Landa v Perpetual Trustees Victoria

Judgment 1The Plaintiff is a medical practitioner. He is the controller of various private companies: Heperu Pty Ltd ("Heperu"), Kirisi Holdings Pty Ltd ("Kirisi") and two others. 2In 2001 he was introduced to Dominic Cincotta. Mr Cincotta was the financial advisor who acted for and invested monies for the plaintiff's sister-in-law and other friends. These relatives and friends spoke very highly of him and how well he was able to produce income. 3The plaintiff and Mr Cincotta became friendly. The plaintiff was encouraged by Mr Cincotta to invest with Perpetual Trustees Australia through Mr Cincotta and the company with which he was associated, Morgan Brooks. In about August 2001, Mr Cincotta told the plaintiff: "I will invest your money with Perpetual Trustees Australia, you will get 8% per annum paid monthly. Your money will be at call. For every $1,000,000 invested you will get 1000 Perpetual Trustees Shares." 4The plaintiff made an investment and received what Mr Cincotta promised. About a month later Mr Cincotta said to the plaintiff: "Do you have any property that is not mortgaged?" The plaintiff said he had a unit at Bondi and another unit at Pyrmont. Mr Cincotta said: "I can arrange mortgages through Perpetual and that money can be reinvested at the same rate as the cash already invested with Perpetual. This is easy. I do a large amount of this with Perpetual Trustees Victoria through Morgan Brooks. You would be borrowing at 6% and getting 8%". The plaintiff then mortgaged his units, borrowing $650,000 from Perpetual Trustees Victoria Ltd. Later he mortgaged his home for $1 million. He thus borrowed $1.65 million at 6 per cent. When the monies were paid by Perpetual Trustees Victoria Ltd, the plaintiff intended to invest them with Perpetual Trustees Australia, its holding company, at 8 per cent. The way in which this was organised was that the loan monies were paid to Mr Shacklady, a solicitor of a firm called Coopers. At the plaintiff's direction they were then paid out to Mr Cincotta to invest. 5Unfortunately for the plaintiff, Mr Cincotta misappropriated the lot. The accounts that Mr Cincotta was rendering were completely fictitious. The "free shares" in Perpetual Trustees were actually shares that Mr Cincotta bought off the market. It would appear that he was paying for this and was also paying interest out of his investors' funds. 6Accordingly, at the end of the exercise, the plaintiff lost his $1.65 million. Perpetual Trustees Victoria is seeking possession of the mortgage properties. 7There has been previous litigation concerning these matters. The most significant are Heperu Pty Ltd v Morgan Brooks Pty Ltd [2007] NSWSC 1438 (Palmer J); on appeal: Heperu Pty Ltd v Belle [2009] NSWCA 252; 76 NSWLR 230 and Heperu Pty Ltd v Belle (No 3) [2013] NSWSC 1088. 8Dr Landa, or one of his companies, has sued Morgan Brooks, Mr Cincotta, Mrs Cincotta (now Ms Belle) and various banks. Mr Cincotta became bankrupt and indeed served time in prison for his frauds. He has now been released and gave evidence on behalf of Dr Landa in this case. Some monies have been collected from other persons sued, but Dr Landa is still experiencing a large shortfall and has the threat of possession proceedings over his home and other properties. He now sues Perpetual Trustees Victoria on the basis that Mr Cincotta was its agent when he perpetrated the frauds, and accordingly, the principal is liable for the sins of its agent. 9The basal question in this litigation is whether what Mr Cincotta did in defrauding the plaintiff was done whilst he was the agent of Perpetual Trustees Victoria acting within the scope of his actual or apparent authority. 10I heard the case on 19 and 20 August, 2013, Mr G Burton SC and Mr T Bray appearing for the plaintiff and Mr M Ashurst and Mr MP Cleary appearing for the defendant. 11The basal facts are not in dispute: I will come to them shortly. However, as Mr Burton SC submits, Mr Cincotta's actual or apparent authority must be assessed on the entire factual matrix, including the relationship between Perpetual Trustees Victoria, its mortgage manager, Interstar, one of its mortgage originators, Morgan Brooks, and (either directly or via Morgan Brooks) Mr Cincotta himself. 12It is trite law that use of the word 'agent' may lead to confusion. 13The High Court said in Peterson v Moloney [1951] HCA 57; 84 CLR 91 at 94-95: ... an "agent" is a person who is able, by virtue of authority conferred upon him, to create or affect legal rights and duties as between another person, who is called his principal, and third parties. ...the mere employment of such a person under the designation of agent does not, apart from the general rule that the employer will be responsible for misrepresentations made by him, necessarily create any authority to do anything which will affect the legal position of his employer. ... [T]he law does not imply from the mere fact of employment to find a purchaser a general authority to do on behalf of the employer anything which may be incidental to the effecting of a sale. 14There have been recent reminders of the danger in the loose use of the term "agent" in two leading cases. 15In A v B1 (No 2) [2012] WASC 383; 271 FLR 122, at 167 [208] - [215], Edelman J noted that the law of agency was bedevilled with confusing terminology and that even the word "agency" can mislead. 16In Tonto Home Loans Australia v Tavares [2011] NSWCA 389; 15 BPR 29,699, Allsop P (with whom Bathurst CJ and Campbell JA agreed) discussed the concept of agency, at 29,740 [170] and following in connection with the liability of a lender for the acts of a fraudulent mortgage originator. Even though the originator was a key cog in the lender's organisational or enterprise structure, this was insufficient to enable the court to find that it was the lender's agent. 17In A v B1 (No 2) at [247] - [252], Edelman J pointed out that whilst there have been many attempts recorded in the law reports to make financiers liable for the fraud of finance brokers, those attempts have almost always failed. An exception is the Violet case which I am about to consider. First, it is necessary to consider the facts, and particularly, the relationship between Mr Cincotta and Perpetual Trustees Victoria. 18On 7 September 1993, Morgan Brooks entered into a Loan Origination and Management Agreement (usually referred to as a LOMA) with Interstar Management Pty Ltd whereby Morgan Brooks was given the rights to provide a submission to Interstar requesting Interstar to arrange for Perpetual Trustees Victoria to advance monies on mortgage. The LOMA also empowered Morgan Brooks to act as the servicer, manager and supervisor of mortgages that were granted. 19There were various agreements between Morgan Brooks, Mr Cincotta and his company (usually referred to as ACN067) whereby Mr Cincotta and ACN067 were appointed agents of Morgan Brooks for the Coffs Harbour area and the Double Bay area. This imposed on ACN067 and Mr Cincotta a duty to market and promote Morgan Brooks' products and services. 20On the other side of the record, Perpetual Trustees Victoria appointed a mortgage manager. At the relevant time Interstar had overall responsibility for arranging, dispersing and managing secured loans. Interstar in turn outsourced origination, account management and other functions to entities such as Morgan Brooks. Morgan Brooks, as I have shown, in turn authorised people like Mr Cincotta to conduct at least the arranging aspects of these functions. 21Mr Burton says that the documentation between Perpetual Trustees Victoria, Interstar, Morgan Brooks and Mr Cincotta established a legal framework for a system in which Morgan Brooks and its agent Mr Cincotta were, and were held out by Perpetual Trustees Victoria to be, entered or represented as representatives, promoters and protectors in the interests of Perpetual Trustees Victoria. 22Not only that, but there is evidence that Interstar's staff allowed Mr Cincotta special access and gave him some special dispensations from its ordinary procedures. The latter enabled him to mask some of his frauds. 23I will now pass to a separate question of fact. 24In about February 2003, Dr Landa requested a withdrawal of $1 million from his Heperu offset account and asked that that money be paid to Brutone Pty Ltd as a loan. Mr Cincotta obliged. 25The arrangement with Brutone was that the loan would be repaid by instalments of $100,000. Dr Landa asked Mr Cincotta to use these repayments to reduce the loan from Perpetual. 26A series of payments of $100,000 were made to Mr Cincotta up to 7 November 2003, all from McBurney & Partners Chartered Accountants, who were Dr Landa's accountants. All of them say: "this payment is reduced $1 [million] loan Barry currently has with Morgan Brooks." The payments are referred to as the "UTT monies"; UTT being an associate of Brutone. 27On page 177 of the plaintiff's Exhibit Book is a document dated 18 November 2003 with a notation that was faxed on 20 November 2003. In that letter Dr Landa says to Mr Cincotta that he needs to change the procedure with respect to his investments in and loans from Perpetual Trustees. In a hand written note at the bottom of the letter he says: "if I don't restructure, my tax will be horrendous. We will redo it in my name and not the company's." Dr Landa asks Mr Cincotta to discharge all the loans using the monies invested in Heperu's name which he calculates will leave about $550,000 invested. This of course was impossible for Mr Cincotta to do and the fraud was discovered shortly thereafter. 28The plaintiff's case is that his accountants gave instructions to Mr Cincotta to use the monies, which the accountants had deposited in the Morgan Brooks account to reduce the $1 million loan on Dr Landa's home. 29In Mr Cincotta's affidavit of 31 May 2013, at [124] and following, he acknowledges that the UTT monies he received were $769,994.84. He acknowledges that he did not use the funds to pay down the loan but misappropriated them. 30However, he says at [127] that some time after he issued the statement to which I have already referred, Dr Landa phoned him and said: "My accountants have checked the statements and the money from Warrick (referring to the UTT payments of $100,000.00 per month) has not been paid off the home loan but paid into the offset account." 31Mr Cincotta said he replied: "I have invested that with Perpetual. If you use the money to repay the loan that is dead money. Use the money to get interest at 8% plus the Perpetual shares." 32In cross-examination Mr Cincotta said that he convinced Dr Landa that that was the way to go. 33I believe that I should accept that evidence from Mr Cincotta. It is consistent with Dr Landa's letter of November 2003 to which I referred. I agree with Mr Ashurst SC that the figures in Dr Landa's November letter are only consistent with what Mr Cincotta says. 34Accordingly, the monies were misappropriated by Mr Cincotta as a result of Dr Landa agreeing to have the monies reinvested in what he thought was the offset account, rather than anything to do with Perpetual Trustees Victoria. 35Mr Burton put, and I take this almost verbatim from his closing oral submissions (T55.32-.46): ... the question, then, becomes does that person, who is clearly seen as the agent of a custodian in arranging a packaging of these loans, confer authority on the intermediary between that person or any broker or the borrower itself? The intermediary in this structure is usually known as the aggregator, the administer or the manager, or more usually, and in this context, the originator. The originator is someone who effectively packages, that is, presents, individual loans as an application for the mortgagee to consider via its manager, being [Interstar]. That function in the past would have perhaps been done in-house by the mortgagee being presented by a broker. But we now have these two intervening. The question becomes why should there be any difference in the legal incidence when the structure is for the commercial benefit of the mortgagee who has to act through other people by the choice of structure that that person has sought to establish, being the outsourcing? And the answer that is primarily given is, well, the mortgagee...has [so] arranged its affairs. 36Mr Burton says that none of these details were ever published to the potential mortgagor. Accordingly, a tentative mortgagor would see and participate in and (at least implicitly) rely upon the structure of which the originator was an integral representative part. Thus, the potential mortgagor would not know about the unpublished limitations on the responsibility between the intermediary and the putative secured lender. 37This structure gave those performing the outsourced functions an opportunity to abuse the power they were given whilst purporting on the face of things to quarantine from responsibility the party contracting with the borrower. The mortgagor was the victim of this abuse. In such circumstances, it is a necessary conclusion that the intermediary who is put in place for the purposes and benefits of another is actually or apparently authorised by that other, to perform those activities in dealing with third parties, who may then as a consequence of those activities contract with that other. 38Mr Burton says that his propositions are founded on recent authority, particularly the decision of the Victorian Court of Appeal in Violet Home Loans Pty Ltd v Schmidt [2013] VSCA 56; 93 ACSR 205, especially at [67] - [69]. 39However, in the Violet Home Loans case at [31] the Court of Appeal noted that: The Judge found that Violet was acting as Perpetual's agent in respect of the loan. That issue was hotly contested at trial but the Judge's finding is not challenged on this appeal. 40That means that for the vital question for the present case, one must look to the first instance decision in that case, which is reported as Perpetual Trustees Australia Ltd v Schmidt [2010] VSC 67, a decision of John Forrest J. 41The learned judge considers the matter at [142] onwards. The key paragraph is [152] (omitting citations): The securing of Mr Schmidt's application and the processing of the loan through [the mortgage manager] was all to Perpetual's benefit. As the loan contract made clear [Violet Home Loans] managed the loan contract and the security and, was authorised "to exercise all the powers, rights and functions of Perpetual under your loan contract and the securities on its behalf"; the other terms of the loan's contract as set out at [103] and [104] demonstrate that Perpetual's relationship with the client was managed exclusively by [Violet Home Loans]. It was, I think, more than just a conduit between Perpetual and Mr Schmidt. [Violet Home Loans] was, to all intents and purposes, Perpetual's right hand in procuring the loan and managing it after the funds were released ... 42His Honour then said at [154] that the totality of the relationship demonstrated that Violet Home Loans was in truth, Perpetual's agent. 43Do the facts and circumstances and documentation in the instant case, lead to a similar result? 44With respect, Mr Burton's focus on Perpetual's organisational structure runs against the warning given by the Court of Appeal in Tonto that the lender's organisational structure is not the key factor in these cases. What needs to be shown is how the originator was authorised or was held out by the lender to be a person for whose acts the lender must bear responsibility. 45I do not consider that the acts of the lender, including any impetus it may have provided to Mr Cincotta's ability to make borrowers think that he was an integral part of Perpetual, are sufficient to establish agency in the relevant sense. 46There is another issue here to which I should refer, though in the outcome it is of no moment. Mr Ashurst says that Dr Landa is now trying to take a completely different tack to the facts as compared to what he did in the Heperu litigation commenced before Palmer J. 47Mr Ashurst points out that the Court of Appeal in VACC Insurance Ltd v BP Australia Ltd [1999] NSWCA 427; 47 NSWLR 716 at [32], makes it quite clear that a litigant cannot at the one time assert that X is liable to Y for the amount given in a previous judgment and also dispute a matter which increases the amount of that judgment. It is an abuse of process to succeed in Court A on the basis of fact X and then subsequently to argue in Court B that X is not correct. 48I accept the principle of course, but in the light of what I have said earlier, it has got no part to play in this litigation. In any event, I am not convinced that Dr Landa has completely changed tack. 49Although the agency point was Dr Landa's main point, he also relied on the Contracts Review Act 1980 (NSW). 50Almost by way of a strike out defence, the defendant says that the Act cannot apply because s 6(2) makes it clear that it does not apply to a business transaction. Mr Burton's response was that there was a difference between a business transaction and an investment. 51The sub-section reads, so far as is presently relevant: A person may not be granted relief under this Act in relation to a contract so far as the contract was entered into in the course of or for the purpose of a trade, business or profession... 52I was referred to the decision of Bellew J in GE Mortgage Solutions Limited v Fassos [2012] NSWSC 1446. At [134], Bellew J said (omitting citations): The question of the application of s 6(2) must be viewed as a matter of substance and not form ... The words "trade, business or profession" are necessarily very wide and cover the whole gamut of professional and commercial activity. 53His Honour cited authority and decided that the relevant transaction was part of a business of investment in property, and accordingly, that the Act did not apply. 54Mr Ashurst says that case is directly on point. Mr Burton says that there must be a distinction between a business of investment and a mere investment. I agree, however, it is a question of fact as to where the line is to be drawn. 55What is a business is a very awkward question. 56In Town Investments Ltd v Department of the Environment [1978] AC 359, 383, Lord Diplock said: The word "business" is an etymological chameleon; it suits its meaning to the context in which it is found. 57The early editions of Stroud's Judicial Dictionary of Words and Phrases set out a host of cases where courts have attempted to define "business". The current edition has abandoned this exercise as of little value because context is so important. 58One of the cases referred to in the 4th edition of Stroud is Re Wallis; ex parte Sully (1885) 14 QBD 950 where a barrister had a vegetable and flower garden in his country estate. Even though he sold some of the surplus to passers by, the court held that this activity was not a business. 59In Re Pszon [1946] 2 DLR 507 at [11] a Canadian court said that there were three elements usually found in a business: an expenditure of time, attention and labour; a realisation that debts would be incurred and paid; and an expectation of profit. This is clearly not a test that can produce realistic results in every case, but, if one applies it here, Dr Landa was not expending any time, attention or labour. Nor was he expecting to be paying any debts in connection with the enterprise, except, of course, interest. 60Dr Landa was expecting a profit. However, there are cases which show that in some contexts the word 'business' is very wide and one can carry on a business even if it is not one's main activity and even if it does not in fact produce a profit or was meant not to make a profit. (For example, a school run by a not-for-profit charity). 61I agree that the mere fact that a person is an investor and does not devote time and attention to the management of the investment does not always mean that the person is not operating a business. In Inland Revenue Commissioners v Desoutter Bros Ltd (1945) 62 TLR 110, the taxpayer gained some profits from investments apart from income from its core business. At that time in England business income was taxed at a higher rate. The court held that the investment income was business income, though the court said that the question was one of fact in each case. 62Thus, with respect, I do not consider that I can follow the approach taken by Bellew J in GE Mortgage Solutions Limited v Fassos. Unfortunately, the question must be decided in each case as one of fact, rather than by applying a formula. 63As the question is one of fact, this leads to the question as to whether on the facts of the present case, "the contract was entered into in the course of or for the purpose of a trade, business or profession". 64Dr Landa's main profession was as a medical practitioner. However, he was dealing in very large sums of money. This is not the case of a person who happens to win the lottery or receives a redundancy payment and invests that money in a fixed deposit for six months. That situation would not be a 'business'. But when the amounts are large, and when as here there were three transactions of mortgaging properties as well as subsidiary transactions, bearing in mind that the word 'business' often has a wide meaning, it is open to conclude that Dr Landa's transactions with Mr Cincotta were for the purpose of a business of investment. 65(I should note here that it is unclear whether in fact it was one of Dr Landa's companies that made some of the investments, but no point was taken on this if it be the case.) 66Should I so conclude? 67In Tonto, s 6(2) is not mentioned at all. Presumably this is because no one relied on it. Yet the activities of the borrower extended beyond merely borrowing money to purchase a house. 68Although the case is a borderline one, I believe that one must construe this remedial legislation widely, that the focus of s 6 is to exclude what is the ordinary operations of a business, trade and profession, and that the section is not aimed at people's profit making on the sidelines at least where they are not actually expending effort in acquiring income or capital. 69I do not consider that Dr Landa was doing more than investing. His contracts were not in the course of or for a business, trade or profession. 70Thus, I need to consider whether the contract was unjust. 71A contract may be held to be unjust under the Contracts Review Act because of the way it was made or because of the way it operates or both: West v AGC (Advances) Ltd (1986) 5 NSWLR 610, 621. 72The present case does not fit neatly into either category, but, as the plaintiff's success in Tonto shows, this is not fatal. A contract may be unjust if there is fraudulent or misleading conduct practised upon the plaintiff even if the perpetrator is not the agent of the defendant. 73The Act in s 9 provides a list of matters which the court must take into account when considering making an order under the Act, but, again, this case stands apart from the usual case. However, I have considered the statutory factors. 74The plaintiff, Dr Landa is a highly intelligent man and apparently an experienced investor. The contract he entered into with Perpetual contains no unjust provisions, nor did it operate oppressively. The loss of Dr Landa's investment occurred not because of any unjust contract, but because he was deceived by Mr Cincotta. 75Accordingly, in my view, Dr Landa's claim fails. 76Because of this, it is unnecessary to deal with questions of quantum, but I should note that the parties did agree on quantum and that is in a document which was handed to me after the argument, and which I will leave with the papers in case the matter goes further. 77The only other point I need consider is a ruling on evidence. 78The plaintiff produced evidence principally from a Mr Sendro as to transactions that Mr Sendro put through Mr Cincotta. The purpose of this was to show that the same modus operandi was employed by Mr Cincotta with investors generally as was employed in the fraud on Dr Landa. 79Mr Ashurst objected to this evidence. 80Section 97 of the Evidence Act 1995 (NSW) provides that evidence of tendency that a person might act in particular way is not admissible unless the party seeking to adduce the evidence gave reasonable notice in writing of the intent to adduce the evidence, and the Court thinks that the evidence will, either by itself or having regard to other evidence, have significant probative value. 81It seems to me where cases are being tried on affidavit, the fact that an affidavit is served containing this evidence, is sufficient notice within s 97 as to the evidence that is to be adduced. 82My impression when I read the material was that it was not of significant probative value. All it did was to show that with respect to other associates of Dr Landa, Mr Cincotta used the same fraudulent method. The fraud is now admitted and the basal question is whether it was committed by an agent of the mortgagee or whether it caused the relevant contract to be called unjust. Accordingly, my inclination was to reject it. 83However at the first day of the trial a compromise was reached that the objection would be the subject of a ruling in my final judgment. I was assured that its admission would not affect cross-examination. 84Mr Burton argued that the material was relevant; not to show tendency but to show generally how Perpetual Trustees Victoria structured its business and how the organisation worked. On more material consideration, I think that it probably is admissible for that purpose. However, it does not seem to me that is of very much weight because it does not add anything to what was already apparent in the uncontradicted evidence of what happened with Dr Landa. However, for the record I admit the evidence; that is, the evidence that was objected to in the defendant's Notice of Objections to Evidence based on s 97 of the Evidence Act. 85For the above reasons, the plaintiff's case must fail. It is conceded that if this happens, the defendant is entitled to orders on the cross-claim. 86I will stand the matter over for Short Minutes to be brought in on a date convenient to counsel. As part of the properties to which the mortgagee is entitled to take possession and sell is Dr Landa's home. In accordance with usual practice I would postpone the orders for possession for four to six weeks, or perhaps longer, depending on what evidence is before me when the Short Minutes are brought in.