Bank of Western Australia Ltd v Tannous

Consumer Credit Code LEGISLATION CITED : Contracts Review Act 1980 Credit Act 1984 Uniform Civil Procedure Rules

Collier v Morlend Finance Corporation (Victoria) Pty Ltd (1989) 6 BPR 13,337; (1989) NSW ConvR 55-473 General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 CASES CITED : Mizzi v Reliance Financial Services Pty Ltd [2007] NSWSC 37 Perpetual Trustee Co Ltd v Khoshaba [2006] NSWCA 41 St George Bank Ltd v Trimarchi [2004] NSWCA 120

Bank of Western Australia Ltd (Plaintiff) Arthur Tannous (First Defendant) PARTIES : Emily Tannous (also known as Emiley Tannous) (Second Defendant/Cross-Claimant) Ing Bank (Australia) Limited (First Cross-Defendant to Second Cross-Claim; Third Cross-Defendant to Third Cross-Claim) Firstfolio Mortgages Australia Pty Ltd (Second Cross-Defendant to First Cross-Claim; Second Cross-Defendant to Third Cross-Claim) Registrar General of NSW (Second Cross-Defendant to Second Cross-Claim)

F Tao (Plaintiff) J Donnelly (First Defendant) COUNSEL : A Kumar (Second Defendant) MBJ Lee & T Iskra (ING and First Folio Mortgages) E Mooney (Registrar General)

Henry Davis York (Plaintiff) Donnelly Lawyers (First Defendant) SOLICITORS : Good Legal Lawyers (Second Defendant) Gadens Lawyers (ING and First Folio Mortgages) Solicitor for the Registrar General

• 14 - IN THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION POSSESSION LIST

2009/292096 BANK OF WESTERN AUSTRALIA LTD V ARTHUR TANNOUS AND ANOR

JUDGMENT 1 The Bank of Western Australia has brought proceedings claiming possession of land at 30 Rixons Pass Road, Woonona against Arthur and Emily Tannous arising out of loan agreements said to have been entered into between them and the Bank in December 2006. The Defendants defend the proceedings on the basis that the loan agreements were fraudulently entered into, alternatively, that the contracts were unjust under both the Contracts Review Act 1980 and the Consumer Credit Code. 2 The Defendants are the elderly parents of Michael Tannous. Emily Tannous has very limited English and neither she nor Arthur Tannous is educated beyond a very basic level. 3 They allege that some of the loan documents have been forged. Rather surprisingly, Affidavits have been sworn by their son Michael Tannous where he admits to having forged his parents' signatures, and otherwise to have persuaded them to enter into various transactions by misrepresenting those transactions to them. In those Affidavits he admits that a prior transaction where money was borrowed from Firstfolio Mortgages Australia Pty Ltd (FMA) as trustee for ING Bank (Australia) Ltd was also obtained in similar circumstances in 2005. 4 When the loans were obtained from Bankwest, Bankwest paid out the FMA loan in full on about 20 March 2007 and that resulted in the mortgage in favour of FMA being discharged and replaced by the present mortgage to Bankwest. 5 After the present proceedings were served on the Defendants not only did they file Defences but they filed 3 Cross-Claims against (inter alia) ING Bank and FMA. 6 The thrust of the pleading against ING and FMA was that the loan made by FMA which led to the mortgage being taken by it over the Defendants' property was not authorised by the Defendants, was fraudulent, and if signed by them as a result of misrepresentations, ought to be set aside under the Contracts Review Act. In the relief claimed, orders are also sought that ING and FMA should indemnify the Defendants for all monies that they (ING and FMA) received from Bankwest less an amount of $30,000 being an existing liability the Defendants had to a company called Fiduciary Services Australia Pty Ltd at the time of the FMA loan. 7 ING and FMA now ask for summary dismissal of those Cross-Claims against them, alternatively that the Cross-Claims be struck out in their present form under Part 14.28 UCPR.

The Cross-Claims 8 Emily Tannous has filed separate Cross-Claims. The First Cross-Claim names (inter alia) FMA and the Second Cross-Claim names (inter alia) ING Bank. 9 Arthur Tannous has filed one Cross-Claim which, although entitled "First Cross-Claim" I have directed is to be referred to as "Third Cross-Claim" to distinguish it from the First Cross-Claim filed by Emily Tannous. 10 Declarations are sought by both Cross-Claimants against each of those parties in identical terms as follows: 1. A declaration that the … Cross-claimant has not executed any Mortgages, charges, encumbrances, memorandums and loan agreements in favour of [ING]. 2. A declaration that all Mortgages, charges, encumbrances, memorandums and loan agreements in favour of [ING] are and were void as against the … Cross-claimant and are of no effect. 11 Emily Tannous then seeks a further declaration and an order against ING in these terms: iii. A declaration that no monies were due and payable by the Cross-claimant to the First Cross-defendant in respect of any mortgages or loans with the charges over the Property. iv. An order that the First Cross-defendant repay or indemnify the Cross-claimant including return of any monies received pursuant to any purported charges or mortgages of the Cross-claimant's interest (in the Property) including the sum of $571,171.26. 12 Arthur Tannous also seeks an order that ING indemnify him, although it does not identify for what the indemnity is to be paid. 13 Against FMA the Cross-Claimants seek the following declaration and order: 3. A declaration that the debt created by the loan agreements or mortgages is not personally due and payable by the … Cross-claimant and no monies were due and payable by the … Cross-claimant in respect of any mortgages or loans with the charges over the property. 4. An order that [FMA] indemnify the … Cross-claimant including return of any monies received pursuant to any purported charges or mortgages of the … Cross-claimant's interest (in the Property) with adjustment for the discharge of the share of the cross-claimant's liability to the Fiduciary mortgage of approximately $30,000.00 plus interest.

The factual background 14 The evidence disclosed that ING was the funder of the loan made to the Defendants in March 2005. FMA acted as the lender of record and as ING's trustee in relation to the loan. 15 Pursuant to a loan agreement dated 2 March 2005 FMA advanced credit of $543,750 to the Defendants. The loan was secured by a registered mortgage over the property of 30 Ricksons Pass Road, Wynuna. The mortgage dated 10 March 2005 discloses that the mortgagee is Australian Wholesale Lending Mortgages Pty Ltd, the former name of FMA. 16 The mortgage was discharged of 20 March 2007 when the sum of $571,171 was paid by Bankwest to ING.

The Cross-Claimants' Contentions 17 The Cross-Claimants submitted in relation to FMA that because the mortgage was obtained by fraud it meant that FMA was unjustly enriched. That seemed to involve the proposition that the Cross-Claimants should be entitled to recover from FMA the amount that was paid to them by Bankwest to discharge their mortgage. That, it was submitted, was the reason FMA had to be a party to the proceedings. 18 When I pressed Mr Kumar, who appeared for Emily Tannous, on this matter he seemed to accept that the real purpose of having FMA as a party to the proceedings was against the possibility that Bankwest argued that in any adjustment of rights as between itself and the Cross-Claimants, they would have to give credit for the amount paid to FMA. Again, although I found the submissions put forward by Mr Donnelly, who appeared for Arthur Tannous, difficult to follow, it seemed that he was also concerned that Bankwest might put such and argument, because at one point he said during submissions: They [Bank West] have the affront to say we have been paid out but the contract was obtained fraudulently,

when he was speaking of the FMA contract. 19 Mr Kumar, in particular, considered it important that a declaration should be made about the FMA contract that it was unjust. Mr Donnelly said nothing about that, but the relief sought by his client suggests that he holds a similar view. 20 In relation to the claim against ING Mr Kumar agreed that if ING was merely a beneficiary it should not be a party. Mr Donnelly made no submissions about ING. 21 Both appeared to concede that s 74 of the Consumer Credit Code and s 148 of the Credit Act were not available, and Mr Kumar appeared to accept that his client was out of time in respect of the Contracts Review Act.

(a) ING 22 Whilst the evidence would justify the making of a declaration that the Defendants have not executed any mortgages in favour of ING, it would be futile to do so because it has never been asserted by any party that there was any mortgage executed by the Cross-Claimants in favour of ING. Moreover, since there are no mortgages, charges, encumbrances, memorandums and loan agreements in favour of ING, there is nothing to declare void in that regard. Similarly, there cannot be moneys due and payable to ING and no one is asserting that there is. 23 Further, there can be no basis for making the order that ING repay or indemnify the Defendants for moneys ING has received, particularly identified as the sum of $571,171. Since the Defendants did not pay this money to ING, there is nothing to repay. Secondly, ING's involvement is only as the source of funds for FMA. To the extent that the Defendants had any dealings, contracts, mortgages or otherwise, they were with FMA. The Defendants have no right in law or in equity to the sum of $571,171 paid by Bankwest to ING. 24 Apart from making a declaration, the contrary of which nobody asserts, and the making of which, therefore, would be futile, there is no basis for the relief sought against ING. The matter easily satisfies the tests as variously expressed in General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 at 129-130. 25 In paragraph 20 of each of the Defences filed by the Defendants, the following appears: C. Pursuant to section 148 of the Credit Act (1984) and section 74 of the Consumer Credit Code ING Bank Australia Limited ("ING") ought to be joined as a party to these proceedings and an order ought to be made against it for the payment of the sum of $571,171.21 plus interest from 20/03/2007. Particulars Upon the settlement of the Mortgage on or about 20/03/2007, the Plaintiff paid ING the sum of $571,171.21. This payment was made by the Plaintiff to ING without the consent, knowledge or authority of the First Defendant. Further, the First Defendant is not and was not ever been indebted to ING in any sum.

No such relief pursuant to those sections is sought in the cross-claims filed. It is, however, appropriate that I should deal with the applicability of those sections. 26 Section 74 Consumer Credit Code provides: (1) If it appears to the Court that a person other than a credit provider or a mortgagee (a "third party" ) has shared in the profits of, or has a beneficial interest prospectively or otherwise in, a credit contract or mortgage that the Court holds to be unjust, the Court may make an order about the third party that the Court considers appropriate.

(2) However, before making an order about the third party, the Court must - (a) join the third party as a party to the proceedings; and (b) give the third party an opportunity to appear and be heard in the proceedings. 27 Section 148 Credit Act 1984 (NSW) provides: Joinder of Parties Where it appears to the Tribunal that a person other than a credit provider or mortgagee has shared in the profits of, or has a beneficial interest prospectively or otherwise in, a regulated contract or regulated mortgage that the Tribunal holds to be unjust, the Tribunal may join that person as a party to the proceedings and may make such order in respect of that person as it thinks fit. 28 There are a number of reasons why these provisions do not apply to enable any relief which the Defendants seek against ING. First, in relation to the Credit Act 1984 s 148 gives power to the Tribunal (defined as the Commercial Tribunal of New South Wales in s 5) to make a person a party to proceedings concerning a regulated contract or regulated mortgage. Regulated contracts are explained in s 30 where it can be seen that there is relevantly a limit of $20,000 in relation to the amount of the loan. 29 Secondly, both s 73 Consumer Credit Code and s 149 Credit Act 1984 impose a time limit for making an application to join a new party pursuant to s 74 or s 148 of 2 years after the relevant credit contract is rescinded or discharged or otherwise comes to an end. The loan contract with FMA came to an end on 20 March 2007. Even if the date of filing of the Defences (where reference is made to these sections) is to be considered as the relevant date, Emily Tannous filed her Defence on 2 April 2009 and her Cross-Claim on 11 August 2009 and Arthur Tannous filed his Defence and Cross-Claim on 1 July 2010. The applications are out of time. 30 Thirdly, it is doubtful if ING can be said to be a person who has "shared in the profits of, or has a beneficial interest … in, a credit contract or mortgage". The mere provision of the funds for FMA to lend, and the receipt of funds at the time of discharge by virtue of some arrangement between the lender and ING does not seem to me to give to ING a "beneficial interest" in the credit contract or mortgage. 31 The Defendants do not show that they have any claim against, or entitlement to relief from, ING.

(b) FMA 32 Although it is a little difficult to discern, the claim made against FMA by the Defendants appears to be derived from the principle as expressed in such cases as Collier v Morlend Finance Corporation (Victoria) Pty Ltd (1989) 6 BPR 13,337; (1989) NSW ConvR 55-473 which ordinarily requires a borrower obtaining relief under the Contracts Review Act to give credit for any sums paid to discharge a pre-existing obligation of the borrower. The Cross-Claims alleging that the prior obligation, evidenced by the mortgage to FMA, was itself unjust seems to be a pre-emptive strike against Bankwest's calling in aid that principle to say that, at the very least, the Defendants should not have relief to the extent of $571,171. However, I consider that such an approach is misconceived. 33 A consideration of what orders should be made and what relief is given to the borrower occurs at the second stage of the proceedings. The first stage is whether the contract was unjust having regard to the matters referred to in s 9: Mizzi v Reliance Financial Services Pty Ltd [2007] NSWSC 37 at [39] and the cases there cited. The second stage is said to be truly a discretionary power to be exercised if the Court "considers it just to do so, and for the purpose of avoiding as far as practicable an unjust consequence or result": Perpetual Trustee Co Ltd v Khoshaba [2006] NSWCA 41 at [109] per Basten JA. One of the considerations in the exercise of that discretion involves a consideration of any benefit that the borrowers obtained as a result of the unjust contract. That is why, in the ordinary case, the discharge of a pre-existing mortgage by the payment of part or all of the proceeds of the loan agreement held to be unjust would result in an order that ultimately required repayment of that sum to the new lender. 34 However, that will not necessarily be so. If it can be shown that the pre-existing liability was itself unenforceable or unjust in whole or in part, the discretionary order made in respect of the unjust contract sued upon would take account of that unenforceability or that unjustness. To do so, there would be no necessity to join the prior mortgagee because no order or relief would be sought, nor would need to be sought, against that mortgagee. Because that loan agreement has been fully performed and discharged, and because any pre-existing mortgage has itself been discharged, there is no longer a justiciable issue between the borrower and the prior mortgagee/lender. 35 No doubt the borrowers in such a case will lead evidence suggesting reasons that the pre-existing mortgage/loan agreement was unenforceable or unjust, and that the discharge of that arrangement by the incoming lender was not a benefit to the borrowers for that reason. One can envisage also that the incoming borrower may need to counter that evidence, by calling evidence from the outgoing mortgagee/lender to answer the claims of unenforceability or unjustness. But none of that justifies the joining of the outgoing mortgagee/lender, because it has no legal or equitable interest to protect. 36 Some support for this can be found in the Court of Appeal's decision in St George Bank Ltd v Trimarchi [2004] NSWCA 120 in a not dissimilar situation to the present. In that case the son of elderly migrant parents obtained a loan from National Mutual Trustees Ltd for an amount of about $2.6 million by forging their signatures and misrepresenting their financial position. That resulted in a loan for his benefit but on the security of his parents' property. 37 When he got into difficulties in relation to the repayment of the National Mutual loan, he persuaded his parents to sign the necessary documents to obtain a loan from St George Bank for $2,675,000, $2.6 million of which paid out National Mutual. Indeed, even prior to the National Mutual borrowings, there had been earlier borrowings from Westpac for the benefit of the son, and those borrowings were paid out by the loan from National Mutual. In the proceedings brought by St George Bank the parents challenged the transaction with St George Bank as well as the successively earlier transactions with National Mutual and Westpac. 38 In relation to the National Mutual transactions, Mason P (with whom Sheller JA and Cripps AJA agreed) said: [21] The parties also joined issue as to the enforceability, in light of the Act, of the National Mutual transaction as regards the respondents. [22] The perceived relevance of examining the unjustness of the 1994 transaction [with National Mutual] was that the appellant argued that its conduct could not be unjust within s 9 of the Act because it resulted in the respondents being discharged from their obligations to National Mutual. These were obligations as principal borrowers vis-à-vis National Mutual, whatever might be their rights of recoupment against their son, the principal debtor (Grounds B-C). [23] Alternatively, it was argued that avoidance of the respondents' mortgages was an excessive and disproportionate remedy in so far as the respondents had obtained the discharge of the earlier mortgages. [24] The direct relevance of the respondents' position vis-à-vis National Mutual to the issues joined between the present parties is not immediately apparent. Certainly, the fact that the St George money discharged the National Mutual debt is not conclusive (as the appellant contended: see Grounds B-C). [25] The Act requires separate attention to be given to the transaction being sought to be enforced and the "justness" of that contract. Simply because the money advanced by St George went to discharge the earlier mortgage transaction involving National Mutual did not mean that relief had to be withheld , a fortiori where the respondents were effectively guarantors of their son's primary obligation, to the knowledge of the appellant through Mr Briggs; where the earlier transaction was tainted as regards the respondents; and where one element of the unjustness of the present transaction was the absence of independent legal advice as to the respondents' rights to challenge the National Mutual loan or financial advice as to the consequence of committing to the St George Bank transaction (J62-63). [His Honour then set out the trial judge's findings in relation to the advance by National Mutual, and continued]: [27] The appellant raised various grounds of appeal in relation to these findings about the National Mutual Mortgage (Grounds D-I). It submitted that the primary judge erred in finding that the National Mutual Mortgage would itself have been liable to be set aside under the Act as regards the respondents (Ground D). Grounds E-I advanced particular challenges to this ultimate finding. (emphasis added) 39 Mason P then considered the challenge to the primary judge's findings and held that the primary judge had been correct in his view that the National Mutual contract was unjust. 40 His Honour returned to the same point again when considering the circumstances of the entry into the St George Bank transaction where he said: [39] The effect of the respondents' entry into the St George Bank transaction was to commit themselves as "borrowers" and mortgagors (offering their three properties as security) in respect of an advance of $2,675,000. Apart from $75,000, this was the sum paid by the appellant to National Mutual to discharge the debt and mortgages held by that company under the 1994 transaction that had been in substantial default since mid 1995. [40] The respondents were jointly liable (together with their son and daughter-in-law) to National Mutual for this sum. But four qualifications to this statement need to be stated immediately: (a) The respondents were substantially in the dark about the scope and implications of this indebtedness, due to the inadequate explanations received from Messrs Matiussi and Demasi. (b) National Mutual's right to enforce the debt against the respondents and their properties was itself subject to the rights conferred on the respondents by the Act. As indicated, Dunford J correctly held that the National Mutual contracts could have been avoided at the suit of the respondents. (c) The relationship between the respondents and their son Anthony was that of surety (the respondents) and principal debtor (the son) having regard to the fact that the respondents had entered into the National Mutual transaction at the request of and for the benefit of the son for whose purposes the borrowing was made. (d) Unlike the appellant's Mr Briggs, the respondents were ignorant of the extent of the default under the National Mutual transaction (see J8, 16). (emphasis added) 41 It is to be noted also that it was in the context of Dunford J considering the principle that I have identified from Collier v Morlend Finance that he held that the National Mutual contracts could have been avoided at the suit of the borrowers. Because his Honour found that the National Mutual mortgage was also a unjust contract he held that Collier was thereby distinguishable. 42 It is notable that in Trimarchi, not only was National Mutual not a party, but no order was made under the Contracts Review Act or otherwise in relation to the National Mutual contract and mortgage. Rather, what was determined was that that contract and mortgage was liable to be set aside on the basis of the unjustness and, for that reason, the Plaintiff was not entitled to claim that the borrowers had the benefit of the amount that paid out that National Mutual mortgage. 43 Where there is an issue about the unjustness of a contract or mortgage paid out by an incoming mortgagee who is the Plaintiff in proceedings, the issue is not determined by joining that prior mortgagee as a party to the proceedings. Rather, the issue is determined in the context of the discretionary order at the second stage of the Contracts Review Act proceedings. That is so, because the issue forms part of the controversy between the Plaintiff and the Defendants. The justiciable issue is what order should be made in circumstances where the contract made between the Plaintiff and the Defendants is held to be unjust. There is no justiciable issue between the Defendants and the mortgagee/lender whose contract has been completed and whose mortgage has been discharged. 44 Additionally, s 148 Credit Act 1984 cannot apply to FMA for the reasons I gave in respect to ING. Nor can s 74 of the Consumer Credit Code apply, both because of the time limit contained in s 73 and because FMA is not "a person other than a credit provider or a mortgagee". 45 The problem with the claims made by the Defendants against FMA are not matters of pleading. They are matters of substance. There is no claim, and can be no claim, against FMA arising out of the facts pleaded. Again, the matter easily satisfies the test in General Steel Industries.

Conclusion 46 I make the following orders: (1) Judgment for the Second Cross-Defendant on the First Cross-Claim dated 11 August 2009.

(2) Judgment for the First Cross-Defendant on the Second Cross-Claim dated 1 July 2010.

(3) Judgment for the Second and Third Cross-Defendants on the Third Cross-Claim (wrongly entitled First Cross-Claim) dated 1 July 2010.

(4) The Second Defendant/Cross-Claimant is to pay the costs of the Second Cross-Defendant to the First Cross-Claim and the First Cross-Defendant to the Second Cross-Claim.

(5) The First Defendant/Cross-Claimant is to pay the Second and Third Cross-Defendants costs of the Third Cross-Claim.

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