Que Capital Pty Ltd v Mueller - [2015] WADC 6

JURISDICTION : DISTRICT COURT OF WESTERN AUSTRALIA
IN CIVIL

LOCATION: PERTH

CITATION: QUE CAPITAL PTY LTD -v- MUELLER [2015] WADC 6

CORAM: SWEENEY DCJ

HEARD: 10, 11 & 12 FEBRUARY 2014

DELIVERED : 29 JANUARY 2015

FILE NO/S: CIV 3634 of 2010

BETWEEN: QUE CAPITAL PTY LTD
First plaintiff
SMARTCARD FINANCIAL SERVICES PTY LTD
Second plaintiff
AND
KARL PAUL MUELLER
Defendant

Catchwords:

Loan agreement - Unconscionable conduct - Misrepresentation - Misleading and deceptive conduct - Caveats - Turns on its own facts

Legislation:

Australian Securities Investment Commission Act 2001 s 12CA, s 12CC

Result:

Judgment for second plaintiff
First plaintiff's claim dismissed

Representation:

Counsel:

First plaintiff                :     Mr J M Burke
Second plaintiff            :     Mr J M Burke
Defendant:     In person

Solicitors:

First plaintiff                :     MDS Legal
Second plaintiff            :     MDS Legal
Defendant:     Not applicable

Case(s) referred to in judgment(s):

Australian Competition and Consumer Commission (ACCC) v CG Berbatis Holdings Pty Ltd [2003] HCA 18; (2003) 214 CLR 51
Beneficial Finance Corporation Ltd v Karavas (1991) 23 NSWLR 256
Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447
Deeley v Lloyd's Bank [1912] AC 756
Devaynes v Noble (1816) 1 Mer 529; (1816) 35 ER 767
Issa v Berisha [1981] 1 NSWLR 261
Kerabee Park Pty Ltd v Daley [1978] 2 NSWLR 222
Maguire & Tansey v Makaronis [1997] HCA 23; (1997) 188 CLR 449
Mayfair Trading Co Pty Ltd v Dreyer [1958] HCA 55; (1958) 101 CLR 428
Micarone v Perpetual Trustees Australia Ltd (1999) 75 SASR 1
Middleton v Aon Risk Services Australia Ltd [2008] WASCA 239
Permanent Mortgages Pty Ltd v Vandenbergh [2010] WASC 10; (2010) 41 WAR 353
Perpetual Trustee Company Limited v Burniston [No 2] [2012] WASC 383
Perpetual Trustee Company Ltd v Burniston [2012] WASC 26
Tonto Home Loans Australia Pty Ltd v Tavares [2011] NSWCA 389

SWEENEY DCJ:

Introduction

In 2008, in the midst of the global financial crisis, when his eight properties were decreasing in value, some below what he had paid for them, and when he was already struggling to keep afloat, the defendant Mr Mueller decided the time was right to borrow $100,000 to renovate his café restaurant in Midland.
His plan was to increase the value of his restaurant property by means of the renovations and then refinance, borrowing more money on the anticipated increased equity in the property. He already had very significant borrowings, his eight properties having been gradually acquired by borrowing money as the properties he owned increased in value, which enabled him to purchase another property and then another and so on.
Prior to approaching his bank for the funds to renovate the restaurant, he quit his nursing job in order to concentrate on the renovations and hence had no income to support a loan. He had already shut his restaurant. His bank refused him finance.
Mr Mueller then made the financially ruinous decision of approaching 'Peter the Lender', Mr Wolf-Peter Melzer of Que Capital Pty Ltd, whose tiny advertisement Mr Mueller had seen in the newspaper. On 2 September 2008, Mr Mueller entered into a loan contract with Que Capital by which he borrowed $101,200 for three months at 6% interest per month. Que Capital is the first plaintiff. The principal sum and the interest were all due to be paid on 5 December 2008.
By way of security, Que Capital took an unregistered second mortgage over three of Mr Mueller's properties: the restaurant in William Street, Midland, a residence in Charles Street, Midland and a block of land in Vestia Walk, Stirling. It lodged a caveat over them.
Shortly after the contract was entered into, the debt was assigned to another, Smartcard Financial Services Pty Ltd, the second plaintiff, but Mr Melzer remained the loan manager and point of contact for the customer. Mr Melzer always intended to assign the debt and the money advanced to Mr Mueller actually came from Smartcard. In fact, the deed of assignment was defective and failed to adequately record the agreement between Que Capital and Smartcard to assign the debt. It also failed to assign the caveatable interest in the land.
The renovations took longer than expected and cost more than expected. Mr Mueller defaulted on the loan. Mr Melzer kept in touch with him, seeking progress reports and encouraging him to sell properties or refinance in order to repay the loan, while the interest steadily mounted at the rate of about $200 per day.
On 14 October 2009, Que Capital entered into a second loan contract with Mr Mueller, purporting to loan him the amount he already owed which, by then, was $182,132, for a period of two months at interest of 3.34% per month. The fact that the debt had at least purportedly been assigned to Smartcard about a year earlier was overlooked by Mr Melzer. No money actually changed hands. The purpose of that further loan was to convert a loan significantly in default to a current loan, in order to give a more favourable impression to a prospective lender as Mr Mueller attempted to refinance. It neither reduced, nor increased, the debt he owed. And the reduction in interest was simply to avoid effectively charging him compound interest, because the outstanding interest as at that date had been converted into principal. The reduced rate meant interest continued to accrue at about $200 per day. It is not suggested that Mr Mueller believed he was paying less interest as a result of that agreement.
Mr Mueller repaid a total of $62,131 over time, while the interest steadily mounted to a disastrous total. He now says he should not have to repay any more, claiming that he was induced to enter into the contract by deceit and that Mr Melzer was guilty of unconscionable conduct towards him.
It is very easy in this case to feel sympathy for Mr Mueller's plight, given the very high rate of interest charged, but it is not the role of this court to administer justice based on sympathy. For the reasons which I have stated below, I find the second plaintiff Smartcard has established that Mr Mueller owes this very substantial debt.

Overview of the pleadings and the issues in the case

Smartcard's claim is based upon the loan agreement entered into on 2 September 2008 between Mr Mueller and Que Capital, purportedly assigned to Smartcard on 4 September 2008. Section 20 of the Property Law Act1969 requires express notice in writing of such an assignment to be given to the debtor in order to effectively pass title in the debt. The plaintiffs plead that written notice of the assignment was given to Mr Mueller on or about 5 September 2008 by way of letter. Smartcard's case is that Mr Mueller has breached the terms of the loan agreement by failing to repay the principal sum and the outstanding interest.
It is uncontroversial that Mr Mueller did receive the $100,000 (the additional $1,200 being the loan application fee) at the interest rate claimed and has failed to repay it, apart from the payments totalling $62,131.
The deed of purported assignment executed on 4 September 2008 between Que Capital and Smartcard, however, did not achieve what the parties sought to achieve. The purported assignment was merely described in the recitals to the deed and not in the operative clauses. Furthermore, Mr Mueller says he was not given the requisite written notice of that assignment. Que Capital and Smartcard have since executed a deed of rectification correcting the defects in the deed of assignment.
The plaintiffs only rely upon the later loan agreement of 14 October 2009 between Que Capital and Mr Mueller in the alternative, in the event that this court finds that the assignment of the debt to Smartcard was ineffective. If the assignment of the debt to Smartcard was effective, then plainly the loan agreement of 14 October 2009 was entered into by the wrong party, namely Que Capital, and Que Capital seeks no relief in those circumstances. Irrespective of what loan agreement might be upheld, Que Capital accepts that the debt is ultimately owing to Smartcard.
Mr Mueller being unrepresented, his defence is not pleaded in the usual form. It constitutes a chronological account of his version of events including matters of evidence, opinion and submissions. Nevertheless it is clearly expressed as to the facts and it is possible to discern several distinct complaints.
The first complaint is one of deceit. Given the pleadings and the manner in which the evidence was given by Mr Mueller, the complaint is of fraudulent misrepresentation, although it makes no difference to the outcome whether the misrepresentation is alleged to be fraudulent, requiring intent to defraud, or is said to amount to misleading and deceptive conduct, requiring merely an objective tendency to mislead.
The alleged deceit is that at no stage was Mr Mueller made aware by Mr Melzer that he intended to assign the loan agreement to Smartcard two days after the loan agreement was signed. Mr Mueller pleads that, had he been informed about the intended assignment, he would have 'been concerned and have sought legal advice and most likely not entered into such an agreement'. He also pleads that, because the advertisement for Que Capital used the expression 'Peter the Lender', he was under the impression that there was no broker involved and he was dealing with the lender. He also pleads that Mr Melzer told him there was no need for a solicitor.
Secondly, Mr Mueller complains that he was not given notice of the assignment of the debt to Smartcard and denies that he received written notice to that effect by letter shortly after entering into the agreement. That is really pleaded, I understand, as proof of Mr Melzer's intention to deceive him.
Mr Mueller therefore does not dispute that the loan was assigned to Smartcard. A substantial part of his case depends on that assignment of the loan, because he complains that he was deceived by Mr Melzer's failure to inform him that he intended to assign the loan to Smartcard. Mr Mueller also complains that he was not given notice of the assignment of the debt to Smartcard, further proof, he says, of the intention to deceive him.
While no relief is sought, Mr Mueller also complains that Que Capital took and retained a caveat over three of his properties when he says it had no right to, the funds having been provided by Smartcard and the debt having been assigned to Smartcard.
If there was no assignment to Smartcard, those complaints fall away.
Third, Mr Mueller complains that, notwithstanding that Que Capital held a caveat over his property at 27 Vestia Walk, Stirling, it failed to assert its right to receive at least part of the proceeds from the eventual sale of that property and simply removed its caveat, enabling the sale to proceed and the first registered mortgagee, RHG, to resort to the entire proceeds from that sale to both discharge its mortgage over the property and to reduce Mr Mueller's overall indebtedness to it.
Fourth, Mr Mueller also pleads that 'he was never in a position to fulfil the conditions of the loan in the first place', and that the loan term of three months
left no margin for error, with the benefit of hindsight it is obvious that completing the renovations stated, and applying for a loan to pay out the Caveat Loan within the 3 months of the term of the loan was never possible. As an experienced Lender the first plaintiff would have been aware of that. The defendant therefore believes this was predatory lending by the first plaintiff.
Finally, Mr Mueller complains that he entered the second loan agreement 'under economic duress and rather than facing a mortgagee sale of his place of business'. The significance of that falls away if the loan was assigned to Smartcard because, in that event, Que Capital places no reliance on the second loan agreement.
Much of the rest of the defence makes complaint about the pressure that Mr Mueller was put under to repay the loan and the various difficulties he experienced. None of those paragraphs of the pleadings give any possible defence to the action and I do not intend to dwell upon them.
Mr Mueller did not plead any remedy he seeks but, in discussions with him, he does not want to pay any more money towards the loan, notwithstanding that he had the benefit of the principal sum of $102,100 and spent it, and has only repaid some $60,000 odd. He therefore seeks to persuade this court that the loan agreement should be set aside, or his liability under it be in some way limited. He did not set up any counterclaim of any sort, his counterclaim having been struck out by this court some time ago for failing to disclose any cause of action.
Mr Mueller's position was unrealistic from the outset. Even had I been persuaded that the contract was unconscionable, or that he was induced to enter it by misrepresentation or misleading conduct, I could not have been persuaded to set aside the contract unless the lender, Smartcard, could be restored to its original position.
The equity of the borrower is to have the whole transaction rescinded, so as to remit both parties to their original position, requiring the borrower to submit to repayment of the moneys borrowed remaining unpaid: see Perpetual Trustee Company Ltd v Burniston [2012] WASC 26 [399] – [402] (Edelman J), quoting Mayfair Trading Co Pty Ltd v Dreyer [1958] HCA 55; (1958) 101 CLR 428, 452 (Dixon CJ) and Maguire & Tansey v Makaronis [1997] HCA 23; (1997) 188 CLR 449, 475 (Brennan CJ, Gaudron, McHugh & Gummow JJ).
In this case that would have necessitated the payment of the remainder of the outstanding principal of approximately $40,000, together with reasonable interest at commercial rates on the total principal calculated from 5 September 2008 until judgment, but taking into account the payment of some $60,000. Plainly that would have amounted to a significantly lesser sum than is owed according to the terms of the loan agreement, but that much at least would have had to be paid as a condition of any order declaring the agreement to be void, or any other remedy available under the Australian Securities Investment Commission Act 2001, discussed below.

A lack of statutory framework

Mr Melzer testified that the loan contract in this case was unregulated by any legislation.
The contract was written under the Consumer Credit Code (WA) (this State adopted the Uniform Consumer Credit Code) which provided that a consumer loan was regulated only if it was for personal, domestic or household use, to purchase, renovate or improve residential property for investment purposes, or to refinance credit provided wholly or predominantly to purchase, renovate or improve residential property for investment purposes.
The position did not alter when this State adopted the later National Consumer Credit Protection Act2009. The Credit Act1984 (WA) did not regulate such a loan. No other relevant statute was put before the court and I have been unable to find any legislation that regulated such a contract.
Mr Mueller signed a 'declaration of purpose' on 25 August 2008, well prior to signing the loan contract itself, declaring that the credit provided to him was 'to be applied wholly or predominantly for business or investment purposes (or for both purposes)'. That declaration was part of a standard form document issued under the then Consumer Credit Code which warned the potential borrower that:
You should not sign this declaration unless this loan is wholly or predominantly for business or investment purposes. By signing this declaration you may lose your protection under the Consumer Credit Code.
Presumably the philosophy behind that was that those who borrow money for a business or investment purpose, as opposed to those who borrow money for domestic expenses, do not need the same degree of regulated protection under the law and should be expected to negotiate at arms' length and look after their own interests. It is not suggested that the declaration was not accurate. Mr Mueller did want the money to renovate his restaurant.
It is also of interest to note that, even under current legislation (brought in by the Consumer Credit Legislation Amendment (Enhancements) Act2012) which caps the interest chargeable per annum on consumer loans, if Mr Mueller had been borrowing funds for a domestic purpose, the maximum rate of interest chargeable is capped at the still very high rate of 48% per annum including fees. Prior to that enactment, this State had no cap in place (see the discussion in The Law Relating to Banker and Customer in Australia (looseleaf service) Thomson Lawbook Co at [6.25] ‑ [6.35]).
I turn now to the key evidence given by the three witnesses, Mr Melzer of Que Capital, Mr Smith of Smartcard and Mr Mueller.

Evidence of Wolf‑Peter Melzer

Mr Melzer is the sole director and shareholder of Que Capital and it has no employees. He testified that Que Capital is (and was) a licensed credit provider, predominantly offering short-term caveat loans to the sort of people who cannot get credit with the banks. He said it is a small lender, the loans are short term and higher risk, and it therefore charges higher interest rates than the banks. He said such loans were, at the time of the contract, entirely unregulated by statute, because they were loans for business or investment purposes. He said that, when he began the business in 2007, he borrowed money against his own home and lent that out and then, after he expended his own funds, he sought contributions of capital for the purpose of lending out to customers from other companies. Smartcard was one such company.
Mr Melzer testified that, in most cases when money is loaned to a customer, he acquires the money from another source, but on the odd occasion when Que Capital has got money, it will contribute to the funding of the loan. He explained that the investor who contributes the money is always passive as they do not have the licence, nor the expertise or experience.
Mr Melzer said his role is to advertise, take the inquiries and evaluate them over the telephone and, if one appears to have merit, then he either has the potential customer come in to his office and complete an application form or, if it is more convenient to them, he emails the form out together with any other paperwork that is required. Once the application form is returned to him with accompanying documentation, he does a credit check, including searching any properties in their name and evaluating the value of the properties that are being offered as security and finding out the balance of any loan secured by a first mortgage over the property.
He testified that, if he decides that the loan should be granted, he then approaches one of his funders, giving them all of the details of the proposed loan, and asks if they are prepared to put up the money. He said that, if he recommends a loan, they always accept and contribute the money. He explained that, in such a case, he gets a percentage of the net interest recovered at the end of the loan, as opposed to a broker's fee. He described the arrangement as a profit share, which includes paying him for the ongoing management of the loan, because he is the person who maintains contact with the customer until the loan is repaid. He said he keeps the funder up to date at least once a month by forwarding on any emails that he receives from the customer.
He said it is then his practice, once the funds have actually been deposited into the customer's account, to write to the customer and tell him the loan has been assigned. He said he provides the customer with the bank account details and address of the assignee, together with instructions that any repayments should be made to the assignee, while informing the customer that he remains the loan manager.
The following exchange took place concerning Mr Melzer's approach to assessing potential clients:
SWEENEY DCJ: Can I just ask, Mr Melzer, how do you assess that a potential client is worth the risk? You're dealing with people who, as you say, the banks won't touch. They've gone past that point? – Mm'hm.
If you're charging higher interest, that obviously increases the risk that they won't pay you back. So what makes it - - -? – The exit - - -
- - - worth your while? – There are two prime factors. One is security, enough equity in a property, and the other is an exit strategy. The exit strategy is as important as the security.
An exit strategy on whose part, yours or theirs? – Their part. How – how are they going to repay the loan, because we don't – I don't take monthly payments. I need a strategy like refinance of a property or the sale of a property, where they will repay from that event.
Right. Thank you.
BURKE, MR: Mr Melzer, in your experience is that how these loans which Que Capital dealt – deals in are resolved? – Correct. Yes, each and every time.
Now you've said each and every time. So that's every single loan that Que Capital deals in is resolved in one of the two fashions you mentioned? – Yes. Yes.
I think you said refinancing - - -? – The exit - - -
- - - or the sale of a property? – Mm'hm.
Are there any others that don't, I guess, resolve? – No.
By way of either of those or indeed any other fashion? – No, that is the only way.

In relation to this particular transaction, Mr Melzer said he received a telephone call from Mr Mueller, asking for a loan of $100,000. He said Mr Mueller briefly told him about himself and Mr Melzer asked his standard questions 'What's the security?' and 'What's the exit strategy?'. He said Mr Mueller told him he was a property investor with eight properties and he immediately thought that Mr Mueller had 'some horsepower. He's just a little bit short of cash in the short term'.
Mr Melzer said he then emailed Mr Mueller an application form and the defendant emailed it back with some accompanying documents. The first email between the two appears to have been around 11 August 2008. Mr Mueller informed Mr Melzer:
I thought I better let you know that all my loans are Low Doc as my financials are not quite ready yet. My declared income has been and is expected to be $350,000 from the Café Restaurant' and $61,880 from my rental properties annually. Can you let me know whether this is acceptable before I send all the documents off to you.
Mr Melzer responded that it was acceptable 'as I am more interested in your assets than income'.
The application form sent back by Mr Mueller was dated 25 August 2008. In that application form he described himself as a restaurateur and chef of 17 years' self‑employment running the Café Mueller in Midland as a café, restaurant and art studio since 2001.
He described his taxable income for the past two years as $410,000 for both years. Mr Melzer candidly stated however that 'we don't rely on people's income, because we rely on the exit strategy'.
The defendant then listed eight properties and their estimated values as follows:
1.Toodyay $500,000 (which comprised two properties);
3.William Street, Midland $495,000;
4.Vestia Walk, Stirling $525,000;
5.Coulston Road, Boya $450,000;
6.Charles Street, Midland $290,000;
7.Railway Parade, Midland $400,000; and
8.Koolgoo Way, Koongamia $395,000.
He also listed a couple of cars and cash savings and furniture, artworks and commercial equipment. His total assets he valued at $3,242,000. His total liabilities, which largely consisted of mortgages on his various properties, totalled $2,131,402, with a net worth claimed at $2,110,598.
As a matter of simple mathematics, his net worth was precisely $1 million less than claimed. It is not suggested that error was deliberate and, from his evidence, Mr Melzer had clearly noticed the error, but was unfazed by it. He said his sole concern really was the properties Mr Mueller owned and the amount owed on those properties. He said he does not rely on what the client tells him and does his own research but, on the surface of the application, the loan was worth looking into.
The purpose for which the loan was required was described as 'complete renovations of business premises (four toilets, art studio, grease trap, parking for five cars)'. The loan amount required was described as $100,000 for a term of three months and the loan was said to be required 'asap'.
As to how he intended to repay the loan, Mr Mueller wrote 'Refinancing 12 William St and 27 Vestia Walk, Stirling (Value of 12 William St, Midland expected to increase from $495,000 to 700,000)'.
As to the duration of the loan, Mr Melzer said he always asks the potential borrower how long they need the money for and, in this case, Mr Mueller said three months and he was happy with that. He said the suggestion of three months came direct from the client. Although he could not recall specifically whether he had said this to Mr Mueller in this case, he said he often warns people that, if the loan goes on much beyond six months, it gets out of hand and if there is any doubt then 'we won't do it'.
Mr Melzer said at no stage did Mr Mueller raise with him a question of whether he should obtain legal advice and nor did he volunteer that. He said the issue was not discussed. I note that, in the application form completed by Mr Mueller, under the heading 'Solicitors Details' he wrote 'To be selected'.
Mr Melzer testified that he decided that the loan application should be granted. The next step was to ask Mr Mueller for the legal fees for his lawyers to prepare the loan documentation and then to approach Mr Philip Smith of Smartcard with a view to inviting it to provide the funds to finance the loan. It was clear from Mr Melzer's evidence that he had every expectation that, if he recommended this loan to Mr Smith, then Smartcard would agree to finance the loan. Mr Melzer testified that the formal loan agreement was signed at his office in Adelaide Terrace, Perth by Mr Mueller and him on 2 September 2008.
The loan agreement is a simple four‑page document, the terms being contained in two pages, followed by a one-page schedule, and a final page for execution. It is written in plain English. It provided for a loan of $101,200 to be advanced on 5 September 2008 and repaid on 5 December 2008 or upon demand by one month's notice in writing, whichever was earlier. As to interest, it provided that Mr Mueller was to pay 'interest on the principal sum or so much thereof as shall be owing from time' at the rate of 6% per month, the interest to be computed from the date of the advance, payable on 5 December 2008 'and every month after the advance date until the Principal Sum is repaid in full'. It provided that, in default, the Lender was entitled to issue legal proceedings forthwith for the recovery of the principal sum together with any interest due, or exercise its rights under the mortgage, being an equitable mortgage.
On the same date the parties executed a mortgage, which was to be unregistered. Mr Melzer said, once his lawyers had lodged a caveat and registered it over the properties to be secured, he instructed Smartcard to transfer the funds into Mr Mueller's account.
On 4 September 2008 he and Mr Smith on behalf of Smartcard executed the deed purporting to assign the loan from Que Capital to Smartcard. The deed specified that, when the debt was paid in full, Mr Melzer would receive $8,737.20 and, if it was not paid on the earliest due date and interest accrued over time, Smartcard would pay Mr Melzer 45% of the interest paid from the due date until actual payment. In other words, Mr Melzer was not to receive a broker's fee, payable in any event, for introducing the customer to Smartcard. He would only get paid if the customer repaid the loan, hence his description of the arrangement as a 'profit share'.
Before the court is a copy of a letter dated 5 September 2008, which Mr Melzer testified he sent to Mr Mueller, stating:
Please be advised that the above loan has been assigned to Smartcard Financial Services Pty Ltd, 52 Melville Pde South Perth.
All moneys should be paid to them when due, however if you have any queries or if you want to repay the loan and make arrangements to have the caveat lifted from the security properties, please contact Que Capital Pty Ltd the Loan Manager.
He testified that the letter also contained an attachment, also before the court, being a document dated 4 September 2008 entitled 'Assignment of Loan' which states:
The loan of $101,200 between: Que Capital Pty Ltd … and Karl Paul Mueller Has Been Assigned to Smartcard Financial Services Pty Ltd … of 52 Melville Pde, South Perth WA 6151.
The principal and interest for this loan as described in the loan agreement dated 2nd of September 2008 should be deposited to Smart Card Financial Services Pty Ltd bank account BSB 306-043 Account 0593405 on the loan discharge date or at their office address as mentioned above.
Que Capital Pty Ltd … will still manage this loan. Any queries should be directed to Mr Peter Melzer …
The letter was addressed to post office box 1034, Midland, being the postal address provided by Mr Mueller and which appears in the loan agreement. Mr Melzer said he posted the letter by mail on that date using standard post.
The loan was due for repayment on 5 December 2008. He testified that no repayment was received.
By letter dated 9 January 2009 Mr Melzer purported to claim some additional fee of 11.5% per annum on the money owing. He wrote to Mr Mueller informing him that, because the loan was overdue:
unless you can discharge the loan by Friday the 16th January 2009 I will need to charge you an ongoing fee of 11.5% pa paid monthly. That would amount to $969.83 per month until you have discharged the loan. Please note that the original loan agreement still stands as written. Please deposit the amount of $969.83 to the account of Smartcard Financial Services BankWest, BSB 306-043 account 0593405.
Mr Melzer testified that 'the loan could go on ad infinitum without any urgency from the borrower to repay it. And this was meant to create a degree of urgency', as if a degree of urgency was missing, with an interest rate of 6% per month.
There was no mention of such a fee in the loan agreement. Mr Melzer did give evidence that he discussed that additional fee with Mr Mueller, who agreed to pay it. Plainly he did, because Mr Mueller made three subsequent payments of $1,939.66, $410 and $559.83 in February 2009. The first of those payments precisely coincides with twice the monthly payment requested.
Nevertheless this was a unilateral penalty clause, with no consideration attached. It is plain there was no contractual justification for such a fee and I confirmed with the plaintiffs' counsel that the 11.5% per annum fee was not claimed in the legal proceedings and formed no part of the calculations of money owing. Mr Melzer testified that he eventually abandoned the extra interest payments when it became apparent that Mr Mueller could not pay them.
The real significance of the letter demanding the additional fee is that it was posted to the same post office box, 1034 Midland, to which the letter advising the assignment of the loan to Smartcard was posted. The payments into the Smartcard account (and Mr Mueller accepts he did make those payments to that account) tend to suggest he did receive that letter.
Mr Melzer testified that he stayed in touch with Mr Mueller probably every fortnight. A series of email exchanges are before the court and also the equivalent of a running sheet kept by Mr Melzer detailing those contacts, which is a composite document of his communications with Smartcard via a website called google docs, including emails from Mr Mueller which Mr Melzer cut and pasted and forwarded to Smartcard. Mr Mueller accepts he wrote those emails. I have had regard to those parts of the document which are not hearsay.
It is not necessary to go into detail about their ongoing discussions about Mr Melzer's progress in attempting to repay the loan. In essence, Mr Mueller gave continual assurances that he was doing what he could to pay the loan and, over time, he placed a number of his properties on the market. He also made attempts to refinance his various properties and, for a time, Mr Melzer took the view that there were moves afoot to repay the loan and he was prepared to wait to allow those plans to bear fruit. By email of 12 June 2009 Mr Mueller informed Mr Melzer that he had finance from RAMS and was also hoping for further finance from Adelaide Bank. He stated:
Your loan managed to get my business going and whilst I never dreamed I would have it for that long I have to look at the big picture and look forward. I thank you for your patience with me and my circumstances. Hopefully settlement will be quick now.
By email of 28 August 2009, Mr Mueller advised Mr Melzer that he had sold his block of land at Vestia Walk, Stirling and that interest had been shown in two other properties he had on the market. He told Mr Melzer the loan would be paid during the next month 'to clear the caveat on Vestia Walk'. It is uncontroversial that Mr Melzer arranged for Vestia Walk to be released from the caveat Que Capital held over it. Mr Mueller had hoped that the balance of the sale proceeds from Vestia Walk, which he estimated as being around $100,000, would be available to reduce his debt pursuant to the loan agreement. Instead, the first mortgagee, RHG, which had cross-collateralised mortgages over three of his properties, used the entire proceeds to reduce his overall debt. Apparently it decided to reduce Mr Melzer's overall loan to value ratio.
Ultimately Mr Mueller complained about RHG's conduct (and Mr Melzer's conduct) to the Ombudsman. The Ombudsman's findings, whatever they were, are not relevant to the issues before this court. Further, the terms of reference provided to the court during submissions indicate those proceedings were conducted on a 'without prejudice' basis. Whether RHG was or was not entitled to act as it did according to its contractual arrangements with Mr Mueller, it is uncontroversial that none of the proceeds from Vestia Walk were applied to reduce the debt owing to Smartcard.
In about September 2009 Mr Mueller approached Mr Melzer wanting further finance in order to purchase the property next door to his restaurant. He had at that stage made no repayment on the existing loan. Mr Melzer said he thought that idea to be 'absolutely preposterous'. What Mr Melzer was prepared to do however was to re-write the loan so as to achieve for Mr Mueller a position whereby he moved from being in default on the loan, to being party to a current loan, albeit a loan for a larger sum. Mr Melzer wrote to him on 28 September 2009 stating:
The way that I can help you is by continuing the loan as written providing that you pay the application fee and interest that is owing. On the 5/10/09 that will be $79,138. If you pay us that amount we will continue the loan and I also reserve the right to more security over your properties.
This occurred at around the same time as Que Capital had released the caveat over the land at Vestia Walk to enable it to be sold. Mr Melzer wanted a replacement property by way of security.
On 14 October 2009, Mr Mueller and Que Capital entered into the second loan agreement in similar terms to the first loan agreement. The principal sum comprised the original $101,200 together with outstanding interest and fees, which then amounted to $182,132. The term was for two months and the interest was reduced to 3.34% per month. That did not truly amount to a reduction in interest. Because a significant sum of interest outstanding had been added to the principal sum, Mr Melzer reduced the interest rate so that, in practical terms, it amounted to the same interest owing per day which was, approximately, $200 per day.
No money actually changed hands upon the execution of the second loan agreement contract and Mr Mueller did not become liable to pay any more than was owing pursuant to the first loan agreement. Mr Melzer in fact did not regard this as being a second loan agreement. He said it was executed simply because Que Capital released the caveat on one of Mr Mueller's properties to enable it to be sold and took a security over a replacement property and so 'it's only a new loan document, it's not actually a new loan'. As part of that second loan agreement he also took an unregistered mortgage over the replacement property and a caveat was placed over that property.
The further point of the second agreement was that, from the perspective of a third party perhaps looking to advance finance to Mr Mueller, he had a current liability and was not yet in default on his loan, as opposed to an old loan in respect of which he had been in default for about 10 months.
What Mr Melzer had lost sight of was the fact that the original debt had been assigned to Smartcard and was therefore no longer owed to Que Capital. The second loan contract was entered into by the wrong party. He said it was a pure oversight because at that time Que Capital had written about six loans that it had funded and about 17 that other financiers had financed.
That fact matters little to the plaintiffs' substantive case. From both plaintiffs' point of view the debt is owing to Smartcard and always has been and the only reason Que Capital is a party to this action is because of the doubt that was occasioned by the creation of that second contract. Legal proceedings were originally instituted by Que Capital on the basis that the loan agreement of 14 October 2009 was the operative contract. Leave was later given to add Smartcard once, no doubt, more accurate instructions were taken. For reasons detailed later in this judgment, I find the debt was assigned to Smartcard and, in those circumstances, the plaintiffs do not seek to rely on the second agreement and Mr Mueller is not prejudiced by that position.
What is of note, however, is that by email of 4 December 2009, Mr Mueller requested a copy of that contract stating 'I haven't received one yet'. Mr Melzer said he sent him a copy of that second loan agreement. Mr Mueller denies receiving that contract, just as he denies receiving a copy of the first loan agreement, the letter notifying him it had been assigned and the letter demanding 11.5% per annum interest payments. Yet four days later Mr Mueller responded by email 'Thanks for that' and it is plain, and I infer, that he was referring to having received the loan agreement.
By email of 4 December 2009 Mr Mueller indicated that he had now placed his property at Coulston Road, Boya on the market, together with his property in Charles Street, Midland.
On 4 February 2010 Que Capital provided Mr Mueller's settlement agents with the total payout figure for the loan as at 15 February 2010 which had grown to $206,903. His settlement agent subsequently provided a settlement statement dated 25 February 2010 in relation to the sale of Coulston Road indicating a balance available to be paid to Que Capital of $59,221.37. Again, Que Capital provided a withdrawal of caveat to enable the sale of that property to proceed. The $59,221.37 was received by the plaintiffs' lawyers on 2 March 2010 and transferred to Smartcard.
Also in February 2010, the property in Charles Street, Midland was sold. Again Que Capital provided a withdrawal of caveat to enable that sale to proceed, but did not receive any funds from that settlement.
In July 2010, Mr Melzer emailed the defendant asking him 'how much longer is this going to go on for? Please tell me what is happening'. In response Mr Mueller informed him that he had been working to finish the studio building at the back of his restaurant, which was now finished and had been approved as a separate art studio, which meant he could add another business to his existing one. The art studio was amongst the renovations for which he had borrowed the $100,000, nearly two years earlier.
On 23 July 2010, Mr Melzer wrote a letter of demand stating:
The balance of the above loan on the 23/8/2010 will be $185,112. Unless we can see some positive action we have no choice but to send your file to our solicitors for recovery of the above funds on that date. I would urge you to sell assets at a fire sale price …
On 2 September 2010 Mr Mueller emailed Mr Melzer telling him he had sought advice and been told that the interest rate 'is excessive and unconscionable' and that he had been advised to challenge the interest amount. He received a heated response from Mr Melzer and legal proceedings were instituted in November 2010.
Mr Melzer gave evidence that, apart from the payment of $59,221.37 and a couple of interest payments made by Mr Mueller in response to his request for the 11.5% per annum extra fee, no further sums had been paid.

Evidence of Phillip Smith

Mr Smith added little to the evidence. He testified that Smartcard is a private business which invests in property and investments, usually financing short-term commercial loans over a two to three‑month period. Smartcard itself sometimes borrowed the money advanced. He said Smartcard had funded such loans since 2008 and it was not uncommon for the customer to default and for the loan to be extended for a few months and, in those circumstances, Mr Melzer would keep him informed of progress. He confirmed Mr Melzer's evidence as to the passive role played by Smartcard.

He confirmed that Smartcard funded the loan to Mr Mueller upon Mr Melzer's recommendation. He had no dealings with Mr Mueller whatsoever.
He confirmed the three payments received from Mr Mueller, referred to earlier, totalling $2,909.49, and the substantial payment of $59,221.37.
The cross-examination of the witness concerned his personal opinions about how he felt about Mr Mueller's plight and his views on the assignment of the debt and the loan agreement itself. None of that evidence advanced Mr Mueller's position and it is unnecessary to detail it.

The defendant's evidence

Mr Mueller said in 2008 he was working as a nurse and also studying for his Bachelor of Nursing degree externally. In addition, he was trying to renovate his restaurant, Café Mueller, in Midland. Given evidence he gave in cross‑examination, my impression is that he had run his restaurant for some years but had shut it down at some stage for the renovations. It is also clear that he had commenced renovating, given that he said he needed to get a loan to 'finish the renovations' and that 'I found that I just didn't have enough time to get the renovations done fast enough. I had to take time off'. He said he needed funds to pay for new plumbing and other quite major expenses associated with renovating, because the premises were 100 years old and 'I wanted to keep them original which meant there were some things that cost more because of the way they needed to be done'. I infer that not all of the renovations were being undertaken by tradesmen and that Mr Mueller was doing at least some of the work himself.
He said he knew that, with work and study, he would not have enough time to get the renovations done quickly enough and consequently he took time off work, but continued with his studies. He knew that would also mean he had no income coming in and so he needed to get a loan to finish the renovations.
Mr Mueller testified that he came across an advertisement in The West Australian business section. He was unable to produce the exact advertisement that he saw in 2008 but produced a later one, published in The Weekend West Australian for 16 – 17 July 2011, which he said was exactly the same. That advertisement, reads:
QUICK and Easy Caveat Bridging Business + Invest Loans. 1 hr Approval. I am told that I am the cheapest.
the Lender
0418944910 acl 370981
Brokers Welcome.
He said remembered the words 'Peter the Lender' quite distinctly.
Mr Mueller said he telephoned quite a few different financiers and compared what they had to offer and Que Capital was the only one that said that it was the lender and that appealed to him, rather than going through a broker, because it meant he would deal directly and it saved talking to two people. He clarified, however, that he obtained the information that Que Capital was the lender from the advertisement itself, rather than from any conversation he had. That, presumably, was an inference he drew from the combination of 'Peter the Lender' and the mention of the company name in the website address provided.
He testified that he did consider seeking a loan from a bank, prior to going to see someone like Mr Melzer. He said he saw the manager of the Commonwealth Bank, but they refused him a loan because of his lack of income. Mr Mueller said the financial crisis had hit and things had changed dramatically and he was aware, from real estate agents' appraisals, that at least one of his properties was now worth less than he had paid for it. He also had no income. He said, prior to giving up work, he had been earning $100,000 a year with nursing and also 'had the property value increases', 'so I was doing very well and I could've got a loan quite easily. But I stopped working'.
Mr Mueller testified that he telephoned Mr Melzer, who was very pleasant and amicable, and Mr Mueller told him what he wanted the money for and told him that he was doing nursing. He said Mr Melzer told him that his lady friend was a nurse as well. He said he trusted Mr Melzer, who seemed quite interested in his proposal.
Mr Mueller testified that he told Mr Melzer that he had eight properties and was doing very well and the value of them was increasing annually by about $400,000. He said he put that increase in their value down as his income on the loan application form. He said that, around the same time as he approached Mr Melzer, the financial crisis had started to happen, property values had dropped and it was more difficult to get loans, so he was quite pleased that Mr Melzer would lend him the $100,000
and I was quite sure that I was able to repay it, because I had never been through a financial crisis of that extent and there was no reason to believe that I couldn't repay the loan.
When asked how it was he had anticipated that completing the renovations was going to enable him to repay the loan, he answered:
Refinancing, because the value of the property would have gone up. I built a studio and I – we had to build four toilets … But I also had other properties that I could sell in an emergency, so I was not too worried about that part of it, but I – I realised that I needed more money to finish the work so I could start trading again in my restaurant.
In other words, in order to achieve these renovations, Mr Mueller not only gave up his $100,000 per annum income but also had no income from the restaurant itself.
He said he had taken out quite a few loans previously in purchasing his different properties and had some experience with loans.
In cross-examination he confirmed that, when he obtained the loan, it was his intention that the renovations would be completed within the three‑month period and he would also have time to refinance within that same period. He said, with hindsight, it was not realistic and he has never renovated a business premises like that. Extraordinarily, in his defence, Mr Mueller pleaded that, as an experienced lender, Mr Melzer should have known that his plans to renovate and refinance within three months were unrealistic. He accuses Mr Melzer of predatory lending as a result.
Mr Mueller agreed that it was his writing throughout his loan application. There were a number of errors in the application form, some more material than others. In the application form, he had described his type of business as 'café/restaurant/art studio' which started in 2001. In cross‑examination he agreed it started in 1992 and ran till about 2000 and then recommenced in approximately 2006. He said the interruption was due to his spending a few years doing nursing, because he needed money to renovate.
In the loan application form, he described his occupation as restaurateur chef. He testified that the restaurant was not actually open for business at the time, because he was working as a nurse, but he was still using it for parties and groups and explained that a lot of the nurses wanted their birthday parties there.
He said the fact that his net worth was overstated by $1 million would appear to be a mathematical error. He said he did not do that deliberately and it is not suggested he did.
Significantly, Mr Mueller described his taxable income for the past two years in his loan application as $410,000 for each year. He testified that the claimed income was made up of the increase in value over all his properties on an annual basis and that they increased in value by approximately $400,000 per year, but he also earned money from nursing as well. Because of the fact that counsel and the witness talked over each other constantly, there never was a clear answer to the question of whether that meant his income from nursing was only $10,000 by the time he filled in the application. That suggestion is contrary to his evidence that he had actually stopped working. In any event, on that evidence, the value of the homes was included in the application as an asset and then, in effect, used again in order to claim a substantial income of $410,000 per annum.
That evidence is also quite inconsistent with an email sent by Mr Mueller to Mr Melzer on 11 August 2008:
My declared income has been and is expected to be $350,000 from the café restaurant and $61,880 from my rental properties annually. Can you let me know whether this is acceptable before I send all the documents off to you.
That suggests that the claimed income was nothing more than a projected figure at the time. Mr Mueller testified, 'I can't explain it, except that Mr Melzer must have checked it'. He also said he had forgotten the income from the rental properties and appeared to be saying the income he claimed in the application form was a combination of the increase of the value of the properties plus the annual income from the rental properties but concluded 'I don't know. I – I can't explain it'.
In any event, he denied that his declaration concerning his income was false. He testified 'I don't remember why it's got that. It's wrong, yeah. I agree'.
Although it was suggested to Mr Mueller that he had deliberately attempted to mislead Mr Melzer as to his income, there is no pleading to that effect and it is not suggested that Mr Melzer relied upon the income figure. Rather, the relevance of the evidence is that it impacts adversely upon Mr Mueller's reliability as a witness and detracts from his victim stance as someone who was preyed upon by Mr Melzer. He said he did not intend to make any misleading statement in his loan application form as to his income, but explained:
I would have thought that Mr Melzer would have checked all that and then if he would have said to me 'Have you got proof of that?' That's probably what he should have done in hindsight.
He agreed that he suggested the loan amount of $100,000. He insisted, however, that the three-month term of the loan was suggested by Mr Melzer and said 'that's what he offered me' and added 'As far as I knew, that's the longest that he would do the loans'. He agreed that Mr Melzer's email to him sent sometime between 20 and 25 August 2008 (because of the cut and paste method, not all of the emails are dated) stated 'The loan will be for 3 months as requested' but said:
What I remember in my mind, that he said, 'You can have it for three months' and that's what I chose, three months rather than one or two months.
Really nothing turns upon the conflict between Mr Mueller and Mr Melzer on this point. Mr Mueller was not obliged to accept the offer of finance from Mr Melzer on the terms offered. If three months was the longest term Mr Melzer was prepared to offer there was nothing stopping Mr Mueller from approaching another lender. But in fact I accept Mr Melzer's evidence on this point to the effect that the three months was suggested by Mr Mueller. I expect there were discussions about what sort of loans over what sort of period Mr Melzer ordinarily offered but I find Mr Mueller suggested the three months. The high interest rate meant it was in Mr Mueller's interests to repay the loan as soon as possible and his evidence is consistent with him thinking he would have no difficulty in repaying the loan within time. The longer the term, the more he would pay.
There was an issue raised by the plaintiffs' counsel who thought that Mr Mueller had testified that he had initially been told the loan would be at a rate of 4% per month. In fact he had not given any such evidence, but agreed in cross‑examination that he had initially been told a lower interest rate when he made his initial enquiry. It is of no moment. It is clear that he was informed in Mr Melzer's same email that the interest rate was 6% per month, to which he responded by email:
I am sending you my application for finance with this email … I have got a loan for bridging finance approved with the same interest rate but the fees are a lot higher. I would prefer your loan if approved.
He expressed no surprise at the claimed increase in the interest rate in that email and, in any event, applied for the loan in the knowledge that the interest rate was to be 6%.
He said, when he signed the first loan agreement:
I just assumed or thought that Mr Melzer and Que Capital were the lender, because that's what the document said. There was no hint that he wasn't … and I've never heard of anything where the loan could be assigned, like, before it's actually paid out to you, you know?
He said Mr Melzer did not tell him the loan was going to be assigned.
He confirmed that they signed all of the documentation and then the money was paid into his account. Although it was a little confusing, Mr Mueller testified that he has difficulties receiving emails over a particular size and appears to perhaps have limited storage capacity on his computer. He said he has on occasion received a message telling him that his mailbox is full, requiring him to delete documents to free up space. As a result he appeared to be saying that he did not receive the original loan agreement, but does not know whether it was actually sent to him or not.
Mr Mueller said he received no notification that the loan was assigned. He confirmed that PO Box 1034, Midland, the address on the letter to that effect, is his postal address, but said he was not even told verbally that the loan was assigned to Smartcard.
He said he then quickly realised that the money he had borrowed was not enough for the renovations because he also had to live off the money as well and quickly realised that he was trapped. He said he could not extend the loan and there was no way he could get another loan because of his poor credit rating, until the renovations were complete. He said he then loaded up his credit cards.
Mr Mueller testified that the period for payment of the loan came and went and he kept in touch with Mr Melzer and told him what was happening. He said he then began to really worry about the situation and went to different brokers, mainly through the internet, hoping to refinance.
In relation to the extra payments of interest that Mr Melzer requested in January 2009 of 11.5% per annum, Mr Mueller denied receiving that letter. He testified:
I remember I spoke to Mr Melzer on the phone, and he was always, you know, he was getting a bit anxious. And he said 'If you can at least pay the penalty', or something like that. And he said 'You can pay to Smartcard Financial Services'. And I said to him 'Who are' – 'Who is Smartcard Financial Services?', because I haven't heard from – of them. And he said to me 'That's another one of my companies'. And I had no reason to not believe that, because he's been pretty good before, and you know, he was quite pleasant, and amiable, and I did not have any reason to be suspicious.
He said he made those payments by transfer into the Smartcard bank account. He said he was provided with those details by Mr Melzer over the telephone. His account of the phone call was very broad and did not imply that Mr Melzer explained what 'the penalty' was, or why he should pay it, or how often, all of which details had been in the letter he says he did not receive.
Mr Mueller testified that he was not able to open his restaurant again until probably around April 2009, seven or so months after he was given the money, although he was unclear on that. He said the restaurant had been shut for probably two years or a bit longer, because he had been working as a nurse full‑time.
He said he realised the interest was spiralling out of control and approached Mr Melzer to see whether he would vary the loan somehow, but he was unwilling to. Mr Mueller said he then realised he had to sell properties in order to get out of the mess and so he put a number of properties on the market. He also attempted to refinance with RAMS. He said he already had a loan with them, but they were unwilling to advance any further money once they realised that one of the properties being put up as security was a restaurant. He said he also had to disclose that he had the $100,000 loan and his bank told him that they could not help him when he had a quite significant loan already and when the restaurant had not re‑opened yet.
Mr Mueller testified that he approached the Adelaide Bank, which was prepared to loan him $100,000 at 6% per annum, but he did not take up the loan because it would not have been enough to pay back Que Capital. He said he was still 'hoping that things would change and property values would go up again. But they didn't, yep'. The emails indicate that the approval from the Adelaide Bank was given on or before 1 August 2009. Obviously had he taken up that loan, he could have at least reduced the loan from Smartcard substantially and reduced the mounting interest, but he chose not to do so.
Mr Mueller testified that one of the properties he put on the market was a block in Vestia Walk, Stirling, which was one of the properties that Que Capital held a caveat over, and it took a long time to sell because the market went really flat, but ultimately he did sell it. The emails indicate it was sold by 28 August 2009. He said he had equity of $100,000 in that property. He explained that, by then, RAMS had been taken over by RHG, which both increased the interest rate on his loan, making it harder for him to make repayments, and also decided to alter his loan value ratio over his indebtedness to them from 80% to 60%, meaning, in effect, they required more security for their loan to him than they had previously. He explained that three of his eight properties were mortgaged to RHG and they were cross-collateralised.
He said he did actually make a profit on the sale of Vestia Walk and had anticipated that $100,000 would be available to him to pay it to Que Capital. Instead, however, RHG took the entire purchase price to pay out its mortgage on Vestia Walk and to reduce his overall indebtedness to it.
He said Que Capital did not pursue the caveat it held over Vestia Walk and simply released the property and so RHG took the lot and he got nothing from it. He confirmed that that also meant that Que Capital got nothing from that settlement and complained:
Well, I think that having a caveat on a property must mean something … He should have fought for the money.
He said he also approached RHG and pleaded with them to pay that money to Que Capital, but they refused. Mr Mueller later made a complaint to the Ombudsman which, he said, resulted in RHG discontinuing some legal action against him and paying him $8,000.
Nevertheless he insisted that it was Mr Melzer's fault that he did not claim any money from that transaction because 'firstly, Mr Melzer had no right to have a caveat according to the legal documents' and, secondly
because he never contacted – he said to me he contacted RHG. But then in his evidence he said he never did, because he had no right to approach them.
The two propositions are contradictory. If Mr Mueller's complaint is that Que Capital had no right to lodge a caveat over the property in the first place, it would follow that it should have had no right to demand any proceeds from the sale before it released the caveat.
Mr Mueller testified that Mr Melzer then told him he would have to sell another property. He said he put three properties on the market: Charles Street, over which Que Capital held a caveat, Railway Parade, Midland and his property in Boya. He said Que Capital did not originally have a caveat over the Boya property, which means that must have been when the second loan agreement was entered into and he offered replacement security for the land in Vestia Walk.
Mr Mueller said he was told by Mr Melzer that, now that Vestia Walk was no longer a security for Que Capital, he had to replace it. He said he asked Mr Melzer 'Could you change the loan agreement somehow to make it more human, because 72 per cent a year is quite – almost insane', but Mr Melzer told him that the only way he could help him was by doing another contract and with extra security. Mr Mueller said he did not really want to do that but Mr Melzer
was going to sell everything. He would have made me put all our – all my properties on the market. He was quite determined. And I would have lost the whole lot. So I really was under enormous pressure to sign another contract which I really didn't want to do. But I was under economic pressure.

He testified that the second loan agreement did make things worse for him because it made it look like he had borrowed $182,000, when before it was $100,000, and it made it harder for him for refinancing because
I found out that having a caveat loan, especially for such a length of time, is frowned upon by any – any – any lender that I approached, even the more lenient ones. They – because it spells trouble, having a caveat loan for that long at that time.
The second loan agreement of course gave the appearance that it had not been a loan for that long, but was a current loan, but for a greater amount. Mr Mueller agreed that he understood that the effect of the agreement was that his loan would not be in default and said 'that's why I signed it then'. He agreed that, at the time, he saw it as preventing any legal proceedings against him for at least another two months although he said, with hindsight, it was of no help given the interest rate. He complained that 'it would've been kinder for him to wind me up after three months' and said:
I thought he was helping me but now I can see in hindsight that he was greedy … and he made no effort to reduce the interest rate.
When it was put to him that he was making payments to other lenders he responded 'Well, I had to, not to lose my other property' but said he did not make any payments to Que Capital 'because it wouldn't have made any difference'.
He confirmed that the second property to sell was the Boya property, which freed up $59,000 to be paid to Que Capital.
Mr Mueller testified that he then sold two more properties, one in Railway Parade and one in Charles Street (over which Que Capital held a caveat) but, because property values had dropped even further, there were no excess funds to be paid to Que Capital.
As to Mr Melzer's letter of demand to him of 23 July 2010, Mr Mueller testified that he regarded the letter as 'very threatening to me because he wanted me to list all my properties for sale including my business one, which was my only source of income'. He said the nature of the threat was that property prices had dropped and yet 'I would have to sell the remaining four properties that I had to – in order to catch up on this huge interest accumulation'. In essence his complaint is that he felt Mr Melzer should have done something to reduce the interest rate because he was experiencing financial hardship. He said after that 'I refused to sell any more property in spite of him threatening me'.
He testified that he then went to get some advice from someone at a credit assistance agency who advised him to challenge the contract and he advised Mr Melzer of that, but found Mr Melzer's response to be 'quite unprofessional'. Mr Melzer was, in a couple of his communications with Mr Mueller, blunt and very impolite. It is clear he lost his patience from the point at which Mr Mueller approached him for another loan to purchase the property next door to the restaurant, and did not regain it.
Mr Mueller testified that he was not aware, even at the point at which legal proceedings were instituted, that the debt had been assigned. Once legal proceedings had commenced against him, he said he complained to the Ombudsman and this matter was adjourned for some time pending the outcome of that investigation. He said it was during that investigation that he was informed that the loan contract had been assigned to Smartcard.
Mr Mueller was cross-examined about his claim that it was important to him to deal with the lender, because he wanted to deal with one person instead of two. He stated that what he meant by that was he wanted to deal with the lender, as opposed to a broker and then a lender. When it was suggested to him that it would not have mattered to him, he answered 'No. That's not right. You can't tell what matters to me, because I – I am the one that made the decision'.
He agreed in cross-examination that the loan offered by Mr Melzer did have lower fees than another loan for which he had received approval. He said that other loan was being offered through a broker, at the same interest rate as that offered by Mr Melzer, but the fees were a lot higher because there was a broker involved and therefore a brokerage fee 'and I went with Mr Melzer because the fee was the same but there was no brokerage fee. So that's the reason'. When the plaintiffs' counsel then attempted to pin him to that proposition, that he had chosen Mr Melzer's loan because there was no brokerage fee, he responded 'Yes. Because he was a lender … which meant there was no brokerage fees'.
When it was suggested to him that he had chosen the loan offered by Mr Melzer because it had lower fees, he responded 'Because there was no broker. That's what I'm saying, and that's the truth'.
When asked 'If this loan had a broker involved but much lower fees, are you saying you'd go with the more expensive loan?' he responded 'No, of course not. I'm not dumb'. He agreed he wanted the lowest fees that he could find, but denied that, as a result, it did not matter to him whether he was dealing with a lender or broker.
There were several attempts to put the proposition to him that, if Mr Melzer's fees were higher than the other loan, he would not have chosen Mr Melzer's loan purely on the basis that Mr Melzer was the lender, rather than a broker. Mr Mueller insisted he could not be asked a hypothetical question and that the question did not make sense to him. There appeared to be no way in which the proposition could be put to him such that he would understand it.
As to his preference for dealing with one person, the lender, as opposed to two people, the lender and the broker, he said the difference was
money … and also the direct contact. You don't deal with a broker and then you have to wait for him to contact the lender and then he comes back to you. That's all. It's simpler.
He agreed that he was worried about the time it would take if he was dealing with two people instead of one and he was worried about paying a brokerage fee. Of course, in this case, he only ever dealt with the one person, namely Mr Melzer, and paid no brokerage fee.
He was asked to explain how his situation would have been any different if Smartcard was not involved and if the funds had come directly from Que Capital, as he had expected. He answered 'Well, it's – I applied with Que Capital. Que Capital contract was the lender, so it's a legal position, isn't it?'. When he was again asked to explain what his complaint would be if the money had come directly from Que Capital as opposed to Smartcard, his answer was:
Well, I applied with Que Capital. I signed the contract with Que Capital as the lender and as a customer I can expect the money to come from Que Capital … It would mean that I was deceived from the start.
He was given several opportunities to explain what difference it made to him that the money came from Smartcard, rather than Que Capital. He was unable to answer those questions in any satisfactory manner. In essence he insisted that that issue could not be divorced from any other complaint he was making. The following exchange took place:
Now, I put it to you that regardless of who the lender was or where the money came from it made no difference to you? – That's not right. You can't answer - - -
In fact it - - -? – You can't ask me this question.
I put it to you - - -
SWEENEY DCJ: He can ask you the question? – He can ask me but - - -
Are you able to answer it? – But I can't answer it because of the history of what happened. You can't say – I have never had any dealings with Smartcard; never. Never spoken to him, it – and I don't know what he would have done; he might've done a different thing then I was in trouble, you see.
In response to a similar line of questioning, he said that it was incorrect to suggest that it made no difference to him where the money came from
because I knew nothing about Smartcard. I knew everything about Que Capital but I had no information whatsoever about Smartcard and to say it would make no difference to me, that's not right because I – I would have had to look into it … It could have – it could have been worse … and I don't know.
It was put to him that the fact that he got the money from Smartcard, as opposed to Que Capital, had nothing to do with his failure to repay the loan. After saying more than once that he did not know what that question meant, and did not understand the question, he did eventually agree. He agreed he could not pay the loan because he needed more money and more time to finish his renovations.
Mr Mueller agreed that he had later approached Mr Melzer for financial assistance to purchase the property next door to his restaurant because he said it was 'in his interests', that is, in Mr Melzer's interests, for him to purchase the property next door. He agreed Mr Melzer refused him. Mr Mueller said his motivation was that he was 'desperately trying to build up assets so I wouldn't have to sell my whole - - - all my properties'.
When asked whether he, at any stage, had considered that he should sell all of his properties to get out of the position he was in, Mr Mueller made it clear that he had not been prepared to sell all of his properties because he did not anticipate that property values would stay down, and said 'the whole idea was to get my restaurant going and continue with my properties'. He was again asked whether he did not, at any stage, think he had better sell all of his properties to get out of the situation and he again answered plainly 'No'. He said he did consider selling his artwork (which he described as being worth $60,000 ‑ $70,000) but explained that it takes months and possibly years to sell paintings and, with the economic situation at the time, he may have received very little for them and he would have just been selling more assets needlessly.

Some general comments on credibility

To the extent to which this case turns upon the credibility of the witnesses, I formed a favourable view of Mr Melzer's credibility and an unfavourable view of Mr Mueller's credibility. Mr Smith's credibility was really not in issue, given that he had no direct dealings with Mr Mueller, but I accepted his evidence.
It was very apparent from Mr Mueller's evidence that the ruinous financial consequences of entering into this loan have impacted upon his perception of events. I did not form the view that he deliberately gave false evidence, and he retained a polite and pleasant demeanour throughout the trial. But I certainly formed the view that he has convinced himself that he was the victim of predatory, fraudulent and greedy behaviour, and has consequently divested himself of all personal responsibility for his own conduct, and has now become attached to that view of the facts constructed after the event.
Accordingly, he pleaded that Mr Melzer, as an experienced lender, ought to have known that the renovations would take more than three months to complete. It was of course entirely within Mr Mueller's own responsibility to plan, schedule and cost his renovations and get quotes and realistic time estimates from tradesmen. His inexperience in renovating a restaurant may, in part, explain his apparent failure to provide for a cost and schedule blow-out, but can hardly reasonably be attributed to misconduct on the part of Mr Melzer.
His obvious gross overstatement of his income in the loan application – whether it comprised 'income' on the basis of an increase in the value of his properties (which were in decline), or projected income on the basis of what he hoped the restaurant might earn at some stage once it was open for business - he sidestepped by saying that Mr Melzer should have checked the figures he provided. As it happened, Mr Melzer was not too concerned about income, given the 'exit strategy' discussed between him and Mr Mueller, which was that Mr Mueller planned to refinance to pay out the loan and also had eight properties to his name to which he could resort, if needed. But that does not assist Mr Mueller's credibility.
Mr Mueller's stance now is that he should not have to pay any more money to repay this loan, not even the remainder of the principal, notwithstanding that he did receive, and spend, the $100,000 and has only repaid $60,000 odd. His justification for such a stance is that he believes he was preyed upon and deceived. The inherent unreasonableness of his stance reflects adversely upon his credibility.
Given that his key complaint is that the loan was assigned to Smartcard and Mr Melzer did not tell him that was going to happen, the obvious question is: what difference did it make where the money came from? Mr Mueller objected to being asked such a question, insisted he could not understand such a question and provided no meaningful answer, apart from an insistence that he was deceived. He similarly objected to questions designed to test his claim that he wanted the loan from Mr Melzer because he understood him to be the lender, and not because Mr Melzer's loan came with lower fees than another similar loan.
It was apparent from Mr Mueller's evidence that he is of at least normal intelligence and comprehension skill. He did testify that, sometime after he had complained to the Ombudsman, he had a bad car accident and received 'some injury to my brain' and also battled some form of cancer. He said that his cancer was now in remission and that he has 'just about recovered' from the accident as well and so he had had 'some real trauma in the last few months'. I asked him whether the brain injury had impacted upon his memory. He denied that. He did say he was more disorganised than he used to be, but said 'it's getting better every week'.
Clearly the injury has no relevance to his dealings with Mr Melzer years before, but I also formed the view that it had no impact upon the substance of his evidence. Given that he was unrepresented at trial, Mr Mueller listened to and followed instructions as to how to conduct himself and his defence, managed to cross‑examine as competently as can be expected from a person who is unfamiliar with the trial process and generally handled himself politely and well, as perhaps one might expect from a restaurateur of years' experience.
Consequently, I conclude that his reluctance to deal with the two obvious factual issues identified was because he will not now admit of any possible view of the facts which conflicts with his stance that he was victimised and preyed upon. I have made further specific factual findings about his evidence below in dealing with the issues to be determined.
Mr Melzer's evidence was logical, plausible and matter-of-fact, and it accords with the documentation tendered in the case. I find him to have given truthful and reliable evidence.
I now turn to the matters raised by Mr Mueller's pleadings as the basis upon which he should not be liable to pay any more money under the loan agreement. I have proceeded on the assumption that, Smartcard having taken an assignment of the debt, if the loan agreement was voidable on the grounds on unconscionability or because Mr Mueller was induced to enter into it by misrepresentation, then the contract was voidable as against Smartcard.
That may be generous to Mr Mueller, given the analysis contained in the decision in Perpetual Trustee Company Limited v Burniston [No 2] [2012] WASC 383 in which Edelman J concluded that a mortgage broker was not the agent of the financier, and therefore the financier was not responsible for the broker's misconduct.
But this case can be distinguished from those cases where it has generally been held that a broker is not the agent for the ultimate lender. Mr Melzer was not a broker. Que Capital entered into the loan agreement at a time when Mr Melzer always intended to assign the loan to Smartcard. He recommended the loan to Smartcard in advance of the funds being paid to the borrower. He also entered into a profit-share arrangement with Smartcard whereby he would only receive payment if Smartcard was paid. His actions appear at all times to have been designed to generate a profit for Smartcard and therefore for Que Capital.
Smartcard had no dealings at all with Mr Mueller and acted on Mr Melzer's advice. He remained the loan manager and the contact with the client. I consider many of the hallmarks of agency to be present in this case.
But that does not assist Mr Mueller. Because of the findings I have made below, and because the issue was neither the subject of any pleadings nor submissions before me by either party, it is unnecessary for me to decide the issue of whether the conduct of Mr Melzer is binding upon Smartcard.

Which loan contract applies?

The deed of purported assignment executed on 4 September 2008 between Que Capital and Smartcard was plainly defective because, while their objective intention to assign the debt was plain enough, and the evidence establishes that was their subjective intention as well, the purported assignment was merely described in the recitals to the deed and not in the operative clauses. Nor did the deed purport to assign the caveatable interest in the land the subject of the unregistered mortgage.
Had it been in issue, it is arguable that, notwithstanding the defects, an objective bystander could only have concluded that the parties agreed that the debt the subject of the loan agreement of 2 September 2008 was assigned to Smartcard. In any event, however, on 9 May 2013 Smartcard and Que Capital executed a deed of rectification, rectifying the original deed so as to effectively assign the debt from Que Capital to Smartcard, including any interest owing pursuant to the loan agreement.
The deed of rectification also assigned the caveatable interest in the properties the subject of the unregistered mortgage. Little turns upon that, given that Que Capital always released each property from the caveat when necessary to enable a sale to go through, but Mr Mueller does complain that Que Capital should have asserted its rights as caveator in relation to the sale of one of his properties. I deal with that issue later.
The usual position at law is that rectification of a deed takes effect retrospectively from the date of the original deed: Issa v Berisha [1981] 1 NSWLR 261, 265. The two parties to the agreement having voluntarily and by agreement rectified the deed of assignment, the intervention of the court is unnecessary and no plea for rectification was required. In this case, financially, no third party is affected by the rectification of the agreement. It makes little difference to Mr Mueller which loan document is relied upon, either leading to equally ruinous results. There is no reason not to give effect to the deed of rectification.
As I commented to counsel during the trial, if it made a very significant difference and if Mr Mueller's position were considerably better under the later loan agreement, then issues of estoppel against Smartcard might have become relevant, such that it could not in fairness deny the existence of a later, less onerous contract entered into by Que Capital. On the facts and on the calculations in this case, however, there is no practical need to consider such an issue and it was not raised by the pleadings, such as they are.
There is the further requirement that express notice in writing must be given to the debtor.

Was the defendant notifed that the loan had been assigned to Smartcard?

I reject the evidence of Mr Mueller that he did not receive written notice of the assignment, as required by s 20 of the Property Law Act1969. In evidence before the court is a letter dated 5 September 2008 informing him that the debt had been assigned to Smartcard, coupled with a more formal attachment dated 4 September 2008 being a notice of assignment of the debt, in which he was provided with the bank account details of Smartcard for the purposes of making payment to that entity. The letter was addressed to his correct post office number in Midland, being the postal address provided by him and which appears in the loan agreement. Mr Melzer said he posted the letter by mail on 5 September 2008 using standard post.

The fact is Mr Mueller made a financially disastrous decision. He did so for commercial reasons, hoping to enhance the value of his business and, presumably, to reap the financial rewards once he was in a position to re‑open the restaurant for business. Amongst the planned renovations was an adjoining art studio. He was possessed of $60,000 ‑ $70,000 worth of original paintings and was also an artist himself, and so I infer the purpose of the studio was also commercial.
While to any sensible person this was a high risk financial arrangement to enter, I find that Mr Mueller did, at the time he entered the loan agreement, appreciate the risk involved. I can only infer that he thought that risk worth taking to increase the value of his assets. Unfortunately, whether through sheer imprudence and inexperience, or whether he was given some inaccurate information by tradesmen, or whether he encountered unexpected disasters in the renovation work (he did not suggest he did) his plans proved to be far too optimistic. But had his exit strategy worked, it may well have been worth $18,000 in interest to improve his restaurant, if that meant he could reopen for business and if, as he claimed in his email to Mr Melzer of 11 August 2008, 'my declared income has been and is expected to be $350,000 from the Café Restaurant'. It may even have been worth paying for a couple of extra months' interest if the renovations went over schedule.
Although the time to focus on is the time he entered the loan agreement, rather than on Mr Mueller's attempts to clear the debt and his later dealings with Mr Melzer, it is most unfortunate that Mr Mueller's attitude was that he was unwilling to sell all of his properties in order to extricate himself from this financial mess because, to do so, meant that he was selling his properties at what he believed to be less than they were worth. The evidence suggests he even borrowed more money to purchase the property next door to his restaurant, in order to increase the value of the restaurant property (he certainly planned to – it is not totally clear that he succeeded).
Rather than cut his considerable losses by divesting himself of all of his properties to repay this loan, Mr Mueller decided to wait it out, in the hopes that his remaining properties would again increase in value. The longer he waited, the larger the debt grew, and the less tenable it became to hope that his remaining properties would increase sufficiently in value to enable him to refinance. And, of course, Smartcard was not his only creditor.
However unfortunate his current position is, the fact that his decision to take up this loan will have ruinous consequences does not mean that the contract was unconscionable at the time it was entered into. I reject the claim that Mr Melzer was guilty of unconscionable conduct. He being the only person who ever dealt with Mr Mueller, it follows that Smartcard is also not guilty of unconscionable conduct and the loan agreement should not be set aside on that ground.
In considering this issue, I also considered s 12BF of the Act which deals with unfair terms in consumer contracts, specifically in relation to the interest rate. 'Consumer contract', however, is a defined term under the Act (s 12BF(3) and, given the purpose of this loan was not for 'personal, domestic or household use or consumption', the section has no application.

Did Mr Melzer induce the defendant to enter into the loan agreement by misrepresentation?

Mr Mueller's pleadings and his evidence generally strongly suggest that his claim is one of fraudulent misrepresentation on the part of Mr Melzer on behalf of Que Capital. He plainly alleges deliberate deceit. It is not disputed that Que Capital would be fixed with any misrepresentation made by Mr Melzer given that he was the sole director of Que Capital and it operates exclusively through him.
Again, because of the findings I have made below, I have not considered the additional hurdle Mr Mueller would have to overcome in proving that Smartcard was fixed with any misleading conduct or misrepresentation by Mr Melzer, because I am satisfied there was no misrepresentation or misleading and deceptive conduct.
In order to succeed on the basis of fraudulent misrepresentation, Mr Mueller must prove firstly that there was a statement made relating to a fact, past or present, and the statement must have been false to amount to a misrepresentation. A misrepresentation is fraudulent when the representor knew it to be false, believed it to be false, did not know or believe it to be true, or made it with reckless indifference to its truth or falsity: Middleton v Aon Risk Services Australia Ltd [2008] WASCA 239 [43] (McLure JA).
In addition, while the Court was not referred to any relevant legislation, if my reasoning above in relation to the Australian Securities and Investment Commission Act 2001 is sound, then the provisions of that Act apply equally to the issue of misleading or deceptive conduct. The relevant provision is:
12DAMisleading or deceptive conduct
(1)A person must not, in trade or commerce, engage in conduct in relation to financial services that is misleading or deceptive or is likely to mislead or deceive.
Unlike an allegation of fraudulent misrepresentation, under the Act it is unnecessary for Mr Mueller to prove that Mr Melzer deliberately deceived him. The question is whether, objectively, Mr Melzer engaged in conduct which was misleading or deceptive. The defence case is not reliant on proving any intent on the part of Mr Melzer.
Further, misleading conduct is a broader concept than misrepresentation. Pursuant to s 12BA(2) of the Act, 'a reference to engaging in conduct is a reference to doing or refusing to do any act'. It may, therefore, not be necessary in a particular case to prove that an express statement was made, because the definition may be broad enough, in the right factual situation, to encompass a failure to disclose, particularly where there was some obligation to disclose, or where a combination of a representation coupled with a failure to qualify that representation leads to a customer being misled. The failure to disclose may amount to a refusal to do an act, namely disclose in circumstances where disclosure ought to have been made. Obviously each case turns upon its own factual circumstances.
On either basis however, in order to persuade this court that the loan agreement should be set aside, or Mr Mueller's liability under it in some way limited, whether on the basis of fraudulent misrepresentation or misleading and deceptive conduct and the remedies set out in s 12GM(2) of the Act, Mr Mueller needs to establish some causal connection between any misrepresentation, or misleading and deceptive conduct, and his suffering loss or damage of some kind.
The alleged misrepresentation is said to be that Mr Melzer represented himself as being the lender personally, whereas Mr Mueller regards Mr Melzer as having acted as a broker. This is said to be coupled with the fact that Mr Melzer did not inform Mr Mueller that he intended to assign the loan agreement to Smartcard.
There was no evidence of any discussion between Mr Melzer and Mr Mueller during which Mr Melzer is said to have represented that he, personally, was the lender. In his submissions, Mr Mueller made it clear he relies upon the advertisement he read, in which Mr Melzer described himself as 'Peter the Lender, Que Capital Pty Ltd'.
I find the expression 'Peter the Lender' was a 'mere puff', designed presumably to be catchy or memorable, but not intended to have any contractual status as a representation and not intended to deceive the customer. It is immediately obvious from the company name that follows that 'Peter' was not planning to contract in his personal capacity at all, but was the human face of Que Capital.
It is clear, from Mr Melzer's evidence, that he was always intending to contact one of the various companies he was in the habit of dealing with to ask them to provide the finance behind the loan.
Contrary to what Mr Mueller asserts, however, that did not make Mr Melzer a broker in this transaction. He did not act as a broker in this loan agreement at all. He approved the loan. He, or rather his company Que Capital, entered into a legally binding contract to advance the loan to Mr Mueller. Que Capital was, in fact, the lender, albeit for a short time. Had it failed to advance the loan, it would have been Que Capital that Mr Mueller had legal recourse against, not Smartcard. I find that the advertisement did not contain any misrepresentation and did not amount to misleading or deceptive conduct.
Mr Melzer's failure to inform Mr Mueller that he was planning to seek the funds elsewhere did not amount to a misrepresentation at all. No statement was made to Mr Mueller which was false.
As to misleading and deceptive conduct, I reject the suggestion that it is misleading for a financier to fail to disclose the source of the funds he intends to loan out to his customer. Que Capital entered into a legally binding agreement to loan money to Mr Mueller. I find it was under no obligation to disclose the source of the funds. There is no suggestion that the topic was ever discussed between Mr Melzer and Mr Mueller, probably because what private arrangements Mr Melzer may or may not have had with others was so plainly irrelevant to the customer.
As to Mr Melzer's failure to inform Mr Mueller that he intended to assign the debt to the company that provided the funds, there was no statement made that was false. Even if it could be argued that the loan agreement itself represented that Que Capital would be the lender and would not assign the debt, requiring Mr Melzer to disclose that he intended to assign the debt, I find that Mr Melzer had no fraudulent intent in failing to do so.
I accept Mr Melzer's evidence that he believed Mr Mueller would have accepted the funds from whatever source they came. The assignment of the debt did not alter Mr Mueller's legal obligations except that he was to pay the funds into the bank account of Smartcard instead of paying them to Que Capital. He was not obliged to pay any more money, or pay it back any earlier. I find that Mr Melzer considered it to be neither here nor there to Mr Mueller that the funds would be provided by another source and that, therefore, the debt would be assigned.
As to misleading and deceptive conduct, this is based upon Mr Melzer's silence in failing to disclose that he intended to assign the debt to another. I have already commented that failure to disclose can, in certain circumstances, fall within the definition of 'conduct' on the basis that 'refusing to do an act' could extend to failure to disclose. Relevant, however, to the question of whether Mr Melzer 'refused' to disclose that he intended to assign the debt is the issue of whether or not he was under any obligation to disclose that fact. I do not consider that he was.
I have already commented on Mr Mueller's evidence concerning why he says it was critical to him that Que Capital was the lender. I accept that he did not wish to deal with a broker and pay broker's fees. He did not deal with a broker or pay broker's fees. He did not want to suffer the delay which might attach to a broker having to seek approval of the loan from the lender. There was no delay. Mr Melzer approved the loan and Que Capital entered into the loan agreement, committing to advancing the loan to Mr Mueller. And throughout, notwithstanding the assignment, Mr Melzer remained Mr Mueller's sole point of contact.
I found Mr Mueller's evidence, to the effect that he may not have entered into the loan agreement at all had he known it was to be assigned, because he knew all about Que Capital and knew nothing about Smartcard and may have thought twice had he known the lender was going to be Smartcard, to be constructed after the event, perhaps even subconsciously, to rationalise to himself why he entered such a financial arrangement.
I reject the evidence as inherently implausible. The fact is Mr Mueller knew precious little about Mr Melzer. The only personal detail Mr Melzer divulged, according to Mr Mueller, was that his 'lady friend' was a nurse, hardly a salient fact in relation to a loan contract. As to Mr Mueller's speculation that, had he been told the loan had been assigned, Smartcard may have dealt with him differently, better or worse, if the suggestion is that Smartcard would have dealt with him more harshly, then his position is not advanced, and if the suggestion is that he may have received more lenient treatment, the fact is Mr Melzer was the loan manager dealing in the interests of Smartcard and keeping Mr Smith appraised of all his dealings with Mr Mueller. Mr Mueller was quite unable, in his evidence, to counter the proposition that, if the funds had indeed been advanced by Que Capital and the debt never assigned, he would have been in effect in exactly the same position.
I reject his evidence on this issue.
For the assignment to be valid against Mr Mueller, it was necessary that he be given written notice that it had been assigned, but not advance notice that it would be assigned. Que Capital was not obliged to obtain Mr Mueller's consent to the assignment to Smartcard. I find there was no misleading and deceptive conduct.
But if I am wrong in that, there was no loss or damage which flowed from any misleading and deceptive conduct. The assignment to Smartcard made no practical difference to Mr Mueller. He did not become subject to more onerous contractual terms and he continued to deal with Mr Melzer as his only point of contact. Nor is there any substance in his speculation that Mr Smith may have treated him differently, better or worse, than Mr Melzer in his attempts to have the loan repaid.

Did Que Capital have some obligation, as caveator, to demand payment from the sale of Vestia Walk?

Mr Mueller complains that, when his block in Vestia Walk, Stirling was sold, Que Capital removed its caveat to enable the sale to proceed and, although he anticipated that there would be as much as $100,000 surplus after the first registered mortgage to RHG (formerly RAMS) was cleared, RHG took the entire proceeds of the sale to reduce his indebtedness to it, his loans being cross‑collateralised. He complains that Que Capital should have demanded payment from RHG and refused to remove its caveat unless it received payment of the $100,000. Presuming that the loan this case concerns attracted much greater interest than any loan he had with RHG, it obviously would have been in Mr Mueller's interests for the higher interest loan to be reduced.
It does not appear from the emails he sent Mr Melzer that the sale was a 'mortgagee sale' but, rather, that he sold the property willingly himself and RHG demanded payment of a certain sum at settlement in order to clear all encumbrances and enable Mr Mueller to give clear title to his purchaser. He testified that he 'begged' RHG to pay the $100,000 (it may have been a lesser sum – it matters not) to Que Capital, but to no avail.
There are however two flaws in his argument.
Firstly, Que Capital had no right to interfere with the sale by refusing to remove its caveat. In Kerabee Park Pty Ltd v Daley [1978] 2 NSWLR 222, 228, Holland J observed:
It has been pointed out that the right to caveat is given by the statute, not for the purpose of giving notice to the world of a claim by the caveator to an estate or interest in the land, but for the purpose of protecting the caveator's interest from being defeated by the registration of a dealing without the caveator having had an opportunity to invoke the assistance of the court to give effect to his interest: Butler v Fairclough (1917) 32 CLR 78, 84 … If the foregoing correctly describe the nature and purpose of a caveat, it would seem to me to follow that a caveator should have no right to prevent registration of a dealing to which his alleged interest in the land would not entitle him to object, if he were to invoke the assistance of the court. A subsequent incumbrancer, registered or unregistered, has no right whatever to interfere in, or object to, a proper exercise by a mortgagee of the mortgagee's power of sale, and would have no ground on which to seek the intervention of the court, notwithstanding the fact that registration of the transfer to the purchaser would discharge or defeat all mortgage interests in the land whether registered or not. As well as being required by s 58(3) to apply surplus proceeds in payment of subsequent mortgages, the first mortgagee is liable by the general law to account to the holder of a subsequent incumbrance of which he had notice.
This not being a mortgagee sale, but a voluntary sale by the owner, the question of what sum of money RHG required before it would provide a discharge of its mortgage was to be determined as between RHG and Mr Mueller on the terms of his contractual arrangements with RHG. Mr Mueller cannot complain that Que Capital removed its caveat to enable the purchase to proceed when he wanted the purchase to proceed and when the caveat had to be removed for the purchase to proceed. Mr Mueller seeks to convert the rights of a caveator into a duty on the part of a caveator to act in the interest of the vendor in seeking to interfere with the sale of a property, exposing itself to potential litigation and damages. It had no right to interfere with the sale of the property. Mr Mueller's real complaint is against RHG which either was, or was not, contractually entitled to do what it did.
I am not privy to the contractual arrangements between RHG and Mr Mueller. RHG was not before me and, while I am aware that Mr Mueller complained to the Ombudsman about RHG's conduct, the outcome is not relevant to this trial.
But even had this been a mortgagee sale, s 109 of the Transfer of Land Act1893 would have obliged RHG to apply the money from the sale of Vestia Walk first in payment of its expenses, second in payment of any money owed it under the mortgage, third in payment of any money owed under subsequent mortgages, and any surplus to Mr Mueller. In those circumstances, Que Capital could have no have right to interfere with the proper sale of the property by the first mortgagee when its interest was protected by the law in any event.
Secondly, at the time of the sale of Vestia Walk, Que Capital had no caveatable interest to assert in any event. Once it had assigned the debt to Smartcard, no debt was owing to Que Capital. I have earlier found that, by virtue of the deed of rectification, both the debt and the interest in the land were assigned to Smartcard. I have also earlier found that Mr Mueller was given express notice in writing of that assignment as required pursuant to s 20 Property Law Act1969 so as to pass title to the debt to Smartcard. It follows that, had Que Capital invoked the assistance of the court in order to interfere with the sale of Vestia Walk so as to ensure it received something from the sale proceeds, it could not have been successful.
Consistent with that proposition, Mr Melzer agreed with Mr Mueller in cross‑examination that, at some stage, Mr Mueller applied to have the caveats in Que Capital's name removed from the title to two other properties and, following proceedings in the Supreme Court, the caveats were removed. Having consulted the transcript from 16 May 2013, the caveat was ultimately discharged by operation of a previous order extending it only to a fixed date and no further order for its extension was made. Mr Melzer testified that, subsequently, Smartcard lodged caveats over the properties.
I find that Que Capital had no right - and no duty - to maintain its caveat on the land and use it as a means to demand payment of some money from the proceeds of the sale of Vestia Walk.
Inconsistent with his complaint that Que Capital failed to assert its rights as caveator, Mr Mueller also complains of Que Capital lodging a caveat in the first place when it had no caveatable interest. Nothing turns upon that complaint in any event, given that Que Capital did not seek to interfere with any sale of any property. In any event, at the time when the caveat was lodged, Que Capital had entered into a loan agreement to advance money to Mr Mueller and had taken a mortgage over the properties in question. I find it did have, albeit for a brief time only, a caveatable interest in the properties.

Finally, for completeness, I mention that Mr Mueller has also complained that he was deceived by Mr Melzer, because Mr Melzer told him he would contact RHG about this same issue and request that money be paid to reduce the loan, but did not. Mr Melzer was not cross‑examined about that and there is no evidentiary basis for the allegation. In any event, at its absolute highest, that could only amount to a misrepresentation considerably after the event of the loan agreement being entered into and is, therefore, irrelevant. Nor, if Mr Melzer had contacted RHG, is there any reason to think he would have been successful in persuading RHG to pay money to an unregistered mortgagee, rather than to itself. Mr Mueller was entirely unsuccessful in his own attempts to persuade RHG.

Conclusion

It follows from my findings above that I find Mr Mueller is liable to repay the debt, together with interest, to Smartcard. That interest has been accruing up until the date of judgment. He made payments of $1,939.66, $410 and $560 on 2 February, 14 February and 16 February 2009 respectively. He made a further payment of $59,221.37 on 25 February 2010. Due to the delay in making those payments and the steadily increasing interest component of the debt, those payments did not reduce the principal, but merely the interest owing.
I have considered whether the court might find on any basis, in Mr Mueller's favour, that those payments should be treated as repayments of the principal, rather than the interest owing, which would have the effect of reducing the overall debt significantly. Mr Mueller did not raise that issue in his pleadings, given that his position was that he wished to make no further payments at all. I gave the plaintiffs' counsel several days following the end of submissions to find any relevant authority on the point. He produced none and I have been unable to find any authority one way or the other, beyond general authorities to the effect that a creditor may appropriate a payment to whatever debt he chooses, unless a stipulation has been made by the debtor: see, for example, Deeley v Lloyd's Bank [1912] AC 756, at 783. Those cases are not quite on point. Nor could I gain assistance from the rule in Clayton's case, as to which see Devaynes v Noble (1816) 1 Mer 529, 572; (1816) 35 ER 767, 781.
I note that, in the mortgage document, which Mr Mueller signed on 2 September 2008 along with the loan agreement, and is bound by, cl 7(16) provides that:
All moneys received by the Mortgagee under this deed or in respect of the Mortgaged Property shall be applied as follows:
(a)first towards payment of that part of the Moneys Hereby Secured which comprises interest; then
(b)towards payment of the Moneys Hereby Secured other than that part which comprises interest; then
(c)as provided in the Act for money arising from the sale of mortgaged or charged land.
The payment of $59,221.37, however, came from the sale of a property at Coulston Road, Boya not the subject of the mortgage agreement entered into in 2008. It was the subject of a subsequent mortgage entered into in conjunction with the second loan agreement with Que Capital, which agreement Que Capital does not seek to rely upon in the event that I find the debt was effectively assigned to Smartcard, which I have done. That payment was therefore not money received under the 'deed' quoted above, nor in respect of the mortgage property.
The loan agreement entered into in 2008 does not contain such a clause and is silent on the manner in which repayments will be treated. It does, however, contain a clause making it plain that interest will continue to accrue at the same rate of 6% per month 'of each month and every month after the advance date until the Principal Sum is repaid in full.'
In the end, for want of any authority justifying my taking a different course, and notwithstanding my sympathy for Mr Mueller's plight, I accept the logic of the proposition that repayments are to be taken as paying any outstanding interest first, unless the parties have otherwise contracted, because otherwise the principal sum could be repaid in full leaving only outstanding interest payments which do not attract any interest themselves. While ever the principal sum remains outstanding, the borrower has had the use of it and can make use of it to earn interest himself or, as in this case, to renovate a restaurant with the potential to then increase his potential earnings from that restaurant, and should therefore pay interest on it himself.
Accordingly, the debt is to be calculated on the basis that the repayments reduced the outstanding interest first, given that the outstanding interest was greater than the amount repaid, and that interest continued to accrue on the full principal sum.
The total debt owing then comprises, firstly, the principal sum of $101,200. It accrues interest at the rate of 6% per annum, or $72,864 per annum. The interest component from the date of the advance on 5 September 2008 to the date of filing of the writ on 24 November 2010 (811 days), amounts to $161,897.81, which is reduced by payments of $62,131.03, resulting in a total of $99,766.78. The interest component from the filing of the writ to the first day of the trial (1,172 days) amounts to $233,963.30. The interest component from the first day of the trial to judgment (352 days) amounts to $70,268.84. The total debt, therefore, as at the date of judgment is $505,198.92.
The second plaintiff Smartcard is entitled to judgment for that amount. The claim by the first plaintiff, Que Capital, is dismissed.