Lawloan Mortgages Pty Ltd v Young

Blomley v Ryan [1956] HCA 81; (1956) 99 CLR 362 Commercial Bank of Australia Ltd v Amadio [1983] HCA 14; (1983) 151 CLR 447 Lawloan Mortgages Pty Ltd v Hancock and Ors [2001] NSWSC 607 CASES CITED : Lawrence v Lloyd [1930] SASR 194 Miles v Ficuga Pty Ltd (1996) ACSR 156 R v Gray; Ex Parte Marsh [1985] HCA 67; (1985) 157 CLR 351 Varga v Commonwealth Bank of Australia [1996] NSWSC 86; (1996) 7 BPR 15,052

Lawloan Mortgages Pty Ltd (Plaintiff) PARTIES : Alfred Jack Young (First Defendant) Elizabeth Olive Young (Second Defendant)

COUNSEL : M McCulloch SC / S Loughnan (Plaintiff) A Fernon (Defendants)

SOLICITORS : Hennessey & Co Solicitors (Plaintiff) Crane Buther McKinnon Lawyers (Defendants)

IN THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION

14486/2007 Lawloan Mortgages Pty Ltd v Alfred Jack Young & Anor

REASONS FOR JUDGMENT 1 HIS HONOUR: Lawloan Mortgages Pty Limited sue for possession of land, consisting of rural properties, owned by Mr Alfred Jack Young and Mrs Elizabeth Olive Young (the first and second defendant respectively), who are referred to generally as Jack and Betty. Judgment issued against Mr Young on 29 November 2007 leaving the proceedings, at that time, on foot only against Mrs Young. 2 The Court, as presently constituted, made orders on 30 April 2008 which resolved the issues between the parties. Possession has been obtained and a mortgage sale effected. It was understood that all issues were resolved thereby, but it appears that there are some residual issues between the parties that require the delivery of these reasons for judgment. These reasons will for that reason be brief. 3 Mrs Young resisted the application for possession and denied the capacity of Lawloan to sell pursuant to its rights as mortgagee of the properties. The resistance to the orders sought by Lawloan is based on three factors: a claim of "injustice" under the Contracts Review Act 1980; unconscionability; and the requirements of the Farm Debt Mediation Act 1994. Factual Background 4 There is no dispute between the parties that Lawloan is the mortgagee of the property, that Mr Young and Mrs Young are the mortgagors and that there has been default on the mortgage (assuming, for present purposes, that the mortgage is valid and enforceable). 5 The initial loan by Lawloan to Mr Young was negotiated by a broker on behalf of Mr Young. The broker had been selected by Mrs Young. Mr Young's application was for an advance of $650,000 and was secured on the properties, said to be then valued at $1.42 million. This process commenced in October 1997 during which month Mrs Young wrote to Lawloan enclosing the property valuations and a timber valuation of $3.1 million. Mrs Young, in the letter, referred to the fact that "we need the finance" (Affidavit of Michael Harvey, 21 September 2007, in Reply, Exhibit MH3). The reference to "we" must be a reference to Mr Young and Mrs Young. 6 There had been three relevant earlier mortgages. On 22 August 1989, Mrs Young mortgaged her property to the State Bank to secure a loan to Mr Young. On 27 May 1997, Mrs Young mortgaged her property to Equitiloan Securities to secure a loan to Mr Young. And on 19 June 1997, Mrs Young mortgaged her property to Big River Timbers Pty Ltd to secure a loan to Mr Young. 7 On 4 November 1997 (in the month following the commencement of the negotiations for the loan), Colonial State Bank advised Mr Young that he was in default of the loan from it, and that it was prepared to remove its mortgage and to accept in lieu an amount of $624,800 and a second mortgage, for 12 months only, for the residual of $163,000. 8 On 3 December 1997, Mrs Young sent Lawloan a letter enclosing a cheque for the application fee for the loan. The letter advised Lawloan that the valuations would follow when completed. Lawloan had previously been sent a report on Mr Young's financial status from Mr Young and Mrs Young's accountants. 9 The accountants sent a timber valuation by Sherwood Forestry Services for the timber on the land, being "Portion 16 Parish Dingle". The valuation was for $551,000. 10 On 9 December 1997, Lawloan approved the loan for $750,000 on the basis that it was a loan for 12 months at 17% per annum interest (but at 12% per annum if paid on time) and the loan would be in Mr Young's name. Lawloan's approval was faxed to the broker. 11 On 12 December 1997, Mr Young's solicitor faxed the executed loan offer documents to Lawloan. Lawloan, in the same month, received valuations for properties from the broker. Those valuations were for the properties "Texas", "Sunnyside" and "Brinerville", which were valued at $540,000, $880,000 and (excluding timber) $125,000 respectively. 12 On 29 January 1998, Lawloan wrote to the broker annexing a two-page document, prepared by Mrs Young and in her handwriting, which document referred to the timber values at the Kalang and Darkwood properties being included in the values for forestry generally and noted that it was Sunnyside and Texas "for which we need the loan." Again, "we" must be both Mrs Young and Mr Young. 13 The moneys from the mortgage to Lawloan were settled on 6 March 1998. Most of the money arising from the mortgage was paid to cover the State Bank debt ($644,250 out of $750,000) and the Equitiloan Securities debt ($20,000). 14 At the end of June 1998, Mr Young and Mrs Young applied to consolidate the $750,000 loan with their remaining debts, and on 30 June 1998 the solicitor, purporting expressly to act on behalf of both Mr Young and Mrs Young, provided Lawloan with a small ($500) fee and requested advice as to the progress on the loan arrangements. This latter request is clearly a reference to the consolidation. 15 On 27 July 1998, Mrs Young telephoned Lawloan asking about the refinancing, wanting $167,000 to pay the Bank. Lawloan advised that it was awaiting projected figures from the accountants. 16 On 30 July 1998, the accountants sent Lawloan the figures with an entry, as new funding, for $2 million (the amount of the request for the consolidated loan). 17 During August 1998, Mrs Young telephoned Lawloan on a number of occasions and, on 2 September 1998, Lawloan sent the solicitor a loan approval document for the $2 million. The loan approval was expressed as being "subject to valuation". 18 On 7 September 1998, Mrs Young telephoned Lawloan about the interest payment, in which conversation Lawloan explained the necessity to have funds cleared and therefore to receive interest payments by cheque payable to their trust account and posted to reach Lawloan by the 6th of the month. 19 On 23 September 1998, Lawloan received, by facsimile, an acceptance of the loan offer referred to in paragraph [17] above. 20 Lawloan received updated valuations for properties known as Texas, Sunnyside, Darkwood, Kalang, Brinerville and Portion 16. Those updates were received from the solicitor who, in a letter dated 14 October 1998, reiterated that he continued "to act on behalf of Mr and Mrs Young". 21 On 20 October 1998, Lawloan received a valuation for the properties Texas, Sunnyside, Darkwood, Kalang and Brinerville. For the first time, the valuer noted that two titles of Darkwood are owned by Mrs Young. The total valuation of the properties (excluding commercial timber valuation) was $2,505,000 and the valuation, including commercial timber, was $5,377,500. 22 During 1999, Mrs Young visited the finance broker on a number of occasions. During one of the conversations that occurred in one of those visits, the broker said to both Mr Young and Mrs Young words to the following effect: "I am trying to get you a cheaper loan from somewhere so that you can repay Lawloan and have some more money as working capital to carry out improvements on the land." 23 A further conversation with the broker occurred in which the broker said to Mrs Young: "I can't get in [sic] a new loan in time. However, I have been speaking to Lawloan and they have agreed to lend you $1.75 million. This will repay the existing loan. The million can be used to meet the interest and provide some working capital. It will only be for twelve months. In the twelve-month period, I will have the cheaper loan organised for you. Take this loan for a year by then I will have you another loan at a much better rate, five or six percent." 24 On 22 October 1998, Lawloan sent an amended loan offer to the solicitor for Mr Young and Mrs Young. That offer was for a private loan facility of $1,750,000 security for which was a first mortgage over Sunnyside, Texas, Hernani, Brinerville, Darkwood and Kalang. However the borrower is described as Mr Young. The loan term was for a period of one year. The security included not only registered mortgages over the aforementioned properties, but expressly included the property comprising 203.2 hectares presently mortgaged to the State Bank and included all millable and other timber. Security was also placed over plant and equipment and motor vehicles, having an estimated value of $700,000. 25 On 28 October 1998, the solicitors for Mr and Mrs Young wrote to the solicitors for Lawloan and enclosed an authority that was signed only by Mr Young. The body of the accompanying letter included the following sentences: "We understand agreement with [sic] reached with Mrs Young that interest be paid six-monthly in advance…. Any proceeds of interest would be credited toward the loan on behalf of Mr and Mrs Young." 26 Mr Young was required to repay the $167,000 to Colonial State Bank in or about November 1998 (see paragraph [7] above) and during November and December, Mrs Young and representatives of Lawloan communicated, usually by telephone, relating to the payment and enquiries about the new loan by her. On 28 January 1999, Lawloan received the timber valuation on the defendants' properties at $2,872,000 and on 23 February 1999 received a cash-flow analysis from the accountants. 27 On 8 March 1999, the solicitor for Mr Young and Mrs Young wrote to Lawloan. The letter has as its subject matter "AJ & EO Young from Lawloan Mortgages Pty Ltd". It raises a number of matters including brokerage fees and the like. There is a reference to the solicitors "client's understanding", i.e. use of the singular form, but otherwise it seems that the letter is written on behalf of both Mr Young and Mrs Young. Further, there is an express reference to one of the titles in the following terms: "We confirm the title Auto Counsul 12537 - 120 is registered in the name of Mrs Elizabeth Olive Young. Mrs Young will sign that mortgage." 28 On 11 March 1999, the loan agreement was entered between Lawloan and Mr Young to advance Mr Young $1.75 million. At the same time, mortgages were executed, being a mortgage by Mr Young over property and a mortgage by Mrs Young over different property. 29 On 16 March 1999, the solicitor for Mr Young and Mrs Young wrote to Lawloan directing the settlement cheques. The loan was settled, in accordance with the directions, on 18 March 1999. Of the $1.75 million, $750,000 was used to retire the existing loan, and most of the remainder was used to repay pre-existing debts. Some of the proceeds were used to discharge three mortgages over Mrs Young's properties, which are the subject of these proceedings. Those mortgages were discharged on 30 April 1999 and included mortgages over properties in Mrs Young's name in which the mortgagees were State Bank of NSW, Equitiloan Securities Pty Limited and Big River Timbers Pty Limited. The amounts used to discharge those loans were $176,562.38, $37,634.51 and $52,723.33 respectively. 30 The loan was intended to be a short-term loan and on and from approximately 27 September 1999, Lawloan were made aware of attempts by the solicitors for Mr Young and Mrs Young to refinance elsewhere. The terms of the loan allowed early repayment on 30 days' notice and one month's interest on payout. Some, at least, of the negotiations with Lawloan, relating to the refinancing, were conducted by Mrs Young. 31 The repayment date for the twelve-month loan to Lawloan expired on 17 March 2000. On 3 April 2000, notices under s 57(2)(b) of the Real Property Act 1900 and s 111(2)(b) of the Conveyancing Act 1919 were served on Mr Young as was a notice under s 8 of the Farm Debt Mediation Act. Mr Young was provided with a s 9 Form under the Farm Debt Mediation Act, together with a brochure explaining the mediation provisions, a check list for farmers under that Act and an extract of certain important and/or relevant provisions of the Act. 32 On 23 July 2005, Mrs Young certified her Rural Lands Return, which expressed her cattle holding as "nil stock", and inserted into the return the words "shown on AJ Young". On the same date, Mrs Young certified Mr Young's Rural Lands Return for 180 beef cattle and 8 horses. 33 On 11 July 2006, the Rural Lands Return that Mrs Young certified, was, once more, for "nil stock" and she inserted the following sentence: "There are no dividing fences, so cattle on AJ Young's property also feed on this one." 34 On 6 October 2006, Mr Young was rendered bankrupt and a sequestration order was made. 35 On 26 July 2007, Mrs Young certified a Rural Lands Return for "6 beef cattle", which were described by Mrs Young, in cross-examination, as mostly pets (Transcript p 82). 36 On 31 August 2007, the statement of claim in these proceedings was filed and a defence was filed on 2 October 2007. In early October 2007, a notice under s 57(2)(b) of the Real Property Act was served on Mrs Young. Thereafter a cross-claim was filed, as was a defence thereto, and on 29 November 2007, judgment was entered against Mr Young. 37 Apart from the six cattle referred to as "mostly pets", Mrs Young owned no other cattle, but her land was used by Mr Young to graze his cattle. On the returns that are in evidence, there were no fences between the different properties and it seems clear from the evidence, otherwise adduced, that no commercial operation was operated by Mrs Young, other than her participation in the running of Mr Young's business. Mr and Mrs Young separated in 1971, but were not divorced. Farm Debt Mediation Act Issue 38 Counsel appearing for Mrs Young submits that Lawloan has not complied with the formal steps required by the Farm Debt Mediation Act. 39 The combined effect of s 6 and s 8 of the Farm Debt Mediation Act prohibits "a creditor to whom money under a farm mortgage is owed by a farmer" from taking enforcement action, until at least 21 days after the required notice under s 8. Any action taken otherwise than in compliance with s 8 is void by operation of s 6 of the Farm Debt Mediation Act. Lawloan has not provided Mrs Young with the s 8 notice and submits it is not required so to do. 40 Section 4 of the Farm Debt Mediation Act defines a farm mortgage as including any interest in any "farm property" that secures the obligations of a "farmer". In turn, s 4 defines "farm property" as meaning "a farm or part of a farm … [or] farm machinery used … in connection with a farming operation." 41 Section 4 of the Farm Debt Mediation Act also defines a "farmer" and a "farming operation".

"'Farmer' means a person … who is solely or principally engaged in a farming operation …"

"Farming (including dairy farming, poultry farming and bee farming) pastoral, horticultural or grazing operation …"

"Land on which a farmer engages in a farming operation."

"Debt incurred by a farmer for the purposes of the conduct of a farming operation that is secured wholly or partly by a farm mortgage." 42 There is a degree of circularity in the above definitions. While some of the definitions are exclusive, others are inclusive. The definitions of "farm", "farm debt", "farm property", "farmer" and "farming operation" are exclusive. The definition of "farm mortgage" is inclusive. 43 In the context of s 4 of the Farm Debt Mediation Act, where most definitions are exclusive, it would seem that the definition of "farm mortgage" is inclusive and not exclusive: see R v Gray; Ex Parte Marsh [1985] HCA 67; (1985) 157 CLR 351 at 364-365 with whom, on this point, all other judges of the Court agreed. 44 Further, the provisions of s 6 and s 8 of the Farm Debt Mediation Act require the person seeking protection under the provisions of the Act to be a "farmer" at the time that the possession of the property or other enforcement action is sought; Varga v Commonwealth Bank of Australia [1996] NSWSC 86; (1996) 7 BPR 15,052 at 15,056, per Young J; Lawloan Mortgages Pty Ltd v Hancock and Ors [2001] NSWSC 607 at [85] per Bergin J. Further, given that a farm is land in which a farmer engages in a farming operation, the requirement of the Act applies only to, relevantly, a mortgage over land on which a person, being a person solely or principally engaged in (relevantly) a grazing operation, engages in a grazing operation. 45 The difficult question, for Mrs Young, is that the evidence does not disclose that she ever owned cattle (other than the pets) and discloses that she never operated as a grazier. The context of the definitions would exclude from being a farmer, a person who, other than on a formal or commercial basis, allows other persons to graze cattle on their land. 46 At one stage it was submitted that the mortgage in question, taken out by Mrs Young, was a mortgage to secure a debt for Mr Young, who, in turn, was a farmer. In fact, the mortgage largely, or at least partly, was for the purpose of satisfying pre-existing debts owned by Mrs Young. More importantly, even if the definitions in the Act could be so construed, the difficulty with such a submission is that s 8, upon which Mrs Young relies, requires notice only in relation to money under a farm mortgage owed "by a farmer". In other words, where a creditor seeks to enforce an interest under a farm mortgage against a person, other than a farmer, who owes money under that mortgage, s 8 does not require notice and s 6 does not void the enforcement proceedings, if notice were not given. The only source of income for Mrs Young, during any relevant period, has been the aged pension. 47 Alternatively, Mrs Young submits that the "agistment" of cattle on her property constitutes a "farming operation". Counsel who appears for Mrs Young accepts that the judgment of Dowd J in Miles v Ficuga Pty Ltd (1996) ACSR 156 is against them and invites the Court not to follow that judgment. It is said that his Honour, with respect, was incorrect, because, amongst other things, he focused his conclusion on the word "activity" rather than the term "operation". 48 In the context of s 4 of the Farm Debt Mediation Act, the term "operation" seems to involve the carrying on of an activity or undertaking: see Lawrence v Lloyd [1930] SASR 194 at 198, per Richards J. While it is unnecessary to give any conclusive or exhaustive definition of the term "farming operation", in its context the term may include an operation that is not business or commercial in its purpose, but does not include a mere acquiescence, without formal arrangement, in another person grazing cattle on land that is subject to the mortgage. On any understanding of the ordinary meaning of the term "operation" such an acquiescence does not involve the land owner in a "grazing operation". 49 In his judgment, Dowd J referred to the term "activity", probably because an "operation", being the noun from the verb "operate", implies an act or activity or the performance of some process or the exertion of some force or influence. It does not include a mere acquiescence. 50 For those reasons the Farm Debt Mediation Act does not govern the mortgage over Mrs Young's property. Contracts Review Act 51 Mrs Young seeks relief under s 7 of the Contracts Review Act which is in the following terms: "(1) Where the Court finds a contract or a provision of a contract to have been unjust in the circumstances relating to the contract at the time it was made, the Court may, if it considers it just to do so, and for the purpose of avoiding as far as practicable an unjust consequence or result, do any one or more of the following: (a) it may decide to refuse to enforce any or all of the provisions of the contract, (b) it may make an order declaring the contract void, in whole or in part, (c) it may make an order varying, in whole or in part, any provision of the contract, (d) it may, in relation to a land instrument, make an order for or with respect to requiring the execution of an instrument that: (i) varies, or has the effect of varying, the provisions of the land instrument, or (ii) terminates or otherwise affects, or has the effect of terminating or otherwise affecting, the operation or effect of the land instrument." 52 The factual circumstances of the issues between Mrs Young and Lawloan are that a solicitor purported to act for both Mrs Young and Mr Young in dealing with Lawloan. While Mrs Young is elderly, she displayed, on the correspondence between the parties, a remarkable grasp of the business and legal issues associated with the various loans. The loan from Lawloan was, at least in part, for the purpose of satisfying other debts that were due and payable and the terms of the loan itself were not particularly onerous for a short-term bridging loan of the kind in question. 53 Further, Mrs Young was not inexperienced in legal or commercial transactions, and on the evidence before the Court, she had available legal advice (and her solicitors represented her in negotiations) and she understood both the purport and effect of the mortgage. The principles to be applied by the Court in dealing with relief sought under s 7 of the Contracts Review Act are well known. The Court must apply contemporary community standards as to what is just and unjust, which, in turn, depends upon its own facts. Relief will be granted, notwithstanding that the party against whom relief is sought has acted in good faith and/or did not know of the circumstances which led to the unfairness. 54 The Court is required to have regard to the public interest and to compliance and non-compliance with the provisions of the contract sought to be impugned. Further, by the terms of s 9(2) of the Contracts Review Act, the legislature has adumbrated criteria which the Court is required to consider in dealing with the application. These include:

(b) the presence or absence of negotiation of the contract;

(c) the capacity to alter the provisions of the contract;

(d) any unreasonable difficulty in complying with the terms of the contract or the existence of conditions which are not reasonably necessary for the protection of legitimate interests of the other party;

(e) the relative economic circumstances and educational background of the parties;

(g) unfair tactics. 55 I have considered all of the above matters and all of the matters raised by Mrs Young in the proceedings, including her lack of independent income. I do not consider that any of those criteria render the contract or any provision of the contract unjust. 56 In particular, Mrs Young had the option of allowing existing mortgages to be foreclosed and/or the property sold or, alternatively, taking out a new mortgage on, what seems to be, reasonable conditions. In deciding upon taking out a new loan, Mrs Young had the benefit of both a broker and a solicitor to protect her interests. If either suborned her interests to the interests of Mr Young, then two issues arise. First, there is no evidence that any subornation of conflict manifested in the terms of the contract or the circumstances of its execution. Secondly, any such conflict or breach of duty by the broker or the solicitor was both unknown to Lawloan and any recourse arising from it is more a matter between Mrs Young and the broker or solicitor respectively. 57 Further, the notes and objective evidence that are before the Court, disclose an understanding by Mrs Young of the effect of the mortgage, an understanding of the terms of the mortgage, an understanding and appreciation of the need to enter into the mortgage, and the need to replace it with a new and longer-term mortgage at or before the time at which the principal fell due. The material before the Court also discloses a capacity in Mrs Young to negotiate on her own behalf for another mortgage or arrangement in relation to her property. 58 Lawloan's requirement for a mortgage over Mrs Young's property was not an unfair tactic in the context of the loan that was effected. Further, it cannot be said that the mortgage on Mrs Young's property was not reasonably necessary. Indeed, with the benefit of hindsight, such a proposition is manifestly incorrect. The debts were not satisfied by mortgagee sales on Mr Young's property and the power of sale over Mrs Young's property was necessary in order to protect the mortgagees. 59 On the issues of independent legal advice, much of the submissions put on behalf of Mrs Young would, if there were breaches of relevant duties, be relevant to a claim against the solicitors and/or broker and to the existence of conflict and/or a breach of the Rules of the Law Society. However, while, in some circumstances, it is necessary for a lender to ensure that an apparent conflict does not lead to the unjust imposition of terms on one of the parties to a mortgage or contract, in these proceedings the conflict is not manifest and Mrs Young displayed a sufficient understanding of the terms of the contract (and a capacity to understand and act in her own interests) that Lawloan could not be said to have acted unjustly. The contract, or a provision of the contract, is not, in the circumstances, unjust. Unconscionability 60 To the extent that unconscionability is argued separately from the relief sought under the Contracts Review Act, for the foregoing reasons, Mrs Young is not under a special disadvantage of which Lawloan has unconscientiously taken advantage (Blomley v Ryan [1956] HCA 81; (1956) 99 CLR 362 at 415). Further, unconscientious advantage has not been taken of Mrs Young at a time when her will was overborne and she was not deprived of an independent and voluntary capacity to make worthwhile judgment as to her best interests (Commercial Bank of Australia Ltd v Amadio [1983] HCA 14; (1983) 151 CLR 447 at 461 per Mason J). Nor was her disability, if any, sufficiently evident to make the actions of Lawloan in accepting her execution of the document unfair or unconscientious (Amadio, supra, per Deane J at 474). Conclusion 61 For the foregoing reasons, the Court considers that the Farm Debt Mediation Act does not apply to impose conditions precedent to the enforcement of the loan. Further, the terms of the mortgage and the circumstances of its making or the circumstances of the contract do not render the contract or any provision of it unfair. 62 For the foregoing reasons, orders have been made and the following further orders are made:

(ii) The parties are at liberty to approach the Court for an order as to costs and/or any consequential order based upon these reasons for judgment. Such approach must be within 14 days and made to my Associate.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.