Cranfield Pty Ltd v Commonwealth Bank [1998] VSC 140

Supreme Court of Victoria|1998-11-20|Before: Mandie, J.

GUARANTEE - action by mother and son to set aside mortgage and guarantee - Amadio principles - Yerkey v Jones EQUITY - whether unconscionable conduct by bank - uneducated and illiterate wife accustomed to obey husband's directions in business matters - Yerkey v Jones - whether wife a volunteer.

In this proceeding the thirdnamed plaintiff, Domenico (or Domenic) Papalia and his mother, the fourthnamed plaintiff, Guiseppina Papalia, seek to set aside certain securities given to the defendant, Commonwealth Bank of Australia ("CBA"). Guiseppina Papalia, in particular, relies upon the principles enunciated in Commercial Bank of Australia Ltd v. Amadio ; , alternatively, the principles in Yerkey v. Jones ; The CBA counterclaims against those two plaintiffs but withdrew its counterclaim against the fifthnamed plaintiff, Antonio Papalia.

Rocco and Guiseppina Papalia were both born in Varapodio, Reggio Calabria, Italy, Rocco on 19 October 1930 and Guiseppina on 30 October 1934. They were married in Italy in 1953 and emigrated to Australia in the 1950s, Rocco in 1955 and Guiseppina with their eldest son Domenico in 1959. The children of the marriage are: Domenico born on 14 August 1954, Angela born in 1962, Antonio born in 1962, Filippo born in 1967 and Rocco Jnr. born in 1969.

Rocco Papalia was educated in Italy and left school aged about 10 years. In Italy, he worked as a labourer and bricklayer. In Australia, he worked as a factory hand and farm labourer. In 1970, he suffered a serious back injury in a motor car accident. In 1972, he arranged the purchase of a block of three shops at 37-43 Station Street, Cobram ("the Bakery property"), with his accident compensation monies and the family commenced to operate a bakery and retail bread shop from those premises.

Rocco Papalia was able to speak little English, was not able to read or write English, and received assistance with translation from his son Domenico. At all times prior to his death he exercised control of the family's business and investment affairs as the head of the household. Rocco Papalia died on 18 December, 1990. By his will, he appointed Guieseppina Papalia as his executrix and sole beneficiary.

Guiseppina Papalia (in some of the documents referred to as "Josephine") was educated in Italy and left school aged about 11 years. When her husband Rocco emigrated to Australia in 1955, she remained with her son Domenico in Italy living with her parents-in-law. Guiseppina Papalia has never had any formal schooling in English and she has a poor command of spoken English. She is substantially unable to read or write English. Other than working as a bakery assistant in the family bakery since 1972, she has no other employment experience and has been primarily occupied since her marriage in home duties and child raising.

Domenico Papalia, the eldest son, was educated in Australia to year 7 level. He speaks English well and has basic reading and writing skills. He has had work experience in a grocery store and has worked as a bricklayer, and since 1972 he has worked in the family bakery business in Cobram.

While his father was alive, Domenico acted as the business spokesman for his father. After his father's death, Domenico assumed control and management of the family's business and investment affairs.

A corporate structure was devised for the family on the advice of their accountant, Mr L Mogg of Mogg, Peat & Co, comprising two companies and a discretionary trust.

Papalia Family Bakeries Pty Ltd ("the Bakery company") was incorporated on 30 May 1985. Its principal activity was to act as a trustee company for a family trust. Its directors were Domenico and Antonio Papalia. Both Rocco and Guiseppina Papalia ceased to be directors of the company on 15 August 1986 and Filippo Papalia ceased to be a director of the company on 20 July 1990. The secretary of the company was Domenico Papalia (appointed on 15 August 1986). The Bakery company is now in liquidation as the result of a winding-up application by the Deputy Commissioner of Taxation.

The Rocco Papalia Family Trust ("the Family Trust") was established by deed dated 1 July, 1986. It was a discretionary trust which operated to distribute income derived from the Papalia family bakery business. It had two classes of beneficiaries: special and general. The special beneficiaries were the children of Rocco and Guiseppina Papalia and the general beneficiaries were Rocco and Guiseppina themselves. The appointors and guardians of the Family Trust were Rocco and Guiseppina acting jointly during their joint lifetime and solely upon the others death.

The first plaintiff, Cranfield Proprietary Limited ("Cranfield"), was incorporated on 16 October 1987. Its principal activity was described as "rentiers". Its directors were Domenico and Guiseppina Papalia (both appointed on 20 November 1987). Rocco Papalia (also appointed on the 20 November 1987) was a director of Cranfield until his death (18 December 1990). The secretary of the company is Domenico Papalia (appointed on 20 November 1987). Its shareholders are Domenico, Antonio and Rocco Jnr. Papalia. The company is in liquidation as a result of a winding-up application by the CBA.

Apart from family residences, six properties were referred to in the proceeding.

(i) The "Bakery property" is located at 37-43 Station Street, Cobram (described in Certificate of Title Volume 9365 Folios 015 to 019). The property was purchased in the name of Domenico Papalia and Guiseppina Papalia in 1972 who became the registered proprietors as tenants in common in equal shares. At the time of purchase the property was a block of three shops. The property is now the only relevant property unsold. The family bakery and retail bread shop continues to operate in what was initially two shops in a block of three (the other shop is used as storage space).

(ii) The **"**Arcade property" is located next door to the Bakery property at 29-35 Station Street, Cobram (described in Certificate of Title Volume 2181 Folio 153). The property was purchased in the name of Rocco and Guiseppina Papalia who became the registered proprietors as tenants in common in equal shares on 21 July, 1982. At the time of purchase the Arcade property was vacant land. The property was subsequently developed as five shops. It was sold at public auction by CBA on 29 April 1996 for $308,000.

(iii) The **"**Foster Knights property" is located next door to the Arcade property at 21-27 Station Street, Cobram (described in Certificate of Title Volume 6684 Folio 614). This shop property was purchased in early November 1987 for $110,000 and Cranfield became the registered proprietor on 18 January, 1988.

CBFC Limited (a wholly owned subsidiary of CBA) provided Cranfield with financial accommodation in excess of $100,000 to assist with the purchase of the Foster Knights property. The Foster Knights property was mortgaged to CBFC Limited by Cranfield. The mortgage was registered on 18 January 1988. Cranfield granted a second mortgage to the CBA dated 16 February 1989. The property was sold by public auction by CBFC Limited on 18 February 1994 for $82,997.46.

(iv) The "Restaurant property" is located further along the street at 69-75 Station Street, Cobram (described in Certificate of Title Volume 2006 Folio 152). The property was purchased by the Bakery company which became the registered proprietor on 4 December 1987. At the time of purchase the property was a restaurant with attached residence.

CBFC Limited provided the Bakery company with financial accommodation in the sum of about $67,000 for the purchase of the Restaurant property. The Restaurant property was mortgaged to CBFC Limited by the Bakery company on 14 October 1987. The mortgage was registered on 4 December 1987. A second mortgage dated 16 February 1989 was given to CBA to secure the debts of Cranfield. CBFC Limited took possession of the Restaurant property in exercise of its rights under its mortgage and the property was sold by it as mortgagee in possession on 18 February 1994 for $42,814.09.

(v) The "Printing property" is located next door to the Bakery property on the other side at 45-51 Station Street, Cobram (described in Certificate of Title Volume 9709 Folio 555). The property was purchased for $175,000 by Cranfield on 29 February 1988 which became the registered proprietor on 9 March 1988. The property was used for the purpose of a printing business. There was also a proposal that part of the property be developed for a funeral parlour but the details are irrelevant. The Printing property was sold by public auction by CBA on 18 August 1995 for $187,164.63.

(vi) The "High street property" is located at 148 High Street, Cobram (described in Certificate of Title Volume 6701 Folio 103). This house property was purchased for $63,500 by Cranfield on 22 November 1988 which became the registered proprietor on 21 February 1989. The property was sold by public auction by CBA on 7 October 1995 for $33,392.80.

The circumstances of particular relevance may be mentioned in outline before turning to a more detailed account. Cranfield procured finance from CBA by means of a bill discount facility for a total sum of $400,000 on or about 26 February, 1988. The purpose of this facility was to provide Cranfield with $200,000 for the purchase of the Printing property and $200,000 for the construction by it of three shops on the Arcade property (owned by Rocco and Guiseppina Papalia). The money was drawn down over time as required.

As security for the bill discount facility, the Printing property was mortgaged to CBA by a first mortgage executed by Cranfield on 29 February, 1988 and registered on 18 April, 1990 ("the Printing mortgage"). In addition to the Printing mortgage, the Bakery property was mortgaged to CBA by a mortgage executed by Domenico Papalia and Guiseppina Papalia (who were also directors of the borrowing company, Cranfield) on 29 February 1988 and registered on 18 April, 1990 ("the Bakery mortgage"). The Bakery mortgage contains an "all monies" covenant. Further, Rocco, Guiseppina and Domenico Papalia each executed a guarantee by which they jointly and severally guaranteed the due repayment by Cranfield to CBA of all monetary advances and financial accommodations made by CBA to Cranfield ("the Cranfield guarantee").

Rocco Papalia had initially proposed that Cranfield develop three shops on the Arcade property. However, during 1988 Rocco Papalia decided to expand the project to a six shop development. This expansion necessitated additional finance of $100,000 for Cranfield from CBA.

A first mortgage of the Arcade property to CBA was executed by Rocco and Guiseppina Papalia on 25 October, 1988 and registered on 18 April, 1990 ("the Arcade mortgage"). The Arcade mortgage contains personal covenants by the mortgagors to pay all monies due and payable by Cranfield to CBA.

Further financial accommodation of $90,000 was provided by CBA to Cranfield in November 1988 bringing total advances by CBA to Cranfield to $590,000. This amount included $60,000 for the purchase of the High Street property and a further $30,000 for the completion of the six shops on the Arcade property. The High Street property was mortgaged to CBA by a first mortgage executed by Cranfield on 16 February, 1989 and registered on 18 April, 1990. The Foster Knights property was mortgaged to CBA by Cranfield by a second mortgage executed by Cranfield on 16 February, 1989 and registered on 29 March, 1989. In addition, the Restaurant property was mortgaged to CBA by a second mortgage executed by the Bakery company on 16 February 1989 and registered on 29 March, 1989.

I will refer to the claims by Domenico Papalia in due course. It is sufficient at this stage to say that there are only two relevant security documents sought to be set aside by (or to be enforced against) Guiseppina Papalia: the Bakery mortgage and the Cranfield guarantee. Although Guieseppina Papalia purported also to sue on behalf of her late husband's estate, no claim was pursued by her in that behalf.

Some general matters are clear from the evidence. Guiseppina Papalia did not participate in business decisions made by her husband Rocco or eldest son, Domenico. She has no appreciation of banking, financial or commercial documents. She was excluded from all business decisions and the financial affairs of the family companies. As a matter of strong cultural tradition she did not involve herself in "men's work". She did not have any understanding of any position held by her as a company director. She customarily did what her husband (and after his death, her eldest son), told her to do including the signing of bank documents without any enquiry. She was accustomed to accept directions from her husband and later her eldest son in business and financial matters with the consequence that her execution of the relevant security documents was done at their behest.

Expert evidence was given (which I accept) of the cultural traditions that would more than likely remain strong amongst persons born and raised in towns such as Varapodio, Reggio Calabria, Italy who emigrated to Australia in the 1950s, then aged in their twenties. Traditionally, the role of the husband (or in the absence of the husband, an eldest mature son) was dominant as the undisputed head of the household. It was the role of the head male to make all business and commercial decisions to the exclusion of the female members of the household who were deliberately kept ignorant of such matters. If told to sign a business or financial document by the head male or to participate in any business activity, the female would usually, as a matter of cultural tradition, do just that without question and without seeking independent advice.

I return to a more detailed statement of the facts. After leaving school in 1968 (aged 14), Domenico Papalia's first job was with his father as a bricklayer's apprentice. The family lived in a Housing Commission home at 19 Stokes Avenue, Cobram. Domenico later worked in a grocery and then for a few months at a bakery in Melbourne.

In about 1971 (the date is unclear) Rocco Papalia was injured in the accident to which I have referred and became entitled to a disability pension. In 1972 Rocco Papalia received compensation monies in relation to his accident injuries and, using these funds, arranged the purchase of the Bakery property. Rocco Papalia had the Bakery property registered in the names of Guiseppina and Domenico Papalia. Domenico Papalia testified that the reason for this was that the bank "wouldn't give him a loan because he was on the pension". However, it is a reasonable and probable inference that Rocco Papalia wished to avoid or minimise the application of the means test and thus the property was not put in his name and the business was not operated in his name. The evidence does not support any proposition that this was a sham or that there was any trust in relation to their interest in the Bakery property and Guiseppina and Domenico Papalia were and are therefore the beneficial owners of the Bakery property.

The family commenced to conduct a bakery business on the premises of the Bakery property. Domenico began working there with the help of his mother in the bakery shop. At relevant times prior to the establishment of the Family Trust, the business was operated by a partnership between Guiseppina and Domenico Papalia. It would seem that the partnership business was successful. For example, for the year ended 30 June 1984 it had sales of $143,372, a gross profit of $77,131 and a net profit (after expenses including motor vehicles, depreciation, salaries and wages) of $1,218.

At some stage (again the date is unclear), Rocco Papalia provided or obtained monies to purchase land at Catona Crescent, Cobram. Monies were borrowed from the State Bank of Victoria ("SBV") in order to build a house on it for the family and to buy two vacant blocks next door.

In April 1982 Mr Farley, manager of the SBV, Cobram branch, was advised that Guieseppina and Domenico Papalia had the opportunity to purchase the property next door to their bakery business (the Arcade property), being two shops. Mr Farley noted in a memorandum dated 6 April 1982 that:

"The shops on the site are in a poor state of repair and it would not be commercial proposition to renovate them. The applicant's plans are to secure the property and then at a later date demolish the buildings and build a small shopping complex of five shops on the site incorporating their current business in the complex. This would not be started within twelve months. The bulk of the finance required to build the shops would come from the sale of two houses they currently own and rent. The property is in a good position in the commercial area of Cobram. BANKING The total number of accounts associated with the borrowers and their immediate families maintained at this office is 14 savings accounts with balances totalling $24,395-16. Two cheque accounts are maintained, one for overdraft purposes with a limit of $4,000-00 for the business, the other for private purposes. (See attached forms 8015). PREVIOUS BORROWINGS A current mortgage loan No 833397-18 of $55,000-00 granted 8-9-81 to assist with the building of the family home. Personal Loans Nos 77-53714 and 78-55732. Outstanding balances of $7781- and $7407-00 respectively. All instalments have been paid on the due dates. Other personal loans that have been granted and repaid are Nos 75-20985, 75-42733, and 78-55703. SECURITY Their shop is at present subject to a mortgage to the C.B.A. Bank Footscray and the outstanding debt is $4,000-00. They plan to repay this amount giving them a clear title to their bakery shop which is valued at approx $110,000-00. They are requesting that we use the bakery property as security for this loan and they wish to borrow the total amount of $40,000-00."

It is noteworthy I think, having regard to what later occurred, that the plans at that stage were to finance the development of the Arcade property by the sale of assets.

The loan application to SBV was revised in that Mr Farley noted on 8 April 1982:

"The applicants now request we use the property being purchased as the security for this loan.

Funding for the proposed new development will come from the sale of two houses they currently own and rent. But this is a long term project and the development will not commence for at least 18 months and no definite plans have been decided on."

"Bakery not to be used as security as the title it is on also includes two other shops and they are in the process of arranging a subdivision."

In the result, the "family" provided some of its own funds and the sum of $25,080 was lent as a fully drawn advance facility by the SBV to Rocco, Guiseppina and Domenico Papalia in June 1982 and a mortgage over the property purchased (the Arcade property) was executed by Rocco and Guiseppina in favour of SBV to secure the loan. I further note that the sum of $43,680 was lent as a fully drawn advance facility by the SBV to the same three persons in June 1984 and mortgage security was granted over the Catona Crescent home. Again, in February 1986, the sum of $18,000 was lent by SBV to Rocco, Guiseppina, Domenico and his wife Teresa (whom Domenico had married in 1974) on the security of a mortgage in favour of SBV over vacant land adjoining the Catona Crescent home. Further, in November 1987, the SBV lent the sum of $70,000 to the Bakery company with mortgage security given over the Arcade property and the Catona Crescent home and Rocco and Guiseppina and Domenico Papalia and others also signed an unlimited guarantee dated 18 November 1987 in favour of the SBV. Domenico Papalia testified and I accept that when he signed this guarantee he thought it was for a set sum and he did not appreciate nor was it explained to him that it was an unlimited guarantee.

Guiseppina Papalia could not speak English until she worked in the shop where she learned to speak very basic English. She cannot read or write English. Rocco Papalia could speak a little English but also could not read or write English. Domenico Papalia speaks good English and has basic reading and writing skills. He spoke Italian with his parents. Domenico Papalia often translated for his father in the business including communications with the accountant Mr Mogg.

When Cranfield Pty Ltd was first utilised, Rocco Papalia decided that Guiseppina and Domenico should be the directors. Guiseppina had no involvement in running the company and she was not consulted concerning any of its business decisions.

Domenico Papalia testified and I accept his evidence that: "When Rocco Papalia wanted to do something, buy or sell, he made the decision. He did not listen or take anybody's opinion about business decisions. Not even mine. His mind was made up and his decision was final. He told me I did not have experience. He never told my mother about the business, what he was doing or how it was going. He said it was not a woman's job. She has her job - the children. We men have our job - the business. My father never wanted a woman in the decision and in a position of authority, and this included my wife. He always said something like `Better for everybody for the women to know nothing'."

Domenico Papalia had a basic understanding of commercial documents but did not understand complicated documents. He knew that with a bank loan one had to pay a set amount of money each week and then after a set number of repayments the loan would be paid off. He knew how a personal loan worked. He testified that in 1988 he did not know what an unlimited guarantee or an unlimited mortgage was and that when he signed a security document he thought it was for a set amount of money.

On or prior to 18 February 1988 an estate agent (Mr Crow) approached Domenico Papalia in relation to the possible purchase of a building next to the bakery (the Printing property). Mr Crow told him that a Mr McPherson of the Shepparton Newspapers Group had previously contracted to purchase the property from the owners named Beasley for $190,000 and that this purchase was due to be completed by McPherson or nominee by 28 February 1988. Mr Crow said that he was looking for a buyer and added that Shepparton Newspapers would sign a 10 year lease at $17,000 rental per year. Domenico Papalia informed his father who was interested. Mr Crow told Domenico that the only problem was that the deal had to be finalised in a few days. Domenico Papalia met with McPherson who suggested that he get finance from the CBA, Shepparton branch. Domenico Papalia discussed the proposal with his father who told him to go ahead. Domenico Papalia approached the manager of the SBV in Cobram, Mr Bruce Mitchell, but he could not assist and suggested that Domenico approach the Wangaratta branch of the SBV, but that this would require provision of "financials, budgets" and that this could take 7 to 14 days.

Domenico Papalia then telephoned the CBA, Shepparton branch and was referred to Mr Trevor Lowrie, who was the Senior Loans Officer. Mr Lowrie had commenced employment with the CBA in 1967 and had been a loans officer at the Shepparton branch since 1979. Domenico Papalia explained the situation generally to Mr Lowrie. Mr Lowrie said that he had heard of the Papalia family and that he also knew of the building they wished to purchase as a customer of his had bought it previously. They had a discussion about the whole family either on the telephone or the next day in Shepparton (see below). Domenico Papalia told Mr Lowrie that his brother was handicapped and did not take part in business decisions. He told him that his mother was Italian and that she could not really understand English. Domenico Papalia told Mr Lowrie that his father was completely in control of the purse-strings and that his mother and the rest of the family did what they were told concerning business matters. Mr Lowrie said that the proposed loan appeared okay but that he needed further information. Mr Lowrie asked Domenico to come to Shepparton the next day.

Mr Lowrie's memorandum as to an application for accommodation by Cranfield is dated 19 February 1988. On or prior to that date Domenico Papalia met Mr Lowrie at the Shepparton branch of CBA bringing documents he had been asked for and "figures" that he had discussed with his father. Domenico told Mr Lowrie that the Papalia family consisted of parents and three sons who operated a bakery and catering business situated in Cobram which had been operated by them for the past 15 years. Domenico told him that in the last year the business was expanded into take-away foods, pizzas and other general cafe products. He told him that the catering side was generally operated on weekends only and demand for their services was increasing all the time. Mr Lowrie noted (presumably upon information supplied by Domenico) that although the shop was not situated in the main street, it did have easy access to the Murray Valley Highway and as such commanded a good passing trade and that in addition they specialised in making traditional Italian breads and pastries which attracted a fair share of the area's population.

Mr Lowrie noted in his memorandum (probably, at least in part, from other information available to him) that the property next door to their bakery was available for sale at $190,000 and was presently occupied by the "Cobram Courier" and that the Shepparton Newspapers Group had purchased the freehold and business earlier in the year but were not interested in the freehold and the contract of sale permitted a nominee purchaser to be named. Mr Lowrie by then had in his possession a copy of the contract of sale but the source is unclear. Domenico Papalia also told Mr Lowrie that on the other side of the bakery the family owned vacant land (the Arcade property) upon which they proposed that they might build three shops or offices for rental. Mr Lowrie noted that the "contract price" was $190,000 plus prime cost items estimated at $10,000 although it is clear that Mr Lowrie was not told anything more than that there was a quotation for $150,000 (see below).

Based upon information supplied to him on that occasion by Domenico Papalia, Mr Lowrie prepared rough "family" and company balance sheets as follows:

(facilities in name of Papalia Family Bakeries Pty Ltd)

Housing Commission $37 pm (lived in by son rent free)

Mr Lowrie recorded the following rental income based on information or estimates supplied to him by Domenico Papalia:

Mr Lowrie recorded that he had been supplied with partnership financial statements for the bakery business for the year ended 30 June 1986 but that the statements of the newly formed company for the year ended 30 June 1987 were not yet available. Domenico told him that the "income" for the year ended 30 June 1987 exceeded $200,000 with a profit of approximately $45,000. He noted that the financial statements for the previous year showed a profit of $470 but that if various items (including family wages and partners' salaries) were added back, there was a profit of $30,261.

Mr Lowrie, again based on information supplied to him, noted actual and projected annual expenditure on loan repayments as follows:

"Overall clients are in a very sound financial position and they will be relying on rental income to meet their commitments with some backup from the `bakery'. As rentals are adjusted in line with C.P.I. adjustments their position should improve considerably over the next few years. Position is considered satisfactory."

In relation to the security available, Mr Lowrie noted that in addition to the Printing property to be purchased by Cranfield and the Arcade property (the development site registered in the name of Rocco and Guiseppina Papalia) there was the Bakery property (registered in the name of Domenico and Guiseppina Papalia). He noted that there would be a guarantee by the directors of Cranfield. At this stage he had been told that the directors of Cranfield were Rocco, Guiseppina and Domenico Papalia. He also noted, in effect, that the "clients" were to arrange discharge of the SBV mortgage on the Arcade property. He noted that settlement was due on the Printing property on 29 February 1988.

"OTHER BANK ACCOUNTS At this stage we are not represented in Cobram and it is not possible to gain their day to day business accounts. It is expected we will gain investment funds of up to $10,000. COLLATERAL ADVANTAGES It is expected we will gain their business accounts when the Commonwealth opens a branch in Cobram. From time to time they are involved in Lease and H/P transactions and will approach us for quotes in this regard. COMMENTS & RECOMMENDATION Directors of applicant company are a typical hardworking Italian family who have built up a solid worthwhile business over a period of time. Their balance sheet position is sound and repayment capacity will be demonstrated mainly from collection of rental income. Mr Papalia Senior is a very astute businessman and still holds the `purse strings' when dealing with financial matters. This is an opportunity to write worthwhile solid business in a town where we are not yet represented. In the past few years the local Council has adopted a progressive attitude which has attracted new business and growth to the town in both housing and the commercial sector. We are satisfied that security offered and income/expenditure are sufficient to service all commitments on a troublefree basis. Approval is recommended..."

Mr Lowrie testified that his comments about Rocco Papalia were based on what Domenico had told him and on other inquiries with people in Cobram. Mr Lowrie swore and I accept that he formed the view on the information provided to him that the family could afford to service the loan.

At this meeting with Mr Lowrie at the Shepparton branch, Domenico testified that he told Mr Lowrie in relation to the Arcade property that the State Rivers and Water Supply Commission were looking for office space. It is not clear whether the discussion was in terms of shops or offices or both. He said that Mr Lowrie asked him "how much to build the offices", and he said: "around $150,000". Mr Lowrie then made the suggestion, unprompted, that the CBA would provide finance of $200,000 in relation to the proposed development and then said that he could arrange approval of a loan of $400,000. At the time of this meeting, the Arcade property was land with some old buildings on it. Domenico Papalia testified that he only had "an inquiry about the shops with the State Rivers" and "in general discussion I mentioned it and [Mr Lowrie] had heaps of money to borrow (sic) and he said, why have to reapply again, we will make it for the whole 400 [thousand]." Mr Lowrie suggested that the funds be made available by way of bank bills. It was the first Domenico Papalia had heard of bank bills and he asked for an explanation. Mr Lowrie told him that it was the usual way businesses operated and the cheapest way to borrow money. He said that "you paid less interest as it needed to be paid every 180 days". He persuaded Domenico that this was the best way. I accept this evidence of Domenico Papalia.

By letter dated 26 February 1988 from CBA to Cranfield, CBA advised that it had approved a Bills Facility of $400,000 for five years, interest only, "to assist with the purchase of commercial premises at Cobram and to complete construction of three shops". The security to be provided was listed as two mortgages (over the Printing property and the Arcade property) and a "joint and several guarantee by DG and R Papalia Unlimited as to amount". The letter was endorsed at the end "We indicate our acceptance of the above terms and conditions" - under which Rocco and Domenico Papalia had each signed. I find that Domenico Papalia read the letter and then translated it to and discussed it with his father before they signed it. Although the evidence is unclear, it would seem that the Bakery mortgage was taken instead of a mortgage over the Arcade property as envisaged because the latter was still subject to the mortgage in favour of SBV. The Bakery mortgage was given only after Rocco Papalia gave his permission to Domenico Papalia to proceed with it.

The Printing mortgage is dated 29 February 1988 and bears the seal of Cranfield and the signatures of Rocco Papalia (Director) and Domenico Papalia (Secretary). The Bakery mortgage is dated 29 February 1988 and signed by Guiseppina Papalia and Domenico Papalia as mortgagors, each in the presence of Mr Lowrie who signed as witness. The mortgage is expressed to secure the indebtedness of Cranfield. The mortgage incorporates a memorandum of common provisions including a covenant to pay "all moneys... now or hereafter to become owing or payable "by Cranfield and the mortgagor or either of them.

The Cranfield guarantee is also dated 29 February 1988 and is expressed to be made between Rocco Papalia and Guiseppina Papalia, company directors, and CBA and Cranfield. It is signed, sealed and delivered by Rocco, Guiseppina and Domenico Papalia as guarantors in the presence of Mr Lowrie who signed as witness (and is also executed by the debtor Cranfield). It guarantees payment of all moneys owing or to become owing by Cranfield.

Domenico Papalia was cross-examined by senior counsel for Guiseppina Papalia, Mr Vickery QC. In answer to questions from Mr Vickery, Domenico Papalia said that the Bakery mortgage was signed at the shop by his mother and himself as mortgagors and that no one was present from CBA to witness their signatures. He said that the Cranfield guarantee was signed at the same time. Domenico said that he could not recall when the dates were put on the documents but: "I know about the signatures, that we signed heaps of documents at the shop. I brought documents back, they were given to me, and at that particular stage just to get signatures and take them back to Shepparton". He said they had been handed to him at the Shepparton branch by Mr Lowrie.

Under cross-examination by Mr Sifris, of counsel for CBA, Domenico Papalia reiterated that Mr Lowrie had given him "heaps" of documents in Shepparton to take back for signing. When it was put to him that Mr Lowrie brought the documents to the shop where they were signed in his presence, he denied it most emphatically. He did say, however, that just before settlement on the Printing property, Mr Lowrie had visited the bakery and met the family and that he had introduced him to Rocco, Guiseppina and his brother Antonio, that Mr Lowrie stayed and had a cup of coffee and that Mr Lowrie asked his father and himself to go to Shepparton the next day.

Guiseppina Papalia could not recall the circumstances in which she had signed the Bakery mortgage and the Cranfield guarantee, although she did remember a number of occasions on which she had signed documents in the shop and she also remembered an occasion when some gentlemen had come to the shop and she had made coffee for them.

Mr Lowrie, on the other hand, said that he had a clear recollection of the occasion upon which these documents were signed and Mr Vickery conceded, as far as his client was concerned, that Mr Lowrie's account should be accepted. I agree with this concession and I think that Mr Lowrie's account of the circumstances, although itself vague, is to be preferred on the balance of probabilities to that of Domenico Papalia so far as it relates to the signing of the documents. I so find partly on the oral evidence but also because it is unlikely that Mr Lowrie would have come to Cobram without the security documents as it appears that they were ready by that stage and he was about to hand over a bank cheque for $189,953 at settlement. I therefore accept Mr Lowrie's evidence as follows, with the one qualification noted.

Mr Lowrie recalled that the settlement of the Printing property was urgent and that he brought a bank cheque for the settlement and the security documents in his car to Cobram on the day fixed for the settlement. He went to the bakery. He said that he saw Domenico Papalia first and told him that he had documents to be signed and that "this is a mortgage" and "this is a guarantee". He said that Domenico Papalia called over his parents and spoke to them in Italian and they all signed those documents where Mr Lowrie indicated. Mr Lowrie said that he did not speak to Guiseppina Papalia on that occasion. He said that he did not know she could not speak English or that she spoke English poorly and he could not recall Domenico having so informed him (although, as I have said, I am satisfied that he had been told). Mr Lowrie said, in substance, that the family came across as a conservative southern Italian family and that he would have expected that the wife would generally accept the husband's decisions and directions in financial matters without question.

It is convenient at this juncture to refer to Guiseppina Papalia's relevant state of knowledge and belief in particular in February 1988. I accept that she was accustomed to sign what she was asked by her husband to sign without question. I find on the evidence that she did not understand companies or trusts or have any clear idea of the nature of a mortgage or a guarantee or any idea at all of the nature and effect of the particular documents she signed in February 1988. I formed the distinct impression that, whilst uneducated, she is intelligent and had by the time of the trial a considerable appreciation of the basic issues affecting her case. However, I would say that it is very likely that most of her current understanding has been gained through the financial troubles that have beset the family mainly since the death of her husband. Nevertheless, I am satisfied that, despite her protestations to the contrary, she was aware that monies were being borrowed first from SBV and then from CBA for investment purposes and that documents she was signing from time to time in a general sense related to bank loans although she did not know how much was being borrowed. She became aware either at the time of signing relevant documents or shortly thereafter of properties in Station Street, Cobram and elsewhere which were being purchased and knew when her name was to be on a title. She regarded the Bakery property and the Arcade property (despite her beneficial ownership) as within her husband's control and intended to devolve upon the family and that she was not free to act as the unrestricted owner thereof. She knew that she was a director of Cranfield whilst having no appreciation of a director's duties.

Guiseppina Papalia gave evidence in substance that had she known that $400,000 was being borrowed and understood what she was being asked to sign, she would not have signed the documents for such a large amount. I do not accept that evidence. On the contrary, all the other evidence points to the probability that she would have signed if so requested by her husband without protest and even with full knowledge.

To return to the narrative, after the documents were signed, Mr Lowrie and Domenico Papalia attended the settlement of the Printing property purchase.

Domenico Papalia testified that the next day he and his father went to Shepparton and signed some "more" documents and that Mr Lowrie gave them "a heap" of documents to take back to the shop and get them signed by Guiseppina Papalia. Mr Lowrie marked where Guiseppina Papalia had to sign with a cross or a yellow sticker and he and his father got Guiseppina to sign. She was told to sign each document where it was marked. Nobody explained any of the documents to her and he did not translate any of the documents for her. She signed without asking any questions and there was no bank person present. Domenico testified that he took the documents to Shepparton the following day and Mr Lowrie then signed his signature as witness at his office. I am unable to accept this evidence as relating to the occasion upon which the Bakery mortgage and the Cranfield guarantee were signed - whether or not other documents were signed in this way at this time or at some other time or times is unnecessary to decide.

According to Domenico, the family started building on the Arcade property. At some stage, precisely when was not stated, the development was changed by Rocco Papalia from three shops to six smaller shops. After building started the costs "blew out". Their original estimate of $150,000 "blew out" to $350,000.

Mr Lowrie was very happy to provide more funds. He said to Domenico "Just let me know how much you need, it is no good to you half finished". Mr Lowrie then said that CBA was opening a branch in Shepparton and that "We are doing the right thing by you, you do the right thing by us and transfer your accounts to our branch in Cobram. Joe Hocevar [the new Branch Manager] needs accounts like yours".

The amount of the Bill Facility was increased by $100,000 in or about August 1988. A letter from CBA dated 11 August 1988 addressed to Cranfield at the Bakery address confirms approval of the additional accommodation and refers to the security. An endorsement accepting the terms and conditions is signed by Rocco and Domenico Papalia and the letter bears the "received" stamp of the Shepparton branch dated 8 September 1988.

Early in September 1988, Mr Lowrie contacted Domenico and asked him who had the title to the Arcade property. Domenico made enquiries and told Mr Lowrie that SBV had a mortgage on it. Mr Lowrie asked Domenico to get a payout figure which he did. On 6 September 1988 CBA paid out the loan (about $60,000) and obtained a discharge of the mortgage. The mortgage and discharge were then forwarded to CBA.

As a result, the Arcade mortgage was obtained dated 25 October 1988 and signed by Rocco and Guiseppina Papalia. It secured the indebtedness of Cranfield. The family moved their accounts from SBV to the Cobram branch of the CBA.

On 22 November 1988 Domenico Papalia telephoned Mr Lowrie and told him that his father Rocco had been successful at auction on Saturday in purchasing a house property in Cobram (the High street property) for $63,500, a deposit of $6,350 had been paid and the balance was payable in 30 days. He requested finance of $60,000. He also advised that the finishing touches to the new shops would be completed over the next two weeks but they expected to be over budget by $30,000 due to increased costs for air-conditioning, verandah and windows, and additional funds were sought. Domenico told Mr Lowrie that he had been in contact with the accountant and that financial statements for the year ended 30 June 1988 should be available by the end of the month. Mr Lowrie noted that Domenico had "undertaken to follow this matter up personally to enable the bank to consider his proposal of increased facilities to $590,000".

On 19 December 1988 a Shepparton branch loans officer (Mr Morgan) recorded that Domenico Papalia had called to discuss several matters; that these included that existing overdraft excesses would be cleared from rentals due before the end of December 1988; that financial statements were to be available at the end of November but their accountant had been slow and had now promised provision of them before Christmas and that he would get them to CBA as soon as he received them; that cost over-runs on the construction of the Arcade property shops were now in excess of $50,000 and that the final figure would not be known for a few weeks and that the over-runs had been caused by increasing prices, building delays and having no fixed contract for the construction; that settlement for the High street property was that day and bank cheques totalling $59,500 were requested; and that Domenico explained that the late notice was because they had hoped to collect their financial statements that morning for the bank's perusal.

"The file indicates a sound banking connection has been established and a strong financial position is evident. Dominic produced an updated Balance Sheet and part income/expenditure summary which is attached.

In view of the financial standing of these clients Bank Cheques were issued as requested. In return Dominic guaranteed the Company Directors would execute any security documents we required including a Mortgage over the property being purchased.

The interview concluded on the basis that we would contact the client during the first week of January for a further interview to:-

1. Obtain Financial Statements if not already received.

2. Establish an amount required to complete construction of shops.

3. Arrange total finance for shops ... "

A bank memorandum of 11 January 1989 refers to "excesses" constituted by three items: bill discount facility roll-over costs ($21,000), purchase of the High Street property ($63,500) and general working capital expenses. The memorandum also refers to further cost overruns on the Arcade property development and to a request for further financial accommodation (the necessity for which seems to have flowed from a combination of the above three items together with cost overruns, interest arrears and the payout of the SBV). In February 1989, the CBA approved an increase in Cranfield's bill discount facility to $665,000 to cover the foregoing. Rocco and Domenico Papalia signed an acknowledgement of acceptance endorsed on the CBA's letter of approval dated 15 February 1989 and Rocco, Guiseppina and Domenico Papalia each signed separate letters of acknowledgement dated 14 February 1989 in which they acknowledged that the CBA was granting financial accommodation to Cranfield not exceeding $675,000 plus interest against the security of their respective mortgages.

It is unnecessary to recount the subsequent financial history in any great detail. A number of factors adversely affected the family's fortunes. Interest rates increased dramatically. In late 1989, Rocco Papalia was diagnosed with cancer. Serious problems were experienced in obtaining and retaining tenants. Property values fell and prices deemed satisfactory for various properties were not obtainable. After Rocco Papalia's death in December 1990, a disastrous saga ensued involving attempted refinancing of debts including the ever-increasing debt to the CBA which apparently led to the loss of the family home and other properties.

I note that certain further securities were obtained by CBA in December 1991 but the bank abandoned any attempt to enforce them.

In early February 1993, Domenico Papalia put a written proposal to Mr G. Dickie, a Regional Manager located at the Bendigo branch of the CBA. Domenico saw and spoke to Mr Dickie at the Cobram branch concerning this proposal.

By letter dated 23 February 1993 from the CBA to Cranfield (Domenico Papalia), the bank replied as follows:

"We refer to your recent letter and subsequent discussion with Mr Dickie of our Regional Office. The following arrangements are confirmed: : you will make a $10,000 repayment immediately ($4,000 received 18/2) and subsequent payments of $10,000 by the 17th of each month. : you have agreed to provide written direction for all property rents to come direct to the mortgagees, ie: CBA & CBFC Ltd.

In relation to your request for additional finance and/or release of term deposit security, the Bank is unable at this stage to assist and the request is therefore declined.

The Bank is, however, prepared to reconsider the proposal, entirely without commitment, upon receipt of:-

We understand that significant expenditure has been incurred in respect of the re-development of one of your properties apparently without any arrangements being in place for the funding thereof. Please be aware that there is no commitment, actual or implied, for the Bank to assist.

Your early attention to the provision of title information and payment of the outstanding $6,000 is essential."

In or about March 1993, Domenico Papalia on behalf of Cranfield gave a number of directions to lessees to remit future rentals as follows:

(i) the Foster Knights property - a direction dated 3 March 1993 to Cobram (Kawasaki) Motor Cycles to remit future rentals to the CBA for the credit of CBFC Ltd;

(ii) the Printing property - a direction dated 3 March 1993 to MV Printers Pty Ltd to remit future rentals to the CBA for the credit of account 3527 175-425 (Cranfield's cheque account);

(iii) the Arcade property (not owned by Cranfield) - directions all dated 3 March 1993 to the lessees of Shops 1 and 3, Shops 4 and 6, Shop 2 and Shop 5 to remit future rentals for the credit of the said cheque account;

(iv) the Restaurant property (not owned by Cranfield) - a direction dated 30 March 1993 to Ms V. Lucas (presumably the tenant of the attached unit) to remit future rentals to the CBA for the credit of CBFC Ltd.

I note that the rents from the Arcade property were always paid to Cranfield because, as Domenico testified, "it built the shops".

Domenico Papalia gave evidence, mostly hearsay, that all rentals (of an unstated amount) which were received by CBA and should have been forwarded by the CBA to CBFC were not so forwarded. There was no proof of the amount involved.

On Friday 26 March 1993 Guiseppina Papalia and Domenico Papalia attended the Cobram branch of the CBA and had a meeting with Ms Vanessa Reid, a Senior Recoveries Officer employed by the CBA. Domenico Papalia informed Ms Reid that they were unable to honour an agreement to repay $10,000 per month as the bakery business was not doing as well as expected and also rentals were harder to collect than expected. Various matters were discussed and Ms Reid made a hand-written diary note of the meeting which included the following exact words:

"It could also be stated that an attempt will be made the 'Amadio' case as Mrs Papallia command of the English language is poor and she relies a lot on her son's to translate, although during our meeting she had a good grasp of the business dealings and the reasons for establishing the two separate companies...

Domenico executed the authorities to direct rental monies to the Bank with the consent of his mother who fully acknowledged the arrears owed to the Bank ... "

Ms Reid gave evidence to the same effect as her note. Having seen and heard both Guiseppina Papalia and Ms Reid give their evidence, I do not accept that Guiseppina Papalia would have said or done anything at this meeting to justify Ms Reid's conclusion either that she had "a good grasp of the business dealings ... (etc)" or "fully acknowledged the arrears".

Ms Reid left a file note for her "successor" noting, inter alia, that she had requested Domenico Papalia to place two properties for sale by auction (the High Street property and the Restaurant property (which was vacant with a unit at the rear)) and that "[m]onies received for CBFC are being credited to (628) 6051-2238 and will need to be redirected by bank cheque to Sydney each month."

In July 1993, accountants then acting for Cranfield and Domenico Papalia, Bent & Cougle Bentleys, wrote to the CBA noting that CBFC would be selling under its first mortgages and that the CBA's chances of recovering anything under its second mortgages were remote. They proposed strenuous efforts to sell the Printing property, the Arcade property and the High Street property for agreed realistic prices and that, if after two months the CBA was not satisfied with progress, it could take whatever action it saw fit. The balance of the letter set out a proposal for the retention of the Bakery property which "Domenic is most anxious to retain" although it was anticipated that there would still be a substantial debt. The CBA responded to the letter but it is sufficient to say that full agreement was not reached. Attempts to sell properties continued as did negotiations concerning payment with the CBA.

In late January 1994 various appropriate written demands were duly served by CBA on all relevant debtors and sureties. In April 1994, appropriate notices to pay were duly served on all relevant mortgagors. On 21 October 1994 the CBA appointed a receiver of income in relation to Cranfield's mortgaged properties.

I have earlier referred to the results of the various mortgagee's sales. Some of these were in February 1994, and others took place, after proceedings to which I refer below, in August 1995, October 1995 and April 1996. (In addition, proceedings were instituted in the County Court at Melbourne by CBFC Ltd against the Bakery company and others.)

This proceeding had been commenced against CBA on 3 February 1994.

The CBA filed a counterclaim in this proceeding in May 1994 and in December 1994 applied for a summary judgment on its counterclaim. Then in April 1995 (before the hearing of its summary judgment application) the CBA also applied for summary judgment dismissing the plaintiffs' claims, except for a claim in defamation.

On 22 May 1995, Master Wheeler granted the CBA summary judgment on the claims of Cranfield and the Bakery company (except the defamation claim) dismissing those claims with costs. On the CBA's application for summary judgment on its counterclaim, Master Wheeler ordered as against Cranfield that the CBA have possession of certain properties and gave judgment against Cranfield for the sum of $1,239,291.70. As against the Bakery company, he gave judgment for $23,345.55 and leave to defend as to the balance claimed. The individual plaintiffs were given leave to defend the counterclaim. The orders not being wholly favourable to the CBA, the CBA appealed from the Master's orders. That appeal was heard in June 1995 and was dismissed with costs by Teague, J in a judgment handed down on 2 May 1996.

In March 1996 the County Court proceedings brought by CBFC Ltd were listed for hearing and there were negotiations between the legal representatives of CBA and CBFC Ltd and of the plaintiffs with a view to compromising both this proceeding and the County Court proceeding.

Following oral negotiations, a proposed Deed of Settlement of 16 pages was provided by the CBA's solicitors to the plaintiffs' solicitors on 20 March 1996. This was a proposed compromise between the first, third, fourth and fifth plaintiffs and Fillipo Papalia on the one hand and CBA and CBFC Ltd on the other. The deed was never executed and negotiations concerning an amended deed, which took place in July 1996, also failed to reach fruition. I mention these matters because CBA's counterclaim alleged a compromise, partly oral and partly in writing, made between the parties on 26 July 1996. However, any claim to rely upon it was abandoned by CBA at trial.

Certified statements of account (constituting prima facie evidence) were put in evidence by CBA showing that as at 20 April 1998 the amount owing to CBA in relation to Cranfield under the Bakery mortgage and the Cranfield guarantee by Domenico Papalia and by Guiseppina Papalia was $610,336.98. No submissions were made challenging the quantum of the said sum. In addition, as at 20 April 1998 there was a further amount of $35,662.68 certified to be owing to the CBA by Domenico Papalia under the guarantee dated 18 November 1987 given to SBV. However, the CBA abandoned that claim for $35,662.68

Before turning to the parties' submissions, one further matter of evidence should be mentioned. I gave leave to Domenico Papalia to call late some expert evidence from a chartered accountant and small business consultant, Graeme William Miller. Mr Sifris consented to a short written statement going in as evidence and did not require that Mr Miller be called or made available for cross-examination and he did not seek to call rebutting evidence. Mr Miller's statement read as follows:

"In my opinion the total loan transaction... was attended with unusually high risk for the following reasons:

1. Approximately 105% of the purchase price was loaned on the property purchase.

2. The other $200,000.000 was to be available as a loan to be taken up for a property development of three shops, which in my opinion was more risky than a loan for the purchase of an existing residential property or an already developed commercial property which is tenanted with secure tenants. It was a speculative venture.

3. As at 19 February 1988 the total level of debt, for the family was in the region of $280,000.00. The additional amount of $400,000.00 would increase the total debt to $680,000.00 which is a massive increase in the overall level of debt exposure.

4. If the values of the properties were not substantiated by valuations, there was a risk of the capital base to support the loans being overvalued and the gearing of the debt to assets being too high.

5. The servicing of the loans was based mainly on rental income, with rent reviews being adjusted on a potentially variable CPI. The principal income base to service the loans was therefore subject to the potential for market fluctuation and for the rents to fall. With adverse economic conditions, income from commercial tenants may become less reliable.

6. If the loans were proposed to be based on a 180 day bank bills facility, interest would have been variable with each bill period over the 5 years of the loan. There was therefore the potential for interest to increase over the term of the loan facility.

7. There appears to be an extremely limited capacity to service the loans from income from the bakery. Approximately $30,000.00 profit was generated from the bakery, which had to be used to provide a living for the family. There would have been little surplus remaining after costs of living were taken into account.

8. If it was the case that the Papalias had not previously entered into a loan of this size, then their capacity to adequately manage an exposure of such a magnitude must be brought into question.

9. If the Papalias had not previously engaged in a commercial property development project, and were proposing to carry out the project themselves, their capacity to manage such a project successfully, and to avoid creating a drain on their cash-flow and reduction of their capital base, must also be brought into question.

10. The allowance for $37,440.00 as rental income from the 3 shops proposed to be developed in the absence of any firm commitments from tenants to take up leases, coupled with the absence of even an outline design plan for the shops, were also a significant risks."

In my view, the uncontradicted evidence of Mr Miller demonstrates that the bill discount facility of $400,000 represented in all the circumstances the provision of financial accommodation with very high risks. The increase in the family debt once the monies were all drawn down was very large. The capacity to safely service the full amount depended on a number of variables including rental levels and interest rates and there was no history of experience with commercial property development.

By the further amended statement of claim dated 5 May 1998, Guiseppina Papalia sought a declaration that the Bakery mortgage and the Cranfield guarantee were void ab initio and unenforceable or that they be set aside as against her.

(i) She was in a position of special disadvantage and CBA had with actual or constructive knowledge of her position acted unconscionably and taken advantage of her (Amadio);

(ii) as a married woman and in all the circumstances she was entitled to rely upon the principles in Yerkey v Jones;

(iii) her execution of the said documents was procured by the undue influence of her husband Rocco Papalia and/or of her son Domenico Papalia - this claim was abandoned by counsel;

(iv) she had no understanding at all of the said documents or the transaction and therefore "did not execute the documents" (non est factum) - this claim was restricted by counsel to the guarantees and to the personal covenant in the mortgage.

Unconscionable conduct

Counsel for Guiseppina Papalia referred to the equitable principles stated in Amadio (in particular as stated by Deane, J at pp.474-6 and Mason, J at pp.461-4).

In my view it is clear that Guiseppina Papalia was in a position of special disability or special disadvantage. She was uneducated, illiterate in English and ignorant of, and subservient to her husband in, financial and business matters.

Further, it was evident to the CBA that she was in a position of special disability or disadvantage. Mr Lowrie was sufficiently apprised of her position by Domenico Papalia and by his own observations and had no reason to think that she had been given any information or explanation or advice concerning the transaction or the documents, independent or otherwise.

Was unconscientious advantage taken of her position in all the circumstances? The onus lies on the CBA to show that its conduct in relation to the transaction was fair, just and reasonable or consistent with equity and good conscience in all the circumstances and that it was not unfair or unconscientious in the circumstances to procure or accept her assent to the Bakery mortgage and the Cranfield guarantee. That is a more difficult question. The facts are quite unlike those of Amadio. There was at first blush nothing so extraordinary about the transaction or its purposes and Guiseppina Papalia was not actively misled or misinformed concerning the transaction or the securities to the knowledge of the CBA (or at all). Moreover, whilst she had no "beneficial interest in the debt", Guiseppina Papalia potentially stood to benefit from the provision of finance for the erection of shops upon land (the Arcade property) of which she was one the registered proprietors along with her husband.

(i) the unusually high risks in relation to the transaction as detailed by Mr Miller;

(ii) the initiation and encouragement by Mr Lowrie of the provision of the additional $200,000 for a speculative property development;

(iii) the failure of the CBA to bring to the attention of Guiseppina Papalia any relevant features of the transaction, the securities and the said risks;

(iv) the ulterior commercial motives of the CBA in using the Papalias as a springboard for expansion into Cobram and to assist another customer, the Shepparton Newspaper Group, to find a substitute buyer for the unwanted printing property. I should say that, whilst I accept that Mr Lowrie was interested in encouraging business for the new Cobram branch, I do not otherwise accept that these motives were proved.

I have concluded that the CBA did take unconscientious advantage of the position of Guiseppina Papalia and the opportunity for the CBA created thereby in all the circumstances. In my opinion, to take the Bakery mortgage and the Cranfield guarantee from her knowing of her said position and without ensuring that she understood, or had an opportunity to obtain advice concerning, the effect of those security documents and advice concerning the said high risks of the transaction, as it affected her, was not fair, just or reasonable and was contrary to equity and good conscience in all the circumstances. Those circumstances were as I have stated and centrally include Mr Lowrie's initiation of the additional $200,000 loan facility, and its speculative purpose.

I think that neither her interest in the Arcade property nor her position as a director of Cranfield detracts from this conclusion, given the CBA's appreciation of her illiteracy and subservient position. Whilst the absence of gain or benefit to the party claiming relief, or the lack of consideration moving to that party, is often an important factor giving rise to equitable intervention, it is not necessarily a prerequisite. It may be sufficient if there is inadequacy of consideration and even that may not be essential - it all depends on the circumstances (see Blomley v Ryan [1956] HCA 81; (1956) 99 CLR 362 at 405-6 per Fullagar J; Brusewitz v Brown [1923] NZLR 1106; and generally: Meagher Gummow & Lehane: Equity, Doctrines and Remedies (3rd ed), paras. 1524, 1604).

The appropriate equitable relief is that the Bakery mortgage and the Cranfield guarantee be wholly set aside as against Guiseppina Papalia.

It was conceded by Mr Sifris that the indefeasibility provisions of the Transfer of Land Act did not insulate the mortgage from attack by an "in personam" claim such as this.

After the hearing concluded and judgment had been reserved, counsel for Guiseppina Papalia sought leave to further amend the statement of claim to clarify the case which had been argued but also "to raise the plea of Yerkey v Jones". Mr Sifris opposed the granting of leave but conceded that the CBA would suffer no prejudice by reason of the amendments. In those circumstances leave to amend was granted and written submissions were thereafter exchanged.

In case I am wrong in my application of the Amadio principles, I turn to consider the application of the principles in Yerkey v Jones. There was considerable debate in the written submissions as to whether Yerkey v Jones was still "alive" and a number of decisions were cited but that has now been resolved in the affirmative by the High Court in Garcia v National Australia Bank Ltd [1998] HCA 48 (6 August 1998); [1998] HCA 48; (1998) 155 ALR 614.

The prima facie position arising from the relationship of trust and confidence between husband and wife was summarised in this way by Dixon J in Yerkey v Jones (at p. 683).

"That exposition, I think, shows that these cases are consistent with and recognize the proposition that, if a married woman's consent to become a surety for her husband's debt is procured by the husband and without understanding its effect in essential respects she executes an instrument of suretyship which the creditor accepts without dealing directly with her personally, she has a prima-facie right to have it set aside. This is contained within the proposition stated by Cussen J. as the minimum necessary for the decision of Bank of Victoria Ltd. v. Mueller 96 (1925) V.L.R., at p. 648..."

"The difficulty, if not danger, thus created of attempting to state the conditions which must be fulfilled before a given kind of conduct or of unfairness amounts to an invalidating cause is greatly increased by the introduction of the consideration that the equity must be such as ought to prevail against the claims of the creditor as a possibly innocent third party. But it is clearly necessary to distinguish between, on the one hand, cases in which a wife, alive to the nature and effect of the obligation she is undertaking, is procured to become her husband's surety by the exertion by him upon her of undue influence, affirmatively established, and on the other hand, cases where she does not understand the effect of the document or the nature of the transaction of suretyship. ... [I omit the passages dealing with undue influence.] In the second case, that where the wife agrees to become surety at the instance of her husband though she does not understand the effect of the document or the nature of the transaction, her failure to do so may be the result of the husband's actually misleading her, but in any case it could hardly occur without some impropriety on his part even if that impropriety consisted only in his neglect to inform her of the exact nature of that to which she is willing blindly, ignorantly or mistakenly to assent. But, where the substantial or only ground for impeaching the instrument is misunderstanding or want of understanding of its contents or effect, the amount of reliance placed by the creditor upon the husband for the purpose of informing his wife of what she was about must be of great importance. If the creditor takes adequate steps to inform her and reasonably supposes that she has an adequate comprehension of the obligations she is undertaking and an understanding of the effect of the transaction, the fact that she has failed to grasp some material part of the document, or, indeed, the significance of what she is doing, cannot, I think, in itself give her an equity to set it aside, notwithstanding that at an earlier stage the creditor relied upon her husband to obtain her consent to enter into the obligation of surety. The creditor relied upon her husband to obtain her consent to enter into the obligation of surety. The creditor may have done enough by superintending himself the execution of the document and by attempting to assure himself by means of questions or explanation that she knows to what she is committing herself. The sufficiency of this must depend on circumstances, as, for example, the ramifications and complexities of the transaction, the amount of deception practised by the husband upon his wife and the intelligence and business understanding of the woman. But, if the wife has been in receipt of the advice of a stranger whom the creditor believes on reasonable ground to be competent, independent and disinterested, then the circumstances would need to be very exceptional before the creditor could be held bound by any equity which otherwise might arise from the husband's conduct and his wife's actual failure to understand the transaction: Cf. per Cussen J. 97 (1925) V.L.R., at p. 649. If undue influence in the full sense is not made out but the elements of pressure, surprise, misrepresentation or some or one of them combine with or cause a misunderstanding or failure to understand the document or transaction, the final question must be whether the grounds upon which the creditor believed that the document was fairly obtained and executed by a woman sufficiently understanding its purport and effect were such that it would be inequitable to fix the creditor with the consequences of the husband's improper or unfair dealing with his wife. Apart from the unwisdom or improvidence of the transaction into which he persuaded her, the facts of the present case do not show that Estyn Jones exercised any influence over his wife which could be considered undue or a ground for interference by a court of equity. His enthusiasm for a project or enterprise that it was foolish to embark upon was not shared by his wife, but it is impossible to believe that she did not understand as well as he that, if the purchase was to be made, whatever money was needed must be found by her... But it was not a case where a husband having incurred a heavy indebtedness is relied upon by a creditor to obtain from his wife a guarantee which will improve the position of the creditor to the detriment of the wife, who will obtain no benefit except the satisfaction of relieving her husband for a time from one of his embarrassments." (See too: Garcia at 18, 21, 25, 31 and 33).

In the present case, the only impropriety of Rocco Papalia was, at I see it, his neglect to inform his wife of the nature of that to which he must have known she would give her assent in complete ignorance of the purposes of the transaction and the nature and effect of the mortgage and guarantee. But that, to my mind, is sufficient to bring the principle into play where the CBA took no steps itself to inform her or to assure itself that she had sufficient understanding.

The cases place emphasis on the relevance of the benefit to the husband and the lack of benefit or gain to the wife. In this case, the benefit flowed to Cranfield, which I am satisfied was the alter ego of Rocco Papalia and in which Guiseppina Papalia had no beneficial interest and over which she had no control in fact (cf. Garcia at 7). I do not think that the operation of the principles is necessarily displaced by the fact that Cranfield was erecting shops on the Arcade property of which Guiseppina was one of the owners.

So far as the evidence went, Cranfield borrowed the monies and erected the shops (and subsequently collected the rent in order, no doubt, that its interest obligations might be paid). I do not think that the fact that the shops were erected on her land or that ultimately benefit or gain might have flowed to Guiseppina Papalia as one of the owners of the Arcade property prevents the application of the equitable principles (except perhaps to the Arcade mortgage itself). Her transaction with the CBA was voluntary in the sense that Guiseppina Papalia obtained no direct or immediate gain from the bill discount facility or other obligation of Cranfield which she guaranteed (see Garcia at 31). Further, Guiseppina Papalia, whilst she was one of the registered proprietors of the Arcade property, had provided none of her own funds for its purchase and held her interest for all practical purposes for the benefit of the family and at the direction of her husband, the other registered proprietor.

The witnesses unsurprisingly provided no explanation for the use of Cranfield as the vehicle to obtain finance for the erection of the shops on the Arcade property. Cranfield had no interest in the Arcade property nor was it a developer. Nor did the evidence disclose the contractual arrangements involved in erecting the shops. Again, the evidence did not show the nature of any arrangement between Cranfield as borrower and financier of the construction and Rocco and Guiseppina Papalia as owners of the Arcade property. The strong inference is that no thought was given by Rocco or Domenico Papalia to the relationship between the company and the registered proprietors. It would seem very probable that the monies flowed to Cranfield simply because it was convenient and cheaper to have one bill discount facility providing the monies both for Cranfield's purchase of the Printing property (the original purpose of the approach to the bank) and for the development on the Arcade property.

In the light of the foregoing, it seems to me that the CBA is not able on the evidence to substantiate its proposition that Guiseppina Papalia was not a "volunteer" for the purposes of the principle in Yerkey v Jones (Cf. ANZ Banking Group Ltd v McGee (1994) ACS 56-278). She was to my mind in substance a "volunteer" in her capacity as mortgagor of the Bakery property and guarantor of Cranfield.

If it be correct that the Yerkey v Jones principles are applicable, this too would constitute a claim "in personam" affecting the Bakery mortgage (see generally Frazer v Walker [1967] AC 569, 585; Bahr v Nicolay (No.2) [1988] HCA 16; (1987-8) 164 CLR 604, 637-8, 653; Vassos v State Bank of South Australia [1993] VicRp 74; [1993] 2 VR 316, 329-333; Macquarie Bank Ltd v. Sixty-Fourth Throne Pty Ltd (Court of Appeal, 28/10/97, unreported - esp. at pp. 29-32).

Alternatively, I am of the view that Guiseppina Papalia is entitled to the full equitable relief sought by her by the partial application of both sets of principles as follows. The principles of unconscionable conduct exemplified by Amadio are applicable, for the reasons I have already given, so as to grant relief in relation to the Bakery mortgage and the Cranfield guarantee limited to the extent to which they provide security for all monies and interest owing by Cranfield in respect of the development of the Arcade property. The principles in Yerkey v Jones are applicable, for the reasons I have already given, so as to grant relief in relation to the Bakery mortgage and the Cranfield guarantee limited to the extent to which they provide security for all monies and interest owing by Cranfield for any purpose in respect of which Guiseppina Papalia was undoubtedly a volunteer - the purchase of the Printing property and any other purpose other than the development of the Arcade property.

I am of the view that the requirements for a non est factum plea were not established (see Gallie v Lee [1970] UKHL 5; [1971] AC 1004; Petelin v Cullen [1975] HCA 24; (1975) 132 CLR 355, 359-360). In any event, the plea is not a defence to the enforcement of the mortgage, nor in my view is it a bar to the personal covenant contained therein (cf. PT Ltd v Maradona Pty Ltd (1992) 25 NSWLR 643, 675-679). However it is unnecessary to decide these matters.

Domenico Papalia claimed the following principal relief by the statement of claim:

* a declaration that each of the Bakery, Printing, Arcade, and other named mortgages was void ab initio and unenforceable and should be set aside as an unconscionable dealing;

* a declaration that the [Cranfield] Guarantee is void ab initio and unenforceable and should be set aside as an unconscionable dealing;

* a declaration that he was not indebted in any sum to CBA;

This relief was sought upon the basis of the following pleaded causes of action, in summary:

(i) that he and his father where each in a position of special disadvantage in relation to the CBA which knew or ought to have known thereof and it was unconscionable for the CBA to procure the Printing mortgage, the Bakery mortgage and the Cranfield guarantee;

(ii) further or alternatively, that in breach of s.52A Trade Practices Act the CBA engaged in unconscionable conduct with respect to the loan of $200,000, the Printing mortgage, the Bakery mortgage and the Cranfield guarantee;

(iii) further or alternatively, that the CBA engaged in misleading and deceptive conduct in contravention of s.52 Trade Practices Act which induced Cranfield to obtain the finance and execute the Printing mortgage and induced him to execute the Bakery mortgage and the Cranfield guarantee;

(iv) further or alternatively, that the CBA acted in breach of a duty of care owed to him and his father in relation to the same matters;

(v) further or alternatively, that the CBA exercised undue influence to induce him and his father to enter the said transaction and execute the said documents;

(vi) that in all the circumstances it was unconscionable for the CBA to procure the Arcade mortgage, and second mortgages over the High Street property the Foster Knights property and the Restaurant property and to induce Cranfield to borrow monies totalling $390,000 to develop the Arcade properly and $63,500 to purchase the High Street property (again, alternative reliance was placed upon s.52A and s.52 of the Trade Practices Act, breaches of a duty of care and undue influence);

(vii) that by an agreement with the CBA concluded in about March 1993 the first four plaintiffs assigned their rights to the rent from the Printing, Foster Knights, Restaurant and Arcade properties to the CBA in consideration for CBA's undertaking to use the same first to discharge the plaintiffs companies' indebtedness to CBFC Ltd and that in breach of the agreement CBA failed to pay any of the rents to CBFC Ltd whereby those companies suffered loss; (further or alternatively, there was misleading conduct by CBA causing that loss);

(viii) that the CBA defamed the first four plaintiffs when its Branch Manager said to one Des Menz in or about March 1993: "Don't bother suing the Papalias. The Bank will be putting them into liquidation next week" (see paragraphs 82-85 of the statement of claim some of which paragraphs appear to have been inadvertently omitted from the amended statement of claim).

Unfortunately, especially having regard to the number and breadth of the allegations and claims, Domenico Papalia was unrepresented and neither he (nor the court) had the benefit of counsel's submissions on his behalf.

I will say at once that the following causes of action or claim were not made out:

* The claim numbered (vii) above was not proved. I am not satisfied that any such agreement was made. There were written directions given to some only of the lessees in respect of whom it was intended that the rent be forwarded by the CBA to CBFC Ltd but the amount paid but not passed on (if any) was not proved.

* The claim numbered (viii) above was not proved. There was no evidence concerning the speaking of the alleged defamatory words.

* All claims based on breaches of "duties of care" fail. In my view, CBA owed no relevant duty of care in law or equity as alleged or at all.

In my opinion, neither Domenico Papalia (nor his father, so far as relevant) was in a position of special disability or disadvantage in relation to the CBA. It is clear on the evidence that they were small businessmen and property investors of some experience despite their lack of education. They had ready access to their own accountants (who in turn had access to leading city solicitors, and indeed had used them to set up the Family Trust). They also had ready access to solicitors in the area. Domenico Papalia was able to read and write English and had a reasonable understanding of financial and business matters. He was a company director and secretary and spokesman for the family. There was no disabling condition or circumstance which seriously affected his ability to make a judgment as to his own best interests (see Amadio at p. 462 per Mason J). He was not in a position of weakness or ignorance (see Amadio at p. 476-7 per Deane J).

Furthermore, I am of the clear view that the CBA through Mr Lowrie was not aware of, nor ought it to have known or suspected, that Domenico Papalia (or his father, so far as relevant) was so uneducated, ignorant or lacking in knowledge or experience (if that was the case) as to be unable to make a reasonable judgment as to his own best interests or to assess the kinds of business risks to which I have referred.

Mr Lowrie was confronted with an urgent application for financial accommodation and presented with information revealing a family with a successful bakery and catering business and numerous investment and other real estate holdings and with an established trust and corporate structure and with a number of existing borrowing facilities. Mr Lowrie's enquiries had established that Rocco Papalia was "a very astute businessman". Mr Lowrie had no reason to suppose that either Rocco or Domenico Papalia lacked adequate understanding of the securities to be provided. He was not asked for financial advice and gave none. I do not accept that the additional $200,000 (whilst suggested by Mr Lowrie) or any other part of the finance was "pushed" on Domenico Papalia or his father.

In my opinion, no case was made out of unconscionable dealing by the CBA as regards Domenico Papalia in relation to any of the matters referred to in the statement of claim (either in 1988 or in 1989).

Further, in my opinion, there was on all the evidence no misleading or deceptive conduct by the CBA, or unconscionable conduct by the CBA, in contravention of the Trade Practices Act. Finally, there was no evidence of any undue influence by Mr Lowrie or the CBA as alleged.

I conclude that Domenico Papalia has failed to establish any cause of action pleaded by him.

1. Judgment for the defendant on the claims by the thirdnamed plaintiff.

2. Judgment for the fourthnamed plaintiff against the defendant for the following orders:

(a) that the Bakery mortgage and the Cranfield guarantee be set aside as against the fourthnamed plaintiff and be deemed to be unenforceable as against her;

(b) that the defendant execute and lodge for registration a registrable partial discharge of the Bakery mortgage so as to discharge the fourthnamed plaintiff's right and title as tenant in common of the Bakery property from the mortgage;

3. Judgment for the defendant on the counterclaim against the thirdnamed plaintiff for the sum of $610,336.98 plus interest from 20 April 1998 until judgment at the rate of $179.92 per day.

4. Judgment for the fourthnamed plaintiff against the defendant on the counterclaim as against her.

I will hear counsel as to the precise form of the above orders and as to costs. I note that the defendant claimed possession of the Bakery property. I will hear counsel as to what orders, if any, are sought or obtainable in this proceeding against the thirdnamed plaintiff's interest in that property by the defendant pursuant to the mortgage.

At a glance

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Judgment (176 paragraphs)

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Cases Cited (6)