Australian Credit Law Bulletin - Vol 10, No 5, May 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:
- When a garnishee order goes wrong (for the bank)
Many creditors overlook the value of garnishee orders – here’s how they work - The AIG bailout explained
What it has to do with credit why it’s a good thing for us all - Receivers fail to take reasonable care to sell properties for fair market value
Local real estate agents likely to get more work as a result of court decision
1. When a garnishee order goes wrong (for the bank)
Aktas v Westpac Banking Corporation Limited [2009] NSWCA 9 (9 February 2009)
Mr Aktas is the sole shareholder and chief executive of Homewise Realty Pty Limited. From 1992 to 1998, Homewise was a franchisee of Century 21 Australia Pty Limited and traded as Century 21 Homewise Realty. By late 1997 the relationship between Homewise and Century 21 had deteriorated. Century 21 sued Homewise and obtained a default judgment against it. The Fairfield Local Court issued a garnishee order for $35,238.40 to Westpac. This ordered Westpac to pay Century 21 any money in Homewise's Westpac accounts which was due and owing to Homewise.
The garnishee order was forwarded to Ms Lidgard, an officer within Westpac's Account Verification Branch. The rent trust account was not one that could properly be subject to a garnishee order because the monies in it were held on trust for Homewise's landlord clients under the NSW Property, Stock and Business Agents Act. Lidgard was not aware of this. She changed the status of the Homewise rent trust account and sales trust account so that money could be put in but not taken out. She also changed the status of the Homewise General Account which, not being a trust account, was an account which could be subject to a garnishee order.
The next morning, she became aware of her error and corrected the status of the rent trust account and the sales trust account. However, by then, 30 rent trust account cheques for Homewise clients had been processed by Westpac and a decision had been made by an officer of the bank to refuse payment. No-one tried to stop the process so, as required by the Cheques Act 1986 (Cth), the decision was communicated to the payees, the landlords. The cheques were returned to the bank they used, or direct to the payee, if they banked with Westpac. They were each endorsed with the words "Refer to Drawer".
Six weeks later, Westpac offered to make amends by writing to each affected payee to explain the situation. In addition it apologised to Homewise and asked what it would take to settle the matter out of court. Mr Aktas did not accept the offer. His reasons were not clear.
Homewise and Atkas sued for breach of contract and defamation. One defense to defamation is that publication of the defamatory statement is required by some legal requirement or moral duty. This is the defense of "qualified privilege". Over the years, this defense has been considered in many bounced cheque cases of this type. In this case, the trial judge decided that it applied. Even though the occasion for the communications was created by Westpac's own error, the communications were privileged. Having decided to refuse payment of the cheques, Westpac had a duty to tell the payees or their banks.
The court heard evidence of gossip and rumour which was seriously unfavourable to Mr Aktas, including allegations of gross dishonesty. There was a suggestion from one witness that a letter from Westpac to Homewise's many Turkish clients may have caused confusion and led to greater harm because of their poor understanding of English. However, an experienced solicitor with knowledge of the Turkish community rejected this suggestion and the trial judge accepted his opinion.
By dishonouring the cheques, Westpac accepted that it breached its contract with Homewise. Homewise was entitled to be compensated for the loss - the damage to reputation - arising from that breach, but not for defamation.
The trial judge awarded the sum of $84,500 to Homewise for the breach of contract by Westpac. Atkas and Homewise appealed. The Court of Appeal upheld the decision but increased the damages in respect of the contracts claim to $117,0
Back to top
Information on our current seminars
2. The AIG bailout explained
The US government is bailing out a huge insurance company, AIG (not to be confused with Australian insurer, Insurance Australia Group Limited (IAG)). As at 13 May, Bloomberg.com said the US government had committed $US182.5 billion in government rescue money, of which the company had so far used $45 billion.
Why don't they just let it fail? And how is an insurance company involved in a banking crisis anyway?
The global financial crisis is a result of many factors, but the key trigger is seen to have been sub-prime mortgages - US lenders lending to very poor risk customers at the peak of the housing boom. Sets of these loans were packaged up in various ways and on-sold to investors ("hedge funds", other banks, etc) as bonds.
For some reason, the rating agencies (S&P, Moodys, etc) rated these bonds as low risk. When house prices dropped and those borrowers stopped paying, many of the owners of those mortgages couldn't pay their debts.
However, many housing bond buyers covered the risk of default with a form of credit insurance called credit-default swaps (CDSs). In fact, even if you didn't own bonds, you could still make a bet on a bond defaulting by buying CDSs.
Normal insurance is covered by all sorts of government regulation to make sure, in particular, that the insurer has enough money to pay claims. CDSs were financial market trades which weren't subject to these controls.
According to the 2008 Forbes Global 2000 list, AIG was once the 18th-largest public company in the world. AIG had a business unit in London which was the other party in billions of dollars of CDS trades. It was apparently doing these trades without sufficient "hedging" (trading in another market to offset the risk).
On 15 September 2008, Wall Street firm, Lehman Brothers, entered bankruptcy. This led to a credit downgrade of AIG which in turn allowed businesses which had CDS "insurance" with AIG to demand tens of billions of dollars from AIG which AIG didn't have. Time Magazine (30 March 2009) said that "AIG is still on the hook for as much as $300 billion in potential CDS losses. Yet the company has a book value of only $50 billion. That means if AIG has to pay out on those contracts it will go bankrupt six times over."
The US government had already seen what happened when it allowed Wall Street firm, Lehman Brothers to fail. It brought the world's financial system to its knees. The failure of AIG might finish it off. And aside from its CDS commitments, AIG is a monster insurance company; to take just one example, 81 million people around the world have life insurance with AIG.
AIG is too big to be allowed to fail, so the US government has bailed it out. This means that they can pay what they owe on these CDSs to the various banks (a total of $US43.7 billion according to Time to banks such as Goldman Sachs, Deutsche Bank, Barclays, and HSBC and other counterparties who traded with them), and who desperately need the money. It's tough on the US taxpayers, but the rest of the world should be very thankful the US government is doing this. As we've now seen, the failure of huge financial firms can have an immediate and negative effect on countries, businesses, and jobs, even for us on the other side of the world.
Back to top
Information on our current seminars
3. Receivers fail to take reasonable care to sell properties for fair market value
Investec Bank (Australia) Limited v Glodale Pty Ltd & Ors [2009] VSCA 97 (14 May 2009)
Companies associated with James Rolfe owned The Verandahs and The Boathouse, two buildings in Port Douglas with 20 apartments and 18 apartments respectively. All the apartments were on separate titles which meant they could be sold separately.
In 2001, Investec Bank lent $11,800,000 to Glodale Pty Ltd, one of Rolfe's companies. The security for the loan included mortgages over both properties.
An additional loan of up to $1 million from First Melbourne Capital Pty Ltd was also secured over the properties.
As part of the Investec loan approval process, Mr Michael Henderson of Herron Todd White ('HTW'), a Cairns valuer, valued each of the properties. The valuation provided two separate estimates, dependent on the manner in which the properties were to be sold. In respect of The Verandahs, the 'gross realisation - current market value' was $6,059,455, and the 'gross realisation - forced sale value' was $5,453,510. In respect of the Boathouse, the 'gross realisation - market value' was $5,135,000, and the 'gross realisation - forced sale' was $4,260,000.
Glodale defaulted under the Loan Agreement on 19 April 2002. On 17 December 2002, Mr Mark Quinn, another valuer and a member of HTW, provided further valuations for Investec Bank. He also valued the properties on two bases. In respect of The Verandahs, the 'market value - individual strata titles' was $6,545,000 and the 'market value - in one line' and 'forced sale value' were each $5,563,250. In respect of The Boathouse, the 'market value - individual strata titles' was $4,860,000 and the 'market value - in one line' and 'forced sale value' were each $4,131,000.
On 24 January 2003, Grant Sutherland of Sutherland Farrelly Pty Ltd provided a marketing report for each of the properties to the lawyers acting on behalf of the bank. Mr Sutherland was an experienced valuer and agent in Victoria but had no qualifications or experience in Queensland, and particularly not in Far North Queensland.
In his report Sutherland recommended that the properties be sold on an "in one line basis". He valued the properties on that basis as follows: The Verandahs at $3,750,000-$4,250,000, The Boathouse at $3,100,000-$3,600,000. The report was compiled with the assistance of Peter Hopkins, a member of Ray White Commercial, a Cairns real estate agent. The receiver then appointed Sutherland Farrelly and Ray White Commercial to sell the properties by tender.
On 5 May 2003, Quinn of HTW wrote to the bank, expressing his views as to the tender process. He pointed out that prospective buyers were "simply looking to purchase the property … at a heavily discounted price (which they have been given advice from a southern selling agent that they may achieve) and then simply sell on the units for a profit…. The Port Douglas unit market is a specialised market and we would consider that local agents who have established contacts would be able to better market such properties and achieve a better result through marketing the individual units as opposed to an 'in one line' sale."
The buildings were sold at low prices. The buyer of The Verandahs then on-sold 19 out of 20 apartments in just over three months making an immediate profit of nearly $1.8 million. The figure reached was close to Quinn's "market value - individual strata titles' valuation of $6,545,000. The new owners of The Boathouse apartments did not try to on-sell them.
Glodale and the other Rolfe companies sued Investec, claiming that it did not take reasonable care to ensure that the properties were sold at market value. The bank accepted at trial that the bank was liable for the receivers' actions.
The trial judge accepted the evidence of the bank that there were a number of considerations which the bank took into account in undertaking an "in one line" sale. He found that the bank had acted honestly and reasonably and that the risk analysis conducted by the bank, whilst unsophisticated, was appropriate.
However he concluded that the bank had not acted reasonably in marketing and selling the buildings. It had failed to engage local Port Douglas agents and there were a number of specific deficiencies in the tender documentation.
He assessed the differential between the price obtained and the market price as being $1,233,250 in respect of Verandahs and $1,481,000 in respect of the Boathouse.
He awarded damages of $2,714,250 to the respondents, minus the $462,544.10 counterclaimed by the bank as still owing under the mortgages.
Both parties appealed. Glodale argued that it should not have to pay interest, costs and receiver's expenses from the time of the sale, as these would not have been incurred had the receivership been terminated earlier, as it ought to have been if there had been a sale at market value. On appeal the Court of Appeal accepted this argument, and sent this issue back to the trial judge for reassessment of the amount. Otherwise it affirmed the trial judge's decision.
