Payton Securities Pty Ltd v Bertacco Ferrier Pty Ltd

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE
COMMERCIAL COURT

S ECI 2020 02308

PAYTON SECURITIES PTY LTD (ACN 004 597 166)	Plaintiff
v
MASON WHITE MCDOUGALL (HURSTBRIDGE) PTY LTD (ACN 097 326 317) & ORS (according to the attached schedule)	Defendants

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JUDGE:	M Osborne J
WHERE HELD:	Melbourne
DATE OF HEARING:	1, 2, 3, 7, 8, 9, 14, 15, 24, 28 February 2022
DATE OF JUDGMENT:	15 July 2022
CASE MAY BE CITED AS:	Payton Securities Pty Ltd v Bertacco Ferrier Pty Ltd
MEDIUM NEUTRAL CITATION:	[2022] VSC 394

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PROFESSIONAL NEGLIGENCE – Land valuation – Where valuation report alleged to have caused lender to advance funds on insufficient security – Whether undervaluation of component part of land goes to negligence of valuation as a whole – Whether miscalculation of easement-affected area of land is negligent – Whether valuer took into account bushfire management overlay – Whether valuer reasonable to take into account high-density development proposal when assessing value – Whether margin of error within permissible bracket – Whether addressee of valuation was agent for undisclosed principal – Concurrent claim in tort and contract – Whether duty of care owed to second mortgage mezzanine lender - Whether award of damages apportionable for contributory negligence and concurrent wrongdoing – Whether ‘harm’ of same type for purposes of s 48 and s 62 of the Wrongs Act 1958 (Vic).

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr M Galvin QC with Mr D Bongiorno	Harding Stenning & Co Lawyers
For the First and Second Defendants (until 3 February 2022)	Mr R Moore with Ms G Douglas	Wotton & Kearney
For the Fourth Defendant	Mr S Pitt with Ms J Nikolic	Sparke Helmore

TABLE OF CONTENTS

Introduction and background.......................................................................................................... 1

Broad overview of Payton Securities’ claims............................................................................ 5
Factual background...................................................................................................................... 6
Settlement of the claims against MWM, Mr Mason, and Mr McCubbin............................ 35
Payton Securities’ negligence claim against Bertacco Ferrier and the valuation evidence 37
The First Banner Valuation – 8 November 2013........................................................... 42
The Second Banner Valuation – 19 January 2015.......................................................... 45
The Third Banner Valuation – 16 March 2016............................................................... 46
The First CKC Valuation – 16 June 2017........................................................................ 48
The Hap Seng Valuation – 30 August 2017................................................................... 49
The Assetline Valuation – 12 November 2017............................................................... 51
The Bertacco Ferrier Valuation – 15 March 2018........................................................... 53
The Second CKC Valuation – 21 March 2018 or 3 October 2019................................ 58
The Sutherland Report – as at 15 March 2018............................................................... 58
The Cations Report – 23 December 2021........................................................................ 63

Was the Bertacco Ferrier Valuation negligent?.......................................................................... 65

Did Bertacco Ferrier value the Super Lot?.............................................................................. 67
The Power Line Easement issue................................................................................................ 68
The BMO Issue............................................................................................................................ 79
The Infill Proposal Issue............................................................................................................. 84
The disparity between the Bertacco Ferrier Valuation and the Third Banner Valuation 87
Mr Bertacco’s consideration of the Infill Proposal........................................................ 90

The Comparable Sales Issue...................................................................................................... 92
The 24 August 2020 sale................................................................................................... 92
Relevance of the Sutherland Report............................................................................... 93
Relevance of the First CKC Valuation............................................................................ 98

Summary and conclusion with respect to the Bertacco Ferrier Valuation and the causative effect of any error or omission................................................................................................. 104
Which Payton entity was party to the retainer with Bertacco Ferrier?............................. 106
The claim in tort........................................................................................................................ 111
Reliance and causation............................................................................................................. 116

Quantum and apportionment...................................................................................................... 120

Contributory negligence.......................................................................................................... 128
Apportionment for concurrent wrongdoing......................................................................... 144
Concurrent wrongdoing of MWM................................................................................ 147
Concurrent wrongdoing by McCubbin........................................................................ 152
Concurrent wrongdoing of Mr Zhang and Mr Liu and MXW Finance.................. 153

Conclusion....................................................................................................................................... 155

DRAFT

HIS HONOUR:

Introduction and background

The plaintiff, Payton Securities Pty Ltd (‘Payton Securities’), lent $3,250,000 to Z&L Property Management Pty Ltd (‘Z&L’) secured by a mortgage over 35 Herberts Lane, Diamond Creek (‘the Property’). Z&L was to develop the Property into a group of residential lots. The fourth defendant, Bertacco Ferrier Pty Ltd (‘Bertacco Ferrier’), valued the Property prior to the loan being advanced (‘the Bertacco Ferrier Valuation’). Z&L defaulted and was ultimately placed in liquidation. Payton Securities took possession of and sold the Property, but suffered a shortfall on the loan. Payton Securities now seeks damages against Bertacco Ferrier for its alleged negligence in valuing the Property.

Negligent valuation cases are a well-known species of litigation. A lender advances money on a valued security. The borrower defaults. The security is realised for less than the valued amount. The borrower is insolvent. The lender resorts to the valuer, whose negligent overvaluation is alleged to have caused the improvident transaction.

Though this proceeding has all the familiar elements of a standard negligent valuation claim, there are a number of matters which distinguish it from the ordinary case.

First, Payton Securities was not the entity that retained Bertacco Ferrier, at least on the face of the Bertacco Ferrier Valuation: Payton Capital Pty Ltd (‘Payton Capital’), another corporate entity in a group of companies which included Payton Securities (the ‘Payton Group’), is the addressee and client for the purposes of the Bertacco Ferrier Valuation. Relevantly, the Bertacco Ferrier Valuation records that it was prepared on the basis that it could only be used by the addressee (ie, Payton Capital) and that Bertacco Ferrier accepted no responsibility to any other person who might rely on it. Where it is clear that conduct has been engaged in by Payton Securities or Payton Capital as the case may be, I refer to the entity in question by that name. Where unclear, I use the neutral descriptor ‘Payton’.

Secondly, and relatedly, the valuation disclosed as its basis an anticipated loan to be secured by a first mortgage. In fact, the loss particularised by Payton Securities arises under a high interest mezzanine loan secured by a second mortgage against the Property.

Thirdly, the Bertacco Ferrier Valuation contained a recommendation that the Property was suitable security for an advance on a first mortgage basis and with the loan amount not exceeding a 55% loan to value ratio (‘LVR’). In fact, Payton Securities advanced monies to Z&L under two agreements: a loan agreement for $8,900,000[1] on security of a first mortgage against the Property (‘the first mortgage loan’) and a loan on security (among others)[2] of a second mortgage of $3,250,000 (‘the second mortgage mezzanine loan’). The second mortgage mezzanine loan bore an interest rate of 18% per annum[3] plus a management fee of 2% per annum,[4] with the interest and management fees payable when the loan matured in 12 months’ time. The total of $9,750,000[5] advanced at the inception of the loans comfortably exceeded what Bertacco Ferrier assessed as the ‘current market land value in situ’ of $8,400,000.
[1]The first mortgage loan agreement provided for a facility limit of $8,900,000. The first tranche of $6,500,000 was advanced on 10 April 2018 at the inception of the loan. Though it is not entirely clear on the evidence before me, according to an information memorandum provided by Payton Securities to its investors the remainder of the $2,400,000 available to Z&L under the first mortgage loan agreement appears to have been drawn down in two further tranches on 15 October 2018 and 15 November 2018, of $1,200,000 each. Ultimately, Payton Securities did not claim against Bertacco Ferrier any loss arising under the first mortgage loan agreement, and as such the amount advanced under that agreement is not directly relevant.
[2]The second mortgage loan was secured against the Property as well as properties at 45 Burgundy Drive, Doncaster and 305 The Boulevard, Ivanhoe East.
[3]A default interest rate of 21% per annum was provided for overdue payments.
[4]The interest rate under the first loan agreement was 10.5% per annum (with a penalty interest rate of 13.5% per annum) plus a management fee of 1.5% per annum, on a term of 12 months from the date of drawdown.
[5]This comprised both the first tranche of the first mortgage loan ($6,500,000) and the whole of the second mortgage mezzanine loan ($3,250,000).

Fourthly, prior to advancing the loans, Payton required confirmation from Z&L that all 28 lots in the first stage of the relevant development had been presold. To that end Z&L’s finance broker, the seventh defendant MXW Finance Pty Ltd (‘MXW Finance’), forwarded Payton documents stating that all 28 lots had been sold at a total price of $12,540,000, and that the deposit monies were held in the trust account of Z&L’s estate agent, the first defendant Mason White McDougall (Hurstbridge) Pty Ltd (‘MWM’). The documents provided by MXW Finance included a letter to that effect apparently on MWM’s letterhead.

It later emerged that the documents provided by MXW Finance had been falsified. The number of presales had been significantly overstated: no more than 16 of the 24 lots had been sold and the deposit moneys were not held by MWM as asserted. MWM denied that it had prepared the relevant letter purportedly sent in its name.

Fifthly, Payton’s assessment of the loans departed from the criteria set out by it in various internal documents in that it did not:

(a) obtain copies of deposit receipts for the presales or trust account statements from MWM, which would have revealed the falsification of the presales contracts; and

(b) engage an independent quantity surveyor or engineer to undertake a review of the anticipated development costs; relevantly, it became apparent shortly after the loans were advanced that the development costs were understated.

Sixthly, notwithstanding that the Bertacco Ferrier Valuation was addressed to Payton Capital (rather than Payton Securities); recommended a 55% LVR; and specified the suitability of the Property for a first mortgage loan only, no representative of Payton requested that Bertacco Ferrier readdress the Bertacco Ferrier Valuation in favour of Payton Securities or otherwise explain or articulate the basis for the 55% LVR.

Bertacco Ferrier further submits that the above matters are relevant to the following inquiries:

(a) determining the party that actually contracted with Bertacco Ferrier and so has privity of contract in respect of any breach of contractual duty by Bertacco Ferrier to exercise reasonable skill and care;

(b) whether Bertacco Ferrier owed a duty of care and to whom it was owed;

(c) the existence of any defence of contributory negligence against Payton Securities or apportionment of responsibility against other the defendants under the proportionate liability provisions in the Wrongs Act 1958 (Vic) (‘the Wrongs Act’); and

(d) remoteness of any loss and damage.

The Bertacco Ferrier Valuation addressed the Property generally, but the alleged overvaluation related to only a single part of the Property (at $5,150,000 in contrast to the asserted ‘true value’ of around $2,000,000): Payton Securities argues that Bertacco Ferrier’s negligence was in relation to a portion of the Property variously referred to as ‘Lot A’ and ‘the Super Lot’ (referred to in this judgment as ‘the Super Lot’), which was to be developed as part of ‘Stage 2’ of the development. Bertacco Ferrier denies that it valued the Super Lot, arguing that it valued strictly the Property as a whole. In any event, it denies that it overvalued the Super Lot in valuing the Property as a whole.

Relatedly and in addition to these matters, the question of whether Bertacco Ferrier had departed from the requisite standard of care required to be exercised by a valuer of ordinary skill and competence, and the significance of any failure to do so, were very much at issue in this case. Both Payton Securities and Bertacco Ferrier called expert evidence in support of their respective cases as to the requisite standard of care.

Bertacco Ferrier also contends that if it is found liable for the loss claimed by Payton Securities, then the Court should reduce the amount for which Bertacco Ferrier is liable having regard to the acts or omissions of others who also caused that loss and damage:

(a) Payton Securities itself, alleged to be contributorily negligent;

(b) MWM and the second defendant, Mr Ian Mason (‘Mr Mason’), a director of MWM;

(c) the third defendant, Mr Ian McCubbin (‘Mr McCubbin’), who carried on a legal practice under the firm name of Ian McCubbin & Associates (‘McCubbin’) and who acted as solicitor for Z&L in connection with the sale of the various lots which Z&L constructed on the Property;

(d) the fifth and sixth defendants, Jacky Zhang (‘Mr Zhang’) and Jack Liu (‘Mr Liu’), both directors of Z&L; and

(e) the seventh defendant, MXW Finance.

Broad overview of Payton Securities’ claims

In the proceeding as commenced, Payton Securities brought claims for damages against the first and second defendants, MWM and Mr Mason; the third defendant, Mr McCubbin; and the fourth defendant, Bertacco Ferrier.

Payton Securities argued that it entered into the second mortgage mezzanine loan on the basis of two freestanding misapprehensions:

(a) first, that all 28 lots comprising stage 1 of the development of the Property had been presold and that MWM was holding 10% deposits for each of the 28 presale contracts, which was false as only some 16 of the 28 lots had been presold (‘the presales representations’); and

(b) secondly, that Bertacco Ferrier had negligently overvalued the Super Lot which formed part of the Property, estimating the value of the Super Lot to be $5,150,000, in circumstances where a reasonable valuer would have valued the Super Lot at around $2,000,000.

Payton Securities alleged that the presales representations were constituted in various ways and made by MWM and McCubbin. Further, Payton Securities further allege that MWM and Mr Mason (from here on collectively ‘MWM’) were liable on an ancillary basis with respect to the misleading conduct giving rise to the presale representations by Z&L.

Some months out from the commencement of the hearing, Payton Securities entered into a deed of settlement with McCubbin for $200,000 (inclusive of costs) (‘the McCubbin Settlement Deed’).

The trial commenced with detailed openings from Payton Securities, MWM, and Bertacco Ferrier. Each had filed detailed lay and expert evidence. After openings had concluded, Payton Securities entered into a deed of settlement with MWM for $925,000 (inclusive of costs) (‘the MWM Settlement Deed’).

The claim accordingly continued against Bertacco Ferrier alone for the revised amount of $1,467,940; after allowance had been made for the sums the subject of the McCubbin Settlement Deed and the MWM Settlement Deed.

Notwithstanding Payton Securities’ resolution of its claim against MWM and McCubbin, those defendants’ liability to Payton Securities remained in issue in the proceeding as a result of Bertacco Ferrier’s apportionment defence. So too did the liability to Payton Securities of Mr Zhang and Mr Liu and MXW Finance, who were joined as defendants by Bertacco Ferrier in order that Bertacco Ferrier could apportion to those persons any liability to Payton Securities for loss and damage found to arise under Payton Securities’ claim against Bertacco Ferrier.

Before determining these various controversies, it is necessary to set out some of the more pertinent facts in greater detail.

Factual background

Payton Securities is one member of a group of companies known as the ‘Payton Group’; the Payton Group also includes Payton Capital. According to the chief executive officer of the Payton Group, David Payton (‘Mr Payton’), since 2012 the group has operated as a boutique investment manager focusing on Australian private real estate debt.

Payton Securities is the authorised representative of another entity in the group, Payton Private Wealth Pty Ltd.

In broad terms, Payton raises money from private investors. Those funds are then pooled and lent by Payton Securities to various borrowers. The loans to Z&L were funded in this manner.

Z&L acquired the Property for $9,950,000 on 14 October 2016.

The Property was the subject of a town planning permit which permitted its subdivision in accordance with a proposed plan of subdivision PS743606S (‘the Plan’). The Plan contemplated subdivision of the property into 29 lots, comprising:

(a) lots 1 to 28, to be developed in ‘Stage 1’ of the proposed development (‘the Stage 1 lots’); and

(b) the Super Lot on the western part of the Property (shown in the diagram below as Lot A), sometimes referred to as ‘Stage 2’ of the proposed development.

Generally, the Stage 1 lots were located in the eastern half of the Property, while the Super Lot made up the residue of some 24,490 square metres on the western half of the Property. The below diagram illustrating the division is taken from a document prepared by TGM Group (‘TGM’), a quantity surveyor:

Mr Zhang was appointed as a director of Z&L on 25 October 2016 and has remained a director throughout the winding-up of the company. Mr Liu was a director of Z&L from May 2018 to 7 May 2019.

On or about 8 February 2017, ‘L & Z Investments Pty Ltd’[6] engaged MWM to act as exclusive agent for the sale of the Stage 1 lots. A revised authority on substantially the same terms was entered into between Z&L and MWM on or about 17 July 2017.
[6]‘L & Z Investments Pty Ltd’ appears to have been a previous corporate vehicle related to Mr Zhang and possibly Mr Liu and may have been deregistered as at 8 February 2017. In all likelihood, the name was entered on the sale authority by mistake.

On 11 January 2018, Mark Murray (‘Mr Murray’), an employee of MXW Finance, emailed Michael Laing (‘Mr Laing’), the head of property at Payton Capital, requesting finance of $10,265,000 in connection with the Property. The $10,265,000 was to be applied as follows:

(a) $5,000,000 to pay out a current secured debt;

(b) $2,700,000 to repay a vendor finance debt;

(c) $2,300,000 to pay for anticipated construction costs; and

(d) the balance of $115,000 to be retained for contingencies and payment of professional fees.

Mr Murray stated that the gross realisable value (‘GRV’)[7] of the Stage 1 lots was $12,540,000 (incl. GST), and using that figure calculated the relevant LVR at 90%.[8] Mr Murray proposed a grant of security in the form of a registered first mortgage over Stages 1 and 2 of the proposed development, to be subdivided in accordance with the plan discussed above. Mr Murray’s email stated that Stage 1 had been ‘100% sold - all local buyers’ and that Stage 2 (that is, the Super Lot) had a preliminary value of about $5,000,000. Mr Murray further advised that Z&L had entered into a joint venture agreement with Metricon Homes to develop the Super Lot. The email further noted:

Understand this is highly geared, but the clients plan is to develop Stage 1 and have Stage 2 unencumbered and this is where his profit will sit.

[7]A definition of GRV can be found at [179(c)] below.

[8]Evidently calculated by reference to the asserted GRV for the Stage 1 lots of $10,265,000, divided by a GST exclusive figure of $11,400,000.

Attached to the email were:

(a) Excel spreadsheets setting out a proposed feasibility study for Stage 1 and Stage 2;

(b) a signed construction contract relating to Stage 1;

(c) Stage 2 town planning drawings; and

(d) a file entitled ‘presales list Stage 1’ and headed ‘Wattle Ridge Estate Price List’, stated to have been updated as at 8 January 2018 (‘the 8 January 2018 Presales List’).

The 8 January 2018 Presales List stated that Lots 1 to 28 at the Property had been sold with a total combined sale price of $12,540,000. It identified the area of each of the 28 lots, the names of each purchaser, and the sale price for each lot sold.

The attachments also included a valuation which had been prepared by valuation firm Charter Keck Cramer (‘CKC’), expressed to be for first mortgage purposes and dated 16 June 2017 (‘the First CKC Valuation’) in connection with a proposed first mortgage loan by Heritage Property Finance Pty Ltd.

The First CKC Valuation is considered in greater detail below, but relevantly for present purposes CKC assessed the ‘as is’ land value of the Property as being $8,000,000 and the project related site value (‘PRSV’) as being $8,100,000.[9]
[9]A definition of PRSV can be found at [179(b)] below.

Over the succeeding days, Mr Laing also came into possession of a valuation produced by Bertacco Ferrier and dated 30 August 2017 on the instruction of a proposed first mortgagee lender, Hap Seng Credit (Australia) Pty Ltd (‘the Hap Seng Valuation’).

Again, the details of the Hap Seng Valuation are referred to below, but relevantly for present purposes Bertacco Ferrier assessed the PRSV at $8,630,000 (excl. GST) and the ‘as is’ value[10] at $8,400,000 (excl. GST). In addition, in the Hap Seng Valuation Bertacco Ferrier ascribed to the Property a GRV ‘as if complete’ of $17,680,000 (inc. GST) and identified the cost of development as $3,280,000 (excl. GST). The GRV of $17,680,000, being a final post-development figure, necessarily included as a component a GRV for the Super Lot.
[10]Referred to by Bertacco Ferrier as ‘current market land value – in situ’.

Mr Laing carried out a review of both valuations.[11] He stated that the GRV and PRSV set out in the Hap Seng Valuation ‘appear reasonable’. Mr Laing noted the lower PRSV in the First CKC Valuation and attributed this to the use of a lower GRV than that used by Bertacco Ferrier in the Hap Seng Valuation. Mr Laing stated that he believed that the Bertacco Ferrier Valuation was ‘more in line with [the] market’.
[11]Mr Laing was also a qualified valuer.

Mr Laing’s valuation review records his acceptance of the Bertacco Ferrier Valuation, but notes under the heading ‘Valuation accepted and concerns/qualifications’ that:

*****Note: The sales need to be verified with the lawyer and actual contracts sighted. Also, the construction work (Civil contract) needs to be verified by either an engineer or [quantity surveyor].

On 18 January 2018, Nelson Tunacao, a borrower services representative at Payton Capital, forwarded indicative offers to MXW Finance for both a first registered mortgage loan of $8,800,000 against the Property (‘the first mortgage loan offer’) and a second mortgage mezzanine loan of $2,400,000 against the Property (‘the second mortgage mezzanine loan offer’).[12]
[12]The first registered mortgage and the loan agreement it secured were also referred to from time to time as the ‘senior debt facility’. The second registered mortgage and the loan agreement it secured were also referred to from time to time as the ‘mezzanine loan’ or ‘mezzanine finance’.

The first mortgage loan offer specified a 12 month term with an interest rate of 10.5% per annum, plus a management fee payable by the borrower to the lender of 1.5% plus GST. The interest and management and establishment fees were payable in advance. Further security was provided in the form of guarantees from Mr Zhang and a company associated with him, Huiming Pty Ltd. The conditions of the first mortgage loan offer included, among others, minimum acceptable presales of a gross value of $12,500,000.

The second mortgage mezzanine loan offer also specified a 12 month term but with an interest rate of 18% per annum plus a management fee of 2% plus GST. In contrast to the first mortgage loan offer, the interest and management fees were payable on maturity. Application and establishment fees of some $71,000 were payable on signing. The second mortgage mezzanine loan offer specified that the loan was not to exceed 82% of the ‘Loan to Devopment Cost ratio [sic]’. The conditions attached to the second mortgage mezzanine offer included that the loan would be subject to a first mortgage of no more than $8,800,000 and minimum acceptable presales of a gross value of $12,500,000.

At about the same time that Mr Tunacao sent out the indicative loan offers to MXW Finance, Payton Securities also forwarded a separate information memorandum for each loan to proposed investors.

In the information memorandum relating to the first mortgage loan offer, Payton Securities stated that the loan of $8,800,000 would be drawn down in up to four separate tranches, with an interest rate of 12% per annum compounded annually (broken down into 10.5% net to investors and 1.5% net to Payton). The memorandum described the collateral as comprising, among other things, a first registered mortgage over the Property.

The memorandum also referred to the Hap Seng Valuation. Under a bullet point recording the Hap Seng Valuation GRV as $17,680,000 (incl. GST), the memorandum stated that the GRV for Stage 1 (that is, the development of the 28 lots) was $12,530,000 with the balance of $5,150,000 representing the GRV for Stage 2 (that is, the Super Lot). The special conditions which were said to attach to the proposed loan included provision of a copy of a valuation as well as a quantity surveyor or engineer’s report acceptable to the dealer and promoter.[13] In addition, the special conditions stated that:

Funding is on a “cost to complete” basis where the undrawn loan amount is sufficient to cover the costs of completion for the works as certified by a Quantity Surveyor from time to time. If the undrawn loan is not sufficient to cover the costs then the borrower was to provide additional equity or additional security.

[13]It is not clear whether the dealer and promoter were one and the same, nor whether this was Payton Securities, Payton Capital, or both.

The memorandum stated that the loan to development cost ratio was 64%, while the LVR was 54%. The purpose of the loan was described as:

To assist with the acquisition of the land and the development of Stage 1 consisting of 28 residential allotments on the vacant site at 35 Herberts Lane, Diamond Creek.

The information memorandum accompanying the second mortgage mezzanine loan offer provided to prospective investors followed a similar format, but specified a higher interest rate (20% per annum) compounded annually (broken down into 18% net to investors and 2% net to Payton). The memorandum also specified a higher loan to development cost ratio of 81% and a higher LVR of 69%, reflecting the combined values of the first mortgage loan offer and the second mortgage mezzanine loan offer.

Both memoranda set out as a special condition:

Standard Finance industry conditions relating to project funding which amongst other things includes the following items:
·Project insurances
·Construction contract
·Presales due diligence

These items are to be satisfactory to the Payton Group.

On 28 January 2018, Payton Capital’s investment committee (‘the Investment Committee’) undertook a review of the proposed loan investments. The minutes of the meeting record in a condensed paragraph that:

(a) the building contract was acceptable to the Investment Committee;

(b) Z&L was considered a risk;

(c) copies of every sales contract were sought as an additional layer of due diligence;

(d) civil construction costs were around $80,000 per block and that a quantity surveyor’s report was sought on this figure;

(e) KLM, a civil engineering firm, or a quantity surveyor was to review the project;

The minutes also record the notation ‘see receipts for deposits’.

On 8 February 2018, MXW Finance’s Mr Murray emailed the team leader of Project Finance at Payton Capital, Richard Vidaic (‘Mr Vidaic’), attaching documents described as a ‘Presales Report’ and a ‘Confirmation Letter of Deposits’ (respectively, ‘Presales Schedule’ and ‘Deposits Letter’). The email advised that there did not appear to be any sunset dates in the sales contracts, and also attached a Dropbox link to copies of all the presales contracts. Mr Murray had received the Dropbox link the day before from Wayne Mo (‘Mr Mo’), also of MXW Finance.

The Deposits Letter was on what appeared to be the letterhead of MWM and bore what on its face appeared to be Mr Mason’s signature. The Deposits Letter read:

To whom it may concern,
We, Mason White McDougall (Hurstbridge) Pty Ltd as an exclusive sales agent for Wattle Ridge Estate in Diamond Creek located at 35 Herberts Lane, Diamond Creek are hereby confirming 28 lots of Wattle Ridge Estate has been sold. Deposit of $1,254,000.00 in total has been paid and is held in our trust account.
Your sincerely,

Ian Mason

Director

The Presales Schedule was not on an MWM letterhead, though it bore a signature matching that purportedly used by Mr Mason in the Deposits Letter. The Presales Schedule repeated the list of purchasers in the 8 January 2018 Presales List, but additionally included purchase dates as well as deposits paid and the relevant payment methods.

On 5 March 2018, Mr Vidaic and Jamie Westlake (‘Mr Westlake’), Payton Capital’s head of lending, met with Mr Murray, Mr Zhang and Mr Liu at Payton Capital’s offices. Following the meeting Mr Vidaic emailed Mr Murray enclosing a pro forma ‘Development Feasibility’ form for completion and return, as well as a schedule indicating a proposed timetable of drawdowns under the first mortgage loan.

On 6 March 2018, Mr Vidaic emailed Mr Murray thanking him for meeting the previous day and foreshadowing a further on-site meeting to be held the next day. Mr Vidaic raised the issue of competing construction cost quotes offered by different civil engineering firms, stating that:

One of the things that we want to seek clarity on tomorrow is the difference between the TGM estimate of costs in October last year at $3.1M vs the Civilwor[x] contract at $2.2m signed in December.

Mr Vidaic’s email also sought clarity as to the role of TGM in the project and the proposed project manager, Mr Peter Howren (‘Mr Howren’).

On 7 March 2018, as foreshadowed, a further meeting occurred on site at the Property. According to oral evidence given by Mr Vidaic, the meeting was attended by Mr Vidaic, Mr Laing, Mr Anthony Salce (‘Mr Salce’), a senior property analyst from Payton, Mr Mason, Mr Murray from MXW Finance, Mr Howren, and Mr Benny Vocale from TGM (‘Mr Vocale’).

On 8 March 2018, Mr Salce emailed Mr Vidaic requesting that he arrange for a further valuation to be provided for the Property from either Bertacco Ferrier or Opteon, another valuer. Mr Salce’s email set out preliminary instructions for the valuation and, among other things, described the Property as being broken into two stages:

(a) Stage 1, where a planning permit had been obtained for a 28 lot subdivision with ‘almost all allotments sold via local agent’; and

(b) Stage 2, being an englobo 2.449 hectare site.[14]

Mr Salce’s email also noted:

In the interim we will provide … confirmation from TGM (QS) on new costings, all contracts, Planning permit, Plan to subdivision. All information to allow [the valuer] to do valuation.

[14]Evidently a reference to the Super Lot.

Also on 8 March 2018, after receiving Mr Salce’s email, Mr Vidaic emailed Mr Alan Bertacco (‘Mr Bertacco’), a director of Bertacco Ferrier, requesting a quote for the provision of the valuation. Relevantly, Mr Vidaic’s email bore the signature of Payton Capital, not Payton Securities. The email set out the valuation requirements as follows:

Within 10 business days we require a valuation for 35 Herberts Lane, Diamond Creek. We require:
1As if complete breaking down figures for Stage 1 + the balance for englobo val for Stage 2 (No permit)
2As is vacant land breaking down figures for Stage 1 and Englobo Stage 2.
3Project related site value for Stage 1 + balance of Englobo Land.

Mr Vidaic’s email concluded by advising that in the interim he would follow up the question of GST from the Z&L’s accountant and seek confirmation from TGM on new costings.

Some 15 minutes later, Mr Bertacco replied and quoted his fee as $5,000 plus GST.

The next day, 9 March 2018, Mr Vidaic replied:

Is there any chance if we engage you by COB tonight, that we could just obtain confirmation via e-mail for PRSV for Stage 1 and the value of the Stage 2 residual land by COB Wednesday the 14/3. The report can follow within the 2 week timeframe.

Later that day Mr Vidaic followed up with Mr Bertacco advising that ‘we will accept your fee proposal’ and indicating that Mr Bertacco may wish to increase his quote to accommodate the proposed 14 March timeframe.

On 13 March 2018, Mr Bertacco replied advising that he would not be able to provide the confirmation sought by close of business on 14 March, but that close of business on 15 March was ‘more realistic’. Mr Bertacco attached a table showing the presales that he was aware of, requesting copies of all particulars of sale containing new additions to those set out in his attached table. He also requested any new development costings from TGM, as had been foreshadowed in Mr Vidaic’s 8 March 2018 email. Mr Bertacco’s table of presales disclosed only 22 sales, with the price and deposit paid for each lot sold.

The same day, Mr Vidaic provided Mr Bertacco with the 8 January 2018 Presales List previously provided to him by Mr Murray. Mr Vidaic also promised to send the updated development costs upon receipt of confirmation from TGM.

On 14 March 2018, Mr Vocale of TGM forwarded a development cost budget to Mr Vidaic, Mr Laing, and Mr Murray. Mr Laing by reply sought clarification from TGM that a full ‘QS equivalent’[15] report was to follow; this request was later affirmed in a reply email by Mr Vidaic, who described receipt of the full report as ‘a precondition of the facility drawdown’.
[15]‘QS’ meaning quantity surveyor.

On 15 March 2018, Mr Bertacco emailed Mr Zhang directly, requesting copies of the contract for Lots 2, 11, 12, 13, 19 and 28. His email advised that he already had copies of the other contracts. These six contracts were those for the remaining six lots which had not been referenced in Mr Bertacco’s original table of 22 contracts, as sent to Mr Vidaic on 13 March 2018.

Later that same day, Mr Vidaic emailed Mr Murray advising that:

We are pleased to confirm that the Investment Committee has approved funding totalling $11,600,000 in senior lending of $8,900,000 and $2,700,000 in mezzanine finance as detailed in the below funding table. We are now in the process of distributing the loans to investors to fill
…
Preconditions that need to be satisfied prior to drawdown are;
·Project insurances to be provided
·Construction contracts to be reviewed
·Presales due diligence including review of every presales contract, confirmation of deposits and acceptable buffer between completion of 'the Stage and the earliest sunset dates in the contracts
·Initial project report from TGM
·Review of all plans, permit approvals

All of these preconditions are to be fully satisfactory to us.

Between 19 and 22 March 2018, Payton forwarded to proposed investors separate information memoranda for the first mortgage loan, now with an increased limit of $8,900,000 and for the second mortgage mezzanine loan, now with an increased limit of $2,700,000.[16] The content of the information memoranda was largely to the same effect as the earlier versions, save for the updated facility limits as well as further contemplated security under the increased second mortgage mezzanine loan facility in the form of second unregistered mortgages against properties owned by Mr Zhang at 49 Burgundy Drive, Doncaster and 305, The Boulevard, Ivanhoe East.
[16]Recalling that the earlier information memoranda contemplated a first mortgage loan of $8,800,000 and a second loan mortgage loan of $2,400,000.

On 21 March 2018, notwithstanding that Mr Vidaic had advised Mr Murray on 15 March 2018 that the Investment Committee had approved the funding, Mr Murray sent a short email to Mr Vidaic, Mr Westlake and Mr Laing stating that ‘this deal is dead’.

On 22 March 2018, Mr Murray’s pessimism notwithstanding, Mr Westlake emailed Mr Murray attaching formal letters of offer for the first mortgage loan and the second mortgage mezzanine loan. In the body of the email, Mr Westlake wrote that the second mortgage mezzanine loan could be increased by $300,000 without difficulty.

On 23 March 2018, Payton prepared a further version of the information memorandum for the second mortgage mezzanine loan, now specifying a facility limit of $3,250,000.

On the same day at 11:43am, Mr Zhang forwarded a Dropbox link containing the presales contracts for all 28 lots to Mr Bertacco, in response to his request of 15 March 2018.

At 1:12pm, Mr Vidaic emailed Mr Murray attaching formal letters of offer for the first mortgage loan (in the sum of $8,900,000) and the second mortgage mezzanine loan (now in the sum of $3,250,000).

At 4:53pm, the office manager at Bertacco Ferrier forwarded the valuation, dated 15 March 2018 (‘the Bertacco Ferrier Valuation’), along with a tax invoice to Mr Vidaic. The valuation and the invoice were both addressed to Payton Capital.

The Bertacco Ferrier Valuation is referred to in more detail below. For present purposes it is sufficient to note that it contained statements to the effect that as at the date of the valuation:

(a) the GRV (as if complete) was $17,685,000 (incl. GST);

(b) the estimated cost of development was $3,460,000 (excl. GST);

(c) the PRSV was $8,600,000 (excl. GST); and

(d) the current market land value was $8,400,000 (excl. GST).

Relevantly, in a section titled ‘Basis for Valuation’, the report stated that Bertacco Ferrier was of the opinion that the Super Lot (which was not at that date on a separate title) was valued at $5,150,000.

At 6:13pm, Mr Vidaic emailed Mr Murray, copying in Mr Westlake, Mr Zhang, and Mr Mo. Mr Vidaic sought:

(a) written confirmation from Civilworx of the intended commencement and completion dates under the relevant contract; and

(b) a reference or letter of recommendation from TGM on Civilworx and their ability to deliver for the project, including within the timeline and budget.

At 6:42pm, Mr Vidaic emailed Cate Morgan (‘Ms Morgan’), a clerk employed by Mr McCubbin, noting that he had been provided with Ms Morgan’s details by Mr Zhang. The email stated that:

We have approved facilities to borrower Z&L Property Management Pty Ltd to assist with refinance and development of Stage 1 of the land subdivision project at 35 Herberts Lane, Diamond Creek. We require a presale confirmation of the 28 lots presold in Stage 1 as a precondition to drawdown
The confirmation is to include a presale schedule with an aggregate gross value of sales of a minimum of $12,500,000. A letter is to refer to the schedule and provide confirmation that;
·Contracts are held as per the schedule
·Contracts are unconditional except for registration of the plan and subject to the sunset dates
·They are at arms length
·There are no side deeds
·Of the sunset dates in the contracts

…

On 24 March 2018, following the receipt of Mr Vidaic’s email, Ms Morgan emailed Mr Mason at MWM informing him that Mr Zhang was refinancing and she had been asked to provide a list of sale contracts to the proposed lender.

Ms Morgan’s email attached a list of presales and sought confirmation from Mr Mason that the list was correct and up to date. The list detailed 16 presales, including the relevant sale price for each; the contract date; whether the contract was held; and other details including the sunset date. There was no reference to contracts for 12 of the lots; importantly, this was at odds with the figure of 28 lots sold in the 8 January Presales List and the Presales Schedule previously provided to Mr Vidaic by Mr Murray, as well as the confirmation of 28 contracts provided to Mr Bertacco by Mr Zhang on 23 March 2018.

On 26 March 2018 at 10:55am, Mr Mason replied to Ms Morgan confirming that her list of 16 presales was correct. Mr Mason copied Mr Liu into his reply.

At 11:12am, Ms Morgan emailed Mr Vidaic attaching the list of 16 presales (‘the First McCubbin Sales Schedule’). Ms Morgan’s email copied Mr Zhang, Mr Murray and Mr Westlake, among others.

At 11:29am, Mr Mason emailed Ms Morgan advising that:

I might have a couple extra contracts.
I will come back to you.

Mr Mason had not been a recipient of the earlier email from Ms Morgan to Mr Vidaic. Mr Mason’s email to Ms Morgan was not copied to any other recipient.

At 12:19pm, Mr Vidaic emailed Ms Morgan, copying in, among others, Mr Zhang, Mr Murray, and Mr Westlake; notably, Mr Mason was not copied to this email. The subject matter of the email was ‘Presales confirmation’ and Mr Vidaic attached, among other things, a copy of the Deposits Letter and the Presales Schedule (which showed all 28 lots as sold) alongside a copy of the schedule earlier sent by Ms Morgan to Mr Vidaic (which showed only 16 lots sold). In his email, Mr Vidaic wrote:

I thought that all 28 lots were sold. As per the attached presales schedule provided by the client. Your schedule indicates 12 lots are still unsold. I assume the sunset date for Lot 17 of 7/2/2010 is a typo. Can you please correct?
In the absence of a covering letter, we may need something on the schedule to indicate that the schedule does come from Ian McCubbin & Associates. I will need to speak to our compliance area as to what we need from you to satisfy that precondition from our viewpoint.

At 12:20pm, within one minute of Mr Vidaic’s email being sent, Mr Liu of Z&L emailed Ms Morgan alone, stating:

Hi Cate,
Can you please let Payton know there is remaining sales list coming. Thanks.

At 12:21pm, Ms Morgan emailed Mr Vidaic alone, stating:

Good afternoon, I have just been advised that there are some contracts of which I was not yet aware.
I will update the list as soon as I have the further information…

At 12:38pm, Mr Liu emailed Ms Morgan stating:

If there is any further enquiry for 35 Herberts Lane presale, can you please let me know firsthand, and don’t reply them unless we approve it.

On 27 March 2018 at 8:34am, Mr Murray emailed Mr Vidaic and Mr Westlake attaching the signed letter of offer for the second mortgage mezzanine loan. Mr Murray also advised that he was waiting on the signed version of the first mortgage loan offer.

Between 10:24am and 10:46am, Mr Zhang emailed Mr Mason 11 contracts of sale, one for each of lots 11, 12, 19, 20, 21, 22, 23, 25, 26, 27 and 28. There is no evidence of any response from Mr Mason, who had left for a holiday to the United States at approximately 6:00am that day.

On 28 March 2018, Mr Laing reviewed the Bertacco Ferrier Valuation and following his review sent an email to Mr Vidaic, copying in Mr Westlake and Mr Salce. Mr Laing’s email read:

The Valuation looks fine. I have checked this against the latest feaso …
Regarding the permit. Did you get a letter from TGM confirming that all permit conditions have been met to start construction? The permit looks fine overall, but I would say the main one is whether the construction plans have been approved which is required for construction start …
…
I can’t find TGM’s cost report. Can you send it to me please. This is important as the construction contract mentions (pg 18) that surface have changed and another survey had been conducted to update and confirm volume quantities. This is basically the QS that we require to check the contract price is reasonable.
There is no legal letter in the file confirming the sales, deposits, sunsets etc. This is required.
…

On 28 March 2018, Marisa Gaiotto (‘Ms Gaiotto’), an employee at MWM, emailed Mr Mason who was holidaying overseas. Ms Gaiotto’s email noted that she had received a call from Mr Salce of Payton regarding finance for the development at the Property, and that Mr Salce had asked her what lots were sold. Ms Gaiotto’s email reads:

I got a call from an Anthony today regarding finance for this. He asked me what was sold and I didn’t know that he had been provided with fake contracts for some of the lots. He is going to email you to clarify. Just so you know I told him that I didn’t sell them but maybe you had. I don’t know how you are going to explain that those lots are going to be further subdivided when they are already sold.

On 29 March 2018, the Investment Committee held a further meeting. The minutes record under the following under the subheading ‘Z&L issues’:

• Original solicitor suggested that there were only 16 presales on the site.
• Principal from the real estate agent has verified that there are 28 sales.
•Need to have deposits transferred to a solicitors trust account. Further details around the deposits. Request trust account receipts for the deposits.
•Still waiting on details from the engineer regarding whether the site is ready to start.
•Don’t currently have a signed PSA from the borrower which is a condition of both loans.

Also on 29 March 2018 at 4:54pm, Mr Liu emailed Ms Morgan, copying in Mr Mason. Mr Liu’s email stated:

Hi Cate,
Because Ian is currently away in US for holiday, so he is unable to send you the remaining contract, so I am sending them to you now so you have a copy of them. I will deliver the hard copy of the contracts to you next Tuesday.
The reason the contracts were held initially was because we were thinking of doing further subdivision for extra lots, due to the timing of the project, we decided to proceed with the original plan of 28 lots and approve these sales. I have CCed Ian on this.

By that email and others sent from 4:54pm to 5:01pm, Mr Liu provided 11 contracts of sale for each of Lots 11, 12, 19, 20, 21, 22, 23, 25, 26, 27 and 28 to Ms Morgan, copying in Mr Mason; Mr Liu also later provided Ms Morgan with a contract for Lot 4 on 3 April 2018.

On 2 April 2018, Mr Vidaic emailed Mr Mason, copying in Mr Murray and Mr Westlake. Mr Vidaic’s email read:

Further to our meeting of a few weeks ago on site, we are finalising our due diligence on the presales.
To this end we have been requested by one of our investors … to obtain trust receipts for the individual deposits or alternatively a detailed trust account statement showing each deposit for each lot number and the relevant date of the transaction.
Can you please arrange this?

By 3 April 2018, having received the remaining 12 contracts from Mr Liu, Ms Morgan had updated her presales list to show that 28 Lots had been sold. At 10:33am, she sent a copy of this updated list to Mr Liu asking that he confirm that the list could be provided to Mr Vidaic. The list took the form of a table which listed all contracts for the Stage 1 lots held as at 31 March 2018, and which among other things, listed the date of each contract; the price of each contract; their unconditional nature;[17] and the sunset date for each contract.
[17]The table noted that the contracts were unconditional save for registration of the plan of subdivision at the sunset date.

Incidentally, at 10:45am Mr Vidaic emailed Ms Morgan following up on the status of the additional contracts mentioned in her email of 26 March 2018.[18]
[18]See [87] above.

At 2:45pm, Mr Liu presumably having provided the confirmation she sought, Ms Morgan emailed Mr Vidaic a copy of the list (‘the Second McCubbin Sales Schedule’).

On 4 April 2018 at 7:20am, Mr Mason responded to Mr Vidaic’s email of 2 April 2018 seeking provision of deposit receipts or a trust account statement. Mr Mason stated:

I am currently in the Smokey [sic] Mountains Tennessee on holidays. I am not sure what I can provide while I am away.
I will see what I can sort.

At 7:22pm, Mr Vidaic sent a further email to Mr Mo and Mr Murray at MXW Finance with the subject line ‘Z&L Property Management – preconditions’. The email attached various files, and the covering email stated, among other things, that ideally the preconditions needed to be satisfied and the executed documents returned at least 24 hours prior to settlement, which was now anticipated to occur on 10 April 2018. The email then proceeded to set out the preconditions along with Mr Vidaic’s comments.[19]
[19]For clarity, the comments made by Mr Vidaic in red in the original of the email are underlined here.

Relevantly, the preconditions included:

ALegal confirmation of unconditional presales for the 28 lots at 35 Herberts Lane, Diamond Creek Vic 3089 with all 10% deposits held. Schedule from the solicitor is held. One of our investors has requested further evidence on the deposits such as trust receipts for the individual deposits or trust account statement. Ian Mason has responded to our request advising he is overseas but will what he can do [sic]. Wayne, I note that you have advised this is not normal practice, however given Ian’s response can we see what they can give us. If we can’t obtain this information in a timely manner we all have to revert back to the investor
…

D Copy of initial TGM quantity surveyor’s report which confirms:
EThe budget for the project, including a suitable contingency allowance. Held.
FThe viability of the construction program, timetable, and cash flow. Still outstanding – we have sought clarity on a number of matters from the QS report (refer last two attachments). We are seeking to understand what outstanding approvals are required to be satisfied prior to commencement of works and the likely timeframe for commencement of works. A written confirmation from Civilworx will assist but TGM or Peter Howren need to confirm what needs to be done to facilitate commencement of works. This is critical we obtain an understanding of this [sic]. We have requested something on this for the past couple of weeks.

(underline added)

One of the ‘last two attachments’ referred to by Mr Vidaic in Item F was the email previously sent to Mr Murray on 23 March 2018.[20]
[20]See [74] above.

On 9 April 2018, Mr Murray emailed Mr Westlake and Mr Vidaic stating that the loan must settle the next day and that the formal documents were yet to be received. By way of context, Mr Murray advised that he had negotiated with the existing mortgagee that their facility would be paid out the next day, and that they were not prepared to grant any further extensions. Mr Murray complained that ‘there doesn’t seem to be any urgency from the investor side of your business.’

On 10 April 2018, Mr Laing emailed Mr Vidaic and Mr Westlake and advised them that he had told Mr Payton that there were a few outstanding items that he would like to see checked off before settlement occurred; however, Mr Payton had overruled him and ‘approved for the settlement to happen’.

On 11 April 2018, Mr Vidaic emailed Sally Burgoyne (‘Ms Burgoyne’), an investor relations director at Payton Capital, and Mr Westlake, attaching a final preconditions checklist for both the increased first mortgage facility and the second mortgage mezzanine loan. Those preconditions corresponded with the conditions precedent set out in the letters of offer for each loan agreement.[21]
[21]Mr Vidaic’s email also noted that ‘items 15 and 17’ were outstanding; the import of this is not entirely clear as only 10 preconditions were attached.

Relevantly for present purposes, the preconditions included:

(a) item 1, legal confirmation of unconditional presales for the 28 lots;

(b) item 2, a valuation report on the security property undertaken by an independent third party; and

(c) item 10, a copy of TGM’s initial report which confirms:

(i) the budget of the project, including a suitable contingency allowance;

(ii) the viability of the construction program, timetable, and cashflow;

(iii) that the contract and project documentation including approvals, plans, and specifications is accurate; and

(iv) contractor capabilities to successfully deliver the project.

The checklist attached by Mr Vidaic noted:

(a) in relation to the legal confirmation of unconditional presales, that Mr Vidaic had ticked this precondition on 4 April 2018 with reference to a schedule received from McCubbin, a schedule from MWM, a letter from MWM in relation to deposits, and individual contracts;

(b) in relation to the valuation report on the security property, that Mr Vidaic and Mr Laing had ticked this precondition on 28 March 2018, with the notes ‘confirmation val acceptable’ and ‘response to ML val queries’;

(c) in relation to the copy of TGM’s initial report, that Mr Laing had ticked this precondition item with reference to an email dated 4 April 2018 described as ‘ML email confirmation’ and an email dated 5 April 2018 described as ‘QS email confirmation’.

On 12 April 2018 at 1:17pm, Michelle Cohen (‘Ms Cohen’) of Harding Stenning & Co Lawyers, solicitors for Payton Securities, emailed Mr Vidaic and Mr Westlake, among others, advising that the total funds required to discharge the existing first and second mortgages against the Property were $8,073,476.68.

At 1:20pm, Mr Westlake replied to Ms Cohen advising that all the conditions precedent had been satisfied and that the second mortgage mezzanine loan was to be fully drawn prior to drawing on the first mortgage loan.

Settlement of both the increased first mortgage facility and the second mortgage mezzanine loan occurred that day. The loan terms were summarised in two letters sent by Payton Securities to Mr Zhang on 18 April 2018 and 19 April 2018 respectively.

The first letter confirmed the terms of increased first mortgage facility as:

(a) a facility limit of $8,900,000;

(b) an interest rate of 10.5% and an additional management fee of 1.5%;

(c) interest and management fees to be paid 12 months in advance based on the initial drawdown of $6,500,000, with interest and management fees for further tranches to be paid in advance and for the term of each respective tranche; and

(d) a loan term of 12 months (repayable on 12 April 2019).

The second letter confirmed the terms of the second mortgage mezzanine loan as:

(a) a facility limit of $3,250,000;

(b) An interest rate of 18% and an additional management fee of 2%;

(c) interest and management fees to be paid upon maturity;

(d) a loan term of 12 months (repayable on 12 April 2019).

In the case of both loans, a default interest rate was payable at a rate of 3% higher than the interest rate.

On 23 June 2018, a little over two months after the loans had been advanced, Mr Vidaic emailed Mr Mason noting:

One of my colleagues was recently on site and noticed the sales board indicated that there were 8 lots on Stage [1] [that] were not marked as sold. However our understanding was that all 28 Stage 1 lots were sold, as per the attached schedule and letter from your firm.
Can you please advise?

On 5 July 2018, Mr Vidaic sent a follow-up email after receiving no response from Mr Mason. There is no evidence of any correspondence from or follow up by Mr Vidaic.

In July 2018, Payton forwarded a project update to those investors who had provided the funds which had been pooled in the loans to Z&L. Among other things, the project update recorded that additional development costs had been identified since the commencement of the project and this had resulted in a funding shortfall. Payton[22] set out the steps that it had taken in order to ‘put the project back on a firm footing’, including entering into an agreement with Z&L for it to provide additional equity to cover the funding shortfall. The update also advised that the engineering design had been finalised, with the tree protection and removal works to be completed before civil works could commence, and that after a delay due to additional tree protection works being required and ten working days of rain delays, the civil works contractor was now fully activated. The update also advised that a works program indicated an expected completion date for civil works of mid-February 2019.
[22]The project updates do not specify which entity in the Payton Group was providing them.

In September 2018, Payton forwarded a further project update, informing investors that a report from a certifying engineer indicated that 18% of the contracted works had been completed, and that according to the project program construction completion was anticipated in February 2019. Compliance for the plan of subdivision and the subsequent issue of lot titles and settlement of the presales was to then follow.

Also in September 2018, Payton issued an information memorandum to investors repeating the substance of the information in the two project updates, albeit in slightly different terms.[23]
[23]Presumably, the information memorandum was issued in anticipation of the provision of the further tranche of the first mortgage loan, which was due to be advanced in October 2018.

That information memorandum opened by noting that Payton had been advised that the costs that were originally provided by the civil engineer in March 2018, and on which the funding table was predicated, were incorrect. However, the information memorandum noted that ‘In Collaboration Projects’, the newly appointed external project manager, had undertaken a thorough assessment of the project and prepared an updated project feasibility and cashflow analysis which ‘reaffirmed Payton’s high level gauge on the project and funding status’.

In relation to the sales status of the presold lots, the information memorandum stated:

All 28 lots presold before drawdown of Payton facilities.
Latest information suggests 5 of these presales are now not expected to proceed. The Sales agent is confident of being able to achieve the original prices in reselling the 5 lots in the current market. Given the current activity on sire and the short timeframe for delivery of Stage 1, In Collaboration are confident of reselling the 5 lots prior to completion of works. The gross presales amount for the 23 lots is $10,290,000. Even after the deduction of GST and sales commissions, this will provide 100% debt cover on the senior loan of $8,900,000.

The information memorandum then compared Payton’s original funding table (which had been in effect a high level feasibility analysis) and a revised table taking into account the increased costs. The revised table indicated an increase in construction costs from $2,185,000 to $3,514,105, along with an increase in the professional fees from $394,000 to $455,000 and an increase in fees to council and authorities from $515,000 to $758,033.

In short, the total costs of had risen from $13,486,435 to $15,236,643. After allowing for offsetting reimbursements, the information memorandum calculated that these gave rise to a net cost increase of circa $1,130,000. The information memorandum noted that the shortfall amount would be met by equity commitments from the borrower, to be made monthly.

Lastly, the information memorandum anticipated the next drawdowns against the first mortgage facility, each for $1,200,000, would take place on 15 October and 15 November 2018 respectively.

On 17 October 2018, Mr Vidaic emailed a Joseph Zhou (‘Mr Zhou’) seeking clarification as to what had happened to the five presales that ‘no longer exist’. It is not apparent how Mr Vidaic was first referred to Mr Zhou. On 19 October 2018, Mr Vidaic forwarded this email to Mr Mason and noted he was yet to receive a response from Mr Zhou.

On 23 October 2018 at 11:13am, Mr Salce also emailed Mr Mason, seeking confirmation on which sales had fallen through and whether any deposits were still held in respect of them.

At 11:14am, Mr Mason responded to Mr Salce stating:

Out of the office. Will get onto it when I am back.

Notwithstanding that, at 11:17am Mr Mason forwarded Mr Salce’s email to Mr Zhou, stating:

See below
I never have had these contracts. These are what Jacky made up.
Any ideas ?

At 9:18pm, Mr Zhou replied to Mr Mason, stating:

Jacky will call you tmr morning to explain it. I think we’ll solve it. Thanks heaps!

In November 2018, Payton forwarded another project update to investors, noting among other things that the latest report from the certifying engineer indicated that 62% of the contracted civil works had been completed as at the end of October 2018, and that construction was anticipated to finish in early March 2019 with compliance for the plan of subdivision, issuing of lot titles, and settlement of presales to follow.

In February 2019, Payton circulated another project update to investors. Now, the project update advised that the latest report from a certifying engineer indicated that 68% of the contracted civil works had been completed as at the end of December 2018, and that construction was now anticipated to finish in April 2019. Investors were informed that the available funding from Payton remained sufficient to cover the remaining construction costs of Stage 1. However, the project update noted that it was likely that an extension to the facilities would be required, given the latest construction program indicated completion was to occur after the original maturity dates in April 2019.

Also in February 2019, Payton undertook enquiries with a view to the possible sale of the Super Lot in anticipation of a possible exercise of its security rights over the Property.[24] Internal communications at Payton noted that estate agents Knight Frank had apparently advised of an expected sale price for the Super Lot of between $4,750,000 and $5,250,000.
[24]Confusingly, the email refers to the Super Lot as ‘Lot B’.

In the context of Knight Frank’s expression of opinion as to the achievable sale price, Mr Laing emailed Mr Payton, Mr Vidaic and Rob Fellows (‘Mr Fellows’), a qualified property valuer who sat on the Investment Committee, expressing the view that the price set by Knight Frank seemed achievable given the prospect of a 37 allotment subdivision.

By contrast, Mr Fellows took a more pessimistic view. He believed that a $4,750,000 sale price would be difficult to achieve in light of the lack of a planning permit and the site topography.

On 21 March 2019, in the context of the anticipated settlement of presales of the Stage 1 lots, Mr Vidaic emailed Mr Mason, stating:

[Our solicitors] have requested the following:
·A schedule of the contact details of each of the purchaser’s solicitors. The contracts we have been provided do not have this detail.
·Confirmation that the individual deposits for each of the lots is still held in the trust account. A trust account statement confirming this would be most helpful.

As an aside if [the Super Lot] was on the market at $4.0m would be [sic] there be demand from developers on a 60 day settlement?

On 22 March 2019, Mr Mason responded:

We will go through the contracts and give a report to the position of the contracts and how the buyers are feeling.
I believe at that price the back lot [that is, the Super Lot] should be saleable. Let me know if you want me to put it out on the quiet.

On 4 April 2019 at 10:19am, Mr Mason further responded and attached an updated sales report, which recorded that 20 of the 28 lots were the subject of existing sales contracts. The sales report noted that some of the existing sales contracts were not expected to settle. Moreover, the report did not reference any sales contracts for Lots 2, 11, 12, 19, 21-23, and 25, and indicated that in a number of cases only 5% deposits had been paid. One of the sales contracts, for Lot 4, was described only by reference to the prospective purchaser and the sale price with no mention of the date of the contract or the deposit paid and was accompanied by the notation ‘(?)’.

At 10:47am, Mr Vidaic replied to Mr Mason, noting that:

(a) the list only included 20 lots and that he sought clarification as to the status of the other 8 lots;

(b) Payton had understood that each lot has a 10% deposit, yet from Mr Mason’s sales report it appeared at least 4 lots only had a 5% deposit;

(c) he required copies of the particulars of sale for each of the contracts.

Following Mr Mason’s email, on 5 April 2019, Mr Vidaic and Mr Scott Hine (‘Mr Hine’), a relationship manager at Payton, met with Mr Mason. Mr Vidaic gave evidence that he raised with Mr Mason the fact that not all of the Stage 1 lots had been sold, contrary to what Mr Mason had told him at the site meeting on 7 March 2018 and contrary to the Presales Schedule and the Presales Letter. Mr Mason said that the Presales Schedule and Presales Letter were not on his letterhead and that it was not his signature on the documents. Further, according to Mr Vidaic, Mr Mason said that he had not told Payton Securities the truth about the presales of the 28 lots, saying that Mr Zhang had threatened him and his family. Given the settlement by Payton Securities of the claims against MWM, Mr Mason did not give evidence in this proceeding.

On 7 April 2019, Mr Vidaic sent Mr Mason an email enclosing copies of the Presales Schedule and the Deposits Letter and asking whether those documents came from his office and bore his signature. The email also foreshadowed a meeting with Mr Mason at the MWM offices on 9 April or 12 April 2019. Mr Mason replied:

Not my letter head or signature or how I set things out.
Will talk tomorrow.

On 8 April 2019, however, it would appear that Mr Vidaic and Mr Hine met with Mr Zhang. Following that meeting, Mr Hine emailed Mr Zhang copying in, amongst others, Mr Vidaic and Mr Westlake. Mr Hine’s email referenced the meeting and then listed a number of matters to be attended to as a matter of urgency, in light of the impending expiration of the first mortgage facility and second mortgage mezzanine loan on 11 April 2019:

1. Presales – Jacky to seek confirmation as to what the actual level of presales are. To also provide Payton with copies of all the actual presale contracts (executed) and also provide Payton with evidence as to where the presale deposits are and how much is held.
2. Payton to provide Jacky with a copy of the Trust account statement detailing what the current balance is.
…
5. Jacky to provide details as to how expiring loans will be serviced post expiry. Noting as per discussions monthly interest will be circa $135k a month.
6. Jacky to confirm how long a loan extension is required.
7. Jacky to confirm what his Plan B is if the stage 1 sales are not fully presold as originally advised.

In May 2019 Payton circulated another project update to investors. Payton advised investors that, among other things, the latest construction program anticipated practical works completion at the end of May 2019, and that after allowing for compliance for the plan of subdivision; the issue of lot titles; and the putting in place of settlement arrangements, lot settlements were anticipated for the end of July 2019. The project update also advised that a number of the sales of the lots had fallen away and that 19 lots would be settling. Payton expressed confidence in the ability to sell the remaining lots as they were predominantly superior lots which MWM anticipated would be readily saleable once works had been completed on site. The project update advised that if the lots were resold, it would be sufficient to fully extinguish both the first mortgage loan and second mortgage mezzanine loan. Investors were also advised that as Z&L was in default (the loans having expired on 12 April 2019 and Z&L having not made all the additional equity contributions required) Payton had issued Z&L with notices to pay for both loans.

In June 2019, Payton circulated another project update to investors. Payton advised investors that the latest report from a certifying engineering indicated that 95% of the contracted civil works had been completed as of May 2019; after allowing for compliance with the plan of subdivision, the issue of individual lot titles and the need to put in place settlement arrangements, settlements of presold lots were now anticipated to take place at the end of July 2019. The sales update confirmed that 19 lot purchasers were ready to settle upon titles being issued, while a sales agent was actively marketing the balance of the lots. Investors were advised that following the expiry of both the increased first mortgage facility and the second mortgage mezzanine loan on 12 April 2019, a higher interest rate now applied to the advanced funds. The project update further advised that Z&L was contemplating a corporate restructure which would result in the purchase of the unsold lots in Stage 1 as well as the Super Lot, and enable both loans to be paid out shortly after the lot settlements had occurred.

In August 2019, Payton circulated another project update to investors. Payton advised that the anticipated settlement of the presold lots was scheduled to take place in mid-September 2019, and that contracted civil works were now essentially complete. The update noted that Z&L was actively pursuing refinance and restructuring options with the aim of facilitating a payout of the loans concurrently with settlement of the sold lots.

On 26 August 2019, notwithstanding Z&L‘s earlier confidence in its ability to pay out the facilities, Z&L was wound up.

On 30 October 2019, the Plan was registered, creating both the 28 individual lots and a separate title for the Super Lot. Payton Securities took possession of the Super Lot, having earlier commenced a sales campaign for it by way of expressions of interest.

On 11 November 2019, the expressions of interest campaign closed. Subsequently, Payton Securities entered into a contract of sale for the Super Lot in the sum of $2,270,000 with settlement due to take place on 20 December 2019 (‘the first Super Lot sale contract’). However, the first Super Lot sale contract was terminated at the purchaser’s option during the contractual due diligence period.

In March 2020, Payton negotiated a prospective sale of the Super Lot in the amount of $1,600,000 plus GST. The negotiations were predicated on the registration of a new plan of subdivision for the Super Lot. The sale price was to increase by $166,667 for each additional lot that was approved of a greater area than 400 square metres, up to a maximum of 17 lots. This would result in a maximum sale price of $2,100,001 plus GST. The potential purchaser withdrew from negotiations in April 2020.

On 24 August 2020, Payton entered into another contract for the sale of the Super Lot for a purchase price of $2,100,000 (‘the second Super Lot sale contract’). The second Super Lot sale contract was subject to council approval of subdivision, and the sale price was to be reduced by $100,000 for each lot under 16 lots not approved by council, to a minimum approval of 12 lots; resulting in a floor price of $1,700,000. Settlement was conditional upon the issue of a planning permit, which ultimately was issued in July 2021. Settlement of the second Super Lot sale contract occurred in October 2021.

The first mortgage facility was discharged following the settlement of the 28 Stage 1 lots, and the settlement of the sale of the Super Lot.

However, the proceeds of the settlements left a shortfall on the amount owing under the second mortgage mezzanine loan.

Settlement of the claims against MWM, Mr Mason, and Mr McCubbin

As noted above, in the first instance, Payton Securities claimed against MWM and McCubbin in addition to Bertacco Ferrier.

The claims against MWM alleged that MWM and Mr Mason had engaged in misleading and deceptive conduct in contravention of s 18 of the Australian Consumer Law (‘the ACL’), by misrepresenting the state of the presales contracts to Payton Securities. MWM’s conduct was said to arise by means of provision of the Deposits Letter, purportedly sent on MWM’s letterhead, and the Presales Schedule, which purportedly bore Mr Mason’s signature, as well as by oral representations allegedly made onsite on 7 March 2018 that all of the Stage 1 lots had been sold.

Payton Securities also alleged that MWM was liable as an accessory to misrepresentations as to the state of the presales contracts made by Z&L between 29 March 2018 and 3 April 2018.

In addition, Payton Securities alleged that McCubbin had engaged in misleading and deceptive conduct contrary to s 18 of the ACL by its provision on 3 April 2018 of the Second McCubbin Presales Schedule which listed sales contracts, the dates of those contracts, and that the contract was held.

In October 2021, Payton resolved its claims against McCubbin in consideration of the payment by Mr McCubbin of the sum of $200,000, inclusive of costs.

When the trial commenced on 1 February 2022, the claims against MWM and Bertacco Ferrier remained on foot.

In its defence, MWM denied that it had provided Payton Securities with the Presales Schedule and the Deposits Letter and denied making the alleged oral representations. MWM had filed and intended to tender expert handwriting evidence to the effect that the Presales Schedule and Deposits Letter did not in fact bear Mr Mason’s signature. Mr Mason, along with other representatives of MWM, also filed witness statements stating that the Presales Schedule and the Deposits Letter were forged; that they denied making any oral representations to the effect that all the Stage 1 lots had been sold; and that the Deposits Letter was on an old letterhead of MWM which was not in use at the relevant time.

On the second day of trial, after the completion of opening submissions, Payton Securities announced that it had resolved its claim against MWM on terms involving the payment by MWM of $925,000 inclusive of costs.

Payton Securities accepts that it has to bring to account the settlement sums paid by McCubbin and MWM in diminution of its damages claim, after attributing parts of these settlement sums to the payment of its costs in prosecuting its claims against McCubbin and MWM respectively.

The quantum of the remaining claim pressed by Payton Securities against Bertacco Ferrier was for $1,467,940, calculated as follows:

Principal of the loan that would have been lent to another party on a second mortgage basis

$3,250,000

Plus interest on $3,250,000 at 20% per annum from 12 April 2018 to 12 April 2019

$650,000

Total:

$4,000,000

Less sums recovered via enforcement

Sale of residential property which formed part of the additional security provided by Z&L

$409,060

Sale of the Super Lot after discharge of the balance of the first mortgage and expenses

$1,265,306

Settlement with McCubbin after deduction of costs associated with that claim

$115,000[25]

Settlement with MWM after deduction of costs associated with that claim

$743,000[26]

Total:

$1,467,940

[25]The settlement sum was $200,000, less $85,000 on account of costs, resulting in a net figure of $115,000.
[26]The settlement sum was $925,000, less $182,000 on account of costs, resulting in a net figure of $743,000.

The question of quantum is considered in greater detail below. For present purposes, three points shall be noted. First, Bertacco Ferrier accepted that the amount adjusted to costs in connection with the settlement with Mr McCubbin and Mr Mason was accurate, thus no issue was raised with the deductions of $115,000 and $743,000 as a result of those settlements. Secondly, there are some arithmetic errors in Payton Securities’ calculation. The sum of the principal ($3,250,000) and the interest ($650,000) is $3,900,000, not $4,000,000. Thirdly, the sums recovered by enforcement, when deducted from the principal and interest should equal either $1,467,624 or $1,367,624 (according to whether the correct sum of $3,900,000 is used or not).[27]
[27]The difference between $4,000,000 and $1,467,940 is $2,532,060, which on the above calculation must represent the deduction on account of the sum recovered via enforcement. In fact, the sums above add up to $2,532,366.

Thus the correctly calculated quantum is in fact $1,367,634; $3,900,000, representing the principal and interest, less $2,532,366 representing sums recovered by enforcement.

Payton Securities’ negligence claim against Bertacco Ferrier and the valuation evidence

In the result, the only aspect of Payton Securities’ claim that was tried was whether Bertacco Ferrier breached a duty to take reasonable care and skill owed in contract and tort to Payton Securities in negligently valuing the Super Lot.

Payton Securities alleges that Bertacco Ferrier had:

(a) a contractual obligation to exercise due skill and care in valuing the Property, including the Super Lot; and

(b) a tortious duty to take reasonable care in valuing the Super Lot;

and breached either or both of those duties in ‘valuing the Super Lot at $5,150,000’, which it alleges had a true value at the time of valuation of some $2,000,000.

In its second further amended statement of claim filed 19 January 2022, Payton Securities particularises the negligence in both contract and tort as follows:[28]
[28]In the statement of claim, ‘the Valuer’ was defined to mean Bertacco Ferrier, and ‘the Valuation’ was defined to mean the Bertacco Ferrier Valuation.

Particulars
In reaching its conclusion that [the Super Lot] had a value of $5,150,000 (exc GST) Bertacco Ferrier adopted an assumed value of $300 per square metre, which assumption was not reasonable. The true value of [the Super Lot] as at March 2018 was about $2,000,000 (exc GST) or $130/sqm as referred to in [112] and [113] of Grant Sutherland’s Expert Report dated 12 October 2021.

(c) thirdly, the falsification of contracts of sale for Lots 4, 11, 12, 19, 20, 21, 22, 23, 25, 26, 27 and 28 by Mr Zhang and/or Mr Liu on or about 27 March 2018 including by Mr Zhang sending falsified contracts of sale to MWM on 27 March 2018 (with the exception of the contract for Lot 4) and by Mr Liu representing to Mr McCubbin between 29 March 2018 and 3 April 2018 that the lots in Stage 1 were sold by sending the falsified contracts to the solicitor’s clerk, Ms Morgan; and

(d) fourthly, the email from Ms Morgan to Mr Vidaic on 3 April 2018 with a copy of the Second McCubbin Sales Schedule which confirmed that contracts of sale for each of the 28 lots were held.

Whilst Payton Securities does not dispute that its claim against Bertacco Ferrier is apportionable, it submits that no reduction in the extent of the liability of Bertacco Ferrier ought be effected.

First, Payton Securities argues that it would not be ‘just’ to effect a reduction in any liability of Bertacco Ferrier with regard to the concurrent liability on the part of MWM and McCubbin, because those parties have already contributed, by way of their respective settlements, amounts which properly reflect the extent of their responsibility for Payton Securities’ loss and damage.

Secondly, In relation to the question of any concurrent wrongdoing on the part of Mr Zhang, Mr Liu and MXW Finance, Payton Securities submits that no further reduction in the liability of Bertacco Ferrier ought be effected, including because Payton Securities’ case against MWM and McCubbin related to the falsity of the presales information, such that it would effectively amount to double counting to effect a further reduction on the ground of misstatements made by any or all of Mr Zhang, Mr Liu, or MXW Finance.

Lastly, Payton Securities also argues that whilst it was deceived regarding the presales and the deposits, the ultimate loss arising from that information was ‘minimal’. It asserts that the relevant subdivision the subject of Stage 1 still occurred in October 2019 and each of the 28 lots were still sold albeit belatedly.

I do not accept this latter submission. First, it is inconsistent with aspects of Payton Securities’ own case to the effect that it entered into the second mortgage mezzanine loan under two free-standing misapprehensions; the first as to the presales and deposits; the second as to the value ascribed to the Super Lot. Further and in any event, and as noted above, each of Payton Securities’ witnesses accepted that had they known the true position (namely, that the information that they had been provided in relation to the status of the sales contracts the subject of Stage 1 was false) they would not have entered into the transaction.

I do not accept that the ultimate loss arising from the misstatements concerning the presales and the deposits was minimal. First, the presales misstatements were one of two actionable statements[103] which induced the very transaction which has given rise to the loss the subject of the proceeding. Had the presales information not been provided the transaction would not have been entered into regardless of any alleged negligence on behalf of Bertacco Ferrier.
[103]The other being the Bertacco Ferrier Valuation.

Further and in any event, the misstatements in relation to the number of presales of the Stage 1 lots did indeed cause substantial loss of itself reflected in the amounts now sought to be recovered. Both the first mortgage loan and the second mortgage mezzanine loan were repayable in April 2019. Recourse to the Stage 1 lot sales that had settled in discharge of the loan, or to a refinancing, would undoubtedly be affected by the timely completion of the Stage 1 development.

As it happened, the failure to achieve timely settlement of the Stage 1 lots resulted in significant increases in the amounts repayable by Z&L under both the first mortgage loan and the second mortgage mezzanine loan, which in turn gave rise to a substantial extent to the shortfall which is the very basis of the damages claimed against Bertacco Ferrier. In a project update provided of March 2020 (at a time when the loans had been in default for nearly 12 months), Payton informed investors that only 19 of the 28 lots had settled and that the debt outstanding at that point was $7,608,000; comprising $2,659,000 owing under the first mortgage and $4,948,000 owing under the second mortgage. In a similar update provided in June 2020, investors were informed that nine lots in Stage 1 still remained unsold, with the debt now rising to $8,109,000, comprising $2,812,000 under the first mortgage loan and $5,296,000 under the second mortgage mezzanine loan.

Thus, the failure to achieve settlement of the Stage 1 lots in the time that would have occurred had they actually been presold (as well as the failure of construction to proceed in accordance with the original schedule) contributed to Z&L’s inability to repay the loans in April 2019, which in turn resulted in substantial increases in the amount of shortfall under the loans, including because the loans accrued penalty interest from that date on.

Concurrent wrongdoing of MWM

The claim that MWM and Mr McCubbin were concurrent wrongdoers is to the effect that they misled Payton Securities with respect to the status of the presales and the holding of deposits.

Given the settlement by MWM and Mr McCubbin, the assessment of whether the allegations of concurrent wrongdoing on their respective parts takes place in circumstances where neither played any active role in the trial.[104]
[104]Although in MWM’s case the settlement occurred after MWM had opened its case and referred to various evidence that it intended to rely upon.

Insofar as the case against MWM is based upon the provision of the Presales Schedule and the Deposits Letter, I do not accept that any concurrent liability on the part of MWM arises as a consequence of the provision of those documents. Though the documents purported to be provided under the letterhead of MWM and bore Mr Mason’s signature, the information was provided to Payton Securities not by Mr Mason but by MXW Finance, and expert evidence was proposed to be led by MWM to the effect that the documents were forgeries. Notably, Payton Securities did not propose to lead contrary evidence. MWM also denied that it was involved in or provided that information in its evidence filed in advance of the case.

In any event, and putting those matters to one side because such evidence was not in fact led as a result of the settlement, based on the documentary evidence that was tendered the provision of such information by MWM via MXW Finance on 8 February 2018 was contrary to objectively verifiable and relevantly uncontradicted subsequent information provided by MWM. Accordingly, I am not satisfied that MWM was involved in the provision of the Presales Schedule or the Deposits Letter.

For example, on 26 March 2018 Mr Mason informed Ms Morgan that the information that she had which referred to only 16 presales was correct. A short time later Mr Mason emailed Ms Morgan advising that he might have a few more sales contracts, but in both cases the information provided by Mr Mason is utterly at odds with the suggestion that six weeks earlier he had signed the Deposits Letter and initialled the Presales Schedule confirming the sale of all 28 lots. Further, it is also inconsistent with the evidence given by Mr Vidaic of Mr Mason’s reaction on 4 April 2019 when he was asked as to the status of the sales contracts by Payton Securities, where Mr Mason denied that it was his signature on the Deposits Letter or that the Deposits Letter was on his letterhead.[105]
[105]See [158] above.

For similar reasons, I reject the evidence that was given by the various witnesses called by Payton Securities to the effect that on 7 March 2018 Mr Mason told them that all 28 lots had been sold at the site meeting. The evidence in chief was given by each of Payton Securities’ witnesses through tender of witness statements. The statements as tendered did not rely on this conversation, those details having been struck out after the settlement of the claims against MWM, but in cross examination by counsel for Bertacco Ferrier, Payton Securities’ witnesses effectively repeated those portions which had been struck out.

Nonetheless, having regard to MWM’s settlement, there was no evidence to contrary effect adduced by Mr Mason, or any other challenge to that evidence. However, these accounts are at odds with the contemporaneous documentary evidence and in any event were given by each witness in a wholly unpersuasive manner, devoid of context and redolent of the recitation of a rehearsed script. For example, the very day after the alleged 7 March 2018 meeting, Mr Salce who was also present at the alleged meeting but who was not called as a witness in the proceeding, emailed Mr Vidaic stating that ‘almost all the allotments’ in Stage 1 had been sold. The reference to ‘almost all’ is contrary to what Mr Mason had allegedly told the Payton representative the day before. Mr Salce’s email did not refer to any discussions which had supposedly occurred previously. Nor did Mr Vidaic respond to the effect that Mr Mason had told them the previous day that all lots had been sold. Similarly, when Mr Vidaic became aware of the inconsistent information that had been provided to him regarding the number of lots sold in Stage 1, and thus emailed Ms Morgan on 26 March 2018, he made no reference at all to any discussions which had allegedly occurred with Mr Mason on 7 March 2018. I have noted above Mr Mason’s email to Ms Morgan on 26 March 2018.[106] Further, when Mr Mason and Mr Vidaic communicated on 4 April 2019 by email in relation to the number of sales in Stage 1 and discussed the veracity of the Presales Schedule and the Deposits Letter, there was not a word about a discussion which had allegedly occurred on 7 March 2018.
[106]See [92] above.

I also have real doubts as to Mr Vidaic’s evidence that when he met Mr Mason on 5 April 2019, Mr Mason confessed that he had not told Payton Securities the truth about the 28 lots because Mr Zhang had threatened him and his family; at least insofar as the statement is said to amount to an admission by Mr Mason that he made a false statement at the site meeting on 7 March 2018. It is curious to say the least that this rather remarkable statement is not referenced in any email or other Payton generated document. The uncertainties which attend evidence of conversations occurring some years earlier and where the particular words spoken may give rise to quite different meanings are well known.[107] It is possible that Mr Mason made a statement generally about these matters, but if he did, I consider it more probable that he did so, not in the context of referring to a positive statement by him at a meeting on 7 March 2018, but rather by reference to the fact he did not notify Payton when he later became aware that Mr Zhang and Mr Liu had provided false information concerning the number of presales.
[107]Watson v Foxman (1995) 49 NSWLR 315.

This failure forms another plank of the claim of concurrent wrongdoing on the part of MWM. There is a claim that MWM is liable on an accessorial basis with respect to the misleading and deceptive conduct on the part of Mr Zhang and Mr Liu. In Ms Gaiotto’s email to Mr Mason on 28 March 2018,[108] she refers to the fact that ‘Anthony’ (presumably Mr Salce) had apparently been provided with ‘fake contracts’ for some of the lots by ‘Jacky’ (Mr Zhang). There is no evidence that MWM did anything about this, with the exception of Mr Mason’s email response to Mr Vidaic on 3 April 2018 in response to the request for trust account receipts, to the effect that he was on holidays and would see what he could do.
[108]See [92] above.

Whilst Ms Gaiotto’s email is somewhat equivocal, it is at least suggestive of an awareness on the part of MWM that Mr Zhang had provided falsified contracts to Payton Securities.

Mr Mason was of course on holidays at the time and it is possible that MWM’s failure to provide Payton Securities with the correct information was partly a product of his absence. It may also have been informed by the fact that MWM was acting as agent for Z&L and may have received contrary instructions from Z&L. Whilst I doubt that the provision of any contrary instructions to that effect would excuse MWM for liability an ancillary basis for the contraventions by Mr Zhang, it is nevertheless relevant to the extent of MWM’s culpability for the purposes of an undertaking the apportionment exercise.

The remaining aspect of the claim against MWM for concurrent wrongdoing is the allegation that Mr Mason had told Mr Bertacco that all the lots had been sold and that deposits were held, and that it was as consequence of this that Mr Bertacco included reference to the inflated presales in the Bertacco Ferrier Valuation. Bertacco Ferrier submits that this reference was in turn relied upon by Payton Securities in advancing the loans.

I do not accept that MWM is liable in this way. First, there was no direct evidence that anyone at Payton read those parts of the Bertacco Ferrier Valuation. For my part, I very much doubt that anyone did. Secondly, I am not persuaded that this conversation occurred in the manner attributed to Mr Mason. It is contrary to other objectively verifiable statements made by Mr Mason.[109] Further, whilst the Bertacco Ferrier Valuation does make reference to such a statement, I note that Mr Bertacco’s practice was to include a statement in those terms in his report as a matter of course and, as I have found, to paste across outdated information from previous valuations.[110] I am not satisfied that this did not occur here.
[109]See [158] above.
[110]See [343] above.

On that basis, and noting that MWM played no active role in the trial, I accept that MWM’s failure to bring the ‘fake contracts’ to Payton Securities’ attention makes it liable on an accessorial basis for the misleading and deceptive conduct of Mr Zhang in providing the falsified documents to Payton Securities. I do not consider that the other bases of concurrent liability are made out.

MWM has contributed a substantial sum, $743,000, in settlement of the claim brought against it by Payton Securities. This represents about 33.3%[111] of the quantum of damages as claimed by Payton Securities (after allowing for the arithmetic errors). It also represents about 54.3%[112] of the quantum of damages that I would have otherwise awarded had I found Bertacco Ferrier liable.
[111]743,000/2,225,634*100.
[112]743,000/1,367,815*100.

I shall return to the question of whether I would have otherwise reduced the quantum of damages for which I would otherwise have found Bertacco Ferrier liable due to the concurrent wrongdoing of MWM.

Concurrent wrongdoing by McCubbin

A similar conclusion arises in relation to the question of any concurrent wrongdoing on the part of McCubbin. McCubbin’s contribution by way of settlement was of much lower magnitude and occurred some months in advance of trial. It was accompanied by a denial of indemnity. Given its timing and quantum, there is little doubt that it was heavily influenced by commercial considerations.

I have considerable doubt that McCubbin is a concurrent wrongdoer. McCubbin forwarded a letter or an email enclosing the Second McCubbin Sales Schedule which confirmed that contracts were held for each of the 28 lots. However, given that McCubbin had been provided with copies of those contracts by its client, Z&L, I have some difficulty in seeing why the mere provision of a sales schedule in that form amounted to some form of representation by implication that McCubbin had a reasonable belief that the contracts were genuine. Further and in any event, to the extent to which the provision of that letter did give rise to an implied representation to that effect, it is not at all clear to me from the evidence led in this matter as to why that belief was not a reasonable one. MWM had informed Ms Morgan that there might be additional contracts beyond the original 16 that MWM held, and subsequently Mr Zhang and Mr Liu provided Ms Morgan with what on the face of it appeared to be genuine contracts of sale.

Concurrent wrongdoing of Mr Zhang and Mr Liu and MXW Finance

That leaves the position of Mr Zhang and Mr Liu and MXW Finance.

In circumstances where it is not in dispute that Mr Zhang and Mr Liu falsified contracts of sale for at least six of the 28 lots, and further that they or MXW Finance were complicit in the provision of what was effectively a forged Deposits Letter and Presales Schedule purportedly in the name of MWM, there is no difficulty in concluding that certainly Mr Zhang and Mr Liu, and possibly MXW Finance, were concurrent wrongdoers whose conduct occasioned Payton Securities’ loss. However, I hesitate to conclude that MXW Finance is a concurrent wrongdoer where it might simply have been passing on information that was provided to it by its principals, Mr Zhang and Mr Liu; acting as a conduit without adopting its content.[113]
[113]See, eg, Butcher v Lachlan Elder Real Estate Pty Ltd (2004) 218 CLR 592; Yorke v Lucas (1985) 158 CLR 661.

In any event, for present purposes and given that they have only been joined for the purposes of enabling Bertacco Ferrier to rely upon an apportionment defence, it does not matter whether MXW Finance is separately liable given that if it was liable at all, it engaged in the wrongful conduct as agent for its principal Z&L (and arguably its directors Mr Zhang and Mr Liu), and so those latter parties would also be liable with respect to the provision of that information. Further, I accept that the provision of the Deposits Letter and the Presales Schedule was a single species of conduct for the purposes of the apportionment exercise. Any apportionment based on the culpability of MXW Finance would be accompanied by a commensurate reduction in the culpability of Mr Zhang, Mr Liu, or both.

Given that the provision of the Deposits Letter and the Presales Schedule is linked to the later provision of the falsified contracts by Mr Zhang and Mr Liu to Mr McCubbin, which contracts were in turn passed on to Payton Securities and which were foundational to Payton Securities’ decision to enter into the loans, the simpler course is to hold Mr Zhang and Mr Liu and not MXW Finance responsible for both the provision of the Presales Schedule and the Deposits Letter, as well as the falsified contracts.

In my view, the conduct of Mr Zhang and Mr Liu involves a large degree of culpability and had a significant causal effect on the loss sustained. It was dishonest and it played an integral role in the loans being advanced. Had Bertacco Ferrier been liable, the concurrent liability of Mr Zhang and Mr Liu would warrant a significant reduction to the damages that would otherwise have been recoverable by Payton Securities against Bertacco Ferrier.

In my opinion, the culpability for the loss lies first and foremost with the egregious conduct of Mr Zhang and Mr Liu in falsifying documents which materially misstated the extent of the presales; secondly and at a significantly lesser degree of culpability, it lies with MWM. As I stated above, I do not consider that McCubbin was a concurrent wrongdoer, but if there was any question of its concurrent wrongdoing it would be very much at the bottom.

Had I found that Bertacco Ferrier was negligent and that it ought to have valued the Super Lot at around $2,000,000 and not $5,100,000, I would have considered its comparative responsibility for the loss and damage to be considerably less than that of Mr Zhang and Mr Liu, but some way more than that of MWM, and certainly Mr McCubbin. Whilst there is no suggestion of moral culpability, any conclusion that Bertacco Ferrier should have valued the Super Lot at $2,000,000 would have involved significant error, albeit one a product of a mistaken judgment.

On the assumption that each, with the exception of McCubbin, was liable I would have apportioned responsibility as follows:

(a) Mr Zhang and Mr Liu 55%;

(b) Bertacco Ferrier 27.5%;

(c) MWM 17.5%;

MWM’s culpability is some way less than Bertacco Ferrier’s (had I found that Bertacco Ferrier’s negligence had been causative of loss). Whilst I accept that on the evidence before me MWM is liable on an ancillary basis with respect to the misleading and deceptive conduct of Mr Zhang and Mr Liu, the relevant context in respect of which it is liable is a failure to bring a matter to the attention of a third party, Payton Securities, including in circumstances where its principal, Mr Mason, was overseas and events were moving at a fast pace.

Given the above, and had I otherwise found Bertacco Ferrier liable, I would have reduced the damages for which Bertacco Ferrier was liable by reason of the concurrent wrongdoing of Mr Zhang and Mr Liu by 55%. However, I would not have made any further reduction by reason of the concurrent wrongdoing of MWM or McCubbin (if any), as the concurrent liability of those parties is reflected adequately (in fact on my findings, more than adequately) in their respective settlement sums such that it would not be just to effect any reduction to the amount for which Bertacco Ferrier would otherwise have been liable.

Conclusion

In summary:

(a) Bertacco Ferrier was negligent in carrying out the Bertacco Ferrier Valuation in one respect, but that negligence had no causative effect;

(b) Payton Securities was not a party to the Bertacco Ferrier Valuation and did not retain Bertacco Ferrier;

(c) Bertacco Ferrier did not owe a duty of care to Payton Securities because Payton Securities was not an addressee of the Bertacco Ferrier Valuation, and because it was not reasonably foreseeable that the Bertacco Ferrier Valuation would be relied upon by Payton Securities for the purposes of a second mortgage mezzanine loan;

(d) the recoverable loss and damages submitted by Payton Securities, even if it succeeded, did not include a component representing the lost opportunity of an alternative mezzanine loan;

(e) no reduction of the damages awarded should be effected on the basis of contributory negligence on the part of Payton Securities as I am not satisfied that there was negligence on its part which caused loss;

(f) the directors of Z&L, Mr Zhang and Mr Liu, were concurrent wrongdoers with respect to their providing of false information to Payton Securities concerning the level of presales and the holding of deposits, such that had Bertacco Ferrier been liable, it would have been appropriate to reduce the amount of damages payable by Bertacco Ferrier due to the concurrent liability of Mr Zhang and Mr Liu;

(g) MWM was also a concurrent wrongdoer but the amount contributed by it in settlement is such that it would not otherwise have been just to effect any further reduction in the damages for which Bertacco Ferrier would be liable;

(h) McCubbin was not a concurrent wrongdoer, and if he was it would not have been just to effect any further reduction in the damages for which Bertacco Ferrier would be liable because of McCubbin’s settlement contribution.

In the result, the claim against Bertacco Ferrier will be dismissed. I will hear the parties as to costs.

SCHEDULE OF PARTIES

S ECI 2020 02308
BETWEEN:
PAYTON SECURITIES PTY LTD (ACN 004 597 166)	Plaintiff
- and -
MASON WHITE MCDOUGALL (HURSTBRIDGE) PTY LTD (ACN 097 326 317)	First Defendant
IAN PAUL CHRISTIAN MASON	Second Defendant
IAN JOHN MCCUBBIN	Third Defendant
BERTACCO FERRIER PTY LTD (ACN 088 268 795)	Fourth Defendant
HUIMING (JACKY) ZHANG	Fifth Defendant
QING (JACK) LIU	Sixth Defendant
MXW FINANCE PTY LTD (ACN 135 158 511)	Seventh Defendant

Principal of the loan that would have been lent to another party on a second mortgage basis	$3,250,000
Plus interest on $3,250,000 at 20% per annum from 12 April 2018 to 12 April 2019	$650,000
Total:	$4,000,000
Less sums recovered via enforcement
Sale of residential property which formed part of the additional security provided by Z&L	$409,060
Sale of the Super Lot after discharge of the balance of the first mortgage and expenses	$1,265,306
Settlement with McCubbin after deduction of costs associated with that claim	$115,000[25]
Settlement with MWM after deduction of costs associated with that claim	$743,000[26]
Total:	$1,467,940

[2022] VSC 394

15 July 2022