Westpac Banking Corporation v Theodosi & Ors [2000] NSWSC 1074

New South Wales Supreme Court

CITATION : Westpac Banking Corporation v Theodosi & Ors [2000] NSWSC 1074 CURRENT JURISDICTION: Equity FILE NUMBER(S) : SC 50114/99 HEARING DATE(S) : 13 - 17 November 2000 21 November 2000 JUDGMENT DATE : 21 November 2000

Westpac Banking Corporation (Plt) Nicholas Theodosi (1st D) PARTIES : Panagiota Theodosi (2nd D) Theo Theodosi (3rd D) Elleni Theodosi (4th D) JUDGMENT OF : Brownie AJ

COUNSEL : P Dowdy (Plt) M Scheib (Def) SOLICITORS : Henry Davis York (Plt) Nicholas G Pappas & Company (Def) LEGISLATION CITED : Contracts Review Act 1980 DECISION : See paras 50, 51, 52

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST BROWNIE AJ

TUESDAY, 21 NOVEMBER 2000

50114/99 - WESTPAC BANKING CORPORATION v NICHOLAS THEODOSI & ORS

JUDGMENT

1 HIS HONOUR: The present litigation is between the plaintiff and the third and fourth defendants, the plaintiff having earlier obtained judgment against the first and second defendants. 2 The plaintiff seeks judgment for the possession of certain land at Cremorne, the subject of a mortgage granted by the third and fourth defendants to the plaintiff, and also a money judgment. 3 The third and fourth defendants concede that the plaintiff is entitled to succeed unless they establish an entitlement to relief under their cross-claim; that is to say, unless they establish either that it would be unconscientious for the plaintiff to enforce its legal rights or unless they establish an entitlement under the Contracts Review Act. 4 The first defendant is Nicholas Theodosi, commonly called Nick. The second defendant is his wife, Panagiota, commonly referred to as Penny. The third defendant is their son Theo, and the fourth defendant is Theo's wife Elleni. Nick and Penny are of Greek ancestry and migrated to Australia from Cyprus. Theo was born and educated in Australia. Elleni was also born and educated in Australia. Her parents were also migrants from Cyprus and of Greek ancestry. 5 To state matters briefly, the plaintiff seeks to enforce a facility agreement dated 11 July 1995 pursuant to which it agreed to provide to the four defendants credit facilities totalling $3,525,000. It took as security mortgages over four properties, including the Cremorne property. On the face of the documents the four defendants acted as principals or co-venturers, but Theo and Elleni assert that in a practical sense they should be treated as if they were sureties for Nick or for Nick and Penny, and as if the plaintiff knew or ought to have known that they were sureties. 6 In part this assertion arises from cultural and personal matters. They say that Nick was the head of the family and that he made all relevant financial and business decisions and that they simply acted in accordance with his expressed wishes without questioning his views. I accept that, generally speaking, they did treat Nick in this way and that he made all relevant decisions affecting the two Nowra properties which lie at the heart of the litigation. At the same time, lengthy, painstaking cross-examination made it clear that Nick did not completely dominate their lives. To the contrary, they embarked upon other business enterprises without his being involved in any way, and for some years he and Penny lived at Vincentia, near Nowra, while they lived, worked and conducted businesses in Sydney. 7 The assertion that Theo and Elleni should be treated as if they were sureties also depends in part on an analysis of a series of transactions over a period of years. Nick had what seems to have been quite a successful business called Nick's Chicks, selling fresh and cooked chickens. Originally the business was conducted by a partnership consisting of Nick and Penny, but later Theo became a partner, at least on paper. I think it is more likely than not that Nick made all the relevant business decisions concerning that business and that whilst, for taxation purposes, Theo was entitled to one-third of the nett profits, Nick treated the business as if it was his own and paid Theo a wage or the equivalent of a wage. 8 Nick also had interests as a property investor. In this capacity he decided in about 1987 to buy an office building in North Street, Nowra. Having worked out the details in his own mind, he then announced to his family that he proposed to buy the land in question in the names of himself, Penny, Theo and Elleni, and the rest of the family simply did as he asked. 9 The purchase involved borrowing money from the plaintiff, and the four defendants executed a mortgage over the North Street property as co-owners. The building situated there was then leased to the Commonwealth and two Commonwealth Departments occupied it, one of them the Commonwealth Employment Office or CES. All concerned regarded that investment as a sound one. 10 However, some time later the Commonwealth spoke of the possibility that the building was inadequate for its then needs and suggested that it might vacate the premises. To avoid this, Nick promised the Commonwealth that he would buy some land nearby in Graham Street, build an office block there and lease at least part of that new building to the Commonwealth. He did all that without consulting his co-owners of the North Street property. 11 A little later, he arranged to buy the Graham Street land, and build the office block, and in due course he leased it partly to the Commonwealth, partly to the State and partly to a coffee shop proprietor. He bought the land in the names of himself and Penny and he borrowed money from the plaintiff to enable him to buy the land and build the new office block. He and Penny mortgaged the Graham Street land to the plaintiff. The rest of the family simply did as he asked in relation to this transaction. 12 There were various other relatively minor sums of money borrowed from the plaintiff during the period up to 1991, but none of this detail seems to me to be significant. 13 By 1992 the position was that the plaintiff had advanced to the four defendants a total of more than $3 million. It held as security the mortgages over the North Street property granted by the four defendants; over the Graham Street property granted by Nick and Penny; and over some property at Vincentia where Nick and Penny lived. 14 In 1992 Nick decided to pay out the debt to the plaintiff and to re-finance with Metway Bank Limited. Again the rest of the family fell in with his wishes. Almost all of the money owing to the plaintiff was repaid out of the moneys then advanced to the four defendants by Metway. Metway took as security four mortgages over the three properties just mentioned and, in addition, a mortgage over the property at Cremorne by Theo and Elleni. This was the first occasion upon which Theo and Elleni had mortgaged that property in respect of any debt that was other than theirs personally. That is to say, on this occasion they gave a mortgage to Metway securing not just their own debt but also the debt owed by Nick and Penny. 15 The Metway loan was for a period of three years and it required only interest to be paid during that period. At the end of the three-year period Nick decided to go back to the plaintiff and again the family acted as he wished. At that time the interest rate charged by the plaintiff was lower than that charged by Metway. Again, the period of the loan was to be for three years and only interest was to be payable during that period. The four mortgages in favour of Metway were discharged and replaced by four fresh mortgages over the same four properties in favour of the plaintiff. 16 Some little time later the Commonwealth vacated the premises it occupied. Fresh tenants could not be found. There was no income or insufficient income available to meet payments due to the plaintiff. There was an event of default and the plaintiff took action. Because fresh tenants could not be found, the North Street property at least, but I think also the Graham Street property, declined quite sharply in value. At the present time, as I understand it, the plaintiff has sold or caused to be sold the North Street property, the Graham Street property and the Vincentia property, but there is still a shortfall of about $1.5 million. It seeks to recover this sum from Theo and Elleni and to enforce its mortgage over their property at Cremorne. 17 On the face of the documents brought into existence in 1995 each of the four defendants was a principal and a co-borrower so that, prima facie, none of the principles relating to sureties have any application. Theo and Elleni seek to escape from this by saying in substance that they were sureties for Nick or Nick and Penny and that the plaintiff knew or ought to have known of this. The plaintiff denies that they were in the position of sureties or quasi-sureties, but also says that even if they were, it did not know, and it could not reasonably be said that it ought to have known of this situation. 18 Exploring these issues led to an examination of the detail of earlier transactions. Just as all the documents relating to the 1995 events showed the four defendants as principals, so did all the documents relating to the 1992 transaction when the defendants borrowed from Metway. That is, on the occasion when the plaintiff advanced some $3.5 million to the defendants in 1995 the defendants were in the position where they were then indebted to Metway for approximately the same amount and they had already given mortgages in favour of Metway over the four properties mortgaged in 1995 to the plaintiff. 19 Similarly but not identically, when Metway advanced some $3.4 million to the defendants in 1992 it did so in circumstances where at that time the defendants were indebted to the plaintiff for approximately that amount of money and where the plaintiff held mortgages over three of the four properties in respect of which Metway took mortgages. To say all that is to say that, prima facie, there was nothing unconscientious in the plaintiff seeking the securities it obtained in 1995 or in enforcing them later on and, if it is relevant, there was nothing unconscientious in Metway seeking the securities it obtained in 1992 or in its enforcing those securities if the occasion for doing so had arisen. Similarly, and remembering the distinction between contracts and transactions, it is difficult to see how the Contracts Review Act can help Theo and Elleni now or how it could have helped them if Metway had attempted to enforce its mortgages obtained in 1992. 20 Theo and Elleni seek today to overcome these hurdles in various ways. They say that, as a matter of history, they were personally liable to the plaintiff only as the co-purchasers of the North Street property and for various relatively minor sums on their own personal account and that the bulk of the debt owed by the Theodosi family to the plaintiff prior to 1992 when Metway re-financed the debts consisted of the debts of Nick or of Nick and Penny. As a historical proposition this is correct. 21 Theo and Elleni then say that the plaintiff knew or ought to have known of this and that the plaintiff knew or ought to have known that Theo and Elleni acted as Nick wished and that they were in substance sureties for Nick or Nick and Penny. 22 In the voluminous records of the plaintiff which are in evidence one can find snippets of evidence showing that various officers of the plaintiff knew or believed various things, but I do not think one can spell out of this paper anything like the case contended for on this point. 23 More significantly, Theo and Elleni say the plaintiff knew or ought to have known that the 1995 transaction, like various earlier transactions, was an improvident one from the perspective of Theo and Elleni and that the plaintiff knew or ought to have known of this improvidence. 24 Again, there are pieces of evidence in the form of business records compiled by officers of the plaintiff in which those officers express various opinions. It is, I suppose it goes without saying, entirely natural that Theo and Elleni now collect these pieces of evidence and try to spell out from them the proposition for which they contend. 25 I do not think that the documentary evidence considered by itself supports this proposition. But more to the point, in my opinion, the evidence of Mr Keir powerfully demonstrated not that the plaintiff knew or ought to have known that the transaction was improvident from the perspective of Theo and Elleni and that the plaintiff knew or ought to have known about that, but that the contrary is true. 26 It was Mr Keir who, in 1995, recommended to his superiors that the transaction in question proceed. It is I think appropriate to state at some little length what he said. He described the proposal that the Theodosi family borrow money from the plaintiff as being one to provide bridging finance pending an anticipated improvement in the Nowra commercial property market. He fully acknowledged that even long-term amortisation was not possible from the cash flow, that is to say, from the money expected to be received from the rents and from such other income as the plaintiff then knew about. He said that, be that as it may, the properties were sound and had excellent tenancies. He said that with a fixed rate facility in place the plaintiff was assured of debt serviceability for the next three years. He said that there was some risk, albeit that it was fairly remote, that the CES would not exercise its option to renew its lease on the North Street property from August 1997. He said that if that occurred there should be twelve months' notice of that circumstance, which would enable the Theodosi family to secure another tenant. He referred to discussions held with the local manager of the CES indicating that it was highly unlikely that the CES would not renew its lease. He said that the CES was a "growing industry" in the Nowra area and that the current premises were the only ones suitable to their existing and perceived future needs. He noted that the CES had just spent some $500,000 on upgrading its offices and opined that, notwithstanding the vagaries of bureaucratic decision-making, it seemed unlikely that the CES would do that just to cater for its needs for the next two years. 27 He then said of the Government tenants in the Graham Street property that the leases had two and a half and four years respectively to run and that a similar scenario to the North Street property applied, in that there were no other suitable properties existent in the Nowra area that could accommodate these Government Departments. Later, he referred to the fact that the application for credit did not meet certain of the plaintiff's policy guidelines but nevertheless he thought that the risk/reward ratio was acceptable and recommended that the transaction proceed. 28 I accept Mr Keir as a truthful and reliable witness. Indeed, he seemed to me to be unusually impressive. 29 It is now contended on behalf of Theo and Elleni that through Mr Keir the plaintiff knew of their position of special disadvantage. They say that this position of special disadvantage for the purposes of this branch of the law consists essentially of a combination of the significant risks attendant upon the 1995 transaction, which risks were unknown to them; to the existence of a relationship between them and Nick such that they were accustomed to doing what Nick asked; and to the fact that they were borrowing from the plaintiff not just the amount that they had originally owed the plaintiff but also some additional $2 million which originally had not been their debt. 30 As to the risks mentioned, Theo and Elleni point to a number of factors. Some of these have been dealt with in the report of Mr Keir that I have mentioned. They point to the possibility that the Commonwealth would vacate the premises. There are certainly passages in the plaintiff's business records which have been tendered which support that view, that is to say, which support the view that someone viewing the matter in 1995 might have thought constituted a significant risk. 31 However, in practical terms no one who considered the matter at the time seems to have thought that the risk was very great. Mr Keir plainly thought to the contrary and I cannot see any sensible basis for criticising him or the plaintiff for coming to the view that he came to on the material that was then available to him in relation to this topic. Hindsight is not to be allowed to prevail over the application of commonsense, viewing the matter at the time of the transaction. 32 Another aspect of this claim that there were significant risks and a position of special disadvantage relates to the decision to transfer the debt from Metway to the plaintiff. It was submitted that the transaction was improvident on that account also. 33 It seems that at the time the plaintiff proposed to charge one per cent per annum less by way of interest rate than Metway proposed, that is to say, $35,000 per year. As against this, certain fees were incurred in relation to the transaction and the capital debt was, at least largely in consequence of this, increased by $100,000. That circumstance or group of circumstances viewed by itself does not seem to me to make the transaction improvident. If one contemplates the fact that Nick had banked with Westpac for something like forty years and was just going back to Westpac after an absence of three years, or perhaps a partial absence of three years, I should think it likely that anyone who viewed the matter at the time would have thought it likely that the relationship between the Theodosi family and the plaintiff might well have continued for more than three years. Perhaps it was realistic to hope that the plaintiff's interest rate might continue to be lower than Metway's. In any event, these circumstances do not seem to me to lead to the view that the transaction was an improvident one from the perspective of Theo and Elleni. 34 Another matter referred to was the proposition that there had been difficulties in servicing the Theodosi family's interest payments to Metway and expressions of anxiety that there might be such servicing difficulties in future. 35 Once again, the case urged by Theo and Elleni seems to me to take its main strength by taking expressions of opinion or records of fact out of the plaintiff's business records and then seek to elevate a theory from those documents, putting to one side relatively inconvenient contexts. 36 As Mr Keir explained, and as I accept, many of the supposed difficulties of servicing the loan debt were timing difficulties rather than a true lack of funds in the sense more commonly encountered. There was, it seems, a fairly regular pattern whereby the dates when interest payments were payable to Metway preceded rather than succeeded the dates upon which rent was paid, so that on repeated occasions the Theodosi family lacked the funds to make prompt payments to Metway. However, over the period of the Metway loan of three years the debt did not increase. Rather, there were repeated short-term deficiencies which were met. 37 When Mr Keir recommended to his superiors entry into the 1995 transaction he proposed a practical solution of including in the overall credit facility an overdraft arrangement of $25,000 to cover this situation and to avoid the trouble, and no doubt the expense, of having repeated applications for short-term credit to meet these timing difficulties. There are other passages in the evidence, that is to say in the plaintiff's business records, speaking of possible difficulty in servicing the loan. But, viewing the matter as a whole, these were no more than matters taken into consideration. 38 Mr Keir, and it seems his superiors, took the view that the transaction proposed in 1995 was a sound one, both from the plaintiff's perspective and from the perspective of the borrowers. Whether one applies the principles relating to unconscientious conduct or the provisions of the Contracts Review Act, it does not seem to me that Theo and Elleni can take any real comfort from any of these matters. In the relevant legal sense, Theo and Elleni were not in a position of "special" disadvantage. 39 Another matter that was referred to earlier, although not in final address, was that the plaintiff had treated the four defendants as partners when in truth they were not. There was in fact, it seems, a partnership concerning all four defendants relating to the North Street property, but no other relevant partnership. It seems that that partnership was called the Nowra partnership and that Theo and Elleni, at least for taxation purposes, took drawings from the nett profits of the Nowra partnership. In any event, it does not seem to me that there was anything relating to those circumstances which would justify a finding of unconscientious conduct or of injustice. 40 Other matters were relied upon in relation to the Contracts Review Act. In particular, as usually happens in these cases, I was taken through the relevant clauses of s 9(2). As section 9(1) makes clear and as the early words in s 9(2) make clear, the ultimate question is one to be found within the four corners of s 7(1). 41 For the reasons I have given, it does not seem to me that there was anything unjust in the contract in question, that is to say, the credit facility agreement of July 1995. Theo and Elleni did not contend that there was anything unjust in any particular provision of the contract. Rather, they said it was the contract itself which was unjust. The test is of course whether it was unjust in the circumstances relating to the contract at the time it was made. 42 The circumstances to be considered include the ethnicity of Theo and Elleni and their cultural and family background. As I have said, I accept that, at least in relation to the Nowra properties now in question, they did as Nick asked them to do. In effect, they put themselves entirely in his hands. 43 I should record that I accept each of them as honest and generally reliable witnesses, and that I also accept Nick as an honest witness, although I think some parts of his evidence are unreliable, perhaps because he blames himself for what has happened. 44 One matter which was urged on behalf of Theo and Elleni was that at or before the time of the entry into the credit facility agreement of July 1995 the plaintiff should have insisted that they receive independent advice, and they contended that the advice given to them by their accountant, Mr Souleles, was not independent advice. Perhaps this is an apt description in that I think it likely that Mr Souleles was more properly described as the accountant for Nick. He acted formally for the family and did accounting work for them generally, but I am inclined to think that he probably put Nick's interests first. 45 The difficulty with the contention that I now deal with is that it does not seem just or reasonable to say that the plaintiff ought to have known of all of the relevant circumstances or that it ought to have done anything along the lines contended for. 46 So far as the plaintiff was concerned, whilst it dealt with Nick and Nick alone on almost every single occasion when any member of the Theodosi family was involved, it had no real reason to think that Nick was doing anything at all improper so far as concerned the rest of his family or that he was in a position akin to that of someone exercising undue influence over them or anything along those lines. 47 Looking at the plaintiff's records in evidence as a whole for myself, I should have thought it perfectly reasonable and just that the plaintiff knew Theo and Elleni as reasonably ordinary people. No doubt the plaintiff should be taken to have known of their ethnicity and that they were generally content to leave things to Nick. But that does not mean that the plaintiff acted unconscientiously, nor does it seem to me to mean that the contract was unjust within the meaning of s 7. 48 Further, even if a different view was taken, I do not think it would be just to grant relief for the purpose of avoiding as far as practicable an unjust consequence or result. I say that because immediately before July 1995 the four defendants owed Metway some $3.4 million and they had mortgaged all of the properties in question to Metway. The contract entered into in July 1995 was not an unjust one in the circumstances related to that contract at the time it was made. 49 I did not call upon the plaintiff's counsel, but I was handed some written submissions. I simply record that what is set out in paragraph 12 of that document seems to me to be probably correct. I also record that, given the findings I have made, it is not necessary to consider the argument based upon s 6(2) of the Contracts Review Act. I propose to dismiss the cross-claim and grant relief generally as claimed by the plaintiff. 50 I give judgment for the plaintiff against the third and fourth defendants for $1,556,579.98. I make orders in terms of paragraphs 2, 4 and 6 of the further amended summons, order 2 being as against the third and fourth defendants only. 51 I direct that the writ of possession lie in the Registry for 28 days. 52 The plaintiff's costs should be assessed on an indemnity basis but credit should be given for all amounts already debited against the defendants. **********