New South Wales Supreme Court CITATION : Westpac v Lakajev [2000] NSWSC 603 FILE NUMBER(S) : SC 11453/92 HEARING DATE(S) : 19/06/00, 20/06/00, 21/06/00, 22/06/00, 26/06/00, 27/06/00 JUDGMENT DATE : 27 June 2000 Westpac Banking Corporation - Plaintiff PARTIES : George Lakajev - First Defendant Anna Lakajev - Second Defendant PTL Investments Pty Limited - Third Defendant JUDGMENT OF : Brownie AJ at 1 COUNSEL : Mr S.D. Robb QC/Mr D.R. Pritchard - Plaintiff Mr N.L. McCaffery - Defendants SOLICITORS : Corrs Chambers Westgarth - Plaintiff Crichton-Brownes - Defendants CATCHWORDS : No question of principle CASES CITED : Henry Roach Petroleum Pty Ltd v Credit House (Victoria) Pty Ltd [1976] VR 309 Pendlebury v The Colonial Mutual Life Society Limited (1913) 13 CLR 676 at 683 DECISION : 1. Judgment for the plaintiff against the first, second and third defendants in the sum of $1,561,100.68; 2. Judgment for the plaintiff against the first and second defendants for possession of the land mentioned in paragraph 2 of the Amended Statement of Claim; 3. Leave to issue a Writ of Possession in respect of that land; 4. Dismiss the first and second cross-claims; 5. Order the defendants to pay the plaintiff's costs; 6. Stay execution for 28 days; 7. Grant leave to any part to apply, upon two days' notice to the others, if any question arises as to the calculation of $1,561.100.68. THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION BROWNIE AJ TUESDAY, 27 JUNE 2000 11453/92 - WESTPAC BANKING CORPORATION v GEORGE LAKAJEV AND OTHERS JUDGMENT HIS HONOUR: 1 The first and second defendants, Mr and Mrs Lakajev, are shareholders in and directors of the third defendant, PTL Investments Pty Ltd. It seems that the first defendant is the sole decision maker. 2 The third defendant bought some land at Devonport, in Tasmania, in 1989 for $360,000, intending to subdivide it and resell it. So far as the evidence shows, the first defendant's prior experience was as a panel beater and he had then recently retired. The third defendant borrowed from the plaintiff the whole of the purchase price and later some further money used to enable the third defendant to develop the land. The plaintiff took as security: first, guarantees from the first and second defendants; secondly, a mortgage of the Devonport land; thirdly, a mortgage of what I take to be the home property of the first and second defendants at Mona Vale in New South Wales, and fourthly, a mortgage of another Mona Vale property from where the first defendant had been carrying on his panel beating business. 3 The Devonport land consisted of some 50 acres. It was situated near the western outskirts of the township of Devonport. The defendants' proposal involved carrying out certain development work and ultimately subdividing the land into about 170 lots in nine stages. The proposal varied from time to time and even in its original form it is not easy to grasp immediately or to describe it in words without reference to diagrams or plans. In its original form the proposal involved the development and subdivision initially of a part of the land called the stage 1 land, consisting of 26 lots. The development work that was needed in order to obtain development approval from the local council was carried out, as well as some preliminary development work on future stages. All this work proceeded rather more slowly than had been predicted, but by December 1989 stage 1 was formally opened and its 26 lots put on the market for sale. Energetic steps were taken to market these lots and nobody offers any criticism of these steps. However, the sad fact remains that by the end of 1991 only six of the 26 lots had been sold. 4 It is common ground that the defendants were extraordinarily unfortunate in relation to the timing of the venture. When the stage 1 land was put on the market, Australia was in the midst of what some people call the recession we had to have and that recession had a particularly severe effect in the Devonport area. The proposed Wesley Vale pulp mill project had been abandoned and this abandonment, together with the air pilots' strike, the more general recession and other circumstances peculiar to the north west area of Tasmania, resulted in the market for land appropriate for housing in the Devonport district being extremely depressed. 5 In the event, the plaintiff entered into possession of so much of the Devonport land as remained unsold, and it eventually sold that land as mortgagee. It now sues the defendants for the balance owing by the third defendant and it also sues the first and second defendants for possession of their Mona Vale residential land. In fact, the plaintiff has already had a consent judgment against the second defendant for possession of this land, but she resists the claim for debt and the plaintiff and the first defendant are at issue over the question of possession of the Mona Vale land. 6 The defendants resist the plaintiff's claims solely by reference to their cross-claims, which are not materially different. One is brought by the first and second defendants and the other by the third defendant. By reference to various legal principles, they say, in summary, that the plaintiff sold the Devonport land at an undervalue. Questions as to the value of the land and as to the steps taken to sell it are at the heart of the debate, but wider questions were canvassed in evidence, going mostly only to supply background information and going to the credit of the first defendant and of various witnesses called for the plaintiff. 7 According to the first defendant, Mr Elliss, who was then the manager of the plaintiff's Devonport branch, made promises to the effect that the plaintiff would extend credit to the third defendant virtually unlimited in both time and amount to enable the third defendant to develop and sell the entire estate, that is, all nine stages. Mr Elliss denies this, but I prefer his evidence. First, he has a mass of documentary contemporary records that are generally supportive of his account, whereas the first defendant has none. Of course, this is a commonplace, and the mere presence of such records are sometimes an occasion for a degree of cynicism. That is not this case. The records here do seem to provide a measure of corroboration for Mr Elliss on significant points. 8 Secondly, the first defendant was not an impressive witness. Recognising that cultural matters and other personal characteristics may have played a real part, he displayed an unwillingness to answer questions that he appeared to regard as possibly hostile and he seemed evasive. 9 So far as I can tell, Mr Elliss was a satisfactory witness. He impressed me as a fundamentally decent man who had displayed a good deal of sympathy for the first defendant in his predicament and who had, in fact, granted and recommended the grant, to the defendants, of a lot of leeway. 10 Another sad but undeniable fact is that by the end of 1991 the first defendant had made many predictions as to what was about to happen by way of the sale of the lots in stage 1 and the reduction of the third defendant's debt to the plaintiff and few, if any, of those predictions had been fulfilled. Interest rates were then about 20 per cent per annum. None of the defendants had any apparent source of income. The land was not selling and nobody came forward with further capital, so that the rapidly accumulating interest debt was at the risk of absorbing the whole of the defendants' equity in the venture. No financier is likely to stand by indefinitely in those circumstances. Further, the estimates given by the first defendant to Mr Elliss in the early part of 1989, as to the costs of the development, had been demonstrated to be overly optimistic. 11 In a sense, all this is of little moment, in that the real issue in the case is whether, when the plaintiff sold so much of the Devonport land as remained unsold, it did so at an undervalue. 12 The defendants put their case under a number of legal rubrics but in a factual sense not much turns on this. Factually they rest their case ultimately upon four propositions spelt out in paragraph 11 of the amended cross-claim. That is, all their legal propositions can be said to be factually based upon the same set of mixed factual and legal matters. These propositions are as follows: (a) the plaintiff had to actually and subjectively consider the interests of the defendants before exercising the power of sale, and it did not; (b) the plaintiff had to obtain a report from a valuer before exercising the power of sale, and it did not; (c) the plaintiff did not advertise the property properly; (d) the plaintiff re-subdivided the land in a way that did not pay proper regard to the interests of the defendants. I will refer to these four propositions as the strands in the defendants' case. Before going to the detail of this, I should recount briefly what it was that the plaintiff did. 13 First, it arranged an auction sale held on 29 February 1992, at which the 22 lots, part of stage 1 then unsold, were put up for sale. Four of those lots were sold on that day and another eight within a short time thereafter. Those twelve lots fetched between $16,000 and $17,000 each. At the same time another lot known as lot 3 in the Sealed Plan 2073 was sold for $18,000. 14 The plaintiff acted upon the advice of Mr Roberts, a Devonport estate agent, and Mr Michell, a Devonport surveyor, in relation to its general plan at this time. That general plan involved the auction sale arranged for 29 February 1992 and then calling for tenders for the sale of the balance of the land. If one uses the original plan for subdividing the whole of the land, this involved calling for tenders for the land in stages 2 to 9 and for so much of the lots in stage 1 as remained unsold after the auction sale, and the negotiations that followed the auction. 15 However, the use of that terminology is not entirely helpful in that, on the advice mentioned, the plaintiff effectively abandoned the plan to develop the whole of the land over nine stages. Strand (d) of the defendants' case attacks that abandonment. 16 In 1991 the first defendant obtained a valuation report from Mr Jones, a Hobart valuer. Mr Jones' instructions were to value each of stages 2 to 9 and the 22 lots then unsold in stage 1. He did this. If one reads his report quickly, one might obtain the impression that Mr Jones valued the totality of the unsold land at almost $2 million. But this impression would be quite erroneous, and this false impression seems to have given rise to some of the events now debated. I should say immediately, in defence of Mr Jones, that he did what he was instructed to do and that if one reads his report carefully, one can see from his report that he made it clear what his opinion actually was and his oral evidence made it even clearer. 17 Mr Jones was of the view that the total number of lots in the proposed subdivision, that is, stages 1 to 9, or about 170 lots, constituted enough vacant land to supply Devonport with all the building sites needed over the period of 10 to 12 years following on from 1991 and that a realistic assessment was that an owner of the whole of the land from stages 1 to 9 might expect to sell about one lot per month over the whole of that period. This meant, of course, that the owner would have to allow for holding costs over that period of 10 to 12 years. However, in accordance with his instructions, Mr Jones valued each of nine fragments of the land separately. Thus, for example, he valued the land in stage 2 at $165,000. He arrived at that figure by saying that over time the owner might expect to sell 22 lots at $27,500 per lot. He then made various deductions, including holding costs and came to the figure of $165,000. 18 Of particular significance now is the fact that he allowed for holding costs of some $21,000 representing one year's interest at 13 per cent. The figure of 13 per cent was his then estimate of how interest rates were likely to fall and the figure of one year represented an average of the holding costs on the 22 lots, assuming that they would be sold progressively over about two years. He valued the other stages, 3 to 9, and the unsold land in stage 1 by a generally similar method. 19 However, as he made crystal clear, it would be utterly wrong to assume that any purchaser who intended to develop the whole of stages 1 to 9 could possibly work on the assumption that the holding costs for stage 2 were only about $21,000 and that at the same time the holding costs for the other stages were similarly limited. Only about one lot per month in the entire estate, that is, stages 1 to 9, could be expected to be sold and it would take 10 to 12 years to sell all of the land. That is, the valuation Mr Jones then gave for any one of the stages was only accurate if it was assumed that none of the land in the other 8 stages was to be on the market for sale during the period of the sale of the land in the one stage under consideration. Mr Jones' report would leave the careful reader, experienced in this area, under no illusion at all, but not everyone who read it answered that description. 20 The evidence demonstrates amply the awkwardness of the defendants' position by late 1991. While people like Mr Jones expected interest rates to fall, this was by no means certain. The defendants had done all that could reasonably be expected to done to sell the land in stage 1, including holding an auction sale themselves, but they had only sold six out of 26 lots in some two years. Within the small community of Devonport these circumstances were well known and the chances of selling the land, at whatever its theoretical value might be, were receding with the passage of time. Local people knew that the land was not selling. Part of the plaintiff's case, which I accept, is that any judgment made now as to the value of the land sold by the plaintiff must take these circumstances into account. 21 When, therefore, the plaintiff put up the 22 unsold lots in stage 1 for auction on 29 February 1992, and sold some of those lots either that day or in the succeeding weeks, I accept that the prices then obtained were the best prices likely to be obtained, at that time, in the market. It is true that the prices obtained were less than the prices that Mr Jones thought should have been obtained, but subject to the questions about the measure of the plaintiff's duty, to which I will come in a moment, the lots were put up for sale at an auction once by the defendants and once by the plaintiff and they fetched prices that were not very far below the prices that the defendants might reasonably have hoped for, on the advice of Mr Jones. That advice is entitled to respect, but not to unquestioning acceptance, and his opinion seems to me to have been demonstrated to have been over optimistic by the facts shown by the auction sales and by other events. 22 In address the plaintiff submitted that if one added up the various values attributed to the several fragments of the land by Mr Jones, added something for the value of lot 12 in the stage 1 land, apparently inadvertently overlooked, and then subtracted the appropriate costs, the best that the defendants could hope for was damages of the order of about $25,000 and interest. Given that the plaintiff seeks some $1.5 million, and possession of the defendants' home, this does seem to make the litigation somewhat curious, but the parties are, of course, entitled to a judgment on the issues litigated in the usual way. 23 In relation to the question of the value of the land, I put aside the opinion of the first defendant. An examination of the history of that shows that at all times after the initial rush of enthusiasm he asked for prices that were unrealistically high and that in effect he refused to face reality. Additionally, I doubt that he has been shown to be qualified to express that kind of opinion. In short, then, I accept that the prices fetched at and just after 29 February 1992 were reasonable prices, subject still to the question of the plaintiff's breaches of duty alleged by the defendants. 24 As to strand (a) of the defendants' case, the defendants point to the diary entry of Mr Elliss of 10 September 1991, recorded at page 253 of Mr Elliss's affidavit, in which there is a reference to the expression "Fire Sale." This was explored in cross-examination [see particularly transcript page 163, lines 21 to 46 and page 164, line 56 to page 165, line 20.] These passages do not establish the proposition now contended for, namely, that the plaintiff did not have regard to the interests of the defendants. 25 In the course of submissions the legal concepts became blurred, presumably as part of the attempt made to squeeze the case into the legal framework hoped to be available, but in any event, I consider that this part of the defendants' case fails on the facts. The evidence does not establish the legal proposition contended for. Further, the evidence of Mr Elliss summarised earlier and taken as a whole seems to me to entirely negate this aspect of the defendants' case. 26 As to strand (b), the defendants pointed to the judgment of Lush J in Henry Roach Petroleum Pty Ltd v Credit House (Victoria) Pty Ltd 1976 VR 309. At 313 his Honour said of a mortgagee, "He is bound to take reasonable steps to ascertain the value before selling", that is, the value of the mortgaged property. According to the defendants now, this means that the plaintiff here had to obtain a valuation from a valuer and not just an expression of opinion from a real estate agent, which is what it did before selling. Lush J did not say this, and counsel could not point to any reason in principle why the law should so provide. Lush J cited the judgment of Griffith CJ in Pendlebury v The Colonial Mutual Life Society Limited (1913) 13 CLR 676 at 683, but all that the Chief Justice said there on the present point was, "It is not disputed that if a mortgagee sells by private contract he is bound to take reasonable means to ascertain the value before selling and the same rule applies, in my opinion, to a sale by auction." 27 I reject the submission that the law is as contended for and I reject the proposition that what the plaintiff did in the circumstances amounted to a breach of the relevant legal duty. I also consider that it would be difficult to see how any loss followed from any such breach if, as happened here, the plaintiff obtained the opinion of a valuer after rather than before the auction sale and the valuer supported the plaintiff's case generally. 28 As to strand (c), the defendants' case boils down to a complaint about the adequacy of the advertising campaign in fact embarked upon. As to that question, the defendants found their case on the opinion of Mr Robson, an estate agent at Penguin, which is not far from Devonport. Mr Robson's starting point seems to have been the proposition that in the area a rule of thumb is that it is appropriate to spend one per cent of the expected gross sale price on advertising; and, misreading the report of Mr Jones, he therefore opined that $90,000 should have been spent on advertising. This sum includes advertising, not just in respect of the auction sale, but also the subsequent sale by tender. Nothing turns on this. 29 In fact, the plaintiff budgeted to spend $3,500, but Mr Roberts' company made a contribution bringing the total up to a little over $4,000. The question is whether the advertising campaign, financed by the these sums was sufficient. On the whole, I conclude that it was. When one looks at the whole of the evidence, including all that had been done in the period of more than two years preceding the start of the advertising campaign, at what was done in the campaign and at the people likely to be influenced to buy, and puts all this into the context I have mentioned, I do not think it is realistic to say that what was done was inadequate. Nor does there seem to me to be any real bite in the criticism that the sale was described as a mortgagee sale. It was, of course, such a sale, but as the evidence makes clear, a significant proportion of the population of Devonport, including, I am inclined to think, most people who might have been interested in buying a lot or advising someone interested in buying a lot, knew already of the misfortunes of the defendants. Further, one might ask rhetorically, what else a mortgagee might be asked to do in this regard, particularly when the mortgagor and its guarantors were not cooperating. 30 I do not overlook the evidence of Mr Robson, but with all due respect, he was barely qualified to express an expert opinion on the point and his approach both seemed theoretical rather than practical, and to have been based upon not only a misunderstanding of the value of the land, but a lack of understanding about what had happened in the preceding two years trying to sell it. Moreover, it seemed to me that he approached the problem from the perspective of an estate agent interested in selling and obtaining a commission, leaving it to his client to then incur whatever expense the agent recommended, and I do not think that he gave sufficient regard to the circumstance that in 1991 most of the land in question could really only have been sold in broad acre parcels. 31 As to strand (d), the defendants say, principally through Mr Jones, that the plaintiff erred in selling the land, lot 3, in Sealed Plan 2073 because that land was needed to provide access to the land in stage 9 and this meant that the stage 9 land was then unlikely to sell for its true worth. 32 Generally speaking, the 50 acres comprising lots 1 to 9 was bounded on the south by Don Road, and access to Don Road was limited. The mechanism for this limitation is not established by the evidence, but there was no dispute about it. The land in stage 9 was situated in the south eastern corner of the 50 acres. A street called Surrey Street ran off Don Road, towards the north. On the western side of Surrey Street there was a strip of land roughly 40 metres wide and 100 metres long divided up into 6 lots, being lots 1 to 6 in Sealed Plan 2073. Lot 3 in that plan formed part of the land which the third defendant bought in 1989, and the defendants' proposed plan of the subdivision included using this lot 3 as a means of access to the stage 9 land, situated immediately to the west of this lot 3. 33 However, the plaintiff sold this lot 3 in 1992, giving rise to the criticism that the stage 9 land could not thereafter be accessed from Surrey Street, so that it was less attractive to potential buyers, particularly those who might wish to subdivide it and resell it. In this context the defendants attached significance to the fact that the council had, it seems, given approval, the detail of which is not clear, for the use of the stage 9 land in a sub-divided fashion, access to that land being gained by a proposed road to be built across the land in lot 3 in Sealed Plan 2073. 34 There were two other ways in which the land in stage 9 might have been accessed, either by building a road running generally from the northern boundary of the 50 acres towards stage 9, or by obtaining council permission to obtain access from Don Road. In the event, a body called Assemblies of God Christian Family Centre Incorporated tendered for the stage 9 land and some adjacent land. The plaintiff negotiated an increase in the tender price and then sold the stage 9 land and the adjacent land to this body, and then the body obtained council permission to obtain access from Don Road. 35 If the realistic position was that a developer was likely to buy the stage 9 land, the defendants' contention would have real merit, but in truth, in Devonport, in 1992 and shortly thereafter, the stage 9 land was unlikely to be of real interest to a developer. The market for housing then was simply not sufficient to make this land an attractive proposition for such a buyer. I think that if one looks at the whole of the evidence, one can see that the defendants, and later the plaintiff, made determined efforts to sell the land and that Mr Jones' views and the first defendants' views were, overall, optimistic. One should not allow the theory of valuation to overwhelm the reality of the market place. 36 Further, the evidence does not justify a conclusion that any loss followed from the sale of lot 3 in Sealed Plan 2073 or that any loss of a compensable nature followed from any supposed breach of duty by the plaintiff. Generally speaking, the plaintiff obtained prices which were as good as the state of the market permitted. The plaintiff acted, as I have said, upon the advice of Mr Roberts and Mr Michell and that advice seems to me to have been reasonable, and the conduct of the plaintiff relying upon it also seems to me to have been reasonable. 37 The plaintiff called two valuers as witnesses, Messrs Eastaugh and Johnson. The valuation evidence is voluminous and there is not much profit in going into its detail but, generally speaking, I prefer the evidence of these two valuers. Mr Jones seems to me to have put theory ahead of experience, to some extent at least, and to have founded part of his opinion upon political considerations that he regarded as reflecting on land values. But I do not think that everyone would agree with the political views he expressed. All three valuers were impressive but Messrs Eastaugh and Johnson seemed to me to be more thoughtful and neutral. 38 I consider that the plaintiff is entitled to succeed and that the cross-claims should be dismissed. 39 I give judgment for the plaintiff against the first, second and third defendants in the sum of $1,561,100.68. 40 I give judgment for the plaintiff against the first and second defendants for possession of the land mentioned in paragraph 2 of the amended Statement of Claim. 41 I give leave to issue a writ of possession in respect of that land. 42 I dismiss the first and second cross-claims. 43 I order the defendants to pay the plaintiff's costs. 44 I stay execution for 28 days. 45 I grant leave to any party to apply, upon two days notice to the others, if any question arises as to the calculation of the sum of $1,561,100.68. ******** Last Modified: 09/26/2000 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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