Permanent Trustee Co Ltd v O'Donnell - [2009] NSWSC 902

No judgment structure available for this case.

CITATION: Permanent Trustee Company Limited v Gillian O'Donnell Permanent Trustee Company Limited v Di Benedetto Tonto Home Loans Australia Pty Ltd v Tavares [2009] NSWSC 902

HEARING DATE(S): 23 March 2009 ; 24 March 2009; 26 March 2009; 27 March 2009; 30 March 2009; 31 March 2009; 1April; 6 April 2009; 7 April 2009; 8 April 2009; 21 April 2009

JUDGMENT DATE :
4 September 2009

JUDGMENT OF: Price J at 1

DECISION: See paragraphs 446
447 and 448

CATCHWORDS: CONTRACTS - loan contracts and mortgages - Lo Doc loans - fraud of finance broker and property developer - borrowers persuaded to sign blank or partially completed loan application forms - borrowers persuaded not to obtain independent legal advice - carelessness of borrowers - loans approved on fraudulent financial information inserted by finance broker without knowledge of borrowers - purported use of loan funds for joint ventures - ASIC intervention - public interest - lending guidelines - panel lawyer's guidelines - mortgage insurance - special condition as to cash out - prudent lending practice - PRINCIPAL and AGENT - conflict of interest - whether broker acting for borrowers or lender - Introduction Deed - terms of agreement - true nature of relationship - attribution of knowledge of broker to mortgage manager and lender - asset lending - conduct of business by mortgage manager - risk of serious fraud to borrowers - UNJUST CONTRACTS - Contracts Review Act - consideration of relevant circumstances - lenders guidelines not followed - whether unjust asset lending - consideration of public interest - exercise of discretion.

LEGISLATION CITED: Australian Securities and Investments Commission Act 2001 (Cth)
Contracts Review Act 1980 s 7(1)(d)
Fair Trading Act 1987
Trade Practices Act 1974
Real Property Act 1900 s 57(2)(b)

CATEGORY: Principal judgment

CASES CITED: Baltic Shipping Co v Dillon (1991) 22 NSWLR 1
Beach Petroleum NL & Claremont Petroleum NL v Johnson (1993) 115 ALR 411
Beach Petroleum NL v Kennedy (1999) 48 NSWLR 1
Beach Petroleum NL v Johnson (1993) 43 FCR 1
Belmont Finance Corporation Ltd v Williams Furniture Ltd [1979] Ch 250
Beneficial Finance Corp Ltd v Karavas (1991) 23 NSWLR 256
Branwhite v Worcester Works Finance Ltd [1969] 1 AC 552
CIT Credit Pty Ltd v Keable [2006] NSWCA 130
Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226
Custom Credit Corporation v Lynch [1993] 2 VR 469
JC Houghton & Co Pty Ltd v Nothard
Lowe & Wills Ltd [1928] AC 1
Kowalczuk v Accom Finance Pty Ltd (2008) 252 ALR 55
Lloyd v Grace
Smith & Co [1912] AC 716
Micarone v Perpetual Trustees Austalia Ltd (1999) 75 SASR 1
Morlend Finance Corporation (Vic) Pty Ltd v Westendorp [1993] 2 VR 284
Nathan v Dollars & Sense Finance Ltd [2007] 2 NZLR 747
Nguyen v Taylor (1992) 27 NSWLR 48
NMFM Property v Citibank (2000) 107 FCR 270
Octapon Pty Ltd v Esanda Finance Corporation Ltd (Supreme Court of New South Wales
3 February 1989
unreported)
Perpetual Trustee Company Limited v Khoshaba [2006] NSWCA 41
Re Hampshire Land Co [1896] 2 Ch 373
Riz v Perpetual Trustee Australia Ltd [2007] NSWSC 1153
Rosenberg v Percival (2001) 205 CLR 434
Short v Crawley (No 30) [2004] NSWSC 1322
Spina v Permanent Custodians Limited [2009] NSWCA 206
Suncorp-Metway Ltd v Bellairs [2009] NSWSC 135
West v AGC (Advances) Ltd (1986) 5 NSWLR 610

TEXTS CITED: Dal
Pont
Law of Agency 2nd ed
(2008)
LexisNexis Butterworths

PARTIES: Permanent Trustee Company Limited (Plaintiff)
Australian Securities and Investments Commission (as Intervener)
John & Gillian O'Donnell (Defendant/cross-claimants)
Lawrence & Maria Di Benedetto (Defendant/cross-claimants)
Tonto Home Loans Australia Pty Ltd (Plaintiff)
Jose De Carvalho E Rego Tavares & Kim Rowe (Defendant/cross-claimants)

FILE NUMBER(S): SC 12148/06; 12147/06; 15644/05

COUNSEL:
A Bell SC, A Abadee + J Muir (Plaintiffs)
P Menzies QC + A Fernon (Defendant/cross-claimants)
R Wright SC + J Arnott (ASIC as Intervener)

IN THE SUPREME COURT
OF NEW SOUTH WALES
COMMON LAW DIVISION

PRICE J

4 September 2009

12148/06 - PERMANENT TRUSTEE COMPANY LIMITED v GILLIAN O'DONNELL AND ANOR
12147/06 - PERMANENT TRUSTEE COMPANY LIMITED v LAWRENCE DI BENEDETTO AND ANOR
15644/05 - TONTO HOME LOANS AUSTRALIA PTY LTD v JOSE DE CARVALHO E REGO TAVARES AND ANOR

JUDGMENT

1 HIS HONOUR: These proceedings have been heard together as similar issues are raised. Each of the defendants entered into joint venture agreements with a property developer Streetwise Property and Projects Pty Ltd (Streetwise Property). In order to enter into the joint ventures the defendants in 2003 borrowed money from the plaintiffs. Applications for low documentary (Lo Doc) loans had been submitted in each case by a finance broker, Streetwise Home and Investment Loans Pty Ltd (Streetwise Loans), to Tonto Home Loans Australia Pty Ltd (Tonto), a mortgage manager and loan provider. Some of the details concerning the assets and income of the defendants in the loan applications had been falsely completed by an undisclosed person or persons at Streetwise Loans. Streetwise Property and Streetwise Loans were part of the Streetwise Group of companies (Streetwise). The moneys advanced by the plaintiffs were secured by first mortgages over the defendants’ family homes. Following the financial collapse of Streetwise in 2005, the defendants defaulted under the terms of the mortgages. The plaintiffs seek orders for possession of the defendants’ homes and monetary judgments. The defendants seek declaratory relief and orders that the loan agreements and mortgages be set aside.

2 The Australian Securities and Investments Commission (ASIC) has intervened in the proceedings in its role in upholding the public interest in the proper functioning of the Australian financial system.

3 The plaintiffs’ cases in chief are not controversial. The issues for consideration arise from the cross-claims. The defendants concede that unless they can establish their cross-claims the plaintiff in each case is, subject to proving the amount claimed, entitled to the orders sought.

4 In this judgment the entities within the Streetwise Group of companies will be referred to as Streetwise unless it is necessary to identify the particular company within the Group.

What are Lo Doc loans?

5 It is important to understand that these proceedings do not involve a general attack by the defendants or ASIC on Lo Doc lending which has been part of the Australian mortgage lending industry for many years. John Brewster in his report dated 2 May 2008 (ex M (TR)) at [35] defines Lo Doc loans as being:

“loans where the savings history and/or income of the borrower is not fully verified by the lender when [assessing] the borrower’s capacity to pay.”

6 Derek Robertson in his report dated 22 October 2007 explained at p2:

“The [Lo Doc] market began and has developed as lenders have seen a need and opportunity to make loans available to borrowers (predominantly self-employed) who:

a. cannot show their income due to tardiness in preparing historical financial statements and tax returns;

b. do not reflect their true incomes in tax returns etc;

c. suffer from inconsistent cash flows.

It is not normal practice for lenders to verify any of the above noted.”

(i) Permanent Trustee Company Limited v Gillian O’Donnell and John Robert O’Donnell (the O’Donnell proceedings).

7 John Robert O’Donnell and Gillian O’Donnell (the O’Donnells) are the registered proprietors as joint tenants of their home at 103 Soldiers Avenue Harbord NSW being the whole of the land in Certificate of Title folio identifier 62/7912 (the O’Donnell property).

8 The O’Donnells entered into a loan agreement with Permanent Trustee Company Limited (Permanent) on about 10 January 2003. The loan agreement identifies Permanent as the “Lender” and the O’Donnells as the “Borrowers”. Tonto is identified as the “Originator/Manager”. The amount of the loan was $500,000 and the interest rate was specified as being a “Lo Doc Variable rate” of 6.95 per cent per annum. The total term of the loan was 30 years. The security for the moneys due under the loan agreement was a first registered mortgage over the O’Donnell property. The purpose of the loan was expressed to be as follows:

The loan must be used to refinance an existing mortgage with CBA over property situated at 103 Soldiers Avenue, Harbord NSW 2096 and to establish facility to purchase investment property in near future. Facility required $500,000.00 (66.67% LVR)”

9 The terms and conditions provided that the loan agreement “must be read together with the FirstMac General Terms and Conditons Booklet Version 1 dated June 2002 which forms part of this loan agreement.”

10 The O’Donnells entered into a mortgage with Permanent which is dated 7 February 2003. The mortgage incorporates standard terms document No 2602619T.

11 The loan was settled on 7 February 2003 and a cheque for $489,651.82 was deposited into the Streetwise Property account in accordance with a written authorisation which the O’Donnells had signed.

12 The O’Donnells failed to pay an instalment due under the loan agreement and the mortgage on 7 August 2005. A default notice under s 57(2)(b) of the Real Property Act 1900 was issued on 16 November 2005 claiming the arrears then due which the O’Donnells did not comply with.

13 By a further amended statement of claim filed on 9 April 2009 Permanent seeks an order for possession of the O’Donnell property, an order for judgment in the sum of $566,050.95 and interest and indemnity costs. According to a certificate dated 20 March 2009 the total amount payable to Permanent is $690,467.61.

Permanent Trustee Company Limited v Lawrence Di Benedetto and Maria Di Benedetto (the Di Benedetto proceedings).

14 Lawrence Di Benedetto and Maria Di Benedetto (the Di Benedettos) are the registered proprietors as joint tenants of their home at 165 Alfred Street, Narraweena NSW being the whole of the land in folio identifier 5/23820 (the Di Benedetto property).

15 The Di Benedettos entered into a loan agreement with Permanent Trustee Company Limited (Permanent) on about 19 February 2003. The loan agreement identifies Permanent as the “Lender” and the Di Benedettos as the “Borrower”. Tonto is identified as the “Originator/Manager”. The amount of the loan was $500,000 and the interest rate was specified as being a “Lo Doc Variable rate” of 6.95 per cent per annum. The total term of the loan was 30 years. The security for the moneys due under the loan agreement was a first registered mortgage over the Di Benedetto property. The purpose of the loan was expressed to be as follows:

“ The loan must be used to refinance an existing mortgage with ANZ over property situated at 165 Alfred Street, Narraweena NSW 2099. To provide funds to free up equity for investment purposes.”

16 The terms and conditions provided that the loan agreement “must be read together with the FirstMac General Terms Booklet Version 1 dated June 2002 which forms part of this loan agreement.”

17 The Di Benedettos entered into a mortgage with Permanent which is dated 26 February 2003. As in the O’Donnell mortgage, the mortgage incorporates standard terms document No 2602619T. The loan was settled on 26 February 2003 and the sum of $487,660.41 was deposited to the account of Streetwise Property in accordance with an authority which the Di Benedettos had signed.

18 The Di Bendettos failed to pay an instalment due under the loan agreement and the mortgage on 26 July 2005. A default notice under s 57(2)(b) of the Real Property Act was issued on 16 November 2005 claiming the arrears then due which the Di Benedettos did not comply with.

19 By a further amended statement of claim filed on 9 April 2009, Permanent seeks an order for possession of the Di Benedetto property, an order for judgment in the sum of $568,750.80 and interest and indemnity costs. According to a certificate dated 20 March 2009, the total amount payable to Permanent is $692,094.16.

(iii) Tonto Home Loans Australia Pty Ltd v Jose De Carvalho E Rego Tavares and Kim Lee-Anne Rowe

20 Jose De Carvalho E Rego Tavares as to a 2/3 share and Kim Lee-Anne Rowe as to a 1/3 share are the registered proprietors as tenants in common of their home at 2 Combara Avenue, Castle Hill being the whole of the land in folio identifier 60/240036 (the Tavares and Rowe Property).

21 Mr Tavares and Ms Rowe entered into a loan agreement with Tonto on about 22 May 2003. The loan agreement identifies Tonto as the “Lender” and as the “Originator/Manager”. Mr Tavares and Ms Rowe are identified as the “Borrower”. The amount of the loan was $416,000 and the interest rate was specified as being a “Lo Doc Variable rate” of 6.95 per cent per annum. The total term of the loan was 30 years. The security for the moneys due under the loan agreement was a first registered mortgage over the Tavares and Rowe property. The purpose of the loan was expressed to be as follows:

“The loan must be used to refinance an existing mortgage with ANZ over property situated at 2 Combara Avenue, Castle Hill NSW 2154 and surplus funds for investment purposes.”

22 The terms and conditions provided that the loan agreement “must be read together with the FirstMac General Terms and Conditions Booklet Version 3 dated April 2003.”

23 Mr Tavares and Ms Rowe entered into a mortgage with Tonto which is dated 30 May 2003. The mortgage incorporates standard terms document No 9534581. The loan was settled on 30 May 2003 and the sum of $352,824.53 was paid to Streetwise Property in accordance with an authority which Mr Tavares and Ms Rowe had signed.

24 Mr Tavares and Ms Rowe failed to pay an instalment due under the loan agreement and mortgage on 31 July 2005. A default notice under s 57(2)(b) of the Real Property Act was issued on 7 September 2005 claiming the arrears then due which Mr Tavares and Ms Rowe did not comply with.

25 By a further amended statement of claim filed on 9 April 2009, Tonto seeks an order for possession of the Tavares and Rowe property, an order for judgment in the sum of $532,508.27 and interest and indemnity costs. According to a certificate dated 20 March 2009, the total amount payable is $562,987.46.

The nature of the Cross-Claims

26 For the sake of convenience, I will from now on refer to the defendants in this judgment as the cross-claimants. By further amended statements of cross-claim the cross-claimants seek declaratory relief and orders that the loans and mortgages be set aside. As the pleadings are of some length, the principal assertions will be summarised in accordance with the cross-claimants’ written submissions.

Agency

Each of the cross-claims asserts that Streetwise was the agent of Tonto (which was in turn the agent of Permanent in the O’Donnell and Di Benedetto proceedings) to promote and advance the Lo Doc loans the subject of each of the proceedings. Alternatively, the cross-claims assert that Tonto held Streetwise out as its agent such that it had the ostensible authority to negotiate and act in respect of the loans.

In preparing the loan applications as agent for Tonto (and Permanent in the O’Donnell and Di Benedetto proceedings) Streetwise inserted false information in the loan applications and knew that the cross-claimants could not afford the loans which were sought.

(a) the true financial position of the cross-claimants,

(b) that they could not afford the loans approved,

(c) that the only basis on which the loans could be repaid was through the sale of the family home; and

(d) that such loans amounted to asset lending.

Perpetual Trustee Company Limited v Khoshaba

Unjust contracts/unconscionability

Contracts Review Act

Trade Practices Act

Fair Trading Act

Australian Securities and Investments Commission Act

One of factors relied upon by the cross-claimants is that the loans were approved in breach of the relevant lending guidelines.

27 The cross-claimants must prove their cases on the balance of probabilities.

Matters of Evidence

28 Although the three proceedings give rise to similar issues, it is necessary to visit in some detail the separate journeys undertaken by each of the cross-claimants in their dealings with Streetwise.

The O’Donnell proceedings

Background

29 In September 2002, John O’Donnell was 54 years old and Gillian O’Donnell was 47 years old. Mr O’Donnell had been unemployed for a period of about 18 months. His taxable income for the financial years ending 30 June 2000, 2001 and 2002 was $0, $12,944, and $0 respectively. Mr O’Donnell had completed income tax returns for these financial years which were available for inspection as at November 2002. Mrs O’Donnell was employed as a customer service officer at the St George Bank. Her taxable income for the financial years ending 30 June 2002 and 2003 was $24,348 and $22,853 respectively.

30 Their home at Harbord was subject to a mortgage to the Commonwealth Bank on which approximately $6,000 was owing. The Harbord property had an estimated value of $750,000. They had savings of approximately $40,000 in the St George Bank and superannuation in the family superannuation fund worth between $164,180 and $179,710. Mr O’Donnell had shares worth approximately $50,000. He had some experience in the share market trading in futures and put and call options. Mr O’Donnell had managed the family superannuation fund since 1999.

31 The Harbord property had been purchased in around July 1984 with the assistance of a loan from the State Bank of NSW. In around 1993, Mr and Mrs O’Donnell took out a loan for approximately $100,000 to purchase their local store known as the Polar Bar. They both worked in the Polar Bar until it was sold in 2001.

32 Mr and Mrs O’Donnell were neither sophisticated nor naïve in financial matters. Before they commenced their dealings with Streetwise they understood what it meant to provide a mortgage and that a possible consequence of default in the loan repayments was the sale of the secured property.

Dealings with Streetwise

33 Mr O’Donnell was approached at the Warringah Mall Shopping Centre by a Streetwise representative who asked him if he would be interested in using the equity in his home for a property investment. He provided his contact details and a meeting at his home with Trevor Downs from Streetwise was subsequently arranged. Before the meeting Mr O’Donnell rang ASIC, the Department of Fair Trading and the Australian Competition and Consumer Commission (ACCC) to make enquiries about Streetwise and Kovelan Bangaru. Mr Bangaru was the managing director of Streetwise.

34 At paras 48-50 of his affidavit, Mr O’Donnell gives an account of what occurred at the meeting:

“Mr Downs said:

You can use the equity in your home to invest. You can partner us in a joint venture building project. When the building is sold, we will then split the profits. You can also build a second investment property. It will cost about $500,000.”

During the meeting, Jill said words to the effect of:

“We can’t afford that”

Mr Downs said words to the following effect:

“It’s okay because Streetwise will pay for the majority of the loan for the course of the joint venture. It will take about 12 to 18 months. The joint venture will be finished before you need to pay the home and land package. The house and land package will be partly paid by the profits of the joint venture.”

At this stage, the location of the projects had not been decided as they had several on their books.

A conversation then took place with words to the following effect.

Mr Downs said:

“What are your assets and liabilities?”

“Our house is worth around $750,000. I think we have about $40,000 in our savings account. We have a couple of hundred thousand in superannuation. We don’t have any credit cards. The car is worth $8,000. We do have two cars but my son owns one of them.”

Mr Downs also asked about our salary. Jill said words to the effect of:

“I earn about $23,000.”

Either I or Jill said words to the effect of:

“Johnno hasn’t been working for 18 months since we got out of the business”.

Mr Downs made a note of all the information we gave him.”

35 Mr Downs enquired about the level of equity the O’Donnells had in the Harbord property and told them that 75 per cent to 80 per cent of the equity could be used.

36 Mrs O’Donnell in her affidavit recalled saying to Mr Downs:

“No. We couldn’t afford that. I don’t want to lose our house”

To which he replied:

“It’s okay. Streetwise will pay the majority of the loan. You can borrow about $500,000. We’ll use about $52,000 of this as a deposit for the house and land package. The rest will be used to enter the joint venture with Streetwise. We will get a good house and land package for you.”

37 Mr Downs further said:

Your portion of the payments should be about $300 to $400 per month.”

38 During the meeting, Mrs O’Donnell said:

“I don’t know how you’ll get a loan on my income.”

39 Mr Downs responded by saying:

That’s not a problem. We’ll get the loan.”

40 On around 17 October 2002, Mr and Mrs O’Donnell met Mr Downs and Luke Hajje at the Streetwise office in Milsons Point. At the meeting Mr Hajje gave a presentation as to how the O’Donnells could invest $500,000 of which $50,000 was to be used as a deposit on a house and land package in either Narre Warren or Shell Cove. The rest of the money would be used to enter a joint venture agreement to develop a block of land in Botany with six townhouses on it. During the meeting, Mrs O’Donnell said on several occasions:

“We can’t afford the loan, as Johnno’s not working. We don’t want to lose our house.”

41 Mrs O’Donnell recalled Mr Hajje replied by saying:

“It’s okay because Streetwise pays the majority of the loan.”

42 The O’Donnells were given a document called an “Irrevocable authority to act as co-ordinator and Project Manager”: ex 1 vol 2 p 400-401 (OD). The document provided inter alia that the agreement was expressed to be “binding and irrevocable” and that Streetwise Property was irrevocably appointed as co-ordinator and project manager on the O’Donnells’ behalf to locate and develop a “suitable” site. The document further stated that:

“Streetwise will, whether through Streetwise Home & Investment Loans Pty Ltd or through an external financier, obtain necessary finance for the original purchase and construction of the proposed development.

All external costs, including government statutory charges, legal, finance, construction costs as well as the financing of the borrowed funds, will be the responsibility of John and Gillian O’Donnell.”

43 Sometime after the meeting, Mrs O’Donnell showed the document to Ms Liddle, a solicitor, who was a friend. Ms Liddle told her there was no escape clause once she had signed on the dotted line, but “otherwise it seems okay”. Mrs O’Donnell did not otherwise seek advice from Mrs Liddle in relation to Streetwise or the investment generally.

44 On around 18 October 2002, the O’Donnells attended the office of their accountant Mr Burchall principally for the completion of their taxation returns. The accountant was handed a booklet entitled ‘Streetwise Financial Strategy’ which had been given to them by Mr Hajje. Mr Burchall did a company search of Streetwise and circled the directors’ names and said:

“ There’s been a few. Just be careful.”

45 When asked by the O’Donnells if he would come to their next meeting with Streetwise, the accountant advised it would cost them about $300 per hour and that he did not think it was worthwhile for him to come.

46 On 23 October 2002, the O’Donnells met with Mr Hajje, Mr Downs and Robert Bassili at the Streetwise office in Clarence Street, Sydney.

47 Mr Hajje explained to them that Streetwise was having difficulties with the Botany project and the Narre Warren house and land package was discussed. Mr O’Donnell recalled that Mr Hajje told them they had to sign some papers. When they hesitated signing, Mr Downs left the room and returned with Kovelan Bangaru. Mr Bangaru said:

“I will personally guarantee your money”

and

“We provide the loan and do everything in-house. You can use our solicitors.’

48 It seems that the joint venture agreement was signed at this meeting.

49 Mr O’Donnell in his affidavit gives an account of being provided with a loan application form by Mr Bassili.

50 Paras 70-73 are as follows:

“Jill and I were handed documents by Mr Bassili which appeared to be a loan application form. I did not read the document, however, I did observe that some information had already been handwritten on this form, including my name and address. The section concerning my income was left blank, as I had already informed them that I was unemployed. I also noticed that there were figures concerning our assets, however, I did not get the chance to look at the document in detail as everyone in the room kept talking about the projects.

There were various conversations going on at the same time. They seemed keen to progress quickly and were rushing us.

I recall Jill saying words to the effect of:

“ It’s a bit high”

I was talking to someone else at the time however, and did not hear the rest of the conversation.

I signed the document while everyone was still talking. A copy of the loan application is at pages 117-120 of exhibit JR01. It is not in my handwriting.”

51 Mrs O’Donnell recounts in para 66 of her affidavit that she looked down at the paperwork and saw the heading ‘Streetwise Home and Investment Loans’. She asked Mr Bangaru:

“…are we getting the loan from you?”

To which he replied:

“Yes. We like to keep everything in house.”

52 Mr Bassili told Mrs O’Donnell that [Streetwise] preferred to use its own solicitors and there was no need for other solicitors. Mrs O’Donnell understood that they would be using Streetwise solicitors as it all needed to be done quickly and that there was no time for other lawyers.

Mr Bangaru said, Mrs O’Donnell recounts:

“I will personally guarantee your mortgage. Streetwise will pay the bulk of the repayments.”

53 Mrs O’Donnell told him that she did not want to lose their house and was assured by Mr Bangaru that they would not.

54 Mrs O’Donnell recalls at para 70 of her affidavit of 5 October 2007:

“After Mr Bangaru left the room, I briefly looked down at the paper work regarding the application again. Mr Downs and Mr Bassilli kept talking to Johnno and I while I looked at the application. It was already filled out with my name, income and my assets. I noticed that Johnno’s income was blank however this made sense as he was unemployed. I also noticed that some of the figures regarding our assets were larger than John and I had estimated at our earlier meeting, particularly our furniture and superannuation. I said words to the effect of:

‘It’s a bit too much’

Either Mr Downs or Mr Hajje said words to the effect of:

Johnno and I had never independently checked the estimates that we had earlier given them regarding our assets or referred to any

paper work, so we accepted what they said. We thought they knew what they were doing. I did not have time to read the document in detail as Mr Downs and Mr Bassili continued to talk to Johnno and I while we signed.”

55 The loan application which the O’Donnells signed is found, at ex 1 vol 1 pp 53-55 (OD). It is headed “Tell us your story Streetwise Home and Investment Loans”.

56 In an affidavit sworn 22 November 2007, Mr Bassili stated that the loan application contained his signature but he did not recall signing it. The balance of the application did not contain his writing but he believed that the handwriting belonged to either Mr Downs or Mr Di Sano.

57 Mr Bassili recounted that Mr Bangaru during the second meeting with “joint venture investors” often produced blank or partially completed loan application and income declaration forms and told investors to sign so they could get started. At the meetings he attended there was no explanation provided to the investors as to the loan being a Lo Doc loan or what the income declaration forms meant. After the investors had left, the rest of the details were completed using the information from the investor’s file.

58 At para 146 of his affidavit, Mr Bassili states:

“Where the investors did not have the level of income to repay the loan, Ko made up his own figures. Ko did not fill out the applications himself, however, he often directed other employees such as Frank Di Sano to complete the income sections of the applications with incorrect figures.”

59 It is evident that the loan application form after it had been signed by the O’Donnells was altered by an undisclosed person or persons at Streetwise inserting in the box headed “Current Occupation & Employer” that John O’Donnell was a “Self-Employed – Sole Trader Coffee Shop” for “5 years” and in the box provided for “Salary” a fortnightly income of $3,500. The form also disclosed superannuation to the value of $241,000, cash to the value of $60,000 and furniture to the value of $60,000. All of this material was untrue and was inserted without the knowledge of Mr and Mrs O’Donnell.

60 The loan product applied for was a “1^st Run Lo Doc” loan of $500,000 with an interest rate of 6.95 per cent and a loan term of 30 years. The loan purpose was recorded as being “Purchase Investment Property”. The O’Donnells were not given a copy of the loan application. The loan application was forwarded by Streetwise to Tonto.

61 In cross-examination, Mr O’Donnell was taken by Mr Bell SC for the plaintiff to paragraphs 117 and 118 of a statement he made to ASIC on 7 June 2006: ex L (OD). Mr O’Donnell agreed that when Mr Bassili had given him the loan application that he had asked:

“What about the other information required?”

62 He had observed that the document had some handwritten details written on it such as “Gillian and my name and address and licence details” but the balance of the application was blank.

63 Further cross-examination on that was as follows (T 189 L 4-50):

“Q. So you signed a partially blank application form for a loan for half a million dollars?

Q. And you knew it was a document that the lender would look at in assessing the loan?

Q. Do you agree that it was careless of you to have signed a loan application form that was partially blank, with the benefit of hindsight?

A. The information I left out was blank, or what was left out was blank and that mainly was confirming my income. Now, the reason it was left blank was because there was nothing to write.

Q. You say in paragraph 118 that Mr Downs said to you, "Don't worry, we'll fill it out later. I already have that information from you. Just sign where the Xs are." Is that true?

Q. So you knew you were signing a loan application form but you were leaving it to Streetwise to fill in some of the information later?

Q. Looking back on it now, would you agree that that was careless?

Q. Could you look at volume 1 of exhibit 1 at page 95, please. Is that also a document which you signed on 23 October 2002?

Q. Do you say that you signed this document with a total income figure of $91,000 a year or do you say that that figure was blank when you signed it?

Q. You appreciated this was a document in connection with the loan?

Q. And you have signed a document with a total income figure left blank; is that right?

A. That's right. “

And further at T 190 L 1-27:

“Q. And looking back on it now, you would agree that that was careless?

64 Mrs O’Donnell was also cross-examined in relation to the signing of the loan application. Part of the cross-examination was as follows (T 154 L 45-50, T 155 L1 –31):

“Q. And you noticed when you signed this document that some of the figures for your assets were a bit too high, didn't you?

A. Yes, I did.

Q. And you appreciated at the time that it was a loan application form, didn't you?

A. Yes, I did.

Q. You accept, don't you, that having signed this declaration, you can hardly complain that it is inaccurate in relation to your assets, correct?

A. Sorry, can you repeat that?

Q. You signed this declaration showing these figures which appear on page 54 as to your assets and liabilities, correct?

A. Yes, I did.

Q. Do you accept that having signed the declaration containing those figures, you can hardly complain that it is inaccurate?
A. No. I don't know. I - I mentioned that it was - they were incorrect and I was told that it doesn't matter because people overestimate their assets and I had already given all the figures that I could remember to Trevor Downs at a previous meeting. I had been truthful in what I told him and - and - but I hadn't checked how much money we had had, how much shares we had, how much we had in superannuation. I hadn't checked - I hadn't looked at any paperwork or anything. It was all just off the top of my head.

Q. Yes, but Ms O'Donnell, it was you who signed this declaration, wasn't it?

A. Yes, it was.

Q. And my suggestion to you is that having signed the declaration with those figures, you can hardly complain if the lender relied on them, can you?

A. Oh, no, not at all.

Q. Would you agree that it was careless of you to have signed a declaration with incorrect information?

A. Yes, it was.”

65 Mr and Mrs O’Donnell each signed a document called “Borrower Income Declaration Form for the First Run & Flexi Range of LoDoc Loans.” Neither had any recollection of signing the form. In the small print of the document is the following:

“I acknowledge that Permanent and FirstMac have relied upon the information contained in the application for credit including the following information provided by me in or with the application in assessing whether to approve the application.”

66 A total income of $91,000 was declared for Mr O’Donnell. The document further provided:

“I acknowledge that neither Permanent nor FirstMac have independently verified the information relating to my personal income provided by me in or with the application. I declare that the information provided in or with the loan application is true and correct and that I can afford to make the loan repayments without any undue financial hardship.”

67 It is plainly the case that when Mr O’Donnell signed the document the space provided for the insertion of income had been left blank. The false income figure of $91,000 was subsequently inserted by an undisclosed person at Streetwise without Mr O’Donnell’s knowledge.

68 Mr and Mrs O’Donnell were not told by Streetwise that the loan application was for a Lo Doc loan or what a Lo Doc Loan was. They were not informed of the particular significance that the information provided as to their income had in Lo Doc Lending. They were rushed by Streetwise into signing the incomplete loan application and income declaration and at the time believed that Streetwise knew what it was doing. Mr and Mrs O’Donnell acknowledged what they did was careless. Regrettably, it exposed themselves, Tonto and Permanent to the risk of fraud by Streetwise.

69 On 30 October 2002, the O’Donnells with Mr Bassili flew to Melbourne where they inspected a vacant block of land at lot 160 Tralee Circuit, Narre Warren (the Narre Warren property). Upon their return to Sydney, the O’Donnells paid a deposit of $2,000 to Mr Bassili and signed an “Irrevocable letter of intent and Authority to Act” which acknowledged that Streetwise Property had proposed the Narre Warren property and that they were proceeding with the purchase of that property at a price of $261,000. The document authorised Streetwise Financial Strategies Pty Ltd to appoint a solicitor to act on their behalf to effect a transfer and settlement and further authorised the financial institution providing the mortgage finance to forward the mortgage documents direct to Streetwise. This document was witnessed by Mr Bassili and is found at ex 2 vol 1 p 103 (OD).

70 On about 7 November 2002, the O’Donnells received a letter from Streetwise confirming a preliminary approval of the loan. The letter stated, inter alia, that the loan product was “FirstRun LoDoc Variable” and the security required was a first registered mortgage over the Harbord property. This letter referred to a special condition of the loan that:

“Any cash out component in excess of $100K is to be fully documented and the purpose considered acceptable by the Funder and Mortgage Insurer.”

71 No reference was made in the letter to the identity of the lender but the letter inferred that it was Streetwise as the letter stated that if the proposed loan was approved, “we will instruct our solicitors who will prepare and forward documents to you or your solicitors.”

72 For the purpose of the Polar Bar business, Mr and Mrs O’Donnell had three Australian Business numbers (ABN). Each of the individual ABNs had been de-registered on 1 July 2001 and their joint ABN was cancelled on 19 March 2001. A matter of some controversy in the proceedings was the registration of ABN 34 143 774 718 by the Australian Taxation Office (ATO) effective as of 21 November 2002. This was an ABN registered in Mrs O’Donnell’s name which had been deregistered on 1 July 2001. An ATO letter dated 20 December 2002 was sent to Mrs O’Donnell notifying her of the registration of the ABN: ex G (OD). Mrs O’Donnell denied in cross-examination that she had applied for the ABN. The plaintiffs argued that the overwhelming inference, despite Mrs O’Donnell’s denials, was that she procured the ABN to re-instate or re-register her personal ABN for the purpose of putting it before the lender and did so with the intention of deceiving the lender into believing that she and/or her husband were carrying on a business.

73 Mr O’Donnell recounted in his affidavit at paras 84-86 the conversations which he had with Streetwise employees concerning enquiries that were made about whether he had an ABN. He had been telephoned on 15 November 2002 by a Frank Di Sano and later that day by Tracey both of whom were from Streetwise. He had informed Mr Di Sano that the ABN was deregistered after the Polar Bar was sold. As to Tracey’s enquiry as to whether he had located “your ABN numbers”, he told her that his wife was looking for them. Mrs O’Donnell recalled that her husband had told her about the conversation with Mr Di Sano and that Streetwise needed an ABN number. In para 84 of her affidavit, Mrs O’Donnell stated that she gave her own individual ABN number over the telephone to someone in Streetwise’s office and also later found a document containing her ABN in her records which she faxed to them. In his affidavit at para 87, Mr O’Donnell recalled that on or around 10 December 2002, he called the Tax Office to inquire as to whether his ABN could be reinstated and was told “it was not possible to reinstate it, this only occurs when it was done in error.”

74 It seems to me that Mr O’Donnell would not have made such an enquiry if his wife had applied to reinstate her ABN prior to 21 November 2002. Furthermore, I do not accept that Mrs O’Donnell participated in what was a deception on the lender. It was her understanding prior to the receipt of a letter from Hunt and Hunt solicitors dated 7 January 2003 that the lender was Streetwise. To my mind, it is more probable than not that Streetwise applied to reactivate the ABN after Mrs O’Donnell provided the ABN number to Streetwise. There is no advantage, for present purposes, in speculating how that was done.

75 As a submission was made for the O’Donnells that the loan agreement and mortgage were sent by Hunt and Hunt to Streetwise, which then arranged for their execution and borrowers’ copies of the documents went to Mr and Mrs O’Donnell, it is necessary to consider this issue. The submission was founded on emails passing between Streetwise, Tonto and Hunt and Hunt on 7 January 2003 which are found in ex 1 v 4 (OD) at pp 1257-1259. Hunt and Hunt were a firm of solicitors on the Origin program panel. Shortly stated, the emails from Tonto and Hunt and Hunt were responses to a request from Mr Di Sano of Streetwise to have the “docs” prepared by the solicitors express posted to Streetwise at their address in Grosvenor Place. The email from Susan Krummenacher, loans processing officer, suggests that the Streetwise request was to be met when she states “I can send the documents to that address of your request. Documents should be sent in today’s post.”

76 Donald Thorne in his oral testimony denied that had occurred. Mr Thorne was the partner in charge of the solicitors’ banking and finance group. He based his evidence on the system which he said was embedded in the firm’s practice of the letter enclosing the documents being addressed to where the parties live. That is the same address, Mr Thorne said, as appears on the loan agreement which is then checked off against the address on the express post envelope. Mr Thorne conceded, however, that the system could be overridden as had occurred in the case of Mr and Mrs Di Benedetto. He said that if the system was overridden and a letter was re-addressed it would be recorded on that letter. No such record appears on the letter dated 7 January 2003 which is addressed to Mr and Mrs O’Donnell at their home address. Mr Menzies QC for the cross-claimants, however, submitted that this would not explain a change being made only to the envelope.

77 Mr O’Donnell gave the following evidence in cross-examination (T 193 L 10-15):

“ Q. Could you open that, please, at page 405? On around 7 January 2003, you receive the letter from Hunt and Hunt which appears at pages 405 to 406?

78 A diary entry for 7 January 2003 made by Mr O’Donnell recorded the receipt of the mortgage and FirstMac loan agreement from Hunt and Hunt: ex 1 v 2 p 657 (OD).

79 In her oral testimony Mrs O’Donnell agreed that on or about 7 January 2003, she had received an express post letter from Hunt and Hunt. Whilst she was initially uncertain whether the loan agreement and the mortgage were contained in that letter, Mrs O’Donnell agreed after being shown her husband’s diary entry that she had received the letter from Hunt and Hunt together with the loan agreement, mortgage and memorandum of mortgage on or about 7 January 2003.

80 I find on the balance of probabilities that the letter from Hunt and Hunt dated 7 January 2003 enclosing the loan agreement, mortgage and memorandum of mortgage was forwarded to and received by Mr and Mrs O’Donnell at their home address on about 7 January 2003. The onus is on the cross-claimants to establish on the probabilities that another letter was sent by Hunt and Hunt to Streetwise enclosing original documents for execution. As will be seen in the Di Benedetto proceedings, Hunt and Hunt failed to comply with the Origin service requirements by forwarding the loan documentation direct to Streetwise. In that case, however, the letter was addressed to Mr and Mrs Di Benedetto care of Streetwise and provides some support for Mr Thorne’s evidence that where the system was overridden, the letter enclosing the documentation would be re-addressed. Mr Menzies’s argument is not supported by the reference to “your letter dated 7 January 2003” in the letter from Streetwise to Hunt and Hunt dated 11 January 2003 and by Mr Thorne’s evidence that he was not aware of any letter dated 7 January 2003 from his firm other than the letter sent to Mr and Mrs O’Donnell. I am not satisfied on the balance probabilities that original versions of the loan agreement and mortgage were sent by Hunt and Hunt to Streetwise.

81 On about 7 January 2003, Mr and Mrs O’Donnell received a letter from Streetwise informing them of the final approval of the loan. The letter referred to the Mortgage Manager as being Tonto Home Loans Limited but did not name the lender. This letter included the same “cash out” condition quoted at [70] above. When cross-examined about the letter, Mrs O’Donnell said that it remained her understanding that Streetwise was providing the finance. Upon being taken to para 161 of the statement that she made to ASIC on 3 December 2005 which appeared to be inconsistent with this evidence, Mrs O’Donnell explained that until the ASIC investigator had pointed out to her [the reference to Tonto] she had understood that Streetwise was providing the loan.

82 In any event, Mrs O’Donnell accepted that following the receipt of a letter dated 7 January 2003 from Hunt and Hunt she was under no doubt that Streetwise was not the lender, that Permanent was and that Tonto was the manager. The letter enclosed the loan agreement and mortgage. In the loan agreement under the heading How to sign the documents the following, inter alia, appears:

“Please read the documents carefully to ensure they agree with your understanding of the transaction. If you have any queries, please ask before you sign. The lender is keen to ensure that you understand the transaction.

You may decide whether or not to obtain independent legal advice…”

83 Under the heading Independent Legal Advice appears the following:

“Remember, you are free to contact your own solicitor for explanation of the documents at any stage. If you have any doubts or want more information, contact your government consumer agency or get legal advice.”

The letter had commenced “We act for the lender and the Manager”.

84 Mrs O’Donnell agreed in cross-examination that she had the opportunity in her home to read the documents before she signed them but said she had not read them in their entirety. She agreed that she observed the lender was Permanent, the originator was Tonto, that she and her husband were the borrowers, that they were contracting to make payments monthly during the facility term and that a mortgage was being given over their property as security for the loan. Mrs O’Donnell further agreed that she understood what the interest rate was and knew that she was liable to the lender irrespective of what their arrangements with Streetwise were. She agreed that she understood that by giving a mortgage over their property it was at risk if the loan was not repaid. Mrs O’Donnell agreed that they had the right to obtain independent legal advice if they required it.

85 It was apparent after this testimony that the main reason Mrs O’Donnell entered the loan could not have been as she had stated in para 109 of her affidavit that “[she] thought that Streetwise was financing it and arranging everything” nor could she have been confident “the loan was coming from Streetwise”:(para 110)

86 When cross-examined on this letter, Mr O’Donnell gave similar evidence as to his understanding of the lender and the mortgage manager as his wife. Whilst there was an initial hesitation about his understanding as to whether Hunt and Hunt were acting for him, he agreed that by the time that he had signed the mortgage documents at the meeting on 10 January 2003 which will be shortly detailed, it was his understanding that Hunt and Hunt were acting for the lender.

87 Mr O’Donnell was cross-examined on the loan agreement. He understood that he was only in part responsible to make the loan repayments as Streetwise would be making a portion of the repayments. Further cross-examination on that was as follows: (T 208 L 1-26)

“Q. But you understood that your agreement with Streetwise was for them to pay into your bank account a proportion of the amount that you had to pay to the lender?

Q. If you look at page 650, you understood at the time that you reviewed this document with your wife at home that you were giving a mortgage over your property as security for the loan to the lender; correct?

Q. And you understood by giving a mortgage over your property that your property was at risk if the loan was not repaid; correct?

Q. You believed that Streetwise were making most of the repayments on the loan?

Q. You took the risk of giving a mortgage to the lender because you believed Streetwise would make those repayments; is that fair?

A. Yes, of course.”

“Q. You understood at the outset of this loan transaction, as you told us, that Streetwise were making payments into your account for some of the amount that you had to pay to Tonto?

Q. And you understood that all of the amount to be paid to Tonto came from your account?

Q. Because you recognised at the outset that it was you and your wife who were responsible to Tonto to make the payments; correct?

A. That's correct.”

88 Mr and Mrs O’Donnell on or about 10 January 2003 met with Mr Bangaru and Mr Downs in the Streetwise boardroom where they were informed that the Botany project was not going ahead and the property for the joint venture would be at 7a Battle Boulevard Seaforth (the Battle Boulevard property). They were provided with a project analysis for the Battle Boulevard property and plans for the development were laid out on the table. Whilst everyone was talking, Susan Lau entered the room carrying a number of documents and was introduced as being from Streetwise’s legal department. Both Mr and Mrs O’Donnell recall that she said:

“You need to sign these mortgage documents.”

occurred:

“Everyone in the room was standing except Jill and I. Ms Lau had a number of documents with her. Mr Bangaru continued to talk about the Battle Boulevard property and the plans, while Ms Lau put a document in front of me, saying “Sign here”. It was then passed to Jill. There were several documents going back and forth in quick succession, so there was no time to read them. I felt quite rushed, as it was all happening so quickly. Mr Downs and Mr Bangaru also kept talking to me while I was handed the documents. I felt uncomfortable and pressured as it seemed to be happening quite fast.”

89 Mrs O’Donnell at para 91 of her affidavit supports her husbands recollection. She states:

“A number of documents were going back and forth. As soon as we signed one it was taken away and we were then handed another. It was all done very fast. I did not read the documents, because as soon as I signed it was either taken away or passed to Johnno.”

90 Mr O’Donnell recalled his wife asking “Should we get legal advice?” and Mr Downs responding by saying:

It is a simple mortgage document. You can use our lawyers. It’s quicker if you use our lawyers.”

91 Mr Bangaru assured them during the meeting that their profit from the Battle Boulevard property joint venture should be about $60,000 and it would take 12 to 18 months to complete.

92 It became evident during the oral testimony of Mr and Mrs O’Donnell that the documents that they signed at this meeting included the loan agreement and mortgage which Hunt and Hunt had forwarded to them in the letter dated 7 January 2003. The terms of the loan agreement and mortgage have been identified at paras [8 - 10] above. Although the signing of this documentation was deliberately rushed by Mr Bangaru and the other Streetwise employees at the meeting, Mr and Mrs O’Donnell had had the opportunity of considering the loan agreement and mortgage prior to the meeting and understood, I am satisfied, the gist of what they were signing. They both appreciated that they could obtain independent legal advice but were persuaded not to do so. The impressive Streetwise offices, high pressured and convincing presentations undoubtedly impacted upon the prudence of their considerations and their common belief was that there was little risk that Streetwise would not meet its promise to pay most of the mortgage instalments.

93 Mr and Mrs O’Donnell, however, had been dishonestly mislead by Streetwise about their investment. Furthermore, Streetwise had fraudulently completed the loan application form and Income declaration as Streetwise knew that truthful disclosure of the O’Donnells’ assets and income would not meet the lending guidelines either under the Origin Program or the FirstMac securitised lending program. But for the fraud of Streetwise, the loan would not have been approved. Mr and Mrs O’Donnell were unaware that the loan had been approved upon the fraudulent material inserted by Streetwise. If they had known that the lender did not take into account the promise by Streetwise to contribute to the loan repayments when considering the application and that their financial position truthfully stated did not meet the lending guidelines, I am satisfied on the balance of probabilities that the O’Donnells would not have proceeded with the loan application.

94 By a letter dated 30 January 2003 from Tonto which was signed by Kim Cannon, Loans Administrator Tonto Home Loans, Mr and Mrs O’Donnell received a FirstMac Variation Notice which amended some of the terms and conditions of the loan agreement. Some time after 7 February 2003, they received an invoice from Streetwise indicating a holding deposit for the Narre Warren property of $489,651.82. Confirmation that settlement of the loan occurred on 7 February 2003 and that a cheque for $489,651.82 was deposited into Streetwise Property bank account was made by a letter dated 6 February 2003 from Hunt and Hunt. Other correspondence received by Mr and Mrs O’Donnell included a letter dated 11 February 2003 on Streetwise letterhead informing of the loan settlement and thanking them for “choosing Streetwise Home & Investment Loans Pty Ltd to provide your recent funding”. The letter purports to be signed by Kim Cannon Managing Director Streetwise Home & Investment Loans Pty Ltd.

95 Following the settlement of the loan, Streetwise paid $2,345.86 into Mrs O’Donnell’s St George account whilst the O’Donnells paid $319.89. The total amount was withdrawn by Tonto. It appears that Streetwise with interest variations made deposits into the St George account until June 2005. During that time Mr and Mrs O’Donnell had received various assurances from Streetwise about the progress of the Battle Boulevard joint venture and the completion of the Narre Warren property all of which proved to be untrue. They were also assured at a meeting in April 2004 that Mr Bangaru would write a cheque for $6,000 to cover the repayments for the Narre Warren property until the joint venture was completed. The cheque was never received.

96 Property searches undertaken after Streetwise went into liquidation revealed that Mr and Mrs O’Donnell had neither received security over the Narre Warren property nor the property at Battle Boulevard. Mr and Mrs O’Donnell obtained no financial benefit whatsoever from their investment with Streetwise.

The Di Benedetto proceedings

Background

97 In November 2002, Lawrence and Maria Di Benedetto were each 37 years old. They operated a smallgoods business known as ‘L B Foodservices’. Mr Di Benedetto’s income tax returns for the financial years ending 30 June 2000, 2001 and 2002 disclosed taxable income of $28,073, $31,296 and $12,395 respectively. The income tax returns for Mrs Di Benedetto disclosed taxable income of $28,544, $30,826 and $7,739 for the financial years ending 30 June 2000, 2001 and 2002 respectively. Mr and Mrs Di Benedetto’s income tax returns for these financial years were available for inspection in January 2003.

98 Mr Di Benedetto had purchased a home unit in the late 1980s for which he had obtained a loan from the United Permanent Building Society. Mrs Di Benedetto had taken out a loan with her parents from the Commonwealth Bank when they jointly purchased a home in around 1989.

99 After their marriage, the Di Benedettos had purchased the Narraweena property with the assistance of the ANZ bank. They had given mortgages to the bank on various occasions to enable them to purchase small businesses. The ANZ loan on the Narraweena property had been completely repaid by 2002.

100 Mr and Mrs Di Benedetto were neither sophisticated nor naïve in financial matters before they commenced their dealings with Streetwise. They understood what it meant to provide a mortgage and that a possible consequence of default in the loan repayments was the sale of the secured property.

Dealings with Streetwise

101 Mrs Di Benedetto met a Streetwise representative in Warringah Mall Shopping Centre in approximately late October 2002 who asked if she needed financial advice. At the time Mr and Mrs Di Benedetto were interested in renovating their home so Mrs Di Benedetto left her contact details. She later received a telephone call from Steve Fassos of Streetwise who made an appointment to come to their home. At the meeting, Mr Fassos informed them that Streetwise did joint ventures and suggested they should consult a financial adviser at Streetwise for a financial analysis. Mr Fassos asked questions about their income and assets which Mrs Di Benedetto provided as follows:

Income: $45,000 (combined average for the past two years)

House: $600,000

Business: $25,000 (purchase price)

Cash $25,000 (in name of business)

Furniture $25,000 to $30,000

Grace Bros Card: $750 (limit)

No Superannuation

102 Mr Fassos was also informed of the name and telephone number of their accountant and was told to contact him.

103 In early January 2003, Mr and Mrs Di Benedetto met Luke Hajje at the Streetwise office in Clarence Street. Mr Hajje explained how they could use the equity in their home as a deposit in a Streetwise development at Shell Cove. When asked questions by Mr Fassos about their business and income, Mrs Di Benedetto provided him with the same figures with which he had been previously provided. At the end of the meeting, the Di Benedettos met Kovelan Bangaru who told them:

“Streetwise are a one-stop shop. We do everything. We get the loan and you can use our legals.”

104 On the following Saturday, Mr and Mrs Di Benedettos met Mr Bangaru and Trevor Downs at the Streetwise Clarence Street office where they discussed a joint venture arrangement in connection with a property at Battle Boulevard Seaforth. This was the same Battle Boulevard property which was the subject of Mr and Mrs O’Donnell’s joint venture with Streetwise. Mr Bangaru informed them that Streetwise paid the loan payments each month and that Streetwise was in the process of buying the property. After inspecting the property and returning to the Streetwise office, the Di Benedettos were informed that it would cost them $500,000 to participate in the joint venture.

105 Mrs Di Benedetto at paras 57 – 58 of her affidavit gives an account of the conversation which then followed:

“…

I said: We can’t pay that. We can’t even get a loan for $100,000.”

“No, this is how it works. Each month Streetwise makes repayments on the house. Each payment will be about $3,000 per month. We will pay it all. It’s an interest only loan for five years.”

I said: “What bank will give us a loan?”

Mr Bangaru turned to Mr Downs and said:

“I think we’ll go Tonto”

I said: “Where’s Tonto from?”

Mr Bangaru said: “Queensland.”

I said: “I hope that they’re not a bunch of cowboys.”

“No. Tonto knows all about this. The director of Tonto, Kim Cannon knows what we do. He knows we pay the loan. We do this all the time.”

Mr Bangaru said words to the effect of:

“What’s your decision?”

I said words to the effect of:

“I can’t give that right now. I need to go and think about it.”

He said:

“Mrs Di Benedetto, you’re female. You’re emotional. We had a client with a very similar property joint venture, and his wife said no. We had to ring him back last week and say no. I need to secure this as soon as possible. Are you on board or not?”
I felt pressured as I wanted to go home and think about a decision.”

106 Mr Bangaru told them that Streetwise was “a one-stop shop. You can use our solicitors, our loan people. We do everything.” Mrs Di Benedetto said that she thought that it must be okay if the bank knew that Streetwise was making the repayments. If she had thought that Tonto did not know about Streetwise or the fact that they made the repayments she never would have entered into the loan.

107 Mr and Mrs Di Benedetto then signed a loan application form that was in blank although they did not know what it was. Mr Di Benedetto recounts at paras 58 - 60 of his affidavit what occurred:

“Maria and I were then each handed a form by either Mr Downs or Mr Bangaru. They said words to the effect of:

The form I was handed was blank. It did not even have my name. Mr Downs or Mr Bangaru said words to the effect of:

Mr Downs then wrote my name on the form, immediately before or just after I signed.

I did not read the form. At the time I did not realise what the form was. I now believe it may have been a loan application. They did not say anything to me to indicate what the form would be used for. At the time, I was under the impression that more steps would be required before an application was made…

At the time I signed the document it was blank. I would not have signed the application if I saw the figures that it now contains regarding my income and assets.”

108 Mrs Di Benedetto said that the form was in blank and she did not know what it was. She said that there was no time to read it as Mr Downs placed the form in front of her and stood waiting behind her.

109 The loan application form which the Di Benedettos signed is found at ex 3 v 1 pp 56-58 (DB). It is headed “Tell us your story Streetwise Home and Investment Loans”. It is evident that the application was subsequently falsely completed by an undisclosed person or persons at Streetwise. Mr and Mrs Di Benedetto’s income was inserted as each having income of $55,000 per annum. The business was valued at $125,000 when the estimation provided was $25,000. Although the Di Benedettos had no superannuation an amount for superannuation was inserted as being $30,000. Furniture was valued at $75,000 notwithstanding Mrs Di Benedetto’s estimation of $25,000-$30,000. The value of shares was inserted as being $10,000 when no value for shares was provided by Mrs Di Benedetto. All of this false information was inserted without the knowledge of Mr and Mrs Di Benedetto.

110 The loan product applied for was a “First Run Lo Doc” loan of $500,000 with an interest rate of 6.95 per cent per annum and a loan term of 30 years. The loan purpose was stated as being “Free up equity for investment purchase.” The Di Benedettos were neither informed that they were applying for a ‘Lo Doc’ loan nor what a Lo Doc loan was. They were not given a copy of the loan application.

111 Mrs Di Benedetto was cross-examined in relation to the signing of the loan application as follows (T 78 L 24 –50; T 79 L 1-5):

Q. And did it occur to you that the lender might be interested in documents that you signed relating to the loan application?

Q. Did it occur to you that the lender might rely on documents that you had signed relating to the loan application?

112 Mr Di Benedetto was also cross-examined as follows (T 109 L 16-50; T 110 L 1-6):

“Q. I see. Looking back on it now, would you agree it is careless to sign blank documents without understanding what they are?

Q. And can you just look at, in the same volume, page 56? You need to look at pages 56 and 57 and 58 just to make sure you understand what it is. Let me know when you have done that.

A. Well, I never saw the top copy at all. That was never put in front of me in the meeting, that one.

A. Absolutely positive because I only had forms put in front of me that I had to sign.

A. Yeah, well, like I said before, it was all towards getting the ball rolling. That was my understanding.

Q. So you understood this was a preliminary to get the loan approved, in effect?

Q. Looking back on it now, it was careless to have done that too, wasn't it?

113 Mr and Mrs Di Benedetto were also cross-examined about documents entitled “Borrower income declaration for the First Run & Flexi Range of LoDoc Loans” which are dated 7 January 2003 and which they each signed. Each form stated an annual income of $55,000 per annum and contained the declaration and acknowledgment I have quoted at [65 - 66] above. Mrs Di Benedetto testified that she did not know that the form was a borrower income declaration nor did she read it before she signed it. She said she was told to sign it which she did. This was a document that Mr Downs had told her would get the “ball rolling”. Mr Di Benedetto said the form was in blank when it was placed in front of him and he did not read it. He thought it was to get the ball rolling and was “preliminaries”. He agreed that looking back now it was careless to sign blank documents. The income declaration forms are found at ex 3 v 1 pp 134-135 (DB).

114 It is plain that Mr and Mrs Di Benedetto were pressured by the salesmanship of Streetwise into signing the loan application and income declaration forms which were in blank and about which their understanding was limited. They did not know that the application was for a Lo Doc loan nor had they been informed of the particular significance that the information provided as to their income had in Lo Doc lending. Nevertheless with their experience in financial matters which included operating a small business and the borrowing and granting of mortgages on earlier occasions, the signing of these documents in blank, even without the benefit of hindsight, was careless. They exposed themselves, Tonto and Permanent to the risk of fraud by Streetwise.

115 Mr Bangaru told Mr and Mrs Di Benedetto that they would make between $50,000 to $70,000 on the Seaforth property and Streetwise would make the repayments which would be deducted from their share of the profit.

116 Mr and Mrs Di Benedetto recalled further meetings at the Streetwise office in Clarence Street. The first was with Mr Hajje when they were asked to sign forms to get the loan underway which they did quickly but did not know what they were. The second meeting was with Mr Bangaru and Mr Downs who gave them more forms to “get the ball rolling.” They were told where to sign which they did but did not recall what the forms were.

117 On about 11 February 2003, Mr and Mrs Di Benedetto received a letter on Streetwise letterhead advising them of the loan approval. The letter informed them, inter alia, that the mortgage manager was Tonto Home Loans, the loan was for $500,000, was a First Run LoDoc product and a first registered mortgage over their Narraweena property was required.

118 Mrs Di Benedetto recalled that not long after the receipt of the letter Mr Fassos and Mr Bangaru came to their house with what she believed may have been “the loan agreement and mortgage”. Paragraphs 84–86 of her affidavit are as follows:

“I noticed that the front page contained the word ‘contract’ or ‘agreement’. I said words to the effect of:

‘What sort of contract is this?’

Mr Bangaru said words to the effect of:

There was a part on the document which mentioned legal advice. I looked at Bangaru. He said words to the effect of:

‘There’s no need. You guys are using our legal department. So really you are just wasting your money taking it to another solicitor. You paid a fee so that you could use all our services, including legals. It’s just a standard mortgage document.’

From this, I understood that we were using their solicitors. I thought that this form was to stop us from using another solicitor.

I did not read the document as the meeting was not very long. The meeting only lasted about 25 minutes. Nothing was explained to us. Afterwards Mr Bangaru got up and shook my husband’s hand and said words to the effect of:

‘This will be the start of a long and wonderful business relationship.’”

119 In cross-examination, Mrs Di Benedetto agreed that the documents she had signed included the FirstMac Residential Program Loan Agreement which is found at ex 3 v 1 pp 2-9 and is dated 19 February 2003. She said that she read the first page and noticed that she and her husband had been described as the borrower and who the other parties to the agreement were. She knew that they were being asked to borrow $500,000 and saw page 9 before she signed it. She noticed it said “legal advice” and asked Mr Bangaru about it. Mr Bangaru told them that they did not need to get legal advice. She agreed that she knew that she was entering a loan agreement for half a million dollars, that the interest rate was 6.95 per cent per annum interest only for 5 years. It was her understanding that Streetwise was going to pay the interest payments to them and they were going to pay Tonto. She agreed that she knew that she was giving a mortgage over her home as security for the loan. The terms of the loan agreement and mortgage have been identified at paras [15-17] above.

120 Mr Di Benedetto in his oral testimony initially said that he did not know what the pieces of paper were which were placed in front of him when Mr Bangaru and Mr Fassos came to his home. When taken to the loan agreement in cross-examination, he agreed that it was one of the documents brought to his home. Mr Di Benedetto realised that it was a loan agreement that he was signing, that he and his wife were borrowing $500,000. He did not realise that the lender was Permanent but thought at the time it was Tonto. He realised that the loan was interest only for 5 years but did not realise that the interest rate was 6.95 per cent variable. He agreed that he realised that the mortgage was over the Narraweena property and recalled signing the legal advice certificate at page 9 about which his wife had asked questions. In further cross-examination, Mr Di Benedetto gave the following evidence (T 112 L 5-14):

A. That would be fair.

Q. And you didn't read the documentation closely because you were relying on the fact that Streetwise were paying the interest?
A. That they were responsible for the loan was the terminology Mr Bangaru used.

Q. But you understood that the repayments for the loan were coming out of your bank account, weren't they?

A. After he and - yes, they were, yes.”

121 The loan agreement, mortgage and direct debit authority had been forwarded by Hunt and Hunt addressed to the Di Benedettos care of Streetwise under cover of letter dated 13 February 2003: ex 3 v 1 pp 424-425 (DB). Mr Thorne in cross-examination agreed that the system that his firm had in place had been overridden. He said that it was overridden on instructions from Tonto, his firm’s client. Notwithstanding Tonto’s instructions, the sending of the documentation to Streetwise was a breach by Hunt and Hunt of the procedures stipulated in the Origin “Documents and Procedures Manual” for the service of documentation by panel lawyers which required that the service requirement must be carefully followed. Clause 9 of the Manual included the following:

ORIGIN prefers documents to be sent to the borrower at home. In exceptional circumstances, where an authority is held signed by all borrowers directing that the documents be sent to their lawyer, the loan agreement may be served on the borrower’s lawyer…”

122 Mr Thorne said that the Manual stipulated the process for documenting the settling of loans for the Origin Program.

123 Hunt and Hunt had been appointed to the Origin program panel for documenting mortgage loan transactions in June 1997. The firm’s failure to comply with Origin’s service requirements placed the loan documentation in the hands of Streetwise thereby assisting Mr Bangaru and Mr Fassos to rush Mr and Mrs Di Benedetto into signing the loan agreement and mortgage without the Di Benedettos having the opportunity to consider the documents.

124 Mrs Di Benedetto states at para 88 of her affidavit that it was around the time that Mr Bangaru and Mr Fassos came to her home she received a letter from Hunt and Hunt dated 13 February 2003 that enclosed a copy of the loan agreement. The letter was not given to her at the meeting or mailed to her by Streetwise. The letter is identical to the letter forwarded by Hunt and Hunt care of Streetwise. In her oral testimony, Mrs Di Benedetto agreed that she had kept the borrower’s copy of the loan areement from February 2003 until she had given it to Mr Foscholo of ASIC in November 2005. She said that she had not seen any reason to read the loan agreement during that time although she could have done so.

125 The first letter Mr and Mrs Di Benedetto received from Tonto was dated 21 February 2003 and advised of a variation in some of the loan terms and conditions. By a letter dated 27 February 2003, Streetwise informed the Di Benedettos that the loan settled on 26 February 2003. Ms Lau from Streetwise in a telephone conversation confirmed the settlement of the loan and that they were now part owners of the Seaforth property. On or after 7 March 2003, the Di Benedettos received a letter from Tonto advising of the settlement of the loan.

126 Mrs Di Benedetto realised about a month or two after the loan settled that she and her husband did not have any proof that they had invested with Streetwise. Mr Bangaru came to their home after Streetwise had been contacted bringing a document entitled “Deed of Investment”: ex 1 v 1 p 133-134 (DB). The Deed recorded that Mr and Mrs Di Benedetto had entered into a joint venture with Streetwise Property to acquire and develop the Battle Boulevard property for the purpose of resale and purported to set out the Framework of the joint venture. The Framework includes the incorporation of a “property investment vehicle” and that Mr and Mrs Di Benedetto “are to raise capital via a mortgage (refinance/redraw) from the equity of their property(ies)” namely $487,660.41 as capital. The Deed, inter alia, authorised the “Trustee and/or the Directors” to borrow monies “for and on behalf of the Investment vehicle.” Mr and Mrs Di Benedetto signed the agreement which is dated 5 March 2003. This was the joint venture agreement which Mr and Mrs Di Benedetto entered into with Streetwise.

127 In accordance with its commitment to make the loan repayments, Streetwise made payments into Mr Di Benedetto’s bank account. The money was then direct debited to Tonto. It seems that the payments continued until about July 2005. A title search made by Mrs Di Benedetto after the collapse of Streetwise disclosed that Streetwise was not the registered proprietor of the Battle Boulevard property. Mr and Mrs Di Benedetto obtained no financial benefit whatsoever from their investment with Streetwise. They had been dishonestly misled by Streetwise about their investment.

128 Mrs Di Benedetto recounted that she rang Tonto in July 2005 and was told that she and her husband were responsible for the mortgage repayments. She stated at para 149 of her affidavit that this was the first time she was told that Tonto did not know about the arrangement with Streetwise and she realised from this conversation that she and her husband were responsible for the loan.

129 In her oral testimony Mrs Di Benedetto said that it was probably a little bit prior to this conversation when she came to that realisation. It was probably when she had spoken to Paul Barry from 60 Minutes in 2005. Mrs Di Benedetto rejected in cross-examination the suggestion that she understood right from the start that one of the risks that she was taking was that Streetwise might not pay the loan interest and that she and her husband had to pay the lender. Mrs Di Benedetto was taken by Mr Bell to para 93 of the statement that she had made to ASIC: (ex E (DB)) in which she had recounted a conversation in her home with Mr Bangaru in May 2004 during which he had assured her that everything was fine with the Battle Boulevard development and she had responded:

“I hope everything is going fine as you say because there is no way we can afford to pay back the $500,000 loan if something ever happened to Streetwise.”

“a personal guarantee in writing from [Mr Bangaru] stating that you will pay the loan repayments for us and for you to draw up a document with Tonto stating you are responsible for the loan.”

130 Earlier on in the conversation she had told Mr Bangaru that she did not want Streetwise to go bankrupt as “[she] could never afford to pay the loan”.

131 These conversations recorded in the ASIC statement suggest that Mrs Di Benedetto was aware well prior to the conversation with Mr Barry that she and her husband were responsible for the loan if Streetwise was unable to maintain its payments. Further cross-examination focussed on her understanding of having given a mortgage. After some hesitation Mrs Di Benedetto agreed that she understood that their property was at risk under the mortgage if the loan was not repaid at the time that the mortgage was given. She said that “we knew Streetwise would pay it for us”: T 98 L 45.

purpose

The purpose of a loan is a concern of a lender, because it is usually a material consideration in determining whether the particular [borrower] is able to service and repay the loan .”

415 The failure by the lender to follow its own lending guidelines and special “cash out” condition made it easier for the fraud by Streetwise to remain undetected. In all the circumstances of this case, the asset lending was unjust.

416 An argument advanced by the plaintiffs was that Khoshaba could be distinguished as one of the legislative purposes of the CRA was to protect people not able to look after themselves. It was said that all of the cross-claimants were able to look after themselves in entering into the loan agreements and mortgages. Where the asset lending has arisen because of the fraud and deception of the lender’s agent and the borrowers are unaware that the reality of the lending is on the value of their home, in my opinion, it makes little difference to considerations of injustice under the CRA that the borrowers are persons who normally are able to look after themselves. After all, a purpose of the CRA is to protect persons from unfair pressure or unfair tactics when they enter into contracts.

417 Another argument was that once it was accepted that Tonto had no knowledge of or involvement in the fraudulent conduct this would be a factor of significant weight in its favour in resisting a finding of injustice: Khoshaba at [77]; Riz at [81]-[82]. So too, it was argued, was the fact that misinformation was provided to Tonto by the borrowers and the borrowers’ joint venturer and mortgage broker: Riz at [82]. The plaintiffs further submitted that any fraudulent conduct directed against the borrowers occurred when the borrowers were deprived of a legal or secured interest in the property to which the loan proceeds were intended to be applied of which the lender had no knowledge.

418 This last submission is not factually correct. The fraudulent conduct of Streetwise commenced at the time the borrowers were persuaded to sign the loan applications and income declarations. As to the second contention, it was not the borrowers who supplied false information to Tonto but its agent, Streetwise. As to the first submission, Tonto possessed the knowledge of Streetwise and by the way it conducted its business with Streetwise exposed itself and the borrowers to a serious risk of fraud.

419 There is, as the cross-claimants submit, a public interest in ensuring that prudent lending practices are followed. Prudent lending practice, to my mind, includes the conduct of the relationship between loan provider/mortgage manager and finance broker. This must be the case in Lo Doc lending where reliance is placed by the lender on the accuracy of the information provided in the loan application documentation. Prudent lending practice requires adherence by the lender to Lo Doc lending guidelines when the finance broker has been entrusted with the first stage of the loan application process. An agreement for commercial self-interest not to contact a broker’s client until after the settlement of the loan does nothing to ensure the integrity of the material supplied. The public interest against unjust asset lending was referred to in Khoshaba and Kowalczuk. I consider that it is unnecessary to consider ASIC’s submissions on public interest.

420 I have concluded that the loan agreement and mortgage were unjust in the circumstances relating to the contracts at the time that they were made.

The Di Benedetto proceedings

421 I propose now to consider in the Di Benedetto proceedings the circumstances relating to the loan agreement and mortgage when they were made. Like Mr and Mrs O’Donnell, the Di Benedettos were neither sophisticated nor naïve in financial matters. Their lack of sophistication in matters financial is demonstrated by the failure to ensure that a joint venture agreement was entered into with Streetwise before the settlement of the loan. Nevertheless, they understood before Mr Fassos came to their home in 2002 what it meant to provide a mortgage and that a possible consequence of default in repaying a loan was the sale of the secured property. Unlike the O’Donnells, they made no enquiries about Streetwise before their dealings commenced. There is nothing, however, which suggests that Mr and Mrs Di Benedetto were incapable of protecting their interests either because of their age or the state of their physical or mental capacity: s 9(2)(e) of the CRA. They were each 37 years old.

422 Mr and Mrs Di Benedetto were pressured by the salesmanship of Streetwise into signing the loan application and income declaration forms which were in blank and about which their understanding was limited. They had neither been informed that the application was for a Lo Doc loan nor been made aware of what the income declaration forms meant. They had not been told of the particular significance that the information provided as to their income had in Lo Doc lending. Nevertheless, they were careless when signing these documents in blank. They exposed themselves, Tonto and Permanent to the risk of fraud by Streetwise. As in the case of the O’Donnells, the evidence does not establish that the risk of fraud by Streetwise was reasonably foreseeable by them at the time the loan agreement and mortgage were made: s 9(4) of the CRA.

423 They did not have sufficient income to service a loan of $500,000 with an interest rate of 6.95 per cent per annum and a loan term of 30 years. An undisclosed person or persons at Streetwise inserted false information in the loan application form and income declarations as Streetwise knew that truthful disclosure of Mr and Mrs Di Benedetto’s assets and income would not meet the lending guidelines either under the Origin or FirstMac lending program. In particular, their income did not meet the loan serviceability requirements of the lending programs. The loan would not have been approved without the fraud of Streetwise. The Di Benedettos were unaware that the loan had been approved upon the fraudulent material inserted by Streetwise. Mrs Di Benedetto had been assured by Mr Bangaru that Kim Cannon knew that Streetwise was paying the loan and that Streetwise did this all the time. If they had known that the lender did not take into account the promise by Streetwise to contribute to the loan repayments when considering the application and that their financial position truthfully stated did not meet the lending guidelines, Mr and Mrs Di Benedetto would not have proceeded with the loan. These matters are relevant to the consideration of the circumstances identified in s 9(2)(d) and s 9 (2)(j) of the CRA and I take them into account.

424 The loan agreement, mortgage and direct debit authority were forwarded by Hunt and Hunt under cover of letter dated 13 February 2003 direct to Streetwise. Hunt and Hunt were Tonto’s solicitors and were panel lawyers for the Origin program. By sending the documentation to Streetwise, the solicitors breached the procedures stipulated in the Origin “Document and Procedures Manual”. The failure to comply with Origin’s service requirements placed the loan documentation in the hands of Streetwise thereby assisting Mr Bangaru and Mr Fassos to rush Mr and Mrs Di Benedetto into signing the loan agreement and mortgage without the Di Benedettos having the opportunity to consider the documents.

425 When Mr Bangaru and Mr Fassos came to the Di Benedetto home with these documents, Mr and Mrs Di Benedetto were in a position of disadvantage. They were persuaded not to obtain their own legal advice: s 9(2)(h) of the CRA. No one explained to them the provisions of the documents and their legal and practical effect: s 9(2)(i) of the CRA. They understood, however, that they were responsible for the loan repayments, that they were giving a mortgage over their home as security for the loan and their property was at risk if the payments were not made. Their understanding of the gist of what they were signing detracts from the consideration of the injustice which arises under s 9(2)(i). They, like Mr and Mrs O’Donnell, had been seduced by Mr Bangaru and by high-pressured and clever salesmanship into believing that they could place their trust in Streetwise and that there was little risk of default in repaying the loan as Streetwise had agreed to make the payments into Mr Di Benedetto’s bank account.

426 Neither Tonto nor Permanent was a party to the joint venture agreement and no direct advantage was received by them from the loan agreement and mortgage other than that specified in the loan agreement. Tonto, however, had chosen to conduct its business with Streetwise in the way that it did for its own commercial advantage.

427 By signing the documents, Mr and Mrs Di Benedetto had expressed that they were willing to be bound by their contracts. As in the O’Donnell proceedings, I give significant weight to the considerations of public interest that people should honour their contract and in ensuring certainty in commercial relations. These considerations and the considerations which arise from the carelessness of Mr and Mrs Di Benedetto when they signed the loan application form and income declarations are to be weighed against the circumstances pointing to injustice to which I have referred and the following further circumstances:

(i) The contracts arose from the unfair pressure, deception and fraudulent conduct of Streetwise which was acting on behalf of Tonto and Permanent and was their agent: s 9(2)(j) of the CRA.

(ii) By the way in which Tonto conducted its business with Streetwise, Tonto exposed Mr and Mrs Di Benedetto to a serious risk of fraud which was reasonably foreseeable at the time the contracts were made: s 9(4) of the CRA. The Di Benedettos were susceptible to the charms and inducements of Mr Bangaru and the Streetwise salespersons. Furthermore, the branding of the loan application form and letters as Streetwise supported the impression that Streetwise was a business of substance with whom they could enter a joint venture and borrow on the security of the family home for that purpose. In comparison to Tonto and Permanent, they were in a position of disadvantage when they came to negotiate the terms of the contracts. Tonto was in a much better position than Mr and Mrs Di Benedetto to appreciate and to manage the risk of fraud by Streetwise. There was a material inequality in the bargaining power between the parties to the contract: s 9(2)(a) of the CRA.

(iii) The Origin lending guidelines were not followed in the following respects:

free up equity for investment purposes

Flexi Express Home Loan.

(iv) Tonto and Permanent possessed the knowledge of Streetwise as to Mr and Mrs Di Benedetto’s true financial position. Mr and Mrs Di Benedetto did not have the income to service the loan and the obligation imposed upon them by the contracts to make the mortgage payments of $2,895.83 per month was unreasonably difficult to comply with: s 9(2)(d) of the CRA. Their equity in their home met the LVR requirements of the lender and this was asset lending. The Di Benedettos were not aware that the money was being advanced upon the fraudulent information supplied by Streetwise. If they had known that the fraud was committed they would not have proceeded with the loan. They did not know that the contribution to the loan repayments by Streetwise was not taken into account when the loan was approved. Because of the fraud and deception of Streetwise, Mr and Mrs Di Benedetto were unaware of the reality of the risks involved when they mortgaged their home, which was their primary asset, to Permanent. The transaction involved no risk to Permanent and there was an imbalance of risk.

428 The loose attitude that was adopted to the lending guidelines indicated that the lender was not much concerned about the purpose of the loan and the self-employment of the borrowers and was content to lend on the security of the Narraweena property and mortgage insurance. The failure by the lender to follow its own guideline as to loan purpose made it easier for the fraud by Streetwise to remain undetected. I have referred to further arguments advanced for the plaintiffs and considerations of public interest at [418] – [419] above. The asset lending in this case was unjust.

429 I find that the loan agreement and mortgage were unjust in the circumstances relating to the contracts at the time that they were made.

The Tavares and Rowe Proceedings

430 I turn to consider the circumstances relating to the loan agreement and mortgage when they were made in the Tavares and Rowe proceedings. Ms Rowe was employed as a tollbooth operator and also had a casual position as a swimming instructor. She was not much experienced in financial matters. Nevertheless, Ms Rowe had been party to the borrowing and the granting of a mortgage when the home unit at Lane Cove and the Castle Hill home were purchased. Mr Tavares had been self-employed in the music industry and was more experienced in matters financial than Ms Rowe. Neither of them, however, was sophisticated in such matters nor were they naïve. Before they commenced their dealings with Streetwise they understood what it meant to provide a mortgage and that a possible consequence of default in the loan repayments was the sale of the secured property. After Bevan Lydement met with Mr Tavares and Ms Rowe at their home in early January 2003, Mr Tavares rang ASIC and the ACCC to enquire whether there were any bad marks against Streetwise to which enquiries he received negative responses.

431 Mr Tavares was 53 years old and Ms Rowe was 39 years old. There is nothing which suggests that either Mr Tavares or Ms Rowe was incapable of protecting their interests either because of their age or the state of their physical or mental capacity: s 9(2)(e) of the CRA.

432 Mr Tavares and Ms Rowe were persuaded by Streetwise that it was in order for them to sign the loan application and income declaration forms although these forms were only partially completed. They did not know that the application was for a Lo Doc loan nor had they been informed of what the income declaration forms meant nor of the particular significance that the information provided as to their income had in Lo Doc lending. They were assured by Mr Bangaru that it was not necessary to obtain legal advice. These matters are relevant to the consideration of the circumstances identified in s 9(2)(d), s 9(2)(h) and s 9(2)(j) of the CRA and I take them into account. Notwithstanding these matters, the signing of the partially completed documents was careless. They exposed themselves and Tonto to the risk of fraud by Streetwise. As in the cases of the other cross-claimants, the evidence does not establish that the risk of fraud by Streetwise was reasonably foreseeable by them at the time the loan agreement and mortgage were made: s 9(4) of the CRA.

433 They did not have sufficient income to service a loan of $500,000 with an interest rate of 6.95 per cent per annum and a loan term of 30 years. An undisclosed person or persons at Streetwise inserted false information in the loan application form and Mr Tavares’s income declaration as Streetwise knew that truthful disclosure of the assets and income of Mr Tavares and Ms Rowe would not meet the lending guidelines under either the Origin or Firstmac lending programs. In particular, their combined income did not meet the loan serviceability requirements of the lending programs. The loan would not have been approved without the fraud of Streetwise. Mr Tavares and Ms Rowe were unaware that the loan had been approved upon the fraudulent material inserted by Streetwise. If they had known that the lender did not take into account the promise by Streetwise to contribute to the loan repayments when considering the loan application and that their financial position truthfully stated did not meet the lending guidelines, they would not have proceeded. These matters are relevant to the consideration of the circumstances identified in s 9(2)(d) and s 9(2)(j) of the CRA and I take them into account.

434 The letter from Hunt and Hunt enclosing the loan agreement, mortgage and memorandum of mortgage was received by Mr Tavares and Ms Rowe on or about 15 May 2003. When they attended the office of Streetwise on 22 May 2003, they were pressured and rushed into signing the loan agreement and mortgage and no-one explained to them the provisions of the documents and their legal and practical effect: s 9(2)(i) of the CRA. They were persuaded not to obtain their own legal advice: s 9(2)(h) of the CRA. They understood, however, that they were giving a mortgage over their home as security for the loan and their property was at risk if the payments were not made. As in the cases of the other cross-claimants, their understanding of the gist of what they were signing detracts from the consideration of the injustice which arises under s 9(2)(i). In a manner similar to the other cross-claimants they had been seduced by Mr Bangaru and by high-pressured and clever salesmanship into believing that they could put their trust in Streetwise and that there was little risk of default in repaying the loan as Streetwise had agreed to pay $2,200 each month into their bank account.

435 Tonto was not a party to the joint venture agreement and no direct advantage was received by Tonto from the loan agreement and mortgage other than that specified in the loan agreement. Tonto, however, had chosen to conduct its business with Streetwise in the way that it did for its own commercial advantage.

436 By signing the contracts, Mr Tavares and Ms Rowe had expressed that they were willing to be bound by their contracts. I give significant weight to the considerations of public interest that people should honour their contract and in ensuring certainty in commercial relations. These considerations and the considerations which arise from the carelessness of Mr Tavares and Ms Rowe when signing the loan application and Mr Tavares when signing the income declaration are to be weighed against the circumstances pointing to injustice to which I have referred and the following further circumstances:

(i) The contracts arose from the unfair pressure, deception and fraudulent conduct of Streetwise which was acting on behalf of Tonto and was Tonto’s agent: s 9(2)(j) of the CRA.

(ii) By the way in which Tonto conducted its business with Streetwise, Tonto exposed Mr Tavares and Ms Rowe to a serious risk of fraud which was reasonably foreseeable at the time the contracts were made: s 9(4) of the CRA. Like the other cross-claimants, Mr Tavares and Ms Rowe were susceptible to the charms and inducements of Mr Bangaru and the Streetwise salespersons. Furthermore, the branding of the loan application form and letters as Streetwise supported the impression that Streetwise was a business of substance with whom they could enter a joint venture and borrow on the security of their home for that purpose. When compared to Tonto, they were in a position of disadvantage when they came to negotiate the terms of the contracts. Tonto was in a much better position than Mr Tavares and Ms Rowe to appreciate and to manage the risk of fraud by Streetwise. There was a material inequality in the bargaining power between the parties to the contract: s 9(2)(a) of the CRA.

(iii) The FirstMac lending guidelines were not followed in the following respects:

(a) No ABN search was made.

(iv) Tonto possessed the knowledge of Streetwise as to the true financial position of Mr Tavares and Ms Rowe. They did not have the income to service the loan and the obligation imposed upon them to make the mortgage payments of $2,753.70 per month was unreasonably difficult to comply with: s 9(2)(d) of the CRA. Their equity in their home met the LVR requirements of the lender and this was asset lending. Mr Tavares and Ms Rowe were not aware that the money was being advanced upon the fraudulent information supplied by Streetwise. If they had known that the fraud was committed they would not have proceeded with the loan. They did not know that the contribution to the loan repayments by Streetwise was not taken into account when the loan was approved. Because of the fraud and deception of Streetwise, Mr Tavares and Ms Rowe were unaware of the reality of the risks involved when they mortgaged their home, which was their primary asset, to Tonto. The transaction involved no risk to Tonto and there was an imbalance of risk.

437 The loose attitude that was adopted to the lending guidelines indicates that the lender was not much concerned about the self-employment of the borrowers and was content to lend on the security of the Castle Hill property and mortgage insurance. I have referred to further arguments advanced for the plaintiffs and considerations of public interest at [418] – [419] above. The asset lending in this case was unjust.

438 I find that the loan agreement and mortgage were unjust in the circumstances relating to the contracts at the time that they were made.

Relief under the CRA

439 I now turn to the third stage of the process which is the question whether relief should be granted and, if so, the extent of the relief. Section 7(1) of the CRA requires the court to consider whether it is “just” to grant relief “for the purpose of avoiding as far as practicable an unjust consequence or result”.

440 The plaintiffs submitted that the court should not exercise its discretion to set the loan agreements aside as to do so would relieve the borrowers from their own admitted carelessness. It was recognised that a significant factor in the exercise of the discretion was whether Streetwise was found to be Tonto’s and Permanent’s agent as knowledge of the circumstances of injustice is highly relevant to the exercise of the discretion: Khoshaba at [77], [122]; Beneficial Finance Corp Ltd v Karavas (1991) 23 NSWLR 256 per Meagher JA at 278; Nguyen v Taylor (1992) 27 NSWLR 48 per Sheller JA at 71F.

441 Tonto and Permanent possessed the knowledge of Streetwise their agent. The lending guidelines were not followed and Tonto conducted its business with Streetwise in such a way as to expose the cross-claimants to a serious risk of fraud. Neither of the plaintiffs could be regarded as an innocent party to the transactions.

442 The unjust consequence or result that is be avoided in the O’Donnell proceedings is that Mr and Mrs O’Donnell must repay a loan of $500,000 with an interest rate of 6.95 per cent per annum or they will lose their home. As at 20 March 2009 the total amount payable to Permanent was $690,471.61.

443 The unjust consequence or result that is to be avoided in the Di Benedetto proceedings is that Mr and Mrs Di Benedetto must repay a loan of $500,000 with an interest rate of 6.95 per cent per annum or they will lose their home. As at 20 March 2009 the total amount payable to Permanent was $692,094.16.

444 The unjust consequence or result that is to be avoided in the Tavares and Rowe proceedings is that Mr Tavares and Ms Rowe must repay a loan of $416,000 with an interest rate of 6.95 per cent per annum or they will lose their home. As at 20 March 2009, the total amount payable to Tonto was $532,508.27.

445 The plaintiffs put to me that as an alternative to setting aside the loan agreements in their entirety, it would be open for the court to set them aside in part. It seems to me that if I was to accede to this submission an unjust consequence or result would not be avoided as the contracts arose from the fraudulent conduct of Streetwise and the cross-claimants received no benefit from the loan monies save for the sum of $50,872.76 which was used by Mr Tavares and Ms Rowe to discharge their mortgage with the ANZ bank.

446 I make the following orders in the matter of Permanent Trustee Company Limited v Gillian O’Donnell and John Robert O’Donnell (the O’Donnell proceedings):

1. The plaintiff’s claim be dismissed.

Contracts Review Act

(a) The loan agreement dated 10 January 2003 and made between Permanent Trustee Company Limited as lender and Gillian O’Donnell and John Robert O’Donnell as borrowers, and

(b) Mortgage registered No 9386484P between Gillian O’Donnell and John Robert O’Donnell as mortgagors and Permanent Trustee Company Limited as mortgagee affecting the land in certificate of title Folio Identifier 62/7912

Contracts Review Act

4. Grant liberty to apply on seven days notice in relation to any question arising in relation to order 3.

5. Order that the plaintiff pays the defendants’/cross-claimants’ costs of the proceedings.

447 I make the following order in the matter of Permanent Trustee Company Limited v Lawrence Di Benedetto and Maria Di Benedetto (the Di Benedettto proceedings):

1. The plaintiff’s claim be dismissed.

Contracts Review Act

(a) The loan agreement dated 19 February 2003 and made between Permanent Trustee Company Limited as lender and Lawrence John Di Benedetto and Maria Di Benedetto as borrowers, and

(b) Mortgage registered No 9457518F between Lawrence Di Benedetto and Maria Di Benedetto as mortgagors and Permanent Trustee Company Limited as mortgagee affecting the land in certificate of title Folio Identifier 5/23820

is void in whole.

Contracts Review Act

4. Grant liberty to apply on seven days notice in relation to any question arising in relation to order 3.

5. Order that the plaintiff pays the defendants’/cross-claimants’ costs of the proceedings.

448 I make the following orders in the matter of Tonto Home Loans Australia Pty Ltd v Jose De Carvalho E Rego Tavares and Kim Lee-Anne Rowe (the Tavares and Rowe proceedings):

1. The plaintiff’s claim be dismissed.

Contracts Review Act

(a) The loan agreement dated 22 May 2003 and made between Tonto Home Loans Australia Pty Ltd as lender and Jose Tavares and Kim Lee-Anne Rowe as borrowers, and

(b) Mortgage registered No A9709341 between Jose De Carvalho E Rego Tavares and Kim Lee-Anne as mortgagors and Tonto Home Loans Australia Pty Ltd as mortgagee affecting the land in certificate of title Folio Identifier 60/240036

is void in whole.

Contracts Review Act

4. In exchange for the instrument or instruments which are referred to in order 3, Jose De Carvalho E Rego Tavares and Kim Lee-Anne Rowe are to pay to Tonto Home Loans Australia Pty Ltd the sum of $50,872.6 with interest at the rate of 6.95 per cent per annum calculated on that sum from 31 July 2005 until the date of payment.

5. Grant liberty to apply on seven days notice in relation to any question arising in relation to orders 3 and 4.

449 Having made these orders under the Contracts Review Act, it is unnecessary to consider the further claims for relief.

Citations

Permanent Trustee Co Ltd v O'Donnell [2009] NSWSC 902

Most Recent Citation

Cases Citing This Decision

14

Bluemine Pty Ltd (in liq) v AKA (Civil) Pty Ltd; Earth Civil Australia Pty Ltd (in liq) v AKA (Civil) Pty Ltd; Diamondwish Pty Ltd (in liq) v Ivana Cassaniti; Rackforce Pty Ltd (in liq) v Ivana Cassaniti; RCG CBD... [2022] NSWCA 160

Tonto Home Loans Australia Pty Ltd v Tavares [2011] NSWCA 389

Firstmac Ltd v Hunt & Hunt (a firm) [2018] QSC 258

Cases Cited

19

Statutory Material Cited

5

Perpetual Trustee Co Ltd v Khoshaba [2006] NSWCA 41

Pianta v National Finance & Trustees Ltd [1964] HCA 61

Perpetual Trustee Co Ltd v Khoshaba [2006] NSWCA 41

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CITATION:	Permanent Trustee Company Limited v Gillian O'Donnell Permanent Trustee Company Limited v Di Benedetto Tonto Home Loans Australia Pty Ltd v Tavares [2009] NSWSC 902
HEARING DATE(S):	23 March 2009 ; 24 March 2009; 26 March 2009; 27 March 2009; 30 March 2009; 31 March 2009; 1April; 6 April 2009; 7 April 2009; 8 April 2009; 21 April 2009
JUDGMENT DATE :	4 September 2009
JUDGMENT OF:	Price J at 1
DECISION:	See paragraphs 446 447 and 448
CATCHWORDS:	CONTRACTS - loan contracts and mortgages - Lo Doc loans - fraud of finance broker and property developer - borrowers persuaded to sign blank or partially completed loan application forms - borrowers persuaded not to obtain independent legal advice - carelessness of borrowers - loans approved on fraudulent financial information inserted by finance broker without knowledge of borrowers - purported use of loan funds for joint ventures - ASIC intervention - public interest - lending guidelines - panel lawyer's guidelines - mortgage insurance - special condition as to cash out - prudent lending practice - PRINCIPAL and AGENT - conflict of interest - whether broker acting for borrowers or lender - Introduction Deed - terms of agreement - true nature of relationship - attribution of knowledge of broker to mortgage manager and lender - asset lending - conduct of business by mortgage manager - risk of serious fraud to borrowers - UNJUST CONTRACTS - Contracts Review Act - consideration of relevant circumstances - lenders guidelines not followed - whether unjust asset lending - consideration of public interest - exercise of discretion.
LEGISLATION CITED:	Australian Securities and Investments Commission Act 2001 (Cth) Contracts Review Act 1980 s 7(1)(d) Fair Trading Act 1987 Trade Practices Act 1974 Real Property Act 1900 s 57(2)(b)
CATEGORY:	Principal judgment
CASES CITED:	Baltic Shipping Co v Dillon (1991) 22 NSWLR 1 Beach Petroleum NL & Claremont Petroleum NL v Johnson (1993) 115 ALR 411 Beach Petroleum NL v Kennedy (1999) 48 NSWLR 1 Beach Petroleum NL v Johnson (1993) 43 FCR 1 Belmont Finance Corporation Ltd v Williams Furniture Ltd [1979] Ch 250 Beneficial Finance Corp Ltd v Karavas (1991) 23 NSWLR 256 Branwhite v Worcester Works Finance Ltd [1969] 1 AC 552 CIT Credit Pty Ltd v Keable [2006] NSWCA 130 Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226 Custom Credit Corporation v Lynch [1993] 2 VR 469 JC Houghton & Co Pty Ltd v Nothard Lowe & Wills Ltd [1928] AC 1 Kowalczuk v Accom Finance Pty Ltd (2008) 252 ALR 55 Lloyd v Grace Smith & Co [1912] AC 716 Micarone v Perpetual Trustees Austalia Ltd (1999) 75 SASR 1 Morlend Finance Corporation (Vic) Pty Ltd v Westendorp [1993] 2 VR 284 Nathan v Dollars & Sense Finance Ltd [2007] 2 NZLR 747 Nguyen v Taylor (1992) 27 NSWLR 48 NMFM Property v Citibank (2000) 107 FCR 270 Octapon Pty Ltd v Esanda Finance Corporation Ltd (Supreme Court of New South Wales 3 February 1989 unreported) Perpetual Trustee Company Limited v Khoshaba [2006] NSWCA 41 Re Hampshire Land Co [1896] 2 Ch 373 Riz v Perpetual Trustee Australia Ltd [2007] NSWSC 1153 Rosenberg v Percival (2001) 205 CLR 434 Short v Crawley (No 30) [2004] NSWSC 1322 Spina v Permanent Custodians Limited [2009] NSWCA 206 Suncorp-Metway Ltd v Bellairs [2009] NSWSC 135 West v AGC (Advances) Ltd (1986) 5 NSWLR 610
TEXTS CITED:	Dal Pont Law of Agency 2nd ed (2008) LexisNexis Butterworths
PARTIES:	Permanent Trustee Company Limited (Plaintiff) Australian Securities and Investments Commission (as Intervener) John & Gillian O'Donnell (Defendant/cross-claimants) Lawrence & Maria Di Benedetto (Defendant/cross-claimants) Tonto Home Loans Australia Pty Ltd (Plaintiff) Jose De Carvalho E Rego Tavares & Kim Rowe (Defendant/cross-claimants)
FILE NUMBER(S):	SC 12148/06; 12147/06; 15644/05
COUNSEL:	A Bell SC, A Abadee + J Muir (Plaintiffs) P Menzies QC + A Fernon (Defendant/cross-claimants) R Wright SC + J Arnott (ASIC as Intervener)