New South Wales Supreme Court CITATION : Lawteal Finance v Chrapacz [2010] NSWSC 73 This decision has been amended. Please see the end of the judgment for a list of the amendments. HEARING DATE(S) : 10 December 2009, 9 February 2010 JUDGMENT DATE : 19 February 2010 JURISDICTION : Common Law Division JUDGMENT OF : Hislop J DECISION : (1) Set aside the default judgment entered on 18 June 2007. (2) Set aside the order for possession of land dated 11 September 2009. (3) Grant leave to the defendant to file a defence within 28 days of the date of this judgment which defence includes a defence based upon the provisions of the Contracts Review Act, 1980 and/or the Consumer Credit Code. (4) Grant leave to the defendant to file any cross claims within 28 days of the date of this judgment. (5) List the matter for directions before the registrar on Friday 26 March 2010. (6) Costs reserved. CATCHWORDS : Common law - practice and procedure - setting aside default judgment - interests of justice. Real Property Act LEGISLATION CITED : Contracts Review Act Consumer Credit Code (NSW) PT Limited v Maradona Pty Limited (1992) 25 NSWLR 643 Perpetual Trustees Victoria Limited v Tsai [2004] NSWSC 745 CASES CITED : Ex parte Vigilant Finance (NSW) Pty Limited re Cameron Smith (1964) NSWR 1282 Evans v Bartlam [1037] AC 473; [1937[ 2 All ER 646 Reinehr Industrial Lease and Finance Pty Ltd v Jordan (unreported, NSWCA, 4 June 1974) PARTIES : Lawteal Finance Pty Limited (Plaintiff) Halyna Chrapacz (Defendant) FILE NUMBER(S) : SC 11864/07 COUNSEL : A.G. Rogers (Plaintiff) D.C. Eardley (Defendant) SOLICITORS : R.L. Kremnizer & Co. (Plaintiff) G & D Lawyers (Defendant) IN THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION HISLOP J Friday 19 February 2010 11864/07 LAWTEAL FINANCE PTY LIMITED v HALYNA CHRAPACZ JUDGMENT Introduction 1 The defendant, by notice of motion filed on 26 November 2009, sought orders that: "1. The default judgment entered 18 June 2007 be set aside. 2. The order for possession of land 11 September 2009 be set aside. 3. The Defendant be granted leave to file a defence in the form annexed to the affidavit of David Kelvin Downey made 26 November 2009 and filed in these proceedings. 4. The Defendant be granted leave to file any cross claim within 28 days." 2 The orders were opposed by the plaintiff. Background 3 The defendant was at all relevant times the registered proprietor of a suburban residential property ("the property"). 4 On 16 April 2007 the plaintiff filed a statement of claim in which it sought possession of the property. The statement of claim alleged that on or about 30 June 2006 the plaintiff loaned the defendant certain moneys; the plaintiff secured the repayment of the loan by taking a mortgage over the property which was registered on the title; the defendant in default of the provisions of the mortgage owed certain moneys to the plaintiff; the defendant was in default of the mortgage, the Plain English Home Mortgage and Loan Agreement which was incorporated in the mortgage. 5 On 18 June 2007 the plaintiff obtained default judgment against the defendant on the statement of claim. A writ of possession issued on that day. 6 On 23 July 2007 the writ of possession was stayed by order of the senior deputy registrar until 5.00 pm on 2 August 2007. 7 On 2 July 2008 leave to reissue the writ of possession was granted. 8 By notice of motion filed on 17 August 2009 the plaintiff sought an order that the writ of possession of 2 July 2008 be extended until 1 July 2010. In a supporting affidavit affirmed on 29 July 2009, Lionel Taitz, solicitor for the plaintiff, deposed that "the plaintiff did not proceed with its writ as the defendant claimed it would rectify the default on this mortgage…The defendant was again in breach of the terms of this mortgage". The plaintiff sought a fresh writ of possession as the existing writ had lapsed. 9 A writ of possession was issued on 11 September 2009 pursuant to the notice of motion filed on 17 August 2009. Additional evidence A. the defendant 10 The defendant was born in 1936. She is a single woman and prior to the death of her mother in 2005 had lived with her mother and acted as her carer. 11 Following the death of her mother, the defendant inherited the property which at that time was unencumbered. The defendant resided thereafter in the property by herself. 12 The defendant was involved in a motor vehicle accident on 25 September 2009. She had only recently been released from hospital and attended court in a wheelchair. The Court was informed from the Bar table by counsel for the defendant, without objection, that the defendant had early onset dementia and that her condition was deteriorating. I observed that the defendant generally appeared somewhat confused when giving her evidence. b. mr georgiou 13 The defendant, in her affidavit, said: "Angelo Georgiou nearly always collected my mail and delivered to me personally. Angelo said to me words to the effect 'I am having some mail sent to your address so that Gina does not know about it.' I understood Angelo Georgiou was referring to his wife Gina Georgiou. I received a letter some time in mid 2009. I am not sure as to the exact date, stating that I owed $530,000. Angelo Georgiou came to my home shortly after I received the letter. I confronted him and said words to the effect 'What is this about?' Angelo Georgiou grabbed the letter from my hands and said words to the effect 'This is what I was waiting for! Don't worry, I will take it to the court. I am going to get those bastards.'" 14 There was unchallenged evidence that the police were investigating alleged property and mortgage fraud by Mr Georgiou involving the defendant's property as well as other property. The police had charged Mr Georgiou with obtaining benefit by deception with respect to the property of another resident of the defendant's street. However, the police had not completed their investigations in respect of the defendant's property. 15 Counsel for the plaintiff, without objection, relied upon the court file to establish that a stay application had been made in 2007 and that the defendant had directly or indirectly involved herself in the proceedings. 16 The court file revealed that the stay was granted on 23 July 2007 and was based upon a handwritten affidavit sworn by Mr Georgiou on 23 July 2007 which he had filed for the defendant and in which it was said the defendant proposed to refinance the property. Accompanying this affidavit was an affidavit purporting to be sworn by the defendant on 23 July 2007 relevantly in the following terms: "2. I believe that the information contained in this affidavit is true. 3. I am in the process of refinancing and paying back the money to lawteal finance. I ask please only to give me a stay of the writ of execution so I can get my finances in order as to keep my house please your worship." The purported signature of the defendant was witnessed by Mr Georgiou. 17 A comparison of the purported signature of the defendant on the affidavit dated 23 July 2007 with her affidavit of 23 November 2009 reveals considerable similarities although it would be a matter for expert opinion to determine if the same hand wrote each signature. c. the service of the statement of claim 18 The plaintiff read an affidavit of Renato Merlino, a process server, sworn 23 May 2007. In that affidavit Mr Merlino swore, inter alia, that he served the statement of claim at the property and "6. At the time of service I asked the female occupant 'Are you Halyna Chrapacz?' She replied 'Yes I am.' 7. The documents listed were then served on the defendant who was also the occupant. 8. Halyna Chrapacz confirmed that she was the occupier of the secured property." 19 The defendant in her affidavit sworn 23 November 2009 said: "15. I was not served a statement of claim in relation to these proceedings." 20 In her evidence the plaintiff said she had lived alone at the property since the death of her mother and she did not remember a man coming to her door and giving her some documents to do with the court case in 2007. d. the mortgage 21 The mortgage relied upon by the plaintiff is Annexure H to the affidavit of David Kelvin Downey sworn 8 December 2009. It is dated 30 June 2006. 22 On the second page of the mortgage are two signatures purporting to be those of the defendant. One of the signatures purports to have been witnessed by Peter Ishak, who certified: "I certify that the person(s) signing opposite, with whom I am personally acquainted or as to whose identity I am otherwise satisfied, signed this instrument in my presence." The document was certified by Jamie Khoury, the mortgagee's solicitor. 23 The defendant in her affidavit sworn on 23 November 2009 said: "8. At no time did I apply or take out a loan secured against the property referred to in paragraph 5 of this affidavit. 9. At no time did I give a mortgage or caveat in favour of any person or company over the property referred to in paragraph 5 of the affidavit." 24 In her cross examination the defendant gave the following evidence: "Q. You see in paragraph 9 you say at no time did you give a mortgage in favour of any person or company over the property referred to in paragraph 5. Do you see that? A. Yes, I just read it. Q. When you say that, do you mean that you did not sign any documents to get money or to give a mortgage? A. Not by myself to go to the bank for my own house, but I have - like I said before, I was pushed to sign something for Evangelous Georgiou, and they kept saying 'This is nothing to do with you.' It is his. He was in trouble, or something, so I signed the papers. Q. Are you saying, then, that you did sign documents? A. Well, for what reason he came? I thought he was in trouble. Q. I am not asking you why. Are you saying that you did sign a mortgage and you did sign-- A. I didn't know it was a mortgage, sir. Q. Have you been shown a document in the last month or two called a mortgage that you are said to have signed? A. I didn't sign. It came as surprise. He was too late to grab it from my letterbox. Q. Just listen to the question please. In the last couple of months, have you been shown a document called a mortgage that someone said you might have signed? A. Well, it was the mortgage when I opened up the letter. Q. No, no, no. In the last month or so-- A. I was in the hospital. Q. In the last month or so, have you been shown a document called a mortgage? A. No. Q. Is it the position, then, that you don't know whether you signed a mortgage or not? A. That is the way, sir." 25 The defendant was then shown a copy of the mortgage by the cross examiner. She then gave the following evidence: "Q. Can I suggest this: You never signed this document. What would you say to that? A. Well, I'm not sure if I signed it or not, because I been fooled so many times. Q. When you swore your affidavit, do you remember you said you never entered into any mortgage? Remember I took you to paragraph 9 of your affidavit a few minutes ago and you said there that 'At no time did I give a mortgage or caveat in favour of any person' over your property at Bexley North? A. Well, I didn't, but Simon did come to my place with Evangelous three times and each time I said 'What is it now?', and I even asked him 'What have you done that I have to' - 'you must have done something wrong', and he said, always, 'It's got nothing to do with you. You know me and you know my family.' Q. Is there some reason why you said, when you swore your affidavit, that you never gave a mortgage, but now you are saying that you might have signed a mortgage? A. Well, I didn't know what it was. I was fooled by him, and that's it. … Q. You have just heard Mr Eardley say that he thought you were saying that you had not signed the mortgage? A. I didn't know they were mortgages. Q. Listen to the question. Can I suggest to you that you did not sign this mortgage? A. I would never sign in my life if I knew what it was. Q. Can I suggest to you that you did not sign it at all? A. Well, if I did, there should be a signature here, shouldn't there? Q. Could I ask you to turn to the next page? A. Back? Q. The next one over. Sorry, the other way? A. (Witness complied). Q. Can I suggest to you that you will see, halfway down the page, your name appears as Halyna Chrapacz? A. Well, I'm sorry, but I don't sign this. Q. Just listen to the question. If I ask you the wrong question, you can tell me. Just wait for the question. Do you see where your name appears in printing? A. Yes. Q. The signature there is not your signature? A. No. I don't sign like this. Q. No. That is not your signature. Somebody else has put that there. The same when you go down the page. The name Halyna Chrapacz-- A. Also is not mine. Q. Again, not your signature? A. No. No, sir. That's it. I know I can read my hand." 26 In re-examination the defendant said: "Q. So, you didn't sign this document? A. No. If - and it is not my signature at all. Q. So, you did not sign the document? A. No. Q. It is not your signature? A. No, no, no. I couldn't lie, particularly here, no." 27 I have compared the signature of the defendant in her affidavit sworn 23 November 2009 with the purported signatures of the defendant on the mortgage. In my opinion, there are considerable similarities between those signatures. Submissions 28 Counsel for the plaintiff made two submissions, namely: (a) it is clear that service of the statement of claim was effected upon the defendant. The affidavit of service and the fact that the defendant lived alone at the property are evidence of that. It is inherently improbable that there was some other female at the premises who would impersonate the defendant. Additionally, the defendant either directly or indirectly involved herself in the proceedings in seeking the stay on 23 July 2007; (b) the mortgage, on the defendant's own evidence, is a forgery. Accordingly, it is caught by s 42 of the Real Property Act. The plaintiff has indefeasible title and that is unchallengeable. The defendant has no defence, on her own evidence, to any claim brought by the plaintiff. The defence that she did not sign the mortgage is no defence at all. To the extent that the defendant's submissions raise matters such as the Contracts Review Act , it simply has no operation in a circumstance such as this, because there is no contract between the plaintiff and the defendant. Accordingly, she simply has no defence. 29 Counsel for the defendant did not challenge the affidavit by the process server but submitted that though somebody was served it may very well not have been the defendant. 30 As to the plaintiff's other submission, defendant's counsel submitted that it was simply not satisfactory to go to the fund via the Registrar General and say that there has been a fraud. It is necessary to prove that. He also submitted that "You heard Ms Chrapacz say he [Mr Georgiou] put things in front of her to sign. She did not understand that they were mortgages, but they could have been mortgages. That brings us squarely into the realm of the Contracts Review Act and the realm of the Credit Code. If the lender had done the proper due diligence checks required by the lender, we would not be in this position today, because the moneys simply would not have been advanced." 31 Counsel for the defendant said he did not know whether the signatures on the mortgage were forgeries and that was a substantive matter that needed to be determined when the default judgment was set aside and the matter was properly brought before the court. He did not agree that if the signatures were forgeries the only remedy was under s 42 of the Real Property Act. He said: "I think there are other remedies. There may be negligence on behalf of the lender for failing to conduct their credit checks, which would have detected, at an early stage, that there were some anomalies with this transaction." He submitted there was no prejudice to the plaintiff if the order sought was granted save the possible prejudice of time whereas the prejudice to the defendant if she lost her house, would be extreme. 32 Plaintiff's counsel submitted, in reply, that the defendant's submissions go well beyond the evidence on a large number of matters and that they go beyond that which had been raised in the proposed defence. 33 Subsequent to the conclusion of the hearing, additional written submissions were, by leave, provided by the parties. 34 Defendant's counsel there submitted the Torrens Assurance Fund is one potential remedy if the mortgage is a forgery but not the only remedy available to the defendant nor is indemnity from the fund an automatic right. The defendant proposed to cross claim against the plaintiff asserting that it had contributed through its own negligence to any loss suffered by the defendant. The defendant also proposed to issue cross claims against the registered conveyancer who purported to certify the defendant's signature on the mortgage and the solicitor who executed the mortgage on behalf of the mortgagee. Accordingly, the defendant had a remedy other than against the Torrens Assurance Fund and the Court should make the orders sought in the notice of motion. 35 Defendant's counsel accepted that it was well settled in law that registration of the mortgage created indefeasibility. However, he submitted "the critical issue is the identification of the 'estate or interest' that, upon registration, is made indefeasible". In PT Limited v Maradona Pty Limited (1992) 25 NSWLR 643 Giles J said at 679: "Registration does not validate all the terms and conditions of the instrument which is registered. It validates those which delimit or qualify the estate or interest or are otherwise necessary to assure that estate or interest to the registered proprietor." 36 In Perpetual Trustees Victoria Limited v Tsai [2004] NSWSC 745 Young J held at [23]: "…As the secured agreement itself does not bring with it any concept of indefeasibility and as there is an issue between the parties as to whether or not it was ever signed by the appellant or merely signed by a person impersonating the appellant, there is not the material to demonstrate to the required standard that there was a loan to the appellant. [24] If there was no loan to the appellant he could not be in default in not repaying the loan and, therefore, the mortgagee was not entitled to possession." 37 Thus it was submitted there was no loan to the defendant as the schedule to the mortgage did not create any personal obligations on the defendant to pay any money to the plaintiff and therefore Annexure A referring to the mortgage did not give rise to any liability. Annexure A sought to incorporate the Plain English Home Mortgage and Loan Agreement but on the unchallenged evidence that document was not signed by the defendant and there was no agreement between the plaintiff and defendant. Accordingly, as there was no loan to the defendant, she could not be in default in not repaying the loan and, therefore, the plaintiff was not entitled to possession. 38 In response to those submissions, plaintiff's counsel submitted, in short: (a) there being no allegation of fraud by the plaintiff, if the defendant's signature was forged on the mortgage the plaintiff has an indefeasible mortgage. Consideration of whether the defendant has a good claim against the Torrens Assurance Fund is not relevant to whether she has a good defence to the claim made against her by the plaintiff; (b) it was accepted the plaintiff could not rely on the Plain English Home Mortgage and Loan Agreement in this application and must rely upon the registered document alone. However, the registered document, in its terms, was a fully effective document without incorporation of the Plain English Home Mortgage and Loan Agreement. It was true to say that Annexure A did not identify the plaintiff's rights in the event of default but, in circumstances where all that is claimed by the plaintiff is possession of the subject property, that is a matter of no importance, the entitlement to possession being recognised by statute without the need for any express provision in the mortgage: Real Property Act , s 60(c); (c) for the above reasons the plaintiff has an indefeasible mortgage and the defendant has no arguable case. 39 Subsequently the matter was relisted and an affidavit by Mr Lengyel was read. The affidavit annexed the reports of two clinical psychologists, M. Forbes and M. McMahon. M. Forbes concluded the defendant's deficits were consistent with a previous diagnosis of a dementing process, probably of a mixed type, both vascular and Alzheimer's. Mr McMahon was of the opinion the defendant's markedly reduced executive memory functioning would significantly undermine her ability to engage in an informed decision-making procedure involving full or partial consideration of alternative options. Her vulnerability to exploitation was likely to have been very high for a considerable period of time. 40 An affidavit of the defendant's solicitor annexed an amended proposed defence. The amended proposed defence pleaded, in the alternative, a defence based on the Contracts Review Act, 1980 and Consumer Credit Code (NSW). Consideration 41 The primary basis for the application, as initially presented, was that the defendant did not sign the mortgage and that her purported signatures were forgeries. This was asserted by the defendant in her affidavit and the initial proposed defence was drafted on that basis. That premise was not disputed by the plaintiff and, if correct, it is common ground that, prima facie, the plaintiff would have the benefit of indefeasibility of title under the Real Property Act. As against that, the defendant submitted that there was an arguable defence in the event the signatures were forgeries in that in those circumstances there was no loan to the defendant, and thus she could not be in default in not repaying the loan and, therefore, the plaintiff was not entitled to possession. 42 It may be the mortgage was not signed by the defendant, however, on the evidence before the Court, there is reason to question that premise having regard to: (a) the state of the defendant's mental health; (b) the involvement of Mr Georgiou in the defendant's affairs; (c) inconsistency in the defendant's evidence as to whether she may have signed the mortgage documents; (d) the similarities between the defendant's acknowledged signature and the allegedly forged signatures; (e) the certification of one of the signatures on the mortgage; (f) the stay application in 2007. 43 In my opinion, there exists a real possibility the defendant was the victim of deception and may have signed the mortgage documents in circumstances which would entitle her to relief pursuant to the Contracts Review Act, 1980 and/or the Consumer Credit Code. 44 At the present time the precise circumstances surrounding the execution of the mortgage and later dealings are unclear and require further investigation. That investigation has been undertaken by the defendant's solicitors but is hampered by the consequences of the defendant's motor vehicle accident and her mental health and resort to other sources is required. 45 In Ex parte Vigilant Finance (NSW) Pty Limited re Cameron Smith (1964) NSWR 1282 at 1285 Herron CJ said, as to the setting aside of default judgments: "The principles are not in doubt, they are to be found set out in the case of Evans v Bartlam [1937] AC 473; [1937] 2 All ER 646. Sir Frederick Jordan CJ in Vacuum Oil Pty Co. Ltd v Stockdale (1942) 42 SR (NSW) 239 at 243, speaking of a cognate matter, said: 'As a general rule, although not necessarily in every case, if some reason exists for departing from it, the Court requires an affidavit showing prima facie that the defendant has a good defence on the merits and also an explanation of his absence which shows that justice requires that in the circumstances it should be excused.'" 46 In Evans v Bartlam Lord Russell of Killowen said: "It was argued by counsel for the respondent that before the Court or a Judge could exercise the power conferred by this rule, the applicant was bound to prove (a) that he had some serious defence to the action and (b) that he had some satisfactory explanation for his failure to enter an appearance to the writ. It was said that until those two matters had been proved the door was closed to the judicial discretion; in other words, that the proof of those two matters was a condition precedent to the existence or (what amounts to the same thing) to the exercise of the judicial discretion. For myself I can find no justification for this view in any of the authorities which were cited in argument; nor, if such authority existed, could it be easily justified in face of the wording of the rule. It would be adding a limitation which the rule does not impose. The contention no doubt contains this element of truth, that from the nature of the case no Judge could, in exercising the discretion conferred on him by the rule, fail to consider both (a) whether any useful purpose could be served by setting aside the judgment, and obviously no useful purpose would be served if there were no possible defence to the action, and (b) how it came about that the applicant found himself bound by a judgment regularly obtained, to which he would have set up some serious defence. But to say that these two matters must necessarily enter into the Judge's consideration is quite a different thing from asserting that their proof is a condition precedent to the existence or exercise of the discretionary power to set aside a judgment signed in default of appearance." 47 In Reinehr Industrial Lease and Finance Pty Ltd v Jordan (unreported, NSWCA, 4 June 1974) Street ACJ said: "The jurisdiction that a court exercises on an application of this nature will be significantly affected by what might be demonstrated to be the requirements of justice." The ultimate question for determination by the court is whether "it appears that the interests of justice will be served by letting the defendant in to defend" - Reinehr per Glass JA. 48 In my opinion, this is a matter in which the special circumstances require that the transaction should be fully examined. This is particularly so as the potential prejudice to the defendant is that she will lose her home. It is true the plaintiff will suffer the prejudice of further delay if it is entitled to succeed in its claim. However, that prejudice is far outweighed by the potential prejudice to the defendant and may be guarded against, to some degree, by imposing a strict timetable upon the defendant. 49 In my opinion the interests of justice will be best served by letting the defendant in to defend the proceedings. Orders 50 I make the following orders: 1. Set aside the default judgment entered on 18 June 2007. 2. Set aside the order for possession of land dated 11 September 2009. 3. Grant leave to the defendant to file a defence within 28 days of the date of this judgment which defence includes a defence based upon the provisions of the Contracts Review Act , 1980 and/or the Consumer Credit Code. 4. Grant leave to the defendant to file any cross claims within 28 days of the date of this judgment. 5. List the matter for directions before the registrar on Friday 26 March 2010. 6. Costs reserved. ********** 12/03/2010 - Correction to title of Act - Paragraph(s) 43 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.