Citation: Commonwealth Bank of Australia v Hilellis & Ors [2009] NSWDC 9
Court: District Court of New South Wales
Date: 13 February 2009
Judge(s): Levy SC DCJ
Background
A bank provided mortgage finance for the purchase of an investment unit, introduced to it by an employee of a mortgage broking company. The purchasers were two brothers whose father had negotiated the purchase with the vendors, a married couple who were also the grandparents of the mortgage broker employee. The transaction proceeded under a low-documentation (sub-prime) mortgage arrangement.
The purchase price was $550,000, but at settlement the vendors accepted only $440,000. They did so on the basis of assurances from the purchasers' father that funds were expected from overseas to cover the balance. Those funds never arrived, the purchasers made no mortgage repayments, and they subsequently disappeared. The bank exercised its power of sale under the mortgage and recovered less than the amount outstanding, leaving a shortfall.
The bank brought proceedings against the vendors, the mortgage broker employee, and the purchasers, alleging misleading and deceptive conduct in trade or commerce. Because the purchasers could not be located and were not served, the claims against them were discontinued. The proceedings continued against the vendors and the mortgage broker employee.
Legal Issues
- Whether the vendors engaged in misleading and deceptive conduct in trade or commerce in contravention of the Fair Trading Act 1987 (NSW), by making representations to the bank in connection with the property transaction.
- Whether the mortgage broker employee was accessorially liable for those contraventions under the Trade Practices Act 1974 (Cth) and the Fair Trading Act 1987 (NSW).
- Whether the bank relied on those representations and suffered loss as a consequence.
- Whether the transaction was conducted at arm's length, or was a "scam" in which property was sold at an inflated value with the bank's funds used to cover costs that purchasers would ordinarily have paid themselves.
Decision
The court found that the pleaded representations were made by the vendors and the purchasers, and that those representations were misleading and deceptive and likely to mislead or deceive. The court determined that the representations were made in trade or commerce, including through the use of telephonic services. The vendors' argument that their conduct occurred only in their capacity as private vendors, and therefore outside the scope of trade or commerce, was rejected as irrelevant to the outcome.
The court concluded that the bank acted in reliance on those representations and suffered loss as a result. The transaction bore the hallmarks of a sale at overvalue, with the purchasers' stamp duty, legal costs, and brokerage fees all being paid from settlement proceeds rather than from the purchasers' own funds. The structure of the transaction meant the bank effectively funded the entire purchase without any monetary contribution from the purchasers.
On the question of the mortgage broker employee's liability, the court found on the balance of probabilities that, given the suspicious characteristics of the transaction, the employee had knowledge of the scheme being perpetrated against the bank. Despite his young age and limited business experience, the court was comfortably satisfied he was knowingly involved as a participant, even if a minor one. Accessorial liability under both statutes was established against him.
The bank's loss was assessed in the liquidated sum of $121,804.54, inclusive of interest calculated from the commencement of the hearing.
Orders Made
- Verdict and judgment for the bank against the first, fourth, and fifth defendants in the sum of $121,804.54.
- The first, fourth, and fifth defendants are ordered to pay the bank's costs.
- Exhibits may be returned.
- Liberty to apply on seven days' notice for any further orders required.
Key Takeaways
- The District Court confirmed that vendors in a property transaction can engage in misleading and deceptive conduct in trade or commerce for the purposes of the Fair Trading Act 1987 (NSW), and that the characterisation of their role as "merely vendors" does not automatically exclude that conduct from statutory reach.
- Accessorial liability under both the Trade Practices Act 1974 (Cth) and the Fair Trading Act 1987 (NSW) can attach to an individual with knowledge of a contravening scheme, even where their role in the scheme is relatively minor.
- A civil standard of proof applied throughout. The court was not required to be satisfied beyond reasonable doubt, only that knowledge and involvement were more probable than not on the evidence as a whole.
- Where a mortgagee sale produces a shortfall, a bank can seek to recover that shortfall from parties whose misleading or deceptive conduct contributed to the bank advancing funds in the first place, provided reliance and loss are established.
- Suspicious transaction characteristics, including the payment of a purchaser's own transaction costs from settlement proceeds and the absence of any genuine monetary contribution by the purchaser, can support an inference that a transaction was not conducted at arm's length.
Legislation and Cases Referenced
Legislation:
- Trade Practices Act 1974 (Cth), ss 75B, 82
- Fair Trading Act 1987 (NSW), ss 61, 68
Cases:
- Best v Housing Commission of NSW 17 LGR (NSW) 129
- Bradshaw v McEwans Pty Ltd (1951) 217 ALR 1
- Brien v Dwyer (1978) 141 CLR 378
- Chamberlain v R (No 2) [1984] HCA 7; (1984) 153 CLR 521
- Doney v R [1990] HCA 51; (1990) 171 CLR 207
- Equity Access Pty Ltd v Westpac Banking Group (1990) ATPR 40-994
- Havyn v Webster [2005] NSWCA 182
- King v GIO Australian Holdings Pty Ltd [2001] FCA 308
- Palmer v Dolman; Dolman v Palmer [2005] NSWCA 361
- Richard Evans & Co Ltd v Astley [1911] AC 674
- Taco Company of Australia Inc & Anor v Taco Bell Pty Ltd (1982) 42 ALR 177
- Yorke v Lucas (1985) 158 CLR 661