Perpetual Trustees Victoria v Longobardi

Perpetual Trustees Victoria v Longobardi - [2009] NSWSC 654 - NSWSC 2009 case summary — Zoe

[18]

(a) In entering into the transaction the Cross Defendant participated in a system which was contrary to the public interest involving the lending of funds to borrowers (including the First and Second Cross-Claimants) who had no capacity to discharge the mortgage other than by way of: (i) Obtaining new finance and incurring further application, establishment, broking, legal, valuation and other fees; or (ii) Selling their home to repay the principle. (b) The advance of the Principal on the terms in the Credit Contract was a form of "asset lending", that is, the sum was advanced in disregard of the First and Second Cross-Claimants' capacity to pay the monies due under the Credit Contract, but with regard to the value of the Property. (c) There was material inequality in the bargaining power, economic circumstances and educational background of the cross claimant and the officers and employees of the Cross Defendant; (d) By reason of the state of their mental capacity, the First and Second Cross Claimants were unable to protect their own interests; (e) The provisions of the Credit Contract and the Mortgage were not the subject of negotiation between the parties at the time they were entered into; (f) It was not reasonably practicable for the First and Second Cross-Claimants to negotiate for the alteration of, or to reject, any provisions of the Credit Contract or the Mortgage; (g) The consequences of non-compliance with all or any of the provisions of the Credit Contract would be to entitle the Cross Defendant to possession of First and Second Cross-Claimants' only substantial asset being their home. (h) At the time of entering into the Credit Contract the Cross Defendant knew or could have ascertained that the First and Second Cross-Claimants could not pay in accordance with its terms or not without substantial hardship. (i) The First and Second Cross-Claimants did not receive independent legal advice or any other sort of professional advice, including financial or accounting advice; (j) The conduct of the Cross Defendant and its officers, employees, and agents in similar transactions and courses of dealing was unfair and was conduct similar to the conduct of the Cross Defendant and its officers, employees, and agents in respect of the transaction between the present parties; (k) The Cross Defendant and its officers and employees did not act in good faith. The statutory provisions 6 I set out, so far as they are relevant, ss 6, 7 and 9 of the Contracts Review Act and ss 12CB and 12CC of the ASIC Act:

[32]

(4) For the purpose of determining whether a person has contravened subsection (1) in connection with the supply or possible supply of financial services to another person : (a) the court must not have regard to any circumstances that were not reasonably foreseeable at the time of the alleged contravention ; and (b) the court may have regard to conduct engaged in, or circumstances existing, before the commencement of this section. SECT 12CC Unconscionable conduct in business transactions (1) A person must not, in trade or commerce , in connection with: (a) the supply or possible supply of financial services (see subsection (6)) to another person (other than a listed public company ); or (b) the acquisition or possible acquisition of financial services (see subsection (7)) from another person (other than a listed public company ); engage in conduct that is, in all the circumstances, unconscionable. (2) Without in any way limiting the matters to which the court may have regard for the purpose of determining whether a person (the supplier ) has contravened subsection (1) in connection with the supply or possible supply of financial services to another person (the service recipient ), the court may have regard to: (a) the relative strengths of the bargaining positions of the supplier and the service recipient; and (b) whether, as a result of conduct engaged in by the supplier, the service recipient was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the supplier; and (c) whether the service recipient was able to understand any documents relating to the supply or possible supply of the financial services ; and (d) whether any undue influence or pressure was exerted on, or any unfair tactics were used against, the service recipient or a person acting on behalf of the service recipient by the supplier or a person acting on behalf of the supplier in relation to the supply or possible supply of the financial services ; and (e) the amount for which, and the circumstances under which, the service recipient could have acquired identical or equivalent financial services from a person other than the supplier; and (f) the extent to which the supplier's conduct towards the service recipient was consistent with the supplier's conduct in similar transactions between the supplier and other like service recipients; and (g) if the person is a corporation--the requirements of any applicable industry code (see subsection (11)); and (h) the requirements of any other industry code (see subsection (11)), if the service recipient acted on the reasonable belief that the supplier would comply with that code; and (i) the extent to which the supplier unreasonably failed to disclose to the service recipient: (i) any intended conduct of the supplier that might affect the interests of the service recipient; and (ii) any risks to the service recipient arising from the supplier's intended conduct (being risks that the supplier should have foreseen would not be apparent to the service recipient); and

[36]

(7) Without limiting the generality of subsections (1) and (2), the orders referred to in those subsections include the following: (a) an order declaring the whole or any part of a contract made between the person who suffered, or is likely to suffer, the loss or damage and the person who engaged in the conduct or a person who was involved in the contravention constituted by the conduct, or of a collateral arrangement relating to such a contract, to be void and, if the Court thinks fit, to have been void ab initio or at all times on and after a date before the date on which the order is made ; (b) an order varying such a contract or arrangement in such manner as is specified in the order and, if the Court thinks fit, declaring the contract or arrangement to have had effect as so varied on and after a date before the date on which the order is made ; (c) an order refusing to enforce any or all of the provisions of such a contract; (d) an order directing the person who engaged in the conduct or a person who was involved in the contravention constituted by the conduct to refund money or return property to the person who suffered the loss or damage; (e) an order directing the person who engaged in the conduct or a person who was involved in the contravention constituted by the conduct to pay to the person who suffered the loss or damage the amount of the loss or damage; (f) an order directing the person who engaged in the conduct or a person who was involved in the contravention constituted by the conduct, at his or her own expense, to supply specified services to the person who suffered, or is likely to suffer, the loss or damage; (g) an order , in relation to an instrument creating or transferring an interest in land, directing the person who engaged in the conduct or a person who was involved in the contravention constituted by the conduct to execute an instrument that: (i) varies, or has the effect of varying, the first-mentioned instrument ; or (ii) terminates or otherwise affects, or has the effect of terminating or otherwise affecting, the operation or effect of the first-mentioned instrument .

[42]

(3) Ring Tread Systems (Australasia) Pty Ltd (Receiver and Manager Appointed) v Tubb [1998] NSWCA 186. 12 In Toscano, the plaintiff and his wife carried on an earthmoving business in partnership. They transferred that business from the partnership to a company of which they were the sole shareholders. Mr and Mrs Toscano guaranteed to one entity the company's performance of certain obligations, and gave a mortgage to another entity to secure advances made by it to the company for the purposes of its business. All of those things were done after the business was transferred to the company. 13 McLelland J said at 149 that, in those circumstances, "neither Mr Toscano nor Mrs Toscano was carrying on a business, in the course of or for the purpose of which it could properly be said that the transactions [in question] were entered into, and I do not think that it could legitimately be said that [those] transactions… were entered into by them "for the purpose of" a business which they ceased to carry on some time before, notwithstanding that those transactions arose out of that business, and more particularly out of a contract entered into in the course of their carrying on that business". 14 In Stokes, the defendants engaged in business through the medium of a company which they controlled. The company carried on the business as the trustee of a trading trust. The plaintiff lent money to the company. The defendants granted mortgages to the plaintiff, over property owned by them personally, to secure repayment of the money lent to the company. 15 Rogers J referred at 176 to the decision of the House of Lords in Salomon v Salomon and Co [1897] AC 22. His Honour said that it appeared from this decision "that the law draws a clear distinction between the individual and the legal entity utilised for the purpose of carrying on business". He then referred to what he perceived to be illogicalities in the operation of s 6(2), and turned to the statutory words "carried on by him" (now rendered into the gender - neutral words "carried on by the person"). His Honour referred to the decision of McLelland J in Toscano and said that, for reasons that it is unnecessary to recount, "it is appropriate to hold that the meaning to be given to [s 6(2)] is the one which appears on its face and which was the one adopted by McLelland J." 16 At 177, Rogers J called for Parliament to clarify its intention. That call has gone unheeded, although s 6 has been amended by the process of gender neutralisation to which I have referred. It is perhaps legitimate to infer from that history that Parliament is of the view that the interpretation given to s 6(2) by McLelland J and Rogers J is correct. 17 Ring Tread likewise concerned a business carried on by a company, supported by guarantees given by its directors. The directors were sued on their guarantees. They raised a defence under the Contracts Review Act. Mason P (with whom Meagher and Handley JJA agreed) said that "the trading or business undertaking was that of [the company] and I cannot see any basis upon which the Contracts Review Act was excluded from the proceedings so far as they touched the respective rights of" the directors. His Honour referred to the decisions in Toscano and Stokes and said that "[t]he principles stated in those two judgments… have not to my knowledge been doubted in any later case". 18 Mr M P Cleary of counsel, who appeared for Perpetual, submitted that the decisions to which I have referred were distinguishable. He drew attention to the fact that each concerned a guarantee, whereas in this case the liability undertaken by Mr and Mrs Longobardi was a principal liability. Mr Cleary did not submit that Mr and Mrs Longobardi carried on a trade, profession or business as investors in other business. Nor did he submit that the amount of $525,000.00 referable to Facility 1, was borrowed for the purposes of any investment business. 19 To my mind, that is a distinction without a difference. The relevant question is the meaning to be given to the words "a trade, business or profession carried on by" a person who is a claimant for relief under the Act. The key issue of fact, common to each case (including this) is that the individuals carried on business through the medium of a company. No doubt, they controlled the company. No doubt, they "engaged" in business through the company. No doubt, they provided financial support to the company for the purposes of the business. But the approach taken in the cases to which I have referred is that, for the purposes of s 6(2) the business in question is not one "carried on by" the individuals. 20 That approach requires the conclusion, in this case, that the business in question was not one carried on by Mr and Mrs Longobardi, for the purposes of s 6(2). Accordingly, the first issue must be resolved in their favour.

[44]

Credibility 22 Perpetual called only one witness: Mr Matthew Boyd. He gave his occupation as "Team Leader - Litigation and Non-Conforming Collections Mortgage Management". He explained that "Non-Conforming" was a term used to describe what are often referred to as "low doc" loans; or, in his view, "subprime" loans. The loan to Mr and Mrs Longobardi was in terms a "low doc" loan. 23 Mr Boyd has been employed in his current position since September 2008. I am satisfied that he sought to give evidence truthfully. However, I am equally satisfied that, to the extent that he purported to give evidence of matters that had been of significance in the approval process, his evidence should be disregarded. That is because he had had no experience in this side of the business. His views were expressed only by reason of his having read the relevant documents (see for example T17.9 - 19.9). He did not speak to the person who had been responsible for approval of the loan (nor was that person called to give evidence). It is in my view the case that the relevant opinions were put into words by Perpetual's solicitors, and that Mr Boyd accepted their truth. 24 To cut to the chase: one matter in issue was whether this was "asset lending": a kind of lending wherein the lender relies purely on the strength of the security, and has no regard to the borrower's capacity to repay. Mr Boyd said in para 28(4) of his affidavit that from his review of the documents that he identified, he concluded that "[t]he ability of the defendants to service the Mortgage Loan by making monthly repayments was a paramount consideration in considering the loan being sought by the defendants". Whilst I have no doubt that Mr Boyd believed this to be true, I do not regard it as having any probative value. It is no more than an opinion expressed by him having read certain documents. If the conclusion expressed by Mr Boyd can be drawn from the documents, it can be drawn regardless of his opinion. If it cannot be drawn from the documents, his opinion does not help. 25 Mr and Mrs Longobardi gave evidence, and were cross-examined. In the result, no real attack was made on their credibility. I formed the view that each of them sought to give truthful and accurate evidence to the best of his or her ability. It is obvious that they have a very significant stake in the outcome. It is equally obvious that each of them is deeply concerned at the prospect of losing their family home. But I do not think that these considerations had any adverse impact on the reliability of their testimony. 26 Mr Longobardi's recall was adversely affected by his history of mental illness and treatment: a matter to which it will be necessary to return. Thus, he was unable to recall a number of matters of which, ordinarily, one would expect a person in his position to have a clear recall. But, accepting as I do the explanation given (which was not challenged) - i.e., his state of health - I do not regard his lack of recollection as reflecting adversely on his credibility.

[45]

Events leading up to the loan agreement and mortgage 27 Mr and Mrs Longobardi have owned and lived in their family home since about September 1996. They have four children who live at home with them. In addition, Mr Longobardi's mother lives there in a "granny flat", and Mrs Longobardi's mother has lived in the house since about February this year, although at the time Mrs Longobardi swore her affidavit (30 May 2009) her mother was in hospital. 28 Mr Longobardi had worked for a company known as 3M for about eight years up until March 2004. In that month, he was made redundant. When that happened, Mr and Mrs Longobardi looked around for a business that they, and their children, could operate. 29 Mr Longobardi had suffered for many years prior to 1999 from acute bouts of depression. In 1999, he was referred to a psychiatrist, Dr John Cosgrove. Dr Cosgrove diagnosed severe bipolar dysfunction and placed Mr Longobardi on medication. 30 At some time prior to June 2004, Mr and Mrs Longobardi became aware of a business for sale known as "Sydney Blooms". That comprised a florist's shop, nursery and café. It operated from leased premises in Sydney Road, Balgowlah. They decided to buy it. The purchase, which was in form the purchase of the shares in the company by which the business was conducted, was settled on 16 June 2004. The purchase price was $90,000.00 together with stock at valuation: in round figures, a further $75,000.00. 31 When Mr and Mrs Longobardi bought their home, they borrowed from AMP Society Limited (AMP). As at mid June 2004, they owed about $125,000.00 to AMP. They borrowed a total of $425,000.00 from RAMS. $125,000.00 (in round figures) was utilised to repay the balance owed to AMP. The balance was utilised (as to $165,000.00) to complete the purchase and (as to $135,000.00) for working capital for the business. The indebtedness was secured by way of mortgage over the family home. 32 The business did not perform well. Its income was insufficient to cover overheads. By August 2004, all the money available under the RAMS facility had been spent. Mrs Longobardi approached RAMS for a further loan. The facility was increased by $70,000.00. That, of course, was also secured by the mortgage over the family home. 33 Mr Longobardi's health declined further from about October 2004. He was experiencing alternating hypermanic and depressive episodes. In addition, he suffered from crushed vertebrae, which caused him severe pain. That pain continued until a fusion was performed in April 2005. 34 To jump ahead: Mr Longobardi, suffering from severe depression, was hospitalised for about eight weeks from April 2006. He underwent electroconvulsive therapy (ECT) at the Northside Clinic. That brought him out of his depressive state, but after a few weeks he suffered a relapse. He was hospitalised for another eight weeks in August and September 2006, and again underwent ECT. That appears to have been successful, in the sense that Mr Longobardi has not (so far as the evidence reveals) suffered any further periods of hypermania or depression. He obtained employment (as a storeman in a local business) in February 2007, and has held that employment since then. 35 In paragraph 12 of his affidavit sworn 30 May 2009, Mr Longobardi said: "12. I have no real memory of the period between October 2004 and October 2006. It is almost a complete blank. Jane had the responsibility of running the business as well as working a part time job to bring in extra income. I do not recall any details of the business or if I had any involvement in any decisions, although I am told by my wife Jane, that I purchased an excessive quantity of garden pots, and other items, which strained the cash flow at the time, but I have no recollection of having done this." 36 That evidence was not challenged, and I accept it. 37 To return to the chronological narrative: by December 2004, the further sum of $70,000.00 advanced by RAMS had run out. Mrs Longobardi (who by then was managing the business on her own, with some assistance from her daughters, and was holding down a part time job which occupied her for two days a week) sought further funding. By then (perhaps not surprisingly) she too had become depressed, and was taking appropriate medication. Mrs Longobardi explained her reasons for seeking further finance as follows in para 12 of her affidavit sworn 30 May 2009: "12. By this stage and despite my taking the anti-depressants, I was very stressed myself and I was having a great deal of difficulty keeping the books up to date, ordering stock and attending to the day to day management of the business. I was falling behind with the BAS returns and payments to the ATO. I knew that the business was in desperate need of more funds to keep it going. It did not appear to me that the business was a failure and that I should have taken steps to close it down. The lease still had some months to run, and I could see no alternative other than to borrow more money." 38 I accept that evidence. 39 In retrospect, one can say the decision to borrow yet more money, in an attempt to keep the business running, was wrong. In the well worn phrase, it was throwing good money after bad. But when one considers the stress in Mrs Longobardi's life at that time, it is not surprising that she did not evaluate matters as dispassionately as one may do, unaffected by personal involvement, in the cold and clear light of hindsight.

[46]

Mrs Longobardi seeks further finance 40 Mrs Longobardi spoke to an employee, Maria, "who was our florist". Maria said that she would speak to her friend, "Marvig". Maria said that Marvig was a broker. 41 To jump ahead once more: "Marvig" (as, for convenience, I shall refer to this person) is a somewhat shadowy figure. All that can be said for sure is that she appears to have been a financial intermediary (or, in more ordinary parlance, a broker), and that in some way which is not entirely clear she procured the loan that is at stake in these proceedings. 42 What is clear is that Marvig provided documents to Mr and Mrs Longobardi on a number of occasions. On the last occasion, about 23 February 2005, she brought the loan agreement and mortgage to them. They signed it and she witnessed it. Her name, as printed under her witnessing signature, is given as "Mahvash - Ojrati". 43 Neither party called Marvig to give evidence. 44 Mrs Longobardi gave evidence that Marvig contacted her in late December 2005 or early January 2005, when they had a telephone conversation. In substance, Mrs Longobardi told Marvig of her and her husband's financial predicament; Marvig said that she could assist, and asked to know what their assets were. Mrs Longobardi said that the home was worth between $800,000.00 and $900,000.00. 45 A few days later, Mrs Longobardi had a further telephone conversation with Marvig. It appears that Marvig was seeking finance from the Commonwealth Bank of Australia. She said that the bank "will… require a letter from your accountant to say that the business can afford the repayments". Mrs Longobardi replied that "[t]here is no way we can get an accountant to say that". Marvig said "I may have to do it elsewhere". 46 A few days later, Marvig rang again. She said that she could get a loan from a lender in Melbourne. She asked for copies of various documents, which Mrs Longobardi faxed to her. 47 At some time, Mrs Longobardi received a "loan application form" on the letterhead of an entity known as "ASMM" or "Australian Secured and Managed Mortgages". ASMM, as I shall call it, is a company known as Property Resources and Investments Pty Limited which trades as AS Mortgage Managers. It is a mortgage originator, which sought out lending opportunities for a company formerly known as Interstar Securities (Australia) Pty Limited. That company and an associated company, Interstar Wholesale Finance Pty Limited (now known as Challenger Mortgage Management Pty Limited) operated a number of mortgage trusts. Perpetual was the trustee under a master trust deed for what was known as the Interstar Millennium Warehouse (N) Trust. For convenience, I shall refer to Perpetual and the Interstar companies collectively as "Perpetual" unless it is necessary to distinguish between them. 48 Mrs Longobardi's evidence is less than clear as to the precise sequence in which documents were given to her and signed. It appears, however, that she and Mr Longobardi signed the application form to which I have referred on 12 January 2005. (I say that because the document contains what they acknowledge to be their signatures, with their names and the date of signature written in by them respectively). By the document, they applied for a total loan of some $650,000.00. The document, which was a printed standard form, contained some information about them in handwriting: including that they were self-employed as florists, and had been so employed for some five years. It gave particulars of their assets and liabilities, and of other matters including the purposes for which the loan was required. Mrs Longobardi said that those details were not in her handwriting. Mr Longobardi identified his handwriting to the extent that he had signed the document (in several places), and written in his name and the date. I do not think that it was put to him that any of the other writing on the loan application form (the document signed and dated 12 January 2005) was his; nor do I think that he said this. (I put the matter in that somewhat obscure way, because the cross-examination, not always having been tied to specific pages of a particular exhibit, is in places a little difficult to follow.) 49 On about 31 January 2005, Mr and Mrs Longobardi signed a further document. That document is entitled: "LoDoc Declaration Of Financial Position" (the LoDoc Declaration). Mr and Mrs Longobardi each agreed that they signed it. Mrs Longobardi appeared to think that it was part of the loan application that had been signed on 12 January 2005. I do not think that it is; it appears to be a separate document, and so far as one can read the date on which it was signed, it appears to be 31 January "20" - presumably, "05" was omitted by mistake. 50 Mr Cleary placed great stress on the LoDoc Declaration. It was addressed to Perpetual as "Credit Provider / Lender". It referred to a loan of $650,000.00, and contained provision for statement of "Borrower Details". It then read: 3. Declaration of Financial Position

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I / We acknowledge that you are relying on this statement in considering whether or not to approve my / our loan application. 51 The document then contained a table for "Borrower (1)" and "Borrower (2)". The first item in the table was "Self Employed - Net Income (Pre Tax). For each of borrower 1 and borrower 2, the amount stated was $75,000.00. The table was signed by Mr Longobardi as Borrower (1) and Mrs Longobardi as Borrower (2). 52 Mrs Longobardi said that the documents were signed in blank: by which she meant that the printed material, including that which I have set out, was present but the handwritten material was not. She said that none of the handwritten material, including the statement of the loan amount, the "Borrower Details", or the stated incomes were in her handwriting. 53 Mr Longobardi had no real recollection of the circumstances in which he signed the document. He did however say that none of the handwriting, apart from his signature, was his. 54 I accept Mrs Longobardi's evidence that the document had not been completed in handwriting when she and her husband signed. It is quite clear that, if they were each making $75,000.00 a year from the business, the business would not have been in the parlous financial position that it was. It is equally clear that their annual income at the time was far less. Mrs Longobardi referred to tax assessments and the like in support of this proposition. Those documents are of little assistance, because they were brought into existence well after 31 January 2005. However, I am satisfied that, as at 31 January 2005, Mrs Longobardi would have understood that she and her husband were not earning anything like $75,000.00 per year. I am equally satisfied that Mrs Longobardi would not have signed a document representing that each of them did earn $75,000.00 per year. 55 Nonetheless, the fact is that each of them signed a document which Mrs Longobardi at least must have understood would have been of no use without some details and figures being written in. Further, each of them signed a document which Mrs Longobardi at least would have understood, had she read it, was one on which Perpetual proposed to rely in assessing their application for a loan. Mrs Longobardi was content to return the document - I think, to Marvig (from whom she had, I think, received it) -having signed it incomplete. 56 Within a few days, Interstar prepared an "income calculation worksheet": on 2 February 2005. That document did a number of things:

[52]

(4) Method 2, however, did allow for tax and living expenses. It took the total income, subtracted tax at what was presumably the relevant rate, and derived a "Net Cash After Tax" figure of $105,826.01 ($52,913.00 for each of Mr and Mrs Longobardi). From this income living expenses, apparently pursuant to some internal formula, of $17,200.00 annually were deducted, leaving available income of $88,628.01. From this, the total commitments (calculated, once more, at the higher rate) of $69,509.04 were deducted, leaving "Surplus Cash Available" of $19,116.97. There was then a calculation of a "serviceability test" which appears to represent the ratio between the net available cash (after tax and living expenses) compared to the total outgoings. That ratio was calculated at 1.28. 57 It is apparent that the author of the document was assessing the ability of Mr and Mrs Longobardi to afford the loan on the basis of their stated incomes. As well, the author calculated the LVR: obviously enough, a matter of significance to someone lending on the security of real estate. 58 It may be inferred that the calculations were carried out pursuant to some guideline or procedure in place at the time. However, no such guideline or procedure was proved. One of Mr Crossland's complaints was that Perpetual had been asked to discover such documents, and had failed to do so. 59 Marvig came to see Mr and Mrs Longobardi in early February 2005: probably, on 10 February. She brought documents for them to sign. Mrs Longobardi's evidence suggests that there was only one such meeting. Mr and Mrs Longobardi signed a document called "Applicant's Financial Summary" and (see at [67] below) at least one other document: a declaration of purpose. Mr and Mrs Longobardi signed the loan agreement and the mortgage. The document styled "Applicant's Financial Summary" was one on which Mr Cleary placed great emphasis in submissions. It is necessary to look at it, and at Mrs Longobardi's evidence of the circumstances in which it was signed, in some detail.

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(3) Living expenses of $17,200.00. 62 There was thus derived a "Surplus (Total Income Less Total Expenses)" of $35,886.00. 63 The document also stated assets of $1,066,000.00, total liabilities of $463,000.00 and net assets of $603,000.00. 64 The salary figure corresponds to the figures stated in the document signed and dated 31 January 2005. The figures for assets and liabilities correspond in substance to the figures given in the loan application 12 January 2005, although with the value of the home taken at $840,000.00 rather than $900,000.00. The liabilities include the amount said in that document to be owed to RAMS. In fact, the amount required on settlement to discharge the RAMS loan was about $507,000.00. 65 Beneath the table appeared the words: "I/We declare that the above is a complete and accurate summary of my/our current financial position and I/We believe that I/We can meet my/our obligations under the loan". 66 The document was then signed by each of Mr and Mrs Longobardi, and dated by them. 67 Mr and Mrs Longobardi agreed that they also signed, and dated 10 February 2005 (in Mr Longobardi's case), a "Declaration of Purpose" pursuant to s 11 of the Consumer Credit Code (i.e., the Consumer Credit Code set out in the appendix to the Consumer Credit (Qld) Act 1994, adopted as a law of New South Wales by s 5 of the Consumer Credit (NSW) Act 1995. The effect of that document is to raise a "conclusive" presumption that the credit to which it refers is not provided wholly or predominately for personal, domestic, or household purposes (see s 11(2) of the Act, and note the somewhat curious rebuttable nature of what is expressed to be a conclusive presumption in circumstances where s 11(3) operates). 68 Neither Mr Longobardi nor Mrs Longobardi professed any recollection of signing the Applicant's Financial Summary. I think the better reading of Mrs Longobardi's affidavit is that that document, and the s 11 declaration, were signed as part of a "suite" of documents including the loan agreement and the mortgage.

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69 On 22 February 2005, someone in the office of Interstar prepared another income calculation worksheet. I infer that this was done using the information conveyed by the Applicant's Financial Summary. The monthly repayments used were slightly lower than those used in the earlier worksheet, and thus the ratios varied slightly (and indicated greater affordability) from those shown in the earlier worksheet. It is not necessary to set out the detail of the later worksheet. 70 The loan agreement and mortgage are dated 23 February 2005. Mr and Mrs Longobardi each acknowledged that they signed each of those documents. As I have said, their signatures were witnessed by Marvig. It is not clear who dated the documents. It is likely that they were signed on 10 February 2005, and that they were retained until settlement, and dated the date of settlement. That is certainly consistent with Mrs Longobardi's evidence that Marvig came to see them in early 2005, and that they signed a number of documents on that day. Mrs Longobardi did not suggest (nor, I think, was it put to her) that Marvig made more than one trip to Sydney for the purpose of procuring the signature of documents. 71 Mr and Mrs Longobardi each agreed that they understood that they were signing an agreement for loan under which they would be lent up to $650,000.00, and a mortgage that would secure their payment and other obligations under that loan. Each of Mr and Mrs Longobardi agreed that they understood that the mortgage was over their family home, and that they might lose the home if they made default. Mrs Longobardi said, perhaps not surprisingly, that this was not at the forefront of her mind when she signed the documents. 72 Equally, Mr and Mrs Longobardi each agreed that they had signed mortgages in the past, over their family home; and that they understood that by doing so they were putting their family home up as security for the relevant loans, and that they might lose the home if they defaulted under those loans.

[60]

(3) The exercise of the power to grant relief "which may, but need not, follow from the conclusion that a contract or a provision thereof is unjust" (at [109]). 74 Counsel referred me to many decided cases, both reported and unreported. I do not propose to deal with many of those cases. I intend no disrespect either to this aspect of counsel's submissions or to the decided cases to which they referred. But, as Spigelman CJ pointed out in Khoshaba at [64], the standard of judgment implied by the word "unjust" in s 7(1) requires the courts "to apply contemporary community standards about what is just. Such standards may vary over time…". 75 Further, as his Honour pointed out in the same case at [73], the application of so general a standard as that denoted by "unjust" cannot be confined by reasons given in earlier cases "as if they were rules". At most, decided cases are helpful because they direct attention to factors that may be significant in undertaking the process of analysis and determination that constitutes the second of the three stages identified by Basten JA. 76 For example, as Gleeson CJ pointed out in Baltic Shipping Co v Dillon (1991) 22 NSWLR 1 at 9, "[t]he general policy of the law is that people should honour their contracts. That policy forms part of our idea of what is just." No doubt, the legislature recognised that general policy. But it set out to create a statutory regime enabling parties to an "unjust" contract to have relief from the operation of some or all of its terms. In effect, the legislature has said that the general policy should be taken to prevail only to the extent that a contract (not excluded from the operation of the act by s 6) is not unjust. 77 Again, Meagher JA has said that although there is jurisdiction under the Contracts Review Act "to make orders in favour of a party to a contract who proves that at the date of the contract he suffers from a relevant disability even though the other party to the contract is unaware of that disability, … in general it would be unsound to exercise the jurisdiction in those circumstances… . The reason… is that it is hardly just to deprive an innocent person of valuable property, of which contractual rights are a species". See Beneficial Finance Corporation Ltd v Karavas (1991) 23 NSWLR 256 at 277. Undoubtedly, the "innocence" of the party against whom relief is sought may be a relevant factor in at least two ways: in considering the jurisdictional question of whether the contract is unjust, and (if it is) in deciding whether and if so how to exercise the discretion to grant relief that is thereby enlivened. But again, his Honour's statement cannot be taken as a rule restricting or circumscribing the operation of s 7.

[61]

Asset lending 78 Having said that, since Mr Crossland's submissions focussed extensively on the concept of "asset lending", it is necessary that I look at some of the cases in which that concept has been discussed. Basten JA referred to that concept in Khoshaba at [128]. He defined asset lending as "to lend money without regard to the ability of the borrower to repay by instalments under the contract, in the knowledge that adequate security is available in the event of default." To engage in such conduct was, his Honour said, "to engage in a potentially fruitless enterprise, simply because there is no risk of loss." His Honour said that in some circumstances, including that the security is the sole residence of the borrower, "there is a public interest in treating such contracts as unjust, at least… where the borrowers can be said to have demonstrated an inability reasonably to protect their own interests". In the same case, Spigelman CJ said at [82] that where a lender is content to lend on the value of the security (i.e., where there is no demonstrated ability to pay other than through sale of the security), that is a factor "entitled to significant weight in the determination of unjustness". His Honour said at [92] that "indifference, suggesting that the Appellant was content to proceed on the basis of enforcing the security" was determinative on the facts of that case. 79 Brereton J referred to asset lending in Riz v Perpetual Trustee Australia Ltd [2007] NSWSC 1153. His Honour said at [70] that where borrowers could not service a loan from their own resources, "then it is not in substance a loan but an asset sale, in which the lender risks nothing but the borrower risks the asset." The risk to the borrower was "considerable" his Honour said, "given the likely inability of the borrower to perform and the probability if not certainty of resort to the security." His Honour found that there was "substantive unfairness… in the imbalance of risk", although that unfairness may not amount to unjustness, for the purposes of s 7(1) where the imbalance was knowingly and voluntarily accepted. However, his Honour continued (again at [70]): "But where in the circumstances in which the transaction is made - particularly where the family home is involved - the borrower has a less than full appreciation of the risks or consequences, or is under some misapprehension or pressure, so as to provide an element of procedural unfairness, such a loan may be unjust. And even apparent comprehension of the transaction and its legal and practical effect and voluntariness is not entirely prophylactic: the purposes of the Contracts Review Act include protection of those who are not able to protect themselves, and while the Act is not a panacea for the greedy, it may come to the aid of the gullible." 80 It will be seen that employment of the concept of asset lending involves a number of matters, including (and this list may not be exhaustive):

[82]

(9) The documents that Mr and Mrs Longobardi signed on 10 February 2005 included one in which, if she had read it, Mrs Longobardi at least must have understood was a statement of their financial position, representing among other things that they had a combined gross annual income of $150,000.00, on which Perpetual would rely in assessing their application for a loan and deciding whether to proceed. 85 Mr and Mrs Longobardi did not communicate to Perpetual the fact that the business had performed dismally for the six months that it had run, and that as a result they were in desperate need of more money to support it. Nor did they communicate to Perpetual the fact that the business was behind in its BAS returns and owed money to the ATO. Was this a case of asset lending? 86 I do not think that it is correct to characterise this as a case of asset lending. On the evidence, Perpetual sought and was given information as to Mr and Mrs Longobardi's annual incomes. Based on what it was told, it carried out calculations which showed that, on the reported income, Mr and Mrs Longobardi were well able to afford to meet their monthly commitments in respect of the amount proposed to be borrowed. In addition, as I have said, Perpetual would have known, or had it turned its mind to the point would have realised, that Mr and Mrs Longobardi had been meeting their commitments to RAMS. By December 2004, their total indebtedness to RAMS was $495,000.00: somewhat in excess of 76% of the loan sought from Perpetual. 87 The inference from the documents is that Perpetual was concerned to know the income of Mr and Mrs Longobardi, so that it could assess whether they would be able to meet their payment obligations. On the figures given to Perpetual, one cannot characterise the transaction as futile (to adapt the language of Brereton J in Riz at [70]). Nor, having regard to the worksheets of 2 and 22 February 2005 (and bearing in mind that there was no challenge to the methodology or calculations in those documents) can it be said that Perpetual lent money without regard to the ability of Mr and Mrs Longobardi to meet their monthly payments (to adapt the language of Basten JA in Khoshaba at [128]). 88 Of course, Perpetual was concerned to know the value of the security, and to calculate an LVR. But most secured lenders have a keen interest in the value of the security. That is not of itself the hallmark of asset lending. 89 It appears that Perpetual, at its own expense, arranged for some form of lender's mortgage insurance. This did not feature largely in the submissions. Nonetheless, it may be possible to infer from the fact that such insurance was put in place that Perpetual thought that the security position needed some form of bolstering. 90 There is some evidence - although far from conclusive - that the interest rate charged on the loan was higher than would have been the case if full documentation had been provided. The LoDoc Declaration dated 31 January 2005 (which Mrs Longobardi said they signed without the handwritten information that now appears) contains a statement to the following effect: "If you present documentation (which is satisfactory to the Lender) at a later stage, in order to verify income, it will be compared with the income that has been declared (above). The comparison will be used by the Lender in assessing whether you are eligible for a decrease in interest rate. Any rate change will be at the Lender's discretion provided the account has been conducted within terms and conditions." 91 As I have said, that notation suggests that Perpetual was charging a higher rate to reflect the "low doc" nature of the loan. It also suggests that Perpetual recognised that there was at least a risk that Mr and Mrs Longobardi's income might not have been as declared. But this does not mean, either by itself or consider in conjunction with the other factors to which I have referred, that Perpetual was engaging in asset lending. 92 It was not suggested that the serviceability worksheets were a sham. It seems to me to be impossible to escape the inference that Perpetual was concerned to satisfy itself as to Mr and Mrs Longobardi's capacity to meet their obligations; or the inference that, if their income had been as disclosed, they should have been able to do so. 93 As I have said, I do not think that the loan and the mortgage can be characterised as asset lending: at least, in the pejorative sense apparent in the descriptions that I have set out.

[86]

(3) valuation and settlement fees of no present relevance. 95 The payment to Money and You Financial Services was confirmed in a fax from ASMM to Mr and Mrs Longobardi dated 13 April 2005, in which the disbursement of the loan amount was set out. 96 The evidence does not reveal the identity of Money and You Financial Services, but it appears to be an entity separate to ASMM. 97 The likelihood, I think, is I think that Marvig either was Money and You Financial Services, or was a representative of that entity. That is consistent with a conversation that Mrs Longobardi had with Marvig in early January 2005 in the course of which Marvig said, among other things: "I think I can get a loan from some mortgage lenders from Melbourne". 98 In any event as I have said, there is no evidence that Marvig was a representative of ASMM. 99 Mr and Mrs Longobardi were put into contact with Marvig through their florist, Maria. It is plain on Mrs Longobardi's account of her first conversation with Marvig that Mrs Longobardi asked Marvig to help them in obtaining a further loan. Thus, I think, it is proper to characterise Marvig (or Money and You Financial Services, if it is correct to say that she represented that entity) as Mr and Mrs Longobardi's broker, not as a representative of ASMM or Perpetual. 100 Marvig was the channel of communication between Mr and Mrs Longobardi on the one hand and ASMM or Perpetual on the other. It was she who provided Mr and Mrs Longobardi with documents for their signature (in some cases, it appears, by fax; and in at least one other case, in person). It was Marvig who passed the signed documents to ASMM or Perpetual. (I except the mortgage, which presumably was handed over at settlement in the usual way). 101 Accepting Mrs Longobardi's evidence that the documents signed by her and Mrs Longobardi and dated 12 January 2005 (the loan application) and 31 January 2005 (the LoDoc Declaration) had not been completed, the inescapable conclusion is that she and her husband signed them and gave them to Marvig to be passed on to ASMM. As I have said at [84(8),(9)] above, Mrs Longobardi at least must have realised that the documents, if incomplete, would be useless; and, had she thought about it, must have realised that Marvig (or another person) would be likely to complete them before passing them on to ASMM. 102 There is no evidence that the Applicant's Financial Summary was incomplete, when it was signed. At best, Mr and Mrs Longobardi signed it without giving any attention to the accuracy of its contents. 103 Thus, I think, if the documents of 12 and 31 January 2005 were completed inaccurately, so as to misrepresent Mr and Mrs Longobardi's financial position, then as between them and Perpetual, it is they who must bear the responsibility for this. They permitted it to happen by dealing with the documents in the way that they did. They did not alert Perpetual to the fact that the documents had been signed "in blank". Further, they compounded the situation by signing the Applicant's Financial Summary on 10 February 2005, when at least Mrs Longobardi must have known that it would be returned to Perpetual for the purpose of assessing and deciding whether to proceed with the proposed loan. 104 To the extent that the use of apparently false declarations of income, and therefore erroneous (although arithmetically correct) assessments of capacity to repay, are indicia of injustice, the responsibility for this must remain with Mr and Mrs Longobardi. If they had completed the documents signed in January before sending them off, or had checked and corrected the document signed in February before sending it off, it is unlikely that the transaction would have proceeded. If, however, it did, it would be a clear case of asset lending and, at least prima facie, a clear case for deciding that the loan agreement and mortgage were thereby unjust. 105 Mr Crossland submitted that Perpetual could have ascertained the truth about Mr and Mrs Longobardi's ability to repay had it wished. I accept that if Perpetual, or ASMM, had made direct contact with Mr and Mrs Longobardi, and had asked for details for their incomes, they would have responded truthfully. I accept that the income revealed would have been a small percentage of the combined figure of $150,000.00 on the basis of which the serviceability calculations were carried out. But to do this, Perpetual would have had to go beyond the business model that it had put in place, and made the inquiries itself (or caused Interstar to do so). 106 Mr Crossland did not shrink from confronting this difficulty. Indeed, he submitted, the business model put in place was designed specifically to put up a barrier between Perpetual and the borrowers, so as (as far as possible) to protect Perpetual from finding out that which it might learn if it dealt with borrowers directly. 107 To some extent, this submission overlooks Perpetual's role. It was the trustee of the master trust. Funds were accumulated, and lent on mortgage security. The mortgages were packaged so as to produce an income stream. No doubt, interests in the various packages were dealt with in a way now all too familiar. But Perpetual was not responsible for putting the funds together, nor for the lending decisions that were made. Its role was to hold the accumulated funds as trustee and to disburse them from time to time as requested, on first mortgage security. 108 It is entirely unrealistic to say that Perpetual, as trustee of the master trust, should itself carry out investigations of individual loan proposals. That was not required of it as trustee; indeed, such interference in the day to day administration of the trusts may well have been inconsistent with its role as trustee. Be that as it may, Perpetual's role as trustee did not require it to investigate and assess individual applications. 109 Further, the submission overlooks the fact that Mr and Mrs Longobardi were asked to confirm the particulars of their income, assets and liabilities; and that they did so through the Applicant's Financial Summary dated 10 February 2005. 110 As it is, and recognising (as indeed Basten JA recognised in Khoshaba at [106] might happen) that I am conflating two steps in the process of analysis, I do not think that the undoubted subjective unfairness flowing from the matters presently under consideration should be visited on Perpetual through the grant of relief under the Contracts Review Act.

[87]

Other matters particularised in the amended cross-claim 111 What I have said deals with paras (b), (h), (j) and (k) of the particulars. 112 As to (b): I have concluded that the transaction was not one of "asset lending". As to (j): as I understand it, this was intended to assert that Perpetual engaged in asset lending in a wider scale, and that the asset loan in this case was part of that wider business. Since I have concluded that this was not a case of asset lending, the fact (if it be a fact - and the evidence does not show it) that Perpetual did act in the way alleged in other cases is of no continuing relevance. 113 As to (h): I have concluded that it was not Perpetual's role to make direct inquiries of borrowers. I have noted that when it did seek confirmation of their financial position, it received it (in the form of the applicant's financial summary dated 10 February 2005). I do not understand why it is that Perpetual should have done more. 114 As to (k): Mr Crossland explained this by saying that the transaction was not was it was represented to be. On analysis, this too appeared to relate to the proposition that asset lending was involved. In effect, Mr Crossland submitted, the transaction was not one of loan but a disguised transaction of sale (relying on what Brereton J had said in Riz at [70]). My conclusion that the transaction was not one of asset lending deprives para (k) of an essential element. 115 I return to those of the particulars that have not been dealt with in what I have said. 116 As to (a): it is unclear whether this, once again, depends upon the characterisation of the loan agreement and mortgage as asset lending. If (or to the extent that) it does, it must fail given my conclusion that this was not a transaction of asset lending. To the extent that it depends on the assertion that Mr and Mrs Longobardi had no capacity to discharge the mortgage other than by refinancing or selling their home, it is, objectively, correct. But in circumstances where Perpetual was given information as to Mr and Mrs Longobardi's financial position which (if true) would reasonably lead to the conclusion that they could meet their repayment commitments out of their income, it goes nowhere. That is so, in particular, because when Mr and Mrs Longobardi were asked to confirm (among other things) their annual income, they did so. They did so by signing the Applicant's Financial Summary (which they do not suggest was incomplete when they signed it) and returning it, or causing it to be returned, to Perpetual. 117 As to (d): I accept that at the relevant time, Mr Longobardi's capacity was such that he was not able to protect his own interests. I do not accept that Mrs Longobardi was similarly afflicted. True, she was overworked, stressed and depressed. True, she felt under considerable pressure to obtain further finance, and indeed saw that as the only course open to her. But it was a decision that she made, knowing (as she acknowledges) that the business had performed disastrously over the six months from June to December 2004. She may have lacked the ability to make an objective and dispassionate assessment of the situation, but it does not follow that she was thereby unable to protect her, and Mr Longobardi's, interests. 118 More significantly, Mr and Mrs Longobardi did not communicate to Perpetual Mr Longobardi's state of health. Nor did they communicate any information as to the disastrous performance of the business. Nor did they communicate any information as to the pressure to which Mrs Longobardi said she was subject, or its sources. On the contrary, what they presented to Perpetual was a rational and apparently voluntary commercial decision. There is no evidence that Perpetual or ASMM played any part in pushing Mr and Mrs Longobardi to decide to borrow more money. 119 As to (e) and (f): they either are, or can be accepted to be, factually correct. They do not seem to be of any relevance, in circumstances where no criticism was made of the terms of the loan agreement or mortgage (leaving aside, for one moment, the amount of the loan). It was not suggested that the interest rate was excessive or usurious, or that the terms of the loan agreement or mortgage were unduly onerous. The only matter that may have been open to negotiation was the amount of the loan; and it was Mr and Mrs Longobardi who, through Marvig, proposed that. Once again leaving aside the amount of the loan, neither the loan agreement nor the mortgage imposed any unreasonable burden on Mr and Mrs Longobardi, let alone a burden that was not reasonably necessary for the protection of Perpetual's legitimate interests (to paraphrase the analysis of McHugh JA in West v AGC (Advances) Ltd (1986) 5 NSWLR 610 at 620). The contract was not "unjust per se"; there was no "substantive injustice" (to adopt his Honour's further analysis at the same page). Nor did Perpetual engage in conduct which deprived Mr and Mrs Longobardi of a real or informed choice to enter into the contract (to paraphrase McHugh JA in West at 621). 120 In those circumstances, it seems to me that the matters raised by paras (e) and (f) of the particulars are of no more than theoretical relevance. 121 As to (g): the assertion is correct. But this was a risk that Mr and Mrs Longobardi understood, even if it was not at the forefront of their minds (more relevantly, of Mrs Longobardi's mind) when they applied for the further loan and when they committed themselves to it by signing the loan agreement and mortgage. They had entered into previous mortgage transactions. They understood the nature of those previous transactions. They understood the nature of their transaction with Perpetual. They understood the risk that they would lose their home if they did not meet their obligations. It may be that they had an unrealistic hope of being able to meet their obligations; but Perpetual played no part in inducing that hope; nor did ASMM, or anyone else for whose actions Perpetual might be thought to have some responsibility. 122 As to (i): it is correct that Mr and Mrs Longobardi received no independent legal advice. However, it is unlikely in the extreme that they would have been distracted had they received such advice (and had such advice been of a commercial rather than a legal nature: to the effect that they should not throw good money after bad). In para 18 of her affidavit, Mrs Longobardi said among other things: "It was not suggested to us that we should obtain independent legal or accounting advice. However if this was suggested, I doubt that I would have sought such advice as I was so anxious to get the extra funds and did not wish to delay settlement." 123 Mrs Longobardi explains that state of mind by pointing out that she was stressed, under pressure to pay arrears of rent and other debts (including tax). She said: "It did not enter my mind that the best thing to do would have been to close the business down and not to borrow more money." 124 In circumstances where, because of Mr Longobardi's state of health, Mrs Longobardi was the effective decision-maker, that evidence makes it clear that the absence of independent legal or accounting advice is of no more than theoretical relevance.

[96]

What is "unconscionable conduct"? 132 In Canon Australia Pty Ltd v Patton (2007) 29 ATPR ¶ 42-183, Campbell JA (with whom Harrison J agreed) discussed the concept of unconscionable conduct that appears in s 51AC of the Trade Practices Act 1974 (Cth). Section 51AC is in terms if not identical to then not relevantly distinguishable from the terms of s 12CC of the ASIC Act. Section 51AC appears as the third of three sections in the Trade Practices Act dealing with unconscionable conduct. Section 51AA prohibits conduct that is unconscionable within the meaning of the general law of the states and territories. It is in terms if not identical to then not relevantly distinguishable from the terms of s12AA. Section 51AB prohibits unconscionable conduct in connection with the supply or possible supply of goods or services. It is in terms if not identical to then not relevantly distinguishable from the terms of s 12AB. 133 Campbell JA said in Canon Australia at 47, 980 [39] that relief might be available under s 51AC "in circumstances that do not involve unconscionability within the meaning of the unwritten law of the states and territories". 134 An equivalent point was made, specifically as to s 12CC of the ASIC Act, by the Full Court of the Federal Court of Australia in Australian Securities and Investments Commission v National Exchange Pty Ltd (2005) 148 FCR 132 at 140 [30]. Their Honours observed that s 12CC, like s 51AC, was "intended to build on and not to be constrained by common law [sic] case law". 135 In Canon Australia at 47, 980 [40], Campbell JA quoted with apparent approval from another decision of the Full Federal Court, Hurley v McDonald's Australia Ltd (2000) 22 ATPR ¶ 41-741. In that case, their Honours, speaking of s 51AC, said at 40, 585 [22] that "[f]or conduct to be regarded as unconscionable, serious misconduct or something clearly unfair or unreasonable, must be demonstrated… . Whatever "unconscionable" means in s 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" import a pejorative moral judgment…" (their Honours' emphasis). 136 In considering the issues on the appeal, Campbell JA at 47, 982 [55] used a test, whether the conduct in question "had such a high level of moral improprietory that it could properly be described as unconscionable" (his Honour's emphasis). Basten JA, whilst agreeing with the orders proposed by Campbell JA and in the main with his Honour's reasons, queried whether the test of unconscionability did require some "high level of moral impropriety". His Honour said at 47, 974 [4] that the use of "such concepts as high moral obloquy is to risk substituting for the statutory term language of no greater precision…" 137 Campbell JA derived the phrase "high level of moral obloquy" from the judgment of Spigelman CJ in Attorney General (NSW) v World Best Holdings Ltd (2005) 63 NSWLR 557 at 583 [121]. Spigelman CJ was speaking of a different statutory regime, s 62B of the Retail Leases Act 1994. His Honour used that phrase in the context of warning against the equation of "what is unconscionable [with] what is merely unfair or unjust". 138 In Kowalczuk v Accom Finance [2008] NSWCA 343, Campbell JA returned to the concept of unconscionable conduct - this time, in the context of s 43 of the Fair Trading Act 1987. His Honour, speaking with concurrence of Hodgson and McColl JJA, treated the concept of unconscionable conduct by reference to what he had said in Canon Australia. 139 I propose to approach this issue on the basis that if Mr and Mrs Longobardi are to succeed, they must show at least that the relevant conduct of Perpetual (or those for whom it is responsible) showed no regard for conscience, or was irreconcilable with what was right and reasonable.

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Judgment (104 paragraphs)

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Cases Cited (11)