Perpetual Trustee Ltd v Baranov [No 2]
[2010] VSC 172
•30 April 2010
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
No. 4208 of 2009
| PERPETUAL TRUSTEE LIMITED (ACN 000 001 007) AND CHALLENGER MANAGED INVESTMENTS LIMITED (ACN 002 835 592) | Plaintiffs |
| v | |
| MARK BARANOV | Defendant |
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JUDGE: | VICKERY J |
WHERE HELD: | MELBOURNE |
DATE OF HEARING: | 15 April 2010 |
DATE OF JUDGMENT: | 30 April 2010 |
CASE MAY BE CITED AS: | PERPETUAL TRUSTEE LTD & ANOR v BARANOV [No 2] |
MEDIUM NEUTRAL CITATION: | [2010] VSC 172 |
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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 | Norton Rose Australia |
| For the Defendant | Mr R Cook | Efron & Associates |
HIS HONOUR:
This is an appeal from the judgment of Mukhtar AsJ dated 8 February 2010[1] pursuant to rule 77.05 of the Supreme Court (General CivilProcedure) Rules 2005.
[1] Perpetual Trustee Ltd and another v Baranov [2010] VSC 18.
Pursuant to rule 77.07, the appeal is a re-hearing de novo, but each party may, subject to any proper objections to admissibility, rely upon any affidavit used before the Associate Justice and upon any evidence given orally before the Associate Justice, and, by special leave of the Judge, rely upon an affidavit or oral evidence not used or given before the Associate Justice. In this matter the affidavit material and the exhibits are extensive. Nevertheless, I granted special leave to admit further affidavit material on the appeal, confined to events and matters which occurred since the hearing before the Associate Judge.[2]
[2]Affidavit of Allan Farrell-Kowalski affirmed 15 April 2010; affidavit of Mark Baranov sworn 15 April 2010.
By the judgment of Mukhtar AsJ, the plaintiffs were granted summary judgment for moneys secured under a mortgage of land, namely $3,569,649.00 and costs, and possession of the mortgaged property at 85 Lumeah Road (also known as 105 Balaclava Road) in Caulfield North (the “Lumeah Road property”).
The defendant (“Mr Baranov”) 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 (“Perpetual Trustee”) as security for his obligations under a guarantee to the second plaintiff (“Challenger”) for the liabilities of his company Beluga Developments Pty Ltd (“Beluga”). The plaintiffs allege there has been default under the mortgage and guarantee.
The plaintiffs say that as at 29 October 2009 the defendant owes $9,706,782 and interest has been accruing on this sum since that time.
There being no issue that there has been default under the mortgage or that the default notice issued and served pursuant to s 76 of the Transfer of Land Act 1958 (“the TLA”) was inadequate, there were two issues which were pressed on the appeal. First, Mr Baranov said that the lender has sold some other mortgaged properties at an undervalue by an amount that is enough to absorb the debt, and there is a counterclaim in respect of this conduct which ought to be the subject of a trial. Second, reliance was placed on my decision in Nolan v MBF Investments Pty Ltd (“Nolan”).[3]That case concerned the exercise of a mortgagee’s power of sale under s 77(1) of the TLA, which provides:
(1)If within one month after the service of such notice or demand or such other period as is fixed in such mortgage or charge the mortgagor grantor or other persons do not comply with the notice or demand the mortgagee or annuitant may, in good faith and having regard to the interests of the mortgagor grantor or other persons, sell or concur with any other person in selling the mortgaged or charged land or any part thereof, together or in lots, by public auction or by private contract, at one or several times, and for a sum payable in one amount or by installments, subject to such terms and conditions as the mortgagee or annuitant thinks fit, with power to vary any contract for sale and to buy in at any auction or to rescind any contract for sale and to resell without being answerable for any loss occasioned thereby and with power to make such roads streets and passages and grant and reserve such easements as the circumstances of the case require and the mortgagee or annuitant thinks fit, and may make and sign such transfers and do such acts and things as are necessary for effectuating any such sale.
[3][2009] VSC 244.
It was the defendant’s contention in the present proceeding that the plaintiffs should sell other secured properties first to meet the debt on the account. By this means he could then preserve his family home from sale by providing “top up funds” for any shortfall on security of that asset. In failing to do so, the defendant said that the plaintiffs were in breach of their statutory duty pursuant to s 77(1) TLA to act in good faith in the conduct of a proposed sale having regard to his interests as the mortgagor.
On the other hand, the plaintiffs submitted that no counterclaim properly arose in favour of the defendant, and further the facts of this case brought it squarely outside those of Nolan, and there was no triable issue on either ground.
The Test for Summary Judgment
The test for the grant of leave to defend in the face of an application for summary judgment is whether there is “an arguably good defence”.[4] 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. Further, in relation to the entry of judgment in the course of considering an application for such an order, the power to enter judgment should be exercised with great care, and only when it is clear that there is no question to be tried.[5] As was said by the High Court in Agar v Hyde:[6]
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.
[4] Clark v The Union Bank (1917) 23 CLR 5.
[5] Fancourt v Mercantile Credits Limited (1983) 147 CLR 87.
[6](2000) 201 CLR 552 at 575 per Gaudron, McHugh, Gummow and Hayne JJ.
A case therefore has to be clear before the power to grant summary judgment is exercised: Webster v Lampard.[7]
[7](1993) 177 CLR 598 at 602-3.
The Facts
The facts as found by Mukhtar AsJ were not in issue. Below I set out those facts, essentially as found by his Honour.
1.The first plaintiff, Perpetual, is the custodian of the Challenger Howard Mortgage Fund. The second plaintiff, Challenger, is the trustee of that fund.
2.There was 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.[8] No notice or demand for payment was required. The defendant, Mr Baranov, is the sole director and sole secretary of Beluga.
[8]See Exhibit JGM-8.
3.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”.[9] 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.[10]
[9]See Exhibit JGM-9.
[10]See the Memorandum of Common Provisions AA674 at Exhibit JGM-10. See especially the definition of “Facility Agreement” and “Financial Indebtedness” at p.2.
4.The mortgage, by clauses 6.3 and 6.5, also contained terms as to default which are of relevance to the arguments advanced before me. The mortgagee, in addition to any powers granted by law, without the need for any consent on the part of the mortgagor, could exercise a number of powers including:
(a)take possession of, collect, manage, get in, and enter into receipt of the income of the mortgaged property;
(b)lease all or any of the mortgaged property, grant options to lease, renew leases, to accept surrenders of leases and to determine leases;
(c)carry on or concur in carrying on any business in relation to the mortgaged property;
(d) acquire any property to be included in the mortgaged property;
(e) maintain and improve the mortgaged property;
(f) borrow or raise money on security of the mortgaged property; and
(g) sell the mortgaged property.
On 9 July 2007, the affected parties also signed a deed of loan.[11] 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 provided for 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.
[11]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.
There were two deeds of cross-collateralisation. The first was dated 9 July 2007.[12] Another party to this deed was Fundsfirst Pty Ltd (“Fundsfirst”) as trustee for the Mark Baranov Discretionary Trust. That was a company of which Mr Baranov was the sole director. He also guaranteed the debts of Fundsfirst. This deed identified six facilities including the loan facility of $3 million. The total amount of the finance was $8,629,520. The deed also identified 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;
(d)a mortgage over shops 1 and 2, 601 Little Collins Street in Melbourne; and
(e)a mortgage over (strata title) floors lot S8, S2 and S3 at 601-611 Little Collins Street in Melbourne.
[12]See Exhibit JGM-18.
Clause 2 of the cross-collateralisation deed provided:
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.
2.2 The 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 Challenger 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.”
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 continued to secure the existing loan facility of $3 million under the deed of loan dated 9 July 2007. The deed also continued to include the mortgage over the shops in Lane Cove in New South Wales, the mortgage over the three lots at 601-611 Little Collins Street, and the mortgage over the defendant’s home. The mortgage over the land in Shoreham was removed. Otherwise, the operative parts of the second deed concerning cross-collateralisation in sub-clauses 2.1, 2.2 and 2.3 remained identical to those in the first deed.
The outcome was that there were separate groups of mortgages of real property which continued to secure the loan which are relevant to this proceeding. Fundsfirst mortgaged the five shops in Lane Cove, Sydney; Beluga mortgaged the two shops at 601 Little Collins Street and three floors (Lots S8, S2 and S3) at 601-611 Little Collins Street, Melbourne; and the defendant mortgaged his home, the Lumeah Road property, in North Caulfield, Victoria.
Possession was granted to the plaintiffs of a number of the secured properties. In respect of the mortgage given by Fundsfirst over 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.[13] The plaintiffs also obtained orders for possession of the three floors (lots S8, S2 and S3) at 601-611 Little Collins Street, Melbourne.
[13]See para 36 of the affidavit.
The result of these orders for possession is that the two shops at 601 Little Collins Street remained as properties in the possession of its owner, Beluga, and the defendant’s home, the Lumeah Road property, remained in the possession of Mr Baranov.
The plaintiffs tendered in 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.[14] 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 of interest 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.
[14]See Exhibit JGM-12.
On 1 December 2008, Perpetual’s solicitor served a default notice on Beluga under the deed of loan.[15] 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.
[15]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 warned that 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.
In this appeal the occurrence of the default and the validity of the notices of default were not in issue.
The default was not remedied. The writ in this proceeding was filed on 15 January 2009. The statement of claim endorsed on the writ pleaded that the defendant was the registered proprietor of the Lumeah Road property. It also pleaded the loan by Challenger to Beluga; the guarantee by the defendant of the loan to Beluga; the mortgage of the Lumeah Road property to secure an advance by Perpetual; the obligation for the defendant to pay interest to Challenger under the loan and the mortgage; the default under the loan and the mortgage; the service of a default notice on Beluga; the service of a default notice on the defendant; the continuing default of the defendant; and a claim for possession of the Lumeah Road property.
Sales at an undervalue
The defendant contends that the plaintiffs sold the Lane Cove shops (owned by Fundsfirst) at an undervalue. He says that “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”.[16] He claims significant shortfalls in sale prices.
[16]See second supp affidavit, sworn 18 November 2009, para 15.
Mr Baranov also says the plaintiffs have undervalued the expected proceeds of the floors at 611 Little Collins Street owned by Beluga. He relies upon an appraisal from selling agents for the expectable price for those lots.[17] The selling agents say an “asking price” of $6.5 million was “within the range of our market expectation”.[18] The plaintiff says the lots “should be worth around $6.3 million” based on other sales in the building, and exceeds the figure of $6 million which the plaintiffs are willing to allow in their calculations.
[17]See defendant’s third supplementary affidavit affirmed 23 November 2009.
[18]See exhibit MB 19.
The plaintiffs obtained valuations before they sold the shops at Lane Cove, and they have valuations of the three lots at 601-611 Little Collins Street.[19] However, the defendant challenges the plaintiffs’ valuations. He says that the capitalisation rates of the rental income on the shops as used by the lender’s valuers were not appropriate. 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 plaintiffs objected to the defendant’s “expert” evidence about capitalisation rates on the ground that he was not a qualified expert on that subject because he was not himself a valuer. As to this, the defendant through his counsel submitted that his expertise was sufficient to permit him to give the evidence at this stage of the proceeding because, although it was not of the weight of a qualified valuer, it was nevertheless sufficient to demonstrate that there was a case to be investigated, either in fact or law, or there was a real uncertainty without full argument or further investigation of the facts whether the plaintiffs were entitled to judgment.
[19]See affidavit of A F Kawalsky at para 5, 7 and 15-17.
I am satisfied that the defendant, Mr Baranov, has sufficiently qualified himself to give the evidence which he has in his affidavits as to the valuations of the properties in contention. Mr Baranov does have specialised knowledge of property valuation based upon his experience in the property market, such as to satisfy s 79 Evidence Act 2008. This is so even though his evidence is not of the weight which would be attributed to an independent qualified valuer.
There is a dispute between the parties as to the valuations of some of the properties which are the subject of mortgage securities in favour of the plaintiffs. According to Mr Baranov, the valuations of the properties in issue are as follows:[20]
[20]See defendant’s third supplementary affidavit paragraph 14; defendant’s Written Outline of Submissions dated 14 April 2010.
Owner: Fundsfirst
Shop 2 - $320,000
Shop 3 - $416,666
Shop 4 - $710,000
Shop 5 - $1,464,166
Unit 7 - $350,000 (not sold but valued by Defendant)
Owner: Beluga
601-611 Little Collins Street, Floors 1, 2 & 3 (lots S8, S2 and S3) - $6,500,000 (not sold but valued by defendant)
Owner: Mr Baranov
Lumeah Road property - $4,000,000 (not sold but valued by Defendant)
Total - $13,760,832.
However, the plaintiffs calculate the value of the properties in issue are as follows:
Owner: Fundsfirst
Shop 2 - $320,000 (sold 12/10/09)
Shop 3 - $228,000 (sold 9/10/09)
Shop 4 - $560,000 (sold 9/10/09)
Shop 5 – $800,000 (sold 9/10/09)
Unit 7 - $350,000 (not sold but valued by plaintiffs)
Owner: Beluga
601-611 Little Collins Street, Floors, 1, 2 & 3 (lots S8, S2 and S3) - $6,000,000 (not sold but valued by plaintiffs)
Sub-Total - $8,258,000
Owner: Mr Baranov
Plus the Lumeah Road property- $4,000,000 (not sold but valued by plaintiffs)
Total - $12,258,000.
The difference in the total valuations is $1,502,832 ($13,760,832 - $12,258,000).
The plaintiffs contend that if the Lumeah Road property is not sold, based on their valuations, there will be only $8,288,000 available to pay a total debt of $9,706,782, being the total debt outstanding as at 29 October 2009, not adding interest which has accrued since that time. This results in a shortfall of $1,418,782.
However, 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 three floors at Little Collins Street, then the plaintiffs would not have to sell his home. He says that the differences in valuations amount to $1,502,832. Accordingly, if the defendant’s valuations are correct, and arguably they are, the debt shortfall of $1,418,782 will be expunged. There will be no need therefore for the plaintiffs to undertake a sale of the Lumeah Road property, the defendant’s home. He also says, in the alternative, that the plaintiffs have a valuation of the Lumeah Road property at $4 million[21] and that gives him sufficient equity to support a loan of $1,418,782 which can be borrowed against the property to pay out the debt, and thereby avoid selling to home to pay the debt. He says in this respect that a loan to him of $2.2 million has now been approved.
[21]See affidavit of A F Kawalsky sworn 20 November 2009, at para 14.
The essence of the defendant’s argument is that in taking possession of the Lumeah Road property, as a preliminary step to exercising of the power of sale in s 77(1) TLA, the plaintiffs, or one of them as the mortgagee, owed a duty to Mr Baranov as the mortgagor to act in good faith having regard to his interests.
He also contended that there had been a breach of that duty by:
(a) not selling some of the secured properties for their true value; and
(b) not valuing the remaining properties for their true value,
with the result that the debt due to the plaintiffs should have been able to be paid out without selling the Lumeah Road property. Alternatively, he submitted that, even if the secured properties which had been sold were sold for their true value, and even if the plaintiffs’ valuations of the remaining properties were correct, by not permitting Mr Baranov to borrow funds against the security of the Lumeah Road property, which have been offered to him, for the purpose of paying out the outstanding loan, the plaintiffs are similarly in breach of their duty to Mr Baranov.
In advancing this argument, the defendant placed reliance on the decision Nolan v MBF Investments Pty Ltd.[22]
[22][2009] VSC 244.
The Decision in Nolan
There is a critical aspect of the Nolan decision which serves to distinguish it from the present case. In Nolan, the mortgagee had obtained possession of the mortgaged property and subsequently exercised its power of sale. In those circumstances, the issue was whether, in the unique circumstances of that case, the mortgagee’s sale of the mortgaged 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”. In the present case, on the other hand, the mortgagee seeks to obtain possession of the mortgaged property, being the Lumeah Road property. No sale is presently sought by the plaintiffs, although it is likely to be in contemplation.
The essential facts and reasoning in Nolan may be summarised as follows:
(1)The borrower, Mr Nolan, mortgaged a residential property situated in Kew, Victoria to the lender MBF (the “mortgagee”) to secure loan funds advanced to him. 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 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. Mr Nolan fell into default. The lender, MBF exercised its right to obtain possession of the mortgaged property, which it did by obtaining a court order for possession. The mortgagee, however, permitted Nolan and his family to continue in occupation of the property and use it as their home, as they had done for the previous ten years.
(2)Nolan sought, and obtained, the permission of the mortgagee to subdivide the mortgaged property into three lots, consisting of a lot containing Nolan’s family home, and two other vacant lots. 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, Lot 2 was a corner allotment, and Lot 3 was a tennis court.
(3)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.
(4)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 mortgagor Nolan urged that the sale of Lots 2 and 3 was all that was necessary to discharge his indebtedness to the mortgage. Nevertheless, the lender determined to proceed with the sale of Lot 2 and followed by Lot 1.
(5)On the day of the auction, the mortgagee was equipped with contracts to sell all three lots in whatever order was needed, and there was no bar to withdrawing any lot from sale.
(6)At the auction, the vacant Lot 2 was sold first. It achieved an extraordinarily high price which was unexpected. 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 the other vacant lot, Lot 3 and withdraw Lot 1, the home lot, from sale. Following the sale of Lot 2, this is precisely what the borrower, Mr Nolan, asked the lender to do. The lender refused. The Court found: “There was no logic or principle behind that decision”. It disregarded its own advice including legal advice to consult with its estate agents following the sale of Lot 2. The interests of the mortgagee Nolan were completely ignored. His home on Lot 1 was then sold making it unnecessary to sell Lot 3, but Lot 3 was sold anyway at Nolan’s request.
(7)The Court found that had Lot 3 been sold after Lot 2, the mortgagee’s position would have been covered and its mortgage debt, and expenses would have been paid. Further, 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. Further, 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.
(8)The central issue of law in the case was whether “interests” in the duty imposed on a selling mortgagee under s 77(1) could include the mortgagor’s occupation interest in continuing to use Lot 1 as a family home.
(9)The Court decided, in construing s 77, that although the content of a mortgage’s duty under s 77(1) was as stated by the Court of Appeal in Vasiliou v Westpac Banking Corporation,[23] because the sub-section contains no words limiting the scope of “interest” found in s 77(1) and consistently with the general law, the sub-section embraced a home occupation interest which the mortgagee was bound to have regard to in the exercise of its power of sale.
(10)Mr Nolan’s interest in Lot 1 was readily distinguishable from his interest in the vacant lots, Lots 2 and 3. Included in the “bundle of rights” the mortgagor had in this case, was his right to occupy the dwelling on Lot 1 as his residence. Under the terms of the MBF mortgage, Mr Nolan had a contractual right as the mortgagor to remain in possession of the mortgaged property until possession was granted to the mortgagee following default. Thereafter, he was entitled to remain in occupation with the mortgagee’s consent until he was directed to quit the property. Until the property was sold, and while he continued to occupy the land with the permission of the mortgagee, subject to the terms of the mortgage, Mr Nolan had all the rights that ownership of an estate in fee simple carried with it, including the full use and enjoyment of the property, within the bounds of the law.
(11)Further, the mortgagor Mr Nolan, at least prior to a sale of the land by MBF, could exercise his right of redemption by paying off the debt due to mortgagee and have the mortgage removed from the register. This right existed until the entry into a binding contract of sale to a third party by the mortgagee pursuant to the exercise of its power of sale.
(12)On the facts of the case, 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.[24] A breach of the mortgagee’s statutory obligation under s 77(1) was found.
[23][2007] VSCA 113 at [63], [64]. More recently, see Krachenko v The Rock Building Society [2009] VSCA 292.
[24]At [289].
However, in the present case the mortgagee does not seek to exercise its power of sale. It merely seeks an order for possession of the mortgaged property comprising the Lumeah Road property. It does so, both pursuant to its contractual rights under the security documents, including the relevant mortgage, and the cross-collateralisation deed, and also pursuant to its statutory right provided for in s 78 TLA, ehich is set out in full below.
None of the security documents contain any inhibition or restriction on which of the properties secured under any of the mortgages may be proceeded against. Indeed, as has already been observed, clause 2.2(d) of the cross-collateralisation deed is framed in wide terms:
(d)the moneys owing or secured under the Facilities may be recovered by Challenger 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.
Reference should also be made to the clause 10.2(b) of the Memorandum of Common Provisions AA674 which formed part of the defendant’s mortgage over his home.[25] 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”.
[25]See exhibit JGM-10.
Section 78 of the TLA is also relevant. It provides a statutory power given to a mortgagee to enter into possession or seek ejectment in respect of the mortgaged property in the following terms:
(1)The mortgagee or annuitant upon default in payment of the principal sum or interest or annuity or any part thereof respectively at the due time-
(a)may enter into possession of the mortgaged or charged land by receiving the rents and profits thereof; or
(b)may bring an action of ejectment to recover the land, either before or after entering into the receipt of the rents and profits and either before or after any sale of the land as aforesaid.
(2)A mortgagee of or annuitant upon leasehold land after entering into possession of the land or the receipt of the rents and profits thereof shall, during such possession or receipt and to the extent of any benefit rents and profits which are received, be subject to and liable for the payment of the rent reserved and the performance and observance of the covenants contained or implied in the lease on the part of the lessee.
Unlike the statutory power of sale in s 77(1) TLA, which, subject to the statutory requirements being fulfilled, including the obligation of the mortgagee to sell the mortgaged property “in good faith and having regard to the interests of the mortgagor”, is granted to a mortgagee to sell the mortgaged property in the event of default, s 78 contains no such obligation. Indeed, the only obligation imposed on a mortgagee in taking possession arises in the case of the mortgaged property which consists of leasehold land, in which case, pursuant to s 78(2), the mortgagee on taking possession of the property is obliged to pay the rent reserved and perform and observe the covenants contained or implied in the lease on the part of the lessee.
It was submitted by the defendant that the right to obtain possession is “concomitant with a right to sell under s 77 of the Act. The result of obtaining an order for ‘possession’ is simply a means to effect a power of sale: if an order for possession is not obtained one can only use self-help to obtain possession … here there is no doubt that the obtaining of possession is simply a prelude to exercising the power of sale”.
However, although it may be inferred in this case, that the seeking of an order for possession may indeed be a prelude to exercising the power of sale, it is nevertheless the exercise of a distinctly different power, which is enlivened following default under the mortgage. As has already been observed, by clauses 6.3 and 6.5 of the mortgage, the mortgagee upon taking possession of the mortgaged premises was entitled, amongst other things, to receipt of the income of the mortgaged property and to lease all or any part of the mortgaged property. It could, in other words postpone selling the mortgaged property for a period of time or indefinitely, if it was in its commercial interests to do so, for so long as the mortgage remained undischarged and the default continued. On the other hand, the mortgagor, following possession being granted to the mortgagee, at any time prior to a sale of the land, could exercise his right of redemption by paying off the debt due to the mortgagee and have the mortgage removed from the register. In this event, the mortgagor would be entitled to regain possession of the mortgaged property pursuant to his property rights as the registered proprietor of the unencumbered land. This right would exist until the entry into a binding contract of sale to a third party by the mortgagee pursuant to the exercise of its power of sale.
Accordingly, I do not accept that the right to obtain possession is “concomitant” with a right to sell under s 77 of the Act. They are different rights with different consequences and carry with them different obligations. The exercise of the power of sale will have the likely consequence that the mortgagor’s exercise of his or her right of redemption by paying off the debt due to mortgagee will be lost. The exercise of the power of sale has final and irrecoverable consequences for the mortgagor. It is therefore properly circumscribed by the obligation of the mortgagee to act in the course of its exercise “in good faith and having regard to the interests of the mortgagor”. On the other hand, obtaining an order for possession does not automatically result in such consequences, and leaves some room for the mortgagor to reclaim the property, at least until a sale to a third party is eventually effected. Further, upon obtaining an order for possession, the plaintiffs in this case would have the right to pursue a number of remedies under the mortgage short of undertaking a sale in the course of enforcing their security, such as leasing the subject property.
It was also submitted by counsel for the defendant in the course of argument that the phrase “sell or concur with any other person in selling the mortgaged … land” as used in s 77(1) TLA included taking preliminary steps necessary for the purpose of effecting the power of sale, such as taking possession of the mortgaged property. It was further submitted that the statutory obligation to act “in good faith and having regard to the interests of the mortgagor” therefore applied to the step of taking possession of the land.
I do not accept this submission. Neither the text of s 77(1) nor its object and purpose warrants such a construction. Further, the statutory context of s 77(1) points strongly to this conclusion. Section 78 of the TLA, which specifically provides for a statutory right for a mortgagee to obtain possession, includes no obligation equivalent to that imposed on a mortgagee in s 77(1).
Nolan does not stand for the proposition that in seeking to obtain possession of mortgaged property, which happens to be the family home of the mortgagor, the mortgagee is obliged as a matter of law under the TLA to act in good faith and have regard to the interests of the mortgagor by first proceeding to obtain orders for possession of secured properties other than the mortgagor’s home in the course of exercising its right to realise its securities. Subject to the terms of the security documents, and in the absence of any stipulation, limitation or restriction as to how or in what order a mortgagee may proceed to exercise its right to gain possession of mortgaged properties as a first step to enforcing its securities, the mortgagee may exercise a commercial judgment as to how and when it should proceed.
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 the owner of those properties, Fundsfirst. However, that has nothing to do with the indebtedness of Beluga, for which Mr Baranov has been sued in this proceeding and which has been proved.
Conclusion and Orders
It follows that there is no arguable case which should proceed to trial. The proceeding would be bound to fail. There is no real case to be investigated either in fact or law, or any real uncertainty without full argument or further investigation of the facts whether the plaintiffs are entitled to judgment.
I am satisfied that each of the matters pleaded in the statement of claim endorsed on the writ has been proven.
For these reasons the appeal will be dismissed with costs. There will be summary judgment for the plaintiffs. I will hear counsel on the precise form of orders.
I would be disposed to grant a stay, [26] but will hear counsel on the matter.
[26]See: ANZ Banking Group Limited v Pearce [2003] VSC 49 at [8].
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