Gattellaro & Anor v Westpac Banking Corporation

THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40763/00 CD 12474/90 PRIESTLEY JA HANDLEY JA GILES JA

1 PRIESTLEY JA: The basic facts of this case are set out in the reasons of Giles JA with whom Handley JA agrees. They both think the appeal by Mr and Mrs Gattellaro should be dismissed. 2 The substance of Mr and Mrs Gattellaros' case is simple. They owed money to the Bank; their company (Falgat) separately owed money to the Bank. The Bank wanted to increase the security it held for Falgat's debt. The Gattellaros' house was security for a personal debt of theirs but not for Falgat's debts . By the transaction which the Gattellaros seek to attack in these proceedings the Bank obtained a mortgage over the Gattellaros' house which secured both Falgat's indebtedness and the Gattellaros' personal indebtedness to the Bank. 3 The Gattellaros claimed that the mortgage was unenforceable to the extent that it secured Falgat's debt because they had not been told of nor had they understood that aspect of the transaction, and that the Bank had unmeritoriously obtained an advantage against them by reason of their unequal position and the Bank's superior power. 4 Hulme J, the trial judge, was not impressed with the reliability of the evidence of either Mr or Mrs Gattellaro, and made a number of findings adverse to them on factual issues. Based on documentation, and his rejection of statements by the Gattellaros that they had not understood their house was becoming security for Falgat's debts, he concluded that both Mr and Mrs Gattellaro must have known that the amount of money which was being made available by the transaction of the 2 June 1986 mortgage included an amount to cover Falgat's debt. 5 Nevertheless he made the following findings about what happened at the time the mortgage was executed: " 94. I have so far dealt with the matter largely on the basis of the inferences to be drawn from documents. There is also other evidence to which I should refer. Firstly, it does seem that the course ultimately followed - to 'borrow' only $450,000 to pay out the Goulburn Street branch, provide $15,000 for renovations at Strathfield and capitalise interest for a year - was proposed and agreed to in the first instance at a meeting on 19 May 1986 at which the Defendants were not present. It was a course significantly different from that envisaged in a memo of Mr Morello of 13 May 1986. It seems also that although the bank sought it in the Bank's letter of 19 May, the Defendants never formally recorded their agreement to this course. There is, indeed no direct evidence that they ever agreed to it. 95 An affidavit of Mr Falcomata was read. At face value he has an extraordinary lack of recollection of events. However, it seems in the highest degree unlikely that Mr Falcomata, who seems to have been seeking to help the Defendants, would not have discussed it with them. At the very least, the signing of Mr Falcomata's guarantee by the 4 parties who executed it would be likely to have inspired a discussion on the topic. 96. There is also the evidence of Mr and Mrs Gattellaro to the effect that the documents were not explained to them and Mr Morello's to the effect that the mortgage was. Despite my reservations concerning the nature of Mr Morello's evidence in this regard, I prefer his evidence on the topic to that of Mr and Mrs Gattellaro where there is a conflict. However given its form, there is nothing in the mortgage itself to inspire any reference to Falgat Constructions or explanation of the use to which the funds would be put. 97. No one formally witnessed the execution of the other two significant documents signed that day, including that referring to the bill acceptance line limit of $450,000 and there is no evidence that either of them was explained. In the result, I am not persuaded that the Defendants were told anything on that day to the effect that the money would be used to repay Falgat Constructions' indebtedness. Indeed I think the proper conclusion on the evidence is that there was never any explanation of what was proposed given by officers of the Bank orally to the Defendants. 98. Of significance also is the fact that, following the letters from the bank of 5 and 10 June 1986, there is no record of either of the Defendants complaining to the bank about what had occurred, notwithstanding the invitation on the last of these letters to which I have referred. Ultimately the conclusion at which I have arrived is that, no later than the affixing of their signatures to the bills on or about 2 June 1986, the Defendants knew that the money being made available by the Bank pursuant to the bills would be used as it was, including to discharge the liability of Falgat Constructions. It is inherently improbable that firstly, Mr Falcomata did not tell them what was proposed and secondly, that they did not receive the letter of 19 May 1986 and that they did not appreciate the significance of the amount of the 2 June 1986 or thereabouts bills. 99. Of course, this is not the end of the matter for, as I have indicated, the Defendants rely on a number of matters in support of their claim that the contract was unfair. I accept that a number of these are established, including:- · that there was material inequality and bargaining power between the parties and that the Defendants had no opportunity to bargain with the Plaintiff, · that the provisions of the mortgage were not subject to negotiation, · that the Plaintiff knew (a) the Defendants were without legal advice, (b) the mortgage did not refer to Falgat Constructions or its debts, (c) the Defendants were Italian immigrants with some limitations in their grasp of English, and (d) its own position was being improved. " 6 Hulme J's conclusion that the Gattellaros' defences all failed was based on the inferences he drew that they both must have known what they were doing at the time they executed the mortgage and acquiesced in what had happened for a long time afterward without complaint. He also briefly discussed what I would call the Bank's main substantive defence, which was that at the time the 2 June 1986 mortgage was executed the Bank already held a guarantee from each of them for Falgat's debts, which, read together with an existing mortgage over their house executed in 1977, meant the Bank had effective security for Falgat's debts over that house. Thus the mortgage of 2 June 1986 did not improve the Bank's security position in the way the Gattellaros contended. 7 The Bank was unable to produce the guarantee it relied on for the foregoing justification of its position. Hulme J held that Mr Gattellaro had signed such a guarantee, but that Mrs Gattellaro had not. As I follow Hulme J's reasons he did not decide the case by reference to the missing guarantee arguments, but on the basis I earlier summarised. 8 In this court it was conceded for the Gattellaros that if an unlimited guarantee had existed then the Bank's main substantive defence should succeed. Handley and Giles JJA reach the conclusion that the unlimited guarantee did exist, signed by Mr Gattellaro, and that its terms were such that it did not matter whether Mrs Gattellaro signed it or not. This was because by a covenant in the 1977 mortgage signed by Mrs Gattellaro she promised to pay all debts secured by the mortgage, and the unlimited guarantee of Falgat's debts supposedly signed by Mr Gattellaro brought his indebtedness under it within the debt secured by the 1977 mortgage. Thus Handley and Giles JJA conclude the Bank's substantive defence succeeded. 9 The foregoing conclusion depends on the view taken by Handley and Giles JJA of what was contained in the guarantee they inferred had been signed by Mr Gattellaro. This view depends upon their taking judicial notice both of the fact that the Bank used a standard form of guarantee and of what was in it. 10 I do not think judicial notice can safely be taken of either of those matters, for three reasons: in my experience bank forms frequently change - they must, in light of constantly changing economic conditions and legislative provisions, and never ending court decisions around the world about the meaning and effect of bank forms; there are, I believe, and there certainly may be, different forms of guarantee within a single bank; and, transaction by transaction, additions and/or deletions may be made to standard forms. 11 In the present case the Bank did not tender a form which it claimed was in the same terms as the missing guarantee supposedly signed by Mr Gattellaro. 12 In these circumstances I do not agree with the majority that the court knows what form of guarantee Mr Gattellaro allegedly signed or what its terms were. This means I cannot accept the line of reasoning leading to the majority's conclusion, so that I must consider the basis on which Hulme J came to his conclusions. 13 To my mind the adverse factual findings made by the trial judge concerning Mr Gattellaro's understanding of the transaction are supportable, (the fact that I have some doubt whether I would have made all of them myself is beside the point) but those against Mrs Gattellaro are not. They involve too many assumptions and inferences about her likely degree of knowledge about commercial, financial and legal terms and the substance underlying them for me to accept the conclusions based on those assumptions and inferences. I would not, for example, be prepared to infer that Mrs Gattellaro had any real grasp of what a bill line was. (I cannot guess what the Italian translation would be.) Many lay people whose first language is English cannot tell who is who between mortgagee and mortgagor. 14 The fact that Hulme J did not accept Mrs Gattellaro's evidence about her lack of understanding of the transaction did not itself justify his conclusions. Putting her evidence on one side, I do not see a basis for drawing the inferences that the trial judge did about what she must have known. 15 Setting that view of mine against the facts found by Hulme J in pars 96 to 99 of his reasons, I reach a different conclusion from his. 16 In my opinion Mrs Gattellaro made out a case that the court should declare the 2 June 1986 mortgage unenforceable against her, to the extent that it secured indebtedness of Falgat. I would uphold her appeal and make orders giving effect to my opinion. Because I am in the minority I see no point in formally setting out the full terms of the orders I would make. 17 HANDLEY JA: I agree with Giles JA. 18 GILES JA: Falgat Constructions Pty Ltd ("Falgat") was a construction company. It bought old houses, did them up and sold them; carried out alterations and additions to houses, and built houses and home units. Mr and Mrs Gattellaro were its directors and shareholders. Both Falgat and Mr and Mrs Gattellaro banked at the Goulburn Street branch of Westpac Banking Corporation ("Westpac"). 19 At the beginning of June 1986 the two accounts of Falgat at the Goulburn Street branch were in debit to a total of approximately $195,000, and the three accounts of Mr and Mrs Gattellaro at the branch were in debit to a total of approximately $187,000. The indebtedness of Mr and Mrs Gattellaro was secured by a 1977 mortgage over their home at Chiswick. Whether the home also stood as security for the indebtedness of Falgat was an issue in the appeal. 20 On 2 June 1986 the accounts at the Goulburn Street branch were closed and new accounts were opened at Westpac's Westpac Plaza branch. A bill acceptance line of credit of $450,000 arranged with the Westpac Plaza branch as an advance to Mr and Mrs Gattellaro was used to pay out the indebtedness on the accounts at the Goulburn Street branch, the balance of the funds being devoted to capitalisation of interest for one year and to completion of the renovations to a property. Mr and Mrs Gattellaro mortgaged their home to secure this advance, and the 1977 mortgage was discharged. 21 Following default by Mr and Mrs Gattellaro, in reliance on the 1986 mortgage Westpac obtained an order for possession of their home and judgment for so much of the $450,000 as remained unpaid. The only part of Mr and Mrs Gattellaro's defence to Westpac's claim maintained on appeal was their reliance on the Contracts Review Act 1980. Other circumstances of injustice were taken up, but in essence, their case was that the 1986 mortgage was unjust in that, without adequate explanation and without their so understanding, they became personally liable for the previous indebtedness of Falgat for which they had not been personally liable and made their home security for that indebtedness when it had not previously been security for it. 22 Westpac's contentions at the trial included that Falgat's indebtedness on the accounts at the Goulburn Street branch was secured by an unlimited guarantee given by Mr and Mrs Gattellaro, or at least by Mr Gattellaro, and that the obligations under the guarantee were secured by the 1977 mortgage of their home. Westpac said that, in that situation, there was nothing unjust about the 1986 mortgage because it did not make Mr and Mrs Gattellaro liable for any amounts for which they were not previously liable and did not make their home security for any indebtedness for which it was not previously security. Westpac was unable to produce a signed guarantee, and relied on other materials to prove its existence. 23 The trial judge found that the guarantee had been given, but by Mr Gattellaro only. Although for other reasons he was of the view that the 1986 mortgage was not given in circumstances of injustice, for that reason he accepted Westpac's contention, and he rejected the defence under the Contracts Review Act . For the present I concentrate on this aspect of the defence. 24 Mr and Mrs Gattellaro conceded on appeal that if there was a guarantee of the debts of Falgat unlimited as to amount, and if the obligations of Mr and Mrs Gattellaro under the terms of that guarantee were secured on their home by the 1977 mortgage, then the 1986 mortgage was not unjust because it secured amounts equal to the debts of Falgat previously unsecured. It is possible that a mortgage might be given in circumstances of injustice although not increasing the obligations of the mortgagors, and it may be that the preferable reasoning is that, even if there were injustice, the discretion to grant relief would not be enlivened. It does not matter, because I consider that the concession was correctly made and should be acted upon. 25 A Westpac memorandum dated 27 November 1985 recorded in relation to Falgat's accounts "Secy $120 G'Tee Supported". In Westpac's jargon this meant that there was a guarantee limited to $120,000 and secured by a mortgage. It also recorded in relation to Mr and Mrs Gattellaro's accounts that they were secured by a mortgage. The memorandum noted that Mr Gattellaro "has signed D & I Guarantee to support Company advances", and that Mrs Gattellaro "is to sign this week". In Westpac's jargon a D & I guarantee was a guarantee unlimited as to amount. From this, Westpac said, a guarantee must have been given by Mr Gattellaro and was to be given by Mrs Gattellaro, and it was not suggested that any mortgage which secured it could have been other than the 1977 mortgage. There was, however, an inconsistency in the memorandum between a guarantee limited to $120,000 and an unlimited guarantee. 26 A Westpac diary note of a meeting with Mr and Mrs Gattellaro on 14 February 1986 recorded in relation to Falgat's accounts "secy D & I Gtee (supp)", and in relation to Mr and Mrs Gattellaro's accounts that they were secured by a mortgage. It is clear from other material and from the diary note itself that Westpac was pressing Mr Gattellaro to reduce the accounts, and wanted second mortgage security over a property at Campsie. Because of a dispute over an entry in the accounts, Mr Gattellaro was refusing to give the mortgage. There was no indication of concern about the guarantee. 27 A Westpac memorandum from the Goulburn Street branch to the regional office dated 21 February 1986 reporting on the meeting recorded the same about a guarantee and security for the accounts. In Westpac's submission, this diary note and the memorandum indicated that the reference to a limit of $120,000 in the memorandum of 27 November 1985 was in error, and confirmed that a guarantee was held unlimited as to amount and secured by a mortgage. When Westpac was concerned about its exposure and pressing for additional security, it was said, had the guarantee still been outstanding it would have been raised at the meeting or referred to in the memorandum. 28 The Westpac manager who wrote the memoranda and had the meeting had no independent recollection of the signing of the guarantee. He agreed that it was possible that he had given the guarantee to Mr Gattellaro for Mr Gattellaro to obtain his wife's signature, and Westpac's records in evidence had no record of the actual signature of the guarantee by Mrs Gattellaro. But the manager also said that the notation "Secy D & I G'teed (supp)" meant that there was a guarantee in place. 29 Mr Gattellaro began by saying that he could not remember signing a guarantee, but moved to denying that he had signed a guarantee. Mrs Gattellaro denied ever signing a guarantee. The trial judge regarded Mr Gattellaro as "as unimpressive and unreliable witness", and as a general observation said that there was "too much to be believable" that Mrs Gattellaro did not know or recall. 30 To my mind the Westpac documents provide a sound basis for finding that a guarantee had been given, at the least by Mr Gattellaro, and on the probabilities that it was unlimited. Counsel for Mr and Mrs Gattellaro accepted that the reference to a limit of $120,000 was probably an error. As against this, the guarantee could not be produced. The trial judge observed that there was no explanation why, if the guarantee existed, it could not be produced or further reference to it found, and said that experience and common sense both indicated that banks do not readily mislay, lose or destroy security documents. He nonetheless found that the guarantee had been given. 31 There was evidence that the guarantee would have been kept in a security packet with any mortgages. On the transfer of the accounts to the Westpac Plaza branch the security packet would have gone from the Goulburn Street branch to the Westpac Plaza branch. A Westpac memorandum recorded that a sum of money was handed over to pay out the Goulburn Street branch accounts "in exchange for CTs, discharges over Chiswick and Strathfield properties". On behalf of Mr and Mr Gatellaro it was said that this did not refer to handing over a guarantee. The significance of this, however, does not seem to me to be great. The memorandum did not refer to obtaining a security packet at all, and was really a note of a conveyancing settlement in which the two branches were treated as the parties to the transaction. 32 In the appeal Westpac suggested that it should be inferred that the guarantee had been regarded as obsolete as at June 1986 because the indebtedness of Falgat at the Goulburn Street branch had been paid out, and that the guarantee had been misplaced or destroyed, probably as a consequence of the closure of the Goulburn Street branch. The explanation would have been improved by evidence from one of the bank officers who was called to the effect that, with paying out of the indebtedness of Falgat and the discharge of the 1977 mortgage, no further use for the guarantee would have been seen, so that it would not have been handed over to the Westpac Plaza branch and would have been dealt with in a way which could lead to its loss or destruction. There was no such evidence. 33 On behalf of Mr and Mrs Gattellaro it was submitted that the memorandum of 27 November 1985 recorded a guarantee in anticipation of it being given, that no more could or should be inferred than that Mr Gattellaro had taken the guarantee home for Mrs Gattellaro to sign, and that it could not be found that an operative guarantee was given. The later Westpac documents, it was said, erroneously perpetuated an initially incorrect record. I do not think that is consistent with the change in the February documents to an unlimited guarantee, and if a signature of the guarantee had been outstanding I consider that it would have been referred to at the meeting or in the memorandum of 21 February 1985. 34 Notwithstanding the submissions on behalf of Mr and Mrs Gattellaro, in my opinion the proper conclusion on the probabilities is that a guarantee was given at the least by Mr Gattellaro, and that it was a guarantee unlimited as to amount and secured by the 1977 mortgage. As will appear, it is not necessary to decide whether or not the guarantee was given by Mrs Gattellaro. I do not accept the submission on behalf of Mr and Mrs Gattellaro, with reference to TNT Management Pty Ltd v Brooks (1979) 23 ALR 325 at 349, that there are no more than conflicting inferences of equal degrees of probability so that the choice between them is a mere matter of conjecture. In my opinion the trial judge's finding was correct. 35 It was submitted that the guarantee given by Mr Gattellaro might not have become operative in the absence of signature by Mrs Gattellaro as co-guarantor. However, the evidence included a guarantee given by a relative of Mr and Mrs Gattellaro in May 1986 in respect of their indebtedness, a Westpac guarantee on a printed form with a print date of 1 October 1984. Judicial notice can be taken of the fact that institutions such as Westpac used a standard form guarantee. It was submitted that this could not be found to have been Westpac's standard form guarantee, and so the form of guarantee which would have been given in November 1985, in the absence of explicit evidence from Westpac. I think that unrealistic, and conclude that the guarantee given by Mr Gattellaro in November 1985 was in the same form. It provided that the guarantee was binding on each signatory notwithstanding that one or more of the persons named as guarantor did not execute it. 36 The 1977 mortgage secured Mr Gattellaro's obligations as guarantor, and included a personal covenant by Mrs Gattellaro whereby she undertook liability to pay the amount it secured. Although with the modification that Mrs Gattellaro's personal obligation was under the 1977 mortgage rather than the guarantee, the conditions for the concession have been made out. 37 It is not necessary to go to other aspects of the defence. In my opinion, the appeal should be dismissed with costs. _________

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