Permanent Trustee Australia Limited & Anor v Andreas Kolozos & Anor & Arthur Krallis & Anor

JUDGMENT 1 HIS HONOUR: These are actions for the possession of land brought by the plaintiff's against two sets of defendant's. As against the defendant's Kolozos, the claim for the possession involves land known as 3 Rayment Avenue, Kingsgrove and as against the defendant's Krallis, land known as 4 Banksia Place, Canada Bay. 2 Both actions for possession were based upon mortgages given to the plaintiff to secure loans made by the plaintiff to the respective defendant's. 3 In relation to both actions for possession there is no contest that the defendant's are in default on repayments of their loan, that appropriate notices were issued pursuant to the Real Property Act (1900) and that the plaintiff is entitled to orders for possession in relation to both properties. 4 However, the matter which calls for the court's determination is a cross-claim, issued by the defendant's. That cross-claim alleges that the plaintiff's allocation of funds raised by the sale of land at Cronulla, which was the subject of a mortgage taken out over that land, is improper. In essence, the defendant's claim that the surplus of funds which arose from the sale of that land by the plaintiff, exercising its power of sale as a mortgagee, should not have been allocated to the second mortgagee of the subject land, but should have been utilised to diminish the defendant's indebtedness under other mortgages taken out over other land. 5 It is thus necessary to outline the history of the relationship between the plaintiff's and the defendant's. The plaintiff's are financial institutions. Over a number of years the defendant's, to finance the activities of a company known as Level Developments Pty Ltd, mortgaged various parcels of land which they owned. 6 The first of those transactions involved a loan by the plaintiff Challenger Managed Investments Limited to the company Level Developments, in the sum of $386,250. That loan was secured by a mortgage over the land at Canada Bay, which is owned by the defendant's Krallis. It was said that the purpose of the loan to Level was to assist in the purchase of a development site at 32-34 Burraneer Bay Road, Cronulla and 26-28 Dodson Avenue, Cronulla. 7 On 20 December 2000 the plaintiff, Challenger, loaned $800,000 to Level. At this time, John Andrew Kolozos, Andrew Kolozos and Theodora Kolozos mortgaged a property at 5 Ramsay Street, Picnic Point to the plaintiff Permanent. On 28 March 2002 that mortgage was discharged. At the time of discharge the property at Picnic Point was sold. 8 The Cronulla property was purchased by Level on 21 December 2000 and at that time Level mortgaged the property to Permanent. That mortgage was discharged on 18 May 2001. At that time the property was re- mortgaged to an organisation known as HG&R Finance Limited. 9 On 16 November 2001 the loan of $800,000 made on 20 December 2000 was reduced, following part repayment, to the sum of $217,000. 10 On 14 December 2001 the loan which had been given on 26 October 2000, was increased by $30,000 to $416,250. 11 On 22 March 2002 the loan of 20 December 2000 which, as I have said, had been reduced on 16 November 2001 to the sum of $217,000, was increased to the sum of $356,000. 12 On 22 March 2002 the loan, initially given on 20 December 2000, was increased by $139,000, from the reduced amount of $217,000, to $356,000. That loan was secured by a mortgage granted by the defendant's Kolozos over the property at 3 Rayment Avenue Kingsgrove, which is the subject of one of the actions for possession. 13 On 13 May 2003 the loan originally granted to Level on 25 October 2000 was further increased by the sum of $108,750 to, $525,000. No additional security was sought over this loan. On 13 May 2003, the loan originally granted on 20 December 2000 was increased by $56,500, to the sum of $412,500. 14 The Cronulla properties had been the subject of mortgages granted in favour of companies known as HG&R Finance Limited and HG&R Securities Pty Limited. On 25 June 2003 those mortgages were discharged. They were discharged as a consequence of a loan in the sum of $2,625,000, granted by the plaintiff Challenger to Level. Those loans were secured by a first mortgage to the plaintiffs over the Cronulla property. Furthermore, the loan was guaranteed by Stephen Dennis Krallis and John Kolozos. On 5 June 2003 the plaintiffs had agreed to a second mortgage being taken out in favour of three entities, in the sum of $900,000, over the Cronulla properties. 15 Unfortunately, Level was placed into administration on 13 January 2004, ultimately being placed into liquidation on 9 February 2004. The plaintiffs went into possession of the Cronulla property on 15 March 2004. Thereafter, the plaintiff's allowed the project manager to complete the development of those properties. Following completion, on 6 November 2004 the plaintiff's sold the Cronulla properties, settlement being achieved on 18 February 2005. 16 The total sum recovered from the sale by the plaintiff's of the Cronulla properties was $3.485 million, inclusive of GST. The plaintiff's propose to pay any surplus funds, after the debt which is related solely to the Cronulla properties to them is extinguished, to the second mortgagees of the Cronulla properties. It is this allocation which is the subject of the cross-claim in the matter. 17 The reason advanced by the plaintiff's why they propose to allocate the surplus monies from the sale of the Cronulla properties in this manner is that they are required to do so by s58(3) of the Real Property Act (1900). S58(3) is as follows :- "(3) The purchase money to arise from the sale of any such land, estate, or interest, shall be applied, first, in payment of the expenses occasioned by such sale; secondly, in payment of the moneys which may then be due or owing to the mortgagee, chargee or covenant chargee; thirdly, in payment of subsequent mortgages, charges or covenant charges (if any) in the order of their priority; and the surplus (if any) shall be paid to the mortgagor, charger or covenant charger, as the case may be." 18 How then, do the defendant's overcome the statutory obligation imposed upon the plaintiff's by the Real Property Act? The defendant's argument commences with the proposition that the mortgage entered into over the Cronulla properties was an all monies mortgage. Thus, it is put, that that mortgage secured the earlier loans entered into by the defendant's. There is no doubt that the wording of the first mortgage entered into over the Cronulla properties by Level is an all monies mortgage. It was put that the defendant's, as third party mortgagors, are entitled to a pro tanto application of the surplus from the sale of the Cronulla properties to their outstanding mortgage debts over other properties. This claim was based upon the plaintiff's equitable duty, as a mortgagee, to act in good faith towards third party mortgagees when the power of sale is exercised. That such a duty exists is undoubted (see Lloyds TSB Bank PLC v Shorney (2002) 81 1 FLR; Hancock v Williams 42 SR 253 per Jordan C.J. at pp 255-257, Davidson.J. at pp 258-259). It was put that that equitable duty of good faith would not be fulfilled by the proposed distribution to the second mortgagee. It was on this basis that the defendant's submitted that they were entitled to have the so called surplus entitled to be applied pro tanto to the debt secured by the mortgages over the other properties. This argument, in my view, is doomed to failure because of the statutory obligation which the plaintiffs had under s58 of the Real Property Act to account, first to the second mortgagee for any surplus, and second, to the mortgagor for any balance remaining. Here, there was no balance remaining to go to the mortgagor - in this case the liquidator of Level. In short, there can be no breach of an equitable duty to act in good faith to third party mortgagors when a mortgagee fulfils a statutory obligation to others in dispersing funds as the plaintiff's propose to do here. 19 Additionally, the defendant's rely in their cross-claim on the provisions of s12CA and 12CC of the Australian Securities & Investments Commission Act (2001) (Cth) ("ASIC Act"). s12CA is in the following terms :- SECTION 12CA UNCONSCIONABLE CONDUCT WITHIN THE MEANING OF THE UNWRITTEN LAW OF THE STATES AND TERRITORIES "12CA(1) [Prohibition] A person must not, in trade or commerce, engage in conduct in relation to financial services if the conduct is unconscionable within the meaning of the unwritten law, from time to time, of the States and Territories."

engage in conduct that is, in all the circumstances, unconscionable." 20 Here, the defendant's seek to make out the case that the plaintiff's conduct is unconscionable within the meaning of those sections; then the defendant' s seek relief in accordance with s12GM of that Act. s12GM is in the following terms :- SECTION 12GM OTHER ORDERS "12GM(1) [Compensation] Without limiting the generality of s12GD, if, in a proceeding instituted under, or for an offence against, this Division, the Court finds that a person who is a party to the proceeding has suffered, or is likely to suffer, loss or damage by conduct of another person that was engaged in in contravention of a provision of this Division, the Court may, whether or not it grants an injunction under section 12GD or makes an order under s12GF, 12GLA or 12GLB, make such order or orders as it thinks appropriate against the person who engaged in the - conduct or a person who was involved in the contravention (including all or any of the orders mentioned in subsection (7) of this section) if the Court considers that the order or orders concerned will compensate the firstmentioned person in whole or in part for the loss or damage or will prevent or reduce the loss or damage." 21 In support of its submission that the plaintiff's actions, in allocating the funds as it proposes to from the sale of the Cronulla properties, is unconscionable, the defendant's relied upon what fell from Austin J in the Supreme Court in Boral Formwork v Action Makers [2003] NSWSC 713. In that case Austin J considered the reach of ss5lAA and 51AC of the Trade Practices Act (1974) - sections which are in identical terms to sections 12CA and 12CC of the "ASIC Act". There, Austin J held that unconscionable conduct within the reach of those sections overcame the principle of autonomy. The principle of autonomy provides that a financier's unconditional payment obligation in commercial instruments is independent of the underlying contract between the applicant for the instrument (the account party) and the beneficiary of the instrument; therefore, with limited exceptions, courts do not interfere with the performance of the payment obligation. In holding that the sections did overcome the effect of that principle, Austin J accepted the analysis of s 51AC (the equivalent of s12CC(1)) proposed by the Full Federal Court in Hurley v McDonald's Australia Ltd [2000] ATPR 41-741 at 4,585. There their Honour's said :- "For conduct to be regarded as unconscionable, serious misconduct or something clearly unfair or unreasonable, must be demonstrated .... . Whatever unconscionable' means in sections 51AB and 51AC, the term carries the meaning given by the Shorter Oxford English Dictionary, namely, actions showing no regard for conscience, or that are irreconcilable with what is right or reasonable ... . The various synonyms used in relation to the term unconscionable' imports a pejorative moral judgment ..." 22 In my view, the plaintiff's conduct, in fulfilling the obligation cast upon them to account in the way they have pursuant to s 58 of the Real Property Act, cannot be catergorised as being unconscionable conduct. Indeed, I find it difficult to catergorise it as being anything other than entirely proper conduct. 23 Accordingly, whether the defendant's claim is based upon the provisions of the "ASIC Act", or a mortgagees equitable duty to third party mortgagees, such claims are without foundation and thus cannot succeed. 24 Since reserving my reasons I have been informed that the defendant's have now discharged the mortgages over the Kingsgrove and Canada Bay properties. Thus, there is no need to make an order for possession on the plaintiff's claim. Accordingly, the orders of the court will be that there will be judgment for the plaintiff's (cross-defendant's) on the defendant's (cross-claimant's) claim. The defendant's are to pay the plaintiffs costs.

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