Hickey v Hickey and Ors [2007] ACTSC 31 (3 May 2007)

Last Updated: 8 May 2008

KRYSTYNA MARIA HICKEY v PETER HICKEY and OTHERS

[2007] ACTSC 31 (3 May 2007)

EQUITY - Right to set aside transaction - unconscionability - mother gifts property to son - son uses property to secure loan from lender - no special disability - no unconscionable conduct by tender.

The Commercial Bank of Australia Limited v Amadio [1983] HCA 14; (1982-1983) 151 CLR 447

State Bank of New South Wales Ltd v Sullivan [1999] NSWSC 596

State Bank of New South Wales Ltd v Burke (unreported, NSW Court of Appeal, 4 April 1997, BC 9701007)

Begbie v State Bank of New South Wales Limited [1993] FCA 579; (1994) ATPR 41-288

NZI Capital Corporation Ltd v Fulton [1998] FCA 667

No. SC 846 of 2003

Judge: Connolly J

Supreme Court of the ACT

Date: 3 May 2007

IN THE SUPREME COURT OF THE )

) No. SC 846 of 2003

AUSTRALIAN CAPITAL TERRITORY )

BETWEEN: KRYSTYNA MARIA HICKEY

Plaintiff

AND: PETER HICKEY

First Defendant

AND: HOMELOANS LTD and

PERPETUAL TRUSTEES

AUSTRALIA LIMITED

Second Defendant

AND: REGISTRAR-GENERAL OF THE

AUSTRALIAN CAPITAL

TERRITORY

Third Defendant

ORDER

Judge: Connolly J

Date: 3 May 2007

Place: Canberra

THE COURT ORDERS THAT:

1. The injunction granted on 23 December 2003 be discharged.

2. There be no order that the security taken by the second defendant be set aside.

3. The parties have leave to formulate orders to give effect to these reasons, and the matter be relisted to this effect.

4. Costs be dealt with at that time.

1. This is a case where the plaintiff seeks to invoke the equitable jurisdiction of this Court pursuant to the principles established by the High Court in The Commercial Bank of Australia Limited v Amadio [1983] HCA 14; (1982-1983) 151 CLR 447 to set aside certain transactions. The facts of the case are briefly that the plaintiff transferred title to her residential property in Weston in the Australian Capital Territory to her son (the first defendant). He used the property as security for certain real estate transactions. These transactions have not gone well and the lender (the second defendant) now seeks to exercise its security over the property. The plaintiff seeks orders to set aside the transfer and to set aside the mortgage. Because of a failure to pay stamp duty on the transfer, the transfer was not immediately registered, and an injunction was granted in the plaintiff's favour to prevent the registration of the transfer until the substantive dispute is resolved. The Registrar-General (the third defendant) has agreed to abide by the outcome of the case, but took no active part in these proceedings.

2. The legal principle on which the plaintiff seeks to rely is now well established in Australian law. Amadio was a case where a son, whose business affairs were in severe difficulties, as was well known to the bank, approached his elderly parents, who had limited English language skills, to execute a form of security over property they owned for a further loan to him. The parents signed, believing the security to be limited to a guarantee limited to $50,000 for a period of six months. In fact the document was a full mortgage applying without limit as to time and for the full amounts secured, which exceeded a quarter of a million dollars.

3. The High Court held that, because the parents were under a special disability, going to their limited language and commercial skills, and the influence of their son, and because this was evident to the bank, it was unconscionable for the bank to rely on the mortgage document. This case has been frequently applied in Australian Courts in circumstances where a party under a special disadvantage executes a form of security to a lending institution that knows, or ought to have known, of the disadvantage and the risk of the transaction.

4. The doctrine was summarised by Mason J at 467 in Amadio where his Honour said:

... if A having actual knowledge that B occupies a situation of special disadvantage in relation to an intended transaction, so that B cannot make a judgment as to what is in his own interests, takes unfair advantage of his (A's) superior bargaining power or position by entering into that transaction, his conduct in so doing is unconscionable. And if, instead of having actual knowledge of that situation, A is aware of the possibility that that situation may exist or is aware of facts that would raise that possibility in the mind of any reasonable person, the result will be the same.

5. The difficulty in this case is that it seems to me that the plaintiff seeks to significantly extend the reach of the doctrine. This is not a case where the financial institution has entered into any transaction by way of mortgage or guarantee with the plaintiff that is susceptible to being set aside. Rather, the plaintiff has transferred her property to her son. Her son has mortgaged the property to the financial institution. I am aware of no authority for extending the rationale of Amadio's case in this manner, and it seems to me that, as a judge hearing this case at first instance, I can only apply the law, rather than make it. The law that I must apply is the law laid down by the High Court in Amadio, which, as I understand it, allows a court to set aside a transaction entered into between a financial institution (or indeed any lender) and a person under a disadvantage, when the person under a disadvantage entered into a transaction with that lender to their disadvantage when the lender knew, or ought to have known, of the special disadvantage of the person, and that the transaction was not to the person's advantage. The difficulty for the plaintiff in this case is that the first defendant has not entered into any legal transaction with the plaintiff, and on this basis, I do not understand that there is an equitable jurisdiction to set aside the mortgage the bank took over the land that it understood to be land transferred into the ownership of the son.

The Facts

6. The plaintiff is a now retired former public servant in her mid 50's. Although born in Poland, she came to Australia as a baby and was educated to the end of year 11. She worked for many years as a secretary in the Australian Public Service, including a period as an administrative assistant in the office of a Commonwealth Minister, and she has worked in an Australian Embassy in a bookkeeping role. She has not worked since the late 1980s. She purchased an investment unit when she first started working, which was subsequently sold and the proceeds put towards the first home she and her husband purchased in Canberra. This home was subsequently sold, and the proceeds applied to the purchase of the home in Weston subject to this dispute. At the time of the transfer of this property it was subject to a mortgage in favour of the Commonwealth Bank, which had been placed as security for certain loans taken out by her son.

7. At the time of these transactions the first defendant had been living in Queensland for several years, and owned a number of investment properties. In an affidavit filed in support of the application for an injunction, which was included in the court book, it was said that these properties had a combined value of some $650,000 on which he owed $500,000. At some time the plaintiff had agreed to allow her property in Weston to be used as security for these purchases.

8. In October 2002 the first defendant made application, through a mortgage broker, for finance from the second defendant to purchase an additional property in Queensland. He was proposing to purchase a house that straddled two blocks of land and to then physically move the existing house so that it was situated on one block, and to build a second house on the other block. He would then sell the two properties separately. He anticipated that this would be a profitable development, and indeed it seems from some of the documents that he was operating as "Hickey Developments", although the actual loan application, which was in an agreed set of documents before me, was in his own name. Approval was given to advance funds in the sum of $311,600.

9. The plaintiff gave evidence that she had discussed this proposal with her son. She said that she viewed him as a successful investor, and that there had been no problems with the earlier mortgage over her home. She says that he told her that the loan would proceed faster if she transferred her home into his name. She says that he said that this would only be for a limited period not to exceed six months. There is no evidence before me as to whether this was the first defendant's idea or whether it came from someone associated with the mortgage broker, which is not involved in these proceedings, or the actual lender.

10. In any event, she agreed to transfer the property to her son on the understanding that he would transfer it back to her in six months. Although she did not give evidence of this directly, it is apparent from the form of the loan application that her son made and the way the transactions proceeded, that of the funds advanced, $65,000 was to go to the Commonwealth Bank, which would apply this against earlier loans to the first defendant, and discharge the mortgage over the Weston property. It seems to follow from this that the arrangement between the plaintiff and the first defendant did go a little more than a simple "love and affection" transfer on a trust because, if things had gone well, the plaintiff would have transferred her encumbered title to her son, who would have used it as security for transactions which were intended to be profitable and would, upon completion of the development, return the title unencumbered. This would have been an obvious and significant benefit to the plaintiff.

11. The plaintiff did not seek to give evidence that she did not understand what she was doing when she executed the transfer. She had previously been involved in real estate transactions, and she had previously offered her property as security by way of mortgage for an investment by her son. She said that she was prepared to transfer the property to him on the understanding that he would use it as security for an investment to redevelop property, and that he would transfer it back within six months. She said that she did not think this involved a risk because the loan was for the purchase of real estate.

12. I am not satisfied that the plaintiff is in a position where it could be said that she was under a special disadvantage in the sense understood by Amadio and the cases that follow. She was not elderly and she was not uneducated. She had worked as a secretary to a Commonwealth Minister. She had bought and sold real estate in the past, and in recent years had offered security by way of mortgage over her property. She did not say that she did not understand that she was executing a transfer of the property. She said that, when she attended upon her son's solicitor to execute the transfer, he advised her to obtain legal advice. There is a letter in the agreed materials from her son's solicitor dated 25 October 2002 which states:

I act for your son Peter in relation to the transfer of your Weston property into Peter's name.

I note there is to be no payment by Peter and that I have recommended that you obtain independent legal advice if you are uncertain about any of your rights or the consequences of this transaction for you.

13. It seems to me that this was most prudent conduct on behalf of the solicitor. The plaintiff acknowledged that she received this advice orally and in writing, but that she wanted to help her son and she proceeded without obtaining legal advice. The loan was approved on the basis that the first defendant would offer the Weston property as security, and on 30 October funds from the loan were used to discharge the Commonwealth Bank mortgage on the Weston property, then being still in the plaintiff's ownership. On 31 October the first defendant executed mortgage documents to authorise a mortgage over the Weston property in favour of the second defendant. On 6 November the plaintiff executed the transfer.

14. I am not satisfied that the plaintiff had any special disability, in the Amadio sense, in relation to her age, education, or commercial experience. However, these categories have been expanded to a disability arising by way of a lack of knowledge of special risks in the loan which is known to the bank but not to the person who executes the security. In State Bank of New South Wales Ltd v Sullivan [1999] NSWSC 596, James J found that the plaintiff there, although aged 67 when his son asked him to offer security, did not suffer disability by way of language, illness, lack of business experience or illiteracy. His Honour said (at [326]):

However, as Dean J said in Amadio the circumstances which may constitute a special disability may take a wide variety of forms and are not susceptible to being comprehensively catalogued. In his judgment in Amadio, Deane J referred to some examples of a special disability given by Fullager J in Bromley v Ryan [1956] HCA 81; (1956) 99 CLR 362 at 405, which included "lack of assistance or explanation, where assistance or explanation is necessary". Lack of information about a transaction and misinformation about a transaction can place a party to the transaction in a position of special disadvantage.

15. Mr Arthur, for the plaintiff, seeks to rely on this aspect of Amadio in the present case. Putting aside the fundamental difficulty as to whether there was ever a transaction between the lender and the plaintiff such as would enliven the Amadio principle, it is said that the plaintiff did not know of the risk of the loan or of the fact that not all the loan was applied to the purchase of the Queensland property.

16. It seems to me that the plaintiff did know that her son proposed to purchase the property, spend money to move an existing timber house that straddled the two titles so that it could be freestanding on one title, and build or relocate a second house on the other block. It follows that she must be taken to have known that he needed funds to be applied both for the purchase and the redevelopment, and I do not think that this amounts to a special disadvantage going to knowledge.

17. The transaction was a transfer of the property to her son, and it seems to me that there is no evidence that she thought that a transfer was anything other than a transfer. While she says that she understood that her son would transfer the title back in six months, she did not say that she did not understand that the effect of the transfer was to transfer ownership of the property.

18. In a number of the cases a feature of the special disadvantage has been that the financial institution had particular knowledge of the perilous financial position of the party seeking the loan, and did not pass on this knowledge to the person offering the security. Thus, in Amadio, there was evidence that the manager of the bank branch well knew the perilous state of the son's finances, and in Sullivan James J found (at [329]) that, because of the financial affairs of the son's company:

... the Bank, unknown to Mr Sullivan, was seriously contemplating enforcing securities it held for Nobsa's debt.

19. This knowledge by the lender of the perilous affairs of the borrower which has been concealed from the person giving the security seems to be a necessary feature to establish this type of special disadvantage so as to enable a court to say that the lender has acted unconscionably. In State Bank of New South Wales Ltd v Burke (unreported, NSW Court of Appeal, 4 April 1997, BC 9701007), Priestley J found that the parents who provided surety for their son were in a position of special disadvantage because the bank knew of the deteriorating financial affairs of the son. In Begbie v State Bank of New South Wales Limited [1993] FCA 579; (1994) ATPR 41-288, the Federal Court (Drummond J) (at 41-886) set aside a security obtained by a man from his girlfriend in circumstances where he was satisfied that the bank was heavily exposed due to his financial affairs and:

had allowed these accounts to become very heavily overdrawn although the bank held little in the way of security.

20. In Lisciandro v Official Trustee (1996) 69 FCR 180, an attempt to enliven the Amadio discretion was unsuccessful in circumstances where there was no particular knowledge by the lender of the difficulties the borrower may face putting the surety at risk. Ryan and Drummond JJ there said (at 186) that:

There is nothing in Amadio that lends support for the view, implicit in the appellant's argument, that whenever a third party provides security for another, the person taking the security is, for that reason alone, put on inquiry with regard to the circumstances in which the third party decided to accommodate the person for whose benefit the third party gave the security

21. It seems to me that this form of special disadvantage, going to risk due to the financial affairs of the borrower, can only be made out when the lender knows of the risk. In NZI Capital Corporation Ltd v Fulton [1998] FCA 667, Black CJ and Lehane J referred to what Mason J said in Amadio (at 462) that special disadvantage in this sense goes to circumstances that:

emphasize that the disabling condition or circumstance is one which seriously affects the ability of the innocent party to make a judgment as to his own best interests, when the other party knows or ought to know of the existence of that condition or circumstance and of its effect on the innocent party.

22. Where this has been found to justify intervention, as in Amadio itself or Sullivan, the financial institution has had a long history of dealings with the party seeking the loan, and there has been clear evidence that the relevant officer well knew of the difficulties. Here there is no evidence that the first defendant had ever had any dealings with the second defendant before they received this loan application, which was sent to them through a mortgage brokering business. The transaction was described as a "Lo Doc" loan, and it is certainly the case that the documentation, as it appears in the agreed material before me and in certain material obtained on subpoena from the mortgage broker, is somewhat sparse. However, on the loan application, the first defendant asserted that he had three investment properties in Queensland, which he valued at $605,000, and which were subject to debts in the order of $491,000. This is consistent with the evidence contained in the affidavit in support of the injunction referred to in [1] above. Ms Crebbin, who then acted for the plaintiff, was the deponent to that affidavit. She was called to give evidence that she had to put this together with some urgency when the plaintiff herself was unavailable and that it was based on information and belief contained in her files on the basis of instructions from the plaintiff. I am satisfied that both the plaintiff and the lender, at the time of the loan, had information that indicated that the proposed borrower held assets valued above the loans, so that he had a substantial net equity merely on his investment loan portfolio. The loan application also disclosed shares and other assets, as well as the Weston property which, on the material before me, was identified by the person approving the loan, on information that could only have come from the first defendant as "property being gifted/transferred from mother".

23. The state of the plaintiff's understanding, as set out in the affidavit, was that, although she was aware that he was no longer in employment at the time of the loan application she "understood that the rental income he was earning from his other properties was high and thought that he was a good property and money manager who would have no difficulty repaying the new loan". This is entirely consistent with the information he presented to the lender in the loan application.

24. There is no evidence that the lender, even if it had been involved in a relevant transaction with the plaintiff, had information that put it on notice that this was a particularly risky loan. Indeed, apart from evidence before me that the first defendant became ill in late 2002, and has subsequently become bankrupt, there is no evidence as to what was his state of financial affairs at the time of the loan beyond what was in the loan application, and the affidavit. There is no evidence as to why these transactions in fact went bad. The only evidence before me was that, at the time of the loan, the first defendant had net equity in his investment portfolio, but that after these transactions he had poor health and subsequently fell into financial difficulties that have lead to bankruptcy. There was, on the evidence before me, no knowledge of the relevant type, and it cannot be said that the second defendant, at the time of the loan transaction, was privy to the type of information that would have meant that, had the plaintiff entered into a transaction with it by way of a mortgage or guarantee, it could be said that she was in a position of special disadvantage. Both the lender and the plaintiff at the time seemed to think that this was a sound loan.

25. The first defendant had been represented by a solicitor, but on the first day of this hearing the solicitor, by leave, withdrew after explaining the fact that his client had become bankrupt in 2006. The plaintiff sought leave to continue the proceedings and as I was advised that the official trustee had no objection, I granted leave. He represented himself at the hearing, but gave no evidence. In his defence he did not dispute that he promised to re-transfer the property to his mother.

26. The relief sought on the statement of claim are orders setting aside the transfer of the crown lease to the first defendant, and setting aside the mortgage. It seems to me, and it was conceded by Mr Arthur, that there is no basis for setting aside the transfer, but all the evidence supports the proposition that the transfer occurred in circumstances where it was on trust, that is, where the plaintiff transferred the lease to her son for a limited period on his undertaking to transfer it back to her, and I indicated that I would, in effect, grant leave to amend the form of relief to order that the first defendant transfer his interest in the crown lease back to his mother.

27. The real issue in the case, however, is the status of the mortgage, because unless this is set aside, the reality is that the lease is subject to the substantial mortgage. It seems to me that the plaintiff must fail in this aspect of her case.

28. While I have considerable sympathy for the plaintiff in entering into an unwise transaction with the motive of helping her son, it seems to me that the principle of Amadio does not extend to setting aside a transaction with at the behest of a plaintiff who claims to have been disadvantaged where that plaintiff was not involved in the transaction. The plaintiff executed a transfer of her property to her son. I am satisfied that she knew that this meant that the legal ownership was passing, and that the purpose of this was to enable the property to be used as security for a loan transaction that he was proposing to enter. The son duly offered the property as security, and although the loan went through and the Queensland development property was acquired, he subsequently fell into financial difficulties.

29. It seems to me that it is not appropriate for a judge at first instance to so significantly expand a principle of law as to extend the doctrine in Amadio to set aside a transaction entered into between a lender and a borrower at the behest of a stranger to that transaction. This would have very significant ramifications to commercial banking practice. Would a lender have to make enquiry behind any apparently clear title to find out whether or not the person offering the security apparently in their name acquired it in circumstances giving rise to some form of trust or equity in another? What would be the extent of the duty to make such enquires? Such a fundamental change in the law is, it seems to me, a matter for the legislature or the High Court.

30. Even if this had been a situation where the Amadio doctrine could be invoked, the plaintiff would face real difficulties. If she had offered her residential property by way of a security, it seems to me that, given that she suffers no disadvantage by way of age, literacy or infirmity, the only way the doctrine could be invoked is if it could be said that she was under a disadvantage by way of lack of information that was in the hands of the lender. For the reasons given above, I am not satisfied that the lender had sufficient knowledge of the first defendant's affairs to know that there was a real risk in the transaction. Indeed, there is no evidence to show that, at the time of the transaction, his affairs were in such a poor financial state.

31. The application for relief against the second defendant must be refused.

32. As the substantive matters have now been dealt with, it seems to me that the injunction granted in December 2003 to prevent the Registrar-General from registering the transfer or the mortgage should now be discharged. The effect of this is that the first defendant must transfer back to the plaintiff his interest in the land, that is subject to the interest of the mortgage. It seems to me that it would be appropriate to hear the parties as to the final form of the orders, particularly as to the sequence in which the transfer may take place given that the mortgagee may wish to exercise its security over the property.

33. The orders of the court are that:

1. The injunction granted on 23 December 2003 be discharged.

2. There be no order that the security taken by the second defendant be set aside.

3. The parties have leave to formulate orders to give effect to these reasons, and the matter be relisted to this effect.

4. Costs be dealt with at that time.

I certify that the preceding thirty-three (33) numbered paragraphs are a true copy of the Reasons for Judgment herein of his Honour, Justice Connolly.

Associate:

Date: 3 May 2007

Counsel for the plaintiff: Mr R Arthur

Solicitor for the plaintiff: Legal Aid Office (ACT)

Counsel for the first defendant: In person

Solicitor for the first defendant: -

Counsel for the second defendant: Mr WL Sharwood

Solicitor for the second defendant: Snedden Hall & Gallop

Counsel for the third defendant: Third defendant took no active part in these proceedings.

Solicitor for the third defendant: ACT Government Solicitor

Dates of hearing: 7 and 8 March 2007

Date of judgment: 3 May 2007