COMMONWEALTH BANK OF AUSTRALIA v MASTROS [2008] NSWSC 616 | Case summary

[23]

(7) The defendant being aware of his financial position, must be taken as being aware of the risk he was assuming in meeting the obligations under the "new" loan and mortgage that he entered into with the plaintiff. 22 In the present case, the plaintiff, in assessing the defendant's loan application, had information concerning the defendant's asset position and his income. A copy of a residential property valuation report attached to Ms Kabbout's affidavit sworn 5 June 2008 disclosed that the property as having a market value $830,000. A copy of the tax return for the year ended 30 June 2003 sent to the plaintiff by Horizon Financial Services disclosed a taxable income of $141,307 and, in respect of the year ended 30 June 2004, the copy of the tax return for that year showed a taxable income of $160,752. I will deal below with the issues associated with the copies of these two income tax returns. 23 The plaintiff's internal assessment is recorded in its internal home loan application form, a copy of which is annexed and marked Annexure B to Ms Kabbout's affidavit sworn 29 May 2008. 24 The internal assessment contained some inaccurate information describing the defendant's occupation as "computing" and his marital status as "single". It recorded an annual income of $151,000 apparently being an average figure based on taxable income for the 2003 and 2004 years based upon the abovementioned copies of the income tax returns for those years. The assessment also referred to the defendant's financial position in terms of the value of his assets totalling $947,124.01. 25 The internal assessment referred to total commitments per month as $5,500 based upon mortgage repayments of $4,800 and credit card debt totalling $700 per month. The monthly income is recorded as $12,583.33. 26 Finally, the internal assessment referred to the purpose of the loan as being refinancing in the amount of $600,000 and borrowing "$60 K extra for alterations internally". Page 7 of the internal assessment noted "client has been a computer operator for 10 years and has been self-employed for 6 of those years". Approval was recommended for the amount of the loan as $664,000. 27 On 16 November 2004, the plaintiff made a "loan offer" to the defendant. The letter confirmed approval of his application for a home loan. It referred to a copy of "Usual Terms and Conditions for Consumer Mortgage Lending" and two copies of the Schedule. The letter recorded that if the defendant wished to accept the offer, he should sign and return to the plaintiff one copy of the Schedule. The letter went on to state that, prior to signing it, he should read the contract carefully and the information statement "Things You Should Know About Your Proposed Credit Contract" included in the Usual Terms and Conditions for Consumer Mortgage Lending. 28 On or about 23 November 2004, the defendant signed the "Consumer Credit Contract Schedule" with respect to the mortgage. A copy was contained in Exhibit B (Tab 3). The disclosure date is recorded as 16 November 2004 in respect of a loan of $664,000. The annual percentage rate for the first year was recorded as 5.99%. 29 The internal application recorded the apparent author of the application (on p.8) as Con Tsouris "mobile banker" and he is also noted as being "recommending officer". The application is dated 10 November 2004.

[25]

2006 $48,593 31 He stated that he had not, as yet, lodged a return for the 2007 year. 32 In paragraph 3, he stated that his estimate of weekly household expenses in the period between late 2004 and the present were approximately between $700 and $900 per week, quite apart from the mortgage payments that he made to the plaintiff. He said that in that period he barely earned enough to meet the family's living expenses, without taking into account the mortgage payments. 33 In cross-examination, he agreed that, taking the low figure of $700 per week, his estimated expenditure was about $33,000 (in fact $36,400) and that, during the period in question, he had a mortgage payment obligation of approximately $4,000 per month, or $48,000 per year. Combining that figure with the above estimated annual household expenditure, it was put to him that his total commitments on an annual basis was $81,000. 34 He was then taken to the taxable income which he said he earned in 2005 in the amount of $22,064 and agreed that there was a deficiency of approximately $60,000 for that year alone between his total commitments and what he said he earned as income for that year. 35 In its written submissions, the plaintiff relied upon the fact that the defendant in fact was shown to have had sufficient funds at his disposal. This was said to have been borne out by the defendant's compliance with his repayment obligations for just under two years (from November 2004 to October 2006) before going into default. 36 The defendant attached to his affidavit copies of what he said were his income tax returns for the period 2003 to 2006. 37 The defendant, in his affidavit sworn 6 June 2008, referred to the copies of tax returns for the years 2003 and 2004 behind Tabs 6 and 7 of the plaintiff's tender bundle, there being copies of the returns that were sent by Horizon Financial Services to the plaintiff. He stated (paragraph 1):- "Those are not my tax returns. I have never seen them before seeing them today in the tender bundle. I know nothing about them. At the time I entered into the loan agreement in 2004, I had not lodged tax returns for a number of years. I am not and never have been a computer operator. I lodged tax returns for the years 2001 to 2006 inclusive in 2007." 38 In the affidavit (paragraph 2), he said that, at the time of entering the loan, nobody asked him what his income was and he never told anyone what he earned. He said that he had a conversation with the broker to the following effect:- "Myself: I haven't put in tax returns for some years. Broker: Can you service this loan? Myself: I'll do my best. Broker: Don't worry, should be alright." 39 He completed his affidavit by stating, "nobody ever asked me to provide any tax returns". 40 The implication from the defendant's affidavit evidence sworn 6 June 2008 is that the broker sent copies of tax returns to which Ms Kabbout refers for the 2003 and 2004 years without his knowledge or consent or involvement. If true, then of course, the broker would have acted in an unauthorised and deceptive manner. Plainly on this application that is a factual question that has not been investigated and upon which no findings can be made.

[26]

Submissions on behalf of the defendant 41 Mr D E Perrignon of counsel, who appeared on behalf of the defendant, stated that the defence "… is based in Khoshaba", a reference to the judgment of the Court of Appeal in Perpetual Trustee Co Limited v Khoshaba [2006] NSWCA 41. Mr Perrignon submitted:- "… The loan was unjust because of the posture taken by the lender in entering into a loan and giving money without making any assessment of the ability of the borrow to repay it. In that sense, the lender engaged in the practice of asset lending. It was said in Khoshaba there is a public interest in setting aside such transactions or, at least, in finding them unjust. … The evidence shows there is an absence of any proper credit assessment by the lender of the borrower's ability to repay. The applicant gave evidence that he told nobody about what his expenses were, did not tell the lender, did not tell his own agent, the broker, nobody asked him whether he had any dependents. He had three young children and one wife. He had considerable weekly expenses on those dependents between $700 and $900 a week. The only evidence put forward by the bank is the application form signed by him, an annexure to the affidavit of Rhonda Kabbout of 5 June. That application form reveals no information about the defendant's usual living expenses. There is provision for it in the standard form, but it is blank. The application form appears in the affidavit of Rhonda Kabbout sworn 29 May, pages 5 and onwards. At page 8 of the affidavit there is a little box, and that is left blank. Added to that there is the provisions of the Consumer Credit Code which applies to this loan in addition to the provisions of the Contracts Review Act and they contain two extra provisions which the court can take into account when determining the contract is unjust - s.70(2)(l) and (m) (Read). With (l) the credit provider could have ascertained what the living expenses were and what his ability to repay the loan was. They took no steps to do that. The position is similar to Khoshaba. They took no steps to find out whether he could repay it, at all, or without substantial hardship. Those considerations were considered significant in Khoshaba." 42 Reliance was placed upon the fact that the defendant was a married man with three young children who had considerable weekly expenses in supporting his dependents of the order of $700 to $900 per week. 43 Reliance was also placed upon the fact that the application form that was submitted for the loan provided no information about the defendant's usual living expenses. The part of the standard form for which such details were to be included was left blank. 44 Accordingly, it was submitted that the plaintiff took no steps to ascertain the nature and extent of the defendant's financial commitments and that "the position is similar to Khoshaba". 45 It was finally contended that, had inquiries been made, the plaintiff would have discovered that the statement of income in the tax returns sent by Horizon Financial Services was incorrect.

[34]

(4) That there was no application fee and minimal settlement and service fees. 49 It was said that, above the signature panel, there was a note "Important" which drew the defendant's attention to the need to read the contract documents and not to sign them in the event that he did not understand them. 50 The Usual Terms and Conditions, again, recorded that, if he had any doubts or needed more information, then he should contact a government consumer agency or obtain legal advice. 51 It was further observed that the defendant did not identify any clause or feature of the loan agreement or mortgage said to be unjust. Reference was made to dicta of McHugh J in West v AGC (Advances) Ltd (1986) 5 NSWLR 610 at 621 to 622. 52 The plaintiff also relied upon the fact that the defendant operated his own business and that the documentation in support of the application disclosed a gross monthly income of $12,583.33 and a net asset position of $325,134.55 taking into account two cars valued at $26,000 and a boat valued at $11,000. 53 It was contended that the plaintiff acted on information that the defendant had sufficient funds and assets to service the loan repayments. It contended that this was not an asset-lending case, as in Khoshaba (supra). 54 The plaintiff relied also upon the fact of the defendant's ability to service the loan for about two years as earlier discussed. 55 Further, it was said that this was not a case involving a failed investment scheme and that the defendant clearly benefited from the loan, having had that benefit for almost four years. 56 The plaintiff asserted, in effect, that there was no procedural fairness and no unfair pressure placed upon the defendant to enter into the transaction. 57 Reliance was also placed upon the fact that this was the second occasion that the defendant had entered into a loan and mortgage with respect to the property in question. It was said that the transaction with First Mortgage Company Home Loans Pty Limited revealed that the defendant had declined to obtain legal advice and that he had said he understood the nature and effect of the document. 58 The plaintiff also submitted that there was no general requirement to ensure that the borrower receive independent financial or legal advice and, in any event, there was no evidence that, had he had such advice, he would have acted differently. 59 On the issue of prejudice, the plaintiff relied upon the fact that the default had operated since December 2006 and that the plaintiff had been put to the trouble and expense of enforcement proceedings, including obtaining a writ of possession. Given that the defendant had been trying to sell his home since at least November 2007 and was unable to achieve the price he wished, the bank, in those circumstances, would suffer prejudice if the market declined. 60 The plaintiff submitted that the application should be dismissed with costs.

[37]

• The second, which only arises if the first is resolved in the affirmative, is whether any and, if so, what relief should be granted. This involves the exercise of a judicial discretion: Khoshaba (supra) at [34] to [36], per Spigelman CJ, [109], per Basten JA. 62 In West v AGC (Advances) Limited (supra), McHugh JA (as he then was) discussed the circumstances productive of "unjustness" as being either substantive or procedural. In this respect, Brereton J in Riz (supra) observed that substantive unfairness may pertain to the harshness of the terms imposed whilst procedural fairness pertains to the manner in which the contract was negotiated and formed: at [52]. Accordingly, an unjust contract, his Honour observed, is usually a product of the combination of substantive and procedural unfairness: at [53]. 63 In the present case, it is necessary to determine whether the evidence establishes a good arguable defence in terms of the provisions of s.7 and s.9 of the Contracts Review Act and the Consumer Credit Code. 64 The present application to set aside the default judgment entered in favour of the plaintiff arises at a time when the interests of both the plaintiff and the defendant are at a critical point. 65 For the defendant, of particular significance is that the Padstow Heights property is his home and that of his family. His personal circumstances and of his wife are set out in paragraph 11 of his affidavit sworn 7 May 2008. He there also stated that he has attempted to comply with the "Sheriff's notice" but that he had not been able to find a rental property to which he could move his family. He said that he first consulted a lawyer about the matter on Monday 5 May 2008. 66 Such pressing circumstances, including the personal situation of the defendant, his wife and his family must, of course, be borne in mind, both in relation to the application for a stay order and generally. I granted a stay order on 6 June 2008. The stay is to operate until 4.00 pm on 20 June 2008. 67 By reason of the submission made on behalf of the defendant by Mr Perrignon of counsel that the present case is a Khoshaba type case, it is important that the facts and matters that were central to the issues in Khoshaba and to the decision of the Court of Appeal in that case be identified. These included:-

[50]

(13) The motivating factor was found to be the plaintiff's wish to obtain a loan such that it was doubtful whether any recommendation by the lender to take advice would have had any effect. 68 The circumstances of the present case, in my opinion, are very different from those in Khoshaba. The risk inherent in the transaction considered by the Court of Appeal was one associated with the security of the investment and its possible return and the respondent's lack of income. Spigelman CJ referred to it as a "dubious investment" at [60]. The nature of the investment raised issues in relation to what Basten JA in Khoshaba termed "an ill-advised investment". 69 The present case is also distinguishable from Khoshaba in another respect. There, the Court of Appeal considered that the purpose of the loan having been left blank was a matter of particular significance. The Chief Justice referred to that fact, in the particular circumstances of the case, as a most significant failure by the appellant for the reasons stated in the judgment: paragraph [82]. Additionally, the failure to verify employment and income and to ensure that documents were properly executed reinforced the conclusion that the appellant in Khoshaba was prepared to act on the basis of adequate security alone: per Spigelman CJ at [84]. 70 Similarly, in Elkofairi v Permanent Trustee Co Limited [2002] NSWCA 413, the respondent lender knew that the appellant in that case had no income nor other assets than the applicant's home. None was disclosed on the loan application: at [79]. 71 The plaintiff in the present case did not approve the loan regardless of the defendant's capacity to service it. Aside from the valuation of assets, it was provided with and acted upon the basis of the copies of the taxation returns for the two years earlier referred to that were supplied by the broker. The defendant's affidavit sworn 6 June 2008, as earlier noted, was to the effect that he has never seen the copies of the returns supplied by Horizon Financial Services and that they were not his tax returns (paragraph 1). 72 Similar circumstances were considered in Riz (supra). In that case, copies of unsigned tax returns with the TFN obliterated had been supplied to the lender. Brereton J observed, at [62], that a lender prudently requires income tax returns for the purpose of income verification, because loan applicants are unlikely to have overstated their income in an income tax return, the tax context being one in which there is an incentive to minimise income. In that case, there was no particular reason, his Honour held, as to why the lender needed to examine the partnership return as opposed to the individual returns. He there observed:- "… a lender is not an auditor, and is not to be expected to scrutinise every entry in an income tax return to ascertain whether the borrower or borrower's agent who is engaged in some fraud …" 73 His Honour's further observation is of relevance to the facts of the present (at [78]):- "… as already remarked, there is nothing remarkable, or sinister, about copy income tax returns being unsigned; nor is a tax file number being masked - so much appears no more than a reasonable security precaution; … The submission that Perpetual ought to have discovered the true position of Mr and Mrs Riz bespeaks an assumption that a lender ought to have a high index of suspicion that its borrower (or agent) is endeavouring to defraud it, and is bound in the borrower's interest to be very alert to such fraud. A prospective borrower is not entitled to expect the lender to be alert for fraud by or on behalf of the borrower; and a lender is not required, in the interests of the borrower, to have a high index of suspicion for fraud by the borrower or the borrower's agent. A lender's failure to detect fraud by or on behalf of a borrower does not weigh significantly in favour of a finding that the consequent loan contract is unjust. To hold that the undetected provision of false information by or on behalf of a borrower to a lender in an attempt to obtain a loan resulted in the loan contract being unjust against the lender would be to invert common sense, logic and justice, by protecting the wrongdoer against the victim. To grant remedies under the Contracts Review Act on such grounds would be to convert an Act, intended to achieve just results, into an instrument of injustice." 74 Mr Perrignon submitted:- "… It was said by Justice Brereton in Riz v Perpetual, a lender is not an auditor. Tax returns not signed, TFN blanked out. His Honour said a lender is not required to have a high index of suspicion for fraud. The tax return situation, in this case, is similar. First of all, these cases cannot be read as if they are some sort of prescription on later Judges to follow. Every case has to be decided on its own circumstances. In that case there was no consideration of the provisions of the Consumer Credit Code. Also one could say in this case, had the credit provider taken reasonable inquiry about expenditure, his commitments, one can infer he probably would have inquired whether or not this borrower had $150,000. In so doing the lender would have discovered the inaccuracy of the submitted tax returns. Were they to have opened the line of inquiry about his commitments they would have discovered the statement of income in the tax returns was incorrect. … … The main circumstances we rely on - Khoshaba is all about posture, it is the attitude the lender takes to the ability of the borrower to repay." 75 I am of the opinion in the present case that the plaintiff was entitled to act upon the basis of the taxable income disclosed in the copies of the income tax returns faxed to it by Horizon Financial Services. There is nothing in the evidence that indicated that the plaintiff knew or ought to have known that there was anything false or incorrect about the information contained in those tax returns. 76 I have had regard to the fact that the information as to the extent of the defendant's monthly commitments reflected in the loan application was limited and plainly did not deal with or provide information as to the full household expenses that a married man with a family would be expected to have. However, the average taxable income of $151,000 with the defendant's asset position would not, of itself, in my opinion have required the plaintiff to have undertaken a more searching analysis of all monthly expenditure. 77 Even if the defendant had disclosed household expenditure at such levels as he has referred to in his affidavit sworn 4 June 2008 (between $700 and $900 per week), that commitment, together with monthly mortgage payments of $4,440 would, in total on an annual basis, equate to between approximately $89,680 and $100,080. On the basis of an annual income as advised by the broker to the plaintiff of $150,000 (average) (based on the copies of the tax returns), that total commitment was serviceable. 78 The facts do not demonstrate, in my opinion, the type of indifference that was referred to by the Court of Appeal in Khoshaba and the circumstances attending the loan application and its assessment do not, in my opinion, establish that the plaintiff engaged in asset lending. Rather, the plaintiff was concerned with and did assess the defendant's ability to service the loan. On the information supplied and available to the plaintiff, I am of the opinion that the loan was reasonably assessed as serviceable, even without reference to the full detail of household expenditure. 79 I have, in making these findings, proceeded upon the basis that, on the defendant's evidence, he disputes all knowledge as to the tax returns faxed by Horizon Financial Services and that a court determining an application to set aside judgment is not to try the issue of fact in relation thereto: Simpson v Alexander (1926) 26 SR 296, 301. There remains the question as to the significance of that aspect of the matter in assessing the criteria under s.9 of the Act. Again, in Riz (supra), Brereton J, on a similar question, observed (at [80]):- "For borrowers to obtain a loan by a misrepresentation made on their behalf, even if not known to them, where the lender would not otherwise have approved the loan, does not make the loan contract objectively unjust to the borrowers against the lender. Perpetual was not required to have a high index of suspicion that it was being deceived by QLS acting for Mr and Mrs Riz, and its failure to discover the deception does not make a case of injustice." 80 Whilst I am sympathetic to the position that the defendant finds himself in, the question at the end of the day is whether or not the evidence sufficiently establishes a good arguable defence pursuant to the Contracts Review Act, in particular, on the basis argued in this application, namely, that it is a Khoshaba type case. 81 The remedy conferred by the Contracts Review Act is one expressed in broad terms and a court will be hesitant, on an application to set aside default judgment in circumstances such as the present case, in refusing the application. I consider in such a case it is appropriate that the question of good arguable defence be evaluated and determined on the basis of the first of the two steps to which I have referred in paragraph [61], namely, whether the contract was arguably unjust in the circumstances in which it was made, having regard to s.9 factors rather than (except for a question as to "unwarranted benefit" to which I refer in paragraph [91]) by reference to the second step, which is concerned with considerations of a broad judicial discretion as to relief. 82 A court hearing an application to set aside a default judgment is, of course, not concerned with an adjudication of the truth or otherwise of the case which is sought to be advanced by a defendant. It rather evaluates the evidence put forward in support of the application in order to see whether, in the interests of justice, a defendant who has, by reason of some procedural default, been deprived of a right to due determination of his defence should nevertheless be put back into the position of enjoying that right: Reinehr Industrial Lease & Finance Pty Limited v Jordan (New South Wales Court of Appeal, unreported, 4 June 1974, BC7400068 at 4 per Street ACJ. 83 In the present application, I have, accordingly, considered the evidence on the basis disclosed in the affidavits. In that respect, in particular, I have proceeded on the basis disclosed in his second affidavit as to the disputed income tax returns. 84 Further, I do not determine the application on the basis of delay. The delay, although significant, was not such as to warrant the refusal of the application. I accept the evidence of the defendant on that issue. 85 Accordingly, my determination of the application has been based upon the two issues as to whether a good arguable defence on the merits has been established and whether it is in the interests of justice to allow the proposed defence to be litigated. 86 I have sought to evaluate all the relevant facts, especially those relied upon to support the "unjust" contract ground. I have done so, keeping in mind the broadly based nature of the value judgment involved in the first step under s.7 of the Contracts Review Act. Where a defence is raised under the Act, particular considerations arise in terms of what is a good arguable defence under that Act. This was adverted to by Ireland J in State Bank of New South Wales Limited v Drury (New South Wales Court of Appeal, unreported 4 April 1996), BC9601073 at 3 to 5. In that case, Ireland J stated that he had agreed with the manner in which the Master had approached the ground of defence based on s.7 of the Contracts Review Act wherein he stated:- "The other defence which is raised is a defence under the Contracts Review Act and this always creates difficulty on summary applications. The relief under the Act is very much a discretionary relief and the Court must be very careful to ensure that in denying a hearing that justice is not denied because the Court has denied the opportunity of the trial judge exercising a discretion in favour of the unsuccessful applicant … It is essentially a balancing act for the Court in determining a summary application where the Contracts Review Act is invoked that there is some evidence to support the prospect of relief under the Act rather than the provisions of the Act being recited for the purpose of avoiding summary relief." 87 I have, as I have indicated, concluded that the defendant has failed to establish a good arguable defence under the Contracts Review Act. It is clear on the evidence that the defendant was having financial difficulties meeting commitments under his previous mortgage prior to refinancing with the plaintiff. He was fully aware of the terms of the loan/mortgage insofar as they determined his obligations associated with the repayment of the loan granted by the plaintiff and that these were dependent upon his financial capacity to service the loan. He was also fully alive to the limits that were operating on his financial capacity as at the date of the loan. 88 In relation to the question of advice, this was not, in my opinion, a case in which the provision of independent legal or financial advice would have played a role and no specific submission was made on the defendant's behalf in that respect. 89 I am, with respect, of a similar view to that expressed by the Chief Justice in Khoshaba at [89], namely, that no such advice was relevant, in the circumstances of the present case, with respect to the loan agreement and mortgage sought to be set aside. The defendant, being fully aware of the nature of the transaction and the ordinary risks associated with it and the limits on his financial capacity, was intent on refinancing primarily to relieve the financial pressure that had already arisen under the previous loan he had secured with First Mortgage Company Home Loans Pty Limited. 90 There is a further matter to which I should refer. The defendant attached to his draft affidavit sworn 7 May 2008 a draft defence to the statement of claim in which he alleges that the loan agreement and mortgage were unjust in terms of s.7 and s.9 of the Act and by reference to s.70 of the Consumer Credit (New South Wales) Code. Particulars were recorded in relation to the latter provision. There was, however, no draft cross-claim seeking relief under the Contracts Review Act. Even if I had been of the view that there was an arguable defence on the merits under s.7, there would then be an issue as to whether any relief could be granted. This is directly relevant to the question as to whether it would be in the interests of justice to allow the proposed defence to be litigated. As Street ACJ in Reinehr (supra) observed (at p.2), 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. 91 The defendant applied the loan monies of $664,000 received from the plaintiff, at least as to $660,000, towards refinancing his home. A court applying the provisions of the Contracts Review Act would, of course, need to consider the issue of "unwarranted benefit" as discussed by Santow JA in Elkofairi (supra) at [98] to [111]. Accepting the principle that a court would only set aside a mortgage on condition that a mortgagor repays the principal advanced with interest, in the present case, as earlier noted, the original loan monies together with interest at 7.07% had amounted, as at 2 January 2008, to $718,530.31. On the basis of the selling agent's appraisal of $690,000 to $740,000 (see transcript, p.2), there may be no or little equity presently in the property. 92 Although the relief sought in paragraph 1 of the notice of motion will be refused, I consider, in all the circumstances of the case, that the stay granted on 6 June 2008 should be extended for a further period to expire at 4.00 pm on 18 July 2008 in order to provide the defendant and his family with notice and an opportunity to locate alternative accommodation. 93 Accordingly, in respect of the orders sought in the notice of motion, I make the following orders:-

COMMONWEALTH BANK OF AUSTRALIA v MASTROS [2008] NSWSC 616 | Case summary | Zoe

COMMONWEALTH BANK OF AUSTRALIA v MASTROS

At a glance

Court

Decision date

Before

Source

Judgment (53 paragraphs)

Parties

Cases Cited (4)