Permanent Custodians Limited v Carmelo Spagnolo and Rosalia Spagnolo [1993] ACTSC 77 (6 August 1993)

SUPREME COURT OF THE ACT

PERMANENT CUSTODIANS LIMITED v. CARMELO SPAGNOLO AND ROSALIA SPAGNOLO
No. SC40 of 1993
Number of pages - 7
Practice and Procedure - Solicitor

COURT

IN THE SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY
MASTER A. HOGAN

CATCHWORDS

Practice and procedure - Setting aside default judgment - Reasons for not entering appearance within time - Prima facie defence on the merits - No issue of principle.

Solicitor - Acting for mortgagee as well as for mortgagors and guarantors - Conduct attributable to mortgagee - Unconscientious conduct - Misleading conduct - No issue of principle.

Trade Practices Act 1974

Contracts Review Act 1980

Blomley v Ryan [1954] HCA 79; (1956) 99 CLR 362

Commercial Bank of Australia Ltd v Amadio [1983] HCA 14; (1983) 151 CLR 447

Beneficial Finance Corporation Ltd v Karavas (1991) 23 NSWLR 256

HEARING

CANBERRA, 30 April 1993
6:8:1993

Counsel for the Plaintiff: S. Walmsley

Instructing Solicitors: Corrs Chambers Westgarth

Counsel for the Defendant: I. Harvey

Instructing Solicitors: Scott Sheils Glover

ORDER

The Court orders that:
1. The application be dismissed.

2. The defendants pay the plaintiff's costs.
3. The stay of execution that was ordered on 30 April 1993 is
extended to 5.00 pm on Friday 9 August 1993.

DECISION

MASTER A. HOGAN By Writ of Summons with Statement of Claim endorsed the plaintiff in this action claimed possession of land at 26 Spalding Street Flynn ("the Flynn land"). The claim was based on default by the defendants in payment of moneys due under a mortgage granted by them to the plaintiff over the Flynn land, of which they were registered proprietors.

2. The Writ was issued on 18 January 1993, and was served personally on both defendants on 19 January 1993.

3. The defendants did not appear to the Writ. Default judgment for possession of the land was regularly entered on 2 February 1993.

4. Sealed copies of the default judgment were served personally on 8 February 1993 on the first defendant and on 10 February 1993 on the second defendant.

5. On 7 April 1993 a Writ of Possession was issued. On 19 April 1993 a Notice to Vacate the land was served on the defendants.

6. On 28 April 1993 the defendants filed a Notice of Motion, seeking orders staying the execution of the Writ of Possession, and setting aside the default judgment.

7. On the hearing of this application there has been no dispute about matters of fact.

8. In mid 1988 the first defendant and the second defendant's brother, Paolo Grippi, were directors and shareholders of a company called Damilway Pty Limited ("Damilway"). Damilway owned land at Mitchell ("the Mitchell land"), on which it was proposed to construct a warehouse for wholesale fruit and vegetables.

9. Finance for the project was arranged in the sum of $1,065,000.

10. Of this sum, $135,000 was secured by a deed of loan and a mortgage entered into by the defendants, the property secured being the Flynn land, their principal residence.

11. The balance of $930,000 was secured by a mortgage entered into by Damilway, with the first defendant and Paolo Grippi as guarantors. The security for this loan comprised:

1. The collateral deed of loan entered into by the defendants.
2. The collateral first mortgage given by them over the Flynn land.
3. A collateral first mortgage over the Mitchell land.
4. A collateral first mortgage over residential land and building at
Five Dock ("the Five Dock land").
5. A deed of guarantee and indemnity entered into by the two
defendants, Mr and Mrs Grippi and Bomilight Pty Limited.
6. A charge over the assets and undertaking of Damilway.

12. The Deed of Loan dated 17 October 1988 executed by Damilway, the first defendant and Mr Grippi bears a certificate by Mr Kourpanidis, a solicitor, that before it was executed he explained the contents and effects of it and the collateral documents to the guarantors.

13. The second defendant gave evidence that she attended at the office of Mr Kourpanidis to sign some documents. She understood that their house at Flynn was to be mortgaged for $135,000. Some documents were put in front of her, which she signed. She did not read them. She also knew that her husband and Mr Grippi wanted to borrow money to refinance the Mitchell property, but she did not know that there was any link between the mortgage over the Flynn land and that over the Mitchell land.

14. In April 1990 an order was made that Damilway be wound up.

15. In May 1990 discussions took place between the defendants and Mr Whiley, an officer of the plaintiff's mortgage manager, about proposals to form a new syndicate and inject additional capital to acquire the Mitchell property. A time limit was imposed for the achieving of those objectives, namely to 6 June 1990.

16. In October 1990, after a warning letter from the plaintiff's solicitors dated 24 September 1990, the plaintiff served on the first defendant, and, I would infer, also on the second defendant, a notice that they were in default under the mortgage over the Flynn land, and requiring them to pay forthwith the whole of the principal sums, with arrears and interest, totalling $1,077,903.

17. Further negotiations took place. The two defendants and Mr and Mrs Grippi then, by contract dated 26 April 1991, agreed to buy the Mitchell land from Damilway for $930,000. Mr Kourpanidis acted as solicitor in that transaction for both the vendor and the purchasers. The whole of that sum was advanced on settlement by the plaintiff, by internal book entries. Mr Kourpanidis also acted for the plaintiff as mortgagee.

18. The mortgage associated with that transaction, which is, as I understand it, the mortgage on which the plaintiff relies in this action, is not in evidence. The loan agreement, being a deed dated 29 April 1991, and made between the plaintiff as lender, and the defendants and Mr and Mrs Grippi, as borrowers, is in evidence.

19. The mortgaged property scheduled in that deed was the Mitchell property. The securities were listed as:

1. A registered first mortgage over the Mitchell land.
2. A registered first mortgage over the Flynn land.
3. A registered first mortgage over the Five Dock land.
4. A collateral Deed of Loan between the plaintiff and the
defendants for $135,000 dated 17 October 1988.
5. A Traders Bill of Sale over equipment at the Mitchell land.

20. There is no solicitor's certificate endorsed on that Deed.

21. The second defendant deposed that Mr Kourpanidis "gave me more documents to sign but did not tell me what they were for and I just signed them". She also claims that at no time did either her husband or her brother explain to her that the Flynn land could be sold if the money borrowed for the Mitchell land was not repaid.

22. The first defendant deposed that the defendants had no independent legal advice in respect of the purchase. Nor did Mr Kourpanidis or any representative of the plaintiff inform him of a number of risks said to be associated with the venture. He was told that the documents were basically the same as those signed three years before.

23. The final date for repayment was in June 1992.

24. Both defendants deposed that they have limited education, can read English, but have difficulty reading and understanding complicated legal documents. Mr Kourpanidis did not tell them that he was acting for the plaintiff as well as on their behalf in connection with the refinancing arrangements in April 1991.

25. When the Writ and Statement of Claim was served, the defendants instructed a solicitor to appear to it and defend the action. He did not enter an appearance. When the defendants learned that default judgment had been entered, Mr Spagnolo asked the solicitor why, and was told that the solicitor could not see any point in entering an appearance.

26. Both the evidence of the defendants and the draft of the Defence that they propose to put on if this application succeeds admit in effect all the elements of the plaintiff's claim.

27. The defence propounded is based on an allegation that the plaintiff "wrongfully induced" the defendants to purchase the Mitchell land from Damilway, by failing to advise them about a number of matters and failing to ensure that they had received independent legal advice. It also alleges that, in breach of the Trade Practices Act 1974, the plaintiff aided and abetted Mr Kourpanidis in false and misleading conduct in that it authorised or permitted him to act both for the plaintiff and for them in relation to the purchase of the Mitchell land and the mortgage arrangements, and in a number of other respects. It would also be alleged that the defendants agreed to purchase the Mitchell land and enter into the mortgage under the duress of the Notices of Demand to give up possession of their home having been served on them, and not withdrawn.

28. It appears that the first solicitor whom they consulted did not advert to the possibility of such a defence, and could not see any way of resisting the action.

29. They consulted another solicitor, Mr Mura, who advised them to attempt a commercial solution, rather than incur the expense of setting aside the judgment. They attempted to follow that advice, or at least arrange alternative finance, until they consulted Mr Levitt, a solicitor in Sydney, to give them a third opinion. He advised them on 14 April 1993 that he could see grounds for defence, and attempted to get possession of their file from Mr Mura, in which endeavour he was not successful until 22 April 1993.

30. Meanwhile, the Five Dock property was sold by the plaintiff as mortgagee in possession on 5 March 1993, for $300,000. Terms imposed by the plaintiff on the granting of further time to allow the defendants to refinance were not adhered to by the defendants. The plaintiff's solicitors proceeded to execution.

31. I would not consider those circumstances, relating to the reason why judgment was allowed to go by default, and why action was not taken for some time to set it aside, as weighing very heavily in the scales against the setting aside of the judgment. This case depends much more on whether there is evidence that the defendants have a prima facie defence.

32. The defence does not seek to raise the issue that the defendants did not know the nature and incidents of the mortgage which they executed, and the facts to which they depose would not support such a defence.

33. There is also no evidence that the plaintiff itself was guilty of any unconscientious conduct, such as would afford the defendants relief under the principles expounded in Blomley v Ryan [1954] HCA 79; (1956) 99 CLR 362 or Commercial Bank of Australia Ltd v Amadio [1983] HCA 14; (1983) 151 CLR 447.

34. What is propounded is that the conduct of the solicitor, Mr Kourpanidis, fell far short of what was required of him as the solicitor for the defendants. I do not need to detail the particular respects in which the evidence points to a conclusion that there is certainly a prima facie case that he did not fully advise them or ensure that their interests were properly protected.

35. Mr Kourpanidis is not a party to this litigation, there was no evidence from him tendered by either party, and he has not been represented during the argument. That prima facie case might well be displaced on further examination. But for the purposes of this application, and for those purposes alone, let it be accepted that the defendants might succeed in demonstrating breaches by him of his duties to the defendants.

36. The defendants' case depends upon fixing the plaintiff with responsibility for those breaches, upon the ground that he was also acting as its solicitor in the same transaction.

37. There is no direct evidence that the plaintiff had actual knowledge of the respects in which Mr Kourpanidis failed to protect the defendants. Nor am I prepared to infer from such evidence as there is that it did have such actual knowledge, or that it ought to have had it.

38. Reference was made by counsel to the decision of the New South Wales Court of Appeal in Beneficial Finance Corporation Ltd v Karavas (1991) 23 NSWLR 256. That case dealt with the question whether a contract was "unjust" under the Contracts Review Act 1980, a question which is not in issue in these proceedings. There is no corresponding legislation in the Australian Capital Territory. Kirby P at 265, 266 referred to the obvious unwisdom of the same firm of solicitors acting for a financier, the principal borrowers and the mortgagors and guarantors. He did not suggest that the financier was thereby fixed with responsibility for any defaults of the solicitor. Meagher JA, at 276, 277, however, set out a number of principles, some of which are of general application, and are not restricted to issues arising under the Contracts Review Act 1980. He said:

"As to the principles of law, they can, I think, be adequately
summarised as follows:
1. There is no duty on a financier to provide either a borrower or
a third-party guarantor with any commercial advice, although if any
such advice is tendered the financier may assume a duty of care;
see Commonwealth Bank of Australia v Mehta (1991) 23 NSWLR 84;
Stanton v Australian and New Zealand Banking Group Ltd (1987) 9
ATPR pp 40-755; and, Cornish v Midland Bank Pic (1985) 3 All ER
513. In the present case, Beneficial did not presume to offer any
advice and assumed no duty of care.
2. A solicitor acting for a borrower has no duty to advise his
client about the nature of his present or intended investments
except to the extent that he is retained to do so and agrees to
carry out that task: Hogan v Howard Finance Ltd (1987) ASC pp
55-594 and Esanda Finance Corporation Ltd v Murphy (Hunt J, 17
March 1989, unreported). In the present case, this principle does
not loom large, because Messrs Heidtman and Co did not tender any
advice. Mr Heidtman, whose word was accepted by His Honour, said
that whilst he knew some risk was involved, he did not know the
magnitude or reality of that risk, and deliberately abstained from
commenting on it. His firm neither commended nor denigrated the
transactions.
3. In cases such as the present, the knowledge and state of mind
of the solicitors, who were the lender's agents, may be attributed
to their principal, the lender."

39. There is no suggestion here that the plaintiff itself tendered any advice to the defendants.

40. The only advice that the defendants received when they entered into the mortgage in 1988 was the advice that they got from Mr Kourpanidis. But there is no evidence that the advice related to anything more than the nature of the documents that they were signing. There is no suggestion that Mr Grippi or the first defendant then needed any advice from Mr Kourpanidis or from anyone about the wisdom or otherwise of embarking upon the venture of developing the Mitchell property.

41. When the venture did not succeed, for reasons which were excluded from the evidence because in truth they are not material, they did seek his advice. It was to negotiate. The letter dated 16 May 1990 which is Exhibit "D" to Mr Spagnolo's affidavit suggests only that the defendants conducted those negotiations with Mr Whiley themselves, not through Mr Kourpanidis.

42. The letter dated 24 September 1990 informing them that action was being commenced to protect the plaintiff's interests under the mortgage came from the firm of solicitors of which Mr Kourpanidis was a partner. They were well aware that the firm was acting for the plaintiff, although the letter was signed by someone other than Mr Kourpanidis, and the firm's reference at the head of the letter was to another partner.

43. Although the defendants were acting on the basis of advice from Mr Kourpanidis when they embarked on the negotiations with the plaintiff's mortgage manager, there is no evidence that they sought or received any advice from him about the terms of the agreement that they themselves negotiated. There is in this case no relevant knowledge or state of mind of the solicitors that is to be attributed to the plaintiff. When, in order to effect the details of the arrangement that they had themselves negotiated with the plaintiff's agent, the solicitor acted on the execution of the further documentation, there is no suggestion that they then sought or received from him any relevant advice, or that he had or ought to have had any knowledge that he was under any obligation to pass on to them.

44. Counsel for the defendants points to evidence tending to show that the date of settlement referred to in the solicitor's settlement statement was not the actual date of settlement. Even if that were so, that fact does not tend to show misleading conduct which induced them to enter into the mortgage, or the unconscientious taking of an opportunity by the solicitor as the plaintiff's agent. Nor does it tend to show a total failure of consideration on the sale, purchase and mortgage.

45. Further, there is no prima facie evidence that the sale to the defendants by the liquidator was at a value in excess of its true value. In any event, Mrs Spagnolo's own evidence is that when she argued against the refinancing project her husband said to her, "No, we must go on. We will buy back the building and eventually, in a couple of years, the value will go up and we will be all right again."

46. There is no evidence that it was any advice from Mr Kourpanidis that led him to form that opinion, nor is there any evidence that it was an incautious or rash opinion to form in any event.

47. Finally, it is necessary to bear in mind that the plaintiff was not selling the Mitchell land to the defendants. The liquidator was. All the plaintiff did was lend the defendants the money to enable them to buy it. There is no evidence that there were any unusual aspects of the terms on which the plaintiff was prepared to lend the money. An allegation of a usurious interest rate charged by the mortgagee would be more to the point in this case than a complaint of a purchase at an overvalue. If the solicitor had advised the defendants to purchase at an overvalue, it might be thought that in so doing he acted as agent of the vendor, not of the mortgagee.

48. Even if all that Mr Kourpanidis might be thought to have known were attributable to the plaintiff, there is no prima facie case made out on the evidence of any unconscientious taking of an unfair advantage by the plaintiff that could be said to have caused them to enter into the mortgage which is the basis of the relief sought in this action.

49. It follows that there is no relevant distinction between the position of Mrs Spagnolo from that of Mr Spagnolo.

50. The defence of duress, adumbrated in the Points of Defence referred to in evidence, was not really pressed at the hearing. It is obvious that it could not succeed in this case.

51. In my opinion the defendants have not disclosed a prima facie defence on the merits.

52. I dismiss the application. I order the defendants to pay the plaintiff's costs. I terminate the stay of execution that was ordered on 30 April 1993.