No. 4486 of 2001
No. 7407 of 2002
- In this matter two related proceedings were heard together. In
proceeding No. 4486 of 2001 ("the principal proceeding"), Fritz
Walter,
Ingrid Walter and Carmen Walter, together with an associated company and family
trust as plaintiffs, seek orders invalidating
certain loan contracts,
mortgages, guarantees and debentures executed by them in favour of the National
Australia Bank ("NAB").
In proceeding No. 7407 of 2002 ("the enforcement
proceeding") the NAB seeks to enforce one of the mortgages, which was executed
by
Fritz Walter and Ingrid Walter over a residential property of which they are
registered proprietors.
THE PARTIES
- The plaintiffs in the principal proceeding are Fritz Josef
Walter, his wife Ingrid Adelheid Walter, their daughter Carmen Walter
(collectively, "the Walters"), the Walter Family Trust and Palatinat Brewery
Pty Ltd. Fritz and Ingrid Walker are stated to be plaintiffs
in their capacity
as natural persons, as sole trustees of the Walter Family Trust and as
directors of Palatinat Brewery Pty Ltd.
- The Walter Family Trust is a discretionary trust. Its
beneficiaries are Walter family members, including Fritz, Ingrid and Carmen
Walter, and a broad class of additional beneficiaries. Its trustees are Fritz
and Ingrid Walter. The Walter Family Trust is not
a legal person. It lacks
standing to sue. No point was taken on this issue by the NAB at trial.
- Palatinat Brewery Pty Ltd ("Palatinat") is a company limited by
shares, first registered on 1 April 1998. Its directors are Fritz,
Ingrid
and Carmen Walter. The shareholders are Fritz, Ingrid, Carmen and Roland
Walter. Palatinat is in receivership. The residual
power of directors of a
company in receivership to institute legal proceedings in its name is subject,
inter alia, to an indemnity for the costs of the action[1]. There was no evidence of such an indemnity in the present
case but no objection was made.
- The NAB is the defendant in the principal proceeding.
- Fritz and Ingrid Walter are the defendants in the enforcement
proceeding. They are the registered proprietors of a residential
property in
Wodonga subject to a mortgage in favour of the NAB, which the NAB, as plaintiff
in the enforcement proceeding, seeks
to enforce.
LITIGANTS IN PERSON
- The Walters were not legally represented. They appeared as
litigants in person. Their case at trial was conducted by Ms Carmen
Walter. Ms Walter presented her case with considerable ability,
intelligence and tenacity. Although English is not her native language,
she
was extremely articulate. Ms Walter is not legally qualified. The
Walters' pleadings in both proceedings were drawn, and the
associated documents
and submissions were prepared, principally by Ms Walter. Ms Walter
acknowledged that she had received assistance
in research and preparation from
Mr Smart, who is not legally qualified but had experience as a litigant in
person in a case involving
many similar allegations against a mortgagee bank
- The Walters' pleadings did not comply with the usual
conventions or technical requirements of pleadings. In some instances,
allegations
in the pleadings did not disclose a cause of action. In other
cases, there were simply assertions which made no allegation at all.
Allegations were not consistently or satisfactorily particularised.
- During the course of the trial, the Walters' amended statement
of claim was supplemented by a document dated 26 May 2003 and proposed
amended
pleadings dated 24 June 2003 intended to clarify their claims. Ms Walter
also orally amended or amplified the Walters' claims
at various stages during
the course of the trial.
- Commendably, in recognition of the difficulties associated
with litigants in person, counsel for the NAB did not make merely technical
objections to the Walters' pleadings or the conduct of their
case.
- The Walters raised a number of unorthodox arguments and
challenges to jurisdiction at the commencement of the trial, on which I
ruled
at the outset. The matters in question included the alleged impact of
Freemasonry, an alleged banking practice described as
"fractional reserve
banking", the invalidity of the Constitution of the State of Victoria, the
Walters' entitlement to trial by jury
under Magna Carta, and apprehended bias
on my part, due to my disclosure of beneficial ownership of a parcel of NAB
shares.
- I determined that none of the Walters' challenges to the
Court's jurisdiction was of any substance. I also ruled that the issues
of
Freemasonry and fractional reserve banking were of no substance and irrelevant
to any legitimate claim. Despite those rulings,
the issues, which were not
clearly defined, were persistently raised by the Walters in various altered
guises throughout the course
of the trial.
- The claims and challenges based on Freemasonry, fractional
reserve banking, constitutional invalidity and Magna Carta which were
raised by
the Walters in these proceedings have previously been raised by litigants in
person in the course of enforcement proceedings
by banks. All have been the
subject of some degree of previous judicial consideration and have been
dismissed as wanting substance
or as nonsense. Although those arguments
occupied a considerable time at trial, the Walters also advanced a more
conventional claim
that the loans and securities were unenforceable on various
related equitable grounds, including unconscionable conduct, duress,
undue
influence and estoppel.
- In essence, they contend that having incurred liabilities of
approximately $1.3 million to the NAB (principally to fund their brewery
-
reception centre), in December 1998 they agreed to restructure the liability on
terms wholly disadvantageous to them. They allege
that they were induced to
agree to replace their existing, longer-term facilities with a principal loan
for $1 million for a one
year fixed term and a business-combination loan for
$380,000 for a seven year term, by an assurance that the one year fixed term
loan would be unconditionally and automatically renewed. They contend that
they were presented with the relevant documents for execution
in circumstances
where their lack of English language skills and their unfamiliarity with
Australian commercial practice amounted
to a special disability which the NAB
exploited in order to perfect invalid or defective existing securities. They
allege that the
NAB subsequently `fabricated' their default and invalidly
appointed a receiver who, in breach of duty, sacrificed their interests
by
selling the security property (on which they had expended approximately $3
million) for approximately $1 million.
THE PLEADINGS
Amended Statement of Claim - Proceeding No. 4486
- The amended statement of claim dated 9 June 2001 in the
principal proceeding was prepared by Ms Walter, a litigant in person, who
is not legally qualified. The writ was filed on 16 February 2001. The
plaintiffs are Carmen Walter, Fritz and Ingrid Walter as
trustees of the Walter
Family Trust, Palatinat Brewery Pty Ltd, as lessee of Lot 4, Lincoln Causeway,
Wodonga, and the Walter Family
Trust.
- The amended statement of claim alleges the
following:
The NAB provided Fritz, Ingrid and Carmen Walter with an
overdraft facility for their personal account in September 1997.
In early 1998, the NAB provided the Walters with various loan facilities,
including a home loan facility and car lease and hire purchase
facilities.
In October 1998 the Walters sought an extension of those loan facilities,
which was verbally approved, but was not put in place until
December 1998. The
completion of paper work took two months.
On 16 December 1998, Fritz and Ingrid Walter, as trustees of the Walter
Family Trust, executed two letters of offer for two loans.
(a) a $1,000,000 interest only loan with a one year term; and
(b) a $380,000 loan with a seven year term.
The loans were secured by the personal guarantees of Fritz, Ingrid, Carmen
Walter and Palatinat, a debenture over Palatinat and mortgages
over the
Walters' brewery property and residential land.
The above loans were illegal in that they breached ss.32, 36 and 38 of the
Credit Act.
The NAB gave no consideration. The Walters met all payments of
interest/monthly instalments.
The Walters were not given an opportunity to read the documents. The fact
that the Walters were to execute the documents in the capacity
as trustees put
the NAB in a superior position of advantage.
The Walters were not given the opportunity to obtain independent legal
advice. The NAB did not send the documents to their accountant
to peruse. The
NAB did not inform the Walters of the necessity to seek advice prior to
signing, nor explain their legal effect.
The letters of offer were signed under duress. The Walters requested the
extension in October 1998, but not until December 1998 did
the NAB present the
documents for signing. This was illegitimate pressure of an economic nature
and "unconscionable conduct".
No interpreter was present at the time of signing. The NAB was in a
position of advantage and the Walters were under a disability
because they
lacked knowledge of the English language and familiarity with the bank's
business practices and the cultural background
distinguishing Australian and
German business practices.
The NAB did not explain the full nature of the documents although it knew
that the Walters had been in Australia for only ten months.
The mortgage over the brewery property is unenforceable because it was
executed by Fritz and Ingrid Walter in their personal capacity,
but in truth,
the Walter Family Trust was the owner of the land. The execution of the
letters of offer was defective because the
letters of offer were not properly
dated or initialled and had other defects. As the Walter Family Trust did not
execute the mortgage,
the owner of the land did not execute it and consequently
"no legal mortgage is available to justify a mortgage sale".
There was no default under the mortgages, because the Walters made payments
on time.
The receiver's sale of the brewery property was illegal. The Walters
apprised the NAB of that, and its "wilful ignorance" amounts
to fraud.
The NAB was in a position of advantage. Mr Membrey, the relevant NAB
officer, did not disclose the full implications of the documents,
and made
only brief explanations to Fritz and Carmen Walter, since Ingrid Walter was not
present at the outset of the meeting. Mr
Membrey explained the facilities
"as ongoing for a long term and did not explain, point out nor stress the fact
that the defendant
would ask the principal sum to be repaid after 12 months.
He left the plaintiff in the understanding of a long term loan which was
at
least as long as seven years". The NAB's conduct therefore amounts to
misrepresentation and unconscionable conduct.
The NAB is estopped from commencing proceedings because Mr Membrey, the
relevant bank officer, promised an ongoing facility with a
year by year renewal
on 16 December 1998, "very clearly".
The Walters did not read the documents on 16 December 1998 and were not
offered time to read and understand them nor an opportunity
to obtain
independent legal advice. The NAB did not explain the legal effect of the
guarantees.
The guarantees were signed under duress due to the "massive delay" in
preparing the documents for execution.
The NAB knew that the brewery mortgage was defective because it was not
executed by the Walter Family Trust as the owner of the land
and "to cover up
their mistake" the bank rushed to appoint a receiver and manager.
The debenture given by Palatinat was executed in relation to an earlier loan
but the NAB sought to rely on it for the later loans.
The debenture was
therefore illegal and the appointment of the receiver was void.
The receiver conducted the auction of the brewery land and chattels "without
legal instrument" and the price achieved at auction was
significantly lower
than previous valuations.
The Constitution of 1975 is "not a source of legal authority".
"Questions of law" involved are identified as:
(a) validity of the Victorian Constitution;
(b) ownership of the Victorian Constitution;
(c) determination and assessment of "Foreign Power";
(d) determination of authority of all parties involved;
(e) Freemasonry.
"Magna Carta is current statute law in Victoria" and "we have the
Fundamental and Constitutional Right that this matter is heard by
Trial by Jury
... "
"Fractional reserve banking is illegal. The NAB is a private banking
institution governed by the Federal Reserve Act, the Banking
Act, the Credit
Act and others. None of these Acts provide a statute, which allows the
defendant to pursue fractional reserve banking".
Defence - Proceeding No. 4486
- By a defence dated 9 June 2001 the NAB admits the making of
the relevant loan agreements, guarantees, mortgages, debenture and
lease-purchase
agreements. It alleges that the bank initially provided
financial accommodation secured by mortgages over a brewery property and
a
residential property owned by Fritz and Ingrid Walter. It also entered
lease-purchase agreements with Fritz and Ingrid Walter.
The NAB alleges that
in November 1998 Carmen Walter requested it to consolidate the liability under
the existing loans and lease-purchase
agreements. It offered Fritz and Ingrid
Walter two restructured loan agreements, being an interest-only loan of $1
million for a
one year term and a business combination loan of $380,000 with a
7 year term. The restructured loans were secured by the pre-existing
mortgages
and securities. The loan agreements were executed on 16 December
1998.
The NAB denies the allegation that it promised "a year by year"
or "on-going" renewal of the interest-only loan. It alleges that
the Walters
acknowledged that the loan facilities were subject to periodic review and to
other special conditions.
The NAB denies that it subjected the Walters to duress or unconscionable
conduct through exploitation of a special disability or
special
disadvantage.
It denies the allegations of invalidity of the brewery mortgage due to the
existence of a trust and the allegations of the invalidity
of the appointment
of the receiver. It denies the allegations based on credit legislation, on the
ground that it does not apply
to the relevant loans. It does not plead to the
"allegations" based on Magna Carta, the Constitution, Freemasonry and
Fractional
Reserve Banking, on the ground that they are unintelligible.
Statement of Claim - Proceeding No. 7407
- In proceeding No. 7407 of 2002 the NAB as plaintiff alleges
that Fritz and Ingrid Walter, as defendants, mortgaged the land situated
at 13
Sanctuary Boulevard, Wodonga, to the NAB by instrument of mortgage dated 30
April 1998; and that Fritz and Ingrid Walter defaulted
on the payment of
principal and interest and retained possession of the land. The NAB claims
possession of the land under s.78(1)(b) of the Transfer of Land Act 1958
(Vic).
Defence - Proceeding No. 7407
- By a defence dated 24 October 2002 Fritz and Ingrid Walter,
as defendants, admit execution of the instrument of mortgage but deny
that it
was represented to be a mortgage document. They allege that the mortgage was
procured by fraud, misleading and deceptive
conduct and unconscionable conduct,
in that the relevant NAB bank officer, Mr Wayne Keating, failed to alert
the signatories to the
possibility of seeking independent legal and financial
advice, knowing they lacked understanding of the English language.
- Fritz and Ingrid Walter further allege that the NAB did not
provide consideration for the mortgage and that they did not receive
any
advances.
SUMMARY OF FACTS
Background
- Fritz and Ingrid Walter migrated to Australia from Germany in
1998. They had conducted a successful Peugeot car repair and dealership
business in Germany for over 20 years.
- Carmen Walter, the daughter of Fritz and Ingrid Walter,
migrated with them from Germany. She was educated to tertiary level in
Germany. Her education included the formal study of English. At all material
times, Ms Carmen Walter was proficient in spoken and
written English.
- From 1981 onwards, the Walters made frequent visits to
Australia, where they spent many vacations. They were attracted to Australia
and in consequence purchased a property in Western Australia. Despite their
frequent visits, from 1981 until their permanent settlement
in Australia in
early 1998, Fritz and Ingrid Walter were not fluent in English. They relied on
their daughter Carmen to translate
where necessary.
- In the late 1980's Fritz and Ingrid Walter attended a
Victorian Government promotion at Frankfurt in German, which was aimed at
encouraging German business migration to Australia. As a result, they formed
the idea of migrating to Australia, establishing a
business and settling there
permanently.
- Fritz and Ingrid Walter, during a subsequent visit to
Australia, had further discussions with the representatives of the
Albury-Wodonga
Development Commission and the Albury Wodonga Council about
establishing a new business in Australia. Although their business experience
was in car repair and dealerships, they were advised that there was no suitable
opening for such a business in the Albury-Wodonga
area. They therefore decided
to establish a combined function centre and boutique brewery in the
Albury-Wodonga region, intended
to form part of a new tourist development
proposed by the Albury-Wodonga Development Commission.
- Ms Carmen Walter had completed tertiary courses in
biotechnology and food technology in Germany which equipped her with the
expertise
to conduct the brewing and yeast maintenance aspects of the Walters'
proposed new business.
Brewery Land and Mortgage
- The Albury Wodonga Rural Council suggested a site for the
proposed function centre and brewery in a complex known as the "Gateway
Island"
which was to be developed as a tourist centre.
- In March 1996 the Walters selected the land suggested by the
Albury-Wodonga Council which was situated at Lot 4, Lincoln Causeway,
for the
function centre and brewery ("the brewery land"). On 13 May 1996 Fritz and
Ingrid Walter executed a contract to purchase
the brewery land for $138,000.
They paid a deposit of $10,000. They subsequently paid the outstanding balance
of $128,000 from their
own funds. No funds were borrowed from NAB in relation
to the purchase of the brewery land.
- The Walters had retained Mr Simon Dubois, a chartered
accountant based in Western Australia, who advised them to establish a family
trust in relation to the purchase of the brewery land. As a result of that
advice, the Walter Family Trust was established. Fritz
and Ingrid Walter were
the trustees of the Walter Family Trust. They retained Mr Warren Judd of
McHarg's Solicitors, in Albury/Wodonga,
to prepare the trust deed and to
represent them in relation to the purchase of the brewery land. The Walters
also sought the advice
and assistance of an acquaintance, Horst Kempf, who was
experienced in the operation of boutique breweries.
- After the purchase of the brewery land the Walters returned to
Germany to complete the necessary arrangements there. During a transitional
period they visited Australia periodically whilst based in Germany prior to
their permanent settlement in Australia. While they
remained resident in
Germany it was necessary for the Walters to exchange documents with, and give
instructions to, Australian-based
agents (including the NAB) in relation to
banking, business and legal transactions. They did so principally by facsimile
transmission
and post.
- Fritz and Ingrid Walter had not executed the contract of sale
for the brewery land as trustees or in any other representative capacity.
When
the instrument of transfer of the brewery land was forwarded to them for
execution in Germany it stated the purchasers to be
Fritz and Ingrid Walter.
Ms Walter wrote in the words "as trustees for the Walter Family Trust"
after Fritz and Ingrid Walters' names
on the transfer. The Walters wished the
Walter Family Trust to be registered as the proprietor of the brewery land.
Their solicitors,
McHargs, advised them that it was not possible to register a
trust as the proprietor of land under s.37 of the Transfer of Land Act
1958 (Vic). No caveat notifying the existence of beneficial interests under a
trust was lodged.
- The Walters opened a bank account with NAB in order to
facilitate payment for the brewery land and to conduct other banking needs.
They deposited $140,000 for the settlement of the purchase of the brewery land.
The local NAB manager with whom the Walters principally
dealt during the
initial phase of their banking relationship with the NAB was Mr Wayne
Keating. Prior to the Walters' permanent
relocation from Germany to Australia,
Mr Keating corresponded with them and communicated by facsimile. He
assisted the Walters with
the transfer of funds, drawing cheques and related
matters.
- The construction of the brewery and reception centre commenced
in July 1997. Ms Walter took an active supervisory role. The Walters
acted as owner-builders. It is undisputed that the workmanship and quality of
the brewery and reception centre were of a very high
standard. Ms Walter
estimated that the Walter family expended over $3,000,000 on the construction
of the building.
- The fit-out of the building was also very expensive. All the
restaurant and brewery equipment was of excellent quality. At trial,
Ms Walter conceded that "we made mistakes" and the Walters consequently
experienced cost overruns. She stated that: "We probably
spent a lot on things
because we thought with our hearts instead of with our heads". Ms Walter
conceded that as a result of the
cost overruns "we ran out of money".
- The completion of the building was accelerated in order to
meet an official opening date of May 1998 by the then Premier of Victoria.
The
acceleration to meet the deadline placed further pressure on the
Walters.
- The Walters' restaurant sold only their own "Palatinat" brand
of beer. which was brewed on the premises by Ms Walter and was relatively
high in price. At first, the Walters intended to concentrate on serving
German-style cuisine in their restaurant.
- The Walters expected a high volume tourist flow through the
Gateway Island tourist complex in which their brewery and reception
centre was
situated. They were confident that the quality of the complex, the boutique
beer and a choice of German style cuisine
would attract the custom of a
sufficient proportion of the estimated annual one million tourists to make
their business profitable.
- Due to the cost overruns in construction and equipment and the
failure of further funds expected from Germany to arrive as anticipated,
by
September 1997 the Walters required financial accommodation to complete the
project. In September 1997 they approached Mr Keating
of the NAB and
obtained an overdraft facility for a three month term. The overdraft facility
was secured by a mortgage over the
brewery land executed by Fritz and Ingrid
Walter on 3 September 1997. The Walters' overdraft facility, initially
for three months,
was subsequently extended to 31 March 1998.
- Mr Keating was the principal NAB officer who dealt with
the Walters from 1997 until he left Wodonga in August-September 1998.
According
to Mr Keating, he dealt principally with Carmen Walter in
correspondence and in relation to drawing cheques. He stated that he had
no
difficulty in communicating in English with Carmen Walter. He stated that
"there were times when Carmen would stop me and clarify
if she did not
understand, but no, we held good strong conversations ... if she didn't
understand, we would clarify it". Mr Keating
saw no reason to use an
interpreter when dealing with Carmen but "with Fritz and Ingrid I used Carmen
at times as an interpreter"
and "Carmen then explained matters to her parents
in German."
- Mr Keating dealt principally with Ms Walter, but observed
that she referred to her father regularly for decision-making. He also
regularly communicated with Mr Dubois, the Walters' accountant, who was
situated in Perth.
- At trial, Mr Keating did not have a strong independent
recollection of the details of his dealings in transactions with the Walters.
- He handled the Walters' application for a $200,000 overdraft
facility with NAB in September 1997 which was required to complete
the
construction project. The Overdraft Facility Approval Advice dated 3 September
1997 identifies Fritz Walter, Ingrid Walter and
Carmen Walter as the customers.
The overdraft limit is $200,000. The expiry date is 31 December 1997.
The Overdraft Facility Approval
Advice sets out the terms of the overdraft
facility, including details of the interest rate, events of default and credit
fees and
charges. It provides that the security of a "first registered
mortgage over Certificate of Title Volume 10289 Folio 289 being the
property at
Lincoln Causeway, Wodonga, [the brewery land] is required to secure the balance
of the Facility".
- By a letter to Fritz, Ingrid and Carmen Walter dated 3
September 1997 Mr Keating confirmed the approval of the overdraft limit.
- By an internal credit memorandum dated 3 September 1997
Mr Keating approved the Walters' $200,000 overdraft credit limit. The
credit
memorandum noted that the Walters had reached agreement with
Albury-Wodonga Development Corporation to construct a German-style boutique
brewery on the Lincoln Causeway. It further noted that "Mr Walter has
owned and managed one of the largest motor vehicle dealerships
in Germany,
which was under contract of sale with a settlement anticipated by 30 October
1997 to result in $3.5 million approximately".
It stated that "these funds
will be transferred as necessary through this bank to fund the $2 million
brewery development. Essentially,
it is the settlement of the business that
forms the core serviceability of the proposed facility".
- The credit memorandum further noted:
"The Walters also have a residential property under negotiation for
sale in WA. The return on this should be around $300K. Should
this settle
then it will be utilised to clear the O/D. [overdraft]
Given the estimated worst case settlement scenario it is expected
that the debt
will reach around $150K before cash is available.
This connection has held over $400K in credit during the past 12
months with
balances averaging around $25K. We are comfortable with the expected
settlements. Having walked the construction site
confirm works to date are
being completed in accordance with plans. Expected completion date is April
1998.
The Walters represent
an excellent long term banking prospect."
- In cross-examination, Mr Keating confirmed that his
principal discussions about the sale of the German business interests were with
Carmen Walter. He said that he "wouldn't have felt comfortable in holding the
extent of that conversation with either Fritz or Ingrid
because I really
struggled with the German language and I don't think that they were au
fait with the English language."
- In order to secure the overdraft facility Fritz and Ingrid
Walter executed a mortgage over the brewery land dated 3 September 1997
("the
brewery mortgage"). The brewery mortgage provided that the provisions
contained in Memorandum of Common Provisions No. AA291
retained by the
Registrar of Titles were incorporated in the mortgage.
- The Memorandum of Common Provisions No. AA291, by clause 35,
defines "the moneys hereby secured" broadly, to include:
"(a) all moneys owing or remaining unpaid to the bank on any
account whatsoever by the Mortgagor, whether alone or jointly with any
other
person and whether as principal or surety.
(b) moneys which the bank whether requested to do so or not has advanced or
paid or become liable to pay to or for on account or
on behalf of the
Mortgagor".
- The brewery mortgage was, in short, an "all moneys, all
accounts" mortgage.
- Mr Keating did not recollect whether he was aware, as at
September 1997, that the brewery property was owned by the Walter Family
Trust.
There was no evidence to establish that the Walter Family Trust was brought to
his attention at that date. He was unable
independently to recollect when he
had first heard of the establishment of the Walter Family Trust.
- At trial, Mr Keating could not independently recollect
the circumstances of the execution of the brewery mortgage. He described
his
uniform standard practice as a banker of twenty-two years' experience, which
was to "sit down, explain the document, its impact
on the client in case of
mortgages and guarantees and other like securities and always suggest that
independent legal advice should
be taken". He testified that there was no
reason why he would not have adhered to that practice with the Walters when the
brewery
mortgage was executed.
- In cross-examination, it was not put to Mr Keating that
he failed to explain the mortgage documents to Fritz and Ingrid Walter or
that
he failed to suggest that independent legal advice should be obtained.
- Mr Keating could not recollect any circumstance which had
suggested to him that the Walters were particularly vulnerable or unable
to
understand the relevant transactions. His evidence was that as at September
1997, he considered that the Walters were able to
look after their own
interests.
- Mr Keating stated that in approving an advance of
$200,000 credit to the Walters, he relied on Ms Walter's representations
and the
fact that substantial sums had been deposited and invested in the
brewery property.
- He testified that although he had no independent recollection
of the execution of the brewery mortgage and assumed that he had carried
out
his standard practice, he did not believe that he had referred to any bank
manuals. He did not refer to bank manuals for standard
transactions. The
overdraft and the brewery mortgage were standard transactions.
- Ms Walter confirmed that she was present when Fritz and
Ingrid Walter executed the documents to secure the overdraft in September
1997.
She testified that she was "always present when these dealings or meetings took
place".
- She stated that in order to execute the security documents in
September 1997, the Walters attended at Mr Keating's office. According
to
Ms Walter, Mr Keating "asked my parents to sign various documents ...
now deemed to be the mortgage over the hotel land and that
pursuant to the "all
moneys" clause they would now secure the interest-only and business combination
loan which comes into the chronology
at a later stage but at this point in time
it was not explained that the mortgage was an ongoing mortgage".
- Ms Walter stated that she "saw that documents were
exchanged and that my parents were asked to sign the documents". She believed
that she would have seen the documents but said that she did not read them to
her parents. She stated that she was unable to recall
even the substance of
what was said.
- Mr Walter also recalled the establishment of the
overdraft in September 1997. He stated that he did not really remember what he
signed. He stated that he had a friendly relationship with Mr Keating and
signed a document because "Mr Keating said `sign'."
- Following the initial borrowing of $200,000 in September 1997,
in April and May 1998 the Walters' borrowings from the NAB increased
very
significantly during a short space of time. In April 1998 they borrowed moneys
to finance the purchase of a residence and in
May 1998 they borrowed further
substantial sums under a number of lease-purchase agreements.
Residential land and mortgage
- Initially the Walters occupied rented accommodation in the
Albury-Wodonga area. In April 1998 they purchased a local residence
at 31
Sanctuary Boulevard, Wodonga ("the residential property"). Fritz and Ingrid
Walter obtained a loan of $310,000 ("the home
loan") from the NAB in order to
purchase the residence. A mortgage over the residential property was executed
by Fritz and Ingrid
Walter on 30 April 1998 ("the residential mortgage").
- Mr Keating handled the home loan and the residential
mortgage on behalf of the NAB. The home loan contract was signed by Fritz
and
Ingrid Walter on 30 April 1998. The home loan contract states that the
securities taken by the bank were registered mortgages
over the residential
property and the brewery property. The amount borrowed slightly exceeded the
purchase price of the residential
property, as it included a further amount for
additional costs.
- The residential mortgage states the mortgagors to be Fritz and
Ingrid Walter.
- The residential mortgage was an "all moneys" mortgage. By
clause 31 "the amount owing" was defined to mean -
"at any time, subject to 28.2(a), all money which one or more of
you owe the Bank, or will or may owe the Bank in the future, and which
by law
may be secured by this mortgage, including:
(a) under an agreement covered by this mortgage; and
(b) in respect of any credit provided by the Bank to you other than under an
agreement covered by this mortgage; and
(c) otherwise payable under this mortgage".
- Mr Keating at trial stated that he was confident that he would
have advised the Walters to obtain independent advice. However,
it was the
client's choice whether to do so. He was confident that he would have relied
on Carmen Walter to transmit his explanations
of the loan and mortgage to her
parents, due to the parents' relative lack of fluency in the English language.
- Ms Walter attended the meeting to execute the residential
mortgage and the associated documentation. She stated that she supposed
that
she saw the mortgage document that day, but that it was very hard to remember.
She could recall no relevant details.
- Mr Walter gave evidence that he signed documents in relation
to the home loan, but did not remember what they were. When asked
whether he
knew that the home loan was also secured by the brewery mortgage he responded,
"I don't look at the paperwork. What can
I say about this? I trust the
bank ... ".
Lease-purchase agreements
- Initially, the Walters had purchased the restaurant and
brewery equipment with their own funds. The restaurant equipment was owned
by
Palatinat The brewery equipment was owned by Fritz and Ingrid Walter as
trustees for the Walter Family Trust. It was of excellent
quality and had
required very substantial expenditure Because the Walters subsequently needed
cash relief due to the overruns in
the costs of construction, in February 1998
Mr Keating proposed the idea of a lease-purchase of the brewery equipment
and Palatinat's
plant and equipment. At that stage there was optimism about
the prospects of the business. The Walters' projected cash flow prepared
in
March 1998 forecast high profits from their future business operations.
- Ms Walter's evidence was that "the bank" suggested the
lease-purchase agreements "to provide the cash relief and to pay our
creditors".
She was present at meetings with Mr Keating and at the
execution of the relevant documents, including the Palatinat debenture in
September 1998.
- The Palatinat Hotel was officially opened on 7 May 1998 by the
then Premier of Victoria.
- On 28 May 1998 the Walters executed four lease-purchase
agreements with the NAB.
- At trial, Mr Walter stated that he executed the lease-purchase
agreements "because the bank offered to us. I can't say why". He
agreed that
he was aware that the monthly repayments to the NAB on the various loans and
facilities would henceforth total over $20,000.
- By the first lease-purchase agreement dated 28 May 1998, Fritz
and Ingrid Walter as trustee for the Walter Family Trust borrowed
$388,032 and
$33,102 ($411,134) for the brewing equipment. By the second lease-purchase
agreement, Palatinat borrowed $332,139 for
the restaurant's internal chattels
and restaurant equipment. Payments were to commence in August 1998. Palatinat
also executed
two lease-purchase agreements for two motor vehicles. The
lease-purchase agreements were for five year terms.
- Mr Keating put forward a credit submission to enable the
Walters to lease-purchase the brewery and restaurant chattels and equipment
in
May 1998. He prepared a credit memorandum which accompanied the credit
submission.
- In the credit memorandum, Mr Keating set out the history
of construction of the Palatinat brewery. The credit memorandum noted
that
over $3 million had been invested in the brewery complex, derived from the
personal resources of the Walter family. It also
noted that the Walters had a
further $1 million still invested in properties in Germany, which could not be
accessed until May 1999.
They also owned a $300,000 property in Western
Australia which was currently on the market.
- The credit memorandum stated that all of the brewery facility
and fittings had been constructed at the "top end" of quality. A
satisfactory
assessment of the quality and value of the equipment had been made.
- It also stated that Mr Keating had consulted a local
valuer, Philip Cosgrave, and, given the expenditure of over $3 million and
the
projected annual turnover of $2.9 million, "we have at this point placed a
conservative m/v [mortgage value] on our security
of $2.5M".
- The credit memorandum noted that the Walter Family Trust "will
own the property, brewing equipment and produce the beer". The company,
Palatinat, would own the internal chattels of the building. It would lease the
building and buy the beer from the Walter Family
Trust.
- Mr Keating noted "Applicants have invested 100% of
expenditure to date on this project. They are impressive, well-educated and
enthusiastic types who have the necessary mix of expertise and financial acumen
to make an outstanding success of this business".
- Further, he noted that "primarily debts may be cleared (all or
in part) from settlement monies from WA and Germany" ... and "the
applicants
have substantial external resources from which they can draw to support the
project".
- The memorandum also refers to the role of the Walters'
chartered accountant, Mr Dubois, who had "extensive industry experience"
and the input of the Walters' associate, Horst Kempf, who had operated a number
of highly successful "boutique" breweries throughout
Australia.
- Prior to handing over the Walter file to his successor,
Mr Membrey, in August 1998, Mr Keating made a file note dated 21
August
1998. The file note stated that the Walters' funds were still due from
Germany. A business plan was required.
- Mr Keating stated at trial that in his dealings with the
Walters in September 1997 and in May 1998, he would not have allowed the
Walters to sign any document if he had thought that they did not truly
understand it.
- In July 1998 Palatinat received a $100,000 overdraft facility.
This was subsequently increased to a limit of $170,000. On 14 October
1998 a
further increase to a limit of $270,000 was approved.
- By June 1998 the Walters' monthly repayments on their various
loan facilities and lease-purchase agreements with the NAB amounted
to
approximately $20,500. They also still had outstanding debts due to
contractors. The business was experiencing problems with
staff. Money
expected from Germany had not arrived. The anticipated influx of tourists had
not eventuated. Local custom was limited.
The business was not trading
profitably. Turnover was not only below the previous estimates but had not
reached the "break even"
point. The Walters, however, were prepared to work
without remuneration in order to get their business on its feet. They were
dedicated
to establishing the business. They took the view that it was only
experiencing teething problems, which could be overcome given
time and
commitment.
Palatinat Debenture
- In September 1998 Mr Keating requested the Walters to
execute the Palatinat debenture over its undertaking, presumably in order
to
secure its liabilities to the NAB under the overdraft and the lease-purchase
agreement. Carmen Walter stated in evidence that
neither she nor her father
hesitated to sign because they trusted that Mr Keating would "do the right
thing".
- The debenture executed by Palatinat Brewery Pty Ltd as
mortgagor on 28 September 1998 was signed by Carmen and Fritz Walter as
directors.
- "Secured Amounts" (Clause 2.3) is broadly defined to
include:
"(b) all amounts which at that time the Bank has advanced or
paid, or has become liable to advance or pay, for any reason:
(i) to or on behalf of the Mortgagor; or
(ii) at the express or implied request of the Mortgagor; or
(iii) because of any act or omission of the Mortgagor; or
(iv) because of any act or omission of the Bank at the express or implied
request of the Mortgagor; and
(b) all amounts for which at that time the Mortgagor is or may become
actually or contingently liable to the Bank for any reason including
all
amounts for which the Mortgagor is or may become liable to the Bank in respect
of any orders, drafts, cheques, promissory notes,
bills of exchange, letters of
credit, guarantees, indemnities, bonds, and other instruments or engagements
(whether negotiable or
not and whether matured or not) which:
(i) have been drawn, issued, accepted, endorsed, discounted or paid by the
Bank; or
(ii) are held by the Bank as a result of any transaction entered into by the
Bank for, or on behalf of, or at the express or implied
request of, the
Mortgagor;..."
- After any Event of Default, the Bank had the following rights
under clause 14:
"Subject to Clause 14.2...the Bank may at its option exercisable
by notice in writing to the Mortgagor (and notwithstanding there is
an
agreement in writing or course of dealing to the contrary and notwithstanding
any concession or delay or previous waiver by the
Bank of its right to demand
payment of the Secured Amounts) treat the Secured Amounts as payable
immediately and may immediately
or at any later time (in addition to any other
rights, powers and remedies conferred on a mortgagee by law and so that no
delay or
failure by the Bank to exercise any of the Rights of the Bank
prejudices their later exercise) do all or any of the following things
without
giving any or further notice or demand to the Mortgagor:
(a) possession: enter upon, and take possession of, collect
and get in the whole or any part of the Mortgaged Property and of its
rents and
profits or both ...
...
(c) sale: whether in or out of possession, sell the whole or any Mortgaged
Property and exercise all other powers conferred upon a
mortgagee by law; and
(d) Receiver: whether in or out of possession and whether or not the Bank is
entitled to appoint a Receiver under any Statue, appoint
any person or persons
to be a Receiver of the whole or any of the Mortgaged Property; and
(e) powers of Receiver: whether in or out of possession and whether or not a
Receiver has been appointed under this Deed, at any time
after the Bank has
become entitled to appoint a Receiver and without giving any notice, exercise
all or any of the powers, authorities
and discretions which may be conferred on
a Receiver under this Deed or by law.."
- Clause 17.4 sets out the powers of a receiver.
- Clause 17.8 provides that:
"every Receiver appointed under or by virtue of this Deed is
deemed at all times and for all purposes to be the agent of the Mortgagor
and
the Mortgagor is solely responsible for the Receiver's acts and defaults and
for the payment of the Receiver's remuneration".
Proposed Restructure
- In September 1998 Mr Keating left the Wodonga Business
Banking Centre. He was replaced by Mr Membrey, who took over the
management
of the Walters' accounts.
- By October 1998 the Walters' difficulty in servicing the
monthly payments of $20,500 was increasing. The business had continuing
cash
flow problems and turnover was still below not only the optimistic estimates,
but break even point.
- Although the Walters had dismissed most of the staff and were
personally performing the work of both brewery and restaurant without
remuneration, they were unable to maintain the monthly repayments of $20,500.
- Mr Membrey had contact with Simon Dubois, the Walters'
West Australian based accountant and financial adviser, in whom they expressed
great confidence. Carmen Walter told Mr Membrey that Mr Dubois had
experience in relation to breweries. Mr Membrey advised the
Walters that
it might be preferable to retain a local accountant who understood the local
Albury-Wodonga market, but the Walters
preferred to rely on Mr Dubois.
- Ms Walter stated that when Mr Membrey took over from
Mr Keating, Mr Dubois discussed the monthly burden of $20,500 with
him. She
agreed that the Walters were anxious to have relief from the
substantial payments. She therefore decided to request the consolidation
of
all loans and facilities into one loan.
- On assuming control of the Walters' file, Mr Membrey
dealt with their application for an increase of the overdraft (then $170,000)
to $270,000. Mr Membrey prepared a credit submission and approved the
further credit himself. However, his superior, the NAB regional
business
manager, Mr Selwyn Wegner, supervised the application. Mr Wegner
hand wrote on the application "note increase will clear
from confirmed sale of
property. Principals need to get debt down to a serviceable level or increase
income. Acknowledge teething
problems but they need to get it working soon or
take a loss and move on."
- By an internal credit memorandum dated 13 October 1998,
Mr Membrey reviewed the Walters' financial position. He prepared the
credit
memorandum after Mr Dubois had requested "restructuring the leases
to a longer term and interest-only facility to give cash flow
some breathing
space". Mr Membrey stated at trial that it was "clear to us and the
accountant that the amortisation of the lease
facilities over a five year
period was beyond the cash flow of the business". Therefore, it was essential
that some action be taken
to reduce the outgoings.
- The credit memorandum noted "Due to vast differences in: (1)
estimated costing and final costing which caused original borrowing
and (2)
projected cash flow and actual cash flow, directors are now in a position that
there is a cash flow shortage causing excess
in the account."
- The credit memorandum further noted that "initial repayment
of this increase will come from funds due from the sale of property
in
Germany". It noted that the business was currently losing $8,000 per month.
- It stated "lending to this connection has in the past been
based on security held. We have over the past month held lengthy discussions
with Directors and following is evident:
"1. There [sic] integrity, cash inputs and quality of produce
are very sound.
2. Directors themselves are very concerned regarding overall position. They
are well aware that if they cannot make it work they
will be required to sell
the business and the premises. They acknowledge this clearly.
3. Given trade to date has been slow, it also encompasses traditional slow
winter months and initial start up of the business.
Coming summer months
should give a better indication of true trade.
4. Within the next month an extensive review will be undertaken. Accountant
has requested us to consider restructuring leases to
a longer term and
interest-only facility to give cash flow some breathing space".
- A handwritten notation on the letter stated, inter
alia, "Whole future this business relies on directors' ability to increase
t/o [turnover]. They fully appreciate this. Have indicated
willingness to
sell asset if unable to turn around."
- On 13 October 1998 the debenture charge over the undertaking
of Palatinat in favour of NAB was lodged for registration.
- On 14 October 1998 Palatinat's overdraft limit was increased
to a limit of $270,000.
- Mr Membrey gave evidence that in order to discuss
banking matters with the Walters, he frequently visited the brewery premises.
He recalled frequent discussions with Carmen and Fritz Walter, in which they
acknowledged the insufficient cash flow and the necessity
to sell assets if it
did not improve.
- According to Mr Membrey, he did not experience any
difficulty in speaking English with Carmen Walter and Fritz Walter. He did not
have discussions with Mrs Ingrid Walter, other than to order a meal at the
brewery restaurant.
- Mr Membrey testified that he discussed the problems of
poor turnover and cash flow with the Walters. He stated "it's outside the
bank's responsibility to run the business but you try to offer advice to
suggest ways to improve the business". He had suggested
that the Walters
should vary the restaurant menu by offering Australian-style meals, rather than
relying solely on German-style cuisine.
- As the turnover of the business remained relatively static,
Mr Dubois and Mr Membrey discussed an interest-only loan as a means
of obtaining relief until cash flow improved. In the circumstances,
Mr Membrey considered that this was "the only option to reduce
their
monthly outgoing payments".
- According to Mr Membrey, an extension of the five year
term of the leases was not an available option offered by the bank. The
overdraft of $270,000 was for a three months term, rather than the usual one
year term, because a complete review and restructure
was planned in the case of
the Walters.
- At trial, Mr Membrey had no independent recollection of
the specific conversations leading up to the restructuring of the Walters'
loans. He recalled that the NAB recognised that the monthly payments of
$20,500 could not continue to be met, and that either a
restructure or
termination of the relationship was required. He personally considered that
the Walters deserved the bank's further
support and that they should be granted
an interest-only facility. Carmen Walter was the person with whom
Mr Membrey principally
dealt in relation to the proposed restructure. She
expressed confidence in the quality of the Walters' product and its future.
She
believed that turnover could be built up.
- Prior to the consolidation, the Walter Family's debt exposure
to NAB under the mortgages overdraft and the four lease-purchase agreements
totalled $1.38 million. The monthly repayments were $20,500, excluding the
overdraft.
- Financial statements for the year ended 30 June 1998,
prepared by Mr Dubois and forwarded to Mr Membrey, indicated that in
order
to break even, an annual turnover of $858,000 was required. The
projected turnover was only about half of that amount ($411,000).
By letter
dated 15 October 1998 Mr Dubois stated that "the current cash flow of the
business cannot support the monthly repayments
on the two large hire purchase
contracts and the two hire purchase contracts on the vehicles".
- At trial, Ms Walter conceded that it was necessary either to
increase turnover or reduce monthly repayments. She discussed that
with
Mr Membrey. Their relationship was friendly and the Walters felt at ease
with him on a personal level. She conceded that the
interest-only loan was
attractive, because it would reduce the monthly burden to an affordable amount.
Although Ms Walter did not
concede it, it must have been apparent at this
stage that default was unavoidable unless some action was taken.
- By letter dated 18 November 1998, Carmen Walter requested the
NAB to "consolidate all our existing loans into one fixed interest-only
loan
totalling $1,4000,000 funded by Commercial Bill Rollovers". The letter also
stated "we understand the Bank will review the
funding position based upon the
performance of the business in April 1999".
- Mr Membrey testified that he discussed fully with Fritz
and Carmen Walter that the NAB was dissatisfied with the business performance
and would need to review "how it was travelling" after a certain period of
time. At trial, Mr Membrey recalled that the idea of
commercial bills
originated with the Walters' accountant, Mr Dubois. Ms Walter could
not remember whether Mr Dubois or Mr Membrey
suggested the idea. According to
Mr Membrey, the Walters did not understand the operation of a commercial
bill facility. He therefore
proposed a straightforward interest-only bank
funded loan instead. He testified that there was a sense of urgency, due to
the Walters'
inability to service the monthly repayments.
- Mr Membrey considered amortising at least a part of the
total amount to be borrowed. He ultimately decided to make an offer which
split the total amount borrowed into two loans.
- Ms Walter denied that she recalled Mr Membrey
saying that the restructure would include a larger interest-only loan and a
smaller
loan, which could be amortised over time.
- An internal credit submission dated 24 November 1998 was
prepared and approved by Mr Membrey. A one year $1 million interest-only
loan and a $380,000 business combination loan were proposed.
- Selwyn Wegner, who supervised the Walters' file, noted on the
credit submission:
"Lack of progress is of concern and strict monitoring of actuals to
budget monthly is essential. Previous increase was to clear from
funds due
from o/seas. How will those funds now be used. Valuation needs to be done to
establish amount M.V. in light of poor performance.
CRS needs to be completed
for borrowing entity. Fresh S/P also needed. Non-standard pricing is not
appropriate. No excesses or
further increase!! Not viable at current level of
debt".
- The credit submission further noted:
"As per prior submission we now propose restructure of facilities
on an amortising facility but over a longer term. End result of
financing is
that Directors are unable to meeting amortisation of leases over proposed five
years".
...
Debt servicing based on
interest-only at 8%. Repayments to be $48,000 p.a.
$100K debt reduction from sale of house in Germany remaining a requirement.
Directors have advised that sale of a house in Germany remains a requirement.
Due to very short history long term viability remains
reliant on building
sales.
As foreshadowed previously this restructure is required to give some chance of
ongoing viability."
[A handwritten note beside this comment states "no chance on
current performance":]
"Integrity and quality remains of the highest standard. Accountant
for the connection has just completed a review of operations.
Changes in
marketing personnel are to be made with a view to increasing sales".
A handwritten note states:
"Request for valuation agreed verbally to but deferred until new
year. Also verbal agreement to provide f/s (financials) and lodge
further
$100K in first half next year also held".
- Mr Membrey testified that he had two or three
discussions with Ms Walter (at times accompanied by Mr Fritz Walter
although he could
not recall individual meetings) which took place in
Ms Walter's office at the brewery between the date of approval of the
restructured
loans on about 24 November 1998 and 16 December 1998 when the
Walters executed the documents.
- He testified that during those discussions he "verbally
discussed what the bank was proposing with the Walters, including the
valuation".
The Walters were concerned about the $2,000 cost of the valuation,
for which they would be liable."
- Mr Membrey's evidence was that Fritz and Carmen Walter, on
being informed of the 12 month term of the interest-only loan, remarked
upon it
and "our response was that it is a 12 month term and the bank will review its
position in 12 month's time and if trade is
to the bank's satisfaction the bank
would consider renewing it."
- According to Mr Membrey, initially the Walters were
concerned that it was a 12 month term but after the discussion and explanation
of the 12 month term, Carmen and Fritz Walter "accepted the bank's position"
although Mr Membrey in cross-examination could not recall
what they said.
He recalled that the Walters' "outlook for the future remained very
positive".
- Mr Membrey testified that he experienced no difficulty
in speaking English with either Carmen or Fritz Walter and, in any event,
"in
my opinion you couldn't find anybody that could speak better German/English
than Carmen could, I could not find a better interpreter".
- Although the bank would not have financed the Walters had it
not already been committed to them, Mr Membrey still considered them
very
competent and was "hopeful that they could achieve what they wanted to do. We
believed it was worth a chance."
- According to Mr Membrey, the Walters visited
Mr Selwyn Wegner to obtain dispensation from obtaining a valuation prior
to executing
the loans on 16 December 1999. He could not recall that they
complained about delay in the period leading up to the execution of
the
documentation.
- Mr Membrey testified that the usual practice was to
forward documents where possible, to give the customer time to read them before
executing them. He stated that a "summary" letter to the borrowers, dated 15
December 1998, enclosing copies of the loan documents
and guarantees would have
been prepared only for the purpose of forwarding it to the customer and would
either have been delivered
or mailed.
- He stated that to the best of his recollection he delivered
the letter by leaving it at the brewery, but conceded that he could
not say one
hundred per cent. "I can't remember the drive down there because I went there
often".
- Mr Membrey gave evidence that the usual practice, which
was mandatory bank policy, was "to table the documents, ask customers if
they
understand and are comfortable with them and advise them to seek legal advice
if they wish." He did not recall questions being
asked about the amount or the
term but said "that had all been worked out in discussions previously".
- He testified that he explained the guarantees, drew attention
to the warnings and asked whether the Walters understood. He did
not recall
any indication that the Walters were uncomfortable or did not
understand.
- Ms Walter denied that Mr Membrey visited the
brewery premises and advised her of the split loans. Although conceding that
she was
awaiting news of the restructuring application, she stated that she
could not remember whether the Walters heard from Mr Membrey
at all
between the date of her letter on 18 November 1998 requesting
consolidation and 16 December 1998 when they executed the transaction
documents. At one point, she stated "I could have or I could not have".
Ultimately she stated that "I could say that there could
have been contact".
She conceded she could not dispute it if Mr Membrey deposed to discussions
having occurred. Ms Walter appeared
evasive and unresponsive in relation
to that issue.
- She conceded that she had visited Mr Wegner during the
relevant period. She denied that the visit occurred because Mr Membrey
had
informed her that the NAB required a sworn valuation as a precondition of
the loan and that she visited Selwyn Wegner in order to
obtain his consent to
the deferral of a sworn valuation.
- Ms Walter stated that she did not know the date of the
events "and could not confirm or deny it". At one point she "simply could
not
say" whether the valuation was a point of discussion prior to the consolidation
of the loans. Ms Walter ultimately conceded
that she spoke to
Mr Wegner but testified that it was only after the consolidation and not
in relation to the valuation.
- In my opinion, Ms Walter visited Mr Wegner to
discuss deferral of the sworn valuation prior to the consolidation.
- I also accept Mr Membrey's testimony that his
discussions with the Walters about the proposed restructure took place.
Ms Walter's
testimony on this issue was vague and equivocal. It is
improbable that Mr Membrey would have failed to inform the Walters of the
proposed terms of the restructure during the three week period between the date
of the submission and the execution of the documents.
It is equally improbable
that the Walters would not have taken the initiative to contact Mr Membrey
if he had failed to contact
them during that time.
The December 1998 Loans and Guarantees
- The letters of NAB (Mr Membrey) dated 15 December 1998 to
Carmen, Ingrid and Fritz Walter respectively, stated that:
"We enclose the following documents relating to the above Guarantee
and Indemnity.
Copy of guarantee and indemnity marked "For
Guarantors Information only".
Information sheet "what a Guarantee is".
Copy of Fixed Interest Rate Interest Only Loan Letter of
Offer dated
15 December 1998.
Copy of Business Combination Loan Letter of Offer dated 15 December 1998.
We wish to draw to your attention
to the warning clause printed on the front
cover of the Guarantee and should you have any questions relating to the
execution of
the above documents, please seek independent legal
advice."
- The Guarantee and Indemnity Document states -
"Warning
This is an important document.
By signing it you become personally responsible instead of, or as well as, the
customer
up to the amounts which the customer owes the Bank even if you have
given the Bank separate security."
- The letter of offer of NAB to Mr and Mrs F.J.
Walter ATF The Walter Family Trustee dated 16 December 1998 for the fixed
interest-only
loan states:
"Fixed Rate Interest Only Loan.
We are pleased to advise approval of your application for a Fixed Rate
Interest Only Interest in
Arrears Loan of $1,000,000."
- The terms and conditions were stated to be in the enclosed
letter of offer.
- The letter requested "We request that you read the Letter of
Offer carefully and familiarise yourself with the terms and conditions
of the
loan and then ring for an appointment to sign the relative (sic) documentation
and attend to the other formalities."
- The letter stated:
"Clause 3 Loan Amount and Term -
The Bank will lend to the Borrower the Principal Sum which must be repaid in
full with interest
together with any other moneys payable under this Agreement
by the Maturity Date."
- The letter of offer for the fixed interest-only loan dated
15 December 1998 states the customer to be Fritz Josef Walter and Ingrid
Adelheim Rosa Walter as trustee for the Walter Family Trust. Relevant terms
include:
* Clause 6 "Subject to Condition 7, The Balance Owing shall be
repaid in full on the Maturity Date".
* By clause 10, "Events of Default" include (b) if the Borrower fails to pay
any sum due under this Agreement on the due date".
* By clause 1: "Balance Owing means the Principal Sum, interest fees charges
and all moneys owing or payable by the Borrower under
the Agreement, including
the amount of any Economic Cost; `Principal Sum' means the amount so described
and set out in Item 2 of
the Schedule, or so much thereof as may be owing from
time to time;
* "`Maturity Date' means the date specified in Item 3 of the Schedule".
* Item 2 of the Schedule states the principal sum to be $1,000,000.
* Item 3 of the Schedule states the Maturity Date to be 12 months from the date
of actual draw down of the loan.
* Item 7 states the guarantors to be Fritz Josef Walter, Ingrid Adelheim Rosa
Walter, Carmen Walter and Palatinat Brewery Pty Ltd.
- The Annexure states the securities to be:
* Guarantee and indemnity for $1,380,000 given by Fritz Josef
Walter, Ingrid Adelheim Rosa Walter, Carmen Walter and Palatinat, Brewery
Pty
Ltd.
* Registered mortgage debenture over the whole of the assets of Palatinat.
* First registered mortgage over 13 Sanctuary Boulevard, Wodonga.
* First registered mortgage over property situated at Lincoln Causeway,
Wodonga.
- The further letter of NAB to Mr and Mrs F.J. Walter
dated 16 December 1998 for the business combination instalment loan relevantly
stated:
"We are pleased to advise approval of the following facility.
Business Combination Loan - Instalment Loan
Amount: $380,000
Term:
7 years
The terms and conditions which will apply to your facility are set out in the
attached Business Combination Loan Letter
of Offer".
- The Business Combination Loan Letter of Offer dated 15
December 1998 was addressed to "Customer - Fritz Josef Walter and Ingrid
Adelheim Rosa Walter as Trustee for the Walter Family Trust".
- The Attached Schedule provides:
"Item 1: Borrower: Fritz Josef Walter and Ingrid Adelheim Rosa
Walter as trustee for the Walter Family Trust."
- The principal sum is stated to be $380,000 and the loan to be
drawn down by 15 February 1999.
- The maturity date/loan term is stated to be seven years from
the date of actual draw down of the loan.
- Repayment details stated that interest is included in
instalments.
- The working account is Palatinat Brewery Pty Ltd's account
No. 68-534 - 4737 Wodonga, Vic.
- The guarantors are Fritz Josef Walter, Ingrid Adelheim Rosa
Walter, Carmen Walter and Palatinat Brewery Pty Ltd.
- The customer acceptance states "I/we accept the Loan upon the
Terms and Conditions herein outlined". It is signed by Fritz and
Ingrid Walter
and dated 16 December 1998.
- The securities listed in the annexure are the same securities
as for the interest-only loan.
- Ms Walter denied that the Walters received copies of any
of the letters or loan documents prior to their execution on 16 December
1998.
- At trial, Ms Walter stated that she and Mr Walter went to
Mr Membrey's office on 16 December 1998. (Mrs Walter was delayed and
arrived at the meeting somewhat later.) When the Walters arrived, Mr Membrey
produced the loan documents. The Walters claim that
it was the first time that
they had been presented with the documents or had been aware of the split
loans.
- Ms Walter agreed that the meeting in Mr Membrey's
office lasted for 30 to 45 minutes. When asked whether Mr Membrey went
through
the fundamental terms of the two loans, Ms Walter replied that
"there were some discussions about it" and "she could not say that
he went
through it item by item".
- She contended that Mr Membrey said that the interest on the
interest - only loan was fixed for one year and that there would be
a year by
year renewal.
- Ms Walter conceded that Mr Membrey discussed the
total amount of $1.38 million and the reasons for the split into two loans.
- She recalled that Mr Membrey said words to the effect
that the split into the two loans was the best for the business. She "couldn't
say" whether the Walters read the documents. She stated "we questioned
Mr Membrey concerning the fixed term of the interest rate
and it was
explicitly expressed that it's fixed for the term of one year, so we understood
that the term was fixed but it was not
explicitly explained or stated that this
would include that after one year we had to pay the principal back and it was
expressed
and apprehended of myself and also of my father that at the finish of
that one year term the interest would be re-negotiated".
- She did not have any difficulty in conversing with
Mr Membrey during the meeting. She agreed that she could have asked
Mr Membrey
any question which arose. If it were necessary to explain
anything to her parents, she could have translated it into German. She
could
not point to anything more that a professional interpreter could have done.
- She did not dispute that she and her father looked at the two
loan agreements. She denied that they had not requested an interpreter
because
they understood the documents. Rather, she stated that it was "because we had
to get this deal over and done with as fast
as we could".
- In an affidavit sworn 22 February 2001 Ms Walter deposed
that she and her parents had not read or understood the letters of offer
"except for the fundamental conditions". At trial, she stated that by
"fundamental conditions" she meant "the ongoing nature" of
the loan, although
conceding that that was not a written term.
- In an affidavit sworn 19 April 2001 Ms Walter deposed to
the production of the two letters of offer at the meeting in Mr Membrey's
office for the first time. She stated that "after looking at the loan
contracts, Fritz and I asked Barry Membrey as to why there
were two loans and
why the interest-only loan was for 12 months? When I asked these questions
Barry Membrey indicated that the interest
rate would be refixed at the end of
the 12 months and by fixing it only for 12 months this loan could also be
restructured as a Principal
and Interest Loan to reduce debt. Barry Membrey
said words to the effect, `Maybe next year interest rates will go down or up.'
At
no stage did Barry Membrey advise us that the fixed rate loan must be repaid
within/after 12 months nor that the defendant had the
right to force the full
repayment at all. It was always our understanding that the interest rate would
be refixed automatically
after the 12 months according to the then actual
interest rate and that the loan would be automatically rolled over and continue
for an extended period".
- The affidavit indicates that Ms Walter clearly noted the one
year term. She did not depose that Mr Membrey represented that it
would
not have to be repaid within that term. Rather, she deposed that he did not
positively reiterate that the 12 month term meant
that the loan was repayable
at the end of a 12 month period.
- In the affidavit Ms Walter further deposed that
Mrs Walter arrived at the meeting somewhat later than Mr Walter and Ms
Walter and
observed the two separate loan documents. Mrs Walter immediately
noted that the date of 15 December 1998 was incorrect and amended
it to 16
December 1998. Mrs Walter also noted that the "interest rate of the loans
was only for 12 months". She asked why. Ms
Walter then gave her the
explanation that "I had understood from Mr Membrey's explanation of the
loan facilities". She told Mrs
Walter in German that the period of the
loan was fixed for one year and that it was going to be rolled over or renewed,
which is
"what was said to us". Ms Walter deposed that the Walters then
signed the documents. The affidavit stated: "At no stage was there
any
discussion with Barry Membrey about repayment of the principal".
- At trial, Ms Walter denied that Mr Membrey told the
Walters that the $1 million loan was for 12 months with interest fixed for one
year, which could be renewed if the NAB was satisfied with performance. She
stated "He never explicitly, or never explained this
to an extent".
- Ms Walter was evasive in cross-examination as to what
Mr Membrey did say. Rather, she referred constantly to the Walters'
understanding
that the loan would be renewed indefinitely and eventually
converted into an amortising loan at "some stage".
- Ms Walter, during the course of 2000, met with and wrote
to a number of NAB officers to protest about the bank's refusal to renew
or
increase funding. She did not state, in the course of any meetings or
correspondence, that Mr Membrey had promised an unconditional
year by year
renewal of the loan. It was not until the writ was issued that the Walters
made the allegation of that representation.
Ms Walter explained that she
had not had legal advice at the relevant time.
- At trial, Ms Walter initially stated that she did not
believe that the Walters would obtain a renewal regardless of financial
performance.
Rather, she had assumed that the business would become more
profitable, and the loan would be adjusted. When cross-examined on
whether she
believed that the $1 million loan would be renewed indefinitely, regardless of
trading performance, Ms Walter was evasive.
She did not respond to the
question. She stated that she "could not say yes or no". She conceded that
she could not say for how
long the automatic renewal would be made but "this
would be a very indefinite time ... the indefinite time would probably be
reasonable
to think on a seven year basis ... ".
- Mr Walter also gave evidence on the execution of the loan
documents on 16 December 1998. He said that he had been contacted and
asked to
come in and sign the loan. He could not recall what Mr Membrey said at
the time of executing the documents. He did not
ask his daughter any
questions. He did recall asking Mr Membrey questions. He was presented
with documents to sign. He heard Carmen
Walter speaking with Mr Membrey
but could not understand it.
- In cross-examination, Mr Walter appeared to agree that he had
noticed that the $1 million loan was for a 12 months term. He also
stated that
Mr Membrey had indicated that it did not matter that the loan was for 12
months, because "after then we negotiate, we
roll it over or we make a new loan
with principal and interest, but it depends how the business go ... ". He
agreed that he knew
that the bank required security for the
loan.
- Mr Walter was evasive and unco-operative when
cross-examined on what Mr Membrey said at the execution of the documents
on 16 December
1998.
- A letter of Mr Membrey to Fritz and Ingrid Walter as
trustees of the Walter Family Trust advised draw down of the interest-only
loan
on 24 December 1998. It stated the term of the facility to be 12 months. The
maturity or expiry date was stated to be 31 December
1999.
- A letter of Mr Membrey to Fritz and Ingrid Walter as
trustees of the Walter Family Trust dated 30 December 1998 advised the details,
including the draw-down date of 24 December 1998, of the business
combination loan of $380,000 and the maturity date of 31 December
2005, (being
seven years from the drawn down date).
- As a result of the restructuring of their loans and
facilities in December 1998, the Walters' monthly repayments were reduced to
about $14,200.
- The principal loan of $1 million was repayable on 31 December
1999. The pre-existing sale and lease-back agreements had been repayable
over
a five year term. The Walters, at trial, submitted that the exchange of a five
year term for a one year term of repayment was
wholly disadvantageous to them
and they would not have knowingly agreed to it. It is clear, however, that the
reduction in the monthly
repayments entailed by the restructure was
necessitated by their urgent cash flow problem.
Subsequent Dealings with NAB
- The Walters made the reduced monthly payments of about
$14,200 on time. However, they continued to experience problems with the
business and its financial affairs. By October 1999 the NAB was sufficiently
concerned to attribute a "Listed" status to the Walters'
account. From that
point, Mr Harris, the officer who had replaced Mr Membrey in
September 1999, was required to report on the account
to the NAB's Asset
Structuring Unit.
- The Walters were requested to provide financial information
in order to permit the NAB to review their loans. They informed Mr
Harris
that, due to the financial pressures, they had decided to sell the restaurant
and function part of the business.
- In February 2000 a letter of Mr Harris of the NAB
notified the Walters that the interest rate had risen from 9.25% to 12.25%.
- After some delay, the Walters provided the requested
financial information which, in Mr Harris' opinion, did not justify a
renewal
of their facilities. The NAB put in place an "exit strategy" for the
Walters' accounts. On 12 April 2000 Mr Harris informed the
Walters that
the NAB would allow them until 30 June 2000 to re-finance or to sell. The
Walters informed Mr Harris that the brewery
and their residence was on the
market. They nevertheless continued to maintain that the business could
succeed given time and banking
support. They sought additional funding to
develop the brewery further and to improve facilities on several occasions.
- The Walters did not meet the NAB's scheduled deadline of June
2000 to sell or re-finance. They met with Mr Harris in July 2000
and
renewed a request for additional funding. Mr Harris agreed to consider
their financial statements and cash flows, which were
provided to him in late
August 2000. The financial information revealed an annual turnover of
approximately $550,000 for 1998/1999
and $477,000 for 1999/2000. The annual
turnover required to break even was $850,000 on Mr Dubois' estimate. That
was almost double
the actual turnover of the business.
- By letter dated 15 September 2000 Mr Edney, head of the
NAB Asset Structuring Unit, informed the Walters that their facilities would
not be renewed and required them to re-finance by 18 November 2000.
- The Walters did not re-finance by the required date.
- Although they had paid the monthly repayments on time they
were in default under the interest-only loan, which had been scheduled
for
re-payment on 31 December 1999 and extended on several occasions. Default
on the interest-only loan constituted a default under
the home loan.
- Ms Walter had discussions with Mr Poulter, the
customer service officer of NAB and arranged a meeting with Mr Hunter who
visited
Wodonga to inspect the brewery.
- On 6 September 2000 Ms Walter met with Mr Ben
Edney, the head of the NAB's Asset Structuring Unit in Melbourne.
Ms Walter presented
Mr Edney with a business plan, aimed at
stabilising the business. According to Ms Walter, at the meeting
Mr Edney informed her that
NAB did not want to continue the banking
relationship with the Walters. He indicated that the bank would take action.
The letter
of Mr Edney to the Walters dated 15 September 2000 provided:
"Notwithstanding the representations made at the meeting, we remain
very concerned about Palatinat's short and long term viability
and your own
personal equity being eroded to fund trading losses. Accordingly:
1. The Bank is not prepared to continue providing
facilities and requires you
to refinance Palatinat's and the Walter Family Trust's facilities by 18
November 2000 (ie. 60 days).
2. The Bank will continue to make available the existing facilities which
formally expired on 31 December 1999, until 18 November
2000 provided you
operate within your facility limits.
3. The Bank will maintain the current interest rates and not the default
rates...".
- Ms Walter wrote to Mr Frank Cicutto, the managing
director of the NAB, complaining of Mr Edney's conduct and requesting a
meeting,
which never ensued.
- She arranged to meet Mr Ray Pridmore, the NAB's Global
Head of Asset Structuring, in November 2000. At the meeting on 8 November
2000 with Mr Pridmore and Mr Hunter, Mr Pridmore stated that the
figures presented to him by the Walters in the balance sheets did
not add up.
He suggested that an investigative accountant be appointed. As an
investigative accountant would cost around $12,000,
which would be paid by the
Walters, Ms Walter rejected the proposal. Mr Pridmore mentioned the
appointment of a receiver at the
meeting.
- On 30 November 2000 the Walters received a notice of demand
under the debenture from NAB.
Receivership and Sale
- On 30 November 2000 NAB appointed Mr Geoffrey Handberg
receiver over the property of Palatinat under the Palatinat debenture and
agent
for the mortgagee in possession under the brewery mortgage. Palatinat was the
lessee of the property. For the avoidance of
doubt, on 21 December 2000
Mr Handberg was appointed receiver over the brewery land pursuant to the
brewery mortgage.
- Mr Handberg took possession on 1 December 2000. He
determined to auction the property in March 2001 but permitted the business
to
continue to trade. He employed the Walters to run the business. He introduced
the Walters to Tally Konstas, a person with expertise
in hospitality business
management. With the receiver's agreement, Mr Konstas attempted to
negotiate a joint venture with the Walters
with a view to obtaining re-finance
and averting the scheduled auction. The negotiations did not result in an
agreement and re-finance
was not obtained.
- Mr Handberg obtained a valuation dated 6 December 1998 of the
Palatinat chattels and equipment from Taylor Lockwood and a valuation
of the
brewery property dated 5 December 1998 from G D Sutherland Pty
Ltd.
- On 2 March 2001 the brewery property and the restaurant
equipment were sold at public auction for $1,030,000. Mr Handberg paid
$600,000 to NAB from the proceeds of sale at auction. That sum was applied
rateably to the two loans. The costs expenses and outgoings
of the receiver's
administration totalled $719,476.
- Mr Handberg gave evidence at trial that he had made at
least twelve appearances in court proceedings or applications initiated by,
or
in relation to, the Walters. He stated that the amount of staff time required
by the receivership had significantly exceeded
his expectations. It had been
necessary to obtain legal advice on many occasions. The legal costs incurred
in relation to the receivership
were between $200,000-$250,000.
- I am satisfied that the litigious and uncooperative conduct
of the Walters, to which Mr Handberg testified, significantly contributed
to the high costs and burdens of the receivership.
- As at 12 June 2003 the shortfall on the relevant loans was
estimated at $1,063,942 which remained unpaid.
APPREHENDED BIAS
- At the outset of the trial, the Walters submitted that the
Court had no jurisdiction to hear the proceedings on the ground of apprehended
bias, by reason of my interest as the beneficiary of a trust which held
approximately 8,000 shares in the NAB and a standard banker-customer
relationship. I disclosed those matters at the commencement of trial.
- In reliance upon the principles expressed by the High Court
in Clenae Pty Ltd v ANZ Banking Group Ltd[2] and Ebner v Official Trustee in Bankruptcy[3], for reasons expressed in detail at pp.12 - 14
of the Transcript, I concluded that a fair-minded observer with knowledge of
the material
facts would not reasonably apprehend that I might not bring an
impartial mind to the resolution of the questions to be decided in
the
proceedings. I therefore declined to disqualify myself.
NAB - STANDING TO SUE - ULTRA
VIRES
- By paragraph 1 of the defence in the enforcement proceeding,
the Walters denied that the NAB is duly incorporated. They sought
"particularised details pursuant to the plaintiffs incorporation and
certificate of authorisation to act as a Bank".
- Late in the course of the trial, the Walters filed and served
a proposed amendment in relation to the allegation that the NAB lacked
corporate status. They argued that the NAB was incorporated pursuant to an
1859 Act which prohibited it from lending on the security
of land, and which
remained in force.
- The National Australia Bank of Australia was incorporated
pursuant to An Act to Incorporate the Shareholders of the National Bank of
Australasia, 22 Victoria, No. 74 (24 February 1859) ("the 1859 Act").
Section 8 of the 1859 Act provided that (subject to certain exceptions)
it was
not lawful for the Bank to lend, inter alia, on the security of land.
The Walters argued that the 1859 Act (including the prohibition on lending on
the security of land) remained
in force and was applicable to the NAB. Their
argument appeared to be one of ultra vires in the traditional narrow
sense, rather than an allegation of want of corporate status. They contended
that the NAB lacked the constitutional
power to lend on the security of land.
The various lending and security transactions at issue in the proceedings were
therefore said
to be unenforceable.
- "An Act to Amend an Act intituled "An Act to incorporate
the shareholders of the National Bank of Australia and for other purposes"
No. DCXLI 29 September, 1879 ("the 1879 Act") repealed an interim Act amending
the 1859 Act. It also introduced an amendment to
a section of the 1859 Act.
- Section 4 of the 1879 Act stated that the passing of the 1879
Act should not be deemed to exempt the National Bank of Australasia
"from the
operation of any general Act which is now in force or which may be hereafter
passed relating to banks or banking in Victoria."
- An Act to Facilitate the Carrying Out of the
Reconstruction Schemes of Certain Companies and the Compromise Schemes of
Certain Societies, No. 1356, 6 November 1893 ("the 1893 Act")
referred, in its preamble, to compromises and arrangements of several companies
under
the Companies Act 1890, sanctioned (in the case of companies
incorporated by an Act of the colony of Victoria) by the Supreme Court of
Victoria and (in
the case of other companies) by United Kingdom Courts. The
preamble further provided that "whereas each of the companies so reconstructed
is now an incorporated company incorporated under the Act specified in the
third column of the schedule to this Act opposite the
name of the company . . .
"
- The third column of the schedule to the 1893 Act lists the
company prior to reconstruction, National Bank of Australasia, as incorporated
under the Companies Act 1890. The fourth column lists the company after
reconstruction as "The National Bank of Australasia Limited".
- Therefore, pursuant to a statutorily-effected and
curially-sanctioned scheme of corporate reconstruction, the company
incorporated
under the 1859 Act was reconstituted with an altered name,
incorporated under a different Act (which was the general incorporation
Act
then in force).
- The
Acts Enumeration and Revision Act 1958 
(Vic) was
passed in order, inter alia, "to provide that certain enactments of the
Legislature of Victoria shall be repealed".
- Section 7(b) of the Acts Enumeration and Revision Act
provides that the enactments set out in chronological order in the Second
Schedule to the Act shall continue to have statutory force
and effect.
- Section 9 of the Acts Enumeration and Revision Act
provides that "save as aforesaid, every enactment enacted before
1 September 1958 so far as the enactment is at the commencement
of the Act
in force in Victoria shall be repealed in and for Victoria." The Second
Schedule refers to only three 1859 Acts, which
are saved by force of s.7(b).
The National Bank of Australasia's incorporating Act is not included in the
Second Schedule. It is
hence repealed.
- In summary, having been initially incorporated under an
individual Act of Parliament, the bank was, following reconstruction in
1893,
incorporated pursuant to the general incorporation legislation which was then
in force.
- The NAB is now certified as having been registered under the
Corporations Act 2001. A certificate issued by ASIC notes that the date
of commencement of its registration is 23 June 1893.
- Section 1274(7A) of the Corporations Act 2001 provides
that a certificate issued by ASIC stating that a company has been registered
under the Act is conclusive evidence that:
(a) all requirements of the Act for its registration have been
complied with; and
(b) the company was duly registered as a company under the Act on the date
specified in the certificate.
- Section 9 of the Corporations Act 2001 relevantly
defines "company" to include "a company registered under this Act."
- Section 124 of the Corporations Act 2001 provides that
a company has the legal capacity and powers of an individual both in and
outside this jurisdiction. It also has all
the powers of a body corporate.
- That provision confirms the abolition of the narrow corporate
doctrine of ultra vires. The NAB, as a company registered under the
Corporations Act 2001, has the capacity to make loans on the security of
land. Section 125 of the Corporations Act 2001 recognises that the
individual constitution of a company may contain a restriction on the company's
exercise of its powers. The
Walters do not point to any such restriction in
the present case.
- There is no basis for the contentions that the NAB lacks
corporate status, is prohibited by statute from making loans on the security
of
land or otherwise lacks the power or capacity to make such loans.
- The Walters' contention based on the NAB's want of corporate
status, and (in so far as it is relevant) the doctrine of ultra
vires, fails.
TRIAL BY JURY
- The Walters sought, at the outset of the trial, to have the
proceedings tried by jury. They submitted that the denial of a trial
by jury
was contrary to Rule 47.02 of the Supreme Court Rules and to s.80 of the
Commonwealth Constitution. Further, they contended
that they were entitled to
have the proceeding tried by jury pursuant to Magna Carta.
- Master Evans, by order made on 27 April 2001, ordered that
the principal proceeding was to be tried by judge alone without a jury.
The
Walters contended that at the hearing of their application for a trial by jury,
Master Evans had declined, in response to their
enquiries, to disclose whether
he was a Freemason. (This is discussed below).
- Although they did not appeal from Master Evans' order, the
Walters claimed that at the time, they were ignorant of the possibility
of an
appeal. At the commencement of the trial, they renewed their application for a
trial of both proceedings by jury.
- For reasons set out in the Transcript, pp.23 to 28, I ruled
at the outset that both proceedings should be tried by judge alone.
The order
of Master Evans had not been appealed within the time permitted by the Supreme
Court Rules. Further, the order of Master
Evans was soundly based. The nature
of both proceedings rendered a trial by jury inappropriate. There was no
constitutional entitlement
or any entitlement under Magna Carta for a trial by
jury of the proceedings in question.
FREEMASONRY
- The Walters contended that the Court lacked jurisdiction to
hear and determine the proceedings and was unlawfully constituted because
certain judges and other Court officials are, or are suspected to be,
Freemasons. They alleged that Freemasons administer and swear
unlawful oaths,
including oaths of allegiance to a foreign power, contrary to s.316 of the
Crimes Act and s.321 of the Crimes Act. Further, the Walters
contended that Freemasons are party to conspiracies to commit criminal acts and
are otherwise implicated in
criminal conduct.
- Ms Walter read to the Court some oaths allegedly
administered to, and taken by, Freemasons. The Walters served a subpoena on an
associate of a judge of the Court, requiring him to produce documentation which
would reveal the identity of any judges, masters
or other Court officials or
employees who were Freemasons.
- The Walters contended that Freemasonry is a brotherhood of
persons who habitually take unlawful oaths and who owe obedience to foreign
powers. They alleged that in the course of their dealing with the NAB,
Mr Fritz Walter (who is not a Freemason) failed to respond
to a secret
Masonic handshake made by an unidentified bank officer. The Walters claimed
that in consequence, the NAB thereafter
acted to the Walters' detriment and
ultimately sold their property. No evidence of the alleged handshake incident
was adduced at
any stage. However, the Walters asserted that alleged
Freemasonry within the Court precluded a fair trial of their claims.
Ms Walter
stated: "If the judge hearing the case were a Freemason, and
the other party was a Masonic member as well and they had discussed
the court
case previously and made their decision while they were in the lodge" then "a
litigant could not win."
- Master Evans, whom the Walters believed to be a Freemason (as
he would neither confirm nor deny membership) had made an order in
the
principal proceeding for trial by judge alone. Master Evans' order was said to
be of no effect, due to his alleged status as
a Freemason.
- Although I stated that I was not, and had never been, a
Freemason, the Walters contended that the status of the individual judge
hearing the proceeding was irrelevant. They claimed that the Bench of the
Supreme Court of Victoria was infested with Freemasons
who were guilty of
criminal acts, indictable offences and other unlawful conduct which
contaminated the entire Court. Although Ms
Walter preferred to
characterise it as a "question", she essentially submitted that the Court
lacked jurisdiction to determine the
proceedings on the ground of Freemasonry.
- In reliance upon Re Shaw & Another[4], in which the Court of Appeal considered almost identical
arguments about Freemasonry to those raised in the present matter, I ruled
from the outset that Freemasonry had no bearing on any legitimate issue to be
determined in the case. The reiteration of such allegations
and the associated
baseless attack on the Court's personnel and processes were, in my view,
irresponsible and regrettable.
FRACTIONAL RESERVE BANKING
- Paragraph 25 of the Walters' amended statement of claim
states -
"Fractional Reserve banking is illegal - Particulars - The
defendant is a private banking institution governed by the Federal Reserve
Act, the Banking Act, the Credit Act and others. None of
these Acts provide a statute which allows the defendant to pursue fractional
reserve banking."
- The Walters served a subpoena on Mr Frank Cicutto, the
managing director of the NAB, requiring him to attend to give evidence
concerning
fractional reserve banking and "credit creation". They contended
that Mr Cicuitto was an expert on those practices.
- The term "fractional reserve banking" was not defined in the
Walters' pleadings. There was no allegation, in terms, that the NAB
engaged in
fractional reserve banking. No legal consequence of engaging in it was alleged
in the pleadings.
- The conduct comprehended by the term "fractional reserve
banking" and its alleged legal consequences were identified incrementally
in
oral submissions by Ms Walter during the course of the trial.
- Broadly, she submitted that fractional reserve banking is a
term applied to the practice of making loans and advances to customers
which
exceed the value of a bank's shareholder equity or other reserves. In such
circumstances, the loans made in excess of the
bank's beneficially owned funds
are said to be mere book entries, and "artificially created". Therefore, it is
contended that the
bank gives nothing of value in making such loans. There is
thus no consideration given by the bank in the loan transaction, which
is
unenforceable on the dual bases of illegality and want of consideration.
- The Walters called Mr Smart to give evidence on their
behalf. Mr Smart had experience as a litigant in person against a major
bank.
Mr Smart stated that he had researched fractional reserve banking
and had discussed the practice with the Walters. During the course
of the
trial, he met them daily. He testified that the practice of fractional reserve
banking and credit creation was "the most
evil face in this country". He
stated: "Credit creation is the greatest evil. Credit creation has many names.
It is commonly referred
to as fractional reserve lending, fractional reserve
banking, Douglas credit, manufactured credit, social credit. It has many
pigeonholes.
I prefer to use the word credit creation". Mr Smart further
stated that "what I do have trouble with is the corruption of the judiciary
supporting the banks and allowing the banks to do what they do. Without a
corrupt judiciary, then the banks would be nothing ...
". He attributed the
existence of credit creation to the complicity of a corrupt judiciary.
- The Walters pointed to the NAB annual financial report for
the year 2001 which showed the NAB to have made loans and advances of
approximately $207 billion, compared with its equity of $23 billion.
- They submitted that the loans and advances shown as assets of
the NAB were "manufactured" and "simply made by book entry. They
are not funds
that the bank has readily available to make them as a loan". In that context,
the Walters submitted that it is necessary
first physically to possess an
amount of money in a material form before it is possible to make a valid and
enforceable loan. That
submission is evidently based on the view that the
chose in action constituting the right to repayment of the loan is
valueless, as it lacks a tangible form. On that basis, a bank which has made
multiple advances has no assets corresponding to those advances.
- The Walters relied upon the decision of First National
Bank of Montgomery v Jerome Daly[5], a
decision of one Martin V. Mahoney, a Justice of the Peace in the Township of
Credit River, State of Minnesota.
- It appears from the brief reported judgment in First
National Bank of Montgomery v Jerome Daly that a "jury of talesmen" in that
case concluded that the plaintiff bank had not provided lawful consideration in
making secured
advances to the defendant. The jury accepted the defendant's
argument that the bank "created" the money and credit upon its own
books by
bookkeeping entry, as the consideration for the defendant's promissory note and
mortgage.
- Justice of the Peace Mahoney declared that the mortgage was
null and void, due to a failure of lawful consideration. An attached
memorandum by Martin V. Mahoney, dated 9 December 1968, stated that the
plaintiff bank had admitted that it created the amount advanced
in money or
credit upon its own books by bookkeeping entry. It noted that "The money and
credit first came into existance (sic)
when they created it". It further noted
that the plaintiff bank admitted that "no United States Law or Statute existed
which gave
[the bank] the right to do this".
- The memorandum concluded that the bank's "act of creating
credit is not authorised by the Constitution and Laws of the United States,
is
unconstitutional and void, and is not a lawful consideration in the eyes of the
Law to support anything or upon which any lawful
rights can be built."
- The Walters submitted that the NAB likewise merely creates
book entries of loans instead of providing lawful consideration for the
promise
to repay. They say that the practice amounts to "credit creation" and
"fractional reserve banking", because the NAB keeps
in reserve funds which
amount to only a fraction of the total amount of loans and advances made. The
loans and advances made by
the NAB are thus simply book entries ... ".
Ms Walter pointed to an NAB account statement for the Walters' home loan
in which the
"purported loan" was not shown as a credit to the borrower, but
immediately shown as a debit and submitted "So there was no credit
given at any
time ...".
- Ms Walter did not, however, dispute that the loan
amounts in question were paid either to the Walters or to third parties at the
Walters' direction or order, so that the NAB provided moneys to pay the vendor
of the Walters' residential property and to discharge
the Walters' liabilities
to their creditors.
- A similar argument based on "credit creation" was advanced in
National Australia Bank Ltd v McFarlane.[6] In that case, the defendant mortgagor contended that
unless the lender in a security transaction hands over "bullion, banknotes
or
coin", the mortgage is invalid. Byrne J stated:
"It is apparent to me that this is arrant nonsense. It has no
regard to the legal obligations created by a bank loan; it ignores
the reality
of modern commerce where it is money, in the broad sense of the term, including
choses in action, and not only gold,
banknotes and coin, or indeed legal
tender, which plays a most important part."[7]
- Byrne J noted that he had read the Daly[8] decision and considered its logic "bizarre". He was
neither bound by the decision nor persuaded that its reasoning was valid. His
Honour noted that, in so far as the Daly decision depended upon the
impact of provisions of the United States Constitution, the Constitution of the
State of Minnesota and
other United States laws, such provisions had no
application in Victoria.[9]
- In Smart v ANZ Banking Group Ltd[10] the appellant, Mr Smart, who gave evidence in the present
case, contended that the loan secured by a mortgage was not a real loan
but "a
paper transaction. Actual money doesn't change hands, cash money". Batt JA at
p.4 observed that:
"The argument thus seemed to be that no moneys were lent, but only
credit was created by book entry, which, it was said, was unlawful
because the
only mode of payment was by legal tender .... Mr Smart's argument overlooks
banking and credit altogether. Indeed,
it seems to take no regard even of an
undoubted fact of commercial life, the use of cheques and bills of exchange.
It may be that
in economic terms, the respondent bank "lends" its credit by way
of fractional reserve banking but it cannot be doubted that in point
of
juristic analysis money was lent. That is so even in the case of the housing
loan; some funds advanced to Mr Smart pursuant to
it were by his direction paid
to the solicitors for the vendors .... Moreover, there can be no doubt that Mr
Smart received value
in this and the other funding transactions. A legal
liability in Mr Smart sounding in money was created for good consideration.
What was done was not unlawful, was real and was not devoid of legal effect.
Arnold v State Bank of South Australia (1992) 38 FCR 484 at 485 and
486".
- I agree with and adopt the above observations of Byrne J and
Batt JA.
- No statutory basis, or any authority other than the
Daly decision, was cited in support of the proposition that the making
of loans is unlawful, and any associated security invalid, unless
the purported
lender has in current possession, bullion, or a net amount of money,
corresponding to the amount of the loan. In making
a loan, the lender advances
money, or gives a promise to pay it to, or at the direction of, the borrower.
The borrower obtains the
benefit of the advance or the promise.
- I ruled at the outset that fractional reserve banking was not
a relevant issue in dispute. Further, I set aside the subpoena served
upon
Mr Frank Cicutto, as being an abuse of process, for the reasons set out in
the Transcript at pp.129-132.
- Despite the ruling that fractional reserve banking was not a
relevant issue, the Walters subsequently raised the want of consideration
claim
in various different guises. For example, they alleged that because the
$304,000 home loan was not shown in NAB bank statements
as a credit to Fritz
Walter and Ingrid Walter, but was paid to the vendor of the property from whom
they took a transfer, at their
direction and on their behalf, Fritz and Ingrid
Walter did not receive a credit. Hence, they claimed that no consideration was
provided
for the home loan by the NAB.
- The Walters' Proposed Amendment dated 26 May 2003 stated that
the bank statements provided did "not show any evidence that the bank
in fact
deposited any funds to the purported loan accounts of the Walters and such
conduct amounts to fraudulent conduct on behalf
of the Bank". It was alleged
that the NAB deceived the Walters by leading them to believe that they would
receive a deposit of legal
tender into their accounts. It is further alleged
that in consequence, the NAB converted the Walters' security documents and the
Walter Family Trust was thereby constituted a lender to the NAB.
- There is no basis in authority, statute or recognised legal
principles for that absurd assertion.
- I am satisfied that the NAB paid the relevant loan amounts to
the borrowers, or to third parties, at the Walters' direction. The
NAB
therefore provided lawful consideration for the legal obligation to repay such
amounts, together with interest and charges pursuant
to the loan contracts and
for the mortgages and charges securing the liabilities under the loan
contracts. There is no basis for
the Walters' claim that the NAB was guilty of
wilful deception or fraudulent conduct due to the absence of a credit in their
bank
statements of amounts paid to third parties at their direction.
- There is no substance in the Walters' allegations of want of
lawful consideration. The associated allegations of fraud are also
without
foundation and were irresponsibly and reprehensibly made.
INCONSISTENT ACCOUNTS
- Although I ruled at the outset that fractional reserve
banking was not a relevant issue, the Walters, during the course of the trial,
complained of another banking practice which may have been comprehended within
fractional reserve banking. The Walters complained
that following default, the
NAB's statements of account were no longer forwarded to them. Further, they
complained that while some
bank documents showed interest and fees still
accruing on the Walters' accounts, other internal bank documents did not. They
described
this as "double-account keeping". The Walters had become aware of
the different statements or records of accounts only as a result
of discovery
by the NAB.
- It was not clear whether the Walters characterised this
practice as an instance of "fractional reserve banking" or whether it was
advanced as an independent ground of complaint. The Walters alleged that it
involved fraud, dishonesty or want of lawful consideration,
or that it
indicated an inaccuracy in, or uncertainty about, the amount for which the NAB
purported to hold the Walters liable.
They alleged that the NAB's practice of
withholding statements from the customer was sinister, indicating an intention
to "conceal
such statements from the customer and the tax department".
- Mr Aldous, a legal services manager of the NAB, gave
evidence on behalf of the NAB in relation to this matter. He did not deny
it
was standard practice for some internal bank records or statements compiled
after a borrower's default to reflect fees and interest
still accruing, while
other internal records did not. He explained that different bank records are
prepared for different internal
purposes.
- Mr Aldous deals with the recovery of debts and legal
proceedings. He instructs solicitors in relation to legal proceedings by or
against the NAB. He was familiar with the two loans at issue in the case.
- He referred to relevant internal bank memoranda which showed
the raising of a provision, being the estimated shortfall on the
loans.
- Mr Aldous explained that according to the NAB's
practice, once a potential loss on a loan is recognised, and a provision is
raised,
an internal instruction is sent to the relevant branch account manager
setting out an action plan. A "memorandum account card" is
also prepared and
maintained. A memorandum account card is a summary of the customer's position
on the basis that interest and fees
payable on the loan continue to be
calculated.
- On 18 December 2000, the NAB made provisions for the
estimated shortfalls on both of the Walters' loan accounts, which were frozen.
- Mr Aldous gave evidence that once a provision is raised
on a loan account, the NAB no longer issues the normal monthly statements
to
customers. The monthly statements are issued to the account manager instead.
The monthly statements show the account as frozen
and interest and fees are not
shown as accruing. A notation is made on the bank's computer records so that
statements will no longer
be issued to the customer. They are marked "Do not
mail - refer to manager". Interest and fees nevertheless continue to accrue.
They are shown on the memorandum account card. The "bad debt" memorandum
account cards show the "true picture". They are continually
updated as fees
and interest continue to accrue.
- The Walters also alleged that certain account statements
revealed that NAB had in fact received an overpayment which entirely
extinguished
their debt.
- In my opinion, the allegations are without foundation.
- I am satisfied that the differences between the monthly
statements and the bad debt memorandum account cards are explicable by
legitimate
internal record-keeping and accounting requirements of the NAB. The
differences identified by the Walters do not constitute evidence
of absence of
consideration, inaccuracy, deception or other illegality or impropriety. There
is no basis for the allegation that
the NAB was "deliberately misleading to
conceal a willful (sic) deceit of the real transactions to the detriment of the
Walter Family
and their associated Trust or Company".
ASSIGNMENT
- During the course of the trial Ms Walter alleged that
the NAB had assigned one or more of the Walters' loans or mortgages to a third
party, Homeside. The principal ground advanced to support that allegation was
a reference in an NAB internal profit report, which
referred to the acquisition
in February 1998 of Homeside Inc. in the United States, which, inter
alia, manages the creation of mortgage-backed securities.
- According to the available evidence "Homeside Lending" is or
was a division of the NAB which dealt with the servicing of home loans
and
personal loans. The names "Homeside" and "Homeside Lending" were both
registered under the Business Names Act with the NAB as proprietor. The
staff of "Homeside" were or are employed by the NAB. Homeside is not a
separate legal entity.
- Mr Aldous, the NAB legal services manager, gave evidence
that he was familiar with the Walter loan files and that none of the mortgages
in this case was assigned to a third party.
- There is no evidence to establish that any of the loans or
mortgages was assigned to a third party at any time. Assignment therefore
does
not constitute an impediment to the recovery of the loans or the enforcement of
the mortgages.
VICTORIAN CONSTITUTION INVALID?
- The Walters advanced a constitutional argument which has been
raised and considered in a similar form in a number of cases in which
litigants
in person have sought to defend claims for possession or enforcement of
mortgages by banks[11].
- First, they apparently contended that the Constitution
Act 1975 (Vic) is invalid, on the ground that there is no proof that Queen
Elizabeth II signed the Constitution Act, which therefore did not
receive royal assent. The Walters tendered a copy extract of the signature
page of the Constitution Act which they stated they had obtained from
Parliament House. It did not disclose the signature of the monarch. They
contended that
by the 1855 Constitution, the personal signature of the monarch
was required.
- Subsequently, the Walters resiled from contending that the
Constitution Act 1975 was invalid, but instead posed the hypothetical
question of its validity.
- The Walters' submissions in relation to the validity of the
Constitution were confused. Ultimately, it was unclear to me whether
any
allegation or submission was being made, or whether the Walters were merely
raising hypothetical issues which the Court should
not determine. Further, it
was unclear what the impact of any such allegations or hypothetical issues on
the present case would
be.
- As I apprehended it, the Walters initially contended that the
Constitution Act 1975 was invalid, due to absence of royal assent.
Further, they asserted that the terms of the 1855 Constitution Act were
not complied with, as s.24 of the Constitution Act 1855 renders vacant
the seat of any member of the Legislative Council or Legislative Assembly "who
shall take any oath" or, broadly,
who acknowledges allegiance, adherence or
obedience to any foreign power. The Walters submitted that the possibility
that members
of the Legislative Council or Legislative Assembly were Freemasons
had an impact in this context. I had ruled that Freemasonry was
not a
relevant issue, for the reasons set out above.
- It was not clear whether the Walters were contending that the
State of Victoria has no valid constitution. However, they submitted
that as a
practical consequence of any constitutional invalidity the NAB was unable
lawfully to engage in banking practices, and
possibly that its incorporation
was unlawful. On a broader level, it was that the Supreme Court was not
validly constituted and
had no jurisdiction to determine the present
proceedings.
- There is no basis for alleging the invalidity of either the
Constitution Act 1855 or the Constitution Act 1975. The
Constitution Act 1855 was proclaimed on 23 November 1855, the 1854 bill
having received assent on 21 July 1855. The Constitution Bill entitled the
Constitution Act 1975 was assented to by Queen Elizabeth II on
22 October 1975, and by proclamation published in the Victorian Government
Gazette
of 19 November 1975, the Governor signified that assent.[12]
- The Walters have failed to establish any constitutional basis
for invalidating the loans or mortgages or for challenging the jurisdiction
of
the Court.
BREACH OF FIDUCIARY DUTY - SALE AT AN
UNDERVALUE
- The amended statement of claim in paragraph 19 pleads breach
of fiduciary duty by the NAB in respect of the auction sale.
- The particulars allege that the receiver, on 2 March 2001,
conducted an auction sale of the brewery land, restaurant land, buildings
and
chattels of the company.
- The basis of the allegation of breach of fiduciary duty
appears to be that the brewery land and associated chattels were sold at
an
under-value.
- The price achieved at auction on 2 March 2001 was $1,030,000.
The sale price was significantly lower than the estimate of value
of the
brewery property made by Dixons First National Real Estate, Wodonga, May 1999,
("the May 1999 valuation") in which the brewery
was valued at $3.5 million.
However, it exceeded the value ascribed to the property in a valuation obtained
by the receiver from
G.D. Sutherland Pty Ltd in December 2000 ("the G.D.
Sutherland valuation") which estimated a value range of $800,000 to $1 million.
- In exercising its powers of sale or other security rights, a
mortgagee is not subject to fiduciary obligations but is entitled to
exercise
the power for its own benefit.
- By s.77 of the Transfer of Land Act 1958
(Vic):
"... the mortgagee or annuitant may, in good faith and having
regard to the interests of the mortgagor grantor or other persons, sell
or
concur with any other person in selling the mortgaged or charged land or any
part thereof, together or in lots, by public auction
or by private
contract."
- The standard of care required of a mortgagee exercising its
power of sale is measured by reference to the equitable test of good
faith.[13] The mortgagee is required to deal fairly
with the interests of the mortgagor and to act without fraud and without wilful
or reckless
disregard of those interests. Relevant authorities establish that
the mortgagee, in exercising the power of sale, "must take reasonable
steps to
ensure that at the time of sale, he is getting the best price then available
for the mortgaged property".[14] On one view,
the mortgagee will not be liable for mere negligence or carelessness pursuant
to the general law duty[15].
- In Carver v Westpac[16] Austin J recently stated succinctly the relevant general
principles as follows:
"1. The power of sale is given to the mortgagee for its own
benefit, and is not held by the mortgagee in a fiduciary capacity.
2. Moreover, the fact that the mortgagee's sale is for a price
disadvantageous to the mortgagor is itself no ground for judicial
intervention:
Warner v Jacob (1882) 20 Ch D 220, 224; Haddington Quarry Co v
Hudson [1911] AC 727; Adamse v Broadway Credit Union Ltd (1999) NSW
Conv Rep 55-876.
3. Nevertheless, in exercising the power of sale, the mortgagee is subject to
an equitable duty to act in good faith: Pendlebury v Colonial Mutual Life
Assurance Society Ltd [1912] HCA 9; (1912) 13 CLR 676; Forsyth v Blundell [1973] HCA 20; (1973)
129 CLR 477. The mortgagee's impropriety is sometimes described as a fraud on
the power, and sometimes as a wilful or reckless disregard of the
interests of
the mortgagor, and sometimes as a sacrificing of the interests of the
mortgagor. Whatever description is used, it is
clear that the commission of
actual fraud (in the sense of an intention to defraud the mortgagor, or
corruption, or collusion wit
the purchaser) need not be shown: Forsyth v
Blundell at 496-7, per Walsh J.
4. It is unclear whether, as a matter of Australian law, the mortgagor and
the mortgagee stand in a relationship of proximity
under which the mortgagee
owes the mortgagor a common law duty to take reasonable care in the exercise of
the power of sale: cf Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971[
Ch 949; 2 All ER 633. So far the Australian cases have analysed facts
suggesting failure to take reasonable care by recourse
to the equitable
principles concerning good faith, rather than common law negligence.
5. Nor is it clear whether different practical results flow from the
application of equitable duty of good faith and the principles
of common law
negligence. Fisher and Lightwood's Law of Mortgage (Australian edn,
1995), p 459, states:
`There may be some practical differences between the two tests,
such as in the extent of the mortgagee's duty to others besides the
mortgagor,
but it is doubtful whether in most cases the result would be different
whichever test was applied. In Forsyth v Blundell [1973] HCA 20; (1973) 129 CLR 477 at
481 it was said that to take reasonable precautions to obtain a proper price is
but part of the duty to act in good faith.'
6. The following are some of the incidents of the mortgagee's
duty of good faith:
(a) the onus of establishing breach of the duty lies on the mortgagor:
Forsyth v Blundell at 499;
(b) a mortgagee fails to act in good faith if it looks after its own interests
alone and sacrifices or absolutely disregards the
interests of the mortgagor:
Pendlebury at 680-1 per Griffiths CJ;
(c) action which is unfair would normally be regarded as action in bad faith;
Pendlebury, at 694 per Barton J;
(d) the mortgagee cannot discharge its duty by delegating the exercise of the
power of sale to an agent (such as a real estate agent),
since the duty
requires the mortgagee not only to select a competent contractor but also to
give adequate instructions, and to exercise
some surveillance over the
contractor or to inspect the work he is doing: Commercial and General
Acceptance Ltd v Nixon (1981) 152 CLR 49, 498 per Gibbs CJ, 500 per Mason
J;
(e) where the mortgagor's case of breach of duty is based on sale at an
undervalue, it is not necessary for him to prove that any
particular individual
would have paid a higher price for the property: Nixon v Commercial and
General Acceptance Ltd [1980] Qd R 153 (not disturbed, on this point, on
appeal to the High Court); McKean v Moloney [1988] 1 Qd R
628."
- The Corporations Act s.420A which applies in terms to
`controllers', is in addition to the general law duty of good faith and
modifies the position that mere
negligence may not give rise to
liability.
- In the present case, the Walters did not particularise the
alleged breach of duty. They did not allege that the advertising of
the sale
was inadequate or inaccurate, that the sales period was too short or otherwise
inappropriate or that the auctioneer misconducted
the auction process. They
did not attack the principles or methodology of the GD Sutherland valuation.
Rather, they pointed to the
disparity between (a) the price achieved at auction
for the brewery land and the value estimated in the May 1999 valuation and (b)
the price achieved at auction for the plant and equipment and the value
estimated for it in the Taylor Lockwood valuation dated 6
December
2000.
- The May 1999 valuation expressly acknowledged that it was
"simply an overview and given thorough researching a different scenario
may
emerge". It stated that "in a forced sale situation I would doubt if the
property would exceed $2,000,000. As a viable operation
its value may be in
the area of $3,000,000 to $3,500,000."
- The Taylor Lockwood valuation dated 6 December 2000 was
obtained on the instructions of Mr Handberg. It valued the Palatinat equipment
as "owned equipment" at $940,350 on a market value for existing use basis, at
$258,330, on an "auction realisation on site" basis
and at $136,055 on an
"auction realisation in rooms" basis. If valued the equipment as "lease
equipment" at $108,000 on a market
value for existing use basis and at $87,500
on an "auction realisation on site" and "in rooms" basis.
- When seeking a consolidation of their existing loans in
November 1998, the Walters had objected to the NAB's usual requirement for
a
sworn valuation. They wished to avoid the expense of a sworn valuation, for
which the borrower is liable. Ms Carmen Walter approached
Mr Selwyn
Wegner, the NAB regional business manager of Wodonga. Wegner agreed to defer
the requirement for a sworn valuation until
the new loan facilities were put in
place. (Although at trial, Ms Walter did not concede that the meeting with
Mr Wegner preceded
the restructuring, I am satisfied that it did.)
Mr Membrey's evidence was that the NAB agreed to follow up with a market
appraisal
at a later date. Unlike the sworn valuation, a market appraisal is
usually performed at no charge.
- At trial, Mr Grant Sutherland of G.D. Sutherland, a
certified practising valuer, gave evidence. In his opinion, the May 1999
valuation
was an "assessment of value" which lacked the depth of investigation
or analysis associated with a full valuation. Mr Sutherland
considered
the basis of the May 1999 valuation (adding up the cost of the land, the
building and the fit out) inappropriate for valuing
the brewery land. He
concluded that the rental figure of $12 per square foot applied to the premises
was high, based on the potential
trading performance of the operations.
- In December 2000, Mr Handberg, the receiver, obtained an
independent valuation of the brewery land from G.D. Sutherland Pty Ltd,
valuers
and estate agents. The G.D. Sutherland valuation valued the property inclusive
of freehold, goodwill, plant and equipment
(excluding the brewery equipment) at
$800,000 to $1 million, on a going concern basis as at 5 December 1998.
- The G.D. Sutherland valuation assessed the value of the
brewery land on the bases of the "current realisable value of the property
considered upon a going concern basis" and "the current realisable value of the
property considered upon a vacant possession basis".
Due to the poor trading
performance, the business entity was considered to have no value and there was
thus no identifiable difference
between the two bases of valuation. Both
assessments took into account, and were "inclusive of the freehold, licence,
goodwill and
plant and equipment, excluding any plant and equipment associated
with the brewery component, which does not form part of the freehold
premises".
The G.D. Sutherland valuation stated that while the "building is of substantial
proportions" and that "little expense
was spared in completing the structure"
the cost of the land, buildings and other improvements did not necessarily have
any direct
impact on its potential profitability. Accordingly, the value was
geared more to its potential net profit return.
- The G.D. Sutherland valuation of the brewery land, relied on
"an assessment of the achievable potential trading performance of the
operation, under alternative management and with a refined business focus" in
conjunction with the valuer's expectation of prospective
purchasers' assessment
of the property's potential.
- At trial, Mr Sutherland's evidence was that the net
profit performance of the operation, (which affects its potential rental
return)
is a significant factor in determining the level of value of a hotel or
licensed premises. Potential purchasers consider the operation's
profitability, which is reflected in the goodwill a purchaser attaches to the
premises. Due to the poor trading performance of the
Walters' business, little
if any value was attributable to the goodwill.
- Mr Sutherland also gave evidence that the brewery land's
location hampered its trading performance and turnover levels. It was
remote
from the main residential and commercial catchments of the cities of Albury and
Wodonga.
- The G.D. Sutherland valuation did not refer to specific
comparable sales. At trial, Mr Sutherland testified that comparable sales
references were inappropriate, due to the unique nature of the brewery land,
its location, circumstances and the trading performance
of the business. He
relied instead on general sales evidence and industry averages. The G.D.
Sutherland valuation concluded that
the valuation range provided was "somewhat
greater than that considered normal for a property of this nature, noting the
uncertainties
and lack of available sale evidence".
- The May 1999 valuation's estimate of $3,000,000 to $3,500,000
was expressly conditional on a "viable operation" and conceded that
thorough
research might produce a different scenario. It had no application to the
conditions prevailing by December 2000. Further,
I accept the evidence of
Mr Sutherland that the basis of the May 1999 valuation was inappropriate.
The G.D. Sutherland valuation
took into account the operation's performance.
The price of $1,030,000 achieved at public auction on 2 March 2001 was
well above
the lower estimate and slightly exceeded the higher estimate of
value in the G.D. Sutherland valuation.
- Although the Walters did not expressly allege misfeasance in
the conduct of the auction they called Mrs Savery, a personal friend
who
had attended the auction, to give evidence on their behalf. Mrs Savery
testified that she did not consider the conduct of the
auction to be irregular
but simply found it "odd that it was knocked down for $1,030,000".
Mrs Savery's evidence does nothing to
support allegations that the brewery
land and associated equipment were sold at an undervalue, or that there was any
impropriety,
negligence, irregularity or breach of duty in the conduct of the
auction.
- The receiver is not a party to the proceedings. The Walters,
however, alleged that the receiver owed them a fiduciary duty in exercising
his
powers of sale and that the receiver's breach of duty is attributable to the
NAB on the basis that the receiver was agent of
the NAB.
- In Jeogla v ANZ[17],
Einstein J observed:
"A receiver appointed to enforce a security is primarily
responsible to the appointing security holder. The receiver's primary purpose
is to gather in and realise the charged assets of the company to which he or
she has been appointed and to apply the proceeds of
sale to the satisfaction of
the claims of the appointing mortgagee. Notwithstanding this primary
consideration, a receiver is obliged
also to have regard to the interests of
the company. This obligation arises by virtue of the receiver being also the
agent of the
debtor company. The interests of the appointing mortgagee and the
debtor company are not necessarily synonymous."
- In Expo International Pty Ltd (Receivers and Managers
Appointed) (In Liq) and Another v Chant and Others[18], the incidents of a receiver's duty were summarised by
Needham J as being a: "duty to exercise his powers in good faith
(including
a duty not to sacrifice the mortgagor's interests recklessly); to
act strictly within and in accordance with the conditions of his
appointment".[19] His Honour considered a
receiver's duty as akin to that of a mortgagee in exercising a power of sale.
- Mr Mukhtar QC, for the NAB, submitted that the receiver
was at all times acting as agent of the mortgagors. The NAB was thus not
liable for the receiver's conduct, if (which was denied) the receiver had
breached his duty.
- Clause 17.8 of the Palatinat debenture
provides:
"Every Receiver appointed under or by virtue of this Deed is deemed
at all times and for all purposes to be the agent of the Mortgagor
and the
Mortgagor is solely responsible for the Receiver's acts and defaults ... and
the exercise of any right, power or remedy by
the Receiver do not render, or
deem the Bank liable as, a mortgagee in possession".
- Clause 9(b) of the Memorandum of Common Provisions attached
to the brewery land mortgage states that the NAB is empowered to appoint
a
receiver who "shall be the agent of the Mortgagor and the Mortgagor shall be
solely responsible for the acts of or defaults of
the Receiver".
- In Expo International Pty Ltd (Receivers and Managers
Appointed) (in Liq) and Another v Chant and Others[20] it was held that where a receiver is expressed to be the
agent of the mortgagor, even though he or she is appointed by the mortgagee,
the latter is not responsible for the actions of the receiver and manager. The
duty owed by the receiver to the mortgagor is directly
enforceable by the
mortgagor. The receiver was not a party to this action.
- Although the conceptual contradictions of the receiver's
status as the agent of the mortgagor is frequently acknowledged, the validity
of the special limited agency is well-established. In consequence, any breach
by the receiver would not give rise to liability in
the NAB unless the receiver
were acting at its direction. A mortgagee who appoints a receiver and manager
is liable for the receiver's
acts only if the mortgagee has directed or
interfered with those acts.[21]
- The Walters in this context relied upon the NAB's instruction
to sell the brewery land. Mr Handberg acknowledged that the NAB
authorised
him to proceed with the sale and marketing program. That
circumstance does not constitute direction or interference, so as to render
the
receiver the agent of the NAB[22].
- Further, whether he were acting as agent of the mortgagor or
of the NAB, for the reasons set out above, there is no evidence that
the
receiver, or any other party, breached any duty in relation to the sale.
- At trial, Mr Handberg gave evidence that he engaged G.D.
Sutherland due to its specialised experience in insolvency and familiarity
with
the duties of insolvency practitioners under the Corporations law. He engaged
Taylor & Lockwood Pty Ltd to complete a detailed
valuation of the plant and
equipment based on an "on site" auction basis. Mr Handberg also engaged
local real estate agents, G.
& A. Dixon, in order to have an agent to
conduct inspections of the premises when required, and for their knowledge of
potential
local buyers. He chose to auction the property because he determined
that it was the best means to obtain the best possible price.
- The Walters also subpoenaed Mr Thomas William Christian
who purchased the brewery property at auction on behalf of himself and other
family members. Previously, in the course of the trial, the Walters had made
allegations that Mr Christian was implicated in a fraudulent
purchase. No
evidence whatsoever was advanced to support such contentions, which were not
persisted with. At trial, Mr Christian
testified that he thought that the
auction was well conducted and that the price he paid was higher than he had
anticipated. He
stated that the property was "not expected to make that sort
of money". His evidence did not support the Walters' claim.
- A video tape of the auction was played in Court. It revealed
a considerable attendance and a conventional bidding process, conducted
by an
attentive and competent auctioneer. The video tape did not disclose any
unusual or untoward occurrence or circumstance. It
did nothing to assist the
Walters' claim.
- In my opinion, there is no evidence that the auction was
improperly conducted, that there was negligence or a failure to take reasonable
steps to sell the brewery land or associated equipment for the best price then
available or that any party breached any duty or obligation
in relation to the
sale.
- There is no evidence to support the allegation that the
receiver or the NAB failed to discharge the power of sale in good faith
or that
the property was sold for less than the best price then available and in
disregard to the Walters' interests.
- The Walters' allegation that the NAB breached its duty by
sale of the property must fail.
THE TRUST ARGUMENT
- By the amended statement of claim, paragraph 13, the Walters
also alleged that the brewery mortgage was unenforceable on the basis
that it
"was not signed in the Trust's name" although "the Trust was the owner of the
[brewery] land". They allege that because
the borrowers under the overdraft
facility were Fritz, Carmen and Ingrid Walter in their personal capacity and
the Walter Family
Trust did not guarantee the overdraft, the owner of the land
did not execute the mortgage.
- In the course of the trial, the Walters developed that line
of argument. They alleged that the NAB, aware that its existing security
was
unenforceable, deliberately exploited or engineered the loan reconstruction in
December 1998, in order to perfect it. That allegation
was apparently based on
a different, nebulously articulated assumption, namely, that the brewery
mortgage was unenforceable because
it was executed by the trustees in order to
secure their own indebtedness rather than trust liabilities. In December 1998,
Fritz
and Ingrid Walter were borrowers in their capacity as trustees of the
Walter Family Trust. Presumably, the Walters contend that
the brewery mortgage
was thereby "technically" enforceable because it now secured trust liabilities
but, that it remained unenforceable
due to the unconscionability involved in
procuring the execution of the loans in December 1998.
- In the December 1998 loan transactions Mr and
Mrs Walter were borrowers on behalf of the Walter Family Trust in their
capacity as
trustees. The fact that they were borrowers in the capacity of
trustee does not, of course, exclude their personal liability for
the debt
although in the usual course, there would be a right to be indemnified from the
trust property for liabilities properly
incurred[23]. In their personal capacity they gave guarantees for
$1,380,000. Further, Palatinat and Ms Walter gave guarantees and indemnities
for $1,380,000.
- Although the guarantees gave rise to a personal liability
which was prima facie unsecured, any personal indebtedness of
Mr and Mrs Walter, whether pursuant to guarantees or otherwise, was
secured by previously
executed registered first "all moneys" mortgages over the
residential property and the brewery property. Palatinat's liability under
the
guarantee was also prima facie unsecured. However, it was supported by
a prior registered mortgage debenture.
- The Walter Family Trust was established by deed dated 15
March 1996. The settlor was Simon Clarke Dubois. The trustees were Fritz
Josef Walter and Ingrid Adelheim Rosa Walter. The beneficiaries were Fritz,
Ingrid, Carmen, Roland and Sophie Walter, Andreas Knierim
spouses, children and
grandchildren, corporations in which directors or beneficial shareholders were
beneficiaries, and a number
of other broad categories of beneficiary.
- The trust is a discretionary trust. Clause 4 provides for
the distribution at the trustees' discretion.
- By clause 12(1) the trustees have, subject to any contrary
provision, "all the powers over and in respect of the trust fund and
the
investments thereof which it would exercise if it were the absolute and
beneficial owner and shall exercise that diligence as
an ordinary prudent man
of business would exercise in conducting his own affairs."
- The powers in clause 12(2)(g) include express powers to
acquire and carry on "any manufacturing, trading, primary production or
other
business in Australia or elsewhere" and to make loans "whether secured or
unsecured" [clause 12(2)(i)].
- There is power to "sell ... mortgage, charge, sub-charge, or
otherwise deal with ... any item or asset comprising the whole or part
of the
trust fund" [Clause 12(4)(a)] and "to acquire, dispose of ... mortgage,
sub-mortgage, lease, sub-lease", and "let ... real
property or any estate "
[clause 12(4)(b)].
- There is power under clause 12(4)(i) to "raise or borrow
moneys ... on terms and conditions and for purposes as the trustee may
decide,
and to secure the repayment of any monies or other indebtedness by mortgage,
charge, security or other encumbrance over the
whole or any part of the trust
fund as the trustee in its discretion may decide. No lender shall be concerned
to enquire as to whether
the necessity for any such borrowing has arisen or as
to the purpose for which it is required, or as to the application of monies
borrowed".
- Clause 12(4)(k) provides the power to "enter into alone or
with others any agreement or arrangement for obtaining credit upon such
terms
and conditions as the trustee may see fit ...".
- By contract of sale dated 13 May 1995, Fritz and Ingrid
Walter purchased the brewery land for $138,000.
- Although the Walters subsequently requested that the property
be registered in the name of the Walter Family Trust, they were registered
as
proprietors of the brewery land. No caveat notifying the interests of the
beneficiaries of the Walter Family Trust or beneficial
interests under any
other trust was lodged. There is no evidence of a declaration of trust by
Fritz and Ingrid Walter complying
with the formalities required by the Statute
of Frauds. There is no evidence of any basis on which to conclude that the
property
was held on constructive or resulting trust. I am not satisfied that
the brewery land was held by its registered proprietors on
trust.
- The bank's mortgage over the brewery land was registered on 4
May 1998. Pursuant to s 42 of the Transfer of Land Act 1958 (Vic)
it is indefeasible, unless the registration was procured by fraud or it is
subject to an in personam claim. The NAB, as registered proprietor of
the mortgage, would not take subject to any interest (save for paramount
interests) unless
fraud or an in personam claim were established.
- There is no evidence that Mr Keating or any other bank
officer was aware, at the date of the mortgage, that the brewery land was
held,
or alleged to be held, on trust. However, notice of the existence of a prior
equitable interest is not in itself fraud.
- If, contrary to my finding, the brewery land were subject to
the trust, the trustees had power to mortgage it. Borrowing for business
purposes, acquiring property and giving security over trust property for such
purposes as the trustees think fit, is clearly within
power. Lenders are
expressly exempt from any obligation to inquire as to the purpose of the
borrowing or the application of borrowed
funds.
- It would not a breach of the terms of the Walter Family Trust
for the trustees to use trust property to secure funds advanced to
Mr and
Mrs Walter personally. In terms the trustee had the power under clause
12(4)(a) to:
". . . mortgage, charge sub-charge, or otherwise deal with,
dispose of or transfer any item or asset comprising the whole or part of the
trust fund, or otherwise held by the trustee under the terms of the Trust for
such consideration and on such terms as in its discretion
it may think fit".
- The trustees had power under clause 12(4)(i):
"to raise or borrow moneys either alone or jointly with another
or others, from any person including a firm or company, either bearing
or free
of interest and on terms and conditions and for purposes as the trustee may
decide, and to secure the repayment of any monies
or other indebtedness by
mortgage, charge, security or other encumbrance over the whole or any part of
the trust fund as the trustee
in its discretion may decide; or to have the
repayment secured over property of a third party which may include property of
a trustee
or beneficiary, whether such third party collateral security is given
alone or jointly with property of the trust fund".
- It is not disputed that the borrowed moneys were applied to
construct and fit out the buildings on the brewery land, which the Walters
assert to be trust property. It is not alleged, and there is no basis on which
to conclude, that the borrowing would constitute
a breach of trust or fiduciary
duty.
- It follows that there is no evidence to establish that the
NAB, through its officers, had knowledge of any breach of trust or fiduciary
duty by Fritz and Ingrid Walter. In MacQuarie Bank Ltd v Sixty-Fourth
Throne Pty Ltd[24] the Court of Appeal
rejected the view that the concept of constructive notice "should be given a
broad application so as to extend
to cases in which a reasonable honest man
would have had knowledge of circumstances telling of the wrongful disposition
of trust
property". Winneke CJ and Tadgell JA (Ashley AJA dissenting) took the
view that protection of the central concept of Torrens indefeasibility
required
"that the registration has been achieved as a result of conduct by the
mortgagee amounting to a want of probity before [a]
registered interest can be
defeated."[25]
- In summary, there is no evidence that the brewery mortgage
was unenforceable on any basis. There is no evidence that the registered
proprietors held the brewery land as trustees for the Walter Family Trust, but
if they did, under the trust deed they had the power
to mortgage it. No breach
of duty by Fritz and Ingrid Walter is alleged, but if it were established, that
circumstance would not
displace the indefeasibility of the registered mortgage.
- It follows that the Walters' arguments based on trust issues
fail. There is no basis for the allegations that the NAB instigated
the
December 1998 restructuring of loans in order to perfect a hitherto invalid
security.
CREDIT LEGISLATION
- The Credit Act ceased operation from 1 November 1996.
From that date the Consumer Credit (Victoria) Code applies, in circumstances
where credit
is provided wholly or predominantly for personal, domestic or
household purposes. In the present case, the credit was predominantly
for
business and commercial purposes.
EQUITABLE CLAIMS -
UNCONSCIONABLE CONDUCT - SPECIAL DISABILITY; UNDUE INFLUENCE; ECONOMIC
DURESS; ETOPPEL
- The validity and enforceability of a contract may be
impugned, and the contract rendered voidable, on the basis of duress, undue
influence, estoppel, unconscionable conduct through the unconscientious
exploitation of a special disability and other equitable
doctrines.
- The Walters allege that in the present case, they should be
relieved of liability under the loans, guarantees and mortgages on the
various
equitable bases, including the above.
- Where one party to a transaction is subject to a special
disability or is at a special disadvantage in dealing with the other party
by
reason of a characteristic such as illness, ignorance or inexperience, which
affects the person's ability to judge and protect
his or her own interests, and
the other party unconscientiously exploits the disadvantage in a transaction,
it may be set aside on
the basis of unconscionable conduct.[26] Although the concept of `special disadvantage' bears
some resemblance to the doctrine of undue influence, it is distinct. Undue
influence is the improper use of control, domination or influence over a weaker
party, to the benefit of the stronger party or a
third party. It indicates that
the will of the innocent party is not independent and voluntary, because it is
overborne[27]. "Special disadvantage" implies
that the will of the innocent party, even if independent and voluntary, is the
result of the disadvantageous
position in which that party is placed and the
other party's unconscientious exploitation of that position.[28] Economic duress signifies the procuring of contractual
assent by illegitimate pressure or threat, which vitiates the assent[29]. A threat to exercise legal rights
appropriately although "driving a hard bargain" will not necessarily constitute
duress. It is
established that estoppel exists where, to his or her
detriment:
"the party raising the equity has acted or abstained from acting
on an assumption or expectation as to the legal relationship between
himself
and the party who induced him to adopt the assumption or expectation."[30]
- The Walters' contentions on equitable doctrines evolved and
shifted somewhat during the course of the trial. The associated legal
argument
was nebulous and appeared to be based on misconceptions of relevant legal
principle and authority. Ultimately, the principal
allegations, as I understand
them, were:
(a) The NAB unconscionably exploited its superior bargaining
power and the Walters' special disadvantage constituted by:
the Walters' lack of knowledge of English,
the Walters' lack of knowledge of the NAB's business practices,
the Walters' lack of knowledge of the cultural background distinguishing
Australian and German business practices.
(b) Messrs Keating and Membrey, the relevant officers of the NAB with whom the
Walters dealt in the principal transactions, exercised
undue influence over the
Walters by reason of a relationship of reliance, ascendancy and trust which had
been established. The Walters
also allege that the bank officers, including
Mr Membrey, acted as their financial advisers.
(c) The NAB exerted economic duress in relation to the execution of the
December 1998 guarantees and loans. The economic duress
was occasioned
principally by the alleged "massive delay" in approving the restructured
revised loans and presenting the documentation
for execution to the Walters.
(d) The NAB presented the December 1998 loan and guarantee documents to the
plaintiffs for execution in pressured circumstances,
without providing the
documents for examination in advance. It is said that there was no disclosure
of the full extent of the liability
under, or implications of, the revised
loans. The explanations provided by Mr Membrey were "in brief". No
interpreter was provided
or made available. No opportunity to obtain
independent advice was provided. The execution of the relevant documents was
hurried.
Mrs Ingrid Walter arrived late and did not hear
Mr Membrey's brief explanation.
(e) Mr Membrey, at the execution of the loans in December 1998 some way
misrepresented the terms of the fixed interest-only loan
or induced the Walters
to believe, that it would not be repayable within a one year term but would be
indefinitely and unconditionally
renewed, irrespective of the performance of
the business.
- Ms Walter is a graduate in biotechnology from the
Technical University of Manheim. Her work experience included biotechnological
laboratory work and hospitals.
She studied English at school in Germany. At trial, she agreed
that in 1997 she was competent in reading and speaking English. She
stated
"The every day language I would be able to handle very competently".
She stated that she was not, however, conversant with legal terminology. She
gave the example of the word "debenture" with which
she was unfamiliar. On
receiving the debenture booklet she consulted a dictionary to ascertain the
meaning of the word.
- Ms Walter has, and at all material times had,
significantly superior English language skills to those of her parents. She
agreed
that their family bonds were strong and that she always assisted her
parents in understanding transactions and documents.
- Although she was reluctant to concede that she dealt
competently and confidently with professional advisers, the evidence
establishes
that Ms Walter was competent and confident in relation to such
dealings.
- Ms Walter agreed that she was careful or "considerate"
about her financial and other affairs. Having observed her conduct at trial,
I
am satisfied that the intelligence and astuteness exemplified by her perusal of
the debenture booklet and independently ascertaining
the meaning of an unknown
technical term, would be characteristic of Ms Walter's approach to, and
conduct of, business transactions.
- Although Ms Walter did not, in terms, concede it, I am
satisfied that she would not execute, or allow her parents to execute, a
document committing them to a significant transaction unless she were satisfied
that the Walters understood its nature and effect.
- Ms Walter acknowledged that she had made a number of
court applications, appearances and appeals. She had prepared the pleadings,
court documents, interrogatories and discovery. Her conduct of the present
proceedings on behalf of the plaintiffs demonstrated
energy, intelligence and
an impressive command of language.
- In the course of the banking relationship, Ms Walter,
either alone or with Mr Fritz Walter, organised communications and contact
with senior banking officials, showing a remarkable degree of persistence and
confidence.
- Mr Fritz Walter operated a very successful car repair
dealership in Germany for 25 years. He had a master's degree in mechanics
from
a German technology college. The business had an annual turnover of 7 million
Deutschmarks. There were about 20 employees.
Mr Walter was the managing
director of the company and handled the business' finance.
- Mr Walter stated that he had received no formal
education in English. He claimed that he did not speak English in 1996
although
his fluency improved after the Walters settled in Australia. He
claimed that he could not read or write English. When he needed
to read or
understand English, he relied on Ms Walter who translated for him. Although Ms
Walter sometimes needed to look up technical
English words, he had great
confidence in her as a translator. He also had access to another translator
who had lived in Australia
for 45 years.
- Mr Walter conceded that in the course of his business in
Germany, he had dealt with banks and had acquired commercial experience.
He
understood the notice of security for bank loans and the concept of a mortgage.
- He had visited Australia frequently for holidays from 1981
and on establishing the business, his language skills were significant
to deal
with customers behind the bar and to welcome them, as the restaurant host.
- On setting up the brewery business he retained the services
of the accountant Mr Dubois. When he and his wife purchased the
property,
solicitors acted for them.
- At trial, Mr Walter initially acknowledged that he knew
that the NAB required security for the home loan, but ultimately denied
that he
knew, at the time, what the mortgage was. Mr Walter also denied at one
point that he knew what a guarantee was. At another
point he stated that he
knew the bank needed a guarantee, but did not know that it required a mortgage.
- I consider that Mr Walter had a greater understanding of
English and a much greater understanding of the relevant transactions,
than he
was willing to acknowledge. He also had access to the services of qualified
professional advisers and a competent translator
in
Ms Walter.
- Mrs Ingrid Walter had eight years of formal education in
Germany. She had no formal English language education. She had spent
vacations in Australia since 1981 but stated that she did not understand much
English at the "really early time when we were in Australia".
- For the first ten years of its operation, Mrs Walter was
actively involved in the Walter family's Peugeot business in Germany.
She
carried out the banking and handled cheques and payments. She ran the business
together with Mr Walter and understood the business.
She understood the
concept of a mortgage. She participated in the decisions to establish a
business in Australia. She worked full
time in the business, managing the
kitchen operations. Mrs Walter understood that a business structure of a
company and a trust
had been established, but did not know the details.
- Mrs Walter stated that she would attempt to understand
when people spoke English and trusted Ms Walter to translate when required.
So
long as Ms Walter understood what the bank officers were saying, Mrs Walter was
content to sign anything which Ms Walter approved.
- In the circumstances, I am satisfied that the Walters,
individually and collectively, were not subject to a special disability or
in a
position of special disadvantage. They were, and are, intelligent, resourceful
and experienced business people who had access
to independent professional
legal, financial and business advice in entering transactions designed to
advance their own interests.
The allegation of unconscionable conduct based on
the unconscientious exploitation of special disability or special disadvantage,
or any other basis, is not made out.
- The fact that borrowers are not fluent English speakers does
not constitute a special disability in circumstances where they have
access to
competent translation, access to qualified professional advisers and extensive
collective business experience and education.
Similarly, local variations (if
established) in banking or commercial practice do not constitute a special
disability for experienced,
competent business people who have access to local
professional advisers.
- In my opinion, Messrs Keating and Membrey were disinterested
and honest witnesses. While neither claimed to retain a specific detailed
memory of individual transactions, each witness testified that he followed his
ordinary and usual practice of explaining documents
and advising the borrowers
of the opportunity to obtain legal advice. I accept that evidence, in
accordance with the principle recognised
by Batt JA in Smart v ANZ[31] that "in order to prove an act has been done
it is admissible to prove any general course of business or office, whether
public or
private, according to which it would ordinarily have been done, there
being a probability that the general course be followed in
the particular
case...".
- The testimony of Messrs Keating and Membrey is also supported
by the contemporaneous documentation and is consistent with the undisputed
surrounding circumstances. In contrast, the conflicting testimony of Ms Walter
and Mr Walter, in particular, was evasive, unresponsive,
inconsistent with
contemporaneous documentation and inherently improbable. I consider that both
Ms Walter and Mr Walter sought to
portray a vulnerability, passivity and
unquestioning trust which were at odds with their assertive, questioning and
self-reliant
demeanour at trial. Where there is a conflict of evidence, I
prefer that of Mr Membrey and Mr Keating.
- I am satisfied that, as he testified, Mr Keating
believed that the Walters understood the documents they executed, and the
nature
and terms of the transactions I am satisfied that the Walters presented
to Mr Keating as he described them in his contemporaneous
diary notes -
well-educated, resourceful and experienced business people.
- I also accept Mr Membrey's testimony that he had several
discussions with Fritz and Carmen Walter prior to 16 December 1998 in which
he
apprised them of the proposed split loans and their fundamental terms,
including the one year term of the $1 million fixed interest-only
loan. I am
satisfied that (in circumstances where, as the contemporaneous documents
reveal, Mr Membrey, his superior and the Walters
themselves were all well-aware
of the troubled and precarious state of the business) he did not assure the
Walters, or induce them
to assume, expressly or implicitly, that the one year
term of the loan would be automatically and indefinitely
renewed.
- I accept his evidence that he informed the Walters that any
renewal would be conditional upon the performance of the business and
that
Fritz and Carmen Walter clearly indicated to him their acceptance of that
position. I consider that each of the Walters understood
that the loan would
not be renewed automatically or indefinitely, irrespective of trading
performance, although they did not entertain
the possibility of business
failure.
- I consider it probable that Mr Membrey arranged for the
delivery of the documents to the Walters prior to 16 December 1998 but it
is
unnecessary to determine that issue, as I conclude that the documents were, in
any event, adequately explained and understood
prior to their
execution.
- Mrs Walter acknowledged in her letter dated 18 November 1998
that the position would be reviewed based on performance, but at trial
would
not acknowledge that she recognised that there might be an adverse review
resulting in a termination of funding "because I
wasn't thinking of these
negative things".
- I am satisfied that Fritz and Carmen Walter had considerable
business experience and possessed a good understanding of financial
and banking
affairs and security transactions. While Mrs Ingrid Walter's experience
of such transactions was not as extensive, she
was familiar with business
procedure and basic banking and security transactions.
- I am satisfied that Ms Walter at all relevant times was
able to understand fully all but technical legal terms. She was capable
of
ascertaining the meaning of technical terms, whether independently, through
inquiry to Mr Membrey or Mr Keating or inquiry to
the Walters' legal
and financial advisers. I am satisfied that she was at all material times
available competently to translate,
and did translate, all relevant oral or
written communications from the NAB to her parents when
required.
- Although both Mr Keating and Mr Membrey enjoyed an
affable relationship with the Walters, there is no evidence to establish that
either bank officer exercised any ascendancy, domination or influence over
them. Further, there is no evidence to suggest that either
Mr Keating or
Mr Membrey acted as a business or financial adviser to the Waters or
otherwise exceeded their arms-length professional
role.
- There is no evidence to establish that the NAB pressured the
Walters to restructure their loans, unduly delayed the approval or
preparation
of the loan documents or otherwise exercised duress, whether economic or
otherwise. The loan restructure was initiated
by the Walters themselves. It
was necessitated by their urgent need to reduce the burden of their monthly
repayments. The NAB's
response to their request was accommodating and
relatively prompt.
- Following the expiry of the initial one year term of the
fixed interest-only loan, the NAB did not take immediate action but continued
to consult and negotiate with the Walters, who were unwilling to accept the
apparently reasonable proposal that an investigative
accountant be appointed.
The NAB did not appoint a receiver until 6 November 2000. Following the
appointment of the receiver, there
was a further opportunity to refinance the
loans and thus avert the sale.
CONCLUSION
- Regrettably, despite dedication, hard work and the commitment
of considerable resources, the Walters' brewery and restaurant enterprise
did
not succeed. They emigrated from their own country and encountered business
failure and financial disaster. While their consequent
distress is
understandable, their baseless accusations of fraud and conspiracy, and the
persistent re-ventilation of discredited
legal arguments during the course of
the trial, were regrettable. The financial and business misfortunes of the
Walters cannot be
attributed to any legal wrong or morally reprehensible
conduct of the NAB. There is no recognised legal or equitable ground on which
to set aside the liability under the relevant loan agreements, guarantees,
mortgages and debenture.
- It follows that Proceeding No. 4486 of 2001 must be
dismissed.
- The NAB is entitled to the relief claimed in Proceeding No.
7407 of 2002.
[1] Newhart Developments Ltd
v Cooperative Commercial Banks Ltd [1978] QB 814 c/f Tudor Grange
Holdings Ltd v Citibank NA [1992] Ch 53.
[2] [1999] VSCA 35; [1999] 2 VR 573
[3] [2000] HCA 63; (2000) 205 CLR 337
[4] [2001] VSCA 175
[5] 12/07/1968
[6] [2002] VSC 116 (leave to appeal refused in
McFarlane v NAB, No. 6450 c/f 1994, 20 September 2002 VSCA).
[7] Ibid at 4.
[8] Supra at 66
[9] [2002] VSC 116 at 4.
[10] 19 July 2002 [2002] VSCA BC 200204274.
[11] See: McFarlane v National Australia
Bank MI791/2002 (25 February 2003); McFarlane v Eastern Pastoral Co
M104/1999 (26 May 2000); Knight v Bell and Falconer M43 and M46 at 2000,
13 September 2002.
[12] Proceedings of the Legislative Assembly,
No. 90, 25 November 1975, para 4; Parliamentary Debates (Hansard) vol 125
p.9184; Government
Gazette vol 338, p.3819.
[13] Pendlebury v Colonial Mutual Life
Assurance Society Ltd [1912] HCA 9; (1912) 13 CLR 676.
[14] Goldcel Nominees Pty Ltd & Ors
(Provisional Liquidator Appointed) v Network Finance Ltd [1982] 2 VR 257 at
261.
[15] Expo International Pty Ltd v
Chant [1979] 2 NSWLR 820 at 834
[16] [2002] NSWCA 431 (31 May 2002) at
p.4.
[17] [1999] NSWSC 563 (11 June 1999).
[18] [1979] NSWLR 820.
[19] Ibid at 823.
[20] [1979] NSWLR 820.
[21] Ibid.
[22] C/f American Express International
Banking Corporation v Hurley [1985] 3 All ER 564.
[23] Vacuum Oil Co Pty Ltd v Wiltshire
(1945) 72 CLR 139 at 324-325; Octavo Investments Pty Ltd v Knight [1979] HCA 61; (1979)
144 CLR 360 at 367.
[24] [1998] 3VR 133.
[25] Ibid, at 136.
[26] Blomley v Ryan [1956] HCA 81; (1956) 99 CLR 362
at 415.
[27] Union Bank of Australia Ltd v
Whitelaw [1906] VicLawRp 119; [1906] VLR 711 at 728; Allcord v Skinner (1887) 36 Ch D,
148.
[28] Commercial Bank of Australia Ltd v
Amadio [1983] HCA 14; (1983) 151 CLR 447 at 461; Louth v Diprose [1992] HCA 61; (1992) 175 CLR
621; Bridgewater v Leahy [1998] HCA 66; (1998) 194 CLR 457.
[29] Crescendo Management Pty Ltd v
Westpac (1988) 19 NSWLR 40 at 456; Wardley Australia Ltd v McPharlin
(1984) 3 BPR 9500
[30] Waltons Stores (Interstate) Ltd v
Maher [1988] HCA 7; (1987-1988) 164 CLR 387 at 420.
[31] BC 200204274 17 July 2002 VSCA at 3.
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