Australian Credit Law Bulletin - Vol 10, No 1, January 2009
A free, plain English review of recent law and items of interest for creditors, produced by Hattaway & Associates Ltd, Credit Consultants. To subscribe, visit the Australian bulletin index and enter your details on the right
Plain language disclaimer:
This bulletin is not legal advice. Do not make decisions on legal matters based on a brief commentary. Instead, get professional legal advice.
In this issue:
- Collecting from non-English speakers
Lender prevented from collecting its debt because of problems in original loan process
- Bank recovers more legal fees from debtors than it is entitled to
Court warns banking industry to investigate and refund in any other similar cases
- US debt collector case
$2.25 million penalty for abusive practices
1. Collecting from non-English speakers
Ms Zhang was born in 1971 in China. Her native language is Mandarin. She came to Australia in 1994. She has been on Centrelink benefits since 1997. She is now 37 and has two children. In April 2006, Mr Ma, her husband, said that he would like to buy Ms Zhang a car as a birthday present. He assured her that they could afford the car. The couple kept separate bank accounts.
They went to Patterson Cheney, a car dealership. After speaking in Mandarin to a sales consultant, Mr Lam, Ms Zhang and Mr Ma decided to buy a Toyota for $35,000.
Mr O’Connor was the finance manager at Patterson Cheney. He had authority as an agent of Mercedes-Benz Financial Services Australia Pty Ltd (Mercedes) to prepare and take signatures on finance applications and loan contracts in respect of finance to be provided by Mercedes.
Before Ms Zhang signed, she spoke to Mr Lam in private for about ten minutes in Mandarin. She told him that she was not working, that her only income was a Centrelink benefit, and that payments must be made by Mr Ma because she could not afford to make loan payments. It was not clear whether he had passed this information on to Mr O’Connor.
The finance application which both Ms Zhang and Mr Ma signed included an item ‘residual: $7500.00. Residual: % 23’. The court was satisfied that this item was never translated for Ms Zhang or brought to her attention, and that she did not know about it when she signed the application. Mr O’Connor obtained approval of the loan from Mercedes’ head office. A cash deposit of $5000 was paid. The balance was $29,000. The loan term was 60 months.
Ms Zhang and Mr Ma separated. In February 2007, Ms Zhang telephoned Mr Lam who visited her home. She explained that Mr Ma had crashed and damaged the car, was in prison, and had stopped making repayments. The loan fell into arrears and Mercedes issued a default notice. With Mr Lam’s help, Ms Zhang spoke to Mercedes. Eventually, in April 2007, Mercedes took possession of the car. By agreement between the parties, Mercedes was permitted to sell the car.
It sold at public auction for $13,552.86, leaving a shortfall owing under the loan contract of $15,390.91. Mercedes sought to recover this from Ms Zhang. She applied to the Victorian Civil and Administrative Tribunal for relief under the Consumer Credit Code.
The court was satisfied that, “if O’Connor had read the joint finance application carefully, he would have known that Mr Ma and Ms Zhang together and singly could not make the balloon payment, and that it was probable that, to pay it, they would either have to forgo necessities, re-finance the amount of the balloon payment (for example by increasing Ms Zhang’s mortgage on her home, or, in the worst case and if none of these prove possible, lose the car secured by the contract or sell the home to make up any shortfall). I am satisfied that, if Mercedes or its agent had made reasonable inquiry, it would have known that Ms Zhang could not, or could not without substantial hardship, repay the balloon payment.”
As a result, “the contract and mortgage were unjust in relation to the Applicant. They were unjust in their terms to the extent that they provided for a balloon payment and in the circumstances under which they were made.
The contract was be set aside in relation to Ms Zhang. However, the judge said, “I take into account that Mercedes lent money to her and Mr Ma, and that the money was used to purchase the car which was then used (albeit for a relatively short period) by Ms Zhang. Given this, it is not appropriate that any money already paid by Ms Zhang under the loan contract should be refunded to her.”
The judge included the following comments in his written decision. “First, I would hope that… if its general lending practices are represented by those in this case, Mercedes will review them. It should review the precautions it takes when a potential borrower has a limited understanding of spoken or written English, so as to ensure that the borrower understands in full what he or she is entering. All the fundamental terms of the contract need to be covered. It is probably unwise for a lender to try to determine which terms and conditions are important, and which are not. It is better to ensure that all are translated and/or explained in a language that the borrower can understand. It is particularly important for such a borrower to be given time to read and understand the document and to take it away to seek further advice about it.
“Second, where the contract involves a ‘balloon’ payment, the lender should take this into account when it considers the debtor’s ability to service the loan. The finance application should be read carefully. It is not enough just to look at the ability to service the other smaller repayments.”
2. Bank recovers more legal fees from debtors than it is entitled to
Pinnacle Investments Pty Ltd is a company associated with the interests of Dr Boman Irani. Finance facilities were provided by the respondent, St George Bank Limited, (“the bank”) to Pinnacle Investments Pty Ltd. Dr Irani, his wife Dr Kermani and companies associated with them, guaranteed the loan. Pinnacle defaulted. The guarantors took the matter to court, making a number of claims against the bank. The bank won and proceeded to sell its security.
Under the terms of the guarantee, the guarantors were liable to pay any money which Pinnacle was liable to pay to the bank. This included all legal costs incurred by the bank, on a full indemnity basis. That means the guarantors were liable to pay the full amount that the bank was charged by its lawyers, not just costs as awarded by the court according to the usual scale of charges. Pinnacle’s liability was to “indemnify” the bank in respect of its own liability for legal costs.
The bank’s legal costs from the first proceeding and the enforcement of its securities were considerable. After the bank sold its securities, it claimed that it was still owed the balance of unpaid legal costs on an indemnity basis - $263,094.93. It sued the guarantors (except for Dr Kermani whose guarantee was limited) for this amount.
Part of the pre-trial process is “discovery”. Each party demands that the other side provide copies of relevant documents. The bank provided the bills of costs received by it from its solicitors, which it had paid and debited to Pinnacle’s account. The bills were in an edited form. The bank did not provide any costs agreements made between it and its solicitors.
Clause 9.4 of the guarantee said that whatever amount St George said it owed was conclusive evidence of the amount of the debt, except in the case of manifest error. The judge accepted this, and the bank didn’t have to justify its calculation. However, the judge ordered the bank to provide unedited copies of the bills and adjourned the trial.
It emerged that the bank had an agreement with its solicitors which entitled it to a rebate of fees based (more or less) upon total annual fees. Initially, an employee of the bank’s solicitors swore an affidavit stating that there was no relevant costs agreement. However, this was later corrected by an affidavit sworn by a partner of the firm.
Every year, the bank wrote to a number of law firms seeking written proposals for legal services for the next year. The tendering firms had to specify the percentage rebate that the firm was prepared to give the bank in respect of fees in certain billing ranges.
In its written proposal to the bank for the first year relevant to the Pinnacle trial, the solicitors who acted for the bank in connection with the Pinnacle account and its enforcement included the following statement:
…[W]e have not had the opportunity to review the issue of the rebate of legal fees paid by third parties (ie the borrower or customer). … [W]e assume St. George will take responsibility for making any disclosures that it is lawfully required to make to third parties to notify that person or entity that St. George is to receive a rebate from fees paid by that third party.
The amounts of the rebates were not disclosed in court but were described as “substantial”. The bank did not accept that the defendants were entitled to have the rebates taken into account in assessing the amount due. It argued that they were not in any relevant sense referable to particular customers. Instead, they were “described as ‘counter payments’ paid by the solicitors so as to secure for themselves the benefit of being on the Bank’s panel.”
The trial judge rejected this argument. “I do not consider that costs or expenses ‘incurred’ by the Bank include costs and expenses which have been repaid to it.” The bank had to credit the rebates to the guarantors.
The final amount was referred to a master (a lesser judge) for determination. The amount of the rebate exceeded $80,000.
The guarantors appealed to the Court of Appeal of the Supreme Court of Victoria on various matters. On appeal, the guarantors were not allowed to raise the ground “that the bank engaged in the tort of deceit, conduct in contravention of the Trade Practices Act 1974 (Cth) or that the conduct of the bank constituted intentional sharp practice which was contrary to public policy,” because this issue had not been raised in the original trial.
However, the court concluded that “fact that the bank may have acted in the honest belief that it was entitled to be paid all of its legal costs without any credit in respect of the volume rebates attributable to legal costs debited to Pinnacle’s account is not to the point. Viewed objectively, the conduct of the bank in seeking to retain the volume rebates for itself was wrongful and unjust.
“… I would express my strong disapproval of the bank’s conduct in seeking to wrongfully exact excessive costs from Pinnacle and the guarantors, and in continuing to maintain … that it was entitled to do so. Further… the inference is open that the bank has for some years been wrongfully exacting excessive costs from borrowers, their guarantors and other third parties who are liable to indemnify the bank in respect of legal costs. The issue is not limited to this case, or even to this state. It appears that the bank has adopted a similar approach throughout the country. … In my view, it is incumbent upon the bank, and other banks and financiers which have similar arrangements in place to those considered in this case, to ensure that they establish a system which ensures that customers, their guarantors and other third parties who are liable to indemnify them for their legal costs are given the appropriate credits forthwith upon the receipt of any volume rebate or like discount. In some cases, this may involve the relevant bank or financier repaying money to the person who has been charged excessive costs; for example, in a case where the person responsible no longer maintains an account with the bank or financier which can be credited. Having regard to the likelihood that the bank’s conduct in this case is of a kind which may be widespread in the banking and financial community, I would refer the Court’s reasons for judgment in this case to the Australian Securities and Investments Commission to take such action as it considers appropriate.”
Interestingly, the judges looked closely at the 1962 case ofHamilton v Haw which dealt with the same sort of issue. In this case a debt collector had an arrangement with a solicitor in respect of fees. Among other things, the solicitor was paid 2 shillings by the debt collector for distress warrants issued against debtors, but the cost passed on to debtors was 10 shillings and sixpence. The difference – 8 shillings and sixpence – was to be paid to the debt collector. The judgment debtors therefore were being required to pay legal costs which were significantly greater than the actual legal costs. However, the solicitor failed to hand over the money, so the debt collector sued him. The whole agreement was found to be illegal as being contrary to public policy. It’s not clear whether it would still be illegal today.
3. US debt collector case
For as long as I’ve studied credit management, whatever is new in terms of consumer credit management, (whether it be new attitudes to credit and lending and insolvency, new lending products, or new law) tends to arise first in the United States, then eventually find it’s way to Australia ,then a few years later, to New Zealand. (Most recently, the world’s current economic downturn – “the biggest financial crisis since the 1930s – started in the US, with incredibly risky “sub-prime” lending. Fortunately, it seems, the collapse there happened before such foolishness could really take hold in this part of the world.)
So it’s interesting that the US equivalent of the ACCC, the Federal Trade Commission (FTC) reports on its website that it has taken its strongest action yet against a US debt collection agency. The FTC announced that Academy Collection Service Inc. and its owner, Keith Dickstein, have agreed to pay $2.25 million to settle charges in what the FTC says is the largest civil penalty the government agency has obtained in a debt collection case.
The FTC’s charges against the Philadelphia-based collection agency included misleading, threatening and harassing consumers; disclosing debts to third parties; and depositing postdated cheques early.
According to a complaint filed by the Department of Justice on the FTC’s behalf, ACS collectors violated the US Federal Trade Commission Act and the Fair Debt Collection Practices Act while collecting debts, and Dickstein failed to stop the violations.
The consent decree with Academy and Dickstein does not constitute an admission that they violated the law. The decree bars them from misrepresenting to consumers that nonpayment of a debt will result in the garnishment of wages, seizure or attachment of property, or lawsuits, or misrepresenting that Academy representatives are attorneys.
The settling defendants also are prohibited from improperly communicating with third parties about a debt; using false, deceptive or misleading representations in debt collection efforts; communicating with a consumer at any unusual time or place, including the workplace; or harassing, oppressing or abusing any person in connection with debt collection.
The settling defendants also are barred from making any withdrawals from consumers’ bank accounts without obtaining the consumers’ consent, and they cannot deposit or threaten to deposit any postdated cheque or other postdated payment prior to the date on the cheque.