Teachers v Julian [2001] NSWSC 231

Reported Decision : (2001) NSW ConvR 55-990

New South Wales Supreme Court

CITATION : Teachers v Julian [2001] NSWSC 231 FILE NUMBER(S) : SC 20762/97 HEARING DATE(S) : 13/11/00, 14/11/00, 15/11/00, 16/11/00, 17/11/00 JUDGMENT DATE : 5 April 2001

PARTIES : Teachers Health Investments Pty Ltd v John Alan Julian & Ors JUDGMENT OF : James J at 1

D Officer QC/A Ogborne - Plaintiff COUNSEL : G Curtin/G Gemmell 1and 2 Defendants G Inatey SC/J Gooley - 3 and 5 Defendants Bailey Meadows - Plaintiff SOLICITORS : Corrs Chambers Westgarth - 1 and 2 Defendants Phillips Fox - 3 and 5 Defendants CATCHWORDS : Professional negligence - contributory negligence - Limitation Act - when cause of action accrued - interest on damages. DECISION : Verdict for the plaintiff against all defendants

THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION

JAMES J

Thursday 5 April 2001

20762/97 - Teachers Health Investments Pty Limited - v - Julian & Ors

JUDGMENT 1 HIS HONOUR: In these proceedings the plaintiff Teachers Health Investments Pty Limited sued five defendants, John Alan Julian (the first defendant), Mark Gregory Squire (the second defendant), Marc Richard Bruce (the third defendant), Robert Meredith (the fourth defendant) and Ian Richard Bruce (the fifth defendant). 2 The plaintiff is the present trustee of the New South Wales Teachers Federation Health Society ("the Society). On 8 August 1991 the then trustees of the Society advanced the sum of $450,000 to Peter Gordon Wynne ("Mr Wynne"), on the security of a mortgage ("the mortgage") for a term of three years over a property known as 34 Charleroi Road, Belrose ("the property") granted to the trustees by Mr Wynne's wife, Mrs Kerry Anne Wynne. On 16 December 1991 the plaintiff became the trustee of the Society and on 20 August 1992 the mortgage was transferred to the plaintiff. It will be convenient sometimes in this judgment to refer to the trustees or trustee for the time being of the Society simply as "the Society". No payment was ever made of any money due under the mortgage. On 18 March 1993 court proceedings were brought by the plaintiff claiming possession of the property and on 29 March 1993 other court proceedings were brought by Mrs Wynne seeking to set aside the mortgage. Both sets of court proceedings were heard by Hunter J, who on 15 September 1994 held that the mortgage should be conditionally set aside. An appeal was brought by the plaintiff from Hunter J's decision and Mrs Wynne cross-appealed. Ultimately, on 16 July 1996 the Court of Appeal dismissed the appeal and allowed the cross-appeal and made orders setting aside the mortgage unconditionally and dismissing the proceedings for possession. 3 On 8 August 1997 the plaintiff commenced the present proceedings in which the plaintiff claims damages against the various defendants in relation to the transaction in which the advance was made and the mortgage was taken ("the mortgage loan transaction"). 4 The first defendant is a solicitor who acted as solicitor for the Society in the mortgage loan transaction. The second defendant was Mr Julian's partner at the time of the mortgage loan transaction, Mr Julian and Mr Squire then practising under the firm name of Boulton Rex Julian. It will be convenient sometimes in this judgment to refer to Mr Julian and Mr Squire as "the solicitors". 5 At the time of the mortgage loan transaction the third defendant was an accountant practicing in partnership with the fifth defendant, who is his father. The third defendant was the author of a letter dated 7 June 1991 in which a representation was made about the amount of Mr Wynne's income. It will be convenient sometimes in this judgment to refer to the third defendant and the fifth defendant as "the accountants". 6 At the time of the mortgage loan transaction the fourth defendant was a valuer. On 26 June 1991 the fourth defendant made a valuation report valuing the property at $750,000. It will be convenient sometimes in this judgment to refer to the fourth defendant as "the valuer". 7 Each of the three groups of defendants, that is the solicitors, the accountants and the valuer brought cross-claims against the other two groups, claiming contribution or indemnity in respect of any verdict obtained by the plaintiff. 8 At the hearing the evidence for the plaintiff consisted of two witness statements and oral evidence by Mr Frank Gehrmann, who since 1982 has been the financial manager of the Society and the secretary of the plaintiff; a witness statement and oral evidence by Mr Dudley James Wrigley, the general manager of the Society; an affidavit by the plaintiff's solicitor largely concerned with the costs incurred or ordered to be paid by the plaintiff in the litigation with Mrs Wynne; a report by a firm of accountants BDO Nelson Parkhill (Mr Mentzalis), commenting on the conduct of the third defendant and the fifth defendant in relation to the mortgage loan transaction; a witness statement and a report by a valuer Mr Whealing commenting on the fourth defendant's valuation of the property; some answers by some of the defendants to certain interrogatories administered by the plaintiff; and a number of documents. 9 A witness statement by Mr Julian on behalf of the first and second defendants was initially admitted into evidence at the hearing but was then, on the application of counsel for the first and second defendants, withdrawn from evidence. The only evidence ultimately adduced by the first defendant and the second defendant in their own case consisted of some documents. 10 A witness statement by the third defendant was admitted into evidence and the third defendant also gave oral evidence. 11 There was no appearance at the hearing by or for the fourth defendant. At the commencement of the hearing a solicitor informed me that he had been acting for the fourth defendant, that the fourth defendant was aware of the hearing date but that the solicitor had not received any instructions from the fourth defendant to appear at the hearing. There was no evidence adduced on behalf of the fourth defendant. 12 At the hearing there was no dispute about any of the following matters. 13 In 1991 the Society was a registered health insurance fund, whose principal function was to provide health insurance services to its members. The Society held a considerable amount of accumulated assets and members' funds, which needed to be securely invested. Most of the Society's investments were in secure short term investments. However, some of the Society's investments were in first mortgages of real estate. 14 From about May 1984 Mr Gehrmann was responsible for managing all investments made by the Society, including mortgage investments. Mr Julian, the first defendant, acted for the Society on every real estate mortgage taken by the Society from May 1984. 15 In paragraph 8 of his first statement Mr Gehrmann said:- "My dealings with Mr Julian in relation to the taking of mortgages by the NSWTF Health Society between about May 1984 and June 1991 usually followed the same pattern. Almost invariably, the first contact the NSWTF Health Society had with any prospective borrower was that it would receive through Mr Julian an application for monies to be advanced to the applicant on the security of a mortgage being taken over real property. Almost invariably, such applications were received under cover of a letter from Mr Julian outlining the basic details of the application. On the occasions that any enquiries about loans were received from any other source, I would invite the prospective borrower to contact Mr Julian and make any application through him. I was aware from my dealings with Mr Julian that, due to the longstanding relationship between Mr Julian and the NSWTF Health Society, Mr Julian knew the criteria which the NSWTF Health Society applied in considering loan applications and would not send on applications which he considered would not meet those criteria. On the NSWTF Health Society approving an application, I would inform Mr Julian, almost invariably by letter, that such approval had been given. On Mr Julian being informed that the NSWTF Health Society had approved of a particular application, Mr Julian then acted for the NSWTF Health Society in preparing the mortgage, in dealing with the mortgagor and on the execution and registration of the mortgage". 16 Principles which had been applied for a number of years by the Society in deciding whether applications for mortgage finance should be approved had been reduced to writing in August 1990 in a document prepared by Mr Wrigley. Part of this document was in the following terms:- "a) No more than 60% of current valuation to be loaned. b) Term to be 3 years, at going interest rate or better. c) 1% penalty interest for late payment. d) Minimum loan $50,000. e) No more than 40% of Health Society investments to be in first mortgage loans. f) Only first mortgages to be approved". 17 In pars 17 and 18 of his first statement Mr Gehrmann said that, in addition to these general principles, he would also take into consideration whether the property to be mortgaged was the family home of the applicant, whether the property was within the Sydney metropolitan area and whether the person who would be liable to repay the loan appeared to have sufficient income from which to meet his or her obligations to repay the loan. 18 In par 18 of his first witness statement Mr Gehrmann said:- "In relation to this last consideration, it was usual for the application to include information or a statement about the income of the applicant from an independent party, usually an accountant. Other than basic statements of personal assets and liabilities, it was not a requirement that, or usual for, financial statements, tax returns or financial source records to be provided to the NSWTF Health Society as part of an application. It would not conduct an analysis of applicant's financial position or seek to verify any income information provided on behalf of an applicant by his or her accountant. If the information provided on behalf of an applicant by his or her accountant indicated that the applicant's income was sufficient from which to meet his or her obligations to repay the loan, then I would be satisfied for the purpose of approving the application, that the applicant did have sufficient income from which to meet his or her obligations". 19 After an application for a mortgage advance had been received, Mr Gehrmann would form his own view about whether the application should be approved and would then discuss the application with Mr Wrigley, who would make the final decision about whether the application should be approved. If a current valuation of the property to be mortgaged had not yet been received, any approval of an application was made subject to the receipt of a satisfactory valuation. 20 On or about 18 June 1991 the Society received a letter from Mr Julian dated 18 June 1991, enclosing four applications for mortgage advances. One of these applications was an application which Mr Julian described in his letter as an application by "PG Wynne". The relevant part of Mr Julian's letter was in the following terms:- "Application of PG Wynne for a first mortgage advance of $450,000.00 for a term of 3 years at an interest rate of 14.25% per annum payable quarterly in arrears over property 34 Charleroi Road, Belrose. Again, any approval would be subject to the provision of a satisfactory valuation". 21 With the letter from Mr Julian was enclosed a letter dated 17 June 1991 from First Liberty Corporation Pty Limited, a company carrying on the business of mortgage brokers, which was signed by Mr Victor Moody. This letter was in the following terms:- "Re: PG & K Wynne Dear Sir, The above wish to make application for a loan of $450,000 details as set out below: Applicants: Peter Gordon & Kerry Wynne 34 Charleroi Road, Belrose NSW Amount Required: $450,000.00 Term: 3 years Rate: 14.25% payable quarterly in arrears Purpose of Loan: Refinance existing encumbrances with Barklays (sic) Bank. Security Offered: 1st Registered Mortgage over Residence 34 Charleroi Road, Belrose NSW Valuation: Estimated value $800,000.00 Ratio of Loan: 56% of value Financials: Accountants advise personal income of client is $235,000 p.a. Accountants balance sheets/profit & loss 89/90 show a nett profit after add backs i.e. Depreciation 55,981.00 Part interest 63,200.00 Borrowings costs 2,658.00 Personal motor vehicles 43,526.00 165,365.00 Less Loss 39,650.00 Total Nett 125,715.00 On accountants advice: Total income Personal - 235,000 Company 125,715 360,715 Information on interim figures shows there will be a similar or better result in the full 90/91 period. Enclosures: Copy application Asset & Liabilities Balance Sheet/Profit & Loss Accountant's letter Your early advice would be greatly appreciated". 22 The enclosed application was on a First Liberty Corporation form. In the boxes for "occupation" and "employer's name" were written the words "company director" and "Banksia Settlements P/L". In the box for solicitor was written "Freehill Hollingdale and Page" and in the box for accountant was written "Bruce & Partners". 23 In an enclosed "confidential statement of personal position" assets were shown as totalling $2,637,000 and liabilities as totalling $458,000. The assets included the property at 34 Charleroi Road, Belrose said to be worth $800,000 and an equity in a business said to be worth $1,700,000. 24 Also enclosed with the application from First Liberty Corporation was a document headed "Banksia Settlements Pty Limited - assets and liabilities" which was not dated or signed; a document headed "balance sheet as at 31/12/1990", not identifying the entity whose balance sheet it was; and a document being consolidated profit and loss statement for the period ended 31 December 1990, which was headed with the words "as trustee for the Peter & Kerry Wynne Family Trust", not identifying who the trustee was. 25 Enclosed with the First Liberty Corporation letter was a letter dated 7 June 1991 from Bruce & Partner, Chartered Accountants, signed by the third defendant, which was addressed to Mr V Moody of First Liberty Corporation Pty Limited. This letter was in the following terms:- "Re: Peter G Wynne We act for Mr Wynne and his Company Banksia Settlements Pty Limited. Mr Wynne is seeking $400,000 secured over his residence at 34 Charleroi Road, Belrose. We understand the property has a value of approximately $800,000. The loan is required for a term of 3 years on an interest only basis, preferably at a fixed rate. The purpose of the loan is to refinance an overdraft facility with Barclays Bank Australia. Mr Wynne's income is $235,000 per annum comprised of a salary of $35,000 per annum and drawings from his business of $200,000 per annum We have already provided you with Mr Wynne's assets and liabilities statement. Should you require any further information, please do not hesitate to contact us. Your urgent attention to this matter would be greatly appreciated". 26 After reading Mr Julian's letter of 18 June 1991 and the enclosures with that letter, Mr Gehrmann formed the view that the application for mortgage finance should be approved. Mr Gehrmann had a meeting with Mr Wrigley and Mr Wrigley agreed that the application should be conditionally approved. On 20 June 1991 Mr Gehrmann wrote a letter to Mr Julian, informing him that the application had been approved, subject to a satisfactory valuation being received. 27 On 21 June 1991 Mr Julian wrote a letter to First Liberty Corporation Pty Ltd, advising that the application had been approved "subject to our being satisfied as to title and to the provision of a satisfactory valuation showing the amount to be advanced as not exceeding 60% of the amount of the valuation. We look forward to receiving the relevant valuation". 28 On 1 July 1991 Mr Julian wrote a letter to the Society, enclosing a valuation of the property 34 Charleroi Road, Belrose by the fourth defendant dated 26 June 1991, which Mr Julian had received and in which the fourth defendant stated that he considered that the market value of the property as at 26 June 1991 was $750,000. 29 On 2 July 1991 Mr Julian wrote a letter to Messrs Freehill Hollingdale and Page. The opening paragraph of the letter read "We act for the mortgagees herein and understand that you act for the mortgagors Mr and Mrs P G Wynne". In the letter Mr Julian suggested that particulars of title to the property might be supplied "in order that the matter may be expedited when the anticipated confirmation of the approval is received". 30 On 9 July 1991 Mr Gehrmann wrote to Mr Julian, advising that a mortgage advance of $450,000 had been approved "after sighting the relevant valuation". $450,000 is, of course, 60 per cent of $750,000. 31 On 10 July 1991 Freehill Hollingdale and Page wrote a letter to Mr Julian, supplying particulars of title. In the particulars the "present registered proprietors" of the property were stated to be Mr and Mrs Wynne but the "mortgagor" was stated to be Mrs Wynne alone. In the letter Freehill Hollingdale and Page said "It is proposed that, prior to, or simultaneously with, drawndown of funds Peter Gordon Wynne will transfer his half interest to his wife, Kerry Anne Wynne… as we would understand the position, your client is lending $450,000 to Mr Peter Gordon Wynne, on the security of what will now be a third party mortgage". 32 Some time on or soon after 10 July 1991, Mr Gehrmann received a telephone call from Mr Julian. Mr Gehrmann and Mr Julian gave somewhat differing accounts in their respective witness statements of what was said in this conversation. However, as I have already stated, Mr Julian's witness statement, after initially being admitted into evidence, was subsequently withdrawn from evidence, so that, finally, the only evidence of what was said in the conversation was Mr Gehrmann's evidence. The account of the conversation given by Mr Gehrmann in his witness statement was as follows:- "Julian: Frank, this is John Julian. There has been somewhat of a change in the way in which they want to structure the Wynne mortgage. Apparently his wife is now going to own the property outright and Peter Wynne will be the principal debtor. Do you have any reservations about this change?' Gehrmann: Well I've no experience in these things, so we would best be advised by you. Are there any risks to us in taking the mortgage from his wife?' Julian: I suppose it will be all right. There have been some recent changes to the law, but the case has not been reported yet.' Gehrmann: Well, so long as our position is not going to be affected by these changes, then we will proceed.' Julian: Okay, I'll let them know'".