Perpetual Trustee Ltd v Baranov

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

No. 4208 of 2009

BETWEEN

PERPETUAL TRUSTEE LIMITED (ACN 000 001 007) and CHALLENGER MANAGED INVESTMENTS LIMITED (ACN 002 835 592)	Plaintiffs
and
MARK BARANOV	Defendant

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JUDGE:	MUKHTAR AsJ
WHERE HELD:	Melbourne
DATES OF HEARING:	24 November, 1, 22 (mention) December 2009
DATE OF JUDGMENT:	8 February 2010
CASE MAY BE CITED AS:	Perpetual Trustee Ltd and another v Baranov
MEDIUM NEUTRAL CITATION:	[2010] VSC 18

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MORTGAGES − Default by mortgagee ― Deed of cross collateralisation ― Multiple securities available to mortgagee to satisfy debt ― Claim for possession of mortgagee’s family home ― Precursor to mortgagee’s sale ― Statutory obligation to exercise power of sale in good faith with regard to mortgagor’s interests ― Protection of “interests” in family home ― Whether mortgagee obliged to have primary recourse to other securities ― Applicability of Nolan v MBF Investments [2009] VSC 244

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APPEARANCES:	Counsel	Solicitors
For the Plaintiffs	Mr B Carew	Deacons
For the Defendant	Mr R Cook	Efron & Associates

HIS HONOUR:

This is an application for summary judgment by the plaintiffs for moneys secured under a mortgage of land, and possession of the mortgaged property at 85 Lumeah Road (also known as 105 Balaclava Road) in Caulfield North. The defendant is the registered proprietor of that land. It is his family home. He is a property developer operating businesses in Sydney and Melbourne. As part of some dealings with the plaintiffs, he mortgaged his home to the first plaintiff as security for his obligations under a guarantee to the second plaintiff for the liabilities of his company Beluga Developments Pty Ltd (“Beluga”). The plaintiffs allege there has been default under the mortgage and guarantee. They say as at 28 September 2009 the defendant owes $3,371,829 and interest has been accruing at $628.84 per day since then.
The affidavit material and the exhibits are vast. Argument took one and a half days. Of itself, that might suggest there is an arguably good defence or a triable issue, or that “there ought for some other reason be a trial”.[1] But the plaintiffs maintained there truly was no defence, and in my view they are entitled to test stringently the tenability of each of the defences which are said to be arguable. That means the Court is bound to assess the case, issue by issue, even if it may involve having to consider a difficult or substantial question of law.[2] In that regard, I note that on 29 June 2009 the defendant filed a notice to have this proceeding heard by a jury.
[1]See Rule 22.06 (1) (b).
[2]See discussion and authorities in Civil Procedure Victoria, Vol 1 at [22.06.25].
There are four issues. First, has there been default under the mortgage? Secondly, the defendant contends as a matter of construction of s 76 of the Transfer of Land Act (“the TLA”), the default notice is inadequate. Thirdly, he says the lender has sold some other mortgaged properties at an undervalue by an amount that is enough to absorb the debt. Fourthly, heavy reliance is placed on the recent decision of Vickery J in Nolan v MBF Investments Pty Ltd.[3] That case concerned the exercise of a mortgagee’s power of sale under s 77 of the TLA. That case says that s 77 has to be construed faithfully with the imperative under the principle of legality to not curtail the human right to protected one’s home from arbitrary inference.[4] The defendant says the plaintiffs should sell other secured properties first to meet the debt on the account, and he could then mortgage his family home to provide “top up funds” for any shortfall.
[3][2009] VSC 244.
[4]See Nolan at [179] to [184].
The transactional facts are not in dispute. But they need to be rehearsed to a greater extent than is usual in such applications because counsel for the plaintiff submitted that these facts made this case patently outside the application of Nolan; that is, there was no triable issue whether Nolan applied.

The facts

The first plaintiff (“Perpetual”) is the custodian of the Challenger Howard Mortgage Fund. The second plaintiff (“Challenger”) is the trustee of that fund. The evidence in this case came largely from managers for Challenger Commercial Lending Limited which is Perpetual’s Program Manager, having responsibility for the management, regulation and credit control of Challenger’s loan accounts with its borrowers. Nothing is said to turn on the different roles or participation of the plaintiffs in the dealings.
There were a suite of dealings. By deed of guarantee and indemnity dated 9 July 2007, the defendant and Beluga guaranteed to Challenger the due performance of all the covenants and obligations incurred by Beluga (as trustee for Bar Um Trust) under a deed of loan between Beluga and Challenger for an advance of $3 million plus interest and costs.[5] No notice or demand for payment was required. The defendant is the sole director and sole secretary of Beluga.
[5]See Exhibit JGM-8.
On the same date, the defendant gave a mortgage to Perpetual “in consideration of and to better secure the principal sum lent or agreed to be lent to the mortgagor by the mortgager”.[6] The principal sum was identified as $3 million. The terms of the mortgage are typical in that the mortgage secures all moneys which the defendant could become indebted for moneys borrowed, or any financial accommodation whatsoever, including moneys owing at any time under a guarantee.[7]
[6]See Exhibit JGM-9.
[7]See the Memorandum of Common Provisions AA 674 at Exhibit JGM-10. See especially the definition of “Facility Agreement” and “Financial Indebtedness” at p.2.
On the same date, the affected parties signed a deed of loan.[8] The amount of the facility was $3 million and the purposes were expressed to be “to assist with the purchase of residential property at 85 Lumeah Road, North Caulfield”. The deed of loan identifies the defendant, as well as Beluga, as a guarantor. The First Schedule of the deed also states these two special conditions:
The loan is to be cross-collateralised with all other Challenger loans to Beluga Developments Pty Ltd and Fundsfirst Pty Ltd;
The Shoreham property must be sold within six months of the date of settlement of this loan.
The Shoreham property was a property at 1 Lexington Avenue, Shoreham, which the deed identifies as belonging to the defendant.
[8]See Exhibit JGM-11.
Under the deed, the borrower was obliged to pay the principal outstanding together with all interest and any other amounts outstanding under the facility by the expiry date of one year from the first day of the month following settlement. Interest was to accrue day to day, and a “higher rate” was applicable on any unpaid moneys. The deed identified the “events of default” which included, typically, the event where there is a failure to pay any amount payable under the deed or other “transaction document” including a guarantee.
Of great importance in this case are two deeds of cross-collateralisation. The first was dated 9 July 2007.[9] Another party to this deed was Fundsfirst Pty Ltd (“Fundsfirst”) as trustee for the Mark Baranov Discretionary Trust. That was a company of which Baranov was the sole director. He also guaranteed the debts of Fundsfirst. This deed identified six facilities including the loan facility of $3 million. On my calculations, the total amount of the finance was $8,629,520. The deed also identifies 12 securities which, for present purposes include:
(a)the mortgage over the defendant’s home;
(b)the mortgage over the defendant’s property at 21 Lexington Avenue, Shoreham;
(c)a mortgage over Shops 2, 3, 4, 5 and Unit 7, 91-93 Longueville Road, Lane Cove in New South Wales; and
(d)a mortgage over shops 1 and 2, 601 Little Collins Street in Melbourne; and
(e) a mortgage over (strata title) lot S8, S2 and S3 at 601-611 Little Collins Street in Melbourne.
[9]See Exhibit JGM-18.
Clause 2 of the cross-collateralisation deed states
2.1The parties acknowledge and agree that each of the Facilities is collateral to each other and with the Securities. Default under either or all of the Facilities or any or all of the Securities will be deemed to be default under each and every document.
2.2The parties acknowledge and agree:
(a)that each of the Securities are cross collateralised to the intent that Challenger may recover under any one or more of the Securities the moneys owing or secured under all or any of the Facilities;
(b)to punctually and duly observe and perform all of the terms, covenants and conditions contained or implied by the Securities and the Facilities;
(c)that default under any or all of the Facilities, or any one Security will constitute default under all the other Securities;
(d)the moneys owing or secured under the Facilities may be recovered by Challenged exercising its rights under any Security separately or concurrently with any other Security and Challenger will be entitled to enforce each Security without reference to any other and without first having to resort to its rights under any one of the Securities; (emphasis added)
(e)each Security will be enforceable notwithstanding that any other Security or any obligations arising between all or any of the parties and CRA or any other person may be void or unenforceable in whole or in parts.
2.3This Deed will operate without derogating from the terms of any Security or from any other security collateral to the Securities and the parties to each of the Securities acknowledge that their liability under the Securities will continue in full force and effect.”
To a similar effect, reference should also be made to the clause 10.2(b) of the Memorandum of Common Provisions AA 674 which formed part of the defendant’s mortgage over his home.[10] That clause states that “no other Security Interest at any time held by the Mortgagee will in any way prejudicially affect this Mortgage, any Collateral Security or any Power.”
[10]See exhibit JGM-10.
The first deed of cross-collateralisation was superseded by a second deed dated 14 January 2008. There are some variations to the details of the facilities but it preserves within its purview the existing loan facility of $3 million under the deed of loan dated 9 July 2007. The number of securities was enlarged but, for present purposes, the deed still included the mortgage over the shops in Lane Cove in New South Wales, over the 3 lots at 601-611 Little Collins Street, and over the defendant’s home. The pre-existing mortgage over the land in Shoreham disappeared, presumably because it was sold shortly after the first deed of cross-collateralisation as was required under the special conditions of the deed of loan. Otherwise, the operative parts of the second deed concerning cross-collateralisation in clause 2.1, 2.2 and 2.3 remained identical.
It is not necessary to describe the various financial facilities given to Fundsfirst and Beluga as identified in the second deed of cross-collateralisation. The affidavit of Joe George Mercieca, sworn on the plaintiffs’ behalf on 2 October 2009 identifies those facilities and the mortgages and guarantees attached to them.[11] But it is important to refer to some subsequent facts.
[11]See the applicant at para 33 ff.
As shown above, one security was a mortgage given by Fundsfirst for Shops 2, 3, 4 and 5 and Unit 7 in Lane Cove, Sydney. On 2 September 2009, the Supreme Court of New South Wales made orders that Fundsfirst give possession of those properties to the plaintiffs.[12] Another property identified in the deed of cross-collateralisation was 42 Ross Street in Toorak as mortgaged by Fundsfirst. On 3 February 2009, this Court made orders that the plaintiffs recover possession of that property. Finally, lot S8, S2 and S3 at 601-611 Little Collins Street are also held by the plaintiffs under a court order for possession. That leaves Shop 1 and Shop 2 at Little Collins Street but they have been sold by Beluga (about which, more later), and it leaves the defendant’s home as security.
[12]See para 36 of the affidavit.
Pausing here, what is important to realise when it comes to considering Nolan, so the plaintiffs urge, is that the cross collateralised dealings in this case involve the separate interests of three persons, namely the defendant, Fundsfirst and Beluga. And there were separate mortgages of real property, and separate mortgaged properties. That is, Fundsfirst mortgaged the shops in Lane Cove; Beluga mortgaged the 2 shops in 601 Little Collins Street and Lots S8, S2 and S3 at 601-611 Little Collins Street; and the defendant mortgaged his home in North Caulfield.
The plaintiffs adduced into evidence a certificate under s 55B of the Evidence Act which attached computer-made statements of Beluga’s account number 9554 for the $3 million facility.[13] That statement shows that an interest payment of $18,770 was dishonoured on 5 August 2008 and thereafter the higher interest rate was incurred. Payment on 3 September 2008 was also dishonoured. Some credits were made but by 22 September 2008, the account was in arrears of interest by $10,231.78. The evidence also shows that as at 1 November 2008, the interest due was $28,981.78.
[13]See Exhibit JGM-12.
On 1 December 2008, Perpetual’s solicitor served a default notice on Beluga under the deed of loan.[14] The notice identified the default as being the arrears of interest of $10,231.78 as at 1 October 2008 and $18,750 as at 1 November 2008. The notice fixed nine days as the time for payment of the total amount of $28,981 due. It warned that unless the total amount due was paid within that time, then the whole of the balance outstanding under the loan facility (stated to be then standing at $3,028,981) would become due.
[14]See Exhibit JGM-13.
On the same date, a similar default notice was sent to the defendant as mortgagor and guarantor. It called on him to pay the arrears, failing which the notice said Perpetual may take possession of the mortgaged land and exercise its power of sale. The notice referred in its heading to s 76 of the TLA.
The default was not remedied. The writ in this proceeding was filed on 13 January 2009.
The mortgage contains a typical provision giving a conclusive effect to a certificate, which states the amount owing.[15] These validity of such a certificate was recognised by the High Court in Dobbs v National Bank.[16] But the plaintiffs did not produce such a certificate. The plaintiffs’ collection manager swears that as at 29 September 2009, the defendant owes Challenger the sum of $3,371,829.27 under the guarantee, the mortgage and the loan account with interest accruing as from 29 September 2009 at the rate of $628.84 per day.[17] Counsel submitted that such a sworn statement was a certificate according to the definition of that word in the Shorter Oxford Dictionary as being a document in which a fact is formally certified or attested. I do not accept that submission. This is a question of manner and form. The mortgage says certificate, which is something resembling solemn form and certainly more than a statement in an affidavit.
[15]See clause 2.8 of the MCP, Exhibit JGM-10.
[16](1935) 53 CLR 643.
[17]See affidavit of J G Mercieca, sworn 2 October 2009, para 54.
But I do not think it matters. The certificate produced under s 55B of the Evidence Act, which was in proper form, shows that as at 15 September the principal owing was $3,018,425 and the interest due as at 1 September 2009 was $316,869, giving a total of $3,335,294. That gives reliability to the statement in the affidavit which puts the figure at $3,371,829 at a time 13 days later which would take into account accumulating interest and expenses, especially litigation costs. Accordingly, I regard the quantification of the default figure as satisfactorily proved.
An affidavit of Allan Farrel Kowalsky[18] on behalf of the plaintiffs produces a table showing, amongst other things, the indebtedness to the plaintiff as at 29 October 2009 by reference to each of the facilities referred to in the deed of cross-collateralisation. The table gives an understanding of the “bottom line” figures to put the legal issues in a proper context. The table shows or enables it to be calculated that:
(a)the outstanding debt as at 29 October 2009 over all the facilities was $9,706,782;
(b)Shops 2, 3, 4 and 5 in Lane Cove (owned by Fundsfirst) have been sold by the lender, but Unit 7 has not;
(c)Shops 1 and 2 at 601 Little Collins Street have been sold by Beluga Developments;
(d)Lot S8, S2 and S3 at 601-611 Little Collins Street are held by the lender under a court order for possession, but are yet to be sold;
(e)42 Ross Street in Toorak (owned by Fundsfirst) has been sold;
(f)assuming a recovery of $6 million for the Little Collins Street properties referred in (d) above, and assuming a recovery of $4 million for the defendant’s home, and bringing into account moneys to be received on settlement of the sale of the properties in Lane Cove, the total realisation of securities will be $12,258,000;
(g)if recourse is not had to the defendant’s home (valued at $4 million) for the total indebtedness of $12,258,000, then all that could be realised is $8,258,000 which is means a shortfall of $1,448,782 from the debt in (a).
[18]Sworn 29 November 2009.
Thus, the outcome as far as the lender is concerned, is that on the figures it is required to have recourse to all securities, including the defendant’s home, in order to satisfy the accumulated debt. This puts to one side what it says is its paramount legal entitlement anyway under clause 2.2(d) of the deed of cross-collateralisation to have recourse to the home security.

First issue 1: was there default?

The defendant seeks to agitate a triable issue about whether there was in truth a default. To understand this, it is necessary to proceed in small steps.
The starting point is the Notice of Default.[19] The notice says that for account no. 9554 there were arrears at 1 October 2008 of $10,231 and as at 1 November 2008 there was outstanding interest of $18,750, thus giving a total of $28,981. The account statement which the defendant put into evidence[20] shows that as at 1 October 2008, the balance due was $28,981 but that on 10 October 2008, all that was received was $18,750, leaving a balance due of $10,231. Then, when the interest was due on 1 November 2008, the balance due increased to $28,981.78 which is the total amount sought in the notice of default.
[19]Exhibit JGM-13 and JGM-14.
[20]Exhibit MB-14.
Shop 1 at 601 Little Collins Street was sold by Beluga Developments under a contract dated 15 August 2008.[21] It was sold for $700,000 with a deposit of $70,000. The balance was due on 20 September 2008 at settlement. The statement of account shows that on 22 September 2008, a surprisingly smaller sum of $457,108 was applied as a repayment into the account. Those moneys came from the sale of Shop 1. So, where did the difference of about $250,000 go? asks the defendant’s counsel, even after allowing for the usual costs of sale. He compares that with the sale of Shop 2 which sold for $730,000 by a contract dated 7 July 2009.[22] For that sale, the statement of account shows that on 6 August 2009, a sum of $702,980 was paid into Beluga’s account. That was accepted as being the net proceeds of sale from the sale of Shop 2, and was less questionable.
[21]See Exhibit MB-8.
[22]See Exhibit MB-9.

It was submitted there was quandary, which the plaintiffs had not explained, why only $457,108 was paid into this account and no explanation of where the lender has put the balance of the net proceeds for Shop 1. Then, it was said, had the “missing” amount been accounted for in this account, there would have been no default. That is, it was within the power of the lender at the time of the notice of default to pay off the amount outstanding.
This supposition was met squarely with an affidavit of William Desmond Slattery, sworn on 27 November 2009. At paragraph 6 of that affidavit, he swears that after the sale of Shop 1, the lender received $611,894 from Beluga. That is, that sum was received from the defendant because the defendant made the sale, not the lender. At the defendant’s request, on about 22 September 2008 the lender then credited the amount of $457,108 into account number 7734 and then distributed various other amounts to meet interest due on other facilities. That is the evidence.
I think this dispels any supposition that it was the lender that might have received some larger amount but only credited a smaller amount into the account. The fact is that Beluga sold Shop 1, and what the lender credited was all that Beluga had given it; and the credits were made before the notices of default. The settlement figures for Shop 1 are within the knowledge of Beluga, not the lender. On the evidence, the lender applied the funds given to it in the way it was instructed to do so by the defendant. And as I see it, that was done by the defendant in his own interests to meet interest obligations over various accounts over which his companies, and he, were liable.
It is the borrower’s obligation to ensure his accounts are in order. It is not up to a lender to “sprinkle” funds around to ensure that a borrower’s accounts are in order, especially where specific instructions are given as to where the borrower wants funds applied.
In the face of that clear evidence, I do not accept the submission that leave to defend ought be given on this point alone in order that there could be discovery to ascertain or explain how and why the funds were dispersed in this way. Accordingly, on this first issue, in my view there is no reasonable argument to advance at trial that there was no default or that it was within the power of the plaintiffs to prevent the default arising.

Second issue: was the notice inadequate?

As I understood it, this argument was cognate to the first submission. It drew attention to s 76 and 77 of the TLA. Section 76(1) says where relevant –
If default is made…in any such mortgage…and continues for one month or such other period as is therein expressly fixed, the mortgagee…may serve on the mortgagor…notice in writing to pay the money owing…
Section 77 says where relevant –
If within one month after the service of such notice…or such other period as is fixed in such mortgage…the mortgagor grantor or other persons do not comply with the notice or demand the mortgagee…may, in good faith and having regard to the interests of the mortgagor…sell…the mortgaged or charged land…
Clause 7.3 of the Memorandum of Common Provision fixed 7 days for the purposes of s 76. The default notice served on the defendant (as mortgagor and guarantor) gave him 9 days to pay the arrears, but nothing turns on the difference in the time limit. The defendant’s counsel submitted that the notice was simply a demand that Baranov pay $28,981 and at that stage only Beluga was in default not Baranov. On “day 10” the mortgagee could have exercised its power of sale, assuming there had been default when the notice was served. But, it was submitted, until such time as the lender exercises its power of sale, the recipient of the notice could in the meantime satisfy the notice according to its terms. But if the mortgagee wished to demand payment of the whole of the loan as accelerated by the default, then it was necessary to serve another notice under s 76 on Baranov before it could exercise its power of sale. As it was within the power of the plaintiffs to pay the default (see the first issue) the demand has been satisfied.
I cannot see any merit in this argument. The notice was sent to Baranov as a guarantor and mortgagor. He is the mortgagor; he has also has guaranteed due performance; and it is an “all moneys” mortgage. His liability is immediately co-extensive with Beluga’s. The notice stated (clause 5) that if the arrears were not paid then the whole of the balance outstanding under the principal loan would become immediately due and payable. That is dictated by clause 15 of the deed of loan. The outcome, just as the plaintiffs submitted, was that if he did not remedy the default in 9 days then there arose a right to take possession and then to sell the mortgaged property in Lumeah Road.
In any case, to the extent that this second argument depends upon the contention that it was within the power of the lender to pay off the default after the sale of Shop 1, then I see no factual basis for that contention, as I have already stated on the analysis of the first issue.
If there has been default, then it is clear that under s 78 of the TLA, the mortgagee may enter into possession of the mortgaged land and bring an action for ejectment. In this proceeding the plaintiffs are seeking possession before any sale.
For those reasons, I do not see a triable issue on the second issue.

Third issue: sale at an undervalue

It is now established in this Court that as part of the duty to exercise the power of sale in good faith under s 77 of the TLA, a mortgagee is bound to obtain for the mortgaged property the best price obtainable consistently with the right of the mortgagee to realise the security: see Vasilou v Westpac Banking Corporation;[23] Kravchenko v The Rock Building Society;[24] and generally, Croft and Johansson, The Mortgagee’s Power of Sale.[25] I will also proceed on the basis for present purposes that the mortgagee’s duty of good faith is owed to anybody interested in the equity of redemption, and to a guarantor: see generally Fisher & Lightwood’s Law of Mortgage.[26]
[23](2007) 19 VR 229, 242.
[24][2009] VSCA 292 at [20].
[25](2nd Aust ed) at 144-5.
[26]By Tyler, Young and Croft (2nd Aust ed) at 20.22.
In essence, the defendant contends that the plaintiffs sold at undervalue and should have got more from their sale of the Lane Cove shops (owned by Fundsfirst). He also says the plaintiffs have undervalued the expected proceeds of the lots at 601-611 Little Collins Street owned by Beluga. He puts into evidence an appraisal from selling agents for the expectable price for those lots. [27] They say an “asking price” of $6.5 million as being “within the range of our market expectation”.[28] The defendant says the lots “should be worth around $6.3 million” based on other sales in the building which he has converted into a price factor per square metre. Both figures exceed the figure of $6 million which the plaintiffs are willing to allow in their calculations.
[27]See defendant’s third supplementary affidavit affirmed 23 November 2009.
[28]See exhibit MB 19.
The defendant says that if the plaintiffs had sold the Lane Cove shops for what they were worth, and if the plaintiffs obtain $6.5 million for the lots at Little Collins Street, then the plaintiffs would not have to “touch” his home. He approximates the differences in valuations as being about $1.5 million which neutralises the debt shortfall of $1,448,000 which the plaintiffs say necessitates them having to sell the defendant’s home (see paragraph 22 above). He also says, alternatively, that the plaintiffs have a valuation of the defendant’s home at $4 million[29] and that gives him sufficient equity to support a loan of $1.448 million and save his home. This alternative point is also connected with the defendant’s ultimate reliance on Nolan.
[29]See affidavit of A F Kawalsky sworn 20 November 2009, at para 14.
The plaintiffs’ affidavits show they obtained valuations before they sold the shops at Lane Cove, and they have valuations of the lots at 601-611 Little Collins Street.[30]
[30]See affidavit of A F Kawalsky at para 5, 7 and 15-17.
But the defendant challenges the capitalisation rates of the rental income on the shops as used by the lender’s valuers. He says he has been a property developer for 13 years and has “a thorough knowledge of how valuers go about valuing commercial properties on the basis of capitalisation of rental value and otherwise.” The plaintiff objected to the defendant’s “expert” evidence about capitalisation rates on the ground that he was not a qualified expert on that subject, and was not himself a valuer.
The technique of valuing commercial property which are suitable for letting as means of investing capital to obtain a reasonable rate of return is known to Courts as one technique of valuation. It is only one method. But it is a skilled business calling for a skilled valuer: see Hyam, The Law Affecting Valuation of Land in Australia[31]. For summary judgment purposes only, I am willing to accept that the defendant has a working knowledge or entrepreneurial understanding about capitalisation rates. But he is not, and does not profess to be, an expert qualified in that field.
[31](3^rd ed) at p117ff.
The problem in these sorts of cases is that the price obtained for the Lane Cove shops, assuming proper steps were taken, is better evidence of value than valuations made afterwards. A difference between opinions on value is not necessarily evidence that the mortgagee has failed in some way. And as for 601-611 Little Collins Street, those sales have yet to be made.
The defendant asserts “the plaintiffs tried to sell all the shops in one single lot after a four week campaign, and when they failed, they immediately proceeded to sell them separately and sold them on the day at reduced price.”[32] He then asserts a shortfall of $312,967 (Shop 2), $35,948 (Shop 3) $150,000 (Shop 4) and at least $371,333 (Shop 5) giving a total of $870,248. He says the shortfall would be even greater because a lower capitalisation rate should have been applied.
[32]See second supp affidavit, sworn 18 November 2009, para 15.
But the plaintiffs’ main point to gain summary judgment was that under the deed of cross collateralisation they were at liberty to have recourse to the defendant’s home regardless of the value or expected proceeds of other securities, and any claim for undervalue could be brought by the affected mortgagor be it Beluga or Fundsfirst. That leads to a consideration of Nolan. Thus, I think it is unavoidable to view this third issue alongside the fourth issue

The decision in Nolan v MBF Investments Pty Ltd

A good part of the defendant’s case was attuned to the decision in Nolan. I think great care has to be taken with that case because it was decided on its own novel facts, and Vickery J was careful to say so.[33] Nolan concerns the exercise of a mortgagee’s power of sale, more particularly, the meaning of the word “interests” in s 77(1) of the TLA. I shall attempt to summarise the case as follows:
[33]At [111] to [113].
(1)The issue in Nolan was whether a mortgagee’s sale of land contravened the duty under s 77 of the TLA to sell the mortgaged land “in good faith and having regard to the interests of the mortgagor”.
(2)The borrower in Nolan mortgaged three adjoining parcels of land. There was also a second mortgage on the property to the ANZ Bank. The mortgagor was also indebted to one, Collie, as a result of some other litigation. The outcome of that litigation was to give Collie an equitable charge or lien over the mortgaged land and over the proceeds of any sale of the property should a sale occur.
(3)A deed was made between the mortgagor and first mortgagee to allow for the subdivision of the mortgaged land. As subdivided, Lot 1 was the mortgagor’s home where he and his family had lived for ten years. Lot 2 was a corner allotment. Lot 3 was a tennis court, and thought to be the least attractive as it was below street level.
(4)The deed included a provision as to method of sale proposed by the mortgagee MBF Investments. Clause 4.1 said:
It is agreed . . . that the method and timing of sale of the security is to be at the absolute discretion of MBF Investments and no reasons need or will be given . . . by MBF for any decision made and action taken with respect to the sale of the property.
(5)Default occurred. The mortgagee obtained advice from estate agents about the most advantageous order of sale of the lots. Initially the advice was to sell Lot 1 followed by Lot 2. The lender did not follow that advice and decided to sell Lot 2 followed by Lot 1. Its legal advice was that it should only sell so much of the land as was necessary to get its money back. Shortly before sale, the lender’s estate agents advised there was an excellent prospect that the sale of Lots 2 and 3 would clear the debt. The lender determined to proceed with the sale of Lot 2 and then Lot 1.
(6) The mortgagor Nolan urged that the sale of Lots 2 and 3 alone was all that was necessary to discharge his indebtedness to the mortgage. The mortgagee proceeded to offer to sell all three lots at public auction, but was equipped with contracts to sell in whatever order was needed, and there was no barrier to withdrawing any lot from sale on the day of auction.
(7)The vacant Lot 2 was sold first. It got an extraordinary price ― “an amazing auction result”. The purchaser of Lot 2 was not interested in buying Lot 1, the home. On the figures, there was no reason for the mortgagee not to then proceed to sell Lot 3 and withdraw Lot 1 from sale, which is what the borrower asked the lender to do. The lender refused. Vickery J found “There was no logic or principle behind that decision”. It disregarded its own advice including legal advice. The interests of the mortgagee Nolan were completely ignored. His home on Lot 1 was then sold exceeding all expectations, making it unnecessary to sell Lot 3, but Lot 3 was sold anyway at Nolan’s request.
(8)The Court found that had Lot 3 been sold after Lot 2, the mortgagee’s position would have been covered. If only Lots 2 and 3 had been sold, there would have been a cash surplus after payment of the lender and the ANZ Bank. Had Lot 1 not been sold, and been available as an unencumbered property, Nolan would be able to borrow on the land and pay out the debt to Collie.
(9)In the end, the Court found the decision to sell Lot 1 was not undertaken in good faith; it was reckless; manifestly unreasonable; and an arbitrary interference of the most serious kind.[34]
(10)The plaintiff’s case was that by selling his home on Lot 1, it was totally unnecessary and was a breach of obligations under s 77 of the TLA. The issue in the case was whether “interests” under s 77 could include the mortgagor’s interest in retaining Lot 1 as a home to be occupied by his family, or, was the interest of the mortgagor in his family home merely an emotional interested unprotected by s 77?
(11)Vickery J decided that the words of clause 4.1 of the deed could not be construed to be free of the statutory protection provided to the mortgagor under s 77(1) of the TLA. That is, the method and timing of sale had to be exercised consistently with the obligations of a mortgagee under s 77. Although the content of a mortgage’s duty under s 77 was stated by the Court of Appeal in Vasiliou[35] his Honour decided that s 77 contains no words limiting the scope of the word “interest” and it has the scope for application to a variety of potential interests.
(12)His Honour decided that the requirement of the mortgagee to exercise good faith in carrying out the statutory is a reflection of the general law. The additional requirement for the mortgagee to have “regard to the interests of the mortgagor” is designed to provide a further measure of protection to the mortgagor and impose a further measure of responsibility on the mortgage in the exercise of its power. The provision is designed as a protective counterbalance to the otherwise unfettered power of the mortgage upon a sale.
(13)Nolan’s interest in Lot 1 was readily distinguishable from his interest in Lots 2 and 3. “Interests” embraces a bundle of rights exercisable with respect to the land, including a right to use and enjoy the house for home occupation as an incident of his legal interest in the property as owner of the estate in fee simple. Therefore, his Honour decided that s 77 embraced a home occupation interest which the mortgagee was bound to have regard to in the exercise of its power of sale.
[34]At [289].
[35]Vasilou v Westpac Banking Corporation [2007] VSCA 113 at [63], [64]. More recently, see Krachenko v The Rock Building Society [2009] VSCA 292.
In this application, it was submitted that Nolan was applicable to this case, or at least, there was a triable issue whether it was. He looks to equate clause 4.1 of the deed in Nolan with the deed of cross collateralisation in this case. The defendant states he earns $700 per week to support him and his family, and he has no means of securing alternative accommodation. He also says this – [36]
Even in the worst case scenario, if after the sale of all the properties, other than the matrimonial home, there is a shortfall to discharge the outstanding debt to the Plaintiff, there would still be millions of dollars left in equity in the matrimonial home, which I could use to refinance the shortfall of the debt owing to the Plaintiff or use the surplus from the sale of this asset to provide alternative accommodation for me and my family. Accordingly, the sought eviction is both premature and vindictive.
[36]Affidavit affirmed 23 October 2009 at para 18.
Of course, as counsel for the plaintiffs urged, Nolan is concerned distinctly with the exercise of a power of sale, and the construction of s 77. It does not concern the power, under s 78 of the TLA, of a mortgagee upon default to enter into possession of the mortgaged land or bring an action for possession. Therefore no occasion has yet arisen to consider the propriety of a mortgagee’s sale and the statutory duty under s 77 of the TLA, about which Nolan was concerned. The plaintiffs say if the defendant wants to eventually restrain the sale, then perhaps he may try to do so, but ordinarily the mortgagee would not be restrained from doing so unless the mortgagor pays into Court the amount claimed to be due under the rule in Inglis v Commonwealth Bank.[37]
[37](1972) 126 CLR 161.
Moreover, it was submitted, to add to the distinguishing features, in Nolan, there was only one mortgagee and he had the same interest in all the lots, yet in this case there are three separate parties with separate interests and dealings with the plaintiffs. All that brought them together in one sense was the deed of cross-collateralisation, but on its terms that contained an agreement by the defendant that the plaintiffs were free to sell whatever securities they wished “without first having to resort to its rights under any one of the Securities”. Why, the plaintiffs ask, should the defendant be able to dictate now that someone else’s security should be sold first so as to save his home? If correct, it would put the lender in an invidious position of having to pick and choose amongst the competing “interests” of various mortgagors in a situation where the defendant has put up his home as security for commercial interests and been willing to sacrifice his interests in it under the deed of cross-collateralisation.
In response, the defendant submits there is a sufficient nexus between possession and the power of sale so that the decision in Nolan reaches back to the claim for possession and the deed of cross-collateralisation. He submits that there is no reason why the plaintiffs need to take possession and sell his home ahead of the other properties, especially as there is no evidence that the plaintiffs are experiencing difficulties, or foresee them, in selling those other properties. As for the separate entities point, it was submitted that Fundsfirst and Beluga were the defendant’s own (trustee) companies and the lenders were in effect dealing with the defendant in all dealings.

In my opinion, Nolan is not applicable in this case. I think the defendant is extrapolating Nolan not by reference to any principle but, as I see it, by portraying the case as creating a legal ethos about the supremacy of a person’s home from the unnecessary actions of a mortgagee. In my view, Nolan does not stand for the proposition that where a mortgagee has a choice of securities to enforce, and a homeowner gave the mortgagee the freedom to realise whichever security the lender wanted, the mortgagee is constrained to spare a person’s home if satisfaction can be obtained by realising another available security.
Section 77 says the power of sale has to exercised in good faith and having regard to the mortgagor’s interests. Nolan stands for the proposition that “interests” can include a home occupation interest. But a sale of a person’s home can be in good faith even if it involves selling a person’s home instead of another security. What made the sale in Nolan not in good faith was evidence that the mortgagor was acting irrationally, recklessly and illogically and above all not in conformity with its legal and sales advice. Therefore, it was actuated by other motives rather than the payment of its debt.
Moreover, I would not equate clause 4.1 of the deed in Nolan with clause 2.2(d) of the deed of cross-collateralisation in this case. They are clauses of a different character. As I see it, the clause in Nolan was in effect saying “How I, the mortgagee, go about selling this land is up to me”. The Court decided in effect: “No it is not, for section 77 puts legal obligations on you.” To my mind the deed of cross collateralisation in this case is in effect saying “In the event of default, I the owner of this home agree you can choose to sell whichever security you like, including my home”. That, as I say, is a clause of a different character.
I see no legal principle in Nolan by which the law in effect sterilises or takes away the plaintiffs’ rights under the deed of cross-collateralisation.
Nor would I accept as valid the simplification in this case that, as in Nolan, the lender was for all practical purposes really dealing with the defendant as one person, despite the legally separate personalities of Beluga and Fundsfirst. But the Court is bound to deal with the facts. In the eyes of the law, unlike Nolan there were separate mortgages, and separate mortgagors, and therefore separate interests.
The test for summary judgment is said to not be different from the former order 14 which required “A good defence on the merits”. This has been explained by authorities to mean a real case to be investigated either in fact or law, or real uncertainty without full argument or further investigation of the facts whether the plaintiff is entitled to judgment. But as was said by the High Court in Agar v Hyde[38] (omitting footnotes) –
The test to be applied has been expressed in various ways, but all of the verbal formulae which have been used are intended to describe a high degree of certainty about the ultimate outcome of the proceeding if it were allowed to go to trial in the ordinary way.
[38](2000) 201 CLR 552 at 575 per Gaudron, McHugh, Gummow and Hayne JJ.
Of course a case has to be clear before the power to grant summary judgment is exercised: Webster v Lampard.[39] I have had the benefit of substantial argument, and the facts have been exposed such that is it hard to see much else to be investigated.
[39](1993) 177 CLR 598 at 602-3.
I have come to the conclusion that the defendant does not have a sustainable case based on Nolan. Naturally the Court is mindful that a person’s home is at stake but under the deed the defendant agreed to mortgage his home as part of a wider dealing and agreed unequivocally that the lender could sell his home without resort to other securities. I see no legal basis for the defendant to now require the lender to sell someone else’s property in order to save his. The Court is allowing no more to happen than what the defendant himself agreed could happen.
If Nolan does not apply, then there is no case to be investigated about the sales prices obtained for the Lane Cove shops because they were owned and mortgaged by Fundsfirst. Any claim for damages against any of the plaintiffs for sales at undervalue would be by Fundsfirst and Mr Baranov will have to consider his position if he is liable as guarantor for the debts of Fundsfirst, and whether he can bring a claim in reduction or extinction of his liability as guarantor for the debts of that principal debtor. However, that has nothing to do with the indebtedness of Beluga, for which he has been sued in this proceeding and which has been proved.
For those reasons there will be summary judgment for the plaintiffs. I will hear counsel on the precise form of orders. I should say that I would be disposed to grant a stay of 30 days .

[2010] VSC 18

8 February 2010