Farrow Mortgage Services Pty Ltd (in liq) v Stone, George Barry Everett [1998] FCA 458

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY NG 7249 of 1998

BETWEEN: FARROW MORTGAGE SERVICES PTY LTD

(In Liquidation) (ACN 006 125 757)

Applicant

AND: GEORGE BARRY EVERETT STONE

Respondent

JUDGE: EMMETT J

DATE OF ORDER: 28 APRIL 1998

WHERE MADE: SYDNEY

THE COURT ORDERS THAT: 1. The debtor have leave to make any further written submissions directed to demonstrating that there are prospects of success in the Court of Appeal. Any such written submissions must identify grounds relating to the lack of good faith in the exercise of the power of sale. The submissions must be supported by any references to the evidence and must be accompanied by copies of any material referred to in the submissions. 2. The petitioner have leave to make written submissions in response to any submissions made by the debtor and to make submissions setting out any further grounds which the petitioner wishes to be taken into account in the exercise of the Court's discretion to adjourn further the hearing of the petition. 3. The hearing of the petition be adjourned for directions only to 19 June 1998 at 9.30am. 4. Costs be reserved. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY NG 7249 of 1998

BETWEEN: FARROW MORTGAGE SERVICES PTY LTD

(In Liquidation) (ACN 006 125 757)

Applicant

AND: GEORGE BARRY EVERETT STONE

Respondent

JUDGE: EMMETT J

DATE: 28 APRIL 1998

PLACE: SYDNEY

REASONS FOR JUDGMENT HIS HONOUR: On 24 March 1998 I adjourned the hearing of the petition to today. I directed the debtor ("Mr Stone") to file and serve no later than 20 April 1998 a document setting out the grounds of appeal upon which he says he has reasonable prospects of success, supported by any references to the evidence and proceedings before Bainton J and attaching copies of any of the material intended to be relied upon, together with written submissions as to why this Court should be satisfied that the appeal is based on genuine and arguable grounds so as to justify any further adjournment of the petition. I said then that unless that was done I would not entertain any further application for an adjournment. On 20 April 1998 an affidavit by Mr stone was filed indicating that he required a further two or three days within which to file such documents. There was then filed on 22 April 1998 a further affidavit by Mr Stone which stated that it had been prepared in accordance with the directions which I gave on 24 March 1998. When the matter came on for hearing this morning, I was informed that the Court of Appeal yesterday dismissed the application by Mr Stone to review the decision of Beazley J refusing a stay. The Court of Appeal, in reasons stated by Sheller JA, with whom the President and Powell JA agreed, said that they agreed with Beazley J that the prospects of success on the appeal are not great. That of course is not decisive of the matter. It may be significant that the Court of Appeal did not go so far as to say that the prosecution of the appeal was futile. This morning Mr Stone relied on, in addition to the two affidavits to which I have just referred, a further affidavit sworn on 27 April 1998. That affidavit was apparently filed in the Court of Appeal and purported to complement the submissions made in the affidavit of 22 April 1998. In addition, Mr Stone relied on a document entitled "Extension to the Supplementary Notice of Appeal", which is a detailed submission referring to the evidence before Bainton J. I do not regard the material to which I have just referred as a compliance with the orders which I made. I did not actually order Mr Stone to file anything but said that I would not entertain any further adjournment application unless he had done so. My concern about the documents is that they contain a great deal of material which neither states the grounds of appeal nor constitutes submissions as to why I should be satisfied that the appeal is based on genuine and arguable grounds. In the document of 22 April, Mr Stone said that he relied on the proposition that a mortgagee must display an attitude to a mortgagor in the exercise of the statutory power of sale which does not ignore the mortgagor's interest in his property. The 22 April document then went on to say the following: (13) The first component of their ignoration (sic) of my interests in the mortgaged property was directly related to the actual building itself, & (sic) I will point to the evidence which shows that a range of values were applied at different times by Farrow's agents to suit their own needs, at different times… (14) The Court should have little difficulty finding,... ……………………………………………………… this ground alone, is only one of a number of vivid examples of Farrow's selling agent Elders' inconsistency of actions. (17) I submit as well that there is evidence of conflicting allegations, not only between Farrow's witnesses, but conflicting allegations made at times by the same witness. ……………………………………………………… (19) The second component of their ignoration (sic) of my interests, was reflected in the manner in which both of Elders' agents, Cassidy the principal & Coleman his salesman, connived to so lightly dismiss the sixteen to seventeen years of time & energies I had already invested in the design & construction of the building as a prototype of the architecture of my development proposals. (20) Elders' agent, Cassidy,...was well aware of the very special value to me of my property, & that I had been building it for a special purpose, over a period of many years, & yet, as an agent of Farrow's, but as well, as a neighbour of mine, he failed to convey that vital knowledge of my special interests to Farrow. ……………………………………………………………………………… (27) There was a third & major component of their ignoration (sic) of both my interests & my brother's interests… (28) The following is a nutshell summation of our interests… My brother & I had searched for a number of years to find a special, environmentally-beautiful, Sydney-based site which we could share for a common purpose… (29) Basically, we had intended to utilise the Balmain property as a special purpose centre… (30) Essentially, it was his dream & ambition to promote the building of an Australia-wide network of specialised specific-sport's-based villages to which he hoped the world would flock… (31) My interest was a little different in that...my concept was to concentrate more on the development of a network of nature-based recreations… …………………………………………………………………………………… (34) …the bulk of this information had been conveyed, in one way or another, to all of Farrow's agents, including the receiver, before the property was sold. …………………………………………………………………………………… (43) The material I will be providing to the Court of Appeal, as the substance of my appeal, will be essentially based on a critical analysis of comments & assertions made by Farrow's witnesses, extracted either from the court transcripts or from their affidavits. In the 22 April document, Mr Stone also said that he proposed to rely on the principles enunciated by the High Court in Warren v Coombs (1979) 142 CLR 531. He said that the Court of Appeal would be entitled to reach its own conclusion about inferences to be drawn from the primary facts found by Bainton J. In the document of 27 April, the following paragraphs and very many others are included: 44: It would be improper for the Court of Appeal to hold that fair play has already been served if I can clearly show that the allegedly solid evidence of Farrow's witnesses his Honour Justice Bainton based his findings of reliability on, is literally riddled with assertions based on erroneous observations & false assumptions. ……………………………………………………… 48: It would seem only fair that, in the pursuit of justice, especially since the very nature & substance of litigation is based on controversy, & where, in litigation, controversy by definition is the difference marked especially by the expression of opposing views, to which I would have thought we are all entitled, that the court should examine these "examples", to satisfy itself as to what was so specifically worrying his Honour about my evidence as to cause him to conclude I was an unreliable witness. ……………………………………………………… 85: Before I actually begin the process of embarking on a point by point analysis of the various affidavits & evidence of Farrow's witnesses & agents, on which my appeal will be based to support my assertions that the cumulative effect of the actions of Farrow & its agents including the receiver, was an act of extreme bad faith, I would ask the court to consider the following; ……………………………………………………… 94: …his Honour erred in that he should have found from the evidence that there were a number of ACTS OF BAD FAITH on the part of Farrow. 95: One of their earliest ACTS OF BAD FAITH was their sustained refusal to meet me on the site so that I might be enabled to explain the relationship between the actual council-approved plans, & how these plans related to the existing building works. 96: Notwithstanding the fact that the relationship between Mortgagee and Mortgagor has been formalised over the years where apparently there is no actual lawful obligation for the Mortgagee to visit the actual site, it is my belief that his Honour should have found that even if Farrow had at that stage already closed down their lending activities, it still would have been a commercially sensible act for Farrow to agree to my request for a site inspection, especially since they had lent me over 800,000 dollars, including capitalised interest in lieu of regular repayments. 97: Additionally, I believe his Honour erred in that he should have found that, … the smallest courtesy that Farrow could have extended to me was to inform me of their own imminent financial problems. 98: Had Farrow not IGNORED MY INTERESTS, & given me some warning about their imminent demise, perhaps I could have made investigations regarding alternative sources of finance to complete the building… 99: I submit that Farrow's refusal to meet with me, as they had agreed to, on several occasions, & as had been arranged by their own agents, the finance brokers, could be considered in itself as an indication of their ignoration of my interests act & bad faith (sic). I was also referred to some parts of the document entitled "Extension to the Supplementary Notice of Appeal". There is no satisfactory analysis in the 22 April document or that document of the evidence which demonstrates that the action of Farrow was undertaken in extreme bad faith. Despite several more hours of argument from Mr Stone, I am not satisfied that he has been addressing what I consider to be the issue before me. In the proceedings before Bainton J, the issue concerning exercise of bad faith by the mortgagee in the exercise of its power of sale was pleaded as follows: 12: In further answer to the plaintiff's contentions or in the alternative the defendant says that the plaintiff … owed a duty to the defendants with respect to amount secured by the said mortgage to the benefit of the plaintiff, to act in good faith and/or to take reasonably adequate steps to ensure a sale at a fair price when exercising a power of sale thereunder… [T]he plaintiff thereby owed a general duty of care to act reasonably in all the circumstances as to the interests of the defendant in the said land when attempting to and when effecting a sale of the defendant's land. 13: The defendant further say in answer to the plaintiff's contentions that the plaintiff exercised its power of sale aforesaid but failed to act reasonably in all the circumstances and further failed to act in good faith and/or take reasonably adequate steps to ensure a sale at a fair price in that it failed to take any or any adequate steps to: (a) ascertain the value of the land before selling it; (b) promote and market and/or to properly promote and market the land for sale; (c) direct its agents to apply a proper and reasonable marketing period in order to properly promote the defendant's land for sale; (d) direct its agents to properly inform the prospective purchasers as to the true and proper potential of the defendant's land; and (e) direct, supervise and control the agent so as to ensure that a proper and fair auction took place of the defendant's land. 14: By reason of the matters aforesaid the plaintiff sold the land for $580,000 in lieu of a price of $975,000 which latter price was the proper price for the said land. In what he has produced in writing and what he has said orally, Mr Stone has noticeably failed to address the matters alleged in paragraphs 12, 13 and 14 of the defence. There is no serious dispute, as I understand it, as to the existence of a duty as pleaded in paragraph 12. However, the real issue is whether there was a failure to act in good faith or a failure to take reasonably adequate steps to ensure a sale at a fair price. Bainton J addressed those matters specifically in his reasons for judgment and I have summarised his findings in my reasons of 24 March 1998. One of the issues before Bainton J, of course, was whether or not there was any damage suffered as a consequence of the breach of duty. For that purpose it was necessary for there to be evidence of the value of the property at the time of the exercise of the power of sale. Bainton J devoted some part of his judgment to consideration of those matters and, as I have said earlier, concluded that he preferred the evidence of the mortgagee's valuers rather than the evidence of the valuer called on behalf of Mr Stone. That evidence, however, is not relevant to the questions raised by paragraph 13 of the defence. It may be that if the sale value were so far below the true value, an inference of fraud or improper conduct might be drawn. That is not pleaded. Accordingly, the resolution of any dispute between the valuers has no real bearing on the question of whether or not there was a breach of the duty owed by the mortgagee in exercising the power of sale. That has some significance in terms of the issue for the Court of Appeal. It is at least arguable that Bainton J did not decide the question of breach of duty by the mortgagee on the basis of an assessment of the credibility of witnesses. His Honour recapitulated the steps taken by the mortgagee in the exercise of the power of sale and concluded that the power of sale was exercised in good faith. On the basis of the material which I have considered to date, I have been unable to form a view as to whether or not Mr Stone's appeal has any prospects of success. In my earlier reasons I indicated that I would not proceed to make a sequestration order so long as the appeal is pending, provided that the appeal is based on genuine and arguable grounds. I am satisfied that the appeal is genuine in the sense that Mr Stone has a genuine and passionate belief in the merits of his case and has a genuine perception that he has been hardly done by. That, of course, is not decisive. Any belief in the justice or substance of his case must be based on reasonable grounds. However, I have not yet had sufficient assistance from Mr Stone as to what I consider to be the true questions for the Court of Appeal. I am very much mindful of the fact that the petitioner is entitled to have finality in relation to this petition. On the other hand, I am not simply deciding the case inter partes. I am determining whether or not the status of Mr Stone should be changed, with the consequences that flow from the making of a sequestration order. I am also mindful of qualifications which might be imposed upon the general statement of principle to which I have referred. A variety of factors may have an important bearing on the exercise of the discretion which I have to adjourn the petition. For example, it may be influenced by evidence that the judgment debtor is, in any event, insolvent; or by the Court's forming the opinion that the appeal, although arguable, has little chance of success; or by the possibility that the costs of the appeal may significantly diminish the amount available for distribution to creditors and by other matters (see Adamopoulos v Olympic Airways (1995) ALR 525 at 526 per Pincus J). Notwithstanding those matters, I have formed the view that I should give Mr Stone one final chance to persuade me that there are some prospects of success on his appeal. However any further submissions which he makes, must be directed to the specific case which he sought to make out before Bainton J, namely, the case pleaded in paragraphs 12, 13 and 14 of the defence. I propose to stand the proceedings over to a date to be fixed in the reasonably near future to give Mr Stone a further opportunity of preparing written submissions directed to demonstrating that there are prospects of success in the Court of Appeal. Any such written submissions must identify grounds relating to the question of lack of good faith in exercise of the power of sale. They must be supported by any references to the evidence and must be accompanied by copies of any material referred to in the submissions. I also propose to give the petitioner the opportunity of making written submissions responding to Mr Stone's submissions and, if it wishes, setting out any further grounds which the petitioner suggests I should take into the account in the exercise of my discretion to adjourn further the hearing of the petition. I propose to fix a date for further directions only, with a view to determining whether it is appropriate for any further oral submissions to be made. I certify that this and the preceding seven (7) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett