In Violet Homes Loans Pty Ltd v Schmidt & Anor [2013] VSCA 56 the Court of Appeal unanimously upheld the trial judge’s decision that a mortgage originator

FACTS

In Perpetual Trustees Australia Limited v Schmidt & Anor [2010] VSC 67 the trial judge, J Forrest J, found that Violet Homes Pty Ltd (“Violet”) had acted unconscionably and in breach of the general law, section 51AC of the Trade Practices Act and section 12CB of the Australian Securities and Investment Commission Act 2001.

In 2003 the Plaintiff (“Schmidt”) responded to an advertisement which claimed an investment of $40,000 in  syndicate would lead to a net return of $80,000 within 12 months.  Schmidt range the number given and spoke to a Mr Maddocks (“Maddocks”).  In next month he invested $80,000 in the syndicate.  obtained a line of credit from Perpetual Trustees Australia Ltd [12].  In early 2004 Maddocks pursuaded Schmidt to make further investments.  Schmidt was unable to borrow from his bank, the Bank of Melbourne, because he was a pensioner who had no capacity to repay [13].  Maddocks arranged a loan for Schmidt from Perpetual, preparing the loan application and income declaration.  The documents contained false information, as to Schmidt’s employment situation and his annual income.  Schmidt did not provide the false information but signed the documents without reading them [14].  The documents were provided to a finance broker, Medallion Finance Concepts (“Medallion”) who onforwarded them to Violet [16]. Responding to querries by Ms Bonnici a credit officer at Violet, including a failure to provide an ABN, raised Maddocks prepared an amended the application and had Schmidt sign it [20].  At no time did anyone from Violet deal with Schmidt directly.

DECISION

Unconsionability

The Court found that “..recklessness, in the form of wilful blindness, may in some cases supply the necessary element of moral obloquy”[58].  The court said that there was limited use in comparing facts of particular cases to determine whether the facts in question is unconscionable, by way of compare and contrast.  Rather, the court said “.. the task requires a more synthesised approach which takes into account all of the facts relevant to the impugned conduct and determines whether, in all the circumstances, that particular conduct is unconscionable” [59]. In this case:

Here, the discrepancy in the figures in the loan application and income declaration, not just once, but twice and the absence of an ABN, which was requested but never provided, ought to have raised the suspicion of Violet that something may be amiss with the application.

The fact that Violet did not comply with its own procedures told against it in light of its other failures with the court stating, at [67]:

However, sometimes a risk eventuates and, depending on all the circumstances, the lender may be held responsible for the consequences, partly because the very system the lender has established facilitates the perpetration of frauds upon borrowers. No doubt lenders take this into account when pricing their products and determining that, overall, it is in their commercial interests to proceed with the simplified and, in some senses, automated, processing and outsourcing of lending functions.

In light of that the court said, at [68], that:

So it was that when the revised forms were submitted with a reduced figure for Mr Schmidt’s income and no ABN, Ms Bonnici did not question this nor examine nor question more closely the other matters that suggested all was not right (for example the payment of interest out of capital in the Assetbuilder Loan account and Mr Schmidt’s age) that ought to have been apparent from the other information provided. In those circumstances, and without a satisfactory explanation, the failure of Violet to conduct an interview (by telephone or in person) was reprehensible. Whilst a failure to conduct an interview and thus comply with the guidelines may not of itself constitute unconscionable conduct in the generality of cases, in the circumstances of this case, that failure strongly supports the proposition that Violet’s conduct was unconscionable.

Section 12CB of ASIC Act

Section 12CB prohibits unconscionable conduct in relation to a consumer.  The appellant claimed that Schmidt’s application was for business credit, not “..were not of a kind ‘ordinarily acquired for personal, domestic or household use’ and therefore not subject of section 12CB.

The Court undertook an anlaysis of the authorities ([72]- [74]) in particular Young J in Bunnings Group Ltd v Laminex Group Ltd where the applicable principles were described as:

(a) the word ‘ordinarily’ means ‘commonly’ or ‘regularly’, not ‘principally’, ‘exclusively’ or ‘predominantly;

(b) it is preferable to ask whether the goods are of a kind ordinarily acquired for personal, domestic or household use or consumption as a single composite question. His Honour referred to a passage from Clean Investments Pty Ltd v Commissioner of Taxation:

For example, an architect’s stool, an office chair and a kitchen stool or chair may be described as ‘stools’ or ‘chairs’ and their purpose as being ‘to provide seating’. Yet it would be wrong to conclude that the architect’s stool or the office chair is of a kind ordinarily used for household purposes for no other reason than that, like the kitchen chair, it is ordinarily used for the purpose of providing seating^.

(c) depending on the precise statutory question and the circumstances of the particular case, it will be relevant to inquire as to the essential character of the goods in question;

(d) the question is ultimately a question of fact and degree^.

and found, at [75] the financial services were of a kind ordinarily acquired for personal use [75] stating:

“.. it is now not uncommon for funds to be borrowed by retirees and used in investment projects, such as the project that Mr Schmidt thought he was investing in. Indeed, the advertisements to which Mr Schmidt responded were headed ‘Retirees/Investors/Superannuation’. Moreover, the type of ‘low doc loan’ obtained by Mr Schmidt was only available if the security property was residential with a loan to value ratio of 80 per cent. The maximum amount that could be borrowed was $600,000. Ordinarily, that type of loan is one that is used for personal investment, rather than for the operation of what might be described as an investment business. ..”

Trade or Commerce

 While the Court was not required to consider whether there was a contravention of section 51AC of the Trade Practices Act they cited with approval the New South Wales Court of Appeal in Kowalczuk v Accom Finance Pty Ltd where the Court stated:

“..a transaction is entered ‘for the purpose of trade or commerce’ when it is entered to enable some further activity, that has itself a trading or commercial character, to be engaged in. For a private individual, or a private individual’s company, to make an investment is not, in my view, to enter a transaction ‘for the purpose of trade or commerce’ when it is not itself a part of a business of investing…”

ISSUE

In this case the Court found the recklessness in the form of wilful blindness gave rise to a claim of unconscionable conduct. Unconscionable conduct is a developing area of equity and this case highlights the latest development in expanding the potential liability of financial service providers (and advisors). Here the court was critical of the creditor who breached its own protocols to effect the loan.