

The effect of those considerations is that the proposed settlement must be fair and reasonable and in the interests of all group members who will be bound by the settlement. In this context group members, who are not clients of Maddens, are not directly represented. It is their interests in particular which the Court, in an application of the present kind, is concerned to ensure are addressed fairly, vis-a-vis the plaintiff and other group members and having regard to the overall merits of the claims made on their behalf in the action.

66. The approval of the settlement is also subject to the principles in ss 56-58 of the CPA; Lifeplan Australia Friendly Society Limited v S & P Global Inc (Formerly McGraw-Hill Financial, Inc) (A Company Incorporated in New York) [2018] FCA 379 (at [35]).

67. Of note in this case, is Justice Ball’s comments in Smith v Australian Executor Trustees Limited [2018] NSWSC 1584 (at [46]) with regard to the length of litigation:

…there are the advantages in timing and certainty that a settlement brings. If the proceedings are not settled, it will take some time to obtain a final judgment. Even if the plaintiffs are successful, it may be necessary to have separate hearings in relation to the claims of at least some group members. Having regard to the amounts involved, an appeal is likely. Many of the group members are elderly. Some have died since the proceedings were commenced. There are obvious disadvantages to group members if the trial proceeds that cannot be compensated for entirely by an award of interest.

68. In Lifeplan, Lee J noted, that the settlement only had to be within a ‘range’ of reasonable outcomes (at [27]);

I deliberately use the word ‘range’ because my role is not, soothsayer-like, to prognosticate the likely outcome of the proceeding and engage in a form of discounting exercise that I would regard as appropriate. It goes without saying that the appropriateness of a particular settlement sum is a matter upon which minds can legitimately differ. The appetite for risk of some clients and those that represent them will obviously differ from person to person. The question the Court needs to satisfy itself of is: whether or not a proposed settlement falls within an acceptable range of settlements that can be characterised as being able to be approved?

69. The reasonableness of the settlement inter partes is a separate consideration from the reasonableness if the proposed distribution between the group members inter se (Botsman v Bolitho [2018] VSCA 278 at [370]-[389]).

70. It is well established that a settlement can and should take into account differences between group members, and where members have stronger or weaker claims, this should be reflected in the distribution scheme; Peterson v Merck Sharp & Dohme (Aust) Pty Ltd (No 6) [2013] FCA 447 at [20]; Wotton v State of Queensland (No 10) [2018] FCA 915 at [41] and [43]-[46]).

71. In Lifeplan on the inter se component, Lee J at [31]-[32], considered:

There are competing objectives that inform an acceptable settlement distribution process. The primary objective, as I have explained, is that the treatment of the applicants on the one hand and the group members on the other can be described as fair and reasonable.

The way in which this fairness and reasonableness is identified, however, must be approached on some rational basis. This rational basis can only be reflected by the notion that, as a general proposition, the individual amounts paid to applicants and group members under a settlement distribution scheme should have some relationship to the individual compensation that reflects the merit of the individual claims, such that each of the applicants and group members receives compensation commensurate to the amount to which they otherwise would be entitled (assuming the settlement the subject of the application involves the payment of a compromised amount). Necessarily, of course, the assessment of the worth or merit of an individual claim requires application of the substantive law in identifying the remedies available to the applicants and the group members. It is in that way that the assessment of what is fair and reasonable does not become arbitrary or idiosyncratic, but has some principled basis.

72. In Camilleri v The Trust Company (Nominees) Limited [2015] FCA 1468 at [43]-[44], Moshinsky J outlined the practical considerations to take into account in the distribution of a settlement:

The cases indicate a number of factors relevant to the assessment whether a proposed distribution scheme is fair and reasonable having regard to the interests of the group as a whole. Some of these factors are as follows:

(a)   whether the distribution scheme subjects all claims to the same principles and procedures for assessing compensation shares;

(b)   whether the assessment methodology, to the extent that it reflects ‘judgment calls’ of the kind described above, is consistent with the case that was to be advanced at trial and supportable as a matter of legal principle;

(c)   whether the assessment methodology is likely to deliver a broadly fair assessment (where the settlement is uncapped as to total payments) or relativities (where the task is allocating shares in a fixed sum);

(d)   whether the costs of a more perfect assessment procedure would erode the notional benefit of a more exact distribution;

(e)   to the extent that the scheme involves any special treatment of the applicants or some group members, for instance via ‘reimbursement’ payments – whether the special treatment is justifiable, and whether as a matter of fairness a group member ought to be entitled to complain.

There are also procedural factors which relate to the fairness of a proposed distribution process, such as:

(a)   whether appropriate individuals have been nominated to administer the scheme;

(b)   whether the procedures for lodging and assessing claims are appropriate and to be conducted in a timely manner;

(c)   whether the scheme incorporates appropriate ‘checks and balances’, such as procedures for ensuring consistency between assessments and meaningful opportunities for review (and objection) by group members.

Plaintiffs’ submissions on settlement

73. The plaintiff submits that the proposed settlement is reasonable both inter partes and inter se, that is the settlement must be reasonable on its face, as well as reasonable between the group members.

74. The Defendant, unsurprisingly supported the settlement.

Consideration of the settlement inter partes

75. The plaintiff notes that there are several factors weighing in favour of settlement.

76. In particular the plaintiff notes that the litigation has been lengthy and involves an extremely complex claim. There are multiple legal claims, which variously raise difficult questions of equitable principles and statutory interpretation (subs [10.6]).

77. At this stage in the proceedings, the parties had yet to file evidence, the process of which would likely require substantial time and costs (subs [10.7]-[10.8]). Prior to settlement, hearing was listed for five weeks and would likely not take place until the beginning of 2020 at the earliest. The determination of the individual group members claims would also require an elaborate and costly tracing exercise, likely taking several years (subs [10.9]-[10.10]). Further given the complexity of the claims and the novelty of the legal issues, it is likely that once the case is heard and determined, one or both parties would appeal (subs [10.11]).

78. Therefore, if not settled now, the parties will have to incur millions of dollars in costs, and the litigation will likely run for several years. Given many of the group members are older, retirees, it is not unlikely that some of them would not see the conclusion of the dispute (subs [10.12]). Such circumstances weigh in favour of approval of settlement (subs [10.13]).

79. The plaintiff notes that the risks of establishing liability and damages, and maintaining the class action, are addressed in the confidential counsels’ opinion(subs [10.14]).

80. The plaintiff notes that there is a difficulty with the breadth of the release given by the group members under the Deed, nonetheless, the matter can be resolved with appropriate notation by the Court.

81. The total estimated claim is in excess of $52 million (although the plaintiffs’ solicitor estimates that some of these claims are by group members who would be unable to substantiate their claims with documentary evidence), and the proposed settlement, after costs only represents approximately $8.1 million. However, given the access to the Hardship Scheme and the risks associated with the litigation, the settlement is still within the range of reasonable outcomes (subs [10.18]-[10.24]).

Consideration of the settlement inter se

82. The plaintiff submits that the court should have regard to the differences between the individual group members’ claims and their prospects of recovery (subs [11.4]). The plaintiff submits that the settlement strikes a balance between the effective, quick disbursement of the settlement with the need to proportionately compensate the group members (subs [11.6]).

83. The plaintiff notes that the various group members are excluded from the settlement (subs [11.7]-[11.11]):

1. Members’ whose claims fall outside investments made between 1 January 2005 and December 2008, and

2. Members’ whose loan-mortgage claims where the FOS determination or independent banking expert find there was no maladministration in lending, although these members will still be entitled to access the Hardship Scheme.

84. Further the method of disbursement of settlement takes into account the different claim groups, for example:

1. The method of quantifying the third party security claims and the cash investment claims is the value of the shares or cash invested less any capital recovered by the claimant, this is not taking into account any dividends received by each claimant (subs [11.12]-[11.14]),

2. The method of quantifying the loan mortgage claims is based on a proportion of the interest that has accrued on the loans, a much simpler and more efficient process then the FOS determinations, albeit this simpler methodology risks either over or under estimating the person’s loss (subs [11.15]-[11.20]), and

3. The loan-mortgage claims are calculated based only on any interest paid and not on the principal debt, whereas the investment claims are calculated on the principal value of the investment; that is the claim payouts of 85%, 22% and 15% cannot be compared (subs [11.21]). Further, the loan-mortgage claims will only be available where there has been a determination that SGB engaged in maladministration of the loan (subs [11.22]).

85. The settlement sum is inclusive of the plaintiffs’ costs. It is estimated that the plaintiffs’ costs in this matter is about 20% of the total settlement sum. The plaintiff submits that this compares favourably with other settlements in like matters; see e.g. Clarke v Sandhurst Trustees Limited (No 2) [2018] FCA 511 at [27]-[36], cf Petersen Superannuation Fund Pty Ltd v Bank of Queensland Limited (No 3) [2018] FCA 1842 (subs [11.25]-[11.30]). The settlement further provides a payment of $15,000 to each of the plaintiffs for time and expenses they have sacrificed to prosecute this action on behalf of the group members (subs [11.31]).

86. The administration of the scheme also enables group members to review all decisions regarding whether they are eligible for compensation and the quantum of the compensation, the group members are therefore afforded procedural fairness in the administration of the scheme (subs [11.35]). The administration of the scheme is further subject to court supervision, creating an important safeguard should anything arise that the Administrator is unable to deal with himself (subs [11.36]).

Objections

87. There were two objections formally pressed at the settlement hearing. In addition there was a letter from a Mr Preston which although was not a formal objection made some criticism of the settlement scheme as well as another letter from a Mr Cham. There was another objection from Mr Harris on behalf of Regensis Pty Ltd, who also wished at some point to be given leave to opt out of the settlement; however it does not appear he made any formal application to that effect. After an exchange between myself and Mr Harris, and a short adjournment Mr Harris decided to maintain his objection but withdraw his application to opt out (T25/4). There was a further objection from the Christian Community in Australia (NSW) Inc which was withdrawn prior to the settlement hearing.

87. The two formal objections were filed by a Mr and Mrs Cryer on 28 June 2019 (Cryer objections). The two objections were substantially identical and raised a number of issues.

88. First, the Cryer objections relate to the treatment of the loan-mortgage claims under the settlement scheme, their objections state:

1. There is a bias towards the first plaintiff

2. Only those group members who participated in the mediation will receive “an 85% payout”

3. FOS is discredited and its decisions ought not to be adopted

4. Their FOS determination found that they would have a case if there was fraud involved, and there was in fact proven fraud in their case,

5. They should not have to front a Westpac Hardship Tribunal.

90. The plaintiffs say that the scheme is not biased towards the first plaintiff nor those group members who participated in the mediation. The FOS determination of the first plaintiff was inconclusive with regards to loss, so her claim would have to be assessed by a banking expert in order to be eligible for any compensation in relation to her loan-mortgage claim under the Settlement Scheme. Further, the second plaintiff, who attended the mediation, has agreed to receive no compensation and just have access to the Hardship Scheme as part of his claim.

91. The plaintiffs further submits that the criticisms of the FOS determinations should be given little weight. The criticisms of FOS in the recent banking Royal Commission have no bearing on the current administration of the Settlement Scheme.

92. Further, this was not a case where the FOS determined that they would have a case if fraud were involved. Rather it found that they suffered no loss as a result of the loan they obtained and further that it was unable to determine whether there was any fraud involved.

93. Finally the plaintiffs submits that the Hardship Scheme in fact provides a substantial benefit to persons in the position of Mr and Mrs Cryer, for example, under the Hardship Scheme they are able to maintain ownership of their primary residence to refinance their loan.

94. Mr and Mrs Cryer initially sought the courts leave to opt out of the proceedings in order to pursue their claim on their own. On the day of the hearing, I heard short oral submissions from Mr and Mrs Cryer on the opposition to the settlement and also in support of their application to be given leave to opt out of the settlement. The Plaintiffs neither supported nor opposed the granting of leave (T13/11).The Defendant opposed the granting of leave to opt out (T15/23). Following an exchange between the court and Mr and Mrs Cryer and a short adjournment, they indicated to me that they wished to withdraw their application to opt out (T37/1).

Consideration

95. In brief the Settlement entitles the plaintiffs and group members to a payout reflecting only a certain fraction of what they ultimately invested with Mr Famularo. The exact payout was, at a start, 85% of the claim value for the Loan-Mortgage Claims, 22% of the claim value for the Third Party Security Claims, and 15% of the claim value for the Cash Investment Claims. Additionally, and extremely significantly in my view, the Settlement also includes access to the Hardship Scheme as outlined above.

96. Although indeed this only represents part of the total loss experienced I nonetheless regard the settlement as reasonable for several reasons.

97. First, it should be said, that no litigation should be considered risk-free. There is a level of risk, uncertainty and importantly, costs, associated with every case brought to Court. As I remarked in OasisFund Management Limited and Royal Bank of Scotland NV & Ors [2012] NSWSC 532; “It must be recalled that there is no case that cannot be lost and, like it or not, litigation in many respects can be a blunt instrument in terms of satisfactorily resolving the grievances of the parties” (at [49]).

98. This case in particular raised a number of complex and novel legal arguments, primarily with regards to attaching accessorial liability to SGB to the actions of Mr Famularo.

99. Moreover, the difficulty brought on by the passage of time between the events and the commencement of proceedings and further the likely eventual hearing date cannot be understated. Not only would the plaintiffs have to overcome the time limitation issues, but the passage of time inevitably brings evidentiary concerns that often have the effect of prolonging and complicating litigation.

100. The fact that the initial first Defendant, Mr Famularo, died in the course of proceedings naturally makes the entire procedure all the more difficult. Not only because of the obvious loss of evidence, but because the plaintiffs and group members were compelled, therefore, to seek remedies entirely from SGB and Westpac.

101. In order to make out the requisite accessorial liability, the plaintiffs faced a number of legal and evidentiary hurdles in proving that SGB had the requisite knowledge of Mr Famularo’s actions. Historically, these types of claims are complex and difficult to prove. Notwithstanding any possible success on the part of the group members it is clear that in order to establish their claim would require a considerable amount of expense and ongoing litigation extending into the next decade.

102. In this regard I further note the particular difficulty in assessing the quantum of the individual group members’ claims. As set out above, there are broadly three claim groups who may be entitled to compensation, the exact amount of which would need to be assessed taking into account a multitude of specific factors peculiar to that particular member. Assessing the damages would clearly be an extremely expensive, time-consuming and difficult exercise.

103. I note that there were some objections to the settlement, and although ultimately withdrawn, it is worth commenting on them briefly. I accept that the members had clearly felt a deep sense of wrongdoing in relation to the Famularo Scheme, and no doubt had faced hardship in the wake of the loss of their investments. I appreciate that they may have had genuine concerns about the reasonableness and appropriateness of the settlement. However, this does not overcome the particular difficulty in establishing their legal claim, nor the enormous expense associated with continuing this litigation. In all the circumstances of this case, I regard the settlement as entirely appropriate and reasonable and congratulate the group members on withdrawing their request to opt out.

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Decision last updated: 21 August 2019