Hillsan Pty Limited v Vaccaro and Anor

Civil Procedure Act 2005 LEGISLATION CITED : Real Property Act 1900 Trade Practices Act 1974 (Cth) Uniform Civil Procedure Rules 2005

Allstate Life Insurance Co v Australian and New Zealand Banking Group Ltd (1995) 57 FCR 360 Assets Co Ltd v Mere Roihi [1905] AC 176 General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 CASES CITED : Perpetual Trustees Victoria Limited v Heuvel [2009] NSWSC 57 Steele-Smith v Liberty Financial Pty Limited [2005] NSWSC 398 Waimiha Sawmilling Co Ltd v Waione Timber Co Ltd [1923] NZLR 1137 Wentworth v Rogers (No 5) (1986) 6 NSWLR 534

Plaintiff/Cross Defendant - Hillsan Pty Limited (ACN 063 926 367) PARTIES : First Defendant/First Cross Claimant - Federico Vaccaro Second Defendant/Second Cross Claimant - Maria Vaccaro

COUNSEL : Plaintiff/Cross Defendant - Ms J Merkel, counsel Defendants/Cross Claimants - Mr P Beale, counsel

SOLICITORS : Plaintiff/Cross Defendant - Hancocks Defendants/Cross Claimants - McGrath, Dicembre & Company

• 14 - IN THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION POSSESSION LIST

JUDGMENT 1 HER HONOUR: By notice of motion filed in March 2009, the plaintiff seeks orders under Rule 14.28 of the Uniform Civil Procedure Rules 2005, striking out the defence to the amended statement of claim and the amended statement of cross claim. Summary judgment for the possession of property owned by Frederico and Maria Vaccaro, the defendants and cross claimants, is also sought, as well as leave to issue a writ of possession. 2 The amended statement of claim concerns a mortgage of property at Narellan Vale, under which the principal sum and unpaid interest became payable on 23 December 2004. It is claimed that the date for repayment was extended by agreement to 23 December 2005; that the principal remains outstanding and that no payments of interest have been made since May 2006. 3 The defence is a bare defence to the plaintiff's original claim. No amended defence has been filed in response to the amended statement of claim, filed by the plaintiff in December 2008, with the Court's leave. 4 The amended statement of cross claim seeks a number of declarations. Firstly, that the signatures of Mr and Mrs Vaccaro were forged and that the person who purported to witness their signatures, Mr Hugh Johnson, did not exist, or alternatively was not a solicitor as alleged. Secondly, that the mortgage was not effectual to pass any interest in the property, or to render the property liable as security for the payment of any monies under the mortgage; that Mr and Mrs Vaccaro were not bound by it and that it was void. Thirdly, that Mr John Hancock, the solicitor engaged by the plaintiff to advise and act for it in preparation of the loan documents, was its agent. Fourthly, that the plaintiff, through Mr Hancock, had constructive notice that the identity of the proposed borrowers had not been established, 'as required by Rule 45.5 of the Law Society of New south Wales', or otherwise. Fifthly, that the plaintiff, through Mr Hancock, had constructive notice that the purported borrowers had not given adequate evidence that independent advice was given to Mr and Mrs Vaccaro by a person admitted to practice as a solicitor. In the alternative, that the plaintiff, through Mr Hancock, had constructive notice that the identity of the borrowers had not been established and that no evidence of independent advice having been given to them, was provided. Sixthly, that having failed to make necessary enquiries as to the identity of the borrowers, the plaintiff was estopped from enforcing or relying on the provisions of the Real Property Act 1900, to render the property liable as security for the monies claimed. In the alternative, that the defendant failed to serve notices required by s 57(2)(b) of the Real Property Act. Seventhly, that the plaintiff had no mortgage in respect of the property. Eighthly, that the plaintiff had no registrable interest in the property. 5 Mr and Mrs Vaccaro also sought orders that the plaintiff provide a discharge of the mortgage and that the plaintiff be restrained from taking or causing any action to be taken to exercise the power to sell the property under s 58(1) of the Real Property Act. 6 It became apparent at the hearing that the defendants' pleadings were inadequate. There was no amended defence to the plaintiff's amended statement of claim. When the parties were before Registrar Atkinson on 16 March 2009, the defendants were ordered to file and serve a notice of motion seeking leave to amend their notice of cross claim and defence, by 20 April 2009. The order has not been complied with, but the defendants have provided the plaintiff with a further amended statement of cross claim and a draft further amended statement of cross claim. The parties addressed their submissions to those documents, the plaintiff's case being that those documents did not redress the problems with the defendants' pleadings.

The parties' cases 7 The plaintiff's written submissions were directed to the further amended statement of cross claim, the draft further amended statement of cross claim, having been provided only shortly prior to the hearing. 8 The plaintiff relied on the indefeasibility of its title as registered mortgagee, observing that it was not in dispute that it had paid money under a forged mortgage, but arguing that there was no defence pleaded to the claim that it was the registered proprietor of the mortgage over the land, or the terms of that mortgage. Prima facie, it was submitted, by reason of the indefeasibility of title which flowed upon the registration of its mortgage, the plaintiff was entitled to an order for possession. It was further argued that nothing pleaded in the further amended cross claim provided an exception to the indefeasibility of that title. 9 It was also submitted that the acts about which complaint was there made, did not amount to an allegation that the registration of the mortgage was fraudulent. It followed that no basis for the orders and declarations sought could thereby be established. The situation was similar to that considered in Perpetual Trustees Victoria Limited v Heuvel [2009] NSWSC 57, where it was held that the innocent mortgagee was entitled to orders for possession, the innocent proprietors being entitled to orders for payment from the Torrens Assurance Fund. 10 Fraud within the meaning of s 42 of the Real Property Act requires proof of subjective dishonesty or moral turpitude on the part of the registered proprietor or its agent, during the course of effecting registration. No such allegation was made by the defendants, nor was actual knowledge alleged. Constructive notice was not sufficient, nor were facts alleged which might have put the plaintiff on enquiry. The allegations in the further amended cross claim as to constructive notice were misconceived. The matters relied on could not constitute actual knowledge of fraud. Mr and Mrs Vaccaro had to establish that the plaintiff knew or closed its eyes to a suspicion that the mortgage was forged, before it was lodged for registration. Pleading rules require full particulars of fraud and 'rolled up pleadings of actual or constructive knowledge' were unsatisfactory. The amended cross claim did not come to grips with this requirement and must be struck out. 11 On the authorities it was clear that a broker was not prima facie the agent of the mortgagee (see Steele-Smith v Liberty Financial Pty Limited [2005] NSWSC 398 at [104]). There was no pleading of any facts or circumstances which could cause the Court to find that the broker in this case, Mr Caradonna, was the plaintiff's agent and there was no basis upon which the cross claimants were entitled to plead in bare terms, that he was the plaintiff's agent. 12 The act of discharge of the 2003 forged mortgage pleaded in the further amended statement of cross claim, the production of the 2005 forged mortgage, was incapable of giving rise to a discharge of the 2003 mortgage, without further facts or circumstances. The pleadings were incapable of making out the case advanced in the submissions put for the defendants. These problems were not cured by the later draft further amended cross claim. 13 The Uniform Civil Procedure Rules require in Rule 15.3: 15.3 Allegations of behaviour in the nature of fraud (cf SCR Part 16, rule 2; DCR Part 9, rule 20) A pleading must give particulars of any fraud, misrepresentation, breach of trust, wilful default or undue influence on which the party relies. 14 Neither the further amended statement of cross claim, or the draft further amended cross claim gave particulars of fraud, sufficient for the plaintiff to understand the case put. The defendants' submissions sought to do what the pleadings failed to do, although even there, none of the matters raised was sufficient to make out a case that the plaintiff was wilfully blind, sufficient to amount to fraud. None of what was relied on could establish that the plaintiff must have known that the defendants' signatures were forged. The allegation had to be properly pleaded. If actual knowledge was to be alleged, the facts and circumstances on which the allegation rested, also had to be provided. 15 At the hearing it was accepted by Ms Merkel for the plaintiff, on the authorities, that if the pleadings were such that they showed the possibility that the defendants had a case, they must be given an opportunity to amend their pleadings. 16 The case for Mr and Mrs Vaccaro was twofold. Firstly, that the plaintiff had no case, because the 2003 mortgage on which the plaintiff's claim rested, had been paid in full and discharged in 2005. A second forged mortgage, dated 5 January 2005 was then created, in circumstances where it was known to the plaintiff that there were real and serious questions about the identity and whereabouts of the alleged mortgagors. The 2005 mortgage was never registered. The 2003 mortgage was not a registrable dealing within s 43A of the Real Property Act, when it was registered in November 2005. 17 The 2003 mortgage was for a fixed sum of $400,000, due to be repaid in December 2003. The terms of the mortgage did not permit the mortgagor to draw down further funds. That required a new mortgage. The documents prepared by the plaintiff's solicitor showed that there had been a repayment and a new mortgage entered in 2005, rather than a variation of the 2003 mortgage, which was discharged. The interest paid and accepted by the plaintiff after 21 January 2005 was consistent with the interest required to be paid under the new 2005 mortgage, rather than that required under the 2003 mortgage, which required payment of a higher rate, given that the borrower had gone into default under that mortgage. 18 It followed that the parties had joined issue over the question of the repayment of the mortgage under which the plaintiff seeks possession of the land. Secondly, it was Mr and Mrs Vaccaro's argument that their amended statement of cross claim did allege fraud on the part of the plaintiff. It followed that Rule 14.28 could not operate and that the controversy between the parties must be resolved at trial. 19 It was accepted that the amended statement of cross claim could be more clearly drafted, but argued, nevertheless, that it was there made clear that the case advanced was that Mr and Mrs Vaccaro came within the fraud exception contained in s 42 of the Real Property Act. 20 It was claimed that the fraud was committed by the plaintiff's agent, Mr Caradonna, who had acquired the certificate of title to the mortgaged property by fraudulent means and who provided the plaintiff with all of its information about Mr and Mrs Vaccaro. Mr Caradonna had the plaintiff's authority to arrange mortgages on its behalf. He never communicated with Mr and Mrs Vaccaro and the information which he provided about them, was demonstrably false. It was further claimed that the plaintiff had actual knowledge of the fraud he perpetrated. 21 There was no dispute that the plaintiff, Mr Hancock, its solicitor and none of his employees or agents ever had any communication with Mr and Mrs Vaccaro and that they never inspected the mortgaged property. In 2004, correspondence being sent by the plaintiff to Mr and Mrs Vaccaro was returned unopened. The plaintiff made no enquiries to investigate why mail was being so returned, even though the mail was being directed to the postal address identified in the mortgage documents. 22 The 2003 mortgage was not registered until ten months after the 2005 mortgage was entered, in November 2005. When that action was taken, it must have been apparent to any honest man that the address given by Mr Caradonna for Mr and Mrs Vaccaro was incorrect. The device of ignoring the return of the mail and the 2005 mortgage and instead, registering the 2003 mortgage it replaced, could not overcome what was then known to the plaintiff. The evidence would show that before the 2003 mortgage was lodged for registration, the plaintiff knew, or closed its eyes to a suspicion that the mortgage was forged. 23 At the hearing Mr Beale initially accepted for the defendants, that the pleadings would have to be amended, because the defendants could not establish that Mr Caradonna was the plaintiff's agent, but then he withdrew the concession, submitting rather that the question of agency required further investigation. 24 Mr Beale did finally accept that if the case was to proceed, the existing pleadings would have to be amended. He did not seek leave to proceed on the draft further amended cross claim, the latest pleading provided to the plaintiff, however. Instead, he submitted that the defendants required a further two months to amend their pleadings, in order that investigations into what had transpired could be concluded. These apparently include the pursuit of documents sought by way of a notice to produce issued to the plaintiff, which it is complained has been inadequately answered, and a subpoena addressed to the plaintiff's solicitor, which is to be challenged on the basis of relevance, as well as privilege. These matters are before the Registrar in June.

Consideration 25 I am well satisfied that the plaintiff has not met the onus which falls upon it. That onus is the one discussed by the High Court in General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125. A party may only be deprived of a trial where it has clearly been demonstrated that its case is so obviously untenable that it cannot succeed, that it is manifestly groundless and that there is no possibility that there can be a good cause of action, even by pleading amendment. 26 The submissions advanced for Mr and Mrs Vaccaro, when considered with the defence and amended statement of cross claim on which they presently rely, show that their pleadings must be amended, if they are to make out the case outlined in submissions. While there was certainly no proper explanation given for the failure to adhere to the order made by Registrar Atkinson in March, that their case is obviously untenable, has not been shown. The submissions advanced indicate that the defendants seek to rely on the fraud exception in s 42 of the Real Property Act. The defence must be amended to say so expressly and proper particulars of the fraud alleged must be provided. The defence that the 2003 mortgage was discharged, must also be pleaded. 27 Despite the submissions advanced for the defendants, it may not be overlooked that even the draft further amended statement of cross claim, which has not been filed and on which the defendants did not seek to rely in any event, does not expressly refer to the fraud exception in s 42 of the Real Property Act. As the plaintiff argued, it was only in the defendants' submissions that there was a clear articulation of the basis upon which it will be argued that the plaintiff had actual knowledge of the fraud, at the time it lodged the 2003 mortgage for registration in November 2005, or at the least, that it closed its eyes to its suspicion that the mortgages were forged. 28 Having those arguments in mind, however, it is apparent that this case is quite factually different to that dealt with in Perpetual Trustees Victoria Limited v Heuvel, on which the plaintiff relied. 29 Not only do Mr and Mrs Vaccaro seek to show that the 2003 mortgage on which the plaintiff relies was paid out in full and discharged in early 2005, they also seek to establish that the plaintiff registered the 2003 mortgage in November 2005, rather than the 2005 mortgage under which it had been receiving payments for many months, at a time when it had suspicions that a fraud had been perpetrated upon it. Despite those suspicions, it abstained from making enquiries about Mr and Mrs Vaccaro's whereabouts, having been unable to contact them, for fear of learning the truth. Instead of registering the 2005 mortgage, it then registered the 2003 mortgage, in order to obtain the indefeasibility of title on which it now seeks to rely. 30 The protection granted by the Real Property Act, on which the plaintiff seeks to rely, is that provided by s 42, which exists 'except in case of fraud'. As to fraud, the plaintiff relied on what was observed in Assets Co Ltd v Mere Roihi [1905] AC 176:

"Passing now to the question of fraud, their Lordships are unable to agree with the Court of Appeal. Sections 46, 119, 129 and 130 of the Land Transfer Act 1870 (NZ) and the corresponding sections of the Act of 1885 [and his Lordship identifies them] appear to their Lordships to show that by fraud in these Acts is meant actual fraud - that is, dishonesty of some sort; not what is called constructive or equitable fraud, an unfortunate expression and one very apt to mislead, but often used, for want of a better term, to denote transactions having consequences in equity similar to those which flow from fraud. Further, it appears to their Lordships that the fraud which must be proved in order to invalidate the title of a registered purchaser for value, whether he buys from a prior registered owner or from a person claiming under a title certified under the Native Land Acts, must be brought home to the person whose registered title is impeached or to his agents. Fraud by persons from whom he claims does not affect him unless knowledge of it is brought home to him or his agents. The mere fact that he might have found that fraud if he had been more vigilant and made further enquiries which he omitted to make does not of itself prove fraud on his part. But if it be shown that his suspicions were aroused and that he abstained from making enquiries for fear of learning the truth, the case is very different, and fraud may be properly ascribed to him. A person who presents for registration of a document which is forged or has been fraudulently or improperly obtained is not guilty of fraud if he honestly believed it to be a genuine document which can be properly acted upon." 31 For Mr and Mrs Vaccaro what was observed by Salmond J in Waimiha Sawmilling Co Ltd v Waione Timber Co Ltd [1923] NZLR 1137, was pointed to:

The true test of fraud is not whether the purchaser actually knew for a certain of the existence of the adverse right but whether he knew enough to make it his duty as an honest man to hold his hand. and either to make further enquiries before purchasing, or to abstain from the purchase, or to purchase subject to the claimant's rights rather than in defiance of them. If, knowing as much as this, he proceeds without further enquiry or delay to purchase an unencumbered title with intent to disregard the claimant's rights, if they exist, he is guilty of that wilful blindness or voluntary ignorance which, according to the authorities, is equivalent to actual knowledge, and therefore amounts to fraud (at 1175). 32 As it was explained in submissions, Mr and Mrs Vaccaro seek to establish not only that Mr Caradonna was the perpetrator of the fraud, but also that before the registration of the 2003 mortgage, both the plaintiff's solicitor and the plaintiff had their suspicions raised by various matters which came to their direct knowledge. They also seek to show that the 2003 mortgage on which the plaintiff relies had been discharged and yet the plaintiff turned a blind eye to this and what had otherwise come to its attention, in order to obtain indefeasibility of title, by registration of the 2003 mortgage. In the draft further amended statement of cross claim, for the first time, complaints under the Trade Practices Act 1974 (Cth) are also advanced. 33 I am satisfied that the defendants must have the opportunity to make out their defences and cross claims, and that the plaintiff has not met the onus which falls upon it, to show that Mr and Mrs Vaccaro's case is hopeless, or untenable, as discussed in General Steel. 34 What must also be considered, however, is what is required by the Civil Procedure Act 2005, which requires by s 56 that the overriding purpose of the just, quick and cheap resolution of the real issues in the proceedings be facilitated and that when considering applications such as this, the Court must act in accordance with the dictates of justice (s 58). 35 It is in that context that it must be considered that while the plaintiff filed an amended statement of claim in December 2008, thereby raising its indefeasibility of title, the defendants have still not amended their defence to raise the fraud exception in s 42 of the Real Property Act and the discharge of the 2003 mortgage, despite the orders made by Registrar Atkinson in March. Rule 14.3 requires that such a defence be filed within 28 days, or as the Court otherwise orders. 36 As the Court of Appeal observed in Wentworth v Rogers (No 5) (1986) 6 NSWLR 534 at 538:

First, the essence of the action is fraud. As in all actions based on fraud, particulars of the fraud claimed must be exactly given and the allegations must be established by the strict proof which such a charge requires: Jonesco v Beard [1930] AC 298 at 301; McHarg v Woods Radio Pty Ltd (at 497).

37 The Court also observed at 536, that in a case where the pleadings were inadequate, an opportunity should be given to put the pleadings into proper form, going on to observe at 537:

If such a viable cause of action could be found, although not stated properly in the statement of claim, it could give rise to leave to amend and the avoidance of the peremptory termination of the litigation sought by the respondent. 38 I am satisfied that this is the proper course in this case. The defendants must have the opportunity to further amend their pleadings. What is required is a clear pleading that the fraud exception in s 42 of the Real Property Act is relied on and the particulars of the fraud alleged provided, that is, the acts involved and that they were done in a manner which involves fraud. That is what Rules 15.3 and 14.14 of the Uniform Civil Procedure Rules require of all parties alleging fraud. There is no reason why the defendants ought to be relieved of that obligation. 39 While fraud should not be alleged unless the allegation is made in proper form and the parties and their legal representative are satisfied that it has a proper basis, this does not require that there must be a positive belief that the allegation will actually succeed at the hearing. In Allstate Life Insurance Co v Australian and New Zealand Banking Group Ltd (1995) 57 FCR 360, it was observed by Hill J, at 372, that:

At the initial stages of pleading a claim there will always be evidence which points in one way and the other. An allegation of fraud is indeed a serious matter and should be the subject of anxious concern. I am sure that in Mr Hayes' case it was. But the pleader is not obliged to conduct in his or her mind a mini-trial to reach a conclusion that the allegation must, or indeed would on the balance of probabilities, succeed. It is sufficient if the material known, which can include not only documentary material but also oral statements of witnesses and matters of instructions, provides a reasonable basis for the allegation if nothing else were to be proved. The mere fact that a possible defence is open does not make it improper to allege fraud unless, on all the materials available, that defence is such that it must necessarily succeed.

40 Presumably, the defendants have a proper basis on which to advance the fraud allegation, given the submissions which they have already made. If the true position is, even now, that there is no proper basis for advancing the allegations of fraud which have been outlined in the submissions, in a properly pleaded defence, then the defendants have no basis upon which to challenge the indefeasible title which the plaintiff claims. The Court's Rules do not contemplate an investigation process such as that apparently contemplated by the defendants, at the stage these proceedings have reached, to determine whether it might be possible to find a basis for such a defence.

41 Mr Beale argued that the issues raised by the case were complex and that the defendants required two more months, to pursue notices to produce and subpoenas, in order to be in a position to prove that the fraud alleged occurred. They would not be in a position to amend their defence until this process was complete. I do not accept that this is so. 42 In order to be pursued, such documents must be relevant to what is in issue between the parties in the proceedings. Until the defendants put on a defence which clearly puts in issue the indefeasibility of the defendants' title and raises the discharge of the 2003 mortgage, what is truly here in issue between the parties will remain uncertain, even having in mind what is presently claimed in the amended statement of cross claim. That is entirely unsatisfactory and can only give rise to unnecessary cost and delay. 43 By their submissions the defendants have clearly identified that their case is that the plaintiff has no indefeasible title, given the fraud exception in s 42 of the Real Property Act and that the 2003 mortgage on which the plaintiff relies was discharged. Their defence must be amended to reflect those claims, as must their cross claim. Proper particulars of what is alleged must also be provided, as the Rules require. If the further documents which the defendants are seeking, turn out to provide further evidence to support their case, no doubt the defence and cross claim can then be further amended, if that proves to be necessary. That this is a possibility, is not a proper basis for further delaying what the defendants were ordered to do in March. 44 It follows that the plaintiff's motion must be dismissed and orders of the kind suggested for the plaintiff should be made, namely, that the defendants provide their amended defence and cross claim to the plaintiff. If there is any further objection to the amendments proposed, the defendant must put on a motion seeking leave to amend the defence and cross claim, as Registrar Atkinson earlier ordered.

Orders 45 For the reasons given, the plaintiff's motion is dismissed, with the usual costs order, namely that the plaintiff pays Mr and Mrs Vaccaro's costs of the motion, as agreed or assessed. The defendants are ordered to serve the amended defence and cross claim on which they propose to proceed, by 5 June 2009. Unless the plaintiff consents to the amendments, the defendants are to file and serve a motion seeking leave to file the amended defence and cross claim, by 19 June 2009.

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