Palinkas v Palinkas

[2011] FMCA 172

FEDERAL MAGISTRATES COURT OF AUSTRALIA

PALINKAS v PALINKAS & ANOR [2011] FMCA 172

BANKRUPTCY – Bankruptcy notice – set aside – counter-claim – mortgagee’s power of sale – exercise of good faith – mortgagee’s duties – improvements to land – value of property.

Bankruptcy Act 1966 (Cth), ss.40(1)(g), 41(6A), 41(7)
Federal Magistrates Act 1999 (Cth), s.17A
Queensland Property Law Act 1974 (Qld), s.85(1)

Pendlebury v Colonial Mutual Life Assurance Society Limited [1912] HCA 9; (1912) 13 CLR 676
Re Brink; Ex parte Commercial Banking Company (1980) 44 FLR 135
ReGlew; Glew v Harrowellof Hunt & Hunt Lawyers (2003) 198 ALR 331
Silven Properties v The Royal Bank of Scotland [2004] 4 ALL ER 484
Upton v Tasmanian Perpetual Trustees Limited [2007] FCAFC 57
White Industries v Federal Commissioner of Taxation (2007) 240 ALR 792

Applicant: RUDOLPH CHARLES PALINKAS

First Respondent: RUDI PALINKAS

Second Respondent: GIZELA PALINKAS

File Number: BRG 7 of 2011

Judgment of: Burnett FM

Hearing date: 23 February 2011

Delivered at: Brisbane

Delivered on: 23 February 2011

REPRESENTATION

Solicitors for the Applicant: Whitehead Gupta Lawyers

Solicitors for the Respondents: Rockcliffs Solicitors

ORDERS

1. That the application be dismissed.

2. That the Applicant pay the Respondent’s costs of application to be assessed on the standard basis.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA
AT BRISBANE

BRG 7 of 2011

RUDOLPH CHARLES PALINKAS

Applicant

And

RUDI PALINKAS

First Respondent

GIZELA PALINKAS

Second Respondent

REASONS FOR JUDGMENT

(Revised from transcript)

1. On 12 March 2009, judgment was given in favour of the respondent creditors, Rudi Palinkas and Gizela Palinkas, against the debtor Rudolph Charles Palinkas.  Orders entered indicate that the judgment was given following extempore reasons.  They were made by consent. Orders made include, inter alia:

   “a)A declaration that the plaintiffs (the creditors) are entitled to recoupment of their contribution to the acquisition, maintenance and improvement of property situated at Boggabri, known as Uplands, and to the machinery used in connection with Uplands in the sum of $210,000 plus interest thereon at a rate of 8 per cent per annum from 13 May 2008.

   b)An order that the defendant (the debtor) pay the plaintiffs (the creditors) the sum of $224,314.52 within three months.

   c)A declaration that the defendant’s interest in title in Uplands together with their machinery used in connection with Uplands is subject to an equitable charge in favour of the plaintiffs for the balance of the amount owing from time to time pursuant to order 2 and any interest thereon pursuant to s.101 of the Civil Procedure Act.”

2. Subsequent to that judgment further orders were made on 30 October 2009.  These orders were by way of enforcement of the orders of the judgment entered 12 March 2009.

3. Before descending into a consideration of the orders, first some of the history.  It seems that following the entry of judgment on 12 March 2009, discussions ensued between the solicitors for each of the debtor and creditors.  Ultimately on 30 October 2009, enforcement orders were entered by the creditors against the debtor directing, inter alia, that the property situated at Boggabri, known as Uplands, be sold subject to supervision of the Court; an order for possession; an order that the debtor deliver to the creditors vacant possession of the property within 28 days of the order; and an order that the property be sold by the creditors in such manner and on such terms as the Court ordered.  In particular, in order 11(A) it was provided:

   “An order that the plaintiffs are to act at all times in relation to the selling of the property in accordance with the duties owed by a mortgagee in exercising a mortgagee’s power or sale.”

4. In accordance with the orders, the debtor did indeed surrender the property to the creditors.  Immediately prior to that time, the debtor caused his solicitors to write to the creditors’ solicitor in terms, including this statement:

   “We also note, however, that if vacant possession is to be delivered, then your client has obligations to maintain the property and to ensure that the property does not deteriorate whilst your client is in control and otherwise to ensure that a proper and appropriate sale price is obtained which is not less than its true market value.  Please detail how the property is to be cared for and maintained.  Also please provide evidence that your client is in a position and has made arrangements to:

   ·insure the improvements,

   ·take out public liability insurance,

   ·retain the services of a qualified caretaker,

   ·implement a maintenance and repair program.”

5. The letter expressed concerns about the prospect of the creditors complying with their duty as trustees for sale in the event that the debtor was not present on the property.  In particular, they noted:

   “It is with great respect that we suggest that the likelihood of obtaining not less than current market value is only likely to be achieved if our client remains in possession and continues to maintain, repair and improve the property.  It is clearly in the best interests of all parties concerned that our client remain in occupation.”

6. I note that the debtor was prepared to offer undertakings to deliver up vacant possession of the property upon the completion of the contract for sale.  The letter also identified that at the time of the correspondence the debtor was running upon the property a large number of cattle and that the presence of cattle, the debtor believed, would enhance the sale prospects of the property.  In the result, the debtor’s solicitor concluded by offering, inter alia, that the debtor remain on the property for the purposes of maintaining the property and ensuring that it remained in a highly presentable and saleable condition. In that regard he particularly undertook, among other things, to maintain the property and cultivate the paddocks in readiness for a purchasers winter crop. 

7. Needless to say, the offer made by the debtor was rejected and the creditors went into possession and sought to sell the property.  The evidence suggests that at that time the debtor had his solicitors write to the creditors’ solicitors and inform them that the debtor had indeed purchased Neuffer glyphosate, a fertilizer; he had hired chains for the purpose of scouring the paddocks; and, he had purchased pesticides for the purpose of weeding. He had also purchased grain seed for the purpose of sowing a crop. All this expense was in order to effect some improvement upon the property with a view to improving its marketability by making it a more attractive property for sale and also with a hope for achieving a better price.  Upon subsequently being told that he would not be permitted to stay on the property, the unsown wheat seed was then returned to the supplier on the basis, at least in part, that it had not been paid for. 

8. Efforts were made to sell the property and they have been unsuccessful ending with the warrant being returned by the sheriff unexecuted.  Despite that fact the creditors then sought the issue of a bankruptcy notice relying upon the unsatisfied judgment of 12 March 2009 which notice was issued on 1 October 2010. This notice was in due course served upon the debtor on 17 December 2010. 

9. The debtor’s application to set the notice aside was made on 6 January 2011, being the last available day permitted under s.41(6A) or (7), of the Bankruptcy Act 1966 (Cth). The application did not describe on its face which provision was being relied upon. However, from the affidavit of the debtor filed in support of the application it is apparent he relies upon s.41(7) to set aside the notice.

10. There is no dispute between the parties concerning the general principles to be applied in the application. That is, the application being one pursuant to s.41(7), where within the time fixed for compliance with the requirements of the bankruptcy notice, the debtor applies to the Court to set aside the bankruptcy notice on the ground that it has a counter-claim set up for cross demand, as is referred to in s.40(1)(g).

11. In this instance, the matter which is contended for on behalf of the debtor is a claim which the debtor has issued in the District Court at Moree claiming a sum of $250,000 damages for loss of income from the wheat crop the debtor had proposed to plant or, alternatively, devaluation of the property due to the loss of the wheat crop together with costs thrown away in association with action to eliminate weeds from the property.  The claim as is presently pleaded, is pleaded in negligence and essentially is premised upon a failure by the creditors in their alleged performance of a duty of care to maintain the value of the property or, in the alternative, to prevent the value of the property from decreasing as a result of acts or omissions by the creditors.

12. At the outset it should be noted this claim, if available, could not have been set upon the proceeding that gave rise to the final judgment.

13. The matters which the Court is required to have regard to in an application to set aside a bankruptcy notice are well settled and as have been stated in ReGlew; Glew v Harrowellof Hunt & Hunt Lawyers (2003) 198 ALR 331 are essentially that the Court must be satisfied of three things: first, that the debtor has a prima facie case, which even if evidence is not adduced on the hearing of the application would be available on a final hearing; second, that he has a fair chance of success; and third, that the claim is genuine or bona fide.

14. At paragraph [12] of his judgment, Lindgren J said:

    “Perhaps little more can usefully be said than that a debtor must satisfy the Court that there is sufficient substance to the counter-claim, set-off or cross-demand asserted to make it one which the debtor should, in justice, be permitted to have heard and determined in the usual way, rather than be forced to comply with the bankruptcy notice by payment or to commit an act of bankruptcy.”

15. Likewise the Court in Re Brink; Ex parte Commercial Banking Company (1980) 44 FLR 135, stated that what is required is that:

    “The Court must be satisfied that it is just that the claim should be determined before the bankruptcy proceedings are allowed to continue”.

16. Ultimately then, the question becomes this; Does the debtor have a prima facie case against the creditor and one with a fair chance of success?  In considering that question, I accept the debtor’s evidence at its highest that being, that the debtor was in possession of the property at the time that he caused his solicitors to hand possession of it to the creditors and that he was willing to perform in accordance with the offers made to the creditors in his solicitors’ letter of 16 February 2010. In particular, that he was prepared to maintain the property and cultivate the paddocks in readiness for a purchaser’s winter crop.

17. It is critical in considering this matter that one has regard to the orders governing the manner in which the sale of the property was to be undertaken.  As earlier noted, the order of 30 October 2009, particularly at paragraph 11(A), directed that the creditors were at all times in relation to the selling of the property to act in accordance with the duties owed by a mortgagee in exercising a mortgagee’s power of sale.  The order in those terms is not without significance for reasons that I will identify in a moment.  As to what those duties are is amply explained by reference to recent authority; see Upton v Tasmanian Perpetual Trustees Limited [2007] FCAFC 57.

18. In Upton (supra), the Full Court was expressly considering whether there was a breach of a mortgagee’s duty by selling land for a price manifestly less than the market value by not allowing the appellant to subdivide it or permit subdivision by another.  In that regard, the facts being considered by the Full Court are, in my view, quite analogous with the facts in this instance.  There, the Full Court was essentially considering whether or not a debtor, being a mortgagor, had a cause of action against the mortgagee in circumstances where a mortgagee refused to permit the mortgagor to effect improvement to the land before sale.  The mortgagor/debtor believed those improvements would enhance the return to be realised on the sale.  The majority of the Full Court (Keifel and Besanko JJ) concluded there was no obligation.  Their analysis commenced at [15] from where their Honours stated:

    “15 The starting point is that the power of sale is given to a mortgagee for his or her own benefit, to enable the realisation of the debt: Fisher & Lightwood’s Law of Mortgage 2^nd Aust edn, par 20.21 and the cases there cited, including Forsyth v Blundell [1973] HCA 20; (1973) 129 CLR 477 at 483. Equity however required a mortgagee exercising that power to act in good faith and not to deal with the property ‘in such a manner that the interests of the mortgagor are sacrificed’. In the passage from Kennedy v De Trafford [1897] AC 180 at 185, cited by Menzies J in Forsyth v Blundell 129 CLR at 481, it was said:

    ‘...... if a mortgagee in exercising his power of sale exercises it in good faith, without any intention of dealing unfairly by his mortgagor, it would be very difficult indeed, if not impossible, to establish that he had been guilty of any breach of duty towards the mortgagor. Lindley L.J. in the Court below, says that "it is not right or proper or legal for him either fraudulently or wilfully or recklessly to sacrifice the property of the mortgagor". Well, I think that is all covered really by his exercising the power committed to him in good faith. It is very difficult to define exhaustively all that would be included in the words "good faith", but I think it would be unreasonable to require the mortgagee to do more than exercise his power of sale in that fashion. Of course, if he wilfully and recklessly deals with the property in such a manner that the interests of the mortgagor are sacrificed, I should say that he had not been exercising his power of sale in good faith.’

    (Kennedy v de Trafford [1897] AC 180 was followed by the High Court in Barns v Queensland National Bank Ltd [1906] HCA 26; (1906) 3 CLR 925 and Pendlebury v The Colonial Mutual Life Assurance Society Limited [1912 HCA 9; (1912) 13 CLR 676).

    16 Mason J in CAGA v Nixon 152 CLR at 502 commented that, after much debate, equity decided that a mortgagee was not a trustee of the power of sale and the power was not a fiduciary power. Nevertheless, his Honour observed, there remained in equity the long-standing controversy:

    ‘Was the duty of the mortgagee in exercising his power of sale limited to acting bona fide or did it extend to the taking of reasonable precautions to ensure that the property was sold at the market value?’

    17 That debate was discussed in Forsyth v Blundell [1973] HCA 20; 129 CLR 477. By that time English cases such as Cuckmere Brick Co. Ltd. v Mutual Finance Ltd. [1971] 1 Ch 949 had accepted that the more onerous requirements were referrable to a selling mortgagee. Salmon LJ in that case held that that duty was owed by a mortgagee on ‘neighbour’ principles (see at 966). The High Court did not need to resolve the debate in Forsyth v Blundell [1973] HCA 20; 129 CLR 477. Menzies J, however in a dissenting judgment, viewed the statements in Cuckmere Brick Co. Ltd. [1971] 1 Ch 949 in light of the equitable duty and was of the view that they were not at odds with the rule stated in Kennedy v De Trafford [1897] AC 180, because to take reasonable precautions to obtain a proper price was ‘but a part of the duty to act in good faith’ (at 481). More recently a Full Court in Gomez v State Bank of New South Wales Ltd [2002] FCA 442 at [20] commented that there is much to be said for this view, one which has more recently been elaborated upon in Medforth v Blake [1999] EWCA Civ 1482; [2000] Ch 86 at 101-102. The Full Court did not however suggest that this approach had been adopted by Australian courts.

    18 The differences of approach have been regarded as irreconcilable: CAGA v Nixon 152 CLR at 494 per Gibbs CJ. The question has not been authoritatively ruled upon by the High Court. Australian courts have not applied the more stringent requirements: see Fisher & Lightwoods, Law of Mortgage at 20.21 and the cases there cited; Gomez v State Bank of New South Wales Ltd [2002] FCA 442 at [24] and [26]; Jovanovic v Commonwealth Bank of Australia [2004] SASC 61; (2004) 87 SASR 570 at 593; [2004] SASC 61 at [91]. They have continued to regard a mortgagee’s duty as equitable but they do not appear to have accepted that the duty is as extensive as that described by Menzies J in Forsyth v Blundell [1973] HCA 20; 129 CLR 477.

    19 The reliance placed by the appellant upon Ultimate Property Group Pty Ltd v Lord [2004] NSWSC 114; (2004) 60 NSWLR 646 at 650, as indicative of an approach towards some wider obligation on the part of a mortgagee, is misplaced. In that case Young CJ in Eq held that authority compelled the view that there was no duty on a mortgagee in New South Wales to render a mortgagee liable for common law damages if a good price was not obtained for the mortgaged property. The duty of which his Honour spoke, and which the appellant sought to adopt for the purposes of his argument, that to act ‘conscionably’ (see at [38]), was that of good faith and no more.

    20 The power to sell in s 78(1) of the Land Titles Act is expressed to require a mortgagee to act in good faith ‘and having regard to the interests of the mortgagor’ and other persons. The appellant relies upon the decision in Henry Roach (Petroleum) Pty. Ltd. v Credit House (Vic.) Pty. Ltd. [1976] VR 309 at 312, where Lush J considered a section of the Victorian Transfer of Land Act 1954 (Vic), which required the mortgagee to act in good faith and having regard to the interests of the mortgagor. His Honour was of the opinion that the effect of the words

    ‘is to bring together the concepts of an obligation to act in good faith and an obligation akin to an obligation to exercise care in much the same way as they are blended in the dissenting judgment of Menzies, J. in Forsyth v Blundell ... and in that of Salmon, L.J. in the Cuckmere Brick Co’s case ...’.

    21 It may be observed that his Honour the primary judge also adopted much the same approach. It is not however one which has the support of any pronouncement of the High Court nor is it one which has been adopted by Australian courts.

    22 It is apparent from the passage cited from Kennedy v De Trafford [1897] AC 180 above that the equitable duty is expressed to have regard to the ‘interests of the mortgagor’, as an incident of good faith. The mortgagee was not to wilfully or recklessly deal with the property ‘in such a manner that the interests of the mortgagor are sacrificed’. Brennan J observed in CAGA v Nixon 152 CLR at 525 that, stated in that way, the duty acknowledges the mortgagee’s interest as the primary interest which the power of sale is conferred to protect. It does not require the mortgagee to act in protection of the interests of the mortgagor, unless the mortgagee’s failure to do so would be fraudulent or would amount to a wilful or reckless sacrificing of those interests.

    23 It is difficult to avoid the conclusion that the reference in s 78 of the Land Titles Act to ‘the interests of the mortgagor’, in the context of the requirement of good faith, was intended in the sense referred to in Kennedy v De Trafford [1897] AC 180 and applied by the courts. If it were sought to impose another, more onerous, obligation upon a mortgagee different language could have been chosen. By the time the Act was passed other legislation, containing different requirements, had been passed in some Australian States. The provision considered in Forsyth v Blundell [1973] HCA 20; 129 CLR 477 is one example. If there were doubt about what was intended in this regard by the subsection, reference could be had to the Bill’s second reading speech: see s 8B(1) of the Acts Interpretation Act 1931 (Tas). In that speech (The Parliamentary Debate (Hansard) Tasmania, House of Assembly, 38^th Parliament, Second Session, Vol II No 1, 1980 p 630) it was made plain that the section ‘declares the case law’ with respect to a mortgagee’s power of sale.

    24 The appellant’s argument with respect to s 78 is not however limited to the words appearing at the commencement of s 78(1). Particular reliance is placed by him upon the reference, in par (b) of the subsection, to the mortgagee being able to do anything that the mortgagor could do ‘for the purposes of making a sale of the land or any part of the land at the best price’. In the second reading speech the Minister was obviously referring to par (b) when he went on to say of the section:

    ‘...But it also extends his power to subdivide, change the use of, or otherwise develop the land for the purpose of sale. The object is to enable him to get the best price for the land. ...’.

    This was said to be in the interests of the mortgagor and subsequent mortgagees.

    25 In our view the speech makes plain what is evident from the terms of s 78(1)(b) itself. What is provided is a power to carry out certain things with respect to the mortgaged property. It does not cast an obligation upon a mortgagee to undertake activities, such as the improvement of the property or the obtaining of further approvals with respect to it; nor does it require a mortgagee to seek the best price in every case. To extend a mortgagee’s duty to obtain the best price would be to convert the mortgagee to something akin to a trustee of the power of sale. Equity long ago resolved that this was not the case: CAGA v Nixon 152 CLR at 502. There is no indication in the Land Titles Act that it was intended to alter the role of a mortgagee in this way.

1. Those observations, in my view, set the background against which a consideration of the creditor’s obligations are to be measured in this case, and, as to whether or not the circumstances of this case give rise to a prima facie case.

2. However there are other factors relevant to this case as have been submitted by the debtor.  In particular, questions as to the obligations on a mortgagee to undertake expenditure on property to improve it.  I have been referred to passages from Duncan and Vann, Property Law and Practice, particularly at paragraph 7.20.90, where the learned authors there have made observations to the effect that the duty may require a mortgagee to expend money on property and that if a mortgagee fails to observe his or her duty arising from possession, in that context the mortgagee will be liable to the mortgagor.  Further that if the failure has produced a reduction in the purchase price that was otherwise obtainable then the mortgagor’s liability will be measured by the extent of reduction of the purchase price.  There were further observations about the need to undertake reasonable repairs.  Despite the fact that the passages there refer to s.85 of the Queensland Property Law Act 1974 (Qld), I don’t think that that matter necessarily detracts from the strength or relevance of the observations.  Perhaps moreover, because as was pointed out by the authors at page 1895, the Pendlebury[1] approach was applied in Upton (supra) to the duty of care arising from s.85(1).[2]  In my view the observations of the authors were not inconsistent with the Full Court, despite the debtor’s submissions to the contrary.

   [1] Pendlebury v Colonial Mutual Life Assurance Society Limited [1912] HCA 9; (1912) 13 CLR 676

   [2] Property Law Act 1974 (Qld)

3. It follows that authority provides the mortgagee is under no obligation to make expenditure even though this would increase the sale price by an amount in excess of the expenditure, unless, under the circumstances, the expenditure was reasonable and apparently necessary to preserve the mortgagor’s interest and to prevent the property from being sacrificed.

4. That approach is also reflected in recent comments of the Court of Appeal in the United Kingdom in Silven Properties v the Royal Bank of Scotland,[3] to which I was referred.  There the Court was considering precisely the same issue which I am called upon to consider today except in the context of receivers.  In that case such action would have meant the receivers pursuing planning applications of the developed properties and/or proceeding to grant leases of the properties in order and deferring sale of the property until most of these matters were attended to.  Despite considering the facts in the context of receivers the Court of Appeal in its judgment analysed the case from the perspective of both mortgagees and receivers, and reached the same conclusion as was later enunciated by the Full Court in Upton (supra).  In that regard it seems the distinction between the obligations upon receivers, to those due by mortgagees acting in exercise of power of sale is without material difference.

   [3] [2004] 4 All ER 484

5. In my view the conduct of the creditor in refusing to accept the debtor’s offer to purchase and plant a crop and to accept responsibility for its ongoing maintenance was not unreasonable. The creditor was not obliged to accept such risk irrespective that the risk may have been ameliorated by offers by the debtor to relinquish possession for completion of a sale or because the debtor was prepared to incur the expense of and fund the planting.

6. It seems to me that the debtor’s claim is one which does not have sufficient substance to make it one which the debtor ought be permitted to have heard and determined in the usual way. I am certainly mindful of this Court’s general obligations in relation to dismissing actions pursuant to s.17A of the Federal Magistrates Court Act 1999 (Cth), on the basis that the Court may give summary judgment in relation to a party if it’s satisfied that the application has no reasonable prospect of successful prosecution and the authorities that are relevant to that such as White Industries v Federal Commissioner of Taxation (2007) 240 ALR 792.

7. In reaching this conclusion I ignore the fact that the claim is probably not adequately formulated. In that regard I again refer to the observations of Silven Properties v The Royal Bank of Scotland (supra) where at [19] their Honours noted that:

   “When and if the mortgagee does exercise the power of sale it comes under a duty in equity and not in tort to the mortgagor and all others interested in the equity of redemption to take reasonable precautions to obtain the fair or the true market value or the proper price for the mortgaged property at the date of sale and not, as the claimant submitted, the date of the decision to sell.”

8. The effect of their Honour’s observations are that if the action is to be prosecuted it is to be one prosecuted in equity for recovery of the difference between the proper price which ought to have been achieved and the actual price achieved.  But that is a matter of form which authority dictates is not a matter with which I ought to be concerned in the context of this application, see Re Brink; Ex parte Commercial Banking Company (1980) 44 FLR 135.

9. In summary, I am of the view that the debtor’s claim has no reasonable prospects and it follows that that ground fails. 

10. Notwithstanding the debtors submission the creditor submitted that even if a bona fide cause of action with reasonable prospects could be formulated the debtor’s application ought fail.  The creditor contended that in any event the claim, even if it succeeded would realise at best approximately $275,000, together with interest, bringing a total of $283,000.  The creditor contended the actual indebtedness of the debtor was well in excess of this sum.  It is fair to observe that the present judgment sum is for a sum of $224,000.  The creditor made reference to other debts, but there is no evidence in respect of those debts before the Court.  In the absence of evidence the creditor’s contentions on this point cannot be sustained and it fails.

11. Notwithstanding the creditors point for reasons relating to the debtor’s first ground, the application fails and is dismissed.

I certify that the preceding twenty-nine (29) paragraphs are a true copy of the reasons for judgment of Burnett FM

Date:  5 March 2011