Azar v Citigroup Pty Ltd

CAMPBELL JA: I agree with Sackville AJA.

YOUNG JA: I agree with Sackville AJA.

SACKVILLE AJA: This is an appeal from a judgment of a Judge of the Supreme Court (Barr AJ) ordering that the respondent (" Citigroup ") have possession of land at 167 Blaxcell Street, Granville (" Land "): Citigroup Pty Ltd v Azar (unreported, 2 March 2011). Citigroup's claim for possession was based on default by the appellants, the registered proprietors of the Land, in abiding by the conditions of a loan secured by a registered first mortgage over the Land (" Mortgage "). The obligations secured by the Mortgage include those created by a Loan Agreement dated 8 October 2008 between Citigroup and the appellants (" Loan Agreement ").

The appellants resisted Citigroup's claim on many grounds. They denied executing the Mortgage or the Loan Agreement, pleaded a defence of non est factum and asserted that, in any event, the Mortgage and Loan Agreement were unconscionable. In a cross-claim, the appellants sought relief against Citigroup under various statutes including the Contracts Review Act 1980 (" Contracts Review Act ") and the Consumer Credit (New South Wales) Code (" Consumer Credit Code "). The relief sought by the appellants included a declaration that the Mortgage was unjust and void and an order setting aside the Loan Agreement and the Mortgage. They also claimed damages.

The primary Judge found that the appellants had signed both the Loan Agreement and the Mortgage and rejected the pleaded defences. His Honour dismissed the cross-claim and made the orders sought by Citigroup.

The following account is based on the primary Judge's unchallenged findings and undisputed evidence.

The appellants were both born in Lebanon, the first appellant (" Mr Azar ") in 1945 and the second appellant (" Mrs Azar ") in 1944. They migrated to Australia in 1973. At that time they had two young sons. A daughter was born in 1975.

Steven Azar is the appellant's younger son. He was at all material times a director of Azar Financial Services Pty Ltd later known as National Brokers Group Ltd (" AFS "). The appellants filed cross-claims against Steven Azar and AFS, but these were not pursued at the trial.

Mr Azar received only a rudimentary education in Lebanon. He worked at Lidcombe Hospital as a porter and later as an anaesthetic technician. He ceased work in 1994 and thereafter was a disability pensioner.

Mrs Azar learned English in Lebanon and studied practical nursing at the American Hospital in Beirut. She commenced working at Auburn District Hospital in 1976 as an Enrolled Nurse. She later completed a Sterilising Technology course at Macquarie University. She subsequently worked in hospitals, sterilising operating theatre equipment. However, she ceased work in 1986 and has not been employed since that time.

The appellants bought the Land in 1977 and became registered as proprietors subject to a mortgage in favour of Westpac Banking Corporation (" Westpac "). The mortgage to Westpac was discharged in 1989.

In 1992, the appellants borrowed money from SGE Credit Union to purchase a house for their sons. The loan was secured by a mortgage over the Land. In 1997 or 1998, Steven Azar transferred his interest in the house to his brother.

In December 1999, Steven Azar arranged a loan to the appellants from Citibank Pty Ltd (" Citibank ") in order to pay out the SGE Credit Union loan. The appellants executed a mortgage in favour of Citibank and the SGE Credit Union mortgage was discharged.

In February 2001, the appellants repaid the Citibank loan, using a lump sum superannuation payment received by Mr Azar for the purpose.

In September 2006, the appellants executed a loan agreement with GEL Custodians Pty Ltd (" GEL "), whereby they agreed to borrow $180,000 on the security of a first mortgage over the Land. The loan was arranged through Down Under Home Loans, the business name of AFS. The purpose of the loan was said to be " to assist with future investments and personal use ". Surveyor's drawings of a building subdivision and a house plan relating to a development in South Africa were annexed to the Loan Agreement (although the location of the proposed development was not necessarily apparent from the drawings and plan).

On 24 September 2008, a mortgage application purportedly signed by the appellants (" Loan Application ") was submitted to Citigroup. The " Introducer " was recorded as Down Under Home Loans, FSA having been appointed in 2005 by Citigroup as an Introducer (that is, a broker entitled to submit loan applications to Citigroup).

The Loan Application stated, falsely, that Mr Azar's principal business was carpentry. The Loan Application sought to borrow the sum of $280,000 for a term of 30 years on the security of the Land, which was said to be worth $450,000. The appellants' assets were said to include superannuation ($100,000) and shares ($100,000).

The Loan Application incorporated a declaration, also purportedly signed by the appellants, certifying their capacity to repay the loan and requesting Citigroup to act on the declaration. A self-employed applicant completing a declaration was not required to furnish to Citigroup copies of tax returns or other proof of income and no such material was supplied by or on behalf of the appellants.

Citigroup made a number of enquiries, including verifying an Australian Business Number said in the Loan Application to be Mr Azar's. However, Citigroup did not contact the appellants directly. Nor did it attempt to ascertain or verify the appellants' income notwithstanding that the Loan Application recorded the name of their accountant.

The Loan Application was accompanied by a disbursement authority directing payment of the loan to AFS. However, Citigroup insisted on payment of the loan into an account maintained by the appellants of so much of the loan as was not required to discharge the existing mortgage to GEL. Subject to this requirement, the Loan Application was approved on 1 October 2008.

On 2 October 2008, Citigroup wrote separately to each appellant enclosing a number of documents to be signed and returned to Citigroup's solicitors. These documents included the Loan Agreement and Mortgage. The Loan Agreement included a section entitled " Acknowledgement of Acceptance ", which recorded a number of matters that Citigroup wished to draw to the attention of borrowers about a proposed credit contract. His Honour found that the appellants themselves signed all the documents submitted to them.

On 27 October 2008, Citigroup advanced the sum of $278,620.01 pursuant to the Loan Agreement. Of this sum, $182,776.00 was used to discharge the GEL loan and the balance of $95,244.41 (after expenses) was paid into Mr Azar's credit union bank account. On the same day, GEL discharged its mortgage and the Mortgage was registered.

On 29 October 2008, Mr Azar and Steven Azar attended SGE Credit Union. Mr Azar signed a withdrawal request for $90,000. That amount was paid by cheque, made out as requested by Steven Azar.

AFS paid moneys into Mr Azar's credit union account to enable instalments due under the Mortgage and Loan Agreement to be paid. However, by 16 July 2009, a total of $3,206.25 had fallen due for payment, but was unpaid. Shortly thereafter, a default notice under s 57(2)(b) of the Real Property Act 1900 was served on the appellants.

Section 7(1) of the Contracts Review Act relevantly provides as follows: "Where the Court finds a contract or a provision of a contract to have been unjust in the circumstances relating to the contract at the time it was made, the Court may, if it considers it just to do so, and for the purpose of avoiding as far as practicable an unjust consequence or result, do any one or more of the following: (a) it may decide to refuse to enforce any or all of the provisions of the contract, (b) it may make an order declaring the contract void, in whole or in part, ..." " Unjust " is defined by s 4(1) of the Contracts Review Act to include " unconscionable, harsh or oppressive ".

Section 9 sets out matters to be considered by the Court in determining whether a contract is unjust. It relevantly provides as follows: "(1) In determining whether a contract or a provision of a contract is unjust in the circumstances relating to the contract at the time it was made, the Court shall have regard to the public interest and to all the circumstances of the case, including such consequences or results as those arising in the event of: (a) compliance with any or all of the provisions of the contract, or (b) non-compliance with, or contravention of, any or all of the provisions of the contract. (2) Without in any way affecting the generality of subsection (1), the matters to which the Court shall have regard shall, to the extent that they are relevant to the circumstances, include the following: (a) whether or not there was any material inequality in bargaining power between the parties to the contract, (b) whether or not prior to or at the time the contract was made its provisions were the subject of negotiation ... (e) whether or not: (i) any party to the contract (other than a corporation) was not reasonably able to protect his or her interests, or (ii) any person who represented any of the parties to the contract was not reasonably able to protect the interests of any party whom he or she represented, because of his or her age or the state of his or her physical or mental capacity, ... (h) whether or not and when independent legal or other expert advice was obtained by the party seeking relief under this Act, (i) the extent (if any) to which the provisions of the contract and their legal and practical effect were accurately explained by any person to the party seeking relief under this Act, and whether or not that party understood the provisions and their effect, (j) whether any undue influence, unfair pressure or unfair tactics were exerted on or used against the party seeking relief under this Act: (i) by any other party to the contract, (ii) by any person acting or appearing or purporting to act for or on behalf of any other party to the contract, or (iii) ... (k) the conduct of the parties to the proceedings in relation to similar contracts or courses of dealing to which any of them has been a party, and (l) the commercial or other setting, purpose and effect of the contract. (3) For the purposes of subsection (2), a person shall be deemed to have represented a party to a contract if the person represented the party, or assisted the party to a significant degree, in negotiations prior to or at the time the contract was made."

The Consumer Credit Code applies, subject to other requirements, to the provision of credit if, when the credit contract is entered into: "the credit is provided or intended to be provided wholly or predominantly for personal, domestic or household purposes ..." (s 6(1)(b). Investment by the debtor is not a personal, domestic or household purpose: s 6(4). The predominant purpose for which credit is provided is the purpose for which more than half of the credit is intended to be used: s 6(5)(a).

Section 70(1) of the Consumer Credit Code relevantly provides as follows: "(1) Power to reopen unjust transactions . The Court may, if satisfied on the application of a debtor, mortgagor or guarantor that, in the circumstances relating to the relevant credit contract, mortgage or guarantee at the time it was entered into or changed (whether or not by agreement), the contract, mortgage or guarantee or change was unjust, re-open the transaction that gave rise to the contract, mortgage or guarantee or change. ... (7) Meaning of unjust . In this section, " unjust " includes unconscionable, harsh or oppressive." (Emphasis in original.)

The primary Judge recorded (at [15]) that a forensic document and handwriting examiner gave evidence, which was not challenged in cross-examination, that the signatures on the Loan Application were probably not the genuine signatures of the appellants. However, his Honour found (at [50]), on the basis of the expert evidence and a concession ultimately made on behalf of the appellants, that they had signed both the Loan Agreement and the Mortgage.

His Honour rejected the non est factum defence. In the course of doing so, he made the following findings (at [43]-[61]):

On the basis of a taped telephone conversation between Mrs Azar and a representative of Citigroup in early 2009, his Honour also found (at [65]) that she was fully aware that she and her husband were obliged to service the loan and that they had granted the Mortgage to secure the loan.

The primary Judge rejected both a defence of unconscionability and the appellants' claim for relief under the Contracts Review Act for the following reasons (at [74]-[79]); "74 ... There seems no doubt that Steven Azar made false statements to [Citigroup] in the application documents. The evidence does not enable me to find whether the [appellants] knew the details of what Steven Azar was representing to [Citigroup] in the application documents, but I am satisfied that they were not concerned for him to tell the truth, because they knew that if he did the loan application would not succeed. It can at least be said that they were content for him to say whatever he considered necessary to secure the loan. 75 In my opinion if anybody was misled it was [Citigroup], by Steven Azar on behalf of the [appellants]. It was entitled to accept at face value the statements of fact and the declarations in the loan application and associated documents. It had no reason to doubt that they were genuine. It had therefore no reason to seek the [appellants'] confirmation that they were genuine. 76 Then it was submitted that the benefit of the loan was not received and used by the [appellants] for their own personal benefit, except for a very small amount remaining after the withdrawal of $90,000.00. That submission must be rejected. The [appellants] received first the benefit of the discharge of their obligations to GEL under the pre-existing mortgage. That was worth $182,776.00. Then they received, by payment into [Mr Azar's] credit union account, the net balance of the proceeds of the loan. The fact that [Mr Azar] almost immediately withdrew $90,000.00 and gave it to Steven Azar is not a matter the [appellants] can set up against [Citigroup]. 77 In my opinion the loan agreement and the mortgage were not unjust and were not unconscionable. They resulted from [Citigroup's] reliance on an application made by Steven Azar on behalf of and with the concurrence of the [appellants]. The documents of application contained a number of errors of fact which were false to the knowledge of Steven Azar. That the [appellants] knew or did not wish to know. Such was the financial position of the [appellants] that, as they knew, it was necessary for Steven Azar to put forward a case for a loan stronger than the one he and they could truthfully make. 78 It seems to me that [Citigroup] acted conscientiously and reasonably when assessing the loan application and entering into the loan agreement and the mortgage. ... [Citigroup] received the loan application on 24 September 2008. Its policy was to permit repayments only from accounts in the names of borrowers. It would lend only up to 70% of the value of the security offered. [Citigroup] obtained a certificate of valuation of the [appellants'] land and the loan met that criterion. [Citigroup] required a signed declaration to confirm that the [appellants] were able to repay the loan. It conditionally approved the application on 30 September 2008. It made checks as listed in the self certification check list. After final approval the loan documents were sent to the [appellants] for signature. The documents they signed included a legal advice acknowledgment certificate in which they made a statement to the effect that they understood the nature and effect of the loan documents. 79 The [appellants] have not demonstrated that the conduct of [Citigroup] was unjust or unconscionable. They freely and voluntarily signed the loan agreement, the mortgage and the associated documents. They received the whole of the benefit of the loan. Their will was not overborne. The defence of injustice and unconscionability has not been made out."

The primary Judge also rejected the appellants' claim that the Loan Application and Mortgage were unjust within the meaning of s 7 of the Consumer Credit Code. His Honour did so on the ground that the provision of credit was not " wholly or predominantly for personal, domestic or household purposes " as required by s 6(1)(b) of the Code (at [81]).

The amended notice of appeal identifies four grounds. The primary Judge is said to have erred in the following respects: 1. failing to find that the appellants did not sign the Loan Application, the Statutory Declaration of 28 May 2010 and the Nominated Bank Account forms; 2. failing to find that the conduct of Citigroup in entering the Loan Agreement, procuring the Mortgage and making the loan to the appellants amounted to unjust conduct for the purposes of s 7 of the Contracts Review Act; 3. finding that the Consumer Credit Code did not apply to the Citibank Loan because it was not predominantly for personal, household or domestic purposes; and 4. finding that the appellants had a well-established practice before 2008 of using their home as security to raise funds to lend to members of their family and that the proceeds of the Citibank Loan were for the benefit of the appellants.

The principles that apply in an appeal against a finding that a contract was not unjust for the purposes of s 7(1) of the Contracts Review Act may be derived from the reasoning in Perpetual Trustee Co Ltd v Khoshaba [2006] NSWCA 41; 14 BPR 26,639, as follows:

At the hearing of the appeal, Mr Eardley, who appeared for the appellants, abandoned Grounds 1 and 4, although his abandonment of Ground 1 appeared to be on the basis that the primary Judge accepted that the appellants had not signed the Loan Application. However, he sought to challenge the finding (at [77]) that the Loan Application had been made by Steven Azar on behalf of and with the concurrence of the appellants. Mr Eardley also sought to challenge the finding (at [74], [77]) that the appellants, whether or not they knew that Steven Azar made false statements in the loan application, were content for him to say whatever he considered necessary in order to secure the loan.

It was pointed out to Mr Eardley that there was no hint of this challenge in either the amended notice of appeal or in the appellants' amended written submissions (the amended written submissions having been filed on the eve of the hearing). Mr Eardley then applied for leave to further amend the notice of appeal to enable the appellants to challenge these factual findings. As Mr Newton, who appeared for Citigroup, did not object, leave was granted. The grant of leave does not imply that the Court in any way condones the egregious failure to comply with the rules governing the conduct of appeals.

The primary Judge expressly referred in his judgment to the demeanour of each appellant while giving evidence. For example, his Honour rejected (at [48]) Mr Azar's evidence that he had not understood a statement by Steven Azar at an earlier hearing to the effect that the appellants knew where the money borrowed from Citigroup had gone (that is, to a development project in South Africa). His Honour rejected Mr Azar's evidence partly because Mr Azar: "appeared to me to understand questions that he was asked. I found his responses quick and relevant."

In the case of Mrs Azar, the primary Judge was not satisfied (at [61]) that her eyesight was as bad as she claimed. Furthermore: "While I accept that she needed time closely to look at documents she was required to read, I do not think that her eyesight inhibited her understanding of what she was doing. I found her an intelligent person who quickly understood the meaning of questions and wasted no opportunity to put her point of view. I thought her explanation [as to why AFS made payments into Mr Azar's credit union account] untrue."

The primary Judge made a series of credit-based findings adverse to the appellants. These included the following:

Mr Eardley accepted that the findings that the appellants sought to challenge were credit based and that, accordingly, this Court would uphold the challenge only if the findings were glaringly improbable or contrary to compelling inferences from the incontrovertible evidence: Fox v Percy , at 128 [29], per Gleeson CJ, Gummow and Kirby JJ. The findings cannot be so characterised. On the contrary, if anything, the undisputed evidence supported his Honour's findings.

Prior to the Citigroup loan, the appellants mortgaged the Land on three occasions to obtain or refinance loans to assist one or both of their sons. The first of these, the loan from SGE Credit Union in 1992, was obtained at a time when Mr Azar was still employed. It can be put to one side.

However, the second loan from Citibank, which paid out the SGE Credit Union loan, was taken out in December 1999, five years after Mr Azar had become a disability pensioner. The mortgage loan was arranged by Steven Azar and there was no dispute that the appellants signed the relevant documentation. The mortgage to SGE Credit Union was discharged in 2001 using a lump sum payment received by Mr Azar.

In 2006, the appellants borrowed $180,000 from GEL Custodians on the security of a first mortgage. This mortgage loan was arranged by Steven Azar, through Down Under Home Loans. Despite the appellants asserting in their affidavits that they had not borrowed any money since taking out a small personal loan in 2005, they did not directly deny that they had signed the mortgage documents. Nor did they adduce any expert evidence to suggest that their signatures on the documents were not genuine.

Statements relating to the GEL Custodians loan for the period from January to September 2008, were in evidence. The statements were addressed to Mr Azar at his home address and recorded the interest payable on the mortgage loan. The statements also recorded that moneys were paid into the account by AFS (and, on one occasion by Down Under Home Loans) to enable interest payments to be met. When asked in cross-examination, in the context of questions directed to the Citigroup loan, whether he read his bank statements, Mr Azar acknowledged that he may have looked at them briefly.

The Citigroup loan was also arranged by Steven Azar, through Down Under Home Loans. It can be accepted that (as the primary Judge appears to have accepted) the appellants did not sign the Loan Application purportedly lodged on their behalf. But the expert evidence strongly supports the primary Judge's finding that each of the appellants signed the Loan Agreement and the Mortgage.

The loan moneys were partly applied (as to $182,776.00) to discharge the GEL loan. The balance after expenses ($95,244.41) was paid into Mr Azar's credit union account on 28 October 2008. The following day, as Mr Azar stated in his affidavit, he attended the credit union with Steven Azar. At the latter's request, he signed a transfer form that enabled $90,000 to be withdrawn from the account. It is hardly plausible that Mr Azar did not appreciate that funds sufficient to enable this amount to be withdrawn had been borrowed from a lender on the security of the Land.

To these objective facts must be added the inconsistency between Mrs Azar's denials that she knew anything about the Mortgage and the contents of the recorded telephone conversation with Citigroup in early 2009. The obvious inference from Mrs Azar's contributions to that conversation, quoted at length in the primary judgment, is that she knew perfectly well that she and her husband had executed the Mortgage and that she also was clearly aware that the instalment due in January 2009 might not have been made. Mrs Azar told the Citigroup representative in the conversation that she would try to arrange payment of the instalments due under the Mortgage within a short time.

In addition, the primary Judge relied on the appellants' failure to call Steven Azar to give evidence as supporting an inference that his evidence would not have assisted their case. As his Honour pointed out, Steven Azar could have given evidence about how much the appellants knew of his activities and the conversations that transpired at the time the Loan Application and Loan Agreement were made and the Mortgage executed. His Honour was entitled to draw the inference he did: Jones v Dunkel [1959] HCA 8; 101 CLR 298.

There is nothing improbable or contrary to compelling inferences in the factual findings challenged by the appellants. Their challenge to those findings fails.

On the findings of primary fact made by the primary Judge, the challenge to the finding that the Loan Agreement and Mortgage were not unjust within the meaning of s 7(1) of the Contracts Review Act cannot succeed.

The basis of the appellants' challenge to this finding was that they had not signed the Loan Application which had been submitted by Steven Azar, purportedly on their behalf, to Citigroup. Accordingly, so it was argued, they were not responsible for any false statements incorporated in the Loan Application. Citigroup had chosen to rely on the information supposedly certified by the appellants and had done so without undertaking simple checks to ascertain its accuracy and to confirm that the appellants had indeed applied for a loan.

Mr Eardley submitted that Citigroup, although carrying out some cursory checks, had effectively engaged in asset lending. It was unjust for Citigroup, so he argued, to rely on the value of the Land as providing ample security for the loan, when it had made no attempt to determine whether the appellants had the ability to service the loans.

Had the primary Judge not found that the appellants were aware that Steven Azar was raising money on the security of the Land and that he might provide false information to prospective lenders, there may have been considerable force in the contention that the Loan Agreement and the Mortgage were unjust. If the appellants had not been aware that Steven Azar was proposing to raise funds on the security of the Land for his South African venture and that he would tell Citigroup whatever was required for that purpose, Citigroup's enquiries might not have been sufficient to avoid a finding of injustice. In particular, it is by no means clear that the primary Judge was necessarily correct to say (at [75]) that Citigroup, for the purposes of the Contracts Review Act, was: "entitled to accept at face value the statements of fact and the declarations in the loan application and associated documents."

But this is not a case of unsophisticated pensioners being misled by their son into making an improvident loan which they did not understand or of which they had no knowledge. On the primary Judge's findings, the appellants:

The primary Judge was correct to find that neither the Loan Agreement nor the Mortgage was unjust within the meaning of s 7(1) of the Contracts Review Act. The appellants obtained precisely the benefits they thought they would derive from the loan arranged on their behalf by Steven Azar. They understood the nature of the transaction and also understood that Steven Azar might misrepresent their financial situation in order to obtain the loan. As the primary Judge observed (at [75]), if anyone was misled it was Citigroup. It was misled by Steven Azar's actions, which were undertaken with the acquiescence and co-operation of the appellants.

I think it is doubtful whether the primary Judge was correct to find that the Loan Agreement was not governed by the Consumer Credit Code on the ground that it was not predominantly for personal, domestic or household purposes. The Loan Application recorded that the purpose of the loan, apart from paying out the GEL loan, was " to assist with future investments and personal use ".

However, as Citigroup submitted, even if the Consumer Credit Code applied to the Loan Agreement, the only basis for granting the appellants relief was that the Loan Agreement or Mortgage was unjust, a term defined to include " unconscionable, harsh and oppressive ": Consumer Credit Code, s 70(7). For the same reasons that the Loan Agreement and Mortgage cannot be regarded as unjust for the purposes of the Contracts Review Act, they cannot be regarded as unjust for the purposes of the Consumer Credit Code.

I propose the following orders: 1. Appeal dismissed. 2. Appellants pay the respondent's costs of the appeal.