Reliance Financial Services Pty Ltd v Criniti

1. [1]

   In a statement of claim filed 30 December 2017 the plaintiff as second registered mortgagee claims possession of land at 7 Dorrigo Avenue, Hoxton Park. The land is owned by the first and second defendants. The first defendant was made bankrupt on 30 May 2017. The third and fourth defendants are his trustees in bankruptcy. The fifth defendant is the first mortgagee of the property.

2. [2]

   The mortgage is said the secure the sum of $400,000 lent to the first and second defendants pursuant to a loan agreement dated 12 October 2001. The loan agreement provided in cl 1.1 as follows:

3. [3]

   Clause 2.2 provided that the term of the loan was to be for two years.

4. [4]

   The Mortgage relevantly provides:

5. [5]

   The plaintiff is the trustee of a discretionary trust. Although it has the same name as the original lender, the plaintiff is a different company with the same name as the original lender who was then the trustee of the trust. The plaintiff was appointed the trustee of the trust by a deed of appointment dated 18 June 2014. The evidence establishes that the plaintiff has now been registered as the mortgagee of the relevant mortgage on the title.

6. [6]

   The second defendant filed a defence on 7 February 2018. She did not admit entry into the mortgage as alleged but admitted that there was a registered dealing in relation to the property which she asserted did not secure any debt.

7. [7]

   The substantive defence to the claim is found in paragraphs 8 and 9 of the defence. Those paragraphs asserted that no monies were advanced or provided by the plaintiff or the original lender, that neither provided any consideration for the registration of the mortgage, and that no monies or obligations were owing by the second defendant to the plaintiff.

8. [8]

   There was also an assertion that the plaintiff was not entitled to possession of the property because no notices had been served under ss 57(2)(b) of the Real Property Act 1900 (NSW) or s 80 of the Consumer Credit Code (incorporated into New South Wales law by the Consumer Credit (New South Wales) Act 1995 (NSW) s 5).

9. [9]

   On 15 February 2018 the plaintiff filed a reply in which, amongst other things, the plaintiff sought to rely on a deed said to have been executed by the lender and the defendants on 20 August 2004. That deed recited the mortgage, the loan agreement and defaults by the mortgagors in failing to pay instalments of interest and to pay amounts owing under the loan agreement and mortgage by 12 October 2003. The recitals noted that the mortgagors had requested the mortgagee to allow them further time to pay amounts owed under the mortgage. The operative provisions then provided:

10. [10]

    By a notice of motion dated 22 February 2018 the plaintiff seeks to strike out paragraphs 6, 8, 9 and 11.2 of the defence and asks that summary judgment be entered in favour of the plaintiff for the possession of the land. Paragraph 6 of the defence did not admit that the defendants entered into a mortgage of the land in favour of the lender. I have summarised the effect of paragraphs 8 and 9 earlier. Paragraph 11.2 denied the plaintiff was entitled to possession of the land and then said:

11. [11]

    By a notice of motion filed by the second defendant on 27 March 2018 she seeks leave to file an amended defence and to file a cross-claim. The essence of the amended defence and the cross-claim is that the loan agreement and mortgage were a sham. The matter is most clearly articulated in paragraph 6 of the proposed amended defence as follows:

12. [12]

    In addition, the second defendant, in response to what is contained in the reply, denies that she or the first defendant signed the deed dated 20 August 2004.

13. [13]

    The proposed cross-claim seeks declarations that the mortgage is void or otherwise unenforceable, and that there are no moneys owing under the mortgage. It also seeks orders that the plaintiff deliver a discharge of the mortgage and do all necessary things to have the mortgage removed from the title.

14. [14]

    The proposed cross-claim relevantly pleads:

15. [15]

    The plaintiff submitted that the second defendant should not be given leave to file the amended defence and the cross-claim because the registration of the mortgage, which was intended by the first and second defendants, meant that the mortgage could not be a sham. In that way there was no arguable cause of action to justify the new pleadings, and the existing defence demonstrated no defence to the claim made. That was fortified by the acknowledgments in the Loan Agreement and Mortgage of receipt by the first and second defendants of the principal sum.

16. [16]

    The plaintiff submitted that ss 57 and 58 of the Real Property Act applied so that the power of sale has become available by virtue of the default in the observance of the covenant to repay the $400,000. The plaintiff submitted that it cannot be that the mortgage is a sham when the second defendant admitted to executing it with the intention that it be registered. The plaintiff pointed out that fraud was never pleaded by the second defendant in the original defence. The plaintiff submitted that since the principal defence is that the transaction was a sham, the second defendant cannot verify a belief that the Consumer Credit Code provides a defence because reliance on the Consumer Credit Code assumes the validity of the mortgage.

17. [17]

    The second defendant submitted that the proposed amended defence pleads with greater clarity her original defence that the loan agreement and mortgage were entered into as shams. The second defendant submitted that the original defence clearly asserted that no loan was ever made and that, although documents were signed, they did not reflect the true position because no funds were advanced.

18. [18]

    The Second Defendant submitted that whether or not the mortgage was a sham, if no moneys are owing under the mortgage, she is entitled to redeem her equity in the property and have the mortgage discharged. The Second Defendant pointed to fraud being an exception to indefeasibility under s 42 of the Real Property Act.

19. [19]

    The second defendant submitted that there can be no prejudice to the plaintiff in amending the pleadings at this stage when the statement of claim was only filed at the end of December 2017.

Consideration

1. [20]

   The concept of fraud as it is used in the Real Property Act was clarified by the Privy Council in Assets Co Ltd v Mere Roihi [1905] AC 176 at 210 as follows:

2. [21]

   In Anderson v Anderson (2017) 94 NSWLR 591; [2017] NSWCA 131 Leeming JA (with whom Basten JA and Sackville AJA agreed) said:

3. [22]

   In circumstances where the first and second defendants intended to sign the mortgage and intended that it be registered, there was no fraud that operated as an exception to the indefeasibility of the title of the original lender or its successors including the plaintiff. A mere finding that the mortgage along with the loan agreement was a sham does not necessarily lead to a conclusion that the registration of the mortgage was obtained by the fraud of the mortgagee. The assertion now, if the amended pleadings are permitted, of a sham arrangement could only mean that fraud might be able to be alleged against the plaintiff in seeking now to enforce an arrangement which was never intended to be a real arrangement. I am not thereby suggesting that there is any fraud in that way. However, if there was, that would not be fraud that could impeach the plaintiff’s title.

4. [23]

   If the second defendant is permitted to defend the claim on the basis that the arrangement was a sham, her rights to have the mortgage discharged would be because of personal equities that she had against the mortgagee: Egan v Egan [2018] NSWSC 202 at [68]-[72]; Black Uhlans Incorporated v New South Wales Crime Commission [2002] NSWSC 1060 at [178]-[182]; Tang v Bongreen [2003] NSWSC 824 at [49]-[50].

5. [24]

   What those personal equities or rights in personam may be was recently clarified in Anderson v Anderson. Justice Leeming said:

6. [25]

   During the course of the hearing of the motions the second defendant accepted that the cross-claim needed to be re-pleaded to take account of the need to identify the equity she was seeking to rely on to have the mortgage set aside. Accordingly, I adjourned the hearing of the motions for that to take place.

7. [26]

   The next form of the proposed cross-claim contained a confused pleading of an express agreement concerning the lodgement of a caveat or mortgage to protect the first defendant against creditors, without alleging the caveat or mortgage was fictitious, with an alternative claim that the asserted arrangement contained a number of implied terms that the mortgage would not be enforced.

8. [27]

   Ultimately, the second defendant put forward a third form of the cross-claim which relevantly pleaded:

9. [28]

   It is convenient to deal first with the second defendant’s motion because if leave is given to amend the defence and to file a cross-claim on the basis that the second defendant establishes that there is an arguable case on the sham, the plaintiff will not be entitled to summary judgment.

10. [29]

    It should first be noted that in the defence filed on 7 February 2013 there is no mention of the arrangement being a sham. While the plaintiff was not prepared to say that the argument was a recent invention in terms of the amended pleading, counsel for the plaintiff asserted that the second defendant was perjuring herself in so asserting. A similar type of assertion was made in the plaintiff’s reply filed to the initial defence.

11. [30]

    Nevertheless, the assertion that the arrangement was a sham did not come from nowhere in terms of the pleading. The second defendant was careful in her initial defence to accept that there was a registered mortgage but to deny that it was effective to do anything because no debt was secured by it. She specifically pleaded that no monies were advanced pursuant to the loan agreement or mortgage and she asserted that the plaintiff and its predecessors provided no consideration for the registration of the mortgage.

12. [31]

    The proposed amended defence has been verified by the second defendant. Although counsel for the plaintiff said that the affidavit went no further than saying that the second defendant believed that the allegations of fact contained in the defence were true and did not swear that they were true, I do not think I should place any importance on that semantic difference. The second defendant has verified the facts in the defence in the terms of the affidavit required by the Rules to be sworn. I do not consider in the circumstances that swearing to belief in the truth of the facts is saying anything different from swearing to the truth of the facts. If there is a difference in meaning, that difference can be justified on the basis that it will be for the Court to determine the truth of the facts and, while those facts are in dispute, the best a party can do is to swear that the party believes them to be true.

13. [32]

    The plaintiff’s resistance to the filing of the new pleadings is based on the assertion that a sham cannot be argued where the mortgage has been registered and was intended by the party now asserting a sham to be registered. With all due respect, that seems to misapprehend the notion of a sham. The sham is a challenge to the whole of what otherwise appears to be the legal arrangements between the parties.

14. [33]

    In Lewis v Condon; Condon v Lewis (2013) 85 NSWLR 99; [2013] NSWCA 204 Leeming JA (McColl JA and Sackville AJA agreeing) said:

15. [34]

    As was made clear in Egan, Black Uhlans and Tang v Bongreen, registration of an instrument such as a mortgage does not of itself mean that the mortgage cannot be held to be a sham. If a sham is proved, the result is that the registered instrument is set aside or discharged.

16. [35]

    The revised proposed cross-claim pleads the second defendant’s equity as her equity of redemption. Her right in that regard to call for the mortgage to be discharged in reliance on that equity of redemption would appear to derive from the agreement pleaded in paragraph 6 of the proposed cross-claim. That was an oral agreement for a caveat or mortgage to be lodged on the title of the property to protect it from claims from subsequent creditors of the first defendant or any business of his. In that way the second defendant is asserting that her right is based on a breach of that agreement. Her cause of action is, therefore, one for breach of contract which provides her right in personam to overcome the indefeasibility brought about by the registration of the mortgage. If, as appears to be left open by Anderson v Anderson at [51] and [52], there is a requirement of unconscionability before the second defendant can establish such a right, I would consider that the reliance on the registered mortgage by the plaintiff in breach of that agreement (if that is established at the hearing) would amount to the necessary unconscionability, at least for the purposes of considering whether the second defendant has an arguable case.

17. [36]

    No particular prejudice is identified that would preclude an amendment to the defendants’ pleadings being permitted. An explanation has been provided on behalf of the second defendant for the desire to amend. Although an explanation that relies on a new lawyer’s different view of the proceedings is not an entirely satisfactory explanation, I do not consider that at the stage the proceedings have reached, the defendant should not be permitted to amend. Certainly, the original defence made reference to the fact that no monies had ever been advanced pursuant to the terms of the loan agreement and mortgage.

18. [37]

    In terms of the various tests in General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 at 129, it cannot be said that the defence of a sham is hopeless or unarguable. In those circumstances, the plaintiff is not entitled to summary judgment.

19. [38]

    I am somewhat strengthened in that view because in the affidavit by the principal of the plaintiff in support of the plaintiff’s motion for summary judgment nothing is said about the advance of funds. Both the loan agreement and mortgage contain an acknowledgment in that regard, but they are said by the second defendant to be part of the sham. When even the original defence filed by the second defendant asserted that no funds had ever been advanced despite what the documents said, it seems to me to be a singular omission on the part of the plaintiff in seeking summary judgment not to have demonstrated that funds were actually advanced. Had that happened, it is likely to have been a sufficient answer to any assertion that the whole arrangement was a sham. I consider that I can draw a Jones v Dunkel inference in that regard, at least for the purposes of considering whether the second defendant has an arguable defence: see also Commercial Union Assurance Company of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389 at 419.

20. [39]

    I do not consider that the second defendant should not be able to plead in the alternative that the mortgage is governed by the Consumer Credit Code. In Egan v Egan the defendant was entitled, in the alternative to an allegation of sham, to rely on the Contracts Review Act 1980 (NSW) if the sham allegation was not made out, as was in fact the case.

21. [40]

    In circumstances where the second defendant demonstrates an arguable defence in the proposed amended defence and cross-claim, the plaintiff is not entitled to summary judgment.

22. [41]

    As far as costs are concerned there are two issues. The first concerns the costs of the amendment of the defence and the filing of the cross-claim. Costs thrown away by the amendment to the defence should be paid by the second defendant. The cross-claim should have been filed at the same time as the defence. It concerns the same matter, namely, the alleged sham mortgage.

23. [42]

    The second issue concerns the costs of the motions. While the plaintiff has been unsuccessful on its summary judgment motion, there is no doubt that its motion focused the second defendant’s attention on the need to amend the defence and seek leave to bring a cross-claim so that the true issue could be clearly identified. The plaintiff seeks its costs of both motions for that reason. The second defendant submitted that both sides had a measure of success so that each party should pay its own costs of both motions. Somewhat inconsistently, the second defendant submitted that the costs should be reserved.

24. [43]

    There is no basis for displacing the usual rule that costs thrown away by an amendment should be paid by the party seeking to amend. Further, the second defendant was seeking an indulgence in asking for leave to file a cross-claim out of time. The second defendant needed three attempts to plead the proposed cross-claim adequately. The plaintiff should be compensated for costs incurred in relation to those matters. That the mortgage was said to be a sham was not easily discernible from the defence originally filed. It was not unreasonable for the plaintiff to seek summary judgment. However, the plaintiff persisted with its application when it became clear that the real issue was a sham.

25. [44]

    It is not helpful to the parties to make a number of different costs orders. Taking into account all of the matters in [41]-[43] above, the second defendant should pay 50% of the plaintiff’s costs of both motions.

26. [45]

    Accordingly, I make the following orders:

    1. (1)

       Grant leave to the second defendant to file an amended defence in the form of the document annexed and marked “C” to the affidavit of Hannah Sue Veldre sworn 27 March 2018;

    2. (2)

       Grant leave to the second defendant to file a cross-claim in the form attached to an email from the second defendant’s solicitor to my Associate date 26 April 2018;

    3. (3)

       Dismiss the plaintiff’s notice of motion dated 22 February 2018;

    4. (4)

       The second defendant is to pay 50% of the plaintiff’s costs of the plaintiff’s notice of motion dated 22 February 2018 and the second defendant’s notice of motion dated 27 March 2018, such costs to include costs thrown away by reason of the amendment to the second defendant’s defence and the filing of the cross-claim.