Boumelhem v Commonwealth Bank of Australia

4. The offer made by Mr Nassar, the plaintiffs' son-in-law, was conveyed in a letter from the plaintiff's solicitors to the defendant bank. The text of this letter is as follows: "Dear Sirs,

re: Amin and Jamal Boumelhem Commonwealth Bank of Australia Supreme Court Proceedings 12282 of 2004

We refer to the above matter and advise that our clients, [sic] have a purchaser interested in taking over the property of which you are now in possession. We enclose herewith:

1. Preliminary loan approval from Integral Home Loans Pty Ltd in terms of which they are prepared to advance an amount of $306,850.00. We are instructed that Mr Nassar has a further $28,150 and he accordingly offers $335,000 for the property. 2. Valuation from Valuers Illawarra indicating the market value of $323,500.00 3. Market appraisal by Ray White dated 16 November, 2005.

We wait on your responses." 5. The real estate agency invited by the bank to contract to auction the property had provided a handwritten valuation of $260,000 - $270,000 on 12 December and a typed valuation on 20 December 2005 confirming this amount. The auction date had already been set for 4 March, although the agent had yet to sign the agency agreement with the bank.

Mr Chris Zammit (who was not required for cross-examination) in his affidavit of 7 February 2008 deposed to the following conversation with the solicitor at Henry Davis York who received this letter: "Solicitor: Hi Chris, account no. 209185704. Zammit: Boumelhem?

Solicitor: Yes. We have received a fax from the borrowers' solicitor. They claim to have an interested purchaser. The offer is for $335,000. They have attached a preliminary loan approval, valuation and market appraisal. Zammit: A preliminary loan approval?

Solicitor: Yes Zammit: Well then they don't have enough. We need an unconditional loan approval before we consider any offers. The property is going to auction."

Mr Zammit deposed to the usual practice of the bank to continue with auctions and evictions until such time that a customer provided an unconditional loan approval for a refinance of the loan for an amount that would satisfy the entire debt. In this particular case, the preliminary approval was from a third party purchaser, and it was not the practice of the bank to accept offers from such persons, because the bank "prefers to auction the property in order to ensure that the best market price is achieved for the property". The real estate agent, Mr Fitzgibbon, confirmed in his evidence that this was his understanding as well.

It is not in dispute that their matters rested until the auction, save for the telephone calls the plaintiffs made about attending the auction to make offers. Henry Davis York did not reply to the letter. There was no contact between Mr Nassar and the real estate agent, who began his auction campaign in February 2006. The real estate agent held four open houses, advertised in the newspapers, put a sign outside the property, talked to prospective purchasers and reported on those talks to the bank.

On the day of the auction, Mr Nassar and two other bidders registered their interest. The property had a reserve price of $290,000 and the bank gave authority to negotiate down to $260,000. The opening bid was $200,000 and bidding proceeded slowly by increments of $1,000 but stalled at $253,000. After a conversation with the auctioneer the real estate agent announced that the bank was prepared to put the property on the market for $260,000 and if this price could be achieved the bank would allow the property to be sold. Only Mr Nassar was prepared to do this and the property was accordingly sold to him that day under auction conditions.

This price of $260,000 was $65,000 less than the $335,000 Mr Nassar had offered in January, and the plaintiffs claim the difference. The manner in which this claim is framed, however, needs some explanation.

The question to be determined is whether in exercising its power of sale as mortgagee over the plaintiffs' property at 69 Roberts Street, Dapto the defendant breached any duty it owed to the plaintiffs.

The claim for negligence was amended yesterday at the commencement of the hearing. The plaintiff's counsel accordingly sought leave to amend the Statement of Claim to claim that the defendant alternatively breached its duty of good faith to the plaintiffs (paragraph 11 of the Statement of Claim) and to amend the claim in damages to claim (in the alternative) equitable compensation in relation to the sum of $65,000.

The plaintiff submitted that the High Court, in a series of decisions (notably Forsyth v Blundell (1973) 129 CLR 477 at 481 and ANZ Banking Group Ltd v Bangadilly Pastoral Co Pty Ltd (1978) 139 CLR 195 at 201), appears to blend the equitable duty to act in 'good faith' with the obligation to exercise reasonable care and that this leaves open the question of whether the claim for damages is a claim which can be made under common law or under equitable principles. However, I consider that there is no common law duty in negligence, in New South Wales, which makes a mortgagee liable in common law damages if he fails to get a good price for the property: Ultimate Property Group Pty Ltd v Lord (2004) 60 NSWLR 464 at [26] (see Skead, "A mortgagor's remedies against a mortgage for the improper exercise of the power of sale: you can't always get what you want", (2008) Australian Property Law Journal 130 fn 57); State Bank of NSW v Chia [2000] NSWSC 552 at [878]; Upton v Tasmanian Perpetual Trustees Ltd (2007) 158 FCR 118. A similar view was expressed by Basanko J in Jovanovic v Commonwealth Bank of Australia (2004) 87 SASR 570 at 593.

Whether or not the claim is brought under the common law or pursuant to equitable principles, the law is clear that common law proceedings cannot be brought for damages: Coronoe v Australian Provincial Assurance Association Ltd (1935) 35 SR (NSW); Colin D Young Pty Ltd v Commercial & General Acceptance Ltd (1982) NSW Conv R 55-097 at 56-572 per Hutley JA; Commonwealth Bank of Australia v Hadfield [2001] NSWCA 440 at [35] - [49].

The duty of a mortgagee is to act in good faith, without wilfully or recklessly sacrificing the interests of the mortgagee: State Bank v Chia (at [878]); Upton v Tasmanian Perpetual Trustees Ltd (2007) 158 FCR 118. As Skead notes (at p. 137), this makes it much more difficult for an aggrieved mortgagor to secure a finding of impropriety against a mortgagee where the duty is founded in equity.

An additional issue was the proposed amendment of the pleadings to bring a claim in the alternative in bailment in relation to the chattels. Although the defendant was ready to meet the reframing of the claim for damages, it was not ready to meet this claim. I note that no submissions were made in relation to the chattels, on any basis, by the plaintiff. I have dealt with this claim briefly at the end of this ex tempore judgment.

What kind of conduct on the part of the mortgagee must be established?

Counsel for the defendant, in his helpful written submissions, has extracted the relevant principles as follows:

In Hawkesbury Valley Developments Pty Ltd v Custom Credit Corporation Ltd (1994) 8 BPR 15,581, 15,583, McLelland CJ in Eq explained: "What matters is the underlying equitable principle, which in the modern idiom usually finds expression in terms of unconscionability. The mortgagee is not answerable for what Isaacs J in Pendlebury describes (at 700) as 'mere negligence or carelessness in carrying out a sale'. Any departure from reasonable standards must be so serious as to be properly characterised as unconscionable, in order to render the mortgagee accountable. If a failure by a mortgagee to take reasonable steps to obtain a proper price is sufficiently serious to be characterised as unconscionable as that expression is understood in equity, then in the taking of accounts between the mortgagee and the mortgagor, the mortgagee will be accountable on the basis of wilful default for the price which would have been obtained if the mortgagee had not been guilty of unconscionable conduct."

This approach was endorsed by Young CJ in Eq in Ultimate Property Group v Lord Ultimate Property Group Pty Ltd v Lord (2004) 60 NSWLR 646 at 653.

Mr Aspinall also draws my attention to the requirement by Einstein J in State Bank v Chia at [879(5)] that the conduct possess: "some moral turpitude or dishonesty or improper motive on the part of the receiver and does not embrace mere negligence or inadvertence"

In Hurley v McDonald's Australia Ltd (2000) ATPR 41-741 at [21]-[22], the Full Court of the Federal Court of Australia (Heerey, Drummond and Emmett JJ) held: "For conduct to be regarded as unconscionable, serious misconduct or something clearly unfair or unreasonable , must be demonstrated - Cameron v Qantas Airways Ltd ( 1994) 55 FCR 147 at 179. Whatever "unconscionable" means in s 51AB and s 51AC, the term carries the meaning given by the Shorter Oxford English Dictionary, namely, actions showing no regard for conscience , or that are irreconcilable with what is right or reasonable - Qantas Airways Ltd v Cameron (1996) 66 FCR 246 at 262. The various synonyms used in relation to the term "unconscionable" import a pejorative moral judgment - Qantas Airways Ltd v Cameron (1996) 66 FCR 246 at 283-284 and 298."

In Attorney General (NSW) v World Best Holdings Ltd (2005) 63 NSWLR 557 Spigelman CJ said (at 583): "Unconscionability is a concept which requires a high level of moral obloquy. If it were to be applied as if it were equivalent to what is "fair" or "just" , it could transform commercial relationships …"

The burden of proof is on the mortgagor seeking to impugn the sale to prove breach of duty by the mortgagee (see Stone v Farrow Mortgage Services [2000] ANZ ConvR 463 as quoted in Stockl v Rigura Pty Ltd [2004] NSWCA 73; Australia and New Zealand Banking Group Ltd v Bangadilly Pastoral Co Pty Ltd (1978) 139 CLR 195).

The first issue is whether the conduct of the defendant satisfies the test set out in the authorities referred to above. However, there is a second issue. If the sale of the property was not at a significant undervalue then there is no case for damages or an account by the mortgagee: Carver & Anor v Westpac Banking Corporation [2002] NSWCA 415 at [25]-[26] per Hodgson JA.

The defendant submits that there are two issues to be determined: (a) that the sale of the property was at a significant undervalue; and (b) that this was caused by the Defendant's sale of the Property in a manner which demonstrates misconduct so serious as to satisfy the tests of unconscionability set out above. 26. The plaintiffs, relying upon Forsyth v Blundell at 493 per Walsh J and 481 per Menzies J (and noting similar words used by Smith J in Cachalot Nominees Pty Ltd v Prime Nominees Pty Ltd [1984] WAR 380 at 393), submit that the fact that the property was sold at market value was irrelevant. In Forsyth, both offers were above the market value, but the mortgagee's conduct in accepting the lower of these two offers was conduct amounting to unconscionability, even though the higher offer was not so much an offer but an indication of interest. The mortgagee's duty is to obtain "the best price then available" (per Walsh J in Forsyth v Blundell) and "the failure…to follow up the prospect of obtaining a higher price, when it was known that a prospective purchaser was prepared to pay more" (per Aickin J in Bangadilly at 228) is evidence of breach of duty. In particular, it is asserted that failure to respond to an offer is a breach of the duty of good faith: Forsyth v Blundell per Walsh J at 492 and per Mason J at 508 - 9 and 510. I shall deal with this issue first.

Was the property sold for market value and if so, can the plaintiffs still claim damages for the lost sale for a higher figure?

The defendant submits that it is critical to the plaintiff's case that they must prove that the Property was sold at a substantial undervalue: Upton (at [31]).

There is no challenge to the adequacy of the auction process. In Stockl v Riguara Pty Ltd [2004] NSWCA 73 Palmer J said, as to evidence of value: "… the first question is always: has the mortgagee taken proper steps to advertise and sell the property? If the clear answer to that question is 'yes', the court may regard the resultant sale as the best evidence of the current market value of the property so that no regard need be paid to other valuation evidence. However, if the answer to the first question is doubtful, valuation evidence as to current market value may assist to resolve the doubt."

The Statement of Claim does not seek to impugn the marketing or auction process and the plaintiff's counsel conceded in addresses that the property was sold for fair market value. The plaintiffs say that this is not sufficient; the mere fact that there is an auction properly conducted does not absolve the bank from the obligation to obtain the highest price that either Mr Nassar or others interested in the property could offer by following up Mr Nassar's offer. I should, however, first address the issue of whether the offer from Mr Nassar, including the documents attached to the Horowitz & Bilinsky letter, are capable of being evidence of the real value of the property and whether it is an offer at all.

The defendant submits that the offer made in the fax to Henry Davis York dated 13 January 2006, is not capable of acceptance. This is so because there is no indication in the fax that Horowitz and Bilinsky were authorised to act for Mr Nassar, nor that they were authorised to bind him if the offer were accepted. They therefore lack actual or ostensible authority (see Essington Investments Pty Ltd & Ors v Regency Property Pty Ltd [2004] NSWCA 375) to bind Mr Nassar. If it were an offer capable of acceptance it is still not evidence of value. In Cordelia Holdings Pty Ltd v Newkey Investments Pty Ltd [2004] FCAFC 48 at [121] the Full Court of the Federal Court held that an offer to purchase is not to be accorded the same significance as a conclude sale and is not permissible evidence of value. Mr Nassar cannot be regarded as an "arms-length party". Accordingly, it is submitted, that the Court ought not to take his offer into account in considering that the true value differed from the price attained at the auction.

The offer in the Horowitz & Bilinsky letter may not have been capable of acceptance, but this is irrelevant to the issue, because the higher offer in Forsyth v Blundell was similarly incapable of acceptance. The fact that a potential buyer is considering offering, or does offer, to pay a particular price is not evidence of the value of the price; it is evidence of the offer only.

Having noted these two preliminary matters, I now turn to a consideration of the plaintiffs' arguments that the defendant was obliged to obtain, not the market value obtainable at an auction but the best price then available, and whether the failure of the bank to follow up the higher offer was conduct amounting to breach.

The plaintiffs submit, having regard to the principles enunciated in Forsyth v Blundell and Bangadilly referred to above, that the bank's failure to follow up on the offer of their son-in-law for an amount $65,000 higher than the market value later obtained at auction is a breach of the bank's duty to them and is unconscionable.

As can be seen from the summary of factual material set out at the commencement of my judgment, Mr Zammit's evidence is that offers from third party purchasers are not accepted, as the Bank prefers to auction the property in order to ensure that the best market price is achieved. Mr Fitzgibbon also said, in his affidavit (at paragraph 8) and in cross-examination that auction is the method he recommends in mortgagee sales. A properly conducted auction is a transparent process which allows both parties and the Court, when necessary, to see that the true price has been attained. In fact, it was in part because no auction was conducted, and the offer of Shell accepted, that the acceptance of the offer from Shell was held by the High Court to be unconscionable in Forsyth v Blundell.

The bank's decision to proceed to auction could not in any way amount to what Einstein J referred to in Chia as moral turpitude or dishonesty or from an improper motive. For all the bank knew, the property could realise $335,000 or more at auction, if the property was in fact worth this amount. The letter from Horowitz & Bilinsky was a letter advising the plaintiffs had found someone to take over their interest in the property and was effectively asking the bank to cancel the auction. The offer needs to be looked at in this context.

Mr Zammit, who made the relevant decision to proceed to auction notwithstanding this offer, swore an affidavit in these proceedings but was not required for cross-examination, and he was therefore never put to him that the decision to proceed to auction was made otherwise than in good faith.

The defendant submits that at auction Mr Nassar paid the true price and that any contention that the Bank's decision not to sell to Mr Nassar prior to auction was unconscionable in any sense is simply not made out.

The plaintiffs are essentially complaining about loss of a windfall. Mr Nassar was willing to pay not only more than the property went for at auction but $10,000 more than his own valuer said the property was worth. The plaintiffs point to the fact that the offer of Shell in Forsyth v Blundell was for more than the market value, that the offer higher than Shell's was not really an offer at all, and that the High Court agreed the conduct of the mortgagee in accepting Shell's offer was unconscionable.

It is important, when reading the extracts from Forsyth v Blundell and Bangadilly referred to by the plaintiffs in the written submissions supplied to me this morning, to read them in context of the factual background in each case. This is what McLelland CJ in Eq was referring to in Hawkesbury Developments Pty Ltd & Anor v Custom Credit Corporation Ltd & Ors (Supreme Court of NSW, 9 December 1994, unreported) when his Honour, having noted that Pendlebury v Colonial Mutual Life Assurance Society (1912) 13 CLR 676 was authority for the proposition that a mortgagee was acting in good faith, went on to warn: "Subsequent discussion of the question in the High Court (particularly in Forsyth v Blundell (1973) 129 CLR 477; ANZ Banking Group v Bangadilly Pastoral Co (1977 - 78) 139 CLR 195 and Commercial and General Acceptance v Nixon (1981) 152 CLR 491) has not displaced the authority of the decision in Pendlebury , although in Bangadilly a mortgagee was said by Aickin J (with whose judgment Stephen and Jacobs JJ agreed) to be in breach of its obligation to the mortgagors where there was "a serious departure from accepted standards in seeking to obtain the best price available" (at p. 228). This is an area of the law where particular phrases used in judgments should not be construed and applied as if embodied in an Act of Parliament (cf Australian Apple & Pear Marketing Board v Tonking (1942) 66 CLR 77 at p. 110). What matters is the underlying equitable principle, which in the modern idiom usually finds expression in terms of unconscionability. The mortgagee is not answerable for what Isaacs J in Pendlebury describes (at p. 700) as "mere negligence or carelessness in carrying out the sale". Any departure from reasonable standards must be so serious as to be characterised as unconscionability in order to render the mortgagee accountable."

Even if I were to accept the plaintiffs' arguments that the conduct of the bank in failing to respond to the letter of Horowitz & Bilinsky by cancelling the auction and accepting the offer of $335,000, it was not unreasonable for the bank to let the property go to auction on the basis that if Mr Nassar genuinely wished to purchase for this price he could do so at any time prior to, or at, the auction. Nor was it unreasonable for the bank to consider that auction was the best way to ensure that the property was sold for market value. The obligation of the bank is not to follow every offer, but to set up a procedure to ensure that the property is sold for market value in a transparent fashion. The bank was entitled to assume that if the property was properly marketed and put to auction, any interested persons would participate in the auction process, which was the surest sign that offers were bona fide.

A claim is also made in the Statement of Claim for "relocation costs"; this is referred to briefly in Mr Aspinall's written submissions but this morning Mr Horsley conceded there was no evidence of this. Accordingly the claim for relocation costs fails.

My overall conclusion is that on none of the grounds on which the bank's conduct is sought to be impugned, considered separately or in combination, am I satisfied that the bank by itself or its agents acted unconscionably or in wilful or reckless disregard of the interests of the mortgagors, or otherwise than in good faith. Accordingly I will give judgment for the defendant concerning the claim for $65,000.

The plaintiffs in their Statement of Claim seek $1,895 being for lost outdoor furniture, a BBQ and sundry items. Any goods left behind by the plaintiffs were left behind without the Bank's prior consent. The plaintiffs knew from 9 December 2004 that they would be required to vacate the premises and remove their goods. At the time of they left the property they had not done so. Mr Fitzgibbon in his affidavit says that he would not have arranged for the disposal of anything of value.

In cross-examination of Mr Boumelhem it was put to him that he had claimed to have some receipts in his evidence in the Federal Magistrates Court (in bankruptcy proceedings that were adjourned while these proceedings are litigated) but has not produced them in these proceedings and now claims not to have them. Effectively the only evidence of value is Mr Boumelhem's claims of how much he spent on these items, all of which (except the BBQ) are around 15 or more years old.

I accept the submission of the defendant that these were old items in poor condition that were abandoned by the plaintiffs. No submissions to the contrary (indeed, no submissions at all on this claim) were put by counsel for the plaintiffs. Accordingly I also find for the defendant on this issue.

1. Judgment for the defendant.
2. Plaintiffs pay defendant's costs.
3. Liberty to restore re interest and costs.
4. Exhibits retained for 28 days.

14/05/2008 - Typographical error - Paragraph(s) Catchwords

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