CB Direct v Challenger Mortgage Management

Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 Sargent v ASL Developments Ltd (1974) 131 CLR 634 Integral Home Loans Pty Ltd & Anor v Interstar Wholesale Finance Pty Ltd & Anor [2007] NSWSC 406 CASES CITED : Interstar Wholesale Finance Pty Limited v Integral Home Loans Pty Limited [2008] NSWCA 310 Keenan v Handley (1864) 2 De G J & S 283; 46 ER 384 Australian Broadcasting Corporation v O'Neill [2006] HCA 46; (2006) 227 CLR 57 Kerridge v Foley [1968] 1 NSWR 628 Air Express Ltd v Ansett Transport Industries (Operations) Pty Ltd (1981) 146 CLR 249

TEXTS CITED : RP Meagher, J D Heydon and M J Leeming, Meagher, Gummow and Lehane's Equity: Doctrines & Remedies 4th ed 2002

CB Direct Pty Ltd PARTIES : v Challenger Mortgage Management Pty Ltd & Anor

COUNSEL : Plaintiff: R K Newton Defendants: M Cohen

SOLICITORS : Plaintiff: Bransgroves Lawyers Defendants: Deacons Lawyers

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION DUTY JUDGE'S LIST

2157/09 CB Direct Pty Ltd v Challenger Mortgage Management Pty Ltd & Anor JUDGMENT 1 HIS HONOUR: The plaintiff is a finance broker. On 9 April 2003 it entered into an agreement called a Loan Origination and Management Agreement ("LOMA") with the first defendant then called Interstar Securities (Australia) Pty Limited. 2 Pursuant to this agreement it became entitled to receive a trailing commission called an Originator's Fee in respect of outstanding loan balances on loans it introduced or "originated" to the first defendant. 3 On 6 March 2009 the first defendant gave notice purporting to terminate that agreement. The first defendant purportedly acted pursuant to clause 20.1(c) of the agreement. That clause after amendment on 15 June 2004 provides: " Either Manager may terminate this Agreement immediately upon the happening of any of the following events:

(c) where the Originator or Originator's Representative has engaged in any proven deceptive or fraudulent activity in relation to an Application or a Settled Loan or Interstar considers, in its reasonable opinion, that the Originator or Originator's Representative has engaged in deceptive or fraudulent activity in relation to an Application or a Settled Loan; "

4 Each of the first and second defendants is a "Manager" within this clause. Clause 20.3(c) provides that: " In the event that this Agreement is terminated by Interstar [the first defendant] :

(c) pursuant to clause 20.1 ... , then the Originator shall, with effect from the date of the termination, have no further entitlement to receive any Originator's Fee ".

5 The plaintiff's right to an Originator's Fee is found in clause 10. That clause provides: " 10.1 In consideration of the origination and management of Mortgages by the Originator, Interstar will, subject as herein provided, pay to the Originator a percentage (as agreed upon between the Originator and Interstar) of the Outstanding Loan Balance on the last Business Day of each month. In the event that: (a) a Loan is Settled during a month then the Originator's Fee in relation to that Loan for that month shall be calculated on a daily basis for the period from the date upon which the Loan is Settled until the last Business Day of that month; and (b) a Settled Loan is repaid in full during a month then the Originator's Fee in relation to that Settled Loan for that month shall be calculated on a daily basis for the period from the first day of that month to the calendar day immediately prior to the date of repayment of the Settled Loan in full. 10.2 Interstar will use its best endeavours to ensure that the originator's Fee is paid by Interstar to the Originator on a date no later than the 15th calendar day of the succeeding month. " 6 The plaintiff contends that the first defendant was not entitled to terminate this agreement. The plaintiff has not accepted the purported termination as a repudiation. It insists it is entitled to continued monthly payments of the Originator's Fee. 7 It contends that it is likely to be driven out of business if the fees are withheld. It seeks a mandatory interlocutory injunction that the first defendant pay trailing commissions due for the months of February and March 2009 and, until further order, that the first defendant pay trailing commissions for each succeeding month by the 10th day of the following month. 8 The plaintiff makes separate claims with respect to trailing commissions on loans originated by it and on loans originated by a third party, Prosperity Mortgages Pty Ltd. The latter loans are called "Prosperity Loans". 9 On 16 November 2006 the plaintiff purchased the trailing commission and management rights to the Prosperity Loans for $80,000. Thereafter it was paid trailing commission in respect of the Prosperity Loans until notice was given of the termination of the 2003 LOMA. 10 The plaintiff contends that even if the first defendant were entitled to terminate that agreement, such termination does not affect its right to trailing commission in respect of assigned Prosperity Loans. However, it is certainly seriously arguable, and I think it is prima facie correct, that the plaintiff's right to receive trailing commissions in respect of the Prosperity Loans is also to be derived from the 2003 LOMA. 11 The Originator's Fee is to be paid as a percentage of the "Outstanding Loan Balance". That expression is defined relevantly as meaning the principal loan balance outstanding of the "Loan Portfolio" on the last business day of each month excluding certain matters. The "Loan Portfolio" is in turn defined by reference to all "Settled Loans" originated by the Originator (that is, the plaintiff) and also: " Any other Settled Loans designated in writing by Interstar [the first defendant] from time to time as being subject to this Agreement, which have not ceased to be subject to this Agreement ".

12 On 16 September 2006 the plaintiff asked the first defendant to provide its written agreement to the substitution of the plaintiff to manage the portfolio of the Prosperity Loans from 1 December 2006 and to assume the same management responsibilities presently undertaken by Prosperity Mortgages Pty Ltd from that date. 13 The first defendant acknowledged the transfer of loans in an email of 1 December 2006 to the plaintiff. The first defendant acknowledged that the "transfer of loan book from Prosperity Mortgages ... has taken place" and attached details of the transferred loans. 14 The plaintiff's letter of 16 September 2006 did not itself set out the details of obligations which the plaintiff might assume in respect of the management of Prosperity Loans. Clause 5.2 of the 2003 LOMA provides: " 5.2 In relation to a Settled Loan, the Originator shall, unless otherwise directed by Interstar: (a) continue to liaise with Borrowers in relation to Settled Loans; (b) where appropriate, answer any queries raised by Borrowers in relation to Settled Loans or refer those queries to Interstar; (c) in accordance with the directions of Interstar, contact Obligors in relation to arrears owing under a Loan (or any other default) and liaise with Interstar in relation to those arrears or defaults; and (d) generally manage and service Settled Loans in accordance with the Manual or as otherwise reasonably directed by Interstar. " 15 It appears to me that prima facie the designation in writing by the plaintiff of the Prosperity Loans as Settled Loans was effected by at least its email of 1 December 2006 and that thereupon both the plaintiff's right to the Originator's Fee under clause 10 and its obligations in relation to the management of Settled Loans under clause 5.2 arose pursuant to the 2003 agreement. 16 In its letter of 6 March 2009 the first defendant wrote: " I refer to the loan origination and management agreement (LOMA) dated 3 April 2003 between Interstar Securities (Australia) Pty Ltd (now known as Challenger Mortgage Management Pty Ltd or Challenger) and CB Direct Pty Ltd trading as Starfund ('Starfund'). Challenger has identified the following inconsistencies on a loan application relating to a loan submitted by Starfund including a misrepresentation by you that you had conducted and confirmed the employment of a borrower. As a result of those inconsistencies, Challenger has formed the opinion that Starfund or its Representative has engaged in misleading or deceptive activity. As such, Challenger is exercising its rights to terminate under clause 20.1(c) of the LOMA effective as at the date of this letter. In accordance with clause 20.3(c) of the LOMA, Starfund is not entitled to receive any further fees under the LOMA. Please forward all original documents to this office within 14 days. "

17 The letter was signed by Mr Tobin Fonseca, the general manager operations-broker platforms and lending of the first defendant. The first defendant relies on the second limb of clause 20.1(c) as providing the ground for termination of the agreement. 18 As at 6 March 2009 there was no "proven" deceptive or fraudulent activity in relation to an Application or a Settled Loan. There is a serious question to be tried as to whether the first defendant formed the requisite opinion to trigger the second limb of clause 20.1(c). There is also a serious question to be tried as to whether any such opinion was reasonable. 19 In his letter of 6 March 2009 Mr Fonseca referred to the first defendant having formed the opinion that the plaintiff or its representative had engaged in "misleading or deceptive activity". Activity may be misleading or deceptive without the actor having any malign intention. The adjective "deceptive" when used alone and a fortiori when used in the phrase "deceptive or fraudulent activity" would connote an intention to deceive or at least some "craft or overreaching" (Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 at 198). 20 The opinion Mr Fonseca stated the first defendant had formed on the face of it would not be an opinion which would justify the termination of the agreement. The defendants did not give evidence on this application of precisely who on behalf of the first defendant formed an opinion for the purposes of the first defendant's giving notice of termination of the agreement; nor was there evidence, apart from that which appears in the correspondence, as to what that opinion was. 21 On 13 March 2009 the plaintiff sought particulars of the grounds for termination. It will be recalled that the first defendant's letter of 6 March 2009 had referred to: " The following inconsistencies on a loan application relating to a loan submitted by [the plaintiff] including a representation by you that you had conducted [sic] and confirmed the employment of a borrower ".

22 The first defendant did not identify the loan or the loan application or any inconsistency or misrepresentation which caused it to form the opinion set out in that letter. 23 On 17 March 2009 a Mr John Evangelista, a "Legal Counsel Mortgage Manager" with the first defendant advised that: " In accordance with the terms of the Loan Origination and Management Agreement (LOMA), where Challenger forms the opinion that Starfund (or its Representative) has engaged in misleading or deceptive activity, Challenger has the right to terminate the LOMA. Challenger has formed its opinion after due consideration and investigation of, amongst other files, Z. El-Akkaoui Loan ID 285485, that income and employment details provided by you were false. Clause 20.3(c) of the LOMA provides that Starfund is not entitled to receive any further fees under the LOMA. "

24 The unspecific reference to "other files" is most unsatisfactory. If the opinion described in the letter was formed by reference to "other files", the plaintiff should reasonably be entitled to expect that proper particulars would be provided. Fair dealing would require no less. 25 Again, it appears from this correspondence that whoever at Challenger formed an opinion about the plaintiff's activities, that person's or those persons' opinion was that the plaintiff had engaged in misleading or deceptive activity; not deceptive or fraudulent activity. 26 At the hearing of this application the defendant adduced evidence of enquiries made of a purported employer of the borrower, Ms El-Akkaoui. Her loan application was made in June 2006. The employee of the plaintiff handling the loan was a Ms Saleh. She completed a form stating that she had verified information as to the applicant's employment by telephoning a Maher Naboulsi of "Longwreck". 27 Included with the loan application was a document apparently on the letterhead of Longwreck Pty Ltd dated 23 June 2006, and apparently signed by a Maher Naboulsi, confirming the employment and salary of the applicant. 28 Ms Saleh gave evidence to the effect that she was provided with the letter on the letterhead of Longwreck Pty Ltd; that she telephoned the telephone number on the letter and confirmed details of the applicant's employment with the person named in the letter. 29 In 2007 the first defendant made enquiries about this matter. On 23 October 2007 an employee of the first defendant apparently telephoned the offices of Longwreck and was put through to its pay office. The file note records that the person in the pay office to whom the enquirer spoke did not know of a Maher Naboulsi and had not heard of the applicant. 30 On the same day the first defendant received a letter also on the letterhead of Longwreck Pty Ltd with the same ABN as the previous letter, but with a letterhead completely different from the 2006 letter. The 2007 document from Longwreck stated that the letterhead then used was one "we use all the time" and that the person signing the bottom of the letter purportedly from Longwreck Pty Ltd and dated 23 June 2006 was not the manager of Longwreck. 31 On this application the defendant called no evidence from Longwreck Pty Ltd and there was no corroboration of the assertions contained in the first defendant's file note, nor in the copy letter from Longwreck Pty Ltd dated 23 October 2007. 32 On this evidence there is a serious question to be tried as to whether the defendant could reasonably have formed the opinion that Ms Saleh had an intention to deceive the first defendant, or that she had any other malign intent, without making further enquiries to corroborate the statements in the facsimile on the letterhead of Longwreck Pty Ltd dated 23 October 2007, or the statements made to the telephone enquirer on the same day, so as to exclude as a reasonable hypothesis that Ms Saleh had herself been deceived. The defendants gave no evidence of any such enquiries. 33 A Ms Christine McCarthur, the head of "Operational Risk" of the first defendant, gave evidence which I admitted only for the purpose of attempting to identify the further grounds on which the first defendant said it was entitled to terminate the agreement. 34 Ms McCarthur deposed that in relation to one file it appeared that the: " Employment details confirmed by [the plaintiff] were questionable, including information that identified that written representations by an entity known as R M S Finance Brokers ... had been altered fraudulently to remove reference to payments made by the borrower, which had been dishonoured and employment verification details for ... a relative of Kylie Skaf and Roy Skaf were falsified. "

35 Kylie Skaf is the director of the plaintiff and Roy Skaf is an employee of the plaintiff and her husband. In relation to another file Ms McCarthur deposed that the employment details confirmed by the plaintiff were questionable, and that employment verification details had been falsified in relation to another file. She said that it appeared that employment details confirmed by the plaintiff were questionable and notices of assessment issued by the Australian Taxation Office had been falsified. 36 In relation to a further file, she said that it appeared employment details confirmed by the plaintiff were questionable including employment verification details supplied, which had been falsified. 37 Counsel for the defendant provided some explanation of these generalised allegations by reference to documents which Ms McCarthur exhibited. He contended the particular documents provided to the first defendant were forgeries. The alleged fraud and forgeries were not self-evident from the documents exhibited to Ms McCarthur's affidavit, and the evidence adduced in this respect on the present interlocutory application did not substantiate the claims in Ms McCarthur's affidavit.

38 The first defendant conducted its investigation into these matters in 2007. Ms McCarthur deposed that following the investigations Interstar's Operational Risk Committee decided to suspend the LOMA with the plaintiff on 23 October 2007 by the giving of notice in writing. 39 In its letter of 23 October 2007 the first defendant advised the plaintiff that it would not accept any new loan applications from the plaintiff but it also said "Starfund (the plaintiff) must continue to manage all Starfund originated loans in accordance with the relevant terms of the Loan Origination and Management Agreement (LOMA) and the guidelines manual." 40 The letter concluded, "Challenger reserves all rights available to it at all times under the LOMA and under this letter." 41 At a final hearing the plaintiff would be on strong ground in contending that by requiring the plaintiff to continue to perform the LOMA and by itself continuing to perform the LOMA by making monthly payments of the Originator's Fee under clause 10, the first defendant had elected to affirm the agreement. 42 It is the first defendant's contention, as I understand it, that it had formed the requisite opinion entitling it to terminate the agreement prior to sending the letter of 23 October 2007. At least prima facie requiring the plaintiff to continue to perform its obligations under the LOMA is inconsistent with the first defendant's thereafter exercising its right to terminate the agreement, (assuming such a right had arisen) and constitutes an unequivocal election to affirm the agreement (Sargent v ASL Developments Ltd (1974) 131 CLR 634 at 646 and 656-657). 43 The reservation of rights in the last paragraph of the letter would be of no avail if there had been an unequivocal election to affirm the contract. 44 It appears that the first defendant believed that it had the right to terminate the agreement but did not do so because it apprehended that were it to do so it would still be required to pay trailing commission. 45 On 27 April 2007 Brereton J held in proceedings between the first defendant and other mortgage originators that provisions in the same terms as clause 20.3(c) were void as penalties (Integral Home Loans Pty Ltd & Anor v Interstar Wholesale Finance Pty Ltd & Anor [2007] NSWSC 406). That decision was reversed by the Court of Appeal on 24 November 2008 (Interstar Wholesale Finance Pty Limited v Integral Home Loans Pty Limited [2008] NSWCA 310). 46 Mr Fonseca deposed that "Challenger" did not intend to elect to affirm the agreement. I admitted that evidence as a statement of his intention. But an actual subjective intention to elect is not required if steps taken by a party entitled to exercise its contractual right are justifiable only if an election has been made (Sargent v ASL Developments Ltd at 646). 47 It follows that whilst there is a serious question to be tried as to whether the first defendant was at any time entitled to terminate the agreement pursuant to clause 20.1(c) there is a strong prima facie case that if the first defendant was entitled to do so, it nonetheless elected to affirm the agreement. 48 If, at a final hearing, the plaintiff establishes that the notice of termination was ineffective, and if at the final hearing the plaintiff has maintained its position not to accept the purported termination as a repudiation, then prima facie the plaintiff will be entitled to equitable relief to restrain the defendant from refusing to pay Originating Fees under clause 10 on the ground that he had terminated the agreement on 6 March 2009.

49 If at the final hearing the plaintiff succeeds on liability, then it would be entitled at law to sue for the fees each month as they fall due. Damages would not be an adequate remedy where the plaintiff would have to sue for each payment as it fell due (Keenan v Handley (1864) 2 De G J & S 283; 46 ER 384; RP Meagher, J D Heydon and M J Leeming, Meagher, Gummow and Lehane's Equity: Doctrines & Remedies 4th ed 2002 at [2502]). 50 This is not a final hearing. Both the strength of the plaintiff's prima facie case and the balance of convenience have to be considered to determine whether greater injustice would be occasioned to the defendant if the interlocutory injunction sought is granted, if it is found at a final hearing that the plaintiff is not entitled to final equitable relief, than would be occasioned to the plaintiff if the interlocutory injunction is refused, but if it is held at a final hearing that the plaintiff is entitled to final relief. The strength of the prima facie case must be such as to show sufficient likelihood of success to justify the preservation of the status quo pending the trial (Australian Broadcasting Corporation v O'Neill [2006] HCA 46; (2006) 227 CLR 57 at 65 [19]), but the strength of the plaintiff's prima facie case is only part of the equation. 51 Here the plaintiff's claim for loss flowing from the non-payment of commission would prima facie be fully compensated for at trial by judgment for debt and interest. 52 The plaintiff submits that monetary remedy at trial will not be an adequate remedy because it is possible, and perhaps likely, that if the defendant withholds payment of the monthly commissions the plaintiff may be forced out of business with the destruction of goodwill associated with its business. 53 The evidence of the plaintiff's financial position is not very satisfactory. It appears that only very summary financial statements have been prepared and the plaintiff's director, Ms Skaf, was at a loss to explain them. 54 A cashflow summary provided by Ms Skaf showed monthly commitments of a little under $35,000 and monthly income prior to the termination of the agreement of a few thousand dollars in excess of that sum. 55 Ms Skaf deposed that the reduction in trailing commission receipts would result in a monthly cashflow deficit of about $9,000. She said that she and her husband were endeavouring to meet that deficit from their own resources but were not in a position to continue to do so for more than a few weeks unless they could arrange either resumption of the trailing commission from the defendants, or some other source of funding. If not, Ms Skaf deposed that she would be obliged to close the plaintiff's business, lay off staff and possibly place the plaintiff into the hands of an administrator. 56 It appears that there was one other employee or consultant engaged in the business other than the plaintiff and her husband. 57 This evidence demonstrates that the plaintiff's undertaking as to damages is likely to be worthless if the defendant succeeds at the final hearing. 58 No undertaking as to damages has been offered by those standing behind the plaintiff, although the plaintiff's counsel indicated that such undertaking would be forthcoming. Even if forthcoming, there is no evidence as to the ability of Mr or Mrs Skaf to meet an undertaking as to damages. 59 The defendants served a notice requiring production of, amongst other things, the financial statements of the plaintiff for the financial years ending 30 June 2006 to 30 June 2008. In response to that notice the plaintiff produced a summarised balance sheet which disclosed net assets as at 30 June 2008 of $305,919. The principal assets were said to comprise sundry debtors of $198,755, and plant and equipment after depreciation of $129,494. 60 The summarised balance sheet did not include a loan which Ms Skaf said had been made to the plaintiff by a related company, Star Fund Mortgage Corporation Pty Ltd, of "about $260,000." Ms Skaf was not able to give any meaningful evidence as to the collectability of the debts or otherwise as to the value of the plaintiff's assets. 61 An undertaking as to damages is, except in special circumstances, required in every case in interlocutory injunctions. It is the price of such an injunction Kerridge v Foley [1968] 1 NSWR 628 at 630. In Air Express Ltd v Ansett Transport Industries (Operations) Pty Ltd (1981) 146 CLR 249, Gibbs J said (at 311) that an undertaking as to damages was a "very important, if not an essential, means of preventing injustice from being done by the Court when it makes an order at an interlocutory stage, before the rights of the parties have been finally determined." 62 Notwithstanding the prima facie strength of the plaintiff's case, to grant a mandatory order requiring the first defendant to pay outstanding trailing commissions and to make future payments of trailing commissions as they fall due up to the hearing would be tantamount to deciding the plaintiff's claim on a final basis, if the plaintiff were not able to repay such moneys pursuant to its undertaking as to damages. 63 I think it very likely that if the plaintiff fails at the final hearing it would not be able to meet its undertaking as to damages, so that to make the order now sought would be tantamount to giving the plaintiff final judgment on amounts which are claimed to have fallen due under clause 10. 64 There is force in the plaintiff's submission that damages would not be an adequate remedy because they would not compensate the plaintiff if it were forced into administration or liquidation and lost the value of the goodwill of its business. 65 Having said that, there is little evidence of the value of any goodwill attaching to the plaintiff's business. The flip side of the argument is that the plaintiff's undertaking as to damages is of no value. 66 Mandatory interlocutory injunctions are not common. The usual reason for this is that the balance of convenience is tilted in the defendant's favour if the relief sought is mandatory (Meagher, Gummow & Lehane's Equity: Doctrines & Remedies 4th ed at [21-215]). 67 The plaintiff will be entitled to seek an expedited final hearing. Without binding the expedition judge, it would seem to me that such an application has some prima facie merit. 68 In preparing for a final hearing both parties' positions have been advanced by the work which has been undertaken in this interlocutory hearing, and subject to the availability of a judge to hear the matter, there is a reasonable prospect of the matter coming on for an urgent final hearing. 69 I do not regard the prospect of the plaintiff being forced into administration or liquidation with the closure of its business as being inevitable although I recognise the risk. Nonetheless, in the absence of a worthwhile undertaking as to damages, I am not satisfied that the lower risk of injustice would lie with granting the remedies sought. 70 For these reasons I order that the plaintiff's notice of motion filed on 15 April 2009 be dismissed.

[Counsel addressed on costs.] 71 I assume that the defendants have corresponded with the plaintiff in the way indicated by Mr Cohen, who appears for the defendants. Indeed, it is my recollection that there is some such correspondence in evidence. Nonetheless, as the parties' rights are not determined by this application and having regard to the prima facie view I have formed as to the defendants' position in this matter, I think the appropriate order is, as I have indicated, namely, that the costs of and incidental to the plaintiff's notice of motion be the defendants' costs in the proceedings. 72 If at a final hearing it is found that the plaintiff is entitled to the continued payments of trailing commission, then it could fairly be said that the defendant ought not to have put the plaintiff in a position where it had to seek, or did seek, interlocutory relief. I do not regard the balancing exercise which I have described as being so clear that it must have been obvious to the plaintiff that it could not obtain the interlocutory relief sought.

73 I order that the plaintiff file and serve a statement of claim by 23 April 2009. I order that the defendants file and serve a defence and any cross-claim by 29 April 2009. 74 I stand the proceedings over to the Expedition List on 1 May 2009. I order that the requirement for the filing of a notice of motion for expedition and supporting affidavit be dispensed with.

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.