Paino v MDN Mortgages Pty Ltd

Supreme Court of NSW|2009-08-24|Before: Simpson J

CITATION : Paino v MDN Mortgages Pty Ltd [2009] NSWSC 898

DECISION : (1) David Bruce Magney, solicitor, and the firm of Magney & Magney, be restrained from acting on behalf of the first defendant. (2) Parties to address on the question of costs.

CATCHWORDS : PROFESSIONS AND TRADES - lawyers - application to restrain solicitor from acting for client in which a financial interest is held - solicitor likely to be material witness - solicitor's evidence and/or conduct likely to be scrutinised - test to be applied to restrain solicitor from acting - interests of justice - order to restrain solicitor from acting for client made

Civil Procedure Act 2005 LEGISLATION CITED : Consumer Credit (NSW) Act 1995 Consumer Credit (NSW) Code

Kallinicos v Hunt [2005] NSWSC 1181; (2005) 64 NSWLR 561 CASES CITED : Mitchell v Burrell [2008] NSWSC 772 Scallan v Scallan [2001] NSWSC 1078

Cecelia Maria Paino (Plaintiff) MDN Mortgages Pty Ltd (First Defendant) Sydney Lending Centre Pty Ltd (Second Defendant) PARTIES : Christopher Riotto (Third Defendant) Helen Youssef (Fourth Defendant) Paul Scara and Joseph Trimarchi trading as Scara Trimarchi Solicitors (Fifth Defendant) Joseph Trimarchi (Sixth Defendant)

R Francois (Plaintiff) COUNSEL : S E Gray (First Defendant) N/A (Second - Sixth Defendants)

S O'Connor, Legal Aid Comission of New South Wales (Plaintiff) SOLICITORS : Magney & Magney (First Defendant) N/A (Second - Sixth Defendants)

IN THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION

20413/2007 Cecelia Maria Paino v MDN Mortgages Pty Ltd & Ors

JUDGMENT 1 HER HONOUR: By amended Notice of Motion filed on 30 July 2009, the applicant, Cecelia Maria Paino, seeks an order restraining David Bruce Magney, a solicitor, from acting on behalf of the first defendant in the substantive proceedings. 2 It is necessary to say something about the substantive proceedings. The current initiating process is an amended statement of claim filed by leave on 24 August 2009. 3 It names Ms Paino as plaintiff; MDN Mortgages Pty Ltd ("MDN") as first defendant. The document indicates that five other defendants are the subject of the proceedings, but these are not named in this document. Since the notice of motion does not concern them, it is unnecessary further to identify them. 4 So far as the first defendant, MDN, is concerned, Ms Paino seeks the following orders: "1. … that the contracts of loan and mortgage between [Ms Paino] and [MDN] (the ' Mortgages ') be declared void in whole or in part;

In the alternative, an order varying in whole or in part the provisions of the Mortgages;

An order that [MDN] refund any moneies it received in excess of its entitlements under the Mortgages as voided or varied." 5 The amended statement of claim goes on to plead a case that may be encapsulated as follows. In what follows, I have attempted to isolate, from a very lengthy pleading, that which is applicable to MDN and the issues for present determination. What follows is not, obviously, intended to involve any findings of fact. It is purely a recitation of the relevant facts alleged in the amended statement of claim. 6 Ms Paino was born in Australia in 1950 of Italian immigrant parents. (She is now 59 years of age.) She was educated to the age of 15, since when she has held various forms of unskilled employment. She is able to speak, read and write "every day English". She is married but separated from her husband and is the mother of two adult children. She has some health problems. From May 2001, when her father died, to July 2004, she cared for her disabled mother. In July 2004 her mother was admitted to a nursing home. 7 Ms Paino and her estranged husband are the joint registered proprieties of a domestic property at Riverwood, which is adjacent to the property formerly occupied by her parents. In August 2001 her mother transferred the latter property to Ms Paino. 8 Prior to the transfer, Ms Paino, acting under a power of attorney from her mother, jointly with her father executed loan documents, secured by mortgage over the property. The purpose of the borrowing was to obtain finance to pay for expenses associated with her mother's medical needs. 9 Thereafter, Ms Paino executed a series of loan and mortgage documents, the purpose of each of which was to obtain finance from a succession of financial institutions. It is probably fair to infer (from the pleadings alone) that Ms Paino sought finance successively in order to avoid enforcement of the previous mortgage. 10 The sixth mortgage in the series was entered into in about September 2004. It secured a loan in the sum of $582,000. The mortgagee was MDN. Among the associated documents was a declaration, signed by Ms Paino, that the purpose of the loan was "predominantly for business or investment purposes". That declaration was false. The consequence of a declaration to that effect is to remove the loan from the regulation provided by the Consumer Credit (NSW) Code ("the Code"). 11 The Code is, by s 5 of the Consumer Credit (NSW) Act 1995, adopted from Queensland legislation. By s 6(1) it applies to the provision of credit (and related matters) if, inter alia, "the credit is provided or intended to be provided wholly or predominantly for personal, domestic or household purposes". By s 11(2) credit is presumed conclusively not to be provided wholly or predominantly for those purposes if the debtor declares, before entering into the credit contract, that the credit is to be applied wholly or predominantly for business or investment (or both) purposes. 12 By s 11(3) that presumption is overridden if the credit provider (or any other relevant person who obtained the declaration from the debtor) knew, or had reason to believe, at the time the declaration was made, that the credit was in fact to be applied wholly or predominantly for personal, domestic or household purposes. 13 The substance of the claim made against MDN is that, at the time it gave Ms Paino the mortgage, and notwithstanding the declaration, it knew or had reason to believe that, contrary to the declaration made by her, the loan funds were likely to be applied wholly or predominantly for personal, household or domestic purposes. 14 If Ms Paino succeeds in establishing that, then the Code will operate to regulate the loan. Presumably, that confers some advantage on Ms Paino, and corresponding disadvantage on MDN. 15 Ms Paino also claims that the contract for loan (and mortgage) was an unjust contract within the meaning of the Contracts Review Act 1980. If she succeeds in establishing that, then she may be entitled to relief of the kind provided by that Act. 16 The relevant issues involving MDN therefore appear to be:

● whether (assuming the declaration was false) MDN knew or had reason to believe that the loan funds were to be applied wholly or predominantly for personal, domestic or household purposes (and, therefore, that the declaration was false);

● whether the contract of loan was unjust within the meaning of the Contracts Review Act . * * * 17 Mr Magney is the solicitor on the record representing MDN. 18 The evidence adduced on the hearing of the notice of motion establishes that he is a director of, and has a significant financial interest in, MDN. That interest arises from his directorship and 80 percent shareholding in Magney Superannuation Pty Ltd (the remaining 20 percent share being held by Mary Jane Magney, who may be assumed to be closely related to Mr Magney); in turn, Magney Superannuation holds 25 percent of the shares in MDN. 19 On that basis, it was argued on behalf of Ms Paino, Mr Magney, because he has a personal financial interest in the outcome, does not have, and can not be seen to have, that degree of objectivity and impartiality that is a necessary incident of legal professional representation of a litigant before the Court; and that it is likely that Mr Magney will be a material witness in the proceedings. 20 I was referred to many authorities establishing that the Court has power to make orders of the kind here sought. That the power does exist was not contested. In many cases, these decisions also set out the tests to be applied, and the circumstances in which the power will be exercised. I do not need to refer in detail to the many authorities cited. In two separate decisions, Brereton J has comprehensively set out the relevant principles. In Kallinicos v Hunt [2005] NSWSC 1181; (2005) 64 NSWLR 561 and in Mitchell v Burrell [2008] NSWSC 772, after considering the relevant principles, Brereton J made orders of the kind sought. 21 In the former case, Kallinicos, the application was made on the twin bases, as here, that the solicitor in question was likely to be a material witness, and that he had a perceived interest in the outcome of the proceeding. The first asserted interest came about as a result of a complicated series of transactions to which it is not necessary to detail, except that an issue arose as to whether he had acted for a company which was involved in the litigation. Brereton J concluded that the solicitor not only would "almost certainly" be a material witness, but that he might well be exposed to suit; he therefore had an interest in the emergence of the evidence. He said that there was a high degree of probability that his evidence and/or conduct would come under scrutiny, and that the propriety of his conduct was likely to be examined in the proceedings. 22 Brereton J exhaustively reviewed authorities with respect to applications of this kind. He repeated this exercise in the later case, Mitchell v Burrell, in which he stated the following principles:

"20 … I do not accept that the mere circumstance that a solicitor will be a material witness, even on a controversial matter, of itself justifies restraining the solicitor from continuing to act …

… the cases indicate … that the line is crossed only when the solicitor has a personal stake in the outcome of the proceedings or in their conduct, beyond the recovery of proper fees for acting, albeit that the relevant stake may not necessarily be financial, but involves the personal or reputational interest of the solicitor, as will be the case if his or her conduct and integrity come under attack and review in the proceedings. The presence of such circumstances will be a strong indication that the interests of justice - which in this field involve clients being represented by independent and objective lawyers unfettered by concerns about their own interests - require the lawyer to be restrained from continuing to act." 23 In Kallinicos, the principles stated by his Honour are adequately refined in the headnote, as follows: "(1) The court has an inherent jurisdiction to restrain solicitors from acting in a particular case, as an incident of its inherent jurisdiction over its officers and to control its processes in aid of the administration of justice.

(2) The test to be applied in this inherent jurisdiction is whether a fair-minded, reasonably informed member of the public would conclude that the proper administration of justice requires that a legal practitioner should be prevented from acting, in the interests of the protection of the integrity of the judicial process and the due administration of justice, including the appearance of justice.

(3) The jurisdiction is exceptional and is to be exercised with caution. Relevant considerations include the public interest in the litigant not being deprived of the lawyer of his or her choice without due cause, and the timing of the application, in that the cost, inconvenience or impracticality of requiring lawyers to cease to act may provide a reason for refusing to grant relief.

(4) In proceedings where it was likely that the solicitor for certain of the defendants would be a material witness on controversial issues of substance, and his evidence and the propriety of his conduct would come under scrutiny, such that he would be in a position in which client's interest, his own interest, and his obligation to the court might well be in conflict, fair-minded reasonably informed members of the public would conclude that the proper administration of justice required that the solicitor not act for those defendants in the proceedings."

I am happy to adopt this statement of the relevant principles. 24 It is, appropriate, however, to note a decision of Windeyer J who, applying the same principles, came to a different result: Scallan v Scallan [2001] NSWSC 1078. That case involved a contested probate suit in which the issue was the capacity of the testator to make the will. The solicitor was one of the witnesses to the will and had taken instruction for its content. 25 Windeyer J noted the argument that there existed some risk of conflict between the duty of the solicitor to the Court and his duty to his client. He observed that that proposition assumed that a solicitor might give tailored or biased evidence or even false evidence to assist a client, or to support his actions so as to negative negligence. He said that he thought that such conflicts would only arise if the solicitor had a (personal) interest in the result of the action. On those facts he dismissed the application. 26 It is not yet clear that Mr Magney will be a witness. Although a direction has been given that evidence be exchanged in documentary form, the timetable for the provision of the defendants' evidence has not yet expired. While it might be thought, in those circumstances, premature to anticipate that he will be a witness, delay in making an application of this kind may well be a factor contra-indicating the making of the order. Counsel who appeared for MDN was not prepared to give an indication as to its intention to call, or not call, Mr Magney. 27 In the present case it was also argued, on behalf of Ms Paino, that Mr Magney's interest in the outcome of the proceedings might provide an incentive to him to be less than frank with the Court (as a witness). 28 But that temptation will exist if he is a witness, whether he also fulfills the role of solicitor or not. I note that it is a serious allegation to suggest that any witness is likely to mislead the Court, and that is especially so where the potential witness is an officer of the Court, as is a solicitor. I make no finding of any risk that Mr Magney would succumb to any such temptation. I do not think the mere fact that he is potentially a material witness is a sufficient reason to make the orders sought. 29 However, the cases also establish that the important role of the solicitor as officer of the Court requires, not only that the solicitor give truthful evidence to the Court if called as a witness, but also that he or she give objective and impartial advice to the client. That is an incident of the overriding object now spelt out in statute form in s 56 of the Civil Procedure Act 2005 - the just, quick and cheap resolution of issues. 30 I am conscious that to make an order of the kind sought is likely to impose a significant financial burden on MDN. It may be supposed that the costs of the representation by Mr Magney would be at something less than commercial rates. 31 Notwithstanding that, I have come to the view that Mr Magney's personal interest in the outcome is such that, if he were to continue to act, the Court may be deprived of relevant objectivity in the preparation and presentation of the case. 32 I pause also to note a submission made on behalf of Mr Magney (or MDN, which is the party to the proceedings). This pointed to the paper value of Mr Magney's financial interest in MDN. The shares are $1 shares. 33 I agree with the submission made by counsel for Ms Paino that the submission is somewhat disingenuous. Plainly, the transaction to which MDN was a party was a commercial transaction in which MDN expected to make a profit. The paper value of the share is of no relevance to the real financial interest of Mr Magney in the outcome. 34 In all of the circumstances I have concluded that the order sought should be made. 35 I order that David Bruce Magney, solicitor, and the firm of Magney & Magney, be restrained from acting on behalf of the first defendant. 36 I will hear the parties on the question of costs. **********

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Judgment (22 paragraphs)

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Cases Cited (4)