La Trobe Capital & Mortgage Corporation Limited v Hay Property

La trobe - the fund and its members 8 La Trobe is the responsible entity of the La Trobe Australian Mortgage Fund ("the Fund"). The Fund is a managed investment scheme within the meaning of Chapter 5C of the Corporations Act 2001 (Cth). Persons who become members of the Fund are offered, investment options, by La Trobe. Those options include a "select mortgages" option. Members of the Fund who choose the "select" option have their money invested by the Fund in a cash management account managed by the Fund prior to and following repayment of any select mortgage. When members' money is not invested in a select mortgage it is held in cash management investments. 9 Members who invest in the "select" option, receive a separate and supplementary product disclosure statement setting out the details of approved select mortgages, including: · Investment rate of return; · Investment term; · Details of the proposed borrower; · Details of the real property taken as security; · Details of the valuation provided by the valuer.

LOSS 10 Pursuant to s 82 of the Act, a person who suffers loss and damage by the conduct of another, which was done in contravention of s 52, may recover the amount of loss or damage against that person. 11 There is a dispute between the parties concerning whether La Trobe suffered any loss or damage as a consequence of Hay's breach of s 52. First, the parties differ on the issue which raises the assertion that La Trobe made a capital loss on the loan it advanced to Jet. Second, there is an issue about whether La Trobe is entitled to recover from Hay, for what it says was its lost opportunity to advance the funds loaned to Jet to some other performing loan, which was available to it at the relevant time. 12 The parties do not agree on what La Trobe recovered from Jet in respect of the $2.4 million loan to Jet. Hay says that La Trobe made a profit on the loan. It contends that La Trobe received the sum of $2,259,823.89 from the sale of the Flinders Street property, $455,460 in interest payments received from Jet and $36,000 by way of an application fee. This leads to a total of $2,751,283.89. A sum over and above the sum of $2.4m initially advanced by La Trobe to Jet. 13 La Trobe presents a different set of figures. It says the net recovery from the sale of the Flinders Street property is $2,210,965, which is made up of the following components: · $1,996,913 from the sale; · $125,000 from a forfeited deposit; · $80,000 from the reversal of a legal expenses deduction; · $9,052 from the reversal of a GST input. On these calculations La Trobe made a capital loss on the loan of $189,035. 14 Where does the truth lie? 15 Hay's approach is that it is artificial to concentrate on the question of capital loss alone as at the date of the settlement of the Flinders Street property in 2007. It points especially to the $455,460 (pre-paid) by way of interest by Jet to La Trobe. If one includes this figure in the sums provided by La Trobe, the loss of $189,035 is turned into a profit of $266,425. 16 Is Hay's approach legitimate or should one concentrate on the capital loss approach urged by La Trobe? The answer is provided in I & L Securities Pty Limited v HTW Valuers (Brisbane) Pty Ltd (2002) 210 CLR 109. That case concerned a negligent over-valuation of a property for mortgage security purposes. The net proceeds of the sale of the property were insufficient to discharge the debts of the borrower. Chief Justice Gleeson, at [1] described the principal question before the Court as whether the amount of the respondent's liability to the appellant should be reduced because of the appellant not taking proper steps to investigate the credit-worthiness of the borrower. 17 His Honour at [31], found that the whole of the loss on the transaction flowed from the under valuation. Gleeson CJ at [34] referred to a submission by the respondent that the appellant's lost interest was caused by its failure to assess, with care, the credit worthiness of the borrower. His Honour rejected that submission, saying: There is no reason to distinguish between principal and interest in considering the loss to the appellant. The mortgage was taken to secure the totality of the borrower's obligations and the appellant, as a financier, lost both capital and income. 18 Their Honours Gaudron, Gummow and Hayne JJ, held at [57] that under s 82, it was sufficient that the contravention of the Act was a cause of the loss or damage caused. At [64], their Honours said: There is…no basis for distinguishing between the loss of the balance of the loan principal not recouped on sale, and loss as a result of the respondent's contravention of the Act, and the loss of the interest that otherwise would have been earned on that money during the period of the loan. The loss of interest on the principal sum lent in this transaction was part of the loss suffered by the appellant by the respondent's conduct in contravention of the Act. 19 Similarly McHugh J said, at [123]: …no distinction can or should be drawn between I & L's loss of principal and its loss of income arising from the failure to pay interest on that principal. The lost interest was as much a part of I & L's loss or damage as the lost principal. 20 In this proceeding, La Trobe made a small capital loss on its transaction with Jet but taking into account interest pre-paid by Jet to La Trobe, it made a small profit on the transaction as a whole. If, in assessing loss, it is proper to take into account loss of principal as well as loss of interest it is equally permissible to take into account loss of principal and payments actually made by way of interest. 21 Counsel for La Trobe submitted that the above approach ignores considerations of time, seeing that the loan was originally intended to be paid out by August 2005. However, the settlement of the sale of the Flinders Street property did not take place until June 2007, so it would be artificial not to consider payments by way of interest prior to that settlement. To ignore those payments understates the real position of La Trobe as at June 2007 and ignores the fact of the receipt of interest payments on the loan. 22 The first aspect of La Trobe's case is rejected. It has not shown any loss by reason of entering into the loan. The next issue requiring determination is whether it is entitled to recover a sum reflecting the interest it may have earned during the life of the loan, if the loan had been made to a customer who complied with its terms, by making regular and timely payments of interest. This may be described as a loss of interest or loss of income claim.

Loss of income 23 La Trobe contends that as at June 2007, it would have received $3,052,143.24, being the original $2.4m advanced plus interest in the sum of $652,143.24. Allowing for the sale of the property, if successful, La Trobe would receive a sum reflecting the difference between approximately $3m and the amount actually recovered from the loan. For current purposes, though inexact and if necessary the subject of future precise refining, the figure claimed on the loss of interest argument would be $3,052,143.24 less $2.4m and also less $266,425 (being the difference between interest payments of $455,460 and a capital loss of $189,035). Further refined the claim would be $3,052,143.24 minus $2,666,425 which equals $385,718.24. Therefore the claim for what in effect is a lost opportunity to earn income is in the order of $400,000 approximately. 24 The loss of income claim is calculated by reference to the interest which La Trobe says it would have earned in 2004 and 2005 had the loan been performed.

Evidence on the loss of income claim 25 Mr Jason Gidman is the Portfolio Manager for the Fund. From 2000 to early 2005 he was the Manager, Investor Liaison and from early 2005 to late 2007, the Manager - Finance. Both previous positions involved portfolio management. Mr Gidman approved the loan to Jet, in reliance on Hay's valuation. In a witness statement adopted in Court, Mr Gidman said that as at August 2004, demand by potential borrowers for loans was greater than the money available in the Fund. Also, about that time, insufficient interest by members of the Fund led to a rejection of up to five loan applications per day. 26 Mr Gidman considered that, based on his experience of the type and number of loan applications the Fund received as at August 2004, one or more loan applications totalling $2.4m would have been rejected by La Trobe after the making of the loan to Jet. Mr Gidman asserted that the money lent to Jet would have been lent to another borrower or borrowers if not lent to Jet. 27 Under cross-examination, Mr Gidman was unable to give the details of any particular loan application which was rejected for the Select Mortgage Option from August 2004 to February 2007. Mr Gidman could not remember "exact loans" which were rejected and could have been accepted but for the Jet loan. He said he could remember loans which were rejected for a number of reasons, "including because of Jet", but not any particular loan.

ContENTIONS on loss of income 28 Counsel for La Trobe submit, on the basis of Mr Gidman's evidence and on the product disclosure statements given to investors in the fund, that it was more probable than not that another performing loan would have been made but for the Jet loan. 29 Counsel for Hay submit that Mr Gidman's evidence does not prove the loss of an investment opportunity by reason of La Trobe entering into the Jet loan. This is so, they contend, in light of the evidence that loans had been rejected at the relevant time for reasons including reasons extraneous to the Jet loan. Hay's counsel point to a lack of evidence that La Trobe's entry into the Jet loan led to the rejection of any particular loan. They also point to the lack of evidence of any particular loan being rejected at all during the period August 2004 to February 2007. Counsel refer to the lack of evidence that but for the Jet loan, La Trobe would not have declined a loan or loans of $2.4m that were acceptable to the Fund and its members in respect of interest, security, location and nature, but which were rejected because of lack of funds to advance from the Fund. Counsel also point to the lack of evidence about the level of funding at the relevant time and La Trobe's consequent inability to prove that it had insufficient funds at any particular, relevant time to prevent it investing $2.4m in an acceptable alternative investment. 30 The above-mentioned submissions by counsel for Hay are persuasive. They are supported by authority, but are basic, in that they highlight La Trobe's failure to demonstrate, by evidence rather than supposition, that the Jet loan prevented the making of a particular loan or particular loans, which would likely have been performing ones. Mr Gidman's evidence does not go that far. 31 A similar issue was recently the subject of discussion in the Victorian Court of Appeal by Nettle JA, with whom Mandie JJA and Beach AJA concurred. In St George Bank Limited v Quinerts Pty Ltd [2009] VSCA 245, the Court of Appeal considered a claim for damages by a bank as a result of a negligent over-valuation. After selling the subject property the bank lost $100,000 plus interest. It claimed the right to be put in the position which it would have been in but for the loan. The valuer claimed that if the valuation had been $500,000, the bank would have lent less to the borrower and therefore the bank's claim should be limited to, the difference between its loss and that which it would have incurred on the supported "alternative transaction". 32 Justice Nettle at [9] held that the documentary evidence was insufficient to support the view that the bank would have entered into the alternative transaction. 33 His Honour at [23] then dealt with the bank's claim for an amount of damages for interest foregone by entering into the transaction which caused it to lose $100,000. 34 The judge below held that it could not be assumed that the bank would have lent the funds advanced to another borrower at the same rate as charged to the non-performing customer. Nettle JA at [24] noted the submission of counsel for the bank that his client was "in the business of lending money on a regular and recurrent basis". This, counsel contended, meant it should be assumed that if it had not entered into the agreement with the borrower it would have loaned the money to another borrower at a similar rate of return. 35 His Honour rejected that submission at [25] he said: …the incurrence of such losses must be proved. It is not enough for a party like the Bank simply to assert that, because it is in the business of lending money, it must follow that it has suffered a loss equal to the return on funds which it might have achieved if it had entered into a successful transaction at the same rate of return as the failed transaction. At best, the opportunity foregone represents a loss of chance to invest in a more successful transaction and, depending on the facts of a case, the value of the loss may have to be discounted significantly to allow for the vicissitudes of chance. 36 Nettle JA, at [27] described assumptions about the likely rate of return in another transaction as "speculative" and went on to say that: In the absence of evidence, there is little reason to suppose that the cost of funds and expenses for one transaction is the same as for another. Moreover, in order to provide a truly accurate reflex of the damage actually incurred as a result of not entering into a more satisfactory transaction at an identified rate of return, the spread should ordinarily be discounted to allow for possibilities such as that the funds invested in the improvident transaction could not have been placed in another more acceptable transaction; and the risk that, even if so placed, the other borrower might still have defaulted. 37 The above analysis is persuasive. In the current case I am not satisfied that La Trobe has proved, on a balance of probabilities, that there was a particular loan or loans that were not entered into by reason of La Trobe entering into a loan agreement with Jet. Mr Gidman's evidence is vague and imprecise and an insufficient foundation for this aspect of La Trobe's case. As counsel for Hay submits, there is no evidence that there ever existed a particular loan application which was acceptable on all terms to La Trobe, but which La Trobe did not accept due to insufficient funds by reason of the Jet loan. 38 Counsel for La Trobe contends that whilst Nettle JA's analysis is not "palpably wrong" it appears to be in conflict with the principles enunciated in Sellars v Adelaide Petroleum (1994) 179 CLR 332. In Sellars, the High Court held that loss of an opportunity to obtain a commercial advantage or benefit is "loss or damage" within s 82. However, nothing in Sellars excuses an applicant seeking to be compensated for such loss to prove its existence. In Sellars the lost opportunity was established, the question to be decided was its measurement. The evidence before the Court does not prove the existence of a lost opportunity in this case. As Nettle JA said in St George it must be proved, not assumed. 39 Accordingly, the application must be dismissed with costs as the loss, for the purposes of s 82, has not been proved. La Trobe should pay Hay's costs, including reserved costs. I certify that the preceding thirty-nine (39) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Marshall.