Commonwealth Bank of Australia v Remo 97-99 Queens Road Pty Ltd

The Bank's claim in the present proceedings

1. The debt claimed by the Bank is the balance of its loans to Remo 49 Queens Road Pty Ltd ("Remo 49") and Remo 97 for construction and development on two sites at Five Dock, Nos 49-51 and Nos 97-99 Queens Road. Each site was developed by its correspondingly named company, commencing with Nos 49-51. The loans were advanced between 2007 and 2010. Remo 97 and Messrs Mastronardo guaranteed the borrowings of Remo 49. Messrs Mastronardo in turn guaranteed the liabilities of Remo 97. Default is alleged to have occurred by 23 December 2010.
2. The development of 49-51 Queens Road was completed and Mr Mastronardo snr became the registered proprietor of 62 strata lots in the finished building. He was also the registered proprietor of the undeveloped site at 97-99 Queens Road. The Bank took mortgage security over the 62 strata lots and over the title to 97-99 Queens Road. Upon default by Remo 97 and Remo 49 the Bank appointed a receiver to some of the property on 23 December 2010 and realised the securities in about 2012. It applied the proceeds in reduction of the loan and made demand on Remo 97 and Messrs Mastronardo for the shortfall. These demands were not met and the shortfall is the subject of the Bank's present claim.

The current defences

1. The current defences of CA Mastronardo and of Mr Mastronardo snr were filed on 27 and 28 September 2017 respectively. They admit the loans, the guarantees and the mortgages but plead a number of implied terms of the transactions. They put in issue the validity of actions taken by the Bank's receivers, appointed to the mortgaged properties. Messrs Mastronardo both contend that their liabilities under their guarantees have been discharged as a result of breaches by the Bank of various implied terms and alleged duties. They allege that interest at the default rate claimed by the Bank is a penalty and that the provisions of loan agreements under which interest is claimed are void.
2. The defences also allege that some breaches by the Bank have given rise to causes of action for damages, which Messrs Mastronardo seek to set off against the debt claimed. In the defence of Mr Mastronardo snr filed 28 September 2017 set-offs are pleaded as follows: 1. At par 47 it is alleged that the Bank breached the terms of Mr Mastronardo snr's guarantees and of the mortgages by causing its receivers to take possession of the mortgaged properties and that this hindered the defendants and their companies in marketing the developments, resulting in damage. In sub-par (e) a set-off is asserted. This is substantially repeated at pars 137-144. 2. At pars 132-135 and 136(e) it is alleged that the Bank owed Mr Mastronardo snr, as mortgagor, a duty to exercise its powers of sale in good faith and not to "sacrifice" his interests. It is alleged that in breach of this duty the securities were sold at up to $13,050,000 under their value and that that amount is to be brought to account in reduction of the debt. 3. The defence pleads: 1. a "Condition Precedent" of Mr Mastronardo snr's guarantees that they would not be enforced without prior demand in writing (pars 89-90) and an "Implied Duty to Respect" this condition (par 104); 2. implied terms of the mortgages that the Bank would not exercise its powers thereunder "other than in circumstances in which it was entitled to do so" (par 98) and an "Implied Duty to Respect" this term (par 106); 3. a term of each of Mr Mastronardo snr's guarantees, imported by cl 2.2 of the Banking Code of Practice, that the Bank would "act fairly and reasonably towards [Mr Mastronardo snr] in a consistent and ethical manner" (par 116); 4. the Bank breached all of the above obligations, giving rise to a claim in damages that Mr Mastronardo snr is entitled to set off against the Bank's claim (par 136(a)-(d) and (f)).
3. In CA Mastronardo's defence filed 27 September 2017 the following set-offs are pleaded: 1. At par 47 and again at pars 127-134 it is alleged that the Bank breached the terms of CA Mastronardo's guarantees in the same way as Mr Mastronardo snr has alleged, as summarised at [6(1)] above. A set-off of damages for these breaches is asserted. 2. At par 90 it is alleged that the Bank owed CA Mastronardo, as guarantor, a duty not to "sacrifice" the mortgage securities it held. It is alleged (par 109) that in breach of this duty the securities were sold at up to $13,050,000 under their value. At pars 124-126 it is alleged that the shortfall in realisation of full value is to be brought to account in reduction of CA Mastronardo's debt on his guarantees.

The current cross-claim

1. On 21 December 2015 Mr Mastronardo snr filed a cross-claim against the Bank. It alleges that the Bank purported to execute Mr Mastronardo snr's mortgages in support of his guarantees without first having made demand upon him and at a time when he was not in default. Mr Mastronardo snr contends that this premature action of the Bank constituted a breach of various express and implied terms of his guarantees and resulted in him being discharged from liability.
2. Consequentially Mr Mastronardo snr claims restitution of the proceeds of sale of the mortgaged strata lots at 49-51 Queens Road. There were two groups of sales, which grossed $6,140,799.73 and $12,948,280.58 respectively. He also claims that 97-99 Queens Road was wrongfully sold by the Bank for $4,350,000. Restitution of the total of these proceeds of sale is claimed. The combined restitution claim is approximately $23.5 million. Mr Mastronardo snr repeats in the cross-claim his allegation that some of the mortgage sales were up to $13.05 million under value. The total cross-claim is in the order of $36.55 million.
3. Obviously, some elements of Mr Mastronardo snr's present cross-claim are repetitive of set-offs pleaded in his defence. There is no pleading or particularisation of the total amount by which it is alleged the Bank's debt is reduced as a result of the defences raised, including set-offs. As a result, it is not apparent on the face of the existing pleadings that the amount claimed under the cross-claim would exceed the Bank's debt, even assuming that all defences and cross-claim causes of action should succeed.

Proposed amendments to the defences

1. Mr Mastronardo snr seeks to amend his defence by adding a misrepresentation case as set out in new paragraphs 145-149. Those paragraphs allege that he gave his guarantees of the liabilities of Remo 49 and Remo 97 and agreed to the Bank increasing its facilities to those companies in reliance upon a representation by the Bank that it: would not seek to enforce any of the agreements to which [Mr Mastronardo snr's guarantees] related, including the Loan Agreements and Mortgages or the [guarantees] (Agreements), prior to the completion of the redevelopment of [both sites at 49-51 and 97-99 Queens Road] … other than in circumstances in which the Bank would be entitled to do so as a result of a breach of any material term in the Agreements.
2. "Particulars" of this alleged representation are given in these terms: The facts, matters and circumstances referred to in paragraphs 36 to 41 of the Amended First Cross-claim … .
3. Paragraphs 36-41 of the proposed cross-claim allege that:

• the financial capacity of Remo 49 and Remo 97 to meet their obligations to the Bank depended upon successful completion of the "Project" (defined as development of both sites);
• the Bank was aware of this dependence;
• the purpose of the parties in entering into the loan agreements, guarantees and mortgages was to fund completion of the Project and
• the purpose of the Bank and of Mr Mastronardo snr in entering into his guarantees and the mortgages was to secure repayment of the loans to the Bank and to facilitate completion of the Project.

1. To this point, the proposed amendments to the defence are hopelessly deficient. A representation that the Bank would be constrained in its actions depending upon whether or not there occurred a "breach of any material term in the Agreements" is vague and uncertain to the point of being meaningless. The purported "particulars" are not particulars of a representation at all. They provide no information as to how the alleged representation is said to have been conveyed or from what conduct it might be inferred.
2. As drafted the pleaded representation concerns future conduct. In par 147 the representation is alleged to be "false". A representation of this character could only be impugned by alleging that it was misleading because, at the time it was made, there was no reasonable basis for asserting that the Bank would in the future conduct itself as stated. But that is not alleged. One particular of falsehood given under par 147 is that the Bank enforced the Agreements prior to completion of the Project. That circumstance is not in any sense a contradiction of the alleged representation that the Bank would only act in the event of "breach of any material term in the Agreements". This particular merely begs the question as to whether there had been any such breach prior to the Project's conclusion.
3. The only other particular of falsehood given under par 147 is: The facts, matters and circumstances referred to in paragraphs 73, 78 and 79 [of the] Amended … Cross-claim.
4. In those paragraphs it is alleged that on 23 December 2010, when the Bank appointed receivers to the mortgaged property, no demand had been made upon Mr Mastronardo snr (in contravention of an alleged "Condition Precedent") and he was not in default under his guarantees or under the mortgages. It is alleged that the mortgages had not become enforceable and that the Bank had not become entitled to appoint the receivers. Taken at their highest none of these allegations render "false" the asserted representation by the Bank that it would not enforce the guarantees and mortgages in the absence of "a breach of any material term in the Agreements".
5. Paragraphs 148 and 149 allege that Mr Mastronardo snr's guarantees are "liable to be rescinded or set aside" by reason of the alleged false representation and that he is, accordingly, discharged from liability under those guarantees. The proposed paragraphs of pleading that lead up to these assertions are inadequate and unsatisfactory in the respects discussed above. They do not plead an intelligible or viable case of misrepresentation. Leave will not be granted for the amended pleading to be filed. The proposed amendments to CA Mastronardo's defence, in pars 135-139, are in the same terms and leave will not be granted for those amendments, for the same reasons.

New cross-claim by CA Mastronardo and other amendments

1. The proposed amended cross-claim includes claims by CA Mastronardo for damages in paragraphs 147-154 (breach of implied terms of the guarantee of Remo 49), 159-162 (misrepresentation), 170-176 (misleading and deceptive conduct contrary to s 12DA of the Australian Securities and Investments Commission Act 2001 (Cth)) and 179-180 (unconscionable conduct contrary to s 12DA of the Australian Securities and Investments Commission Act).
2. In pars 148-150 it is alleged that terms are to be implied in CA Mastronardo's guarantee of Remo 49's obligations as a matter of business efficacy. The principles stated in Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR; [1982] HCA 24 are evidently relied upon. The implied terms are pleaded as follows: 148 … that the Bank would at all times act in good faith in order to achieve the purpose of the parties to the Agreements, including completion of the Project; 149 … that the Bank would not seek to enforce any of the Agreements … other than in circumstances in which the Bank would be entitled to do so as a result of a breach of any material term of the Agreements; 150 … that the repayment date of the [loans to Remo 49 and Remo 97] was the Project Completion Date.
3. A relatively undemanding test would apply to CA Mastronardo's claim that the Court should imply a non-specific obligation of good faith, as pleaded in par 148. However no viable case on breach of this alleged obligation is pleaded or particularised. In par 151 breach is alleged to have occurred by reason of facts and circumstances pleaded in pars 25 and 99-101 of the amended defence and pars 73, 78 and 79 of the cross-claim. Paragraph 25 of the amended defence merely pleads that the Bank was not entitled under the loan agreements and mortgages to appoint receivers in the circumstances that had occurred up to the date of the appointment. Paragraphs 99-101 of the amended defence allege that the Bank was bound by a Banking Code of Conduct in relation to CA Mastronardo's guarantees, or at least was estopped from denying that the Code applied. Paragraphs 73, 78 and 79 of the cross-claim allege that the Bank was not entitled to appoint receivers without prior demand on the guarantor (see [16]-[17] above). In par 152 it is alleged that the appointment of receivers before the Project had been completed was a breach of the implied obligation of good faith.
4. None of the particulars of breach of an implied obligation of good faith, as given in pars 151 and 152, are anything of the kind. In neither of those paragraphs nor anywhere else in the proposed amendments to the cross-claim is there an allegation that the Bank knew it was acting beyond its contractual entitlements or that it acted for an improper or collateral purpose. Leave will not be granted to plead at this late stage a cause of action for breach of implied term where the party applying for that leave has failed to articulate a viable case on breach.
5. The putative term in par 149 is on its face inherently uncertain. It could not satisfy the requirement that a term to be implied for business efficacy "must be capable of clear expression": see element (2) quoted by Mason J (as his Honour then was) in Codelfa Construction Pty Ltd v State Rail Authority of NSW at 347, from B.P. Refinery (Westernport) Pty. Ltd. v. Hastings Shire Council (1977) 52 ALJR 20. Leave will not be granted to plead a term that would not be implied on the ground of manifest uncertainty.
6. The implied term advanced in par 150 would purport to contradict the Bank's right to require repayment in the event of default by the principal debtor and to enforce the liability of CA Mastronardo on his guarantee in that event. The implication of such a term could not satisfy Mason J's requirement (5) (at the reference above) that the term to be implied "must not contradict any express term of the contract". Leave to plead this implied term will not be granted in the absence of evidence and submissions to explain how, if at all, this impediment to par 150 could be overcome.
7. The purported "particulars" of these implied terms, pars 148-150, are given in identical wording for each. Apart from reciting the legal prerequisites of implication on the ground of business efficacy, the particulars refer to pars 36-41 of the proposed cross-claim (summarised at [13] above). In addition to the fundamental objections to implying the terms pleaded in pars 149 and 150, as identified above, there is the problem that these particulars merely assert that the purposes of the transactions were to achieve completion of the Project and have the Bank debt repaid and that financial success of the two development companies depended upon completion. Those assertions are incapable of supporting the implication of the terms pleaded, particularly those in pars 149 and 150.
8. For these reasons amendment of the cross-claim to add pars 147-154, constituting a cause of action of CA Mastronardo for damages for breach of implied terms, will not be permitted
9. In pars 159-162 of the amended cross-claim CA Mastronardo pleads that he was induced to provide his guarantees by a misrepresentation that the Bank would not enforce any of the lending transactions prior to completion of the project on both sites unless entitled to do so "as a result of a breach of a material term of the Agreements". These paragraphs repeat, almost word for word, pars 135-139 of the proposed additions to CA Mastronardo's defence and pars 145-149 sought to be added to the defence of Mr Mastronardo snr. The representation relied upon is almost identical with that now sought to be pleaded by way of amendment to the defences, quoted at [11] above. Reasons have already been given for my view that these paragraphs do not plead a viable misrepresentation case (see [11]-[18] above). Leave will not be granted for the paragraphs to be added to the cross-claim.
10. In pars 170-176, the misrepresentation case is substantially repeated in the character of a claim of misleading and deceptive conduct contrary to s 12DA of the Australian Securities and Investments Commission Act "or, alternatively, s 52 of the TPA [Trade Practices Act 1974 (Cth)]". Again the same vague representation, that the Bank would not enforce any of its agreements unless there should have occurred a "breach of any material term in the Agreements", is sought to be relied upon. The same reasons for refusing leave to plead the misrepresentation case, as given at [11]-[18] above, apply. That is subject to the qualification that in par 173 of the proposed amended cross-claim it is recognised that the alleged misrepresentation concerns future conduct and it is pleaded that "the Bank had no reasonable grounds for making the Representation" to CA Mastronardo. However this allegation is not particularised or in any way supported. There is no pleading of any facts or circumstances from which it would be sought to demonstrate that the Bank had no reasonable grounds. This is a minor point, as the fundamental problem with the s 12DA case is that it is founded upon a misrepresentation alleged in terms of profound uncertainty.
11. In pars 179-180, the misrepresentation case is yet again repeated, this time in the character of a claim of unconscionable conduct contrary to s 12CB of the Australian Securities and Investments Commission Act "or, alternatively s 51AA of the TPA [Trade Practices Act]". The s 12CB case suffers from the same defects as the s 12DA case. Leave will not be granted for CA Mastronardo to plead these causes of action in the insupportable form in which they appear in the draft cross-claim on this application.
12. Other paragraphs of the proposed amended cross-claim within the range of pars 139-178 would plead equivalent causes of action to be relied upon by Mr Mastronardo snr. Those amendments will not be allowed. The reasons I have already given in relation to the causes of action sought to be pleaded in the cross-claim by CA Mastronardo apply with equal force
13. In pars 181-186 of the proposed amended cross-claim Messrs Mastronardo plead that Remo 49 and Remo 97 were formed pursuant to a joint venture agreement between them and that the project of redeveloping the two properties in Queens Road was undertaken within that joint venture. It is pleaded that the alleged breaches of implied terms, the misrepresentation, the misleading and deceptive conduct and the unconscionable conduct as alleged in pars 139-180 were wrongful on the part of the Bank and "prejudicial and detrimental to the interests of" both of Messrs Mastronardo as partners in the joint venture. These paragraphs are dependent upon pars 139-180 being added to the cross-claim. On their own they contribute nothing towards establishing any cause of action that could sound in damages. The application to add pars 181-186 fails with the rejection of pars 139-180.
14. The proposed cross-claim does not particularise the damages claimed by either of the Mastronardos. An affidavit of CA Mastronardo was sworn on 29 April 2019 in support of an application to the Court of Appeal for a stay of writs of possession issued in the Remo Corporation proceedings (referred to below). CA Mastronardo there deposed, at par 48, that he estimates the damages under his proposed cross-claim are "at least $50M and up to approximately $268M". No substantiation for either end of this range or for any figure in between is provided in the affidavit. The figures lack any prima facie support and there has not been proffered, in affidavit or submissions, even an outline or preliminary calculation of quantum.

Lateness of the present application

1. During the hearing of the defendants' notice of motion submissions were addressed to the possibility of leave being granted despite lack of particularity in the proposed amendments, on the basis that directions could be made for affidavits to be filed and that these would sufficiently delineate the case that the Bank must meet. I would not consider that an acceptable course having regard to the deficiencies of the draft pleadings identified above. Those deficiencies go beyond a mere lack of particularity. In many respects the amendments fail to allege viable cross-claim causes of action, however particularised. Where particulars purport to be given by cross-reference within the pleadings, the cross-references prove to be only further assertions that are incapable of substantiating the allegations for which they are cited.
2. Further, in light of the history of this case it is incumbent on the defendants to articulate clearly any additional cross-claim causes of action they wish to introduce so belatedly. It would be procedurally unfair to the Bank for these obscure and incomplete amendments to be allowed, on the basis that Messrs Mastronardo would clarify them in affidavits. That course would be inconsistent with the Court's obligation under s 56(2) of the Civil Procedure Act 2005 (NSW) to "facilitate the just, quick and cheap resolution of the real issues in the proceedings". It would be contrary to the objectives prescribed in s 57(1), including "the efficient disposal of the business of the court" and "the timely disposal of the proceedings, and all other proceedings in the court, at a cost affordable by the respective parties".
3. Brief reference to the procedural chronology shows this. Discovery was completed in 2014 and the principal affidavit in support of the Bank's case was sworn and served on 7 November 2014. The Bank amended its statement of claim on 28 August 2015 and the defendants filed defences on 29 October 2015. Since that time the following have been the principal developments:

• 18 December 2015: Mr Mastronardo snr was directed to file his proposed cross-claim by 21 December 2015. That was done. The defendants were directed to serve their evidence by 9 March 2016.
• 16 March 2016: The defendants had failed to serve their evidence within the time allowed. They were directed to do so by 29 April 2016.
• 28 and 29 April 2016: Messrs Mastronardo served their respective affidavits.
• 27 and 28 September 2017: The defendants filed amended defences.
• 28 November 2017: The defendants were given leave to file lay evidence in support of the amended paragraphs of their defences and any valuation evidence by 18 January 2018. It was ordered that they not be permitted to rely on any evidence served after that date without the leave of a judge.

1. No further evidence was served under the last-mentioned direction. Throughout 2018 the Registrar from time to time fixed dates by which the defendants were to file any notice of motion seeking leave to rely upon additional evidence. No such application was ever made. The defendants did not take any active step in the proceedings or file any affidavit or other substantive document from 28 September 2017 when their amended defences were filed until 4 April 2019 when they commenced the present application for leave to amend.
2. It would have been open to the Bank to have the proceedings listed for final hearing at any time after the filing of affidavit evidence closed on 18 January 2018. I infer that the Bank did not take that course because it had obtained in August 2017, in the Remo Corporation proceedings (referred to below), very substantial judgments against Messrs Mastronardo that they were unlikely to be able to satisfy. The Bank's reticence to obtain a hearing date does not explain or justify the defendants' inactivity until now with respect to any proposed cross-claim by CA Mastronardo or any additional claims by his father. On the contrary, the Bank's pursuit of Messrs Mastronardo in other proceedings during 2017 and 2018 would have made it very clear that if CA Mastronardo had a viable cross-claim he would need to put it forward expeditiously.

The related Remo Corporation proceedings

1. Both Remo 49 and Remo 97 are subsidiaries of Remo Corporation Pty Limited (in liquidation) ("Remo Corporation"). In Equity Division proceedings entitled Mastronardo v Commonwealth Bank of Australia (No 2014/86502) ("the Remo Corporation proceedings") CA Mastronardo and his wife claimed damages of approximately $7.2 million for alleged breaches by the Bank of the terms of loans to themselves and to Remo Corporation, which they guaranteed. The Bank cross-claimed to recover Mr and Mrs Mastronardo's personal loan and to enforce their liability as guarantors of Remo Corporation. The Bank also sought possession of Mr and Mrs Mastronardo's residence and another property, under mortgages. The Bank sued Mr Mastronardo snr as co-guarantor of Remo Corporation.
2. The damages claim by Mr and Mrs CA Mastronardo was dismissed and the Bank's cross-claim was upheld: Carmelo Adriano Mastronardo v Commonwealth Bank of Australia trading as BankWest [2017] NSWSC 1052. Orders entered by Hammerschlag J on 21 August 2017 included judgments for debt: 1. against CA Mastronardo for $18,247,162.43 (order 7) and 2. against Mr Mastronardo snr for $9,938,954.27 (order 9).
3. It is an admitted fact that no interest has been paid since May 2011 on any of the loans the subject of the Remo Corporation proceedings. There has been no payment in reduction of either of the above judgments since they were entered. With interest accrued since 21 August 2017 the judgment debt of CA Mastronardo now exceeds $23.5 million.
4. An appeal by CA Mastronardo and his wife to the Court of Appeal was dismissed on 22 June 2018: Mastronardo v Commonwealth Bank of Australia [2018] NSWCA 136. On 14 November 2018 the High Court refused special leave to appeal from the Court of Appeal's decision.
5. On 21 August 2017 Hammerschlag J also gave judgment in favour of the Bank for possession of the mortgaged properties. Evidence given in the Remo Corporation proceedings showed that in April of this year the securities had a value of approximately $6.85 million. Writs of possession were issued but not enforced while the appeal and special leave application were pending. Writs were reissued on 4 March 2019. On 19 March the Sheriff notified CA Mastronardo and his wife that possession would be recovered on 30 April 2019. At the last possible moment late on the afternoon of 24 April 2019 an application was made for a stay of the writs. The principal basis of this application was that CA Mastronardo said he had a cross-claim against the Bank that would exceed the debt secured over the properties. The cross-claim referred to was that for which he has sought leave to amend on the present application.
6. The application for a stay was refused at first instance: Mastronardo v Commonwealth Bank of Australia [2019] NSWSC 466. On 29 April 2019 the Court of Appeal refused an application for a stay in connection with an appeal from that refusal: Mastronardo v Commonwealth Bank of Australia [2019] NSWCA 99.

Bankruptcy proceedings against Messrs Mastronardo

1. In July 2018 the Bank prepared bankruptcy notices addressed to Messrs Mastronardo based upon the judgments entered by Hammerschlag J in the Remo Corporation proceedings. These were served in July 2018. The bankruptcy notices were not satisfied and no application was made to have them set aside, under s 40(1)(g) of the Bankruptcy Act 1966 (Cth), on the basis of "a counter-claim, set-off or cross demand equal to or exceeding the amount of the judgment debt". The Bank therefore filed creditor's petitions. These are listed for hearing in the Federal Circuit Court of Australia at Sydney on 8 May 2019.
2. CA Mastronardo has filed an amended notice of opposition in the Federal Circuit Court alleging that he has a counterclaim exceeding the amount of the Bank's judgment debt. Again, that is a reference to the cross-claim for which he seeks leave in the application now before this Court.

Conclusions from the Remo Corporation and bankruptcy proceedings

1. The course of the Remo Corporation and bankruptcy proceedings shows that throughout 2017 and 2018 the Bank has been actively trying to bring recovery of its debts to a head through sale of the remaining securities and through sequestration. CA Mastronardo has sought to deploy the draft of the proposed amended cross-claim herein as a means of thwarting both the Sheriff's writs of possession and the creditor's petition against him. If there were any substance in the proposed cross-claim thus invoked as a last stand against enforcement, the Court would expect it to be pleaded with sufficient precision to show serious questions to be tried. Instead the cross-claim for which leave is sought appears on its face to be no more than insupportable obfuscation.

Orders

1. For these reasons it will be ordered that the defendants' notice of motion filed 4 April 2019 be dismissed with costs.

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