Permanent Custodians Limited and Anor v King and Ors

Permanent Custodians Limited and Anor v King and Ors - [2009] NSWSC 600 - NSWSC 2009 case summary — Zoe

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Late amendments of the claim 5 By a second amended statement of cross claim filed in court on 7 April 2009, leave was sought for Mr King to amend his further amended cross claim, by the addition of a claim that Mr King would only have entered into the loan and mortgage in question, if his son or his wife, or one of their two companies had provided him with sufficient security over their assets to enable the discharge of the loan and mortgage from those assets. 6 That application was made without notice, after the parties had closed their evidentiary cases, on the morning that they were due to complete their submissions, after having already filed written outlines. 7 It was candidly explained that the amendment arose from a consideration of the fourth cross defendant's submissions, and was sought to be made in order to ensure that the cross claimant's claim reflected the expert evidence which had been given concurrently, earlier in the hearing. What that evidence would be, had been long known to Mr Charles King's legal advisers, given the expert's respective reports. The failure to advance the claim pressed at that late stage of the proceedings, was acknowledged to be the result of representative error. 8 The application was opposed for Mr Vertzayas, given not only the late stage at which it was made without notice, but also because it gave rise to the question of whether the fourth cross defendant would need to revisit the evidence. Consideration had to be given to whether Mr Charles King would need to be further cross examined and whether further evidence should be called from others. For Mr Charles King, it was accepted that in fairness, such an opportunity would have to be given and that a costs order should flow in favour of the fourth cross defendant, for any costs thrown away as the result of the ajournment. 9 The application was granted, I taking the view that representative error was a powerful argument in the circumstances and that the situation was one where a costs order would go some way to redressing what the dictates of justice required in the circumstances. 10 The parties agreed on a timetable for further evidence and the hearing was adjourned to 13 May 2009. 11 By a notice of motion of 14 April, the cross claimant sought to further amend his claim, this time to advance an entirely new case, breach of fiduciary duty, not before pleaded or argued. At the hearing of the motion, again, representative error was said to explain the late amendment. It was accepted that the claim raised new issues which required a different path, relying as it did on equitable principles, which gave rise to different issues so far as causation and damages were concerned. The parties did not agree that any different evidentiary course would have been taken at the hearing, had this further claim been advanced earlier, but it was accepted for Mr King that different onuses arose and that other evidence might have been called by the fourth cross defendant, had he been on notice of the claim at the hearing. 12 In the circumstances, I came to the conclusion that the further leave sought could not, in justice, be granted at the stage the proceedings had then reached. While the new claim sought to be advanced plainly arose out of the same circumstances, the arguments advanced against the leave sought had to be accepted. Decisions had been made and acted on at trial, in relation to the defence conducted, which would not have been made if the cross claimant's claims had been advanced on the basis now sought to be raised for the first time. 13 Not only would the leave sought again require that the fourth cross defendant be given another opportunity to revisit the question of the cross examination of Mr King, but he would have to have the opportunity to lead other evidence, in defence of the entirely new claim sought to be raised. Given the way in which the case had already been conducted, having in mind the differing onuses which fell on the parties in relation to the two claims, it was simply too late to fairly permit the cross claimant to embark upon such a marked alteration in course. 14 The cross claimant's application was refused, for these reasons.

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The background 16 From about 1990, Mr Charles King gave his son financial assistance by guaranteeing loans made by the National Australia Bank ('NAB') to his son's company, King Surfers Pty Ltd ('King Surfers'). Mr Paul King operated that company's business, running surfing tours to Indonesia and other Asian destinations. He also ran a second business which had shares in charter boats to run surf tours, through The Surf Travel Company Pty Ltd ('Surf Travel'). These businesses were established in the 1980s. 17 The NAB loan to King Surfers was secured by a registered mortgage debenture given over the company's assets and undertakings, as well as by a personal guarantee given by Mr Charles King, secured by a mortgage over his home. Over the years, the NAB made further advances, with the result that in 2002, the total amount guaranteed by Mr Charles King was approximately $212,000. Mr Charles King's evidence was that he understood that if his son could not repay the loan, he would be liable, but because of what his son had told him about his assets, he was certain that this would not happen. 18 In late 2001 the Travel Compensation Fund Pty Ltd required King Surfers to provide $360,000 by way of working capital. Mr Paul King again asked his father to help him, explaining that after the September 11 bombings in the United States, tourists were not travelling and a lot of deposits had to be refunded. It was Mr Charles King's case that his son did not tell him that the NAB had any concerns about the trading position of Surf Travel and he did not show him a letter sent by the NAB in January 2002, in which it raised its concerns. Mr Charles King agreed to help his son, after they discussed his son's financial position. He believed that his son could cover the loan amount at any time, by selling his home. 19 It was Mr Charles King's case that the representations made by Mr Paul King were false and that Mr Paul King was not in a position to repay the loan. 20 In 2002 an application was made to the second cross defendant, Peppers Finance Corporation Limited ('Peppers'), for a loan of some $353,500. Mr Charles King's evidence was that he signed the loan application without reading or checking it. Mr Vertzayas was retained to advise Mr Charles King in relation to this loan and a further loan for some $450,000 obtained by way of refinancing from Permanent in 2003. He also advised Mr Paul King. 21 Mr Charles King's evidence was that he executed the first loan documents in the presence of Mr Vertzayas and Mr Paul King, in the belief that he was giving a guarantee in respect of the loan. He claimed that Mr Vertzayas failed to advise him that under the documents which he executed, he was a co-borrower, not a guarantor and that Mr Vertzayas also failed to explain the significance, nature and effect of the documents which he executed. 22 Mr Charles King's case was further that in 2003 Mr Paul King asked him to guarantee a refinance of his business debts, the borrowings to be increased, money he needed to operate the business and that he was able to get a new loan for a higher amount, at a lower rate of interest. His son assured him that he would sell his family home, if needed, to cover the debt. Mr Charles King claimed that his son failed to advise him as to the risk he was accepting, given that Surf Travel had already gone into voluntary administration and that the administrator had recommended that it be wound up, and a liquidator had been appointed in December 2002. Mr Vertzayas again advised in relation to this transaction. Further failure of duties to Mr Charles King, were alleged against Mr Vertzayas, in relation to this second transaction. 23 The relief sought against Mr Vertzayas was an order for damages of some $590,000.

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30 As the fourth cross defendant argued, the case he had to meet was that brought in the cross claim, where the particulars of the breach of duty complained of were provided. In relation to the 2002 loan, they included a failure to advise that Mr Charles King was a co-borrower rather than a guarantor; that he failed to explain the nature and effect of the documents executed; that he failed to ascertain Mr Charles King's understanding of his obligations under those documents; that he failed to explain the significance of a declaration that finance was being provided for domestic or household purposes; that he failed to ensure that Mr Charles King received the stated consideration for the transfer of loans; that he failed to advise that the loans were improvident; that he failed to disclose the conflict of interest which he had in acting for both Mr Charles King and Mr Paul King and failed to obtain informed consent thereto; that he failed to advise Mr Charles King independently and not in the presence of Mr Paul King; and that he failed to advise Mr Charles King to obtain independent financial advice. 31 In relation to the 2003 loan, the particulars of the breach of duty complained of were also provided. They included the failure to advise about the obligation being undertaken; the failure to ensure that Mr Charles King understood the reason why the refinance was being sought; the failure to give advice as to whether it was in Mr Charles King's best interests to agree to mortgage his only asset for the benefit of Mr Paul King, when he had no capacity to service the loan; the failure to correct any misunderstanding that Mr Charles King was a co-borrower rather than a guarantor; that he failed to explain the significance of a declaration that finance was being provided for domestic or household purposes; that he failed to disclose and correct any breach of duty with respect to the earlier transaction; and that he failed to advise Mr Charles King independently and not in the presence of Mr Paul King.

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What duty was owed by Mr Vertzayas? 32 Mr Vertzayas was retained to advise Mr Charles King and Mr Paul King in relation to the loan contract and mortgage which they entered with Peppers in 2002 and that later entered with Permanent in March 2003. Mr Charles King's case was that if Mr Vertzayas had advised him properly, he would not have agreed to either loan, or that he would only have entered into the loans and mortgages if his son or his wife, or one of their two companies had provided him with sufficient security over their assets to enable the discharge of the loan and mortgage from those assets. 33 It was argued for Mr Vertzayas that his retainer was oral, to act on behalf of both Mr Charles King and Mr Paul King in relation to the two transactions and in respect of the first transaction, in relation to the transfer of a 2/100th share of the land to Mr Paul King. It was accepted that Mr Vertzayas was obliged to advise Mr Charles King about the nature of the obligations he was undertaking with due care and skill, as well as explaining the nature and effect of the documents being executed. It was also admitted that he had a duty to disclose any actual or potential conflict of interest. Nevertheless, it was argued that he had no obligation to give more than legal advice, although it was accepted, as Allsop P observed in David v David [2009] NSWCA 8 at [76]: 76 Some reliance was placed on Waimond Pty Ltd v Byrne (1989) 18 NSWLR 642 in argument. In Kowalczuk v Accom Finance Pty Limited [2008] NSWCA 343 at [267]-[294] Campbell JA undertook a detailed analysis of the precedential status of Waimond in particular after Heydon v NRMA Ltd [2000] NSWCA 374; 51 NSWLR 1 and Astley v Austrust Ltd [1999] HCA 6; 197 CLR 1. It is unnecessary to repeat that analysis. It is sufficient to say that the notion that a solicitor may owe a client a "penumbral" duty that extends beyond scope of the retainer is doubtful. If, however, the solicitor during the execution of his or her retainer learns of facts which put him or her on notice that the client's interests are endangered or at risk unless further steps beyond the limits of the retainer are carried out, depending on the circumstances, the solicitor may be obliged to speak in order to bring to the attention of the client the aspect of concern and to advise of the need for further advice either from the solicitor or from a third party. 34 This approach was consistent with that of Kirby P in Macindoe v Parbery (1994) Aust Torts Reports 81-290, at 61,534, whose view was that a solicitor's duty went beyond the obligation to explain 'the usual perils' and included a duty to explain unusual risks which were 'reasonably foreseeable and which the client should weigh'. 35 It was argued that on the evidence in this case, it would be concluded that Mr Vertzayas' duties concerned the provision of legal advice as to the nature and terms of the loan transactions and nothing more. This followed because at the time of the first transaction, both Mr Charles King and Mr Paul King were already parties to a previous loan, using Mr Charles King's property as security. It was also relevant, in this respect, that when advising on the 2002 transaction, Mr Vertzayas had suggested that Mr Charles King seek a separate solicitor, but Mr Charles King had rejected that suggestion. 36 I am unable to accept these submissions. Undoubtedly, when Mr Vertzayas came to act for both Mr Charles King and his son Mr Paul King in 2002, Mr Charles King had already provided his home as security for the NAB loans for his son's business, which had climbed to some $212,000 over some 12 years. This loan was to be refinanced, with Mr Charles King becoming a co-borrower, rather than a guarantor, with the borrowings increased to some $353,500, in circumstances where Mr Vertzayas knew that the refinancing was being sought from another lender, at a time when the NAB had concerns about the viability of the son's business. 37 In the circumstances, there can be no question that an obligation fell on Mr Vertzayas to draw Mr Charles King's attention to the risk of significantly increasing the borrowings which his family home secured. When, a year later, the borrowings were further increased to $450,000, for purposes declared to the lender, which were patently wrong, Mr Vertzayas not only had a duty to advise Mr Charles' King about the consequences of such a declaration, but also in relation to the risks of even further increasing the borrowings which his family home secured, by about another $100,000. 38 The evidence showed that these duties were not met, for reasons which I will explain. 39 On the evidence I am satisfied that the evidence did not establish that Mr Vertzayas 'acted in a manner that (at the time the service was provided) was widely accepted in Australia by peer professional opinion as competent professional practice', as s 5O of the Civil Liability Act provides, in relation to either the first or second loan. There was much common ground between the two experts, Mr Moses and Mr Bluth, as to this issue, but some measure of disagreement, as I will elaborate. 40 It was agreed that it was common practice to meet separately with an elderly father in a situation such as this, in order to ascertain that he had an understanding of his son's business and the true risk which he was taking on as mortgagor of considerably increased borrowings. Mr Vertzayas did not do so in either 2002 or 2003, in the context of a loan for a business known to be facing real difficulties in both 2002 and 2003. 41 While the experts were disagreed as to whether any conflict existed, on the evidence I am satisfied that Mr Vertzayas did have a conflict of interest, which he failed to explain, or to deal with, with the result that he failed in his duty to Mr Charles King in relation to both the 2002 and 2003 loans. Mr Vertzayas did not advise Mr Charles King that it was in his interests to obtain independent legal and financial advice, in the circumstances, as he ought to have done.

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Breach of duty - the 2002 loan - conflict of interest 42 It was the case advanced for Mr Charles King that in the approach which Mr Vertzayas adopted, he had acted to the detriment of Mr Charles King, as if the sole client was Mr Paul King. Mr Vertzayas denied that this had been his approach, explaining in cross examination that because Mr Charles King was divesting himself of a proportion of his property in 2002, he always recognised that Mr Charles King was more significant than Mr Paul King, who was obtaining the benefit of the asset and that accordingly, Mr Charles King required his protection. Nevertheless, he agreed that he had never told Mr Paul King that he should be separately represented. 43 The loan had been arranged by a broker with whom Mr Paul King had dealt, Mr Laskaris. Mr Laskaris referred Mr Paul King and Mr Charles King to Mr Vertzayas. The documentation was completed by Mr Paul King, who lived with his father at the time. Mr Charles King did not read the documentation before signing it. There Mr Paul King claimed to have various assets, including certain boats and a share in property. 44 Mr Vertzayas was aware when first acting in 2002, that Mr Charles King was an elderly man in receipt of a pension, living in his family home, which already secured borrowings of over $212,000 for his son's business, which it was proposed to increase to over $350,000. There was no evidence that Mr Vertzayas made any enquiry as to Mr Charles King's education, or business background, so as to assess his level of sophistication, or understanding of what he was telling him. 45 Under the proposed arrangement, Mr Charles King was to become a joint mortgagor with Mr Paul King, who was to acquire a 2/100th share of the property. If the loan could not be repaid, Mr Charles King, undoubtedly, faced the loss of his home, as Mr Vertzayas told Mr Charles King when he met him with Mr Paul King in February 2002, to advise them about the proposed mortgage documentation. 46 When they met, Mr Vertzayas told Mr Charles King that 'You are entitled to have a separate solicitor represent you'. Mr Vertzayas explained in cross examination that he said this because he then recognised that there was a conflict, because the proposed borrowings were to be of no benefit to Mr Charles King, even though they were to be secured by his home. It was for this reason that he gave Mr Charles King advice that he was entitled to a separate solicitor, in order to ensure that he was not later the subject of a claim such as this. Mr Vertzayas said that he also went on to explain to Mr Charles King why he might need separate representation. This was because the lender required that Mr Paul King be on the title of the property and therefore, he was to be given a 2 per cent interest, by way of transfer and because Mr Charles King wasn't obtaining the benefit of any of the loan moneys. 47 For his part, Mr King denied that Mr Vertzayas had ever told him about any conflict. That Mr King did not understand that this was what Mr Vertzayas was trying to tell him, was entirely understandable, it seems to me, given what Mr Vertzayas actually said. Neither the words used to tell Mr King that there was a conflict, nor the explanation given as to why Mr Vertzayas had identified that it existed, were such as to clearly convey to Mr King the existence of a conflict, or to explain to him why it would be wise for him to be separately advised from his son. 48 This was made clear by Mr Vertzayas' own evidence, where he agreed that he regarded Mr Charles King to be taking on an extraordinary amount of risk in 2002 and that in his opinion, it was a much less risky transaction from Mr Paul King's point of view. That was certainly not an opinion which he ever shared with Mr Charles King. Nor did he act in accordance with such an opinion. 49 As the experts explained, a situation such as this can be a difficult one for a solicitor. They agreed that in this case, there was no conflict, if both Mr Charles King and Mr Paul King had a common purpose, but there was an immediate and obvious potential conflict confronting Mr Vertzayas, which he had to deal with. That conflict would crystallise, if the father, when properly advised, came to the view that he did not wish to proceed with the loan. The immediate difficulty for Mr Vertzayas arose from the need to give the father advice, which might be to the detriment of the son, who wanted the loan for his company's business purposes. This situation required the exercise of careful judgment, particularly given the information which Mr Vertzayas had about difficulties with the financial position of the son's business. 50 Mr Vertzayas' evidence was that he had a copy of a January 2002 letter from NAB which put him on notice of a problem with the son's business, well before he met with Mr Paul King and Mr Charles King in February. Amongst other things it was there said:

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51 Mr Vertzayas explained in cross examination that while in his view both Mr Charles King and Mr Paul King had an interest in the NAB loan being paid out, he did not perceive that Mr Charles King would receive any benefit from this transaction. That was because, as he initially explained, while the NAB loan was to be discharged, a new loan was also to be entered. Later, in his cross examination he suggested that Mr Charles King did obtain a benefit from the refinancing, but accepted that there was a competing interest, so far as the increased amount of the new loan was concerned. Given that the loan was increasing from some $212,000 to $353,500, to be secured by his family home, his only asset, this was undoubtedly of real significance to Mr Charles King. 52 The NAB letter certainly put Mr Vertzayas on notice of the financial difficulty which had led to the need to refinance. As he explained in cross examination, no-one refinances unless they get a better arrangement, or because they are forced to refinance. Mr Vertzayas believed that Mr Paul King needed to get the refinancing, both in order to be able to trade out of his difficulties and so that he could make the loan repayments. 53 Mr Vertzayas recollected asking Mr Charles King whether he understood that the loan was a business loan, because it was then not regulated by the Consumer Credit Code. Mr Charles King was not involved in that business. As Mr Vertzayas understood, Mr Charles King's purpose in agreeing to the loan, was to assist his son. It follows that without instructions from Mr Paul King, Mr Vertzayas had no authority to divulge the contents of the NAB letter to Mr Charles King. There was no suggestion that he had sought, or obtained such instructions, either at the meeting, or beforehand. It was Mr Charles King's evidence that he was not aware of the letter. That evidence was challenged, but there was no evidence from Mr Vertzayas, that he had discussed the letter with Mr Charles King. 54 On his oral evidence in chief, Mr Vertzayas explained that in a situation such as this, it would be his usual practice to raise the matter of the NAB letter with his clients and to ask for further details. He gave no evidence, however, that he had done so in this case, nor did he give any evidence about what he was told or what he advised, as a result of having acted in accordance with his usual practice. Indeed, what he said in cross examination he did do, was to ask about the viability of the borrower, Mr Paul King, who instructed that he had an interest in his matrimonial home. Mr Vertzayas agreed that he had not, in fact, entirely followed his usual practice in this case, because he had not asked about the viability of the business, a matter that was very relevant to his assessment of the steps he might need to take, in order to advise Mr Charles King about his risks in the transaction. 55 That this was a matter which he ought to have raised, cannot be doubted. Mr Vertzayas had the NAB letter and yet, at the meeting when Mr Paul King was assuring his father that he could meet the loan repayments, he said that the business was doing well. Still, Mr Vertzayas asked nothing about the NAB's concerns, of which he was, undoubtedly, then aware. 56 Mr Vertzayas explained the steps which could have been taken, to minimise the risk of the transaction from Mr Charles King's point of view. They included obtaining independent legal advice and independent financial advice. He agreed that it might have been remiss of him not to suggest independent financial advice to Mr Charles King, but said that what advice might have been given, depended on whether correct information was provided about the business to the adviser. He claimed that any independent financial adviser was entitled to rely on information provided, even if it turned out to be untrue, just as he was. 57 There was an obvious difficulty with this evidence. It is undoubted, on the evidence, that Mr Paul King misrepresented his financial position to his father, to the lender and to Mr Vertzayas. Yet, as was the expert evidence, testing the accuracy of the information provided by readily available means, such as a search of the title of the matrimonial property Mr Paul King claimed to have a share in, is what an independent legal or financial adviser to Mr Charles King would have done. There was nothing to prevent Mr Vertzayas from undertaking such a search and every reason for him to have done so in the circumstances, given the extraordinary risks he perceived Mr Charles King to be taking. Another obvious and simple step would have been to undertake a company search, or to make other enquiries which Mr Paul King could have authorised, as to the viability of the business. 58 On Mr Vertzayas' evidence, other options available to Mr Charles King included not refinancing and coming to an arrangement with NAB, to reduce the mortgage or the instalments payable. Charges over Mr Paul King's companies could have been another potential option. He agreed that he had not pursued any of these options with Mr Charles King, explaining that he took the view that the lender might have pursued the question of charges. That, it seems to me, was hardly an adequate way to ensure that Mr Charles King's interests were either appreciated by him, or protected. 59 Mr Charles King undoubtedly always understood that the necessary consequence of providing his home as security for the increased loan was that he risked losing his house, if the money was not repaid. He had understood the risk that he would be pursued if the loan was not repaid, since he first guaranteed the NAB borrowings for his son and his company. Despite this, he plainly did not understand the real nature of the 2002 transaction, even though it was finally accepted that it was explained to him by Mr Vertzayas at their meeting. Mr Charles King explained in his evidence, that at the time, he had understood that the NAB loan had been paid off. He was mistaken in that belief. He knew that his son's business was then facing real difficulty. That was why he agreed to the 2002 loan, but he did not pay much attention to what Mr Vertzayas explained at the meeting. 60 In his affidavit evidence, Mr Charles King had claimed that Mr Vertzayas did not explain the details of the transaction, as Mr Vertzayas claimed to have done, in the affidavit evidence he had sworn. In cross examination Mr Charles King admitted, however, that he did not pay close attention to what Mr Vertzayas was explaining to him and his son at their meeting, because he regarded the loan to be his son's and he believed that he was still only to be a guarantor, not a mortgagor. That understanding was plainly wrong, as Mr King accepted. 61 It is convenient, at this point, to say something about the evidence of the two witnesses. It was the case advanced for each of them, that the others' evidence would not be accepted, in various respects. 62 For Mr Vertzayas, it was argued that in reality, Mr Charles King was a witness of little credit, who was not being truthful in the evidence which he gave as to a number of matters and that he was pursuing this claim, not on his own behalf, but that of his children. This was because under the settlement reached with the plaintiff, Mr Charles King had gained the right to live in his home until his death, but would have nothing to leave his children thereafter. Under the terms of his will, his estate was left to his four children equally. I have difficulty with the case so advanced. 63 For Mr Charles King it was argued that it was relevant to consider that his belief that his son owned the family home with his wife was explored in cross examination, which was repetitive and aggressive. I also do not accept that submission. 64 The cross examination was certainly thorough, revealing much about Mr Charles King's understanding and the state of his memory, when giving evidence. It explored not only what Mr Paul King had told his father, but how Mr Charles King had always understood that a married couple living together in a family home, each owned a percentage of the home; how he and his other sons had acted on that understanding, spending considerable time and funds on performing work to improve the home where Mr Paul King lived with his wife and family; and that they would not have done so, if they had not believed that his son owned a share of the home. 65 For Mr Charles King it was argued that Mr Vertzayas had also not been an entirely truthful witness, in a number of respects, including in relation to his beliefs in 2002 when advising Mr Charles King. 66 Having considered the evidence given by both Mr Charles King and Mr Vertzayas, particularly that given in cross examination, I have come to the view that each of them endeavoured to give their evidence honestly at the trial. I do accept that proper account must be taken of the fact that Mr Charles King was an elderly man, in ill health, who had difficulty remembering the details of things which had occurred some years ago and who was being subjected to vigorous cross examination. He candidly admitted his difficulties and properly made a number of concessions, although in some instances, insisting that he remembered certain things which had occurred. Mr Vertzayas also had difficulty remembering some things which had occurred and made various concessions in cross examination, while insisting on having a recollection of certain other matters. 67 I do not accept the parties' submissions that either witness did not seek to give their evidence honestly, or candidly. Not only were parts of their evidence corroborated by each other's evidence and also by other evidence, they each also made concessions in cross examination, contrary to their interests. Still, there were conflicts which have to be resolved. In this case, that did not lead me to the view that either of these gentlemen did not finally give their evidence honestly, as best they could. 68 The fourth cross defendant also advanced submissions about the cross claimant's failure to call evidence from Mr Paul King, who undoubtedly could have given evidence relevant to the issues which here lie between the parties. It was argued for Mr Vertzayas, that a Jones v Dunkel (1959) 101 CLR 298 at 321 inference arose against Mr Charles King, from the failure to call Mr Paul King. 69 The Court was invited to infer that: ... there would have been a number of discussions between Paul and Charles King concerning Paul's business, the need to refinance the NAB loan and enter into the Peppers loan, and then the need to enter into the Permanent loan. In particular, the Court is invited to conclude that Paul, having received the NAB letter, would have discussed the contents of the letter with Charles King.

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70 It was not in issue that Mr Paul King had been convicted of importing cocaine into Australia, contrary to the provisions of the Customs Act 1901, after his arrest, shortly after arrival in Australia on 14 November 2003. He was sentenced to a term of imprisonment in September 2004, commencing from the date he was taken into custody, on 14 November. It was Mr Charles King's evidence that his son has since been released and that he was in contact with him, when he visited his granddaughter, who was living with him. 71 For Mr Charles King it was argued that no Jones v Dunkel inference arose. It would not be overlooked that Mr Paul King was a party to the unsettled cross claim brought by Mr Charles King. The drawing of any inference was discretionary and only available, if there was a need to explain, or contradict something in the evidence. Here, the only failure was a failure to call evidence to corroborate Mr Charles King's evidence, there being nothing which required Mr Paul King's explanation. In any event, the inference only arose if there was a failure to give an explanation for not calling a witness. 72 In this case, the explanation was the unresolved cross claim and that Mr Paul King's evidence would be of little value in any event, given his relationship to Mr Charles King and his obvious interest in the outcome of the proceedings, given that he was a beneficiary under Mr Charles King's will. It was also relevant that he had been convicted in circumstances relevant to this case, where he had been found to have been dishonest in his evidence. It followed that a proper reason for not calling him had been established. 73 I am satisfied that there has been an explanation given as to why Mr Paul King was not called and that, in any event, the inferences urged were not available to be drawn. In Jovic v Lamont [2007] NSWCA 47, it was explained by the Court of Appeal that: 57 As explained in Manly Council v Byrne and Anor [2004] NSWCA 123 at [45]--[67], two different processes for drawing inferences can (sometimes) arise from failure to call a witness. The first is that an inference can be drawn that the evidence of the absent witness, if called, would not have assisted the party who failed to call a witness. That is not the same as an inference that that witness, if called, would have been detrimental to the party who failed to call that witness. The second is that any inference that is already open on the evidence and is unfavourable to the party who failed to call a witness can be drawn with greater confidence, if that witness seems to be in a position to cast light on whether that inference should properly be drawn. However, there is no compulsion on a trial judge to engage in either of these processes for drawing inferences from the failure to call a witness. Further, the principle stated in Jones v Dunkel (1959) 101 CLR 298 does not require that all the witnesses to some particular incident that is in dispute should be called. The question for any trial judge, concerning a disputed matter of fact, is whether the trial judge concludes, from all the available evidence, on the balance of probabilities, that that fact is established. The principle in Jones v Dunkel is merely one of the tools through which conclusions on disputed matters of fact can be reached. In the circumstances of the present case, I see no error in the trial judge having failed to draw adverse inferences from the fact that the plaintiff did not call Mr van Tongren or Mr Fahey. 74 Further, I am unable to accept the argument that the inference arising from the failure to call Mr Paul King, was that Mr Charles King would have been told of the contents of the NAB letter by Mr Paul King. The rule in Jones v Dunkel, if available, does not permit an inference that Mr Paul King would have given such evidence. As was observed in HML v R [2008] HCA 16 at [303]:

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76 He was later given a similar assurance when his son asked him to agree to the 2003 loan. 77 If the argument advanced by the fourth cross defendant in relation to the failure to call Mr Paul King is accepted, it would not only be inferred that that he was also aware of the concerns which the NAB had about the viability of the business in 2002, but that his son's various assurances were never given; and that Mr Charles King was aware that his son did not have assets which could be used to repay the loan. 78 The difficulty with the argument advanced in relation to the state of Mr Charles King's knowledge about the ownership of his son's matrimonial home was that his evidence, that he believed his son was a part owner of that home, was consistent with Mr Vertzayas' own evidence as to the instructions which he received from Mr Paul King at their meeting in 2002, when he raised with Mr Charles King the risk that he would lose his family home, if the loan was not repaid. 79 Had Mr Paul King ever told his father the true position, namely that he had no interest in his matrimonial home, there was no reason for Mr Paul King to have so misled Mr Vertzayas. There was a similar difficulty in relation to the NAB letter. Mr Vertzayas' own evidence was that Mr Charles King told him that this business was doing very well, echoing what his son had said about the business a few moments before. Knowledge of the existence of the NAB letter, was plainly not consistent with that statement, but rather a reliance on what Mr Paul King had said. There is no proper basis in the evidence for the conclusion that the contents of the NAB letter or its existence, was ever made known to Mr Charles King. 80 Reliance was also placed on an affidavit sworn by Mr Charles King in September 2005 in family law proceedings between his son and his wife, where he deposed to a conversation with his son, where his son told him that the matrimonial home was not in both the names of he and his wife. The time of the conversation was not specified. This was the second of a series of three affidavits sworn by Mr Charles King in the family law proceedings. In the other two affidavits, Mr Charles King gave evidence to similar effect to that which he gave in these proceedings, namely that he believed that his son did have an interest in the matrimonial home. 81 Mr Charles King swore those affidavits because he had made a claim in the family law proceedings, in relation to the matrimonial home. His claim was settled by the payment of $205,000, which Mr Charles King then used to partially pay off the loan which his own home secured, in the settlement of these proceedings. 82 In cross examination, Mr Charles King explained that the second affidavit was incorrect. In re-examination he explained the circumstances in which he came to swear the second affidavit. It was the case advanced for Mr Vertzayas that this evidence would be rejected. I do not agree. I accept Mr Charles King's explanation that the affidavit was wrong and that the correct position was that he understood that his son did own a share in the matrimonial home, as was his evidence in the other two affidavits sworn in those proceedings and his evidence in these proceedings. 83 As I have noted, that also accorded with the information Mr Paul King provided the lender and the instructions Mr Vertzayas received from Mr Paul King in 2002, given after Mr Charles King told Mr Vertzayas that he understood the risk of losing his home, if it was not repaid, but that the loan would be repaid by Mr Paul King's business. 84 The only sensible explanation for Mr Paul King having given Mr Vertzayas instructions that he owned a share of his matrimonial home, was that this lie was necessary, given what he had earlier told his father, because he wanted to ensure that his father would agree to the increased borrowings, about which Mr Vertzayas was giving advice to both of them. It was certainly not in his interests for his father to receive independent advice about the wisdom of agreeing to provide his house as security for the proposed significant increase in borrowings. 85 At the time, Mr Vertzayas recognised that a conflict arose in the situation in which he was called on to advise both Mr Charles King and Mr Paul King. As I have noted, Mr Vertzayas' evidence was that he purported to advise Mr Charles King of this conflict, by telling him that 'You are entitled to have a separate solicitor represent you'. Mr Charles King replied 'No I can't see why I need one'. 86 This response did not result in the obvious explanation as to why that might be sensible, or even necessary in the circumstances, given the risks he was taking. Mr Vertzayas instead went straight on to explain that it was proposed that 2/100th share of Mr Charles King's property would be transferred to Mr Paul King, with the result, that in future Mr Paul King would have to sign any transactions, such as a sale or mortgage of Mr Charles King's home. This explanation led Mr Charles King to say 'Yes. If I can't help my son who can I help'. Instead of any explanation then being given as to why Mr Charles King might need independent advice, this response instead led to the following exchange: I said: I will now go through the mortgage documents which you have received copies. Firstly, have you satisfied yourselves that you are able to meet the repayments? As borrowers you are both responsible for the repayment of the loan.

[46]

90 Mr Vertzayas did not explain anything more to Mr Charles King, which might have resulted in him not being happy to help his son as was being proposed. I am satisfied, on this evidence, that Mr Vertzayas failed to properly advise Mr Charles King. 91 Mr Moses and Mr Bluth agreed, in a case such as this, where an elderly father is a volunteer, providing the family home as security for another family member's business borrowings, that it would be standard practice to see the father alone, to ensure that there was no undue influence being exerted upon him. I accept that in a case such as this, a careful and prudent solicitor would interview the father alone, to ensure that he understood the transaction and the chance that the risks he was agreeing to accept would materialise, as Mr Bluth explained. That did not occur here. 92 The experts agreed that while there was a potential conflict, they did not agree that in the circumstances of these transactions, any conflict of interest finally crystallised. 93 It was Mr Moses' opinion that there was a conflict and that given what Mr Vertzayas knew about the NAB's concerns about Mr Paul King's business, he should have advised Mr Charles King that he should seek independent legal and financial advice. Mr Bluth's opinion was that there was no conflict because this was a refinancing, in circumstances where the father had already provided his home as security for earlier borrowings and that it was not necessary, or common practice, for independent legal and financial advice to be suggested in those circumstances. Mr Bluth said, however, that it was a matter of judgment for the solicitor, who had to assess whether the father was conversant with the son's financial affairs and the business, given the business risk which was being undertaken. 94 Mr Moses and Mr Bluth agreed, however, that the sophistication of the elderly family member must be considered by the solicitor in a situation such as this, because informed consent to act must be obtained, if conflict is to be avoided. By sophistication, it was explained that an assessment had to be made by the solicitor that the client understood the transaction and any risks involved. 95 Here the evidence showed that Mr Vertzayas took no steps to ensure that he had such informed consent; or to properly satisfy himself that Mr Charles King was conversant with his son's financial affairs and his business; and that he appreciated the nature of the transaction, or the real risks he was taking on. That would have required meeting alone with Mr Charles King and raising these matters with him and advising him about the extraordinary risk he believed was being taken. None of these steps were taken. 96 Mr Vertzayas' evidence was that the only enquiries which he made, after telling Mr Charles King that he was 'entitled' to be separately represented, was to ascertain that he understood that he risked losing his house, if the loan was not repaid. He then accepted, without further enquiry, what Mr Paul King told him about ownership of the matrimonial home and made no enquiries as to the state of the business, or its capacity to meet loan repayments, even though he was on notice of the NAB's concerns. He certainly gave Mr Charles King no advice about these matters, or that it might be prudent to make even simply enquiries, such as a company or title search, to ensure that Mr Paul King's instructions were accurate. 97 Mr Vertzayas claimed in his evidence that he 'relied on the representations of the co-borrower', instead of making any further enquires about the viability of the business. Undoubtedly in doing so he failed in his duty to Mr Charles King. While he claimed that he had no reason to doubt what Mr Paul King told him, the NAB letter provided a good reason for further enquiry, or at the least, ensuring that this was information which Mr Charles King was privy to and understood, in the context of the extraordinary risk of the transaction which Mr Vertzayas perceived. 98 Contrary to the submissions advanced for Mr Vertzayas, on any view of what he told Mr Charles King, Mr Vertzayas did not inform him of the nature of the conflict he perceived, or why it would be in his interests to obtain separate advice. Both parties relied on what the Court of Appeal observed in Stephen James Rigg v Paul Sheridan [2008] NSWCA 79: 36 There is no general rule that a solicitor cannot act for different parties in the one transaction. In Farrington v Rowe McBride and Partners [1985] 1 NZLR 83 CA, 47 Richardson J said, in a passage cited by the Privy Council in Clark Boyce (above) at 436, by the High Court in Maguire v Makaronis [1997] HCA 23, 188 CLR 449, 465 and by this Court in Beach Petroleum (above) para [207]: "But the acceptance of multiple engagements is not necessarily fatal. There may be an identity of interest or the separate clients may have unrelated interests. In some circumstances they may even be able and prepared to look after their own interests. Such cases seem straight forward so long as it is apparent that there is no actual conflict between duties owed in each relationship. However the difficulty lies in determining in particular cases that there is no such conflict and the courts have often warned of the risks involved where the solicitor acts for both parties in a conveyancing transaction." 37 Mr Sheridan, as a fiduciary, owed separate duties of undivided loyalty to the widow and the appellant. This Court said in Beach (above) at paras [196], [201]: "This case involves an alleged conflict of duty and duty, rather than a conflict of interest and duty. However in both categories what is involved is a breach of the same over-riding duty of undivided loyalty …The conflict of duty and duty rule and the conflict of duty and interest rule may impact differently but both are manifestations of the over-riding duty of undivided loyalty." 38 The test for the existence of conflicting duties to two or more principals is that stated by this Court in Beach Petroleum (above) at paras [425]-[427]: "In a situation of alleged conflict of duty and duty, there must be 'a real sensible possibility of conflict'. It is not enough to identify 'some conceivable possibility' which may result in a conflict … [Counsel] submitted that in neither case - a retainer for restructuring or for the currency swap - did a 'real sensible possibility of conflict' arise in the circumstances of this case. We accept this submission in the case of the currency swap. The limited retainer for completion and delivery of documents to implement the transaction which had already been agreed, was restricted to clerical acts that gave rise to no conflict of the relevant character." 39 The authority cited by the court for its statement of principle included Boardman v Phipps [1967] 2 AC 46 at 124 where Lord Upjohn said: "The phrase 'possibly may conflict' requires consideration. In my view it means that the reasonable man looking at the relevant facts and circumstances of the particular case would think that there was a real sensible possibility of conflict; not that you could imagine some situation arising which might, in some conceivable possibility in events not contemplated as real sensible possibilities by any reasonable person, result in a conflict." 40 Earlier, as Upjohn LJ, he said in Boulting v Association of Cinematograph, Television and Allied Technicians [1963] 2 QB 606, 637-8: "… a broad rule like this must be applied with common sense and with an appreciation of the sort of circumstances in which over the last 200 years and more it has been applied and thrived. It must be applied realistically to a state of affairs which discloses a real conflict of duty and interest and not to some theoretical or rhetorical conflict." 41 This Court noted in Beach Petroleum that Lord Upjohn's statement in the later case had been cited with approval by the Privy Council in Queensland Mines Ltd v Hudson (1978) 52 ALJR 399, 400, and in Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64, 156 CLR 41 at para [85] per Mason J, with whom Deane J agreed. Theirs were dissenting judgments on the fiduciary issue but they are persuasive on the present point. Gibbs CJ and Dawson J who formed part of the majority also quoted extensively from the speech of Lord Upjohn in Phipps v Boardman (above). 42 The judge's findings establish that there was no real sensible possibility of conflict in this case. There was no evidence, expert or otherwise, of any occasion when Mr Sheridan had to choose between two or more ways in which the transaction could be framed or implemented where the interests of the appellant and those of the widow might have diverged. There was also no evidence that any fact relating to the merits or wisdom of the transaction came to the knowledge of Mr Sheridan before it was implemented that should have been disclosed to the appellant or the widow or both and was not.

[48]

Breach of duty - first loan - lack of informed consent 101 As the experts again agreed, at the least, if continuing to act for both Mr Charles King and Mr Paul King, Mr Vertzayas should have met separately with Mr Charles King to satisfy himself that he was giving informed consent, if his duty to Mr Charles King was to be satisfied. 102 Mr Charles King understood that Mr Paul King had sufficient assets himself to repay the loan and that was what Mr Paul King instructed. Had Mr Vertzayas met separately with Mr Charles King, the obvious question of why those assets were not being used to secure the loan, given that the purpose of the loan was for Mr Paul King's business interests, could have been raised with Mr Charles King, as could the other steps which Mr Vertzayas identified as being available to be taken in order to protect Mr Charles King's position, against the extraordinary risk which he was taking. Undoubtedly, Mr Charles King could have told Mr Vertzayas what he understood from his son about the problems which the business faced, in the aftermath of the September 11 bombings and the need to provide the capital which the Travel Compensation Fund required. 103 That information, contrary to what Mr Paul King had said about the business doing well, would also have highlighted the importance of an investigation of the business' actual position and whether Mr Paul King owned the assets he claimed. That there was a basis in what was known by Mr Vertzayas at the time, in doing more than he did to address the conflict he had recognised, in order to ensure that he met his obligations to Mr Charles King and that he was giving informed consent, given the obvious risks he was confronting, was well made out on the evidence. 104 As I noted earlier, Mr Charles King's understanding was consistent with Mr Vertzayas' evidence as to the instructions which Mr Paul King gave him as to his assets, when they all met in February 2002. What Mr Vertzayas did not raise, was whether those assets should be used to secure the increased borrowings, given the apparent difficulties confronting the business and Mr Charles King's personal circumstances, given those difficulties. 105 This was important because not only was it proposed to refinance the NAB loan, but the borrowings were to be increased from $212,000 to $353,500. 106 Mr Vertzayas gave Mr Charles King no advice as to how the position of the business increased the chance that the risks he was taking might materialise, or that it would be in his interests to confirm his understanding as to the assets his son owned, by a title search, or that it would be wise for him to take independent financial advice. As Mr Bluth explained, 'it was incumbent on the solicitor to ensure Mr Charles King understood the legal effect of what he was doing and the risks involved'. 107 Had Mr Vertzayas enquired as to Mr Charles King's background, he would have learned that he was 78 years old, having long been retired from the service station business which he had operated with his wife, for many years. The business had been successful, he having a worked as a motor mechanic and his wife attending to the administrative affairs of the business. Mr Charles King had four children and had provided for each of them in various ways, with the result that his only remaining asset was his family home, where he lived and which he had left in his will in equal shares to his children. 108 Mr Charles King had originally agreed to guarantee Mr Paul King's business loan over a decade beforehand, because he had not given him assets in the same way that he had gifted his other three children. Mr Charles King understood that Paul King had operated a very successful travel business conducting surf tours to Indonesia, through his two companies. He also understood that the business had been detrimentally affected by the September 11 bombings in the United States, but he had confidence that his son would be able to trade out of his difficulties. The basis of that confidence was not any access to, or involvement in his son's business, which he had nothing to do with at all, other than guaranteeing the borrowings, which had increased over twelve years. 109 Given Mr Charles King's personal circumstances and his reliance on his son's ability to repay the loan and what Mr Vertzayas knew of the NAB's concerns about the circumstances of Mr Paul King's business, which was the reason for the refinancing, that Mr Paul King had the assets his father understood, was undeniably important, if Mr Charles King's position was to be protected. A simple search of the ownership of Mr Paul King's assets would have shown that contrary to Mr Charles King's understanding and Mr Paul King's instructions, he did not own a share in his matrimonial home, it was owned by his wife and her mother. Had the search been conducted, that would have squarely raised for Mr Charles King's consideration, whether he should agree to an increase in the loan he was guaranteeing, from $212,000 to $353,500. The advisability of obtaining independent financial advice would also have become apparent. 110 It was the common view of the experts, as Mr Moses explained, that if independently advised by a solicitor, it would have been recommended that Mr Charles King take advice as to the prospects of the company recovering, to be in a position to repay the loan. Even if Mr Charles King had not wished to obtain independent financial advice, a company search should at the least have been obtained, or a letter from the company's accountants, as well as a title search of the matrimonial property. A loan agreement could also have been agreed, to ensure that Mr Charles King would not lose his house. As was Mr Vertzayas' evidence there could also have been a charge placed over assets owned by Mr Paul King, or his companies. 111 Ultimately, Mr Charles King would have been free to reject such advice, had it been given. In its absence, that Mr Vertzayas undoubtedly failed in his duty to ensure that Mr Charles King was giving informed consent in relation to the transaction, was established.

[49]

Breach of duty - failure to advise - the first loan 112 On the evidence there can be no question that Mr Vertzayas failed in his duty to advise Mr Charles King about the additional risk he was taking on materialising, in the absence of any security being provided by Mr Paul King, for these significantly increased borrowings. 113 While it was argued for Mr Vertzayas that this loan was not shown to have been improvident, as alleged, because Mr Charles King obtained a benefit from the NAB loan being paid out, that the price of this 'benefit' was the significantly increased borrowings taken on in this loan, may not be overlooked. That is particularly so, given what was known to Mr Vertzayas about the problems which the business faced. That Mr Paul King was lying to his father about his ability to repay the loan was a possibility which Mr Vertzayas failed to deal with. 114 In the face of what was known about the business, establishing that the son had the assets he claimed, was crucial for Mr Charles King. Had a simple, available search been made, it would have revealed that Mr Paul King had lied about owning a share of his matrimonial home. This would have given Mr Charles King the opportunity to consider if he still wanted to help his son, when the real position was that the son did not himself have assets enabling him to repay the loan, if the business was unable to make repayments. While it was Mr Bluth's evidence that in circumstances such as these, it would not have been common practice for a solicitor to advise that independent financial advice should be obtained, the evidence at trial revealed that this was hardly a usual situation, given Mr Paul King's lies. 115 I am satisfied that in these circumstances, Mr Vertzayas ought to have advised Mr Charles King to obtain independent financial advice as to his position, given what was known about the NAB's concerns, or at the least, to have obtained a title search and to have advised Mr Charles King about the real nature of the risks he was taking on, if he agreed to these increased borrowings, in the face of known problems. On the evidence, that is what a reasonably competent solicitor would have done in the circumstances, given what was known to Mr Vertzayas at the time. His failure to give advice necessary in the circumstances, was well established.

[50]

Breach of duty - conflict of interest - the 2003 loan 116 The conflict which Mr Vertzayas recognised in relation to advising on the first loan, was not recognised when he was instructed in relation to the second loan, although, patently, the same conflict potentially existed. As a result, in the case of this transaction, Mr Moses took the view that the provisions of Rule 45 of the Revised Professional Conduct and Practice Rules 1995 applied. Mr Bluth's view was again that there was no conflict, because Mr Paul King and Mr Charles King were agreed that the new loan was to be entered. There was only the possibility of a later conflict emerging. Mr Moses disagreed. The Rule provided: 45. Solicitors advising on loan or security documents 45.1 Commencement of Rule 45.1.1 This Rule commences on the thirty-second day after its publication in the Gazette It replaces the current Solicitors Rule 45 which ceases to operate at midnight on the day preceding the date of commencement of this Rule. 45.2 Purpose of Rule 45.2.1 This Rule is published by the NSW Law Society. Its purpose is to state the approved practice to be followed by a solicitor (whether a principal or an employee) when engaged to advise a proposed signatory on loan or security documents ("the documents"). 45.3 Application of this Rule 45.3.1 This Rule applies where the solicitor is engaged to give advice to a proposed signatory that will be: - a borrower, or a security provider referred to as a borrower ("a borrower") in the documents; or - a third party mortgagor, guarantor, surety mortgagor or indemnifier ("a guarantor") providing security for the borrower; and - whether or not the documents relate to the provision of credit to which the Consumer Credit Code applies. 45.3.2 This Rule applies only where the solicitor has been asked to provide evidence of advice 45.4 Independence of the Advising Solicitor 45.4.1 The solicitor must not act for the lender in the transaction to which the documents relate. 45.4.2 The solicitor must not advise a proposed signatory in any circumstances where the interests of any signatory or proposed signatory conflict with those of the solicitor, or with those of any other client of the solicitor. 45.4.3 The solicitor's advice can be given to a proposed signatory, who is either a natural person, or a corporation subject to paras 45.4.5 and 45.4.6 of this Rule. 45.4.4 The solicitor must not advise a proposed signatory in the presence of any other signatory or proposed signatory of the documents, or in any circumstances where the interests of any signatory or proposed signatory of the documents conflict with those of any other such signatory or proposed signatory, except in accordance with the following principles laid down by the Privy Council in Clark Boyce v Mouat [1994] 1 AC 428 at 437: - that where the interests of the parties to the transaction may conflict the solicitor may only act for more than one such party provided he/she has obtained the informed consent in writing of those parties to the solicitor acting for them, - such consent being given in the knowledge that there is or may be a conflict between the parties, and as a result - that the solicitor may be disabled from disclosing to each party the full knowledge which he/she possesses as to the transaction, or - that the solicitor may be disabled from giving advice to one party which conflicts with the interests of the other or others. 45.4.5 Where the solicitor's advice is given to a proposed signatory who is a natural person, the solicitor must not act for, or give advice to, any other signatory or proposed signatory except with the written consent of all signatories or proposed signatories given in accordance with the principles specified in para 45.4.4 of this Rule. 45.4.6 Where the solicitor's advice is given to a proposed signatory that is a corporation, the solicitor must not act for, or give advice to, any other signatory or proposed signatory apart from a related corporation within the meaning of the Corporations Law, or a person who is the sole director or sole member of the signatory corporation, or otherwise except with the written consent of all signatories or proposed signatories given in accordance with the principles specified in para 45.4.4 of this Rule. 45.5. Identification of Proposed Signatories of Documents 45.5.1 The solicitor must identify the proposed signatory as the person described by reference to one of the following documents means: (a) Passport (b) Driving Licence (c) Medicare Card (d) Credit Card (e) Rate Notice (f) Other. 45.6 Advice 45.6.1 The solicitor should advise a proposed signatory of those matters that the solicitor, in exercising the professional skill and judgment called for in the circumstances of the particular case, considers appropriate. 45.6.2 Without limiting the generality of 45.6.1, when advising a borrower, the solicitor should, where necessary, advise the borrower that: 45.6.2.1 by signing the documents the borrower will be liable for regular payments of interest and repayment of the amount of the loan at the due date; 45.6.2.2 if the borrower fails to make any payment on time, the lender can charge a higher rate of interest, and the lender's costs of rectifying that failure; 45.6.2.3 if the borrower fails to comply with any of the terms and conditions of the loan including the obligations to pay principal or interest, - the lender can sue the borrower personally; and - the lender may take possession of the borrower's property; and - after notice, sell it to recover the amount owing together with interest and other costs including solicitor's costs, the costs of selling the property and the costs of maintaining the property; and - if the proceeds of sale of the borrower's property are insufficient to satisfy the debt to the lender, the lender can sue the borrower for the deficit; and 45.6.2.4 if the Consumer Credit Code applies, additional obligations, rights and remedies may apply as set out in the loan documents. 45.6.3 Without limiting the generality of 45.6.1,when advising a guarantor, the solicitor should, where necessary, advise the guarantor that: 45.6.3.1 if the borrower fails to make any payment on time, the guarantor will be liable to remedy that failure, and that could involve the guarantor in payment to the lender of all amounts owed by the borrower to the lender including principal, interest, 45.6.3.2 if the guarantor fails to remedy any failure by the borrower to comply with the terms and conditions of the loan in any way, including the obligation to pay principal, interest, default interest, or other charges, - the lender can sue the guarantor personally; and - can take possession of the guarantor's property secured to the lender and sell it to recover the amount owing together with interest and other costs, including solicitor's costs, the costs of selling the property and the costs of maintaining the property; and - if the proceeds of sale of the guarantor's property are insufficient to satisfy the debt to the lender, the lender can sue the guarantor for the deficit; 45.6.3.3 if the guarantor is a proposed signatory to documents under which the guarantor's liability can be increased, that fact, and the extent of the possible increase, and of any restriction or limitation of the guarantor's rights or obligations in relation to the security and any other party to the documents; 45.6.3.4 the lender can exercise its rights against the guarantor even if it has not pursued the borrower; 45.6.3.5 the liability of the guarantor is limited to a specified sum, or is unlimited (whichever is the case) and may be affected by cross guarantees; and 45.6.3.6 if the Consumer Credit Code applies, additional obligations, rights and remedies may apply as set out in the loan documents. 45.6.4 In any case, the solicitor must advise the proposed signatory that: 45.6.4.1 the solicitor does not profess any qualification to give financial (as distinct from legal) advice; and 45.6.4.2 if the proposed signatory has any questions about any financial aspect of the transaction or the documents, the proposed signatory should consult an accountant or other financial counsellor of the proposed signatory's choice before signing the documents. 45.7 Evidence of Advice 45.7.1 Any Statutory Declaration, in evidence of independent advice, provided by the borrower must be in the form of Schedules 1 or 1A or where provided by a borrower/trustee in the form of Schedule 1B. 45.7.2 Any Statutory Declaration, in evidence of independent advice, provided by a guarantor must be in the form of Schedules 2 or 2A. 45.7.3 A solicitor (e.g. a solicitor acting for the lender) must not aid, abet, counsel or procure any other solicitor to tender evidence otherwise than in conformity with this Rule and in the authorised form approved and published by the NSW Law Society from time to time. 45.7.4 Where an interpreter is present at the conference when a signatory is advised by a solicitor instructed independently of the lender, the name of the interpreter must be included in the Statutory Declaration, and the interpreter must be asked to complete a certificate in the form of Schedule 3 before the conference is concluded. 45.8 Acknowledgment by Signatory 45.8.1 The solicitor giving the independent advice must obtain an acknowledgment, in the form set out in Schedules 4 or 4A (or in the case of a borrower/trustee Schedule 4B or 4C) below for retention on the solicitor's file (not to be sent to the lender or the lender's solicitor) together with a copy of the Statutory Declaration and a comprehensive list of the loan and security documents. 45.9 Consent by Signatory to Advice 45.9.1 If the solicitor is aware of a possible conflict of interest between the parties to the transaction, the solicitor must, before advising more than one of such parties, obtain the informed consent of each such party in writing in the form of Schedule 5 before such advice is given. 117 I am satisfied that there was a conflict and even if there was not, at the least there was a possible conflict. Mr Vertzayas did not comply with the Rule. No written consent was obtained from Mr Charles King or Mr Paul King, nor was oral consent sought, or obtained. 118 It was common ground between Mr Moses and Mr Bluth, that in practice, solicitors do not always observe the strict requirement of the Rule that there be written consent obtained, when oral consent is given, particularly in family transactions such as this one. Mr Moses' view was that while this often occurred, proper practice still required compliance with the Rule. Mr Bluth explained that the breach was a technical one, but that a prudent and careful solicitor would at least make a file note, noting that oral consent had been given. 119 In this case, neither written consent, nor any file note recording oral consent was made. 120 Mr Vertzayas again received his initial instructions through Mr Laskaris, who organised the refinancing. The borrowings were to be increased by some $100,000 to $450,000. The purpose of the loan, specified in a loan proposal which Mr Paul King and Mr Charles King had already signed when Mr Vertzayas was first instructed, indicated that the purpose of the loan was 'to refinance owner occupied property and the balance to assist with home improvements'. Given his involvement in the earlier loan and the instructions he received from Mr Paul King when they met, it was undoubtedly the case that Mr Vertzayas, as well as Mr Charles King, would have appreciated, had he turned his mind to the application, that it was inaccurate. Understandably, it was the common view of the experts that Mr Vertzayas ought not to have been involved in any misrepresentation to the lender. 121 Mr Vertzayas met again with Mr Paul King and Mr Charles King in February 2003. They brought the loan documentation with them. Mr Paul King explained to Mr Vertzayas at the meeting that they were refinancing because they had obtained a better deal, and that there would be money left over to pay off some debts and to do some work on the house. 122 On his evidence, in 2003 Mr Charles King was concerned about the size of the loan his home was to be securing. It was worth about $620,000. His son had explained to him the need for the increased loan in the aftermath of the Bali bombings and that he could get out of trouble, because he could get further funds for the same monetary repayments. On his evidence, however, Mr Charles King's son assured him then that:

[54]

Breach of duty - informed consent - the 2003 loan 129 In a December 2002 report, the voluntary administrator who had been appointed to Surf Travel in November 2002, noted that the company had incurred significant losses that financial year, due to the downturn in trade as the result of the September 2001 bombings, the Bali bombings in October 2002 and a fraud perpetrated by a former accountant in 2002. Despite the downturn, the company earned a minimal profit in both 2001 and 2002, but the administrator's opinion was that the directors might have a case to answer in relation to insolvent trading. 130 In 2003, Mr Vertzayas knew of the NAB's concern in 2002, that Mr Paul King's business had been in difficulty, when borrowings were increased to $353,500. A little over a year later, those borrowings were being refinanced and significantly increased. Given what Mr Vertzayas was aware of from the last transaction and what he was told by Mr Paul King in 2003, had he turned his mind to the loan proposal which Mr Paul King and Mr Charles King had signed, it would have been apparent that it was inaccurate. The purpose of the loan was undoubtedly to refinance the business borrowings. On Mr Charles King's evidence, he understood that the information was not accurate, because the purpose of the increased borrowings was for his son's business, but he did not appreciate that anything flowed from that. This was not a matter about which Mr Vertzayas gave Mr Charles King any advice. 131 Mr Vertzayas did not seek any information as to the viability of the business, or its ability to make the increased repayments. Nor did Mr Vertzayas take any steps at all, to satisfy himself as to Mr Charles King's understanding of the circumstances in which he was taking on this additional risk, in order to ensure that he was giving informed consent to this transaction. I am satisfied on this evidence that there can be no doubt that Mr Vertzayas did not take the steps necessary to obtain informed consent from Mr Charles King in relation to the second loan. Had he done so, he would have learned what Mr Charles King understood about the further serious problems confronting the business. 132 Had a simple company search then been undertaken, it would have revealed that a liquidator had been appointed to the company in the preceding December. Had a title search been undertaken, that Mr Paul King did not have a share in the matrimonial home would also have been revealed. Again, the failure to take steps which a reasonably competent solicitor ought to have taken in this situation, in order to ensure that Mr Charles King was giving informed consent to the proposed transaction, was well established.

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Foreseeability of loss 137 Not every mistake founds liability in negligence (see Trust Co of Australia v Perpetual Trustees WA Limited (1997) 42 NSWLR 237 at 247D.) Nevertheless, as Dean J observed in Hawkins v Clayton [1988] HCA 15 at 579, where there is a real and foreseeable risk of economic loss being sustained by the client, a solicitor does have a duty to take steps, even beyond the specifically agreed professional task or function, necessary to avoid that loss. 138 In this case, it was entirely foreseeable, as Mr Vertzayas actually warned, that if the loans were not repaid, that Mr Charles King would lose his house. Even so, in both 2002 and 2003, Mr Vertzayas did not act to deal adequately with the conflict which he had identified in 2002, in order to ensure that Mr Charles King was giving his informed consent to the transaction, or to advise Mr Charles King about the real risk of loss which he faced, if he entered either transaction, with the result that he failed in his duty to Mr Charles King, as I have explained. I am satisfied that the loss which resulted when Mr Paul King was unable to meet the loan repayments or to repay the loan, was entirely foreseeable, given that he had entirely misrepresented his position, misrepresentations which could easily have been uncovered and ought to have been investigated, given the extraordinary risk of the transaction, from Mr Charles King's point of view, which Mr Vertzayas identified in 2002. 139 A solicitor is not a 'general insurer against his client's legal problems' (see Credit Lyonnais SA v Russell Jones and Walker [2003] Lloyd's Rep PN 7 at [28]) and the advantage which hindsight gives must be guarded against. Nevertheless, a solicitor who does not bring the necessary reasonable degree of skill and knowledge to a task and fails to exercise reasonable care in carrying it out, will be liable for an error of judgment. This is such a case. 140 This is not a case where Mr Vertzayas would have been going beyond his instructions, to proffer unsought advice about the wisdom of the transaction, as discussed in Nikolic v Nikolic [2002] NSWCA 248. Rather, it was a situation where a conflict which Mr Vertzayas had actually identified, at least in relation to the 2002 loan and which he should have identified in 2003, had to be dealt with adequately, in order to ensure that the duty which he owed to an elderly father, Mr Charles King, a volunteer, providing his only asset, his home, as security for increased loans for his son's struggling business, was adequately advised as to the real nature of the risk he was incurring. Had that occurred, Mr King would have been given the opportunity he needed to consider the advisability of the real risk which he was being asked to take, as well as the advisability of taking independent financial advice as to what his son proposed. 141 Had Mr Vertzayas met separately with Mr Charles King, to ascertain that he was giving his informed consent to the transaction, cheap and easily made searches would have readily uncovered the son's lies and the very significant risk which was, in reality, being undertaken by the father, which later materialised. As Brereton J discussed in Riz v Perpetual Trustee Australia Limited [2007] NSWSC 1153, while it is not a solicitor's role to give a client financial advice: 109 I accept that the scope of a retainer is of considerable significance in identifying the extent of a solicitor's duty of care. However, the scope of a solicitor's duty of care to a client is not confined to the contract of retainer but may extend in the circumstances of a particular case to require the taking of positive steps, beyond the specifically agreed task or function, where such steps are necessary to avoid a real and foreseeable risk of economic loss being sustained by the client [ Waimond Pty Ltd v Byrne (1989) 18 NSWLR 642]. In that case, a solicitor received and acted on instructions, from another client, to mortgage land in which his client Waimond had an interest, for purposes unconnected with and having no benefit for Waimond, where that was a matter of which a clerk in the solicitor's employ had knowledge derived from previous transactions. The Court of Appeal held that when the solicitor had knowledge of a transaction proposed by one client which necessarily carried the risk of loss to the other, there was a breach of duty when he failed to check with the other client or to advise him to seek independent advice before taking a step potentially damaging to those interests. This was so notwithstanding that the solicitor (who acted for the other client) was personally unaware of Waimond's interest, its affairs having been attended to by his clerk. Kirby P said (at 652): Although the contract of retainer will be an important indicium of the nature of the relationship which gives rise to the common law duty of care (as the minority held in Hawkins ) it will not chart exclusively the perimeters of that duty. Deane J pointed out (at 579) that, depending upon the circumstances of the particular case, the duty may require the taking of positive steps "beyond the specifically agreed professional task or function", where these are necessary "to avoid a real and foreseeable risk of economic loss being sustained by the client". 142 On the evidence in this case, it cannot be doubted that Mr Vertzayas had a duty to take positive steps readily available to him, to avoid the real and foreseeable risks here in question.

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Causation 143 The onus fell on Mr Charles King to establish causation, that is that Mr Vertzayas' negligence caused the loss, a question of fact to be decided in a common sense way, given the particular facts in question, on the balance of probabilities (see Chappel v Hart (1998) 195 CLR 232). 144 Would Mr Charles King have entered either the 2002 or 2003 loans, if he had been advised, as he ought to have been, by Mr Vertzayas? Would that have avoided his losses? The 2003 loan ceased being repaid after Mr Paul King was imprisoned, when it came to light that he did not have assets which could be used to satisfy the loan. Until then, the loan continued to be serviced by Mr Paul King, despite what had happened to the business. Mr Paul King then asked his father and brother to continue making the loan repayments, which Mr Anthony King did, until 2005. Mr Charles King had also intervened in Mr Paul King's family law proceedings, with the result that he received a sum of $205,000, in settlement of his claims. 145 For Mr Vertzayas it was argued that even if Mr Charles King had been properly advised, or if he had received independent financial advice, still, he would have gone ahead with both loans. He was sufficiently aware of the risks which he was taking and so determined on helping his son, that he would not have refused to enter either loans even if he had been properly advised. This was because of his advanced years and his intention that the property would go to his children. 146 Reliance was placed on Berry v Kanakis [2002] NSWCA 68 at [32] - [43], where a trial judge's conclusion that the client would have gone ahead with the transaction in any event, was not disturbed on appeal; Baker v Sheridan [2005] NSWSC 89, where a failure to advise about the risk of default was found to have no causative effect, because the client was already cognisant of the danger of default and Ibrahim v Pham [2005] NSWSC 246, where the trial judge was not satisfied that the clients would not have proceeded, in any event, if the solicitor had ceased acting. 147 I am unable to accept these submissions, on the evidence. Undoubtedly, here Mr Charles King was aware of the risk which he took, the loss of his home, if either loan was not repaid by his son. Nevertheless, it was not his intention that the house would go to his son Paul, he had left it to all four of his children in his will and while he was elderly and in ill health, he still needed his home to live in with his other son, Mr Anthony King. 148 In cross examination, Mr Charles King agreed that he was dubious about agreeing to the 2002 loan when his son Paul first raised it with him, because he then thought that the business was not viable, without the further loan, given the money then required by the Travel Compensation Board. In 2003, he was further concerned about the amount of the loan proposed, but his son reassured him. 149 In that context, it is quite contrary to commonsense to think that Mr Charles King would have agreed to the 2002 loan, if he had known that his son's financial position was not as his son had represented it to be. It is also contrary to the evidence that in agreeing to the loan, Mr Charles King was acting in the belief, not only that his son's business would be able to repay both loans, but that if it could not, his son personally had assets which he could and would make available, to repay the loan, so that he would not lose his only asset, his family home. At the time his son Paul was going through a divorce and Mr Charles King understood that his half share in the matrimonial home, that was valued at some $1.8 million, would be available to repay the loan, if the worst came to the worst. 150 That this was Mr Charles King's belief in both 2002 and 2003, cannot be doubted. Not only was it Mr Charles King's evidence that he discussed this with his son Paul, both in 2002, before agreeing to the first loan and in 2003, when agreeing to the second, but it was corroborated by Mr Vertzayas' evidence. His evidence was that he did discuss with Mr Charles King and Mr Paul King in both 2002 and 2003 when he met with them, how the loan was to be repaid. On both occasions, Mr Paul King instructed that his business would repay the loan; that there was no difficulty because it was doing well and that his father did not need to worry, because he had assets, including the matrimonial home, which he would use to repay the loan if the business did not make the repayments. 151 The evidence certainly suggested that despite his lies, Mr Paul King always intended himself to pay out the loan. Consistent with such an intention, was the fact that repayments continued to be made, even after the business went into administration in 2002, ceasing only when Mr Paul King was imprisoned later in 2003. 152 In my view, in the face of all of this evidence, that Mr Charles King would have taken no different course if he had been properly advised, is not sensibly open. Mr Charles King was a very elderly man, a pensioner, living in his family home on $600 per fortnight. His home was his only remaining asset, one which he intended to leave to all of his children and where he was living with one of his other sons, Anthony. He was happy to assist his son Paul, who he believed to be a very successful businessman, capable of trading out of his business difficulties and with sufficient assets to repay the loans, if the business was not capable of doing so. His own house was worth $620,000 and he was concerned about the increase in the loan to $450,000, but his son reassured him. In cross examination he explained that he was worried about the property, but he was getting on and that '[m]y life wasn't that long so whatever happened, happened.' 153 That was a view which he plainly reached, given his understanding of his son's position. That Mr Charles King would have agreed to increase the loans he was involved with from some $212,000 to $353,500 and then $450,000, at real risk of ending up homeless, in circumstances where he came to know that his son had lied to him in 2002 about his asset position and in 2003, about that and his business' ability to make repayments, given that it had already been put into liquidation, is a conclusion which I am satisfied is not open on the evidence. 154 While he was undoubtedly a loving and supportive father, he was plainly not a foolish man. He understood that the business had been affected disastrously by events beyond its control, but he was assured that it was improving. In the past, the business had been so successful that his son had received an offer of a million dollars for the business. His belief was that the business would recover. He had himself worked through downturns in his own business. Had he discovered in 2003 what was readily discoverable by Mr Vertzayas, that his son had concealed from him that the business was in liquidation, the purpose for which he understood from his son the increased loan was being sought, would have been gone. He would have learned this in circumstances where he would also have learned that his son had lied to him about his assets. Again, that was easily discoverable by Mr Vertzayas. Had Mr Charles King been advised about these matters as he ought to have been, I am of the view that he would not have proceeded with the loans, at the least unless other security was provided, which would have protected his home. That was certainly consistent with his pursuit of a settlement in the family law proceedings and his pursuit of his cross claim. 155 When Mr Vertzayas told Mr Charles King in 2002 that he was entitled to be separately represented, he did not understand that Mr Vertzayas was attempting to tell him that he had a conflict. His response was to ask why he needed a separate solicitor, but Mr Vertzayas' attempt to answer his question, was not really enlightening. Mr Vertzayas certainly gave Mr Charles King no advice about the real nature of the risk he perceived Mr Charles King to be taking, other than the obvious, that if the loan was not repaid, he risked losing his home. Both Mr Charles King and Mr Paul King explained why there was little risk for Mr Charles King, but still Mr Vertzayas took no steps to ensure that Mr Charles King had the necessary understanding of what he was agreeing to, or the risk he was really taking. Mr Vertzayas did nothing at all to satisfy himself that Mr Charles King was giving informed consent, or to advise him as to what steps he could take, in order to protect his own position, in relation to his only asset, even though he had knowledge of the NAB's concerns about the business. 156 Mr Charles King had been a successful businessman, who ran a family business with his wife, for many years before retirement. The evidence did not suggest any imprudence on his part, until his son misled him in 2002 and 2003. On his evidence, he believed that he was helping to save a very successful business, by agreeing to the increased borrowings, but that he was not at real risk in financing that assistance, given his son's assets. 157 So far as 2003 is concerned, there is a question as to when it was that Mr King came to learn about the appointment of the administrator; it was after he learned about the accountant stealing from the business. That it was before the loan was taken out, was not established. Had Mr Charles King understood that the company had been placed into administration, it is unlikely that he would have told Mr Vertzayas at their meeting that the business was doing well. At that stage, a liquidator had been appointed. There is no evidence from which it can be inferred that this was known to Mr King, nor that he would have agreed to such significantly increased borrowings, in those circumstances. 158 It was also suggested that it would be concluded that unless the further money was advanced, that the business would have failed earlier and that Mr Charles King would then have lost his money, when the bank called on the mortgage. I am unable to accept the thrust of that submission. What must also be considered is what Mr Charles King would then have been confronting had the 2002 loan not been entered, namely repayment of the NAB debt of $212,000, not the $353,500 loan from Peppers, or the $450,000 loan from Permanent. 159 In considering this aspect of the argument, account must be taken of Mr Vertzayas' evidence, that coming to an agreement with the NAB about repayment terms, could have been explored in 2002, if Mr Charles King had not been prepared to agree to the loan with Peppers. Other means of securing his position, such as a charge over the assets of Mr Paul King, or his companies, could also have been considered. While the NAB was then concerned about the financial position of the business, it continued. Mr Paul King serviced both the significantly increased borrowings in 2002 and 2003, up until his arrest in 2003, despite the problems which the business faced. That the NAB loan would not have been serviced, had it continued, was not established. 160 Further, it may also not be overlooked that after Mr Paul King ceased making repayments in 2003, one of Mr Charles King's other sons, Mr Anthony King serviced the loan to an amount of some $50,000. On the evidence these payments ceased in April 2005, when certain advice was given by the Legal Aid Commission. While it was argued that there was no evidence led from Mr Anthony King, which established that he was willing or able to provide financial assistance to Mr Charles King in 2002 or 2003, the fact that he did provide such assistance, may not be ignored. 161 It may also not be overlooked that Mr Charles King obtained a settlement in the family law proceedings involving his son Paul and his wife, of $205,000, which he applied to partially repay the 2003 debt. 162 Having considered the evidence, I am unable to conclude that had Mr Charles King received the advice he ought to have received from Mr Vertzayas in 2002 and 2003, so that he came to know how his son had deceived him, that he would nevertheless have agreed to the increased loans, which his son duped him into agreeing to, without taking any of the other steps available to him, to protect his home. I am satisfied that the increased borrowings and the losses suffered by Mr Charles King, when the 2003 loan could not be repaid, were the result of Mr Vertzayas' failures. 163 Also to be considered is the argument that Mr Vertzayas may not be held liable for the Permanent loan, because he was told the purpose and intent of the loan was for improvements on the property. The loan documentation had already been signed when Mr Vertzayas saw it. As Mr Charles King accepted, he knew that the purpose of the loan was for his son's business, to increase the borrowings and to obtain more favourable terms, so that the purpose declared for the loan in the documentation was inaccurate. While he and his son had discussed some renovations to his home, he did not expect that to be done. He nevertheless just signed the form, giving no thought to the inaccuracy having any consequence. 164 It was argued that no damage could be found, given Mr Vertzayas' unchallenged evidence that he understood the money was intended to be used for home improvement. That is not how his evidence may be understood. On that evidence, he was aware that the purpose of the 2002 loan was for Mr Paul King's business. In 2003 when he met with Mr Charles King and Mr Paul King, Mr Paul King instructed that 'We are re-financing the Peppers Loan because we have obtained a better deal' and that 'The terms work out better for us. We will pay out Peppers and there will be some money left over to do some work on the house and pay various debts'. When asked whether Mr Charles King understood the risk that he would lose his house, he replied that his son was to make the repayments and that he was helping him. 165 I do not accept that this conversation could have led to an understanding that the purpose of the 2003 loan was truly for home improvement, given Mr Vertzayas' understanding of the purpose of the 2002 loan, which was being refinanced, in order to obtain better terms, as well as being increased by some $100,000 to $450,000, in the context of a house worth $620,000. While he explained the terms of the mortgage to Mr Paul King and Mr Charles King, Mr Vertzayas did not discuss with them the purpose disclosed in the loan documentation, nor did he give them any advice about their declaration as to the purpose of the loan, or the consequences of that declaration. 166 Again, what has to be considered is that Mr Vertzayas neither met separately with Mr Charles King, to ascertain that he was truly giving informed consent to this significant increase in borrowings, nor, on this occasion, even suggested that he might be separately advised. This was, Mr Vertzayas explained, because he had 'gone through this process' a year before and Mr Charles King appeared to clearly understand the purpose and effect of giving a mortgage and the risk of losing his house. The difficulty with the approach adopted was that Mr Vertzayas again failed in his duty to Mr Charles King. That this approach can have resulted in him having no responsibility for the loss which flowed from the 2003 loan, given the inaccuracy in the purpose stated in the loan documentation, may not be accepted.

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Judgment (60 paragraphs)

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Cases Cited (24)

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