Secure Funding v Patane

[2009] NSWSC 845

CITATION:	Secure Funding v Patane [2009] NSWSC 845
HEARING DATE(S):	14 August 2009
JUDGMENT DATE :	25 August 2009
JURISDICTION:	Common Law
JUDGMENT OF:	Harrison AsJ
DECISION:	(1) The notice of motion filed 7 April 2009 is dismissed. (2) The defendants are to pay the plaintiff's costs as agreed or assessed.
CATCHWORDS:	MORTGAGES - mortgages and charges generally - rights and liabilities of mortgagor and mortgagee - mortgagor sought orders pursuant to s 73 Civil Procedure Act 2005 to dismiss proceedings and set aside default judgment for possession – mortgagor sought leave to file defence pursuant to r 36.16 of the Uniform Civil Procedure Rules 2005– proposed defence shows no viable grounds of defence - application dismissed - construction of the mortgage – whether loan agreement clearly acknowledged the registered mortgage – CONTRACTS - general contractual principles - illegal and void contracts - whether default rate of interest and administration fees are penalties – four per cent penalty rate not out of proportion - whether mortgagor’s delayed payment of lesser sum than the debt falls within the de minimis exception
LEGISLATION CITED:	Civil Procedure Act 2005 Uniform Civil Procedure Rules 2005
CATEGORY:	Principal judgment
CASES CITED:	Acron Pacific Ltd v Offshore Oil NL [1985] HCA 63; (1985) 157 CLR 514 AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170 Adams v Kennick Trading (International) Ltd & Ors (1986) 4 NSWLR 503 Bay Bon Investments Pty Ltd v Selvarajah [2008] NSWSC 125 Cohen v William (1995) 38 NSWLR 476 Cuttle v Brandt (1947) 64 WN (NSW) 96 David Securities Pty Ltd v Commonwealth Bank of Australia (1990) 23 FCR 1 Davies v Pagett (1986) 10 FCR 226 Hungerford v Walker (1989) CLR 125 Perpetual Trustees Victoria Ltd v English and Anor [2009] NSWSC 478 Perpetual Trustees Victoria Limited & Anor v Tsai [2004] NSWSC 745 Ringrow Pty Ltd v BP Australia Pty Ltd [200] HCA 71 Vacuum Oil Pty Limited v Stockdale (1942) 42 SR (NSW) 239
PARTIES:	Secure Funding Pty Ltd ACN 081 982 872 (formerly Liberty Funding Pty Ltd) (Plaintiff) Alfie Richard Patane (First Defendant) Karen Jean Patane ( Second Defendant)
FILE NUMBER(S):	SC 11368/2008
COUNSEL:	A McManus (Solicitor for Plaintiff) D Jenkins (Defendants)
SOLICITORS:	Deacons (Plaintiff) N/A (Defendants)

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IN THE SUPREME COURT
OF NEW SOUTH WALES
COMMON LAW DIVISION
POSSESSION LIST

ASSOCIATE JUSTICE HARRISON

TUESDAY, 25 AUGUST 2009

11368/2008 - SECURE FUNDING PTY LTD
ACN 081 982 872 (formerly Liberty Funding Pty Ltd) v ALFIE RICHARD PATANE & ANOR
JUDGMENT (Set aside default judgment; file defence)

1 HER HONOUR: On 15 July 2008, default judgment was entered that the plaintiff Secure Funding Pty Ltd (“Secure Funding”) have possession of the whole of the land comprised in Certificate of Title Folio Identifier 157 in Deposited Plan 239144, the postal address of which is xxx xxxxxx xxxx, Bobs Farm, New South Wales (“the property”); judgment was entered that the first and second defendants, Alfie Richard Patane and Karen Jean Patane, pay to the plaintiff the sum of $445,065.29. On the same day a writ of possession issued. The property is due to go to auction on 29 August 2009.

2 By amended notice of motion filed 7 April 2009, the defendants seek orders that, pursuant to s 73 of the Civil Procedure Act 2005, these proceedings be dismissed on account of a settlement concluded between the parties on or around 4 June 2008; or, in the alternative pursuant to r 36.16 of the Uniform Civil Procedure Rules 2005, default judgment entered on 15 July 2008 in these proceedings be set aside, and the judgment debtors be granted leave to file a defence to the judgment creditor’s statement of claim within 14 days.

3 Secure Funding relied on the affidavit of Beverly Bridson sworn 10 July 2008 and four affidavits of Mitchell Mathas sworn 31 March 2009, 6 April 2009, 29 June 2009 and 16 July 2009. The defendants relied on four affidavits of Alfie Patane sworn 18 March 2009, 6 April 2009, 7 April 2009 and 30 July 2009.

4 On 7 April 2009, the matter came before Adams J. Short minutes of order were filed and his Honour noted the agreement between the parties. His Honour also noted the defendants’ undertaking (at [4]) to make weekly repayments to Secure Funding until the date of settlement of any sale of the property in the amount of $350 per week, the first of such payments to be made on 8 April 2009, such payments to be credited to the defendants’ account.

5 Orders [10] and [11] of the SMO read as follows:

“10. On settlement of any sale of the Property, whether by auction or otherwise as consented to by the Plaintiff, the Plaintiff is entitled to be paid the amount of $445,065.29 (being the amount set out in the Judgment) and the balance of the proceeds of sale (less any deductions on settlement) are to be paid into the Plaintiff’s solicitor’s trust account pending further order of the Court.
11. The Plaintiff undertakes to provide within 7 days of completion, the Defendants with an accounting of all monies that the Plaintiff says are payable or were to the Plaintiff on settlement of any sale of the Property, such accounting to include a breakdown of the interest component, differentiating between the lower rate of interest and the higher rate of interest charged to the Defendants’ loan account.”

6 The defendants (in order [10]) agreed that the plaintiff is entitled to the sum of $445,065.29. I shall deal firstly with whether the default judgment should be set aside and then whether there was a settlement between the parties on about 4 June 2008.

Setting aside default judgment

7 The Court’s powers to set aside default judgment are contained in r 36.16 of the Uniform Civil Procedure Rules.

8 Rule 36.16(2)(a) provides:

“(2) the court may set aside or vary a judgment or order after it has been entered if:
(a) it is a default judgment, or
…”

9 The authorities on setting aside default judgment are Evans v Bartlam [1937] 2 All ER 646; Vacuum Oil Pty Limited v Stockdale (1942) 42 SR (NSW) 239; Cuttle v Brandt (1947) 64 WN (NSW) 96; and Adams v Kennick Trading (International) Ltd & Ors (1986) 4 NSWLR 503.

10 One of the considerations to be taken into account when determining whether default judgment should be set aside was expressed by Priestley JA in Cohen v McWilliam (1995) 38 NSWLR 476 (at 481) quoting from the Federal Court in Davies v Pagett (1986) 10 FCR 226:

"It is, however, another question whether concern about the extent of delays, either in a particular case or generally, should, in the absence of prejudice in the particular case, be taken into account in exercising a discretion to set aside a default judgment. The fundamental duty of the court is to do justice between the parties. It is, in turn, fundamental to that duty that the parties should each be allowed a proper opportunity to put their cases upon the merits of the matter. Any limitation upon that opportunity will generally be justified only by the necessity to avoid prejudice to the interests of some other party, occasioned by misconduct , in the case, of the party upon whom the limitation is sought to be imposed. The temptation to impose a limitation through motives of professional discipline or general deterrence is readily understandable; but, in our opinion it is an erroneous exercise of the relevant discretion to yield to that temptation…”

11 For the defendants to succeed on their application to set aside default judgment, they must give an adequate explanation for the delay in filing their defence and show that they have a defence on its merits. A court, when hearing such an application, must be mindful of its fundamental duty to do justice between the parties.

Explanation for delay

12 As previously stated, on 15 July 2008 default judgment was entered. Prior to entry of judgment, two letters were exchanged between the solicitors acting for the plaintiff and the defendants. It is exchange of these letters that the defendants contend effected a settlement between the parties.

13 On 30 May 2008, by facsimile, Secure Funding’s solicitor wrote to the defendants’ solicitor relevantly stating that:

“We are instructed that the arrears as at 2 June 2008 for the above mortgage account will be $57,233.52 plus $2,315.67 for legal costs.
Our client will accept the payment of $45,000.00 on Monday, 2 June 2008 on a without prejudice basis.
We are further instructed to proceed to continue with the proceedings until judgment is obtained. Our client will review the situation before executing the writ of possession.”

14 While that fax was forwarded at 5.44 pm on Friday, 30 May 2008, the defendants did not pay the $45,000 on the following Monday (2 June 2008), but did so on Wednesday, 4 June 2008. Counsel for the defendants submitted that it was the defendants’ understanding that the matter had been settled, although Mr Patane does not say this in his affidavits. Even if the defendants were under this misunderstanding, it would have been clear that no settlement had been reached when they received a notice to vacate in August 2008. Mr Patane then contacted his (now) former solicitor who undertook to make enquiries as to how the matter could be dealt with.

15 Counsel for the defendants referred to Secure Funding’s letter dated 24 February 2009. This letter indicated the amount of the loan arrears as being $9,767.60. It stated that the defendants had seven days to pay. On 19 March 2009, Secure Funding wrote a further letter to the defendants stating the amount of the loan arrears was $13,963.98. On 24 March 2009, the defendants filed a notice of motion seeking to stay execution. On 7 April 2008, this motion was filed. On 4 August 2009, Mr Patane filed an affidavit with a proposed notice of defence attached.

16 The plaintiff says that the defendants’ explanation is not satisfactory because firstly, the defendants were legally represented throughout the proceedings; secondly, the motion to set aside judgment was filed nine months after default judgment had been entered; thirdly, because the defendants have already been granted three stays on the writ of possession; and finally, they have delayed in prosecuting this motion. The plaintiff also submitted that the delay has caused it to incur additional costs and prejudice because there may now be a shortfall when the property is sold. Whether or not there will be a shortfall I cannot say, but I accept there is not much equity, if any, left in the property.

17 The real explanation for delay appears to be that the defendants made attempts to make good the arrears but have been unable to do so. While I have sympathy for the position in which they find themselves, it is my view that their explanation for delay is not satisfactory.

18 The proposed defence raises three main issues, firstly, the construction of the mortgage; secondly, that the default interest rate of 15.30 per cent and the default administration fees are penalties and therefore are void and unenforceable; and finally, Secure Funding has elected not to enforce the term of the mortgage requiring immediate repayment of the entire principal amount of the loan or, alternatively, Secure Funding is estopped from relying upon any such terms.

(1) The construction of the Mortgage

19 The defendants submitted that the registered mortgage secures nothing because the loan agreement between Secure Funding and the defendants does not sufficiently acknowledge the mortgage as attaching to the loan agreement. The defendants further submitted that the contents of the page four of the schedule, which details the security taken for the mortgage falls short of acknowledging the registered mortgage. According to the defendants, the loan agreement failed to provide the dealing number for the registered mortgage. Without the dealing number, the defendants could not be said to have acknowledged that the loan agreement was “covered” by the registered mortgage; and secondly, there was no positive identification that the “new mortgage” referred to in the schedule was a registered mortgage at all.

20 Counsel for the defendants referred to Perpetual Trustees Victoria Ltd v English and Anor [2009] NSWSC 478, where Simpson J considered whether what was described as “an acknowledgement” in the loan agreement was in fact an acknowledgement at all. However, in Perpetual Trustees v English, Mr English had forged Mrs English’s signature on the letter of offer and the Mortgage. Her Honour (at [166] and [167]) held:

“166 Firstly, “Secured Agreement” is defined as an agreement acknowledged in writing to be an agreement secured by “the Mortgage”; but “the Mortgage” is defined to mean “the Mortgage Form”; and “Mortgage Form”, in turn, is defined to mean “the form of mortgage which I have executed”; and “I”, of course, means both Mr English and Ms English. There is, therefore, no “Mortgage Form” executed by Mr English and Ms English; there is, therefore, no “Mortgage” within the meaning of the definition.

167 Secondly , what is put forward on behalf of Perpetual as the “acknowledgement in writing” (in clause 5 of the Loan Agreement) is not an acknowledgment of a “Loan Agreement”, but is an acknowledgement in writing of a “Loan”.”

21 Secure Funding submitted that the defendants’ mortgage incorporates the provisions set out in the Memorandum and lodged with Land Property Information. The Mortgage was granted as security for the moneys advanced to the defendants pursuant to the Loan Agreement. The Loan Agreement incorporates the Consumer Loan Agreement Standard Terms and Conditions and Schedule. On registration of the Mortgage, Secure Funding had an indefeasible interest in the entirety of the property on the terms and conditions set out in the Mortgage and subject to the Real Property Act 1900 and the general law: Perpetual Trustees Victoria Limited & Anor v Tsai [2004] NSWSC 745 at [13].

22 The Mortgage identifies the mortgagors as “Alfie Richard Patane” and “Karen Jean Patane”. The Mortgage states, “mortgage[ing] to the mortgagee all the mortgagor’s estate and interest in the land specified above …”; and the mortgagors covenant with the mortgagee that “… the provisions in the memorandum … Number AA658220 are incorporated in this mortgage. You acknowledge that you received, read and understood a copy of the memorandum before signing the mortgage …”. The Mortgage was dated 26 July 2006.

23 The plaintiff’s registered AC541722N mortgage incorporates the provisions set out in memorandum number AA658220 and lodged with the Land Property Information Division of the Department of Lands. The mortgage was granted as security for the moneys advanced to the defendants pursuant to the loan agreement.

24 Clauses 1.2 and 1.3 of memorandum number AA658220 states that:

“1.2 You are liable for all the obligations under this mortgage both separately on your own and jointly with any one or more other persons named in this mortgage as mortgagor.”
1.3 “…You must also carry out on time all your obligations under every agreement covered by this mortgage including the obligation to pay any of the amount owing …”.

25 Clause 18 defines “in default” as being the “amount owing” not paid on time. Clause 5 defines “amount owing” as money owed pursuant to “an agreement covered by this mortgage”. Clause 35 defines “agreement covered by this Mortgage” as being an agreement “which all of you acknowledge in writing to be an agreement covered by this mortgage”. “Security” means any security for the payment of money or performance of the obligations including a mortgage, charge, lien, pledge, trust or powers. “You” mean the person or persons named in the mortgage as mortgagor. If there are more than one, “you” means each of them separately and every two or more of them jointly; “you” includes your successors and assigns.

26 On page four of the schedule the following appears:

SECURITY	The following mortgages, other securities and guarantees, if any, have been or are to be taken by us:
Security Address#:	XX XXXX XXXX, BOBS FARM 2316, NSW Australia
Mortgage Status#:	New Mortgage
Registered Number#:
Minimum Building Insurance#:	$300,000.00
Names of mortgagor(s)#:	Alfie Richard Patane, Karen Jean Patane

27 The defendants submitted that the failure to complete the schedule in a way that clearly and unequivocally acknowledged the registered mortgage given by them means that the registered mortgage secures nothing.

28 The schedule refers to the amount of credit, namely $424,000 and that “you” must make 60 monthly interest repayments of $3303.67 each.

(2) Default rate of interest and administration fees are penalties

29 It is not disputed that the loan agreement standard terms and conditions sets out the default rate of interest at clauses 7.4 and 7.6. They read:

“7.4 You must pay interest charges at a higher rate – the default rate – on any amount while it is overdue.
7.6 The default rate at the disclosure date is shown in the schedule. The default rate is always 4% more than the annual percentage rate and therefore, if the annual percentage rate changes, so does the default rate.”

30 Secure Funding is entitled to charge interest on the principal amount pursuant to the loan agreement standard terms and conditions version C BBB OCT04. Secure Funding referred to pages 1, 3 and 4 of the loan agreement and clauses 2, 3, 7.4, 7.5, 7.6 and 7.7 of the Terms and Conditions.

31 Default interest is a penalty, and as such is void and unenforceable; when it is not a genuine pre-estimate of the loss a lender may suffer by being kept out of his money: Acron Pacific Ltd v Offshore Oil NL [1985] HCA 63; (1985) 157 CLR 514 at 520. An increase of two per cent has been accepted as a standard and acceptable increase: David Securities Pty Ltd v Commonwealth Bank of Australia (1990) 23 FCR 1 (at 30, 31).

32 The defendants’ penalty rate of interest is four per cent. White J in Bay Bon Investments Pty Ltd v Selvarajah [2008] NSWSC 1251 stated (at [46] - [49]):

“46 The next question is what, on the proper construction of the contract, is payable. Each loan expired one month after it was made. One month’s interest at the lower rate of five percent per month in the case of the first loan and 8.35 percent in the case of the second loan was prepaid. The contracts expressly provide for the payment of damages if the loans are not repaid at the end of the term. There are two components of the damages. One is the payment of the higher rate of interest from the expiry date until repayment (that is, at the rate of ten percent per month for the first loan and 15 percent per month for the second loan). In addition, for each month or part of a month that the loan was overdue a further “one month’s interest” is payable. In the context in which the words “one month’s interest” appear, it is an additional one month’s interest at the higher rate. The contrary was not contended. Accordingly, the damages can be calculated as a minimum of 20 percent per month (or 240 percent per annum) in the case of the first loan, and 30 percent per month (or 360 percent per annum) in the case of the second loan.

47 The agreement to pay interest as damages for late repayment attracts the doctrine of penalties if, as a matter of substance, the sum payable is not a genuine pre-estimate of the loss the plaintiff may suffer by being kept out of its money, but is in the nature of a punishment ( Acron Pacific Ltd v Offshore Oil NL (1985) 157 CLR 514 per Deane J at 520). The moneys are payable as a consequence of a breach of contract rather than as the withdrawal of an incentive. This distinguishes this case from those where a mortgage stipulates a higher rate of interest reduceable to a lower rate if instalments are paid on time.

48 It is no longer the law that damages cannot be recovered for late payment of a debt ( Hungerfords v Walker (1989) 171 CLR 125). In any event, a provision for the payment of interest at a higher rate after default which does not operate retrospectively is not a penalty provided it can be seen as a genuine pre-estimate of compensation for loss the lender would suffer by being kept out of its money ( David Securities Pty Ltd v Commonwealth Bank of Australia (1990) 23 FCR 1 at 30, 31).

49 In Ringrow Pty Ltd v BP Australia Pty Ltd [2005] HCA 71; (2005) 224 CLR 656, the High Court referred with approval to a statement by Mason and Wilson JJ in AMEV–UDC Finance Ltd v Austin (1986) 162 CLR 170 at 190 that an agreement to pay a sum as damages should only be struck down as a penalty if “ it is out of all proportion to damage likely to be suffered as a result of breach ” (at 667 [27]). In Ringrow Pty Ltd v BP Australia Pty Ltd the High Court said (at 669 [32]):

“Exceptions from that freedom of contract require good reason to attract judicial intervention to set aside the bargains upon which parties of full capacity have agreed. That is why the law on penalties is, and is expressed to be, an exception from the general rule. It is why it is expressed in exceptional language. It explains why the propounded penalty must be judged ‘extravagant and unconscionable in amount’. It is not enough that it should be lacking in proportion. It must be ‘out of all proportion’.”

33 The defendants’ counsel submitted that Secure Funding has not provided any evidence to show that four per cent is not “out of all proportion”. In my view, the defendants have to show they have a bona fide defence and they must establish, at least at a prima facie level, that the penalty rate must be out of all proportion. They have not done so. In any event, four per cent can hardly be said to be “out of all proportion”.

34 There is provision in the schedule to the loan agreement for the charge of an administration fee. So far as the administration fees are concerned, where there is a default in payment, the administration fee rises from $25 to $95. Likewise, the defendants have not shown that this administration fee is a penalty and is “out of all proportion”.

35 In my view, it is not necessary to have the dealing number on the mortgage for the defendants to acknowledge that the loan agreement was covered by the registered mortgage. The mortgage incorporated the provisions of the memorandum. The mortgage was granted as security for moneys advanced to the defendants pursuant to the loan agreement. The loan agreement incorporated the consumer loan agreement terms and conditions and the schedule. The mortgage and loan agreement and schedule are dated 26 July 2006. The defence is doomed to failure.

(3) Secure funding has elected not to enforce the acceleration clause

36 The defendants alleged that Secure Funding has elected not to enforce the acceleration clause. As previously stated, on 4 June 2008, the defendants made a payment of $45,000. The defendants submitted that as this payment was accepted and no correspondence was sent by Secure Funding refusing to accept the payment as being in compliance with the offer, the delay of two days is trivial having regard to the amount of money and the time frame in which it was requested and provided and falls within the de minimis exception. The amount of $45,000 was a lesser sum than the debt. It would have been to the defendants’ benefit had it been paid on time. But it was not. It is my view that the de minimis rule does not apply here.

37 Alternatively, the defendants submitted that if the Court is not minded to regard the delay, as a de minimis one, then Secure Funding should be estopped from enforcing its legal rights strictly. The defendants further submitted that they proffered payment of $45,000 on account of the offer made by Secure Funding, and it would be unconscionable for Secure Funding to rely upon the defendants’ delay to make payment when the plaintiff did nothing to disabuse the defendants of the notion that the payment was in compliance with the settlement offer. The letter in its own terms advised that it would continue with the proceedings. In these circumstances, it cannot be said that the plaintiff acted unconscionably. Finally, the defendants submitted it would appear that, even following default judgment, Secure Funding has treated the mortgage as being on foot, with Secure Funding purporting to continue to charge the defendants ordinary contractual interest, default administration fees, default interest, professional legal costs, expired insurance fees, service fees and a valuation payment. These submissions overlook the correspondence by the plaintiff where it was saying that the loan repayments were in arrears. In my view, the defences raised are hopeless. They are not bona fide. Further, it is not in the interests of justice to set aside the default judgment in circumstances where the defendants have agreed they owe the plaintiff $445,000. There have been three stays on the execution of the writ of possession, the property is vacant and there is little or no equity in the property.

Section 73 of the Civil Procedure Act

38 The final issue is whether there was a settlement between the parties on around 4 June 2008 and whether an order should be made under s 73 of the Civil Procedure Act.

39 Section 73 reads:

“Power of court to determine questions about compromises and settlements

(1) In any proceedings, the court:


(a) has and may exercise jurisdiction to determine any question in dispute between the parties to the proceedings as to whether, and on what terms, the proceedings have been compromised or settled between them, and

(b) may make such orders as it considers appropriate to give effect to any such determination.

(2) This section does not limit the jurisdiction that the court may otherwise have in relation to the determination of any such question.”

40 Firstly, the payment was not made in accordance with the plaintiff’s offer, namely, that payment would be accepted on 2 June 2008. Payment was not made until 4 June 2006. Secondly, the plaintiff’s letter stated that, “We are further instructed to proceed to continue with the proceedings until judgment is obtained. Our client will review the situation before executing the writ of possession”. Even if the payment had been made, the plaintiff stated that it still intended to proceed to judgment. In my view, there was no settlement on or about 4 June 2008. I decline to set aside the default judgment entered on 15 July 2008. I dismiss the notice of motion filed 7 April 2009. Costs are discretionary. Costs usually follow the event. The defendants are to pay the plaintiff’s costs as agreed or assessed.

The Court orders:

(1) The notice of motion filed 7 April 2009 is dismissed.

(2) The defendants are to pay the plaintiff’s costs as agreed or assessed.
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