WINTERS v H G & R NOMINEES PTY LTD [2009] NSWSC 467

New South Wales Supreme Court

CITATION : WINTERS v H G & R NOMINEES PTY LTD [2009] NSWSC 467

HEARING DATE(S) : 25-26/05/2009

JUDGMENT DATE : 1 June 2009

JURISDICTION : Equity

JUDGMENT OF : Bryson AJ at 1

DECISION : Reserve further consideration of the settlement of accounts.

CATCHWORDS : MORTGAGOR and MORTGAGEE - mortgagee's power of sale - claim by mortgagors that mortgagee liable for deficiency on sale at undervalue - on review of facts, found, no undervalue, no lack of good faith. Accounts settled on basis of sale price received by mortgagee.

LEGISLATION CITED : Real Property Act 1900, s 57(2)(b) Limitation Act 1969, s 14

CASES CITED : Commonwealth Bank of Australia v Hadfield [2004] NSWCA 350 Pendlebury v Colonial Mutual Life Assurance Society Ltd (1912) 13 CLR 676

Denise Erica Winters - First Plaintiff PARTIES : Richard Piper - Second Plaintiff H G & R Nominees Pty Ltd - Defendant

FILE NUMBER(S) : SC 2112/07

COUNSEL : D Reid - Plaintiffs M W Young - Defendant

SOLICITORS : Karageorge & Co Solicitors - Plaintiffs Bransgroves Lawyers - Defendant

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

BRYSON AJ

MONDAY 1 JUNE 2009

2112/07 WINTERS v H G & R NOMINEES P/L JUDGMENT 1 BRYSON AJ: The plaintiffs are the surviving mortgagors in Mortgage 5896546 and the defendant is the mortgagee. The mortgage was granted on 1 June 1999 over land in Union Street Pyrmont then in Folio Identifier 2/578866, later subdivided by a Strata Plan. The mortgage secured loan advances to be made by the defendant to meet construction costs of the building on the land which the borrowers had contracted for Consolidated Constructions to build. There were four borrowers; the plaintiffs and their mother Mrs Aileen Piper, and Renaissance Pyrmont Pty Ltd, a company controlled by them and involved in this development. The plaintiffs and Mrs Piper owned the land and gave the mortgage. Mrs Piper died on 3 January 2000 and title passed to the plaintiffs. 2 The land, and the building which stood on it earlier, had been owned by family members since 1949, when it was bought by the plaintiffs' father and used in his engineering business. The plaintiffs and Mrs Piper embarked on their redevelopment project about 1994 and commissioned a design by Mr Ercole Palazzeti, Architect. Before construction began they obtained several valuations of the projected building. Work on the site commenced with demolition in May 1999. In the course of dealings with the defendant which led to an agreement for finance the plaintiffs showed the defendant their most recent valuation, by Herron Todd White dated 22 June 1998 and giving a value as developed at $17,220,000. However the defendant required a check valuation and a valuation was obtained from Laing and Simmons. Laing and Simmons' opinion was that the value as at 19 February 1999 for mortgage purposes was $4,500,000 as a site with development approval and that the gross realisation to be expected was $16,734,900. 3 Although there was an earlier approval in correspondence the loan was regulated by Facility Agreement dated 1 June 1999, and the mortgage was granted on that day. The defendant agreed to advance up to a facility limit of $10,045,000. There was to be an initial advance which it seems was used to repay a previous registered mortgage, and to set aside $950,000 which under clause 3 of the Facility Agreement the defendant was to retain and deposit into an at-call account with Sandhurst Trustees Ltd so as to be available to be applied towards payment of interest as it fell due. Later advances were to be made to meet claims by the builder. The defendant made a number of advances in this way, from an advance on Claim 1 $577,000 on 21 June 1999 until the last advance which appears in the defendant's account Exhibit 2, $247,000 on 5 October 2000. 4 HG & R Nominees then was a company associated with Herbert Geer and Rundle, solicitors of Melbourne and was a vehicle by which that firm invested money of clients and others. Mr Geer then was a member of the firm; he no longer is. Business methods relating to investments managed by solicitors have changed since 1999. 5 The Facility Agreement provided for repayment on 1 December 2000. (There are a number of references in the evidence to October 2000 as the repayment date, but I rely on Annexure A to the mortgage at Exhibit B, Tab 9). 6 Construction reached the point where, although they had been delays with which the plaintiffs were greatly disappointed, an occupation certificate was issued in September 2000. The plaintiffs were then able, subject to controls in the provisions of the Facility Agreement and mortgage, to lease out or sell the building or parts of it. The Strata Plan was registered on 15 February 2001, and the plaintiffs were then in a position to sell strata units. 7 The plaintiffs also raised money with a second mortgage to GIO Insurance Ltd. This secured GIO Insurance for its liability on a bond which the plaintiffs obtained from GIO Insurance and used as security for an advance of $1 million from Helant Pty Ltd to the borrowers. There were several references to this transaction in the evidence, and in the course of the hearing. It appears that Helant Pty Ltd made a claim on the bond and obtained repayment from GIO Insurance Ltd of the debt to Helant. This would leave GIO Insurance with its entitlement under its second mortgage to security over the property for $1 million, but this cannot have been effective as the actions of the defendant exhausted the security. It was suggested several times and Mr Richard Piper asserted in evidence that the defendant in some way received the $1 million or got the benefit of it. I am unable to see how this could have happened and in the evidence of Mr Geer the director of the defendant it was denied that it had happened. No contention was put in closing submissions that I should make any finding that the defendant should give credit for any such payment. 8 The plaintiffs defaulted in repayment on 1 December 2000 and by 12 February 2001 they had made no repayment. At some time they made an agreement to sell one of the apartments in the building and the sale was later completed and the proceeds went towards the debt owed to the defendant. Otherwise there is no indication in the evidence of any resources which the plaintiffs had available towards the payment of the debt, apart from their prospects of raising money by further sales. On 13 February 2001 the defendant served notice under s 57(2)(b) of the Real Property Act 1900, laying the ground for exercise of its statutory powers on default, including power of sale. There were suggestions in evidence for the plaintiffs (but it was not clearly established) that there was some irregularity about service of this notice, but the Statement of Claim alleged that the defendant entered into possession pursuant to its powers under the mortgage on 12 March 2001 (Para 7) and it was not contended at the hearing that the defendant was not duly equipped with power of sale. 9 The building comprised the ground floor, seven upper floors and two floors of basement parking. In the Strata Plan registered on 15 February 2001 Lots 1 to 9 were residential units on floors 4, 5, 6 and 7, with associated basement car parking. Levels 10 was office space on the third floor and Lot 11 was office space on the second floor. Lot 12 was space on the first floor suitable for a restaurant, and Lot 13 was the ground floor, suitable for retail use. 10 The defendant sold off all the lots (or perhaps in one case completed a sale which the plaintiffs had already made), collected the proceeds and exhausted the security, and, on the defendant's accounting, was left with a large unpaid balance which the plaintiffs have not paid. The last significant realisation in the defendant's account Exhibit 2 was $636,726.20 received on 8 April 2002, after which according to the defendant's account there was an outstanding loan balance of $799,990.75. Thereafter in the defendant's account interest accumulated until on the day the trial commenced 25 May 2009 the loan balance outstanding was $2,288,657.49. 11 The real subject of this litigation is the manner in which the defendant sold Lots 12 and 13. As appears in paragraphs 9 and 10 of the Statement of Claim the plaintiffs claim that Lot 12 had a market value of $2,750,000 but the defendant sold it for $975,000, and Lot 13 had a market value of $1,465,000 but the defendant sold it for $700,000. They claim that on taking accounts they should be credited with the price of the defendant would have received had it exercised its power of sale properly. If the plaintiffs' case is upheld there would have been a large balance in their favour at the completion of realisation. In form the relief claimed is taking accounts but there is no need to embark on any elaborate process of taking mortgage accounts because the items in the account which are in dispute can be readily identified and I am in a position to dispose of the disputes about them. I was concerned to establish whether any other items were in dispute and required the parties to state what items were disputed. Statements and concessions by counsel establish that there were two other disputed items. The plaintiffs disputed and on taking account would require proof that an advance of $247,000 was made on 5 October 2000. This is the second last item on page 2 of Exhibit 2. They also disputed the last item charged in the account, on page 9, a charge of one month's interest $31,332.77 on payment out. 12 The defendant's counsel told me that the defendant did not maintain that claim for interest, and would not pursue the claim that an advance of $247,000 was made on 5 October 2000 because the claim meant that there would be a reference and further proceedings relating to taking accounts. He explained this in terms of the defendant's perception about the value of their remedies; I am not concerned with this. When I decide the issues relating to the sales of Lots 12 and 13 settlement of the accounts will require no more than arithmetical adjustments to Exhibit 2. 13 The defendant's counsel observed that the Statement of Claim did not contain an offer to do equity, and contended that the plaintiffs should not succeed for that reason. Amended Defence para 24 contends that to do equity the plaintiffs should have paid the amount of the defendant's claim into court or made a bona fide offer to pay whatever is found due upon taking accounts. There is no doubt of the plaintiffs' obligation to pay whatever amount is found due by them on taking accounts, if any amount is so due. They limited their contentions and accept that the case relates to Lots 12 and 13. Their case did not impugn the defendant's right under its mortgage. The defendant brought a cross-claim to recover what it asserts is the balance due under the mortgage. On the whole of the pleadings I am in a position to do equity whatever the outcome. In these circumstances the absence of an offer to do equity is in my opinion a formal defect which does not disentitle the plaintiffs to my decision on the issues. The power of the court to do equity and resolve the whole controversy is important, but it is available in the present circumstances. 14 There are references in pleadings to the six-year limitation period in s 14 the Limitation Act 1969. However this limitation period does not apply to obligations under a registered mortgage, which operates as a deed to which s 16 and its 12 year limitation period apply. There was no reliance on the Limitation Act during the hearing before me. 15 Evidence from both parties refers to a controversy about whether the defendant was late in making advances in response to claims by the builder; and whether this caused delays in construction. There were delays in construction, but I was not asked to adjudicate on whether there were any breaches of obligation relating to delays in making advances. There is no issue of damages before me for adjudication. 16 The law of negligence does not apply to the exercise by the defendant of its power of sale conferred by s 58 of the Real Property Act 1900. A power of sale is a power which must be exercised in good faith for the purposes for which the power was conferred. In the application of this principle to mortgagees' powers of sale the law of New South Wales is controlled by and conforms with a number of decisions of the High Court of Australia, the oldest of which is Pendlebury v Colonial Mutual Life Assurance Society Ltd (1912) 13 CLR 676; the High Court held that the duty was to act in good faith and the mortgagee must not act wilfully, or recklessly sacrifice the interests of the mortgagor. See Commonwealth Bank of Australia v Hadfield (2001) 53 NSWLR 614 at 620-621 [35-40]. I referred to the principal authorities and collected references to them in my judgment in a later appeal in Commonwealth Bank of Australia v Hadfield [2004] NSWCA 350 at paras 9-14 and I there set out a number of important statements of principle. 17 In Hadfield's case an important concern was whether the bank had failed in its duty by not going to the trouble and expense of completing a proposed subdivision of the land before offering it for sale. That is not a problem in the present case, but authorities which are there referred to indicate the breadth of the choices available to the mortgagee with respect to the time of sale, and the manner in which the sale was carried out. The power is conferred on the mortgagee in the interest of the mortgagee, and not in the interest of the mortgagor, and the mortgagor's protection is the limit on the power imposed by the requirement to act in good faith, and not to act wilfully, nor recklessly to sacrifice the interests of the mortgagor. A sale to a purchaser who acted in collusion with the mortgagee's selling agent at a price which was selected to confer some advantage on the purchaser would not be an exercise in good faith of the power of sale. A sale entered into at a significant undervalue, so significant as to sacrifice the interests of the mortgagor, would be outside the power of sale if the mortgagee acted recklessly. The quality of the mortgagee's consideration is open to examination; selling a mortgaged property is not something which can be done offhand or without serious consideration, especially serious consideration of value. 18 I concluded my review of authority in Hadfield by saying in para 14: 14 Exercise of the power of sale is undertaken by a mortgagee in the interest of the mortgagee, although the mortgagee is confined to exercise of the power in good faith for the purpose for which it was conferred; the mortgagee cannot act for any extraneous purpose or bye-motive, and cannot sacrifice the interest of the mortgagor; to do so would be to depart from good-faith exercise of the power, and from the concept of a sale in the exercise of the power. The sale must bona fide be a sale, not a sacrifice, and the mortgagee cannot be indifferent to the price provided only that its debt is paid. In the pursuit of its own interest the mortgagee is entitled to choose the time at which it sells the property. 19 My observations were agreed in by Giles and Tobias JJA – see paras 1-5. 20 A different test is applied under the law of some other Australian states, and under the Corporations Act. Some of the authorities to which I was referred to were inapplicable for this reason. 21 Before other evaluation of the mortgagee's conduct is significant it is essential to the plaintiffs' case to establish that there was a serious discrepancy between the current market values of Lots 12 and 13 at the time that they were sold and the sale prices agreed on. Unless there was a serious discrepancy, consideration of whether the mortgagor's interest was sacrificed and of criticisms of the mortgagee's conduct which were offered cannot affect the outcome. 22 The plaintiffs obtained valuations or valuer's opinions about the value of their development when completed at several stages before construction started. No doubt these were important at the time, but by the time the defendant was exercising its power of sale in April 2001 they were not material to which regard should have been paid. They were valuation opinions expressed some years in advance about a development which had not yet been constructed; there were variations in design from time to time and the time of completion was later than had been expected. 23 In February and March 1999 two valuations were obtained and considered in relation to the application to the defendant for finance. The plaintiffs obtained the valuation from Herron Todd White dated the 10th February 1999 which estimated gross realisations at $17,385,000. This valuation also projected the value for Lot 12 the first floor at $1,800,000 and Lot 13 the ground floor at $1,335,000. Laing and Simmons' valuation prepared by Mr Hepworth, and dated 5 March 1999 valued the ground floor and first-floor jointly at $3,066,000 and gross realisation at $16,734,900. Bearing in mind the nature of the valuing task, relating to a building which had not been constructed and a market as it would be after construction was completed, the difference between these two valuations is not striking. The plaintiffs obtained the Laing and Simmons valuation to meet a requirement by the defendant. To me it seems only common prudence that the defendant required a valuation by a valuer it nominated and did not rely only on the valuer brought forward by the borrowers. The maximum amount of the Finance Facility is recognizably based on a proportion of the Laing and Simmons valuation. 24 The plaintiffs obtained a valuation by Herron Todd White dated 28 September 2000, prepared when the building had been completed. This gave a projected gross realisation of $17,575,000 and valued Lot 12 and Lot 13 together at $4 million. The plaintiffs obtained this to support applications for finance which they were actively pursuing in a number of different directions, as the expiry of their Finance Facility with the defendant and the need to refinance were approaching. 25 The plaintiffs contemplated selling lots in the Strata Plan, or even selling the whole building, or selling some lots and retaining others and leasing them out, or conducting a hotel on Lots 12 and 13; and they pursued negotiations for and had prospects of acquiring a hotel licence of a nearby hotel. In the course of doing this they retained as a selling agent a company of which the principal was Mr Kurt Braune. As I earlier mentioned, they made arrangements to sell one apartment. They also leased out several apartments, apparently on short-term lettings. This was a subject of some complaint from the defendant, which was of the view that it should have collected the proceeds. The plaintiffs also negotiated with 7 Eleven, for leasing Lot 13 on which a convenience store would be conducted. In communications with the defendant and the marketing agents the defendant appointed, McGrath Real Estate, one representative of which was Mr Warren Duncan, the plaintiffs gave information about what they had done, and indicated that Mr Braune should be asked to provide the leads he had obtained in his attempts to sell the units. 26 The defendant did not rely on the valuation of Herron Todd White, which was known to it, when the defendant decided to sell Lots 12 and 13. Mr Geer the director of the defendant was cross-examined about this; his evidence showed that he had an adverse view of Herron Todd White and regarded them as too close to the interests of borrowers. However that may be, it was only common prudence for the defendant to obtain its own valuer's advice before embarking on exercise of its power of sale over security property of this order of value. Laing and Simmons' valuation relates the values as of 6 April 2001, the date of inspection. The valuation itself is dated 17 April 2001, and the full document could not have been available to the defendant before that date; that is, cannot have been available at the time when contracts for sale were entered into. 27 However records contemporaneous with the agreements for sale early in April 2001 showed that Mr Hepworth, the valuer of Laing and Simmons, was consulted and his views, not indeed his final views, were known when the decision was taken to sell. His final views when available differed little from earlier indications. He projected gross realisations at $12,425,000. He also projected realisations of what he called "forced sale value" at $11,510,000. He valued Lot 12 at $970,000 and Lot 13 at $725,000, a total of $1,695,000. 28 Neither valuer was cross-examined; what are before me are their reports. I also have the appreciation and comment made by Mr Benporath, the general manager of the defendant, in a report upon which the decision of the directors who took part in the decision to sell Lots 12 and 13 was made. 29 Mr Benporath's report is an important document for disposition of this case, and I set it out in full. Dear David We have succeeded in gaining vacant possession of the building (refer next paragraph) and the McGrath marketing campaign is now well under way into its second week.