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Stubbings v Jams 2 Pty Ltd

Stubbings v Jams 2 Pty Ltd

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HIGH COURT OF AUSTRALIA
KIEFEL CJ,
KEANE, GORDON, STEWARD AND GLEESON JJ
JEFFREY WILLIAM STUBBINGS APPELLANT
AND
JAMS 2 PTY LTD & ORS RESPONDENTS
Stubbings v Jams 2 Pty Ltd
[2022] HCA 6
Date of Hearing: 14 October 2021
Date of Judgment: 16 March 2022
M13/2021
ORDER
1. Appeal allowed.
2. Set aside orders 2 and 3 made on 5 August 2020 and orders 2 and 3 made on 24 August 2020 by the Court of Appeal of the Supreme Court of Victoria and, in their place, order that:
(a) orders 1 and 3 made on 22 July 2019 by the primary judge be varied so that the date of those orders be taken instead to be the date of final orders in Proceeding No M13 of 2021 in the High Court of Australia;
(b)the appeal be otherwise dismissed;
(c)the appellants pay the respondent's costs of the application for leave to appeal and of the appeal on the standard basis; and
(d)pursuant to r 63.34.2 of the Supreme Court (General Civil Procedure) Rules 2015 (Vic):

(i)the appellants pay the costs of the legal assistance provided to the respondent by the legal practitioners on a pro bono basis, as if the legal assistance had been provided by the legal practitioners not on a pro bono basis but on the basis that the respondent was under an obligation to pay for the legal assistance in the ordinary way; and

(ii)costs payable in respect of legal assistance given on a pro bono basis are payable directly to the legal practitioners.

3. The respondents pay the appellant's costs.

On appeal from the Supreme Court of Victoria
Representation
N C Hutley SC with A M Dinelli and A Christophersen for the appellant (instructed by Garland Hawthorn Brahe Lawyers)
B W Walker SC with J D Watson for the respondents (instructed by Christopher William Legal)
Notice: This copy of the Court's Reasons for Judgment is subject to formal revision prior to publication in the Commonwealth Law Reports.

KIEFEL CJ, KEANE AND GLEESON JJ. The respondents in this matter are in the business known as asset‑based lending, or "pure asset lending". This type of lending has the distinguishing feature, which often makes it easier for a borrower to obtain finance, that loans are made exclusively on the basis of the value of the assets securing the loan "without regard to the ability of the borrower to repay by instalments under the contract, in the knowledge that adequate security is available in the event of default"[1].
[1]Perpetual Trustee Co Ltd v Khoshaba (2006) 14 BPR 26,639 at 26,660 [128].
The appellant was the guarantor of loans made by the respondents to a company owned and controlled by him, Victorian Boat Clinic Pty Ltd ("the company")[2]. The appellant's obligations as guarantor were secured by mortgages given over parcels of land owned by him. The company had no assets and had never traded. The appellant had no income or other means to meet…

Grounds of appeal

[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.

[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.

[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.

Consideration

[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.

[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.

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Details

Case: [2022] HCA 6
Decision Date: 16 March 2022

CaseChat Overview and Summary

The High Court of Australia heard an appeal concerning allegations of unconscionable conduct in an asset-based lending transaction. The appellant, who was unemployed, had no regular income, and possessed poor financial literacy, guaranteed a loan made by the respondents to a company he owned and controlled. This company had no assets and had never traded. The loan and guarantee were secured by mortgages over three of the appellant's properties. The respondents, through an intermediary law firm acting as their agent, facilitated this secured loan. The appellant had provided signed certificates of independent financial and legal advice, which were drafted by the respondents' agent. When the company defaulted on the loan, the respondents sought to enforce their rights against the appellant.

The central legal issues before the High Court were whether the respondents had acted unconscionably in seeking to enforce their rights against the appellant, whether the respondents' agent possessed knowledge of the appellant's circumstances, and whether the respondents were entitled to rely on the certificates of independent advice. The court was required to determine if there had been an unconscientious exploitation of the appellant's special disadvantage.

The High Court allowed the appeal, finding that the respondents' conduct amounted to the unconscientious exploitation of the appellant's special disadvantage. The court reasoned that the respondents, through their agent, had taken advantage of the appellant's lack of business acumen and limited financial resources to strip him of his equity in the properties. The court noted that the transaction was not merely a high-risk loan to an asset-rich but income-poor individual or a gamble on property values, but rather a deliberate exploitation. The court concluded that it was unconscionable for the respondents to insist upon their rights under the mortgages.

Consequently, the High Court set aside the orders of the Court of Appeal and varied the orders of the primary judge. The appeal was otherwise dismissed, with specific directions regarding costs, including the payment of costs for legal assistance provided on a pro bono basis. The respondents were ordered to pay the appellant's costs.

Orders

Orders of the court

1. Appeal allowed.

2. Set aside orders 2 and 3 made on 5 August 2020 and orders 2 and 3 made on 24 August 2020 by the Court of Appeal of the Supreme Court of Victoria and, in their place, order that:

(a) orders 1 and 3 made on 22 July 2019 by the primary judge be varied so that the date of those orders be taken instead to be the date of final orders in Proceeding No M13 of 2021 in the High Court of Australia;

(b) the appeal be otherwise dismissed;

(c) the appellants pay the respondent's costs of the application for leave to appeal and of the appeal on the standard basis; and

(d) pursuant to r 63.34.2 of the Supreme Court (General Civil Procedure) Rules 2015 (Vic):

(i) the appellants pay the costs of the legal assistance provided to the respondent by the legal practitioners on a pro bono basis, as if the legal assistance had been provided by the legal practitioners not on a pro bono basis but on the basis that the respondent was under an obligation to pay for the legal assistance in the ordinary way; and

(ii) costs payable in respect of legal assistance given on a pro bono basis are payable directly to the legal practitioners.

3. The respondents pay the appellant's costs.

Background

Background to the litigation

The appeal to this Court should be allowed.The facts The appellant owned two houses in Narre Warren, both of which were mortgaged to Commonwealth Bank. The mortgage repayments were between $260 and $280 per week. The appellant did not live in either house; instead he lived at rental premises at Boneo, where he worked repairing boats for the owner of the property. Due to a falling out with the owner, the appellant ceased work and needed to move house. Rather than live at one of the Narre Warren properties, he sought to purchase another property on the Mornington Peninsula[6].[6]Jams 2 Pty Ltd v Stubbings [No 3] [2019] VSC 150 at [8], [105]‑[106]; Jams 2 Pty Ltd v Stubbings [2020] VSCA 200 at [7]. The appellant was unemployed and had no regular income. He had not filed tax returns in several years and was in arrears on rates payments in respect of the two Narre Warren properties[7]. After a home loan application to ANZ was rejected for lack of financial records, the appellant was introduced to Mr Zourkas[8].[7]Jams 2 Pty Ltd v Stubbings [2020] VSCA 200 at [8].[8]Jams 2 Pty Ltd v Stubbings [No 3] [2019] VSC 150 at [108]‑[109]; Jams 2 Pty Ltd v Stubbings [2020] VSCA 200 at [9]. Mr Zourkas described himself as a "consultant", in the business of introducing potential borrowers to Ajzensztat Jeruzalski & Co ("AJ Lawyers"). AJ Lawyers in turn provided a service to clients, such as the respondents, to facilitate the making of secured loans by those clients. The primary judge found that Mr Zourkas played an "important and essential" role in these transactions, in that his involvement ensured that AJ Lawyers never dealt directly with the borrower or guarantor, such as the appellant[9].[9]Jams 2 Pty Ltd v Stubbings [No 3] [2019] VSC 150 at [10]‑[11]. The appellant and Mr Zourkas met on a number of occasions in 2015. At their first meeting, the appellant said that he "wanted to buy a little house" to live in, to which Mr Zourkas responded that "there would not be a problem going bigger and getting something with land"[10]. On the strength of that suggestion, the appellant found a five‑acre property with two houses on it in Fingal, available for $900,000. At another meeting, Mr Zourkas told the appellant that he could borrow a sum sufficient to pay out the existing mortgages over the Narre Warren properties, purchase the Fingal property, and have approximately $53,000 remaining to go towards the first three months' interest on the loan. Mr Zourkas advised the appellant that he could then sell the Narre Warren properties, reducing the loan to approximately $400,000, which the appellant could then refinance with a bank at a lower interest rate[11]. [10]Jams 2 Pty Ltd v Stubbings [No 3] [2019] VSC 150 at [114]; Jams 2 Pty Ltd v Stubbings [2020] VSCA 200 at [10].[11]Jams 2 Pty Ltd v Stubbings [No 3] [2019] VSC 150 at [116], [120]‑[124], [137]‑[138]; Jams 2 Pty Ltd v Stubbings [2020] VSCA 200 at [11]. The two Narre Warren properties and the Fingal property would secure the appellant's obligations as guarantor[12]. The existing debt to Commonwealth Bank secured on the Narre Warren properties totalled approximately $240,000[13]. On the basis that the two properties had a market value of $770,000, the appellant's equity was thus worth about $530,000[14].[12]Jams 2 Pty Ltd v Stubbings [2020] VSCA 200 at [15].[13]Jams 2 Pty Ltd v Stubbings [No 3] [2019] VSC 150 at [105].[14]Jams 2 Pty Ltd v Stubbings [No 3] [2019] VSC 150 at [304].

Evidence

Evidence Before The Court

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Decision

Reasons for decision

KIEFEL CJ, KEANE AND GLEESON JJ GORDON J STEWARD J

Mr Jeruzalski, on behalf of the respondents, appreciated that the loans were a dangerous transaction from the appellant's point of view; but the prospect of obtaining the profit to be made by the taking of the appellant's equity by way of interest payments made the exploitation of the appellant's disadvantages good business for the respondents. The transaction in this case cannot be regarded as if it were, for example, a loan to an asset‑rich but income‑poor individual sought for the purposes of meeting a temporary liquidity problem. The transaction could not even be seen as a high‑risk loan to a person willing to gamble on the prospect of a rise in property values. Having regard to the unchallenged findings of fact by the primary judge, it is evident that Mr Jeruzalski, on behalf of the respondents, took the opportunity to exploit the appellant's lack of business acumen and meagre financial resources to deprive him of his equity in the Narre Warren properties.Conclusion Mr Jeruzalski's conduct on behalf of the respondents amounted to the unconscientious exploitation of the appellant's special disadvantage. The primary judge was right to hold that it was unconscionable for the respondents to insist upon their rights under the mortgages. That being so, it is unnecessary to consider whether the appellant was entitled to succeed pursuant to s 12CB of the ASIC Act.Orders We would make the following orders:1. Appeal allowed.2.Set aside orders 2 and 3 made on 5 August 2020 and orders 2 and 3 made on 24 August 2020 by the Court of Appeal of the Supreme Court of Victoria and, in their place, order that:(a)orders 1 and 3 made on 22 July 2019 by the primary judge be varied so that the date of those orders be taken instead to be the date of final orders in Proceeding No M13 of 2021 in the High Court of Australia;(b)the appeal be otherwise dismissed; (c)the appellants pay the respondent's costs of the application for leave to appeal and of the appeal on the standard basis; and (d)pursuant to r 63.34.2 of the Supreme Court (General Civil Procedure) Rules 2015 (Vic):(i)the appellants pay the costs of the legal assistance provided to the respondent by the legal practitioners on a pro bono basis, as if the legal assistance had been provided by the legal practitioners not on a pro bono basis but on the basis that the respondent was under an obligation to pay for the legal assistance in the ordinary way; and(ii)costs payable in respect of legal assistance given on a pro bono basis are payable directly to the legal practitioners.3.The respondents pay the appellant's costs. The detail of the relevant background is set out in the reasons of other members of the Court. I agree that the appeal must be allowed. I write separately because I consider that the respondent lenders' system of conduct was contrary to s 12CB of the Australian Securities and Investments Commission Act 2001 (Cth) ("the ASIC Act").Section 12CB of the ASIC Act – system of conduct Section 12CB(1)(a) of the ASIC Act prohibits persons from engaging "in conduct that is, in all the circumstances, unconscionable", in connection with, relevantly, the supply of financial services in trade or commerce. Section 12CB(4)(b) makes clear that the prohibition in s 12CB(1) can apply "to a system of conduct or pattern of behaviour, whether or not a particular individual is identified as having been disadvantaged by the conduct or behaviour" (emphasis added). "A 'system' connotes an internal method of working; a 'pattern' connotes the external observation of events"[81]. Because a specific person need not be identified, "special disadvantage of an individual is not a necessary component of the prohibition"[82].[81]Australian Securities and Investments Commission v Kobelt (2019) 267 CLR 1 at 56 [143], citing Unique International College Pty Ltd v Australian Competition and Consumer Commission (2018) 266 FCR 631 at 654 [104].[82]Kobelt (2019) 267 CLR 1 at 78 [232]; see also 101 [293].

Ratio Decidendi

Legal Principle Established

Established by: KIEFEL CJ, KEANE AND GLEESON JJ, GORDON J, STEWARD J

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