RHG Mortgage Securities v BNY Trust Company - [2009] NSWSC 1432

No judgment structure available for this case.

CITATION: RHG Mortgage Securities v BNY Trust Company [2009] NSWSC 1432

HEARING DATE(S): 30/11/09, 01/12/09, 03/12/09

JUDGMENT DATE :
17 December 2009

JURISDICTION: Equity Division
Commercial List

JUDGMENT OF: McDougall J at 1

DECISION: See paragraphs [180] to [181] of the judgment.

CATCHWORDS: EQUITY – relief against forfeiture – whether acceleration of obligation to pay principal amounts to forfeiture – whether appointment of receiver amounts to forfeiture – whether plaintiff entitled to relief. - CONTRACTS – breach – whether amortisation event occurred – whether an ‘Event of Default’ occurred – whether defendant actually aware of Event of Default – construction and interpretation – words and phrases – arrears – in arrears

CATEGORY: Principal judgment

CASES CITED: Acron Pacific Limited v Offshore Oil NL (1985) 157 CLR 514
Commercial Union Assurance Company of Australia Limited v Ferrcom Pty Limited (1991) 22 NSWLR 389
Devaynes v Noble (1816) 1 Mer 572, (1816) 35 ER 781
Esanda Finance Corporation Limited v Plessnig (1989) 166 CLR 131
Forestry Commission of NSW v Stefanetto (1976) 133 CLR 507
Farah Constructions Pty Limited v Say-dee Pty Limited (2007) 230 CLR 89
G & AC Kreglinger v New Patagonia Meat and Cold Storage Limited [1914] AC 25
Jones v Dunkel (1959) 101 CLR 298
King v Goussetis (1986) 5 NSWLR 89
Kostopoulos v GE Commercial Finance Australia Pty Ltd [2005] QCA 311
Nguyen v Cosmopolitan Homes (NSW) Pty Limited [2008] NSWCA 246
O’Dea v Allstates Leasing System (WA) Pty Limited (1983) 152 CLR 359
On Demand plc v Gerson plc [2001] 1 WLR 155
Scandinavian Trading Tanker Co AB v Flota Petrolera Ecuatoriana (the Scaptrade) [1983] 2 AC 694
Shiloh Spinners Ltd v Harding [1973] AC 691
Tanwar Enterprises Pty Limited v Cauchi (2003) 217 CLR 315
The Protector Loan Co v Grice (1880) 5 QBD 592

TEXTS CITED: The Australian Oxford Dictionary (2nd edition, 2004)

PARTIES: RHG Mortgage Securities Pty Ltd (First Plaintiff)
RHG Home Loans Pty Limited (Second Plaintiff)
RHG Treasury Services Pty Ltd (Third Plaintiff)
Receivables Servicing Pty Ltd (Fourth Plaintiff)
BNY Trust Company of Australia Limited (First Defendant)
Elektra Purchase No. 19 Limited (Second Defendant)

FILE NUMBER(S): SC 50152/09

COUNSEL: M A Pembroke SC / J K Taylor (Plaintiffs)
R M Smith SC / M A Jones (First Defendant)
M R Speakman SC / S A Lawrance (Second Defendant)

SOLICITORS: Mallesons Stephen Jaques (Plaintiffs)
Corrs Chambers Westgarth (First Defendant)
Allens Arthur Robinson (Second Defendant)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST

McDOUGALL J

17 December 2009

50152/09 RHG MORTGAGE SECURITIES PTY LIMITED & ORS v BNY TRUST COMPANY OF AUSTRALIA LIMITED & ANOR

JUDGMENT

1 HIS HONOUR: The plaintiffs manage and securitise residential housing loans secured by mortgage. From time to time, the plaintiffs raise money on the security of discrete packages, or series, of such mortgages. One such series, known as the Series UniCredit (1), has been charged to the first defendant (BNY) as “Security Trustee” for a “Note Subscriber”. The original Note Subscriber was a German bank which I shall call, as the parties did, HVB. HVB has assigned its rights to the second defendant (Elektra), which has thereby become the “Noteholder”. There is no relevant distinction between HVB and Elektra. Indeed, in the disputes with which I am concerned, HVB in effect spoke for Elektra.

2 BNY and Elektra assert that there has been an “Event of Default”. Accordingly, BNY says, it is required to call a meeting of Noteholders (i.e., Elektra) and, if so directed by Elektra, to take steps to enforce the security: including the appointment of receivers to the underlying pool of mortgages. BNY has notified the plaintiffs of the alleged default, and has taken steps to call a meeting.

3 The plaintiffs say that there has been no Event of Default. Alternatively, they say, if there has been an Event of Default they are entitled to relief against forfeiture.

Factual background

4 The plaintiffs are part of the RAMS Group. The mortgages in question were “originated” by members of that group. The lender and mortgagee is another member of the group. The first plaintiff (RMS) has acquired an equitable interest in the loans in question. That equitable interest has been charged to BNY as Security Trustee pursuant to a deed made on 8 December 2004 (the Trust Deed).

5 By letter dated 18 December 2008, HVB notified BNY that an Event of Default might have occurred, because an Amortisation Event might have occurred. HVB relied on a report prepared by a firm of accountants, GJ McLuskey and Co (McLuskey).

6 The letter from HVB was passed on to the plaintiffs. The plaintiffs replied, stating that no Amortisation Event or Event of Default had occurred. That was followed up by a certificate under cl 25.2(e) of the Trust Deed to the same effect. By cl 31.7 of the Trust Deed, BNY was authorised (but not bound) to rely upon, and regard as conclusive and sufficient, any such certificate.

7 BNY decided that the dispute could not be resolved by reference to the certificate. Accordingly, it appointed an expert under cl 31.12 of the Trust Deed. The parties did not agree on the scope of the brief to the expert or the methodology to be used. Although BNY had said that it would approach the Court for directions, it did not do so. It delivered a brief to the expert, the accounting firm known as McGrathNicol. McGrathNicol determined its own methodology.

8 McGrathNicol produced a report and a supplementary report in which it concluded that there had been an Amortisation Event. It reached that conclusion on the basis of certain assumptions as to when a loan would be in arrears and how one would determine the time for which loans should be classified as having been in arrears. The plaintiffs challenge those assumptions. McGrathNicol has produced further reports seeking to respond to the plaintiffs’ challenge.

9 BNY concluded that an Event of Default had occurred. Accordingly:

(1) on 7 August 2009, it gave Elektra (as Noteholder) notice of that Event of Default; and

The contractual regime

10 The transactions in question were documented in a series of interlocking and complex agreements. Those agreements include the Trust Deed, a document known as a “Series Supplement” whereby the Series UniCredit (1) was established, a Subscription Agreement relating to the Series UniCredit (1) and a Deed of Charge whereby the mortgages in that series were charged to BNY.

11 At the heart of the dispute is the concept of “Amortisation Event”. By cl 13.2 of the Series Supplement, an Amortisation Event occurs where, among other things:

at any time, the aggregate of the Outstanding Loan Balance of all Loans in respect of the Series which are in arrears for greater than 90 days is more than one (1) % of the aggregate of the Outstanding Loan Balance of all Loans in respect of the Series.

12 Where an Amortisation Event has occurred, the order of payment of cash flows arising from the underlying pool of mortgages will vary. In substance, once an Amortisation Event has occurred, the whole of the excess income should pass to Elektra as Noteholder, to the exclusion of the plaintiffs.

13 There are a number of relevant provisions in the Trust Deed. Clause 25.2 includes “[s]pecific undertakings of RMS”. Those undertakings include a number of reporting obligations. There is a general reporting obligation (para (j)), a daily reporting obligation (para (k)), a weekly reporting obligation (para (l)) and a monthly reporting obligation (para (m)). I set out the first and fourth of those obligations:

(reporting)

…

(monthly reporting)

(i) a Cashflow Statement for the relevant month; and

(ii) a Trial Balance for the relevant month; and

(iii) a schedule showing the outstanding arrears in relation to each Receivable and, if requested by the Security Trustee, the action being taken or proposed to be taken by RMS in relation to such Receivable for the relevant month; and

…

14 Other relevant obligations include cll 31.11, 35.1 and 46.2. To the extent that they are relevant, they provide as follows:

31.11

Receipt of instructions from Secured Creditors

Without limiting its rights, powers and discretions, but subject to its express duties or obligations under this deed or any Transaction Document in respect of a Series, the Security Trustee will not be required to exercise any right, power or discretion (including to require anything to be done, form any opinion or give any notice, consent or approval) without the specific instructions of the Voting Secured Creditors in respect of a Series given by an Extraordinary Resolution.

(“Meetings”)

The Secured Creditors in respect of a Series have no rights to direct the Security Trustee as to how to exercise its rights and powers other than as expressly set out in the Transaction Documents.

35.1

Convene meetings on the occurrence of an Event of Default

(“Security Trustee may waive breach and determine whether an Event of Default has occurred”),

(a) notify all Secured Creditors of the Security Trust relevant to that Series that the Charge granted in respect of that Series has taken effect as a fixed charge and provide to those Secured Creditors full details of:

(i) the Event of Default as advised by RMS to the Security Trustee or otherwise known to the Security Trustee; and

(ii) the actions and procedures which RMS has notified the Security Trustee are being taken or will be taken by RMS to remedy the relevant Event of Default; and

(“Meetings”)

(c) convene a meeting of Voting Secured Creditors in respect of that Security Trust (including a meeting of Holders of Offshore Notes) or a meeting of the Relevant Secured Creditors in respect of that Security Trust (including a meeting of Holders of Offshore Notes) convened in accordance with paragraph (b) must consider and vote on a resolution to:

(i) declare the Deed of Charge in respect of that Series to be enforced;

(ii) direct the Security Trustee to exercise all of any of its powers under this deed, the Deed of Charge in respect of that Series and the Note Trust Deed (if any) in respect of that Series; and

(iii) declare the Secured Moneys (including, in respect of the Debt Instruments, the Outstanding Principal of the Debt Instruments, all accrued interest and any other moneys owing to the Holders of the Debt Instruments under or in respect of the Debt Instruments) in respect of that Series to be immediately due and payable on demand.

Convening meetings

RMS or the Security Trustee at any time may, and upon a request (by notice in writing to RMS) by Secured Creditors holding not less than 25% of the aggregate of the A$ Equivalent of the Amount Owing in respect of a Series must convene a meeting of the Secured Creditors in respect of that Series. Whenever RMS or the Security Trustee is about to convene any such meeting it must promptly give notice in writing to the Registered Note Registrar and the Note Trustee (if applicable) of the proposed day, time and place of the meeting and of the nature of the business to be transacted at the meeting. Every such meeting must be held at a place approved by the Registered Note Registrar and the Note Trustee (if applicable).

15 Clause 4(b) of the Series Supplement makes it an Event of Default if RMS fails to make a payment within three business days of its due date. However, that is qualified by a proviso. I set out cl 4(b):

4 Events of Default

Each of the following is an Event of Default in respect of the Series:

…

(Failure to Pay)

…

The Manager must advise RMS, the Security Trustee, the Note Subscriber and each Current Rating Agency in respect of the Series upon becoming aware of the occurrence of an Event of Default or Amortisation Event.

16 The allocation of cash flow is governed by cl 8 of the Series Supplement. Clause 8.8 deals with distribution of “Total Available Income.” The particular provisions to which the parties made reference were paras (e), (f) and (o). I set them out:

8.8 Distribution of Total Available Income

…

(“Withholding tax”)

Withholding tax”)

…

(“Application of proceeds following an Event of Default”)

“Total Available Principal”)

17 Clause 8.9 specified what was “Total Available Principal”. It included, by para (f), “any amount applied to Total Available Principle in accordance with cl 8.8(o)”.

18 Clause 8.10 dealt with distribution of Total Available Principal. I set it out:

8.10 Distribution of Total Available Principal

On each Payment Date prior to the occurrence of an Event of Default and enforcement of the Charge in accordance with the Deed of Charge and the Trust Deed, RMS will make payments from the Total Available Principle in the following order of priority:

“Future Receivables”)

(b) second, pari passu and ratably to the Class A Noteholders (if any), until the Aggregate Principal Outstanding of all Class A Notes has been reduced to zero;

(c) third, to pay ratably any remuneration, fees and any outgoings, liabilities, losses, costs, claims, expenses, actions, damages, demands, charges, stamp duties and other taxes due to:

(i) the Custodian;

(ii) the Standby Trustee;

(iii) the Standby Manager;

(iv) the Registered Note Registrar;

(v) the Registered Note Paying Agent;

(vi) the Standby Servicer; and

RMS will only make a payment under any of paragraphs (a) to (c) (inclusive) to the extent to which Total Available Principal remains from which to make the payment after all amounts with priority to that payment have been paid in full.

19 The expression “Payment Date” is defined to mean, relevantly, “the 26^th day of each month… or, if that date is not a Business Day, the next Business Day…”.

20 I should note also cl 5.4 of the Series Supplement. That clause in effect requires RMS, on the direction of the second plaintiff (the Manager), to take particular loans out of the Series UniCredit (1) and allocate them to other pools, in exchange for payment of an amount at least equal to the Outstanding Loan Balance in respect of the loans so “redesignated”. The obvious purpose of this clause is to enable RMS and the Manager to attempt to keep the percentage of 90 day arrears (compared to total loans) below 1%:

5.4 Disposal

Sale of Mortgage Loans”)

21 I turn to the Deed of Charge. By that deed, RMS charged its interest in the underlying pool of mortgages to BNY as security for payment of the “Secured Money” as defined (cl 1.1). That charge is, as to the interest of RMS in the Receivables, a floating charge (cl 2.1(c)(i)).

22 By cl 6.1(a), if the charge has not otherwise taken effect as a fixed charge, “it takes effect as a fixed charge… automatically and immediately… if an Event of Default occurs in respect of the Series”.

23 Clause 6.5 provides that, once an Event of Default occurs in respect of the Series, the charge becomes enforceable:

6.5 Charge enforceable

“Receipt of instructions from Secured Creditors

If an Event of Default occurs in respect of the Series, the Secured Money is payable on demand by the Security Trustee. The Security Trustee may make such demand at its discretion and must make such demand if directed to do so by an Extraordinary Resolution of Voting Secured Creditors.

24 Clause 7 of the Deed of Charge authorises BNY to appoint a receiver in certain circumstances:

7.1 Appointment

Where the Security Trustee has actual knowledge that an Event of Default has occurred in respect of the Series, or if directed to do so by an Extraordinary Resolution of Voting Secured Credtiors, the Security Trustee must appoint a person or persons as Receiver to the Secured Property.

Security Trustee may waive breach and determine whether an Event of Default has occurred”

The issues

25 The substantial issues that the plaintiffs pose for decision are:

(1) what is the proper construction of the term “Amortisation Event” in the Series Supplement?

(2) As a matter of fact, has an Amortisation Event occurred?

(3) Has an Event of Default occurred?

(4) Was BNY “actually aware” of the occurrence of an Event of Default when it gave the Notice of Event of Default dated 7 August 2009 and the Notice of Meeting dated 10 August 2009?

First issue: construction of “Amortisation Event”

Background: the plaintiffs’ methodology for calculation of arrears

26 There is some overlap between this issue and the second issue. That overlap arises because the plaintiffs’ methodology for calculating arrears has the following features:

(1) it is carried out at the end of each month;

(2) it purports to determine the arrears position “as at” the end of the month, not “as at” the immediately preceding Payment Date; and

27 The adjustments include:

(1) reversal of capitalised interest;

(2) reversal of accrued credit fees and charges; and

28 The first of those adjustments is not controversial. The plaintiffs’ computer system calculated and debited interest to a loan account on the last business day of a month, even though the interest did not accrue until the first business day of the following month. That was apparently some inherent quirk of (or flaw in) the system. As I understand it, the defendants accepted that the reversal of capitalised interest which had not accrued due and payable as at month’s end was appropriate.

29 The second adjustment is controversial. The defendants submitted that, since credit fees and charges are payable (for example, on default) according to the terms of the underlying mortgage or loan agreement, they formed (once charged) part of the balance due. The plaintiffs submitted that the true purpose of calculating arrears was to measure a borrower’s performance, or non-performance; and that this was best assessed by looking at the extent to which the borrower had met “scheduled” obligations under the mortgage or loan instrument. In any event, the plaintiffs submitted, this aspect of their methodology had been disclosed in public documents, including prospectuses issued for bonds such as the Series UniCredit (1), and in the annual report of the plaintiffs’ public listed holding company.

30 The third adjustment too was controversial. The plaintiffs did not suggest that it had been disclosed, in terms, to the defendants. However, the plaintiffs submitted, HVB could have found out about it when carrying out its due diligence, and thus the defendants should be taken to have been aware of it. The defendants denied this, and submitted that, in any event, there was no basis, either as a matter of language or on the proper construction of the expression “Amortisation Event”, for determining a loan balance “as at” a particular date by deducting payments made after that date.

31 Further, the plaintiffs’ methodology did not in terms count, for each loan in arrears, the number of days for which it had been in arrears. It used a method known as the “adjusted quantum method” to determine whether, and if so for how long, a loan had been in arrears. In essence, the adjusted quantum method involves the following steps:

(1) for all loans determined to be in arrears after the first two adjustments outlined at [27] above, are made, the amount of arrears at month’s end is determined (excluding, in accordance with those first two steps, capitalised interest and credit fees and charges);

(2) the amount of arrears, so determined, is divided by the amount of the contractual repayment obligation and multiplied by 30; and

32 That methodology is explained, in simple terms, by the following example given in BNY’s submissions:

33 In this example, at the end of month 3, the adjusted quantum method would determine the loan to have been in arrears for 90 days. It would not be until the end of month 4 that application of the adjusted quantum method would determine the loan to have been in default for more than 90 days (20/5*30 = 120). However, if the number of days of default were counted (the parties call this “the duration method”) the loan would be determined to have been in default when, no repayment having been made, the 90 days elapsed: on the above example, 2 April.

34 I note that, if credit fees and charges were not taken out of the calculation of arrears, there would be some impact on a determination of the duration of arrears by use of the adjusted quantum method. If one adds, to BNY’s example set out at [32] above, the further assumption that a default charge was lawfully levied for each of the months in default at the rate of $2.50 per month, the arrears at the end of month 3 would be not $15.00 but $20.00, and the calculation of arrears would lead to the somewhat surprising conclusion that the loan had been in arrears for 120 days (that is to say, a period substantially longer than the actual period of default). In fact (see at [70] below), the impact does not seem to have been significant.

The parties’ submissions

35 This issue focuses on the phrase “loans… in arrears for greater than 90 days”. The plaintiffs submitted that the phrase is ambiguous, because there is more than one way of calculating arrears. Thus, the plaintiffs submitted, the Court is entitled to have regard to the objective framework of facts within which the Series Supplement came into existence, insofar as those facts were known to the parties. That objective framework of facts is said to have included the following matters (I quote from the plaintiffs’ written outline):

“which are in arrears for greater than 90 days”

First,

UCS

Secondly,

Thirdly,

scheduled loan balance basis

Fourthly,

(3) Taken as a whole, it was evident from the surrounding circumstances known to the parties that the plaintiffs would continue to monitor and report upon arrears in the way that they had been doing for many years. No other system was proposed by any of the parties to the transaction. Despite conducting due diligence, the original Note Subscriber did not suggest or require that the system be altered in any material respect. Nor is there any evidence to suggest that the Security Trustee ever indicated any difficulty with the systems that the plaintiffs used.

36 The plaintiffs submitted further that:

(1) the original Note Subscriber, HVB, had conducted due diligence, and had had an opportunity to investigate the methodology used by the plaintiffs to calculate and report on arrears;

(2) HVB had not required or suggested any material change to that methodology;

(3) when the parties entered into the Series Supplement, neither BNY nor HVB expressed, or had any reason to express, doubts as to the good faith of the plaintiffs’ methodology; and

37 Thus, the plaintiffs submitted, the phrase “loans… in arrears for greater than 90 days” should be construed to mean arrears calculated according to the plaintiffs’ methodology in use at the time the parties entered into the Series Supplement.

38 The defendants submitted that there was no ambiguity in the relevant phrase. They submitted that the word “arrears”, and equally the phrase “in arrears”, had a well established meaning, and that there was no reason to deny them that meaning in the context of the Series Supplement.

39 Further, the defendants submitted, the crucial feature of the plaintiffs’ methodology had not been disclosed at any material time. That crucial feature is the step referred to at [27(3)] above. The parties referred to this step as the making “of post period adjustments”. I shall adopt that usage.

40 Finally, the defendants submitted, the effect of the plaintiffs’ submissions was that instead of there being an objective standard by which loans in arrears for more than 90 days could be ascertained, the standard would be whatever the plaintiffs might choose to adopt from time to time. They noted, correctly, that the plaintiffs’ methodology had not been applied consistently over the time period relevant to the Series Unicredit (1). The defendants submitted, in essence, that the plaintiffs’ approach was commercially unreasonable.

Decision

41 In substance, the plaintiffs’ submission is that the phrase “in arrears” should have, not its ordinary English meaning, but the meaning that the plaintiffs, through their methodology, attribute to it: an approach reminiscent of that of Humpty Dumpty in Through the Looking Glass (Lewis Carroll, 1872). On the plaintiffs’ approach:

(1) the calculation of arrears excludes certain overdue payments that, on the ordinary English meaning of the word “arrears”, are in arrears; and

42 For the reasons that follow, I do not think that the plaintiffs’ approach to construction should be accepted.

43 The plaintiffs submitted that there was no definition, in the Series Supplement, or elsewhere, of the noun “arrears” or the phrase “in arrears”. That is correct. It follows that the noun and the phrase should be given their ordinary English meaning unless, construed in context and against what it is convenient to call the factual matrix, some other meaning should be given.

44 The Australian Oxford Dictionary (2^nd edition, 2004) defines the noun “arrears” to mean “an amount still outstanding or uncompleted, especially… a debt unpaid”. The same source defines the phrase “in arrears” to mean “behindhand, especially in payment”. Those definitions are readily capable to application both to the noun “arrears” and to the phrase “in arrears” in the definition of Amortisation Event. Applying them, a loan would be in arrears if an amount due and payable is not paid; and would be in arrears for greater than (ie, more than) 90 days if that default in payment continues (ie, if the amount is not paid) for more than 90 days from the due date.

45 There is nothing in the Series Supplement, or for that matter in the other documents, to indicate that the phrase “in arrears” should be given anything other than its ordinary English meaning. On the contrary, I think, the contractual context is consistent with its having that meaning. An Amortisation Event can occur at any time. It will occur if the relevant percentage exceeds 1%. That percentage is ascertained by comparing the aggregate of the “Outstanding Loan Balance” of loans in arrears for more than 90 days with the aggregate of all Outstanding Loan Balances. The expression “Outstanding Loan Balance” is defined (not in the Series Supplement but in a “Master Definitions Schedule” dated 8 December 2004) to mean “on any day and in respect of a Loan which has been acquired or sold by RMS, the outstanding balance of the Loan taking into account all interest, fees and other charges which have accrued or have been debited to the relevant Borrower’s accounts in respect of that Loan at the end of the previous day”. Thus, the concept of a loan being “in arrears” is linked, as on its ordinary English meaning it should be, to amounts “which have accrued or which have been debited to” the loan account. Once a loan is in arrears for more than 90 days then its Outstanding Loan Balance is added to the numerator of the fraction by which the relevant percentage is to be calculated.

46 It follows, both from the fact that an Amortisation Event may occur “at any time” and from the fact that the Outstanding Loan Balance can be ascertained “on any day”, that the calculation, for the purpose of seeing whether an Amortisation Event has occurred, is to be carried out having regard to debits and credits up until the day as at which the calculation is carried out.

47 In any event, I think, there is a logical flaw in the plaintiffs’ submissions. The premise of their submission is that, because there is more than one means of calculating arrears, there is an ambiguity in the phrase “in arrears for greater than 90 days”. The submission that there is more than one method for calculating arrears depends upon the proposition that both the duration method (which the plaintiffs do not use) and the adjusted quantum method (which they do use) are valid ways of calculating the time for which a loan has been in arrears. Accepting, for the sake of argument, that proposition, it does not follow that there is ambiguity either in the noun “arrears” or in the phrase “in arrears for greater than 90 days”. There is, no doubt, more than one way of ascertaining the height of a building. It does not follow that there is ambiguity in the phrase “height of a building”. At most, assuming that there is more than one appropriate way of calculating the length of time for which a loan has been in arrears, it might follow that a calculation properly performed according to one method could be relied upon even though the answer given conflicts with the result of a calculation properly performed according to another method.

48 The real issue, it seems to me, is not one of the proper construction of the phrase “in arrears for greater than 90 days”. It is whether, in determining the amount of “arrears” at any time, post period adjustments should be made. I accept that the first category of adjustments made by the plaintiffs – reversing capitalised interest – is appropriate. As a matter of language, interest that has been debited to a loan account may form part of the Outstanding Loan Balance (as defined) on the day when it is debited, even though it is not payable until the following day. That is because the definition refers disjunctively to amounts that have accrued or amounts that have been debited to the account. But it does not follow that interest debited in advance to the account should be regarded as being in arrears on the day it is debited. There is no obligation to pay an amount that is not due and owing. A failure to pay an amount that is not due and owing cannot create an arrear in respect of that amount.

49 The second category of adjustments is more problematic. It does not follow, from what I have just said, that credit fees and charges that have become due and payable should be disregarded for the purpose of calculating arrears. Such credit fees and charges form part of the Outstanding Loan Balance. That is so both because they have accrued and (assuming it to be the case) because they have been debited to the account. It is very difficult to understand why amounts that have become contractually due and payable, but have not been paid, should be regarded as anything but “in arrears”. Whatever the commercial justification for excluding accrued credit fees and charges from the calculation of arrears may be, those commercial reasons afford no real basis for concluding that an amount due and payable, but not paid, is anything other than “in arrears”. In this context, it may be noted that the plaintiffs asserted no case of estoppel, conventional or otherwise. They said only that the meaning to be given to the phrase “in arrears” should be informed by their practice, said to have been known to the defendants, of excluding certain overdue payments from the calculation of arrears.

50 It follows that overdue credit fees and charges should be taken into account in assessing whether a loan has been in arrears for more than 90 days. It is unlikely to matter (unless one calculates the duration of arrears by using the adjusted quantum method). That is because, in the ordinary way, a default charge (which is really the kind of credit fee or charge with which I am presently concerned) would not normally be levied until some period of time following delay in payment of another monetary obligation. A default charge would be relevant, to the calculation of the duration of arrears, only if the default in payment for which it was levied were rectified, but the credit charge itself were not paid. In any event, having regard to the evidence summarised at [70] below, nothing of practical significance flows from this aspect of the plaintiffs’ methodology.

51 Whatever may be the commercial or other justification for excluding overdue credit fees and charges from the calculation of arrears, it does not extend to post period adjustments. The essence of the calculation is that it may be carried out “at any time”. Those words suggest that the calculation is to be carried out on, as at, or effective for, a particular day. A calculation carried out accordingly should not take account of payments received (or, for that matter, amounts debited) after that day. A calculation that does take account of post period adjustments is not a calculation of arrears at a date prior to the post period receipts. Thus, even if the end of the month should be taken as a proxy for the preceding Payment Date (and putting aside the question of credit fees and charges), a calculation that includes post period adjustments is not a true calculation of arrears: at the Payment Date or otherwise.

52 It might be thought that, if an Amortisation Event occurs, the plaintiffs could act under cl 5.4 of the Series Supplement. The availability of that theoretical course of action has limited practical significance. It is not until about the middle of a month that the plaintiffs, through UCS, are able to produce a report showing the position of the Series as at the end of the preceding month. Thus, even if it is assumed that such a report is capable of demonstrating the position not only at month’s end but also at the immediately preceding Payment Date, by the time the plaintiffs become aware (through the report) of the occurrence of an Amortisation Event, the time for action under cl 5.4 would have passed. That is because, if the Amortisation Event were subsisting at the Payment Date, the payments required to be made by cl 8.8(o) of the Series Supplement must be made within three business days thereafter: well before the time when the plaintiffs would receive the report.

53 I note however that the evidence of Mr Warren Gareth Williams, who is the treasurer (and earlier was the deputy treasurer) of the third plaintiff, and who is a director of the Manager, is that from time to time the Manager has directed RMS to redesignate loans in arrears, thus in effect removing the redesignated loans from the pool of non-performing loans. Mr Williams said that this was part of the process of management of the pool of loans comprised in the Series UniCredit (1).

54 Another reason for rejecting the plaintiffs’ methodology as the definition of “in arrears” is that, although the phrase is an essential element of the definition of an Amortisation Event which may occur “at any time”, the plaintiffs’ methodology includes, as an element, the calculation of arrears on a monthly basis at the end of each month.

55 Paragraph 12 of the plaintiffs’ Further Amended List Statement asserts that there was no Amortisation Event subsisting at any relevant Payment Date. The particulars to that paragraph assert that “the meaning and content of the term “90 day arrears” in the definition of “Amortisation Event”… should be construed by reference to the plaintiffs’ practice in calculating arrears… in existence at the time of entry into the Series Supplement”. That methodology is defined as the “RHG Methodology”. Thus, the plaintiffs say, the term “arrears” means the amount calculated by RMS as arrears in accordance with the RHG Methodology.

56 The particulars assert that the RHG Methodology is described in paras 21 to 29 of Mr Williams’ affidavit affirmed 4 November 2009. The methodology described in those paragraphs (particularly, in para 25) is one performed after the end of each calendar month, that produces, among other things, a calculation of the Outstanding Loan Balances of all loans in default for more than 90 days as at the end of the month, and of all loans in the Series as at the end of the month.

57 A methodology that includes, as an element, calculation of relevant balances only as at the end of each calendar month is not of itself capable of being used to determine if an Amortisation Event has occurred at some other time. (And, for the reasons given at [51] above, that is so a fortiori if the methodology takes into account post period adjustments.) This is a significant defect. RMS is obliged to make payments of Total Available Income in accordance with the “waterfall” described in cl 8.8 of the Series Supplement. If an Amortisation Event subsists at any relevant Payment Date then, from subpara (o) onwards, whatever remains in that waterfall is diverted to Total Available Principal. It is RMS’s obligation to make payments in accordance with the Series Supplement. Its methodology does not enable it to do so, because it does not calculate the position of the Series at a Payment Date. (Indeed, because it makes post period adjustments, it does not truly calculate arrears at all). It is unlikely, looking at the matter objectively, that the parties – in particular, the defendants – would have agreed that the phrase “in arrears” should be determined by reference to a methodology the use of which would mean that RMS could not monitor, and therefore could not perform, its obligation as at each Payment Date. There was no case of conventional or other estoppel, to the effect that the parties had agreed to use the end of the month as a substitute, or proxy, for the immediately preceding Payment Date.

58 There are other defects with the plaintiffs’ methodology (and, as foreshadowed, this is relevant also to the second issue):

(1) it accepts, for the purposes of one element of the calculations required to be carried out (the calculation of Outstanding Loan Balances), that overdue credit fees and charges are to be included, but does not accept that they should be included for the purposes of another element of that calculation (the calculation of loans in arrears for more than 90 days);

(2) more fundamentally, it does not actually measure, but rather produces an estimate of, the number of loans actually in arrears for more than 90 days at any point in time; and

59 The first point is self explanatory. The second follows from the fact that the adjusted quantum method does not involve a process of counting loans in arrears for more than 90 days, but, instead, uses loan data to simulate the outcome of such a count. The third point follows from the fact that the calculations are carried out monthly. It is of particular significance where (as here) the Payment Date for a series is not the last day of the month but an earlier date.

60 One would require compelling circumstances to support a conclusion that arrears should be defined not in the ordinary English meaning of that word, but as meaning arrears determined in accordance with a system that is both conceptually and methodologically flawed.

61 I set out at [13] above some of the provisions of the Trust Deed relating to RMS’s reporting obligations. There was no pleaded case that the reports from time to time given by RMS to BNY should be regarded as in a form agreed by BNY so that, regardless of the proper construction of the phrase “in arrears for greater than 90 days”, the reports should somehow be taken as providing exclusively the content, or meaning, of that phrase. Although there were from time to time suggestions, in the course of submissions, that the form of the reports had been agreed, those submissions were not developed. There was no pleaded case of conventional or other estoppel on this point.

Conclusion on the first issue

62 I conclude that the phrase “in arrears for greater than 90 days” should be given its ordinary English meaning, and should not be construed to mean, or refer to, arrears as determined by the plaintiffs’ methodology (or, in the language of the pleadings, the RHG Methodology).

Second issue: has an Amortisation Event occurred?

The parties’ submissions

63 The plaintiffs accepted that, if I rejected their submissions on the proper construction of “Amortisation Event”, and in particular if I rejected the proposition that the calculation of arrears should take into account post period adjustments, then an Amortisation Event had occurred, and subsisted, at the Payment Dates in each of the months of October and December 2008 and January 2009.

64 Elektra submitted that an Amortisation Event had occurred in the months of September and November 2008, and subsisted as at the Payment Dates in each of those months (and, as well, in the months the subject of the plaintiffs’ conditional concession).

65 Elektra based its submission on the evidence of Mr Christopher John Honey of McGrathNicol. In essence, Mr Honey’s evidence was that the most appropriate method for measuring the duration of default was one known as the duration method.

66 The plaintiffs accepted that, if the duration method were the appropriate way to measure the length of default, then an Amortisation Event had occurred in each of the months for which Elektra contended.

The evidence

67 Mr Honey was responsible for production of the reports referred to at [8] above. He prepared a further report, for the purposes of these proceedings, in which in effect he summarised his findings in the earlier reports and provided further reasons for concluding that Amortisation Events had occurred in the relevant months. Mr Honey was not required for cross-examination. Indeed, the plaintiffs embraced his evidence.

68 Mr Honey applied two versions of the quantum methodology and two versions of the duration methodology. They were, respectively:

(1) the adjusted quantum method, whereby fees and charges were deducted from the current loan balance;

(2) the quantum method, in which no such deduction was made;

(3) the adjusted duration method, whereby once again fees and charges were deducted from the loan balance; and

69 There are three other features of Mr Honey’s methods that require mention:

(1) where payments were made prior to the end of the month by a direct debit which was subsequently dishonoured after the end of the month, the amount of the payment was excluded from the loan balance. Mr Honey justified this by saying that the rejection was processed (whether by the bank in question, by the plaintiffs or by both is not clear) to be effective from the day when the dishonoured payment was originally credited to the loan account;

(2) he did not perform any post period adjustments of the kind undertaken by the plaintiffs; and

70 Mr Honey’s findings are, in summary, that as at each relevant Payment Date and each relevant month’s end, and for each of the four different methods of calculation used by him, the relevant percentage exceeded 1%. Further, Mr Honey said, the discrepancy between his calculations and the plaintiffs’ calculations was referable to the plaintiffs’ practice of carrying out post period adjustments.

71 Mr Honey said, in one of his earlier reports, that use of the duration method to determine the age of arrears did indeed lead to the conclusion that, for the months of September and November 2008, the relevant percentage exceeded 1%. However, in that report (as, I think, in all his reports) Mr Honey accepted that there was more than one way of determining the length of time for which a loan had been in arrears. Further, whilst Mr Honey did not agree with the practice of making post period adjustments, and appears not to have accepted the practice of excluding credit fees and charges, he did not say that the quantum method was in principle inappropriate. On the contrary, he said that “we do not express an opinion as to the validity or relative merit of any methodology employed”.

72 One possible concern with the duration method relates to the allocation of payments after a loan has gone into arrears. Take the example at [32] above. Assume default in month 1, but payments of the required amounts in months 2, 3 and 4. If the amounts paid in months 2, 3 and 4 are applied to the interest obligation due on the first of each of those months, the default for month 1 would continue unrectified. On the duration method, that default would be treated as having subsisted for more than 90 days at around the beginning of month 4. If, however, the payments made in months 2, 3 and 4 are applied to amounts in arrears, rather than to the current month’s obligation, no default would subsist beyond one month (leaving aside any question of “penalty” interest, and credit fees and charges). In the usual way, one would expect the loan documents to make provision for the application of payments; and if they did not, then presumably the rule in Clayton’s case (Devaynes v Noble (1816) 1 Mer 572, (1816) 35 ER 781 might have some application. In the absence of a clear guideline as to the application of payments, the duration method might overstate the length of time for which an amount has been in arrears.

73 Further, it seems, McLuskey used a different methodology again, in its original report prepared on the instruction of HVB for Elektra.

74 It is not necessary to express a conclusion as to whether there were, as Elektra submitted, Amortisation Events in September and November 2008. If there were, there would have been (subject to the operation of the proviso to para (b) of the definition of Event of Default) Events of Default in each of those months. The only possible significance of the occurrence of additional Amortisation Events and Events of Default might be in considering the plaintiffs’ alternative case seeking relief against forfeiture. Since no one suggested that the answer to that case turned on the number of Amortisation Events or Events of Default, it is not necessary to express a concluded view on this aspect of Elektra’s submissions.

75 I note that BNY, through its relevant officer Ms Marelize Coetzee, was not prepared to conclude that it was actually aware of, nor did it purport to act on, any Event of Default other than the one which, the defendants say, occurred in January 2009. This is another reason rendering it unnecessary to decide whether there were (as Elektra submitted) further Events of Default.

Conclusion on second issue

76 I find that an Amortisation Event subsisted as at the end of each of the months of October and December 2008 and January 2009, and as at the Payment Date immediately before the end of each of those months.

Third issue: has an Event of Default occurred?

77 It is common ground that:

(1) RMS did not, on those Payment Dates or at all, apply Total Available Income to Total Available Principal in accordance with cl 8.8(o) of the Series Supplement;

(2) in each month from October 2008 to January 2009 (inclusive) there was Total Available Income available to be applied in accordance with 8.8(o) if that clause had effect; and

The parties’ submissions

78 The plaintiffs submitted that no Event of Default had occurred. First, they submitted, their methodology showed that for the months in question (October and December 2008, and January 2009) the relevant percentage had not risen above 1%. Secondly, they submitted, the proviso to the relevant definition of Event of Default) operated. For convenience, I repeat that the proviso states that a failure to make a payment in full to Noteholders within three business days of its due date does not amount to an Event of Default “until any Notes which rate senior to such payments have been redeemed in full”.

79 The defendants submitted that, once post period adjustments were disregarded (as the defendants submitted they should be), there was an Amortisation Event in each of the months in question. (As I have noted, Elektra submitted also that Amortisation Events had occurred as well in September and November 2008.) Secondly, they submitted, the proviso to the definition of Event of Default was irrelevant because the failure relied upon was a failure to make a payment to Class A Noteholders, but there were no Notes ranking above the Class A Notes.

80 The Events of Default arose, on the defendants’ submissions, in two ways:

(1) where an Amortisation Event subsisted on a Payment Date, cl 8.8(o) of the Series Supplement was activated. In those circumstances, surplus income was to be applied to Total Available Principal and distributed in accordance with cl 8.10.

81 The plaintiffs accepted that, assuming that there had been an Amortisation Event in any of the months in question, and assuming that the proviso to para (b) of the definition of Event of Default did not have the effect to which they contended, then, in each of the months in question (October and December 2008, and January 2009) there had been an Event of Default.

(c) for the purposes of the definition of “Amortisation Event” in the said Series Supplement, a loan is in arrears for greater than 90 days if, for more than 90 consecutive days, an amount due and payable in respect of that loan has been in arrears;

(d) when determining if a loan is in arrears on a certain date for the purposes of the definition of “Amortisation Event”, payments made after that date must not be taken into consideration; and

(e) when determining whether a loan is in arrears for greater than 90 days for the purpose of the definition of “Amortisation Event”, amounts owed in respect of credit fees and charges are to be included.

(6) Order that the amended cross-claim cross-summons otherwise be dismissed.

(a) the plaintiffs to pay the defendants’ costs of the proceedings; and

(b) the cross-defendants to pay the cross-claimant’s costs of the cross-summons.

(8) Reserve liberty to any party to apply to discharge or vary order (7); any such application to be made by notice in writing to the party or parties affected, with a copy for my Associate; any such notice to specify both the orders sought and, in brief, the reasons why those orders are sought.

(9) Reserve liberty to apply in respect of the plaintiffs’ undertaking as to damages.

(10) Order that the exhibits be dealt with in accordance with r 31.16A.

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Citations

RHG Mortgage Securities v BNY Trust Company [2009] NSWSC 1432

Most Recent Citation

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Statutory Material Cited

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CITATION:	RHG Mortgage Securities v BNY Trust Company [2009] NSWSC 1432
HEARING DATE(S):	30/11/09, 01/12/09, 03/12/09
JUDGMENT DATE :	17 December 2009
JURISDICTION:	Equity Division Commercial List
JUDGMENT OF:	McDougall J at 1
DECISION:	See paragraphs [180] to [181] of the judgment.
CATCHWORDS:	EQUITY – relief against forfeiture – whether acceleration of obligation to pay principal amounts to forfeiture – whether appointment of receiver amounts to forfeiture – whether plaintiff entitled to relief. - CONTRACTS – breach – whether amortisation event occurred – whether an ‘Event of Default’ occurred – whether defendant actually aware of Event of Default – construction and interpretation – words and phrases – arrears – in arrears
CATEGORY:	Principal judgment
CASES CITED:	Acron Pacific Limited v Offshore Oil NL (1985) 157 CLR 514 Commercial Union Assurance Company of Australia Limited v Ferrcom Pty Limited (1991) 22 NSWLR 389 Devaynes v Noble (1816) 1 Mer 572, (1816) 35 ER 781 Esanda Finance Corporation Limited v Plessnig (1989) 166 CLR 131 Forestry Commission of NSW v Stefanetto (1976) 133 CLR 507 Farah Constructions Pty Limited v Say-dee Pty Limited (2007) 230 CLR 89 G & AC Kreglinger v New Patagonia Meat and Cold Storage Limited [1914] AC 25 Jones v Dunkel (1959) 101 CLR 298 King v Goussetis (1986) 5 NSWLR 89 Kostopoulos v GE Commercial Finance Australia Pty Ltd [2005] QCA 311 Nguyen v Cosmopolitan Homes (NSW) Pty Limited [2008] NSWCA 246 O’Dea v Allstates Leasing System (WA) Pty Limited (1983) 152 CLR 359 On Demand plc v Gerson plc [2001] 1 WLR 155 Scandinavian Trading Tanker Co AB v Flota Petrolera Ecuatoriana (the Scaptrade) [1983] 2 AC 694 Shiloh Spinners Ltd v Harding [1973] AC 691 Tanwar Enterprises Pty Limited v Cauchi (2003) 217 CLR 315 The Protector Loan Co v Grice (1880) 5 QBD 592
TEXTS CITED:	The Australian Oxford Dictionary (2nd edition, 2004)
PARTIES:	RHG Mortgage Securities Pty Ltd (First Plaintiff) RHG Home Loans Pty Limited (Second Plaintiff) RHG Treasury Services Pty Ltd (Third Plaintiff) Receivables Servicing Pty Ltd (Fourth Plaintiff) BNY Trust Company of Australia Limited (First Defendant) Elektra Purchase No. 19 Limited (Second Defendant)
FILE NUMBER(S):	SC 50152/09
COUNSEL:	M A Pembroke SC / J K Taylor (Plaintiffs) R M Smith SC / M A Jones (First Defendant) M R Speakman SC / S A Lawrance (Second Defendant)
SOLICITORS:	Mallesons Stephen Jaques (Plaintiffs) Corrs Chambers Westgarth (First Defendant) Allens Arthur Robinson (Second Defendant)