Gomez v State Bank of New South Wales Limited

The Eastwood Property 8 The Eastwood property was sold at auction on the Bank's instructions on 27 May 1999 for $590,000, and the sale was completed on 30 June 1999. Dr Gomez contended that the market value at the time of the sale was $1,200,000, based on a report dated 11 October 2000 provided to him by Mr Phippen, who also expressed the opinion that the net market rental value of the property was $113,000 per annum. 9 As in the case of the Leichhardt property, the Bank retained CDH to provide it with advice and management in relation to the leasing and sale of the Eastwood property, which comprised a strata lot consisting of a gymnasium then in current use, and vacant commercial space known as Suite 20A. CDH obtained from LJ Hooker Limited, Eastwood, a rental recommendation and marketing/advertising plan and budget in respect of Suite 20A, which was partitioned as five offices together with a reception and waiting room. That rental recommendation was to market "at around the $450 per week mark". Dr Gomez had been endeavouring to lease Suite 20A for several months at a rent equivalent to $577 per week. The Bank instructed L J Hooker Limited to offer the space at a net rent of $500 per week for Suite 20A, but with the proviso that following negotiations, a "net rent" of $450 per week could be accepted. CDH later obtained an opinion of Raine & Horne Eastwood, which was similarly conservative. In the events which happened, the Bank was not successful in leasing the vacant Suite 20A of the Eastwood site. 10 As to the gymnasium area, certain desultory negotiations had taken place between Dr Gomez and the existing lessee from the expiry of an existing lease in early 1995. According to Dr Gomez the tenant had previously offered an annual rent of $102,000 plus a percentage of outgoings for two years and thereafter payment of all outgoings. The Bank, as mortgagee, issued a writ for possession of the gymnasium area, whereupon negotiations took place between the Bank and the gymnasium operators with a view to an extension of the lease of the gymnasium area for only eighteen months at an annual rental of $88,000 gross, or alternatively the purchase outright of the site as a whole. An offer of $680,000 was apparently made to the Bank for the purchase of the whole of the strata lot, but was not accepted because the Bank considered it necessary to commission a new valuation of the property, or to submit it for sale by auction. 11 After the Bank had received marketing submissions, Egan National Valuers (NSW) Pty Ltd inspected the Eastwood property on 14 May 1999, and by written valuation assessed its market value at $620,000, and expressed the opinion that the market conditions for leasing Suite 20A were quite poor, but a rent of approximately $300 (ie $15,600 per annum) per week would be obtainable, and further that the existing rent of $88,000 per annum being paid under the short term lease of the gymnasium represented fair market rent. 12 The conclusions of the primary judge in relation to the steps taken by the Bank to sell the Eastwood property were as follows: "In my view, the whole of the evidence, particularly that touching upon efforts to lease the two sections of the Eastwood property, suggest that Mr Phippen's assessment of the ease with which, and the price at which, the Eastwood property could have been leased in the period preceding its auction is overly optimistic and that consequently his valuation of the property as at 20 May 1999 is too high. More importantly, the evidence before me as to the professional advice provided to the Bank, and the steps that were taken by the Bank, in relation to the sale of the Eastwood property does not suggest that the Bank failed in any serious way to take reasonable steps to obtain a proper price for the Eastwood property. In particular, I do not consider that the evidence establishes that Dr Gomez has a reasonable prospect of satisfying the Supreme Court that the Bank acted unreasonably in renewing the lease of the gymnasium area and then agreeing to the assignment of the lease to the new owner of the gymnasium business, or in its endeavours to let suite 20A. I am not satisfied that Dr Gomez has a reasonable prospect of satisfying the Supreme Court that the Bank so failed to take reasonable steps to obtain a proper price for the Eastwood property that it was guilty of unconscionable conduct."

St Ives Property 13 The Bank took possession of the St Ives property, being the place of Dr Gomez's residence, on 24 September 1998. On the same day, the solicitors for Dr Gomez provided to the Bank's solicitors a memorandum from Mildwater Nominees Pty Limited, which purported to offer $500,000 for the sale of the St Ives property. The Bank regarded the offer as originating in fact from Dr Gomez, and as being too low to be accepted in the absence of a current independent valuation of the property. 14 The Bank retained CDH to manage the marketing also of the St Ives property. On 1 October 1998, CDH was provided with an independent opinion of a licensed real estate agent that the St Ives property might realise $600,000 by reason of its potential for subdivision, or, if sold upon the basis of the existing use as a residence, $475,000 to $500,000. Another real estate agent furnished an opinion that the likely sale price was $300,000, "if a subdivision was permitted and successfully completed". On 8 October 1998, a licensed valuer provided to the Bank an opinion of market value of the St Ives property in the sum of $580,000, observing that "[t]he property has been neglected throughout and is currently poorly presented. Due to the condition of the property and its location on a main road it has a limited market". The Bank spent $2,500 on the removal of rubbish from the property, and $500 on tidying the garden, which the primary judge found to have been insufficient, with the consequence that the home and its environs, at least by that time, were not well presented for sale as a residential property. 15 The next step taken by the Bank, apparently pursuant to an approach by Dr Gomez, was to offer the St Ives property for sale to Dr Gomez for $560,000, provided that Dr Gomez released the Bank from any claims arising out of the property not being offered for sale by auction. That offer by the Bank was not accepted, and consequently the property was advertised for sale, and coloured brochures and a signboard were made for presentation to potential buyers. Buyers evinced interest by way of inspections and telephone enquiries. Qualified valuation advice was received by the Bank from Mr Keane of Metropolitan Valuation Services Pty Ltd that the likely selling price would be between $560,000 and $580,000, and that a reserve price of $570,000 should be set. In the result, the St Ives property was sold for $563,000. 16 The conclusions of the primary judge, in relation to the sale of the St Ives property, were as follows: "Again, in my view, it is not necessary for me to undertake a careful critique of the valuations of Ms Collins, Mr Keane and Mr Phippens (sic) respectively. The evidence before me does not, in my view, suggest that the Bank failed in any serious way to take reasonable steps to obtain a proper price for the St Ives property. The Bank had received advice, which it was entitled to accept and that Dr Gomez did not challenge, that the highest and best use of the property was as a development site. For this reason it was not unreasonable for the Bank to limit its expenditure on the presentation of the property as a potential residence. No evidence was placed before me to suggest that the poor presentation of the property had any impact on the sale price achieved for it. The sale price achieved for the St Ives property at auction after an apparently successful marketing campaign is powerful evidence of the true market value of the property as at the date that it was sold. I am not satisfied that Dr Gomez has a reasonable prospect of being able to persuade the Supreme Court that the Bank so failed to take reasonable steps to obtain a proper price for the St. Ives property that it was guilty of unconscionable conduct."

The principles restated and applied by the primary judge 17 Branson J first adverted to the requirements of paragraph (g) of subs 40(1) of the Act, and in that context extracted this well known passage from the judgment of the High Court (Dixon CJ, McTiernan and Windeyer JJ) in Ebert v The Union Trustee Company of Australia Ltd (1960) 104 CLR 346 at 350: "The debtor clearly must satisfy the Court that there exists in him a counter-claim, set-off or cross demand. 'Cross demand' is the word relied upon here. The appellant cannot satisfy the Court that a cross demand exists by showing no more than that she propounds one and states how she suggests that she can make it out. In Re Duncan; Ex parte Modlin (1917) 17 SR (NSW) 152; 34 WN 49, Street J said that the debtor need not satisfy the Court that there are reasonable grounds for believing that he will establish his cross action, but only that he has a bona fide claim which he is fairly entitled to litigate. This perhaps is expressed too favourably to the debtor. In Re A Debtor (1958) 1 Ch 81 Roxburgh J said: 'But not every demand will suffice. A demand made in bad faith would not be good enough. The debtor must satisfy the Court that he has a genuine demand… But in my opinion a demand must be more than bona fide: the Court must be satisfied that it has a reasonable probability of success" (1958) 1 Ch at p. 99. Perhaps the standard may be expressed by saying that the debtor must show that he has a prima facie case, even if then and there he does not adduce the admissible evidence which would make out a prima facie case before a court trying the issues that are involved in his counter-claim, set-off or cross demand." Thereafter her Honour cited the following passage from the recent judgment of the High Court (Gleeson CJ, Gaudron, McHugh, Kirby and Callinan JJ) in Guss v Johnstone (2000) 171 ALR 598 at 606: "[40] The state of satisfaction referred to in s 40(1)(g), and s 41(7), involves weighing up considerations as to the legal and factual merit of the claim relied upon by the debtor, and the justice of allowing the bankruptcy proceedings to go ahead or requiring them to await the determination of the claim." 18 The prima facie case by way of counter-claim, set-off or cross demand was set out in the statement of claim of Dr Gomez against the Bank filed in the Supreme Court of New South Wales on or about 21 November 2000. That statement of claim pleaded a cause of action in negligence against the Bank alleging a breach of a duty of care said to be owed to Dr Gomez in the course of exercising the power of sale under the mortgages over the Leichhardt, St Ives and Eastwood properties, namely to take all reasonable steps to sell each property for a reasonable price. In particular it was alleged that the Bank had failed to obtain proper prices for the properties, and instead had accepted prices at which no reasonable vendor would have sold. It was pleaded in the alternative that, in exercising its power of sale under the mortgages, the Bank owed to Dr Gomez an obligation to act bona fide and in good faith, and had been in breach of that obligation. 19 The primary judge reviewed several authorities concerning the nature and scope of the duty of a mortgagee exercising a power of sale, and the circumstances in which the duty may be regarded as breached. Her Honour commenced with the well known description of the duty by Lord Herschell in Kennedy v De Trafford [1897] AC 180 at 185, namely to act in good faith, without wilfully or recklessly sacrificing the interests of the mortgagor. Her Honour thereafter referred to the equitable notion of unconscionability, in the context of a mortgagee's exercise of the power of sale, formulated by McLelland CJ (in Equity) in Hawkesbury Valley Developments Pty Ltd v Custom Credit Corporation Ltd (1995) NSW ConvR 55-731 at 55,650, as follows: "If a failure by a mortgagee to take reasonable steps to obtain a proper price is sufficiently serious to be characterised as unconscionable as that expression is understood in equity, then in the taking of accounts between the mortgagee and the mortgagor, the mortgagee will be accountable on the basis of wilful default for the price which would have been obtained if the mortgagee had not been guilty of unconscionable conduct…" Upon that footing, the primary judge expressed her approach in principle as follows: "I therefore approach the present application on the basis that Dr Gomez is required to satisfy the Court that he has a genuine demand against the Bank, which has a reasonable prospect of success, that the Bank so failed to take reasonable steps to obtain a proper price for the Properties that it was guilty of unconscionable conduct. It will be insufficient for Dr Gomez to satisfy the Court merely that the Properties, or one or more of them, was sold at an undervalue." 20 Branson J next referred to the following observations of Hodgson CJ (in Equity) as he then was in Stone v Farrow Mortgage Services (in liq) Limited [1999] NSWCA 435 at [4] concerning what his Honour described as two broad areas of enquiry to be undertaken in cases like the present: "…first, what steps were taken in relation to the sale; and second, the comparison between the sale price and the true value of the property. These areas are interdependent. A price actually obtained after proper steps have been taken is strong evidence of the true value of the property. On the other hand, if it is proved that the price obtained is substantially below the true value, that may be some evidence that proper steps were not taken."

The submissions of Dr Gomez on appeal 21 Counsel for Dr Gomez focused primarily upon the references in the passage cited at [17] above from Ebert to the requirement that a debtor show or make out a prima facie case, and assimilated that to the test of entitlement to an interlocutory injunction subsequently formulated by the High Court in Beecham Group Limited v Bristol Laboratories Pty Limited (1967) 118 CLR 618 at 622, that is to say, the existence of a prima facie case where, "if the evidence remains as it is there is a probability that at the trial of the action the plaintiff will be held entitled to relief". It will be recalled that in the passage from Ebert, reference was made to "a prima facie case" test in a context like the present. In the same context Dr Gomez pointed to the gravity of the consequences for him of refusal of the relief he sought, namely his bankruptcy and the ensuing likely prejudice to his claim against the Bank for damages in a sum substantially exceeding the unsatisfied balance of the Bank's judgment debt, which was, as earlier stated, $547,334.22. 22 The material relied on to persuade the Court of the existence of the prima facie case for which the appellant contended was the valuation testimony of Mr Phippen, to which reference has already been made, concerning the Leichhardt, Eastwood and St Ives properties. That testimony, if wholly accepted, would have supported an entitlement to damages in the order of $1.3 million. That sum would, of course, substantially exceed the residual indebtedness of Dr Gomez to the Bank quantified in the bankruptcy at $547,334.22. Mr Phippen's three valuations substantially exceeded in amount both the valuations obtained by the Bank before its mortgagee's sales of the three properties, and the sale prices actually achieved. Those valuations of Dr Phippen were said to provide "abundant and compelling evidence" to support a finding, at least prima facie, that the properties had been sold without reasonable care, or alternatively, with reckless disregard for the interests of Dr Gomez. 23 In addition to the valuation evidence of Mr Phippen, Senior Counsel for Dr Gomez, who did not appear for Dr Gomez in the trial at first instance, relied upon the following conduct of the Bank, as indicating a breach of duty in the exercise of its powers of sale as mortgagee: (i) The brevity, alleged by Mr Phippen, of the Bank's advertising campaign conducted in respect of the St Ives property, and the Bank's failure, according to Dr Gomez, to take reasonable steps to present the St Ives property properly for sale. (ii) The failure of the Bank, according to Dr Gomez, to take reasonable steps to secure the leasing of the Eastwood property at a proper market rent before it was sold. (iii) The marketing and selling campaign conducted by the Bank, in relation to the Leichhardt properties alleged by Dr Gomez to have been inadequate, in the light of their development potential, and the decision of the Bank to sell the Leichhardt properties in one line. Each of these complaints was set out in affidavit evidence placed before the primary judge. We should record that Dr Gomez did not seek to restrain the sale of any of the properties before the conduct of the relevant auction. 24 By way of underlining the implications and significance of the factors propounded in [21-22] above, Senior Counsel for Dr Gomez submitted that the primary judge applied the wrong legal tests or standards, and that the approach which her Honour should have taken was that which had been enunciated in Cuckmere Brick Co Ltd v Mutual Finance Limited [1971] Ch 949, and followed subsequently in the United Kingdom in a number of cases including most recently Medforth v Blake [2000] Ch 86. Those cases examine the proposition that, in exercising its power of sale, a mortgagee owes a duty to the mortgagor to take reasonable care to obtain a proper price for the property. It was acknowledged on behalf of Dr Gomez, however, that the New South Wales courts have consistently imposed on a mortgagee the less stringent duty of acting in good faith in the exercise of the power of sale, and not to act in reckless disregard of a mortgagor's interests. That formulation of the duty has been applied in at least the Supreme Court of New South Wales, since the decision of the High Court in Pendlebury v Colonial Mutual Life Assurance Society Limited (1912) 13 CLR 676, which had applied the earlier English test articulated in Kennedy v De Trafford (see [19] above). However it was submitted on behalf of Dr Gomez that it has been open for the High Court of Australia to adopt the test in Cuckmere since that case was decided by the Court of Appeal in England in 1971. In Forsyth v Blundell (1973) 129 CLR 477 and Commercial and General Acceptance Corporation Limited v Nixon (1981) 152 CLR 491 it had been unnecessary to choose between the two approaches. For instance in Forsyth at 506, Mason J said: "It will be seen that the conclusion which I reach is that A.S.L. was in breach of its duty to the mortgagors in that it exercised its power of sale without taking reasonable steps to obtain a proper price and in doing so acted otherwise than bona fide, that is recklessly, not caring whether the price obtained was in the circumstances a proper price or not. Accordingly, I need not consider the vexed question whether the mortgagee's duty is merely to act bona fide or whether, in addition, he is bound to take reasonable precautions to obtain a proper price." 25 The Bank complained that Dr Gomez should not be permitted to raise what may be described as the Cuckmere controversy on this appeal, as the proceedings below had been conducted upon the basis that the Pendlebury test applied. In support of this contention it was argued that, as a general rule appellants are bound by the course they intentionally adopted at first instance (Banque Commerciale SA (In liq) v Akhil Holdings Limited (1990) 169 CLR 279 at 284), and that a point of principle cannot be raised for the first time on appeal when it could have been met by the opponent calling further evidence below. That rule, it was accepted, will be displaced if all facts have been established in any event beyond controversy, or if the point is one merely of construction (Water Board v Moustakas (1988) 180 CLR 491 at 497). He asserted further that, in any event it was apparent from the reasons of the primary judge that she had addressed the particular circumstantial complaints distilled by Counsel for the appellant on appeal (see [23] above), and had found them to lack substance, particularly those relating to the decisions and steps which the Bank had taken, or allegedly had failed to take, with a view to obtaining proper prices for the three properties in issue. The findings of the primary judge, which have been extracted at [7], [12] and [16] above, appear to have addressed all complaints made by Dr Gomez of the inadequacy of steps taken to obtain proper prices for those properties. 26 We agree with the recent observations of Einstein J in State Bank of New South Wales Ltd v Chia & Anor (2000) 50 NSWLR 587 at [878] that "the Cuckmere test has no currency in New South Wales", and consider that, for the reasons already explained, the conclusions of the primary judge in relation to the sale of each property in question render academic for present purposes the controversy about the proper formulation of the principle. However, there is much to be said for the view of Menzies J in Forsyth at 481 that the Pendlebury test (and therefore the earlier De Trafford test in England) on the one hand, and the Cuckmere test on the other hand, may not be incompatible. That view has been elaborated as follows in Medforth at 101-102 in the joint judgment of Sir Richard Scott VC and Swinton and Tuckey LJJ: "The duties imposed on a mortgagee in possession, and on a mortgagee exercising his powers whether or not in possession, were introduced in order to ensure that a mortgagee dealt fairly and equitably with the mortgagor. The duties of a receiver towards the mortgagor have the same origin. They are duties in equity imposed in order to ensure that a receiver, while discharging his duties to manage the property with a view to repayment of the secured debt, nonetheless in doing so takes account of the interests of the mortgagor and others interested in the mortgaged property. These duties are not inflexible. What a mortgagee or a receiver must do to discharge them depends upon the particular facts of the particular case. A want of good faith or the exercise of powers for an improper motive will always suffice to establish a breach of duty. What else may suffice will depend upon the facts. Tse Kwong Lam v Wong Chit Sen [1983] 1 WLR 1349 is a very good example. The fact that the mortgagee had an interest in the purchasing company placed the mortgagee under an obligation to show that a proper price had been obtained. This was an obligation more onerous than would otherwise have been required. It is true that Lord Herschell in Kennedy v De Trafford [1897] AC 180 expressed the duty on the mortgagee in terms much less onerous than the terms in which Salmon L.J. expressed the duty in the Cuckmere Brick case. That does not make the two cases inconsistent with one another. The facts that constituted the mortgagors' complaints were different. And the duty in equity appropriate to have been owed by a mortgagee selling in 1888 is not necessarily of the same weight as the duty appropriate to have been owed by a mortgagee selling in 1967. Equity is at least as flexible as the common law in adjusting the duties owed so as to make them fit the requirements of the time." 27 The conclusions of the learned primary judge concerning Mr Phippen's valuations of the three properties, extracted at [7], [12] and [16] above, have dispelled, in our opinion, the existence of a justifiable evidentiary basis for satisfaction of the Ebert test. Those conclusions of her Honour constituted a "weighing up [of] considerations as to the legal and factual merit of the claim relied upon by the debtor, and the justice of allowing the bankruptcy proceedings to go ahead or requiring them to await the determination of the claim" within the Guss v Johnstone test. We do not think that the intrusion of the word "reasonable" in each of the primary judge's conclusions in [7], [12] and [16] above detracted from her conviction that the Ebert test had not been satisfied. The reality of sale prices actually obtained at auction, together with the justifiable rejection by the primary judge of the allegations of Dr Gomez of an absence or insufficiency of reasonable steps taken by the Bank to obtain proper sale prices in the first place, present, in our view, an inseparable obstacle to the appellant satisfying the Court of the existence of a viable counterclaim, set-off or cross-demand in accordance with the principle expounded in Ebert and Guss v Johnstone. 28 For these reasons the appeal must be dismissed with costs. I certify that the preceding twenty-eight (28) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Court.

Associate: Dated: 15 April 2002 Counsel for the Appellant: B W Collins QC and K Andronos

Solicitor for the Appellant: Dominic David Stamfords

Solicitor for the Respondent: Garland Hawthorn Brahe