National Australia Bank Limited v McFarlane [2002] VSC 116

Supreme Court of Victoria|2002-04-11|Before: Byrne J

Banks and Banking - mortgage - sufficiency of consideration - whether loan made in breach of duty to customer - question of fact.

These are my reasons for judgment in proceeding No. 6450 of 1994 in which the National Australia Bank is plaintiff and Malcolm James McFarlane and Jill Elizabeth McFarlane are defendants, and in proceeding No. 6451 of1994 in which the National Australia Bank Ltd is plaintiff and Mr McFarlane alone is the defendant.

Following the conclusion of this trial, Mr McFarlane, who conducted the case on behalf of himself and his wife, handed to me a series of 25 questions which he offered for my assistance in dealing with the issues and identifying the issues in this case. With respect to these questions, I will direct that they remain on the court file. I do not propose to address them in the terms in which they are presented, and in some cases I will not address them at all. I will address the issues of law which arise in the course of my deciding this case, and only those questions of law that are necessary for me to decide this case.

In these two proceedings, the plaintiff, National Australia Bank Ltd (whom I shall refer to as "the Bank"),seeks possession of three rural properties in northern Victoria. Its entitlement to possession depends upon its rights as mortgagee under three mortgages whose details are as follows:

[diamond] Mortgage dated 21 January 1978 granted by the defendants, Mr and Mrs McFarlane, registered H81003 over a block of 531 acres or thereabouts being part of the property known as Mystic Park, Kunat and being the land more particularly described in Crown Grant Volume 6632 Folio 238.

[diamond] Mortgage dated 19 September 1988 granted by Mr and Mrs McFarlane registered P207655J over 610 acres or thereabouts at Angle Road, Kunat being the land more particularly described in Certificate of Title Volume 7504 Folio 119.

[diamond] Mortgage dated 19 September 1988 granted by Mr McFarlane registered N941872R over 531 acres or thereabouts being part of the property known as Mystic Park and being the land more particularly described in Crown Grant Volume 7750 Folio 008.

The Bank has made out its formal proofs, it bearing the burden of proving those matters. It has proved the Certificates of Title to the land, the execution of the mortgages, the amount of the indebtedness of the McFarlanes, their default, and the necessary demands. It is clear that the McFarlanes have not repaid the debt and they remain in possession of the properties. If this were all, the Bank would clearly be entitled to the orders which it seeks.

I turn now to the matters which the McFarlanes raise against the Bank. These are the matters which Mr McFarlane addressed orally and which are contained in a document entitled "Outline of Evidence" which was handed to me by him on Day 2 of the trial and which also I direct be placed on the court file. A number of these matters can be dealt with shortly.

The defendants contend that the Bank is not a lawfully registered corporation. A certificate is in evidence showing that the National Bank of Australasia Ltd was incorporated under another name in 1897. The matters alleged in the outline of evidence on this question did not support any argument which persuades me that I should not act upon this certificate. There is no substance in the point.

The defendants next contend that there was no lawful consideration given for the mortgages as the Bank did not advance the money claimed but only created a credit in the accounts of the McFarlanes. The factual basis for this submission was provided by the evidence of Michael Wataszczuk, who was employed by the Commercial Banking Company of Sydney between 1966 and 1988. He told me that he had experience in the practice of banking in those years rising to the position of manager. He advanced the surprising proposition that a customer who borrows money from a bank upon the security of a mortgage, like the McFarlanes in the present case, is in fact a lender to the Bank. As best I understood him, he based his conclusion on the fact that the Bank, as lender, does not in fact lend money, that is, cash, banknotes or bullion, but merely creates a book entry. This, he said, was a fraud on the customer who believes that they are receiving a loan. Unless the supposed lender in a transaction such as the present hands over bullion, banknotes or coin, he continued, the mortgage entered into is invalid. It is apparent to me that this is arrant nonsense. It has no regard to the legal obligations which are created by a bank loan; it ignores the reality of modern commerce where it is money, in the broad sense of that term, including choses in action, and not only gold, banknotes and coin, or indeed legal tender, which plays a most important part.

I was referred also to the decision of Justice of the Peace Martin V Mahoney in First National Bank of Montgomery v Daly decided in 1969 in the Justice Court, Township of Credit River, County of Scott, State of Minnesota in the United States of America. I have read this decision with care. This is not an easy task as its procedural aspects are unfamiliar to an Australian practitioner and its logic is bizarre. Insofar as His Honour relied upon the provisions of the Constitution of the United States of America, the Constitution of the State of Minnesota and the laws of the United States, these precepts have no application in Victoria. I am not bound by this decision. In any event, I am not persuaded that His Honour's reasoning is valid.

The Bank in this case provided the money required by the McFarlanes, permitting them to use it to discharge their own liabilities, notably their liability to pay about $150,000 under a contract of sale for the purchase of the Angle Road property in 1988. The fact that the money was not provided in bullion, coin or banknotes is beside the point. If, which I very much doubt, this is contrary to the United States law, it is certainly not prohibited by the law of the State of Victoria or that of Australia. Sufficient consideration has been provided for the mortgages. There is no substance in the consideration point.

The next point is the stamp duty point. It is said that the stamp duty is not paid on the mortgages. The evidence shows that the primary security document was alien dated 28 April 1978 upon which duty was in fact paid from time to time as the loans to the McFarlanes were increased. Duty on the mortgages was paid as on a collateral security. There is no substance in the stamp duty point.

I turn now to the counterclaim. The evidence showed that Mr McFarlane was made a bankrupt in 1998. He remains a bankrupt. It was accepted before me, however, that he might raise the matters in the counterclaim to extinguish his indebtedness to the Bank in defence to the claims of the Bank to enforce its security. The allegations which he and his wife make may be shortly stated.

In early 1988 the McFarlanes were longstanding customers of the Bank and dealt with its Swan Hill branch. They then owed to the bank $80,000 on a farm development loan and had an overdraft of about $20,000. In mid-1988 they borrowed a further $150,000 to purchase the Angle Road property from Ian Archibald Alexander and his wife, Lynette Joy Alexander. The Bank provided the McFarlanes with all of the funds required for the purchase of this property. Their total indebtedness then became of the order of $280,000.

The Alexanders were also customers of the Bank but dealt with the Lalbert branch. They had an overdraft limit of $45,000 and in 1988 they were trading within that limit.

The McFarlanes contend that their decision to purchase the Angle Road property from the Alexanders was the result of the recommendation of the Swan Hill branch manager, Ian William Murphy, that they should make the purchase and the result of his agreement to provide 100 per cent of the purchase price. They contend that this advice was in breach of a duty of care, in breach of fiduciary duty and fraudulent. What they say is that the Bank pressed them to make the purchase because the Alexanders were in financial difficulty, as the Bank knew, and that the Bank saw its position as more secure if the indebtedness of the Alexanders was in this way shifted to the McFarlanes.

The evidence showed without any doubt that there was no factual basis for this contention. The Alexanders were not in financial difficulties in 1988. They said, and I accept, that their decision to sell was the result of personal considerations not financial pressure. The manager at the Lalbert branch of the Bank, Ronald James Rose, confirmed this and said that he had no communication on this matter with the Swan Hill branch. Mr Murphy, the manager at Swan Hill, said that he had no communications with the Lalbert branch and that he was not affected by any belief that the Alexanders were under any financial pressure to sell. He rejected the suggestion that he made any recommendation adverse to his customers' interest in order to advantage the Bank. I accept his evidence.

The evidence all pointed in the same direction. The Alexanders decided in May 1988 to sell the Angle Road property and to cease carrying on farming on their own behalf. They invited and received offers from their neighbours. It seems that the availability of the property for purchase was brought to the attention of the McFarlanes. Mr Alexander mentioned his decision to his brother-in-law Gordon McFarlane, who was a stock and station agent and also a cousin of Mr McFarlane. Mr Gordon McFarlane arranged or participated at a meeting between Mr Alexander and Mr McFarlane who was a farmer keen to enlarge his landholding. Mr McFarlane about this time went to the Swan Hill branch and told Mr Murphy of his intention to buy, asking if the Bank would assist him. Mr Murphy showed some interest and, at a meeting said to have taken place on 19 July 1988, he suggested that Mr McFarlane go away and prepare some financial projections to support the loan application. This Mr McFarlane did, and on 3 August a formal loan application was submitted to the Bank. In it, Mr Murphy records, the expectation of the customers that they would net $50,000 plus as extra income by reason of the purchase. It is likely that Mr Murphy gave his customers some reason to be confident that the loan application would be approved, for the McFarlanes signed a contract dated 8 August 1988 to purchase the Angle Road property for $143,574.71, subject to finance approval within seven days. Mr Murphy agreed to make the necessary loan upon the security of the existing 1978 mortgage and a mortgage over the balance of Mr McFarlane's land at Mystic Park and over the Angle Road property. And so the purchase was made. Settlement of the purchase was effected in September although the McFarlanes had been permitted to sow crops before that date.

Notwithstanding the expectations of the McFarlanes in August 1988, the purchase of the Angle Road property turned out to be a hazardous venture. The McFarlanes' trading figures disclosed in their tax returns show that in the years after the purchase their total income from farming increased substantially and then fell back with a slump in commodity prices. The increased sales figure was, however, more than offset by increased operating costs. Furthermore, finance costs also increased substantially, not only because of the increased borrowing, but also because these were years in which interest rates generally increased very dramatically. In the year 1988/89, the McFarlanes actually made a net loss of about $5,000 and in the years that followed their net profit was not much more than it was before the purchase of the Angle Road property. Finally, in the same years the McFarlanes' own drawings increased substantially. All of this meant that they were, in the years 1989 to 1991, living well beyond their means. They were in serious need of more working capital and unable to reduce their debt as they had budgeted. Moreover, land values dropped in the area so that lenders became anxious about their security cover. By 1994 the McFarlanes were in default and notices to pay were given in April of that year.

Regrettably, the McFarlanes appear not to have accepted, in 1994 and following, that this state of affairs was the consequence of a decision made by them as responsible adults - a decision which carried the risk of loss which unfortunately came to pass. They seek to fasten the blame for their present predicament, not upon their own decision to enlarge their landholding; not upon their own erroneous profit projections; not upon the vicissitudes of the seasons; not upon the vagaries of commodity prices; not upon the unexpected increase in interest rates; not even on their own rate of personal expenditure which exceeded their income. They blame the Bank for their financial difficulties.

They fail to acknowledge that in farming, like in any business, financial decisions to expand sometimes carry risks of failure. It is not for me, on the limited evidence before me, to attribute a cause to this financial failure. It is sufficient that I conclude, as I do, that it was not the consequence of any breach of any duty or other wrongful act of the Bank. I specifically find, for it is a serious allegation, that the Bank and its Swan Hill manager, Mr Murphy, have not been shown to have been guilty of fraud or breach of any fiduciary duty to their customers, the McFarlanes.

I should add that the McFarlanes have claimed losses which they have quantified at a little over $750,000. It is not necessary for me to enter upon these matters, having regard to my conclusion that they have not made out their case against the Bank. I should, however, mention that I am not satisfied that the figures that they have claimed to have lost have been established. Nor is this a case for non-pecuniary damages which they seek in their counterclaim.

It follows from all of this that the allegations made in by the McFarlanes in their counterclaim and in defence to the Bank's claims have not been substantiated. The Bank is, therefore, entitled to the orders for possession that it seeks.

The Bank puts an alternative claim which, likewise, is not necessary for me to consider. But in deference to the evidence that has been led, and the submissions made on it, I will venture briefly my conclusions upon it. This claim depends upon a settlement agreement achieved, it was said, following a mediation in 1999. The position is that following the negotiations a written offer was submitted signed by the McFarlanes. In due course the Bank, through its solicitor, wrote accepting that offer. The offer required the approval of Mr McFarlane's trustee in bankruptcy, and that was duly forthcoming.

The McFarlanes, whether because they were unable to understand the terms of the offer; whether they were mistaken; or whether perhaps they were right in their interpretation of the written offer, raised with the solicitors for the Bank a different view of the effect of the settlement, that is, different from that taken by the Bank. This matter caused them to write in November to the Bank setting forth their position. The Bank solicitor regrettably terminated the whole matter rather abruptly, and accordingly the matter did not proceed. No documentation, as the settlement contemplated, was submitted to the McFarlanes for them to sign or not to sign.

In the circumstances, I am unable to conclude that the attitude of the McFarlanes in November 1999 was such that the Bank was excused from itself taking the steps which were contemplated by the terms of settlement. This preludes it from enforcing the settlement by specific performance, as it seeks. If it were necessary, therefore, to do so, I would reject the Bank's alternative claim.

I leave the matter then with the conclusion that the Bank has made out its entitlement to the orders for possession.

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