VYACHESELAV Kravchenko v The Rock Building Society
[2009] VSCA 292
•11 December 2009
SUPREME COURT OF VICTORIA
COURT OF APPEAL
No 3927 of 2009
| VYACHESELAV KRAVCHENKO | Appellant |
| v | |
| THE ROCK BUILDING SOCIETY | Respondent |
---
JUDGES: | BUCHANAN and DODDS-STREETON JJA and BYRNE AJA | |
WHERE HELD: | MELBOURNE | |
DATE OF HEARING: | 19 October 2009 | |
DATE OF JUDGMENT: | 11 December 2009 | |
MEDIUM NEUTRAL CITATION: | [2009] VSCA 292 | |
JUDGMENT APPEALED FROM: | Unreported, County Court of Victoria, 3 December 2008 (Judge Anderson) | |
---
Mortgages – Power of sale – Duties – Good faith – Best price consistent with entitlement to security – Private sale to employee of solicitor acting for the mortgagee – Mortgagee failed to fully test the market – Sale price less than best price available for the land – Damages awarded against the mortgagee.
---
| APPEARANCES: | Counsel | Solicitors |
| For the Appellant | Mr C R Northrop | Ella Gorenstein |
| For the Respondent | Mr A T Schlicht | Koroneos Lawyers |
BUCHANAN JA:
The question raised by this appeal is whether a mortgagee breached the duty imposed upon it by s 77 of the Transfer of Land Act 1958 (‘the Act’) in selling a residential property owned by the mortgagor.
The property was a first floor apartment in a two-storey strata development on the Nepean Highway. The apartment was at the rear of the development. It consisted of three large bedrooms, a combined dining and living area, laundry and an ensuite bathroom to the master bedroom. There were two balconies. The apartment was elevated, with views to Port Phillip Bay. There was an outside area on the title. The apartment was equipped with ducted gas heating and was air conditioned.
The appellant purchased the apartment in December 2002 at a price of $340,000. The purchase was largely financed by a loan by the respondent secured by a mortgage over the apartment.
In 2005 the appellant failed to make payments due in respect of the loan. In November 2005, the respondent obtained judgment for possession pursuant to the mortgage and in June 2006 served a notice to quit upon the tenant in occupation of the apartment.
On 2 March 2006 the respondent obtained a valuation of the property by Barry McLennan in an amount of $355,000. Also in March 2006, the respondent obtained market appraisals from two estate agents. The first estimated the value of the property at between $350,000 and $380,000 and the second at between $360,000 and $390,000. The estate agents and the valuer recommended that the property be sold by auction. Mr McLennan said in evidence, ‘The auction market in Elsternwick is strong at that time. It’s an area that you would certainly be auctioning the property.’
The respondent engaged Whiting & Co, estate agents, to sell the property by auction, the form of sale recommended by that firm. The auction authority set the reserve at $355,000. The auction date was to be 6 May 2006.
The sales campaign began in the first week of April 2006. A board was erected on the site. Advertisements were placed on seven internet sites, in a local newspaper, in The Age newspaper and on the front window of the estate agent’s premises. Brochures were made available. The advertisement in The Age newspaper was a small text advertisement. The advertisements in the local newspapers were larger and included a photograph of the unit.
On 5 April 2006, Scott Ames made an offer to purchase the property at a price of $360,000 with a deposit of $14,000. Mr Ames was an employee of the firm of solicitors who acted for the respondent in obtaining possession of the property and who were engaged by the respondent to act in the conveyance of the property to a purchaser. Mr Ames was involved in obtaining possession of the property. Another solicitor in the firm handled the conveyancing transaction.
Philip Hall, the agent in charge of selling the property, referred Ames’ offer to Stephen Hickman, an employee of the respondent, saying that ‘the benefits of acceptance of this offer is that there will be a quick resolution to the file as well as a saving of the bulk of the budgeted allocation for advertising’. Mr Hickman responded, saying that ‘if there are no responses to the advertisements then we can proceed to accept the offer from Scott and yet be deemed to have given the public an opportunity to purchase’.
On 8 April 2006, the first advertisement appeared in The Age newspaper and the property was open for inspection. On 11 April 2006, an advertisement appeared in the local newspaper. On 12 April 2006, a second open for inspection day was held. In evidence Mr Hall said that a few people inspected the property. On 18 April 2006, another advertisement appeared in the local newspaper.
On 18 April 2006, the respondent instructed the agent to cease the sales campaign and to accept the offer by Mr Ames. The contract of sale was signed the next day. The price exceeded the sum then owing by the appellant to the respondent.
The appellant brought proceedings against the respondent and Mr Ames seeking to set aside the sale and claiming damages from the respondent for breach of a duty to take reasonable care in selling the property for not less than market value or the best price that was reasonably attainable and to act in good faith and have regard to the interests of the appellant. In the course of the trial the appellant settled the proceeding against Mr Ames and continued with his claim for damages against the respondent.
At the trial, three valuers gave evidence of their opinions of the value of property at the date it was sold to Mr Ames. Mr McLennan, who had given the respondent the valuation in March 2006, said that the value of the property was $355,000. He said that ‘in his head’ he had a range of values between $355,000 and $385,000. Anthony Falvo, the first of two valuers called by the appellant, said that the market value of the property was $415,000. Mr John Castran, the second valuer called by the appellant, said that the value of the property was $420,000.
The trial judge said that the valuation evidence generally was ‘less than satisfactory’. His Honour’s criticisms of the valuation by Mr McLennan were, inter alia, that Mr McLennan was unsure whether the property included an outdoor living area, which he conceded would affect the value of the property, that each area of the valuation included in his risk analysis was rated ‘low to medium’ and the trial judge said that Mr McLennan’s explanation for each of those conclusions appeared to be contrived, his report noted a rental value of $1,300 per month, whereas the tenant was in fact paying $1,600 per month, he described the view from the balconies as ‘sea glimpses’ whereas his Honour said that there were extensive open views from the property and that the sales relied upon by Mr McLennan did not seem to be truly comparable. Mr Falvo’s valuation was calculated on a price per square metre basis, which his Honour said was not a valid exercise, apparently responding to criticisms by Mr McLennan and Mr Castran that this was an unreliable method of valuation. Notably, the trial judge had no criticism of the valuation by Mr Castran, unless his comments that Mr Castran gave his evidence ‘with great confidence and with few concessions to alternative arguments’ are construed as criticisms.
The trial judge said:
I saw no reason to prefer the evidence of any one valuer over another. My impression of their evidence was that at best it can be said that there is a range of values within which a property would be likely to sell.
He said that it was ‘easy to jump to the conclusion that the probable value of the property was between perhaps $360,000 and $400,000’ and said that in his view the evidence showed that the property was sold at the lower end of a range of values.
As to the steps taken by the respondent to sell the property his Honour said:
It is difficult, however, to conclude that the [respondent] gave itself the best opportunity of obtaining the highest sale price. The receipt of the offer for a figure which, coincidentally, was the lowest figure the [respondent] would be prepared to accept, occurred at a time when no marketing had taken place.
He continued:
There appears to have been little interest in the property in the week leading up to Easter. However, it is unclear whether the lack of interest in the property would have meant that there would not be a successful auction some three weeks later. This suggestion appears inconsistent with the confidence expressed in the market proposal a few weeks earlier. Mr Hall’s evidence was that although the market was buoyant and healthy, by 18 April the prospect of sale at auction was “dismal” and his preferred option was to sell to Mr Ames.
As to the position of Mr Ames, the trial judge said:
Although the position of Mr Ames as an employee of the solicitors handling the conveyance of the transaction on behalf of the [respondent] is a relevant circumstance to take account of, it seems to me that the critical factors in determining whether the [respondent] undersold the property are, firstly, the sufficiency of the advertising and, secondly, the sufficiency of the price obtained.
His Honour concluded:
In the circumstances the [appellant] has not satisfied the onus upon him of establishing a breach of the [respondent’s] obligation as mortgagee. If it had, it would be difficult to prove more than a fairly nominal loss on the part of the [appellant] in the context of a case which depends upon the valuation evidence. Inevitably, such evidence is not based on an exact science and can only, for properties such as the Elsternwick property, be accurate to plus or minus about ten per cent. In the circumstances, it would be difficult for the plaintiff to demonstrate any loss.
Accordingly, the plaintiff’s claim was dismissed and judgment was given for the respondent.
Section 77 of the Act provides that if within one month after service of a notice of demand the mortgagor fails to comply with the notice, ‘the mortgagee … may, in good faith and having regard to the interests of the mortgagor … sell … the mortgaged … land’.
The trial judge said that the nature of the duty created by the section was ‘a matter of some uncertainty’ because of an apparent difference between the views of two judges of the Supreme Court.
In Goldcel Nominees Pty Ltd v Network Finance Ltd[1] Murphy J said:
[T]he mortgagee, on selling, must take reasonable steps to ensure that, at the time of sale, he is getting the best price then available for the mortgaged property.
In Henry Roach (Petroleum) Pty Ltd v Credit House (Vic)Pty Ltd[2] Lush J said that the mortgagee exercising a power of sale of Torrens title land was obliged to act in good faith and with regard to the interests of the mortgagor, was entitled to give first consideration to his own interests, was entitled to sell at the time of his choice and without waiting for a time which a selling owner might consider more propitious, was not entitled to sell without advertising so as to bring the property to the notice of persons likely to be interested and so as to bring to the notice of possible buyers the potentiality of the property to be sold, was not entitled to adopt or accept any arrangement or price merely because it will see him paid out and was bound to take reasonable steps to ascertain the value of the property before selling.
[1][1983] 2 VR 257, 261.
[2][1976] VR 309.
I think the difference between these statements of the duty of a mortgagee is more apparent than real. Generally, the interests of the mortgagee and the mortgagor are best served by obtaining the best price that is available, and that should be the mortgagee’s aim. Nevertheless, as the mortgagee is entitled to prefer his own interests while taking reasonable care to protect the interests of others, in certain circumstances it may be that a mortgagor will be justified in accepting a price that is less than the best price that could reasonably be obtained,[3] but is a price that can be described as proper. In Vasiliou v Westpac Banking Corporation[4] Maxwell P, Neave and Kellam JJA said of a mortgagee to whom s 77 of the Act applied:
The mortgagee is obliged to obtain the best price consistent with its entitlement to realise its security.
In my view, the circumstances in the present case did not permit the respondent to omit any reasonable step to obtain the best available price.
[3]Cf Guss v Geelong Building Society(in liq) [2001] VSC 37.
[4](2007) 19 VR 229, 242.
A circumstance bearing upon the question whether the respondent fulfilled its duty to the appellant was the identity of the purchaser of the property. For the reasons stated by Dodds-Streeton JA, I consider that the fact that Mr Ames did not perform work in the sale of the property did not remove him from the equitable principle prohibiting sale by a mortgagee to itself, a trustee for itself or a person employed to conduct the sale. I also doubt that the equitable principle has less force today than in the nineteenth century. Be that as it may, the fact that the purchaser was a solicitor acting for the respondent did bear upon the question whether the respondent used reasonable endeavours to obtain the best available price.
Mr Ames had the advantages of an insider. He arranged with Philip Hall, the employee of the agent who was in charge of the sale, to inspect the property. Mr Ames was the first person to inspect the apartment and met Mr Hall at the property. He was also able to sound out the agent as to the price which the respondent anticipated. Mr Hall in his evidence said that Mr Ames ‘made it clear to me at the very beginning that he is an employee of the solicitors who were acting for [the respondent]’. As a result of his conversation with Mr Hall, Mr Ames was able to pitch his offer at the minimum amount for which the respondent contemplated selling the property. When Mr Hall was asked whether he suggested an offer of $360,000 to Mr Ames, he said:
I may have suggested to him if – had he asked me what kind of money do you think might buy this, I might have said something in that range might do the trick.
The respondent’s reaction to the offer by Mr Ames was not to ascertain what further steps might be taken to increase the price, but rather to discover whether Mr Ames’ offer could be accepted without incurring liability to the appellant. The respondent sought the advice of its solicitors as to whether the respondent could sell the property to Mr Ames. On 5 April 2006 the employee of the respondent managing the sale sent an email to Mr Hall as follows:
Hi Philip, our solicitors have made enquiries with Victorian Law Society, and have advised that there is no problem with Scott making an offer on the property notwithstanding the fact that Scott is the legal representative of our solicitor’s Victorian agents.
To ensure that we have “tested the market” it is deemed prudent to advertise the property once in The Age and once in the local papers. If there are no responses to the advertisements then we can proceed to accept the offer from Scott and yet be deemed to have given the public an opportunity to purchase.
Please advise your client ie Scott accordingly.
In my opinion the trial judge erred in failing to find the value of the property at the time it was sold to Mr Ames. Instead of treating the evidence of the valuers as indistinguishable, his Honour should have made ‘a critical selection of the most helpful facts from the mass of information provided by the evidence and applying the correct principles in the light of the selected material’[5] to arrive at the value of the property. The trial judge’s task was to determine the issue on the whole of the material before him including the evidence of the experts. The valuers’ evidence was called to enable to judge to form his own independent judgment on the matter. For the reasons which he gave, I consider that his Honour should have preferred the evidence of Mr Castran to that of Mr McLennan. Perhaps the most significant of the trial judge’s criticisms of Mr McLennan was the incomparability of the sales upon which he relied and his apparent discounting of the importance of the property’s advantages of three bedrooms, a rear garden, a lock-up garage and elevated views.
[5]The Commonwealth v Milledge (1953) 90 CLR 157, 160-1 (Dixon CJ and Kitto J).
The respondent may have been influenced by the view of its selling agent, Mr Hall, who said that ‘At about 18 April the prospect of selling was looking dismal to us’. Mr Hall’s retreat from his earlier enthusiasm for sale by auction and his opinion that ‘The market was buoyant’ was apparently based upon the fact that few people attended when the property was open for inspection. In my opinion that was too slight a basis for such a profound change in attitude. Members of the public were anticipating sale by auction rather than sale by private treaty.
Counsel for the respondent emphasised the fact that the trial judge saw and heard the witnesses. He relied upon statements in the High Court to the effect that findings of fact by trial judges based upon the credibility of witnesses are not to be set aside because an appellate court thinks that the probabilities of the case are against the findings of fact. If a trial judge’s finding depends to any substantial degree on the credibility of a witness, the finding must stand unless it can be shown that the trial judge failed to use or palpably misused his advantage or acted on evidence which was inconsistent with the facts controvertibly established by the evidence or which was glaringly improbable.[6] In my opinion, in this case the evaluation of the steps taken by the respondent to sell the property did not depend upon the manner in which the witnesses gave their evidence or the atmosphere of the trial. His Honour did not suggest in his reasons that there was a factual issue which depended upon credibility or observations of the witnesses.[7]
[6]See Devries v Australian National Railways Commission (1993) 177 CLR 472, 479 (Brennan and Gaudron JJ); Fox v Percy (2003) 214 CLR 118, 138-146 (McHugh J); Abalos v Australian Postal Commission (1990) 171 CLR 167, 178-9 (McHugh J).
[7]Cf In the Marriage of Lenehan (1987) 11 Fam LR 615, 621.
In evaluating Mr Ames’ offer, the respondent relied upon the valuation of the property given by Mr McLennan, which he said ‘has been prepared on behalf of the instructing party as Mortgagee in Possession for Pre-Sale Purposes and is not to be used for any other purpose’. Mr McLennan assessed the market value of the property at $355,000. Mr McLennan’s market value did not purport to reflect the best available price, but rather ‘the market value … for prudent first mortgage lending purposes’. The respondent did not obtain an opinion as to whether the offer made by Mr Ames represented the market value of the property.[8] The respondent knew that the price offered by Mr Ames was at the bottom of the ranges nominated by the three estate agents it consulted.
[8]See Pendlebury v Colonial Mutual Life Assurance Society Ltd (1912) 13 CLR 676, 683 (Griffith CJ); Henry Roach (Petroleum) Pty Ltd v Credit House (Vic) Pty Ltd, above, 313 (Lush J).
The respondent did not proceed to auction, the course recommended by all the estate agents and the valuer, and cut short the sales campaign. I think that the respondent was obliged to fully test the market. Like the trial judge, I would not ‘conclude that the [respondent] gave itself the best opportunity of obtaining the highest sale price’.
In abandoning the auction which had been arranged and accepting a price offered by an insider at the bottom of a range of prices which it contemplated could be obtained, without obtaining an expert appraisal of the offer, I consider that the respondent did breach the duty imposed upon it by s 77 of the Act. In reaching this conclusion, I have taken into account the value ascribed to the property by Mr Castran. I think that the trial judge’s criticisms of Mr McLennan’s valuation and his rejection of Mr Falvo’s valuation were warranted, leaving Mr Castran’s valuation as a factor to be brought to account on the question whether the respondent took reasonable steps to realise the best available price.
For the foregoing reasons, I am of the opinion that the respondent did breach the duty which it owed to the appellant. I am also of the opinion that this Court can assess the quantum of the damages to be awarded to the appellant by accepting Mr Castran’s valuation. Accordingly, damages are to be assessed in an amount of $60,000. I would hear the parties as to the orders which should be made for interest and the costs of the proceeding below.
DODDS-STREETON JA:
I agree with Buchanan JA and wish to add some brief observations of my own.
The purchaser in this case was a solicitor employed by the firm of solicitors acting for the mortgagee both in relation to the writ of possession for the property and its ensuing sale. The purchaser personally worked on the writ for possession, but another solicitor in the firm handled the sale. The respondent relied on Nutt v Easton[9] to establish that the purchaser was not within the ambit of the absolute prohibition on sale (if it applied) by a mortgagee to itself, as trustee for itself or a person employed by it to conduct the sale, and that neither the purchaser nor the mortgagee bore the onus of establishing the validity of the sale. In my opinion, the authorities suggest that if there were no absolute prohibition on sale, the identity of the purchaser nevertheless cast an onus on him and the mortgagee.
[9][1899] 1 Ch 873.
The survival of the ‘absolute equitable principle’[10] prohibiting sale by a mortgagee to itself, a trustee for itself or a person employed to conduct the sale, has been doubted.[11] In Re One.Tel Networks Holdings Pty Ltd (Hall as rec and mgr) and others, Austin J suggested that ‘a modern court may well hold that the validity of the exercise of a power of sale depends upon general principles applicable whether or not the purchaser is (or is related to) the mortgagee, although their circumstance may be relevant to the propriety of the transaction’.[12]
[10]The prohibition applied even where the price was fair and the mortgagor gave informed consent. See Re One.Tel Networks Holdings Pty Ltd (Hall as rec and mgr) and others (2001) 40 ACSR 83, 95; [2001] NSWSC 1065.
[11]Note the exception in s 101(1)(a) of the Property Law Act 1958 – the mortgagee is empowered to buy in at auction.
[12](2001) 40 ACSR 83, 96.
Austin J referred to Farrar v Farrars Limited,[13] in which Lindley LJ (delivering
the judgment of the Court of Appeal) excepted from the prohibition a sale to a company in which the mortgagee had an interest. Such a sale was not invalidated per se, but could, ‘for example, be fraudulent and at an undervalue or it may be made under circumstances which throw upon the purchasing company the burden of proving the validity of the transaction …’.[14] That flexible approach was followed in Tse Kwong Lam v Wong Chit Sen,[15] in which the mortgagee and his family were the sole shareholders of the purchasing company. The Privy Council held that, while there was no absolute prohibition on the sale, ‘the mortgagee and the company seeking to uphold the transaction must show that the sale was in good faith and that the mortgagee took reasonable precautions to obtain the best price reasonably obtainable at the time’.[16]
[13](1888) 40 Ch D 395 (Cotton, Lindley and Bowen LJJ).
[14]Ibid 410.
[15][1983] 1 WLR 1349.
[16]Ibid 1355 (Lord Templeman delivering the judgment of the Privy Council).
No authority discarding the absolute equitable principle was cited and it has been suggested[17] that Austin J’s approach does not accord with that of the High Court in ANZ Banking Group Ltd v Bangadilly Pastoral Co Pty Ltd (‘Bangadilly’).[18] In Bangadilly, a corporate mortgagee sold mortgaged property at auction to a company controlled by the same persons. The purchaser conceded that it bore the onus to prove good faith due to its close connection with the mortgagee. The High Court held that, in circumstances where the controllers of the mortgagee and the purchaser were the same people, who knew (and fixed) the reserve price and what the prospective purchaser was prepared to pay, there was no independent bargain and the onus was not discharged. Aickin J (with whom Stephen and Jacobs JJ agreed) observed that a ‘truly independent bargain’ was critical.[19] Jacobs J stated that where there is a possible conflict between the mortgagee’s interests:
… and a desire that an associate should obtain the best possible bargain the facts must show that the desire to obtain the best price was given absolute preference over any desire that an associate should obtain a good bargain. When those circumstances exist it may not be sufficient that steps are taken in the conduct of the sale which would suffice to support the validity of the sale when there was no conflict of interest. The steps taken or not taken in the conduct of the sale cannot be considered separately from the conflict of interest.[20]
[17]Croft C, The Mortgagee’s Power of Sale (2nd ed, 2004), [9.2].
[18](1978) 139 CLR 195; [1978] HCA 21.
[19]Ibid 227.
[20]Ibid 201-2.
Therefore, even if the inflexible rule has been or should be overtaken by general principles, where the purchaser is closely associated with the mortgagee, the mortgagee and the purchaser may bear the onus of establishing that the sale was in good faith and involved reasonable steps to obtain the best price.
Nutt v Easton, on which the respondent relied, involved facts very different from those of the present case. In Nutt v Easton, a solicitor who had acted for a mortgagee’s executrix to obtain probate of the mortgagee’s will purchased a reversionary interest in the property over a year later, at the express request of the client. A third party who had purchased the equity of the reversion sought to set the sale aside. The solicitor’s bona fides and the sufficiency of the price, which was ‘considerably more than the then actuarial value of the property’,[21] were unchallenged.
[21][1899] 1 Ch 873, 875.
Moreover, Cozens-Hardy J was not satisfied that the purchaser had ever ‘acted as solicitor in the matter of the sale at or for some time before the transaction which resulted in the conveyance to him as purchaser’.[22]
[22]Ibid 878.
In my opinion, a solicitor employed by a firm of solicitors acting for the mortgagee in relation to both the writ for possession and the immediately ensuing sale may be well within the equitable principle although he or she does not work personally on the sale. In such a case, the solicitor is properly to be identified with his or her employer; and the distinction between the writ and the sale may be artificial if the former involves work closely related to, or connected with, the sale.
In the present case, the purchaser of the mortgaged property was, as Buchanan JA has stated, an insider, due to his employment by the mortgagee’s solicitors and the work he performed in that capacity.
His insider status was not negated because another solicitor in the firm worked on the sale. It afforded peculiar advantages and presented the potential for conflict of interest. As in Bangadilly, the purchaser knew, in effect, the reserve and the mortgagee knew what the purchaser was prepared to pay. In such circumstances, although the appellant discontinued his claim against the purchaser and sought only damages from the mortgagee, the identity of the purchaser was relevant to both the onus of proof and the sufficiency of the steps taken to protect the mortgagor’s interests and obtain the best price.
BYRNE AJA:
I, too, have come to the conclusion that this appeal should be allowed for the reasons given by Buchanan JA.
I have for a little while been concerned that the essential issue in this appeal was the correctness of the finding of fact by the primary judge that the price obtained was a proper one. If this finding stands the appeal must fail, if only because no loss had been demonstrated by the mortgagor. His Honour had the benefit of hearing the valuation witnesses and observing them being cross-examined. His conclusion was that the price obtained was within the range of values within which the property would be likely to sell.
I am persuaded, however, having had the benefit of reading in draft the judgments of Buchanan and Dodds-Streeton JJA, that this conclusion was not sufficient to discharge the burden which a mortgagee must assume when the sale is to a person in Mr Ames’ position. It has not been shown to be the best price then available.
- - -
2
9
0