New South Wales Supreme Court CITATION : CKM (Mortgages) Limited v Burtenshaw [2010] NSWSC 1044 HEARING DATE(S) : 8 September 2010 JUDGMENT DATE : 15 September 2010 JUDGMENT OF : Schmidt J DECISION : Default judgment entered on 28 May 2010 be set aside. If there is any disagreement as to costs, the parties have liberty to approach. CATCHWORDS : PROCEDURE - Supreme Court procedure - judgments and orders - amending, varying and setting aside - setting aside default judgment - cross claim - question of delay - prejudice - whether there is an arguable case - is defence asserted bona fide - delay explained - arguable case shown - section 80 of the Consumer Credit Code - unconscionability - Contracts Review Act 1980 - default judgment set aside Civil Procedure Act 2005 LEGISLATION CITED : Consumer Credit Code Contracts Review Act 1980 Uniform Civil Procedure Rules 2005 CATEGORY : Procedural and other rulings Bank of Queensland Ltd v Dutta [2010] NSWSC 574 CASES CITED : Benjamin v Ashikian [2007] NSWSC 735 Fast Funds Limited v Coppola [2010] NSWSC 470 Permanent Mortgages Pty Ltd v Cook [2006] NSWSC 1104 PARTIES : CKM (Mortgages) Limited ACN 089 263 310 - Plaintiff Valda Jean Burtenshaw - Defendant FILE NUMBER(S) : SC 2010/48001 COUNSEL : Mr NW Young - Plaintiff Mr D Hand - Defendant SOLICITORS : Bransgroves Lawyers - Plaintiff Castrission & Co - Defendant - 14 - IN THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION SCHMIDT J WEDNESDAY, 15 SEPTEMBER 2010 2010/48001 CKM (MORTGAGES) LIMITED v BURTENSHAW JUDGMENT 1 HER HONOUR: By motion filed in July 2010, the defendant, Mrs Burtenshaw, seeks orders setting aside judgment. The matter was commenced by statement of claim filed in April 2010, in which the plaintiff sought an order for possession and judgment in the sum of $315,000. Default judgment was entered on 28 May 2010. 2 The motion was supported by affidavits sworn by Mrs Burtenshaw and by Mr John Castrission, her solicitor. The property in question is Mrs Burtenshaw's home, where she resides with her mentally ill 42 year old son and her daughter. Mrs Burtenshaw deposed that she had executed various loan documents, in order that her prospective son-in-law, Mr McAuliffe, could obtain a loan. He assured her that he could service and repay the loan. Mrs Burtenshaw acknowledged that she was told things about the loan by a solicitor, Mr Greenstein, but said she had not fully understood what she was told. She received documents earlier this year from the plaintiff which she did not understand and gave to Mr McAuiliffe, who said that he would sort things out. She first obtained legal advice in May 2010, but then had to make arrangements to enable her to meet her legal costs, before she could defend the proceedings. 3 Mr Castrission deposed that he received instructions on 7 May but action to set aside the default judgment was not taken until July, during which time, certain negotiations were pursued with the plaintiff. Mr Castrission annexed a draft defence and cross claim to his affidavit, in which reliance on the Consumer Credit Code and the Contracts Review Act 1980 were sought to be pleaded. 4 Mr Castrission deposed that Mrs Burtenshaw was aged 68 years. The loan had largely been made for the benefit of her son-in-law, who had received the bulk of the loan moneys. The plaintiff had never conferred with Mrs Burtenshaw about the loan, all dealings were with Mr McAuliffe and the mortgage broker, Mr McDonnell, with whom he had dealt. It was never brought to Mrs Burtenshaw's attention that there was a risk that she would lose her home of 30 years, if the loan was not repaid. The plaintiff should have exercised greater scrutiny over the loan application and ensured that the defendant received independent advice, given the circumstances where the loan was being made to an elderly person, mainly for the benefit of a third party, her prospective son-in-law. 5 Mrs Burtenshaw deposed in a second affidavit that she first met a broker, Mr McDonnell, when the security documents were to be signed. She did not know who he was, or from whom he had obtained his instructions, she assumed it was from Mr McAuliffe. No one told her what his function was. She had signed various documents, she believed on 6 October 2006, when Mr McDonnell came to her house. She was not involved in any business or aware of any joint venture. She was a divorced, retired homemaker. Her only income now was a small annuity providing her with $1000 per month. She presumed the loan funds were being used for Mr McAuliffe's own purposes and businesses. She was not capable of operating a computer to send emails and had not sent any to the plaintiff. 6 Mrs Burtenshaw attended on her former solicitor, Mr Greenstein's office on two occasions to sign documents, she believed on the second occasion for a second mortgage, although she was not certain. On other occasions she signed documents at the plaintiff's premises, or those of its solicitor at Cronulla. She was then accompanied by her daughter. 7 There were various documents on which the plaintiff relied which Mrs Burtenshaw acknowledged she had signed, without reading or understanding them, at various times when put in front of her by her daughter, Mr McAuliffe and Mr McDonnell, because she did not want to be obstructive or create problems. She had also discussed with Mr McAuliffe his desire to increase the original loan. She understood that he was responsible for repaying the loan and that her house would never be in a position where it could be sold and she and her family evicted. 8 Mrs Burtenshaw also deposed that she had signed the original mortgage for $130,000 before her solicitor Mr Greenstein; a variation of $60,000 before B Weekes in Cronulla, she believed at the plaintiff's solicitor's office; a second variation for $76,000 before her daughter and the third variation for $49,000 before a justice of the peace at Cronulla, after the plaintiff's solicitors, Gibson Howlin, gave her and her daughter the documents to have signed before a JP. They were directed to the Commonwealth Bank, which referred them to the office of LJ Hooker. 9 The plaintiff opposed the orders sought. Its case was that Mrs Burtenshaw received a benefit from the loan, which could not be overlooked, namely the $50,000 used to pay out an earlier mortgage. It relied on affidavits sworn by Mr Vincent Gibbs, an authorised officer of the plaintiff, to which were annexed various documents executed by Mrs Burtenshaw, as well as correspondence form Greenstein Shakenovsky, the solicitors who acted for her on the original loan. Gibson Howlin acted for the plaintiff. These documents included two declarations signed by Mrs Burtenshaw on 11 October 2006. The first, in which she declared that she was the borrower; that she had received independent legal advice regarding the loan and the security documents and that she had freely and voluntarily signed the mortgage and other documents. The second, in which Mrs Burtenshaw declared that the purpose of the loan was wholly or predominantly for business purpose. 10 Also in evidence was an email sent to the plaintiff by Mrs Burtenshaw on 5 March 2007, sent from her daughter's gmail address to Mr Gibbs. In this email Mrs Burtenshaw asked to extend her loan by $60,000, for further investment in two businesses in which she was involved. Mr Gibbs was asked to contact her daughter or Mr McAuliffe, if additional information was required. In 2010, after the loan fell into default, other emails were sent to the plaintiff by Mr McAulife, in which he represented that Mrs Burtenshaw had asked for correspondence and documents to be sent to him, because she was unwell and he was negotiating to refinance the loan. 11 The evidence shows that of the original $130,000, $50,000 was paid to ING Bank Australia Limited ('ING'), to pay out Mrs Burtenshaw existing mortgage and the bulk of the remainder to York Street Capital Pty Ltd. Further advances were partly used to pay outstanding interest to the plaintiff, with the balance paid to Mrs Burtenshaw. While it was her evidence that the money was used for Mr McAuliffe's business purposes, she did not dispute that the cheques were made to her, she could not remember to whom they were made out. Default judgment 12 There is no question that the Court has power to set aside the default judgment under Rule 36.16 of the Uniform Civil Procedure Rules 2005. The application must be determined on the basis of whether the interests of justice in the circumstances here before the Court require that Mrs Burtenshaw be given the opportunity to contest the plaintiff's claim. The issues lying between the parties must be determined in the context of the overriding purpose of the Civil Procedure Act 2005, which is specified by s 56 to be the just, quick and cheap resolution of the real issues in the proceedings. 13 In achieving that purpose, the Court must also have regard to matters such as the just determination of the proceedings; the efficient disposal of the business of the Court and use of available judicial and administrative resources, as well as the timely disposal of the proceedings, and all other proceedings in the court, at a cost affordable by the respective parties (s 57). The Court must have regard to what the dictates of justice require, including the degree of expedition with which the respective parties have approached the proceedings, including the degree to which they have been timely in their interlocutory activities and their observance of their own obligations to assist the Court to further the overriding purpose of the Act (s 58). 14 In this case, relevant considerations include the circumstances in which the default judgment came to be entered on 28 May; any delay in making this application; any resulting prejudice to the plaintiff; and Mrs Burtenshaw's apparent prospects of success. The Court does not enquire into the truth or otherwise of the case which she seeks to advance, but rather whether the defence is asserted bona fide. 15 The plaintiff claimed no prejudice, consistently with its submission that sale of the property would result in a balance which would be paid to Mrs Burtenshaw. The circumstances – delay? 16 Default judgment was entered on 28 May 2010. In Mr Gibbs' affidavit in support of the application for default judgment, sworn on 8 April, he deposed amongst other things, that the persons in occupation of the property were Mrs Burtenshaw, her son and daughter; that they had been served with the application and that he had not been contacted by any of them in relation to the proceedings. 17 What had not been disclosed was that while the plaintiff had never had contact from Mrs Burtenshaw herself, negotiations had been conducted on her behalf by Mr McAuliffe. In December 2009, she had given written authorisation for discussions to be conducted on her behalf by Mr McAuliffe. On 7 April 2010, he had advised on the progress of steps being pursued to refinance and that Mrs Burtenshaw was undergoing medical treatment, and regularly had to stay overnight in hospital and had asked him to arrange alternative methods of receiving legal papers. He proposed to telephone Mr Gibbs the following day. 18 A further email sent on 9 April asked that legal action be suspended, there being no dispute over the debt and that refinancing was being pursed. That day Mr McAuliffe was advised that default judgment was being pursued. On 13 April, an offer was made to pay outstanding interest immediately, to avoid a default judgment being entered and asking that legal documents be collected personally by Mr McAuliffe, Mrs Burtenshaw having undergone vascular surgery. The response, if any, was not in evidence. Mrs Burtenshaw's evidence was that Mr McAuliffe advised her in April that she needed legal assistance and she then approached Mr Castrission. 19 On 30 April, Mr Castrission advised the plaintiff's solicitors that he had received instructions to defend the proceedings, asking that the plaintiff refrain from pursuing default judgment and asking for answers to a number of particulars. Correspondence ensued, in which the plaintiff refused to withdraw the motion seeking default judgment advising that no basis for defending the claim could be seen. On 7 May, Mrs Burtenshaw instructed Mr Castrission to make this application. She took steps to enable her to fund the litigation. Default judgement was entered on 28 May. No writ of possession has yet been issued. 20 The draft defence and cross claim were prepared and the motion and supporting affidavits served on 14 July. Further correspondence ensued, with the plaintiff requesting that the motion not be filed, while instructions were given. After various correspondence the plaintiff advised on 28 July that it would not consent to judgment being set aside. 21 I am satisfied that the circumstances are such that it must be concluded that any delay in pursuing the motion has been adequately explained. Was an arguable defence shown? 22 There is no dispute that there has been default under the mortgage. That the defence which is sought to be raised is pursued bona fide must be accepted. Mrs Burtenshaw also wishes to pursue a cross claim. Amongst other things she will claim that she was a volunteer, a fact of which the plaintiff was on notice; that she is entitled to a set off; and that the loans and mortgage were unconscionable within the meaning of the Consumer Credit Code and the Contracts Review Act. 23 At this interlocutory stage of the proceedings, Mrs Burtenshaw's evidence must be accepted at its highest. She is a 68 year old woman, not in employment, having retired from employment as a stock taker at Woolworth's in 2005, living in her family home with her mentally ill son and her daughter. The loan has been used as security for loans the bulk of which have been used for the benefit of her son-in-law's business purposes. The plaintiff's documents suggest that it was advised initially by Mr McDonnell that Mrs Burtenshaw sought the loan in order to go into a joint venture with her son. Later documents suggest that her daughter and Mr McAuliffe informed the plaintiff that further loans were required for two internet based music and jewellery businesses which Mrs Burtenshaw operated with her daughter's assistance. The prospect of Mrs Burtenshaw's daughter and Mr McAuliffe's guaranteeing the loan was raised but the plaintiff was advised by the daughter that a guarantee was not appropriate. 24 Mrs Burtenshaw's evidence is that she is not involved in any business and cannot operate a computer, even to send emails. She acknowledges that she signed various documents, but says that she did not understand them or their consequences. An email purportedly sent by Mrs Burtenshaw informed the plaintiff that she was involved in two businesses with significant global interests, for which the further loan then sought was required. This email was apparently sent by Mrs Burtenshaw's daughter. 25 There is no dispute that $50,000 of the initial loan was used to pay out Mrs Burtenshaw's existing mortgage from ING. That this was known to the plaintiff is apparent from notes kept by the plaintiff in relation to information originally provide by the broker, Mr McDonnell. Mrs Burtenshaw's loan repayment history was also to be provided. 26 Mrs Burtenshaw was represented in the original transaction by a solicitor, but claims that she did not understand that by taking out the loan she was at risk of losing her house if the loan was not repaid. In the further transactions she appears to have been represented by her daughter and Mr McAuliffe, who also acted on her behalf earlier this year in negotiations with the plaintiff, while he sought to refinance the loan. 27 One of the documents Mrs Burtenshaw signed was a declaration that she had freely and voluntarily signed various documents, including a declaration of purpose and that she had received independent legal advice. The declaration was that the funds were to be used wholly or predominantly for business purposes and that Mrs Burtenshaw was aware that by signing the declaration, she might lose her protection under the Consumer Credit Code. 28 Under s 11 of the Code (which is an appendix to the Consumer Credit (Queensland) Act 1994, given force by s 5 of the Consumer Credit (New South Wales) Act 1995), such a declaration is conclusive, unless the credit provider had reason to believe that the loan was to be used 'wholly or predominantly for personal, domestic, or household purposes'. 29 In this case, given the amount of the initial loan, $130,000 and that only $50,000 was used to repay the existing mortgage, it does not seem seriously arguable that the plaintiff was on notice that the loan was to be used 'wholly or predominantly for personal, domestic, or household purposes'. Later advances were paid to Mrs Burtenshaw herself, for purposes which the plaintiff was informed were business related, but that was advice not given by Mrs Burtenshaw herself. Nevertheless, it is her own case that they were for Mr McAuliffe's business. That does not support the availability of an argument that the plaintiff was aware that these loans were to be used 'wholly or predominantly for personal, domestic, or household purposes'. What could be in issue is what business the loans were used for and whether or not Mrs Burtenshaw was herself involved in any business. 30 Even if that view was not correct, the view that the failure to give notices under s 80 of the Code would mean that the proceedings ought to be dismissed, as was argued for Mrs Burtenshaw, is open to doubt. Failure to comply with the requirements of s 80 is an offence under the Code, but it does not provide that such a failure will invalidate the proceedings. In Fast Funds Pty Limited v Coppola [2010] NSWSC 470, Slattery J stayed possession proceedings brought without the giving of s 80 notices, reserving the plaintiff's right to seek orders lifting the stay after service of the notice and the defendant's right to seek orders striking out the proceedings (see at [97]). 31 In Bank of Queensland Ltd v Dutta [2010] NSWSC 574, Davies J concluded that a failure to serve s 80 notices did not result in the proceedings being a nullity. His Honour observed at [154] - [160]: "154 Where there is a genuine issue in proceedings about whether a loan has been provided wholly or predominantly for personal, domestic or household purposes, and that issue has been determined against the credit provider in such a way that the Code is held to apply to a loan, s 80 does not have the result that a failure by the credit provider to have served a notice prior to the commencement of the proceedings will result in the proceedings being dismissed. Two policy reasons point against that result. First, if the only way the credit provider could avoid such an outcome was to serve a s 80 notice just in case, the effect of the service of the notice was likely to result in an admission by the credit provider that the Code applied although that was an issue in the proceedings. Secondly, and as I noted earlier, it would be in no party's interest for it to be determined after a full hearing that the borrower had made out no defences under the Code but that the proceedings had to be dismissed simply so that notice could be served and then new proceedings commenced to decide the same issues. The position might be different if at an early stage an application was made to strike out the proceedings for failure to serve a s 80 notice. However, even in that case if the real issue was whether or not the Code applied that would scarcely be an appropriate use of the summary dismissal provisions of the Rules. 155 Next, as I have noted, the present proceedings cannot be regarded as a nullity. At worst, there is an irregularity involved in the commencement of the proceedings. Section 80 does not confer the jurisdiction for the bringing of the proceedings: Plowman v Palmer (1914) 18 CLR 339 at 348-349, Emanuele v Australian Securities Commission (1997) 188 CLR 114 at 128. 156 In Woods v Bate (1986) 7 NSWLR 560 McHugh JA (as he then was) said (at 567): In recent times the courts have shown great reluctance to invalidate an act done pursuant to a statutory provision because of the failure to comply with an antecedent condition: ... Speaking generally, I think that, at the present time, the proper approach is to regard a statutory requirement, expressed in positive language, as directory unless the purpose of the provision can only be achieved by invalidating the result of any departure from it, irrespective of the circumstances or resulting injustice: … (authorities omitted) 157 However, if I am wrong in my approach to the proper construction of s 80 I would authorise the Plaintiff in the present case nunc pro tunc to bring the present proceedings for these reasons. First, the failure to serve the s 80 notice resulted from the view of the Bank that the Code did not apply to the Line of Credit. Although I have held, on the basis of the authorities, that the Code does apply, there are authorities to the opposite effect. Secondly, the issue arose in the present case precisely because Mr Dutta did not use the funds he obtained for the purposes he had advised to the Bank at the time he applied for the Line of Credit and for its increase. The purposes he advised to the Bank, if he had used the money for those purposes, would have resulted in the Code not applying to the loans. In that regard the Bank's failure to serve a notice was neither contumelious nor a highhanded disregard for its obligations. 158 Thirdly, the Defendants are not disadvantaged because they were served with a s 57 notice which complied with the provisions of s 80 except to the extent that I have discussed in paras [137] to [141] above. The notice specified the default and specified what was required to be done to remedy the default. Although it did not contain the notification concerning subsequent defaults, that was not relevant in the present circumstances. 159 Furthermore, it would not be consistent with the just, quick and cheap resolution of the real issues in the proceedings if, having found that the Defendants had not made out any defences under the Code, it would still be necessary to dismiss the present proceedings simply to enable the service of a s 80 notice so that new proceedings could be properly commenced. 160 For these reasons, the present proceedings are not a nullity nor does s 80 require that they be dismissed." 32 In coming to those conclusions his Honour disagreed with views earlier expressed by Patten AJ in Permanent Mortgages Pty Ltd v Cook [2006] NSWSC 1104 and by Smart AJ in Benjamin v Ashikian [2007] NSWSC 735. For myself, I find Davies J's reasoning compelling. While it must be accepted, as was argued for Mrs Burtenshaw, that there is a controversy about the consequences of a failure to give s 80 notices under the Code and a claim that the Code applied to the transactions, which may not be overlooked, were that the only matter in contest between the parties, it seems to me that Mrs Burtenshaw's application would face real difficulty. 33 Mrs Burtenshaw also wishes to pursue a claim of unconscionability and to seek relief under the Contracts Review Act. That claim appears to have a stronger basis. I did not permit the plaintiff to embark on a cross examination of Mrs Burtenshaw as to the merits of her claim. In part her evidence was corroborated by evidence led by the plaintiff. Given what the plaintiff's own business records reveal, there does appear to be material on which the view that there was relevant unconscionability could potentially rest. Whether or not such a case could be made out at a hearing, does not arise to be determined at this stage of the proceedings. The Court is not presently concerned to determine the merits of the claim, but rather whether there is material on which it can be concluded that there is an arguable basis for the case sought to be advanced. 34 Also to be considered, however, is that on any view, as the plaintiff argued, even if such a case succeeded, the best outcome which Mrs Burtenshaw could conceivably achieve would be to be made liable only for repayment of the $50,000 advanced to refinance her pre-existing mortgage. That was not put in issue for Mrs Burtenshaw. 35 In those circumstances, it was argued for the plaintiff, the Court would not interfere with the order for possession and would instead permit the inevitable sale of the property to proceed now, with the proceeds of the sale greater than the amount claimed by the plaintiff to be paid to Mrs Burtenshaw. On her own evidence, Mrs Burtenshaw having only income of $1,000 per month, she could not finance even the repayment of $50,000 without the sale of the property. If the sale proceeded, the disputed amount could then either be paid to the plaintiff, with an undertaking to the Court to repay any amount which the Court ordered in favour of Mrs Burtenshaw, or the disputed amount could be paid into Court. There were advantages to Mrs Burtenshaw which flowed from the first course, such as that interest under the mortgage would then cease to run. 36 For Mrs Burtenshaw that approach was opposed on two bases. Firstly, it would amount to an order for summary judgment in favour of the plaintiff in the face of Mrs Burtenshaw's arguable case and secondly, that it overlooked that a sale of the property was not inevitable. If the Court were to find that Mrs Burtenshaw only had to repay the plaintiff $50,000, it did not follow that the property would have to be sold. It was entirely possible that she might be able to refinance that sum. That Mr McAuliffe's efforts to refinance the entire amount owing had not succeeded, was not a basis for concluding that $50,000 could not be refinanced by Mrs Burtenshaw. 37 Having considered the parties' competing arguments, it seems to me that it must be accepted that the argument advanced for Mrs Burtenshaw may have a basis, notwithstanding that at this stage of the proceedings evidence as to all of her financial circumstances is not on. 38 When the loan was first advanced Mrs Burtenshaw was not in employment, yet she was servicing a $50,000 mortgage on her home. There was no suggestion of any difficulty. The plaintiff wanted a service history before the loan of $130,000 was advanced. It no doubt wanted other financial information as well. It became sufficiently satisfied not only to advance $130,000, but the subsequent loans as well, substantial parts of which were used to repay interest outstanding under the previous loans. Those further loans eventually resulted in a default judgment reflecting a total outstanding of $315,000. Mrs Burtenshaw's only income now is $1,000 per month, but that she would not have the capacity to repay $50,000, by way of refinancing, without the sale of the property, may not yet be concluded on the evidence. Possibilities such as a reverse mortgage, whereby elderly people may use their equity in a property to fund a loan, where repayment is deferred until the owner dies or leaves the property, for example, may not be overlooked. 39 I am not satisfied that if Mrs Burtenshaw succeeded on the claims which she seeks to advance, it is certain that her home would have to be sold. In those circumstances it must be concluded that justice does not permit the orders urged for the plaintiff, particularly when it is considered that it did not claim that it would suffer any prejudice from the making of the orders sought by Mrs Burtenshaw. Interest will continue to accrue, which may be recouped on any future sale. Undeniably thereby Mrs Burtenshaw takes a considerable risk, given the rate of interest which continues to accrue on the loan, but that is not a matter on which the conclusion urged for the plaintiff may rest. 40 The circumstances here are such that a mediation may well be in the parties' interests. I do not propose as yet to order a mediation but suggest the parties discuss that question, before any hearing date is sought. Orders 41 For these reasons, I order that the default judgment entered on 28 May 2010 be set aside. If there is any disagreement as to costs, the parties have liberty to approach. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.