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[2019] VSC 482
Supreme Court of Victoria
2019-07-22
ROBSON J
Original judgment source is linked above.
EQUITY - Setting aside of unconscionable loan, mortgage and guarantee - Rescission on equitable grounds - Restitutio in integrum - Formulation of orders to achieve practical justice between the parties.
1 In Jams 2 Pty Ltd & Ors v Stubbings (No 3) ('Stubbings (No 3)')[1] I found that the plaintiffs acted unconscionably in entering into a loan agreement with Victorian Boat Clinic Pty Ltd, in taking a first mortgage over the Fingal property, and in procuring from Mr Stubbings a guarantee in relation to the loan agreement supported by mortgages over two other properties owned by Mr Stubbings. Accordingly, I found that the loan agreement, first mortgage and guarantee should be set aside. The two other properties of Mr Stubbings had already been sold by the plaintiffs under the mortgages.
2 Since handing down judgment on the issue of liability on 14 March 2019, I have heard argument and received written submissions on the orders that should be made. No application was made by any party to re-open the case to tender further evidence. Mr Stubbings was able to obtain pro bono representation for this further hearing, which greatly assisted the Court in its determination of final orders.[2]
3 The remedial orders that are available where unconscionable conduct is established are under the Court's equitable jurisdiction. Counsel for the plaintiffs and counsel for Mr Stubbings each submitted that the High Court decision of Maguire v Makaronis[3] sets out the well-established principle which is to be applied, namely that those who seek equity must also do equity. Accordingly, in making orders I must fashion them in such a way to ensure Mr Stubbings does not make a windfall gain and that due consideration is given to the interests of the lenders.
4 For the reasons that follow, I have concluded that equity (or as discussed below, practical justice) will be achieved between the parties if orders are made requiring the plaintiffs to discharge the first mortgage and requiring Mr Stubbings to make payment to the plaintiffs in the sum of $109,315.00, that sum being an unsecured debt.
5 In reaching that conclusion, it has been necessary to address the following issues:
(a) complicating factors in shaping orders which arose in the specific facts of this matter, including the existence of a second registered mortgage;
(b) the appropriate nature of the restitutionary order (secured or unsecured);
(c) the treatment and calculation of interest on any amount outstanding; and
(d) the calculation of the amount to be repaid by Mr Stubbings.
6 There are two matters which present some difficulty in fashioning the orders which are to be made.
7 First, there was very little attention given by the plaintiffs to the question of damages or compensation in equity or otherwise arising on Mr Stubbings' counterclaim during the trial. The plaintiffs did not suggest or seek an order that the hearing be divided into two, with liability to be determined first and, if necessary, a subsequent hearing on the orders that may arise if the agreements were found to be unconscionable. In those circumstances, I have no evidence on the current value of the Fingal property or what are current interest rates for loans by banks or other institutions.
8 The second complicating factor is the existence of the second mortgage registered over the Fingal property. Importantly, during the trial, I heard no evidence on what, if anything, has been done or will be done about the second mortgage. The plaintiffs' solicitors originally also acted for the second mortgagee. I was informed, however, from the Bar table at the subsequent hearing that the plaintiffs' solicitors no longer act for the second mortgagee.
9 In those circumstances, I put to both counsel for the plaintiffs and counsel for Mr Stubbings that in calculating sums relevant to the orders, I may do so on the assumption that it is likely, on the balance of probabilities, that the second mortgage, if challenged, would suffer the same fate as the first mortgage. Neither suggested that I adopt any other course.
10 As the evidence disclosed, the second mortgage was only sought by the solicitors for the plaintiffs when it became apparent that, after all the fees and expenses were incurred, there would not be sufficient funds to provide the settlement moneys that Mr Stubbings required to purchase the Fingal property.[4] As with the first mortgage, Mr Zourkas was given the task on behalf of the plaintiffs' solicitors of explaining this to Mr Stubbings, or giving Mr Stubbings correspondence from the plaintiffs' solicitors that purported to explain the need for the second mortgage to Mr Stubbings and procuring the second mortgage's execution.
11 On the basis of the evidence led at the trial, I find that it is likely, on the balance of probabilities, that the second mortgage would suffer the same fate as the first mortgage, if the second mortgagee sought to enforce the terms of the second mortgage against Mr Stubbings. This is not an ideal position, but as courts do when considering personal injury damages, it is necessary in doing justice between the parties to litigation to make reasonable predictions as to what will happen in the future. Of course, nothing I say here about the second mortgage has any effect on the second mortgagee's rights. The second mortgagee is not a party to this proceeding.
12 At common law, a party would not be entitled to rescission where it was unable to restore the parties to their original position before the contract, for example, money repaid and property returned. This requirement is known as restitutio in integrum. However, where a transaction is set aside by reason of a wrong recognised by equity, more flexible relief is available. This was explained by the High Court in Alati v Kruger:[5]
If the case had to be decided according to the principles of the common law, it might have been argued that at the date when the respondent issued his writ he was not entitled to rescind the purchase, because he was not then in a position to return to the appellant in specie that which he had received under the contract, in the same plight as that in which he had received it. But it is necessary here to apply the doctrines of equity, and equity has always regarded as valid the disaffirmance of a contract induced by fraud even though precise restitutio in integrum is not possible, if the situation is such that, by the exercise of its powers, including the power to take accounts of profits and to direct inquiries as to the allowances proper to be made for deterioration, it can do what is practically just between the parties, and by so doing restore them substantially to the status quo.[6]
13 Subsequently, the High Court in Vadasz v Pioneer Concrete (SA) Pty Limited[7] referred to its earlier decision in Alati v Kruger in considering the consequences of rescission:
Where, as in this case, the court has granted equitable relief in the shape of rescission of a contract, the result is to set aside the contract ab initio. While equity followed the law in requiring restitution as a condition of rescission where the contract has been wholly or partly executed, it allowed greater flexibility in the basis upon which restitution and accounting between the parties may be ordered. Thus, equity did not require complete restitution of the position which existed before the contract but allowed its remedies, particularly an order for monetary accounts, to be utilised to achieve practical restitution and justice. That point was made by Dixon CJ, Webb, Kitto and Taylor JJ in Alati v Kruger...
...
The idea of a Court of Equity using its powers to do "what is practically just" was referred to by Lord Blackburn in Erlanger v New Sombrero Phosphate Co well over 100 years ago. In contrasting the relief available in law and in equity on rescission of a contract, in particular the ability of equity to take account of profits and make allowance for deterioration of property, his Lordship said:
And I think the practice has always been for a Court of Equity to give this relief, whenever, by the exercise of its powers, it can do what is practically just, though it cannot restore the parties precisely to the state they were in before the contract.
...
Thus unconscionability works two ways. In its strict sense, it provides the justification for setting aside a transaction. More loosely, it provides the justification for not setting aside the transaction in its entirety or in doing so subject to conditions, so as to prevent one party obtaining an unwarranted benefit at the expense of the other.[8]
14 Counsel for Mr Stubbings drew my attention to the decision of EM Heenan J of the Supreme Court of Western Australia in Perpetual Trustees Victoria Ltd v Burns ('Burns').[9] In that case, the plaintiffs lent more than $840,000 to a couple, each of whom was on a disability pension with no prospects of any employment. The loans were secured over real property by way of mortgages. There, in setting aside the loans and mortgages, his Honour summarised the cases and principles referred to above, which I adopt:
The court may order rescission on the basis of restoring the parties so far as practically possible to do so. For this purpose ancillary relief may be granted, such as an account of profits, or an allowance for work done, or a sum paid for benefits enjoyed ...
15 It is clear that precise restitutio in integrum cannot be achieved in this case. Mr Stubbings' two Narre Warren properties, in which he had managed to acquire approximately half a million dollars in equity, have been sold to third parties for value. Even if Mr Stubbings were to hand back the unpaid principal with interest, the plaintiffs are unable to return him to the specific position he was in prior to the impugned transaction. Further, Mr Stubbings is now the registered proprietor of the Fingal property, a position he would not be in save for the impugned transaction.
16 The remedy therefore is to set aside the impugned transaction and order such other relief as may be necessary to achieve what is practically just between the parties.
17 In considering, however, what will achieve 'practical justice' between the parties, I am of the view that I must take into account the reality of what an order conditioned on Mr Stubbings paying any significant sum to the plaintiffs will actually mean.
18 No recent valuation evidence regarding the mortgaged properties was adduced at trial. Around the time of the unconscionable transaction in 2015, the Fingal property was valued at $820,000.[11] No evidence was adduced of other assets of Mr Stubbings and it is likely that Mr Stubbings' equity in the Fingal property is his only significant asset. In order to satisfy any substantial ancillary restitutionary orders made in relation to the plaintiffs, Mr Stubbings would need to refinance or sell the Fingal property. Regardless of the orders to be made in this proceeding, the second registered mortgage remains. Mr Stubbings does not have any meaningful income. It is unlikely that Mr Stubbings could obtain a further loan in those circumstances. It is open to the Court to find, and I do find, that it is likely that any restitutionary order would require Mr Stubbings to sell the Fingal property and incur the costs associated with the sale of that property and the purchase of another, more modest, home with whatever equity remains to him.
19 It is with this practical consequence in mind that I approach the remaining issues.
20 The plaintiffs submit that Mr Stubbings should be required to repay the outstanding principal owing to them, together with interest, within 60 days of the making of a final order, failing which the plaintiffs should be entitled to possession of the Fingal property. This would have the effect of maintaining the plaintiffs' security interest in the Fingal property.
21 The plaintiffs rely in this regard on the decision of Maguire v Makaronis.[12] Maguire v Makaronis involved the equitable rescission of a mortgage granted by clients of a firm of solicitors to that firm, where the clients were not advised to obtain independent legal advice. At first instance, the mortgage was set aside without any condition that the principal and interest be repaid. An appeal to the Appeal Division of this Court (Nathan and Smith JJ, Brooking J dissenting) was dismissed. Before the High Court, the mortgage was set aside but upon condition that the clients repaid the principal and interest due under the mortgage within thirty days. The mortgage was not to be otherwise discharged.
22 The plaintiffs rely on the following statement of the Court:
To set aside the Mortgage purely in its operation as a security, without conditioning that upon repayment, would be to reform the transaction in an impermissible fashion. It would be to strike down the security interest without ensuring payment of that which was paid in return for it. The respondents would be left with the fruits of the transaction of which they complain, whereas their equity was to have the whole transaction rescinded, and so far as possible, the parties remitted to their original position.[13]
23 Counsel for Mr Stubbings submits that the relief granted in Maguire v Makaronis was particular to its facts and is not directly applicable to the facts as found in Stubbings (No 3). Relying on Burns as a more analogous authority_,_ it is submitted that orders for security for repayment are not apposite in circumstances where the borrower's position has changed drastically as a result of the unconscionable transaction:
In considering what terms, if any, should be imposed on the defendants to satisfy this longstanding principle, it is essential to appreciate that had the unconscionable conduct not produced this loan, neither of the defendants would have granted security over Railway Avenue or have been exposed to claims for possession, foreclosure or sale of the security by a registered mortgagee.[14]
24 Heenan J found that it would be inappropriate in those circumstances to make an order for security as a condition of relief in the way that was done in Maguire v Makaronis:
Rather than make the repayment of the principal with such interest a condition of the dismissal of the plaintiff's claim for possession and the defendants' relief on their counterclaim, I consider that there should be an order that the defendants do pay to the plaintiff the sum of $266,849.83 plus interest to be calculated in accordance with the terms of this judgment, such obligation to make payment of principal and interest by the defendants to be, once ascertained, a debt due and payable by them to the plaintiff but unsecured. The obtaining of security by the plaintiff under the mortgage was part of the imposition and exploitation of the defendants by the unconscionable conduct proved.[15]
25 Counsel for the plaintiffs submits that the decision in Burns is distinguishable on the basis that the pensioners owned their own home unencumbered prior to the impugned transactions, and therefore the granting of security was a drastic change of position. It is true that Mr Stubbings' Narre Warren properties were, prior to the plaintiffs' involvement, both encumbered by mortgages to the Commonwealth Bank and therefore Mr Stubbings could have been exposed to claims for possession, foreclosure or sale of security by the Commonwealth Bank had he defaulted under those mortgages. However, those mortgages were modest and the evidence suggests nothing other than that Mr Stubbings had been able to service them.
26 I consider that there is force in the submission by counsel for Mr Stubbings that it would be equally inappropriate in these circumstances to make an order for security as a condition of relief in the way that was done in Maguire v Makaronis as a result of the way that the loans were structured by the plaintiffs' agents.
27 One effect of the registration of first and second registered mortgages is that the second registered mortgagee, who is not a party to this proceeding, is paid out of the surplus of any mortgagee sale under s 77 of the Transfer of Land Act 1954 (Vic). The ordering by this Court of security as part of a restitutionary measure, such as by way of an order making the grant of relief conditional upon payment of any amount said to be outstanding, would create a disadvantageous circumstance where, should Mr Stubbings fail to make the required payment within the time specified, not only would he lose possession of his family home, but the balance of the proceeds of sale would inevitably be disbursed to the second mortgagee in satisfaction of the unreformed second mortgage.
28 This would have the result that, in addition to any amount ordered by this Court to be paid to the plaintiffs, the proceeds of the Fingal property would be significantly diminished by payment of the outstanding second mortgage and interest thereon (likely at the higher default rate of 25 per cent),[16] leaving Mr Stubbings with little - or possibly nil - equity left from the sale of his home and sole asset while returning considerable benefit to the first and second mortgagees. Counsel for Mr Stubbings contends that outcome would run directly contrary to the operative principle of restitutio in integrum referred to in Maguire v Makaronis and Burns, having regard to my earlier finding that Mr Stubbings had equity of approximately $530,000 in his other properties at the time of entering the unconscionable loans.[17]
29 To further demonstrate the flexibility of the remedy of equitable rescission in Australia, counsel for Mr Stubbings also refers to the decision of Perpetual Trustees Australia Ltd v Schmidt,[18] where J Forrest J set aside a loan contract and dismissed in whole the plaintiff's claims for repayment and possession, with the exception of ordering the repayment of an amount used to discharge a pre-existing debt.[19]
30 I consider that the obtaining of security by the plaintiffs' agents by way of two mortgages was 'part of the imposition and exploitation of the defendan[t] by the unconscionable conduct proved'.[20] Having regard to the reason the second mortgage was necessary in the first place and the likely deleterious consequences on Mr Stubbings' equity of maintaining the plaintiffs' security interest, I consider that the equitable approach is to order that any amount decided by this Court to be payable by Mr Stubbings to the plaintiffs in restitution be an unsecured debt due and payable.
What rate of interest should be applied to the debt?
31 Counsel for the plaintiffs submits that any amount to be repaid by Mr Stubbings must include interest at a rate of 10 per cent, contending that any rate less than this would be 'iniquitous'. It will be noted that this rate corresponds precisely with the lower rate stipulated in the first mortgage.[21] While there was an absence of evidence from the plaintiffs as to appropriate domestic lending rates, or any cost of capital faced by the plaintiffs, it can be assumed that the rate of 10 per cent was sufficient for them to obtain a profit, otherwise they would have no incentive to lend the funds.
32 Relying on Burns, counsel for Mr Stubbings contends that any interest should be calculated pursuant to the cash rate only, of which I am entitled to take judicial notice.[22]
33 In Burns, Heenan J considered whether there should be an order to pay interest as it had accrued under the terms of the mortgage and loan agreement, noting that since default, interest accrued at a higher rate. His Honour stated:
By setting aside the mortgage which takes effect ab initio there is no contractual right for the plaintiff to receive interest at the rates prescribed in the security either before or after the default. Similarly, there is no contractual basis for the plaintiff to recover legal fees or other expenses under the terms of the mortgage once it is set aside. The unconscionable conduct proved disentitles the plaintiff to derive any benefits from the defendants by that transaction.
I consider that the restitution payable by the defendants in return for the relief granted in respect of the Railway Avenue 2007 loan and mortgage should be the original principal plus simple interest thereon from the date of the advance of the principal, namely 7 November 2007 (date of registration) at a modest rate, such rate being the cash rate as fixed by the Reserve Bank of Australia prevailing from time to time from 21 October 2007 until the date of payment. This rate should reflect the effects of inflation over the period the defendants had the benefit of the money advanced and a small commercial return acceptable to the market rather than an elevated rate charged by the plaintiff for Easydoc loans.[23]
34 In any event, as will become clear, I have concluded that Mr Stubbings should not be required to pay any interest on the amount which he is to repay to the plaintiffs. I will, however, adopt the cash rate in any other calculations which need to be made for the purposes of this judgment.
What amount is required to be paid by Mr Stubbings to achieve practical justice?
35 In my view, practical justice between the parties requires that Mr Stubbings be returned to a position where he has a property, free of obligation of possession and forced sale, in which he has equity of approximately $530,000, as he had prior to the unconscionable transactions.
36 An alternative approach was also raised by counsel for Mr Stubbings and counsel for the plaintiffs, whereby the amount owing by Mr Stubbings was calculated by taking the outstanding loan amount and deducting from it certain fees, payments and sale proceeds received by the plaintiffs or their agents. I accept that this course may have been open for me to take. However, in my opinion, the approach I have adopted is the more equitable means of putting Mr Stubbings back in the position he would have been but for the unconscionable conduct of the plaintiffs.
37 As mentioned above, the plaintiffs gave very little attention to the question of damages or compensation in equity or otherwise arising on Mr Stubbings' counterclaim during the trial. Accordingly, in formulating ancillary orders in this proceeding, I have relied on what limited evidence there was before me in relation to the value of the Fingal property, the position of the second mortgagee, and the costs associated with the sale and purchase of property. The plaintiffs, whose conduct was unconscionable (by reason of the unconscionable conduct of their agents) are 'not to be heard to complain if remediation favours the innocent party',[24] particularly in circumstances where they could have furnished the Court with updated valuation evidence and the like, but chose not to.
38 Mr Stubbings is likely to incur, at least, the following:
(a) costs in the sale of the Fingal property, including agent's commission and advertising in the amount of $25,232;[25]
(b) costs of transfer of land and discharge of mortgage registration fees in the amount of $1,597;[26]
(c) stamp duty on the purchase of a property to the value of $530,000 calculated under s 28 of the Duties Act 2000 (Vic), being $26,870 (calculated as $2,870 + 6% of ($530,000-$130,000)).
39 On the evidence in this proceeding, Mr Stubbings is plainly in default of his obligations under the second mortgage. Having regard to the circumstances of entry into the first and second mortgages in September 2015, I find, on the balance of probabilities, for the purposes of this proceeding only, that the second mortgage should be treated as voidable, and that Mr Stubbings would, whether proactively or by way of counterclaim in any proceedings by the second mortgagee for possession, seek and obtain relief corresponding to that ordered by this Court in relation to the first mortgage.
40 Having regard to the evidence adduced in this proceeding regarding the second mortgage, I find, on the balance of probabilities, for the purposes of this proceeding only, that any relief ordered against the second mortgagee would be subject to ancillary orders to the effect that Mr Stubbings pay restitution to the second mortgagee of $126,986.[27] The calculations in support of that likely finding are as follows:
Simple interest at RBA cash rate (1.75%) on $119,206
Simple interest at RBA cash rate (1.5%) on $119,206
Simple interest at RBA cash rate (1.25%) on $119,206
Simple interest at RBA cash rate (1.00%) on $119,206 (allowance for six months' time to settlement)
41 Accordingly, taking into account the likely position of Mr Stubbings in relation to his obligations under the second mortgage and the likely losses to be incurred by Mr Stubbings in the course of making restitution as set out above, any equity realisable by Mr Stubbings from the Fingal property will be reduced by the sum of the amounts set out at paragraphs [38] and [40] above, being $180,685.
42 Accordingly, any ancillary adjusting relief orders in this proceeding to avoid the unjust enrichment of Mr Stubbings following the setting aside of the unconscionable transaction ought place him in a position where he has a property, free of obligation of possession and forced sale, in which he has equity of $530,000 (which he had before entering into the transaction with the plaintiffs). That is to be achieved by ordering that Mr Stubbings pay the plaintiffs the sum of $109,315, being the likely proceeds of sale of the Fingal property (being $820,000) less the costs incidental to that sale, the purchase and the costs of and incidental to the purchase of a home to the value of $530,000 (being $583,699) and Mr Stubbings' likely obligation to pay the second mortgagee in relation to his obligations to that person (being $126,986).
43 Adopting this approach, I do not consider it appropriate to make any order as to interest. I also do not consider that any ancillary order need be made in respect of the various fees paid to the third parties, or in respect of my finding of Mr Topalides' breach of duty.
44 I will give Mr Stubbings six months from the date of final orders to repay the moneys to the plaintiffs. I have done so, as I have found that it is likely that he will not be able to borrow the required funds to do so, and thus will have to sell his Fingal property.[30]
45 Mr Stubbings was provided with legal assistance in the proceeding on a pro bono basis by legal practitioners at the interlocutory stages and at the hearing on the final orders.
[1] [2019] VSC 150 ('Stubbings (No 3)').
[2] In particular, the written submissions of Mr Christophersen (which included calculations of the relevant sums) were very helpful to the Court in formulating orders.
[3] [1997] HCA 23; (1997) 188 CLR 449 ('Maguire v Makaronis').
[4] Transcript of Proceedings (Jams 2 Pty Ltd & Ors v Stubbings (No 3)) (17 September 2018) 292.7-11.
[9] [2015] WASC 234 ('Burns').
[13] Ibid 475 (citations omitted) (Brennan CJ, Gaudron, McHugh and Gummow JJ).
[16] Counsel for Mr Stubbings submitted $400,000 would be the amount that would likely be claimed by the second mortgagee based on the higher interest rate of 25 per cent: Ex P 39.
[19] Ibid [235]-[236]. The order was not disturbed on appeal in Violet Homes Loans Pty Ltd v Schmidt [2013] VSCA 56; (2013) 44 VR 202.
[22] Section 85A of the Reserve Bank Act 1959 (Cth) provides for judicial notice to be taken of information published by the Reserve Bank.
[24] Elkofairi v Permanent Trustee Co Ltd [2002] NSWCA 413 [110].
[25] Calculated pro rata by property value based on fees of $14,339 charged in relation to sale of mortgaged property at 5 Ashton Rise for $466,000: see Statement of Account at CB 574.
[26] See costs on previous transfers at Ex P44.
[27] See Ex P39, P40, P41, P42, and P44; Defendant's Supplementary Submissions, 16 April 2019 [7].
[28] Fees payable in the establishment or subsequently under the loans should be excluded from any restitutionary sum payable. See Burns (n 9) [275] (EM Heenan J): 'By setting aside the mortgage which takes effect ab initio...there is no contractual basis for the plaintiff to recover legal fees or other expenses under the terms of the mortgage once it is set aside. The unconscionable conduct proved disentitles the plaintiff to derive any benefits from the defendants by that transaction'.
[30] By the plaintiffs' own admission, the likely timeframe to market, sell and settle a property is five months: see Transcript of Proceedings (Jams 2 Pty Ltd & Ors v Stubbings (No 3)) (17 September 2018) 265-266.
Jams 2 Pty Ltd & Ors
Stubbings
(1995) 94 CLR 216
(1997) 188 CLR 449
(1955) 94 CLR 216
(1995) 184 CLR 102
(2013) 44 VR 202