Stockl v Rigura Pty Ltd

LOWER COURT District Court JURISDICTION : LOWER COURT DC 3078/98 FILE NUMBER(S) : LOWER COURT English DCJ JUDICIAL OFFICER :

The appellant granted a mortgage over his home to the Tenth Respondent ("Adolfson") to secure a loan made by it to the appellant's company. The borrower defaulted. Adolfson, in exercise of its power of sale, advertised the property for sale by an auction to be held on 7 March 1991.

The property was damaged in a severe storm in late January 1991. The appellant requested Adolfson to postpone the auction until the storm damage to the property had been repaired. Adolfson refused. The sale was extensively advertised but, at the auction, no bid was received except from a person nominated by a second mortgagee. The property was passed in and later sold by private treaty to the nominee of the second mortgagee at the price bid at the auction.

The appellant sued Adolfson, alleging that, in breach of its duty of good faith in exercising its power of sale, Adolfson had: (1) sold the property at a gross under-value, as demonstrated by a number of expert valuations; (2) refused to postpone the auction until the storm damage had been repaired; (3) advertised the property as a "mortgagee sale", thereby depressing the market for it; (4) failed to obtain an independent valuation before accepting the offer of the second mortgagee's nominee; (5) disclosed the reserve price to the second mortgagee prior to the auction.

The trial judge did not refer at all to the valuation evidence as to the current market value of the property. She held that the advertising and sale process had been properly conducted and that, in that circumstance, there had been no breach by Adolfson of its duty of good faith as mortgagee.

On appeal, the appellant submitted that the trial judge had erred in failing to determine the current market value of the property by reference to the evidence of expert valuers and in not holding that the other matters of which he complained constituted breaches of the mortgagee's duty of good faith.

The appellant also sued the Second to Ninth Respondents, a firm of solicitors, alleging that: (1) the solicitors, while acting for Adolfson on the exercise by it of its power of sale, had agreed to represent his interests as well; (2) the solicitors had thereby come under a duty of care to protect his interests; (3) the solicitors had negligently failed to advise him as to when and how he should sell the property himself.

The trial judge did not make a finding as to whether the solicitors had agreed to act for the appellant as well as for Adolfson in connection with the exercise of the power of sale. She held that the appellant would not have followed the solicitor's advice as to how and when to sell the property.

On appeal, the appellant submitted that: (1) his cause of action against the solicitors should be remitted for determination of the question whether they had agreed to act for him; (2) if it were found that the solicitors had agreed to act for him, it was clear that they had negligently failed to advise him to take steps to restrain the auction by injunction. This ground of negligence had never been pleaded by the appellant.

In a case in which a mortgagor alleges that a mortgagee has exercised a power of sale in breach of the duty of good faith by selling the property at a gross undervalue, expert valuation evidence as to the current market value of the property will almost always be relevant and admissible. However, its weight, and the degree of attention which the judge must give it in the judgment, will vary according to the other facts proved.

Where it can be seen that the mortgagee's sale has been advertised and conducted in a proper and prudent manner and with reasonable care and skill, the court is entitled to take what is actually elicited from the market in response to that sale process as the best evidence of the market value of the property at the time. Consequently, the court may be justified in paying little, if any, regard to the evidence of expert valuers.

There was no basis to interfere with the trial judge's conclusion that the Adolfson's advertising campaign and the sale process had been properly conducted. It was, therefore, open to the judge to place no weight upon the expert valuations which, in any event, had been carried out many years after the actual sale.

The judge was entitled to have regard to the unaccepted offer of the second mortgagee's nominee in determining whether the property had been sold at a gross undervalue because that offer was the only offer received after a properly conducted sale process. The offer was evidence of the weakness of the market for the property.

There was no basis for interfering with the judge's finding that the storm damage to the property had been minor and that the property was in a suitable condition for sale at the time of the auction. There was no appellable error in the judge's conclusion that the mortgagee was not required to postpone the auction.

There is no absolute rule that a mortgagee exercising a power of sale cannot advertise the sale as a "mortgagee sale". Much will depend upon the type of property being sold and the way in which the words "mortgagee sale" are used in the advertising campaign.

There is no absolute rule that a mortgagee must obtain a recent independent valuation before exercising a power of sale. The mortgage must take reasonable steps to ascertain the value of the property but what steps are reasonable depends on the circumstances of the particular case.

Disclosure of the reserve price to the second mortgagee prior to the auction did not damage the appellant. The second mortgagee's nominee was the only person to bid and she knew that she alone constituted "the market" for the property. Disclosure of the reserve price made no difference to the price for which the property was sold.

It would be futile to remit the appellant's cause of action against the solicitors to the District Court for determination of the issue whether they had agreed to act for him because even if that issue were decided in his favour the appellant could not show that he had suffered any loss.

ORDERS: (1) Leave to amend Notice of Appeal refused. (2) Appeal dismissed. (3) Parties to file written submissions as to costs.

1 MASON P : I agree with Palmer J. 2 IPP JA: I agree with Palmer J. 3 PALMER J: Introduction This appeal raises two broad questions: whether a mortgagee's power of sale was exercised with due regard for the mortgagors' interests and whether the solicitors acting for the mortgagee on the sale breached a duty of care to the mortgagors. 4 The Appellant, Mr Stockl, and his wife were the registered proprietors of a residential property at St Ives ("the Property"). In September 1990, the Tenth Respondent, Adolfson Investments Pty Ltd ("Adolfson") lent Mr Stockl's company, Planetronics Pty Ltd ("Planetronics") the sum of $500,000. The loan was guaranteed by Mr and Mrs Stockl and secured by a first mortgage over the Property. At about the same time the First Respondent, Rigura Pty Ltd ("Rigura"), lent Planetronics $150,000. This loan was also guaranteed by Mr and Mrs Stockl and secured by a second mortgage over the Property. The loans were arranged by a firm of solicitors, Parish Patience, whose partners are the Second to Ninth Respondents ("Parish Patience"). Parish Patience acted as the solicitors for all parties in the mortgage transactions. 5 Planetronics failed to make any payment of interest under either of the mortgages. On 17 December 1990, notices under s.57(2)(b) of the Real Property Act 1900 (NSW) was served on Mr and Mrs Stockl and on 7 March 1991 the Property was put up for auction by Adolfson as first mortgagee. 6 At the auction only one bid was received - from a Mrs Patten, who is the daughter of the controlling director of the second mortgagee, Rigura. The bid was $640,000. The reserve price had been set at $750,000 and the Property was passed in. 7 After the auction, the controlling director of Adolfson, Mr Adolfson, instructed Parish Patience to exchange contracts for the sale of the Property with Mrs Patten for the price of $640,000. 8 The proceeds of the sale of the Property to Mrs Patten were sufficient to repay to Adolfson its principal and interest under the first mortgage, but left Rigura with a shortfall under its second mortgage. In June 1991, Rigura commenced proceedings against Mr and Mrs Stockl to recover the shortfall under their guarantee. Mrs Stockl was declared bankrupt and the proceedings against her were settled at an early stage. 9 Mr Stockl put on a Defence and Cross Claim for relief under the Contracts Review Act 1980 (NSW). He filed a Second Cross Claim against Parish Patience, alleging breach of its retainer and negligence in respect of the advice given to him at the time of execution of the loan documentation in September 1990. By a Third Cross Claim he joined Adolfson in the proceedings, alleging improper exercise by it of its power of sale under the first mortgage. 10 Rigura then amended its Statement of Claim by joining Parish Patience as a defendant, alleging breach of its retainer in acting for it in relation to the loan to Planetronics and the second mortgage. By a Fourth Cross Claim, Rigura sought an indemnity or contribution from Parish Patience in respect of any liability which Rigura might be found to have to Mr Stockl. 11 By a Fifth Cross Claim, Adolfson likewise sought an indemnity or contribution from Parish Patience in respect of any liability which Adolfson might be found to have to Mr Stockl. 12 Rigura compromised its claims against Parish Patience, which removed Parish Patience as the defendant in the proceedings and disposed of the Third Cross Claim against it. As part of the compromise, Rigura assigned to Parish Patience Rigura's rights against Mr Stockl under the guarantee given by him in respect of the loan to Planetronics. Parish Patience then took over the conduct of the proceedings which had been instituted by Rigura to recover the shortfall under Rigura's loan to Planetronics. 13 The proceedings came on for hearing before English DCJ on 16 October 2000. The taking of evidence occupied seven days concluding on 28 November 2000. Written submissions were directed and oral submissions were heard on 12 and 13 June 2001. Her Honour delivered judgment on 15 July 2002. 14 Many issues were raised in the proceedings in the District Court and many grounds of appeal were advanced in Mr Stockl's Notice of Appeal. However, during the course of the proceedings and of the appeal itself, several of the major issues which Mr Stockl had raised were abandoned. Relevantly for the purposes of the appeal, only two broad questions now require determination:

• whether Adolfson breached its duty of good faith to Mr and Mrs Stockl in manner in which it exercised its power of sale;

• whether Parish Patience were acting as the solicitors for Mr and Mrs Stockl as well as for Adolfson and Rigura at the time that the mortgagees were exercising their rights under their mortgages and, if so, whether Parish Patience breached their duty of care to Mr Stockl in the manner in which they acted for him.

15 Mr Stockl alleged that the Property had been sold to Mrs Patten at a gross undervalue. The market value of the Property was, Mr Stockl claimed, $850,000 at the time of the auction and by selling to Mrs Patten at $640,000 Adolfson recklessly sacrificed the mortgagors' interests. Mr Stockl's case may be summarised thus. 16 There were in evidence the following valuations:

• a valuation of Jones Lang Wootton dated 7 September 1990, obtained by Parish Patience for the purpose of the mortgages to Adolfson and Rigura, which put the market value of the Property at $900,000;

• a valuation procured by Mr Stockl from Mr Phippen in October 1999, which put the market value of the Property as at 8 March 1991 at $850,000;

• a valuation procured by Parish Patience from Mr Rendall in November 2000, which put the market value of the Property as at 7 March 1991 at $700,000;

• a valuation procured by Adolfson from Richardson & Wrench in September 2000, which put the market value of the Property as at 8 March 1991 at $750,000. 17 Mr Stockl claimed that all of these valuations put the market value of the Property as at 8 March 1991, the date upon which contracts were exchanged with Mrs Patten, at well above the sale price of $640,000. He submitted that the trial judge should accept the valuation of Mr Phippen at $850,000 and should hold that the sale at $640,000 was at such a gross undervalue as, in itself and without more, to evidence a reckless sacrificing of the mortgagors' interests, in breach of Adolfson's duty of good faith. 18 In further support of the contention that Adolfson had acted with reckless disregard for his interests, Mr Stockl claimed that the Property had suffered substantial damage in a very severe storm which had ravaged the locality on 21 January 1991, that a mortgagee having regard to the mortgagors' interests would have postponed the auction date of 7 March 1991 until the damage to the Property and its gardens had been repaired, and that he himself had repeatedly sought such a postponement but it had been refused. 19 In response, Adolfson and Parish Patience contended that the storm damage to the Property had been minor and that it had been repaired before the advertising campaign for the auction had begun. To rebut the assertion that Mr Stockl had continually sought a postponement of the auction in order to repair storm damage they relied upon a document dated 6 February 1991, signed by Mr and Mrs Stockl, in which Mr and Mrs Stockl undertook to take no action to interfere with or prejudice the procedures being taken to sell the Property and to give vacant possession on or before 7 March 1991. 20 Next, Mr Stockl claimed that the advertising campaign for the auction had not been conducted properly in that the sale had been advertised as a "mortgagee sale". He relied upon the evidence of his valuer, Mr Phippen, that this disclosure would tend to depress the market value of the Property because buyers would think that they could acquire it at a bargain price. 21 Next, Mr Stockl said that it was grossly imprudent of Adolfson not to obtain a new and independent valuation of the Property shortly before the auction date. The real estate agent engaged by Adolfson for the auction, Mr Mitchell of Raine & Horne St Ives, had inspected the Property on 23 January 1991 and had by letter dated 25 January 1991, advised Parish Patience that he recommended a reserve price at the auction "in the vicinity of $650,000 to $700,000" . By letter dated 5 March 1991 to Parish Patience, Mr Mitchell advised that approximately sixty families had inspected the Property, two contracts had been issued and "the price feed-back received from buyers indicated the current market value to be in the vicinity of $600/650,000" . Mr Mitchell recommended a reserve price of $630,000. Mr Stockl contended that Adolfson was not entitled to rely upon these opinions of Mr Mitchell but should have obtained a valuation before proceeding to auction and, certainly, before selling to Mrs Patten. 22 Finally, Mr Stockl claimed that it was improper and imprudent that the reserve price of $750,000 had been disclosed to Rigura and Mrs Patten shortly before the auction.

23 After outlining the issues on the pleadings and some of the non-contentious facts, the judge comes to her consideration of the first issue, namely, whether there had been a breach of Adolfson's duty of good faith to the mortgagors in the exercise of the power of sale. Her Honour formulates the relevant principle of law thus: The only duty owed by the mortgagee to the mortgagor in respect to the exercise of power of sale is a duty to act in good faith and for proper purposes. Mere negligence or carelessness in the exercise of the power of sale does not give rise to any liability. The conduct must amount to recklessness or fraud or unconscionability before any liability can arise. 24 Her Honour notes that no interest had ever been paid under the mortgage and that Mr Stockl did not dispute that auction was the appropriate method for sale of the property. Her Honour refers to the unchallenged evidence of the real estate agent that a marketing programme for the auction had been prepared, that the auction had been extensively advertised, that the Property was opened for inspection during a period of four weeks, and that it had been inspected by about sixty families. There were no offers made prior to the auction. 25 Her Honour then deals with Mr Stockl's submission that the advertising campaign for the auction had not been conducted properly. She says: Mr Stockl complains that the sale should not have been advertised as a mortgagee sale, should not have been advertised as 'must be sold' and should not have indicated bidding would start at $650,000 or $750,000. There is no rule of law that a mortgagee sale cannot be advertised as such. True it is that the expressions mortgagee sale and must be sold attract a buyer looking for a bargain, such methods of attracting potential purchasers cannot amount to recklessness fraud or unconscionability. 26 Next, her Honour considers Mr Stockl's claim that the Property had suffered extensive storm damage and that the auction had not been postponed until the damage was repaired. Her Honour says: The submission that the mortgagee should have waited until the surrounding area had recovered from the storm sufficiently to enhance the possibility of sale must be rejected. The evidence of the estate agent in affidavit form, was that the property sustained minor damage and was in a suitable condition for sale. Certainly the photographs in the advertising afforded potential purchasers an image of the property in all its glory, that is, with foliage. There is no duty upon a mortgagee to wait until the market improves in the hope that a higher price might be obtained. Interest was accruing at the rate of approximately $11,700.00 per month, a six month wait would have increased the debt significantly with no indication from the mortgagor that the mounting interest payments would be met.

It was open to Mr Stockl to refinance the property in the intervening period, he had been advised to do so by independent legal advisers. It was also open to Mr Stockl to make interest repayments in the intervening period. Had he done so, the evidence of Mr Adolfson was that he would have accepted the payments. No attempt was made by Mr Stockl other than to offer post dated cheques. There is no duty of a mortgagee to accept post dated cheques.

I can find nothing improper in the manner of advertising and sale of the property. 27 In conclusion, her Honour deals thus with Mr Stockl's principal submission, that is, that the Property had been sold at a substantial undervalue so that Adolfson had recklessly sacrificed the mortgagors' interests: As to the conduct of the auction itself, I find that the auction was property conducted. The evidence is that the auctioneer sought bids at $750,000.00. The only bids were from persons associated with the mortgagee vendor's agent. The only genuine bid was from Mr Bowman on behalf of Mrs Patten.

The fact that Mr O'Connor disclosed to Mr Bowman the reserve of $750,000.00 made no difference. The bidding did not reach that figure. If Mr Bowman had not been encouraged to purchase the property further expenses would have been incurred, the debt would have continued to increase to the detriment of Rigura Pty Limited and Mr Stockl. There is nothing to suggest that if the property was remarketed a subsequent purchaser may have been found at a higher price.

The attitude of Mr Adolfson was clear, he did not accept the word of Mr Stockl. He was not prepared to accept repayment at the primary interest rate but insisted upon repayment at the penalty interest rate.

Mr O'Connor on the day, in accordance with the instructions from the first mortgagee Adolfson Pty Limited, negotiated with the only bidder at the auction, Mr Bowman on behalf of Mrs Patten, to purchase the property for $640,000.00.

From the time the property was first marketed the opinion of the marketing agent to Mrs Stockl was that the property was worth $654,000.

I can find nothing improper in the conduct of the auction nor the actions of Mr O'Connell following the failure of the property to sell at auction.

There is no evidence that the persons to whom contracts were distributed prior to the auction were potential purchasers. There is no evidence that they were at the auction.

There is no evidence to satisfy me that the purchase by the daughter of a director of the second mortgagee was brought about by any undue advantage or that the second mortgagee acted mala fides in the purchase of the property.

I draw no adverse inference from the failure to call either the auctioneer or Mrs Patten. The auctioneer could not be expected to recall, ten years after an auction, what took place on that day. I find it highly unlikely records would remain as to bids. It was of course open to call him on behalf of the Stockls had they so wished.

Mrs Patten was not the decision maker regarding the purchase. The decisions were made by Mr Bowman, her father. His evidence was available and has been considered. Indeed I find that he and Mrs Patten were what could only be described as reluctant purchasers and did so to protect the interests of Adolfson Investments Pty Limited, which was clearly going to lose its principal and unpaid interest following the unsuccessful auction. 28 It will be observed that her Honour makes no mention of any of the valuations which had gone into evidence and upon which Mr Stockl had placed such strong reliance.

29 Mr Stockl does not now complain that the trial judge, in determining whether Adolfson had breached its duty of good faith as mortgagee, wrongly formulated the relevant principle of law to be applied. The major ground of appeal is that the judge wrongly omitted to consider the very substantial body of evidence and submissions directed to the question of what was the market value of the Property at the time of its sale. Mr Thomson of Counsel, who has very capably argued the case for Mr Stockl, says that the judge could not decide whether Adolfson had recklessly sacrificed the Property by selling it at $640,000 unless she found what was the market value of the Property at the time. That is so, he says, because a sale at a gross undervalue can, of itself, manifest a lack of good faith by the mortgagee. That proposition is, of course, well established: see e.g. Warner v Jacob (1882) 20 Ch D 220, at 224. 30 It is unfortunate that the judge did not refer at all to the valuation evidence which had occupied so much time and attention at the trial. That unexplained omission, particularly when judgment had been reserved for more than a year, was capable of giving the impression that the valuation evidence and its significance had slipped from the judge's mind. 31 In a case in which a mortgagor alleges that a mortgagee has exercised a power of sale in breach of the duty of good faith by a sale at a gross undervalue, expert valuation evidence as to the market value of the property at the time of sale will almost always be relevant and admissible. Its weight and the degree to which the judge must give attention to it in his or her judgment will, however, vary according to the other facts proved. Where it can be seen that the sale, whether by tender, auction or private treaty, has been advertised and conducted in all respects in a proper and prudent manner and with reasonable skill and care, then the court is entitled to take what is actually elicited from the market in response to that sale process as the best evidence of the market value of the property at the time. Consequently, the court may be justified in paying little, if any, regard to the evidence of expert valuers, particularly if, as here, the valuations are carried out long after the actual sale. 32 The point is well made in Stone v. Farrow Mortgage Services (In liq ) [2000] ANZ ConvR 463. At paragraph 3, Hodgson JA, with whom Meagher JA agreed, said: The only real issue in the appeal is whether or not the respondent breached its duty to the appellant in relation to the sale of the appellant's property 2A Duke Place, Balmain. To show such a breach of duty, the appellant must show at least that the respondent failed either to act in good faith or to act with reasonable skill and care or to take reasonably adequate steps to ensure a fair price in relation to the sale. The circumstance, if it be the case, that the sale was at an undervalue is not of itself sufficient.

In such a case, there are two broad areas of enquiry: first, what steps were taken in relation to the sale; and second, the comparison between the sale price and the true value of the property. These areas are interdependent. A price actually obtained after proper steps have been taken is strong evidence of the true value of the property. On the other hand, if it is proved that the price obtained is substantially below the true value, that may be some evidence that proper steps were not taken. 33 Cole AJA considered that, in the light of continual endeavours to sell the property over a period of eighteen months, it was impossible to hold that the true value of the property was other than the amount obtained when sold after auction. Accordingly, his regarded the valuation evidence as of little significance. His Honour said at paragraph 76: Had the process of advertising, marketing and sale of the property been shown to be unsatisfactory or inadequate, a question might have arisen whether the price achieved by the process was other than the true market price or value of the property. In that circumstance valuation evidence might have been important to establish whether, in truth, the price realised was an undervalue, but that is not this case.

There are many other decisions to the same effect: see e.g. Gomez v State Bank of New South Wales Ltd [2001] FCA 1059 at paragraph 29, on appeal, [2002] FCA 442 at paragraph 27; Elizabeth Grove Shopping Centre Pty Ltd v Commonwealth Bank of Australia (unrep. FCA 22 June 1994, paragraph 43); Tyler v Custom Credit Corporation Ltd (In liq ) [2001] QSC 495. 34 It will be seen, therefore, that the first question is always: has the mortgagee taken proper steps to advertise and sell the property? If the clear answer to that question is 'yes', the court may regard the resultant sale as the best evidence of the current market value of the property so that no regard need be paid to other valuation evidence. However, if the answer to the first question is doubtful, valuation evidence as to current market value may assist to resolve the doubt. 35 In the present case, the first question was much debated but her Honour found that there was nothing improper in the way in which the Property was advertised or sold. Although her Honour's reasons for that conclusion are very briefly expressed, it seems that she did not regard the question as doubtful, so that she must have regarded any substantial reference to the valuation evidence as unnecessary. If she was correct in her conclusion as to the propriety of the sale process, then in accordance with the authorities to which I have referred, the approach which she took to the valuation evidence was open to her. 36 Her Honour did not, however, entirely disregard any evidence about the market value of the Property. In her discussion of the conduct of the auction itself, her Honour referred to the opinion of Mr Mitchell, expressed in his letters of 25 January and 5 March 1991, and to the fact that there was only one bid for the Property at the auction, that of Mrs Patten for $640,000, which was not accepted. Was the judge entitled to take into account as evidence of current market value an unaccepted bid at the auction? 37 It used to be regarded as well established in resumption or taxation cases that offers to buy or sell, as distinct from concluded sales, could never be admissible as evidence of the value of property: McDonald v Deputy Federal Commissioner of Land Tax (NSW ) (1915) 20 CLR 231, at 239-240; Marcus Clark & Co Ltd v Commissioner for Railways (1949) 29 VLR 98, at 107. That proposition has been modified somewhat so that a genuine offer to buy the particular land the subject of the dispute may now be taken into account in certain circumstances: see Goold & Rootsey v Commonwealth of Australia (1993) 42 FCR 51, at 56ff. But the purpose of determining market value in a resumption or taxation case is very different from the purpose in determining market value in cases where the exercise of a mortgagee's power of sale is challenged. In the latter type of case, the essential and ultimate question is not what is the market value of the mortgagor's land but, rather, whether the mortgagee, in exercising a power of sale, has acted with good faith. The test of good faith focuses primarily upon whether the mortgagee has seriously failed to take reasonable steps in all of the circumstances to obtain a proper price, and not upon what valuers may say the property should have sold for: see e.g. Pendlebury v Colonial Mutual Life Assurance Society Ltd (1912) 13 CLR 676, at 700; Australia & New Zealand Banking Group Ltd v Bangadilly Pastoral Co Pty Ltd (1978) 139 CLR 195, at 288; Hawkesbury Valley Developments Pty Ltd v Custom Credit Corporation Ltd (1994) 8 BPR 15,581 at 15,582-583. 38 In my opinion, where the answer to the question whether the mortgagee has properly conducted the sale process is debatable so that valuation evidence may assist, it would be unrealistic to exclude from consideration what offers were made for the property. If no offer was received, or only very low offers, the cause may lie in deficient advertising or marketing, as was the case in Pendlebury . On the other hand, if the court can see that the advertising and marketing campaign was in itself satisfactory but produced only low offers, or even no offer, then the court may deduce that the demand in the market for that property was weak and may view the sale price actually achieved in that light. 39 In the present case, the trial judge came to the conclusion that the sale process had been conducted satisfactorily. For reasons to which I will come in a moment, I do not think that that finding should be disturbed. Accordingly, in my view, the trial judge was entitled to have regard to the fact that there was no offer for the Property other than the unaccepted bid of Mrs Patten and that her bid was $640,000. Those circumstances were evidence going to the weakness of the then current market for the Property. Her Honour was entitled to have regard to the weakness of the market in determining whether the sale price achieved was, in itself, evidence of a breach of Adolfson's duty of good faith or whether it was a true reflection of the market value at the time of sale.

40 Mr Stockl's first complaint about the auction process was that the auction should have been postponed until the Property had recovered from severe storm damage which it had suffered on 21 January 1991. The judge found, however, that the Property had not been as extensively damaged as Mr Stockl claimed and that it was in a suitable condition for sale during the period when it was open for inspection. 41 There was sufficient evidence upon which her Honour could make such a finding. For example, Mr Stockl had conceded in cross examination that the damage to the Property was minor; the real estate agent had advised Mr Adolfson shortly after the storm that the Property "presented beautifully" , and Mrs Stockl conceded that the house had been repaired by the time of the auction. Most cogently, however, on 6 February 1991 Mr and Mrs Stockl signed and delivered to Adolfson's solicitor a document in which they undertook not to impede the steps being taken to put the Property to auction on 7 March. It is a legitimate inference that had Mr and Mrs Stockl truly believed that the Property was not in a fit state to be placed on the market, they would not have signed that document. 42 In summary, the appellant has shown no appellable error in the judge's conclusion that Adolfson was not required to postpone the advertising campaign and the auction for the Property because of storm damage.

Whether advertisement as 'mortgagee sale' was improper

43 Mr Stockl complains that the sale of the Property should not have been advertised as a "mortgagee sale" because potential buyers would think that they might be able to acquire it for less than the market price. 44 Her Honour said that "there is no rule of law that a mortgagee sale cannot be advertised as such" . That proposition is correct to the extent that there is no case which holds that for a mortgagee to advertise a sale as a "mortgagee sale" is, in itself, a breach of the mortgagee's duty of good faith. 45 In Hallifax Property Corp Pty Ltd v GIFC Ltd (1987) 4 BPR 9708, Young J (as he then was) was of the view that it was not self evident that advertising a sale as a "mortgagee sale" would depress the price likely to be realised, and that opinions upon the point might legitimately differ. I respectfully agree. Some may think that "mortgagee sale" will attract a larger number of potential buyers hoping for a bargain, thereby creating a larger and stronger market for the property. Others may think that "mortgagee sale" will induce buyers to believe that they need not offer a market price, thereby diminishing the strength of the market. 46 In my view, much will depend on the type of property being sold and the way in which the words "mortgagee sale" are used in the advertising campaign. For example, to emblazon the words in heavy black type prominently across advertising brochures may give the impression that the mortgagee is conducting a "fire sale" rather than seeking the best price reasonably obtainable in the market. Such an impression might cause buyers to hang back from making their best offers. On the other hand, where the property is advertised attractively, with its best features given appropriate prominence, the information that the sale is by a mortgagee may serve merely to whet the appetite of the person seeking that type of property. 47 In the present case, the Property was widely advertised in terms calculated to enhance its attractions and the words "mortgagee sale" were given no undue prominence. No basis is shown for interfering with the judge's conclusion on this point.

48 Mr Stockl submits that Adolfson breached its duty of good faith in failing to obtain an independent valuation of the Property shortly prior to the auction. This was required, he says, because Adolfson was aware that Jones Lang Wootton had valued the Property at $900,000 in September 1990 yet in January 1991 Mr Mitchell, the real estate agent, expressed the view that the reserve price should be in the vicinity of $650,000 to $700,000 and in his letter of 5 March stated that "the price feedback received from buyers indicated the current market value to be in the vicinity of $600/650,000" . The disparity between the Jones Lang Wootton valuation and Mr Mitchell's opinion, says Mr Stockl, should have suggested that Mr Mitchell's opinion was unreliable. He submits that a mortgagee is bound to take reasonable steps to ascertain the value of a property before selling: Pendlebury at 683 per Griffith CJ. In the circumstances of this case, he says, the only reasonable step which could be taken by Adolfson was to obtain a valuation. 49 There is no principle of law which requires a mortgagee to obtain an independent valuation of a property before exercising a power of sale. What Griffith CJ said in Pendlebury at 683 was: It is not disputed that if a mortgagee sells by private contract he is bound to take reasonable means to ascertain the value before selling, and the same rule applies, in my opinion, to a sale by auction. 50 Lush J in Henry Roach (Petroleum) Pty Ltd v Credit House (Victoria) Pty Ltd [1976] VR 309 used almost exactly the same words to describe the mortgagee's obligation. However, in Westpac Corporation v Lakajev [2000] NSWSC 603, Brownie AJ expressly rejected the proposition that the statements in Pendlebury and Henry Roach (Petroleum ) should be construed as requiring a mortgagee to obtain a valuation from a valuer, so that an opinion from a real estate agent would never be sufficient. I agree with his Honour in rejecting that proposition. The words used by Griffith CJ and Lush J are incapable of bearing the construction sought to be placed upon them. What are "reasonable steps" to ascertain value is a question which obviously depends upon the circumstances of each case. 51 For example, if a mortgagee has no information about the market value of the subject property other than a real estate agent's "kerb-side valuation" - i.e., an opinion expressed without a careful inspection of the property and without a study of comparable sales - then it may well be unreasonable for the mortgagee to rely upon that opinion in setting a reserve price or in accepting an offer by private treaty. 52 That is not the present case. Here, Adolfson had, on the one hand, a valuation which was six months old, and, on the other, the opinion of an experienced real estate agent expressed two days before the auction and founded not only upon the agent's inspection of the Property but, most importantly, on his observation of the market's reaction to a well-conducted advertising campaign of four weeks' duration. I do not think that, in those circumstances, Adolfson was in breach of its duty in not going to the expense of obtaining another formal valuation when it had the agent's opinion founded on a result of a genuine testing of the market for the Property. 53 In my opinion, that Adolfson did not obtain a valuation of the Property shortly prior to the auction has not been shown as a sufficient ground for interfering with the judge's conclusion that the sale process was properly conducted.

54 Mr Stockl asserts that it was improper for Adolfson's solicitor, Mr O'Connor, to disclose to Rigura and Mrs Patten shortly prior to the auction that the reserve price had been set at $750,000. How this disclosure damaged Mr Stockl is not apparent. No one was prepared to bid at the auction other than Mrs Patten. Her bid was significantly below the reserve and it turned out to be the only bid at the auction. In that circumstance, whatever reserve price had been set, she knew that she alone constituted "the market" at the auction and in the negotiations thereafter. I agree with her Honour that disclosure of the reserve price to Mrs Patten made no difference to the price at which the Property was sold.

55 In his Further Amended Second Cross Claim, Mr Stockl alleged negligence against Parish Patience in respect of two broad areas of activity. The first was when Parish Patience acted as his solicitors in connection with the borrowing by Planetronics from Adolfson and Rigura and the granting of mortgage security for those borrowings. Mr Stockl alleged that Parish Patience, who were acting for the lenders as well, ought to have advised him to seek independent legal advice. If they had done so, he claimed, he would not have entered into the mortgage transactions. 56 As to this claim, the trial judge found Mr Stockl understood the nature of the mortgage transactions and the consequences of default. She held that Mr Stockl had not proved that, had he received independent legal advice, he would not have proceeded with the transactions. No appeal from that finding is now pressed. 57 The second area of activity in which Parish Patience was said to have been negligent was the exercise by Adolfson of its power of sale upon default under its mortgage. Mr Stockl pleaded his case against Parish Patience thus: 11D As and from December 1990, the Cross-Defendants were aware that in purporting to act as an agent of either or both Rigura Pty. Limited and Adolfson Investments Pty. Limited as mortgagees exercising a power of sale, any wrongful or negligent acts on their part could cause the Cross-Claimant loss or damage.

11E In the circumstances, the Cross-Defendants owed the Cross-Claimant a duty of care to not cause him economic loss.

11F In breach of the duty referred to in paragraph 11E, the Cross-Defendants:

(a) instructed estate agents to sell the property prior to being instructed by any mortgagee;

(b) allowed the property to be advertised as a mortgagees sale;

(c) allowed the property to be commenced to be marketed for sale by the mortgagees without a valuation having been made of likely selling price;

(d) determined to continue selling the property after it sustained damage and the general area sustained significant damage in a storm on 21 January, 1991;

(e) advised Directors of the second mortgagee of the likely reserve and advised the Directors as to the means by which the property could be bought for their benefit and the benefit of the Plaintiff;

(f) caused the Cross-Claimant to sign an undertaking consenting, inter alia, to not interfere with the mortgagees' powers of sale;

(g) allowing [sic] the property to be sold for less than at the best price obtainable consistent with a mortgagee's right to realize its security;

(h) failed to ensure any and all insurance claims in respect of the property and damage sustained to it on 21 January 1991 were made and realized;

(i) allowed the Directors of the second mortgagee to not act in good faith having regard to its interest and the interest of the Cross-Claimant;

(j) failing to advise the Cross-Claimant that payments of interest could be made in and after January 1991 wherein the sale of the property might have been postponed;

(k) those matters set out in paragraph 25 of the Defence to the Sixth Cross-Claim which matters and particulars are herein repeated. [There is no paragraph 25 of the Defence to the Sixth Cross Claim.]

11G By reason thereof, the property was subsequently sold by the mortgagee in possession and the Cross-Claimant suffered loss and damage.

Mr Stockl claimed as damages: (i) The sum by which the Property was undersold, being approximately $256,800.00.

(ii) An indemnity in relation to the sum, if anything, found to be due to Rigura Pty. Limited as assigned to the Sixth Cross Claimants.

(iii) Interest paid and payable between September 1990 to April 1991 to first and second mortgagees.

(iv) In the event of the Cross-Claimant not succeeding against Adolfson Investments Pty. Limited, a Bullock order or a Sanderson order as to costs. 58 In her judgment, the judge refers to a conflict in the evidence between Mr Stockl and Mr C.M. Finn, the partner of Parish Patience who, Mr Stockl alleges, acted for him in relation to Adolfson's exercise of its power of sale. Mr Stockl asserted that Mr Finn said in early 1991 that he would assist Mr Stockl and would see what he could do. Mr Finn said that he advised Mr Stockl to obtain independent advice. Her Honour does not resolve this conflict in the evidence. 59 Her Honour then recounts some evidence to the effect that Mr Stockl went to see another firm of solicitors, Westgarth Middletons, and that there was correspondence between Parish Patience on behalf of Adolfson and Westgarth Middletons culminating in a letter of 5 February 1991 from Westgarth Middletons advising that they had ceased to act for Mr and Mrs Stockl. 60 Her Honour identifies the issues as against Parish Patience thus: Lastly, is the issue of whether the conduct of Parish Patience in the circumstances where a duty of care was owed by them to the mortgagor was such that Mr Stockl is entitled to damages for negligence or breach of contract of retainer.

It is alleged by Mr Stockl that Parish Patience failed to advise him in that the documents prepared and signed in September 1990 were not properly explained to him and he was not advised to obtain independent legal advice.

Secondly that when Parish Patience became aware in October 1990 that Mr Stockl had difficulty in meeting the first interest payment, advice should have been given that it would be better for Mr Stockl to sell the property than allow a mortgagee sale; and

Thirdly that once the mortgagees had issued the Section 57(2)(b) notices on 17th December 1990, Parish Patience should thereafter, have advised Mr Stockl again that it would be better if he sold the property immediately than allow a mortgage sale. 61 Mr Stockl has abandoned his grounds of appeal relating to her Honour's findings on the first of these issues. As to the second and third of the issues her Honour says: It has not been proved that independent advice would have caused Mr Stockl to act differently. No evidence was given by him as to what he would have done differently. The evidence is that the real estate market was falling and the economy in a downward spiral. Mr Stockl had attempted to sell the house for $1,050,000 in late 1989 and had not been successful. It cannot be safely concluded that a sale by him between September 1990 and December 1990 would have resulted in a sale at a figure greater than that achieved at the auction. It is his evidence that Planetronics Pty Limited was strapped for cash. Had he not been able to obtain funds via the refinance, the company may have been forced to close. … He did make mention of the possibility of refinancing through the ANZ Bank at a lesser interest rate but then went on to say he could not repay that loan either.

I find he has failed to demonstrate to my satisfaction what different course of action he could have taken had he received any different advice and I find that to deal effectively with his claim in negligence against Parish Patience.

Most, if not all of this passage, seems to be devoted to the second issue rather than the third although, perhaps, the last paragraph I have quoted is intended to deal with both allegations as to Parish Patience's failure to give advice.

62 Mr Thomson has argued the case on appeal in a way which was not expressly pleaded in the Further Amended Second Cross Claim, as Mr Gleeson SC rightly points out. Mr Thomson does not submit, as paragraphs 11D, 11E and 11F allege, that Parish Patience owed a duty of care to Mr Stockl arising out of the manner in which they acted as solicitors for Adolfson in connection with the exercise of its power of sale. He submits, rather, that the duty of care arose from the alleged agreement by Mr Finn in February 1991 to assist Mr Stockl in respect of Adolfson's proposed sale of the Property. 63 Mr Thomson's first major difficulty is that this allegation was in contest at the trial but the judge did not make a finding about it. Mr Thomson suggests that the issue should be remitted to the trial judge. However, even if the issue were to be remitted, Mr Stockl faces other grave problems in his case. 64 I assume for the moment that it is found that Mr Finn agreed to act for Mr Stockl in respect of Adolfson's exercise of its power of sale. Even so, Mr Thomson has found it difficult to formulate how Mr Finn was negligent in how he acted, or failed to act, for Mr Stockl in February and March 1991. Mr Thomson suggests that Mr Finn failed to advise Mr Stockl to seek an injunction to stop the auction, although this allegation is not pleaded by Mr Stockl. But how could such an injunction have been obtained? First, Mr and Mrs Stockl were clearly in default under the Adolfson mortgage; second, they were clearly not in a position to pay into court the principal and interest outstanding under the mortgage as the price of obtaining an injunction; third, there was, in fact at that stage, no basis for an allegation that the auction process was being conducted by Adolfson in breach of its duty of good faith. In my opinion, if Mr Finn had advised an application for an injunction restraining the auction and if Mr Stockl had followed that advice, the high probability, if not the absolute certainty, is that the injunction would have been refused. 65 Mr Thomson submits that Mr Finn was negligent in "deflecting" Mr Stockl from pursuing his complaints about the auction through Westgarth Middleton. But, again, what could Westgarth Middleton have done which would have postponed the sale? If they had sought an injunction, they would in all probability have failed, for the reasons which I have given. 66 Further, if by some means or other, the auction had been postponed, there is no basis in the evidence for saying that the postponement would have resulted in a higher price for the Property being achieved. A properly conducted advertising campaign for the Property had produced no potential buyers. As all the valuation evidence shows, the property market in Sydney was at the beginning of a decline in the early part of 1991. There was no way of knowing at that time how long the decline would last. There is no basis in the evidence for a suggestion that Adolfson would have been content to defer exercising its power of sale indefinitely until the real estate market improved, particularly as no interest had ever been paid under its mortgage and interest was accruing at the rate of approximately $7,000 per month. Certainly, a court would not have restrained Adolfson's exercise of its power of sale for an indefinite time: a mortgagee cannot be compelled to defer exercising a power of sale in the hope that the market will improve and the mortgagor will thereby realise a greater surplus from the sale: Pendlebury at 701; Westpac Banking Corporation Ltd v Kingsland (1991) 26 NSWLR 700, at 705. 67 In short, even if it were found that Mr Finn had come under a duty of care to Mr Stockl in February and March 1991 as his solicitor, I cannot see how anything done or omitted to be done by Mr Finn has caused any loss or damage to Mr Stockl. Quite apart from the injustice of sending back for trial an issue that was never properly pleaded or argued, in my opinion it would be futile to remit a cause of action which, even if it had been properly raised, was bound to fail.

68 At the commencement of the appeal Mr Thomson sought to leave to amend the Notice of Appeal by adding three grounds; he subsequently abandoned two of them. The remaining proposed ground, 12A, contends that "her Honour failed to identify and/or apply the relevant tests in considering whether the sale by the first mortgagee to Mrs Patten was vitiated by reason of the relationship between the first mortgagee and the purchaser" . The court indicated that it would hear argument on this ground of appeal and would rule later whether leave to amend should be granted. 69 Ground 12A relates to the validity of the sale as between Adolfson and Mrs Patten but that sale has long been completed and Mrs Patten has long been registered as the proprietor of the Property. Mr Stockl has never sought to set the sale aside. Mrs Patten was not a party to these proceedings. The proposed ground of appeal therefore has no bearing on the issues now in contest. In my opinion, leave to amend the ground of appeal by adding ground 12A should be refused.

70 In my opinion, the appeal fails on all grounds. The orders which I propose are as follows:

71 At the conclusion of argument, the court acceded to Mr Gleeson's request that submissions as to costs be reserved until judgment had been delivered and then made by the parties in writing. The Respondents should serve their written submissions as to costs within seven days, and the Appellant should serve his response within seven days thereafter. - oOo -

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