Papalia v Romeo (No.2)
[2013] FCCA 1609
•14 October 2013
FEDERAL CIRCUIT COURT OF AUSTRALIA
| PAPALIA & ANOR v ROMEO (NO.2) | [2013] FCCA 1609 |
| Catchwords: BANKRUPTCY – Priority of creditors – where priority of unregistered mortgages determined on first in time basis – where priority may be affected if third party relies on failure to caveat and subsequently enters into mortgage agreement – where mortgage caveated in part only – where third party lent money to respondent debtor after applicant creditor and caveated its interest – whether applicant creditor’s caveat sufficient to give notice of full amount of its mortgage – where no evidence of third party’s actions entering mortgage – whether applicant creditor’s failure to caveat full amount of mortgage resulted in postponement of applicant creditor’s interest in favour of third party’s interest – whether third party’s caveat affected its priority – whether applicant creditor’s mortgage secured. PRACTICE AND PROCEDURE – Affidavits – admissibility of expert reports – where expert valuer produced valuation of property – where amount of valuation reached without reference to amount of valuation of comparable properties – where reasoning of valuer not apparent – whether opinion of expert wholly or substantially based on specialised knowledge – whether expert report admissible. BANKRUPTCY – Property – divisible property – determination of value of respondent debtor’s property. PRACTICE AND PROCEDURE – Adjournment – where debtor is pursuing litigation against primary, registered mortgagee to remove mortgage – where mortgage is valid on its face – whether petition would require extension or may be extended – whether alternate proceedings sufficiently advanced – where there exists further supporting creditors – whether fruits of proceedings would overcome alleged insolvency – whether debtor’s prospects of success are good or reasonable – whether sufficient cause exists for adjournment – whether to adjourn. BANKRUPTCY – Creditors petition – whether to make sequestration order. |
| Legislation: Bankruptcy Act 1966 (Cth), s.44 |
| Latec Investments Ltd v Hotel Terrigal Pty Ltd (In Liquidation) (1965) 113 CLR 265 Heid v Reliance Finance Corporation Limited (1983) 154 CLR 326 |
| First Applicant: | FRANK PAPALIA |
| Second Applicant: | JULIE RANCE |
| Respondent: | GIUSEPPE ROMEO |
| File Number: | SYG 993 of 2013 |
| Judgment of: | Judge Raphael |
| Hearing date: | 27 August 2013 |
| Date of Last Submission: | 27 August 2013 |
| Delivered at: | Sydney |
| Delivered on: | 14 October 2013 |
REPRESENTATION
| Counsel for the Applicants: | Mr M Hadley |
| Solicitors for the Applicants: | Shaw Reynolds |
| Counsel for the Respondent: | Mr R Perla |
| Solicitors for the Respondent: | Dettman Longworth |
ORDERS
A sequestration order be made against the estate of Giuseppe Romeo.
The applicant’s costs including any reserved costs be taxed and paid from the estate of the Respondent in accordance with the Act.
Under the Bankruptcy Regulations a copy of this sequestration order be given to the Official Receiver in Sydney within 2 days.
THE COURT NOTES THAT
The date of the act of bankruptcy is 1 January 2013.
A consent to act as a trustee has been signed by Chris Chamberlain and has been lodged with the Official Receiver in Sydney.
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT SYDNEY |
SYG 993 of 2013
| FRANK PAPALIA |
First Applicant
| JULIE RANCE |
Second Applicant
And
| GIUSEPPE ROMEO |
Respondent
REASONS FOR JUDGMENT
Introduction
There came into the court on 27 August 2013 the adjourned hearing of the petition for a sequestration order against the estate of Giuseppe Romeo. There was filed on 24 July 2013, in accordance with the previous orders of the court, an amended petition in which it was stated that Mr Romeo owed the applicant creditors the amount of $3,156,491.00 pursuant to a judgment debt entered by consent in the Supreme Court of New South Wales Proceeding No 2010/211436 on 1 October 2010 in the same amount.
The creditors hold security for their debt by way of an unregistered equitable mortgage over property at 235 Powderworks Road Ingleside. The full amount of the judgment debt is secured by this mortgage but the applicants are not alone in holding security. There is on the title a first registered mortgage to Permanent Trustee Australia Limited[1] secured in the amount of $5,000,000.00, and there are then other mortgages registered and unregistered which have priorities in accordance with the date of the lodgement of caveats supporting them. There is a caveat supporting the mortgage to the applicants but it is only expressed to be securing an advance of $300,000.00, although by the time the caveat was lodged on 30 April 2010 the amount of the advance had increased to $3,156,491.00.
[1] “Permanent”
In the amended petition the applicant acknowledges that it holds security over the property of the respondent by a series of additional mortgages each of which was upstamped. There is a final consolidated mortgage for the amount of the claim signed on 16 December 2009.
It is accepted by the respondent that an unregistered mortgage is a security for the purpose of s.44 of the Bankruptcy Act 1966 (Cth)[2] which is in the following form:
[2] “Act”
“44 Conditions on which creditor may petition
(1) A creditor's petition shall not be presented against a debtor unless:
(a) there is owing by the debtor to the petitioning creditor a debt that amounts to $5,000 or 2 or more debts that amount in the aggregate to $5,000, or, where 2 or more creditors join in the petition, there is owing by the debtor to the several petitioning creditors debts that amount in the aggregate to $5,000;
(b) that debt, or each of those debts, as the case may be:
(i) is a liquidated sum due at law or in equity or partly at law and partly in equity; and
(ii) is payable either immediately or at a certain future time; and
(c) the act of bankruptcy on which the petition is founded was committed within 6 months before the presentation of the petition.
(2) Subject to subsection (3), a secured creditor shall, for the purposes of paragraph (1)(a), be deemed to be a creditor only to the extent, if any, by which the amount of the debt owing to him or her exceeds the value of his or her security.
(3) A secured creditor may present, or join in presenting, a creditor's petition as if he or she were an unsecured creditor if he or she includes in the petition a statement that he or she is willing to surrender his or her security for the benefit of creditors generally in the event of a sequestration order being made against the debtor.
(4) Where a petitioning creditor is a secured creditor, he or she shall set out in the petition particulars of his or her security.
(5) Where a secured creditor has presented, or joined in presenting, a creditor's petition as if he or she were an unsecured creditor, he or she shall, upon request in writing by the trustee within 3 months after the making of a sequestration order, surrender his or her security to the trustee for the benefit of the creditors generally.
(6) A secured creditor to whom subsection (5) applies who fails to surrender his or her security when requested to do so by the trustee in accordance with that subsection is guilty of contempt of court.”
In the Amended Petition the applicant creditors acknowledge that they held security over the property of the respondent and estimated that the present value of the security was zero. They stated in paragraph 1.2 of the petition:
“Pursuant to s.44(2) of the Bankruptcy Act 1966 the applicant creditors seem to proceed on the basis of being deemed to be a creditor for the amount stated in paragraph 1.1 [$3,156,491.00].
At paragraph 1.3 the applicants stated:
“The applicant creditors elect not to surrender their securities as they might do pursuant to s.44(3) of the Bankruptcy Act 1966.”
In paragraph 2 of the petition the creditors give their reasons for estimating the present value of their securities to be zero:
“2For the following reasons, the Applicant creditors estimate the present value of those securities to be aero:
(a) The value of the Property is approximately $5,000,000.00.
(b) There are creditors who hold securities, as set out below, with priority over those of the Applicant creditors, totalling $7,315,399.”
In the course of the hearing some of these figures were challenged and I gave leave for the applicant to file a re-amended creditor’s petition with the box in paragraph 2 reading as follows:
Secured Creditor
Amount Secured $
i.
Permanent Trustee Australia Limited
As First Mortgagee AC723008 as at 21 March 2011$3,994,596.32
ii.
Weinert & Korburn – Mortgage registered No.
$605,400.00
iii.
M & V Endurance – Caveats AD 996766 & AD 996779 (combined)
$597,927.06
Secured Creditor
Amount Secured $
i.
Papalia & Rance Caveat AF461645
$300,000.00
ii.
M & V Endurance – Caveat AF635437
$294,000.00
iii.
Hunsdorfer – Caveat AF943460
$371,894.76
iv.
Papalia and Rance – unregistered mortgage
$2,856,491.00
The total of the all the mortgages in the box is $5,197,923.38. The total of the mortgages excluding the registered mortgage to Permanent is therefore $1,203,327.06.
The respondent has commenced proceedings in the Supreme Court of New South Wales against Permanent seeking to set aside the first mortgage pursuant to the provisions of the Contracts Review Act 1980 (NSW). There have been a number of interlocutory skirmishes between those parties which resulted in Judgments of the Supreme Court. The case is set down for final hearing on 30 September 2013 for five days.
The applicants value the property over which they have security at no more than $5,000,000.00. The respondent values his property at between $8,000,000.00 and $10,000,000.00. It is the respondent’s case that at this figure the applicants are fully secured and therefore are not persons who can properly bring a petition pursuant to the provisions of s.44 of the Act, they having declined to surrender their security. The applicants argue that upon their estimate of the value of the property and taking into account the value of the mortgages which have priority to theirs there is no value in their security. The respondent argues even at the applicant’s valuation of the property if he should be successful in his case against Permanent the applicants will still be fully secured. He puts to the court that it should grant an adjournment of the proceedings pending the outcome of the Supreme Court proceedings. The applicants say that even if the Permanent mortgage is discounted in full and the property is worth $5,000,000.00 there would still be a shortfall of some $25,712.00 and that is sufficient to bring the proceeding within the provisions of s.44.
Discussion
It is well to explain how the applicant comes to the figure of $25,712.00 because it involves an interpretation of the law relating to the priority of mortgages and its interface with the law relating to the registration of caveats in New South Wales. The applicant’s security contained in the unregistered equitable mortgage of 16 December 2009 was a consolidation of various other loans to the respondent. These are also detailed in the petition and set out below:
Date Nature of Security Amount $ 16 December 2009 Unregistered Equitable Mortgage over the Respondent’s property at 235 Powder Works Road, Elanora Heights (“the Property”).
Note: Between March 2002 and December 2009 the Applicants lent the Respondent various sums of money which were secured by unregistered Equitable Mortgages over the property. By Deed dated 16 December 2009 the Respondent agreed to combine all outstanding principal sums and interest and costs and to sign an all encompassing mortgage over the property. The loan was to be secured by a Mortgage over the property and was to be repaid by 18 September 2011. The Mortgage was not registered over the title of the property.3,156,491 The following is a summary of the previous Mortgages that had been granted over the property and which were combined into the Mortgage of 16 December 2009:
Date Nature of Security Amount Lent $ 22 March 2002 Unregistered Equitable Mortgage over 235 Powder Works Road, Elanora Heights (“the property”)
Note: The Principal Sum of $250,000 was lent for a period of 12 months from the date of the Mortgage. The Mortgage was varied by Variation of Mortgage dated 18 February 2003 to increase the principal sum to $750,000 and the term of the loan was extended to 7 May 2005. The term was further extended until 18 September 2009 by Variation of Mortgage dated 23 January 2008750,000 22 April 2003 Unregistered Equitable Mortgage over the property.
Note: The Principal sum of $600,000 was lent for a term of three months from the date of the Mortgage. This Mortgage was varied by Variation of Mortgage dated 24 September 2004 to extend the term of the loan until 18 September 2007600,000
1 September 2004
Unregistered Equitable Mortgage over the property.
Note: The Principal sum of $500,000 was to be repaid on 18 September 2007.500,000 21 June 2006 Unregistered Equitable Mortgage over the property.
Note: The Principal sum of $400,000 was to be repaid on 18 September 2007400,000 18 August 2008 Unregistered Equitable Mortgage over the property.
Note: The Principal Sum of $300,000 was to be repaid by 15 August 2009.300,000 For the following reasons, the Applicant creditors estimate the present value of those securities to be zero:
(a)The value of the Property is approximately $5,000,000.00
(b)There are creditors who hold securities, as set out below, with priority over those of the Applicant creditors, totalling
$7,315,399$5,197,923.38.
Secured Creditor Amount Secured $ i.
Permanent Trustee Australia Limited
As First Mortgagee
5,000,000iiMary Weinert (pursuant to Mortgage registered No. 9850692383,799iiiKorburn – Mortgage 9850692480,000ivM & V Endurance (Caveats AD996766 & AD9967791,030,000vHundsorfer – Caveat AF943460421,600
Secured Creditor Amount Secured $ i. Permanent Trustee Australia Limited
As First Mortgagee AC723038 as at 21 March 2011
3,994,596.32
ii Weinert & Korburn - Mortgage registered No. 9850692 605,400.00 iii M & V Endurance - Caveats AD996766 & AD996779 (combined) 597,927.06
In equity the principal is that when the equities are equal the first in time prevails; qui prior est temper potior est jure. This was explained by Kitto J in Latec Investments Ltd v Hotel Terrigal Pty Ltd (In Liquidation) (1965) 113 CLR 265 per Kitto J at [8]:
“[8]In all cases where a claim to enforce an equitable interest in property is opposed on the ground that after the interest is said to have arisen a third party innocently acquired an equitable interest in the same property, the problem, if the facts relied upon as having given rise to the interests be established, is to determine where the better equity lies. If the merits are equal, priority in time of creation is considered to give the better equity. This is the true meaning of the maxim qui prior est tempore potior est jure: Rice v. Rice (1853) 2 Drew 73, at p 78 (61) ER 646, at p 648). But where the merits are unequal, as for instance where conduct on the part of the owner of the earlier interest has led the other to acquire his interest on the supposition that the earlier did not exist, the maxim may be displaced and priority accorded to the later interest.”
The Weinert and Korburn mortgage is dated 10 June 2003 and is registered. It would therefore have priority over the 2009 unregistered mortgage of the applicants. The M & V Endurance mortgages are said to be dated 21 November 2006 and 30 April 2008 and are protected by caveats of around 15 May 2008. I am satisfied that they have priority over the applicant’s mortgage of 2009.
The question then is whether or not and to what extent the applicant’s mortgage is postponed the third M & V Endurance mortgage protected by caveat AF635437 and the Hunsdorfer mortgage protected by caveat AF943460. The M & V Endurance mortgages are said to be dated 21 November 2006, 30 April 2008 and 17 June 2008. On the normal principles they would therefore have priority over the applicant’s mortgage. The caveat was lodged on 19 July 2010 which is after the caveat supporting the applicant’s mortgage which was lodged on 30 April 2010. However, the caveat lodged by the applicants is only said to support a mortgage dated 18 August 2008 and an advance of $300,000.00. The Hunsdorfer mortgage was said to be dated 8 August 2010 and was protected by a caveat lodged on 14 December 2010 thus later in time than the applicant’s mortgage.
I have been provided by with helpful written submissions from Mr Perla, Counsel for the respondent. Mr Perla quotes at length from what fell from Dowsett J in Perpetual Trustee Company Limited v Smith [2010] FCAFC 91 at [94 – 98]. But in my view the essence of the question before the court on this occasion is most aptly expressed in three cases considered by the Supreme Court of New South Wales. The first is Person-To-Person Financial Services Pty Ltd v Sharari (1984) 1 NSWLR 745 where McLelland J considered the authorities against a factual background that a second mortgagee had neither registered his mortgage nor lodged a caveat in respect of his interest. A third mortgagee acted on the basis of representations from the borrower that the only encumbrance over the property was the first mortgage searched the title and found that there were no other subsisting notations. The third mortgagee lodged a caveat in respect of its interest and the dispute was whether it had priority over the second mortgage which was earlier in time. His Honour’s assessment of the position was picked up by Bryson J first in Double Bay Newspapers Pty Ltd and Others v A W Holdings Pty Ltd and Others (1996) 42 NSWLR 409 at 423 and then in Taleb v National Australia Bank Ltd and Another [2011] NSWSC 1562. In the latter case his Honour said:
“McLelland J’s summary and restatement are important sources of understanding.”
And then quoted from the decision at length:
“As between two equitable interests in property, the earlier in time is entitled to priority unless the circumstances are such as to make it inequitable as between the holders thereof that the earlier should have such priority. Such circumstances may be found where some act or omission by the holder of the earlier interest has led the other to acquire his interest on the supposition that the earlier did not exist: see eg J & H Just (Holdings) Pty Ltd v Bank of New South Wales [1971] HCA 57; (1971) 125 CLR 546 at 554, 555 and Heid v Reliance Finance Corporation [1983] HCA 30; (1983) 57 ALJR 683 at 684, 685, and 687; [1983] HCA 30; 49 ALR 229 at 232, 233 and 237. The omission relied on by the plaintiff in the present case is the failure of the defendant either to register his mortgage or lodge a caveat in respect of his interest as mortgagee.
It is quite clear, as was held in J & H Just (Holdings) Pty Ltd v Bank of New South Wales , that failure by the holder of an equitable interest to lodge a caveat in respect of that interest where a caveat might have alerted the acquirer of a subsequent equitable interest to the existence of the earlier interest of which he was unaware, does not necessarily result in the postponement of the earlier to the subsequent interest, but that case does not provide authority for the proposition that failure to lodge a caveat can never bring about the postponement of an earlier to a subsequent interest. Such a proposition would be inconsistent with the decision of the High Court in Butler v Fairclough [1917] HCA 9; (1917) 23 CLR 78 which was not over-ruled by, and in my view stands comfortably with, the decision in J & H Just (Holdings) Pty Ltd v Bank of New South Wales . It is to be noted that in the latter case Barwick CJ (with whom McTiernan and Owen JJ agreed) and Menzies and Windeyer JJ all expressed agreement with the conclusion and reasons of Jacobs JA in the Court of Appeal ((1970) 72 SR (NSW) 499; 92 WN 803) on this aspect of the case.
In dealing with Butler v Fairclough , Jacobs JA said (at 504; 806):
"The real question of this aspect of the present case is whether the principle enunciated by Griffith, C.J. in Butler v. Fairclough ((1917) 23 CLR at pp 91, 92), is an absolute principle that a failure to give notice by lodging a caveat should be regarded as inducing any person subsequently dealing with the registered proprietor to regard the title as clear of any outstanding equitable interest or whether this principle is only applicable where the later person proposing to deal with the registered proprietor can, in all the circumstances then existing, safely so deal with him."
His Honour went on to demonstrate that Butler v Fairclough established only the limited and not the general principle.
The effect of a failure by the holder of an equitable interest to lodge a caveat will depend upon the particular circumstances. A critical point of distinction between the circumstances under consideration in Butler v Fairclough and those under consideration in J & H Just (Holdings) Pty Ltd v Bank of New South Wales is that the party whose conduct in failing to lodge a caveat was under consideration was in the former case an unregistered second mortgagee who did not have the certificate of title, and in the latter case an unregistered first mortgagee who did have the certificate of title.”
In the Double Bay Newspapers case his Honour had said of this restatement:
“In the presence of these authorities McLelland J in Person-to-Person
Financial Services Pty Ltd v Sharari [1984] 1 NSWLR 745 made observations
which show the significance which in my opinion ought to be attributed to a
failure to lodge a caveat. I respectfully share his Honour's view that the
decision in Butler v Fairclough continues to be of authority. Priority which
would otherwise exist according to time may be lost where some act or
omission by the holder of the earlier interest has led the holder of a later
interest to acquire his interest on the supposition that the earlier did not exist.
Examples of those circumstances occur where the holder of a later interest
searched the register, found no such information as lodgment of a caveat would
have put there and acted in reliance on the apparent absence of any such
interest. As is shown by J & H Just Holdings where these circumstances exist
they may not be the only significant circumstances, and they may be
outweighed by other circumstances.”In the end the decisions all came down to the facts concerning the earlier in time mortgage not having been protected by a caveat or registered. In Person to Person his Honour said:
“In the present case there is evidence before me, which I accept, to the effect
that it is the settled practice of competent solicitors in New South Wales
acting for second or subsequent mortgagees, to ensure either the prompt
registration of the mortgage or lodgment of a caveat. The failure by the
defendant through his solicitor to conform to this practice would naturally
lead those who searched, such as the plaintiff, to believe that there was no
outstanding second mortgage (cf per Dixon J in Lapin v Abigail (1930) 44
CLR 166 at 205) and it is my opinion that the failure of the defendant, in the
absence of registration of his mortgage, to lodge a caveat led the plaintiff to
acquire its mortgage on the supposition that no unregistered second mortgage already existed, in circumstances which make it inequitable as between the
parties that the defendant's mortgage should have priority over that of the
plaintiff. As between the plaintiff and the defendant, the defendant must
suffer the consequences of any default of his solicitors.”In Double Bay Newspapers Bryson J said at 416:
“It is quite clear from circumstances that the plaintiffs relied on the absence of any registration of Easyfind’s mortgage and of any caveat; Mr Bowring knew that he should get a search, got one and acted on the position which it showed…The circumstances themselves demonstrate that he ascertained the state of the Torrens register and relied on it. By not lodging its documents for registration and by not lodging a caveat, Easyfind allowed the only source of information available to the public to continue, not for a short period but for over ten months, to appear to show that the only encumbrance on the title was the first mortgage…”
In that case his Honour came to the conclusion that what was being claimed was a mere equity which did not have any standing in the competition of priorities:
“But for this matter the plaintiffs should have in my view succeeded.”
In Taleb v National Australia Bank Limited Bryson AJ was faced with circumstances where there was a failure to lodge a caveat to protect an equitable interest securing a business loan. The loan had been taken out on 28 January 2010, the caveat was not lodged until 26 November 2010 and in the meantime on 18 October 2010 another party (the defendant in the proceedings) entered into a bill facility with the debtor secured by a first mortgage over the same property. That defendant also took possession of the certificate of title and a discharge of an earlier registered mortgage which it had paid out. It had conducted searches of the register on 27 July 2010, 30 September 2010 and 15 October 2010 and found no reference to the plaintiff’s interest. This later mortgage was not lodged for registration until 7 December 2010. After hearing evidence the court concluded that the absence of a caveat was causative of the later lender’s difficulty:
“The plaintiffs not having lodged a caveat in due time and not having done so in time to influence the first defendant’s decisions had the effect that notwithstanding the plaintiff’s priority in time he did not have the better equity. Accordingly, the first defendant had the better equity.” At [37].
Mr Perla appears to concede priority in the M & V Endurance mortgage protected by caveat AF635437 presumably because it protected an earlier equitable mortgage than the applicants. But in respect of the Hunsdorfer mortgage he says this:
“[11]However, the issue is whether or not the amount noted on the caveat ($300,000) has any effect when determining the priority between the Applicant Creditors equitable mortgage (dated 30 April 2010) and the Hunsdorfer’s equitable mortgage (dated 8 August 2010).
[12]In the absence of any evidence from Hunsdorfer that they relied upon the amount recorded in the caveat, the court should determine the extent of the equity in the subject property having regard to the priority of the instruments that the caveats are supported by.
[13]The authorities establish that the earlier interest will only be postponed to the later when, by failing to lodge a caveat, the holder of the earlier interest has “contributed to the assumption upon which the subsequent [holder] acted” when acquiring the later interest or postponement follows failure to lodge a caveat where (and only where) it is “reasonably foreseeable” that a later interest will be created and that the holder of that later interest will assume the non-existence of an earlier interest.
[14]Accordingly, when determining the extent of the equity in the property for the purposes of determining whether or not the Applicant Creditor’s security is $nil, the Hunsdorfer mortgage should not be included in the calculation.”
The statement in [13] in Mr Perla’s submissions comes from the views expressed by Mason and Deane JJ in Heid v Reliance Finance Corporation Limited (1983) 154 CLR 326 at [342] the whole paragraph of which is:
“It may be that an equitable interest will not be postponed to an equitable interest created later in time merely because there is a causal nexus between an act or omission on the part of the prior equitable owner and an assumption on the part of the later equitable owner as to the non-existence of the prior equity. Fairness and justice demand that we be primarily concerned with acts of a certain kind — those acts during the carrying out of which it is reasonably foreseeable that a later equitable interest will be created and that the holder of that later interest will assume the non-existence of the earlier interest.”
The difficulty that the court is faced with in this case is that it has no evidence of what occurred. This is understandable. The case is not being brought by one mortgagee claiming a priority against another. It is being brought by one mortgagee against his debtor who is trying to assert the priority of the creditor’s mortgage. If the mortgagee wishes to assert that he does not have priority, even though his mortgage is first in time, then he must establish the facts which the authorities have indicated are required. In other words he should have brought evidence about what the Hunsdorfers did before they entered into the deed of loan referred to in the caveat. Whilst the court would agree that it is the settled practice of competent solicitors in New South Wales to ensure either the prompt registration of a mortgage or lodgement of a caveat that did not happen in respect of either of the mortgages. The Hunsdorfer caveat was lodged some months after the mortgage was signed. In the absence of this evidence the general rule that where the equities are equal the first in time shall prevail must apply. The lodging of the caveat on behalf of the Hunsdorfers did not give them any priority. As Bryson J said in Double Bay Newspapers:
“The courts have not adopted the view that the order in which caveats are lodged establishes the priorities of the unregistered interest claimed in the caveats. To do so would be to treat lodging a caveat as a provisional registration of the interest claimed.”
The Papalia and Rance mortgages have priority over the Hunsdorfer mortgages and so if the property has a value of approximately $5,000,000.00 as contended for by the applicants it will be fully secured provided the Permanent mortgage is set aside.
The attraction of the applicants’ final submission was that if its constituents were accepted then there exists a debt upon which a petition can be founded and there would be no need to look into the vexed question of the merits of the Supreme Court proceedings to consider the adjournment application or undertake some other calculation of the value of Permanent’s security.
But this no longer applies as it was dependent upon the priority of the Hunsdorfer mortgage. The situation now faced is that the Permanent mortgage stands between the applicants and almost full security, subject always to the real value of the property. If it is set aside by the Supreme Court then Papalia and Rance will have a fully secured debt. If it is not, then on their submissions as to the value of the property they will be only partially secured at best. One would have thought it was in their interest to support the debtors in their tilt against Permanent but they do not. They resist the call for an adjournment. It thus behoves the court to consider the valuation arguments.
The evidence upon valuation is found contained as an annexure to the affidavit of Frank Papalia sworn on 5 May 2013 on behalf of the applicants and an affidavit of Noel John Bridger sworn on 13 July 2013 on behalf of the respondent. There are difficulties with both of these. There is no separate affidavit of a valuer provided by Mr Papalia. What he does is to annexe a letter dated 4 April 2013 to his solicitor from a Mr Jack Elsegood, the principal of a real estate agency known as Domain Residential of Newport. Mr Elsegood’s letter is in the following form:
“Dear Chris
Thank you for the opportunity to appraise the property at Ingleside. My assessment is based upon four main factors;
·Sales over the last 6 – 12 months
·Properties that are for sale and have not sold that are on the market at the present time.
·The likely market demand in your area over the next 4 to 6 weeks.
·The general economic conditions that exist at the present time.
Whilst it has been some years since my last inspection, this property presented exceptionally well.
Key features of the property include four car garage, four plus bedrooms, multiple living areas, swimming pool and exceptional ocean views.
Based on the these factors I believe that your property, if offered for sale on TODAY’S market, would sell in the vicinity of $4,500,000 - $5,000,000.
Key comparables for this property are numbers 18, 24 and 26 Ingleside Road, Ingleside.
Number 18 – Substantial home, similar but with less of a view and on one acre of land.
Number 24 – Fire affected home requiring demolition, similar, but with less of a view on one acre.
Number 26 – Substantial home, less of a view and on once acre.
I believe these comparables support the suggested sale range of 235 Powderworks Road, Ingleside.
Please understand that the property market is influenced by many factors and is constantly changing and that the price of your property could be significantly different in a matter of weeks.
These figures are not a formal valuation and should not be construed as such. It is an opinion of market value based on our local knowledge and comparison of sales. If you require a formal valuation, we can arrange one for you.
Please feel free to call me should you have any further enquiries regarding this matter.
Yours sincerely
Jack Elsegood
PrincipalThere is annexed to the letter particulars of sales in the area, a profile of Ingleside, a plan of the property and an aerial photograph of it and some other statistical information concerning the area. The three properties which are referred to in the letter are all in Ingleside Road, Ingleside, the one at No 26 has sold for $3,150,000.00, the one at 18 Ingleside Road was sold for $3,200,00.00 and the one at 24 Ingleside Road was sold for $1,450,000.00. There is only one other property listed in Ingleside that went for more than $3,150,000.00 and that is a property at 21 Walter Road Ingleside which sold for $3,190,000.00.
Mr Elsegood’s letter clearly does not comply with the requirements of the Federal Court Rules in regard to an expert’s report. But no objection was made to it on the grounds of hearsay. Such objection as there was went to weight. The affidavit of Mr Bridger did purport to be made in accordance with the rules of court and in the letter instructing Mr Bridger, the solicitors referred to the Federal Court Rules 2011 Rule 23.13 noting that an expert report must:
“… (d) Identify the questions that the expert was asked to address; and
(e) set out separately each of the factual findings or assumptions on which the expert’s opinion is based;
(f) set out separately from the factual findings or assumptions each of the expert’s opinions and;
(g) set out the reasons for each of the expert’s opinions.”
Mr Bridger’s valuation states that the purpose it was required was:
“Evidence of resale value of “the fee simple in possession of above property” [described as 235 Powderworks Road Ingleside].”
The valuation gives the title description, dimensions, zoning and improvements of the property and states thereunder:
“Improvements:
Sited upon the land is a well appointed prestigious “Sand Stock” Cavity Brick Residence, covered with a Gable Tile roofline.
Built about 1979, containing an overall floor area of some 461 Square Meters, approx. 5,000 sq. ft. the Residences is provided with all necessary internal Bedroom accommodation, Bathrooms, Main Kitchen, Guest Kitchen and Entertainment areas, Dual Lounge and Dining Rooms, Conference Rooms, secure “Lock-up” Garage units, In-ground swimming Pool etc…
In General, Internal accommodation and Décor to that expected of “Diplomatic/Embassy” Accommodation.
We have included initial Sales investigations which by way of comparison would support a Value in excess of $8 million.
Summary:
A superior well appointed Residence that would attract a wide market response if correctly presented to the Market Place.”
The valuation continues with a short section dedicated to the possibility of the property being sub-divided for low density residential occupation and encloses a proposed plan of sub-division which suggests the average price range of each lot would be $900,000.00, suggests that there should be an initial approval for the realisations of Lots 1, 2, 3 and 4 and the remaining lots to be retained concluding:
“By adopting this approach the full potential of the fee simple in possession should be achieved at a value in excess of $10,000,000.00.”
There are attached some photographs of the property and then the balance of the report provides details only associated with the proposed sub-division. I would disregard a valuation on this basis because of its highly speculative nature and the time that would be taken and cost involved in effecting the subdivision. This is not a development Mr Romeo, who is seriously indebted, gives evidence he could undertake.
Section 79(1) of the Evidence Act 1995 (Cth) provides the exception which allows for the admission of expert opinion evidence. It is in the following form:
“Exception: opinions based on specialised knowledge
(1) If a person has specialised knowledge based on the person's training, study or experience, the opinion rule does not apply to evidence of an opinion of that person that is wholly or substantially based on that knowledge.”
In order to fall within the exception, opinion evidence must therefore be that of a person with specialised knowledge based on training, study or experience and their opinion must be based wholly or substantially on that knowledge.
The High Court recently considered the admissibility of expert evidence under s.79(1) of the Evidence Act1995 (NSW), which is in identical form to the Evidence Act 1995 (Cth), in Dasreef Pty Limited v Hawchar (2011) 243 CLR 588. French CJ, Gummow, Hayne, Crennan, Kiefel and Bell JJ opined that:
“The admissibility of opinion evidence is to be determined by application of the requirements of the Evidence Act rather than by any attempt to parse and analyse particular statements in decided cases divorced from the context in which those statements were made. Accepting that to be so, it remains useful to record that it is ordinarily the case, as Heydon JA said in Makita, that "the expert's evidence must explain how the field of "specialised knowledge" in which the witness is expert by reason of "training, study or experience", and on which the opinion is "wholly or substantially based", applies to the facts assumed or observed so as to produce the opinion propounded".”
In his separate judgment, Heydon J came to a similar conclusion on the reasoning rule. His Honour first outlined the common law position at [91]:
“At common law there is no doubt that an expert opinion is inadmissible unless the expert states in chief the reasoning by which the expert conclusion arrived at flows from the facts proved or assumed by the expert so as to reveal that the opinion is based on the expert's expertise. The court does not have to be satisfied that the reasoning is correct: "the giving of correct expert evidence cannot be treated as a qualification necessary for giving expert evidence". But the reasoning must be stated. The opposing party is not to be left to find out about the expert's thinking for the first time in cross-examination.”
Before considering its applicability under the provisions of the Evidence Act, opining at [129 - 130]:
“There is ample authority supporting the view that it is not enough for evidence tendered under s 79 merely to state the expert's qualifications in a field of expertise and the conclusion. It is necessary to avoid the insidious risk that the trier of fact will simply accept the opinion without careful evaluation of the steps by which it was reached, and hence the evidence must state the criteria necessary to enable the trier of fact to evaluate that the expert's conclusions are valid. The evidence must reveal the expert's reasoning – how the expert used expertise to reach the opinion stated. It is not enough for evidence tendered under s 79 merely to state the expert's qualifications in a field of expertise and the conclusion. Admissibility does not depend on the reasoning being accepted as correct; that is a matter for consideration at the end of the trial. But admissibility does depend on the reasoning being stated.” [Citations removed]
Mr Bridger’s evidence appears, at first, to satisfy one of the two stages of the test at s.79(1) of the Evidence Act. It is not controversial that Mr Bridger holds expertise in valuation of properties, but it is difficult to see how he has used it to come to his opinion of valuation of the property.
The Bridger report does not provide any assistance to the court in understanding how Mr Bridger came to the view he did that the property was valued in excess of $8,000,000.00. Although the report says that he has included initial sales investigations, none are produced. Given the information contained in Mr Elsegood’s report the court cannot be satisfied that Mr Bridger has so complied with the required standards of an expert that this report can be considered as such. There is no justification whatsoever for the figure that he comes up with and it seems contrary to the actual evidence of sales from Mr Elsegood. True it is that the property is well presented but one can infer that this is taken into account by Mr Elsegood when setting a value over $1,000,000.00 in excess of the comparables he demonstrates.
I would conclude that I should give no greater weight to Mr Bridger’s report than I should to Mr Elsegood’s appraisal and that given the uncontradicted evidence of past sales contained in that appraisal I would find that I could not accept that the property had a valuation in excess of $5,000,000.00.
In the circumstances I am unable to find that even if the debtor succeeds in setting aside the Permanent mortgage, there is still a shortfall in excess of $5,000.00 for which the applicants can petition. The only circumstance in which the applicants would be fully secured is if the Permanent mortgage was actually set aside. If it was not there would be a substantial shortfall given the value that I have ascribed to the property. I am thus forced to consider whether I should grant an adjournment so that the litigation between the debtors and Permanent can take place at the end of September.
One has to start from the proposition that the litigation for which the adjournment is sought could benefit the applicants if the debtor is successful by advancing their security. On the other hand if it is not, the debtor’s assets will be substantially reduced by the costs to be paid. The position of the parties as a result of my findings is that at this time prior to the hearing the applicant is totally unsecured and able to proceed. There is also to be taken into account the fact that the Permanent mortgage is valid on its face. It is the manner in which it was entered into that is challenged. There is also a judgment in favour of the mortgagee. It is this judgment that is being appealed. When leave to appeal was granted, it was done so on the condition that the appellant paid into court $1.6 M. That condition itself was appealed to a full bench, Macfarlan and Young JA in Romeo v The Trust Company (PTAL) Ltd [2012] NSWCA 62. The Court said relevantly, per Macfarlan JA:
“[5] In her judgment of 16 September 2011 the primary judge concluded that the default judgment against Mr and Mrs Romeo should be set aside on the condition that they pay $1.6 M into Court and maintain interest payments on that sum at 7.75 per cent per annum. Her Honour directed that upon the respondents undertaking to disgorge any payments to which they were ultimately found not to be entitled, the amount to be paid into court should be paid out to the respondents.
[11] Counsel for Mr Romeo accepted, for the purpose of this application only, first that $1.6 M of the debt claimed by the respondents represented an amount paid by the respondents at the direction of Mr and Mrs Romeo out of the loan proceeds to discharge an existing mortgage and secondly that Mr Romeo did not have any arguable defence in relation to that portion of the claimed debt.
[12] However counsel submitted that if Mr Romeo'sContracts Review Actdefence succeeded, the most likely order that the Court would make would be an order unders 7of theContracts Review Actrequiring the execution of a varied mortgage, limiting the amount secured to $1.6 M. He submitted further that if this Court regarded this as a likely outcome, it could not conclude, at least at this stage, that there had been any default by Mr and Mrs Romeo in the payment of interest in respect of the prospectively varied mortgage. To put it shortly, and somewhat simplistically, he contended that the interest Mr and Mrs Romeo had paid on approximately $3.6 M for three years, in part unnecessarily if theContracts ReviewActdefence succeeded, was likely to have exceeded the interest that Mr and Mrs Romeo would have been liable to pay on $1.6 M for five years, with the result that Mr Romeo'sContracts Review Actdefence, held by the primary judge to be arguable, would negate the respondents' right to possession of the property.
[13] This is arguably an important consideration that her Honour did not take into account in reaching her conclusions. In fairness to her Honour I point out that this contention does not seem to have been put to her Honour in explicit terms. At best it is arguably implicit in the form of draft cross-claim that Mr and Mrs Romeo relied upon before her Honour (see [2] of the relief claimed).”
And per Young JA:
“[23] Does the application for a writ of possession in respect of a bankrupt holding as joint tenant fall foul ofs 58(3)(a)of theBankruptcy Actand, if it does, is it saved by sub-section 5?
[24] On the other side, there are difficulties in obtaining an order for variation under theContracts Review Act 1980; see egVakele Pty Ltd v Assender(1980) 4 BPR 9591.”
The appeal continues without the requirement for payment into court. It is set down for hearing commencing 30 September 2013.
In considering whether to adjourn the court must consider whether sufficient cause exists for the adjournment. In Re Ling; Ex parte Enrobook Pty Ltd (1996) 142 ALR 87, Lehane J considered the authorities on the granting of an adjournment and noted [at 95]:
“As a general proposition (and those authorities say nothing to the contrary) there is no apparent reason why a petitioning creditor should not be entitled to have a sequestration order made, if the requirements of s 52 are otherwise satisfied, simply because the debtor may have a counterclaim or cross-demand against some other creditor.”
This approach was affirmed by the Full Court of the Federal Court Ling v Enrobook Pty Ltd (1997) 143 ALR 396 at 401.
His Honour went on to consider circumstances which would be sufficient to adjourn where the debtor had a claim against a person other than the petitioning creditor and found that there were at least two categories of case in which this would be appropriate. His Honour opined:
“The other type of case in which principle suggests, and authority appears to confirm, that the existence of a claim against a third party may be sufficient cause to dismiss or adjourn a petition is one where the debtor, although not presently solvent, establishes that there is a claim which is being diligently prosecuted, has good prospects of success, is likely to be determined in the near future and is likely, if determined favourably, to produce funds sufficient to discharge all claims against the debtor.”
In the present matter, it is this scenario that is engendered. The debtor is seeking the adjournment in order to remove the primary registered mortgage which would, as examined above, leave the petitioning creditor with a fully secured interest.
In order to determine the appropriateness of any adjournment, it is therefore necessary to look to the possibility of extending the petition, the extent to which the alternate proceedings have advanced, the likelihood that they would be successful if given the opportunity to advance to completion and whether or not the fruits of those proceedings would overcome the alleged insolvency.
As a consequence of the considerations above, the first and second and considerations can be dealt with rather summarily. The bankruptcy notice was served on 21 December 2012. Following non-compliance with the bankruptcy notice the petition by 11 January 2013, the creditor’s petition was filed on 9 May 2013, within 6 months of the alleged act of bankruptcy. The debtor’s application before the Supreme Court is well advanced, and is listed for final hearing on 30 September 2013 for five days. There would therefore be some seven months within which a decision would need to be reached before the creditor’s petition would need to be extended. There is no issue in extending the petition.
The remaining considerations are more problematic for the debtor. Whilst it has been established that if the debtor is successful in removing the primary mortgage the creditor’s interest will be fully secured, it would not “produce funds to discharge all claims against the debtor”. It is to be recalled that there are four supporting creditors, including Permanent. Mr Tao, who appeared for Investec Bank, submitted in court that his client had a judgment debt in the sum of $5.239M, Mr Bruce Blaise Patane, solicitor, deposed in an affidavit sworn 10 July 2013 that Australian Liquor Marketers Pty Limited were owed a judgment debt of $31,940.68 and Ms Webber, solicitor, submitted that the debt owed to D. R. Design (NSW) Pty Limited was in the sum of $32,000.00. It is clear, from the debt owed to Investec Bank alone, that the fruits of any proceedings would fall well short of discharging all of the claims against the debtor.
Similarly, I cannot be satisfied that the prospects of success meet the required standard. Though I have been provided with very little information with which to assess the debtor’s prospects of success, I am satisfied that his prospects are not good. Button J in refusing to enter summary judgment in The Trust Company (PTAL) Pty Ltd v Romeo [2013] NSWSC 347 noted:
“…speaking of the proceedings as a whole, in the absence of any evidence from either party I am simply unable to make anything other than a very general assessment of the strength or weakness of the defendant’s case. For example, was the restaurant a sophisticated business operation? Or was it little more than a simple café? Are there witnesses who will swear that the command of English of the defendant is halting and primitive? Or are there witnesses who will swear that he can easily comprehend sophisticated prospectuses? I am simply unable to tell.
Having said that, it does appear remarkable that a man who, according to his own cross claim, had, at one stage, built up with his wife a property portfolio with equity in the sum of $15 million could rely upon the Contracts Review Act. But although on the very limited information available to me it might seems that the case of the defendant has very serious difficulties, I cannot say that it is doomed to failure.”
The standard to be met in order for an adjournment to be granted is clearly much higher than whether or not a defendant’s case is doomed to failure. It is plain to see that Button J was not convinced that the respondent had good prospects of success. I have heard nothing which would advance the case beyond that considered by Button J. Certainly I am not convinced that the prospects are good or even reasonable when at least $1.6M of the advance is highly likely to be maintained.
Applying the standard set out in Ling I am unable to find that this is a suitable case for an adjournment, especially as now the case should have been heard under the timetable given to me.
At the hearing the applicant provided me with evidence of the formal matters. I am satisfied that the Respondent committed the act of bankruptcy alleged in the petition. I am satisfied of the other matters required by s.52 of the Act. I make a sequestration order against the estate of Giuseppe Romeo. I order that the applicant’s costs including any reserved costs be taxed and paid from the estate of the respondent in accordance with the Act. Under the Bankruptcy Regulations a copy of this sequestration order be given to the Official Receiver in Sydney within two days. The court notes the date of the act of bankruptcy is 11 January 2013. I note that a consent to act as a trustee has been signed by Chris Chamberlain and has been lodged with the Official Receiver in Sydney.
I certify that the preceding forty-eight (48) paragraphs are a true copy of the reasons for judgment of Judge Raphael
Associate:
Date: 14 October 2013
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