FEDERAL COURT OF AUSTRALIA

 

A & D Douglas Pty Ltd ACN 008 404 180 v Lawyers Private Mortgages Pty Ltd ACN 010 556 751 [2006] FCA 520

 

 

PRIVATE MORTGAGE LENDING – Solicitor’s private mortgage lending business – where investment failed

NEGLIGENT MISSTATEMENT – nature of duty of care owed by trustee company – nature of duty of care owed by solicitors – whether duty to enquire as to accuracy of statements made in the loan application

DUTY OF CARE – Duty owed by trustee company – duty to take reasonable care not to recommend an imprudent investment – duty to act bona fide and in the interests of the investors – where failure to check accuracy of asset statement of developer – whether investment was imprudent

DUTY OF CARE – duty owed by solicitors – duty to act with all due care and diligence in recommending lending transactions – whether duty not to recommend imprudent investments – whether duty to make appropriate enquiries

DECEPTIVE AND MISLEADING CONDUCT – Whether statements were misleading or deceptive – Whether statements were likely to mislead or deceive – where statements contained in an “investment summary”, and “newsletters” – extent to which a reasonable investor would rely on those statements

INSURANCE – professional indemnity insurance – dishonest, fraudulent or reckless misstatement – meaning of “dishonest” and “fraudulent” – whether motivation is necessary to prove dishonesty – non-disclosure – whether if the circumstances were disclosed, insurance would have been refused – meaning of “know”, “known” and “knows” pursuant to s 21 Insurance Contracts Act 1984 (Cth)

DAMAGES – Whether compound damages can be awarded – calculation of interest – quantum of damages

WORDS AND PHRASES – ‘practitioner nominee company’, ‘pre-sale’, ‘pre-sale contract’, ‘trade dollars’, ‘trustee company’

 

Marine Insurance Act 1906 (Imp)

Bankruptcy Act 1966 (Cth) Part X

Evidence Act 1995 (Cth)s 63(2)(b)

Trade Practices Act 1974 (Cth)s 52A(2)

Federal Court of Australia Act 1976 (Cth)s 51A

Insurance Contracts Act 1984 (Cth)ss 21, 28, 54

Corporations Law ss 9, 92, 765, 995, 999, 1005(1)

 

Hungerfords v Walker (1988-1989) 171 CLR 125applied

Gilmour v AMP General Insurance (1997) 9 ANZIC 61-372distinguished

Moloney & Anor v Bells Securities Pty Ltd & Ors [2005] QSC 013 cited

Overseas Tankship (UK) Ltd v Morts Dock & Engineering Co Ltd (The Wagon Mound) [1961] AC 388 cited

Mount Isa Mines Ltd v Pusey (1970) 125 CLR 383 cited

South Australia v Johnson (1982) 42 ALR 161 cited

FAI General Insurance Co Limited v Australian Hospital Care Pty Limited (2001) 204 CLR 641discussed

Permanent Trustee Australia & Anor v FAI General Insurance Co Ltd (1998) 44 NSWLR 186 considered

Permanent Trustee Australia Co Ltd & Anor v FAI General Insurance Co Ltd (2001) 50 NSWLR 679considered

Midaz Pty Ltd v Peter McCarthy Insurance Brokers Pty Ltd (1999) 1 Qd R 279considered

Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1987) 4 ANZ Ins Cas 60-813considered

Lindsay v CIC Insurance Ltd (1989) 16 NSWLR 673cited

Ayoub v Lombard Insurance Co (Aust) Pty Ltd (1989) 5 ANZ Ins Cas 60-933cited

Australia and New Zealand Bank Limited v Colonial and Eagles Wharves Limited (1960) 2 Lloyd’s Rep. 241considered

Australian Insurance Law Commercial Union Assurance Co of Australia Ltd v Beard (2000) 11 ANZ Ins Cas 61-458considered

Hammer Waste Pty Ltd v QBE Mutual Ltd [2002] NSWSC 1006 considered

PM Eggers, S Picken and P Foss, Good Faith and Insurance Contracts (2^nd ed), Insurance Law Library, London, 2004

MacGillivray on Insurance Law (10^th ed), Sweet & Maxwell, London, 2003

K Sutton, Insurance Law in Australia (3^rd ed), LBC Information Services, Sydney, 1999

AA Tarr, Australian Insurance Law, The Law Book Co Ltd, Sydney, 1987

The New Shorter Oxford English Dictionary, ed & rev, Oxford, 1993 (1973)

 

A & D DOUGLAS PTY LTD ACN 008 404 180, GRAHAM LESLIE ANDERSEN and HILARY ANDERSEN, YVONNE ELLEN ANDREW, DAVID WILLIAM ARMSTRONG, CHERYL LYNETTE BACKWELL and PHILIP ASHLEY RYAN (as executor of the Estate of ELSIE EDITH BACKWELL), HEINRICH BAUER and SABINE BAUER, DONALD BENGSTON, WILLIAM MALCOLM BRYDEN and MARGARET ANNE BRYDEN, FIONA MARY CAMPBELL (as trustee of the F CAMPBELL SUPERANNUATION FUND), FREDRIKA JANE CARSON, ROBERT JOHN CHARLES MCINTYRE (as executor of the Estate of ALAN STANSFIELD CHENEY), JAMES DAVID CLADINGBOEL and MARIAN ELSIE CLADINGBOEL, KENNETH BARRY DUNCAN and JOAN EDITH DUNCAN (as trustees of the DUNCAN FAMILY SUPERANNUATION FUND), LYNETTE KAY HAMATY, KEITH EDWARD HOLMES (as trustee of the MELZTNER TRUST), PATRICK FYSK HOWDEN, JILLIAN ANNE HUGHES, INFOTEC M.S. PTY LTD ACN 003 954 523, JOHN FRASER KENNEDY and VIVIAN JESSICA KENNEDY, MICHAEL COLIN MELLISH, WADE RICHARD MELLISH, ERIC JAMES MITCHELL and JULIE ANNE MITCHELL (as trustees of the MITCHELL RETIREMENT FUND), RONALD JOHN MOHR and MARGARET STEWART MOHR, ALLAN JOHN MORRISON and PATRICIA JOY MORRISON (as trustees of the A & P MORRISON PENSION FUND), DELIA MURDOCH, BRIAN CHRISTIAN NIELSEN, KAREN ROSE PARKER, PETER JOHN PERRING, KEITH PRINCE, ROBERT RITORZE, NICOLA SCOTT, NARELLE VIDA SHALLARD (as trustees of the C & N SHALLARD SUPERANNUATION FUND), IAN ARCHIBALD STEWART and DOROTHY STEWART, WARREN GEORGE TROTMAN and CARMEL MYNETTA TROTMAN (as trustees of the WGCM TROTMAN SUPERANNUATION FUND), W J & A M LUKE PTY LTD ACN 000 884 266, GRAHAM ROBERT WATT and PATRICIA ANNE WATT, ANNIE CATHERINE WEBB, DIETER HOLMAN (in his own right and as executor of the Estate of MILDRED HOLMAN, ALICE JOY TANGEY (in her own right and as executor of the Estate of KEVIN HERBERT TANGEY) v LAWYERS PRIVATE MORTGAGES PTY LTD ACN 010 556 751, JONATHAN JAMES McCARTHY, BRUCE MICHAEL DURIE, PHILIP ASHLEY RYAN and IAN ALEXANDER NEIL, ST PAUL INTERNATIONAL INSURANCE COMPANY LIMITED and QBE INSURANCE (AUSTRALIA) LIMITED ACN 003 191 035

 

 

QUD 115 OF 2003

 

 

 

 

 

DOWSETT J

12 MAY 2006

BRISBANE

IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY	QUD 115 OF 2003

 

 

BETWEEN:

A & D DOUGLAS PTY LTD ACN 008 404 180 FIRST APPLICANT   GRAHAM LESLIE ANDERSEN and HILARY ANDERSEN SECOND APPLICANTS   YVONNE ELLEN ANDREW THIRD APPLICANT   DAVID WILLIAM ARMSTRONG FOURTH APPLICANT   CHERYL LYNETTE BACKWELL and PHILIP ASHLEY RYAN (as executors of the Estate of ELSIE EDITH BACKWELL) FIFTH APPLICANTS   HEINRICH BAUER and SABINE BAUER SIXTH APPLICANTS   DONALD BENGSTON SEVENTH APPLICANT   WILLIAM MALCOLM BRYDEN and MARGARET ANNE BRYDEN EIGHTH APPLICANTS   FIONA MARY CAMPBELL (as trustee of the F CAMPBELL SUPERANNUATION FUND) NINTH APPLICANT   FREDERIKA JANE CARSON TENTH APPLICANT   ROBERT JOHN CHARLES MCINTYRE (as executor of the Estate of ALAN STANSFIELD CHENEY) ELEVENTH APPLICANT   JAMES DAVID CLADINGBOEL and MARIAN ELSIE CLADINGBOEL TWELFTH APPLICANTS     KENNETH BARRY DUNCAN and JOAN EDITH DUNCAN (as trustees of the DUNCAN FAMILY SUPERANNUATION FUND) THIRTEENTH APPLICANTS   LYNETTE KAY HAMATY FOURTEENTH APPLICANT   KEITH EDWARD HOLMES (as trustee of the MELZTNER TRUST) FIFTEENTH APPLICANT   PATRICK FYSK HOWDEN SIXTEENTH APPLICANT   JULLIAN ANNE HUGHES SEVENTEENTH APPLICANT   INFOTEC M.S. PTY LTD ACN 003 954 523 EIGHTEENTH APPLICANT   JOHN FRASER KENNEDY and VIVIAN JESSICA KENNEDY NINETEENTH APPLICANTS   MICHAEL COLIN MELLISH TWENTIETH APPLICANT   WADE RICHARD MELLISH TWENTY-FIRST APPLICANT   ERIC JAMES MITCHELL and JULIE ANNE MITCHELL (as trustees of the MITCHELL RETIREMENT FUND) TWENTY-SECOND APPLICANTS   RONALD JOHN MOHR and MARGARET STEWART MOHR TWENTY-THIRD APPLICANTS   ALLAN JOHN MORRISON and PATRICIA JOY MORRISON (as trustees of the A & P MORRISON PENSION FUND) TWENTY-FOURTH APPLICANTS   DELIA MURDOCH TWENTY-FIFTH APPLICANT   BRIAN CHRISTIAN NIELSEN TWENTY-SIXTH APPLICANT   KAREN ROSE PARKER TWENTY-SEVENTH APPLICANT   PETER JOHN PERRING TWENTY-EIGHTH APPLICANT   KEITH PRINCE TWENTY-NINTH APPLICANT   ROBERT RITORZE THIRTIETH APPLICANT   NICOLA SCOTT THIRTY-FIRST APPLICANT   NARELLE VIDA SHALLARD (as trustee of the C & N SHALLARD SUPERANNUATION FUND) THIRTY-SECOND APPLICANT   IAN ARCHIBALD STEWART and DOROTHY STEWART THIRTY-THIRD APPLICANTS   WARREN GEORGE TROTMAN and CARMEL MYNETTA TROTMAN (as trustees of the WGCM TROTMAN SUPERANNUATION FUND) THIRTY-FOURTH APPLICANTS   W J & A M LUKE PTY LTD ACN 000 884 266 THIRTY-FIFTH APPLICANT   GRAHAM ROBERT WATT and PATRICIA ANNE WATT THIRTY-SIXTH APPLICANTS   ANNIE CATHERINE WEBB THIRTY-SEVENTH APPLICANT   DIETER HOLMAN (in his own right and as executor of the Estate of MILDRED HOLMAN) THIRTY-EIGHTH APPLICANT   ALICE JOY TANGEY (in her own right and as executor of the Estate of KEVIN HERBERT TANGEY) THIRTY-NINTH APPLICANT

AND:

LAWYERS PRIVATE MORTGAGES PTY LTD ACN 010 556 751 FIRST RESPONDENT   JONATHAN JAMES McCARTHY, BRUCE MICHAEL DURIE, PHILIP ASHLEY RYAN and IAN ALEXANDER NEIL SECOND RESPONDENTS   ST PAUL INTERNATIONAL INSURANCE COMPANY LIMITED FIRST CROSS-RESPONDENT   QBE INSURANCE (AUSTRALIA) LIMITED ACN 003 191 035 SECOND CROSS-RESPONDENT

 

JUDGE:	DOWSETT J
DATE:	12 MAY 2006
PLACE:	BRISBANE

REASONS FOR JUDGMENT

Introduction

1                     These proceedings arise out of an investigation by the Australian Securities and Investment Commission (“ASIC”) into a private mortgage lending business (the “mortgage business”) conducted by the second respondents, a firm of solicitors (“MDRN”).  In conducting the mortgage business, MDRN solicited funds from persons wishing to lend (“investors”).  Investors were frequently clients of MDRN’s legal practice.  MDRN also identified potential borrowers.  Lending to such borrowers would be for a specified project, with repayment secured by a first mortgage over realty.  In the usual course of events, MDRN would provide details of proposed loans to potential investors.  Each was invited to choose the borrower to whom he or she wished to lend and nominate the amount to be lent.  Normally, the loan to a particular borrower would be made up of funds coming from numerous lenders.

2                     The first respondent (the “trustee company”) was a “practitioner nominee company” for the purposes of rules made by the Queensland Law Society (Inc) to regulate the conduct by solicitors of such mortgage businesses.  In effect, the trustee company’s role was to receive and advance investors’ funds, to take security for repayment thereof and to realize the security if necessary.

3                     The applicants deposited funds with MDRN for lending to Rivett Project Results Pty Ltd (“Project Results”) for use in a development project at Yandina (the “Yandina project”).  John Philip Rivett (“Mr Rivett”) was a director and in effective control of Project Results.  The applicants’ funds were advanced as contemplated.  The Yandina project failed.  At a later stage, I will discuss the causes of such failure.  The applicants claim to have suffered loss as a result of the respondents’ conduct and sue accordingly.  The first and second cross-respondents (“St Paul” and “QBE”) are insurers from whom MDRN claim indemnity and/or damages in respect of any amounts payable by them to the applicants.

4                     Although the statement of claim raised other issues, by the end of the trial they had been narrowed to the following claims:

·                against both respondents for damages for misleading or deceptive conduct contrary to s 995 of the Corporations Law as it stood at the relevant time;

·                against the trustee company for damages for breach of duty; and

·                against MDRN for damages for breach of duty as solicitors.

5                     Almost all claims arise out of statements in promotional material sent by MDRN and/or the trustee company to the various applicants, in particular a document describing the proposed investment in the Yandina project (the “investment summary”).  Some applicants claim to have relied on other documents to which I will refer in due course, but such reliance is generally in support of claims which also depend on the investment summary.  Some applicants rely on oral statements.  I will also deal with them at a later stage.

Section 995 claim

6                     The allegedly misleading conduct is primarily in connection with statements made in the investment summary.  The aspects upon which counsel for the applicants relied in final addresses were that:

·                Project Results was contributing the amounts of $400 000 and $238 677 to the Yandina project;

·                the proposed loan had been approved under MDRN’s “loan assessment application programme”;

·                all units (or all units in Stage 1 of the project) had been sold;

·                Mr Rivett’s companies could attend to the payment of interest from their trading profits; and

·                Mr Rivett had a strong asset position with a nett surplus of $1 790 000 and Project Results also had a nett asset position of $640 000.

7                     It was also said that the investment summary was misleading or deceptive in failing to disclose the proposed use by Project Results of “trade dollars”.

8                     The applicants’ case pursuant to s 995 seems to be put in two ways.  Firstly it is said that these various statements were simply misleading or deceptive or likely to mislead or deceive.  The second is that the respondents represented to the applicants that they had checked the accuracy of the statements when they had not done so.  In their written submissions the respondents asserted that the applicants’ case was limited to the second of these approaches, but neither the pleading nor the applicants’ submissions were so limited.  In any event the distinction is probably of no significance, given the circumstances of this case.

cLAIMS FOR BREACH OF DUTY

9                     As to the claim against the trustee company for breach of duty it is said that it had a duty to take reasonable care not to recommend, nor to make, an imprudent investment and that it breached such duty.  The respondents admit that the trustee company had a duty to take reasonable care not to recommend, or alternatively not to make, an imprudent investment.  The claim against MDRN is for breach of duty as solicitors.  The respondents admit that MDRN acted as solicitors for the applicants in the making and management of the loan to Project Results, and that they owed to each applicant a duty to exercise reasonable skill and care in so acting. 

10                  The applicants’ case against both respondents is that they were negligent in recommending the loan to Project Results and in their assessment of the application for such loan.  The particular factual bases of these claims were that:

·                the respondents accepted statements by Mr Rivett as to his assets, background and experience and those of Project Results and other companies without independently checking that information;

·                the respondents did not identify and clarify certain qualifications contained in a relevant valuation;

·                the respondents failed to note irregularities in certain contracts for the sale of units in the project;

·                the respondents failed to investigate the proposed use of trade dollars;

·                the valuation was not independent; and

·                the specified loan to value ratio (“LVR”) was not observed.

11                  Applicants who rely primarily on the allegedly misleading statements in the investment summary are the first to nineteenth and twenty-second to thirty-ninth applicants.  The twentieth and twenty-first applicants did not see the investment summary but claim to have relied on oral representations by Mr David Gill an employee of MDRN.  The first to thirty-seventh applicants are described in the statement of claim as the ‘initial investors’.  The thirty-eighth and thirty-ninth applicants are described in the pleading as the ‘subsequent investors’.  As those descriptions suggest, the initial investors deposited funds for loan to Project Results at an earlier stage than did the subsequent investors.  The subsequent investors invested after Project Results had defaulted in paying interest.  They complain that they were not told of this and also of misrepresentation in the investment summary.

12                  Some of the initial investors claim to have relied upon the combined effect of the investment summary and one or more other documents.  In the statement of claim the sixth, eighth, twelfth, twenty-fourth and twenty-sixth applicants claim to have relied on a brochure issued by the respondents (the “brochure”).  The eighth, twelfth, thirteenth, seventeenth, eighteenth and twenty-fourth applicants claim to have relied on a newsletter (the “autumn 1999 newsletter”).  The second, eighth, twelfth, thirteenth, seventeenth, eighteenth, twenty-fourth, thirtieth and thirty-second applicants claim to have relied on another newsletter (the “winter 1999 newsletter”).  However, in submissions, only the autumn 1999 newsletter was treated as relevant.

Matters admitted by the respondents

13                  At the end of the trial, counsel for the respondents indicated that they would not be contending to the contrary of certain matters.  I will use the expression “not contradicted” rather than the more cumbersome “not contended to the contrary of”.  I understand both expressions to mean that the relevant matter is not admitted so that the applicants must still prove it to the extent that they bear the onus of proof.  The matters not contradicted were (by reference to paragraph numbers in the statement of claim):

Paragraph 4 which pleads that:

‘For a period from or about 1997 until the 13 February 2001 [MDRN]

(a)       engaged in the business of marketing, promoting and conducting its private mortgage lending scheme, i.e. non-institutional or bank initiated transactions;

(c)        invited contributions of money by clients of [MDRN] to be made to the trust account of [MDRN] to facilitate the making of advances by the [trustee company];

(d)       conducted business as a mortgage lender as trustee for the individual contributors to each loan.’

Paragraph 14 which pleads that:

‘The Summary further represented and contained advice that:

…

(b)       Mr Rivett had a good asset position;

…

(i)        Mr Rivett, the guarantor of the loan had a strong asset position evidencing a net surplus of $1.79 million and that [Project Results] had a net asset position of $640 000.’

Paragraphs 18 and 19 which plead that:

‘18.      Further, in or about April 2000, the respondents provided to the Thirty-Eighth Applicants:-

(a)       their MDRN Select Mortgage Fund No 1 Prospectus; and

(b)       an Advisory Services Guide; and

(c)        a brochure inviting completion of an investment authority.”

19.       The terms of the documents referred to in paragraph 18, represented and contained advice that a strict process was used in evaluating each loan proposal submitted and which included loan monitoring, inquiry as to the ability to pay, the carrying out of credit checks, valuation support and a prudent LVR to ascertain that the loan/security ratio did not exceed 70%.  The Applicants shall refer to the said documentation at trial for their full terms meaning and effect.’

14                  The respondents indicated that they did not contradict par 19 to the extent that it applies to ‘the issues raised by subparagraphs 14(b) and (i)’ of the statement of claim.

Paragraph 31 which pleads:

A duty of care as solicitors.  The respondents indicated that they did not contradict the plea in subpar 31(c)(iv), that MDRN owed a duty to each applicant ‘to perform their professional services with all due care, skill and diligence.’  This concession related only to the matters alleged in subpars 14(b) and (i) to which I have already referred and is ‘only in respect of [the respondents’] acting in the capacity as solicitor/lenders’.  I am not quite sure what that means.

Paragraph 32 which pleads that:

‘Notwithstanding the representations referred to in paragraphs 10, 12, 13(b) and (c), and 14, no checks, or no proper checks were made with respect to the character, personal wealth, asset position, background and experience, credit history or personal wealth and asset position of [Project Results] or [Mr Rivett].’

15                  The respondents did not contradict this plea to the extent that it related to the personal wealth and asset position of Project Results and Mr Rivett as pleaded in subpars 14(b) and (i).

Paragraph 56 which pleads that:

The respondents breached their duties, in particular, the duties identified in pars 30 concerning the duties of the trustee company, (which the respondents partially admitted in their defence) and 31.  To the extent of the concession made in connection with par 32, the respondents did not contradict the plea in par 56.

Paragraph 59A which pleads that:

‘Further, or in the alternative, in making the representations pleaded … the [trustee company] and MDRN in, or in connection with a dealing in securities, engaged in conduct that was misleading or deceptive or was likely to mislead or deceive … in contravention of s 995 of the Corporations Law.’

16                  The respondents did not contradict this paragraph to the extent that it applied to the plea in subpars 14(b) and (i), in conjunction with par 19. 

Paragraph 59C which pleads that:

‘In the premises the Respondents and each of them engaged in conduct that was in contravention of s 995 of the Corporations Act (as it applied immediately after the commencement of the operation of the Corporations Act 2001 and under which the … respondents by virtue of s 1400 of the Act have incurred a liability equivalent to s 995 of the Corporations Law as it applied at the time of the relevant conduct).’

17                  To the extent that the respondents did not contradict the pleas in par 59A, they also did not contradict the pleas in par 59C.

Paragraph 25 which pleads that:

Various applicants relied upon various representations in the investment summary and one other representation, which is no longer relevant as I understand the applicants’ final submissions, and deposited money pursuant to such reliance.  The respondents did not contradict the plea of reliance by the ‘initial investors’ save for the seventh and eleventh applicants.  The twentieth and twenty-first applicants do not rely on the investment summary.  Reliance by the subsequent investors was not conceded.

18                  Counsel for the respondents summarized these concessions as follows (TS 2381-2):

‘Your Honour, the practical effect of that is, in relation to the initial investors, I will not contend to the contrary of there having been a contravention of section 995 in relation to the asset position and negligence in relation to the asset position and reliance in respect of those investors.  So in terms of those investors it will leave only the issue of the proper assessment of what, if any, damage or loss flows from that.  And then we are left with these investors, you Honour - McIntyre and Bengston on the basis that it’s not accepted there was reliance on the representations I’ve just identified in relation to financial position.

The two Mellishes, who didn’t see the investment summary at all, and the two subsequent investors Holman and Tangey, that was a case put on rather a different footing in respect of them, understandably.’

19                  Helpful as these “non-contentions” were, they did not obviate the need to address the evidence in some detail.  However, at a later stage, the respondents converted their non-contentions into admissions.  (See TS 2596.)  As a result most applicants are entitled to judgment for breach of s 995 and for breach of duty against both respondents, with damages remaining to be assessed.  However the cases for the seventh, eleventh, twentieth, twenty-first, thirty-eighth and thirty-ninth applicants remain for consideration.  Further, despite the respondents’ admissions, St Paul continues to claim the right to avoid liability under a policy of insurance on the basis of fraud or dishonesty by MDRN in connection with various other statements upon which the applicants previously relied.  For that reason, I have deemed it appropriate to deal with those other aspects of the case notwithstanding the respondents’ admissions.  Those matters are also relevant to the claim against QBE.  It is, in any event, necessary that I discuss most of those issues in connection with the claims by one or other of the applicants whose claims have not been admitted.

Key documents

20                  Most of the applicants claim that they relied upon various statements made in one or more of four documents, namely the brochure (ex 49); the autumn 1999 newsletter (ex 41); the winter 1999 newsletter (ex 42); and the investment summary, issued in two versions which are Parts A and B of ex 54 and will be referred to as ex 54A and ex 54B respectively.  I will refer to those documents as the “key documents”.  In the end, only the investment summary and the autumn 1999 newsletter seem to be relevant.

Factual issues

21                  It is convenient to explain, at this stage, a number of common factual issues.  In so doing, I will be able to explain my reasons for summarily dismissing certain aspects of the applicants’ claims.

The Loan

22                  The loan was to be in the amount of $1 400 000, bearing interest at 9.25 per cent per annum for twelve months.  Interest for the first six months was to be pre-paid from the amount advanced.  The loan was to be used in acquiring land upon which a retirement village would be constructed and in completing Stage 1 of the development, which was to be built in three stages.  Stage 1 included the construction of twelve residential units and the manager’s residence.  The relevant land comprised lots 2 to 6 on RP 111584 (the “subject land”).  The retirement village was to be located on lot 6.  In the investment summary, it was claimed that the other four blocks were zoned for townhouse development and that Mr Rivett was seeking approval to construct a nursing home on them. 

Available Security

23                  The investment summary offered the following “security” for repayment of the loan:

·                registered first mortgage over the subject land in favour of the trustee company;

·                registered mortgage debenture over the assets and undertaking of Project Results; and

·                director’s guarantee from Mr Rivett.

Loan to Value Ratio

24                  The investment summary stated that the Yandina project would have a ‘Loan to Value Ratio’ (the “LVR”) of 70 per cent.  I understand this to mean that the amount of the loan secured on the subject land would not exceed 70 per cent of the value thereof.  The amount owing would increase as the project proceeded and funds were advanced, but the value of the subject land would also increase as the project advanced.  It was anticipated that a quantity surveyor would ensure that the specified LVR was observed at all times.

Representation that Project Results was contributing $400 000 towards the purchase of the land and $238 677 towards the construction of Stage 1

25                  The investment summary specified the purpose of the loan as:

	Cost	Borrower Contribution	Loan Requirement
Purchase land	$800,000	$400,000	$400,000
Construct & sell Stage 1	$1,162,995	$238,677	$924,750
Prepay 6 months interest	$75,250		$75,250
Total Loan			$1,400,000

26                  Two issues arise out of this summary.  Lot 6 was, or was to be, purchased for $400 000.  Lots 2, 3, 4 and 5 were, or were to be, purchased for $398 000.  However that amount was to remain unpaid, repayment being secured by a second mortgage over those lots, with priority after the mortgage to be granted in favour of the trustee company.  In the above table, the debt has been “rounded off” to $400 000.  Some applicants complain that they understood the table to mean that Mr Rivett and Project Results had paid $400 000 towards the project, not merely undertaken to do so. 

27                  The second issue concerns the sum of $238 677 to be paid towards construction costs.  It seems that Mr Rivett or Project Results held a substantial quantity of “trade dollars”.  There are privately conducted markets on which creditors are able to trade debts owed to them.  Debts which are so traded are called “trade dollars”.  The evidence suggests that such debts are generally traded at discounted values.  It seems that Mr Rivett or Project Results intended to use trade dollars to pay for part of the development work.  Some applicants say that had they known that, they would not have invested in the Yandina project.

Valuation by Stanton Hillier Parker

28                  According to the investment summary, a valuation of the subject land had been obtained and was available for inspection.  These are challenges to the validity of assumptions upon which it is based.

Director’s personal statement of assets and liabilities

29                  The notes on p 2 of the investment summary indicate that MDRN were holding a document described as ‘Director’s Personal Statement of Assets and Liabilities’.  That document disclosed Mr Rivett’s assets and liabilities as follows:

30                  Obviously, this statement of assets and liabilities was designed to demonstrate that Mr Rivett’s personal guarantee was substantial.  However the valuation of shareholdings in proprietary companies is notoriously problematic.  The inclusion of trust interests raises questions as to the terms of such trusts, the beneficiaries and ultimate authority over distribution of income and capital.  The values attributed to individual assets were allegedly unsustainable.

Pre-payment of Interest

31                  It was a condition of the advance that six months’ interest be pre-paid by Project Results, held in trust by MDRN and remitted as it fell due.  The table on p 2 of the investment summary shows that such payment was to come from the advanced funds.  Numerous applicants assert that they understood the investment summary to mean that Project Results or Mr Rivett would pre-pay such interest from other funds, thus increasing its, or his, overall investment in the project.  In my view the investment summary clearly showed that the pre-paid interest was to come from loan funds.  To the extent that any applicant thought to the contrary, he or she was mistaken, not misled.

Company Trading Profits

32                  At p 3 of the investment summary it is said that:

‘The trading profits of Mr Rivett’s companies can provide interest coverage.’

A “residual” of $400 000 would remain after the completion of Stage 1

33                  The Yandina project was to be completed in stages, but funding was being provided only for Stage 1.  In that context it is said at p 3 of the investment summary that:

‘It is believed a residual of approximately $400,000 will remain following sale all units and management.  The LVR at this stage will be below 70 per cent.  The borrower will then look to develop Stage 2 with increased borrowings of $550,000.  Stage 2 will be subject to full review by [MDRN] and no commitment to fund Stage 2 has been given.’

34                  Applicants have asserted that they understood this to mean that there would be a residual surplus of $400 000 at the end of Stage 1.  Some asserted that the expectation of such a surplus influenced their decisions to invest.  If the sentence is taken in isolation, the absence of the word “debt” after the word ‘residual’ leaves open such an inference.  However it would be inconsistent with the rest of the paragraph.  The reference to an LVR ‘below 70 per cent’ indicates that at the end of Stage 1 there was to be an outstanding debt.  There could otherwise be no LVR.  The reference in the third sentence to ‘increased borrowings’ clearly indicates that there would be residual outstanding borrowings.  No sensible reading of the clause leads to the inference that there was to be a nett surplus of $400 000.  Again, the relevant applicants may have been mistaken, but they were not misled.

Mr Rivett had a strong asset position with a nett surplus of $1 790 000

35                  This statement appears under the heading ‘Financial Strength’ on p 3 of the investment summary.  The figure is the excess of assets over liabilities in Mr Rivett’s statement of assets and liabilities.  I have previously mentioned some of the alleged difficulties with that document.

Project Results had a nett asset position of $640 000

36                  This statement also appears under the heading ‘Financial Strength’ on p 3 of the investment summary.  Mr Rivett’s statement of assets and liabilities showed Project Results’ nett asset position as $170 000, although it held other assets as trustee.  It also had acquired, or was to acquire, the subject land and had, or would have, the acquisition cost as a debt.

All units in Stage 1 had been sold

37                  A number of passages in the investment summary deal with the pre-sale of units.  Firstly, on p 2, it is said that amongst the documents held by MDRN and available for inspection were ‘… presale contracts of the units’.  On p 3 of both versions of ex 54, it is said that:

‘Mr Rivett is in a unique position of having an intimate knowledge of these members [of trade dollar exchanges] and their motivations.  It is through this that Mr Rivett has successfully secured contracts to sell all the units in Stage 1 and has strong expressions from purchasers for the remaining two stages.’

38                  On that page in each version appears the following statement:

‘This profit is considered achievable for Mr Rivett particularly with the strong expressions to purchase units and existing contracts already available.’

39                  On p 4 of ex 54A under the heading ‘Security’ it is said that:

‘The units are being sold for $85,000 each with Mr Rivett stating all have been sold.’

40                  In ex 54B the statement is slightly different, observing that:

‘… all units in Stage 1 have been sold.’

41                  In each version, under the heading ‘Condition Precedent’ it is said that ‘Presale Contracts for at least six units to be provided prior to the first draw’.

42                  Finally, on p 5 of ex 54A it is said that:

‘This proposal is submitted for your consideration and supported on the basis of:

…

Presale of all units in place (with clear evidence to be provided of at least six sales prior to the first drawdown).

…’

43                  In ex 54B, the statement was:

‘Presale of all units in Stage 1 being in place (with clear evidence …).’

 

44                  In my view the reference in ex 54A to ‘all units’ should be understood as meaning ‘all units in Stage 1’.  It is clear that the project was to be built in stages and that the loan was for, and for the term of, Stage 1.  On p 2 of both versions, it is said that all units in Stage 1 had been sold and that there had been expressions of interest in the remaining stages.  It is made clear that investors had no commitment to fund later stages and that Stage 2 was to be ‘subject to full review by MDRN’.  This suggests that funding might yet have come from an MDRN scheme, implying that no other funding arrangements were in place.  This suggests that there was no final commitment to build Stage 2, and so ‘presales’ would seem unlikely.  When sale of units is discussed in ex 54A, it is clearly speaking of the units to be built in Stage 1. 

45                  A further difficulty arises from the requirement that there be evidence of six sales.  As Stage 1 was to consist of twelve units and the manager’s accommodation, the reference to evidence of ‘six sales’ suggests a distinction between a “sale” and a “pre-sale”.  I will return to this matter at a later stage.

MDRN had investigated the proposal and approved it

46                  Numerous applicants claim to have inferred that MDRN had investigated the project and/or checked information and/or evaluated its prospects.  Some applicants seem to have considered that MDRN, in effect, guaranteed repayment of the loan. 

Mr Rivett had, in 1984, made an arrangement with his creditors

47                  All that is known about this aspect of the matter is that there was such an arrangement.  Some applicants claim that had they known of this matter, it would have influenced their decisions to invest.  There is some debate as to whether MDRN could have discovered this fact and whether they should have taken any step to do so.

48                  It seems unlikely to me that an arrangement with creditors made in 1984 would have influenced a decision to invest in 1999, particularly given the apparently strong financial positions of Mr Rivett and Project Results which appeared from the investment summary.  Such knowledge may have caused some applicants to be more careful, but I doubt whether it would have influenced the decisions in view of the other information in the investment summary.

Purchase of units using trade dollars

49                  Some applicants complain that they were unaware that contracts for the sale of units provided for the purchase prices to be paid partly in trade dollars.  They claim that had they been aware of this, they would not have invested.  As indicated above, the investment summary discloses that Mr Rivett had been involved in the trade dollar market.

50                  At p 3 of the investment summary it was said that:

‘Currently, Mr Rivett controls Barter Pacific Property and Finance which specializes in property and finance where trade dollars are utilised.  The Sunshine Coast has proven to be a very active region for trade dollar exchanges.  He indicates that there is some 1200 trade members in the region.

Mr Rivet is in a unique position of having an intimate knowledge of these members and their motivations.  It is through this that Mr Rivett has successfully secured contracts to sell all the units in Stage 1 and has strong expressions from purchasers for the remaining two stages.’

51                  These two paragraphs make it clear that:

·                Mr Rivett and his companies specialized ‘in property and finance where trade dollars are utilised’;

·                there were 1200 trade members (ie people utilizing trade dollars) in the Sunshine Coast area;

·                Mr Rivett knew these people and their motivations; and

·                these factors had led to Mr Rivett’s successfully securing contracts to sell all units in Stage 1 and having strong expressions from purchasers for the remaining stages.

52                  The statement identified a clear link between the use of trade dollars in property and finance transactions, the number of persons engaged in the use of those trade dollars in the Sunshine Coast area and the successful completion of contracts of sale for units in Stage 1.  Any reasonable reader would have inferred that at least some of the contracts would involve utilization of trade dollars.  In those circumstances I do not consider that there was anything misleading or deceptive about failing to give particulars of the extent of such involvement.  Applicants may have misunderstood the position, but they were not misled.

The evidence

53                  I will now examine the evidence.  I will first discuss the applicants’ own evidence and then evidence from the respondents and Mr Blackadder, MDRN’s principal employee in the mortgage business, concerning the conduct of the mortgage business and the making of the loan to Project Results.  I will then discuss the other evidence relevant to the applicants’ claims against the respondents.  I will discuss evidence solely relevant to the cross-claims after I have disposed of the applicants’ claims.

The applicants’ claims

 

Applicant:	A & D Douglas Pty Ltd
Amount of Investment:  $30 000
Key Documents Received:  Investment Summary

54                  Mr Eaton is a shareholder and director of the first applicant, A & D Douglas Pty Ltd.  That company invested $30 000 in the Yandina project.  I infer that Mr Eaton made the decision to invest those funds on behalf of that company.

55                  Mr Eaton had previously invested in seven first mortgage schemes promoted by MDRN, the first in February 1998.  He is an experienced businessman with a range of investments.  Mr Eaton received the investment summary.  He said:

‘After reading this brochure I decided to invest in the project.  I did not make any further inquiries with respect to this investment other than my consideration of the brochure.  As I had invested with MDRN before and had not had any problems in the past, I felt confident in this project.’

56                  Mr Eaton claimed to have relied upon the following representations in the investment summary:

·                LVR of 70 per cent;

·                the loan was secured by a mortgage over five adjoining vacant lots, a mortgage debenture over the assets of Project Results, and Mr Rivett’s guarantee;

·                Project Results was contributing $400 000 towards the purchase of the land and $238 677 towards the construction of Stage 1 of the project;

·                the valuation by Stanton Hillier Parker;

·                the statement of Mr Rivett’s personal assets and liabilities;

·                interest on the loan for the first six months being pre-paid by the borrower. 

·                trading profits from Mr Rivett’s companies could provide interest coverage;

·                a residual of $400 000 would remain after the completion of Stage 1;

·                Mr Rivett’s asset position evidenced a nett surplus of $1 790 000;

·                Project Results showed a “nett asset position” of $640 000; and

·                all units in Stage 1 of the project had been sold.

57                  In oral evidence-in-chief Mr Eaton claimed also to have relied upon the fact that the application had been approved under MDRN’s private mortgage loan application assessment programme.  He understood this to mean that they had ‘approved the loan and had sort of looked into all the figures and it was okay’.  Had he known that Mr Rivett had, in 1984, entered into an arrangement under Part X of the Bankruptcy Act 1966 (Cth) (the “Bankruptcy Act”), it would have been significant in his decision-making, and he would have ‘put my money somewhere else’. 

58                  As to the figure of $400 000 shown as ‘Borrower Contribution’ on p 2 of the investment summary, Mr Eaton said that had he known that it was the unpaid purchase price, secured by a second mortgage, it would have affected his decision to invest.  Had he known that the sum of $238 677 was to be invested in trade dollars, it would similarly have affected his decision.  In cross-examination, Mr Eaton said that critical matters affecting his decision to invest were the availability of mortgage security and the figures which he had been given.

59                  Although I thought that Mr Eaton was a little “eager” in his assertions of reliance upon various matters, I saw no reason to doubt his honesty.  In particular, I accept that he relied to some extent upon the “figures” given in the investment summary.

Applicants:	Graham Leslie Andersen and Hilary Andersen
Amount of Investment:  $50 000
Key Documents Received:  Investment Summary

60                  The applicants had dealt with MDRN prior to their involvement in the Yandina project.  On or about 11 June 1999 they received the investment summary.  Mr Andersen said that the following matters were important to him in deciding to invest:

·                interest rate of 9.25 per cent, higher than that offered by banks but not the highest rate on offer in the market;

·                term of twelve months; he preferred short-term investments;

·                LVR of 70 per cent; he would not have accepted any higher LVR;

·                background and qualifications of Mr Rivett;

·                financial strength of Mr Rivett and Project Results;

·                nature of the development, namely a retirement village; Mr Andersen considered this to be a ‘sound investment considering Australia’s ageing population’; and

·                all units in Stage 1 had been sold.

61                  Mr Andersen was not cross-examined. 

62                  I have no difficulty in accepting that the various matters identified by him were material to his decision to invest.

Applicant:	Yvonne Ellen Andrew
Amount of Investment:  $5 000
Key Documents Received:  Investment summary

63                  Ms Andrew and another applicant, Mr Ritorze, are partners.  Both invested in the project, but as I understand it, the investments were placed separately.  Ms Andrew first became aware of MDRN in their capacity as solicitors.  She was introduced to their first mortgage investment schemes by Mr Ritorze who had previously invested with them.  Prior to June 1999 Ms Andrew had been involved in one other first mortgage investment scheme arranged by MDRN.  In June 1999 Ms Andrew received a letter from MDRN suggesting that she might like to invest $5 000 (which sum the firm was holding) with Project Results.  It was said of Mr Rivett that:

‘The director, John Rivett has extensive experience in property development and law having practised as a Barrister and as an Executive Director of Forrester Parker Group Ltd.’

64                  The investment summary was included with the letter.  From that document, Ms Andrew identified the following matters upon which she relied:

·                 Mr Rivett’s resume and MDRN’s statement that:

‘We believe Mr Rivett has the necessary experience and qualifications to successfully undertake this project.  From meetings held with him we believe him to be very credible.’

·                 The statement that:

‘This proposal is submitted for your consideration and supported on the basis of:

·                 Experienced and well qualified Director

·                 Good asset position of the Director’.

65                  Ms Andrew inferred that Mr Rivett had relevant experience in property development.  She relied upon the statements in the investment summary headed ‘Financial Strength’ on p 3 and the ‘Good asset position of the director’ on p 5.  She understood these statements to mean that Mr Rivett personally had surplus assets of $1.79 million, which would be available for repayment of the loan if necessary, and that the company had $640 000 in assets.

66                  In oral evidence she said that she also relied upon the LVR of 70 per cent, the period of the loan of twelve months and the registered mortgage.  She formed the view that MDRN had thoroughly checked the information concerning Mr Rivett and Project Results’ assets and the availability of a valuation from a recognized valuer.  Her attention was invited to the statement at the end of the passage headed ‘Notes’ on p 2 of the investment summary which provides:

‘The Borrower’s application has been approved under MDRN Private Mortgages loan application assessment programme and is now available for contribution by you.’

67                  When asked, the witness indicated that she understood this statement to mean that MDRN had ‘completed exhaustive thorough checks and approved a loan to Mr Rivett and that they had done absolutely thorough checks, more so than what a bank might do because they were a legal firm as well.’

68                  I have great difficulty in accepting this evidence.  Firstly, it sounds contrived.  Secondly, it was elicited from her by inviting her to comment on particular passages in the investment summary and thus implying to her that they were important.

69                  The witness said that she inferred from Mr Rivett’s curriculum vitae that he was ‘very well experienced in regard to his management experience, and as a barrister I thought he would have to be a very credible person.’  She said that she would not have invested with him had she known that he had previously entered into an arrangement with his creditors.  She also claimed to have been influenced by the fact that he had secured contracts for the sale of all units in Stage 1.  She did not realize that such contracts involved part-payment in trade dollars.  She was also influenced by the reference to a ‘final margin of 25.7% achievable to the borrower’ and the reference to Mr Rivett’s companies providing interest coverage.

70                  The witness also referred to the statement ‘Interest for this loan is being prepared [sic] by the borrower’ under the heading ‘Serviceability’ on p 3 of the investment summary.  She took this to mean that the borrower would be paying interest from his own funds.  It seems likely to me that the word ‘prepared’ should be “pre-paid”, however the witness seems not to have so understood it.  She also relied upon Mr Rivett’s director’s guarantee.  She said that she understood that the interest was to be paid from the borrower’s own funds and not from the advance.

71                  In the course of cross-examination the witness said that she believed from the investment summary that:

‘Mr Rivett had proved to MDRNbeyond any benefit of doubt that he had this nett surplus of $1.79 million and that they had thoroughly checked it according to their assessment program.  I trusted MDRN to do the right thing beyond what any other lending authority might do, because they were a legal firm … .  If I want to get advice, I go to a legal firm and get advice.’

72                  Again, I cannot accept that evidence.  It is, in my view, little more than a gratuitous assertion of a point of view which the witness thought would be of assistance to her case.

73                  I have indicated in the course of summarizing the evidence that in at least two respects I am unwilling to act upon Ms Andrew’s evidence.  She appeared to be a suggestible witness and, unfortunately, counsel chose to take her through the evidence in a way which amounted, in effect, to subtle prompting.  As a result she claimed to have relied upon many aspects of the document which she had not addressed in her affidavit.  It may be that these matters will not be of great significance at the end of the day, but I will treat her evidence with caution.

Applicant:	Robert Ritorze
Amount of Investment:  $5 000
Key Documents Received:  Investment Summary, possibly Autumn Newsletter

74                  Prior to his investment in the Yandina project, Mr Ritorze had invested in other schemes fostered by MDRN.  He received a letter from them dated 23 June 1999, enclosed with which was the investment summary for the Yandina project.  He considered that document, finding the following matters to be important:

·                Mr Rivett had ‘significant experience and abilities in successfully undertaking this project’;

·                he had managed a number of other similar projects and had a law degree;

·                he appeared to be a man of substance;

·                he had a strong asset position with a nett surplus of $1 790 000 and so could stand behind his guarantee;

·                Project Results had a nett asset value of $640 000;

·                the LVR was 70 per cent;

·                all units in Stage 1 had been pre-sold; and

·                interest for first six months’ would be pre-paid.

75                  In his oral evidence he said that he and Ms Andrew had invested in 32 different loans with MDRN.  He was referred to the winter 1996 newsletter.  He said that in 1999, he received similar newsletters prior to receiving the investment summary.  He was referred to the following passage in the newsletter:

‘As Solicitors we are responsible for conducting legal searches in relation to the property and the applicants and if all is satisfactory, loan documents are prepared for the matter to proceed to settlement.’

76                  The witness said that he took this to mean that ‘they checked everything out’.  He said that he had conversations with Mr Ryan (one of the second respondents) and David Gill (an employee) who ‘also told me the same thing, that everybody is completely vetted.’  He also referred to the following statement in the newsletter:

‘Further, you may recall advertisements being placed in the Courier Mail and other newspapers highlighting that Private Mortgage Lending Ltd would pay a 15 per cent return to investors.  At the time we did have many investors contact us asking if a similar return would be obtained through private mortgages placed through our firm.  Most law firms (including us) offer investment in private mortgages which provide a return of approximately 11 per cent per annum.  This reflects a similar return paid by business borrowers to a bank.  The obvious question with Private Mortgage Lending Ltd was-what was the quality of a borrower willing to pay in excess of 15 per cent per annum interest?  With a such a high return to investors there was obviously a higher risk.’

77                  The witness said that Mr Gill told him that MDRN’s mortgages were not ‘with that group’, and that ‘they were safer but did not offer 15%’.

78                  Counsel then invited the witness to go through the investment summary ‘and if you could tell us, please, of any items that you see there that were of significance to you in your decision to invest in this loan?’.  In answer he referred to the LVR of 70 per cent, to the term of twelve months, to the interest rate, to the fact that interest had been pre-paid for six months and to the various securities.  The witness attached particular significance to the guarantee because of Mr Rivett’s asset backing and the fact that he had a company ‘that’s got assets of $640,000.’  Mr Ritorze thought that Mr Rivett’s nett asset position did not include his interest in Project Results, and that its nett value could be added to Mr Rivett’s for the purpose of assessing the assets available to support repayment of the loan.  Mr Ritorze also said that it would have affected his decision had he known that Mr Rivett had entered into an arrangement with creditors.  He said that he would not have trusted the investment.  The assertion that the trading profits of Mr Rivett’s company would cover interest was important to him.  He understood that the first six months’ interest was being retained out of the loan funds. 

79                  Mr Ritorze understood that MDRN were commending Mr Rivett to him as a person with the necessary experience and qualifications to undertake the project.  He claimed that he relied upon them as his solicitors to give him appropriate advice.  He also relied upon the fact that all units had been sold.  Had he been told that six or fewer had been sold, it would only have made a slight difference to him.  It would have sounded like a good deal anyway.  He understood that the units were to be sold at $85 000.  He did not understand that trade dollars were involved.

80                  He was questioned concerning the extent to which he would have been affected by assumptions underlying the valuation.  However it seemed that the valuation did not affect his decision to invest.  This was because of the asset positions of Mr Rivett and Project Results.

81                  In cross-examination Mr Ritorze said that he expected that MDRN would have made the assessments ‘that a reasonably prudent lender would make’.  He agreed that he had always understood that there was a trade-off between the degree of risk and the rate of return.  He understood that there were risks of default and shortfall.  However he seemed to assume that he could avoid any such risk.  It is very difficult to accept this at face value.  He denied that it was clear from the investment summary that the sales contracts for the units involved trade dollars.

82                  Mr Ritorze is quite intelligent and has reasonable business understanding.  I had difficulty with some aspects of his evidence.  However, on at least two occasions, he conceded that certain aspects of the material had not been of great significance in his decision-making process.  To the extent that he asserted, in his oral evidence, reliance upon aspects other than those identified in his affidavit, I conclude that the affidavit sets out those aspects which were of real importance to him.  I do not accept that he relied upon the summer 1997 newsletter.  It seems quite unlikely that in mid-1999, he would have referred back to specific passages in that letter in order to inform his decision.  If he had done so, he would have said so in the affidavit.  He did not.

Applicant:	David William Armstrong
Amount of Investment:  $10 000
Key Documents Received:  Investment Summary

83                  Mr Armstrong first established contact with MDRN after seeing an advertisement in a local newspaper promoting safe investment opportunities with a return of 9.25 per cent.  In early June he contacted them by telephone to discuss the advertisement and to obtain further information.  He subsequently received investment summaries for the Yandina project and for another project.  He decided to invest $10 000 in the Yandina project.  The important aspects of the information provided to him were:

·                the project was not too large;

·                he was familiar with the Nambour area;

·                he thought that a retirement village would be popular;

·                he was impressed with the information provided in the investment summary concerning Mr Rivett who appeared to be well qualified and experienced;

·                Mr Rivett’s financial strength;

·                the interest rate was attractive; and

·                a twelve month term suited him.

84                  The financial information set out in the investment summary indicated that the investment was safe, particularly as it was to be secured by a registered mortgage.  He understood that the reference to ‘pre-paid interest’ meant that interest was to be paid to MDRN by Mr Rivett (or, presumably, his company) from his own resources.  He understood the reference to ‘a residual of approximately $400,000’ on p 3 of the investment summary to be to a profit after sale.  As I have indicated, I do not consider the words to be capable of that interpretation.

85                  At p 5 of the investment summary there are seven points upon which MDRN relied in supporting the proposal.  He placed considerable significance upon the following:

·                that Mr Rivett was an experienced and well-qualified director;

·                LVR of  70 per cent;

·                pre-sale of all units in Stage 1 with evidence to be provided of at least six sales; and

·                it was a well-located development which would be profitable, having no immediate competition and being a proven product.

86                  Mr Armstrong was not cross-examined. 

87                  I have no difficulty in accepting his evidence at face value, subject only to the qualifications which I have set out above.

Applicants:	Cheryl Lynette Backwell and Phillip Ashley Ryan (as executors of the estate of Elsie Edith Backwell)
Amount of Investment:  $50 000
Key Documents Received:  Investment Summary

88                  Curiously, Mr Ryan, who is one of the partners in MDRN and therefore a respondent in these proceedings, is also one of the fifth applicants.  He is the joint executor of the estate of Elsie Edith Backwell (deceased), an investor.  Mrs Backwell died on 11 August 2001.  Cheryl Lynette Backwell (“Ms Backwell”) is her daughter.  It seems that in 1992, Mrs Backwell received the proceeds of sale of the family farm.  Over the years she invested in MDRN’s private mortgage schemes.  Ms Backwell recalled her mother receiving information concerning the Yandina project.  Mr Ryan agreed (at TS 2115) that Mrs Backwell would have received the investment summary.  He also accepted, based upon his experience of her, that she would have acted upon its contents.  I have no reason to doubt any aspect of the evidence of Ms Backwell or Mr Ryan in that respect.

Applicants:	Heinrich Bauer and Sabine Bauer
Amount of Investment:  $20 000
Key Documents Received:  Brochure, Investment Summary

89                  Mr Bauer is a retired carpenter.  He gave evidence but his wife did not.  In 1998 they consulted MDRN concerning a legal matter.  At that time Mr Bauer picked up a pamphlet entitled ‘Private Mortgages’, apparently published by MDRN in connection with their private mortgage lending business.  In April 1999 he went to their office to discuss such an investment.  He spoke to David Gill.  Mr Gill provided him with information on various projects, including an investment summary for the Yandina project.  As a result Mr and Mrs Bauer invested $15 000 in the Ammbar project and $20 000 in the Yandina project.  Mr Bauer found the investment summary ‘very convincing’.  The matters which were of particular importance to him were:

·                LVR of 70 per cent;

·                experience, qualifications and expertise of Mr Rivett;

·                that all units in Stage 1 had been sold; and

·                the term of twelve months for the loan.

90                  In oral evidence Mr Bauer conceded that he may have received the investment summary by mail rather than personally from Mr Gill. 

91                  When referred to p 3 of the investment summary, he said that he considered Mr Rivett’s asset position to be an important matter in his decision-making.  He said that had he been told that Mr Rivett did not have assets totaling $1 790 000, it would have made a difference to his decision to invest.  Had he known that Mr Rivett’s assets were less than $100 000, he would not have invested.  Similarly, with respect to the company’s assets of $640 000, he said that had he would not have invested had he known that the company had no assets.  He also said that his decision would have been affected had he known that Mr Rivett had previously entered into an arrangement with his creditors.

92                  He was asked whether ex 1 to his affidavit (the brochure) had any relevance to his decision.  He said that the whole document ‘looked really good’.  He said of the brochure that the section headed ‘Evaluation Procedure’ was of importance.  The relevant extract is as follows:

‘The evaluation of applicants is provided by National Mortgage and Development Limited a company whose executives have had extensive banking experience.

They examine the debt service capacity and good credit history of each applicant and obtain a valuation of the security property to ascertain that the loan/security ratio does not exceed 70%.  This is set by the Queensland Law Society.

Many current borrowers are established self employed people who are able to provide all required information, have a good credit history and are seeking a workable alternative to the regimentation of traditional lending institutions.’

 

93                  He said that all of this looked ‘very correct and very sure, like bank guarantees, secure facility insurance through the Queensland Law Foundation and so on.’  As I understand it, the use of external loan assessors had been abandoned by the time of events which are presently relevant.

94                  In cross-examination Mr Bauer said that had he been told that Project Results’ asset position and the asset position of Mr Rivett had not been checked by MDRN, he would not have entered into the transaction.

95                  Mr Bauer’s evidence concerning his reliance upon the brochure, as opposed to the investment summary was not convincing.  It was prompted by the way in which his evidence was led.  However such evidence was not really challenged.

Applicant:	Donald Bengston
Amount of Investment:  $250 000
Key Documents Received:  Investment Summary

96                  Mr Bengston is a retired farmer.  He and his brother had first consulted MDRN as solicitors in the late 1980s.  They had some experience in investment and were sole trustees of their self-managed superannuation fund.  They had owned commercial property.

97                  In 1998, having sold property at Redland Bay for about $3 million, they invested in one of MDRN’s private mortgage investment schemes.  This involved an investment of $1 million.  It was successful.  Thereafter, they regularly received promotional material from MDRN.  In early to mid-1999 Mr Bengston and his brother decided to spread their risk.  Having received repayment of a substantial part of their $1 million investment, they spread it between two new investments, one of which was the Yandina project.  Curiously, Mr Bengston seems to have believed that although the finance was for Stage 1 only, they would not receive their capital back at the end of that stage.  However that misapprehension seems not to matter.  He said that the factors which influenced his decision to invest were:

·                the location of the development at Yandina, allowing him physically to inspect the site although, curiously, he did not do so;

·                the sale price per unit of $85 000; a reasonable price at which price there would be sufficient demand;

·                LVR of 70 per cent which he considered to be a reasonable level of debt; he had no reason to suspect that there was another loan secured by a second mortgage;

·                the extent of borrower contribution, namely $400 000 for the land and $238 677 towards construction and sales costs;  meaning that there would be an investment of $638 677 ‘not so much in monetary terms but as a value/equity contribution’; he did not understand that trade dollars would be involved;

·                director’s personal statement of assets and liability; he believed that MDRN would have verified this statement;

·                the borrower’s application had been approved under ‘[MDRN’s] Private Mortgages loan application assessment programme’; he believed that a formal process existed within MDRN for checking and verifying the contents of loan applications before offering them to the public;

·                Mr Rivett had successfully secured contracts to sell all units in Stage 1;  this was of less importance to him than other aspects because he understood that contracts could ‘fall over’; it showed sufficient demand for units at the nominated price to justify the project;  he was not aware that the purchase prices were payable partly in trade dollars; and

·                ‘It is believed a residual of approximately $400,000 will remain following sale of all units and management.’, which he understood to mean that a surplus of $400 000 would be available.

98                  Mr Bengston understood that the first six months’ interest was to be repaid from borrowed funds.

99                  He discussed these matters with his brother and subsequently received from Mr Gill a copy of the valuation referred to in the investment summary.  In July they deposited the sum of $250 000 with MDRN for investment in the project.

100               In late 1999 Mr Bengston’s brother required funds for private purposes and asked if Mr Bengston would, in effect, buy his share of the investment.  Mr Bengston did so and advised MDRN.

101               In his evidence-in-chief, Mr Bengston said that he understood that Mr Rivett was ‘with the land, providing his equity of the $400,000 which isn’t really his money, it’s already there.’  This seems to be a correct understanding of the position.  He said also that he did not place much weight on Mr Rivett’s financial position as he considered the project to be strong enough to stand on its own.

102               It would have made a difference had he known that only three or four units had been sold out of the first twelve.  He thought that marketing would be important and that ‘if you’ve got buyers lined up the marketing is easy, and if you haven’t got buyers lined up the whole arrangement could drag on.’  His understanding of the assertion that all units had been sold was that ‘somebody had put their name down on the list for a particular unit’ and that there was not necessarily a contract in each case.

103               Mr Bengston said that had he been aware that pursuant to such contracts as there were, 40 per cent of the purchase prices could be paid in trade dollars, it would have affected his decision.  He considers trade dollars to be a problem.  In order to spend them, there must be somebody who wants to buy them.  He would not have proceeded with the investment had he known that trade dollars were involved.  In cross-examination it emerged that he believed that the $400 000 residual surplus at the end of Stage 1 was the value of the land rather than cash in hand.

104               I generally accept Mr Bengston’s evidence.

Applicants:	William Malcolm Bryden and Margaret Anne Bryden
Amount of Investment:  $20 000
Key Documents Received:  Brochure, Investment Summary, Autumn 1999 Newsletter, Winter 1999 Newsletter

105               In his affidavit Mr Bryden identified the following items in the investment summary as influencing his decision to invest:

·                that the application had been approved by MDRN under their private mortgage loan application assessment programme, meaning that MDRN ‘had followed their structured process that is spelled out in the Autumn 1999 newsletter’ and ‘that sufficient checks had been performed in assessing this development application prior to approving same’;

·                LVR of 70 per cent;

·                borrower’s contributions of $400 000 and $238 677, meaning that the borrower had ‘personally’ contributed the purchase price of the land and $238 677 towards construction costs;

·                the anticipated ‘residual of approximately $400,000’ meaning a surplus of $400 000;

·                pre-payment of interest for the initial six months meaning that the borrower would pre-pay it from its own resources and not from the advance;

·                that Mr Rivett’s companies could provide interest coverage from trading profits, meaning that the companies were sufficiently financially strong to meet the interest obligation in the event that the project encountered delay, this statement being based upon MDRN’s checks of the financial records of the companies;

·                Mr Rivett’s strong asset position with a nett surplus of $1 790 000, in excess of the amount of the loan, such figures having been checked by MDRN;

·                Project Results’ nett asset position of $640 000, meaning that Project Results (as trustee for the NJT Trust) had ‘net liquid assets of $640,000 and that this had been verified by MDRN conducting thorough financial checks of financial records’; and

·                all units in Stage 1 had been sold, meaning that all twelve units had been sold for $85 000 each in Australian dollars.  He did not understand that trade dollars were involved.

106               From the autumn 1999 newsletter Mr Bryden learned of the “MDRN Ten Point Assessment Plan’.  In particular it stated:

‘All applications for Private Mortgage loans through MDRN are thoroughly evaluated before approval.  The investigations take place right up to settlement to ensure that the loan is going to perform and that investors are fully secured.’

107               Mr Bryden said of the ten point plan that a number of the steps were important to him:

‘… because they implied that thorough inspections had been made of the balance sheets (and by implication, also the Profit and Loss Statements, and cashflow statements) relating to John Rivett, [Project Results] and Rivett’s other companies.  I believed that because MDRN had made these checks, that was how they came to make the statements in relation to the net asset positions for Rivett of $1 790 000 and [Project Results] of $640 000 and the fact that Rivett’s companies could provide interest coverage.  I also believed that part of the background checks and credit history checks would require a clean credit history with the Credit Reference Association of Australia.’ 

108               From the winter 1999 newsletter Mr Bryden noted the following statements:

‘MDRN’s policy is never simply to “equity lend” ’;

and

‘Loans Manager Dale Blackadder conducts full checks for every prospective borrower and no loan is approved unless it meets the Ten Point Assessment Plan.  (See the autumn 1999 newsletter).’

109               These statements were important in Mr Bryden’s decision-making ‘because it reinforced the thorough evaluation procedure that MDRN stated they followed as per the autumn 1999 newsletter, and the fact that the loan did not rely upon the valuation of the project, but could rely upon the serviceability and financial strengths of John Rivett and [Project Results]’.

110               On or about 23 June 1999, as a result of a conversation with Mr Gill, Mr and Mrs Bryden received a letter from Mr Blackadder entitled ‘A Reliable High Return Investment Opportunity for You’. 

111               Mr Bryden described the contents of the letter as follows:

‘The letter spoke of MDRN’s unblemished track record in relation to Solicitors Mortgages.  The contents of the letter reinforced what Gill had said to me at our meeting.’

112               However evidence of his conversations with Mr Gill was excluded from evidence.  The reference to this letter therefore adds little to the Bryden case.  The Brydens also received a second investment summary.  Mr Bryden claimed that ‘We also relied upon this information …’.  It is a little difficult to understand this statement, given that it was merely a copy of the document which they had previously seen.

113               In oral evidence Mr Bryden was asked if it would have made any difference to him had he known that the $400 000 being advanced by the borrower was the unpaid purchase price for the property and that the sum of $238 077 was to be invested by the developer in trade dollars.  He said that it would have affected his decision.  He was influenced by the fact that Mr Rivett had relevant experience and was a barrister.  Mr Bryden thought that a barrister ‘would have things well sorted’.  He said that he would have been less likely to enter into the project had he known that Mr Rivett had previously made an arrangement with his creditors.  He also said that the project attracted him because projects of that kind were ‘very popular’ and that ‘being a pensioner myself, I can understand that’.  The statement that such projects were ‘very popular with several developers in Queensland undertaking this type of project’ also influenced him.  He noted that a final margin of 25.7 per cent was said to be achievable by the borrower.  He thought that this showed that the developers had done a feasibility study and were certain to make money. 

114               He reiterated his reliance upon the purported sale of all units in Stage 1 and upon the fact that the cost and timing of the project had been confirmed by a qualified quantity surveyor.  He said that he would not have gone into the project had he known that Mr Rivett and Project Results did not have the cash reserves which he understood the investment summary to assert.  He was also attracted by the idea of a first mortgage.  He noted references to the project having amenities and available transport which he considered to be important to retired people.  He also relied upon a statement that Alan Ludlow of Stanton Hillier Parker, the valuers, was recognized as one of the most experienced valuers in connection with this type of development.  He relied upon the fact that Mr Rivett was giving a personal guarantee.  He said that had he known that not all units had been sold, ‘it wouldn’t have been nearly as impressive …’.  He also said that if he had been told that 40 per cent of the purchase prices for the units was to be in trade dollars ‘Alarm bells would have started to ring very loud’. 

115               As with a number of the other witnesses, I have difficulty in accepting at face value assertions of reliance upon aspects of the documentation evinced in evidence-in-chief which were not referred to in the original affidavit.  Mr Bryden seemed willing to claim reliance on every aspect.  Nonetheless, his affidavit is reasonably comprehensive.  For reasons which I have given elsewhere, his understanding of some aspects of the investment summary is not supported by a fair reading of it.

Applicant:	Fiona Mary Campbell as trustee of the F M Campbell Superannuation Fund
Amount of Investment:  $ 100 000
Key Documents Received:  Investment Summary

116               Ms Campbell is a solicitor.  She is not presently practising.  She has developed various subdivisions, renovated premises and bought and sold home units.  I formed the impression that she was quite experienced in property matters.  She first dealt with MDRN whilst she was still in practice.  She discussed investment of her own superannuation fund with Mr Ryan and subsequently received investment summaries for the Yandina project and the Ammbar project.  She invested $100 000 in each.  She was influenced to invest in the Yandina project by the following matters in the investment summary:

·                a maximum term of twelve months;

·                the project was in Yandina which was “local” to her;

·                MDRN adopted a procedure for ascertaining the suitability of a loan application before offering it to the public;

·                LVR of 70 per cent, meaning that the loan would not exceed 70 per cent of the unimproved value of the land over which the mortgage was taken;

·                contracts of sale for all twelve units prior to the first “draw down” of the loan;

·                units to be sold for $85 000 each, with all units in Stage 1 having been sold, meaning that they had each been sold for 85 000 Australian dollars, with MDRN holding deposits; 

·                her understanding that the statement ‘It is believed a residual of approximately $400,000 will remain following sale of all units and management’ implied a cash surplus; and

·                Mr Rivett was providing personal and business guarantees and had a strong asset position with a surplus of $1 790 000; Project Results having a nett asset position of $640 000, represented by the land and the cash to be invested in developing the project, meaning that assets to such value were available to cover repayment;  Ms Campbell having no reason to suspect that the amount to be invested in developing the project was to be in trade dollars.

117               Although she had previously met Mr Rivett, she had no knowledge of his financial position and relied upon the relevant statements in the investment summary.  In her oral evidence she said that had she realized that the sum of $400 000 was not a cash contribution, but represented the unpaid purchase price of the land, and that the further amount of $238 677 was to be in trade dollars, it would have affected her decision to invest.  

118               Ms Campbell knew that Mr Rivett had made an arrangement with his creditors in 1984.  She understood that the assertion that there were contracts over all units in Stage 1 ‘indicated as was fairly typical in looking for finance to be able to proceed, that he already had dedicated purchasers and also had access to a wide range of people who were interested in purchasing.’ (TS 101)  This was significant to her.  Ms Campbell said that had she been told that only three contracts had been entered into, and that each purchase price was payable as to 40 per cent in trade dollars, it would have affected her decision.  The strong asset position of Mr Rivett and the nett asset position of Project Results were of significance to her.  She said that she was surprised by the extent of Mr Rivett’s assets but it was ‘more significant from the point of view of looking at the nature of the contribution and the amount that would be available to secure repayment of the advance, if need be.’ (TS 102)

119               Of the apparent distinction drawn in the investment summary between the number of units sold and the number of units for which contracts of sale were to be produced, Ms Campbell said:

‘… I took that as looking at the usual - what - you know, a bank or other financier may require.  That they may not need all of them to necessarily proceed, but they would certainly want evidence of the number that they felt was adequate to substantiate the development.’ (TS 115)

120               As to the outstanding purchase price for the land, Ms Campbell agreed in cross-examination that it was at least arguable that the vendor’s interest-free loan for two years was advantageous to investors. (TS 145)

121               At TS 169, Ms Campbell said:

‘Well, as far as the document itself at the time I haven’t found anything particularly misleading about it except for what the subsequent events and how they transpired and what occurred subsequently.  For example, the covering letter referred to the interest being pre-paid, the balance being met from trading profits and that the two-thirds of the loan repaid from the sale of units in Stage 1.  Well, that gives you - you know, automatically gives rise to thinking that they would have contracts in existence for those sales.  That the various conditions would have been satisfied with respect to prior to making the advance available on those sorts of things. … It’s not so much a matter of misleading on this document, it’s more the events as they transpired and the difficulties which seem to compound themselves subsequently which then indicated that perhaps information or the way in which this had been presented was not strictly correct.’

122               Ms Campbell was cross-examined about ex 3 which is a questionnaire circulated by ASIC in connection with its investigation of the Yandina project.  Ms Campbell responded to the survey.  The completed response is ex 7.  In it she denied that in investing, she relied upon certain letters.  In cross-examination she said that she was referring to attachments to the letters, including the investment summary.

123               Ms Campbell was asked about par 19(c) of her affidavit in which she alleged that in the investment summary there was an assertion that MDRN ‘had stated a process they followed which contained certain checks to ascertain the suitability of a loan application before offering an investment to members of public.’

124               In cross-examination she said in explanation of this:

‘Because it says that they’ve considered the application, that they consider that its viable; that they’ve nominated certain conditions precedent, which would indicate that they have viewed those documents and weighed them; and have been able to ascertain the information provided as to loan to value ratio, to be able to support the loan details which they’re provided.’ (TS 181)

125               This was a reference to p 5 of the investment summary.  She continued:

‘They could only have got that from having viewed documentation and sought certain documentation.’ (TS 181)

126               She was then asked:  ‘So you have made an assumption that they have done what you say in par (c)?’  She replied:  ‘Well, I think it is supported by the fact that the information which is there can only have been gathered by certainly, at some part, having gathered to support it.’ (TS 181)

127               In re-examination the witness said that she had anticipated the use of trade dollars in the later stages of the development, that is in Stages 2 and 3.

128               Ms Campbell was basically, a straightforward witness, but her specialized knowledge and experience may have led her to reconstruct, to some extent, the inferences which she drew from the investment summary.  As I have previously observed with respect to the question of the $400 000 “residual”, I cannot accept that any fair reading of the passage could lead to her view as to its meaning.  Whilst I think that she was an honest witness, it is necessary to approach her evidence with care. 

Applicant:	Fredrika Jane Carson
Amount of Investment:  $ 10 000
Key Documents Received:  Investment Summary

129               Ms Carson saw an advertisement for MDRN’s business in a local newspaper and telephoned for further information.  She and her husband subsequently received a letter from them headed ‘A Reliable High Return Investment Opportunity for You’, together with two “flyers” headed ‘Meet the Team Looking After You at MDRN Private Mortgages’ and ‘Introducing your Investment Experts MDRN Private Mortgages’.  They subsequently deposited $40 000 with MDRN without having, at that stage, identified any particular investment.  Subsequently, they received investment summaries for the Ammbar project and the Yandina project.  They decided to invest $20 000 in the Ammbar project and $10 000 in the Yandina project.  The remaining $10 000 was invested elsewhere.  In deciding to invest in the Yandina project, they relied upon the letter of 22 June 1999 with which the investment summary was enclosed, and the investment summary itself.  They understood that:

·                Mr Rivett was a lawyer and barrister and was well credentialed;

·                Mr Rivett and Project Results had substantial financial assets;

·                the loan was for twelve months for the first stage of a retirement village; and

·                the units in the first stage of the development had been pre-sold. 

130               They claim also to have believed that MDRN employed strict loan assessment procedures and that Project Results, Mr Rivett and the Yandina project had qualified according to those procedures. 

131               In her oral evidence Ms Carson claimed that the pre-payment of six months’ interest was ‘notable’.  This meant that ‘Mr Rivett had actually paid the first six months’ interest upfront, so that we knew that that first six months’ interest was solid.’  She said that she probably would not have been ‘comfortable’ had she known that the interest was to be paid out of the advance. 

132               At TS 462 she said:

‘Well, in the advertising spiel that we had received from MDRN, it was clearly set down that [MDRN] carefully examined any information that a potential borrower had passed on to them, and they had strict assessment procedures which, to us, sounded, yes, as though it was - that they were very experienced and would look into everything carefully before the loan was accepted.’

133               It seems that this explanation came not from the investment summary, but from one of the other documents exhibited to her affidavit.  Ms Carson, understood that there was ‘a definite contract on the twelve units’. (TS 463)  Had she been told that only three or six had been sold it would have affected her decision.  She would have taken more time to make the decision.  Had she known that 40 per cent of each purchase price was to be paid in trade dollars, she might not have gone ahead.  Ms Carson took the reference to Mr Rivett’s assets to mean that he had a nett surplus of $1.79 million.  This was important to her because the amount of the loan was only $1.4 million and so ‘he had enough assets to cover that’.  Had she been told that Mr Rivett had previously entered into an arrangement with his creditors, she would not have considered him quite as credible.  It was important that Mr Rivett was an experienced and well-qualified director with a good asset position, as was the LVR of 70 per cent and pre-sale of all units.  All of these matters ‘helped us to make the decision’. 

134               Ms Carson said in cross-examination that she understood that twelve units were subject to existing contracts.  In that context, she was unable to explain her understanding of the requirement that six contracts be produced prior to settlement of the loan.  Ms Carson did not understand that part of the purchase price for each unit which had been sold might be paid in trade dollars.  As to Mr Rivett’s asset position, Ms Carson expected that MDRN would review the information in the way that ‘a lender acting reasonably and prudently’ would do.  She said, concerning MDRN’s role in arranging the transaction:

‘We just assumed they would - they would be approached by a potential investor and then they would ask for as much information as possible, and then examine it thoroughly and do searches and check - check out his financial situation and his credit state, and that sort of thing.’

135               She said that she understood that a prudent lender would ‘just examine everything and, I suppose, ensure that there was enough financial security to cover the loans, if there were some problem.’

136               Ms Carson was another witness who seemed to be willing to assert reliance upon virtually any aspect of the documents which might favour her case.  To the extent that such evidence was prompted in oral evidence-in-chief, but not reflected in the earlier affidavit, I am inclined to give it little weight.

Applicant:	Robert John Charles McIntyre (As executor of the Estate of Alan Stansfield Cheney)
Amount of Investment:  $10 000
Key Documents Received:  Investment Summary

137               Mr McIntyre is a solicitor who, in the course of his practice, was appointed executor of Mr Cheney’s will.  He is no longer in private practice.  His firm merged with MDRN.  He was employed as a senior associate until he resigned in May 2000. He continues as executor of the estate.  He had previously invested estate moneys in mortgage schemes fostered by MDRN.  On 30 June 1999 he received a letter from them, advising of investment opportunities in the Ammbar project and the Yandina project.  The letter was accompanied by relevant investment summaries.  Mr McIntyre was influenced in deciding to invest in the Yandina project by the following matters:

·                LVR of 70 per cent, which he considered to be a sufficient level of equity for investors in the event of a fire sale, relying upon the “integrity” of the valuation of the development and MDRN’s assessment procedure;  he was not advised that the LVR might be in excess of 70 per cent, nor that there was a second mortgage;

·                the loan was secured by a registered mortgage, mortgage debenture and director’s guarantee, meaning that ‘both the developer and [Project Results] were providing quality security in relation to the loan’;  again he relied upon MDRN’s ‘abilities and processes in verifying the quality of such security’;

·                borrower’s contributions of $400 000 and $238 677, meaning that the borrower was advancing these moneys from its own resources via cash injection;  he had not heard of trade dollars at that time.

·                availability of the following information (which he believed to have been assessed by MDRN) conveyed ‘an impression … of openness and quality in the documents’, namely:

·                 valuation by Stanton Hillier Parker;

·                 director’s personal statement of assets and liabilities;

·                 plans and specifications for the project;

·                 quantity surveyor’s report concerning preliminary costs;

·                 disclosure statement by borrower and pre-sale contracts;

·                 real property descriptions;

·                 council approvals;

He ‘… took the quality of these aspects of the application process at face value.  Although I did not seek to inspect these documents, I relied upon MDRN’s assessment processes to verify the worthiness of such documents.  The fact the documents existed and were being made available to investors portrayed an impression to me of openness and quality in the documents.’

 

·                the statement that the application had been approved under MDRN’s private mortgage loan application assessment programme, meaning that there was a ‘structured, formal process in place that MDRN followed in assessing the quality of loan applications.  …  I took comfort from the fact that such a system existed and this was important to me.’;

·                pre-payment of interest, meaning that the loan was being pre-paid from the resources of Project Results or Mr Rivett and that the amount would be held in trust by MDRN;  he did not realize that the payment was to be made from the advanced funds;

·                “residual” of $400 000, meaning that there would be a surplus of $400 000;

·                that trading profits of Mr Rivett’s companies would provide interest “coverage”, demonstrating that there would be sufficient cash flow to pay interest;

·                that the LVR would be below 70 per cent following Stage 1, showing that there would be an increase in equity which would be available to investors in case of a fire sale;

·                Mr Rivett’s strong asset position, with a surplus of $1 790 000, and Project Results’ nett asset position of $640 000, meaning that such assets were available via the guarantee and the mortgage debenture, indicating that Mr Rivett and Project Results had substance;  he relied upon MDRN’s processes to verify these matters;

·                the proposed security, including a first mortgage, a mortgage debenture, and director’s guarantee, as to which Mr McIntyre asserted:

‘I would only invest moneys into first mortgage schemes, so these statements were of importance to me. I did not know that any other mortgages might have been in existence, or that there may not have been any substance to the mortgage, debenture or guarantee.’;

·                the units were being sold for $85 000, with Mr Rivett stating that all had been sold, meaning all twelve units and the manager’s accommodation were subject to unconditional contracts, with deposits paid and settlement to occur upon completion of construction, demonstrating the viability of the project; he understood that the purchase prices were payable in Australian dollars, never having heard of trade dollars at that time, subsequently quantifying this statement, saying that he meant that he had not heard of them in connection with the Yandina project; and

·                conditions precedent to the loan included:

·                 valuation from Stanton Hillier Parker to be confirmed as current;

·                 fixed-price building contract;

·                 quantity surveyor to confirm the overall project cost and authorize progress payments on a ‘cost to complete’ basis;

·                 pre-sale contracts for at least six units to be sighted prior to first draw;

·                 six months’ interest to be pre-paid and held in trust by MDRN.

Mr McIntyre considered that these conditions ‘outlined the quality checks that MDRN performed which would protect investors’ monies’.  

138               Mr McIntyre said that the aspects of the investment summary which particularly influenced him were the LVR of 70 per cent, the security being offered, (including the director’s guarantee), the borrower’s contribution and the fact that the project had been subjected to MDRN’s assessment processes.  Had he been told that Mr Rivett’s assets totalled something less than $100 000, ‘the figures wouldn’t stack up’.  Had he been told that the borrower’s contribution of $400 000 was by way of second mortgage and that the $238 677 was to be contributed in trade dollars, he would not have invested.

139               In cross-examination Mr McIntyre said that he considered a satisfactory LVR for his purposes to be 70 or 80 per cent.  He also said that he looked for projects in which the developers ‘were prepared to place their own net assets on the line as security’.  For that reason the various securities over assets other than the subject land were important aspects in his decision-making.  He sought to ensure that, should the project fail, sufficient assets would be available to meet any shortfall, even in the event of a forced sale.  He understood that the assets of Mr Rivett and of Project Results, other than the subject land, might be disposed of prior to any default and would then not be available in the event of such failure. 

140               Mr McIntyre accepted that the return on investment of this kind varied with the risk, and that a higher return rate reflected a higher risk.  He agreed that MDRN had not guaranteed the information provided to them by Mr Rivett.  However he expected that they would have assessed the information in the way that a ‘reasonably prudent lender’ would.  In the case of Mr Rivett’s assets, he understood MDRN to be telling him that ‘We have looked at it and we think his assets evidence this’.  He understood that the obligation of the borrower was to contribute the land.

141               In cross-examination Mr McIntyre agreed that his assertion in par 32 of his affidavit was incorrect.  That assertion was that he understood that the pre-paid interest was to come from some source other than the advanced funds.  He said he could not remember what his understanding was at the time.  In par 35 of his affidavit he asserted that he took comfort from the fact that the trading profits of Mr Rivett’s companies were to be available to provide interest coverage.  In cross-examination it was pointed out to him that it was anticipated that Stage 1 would be completed within six months and that therefore all of the interest would have been pre-paid.  In light of that he agreed that the statement referred to in par 35 was not of great importance to him at the time.

142               He also agreed that his assertion that the reference to a ‘residual’ of $400 000 was to a surplus in that amount was probably incorrect.  He agreed that the estimated return from unit sales was not sufficient to lead to a $400 000 surplus at the end of Stage 1.  He also agreed that the covering letter which accompanied the investment summary made it clear that the six months’ pre-paid interest was to come from the advance, and that a passage in that document also supported the notion of a residual debt as opposed to a surplus.  He understood that the value of the assets of Project Results were reflected in the value of Mr Rivett’s assets. 

143               Mr McIntyre agreed that it was ‘very unlikely’ that there would be ‘unconditional contracts of sale in respect of a development that hasn’t even started’.  Such a contract would typically contain a condition that the building be built and other conditions.  He did not believe, at the time of entering into the investment, that there were unconditional contracts of sale.  He agreed that the first sentence in par 43 of his affidavit was incorrect.  He suggested that the paragraph had been drafted by somebody else and signed by him without sufficient care.  This is a matter of some concern.  Similar concerns arise from the cross-examination of other witnesses. 

144               Mr McIntyre said that had he been told that MDRN had not checked the asset positions of Project Results and Mr Rivett, he would have asked them to do so.  Had he been told that Project Results had no nett assets, he would have made further inquiries.  Had he been told that 40 per cent of the purchase price of each unit which had been sold was to be paid in trade dollars, he would also have inquired further.

145               Mr McIntyre’s answers in cross-examination suggest that some aspects of his affidavit should be treated with great care. 

Applicants:	James David Cladingboel and Marian Elsie Cladingboel
Amount of Investment:  $10 000
Key Documents Received:  Brochure, Autumn Newsletter 1999, Winter Newsletter 1999, Investment Summary

146               Prior to investing in the Yandina project Mr and Mrs Cladingboel had invested in other private mortgage schemes fostered by MDRN.  Mr Cladingboel referred to the following statement in the brochure:

‘The evaluation of applicants is provided by National Mortgage and Development Limited a company whose executive have had extensive banking experience.

They examine the debt service capacity and good credit history of each applicant and obtain a valuation of the security property to ascertain that the loan security ratio does not exceed 70%.’

 

Mr Cladingboel took this statement to mean that ‘an external company was employed to conduct checks/valuations/assessment in addition to those performed internally by MDRN.’

147               In the autumn 1999 newsletter, reference was made to the assessment of loan applications using a ten point assessment plan.  Mr Cladingboel inferred that MDRN performed detailed investigations in assessing loan applications.  He relied upon their ‘honesty and integrity in performing the checks …’. 

148               In the winter 1999 newsletter it was said that ‘Loans Manager Dale Blackadder conducts full checks for every prospective borrower and no loan is approved unless it meets our Ten Point Assessment Plan …’.

149               On or about 2 July 1999 Mr and Mrs Cladingboel received the investment summary.  They relied upon numerous statements in it as follows:

·                statements concerning pre-sale of units, Mr Cladingboel understanding that all units in Stage 1 had been sold at $85 000 each;

·                ‘The Borrower’s application has been approved under MDRN’s Private Mortgages loan application assessment programme’, meaning that thorough checks had been conducted as described in the autumn 1999 newsletter;

·                ‘LVR 70%’, the witness considering this to be sufficient security and that a valuation had been performed by an independent valuer;

·                ‘Directors’ personal Statement of Assets and Liabilities’, indicating that Mr Rivett had a strong asset position with a nett surplus of $1 790 000;

·                ‘The applicant company also shows a net asset position of $640 000’ and ‘Good asset position of the Director.’, indicating that both Mr Rivett and the company had strong financial positions which ‘supplemented the security contained within the project valuation and LVR’;

·                ‘The trading profits in Mr Rivett’s companies can provide interest coverage.’, indicating, ‘an external ability to service the loan, which had been verified by MDRN’;

·                ‘Valuation by Stanton Hillier Parker.  The valuer reports positively of the overall project.’, indicating that the independent valuation supported the LVR of 70 per cent;

·                ‘… a residual of approximately $400 000.00 will remain following sale all units and management’, meaning that there would be a surplus in the amount of $400 000 at the end of Stage 1; and

·                the reference to the borrower’s contributions of $400 000 and $238 677, indicating that the borrower was contributing a total of $638 677 from its own funds, Mr Cladingboel being unaware of the second mortgage or the use of trade dollars;  had he been informed of these facts, he would not have invested in the project. 

150               In oral evidence-in-chief, Mr Cladingboel said that had he known that Mr Rivett had entered into an arrangement with his creditors, he would not have invested.  He considered the personal guarantee to be ‘the one thing that really concerned me in this whole operation’.  He understood that this was a matter that National Mortgage and Development would have checked on behalf of MDRN and the investors. 

151               In cross-examination it emerged that Mr Cladingboel understood that there were to be two ‘external checks’, one by National Mortgage and Investment Ltd and the other by Credit Reference Australia (“CRA”) as well as ‘internal’ checks by MDRN.  That case has not been pleaded.  In the end it seems that his primary complaint is that he was ‘misled as to the status of John Rivett, his assets, his contribution to the project and the safety of the investment.’ Mr Cladingboel agreed that he understood, concerning the LVR of 70 per cent, that the loan was not to exceed 70 per cent of the value of the completed development.  He also agreed that he understood that only six contracts were to be available prior to the advance.

152               The witness was cross-examined concerning the Christmas 1998 newsletter.  He had no recollection of seeing it, although he could not deny that he had received it.  In the end I am not sure that it adds anything to the matter.  In cross-examination he conceded that he had probably misunderstood the reference to a ‘residual’ of $400 000.  He said that Mr Rivett’s experience in construction was of less significance to him than other matters.  Mr Cladingboel was unable to explain how he came to assert in his affidavit that the $400 000 ‘residual’ was a residual cash balance rather than a residual debt.  He attributed it to clerical error.

153               Although there were aspects of Mr Cladingboel’s evidence which appeared to be tailored to improve his case, he was also willing to concede that some matters were of less significance to him than others and to concede the error concerning his understanding of the $400 000 residual.  All in all, I accept him as a substantially reliable witness.

Applicants:	Kenneth Barry Duncan and Joan Edith Duncan (as trustees of the Duncan Family Superannuation Fund)
Amount of Investment:  $50 000
Key Documents Received:  Investment Summary, Autumn 1999  Newsletter

154               Mr Duncan is a retired accountant.  Although he initially invested jointly with his wife, the investment was subsequently transferred to the Duncan Family Superannuation Fund.  In the autumn 1999 newsletter, there was reference to the ten point assessment plan from which, as Mr Duncan claimed, he and his wife took comfort.  They took it to be ‘a thorough evaluation of an applicant’s background and credit history via character and credit checks; the financial strength and serviceability of a loan by inspecting balance sheets, profit and loss statements, bank statements and other basic financial records.’  The matters of particular importance to Mr Duncan were ability of an applicant to service a loan and his or her financial strength or personal wealth. 

155               On or about 30 June 1999, they received a letter accompanied by a copy of the investment summary.  To some extent, the Duncans seem to have derived some information from the letter rather than the investment summary.  The matters in the letter which particularly influenced their subsequent decision to invest in the Yandina project were:

·                the pre-payment of interest, reinforcing the perception that Mr Rivett and his company had financial strength and were trading well enough to continue making interest payments;

·                LVR of 70 per cent, highlighting the security which was available; and

·                that all units in Stage 1 had been pre-sold, which ‘appeared to reinforce the security of the project’, indicating a high demand for units. 

156               In the investment summary the following matters were of importance:

·                that the borrower’s application had been approved under MDRN’s private mortgages loan application assessment programme, which Mr Duncan understood to refer to the ten point assessment plan discussed in the autumn 1999 newsletter;

·                that the trading profits of Mr Rivett’s companies could provide interest coverage, showing that Mr Rivett could meet the interest from sources separate from the development, Mr Duncan believing that this statement had been verified by reference to financial documents such as profit and loss and cash flow statements, balance sheets, bank account statements and tax returns; 

·                Mr Rivett’s strong asset position with a nett surplus of $1 790 000 and Project Results’ nett asset position of $640 000, meaning that those amounts were available by way of security pursuant to Mr Rivett’s guarantee and a mortgage debenture over the assets and undertaking of Project Results;

·                the claim that Mr Rivett had contracts to sell all of the units in Stage 1 for $85 000 each;

·                the residual of approximately $400 000, meaning that there would be a surplus of $400 000 at the end of Stage 1;

·                borrowers contributions of $400 000 to purchase the land and $238 677 to ‘construct and sell Stage 1’, meaning that the borrower had contributed $400 000 from its own resources and was contributing a further $238 677 towards construction costs, Mr Duncan being unaware of the second mortgage or that trade dollars might be involved; and

·                that MDRN had the following documents available for inspection:

·                 valuation;

·                 director’s personal statement of assets and liabilities;

·                 quantity surveyor’s preliminary report of costs;

·                 pre-sale contracts of the units.

He considered that perusal of those documents would verify the representations made in the investment summary.

157               Mr Duncan considered that the ten point plan was ‘the minimum that an investor could rely on a prudent lender performing’.  He understood that MDRN had followed this process.  In cross-examination he said that had he known that Mr Rivett had entered into an arrangement with his creditors in 1984, it may not have affected his decision in view of the passage of time.  Had he been told that only three units had been sold, and that in each case, up to 40 per cent of the purchase price was payable in trade dollars, it would have influenced his decision.  If there were only three contracts, it would have indicated that there was not a great demand for the product.  If payments were made in trade dollars ‘it would be difficult to see how the investors such as myself were actually going to be repaid.’  He also said that the capacity of Mr Rivett’s companies to provide interest from trading profits was important to him because, in the event that the project ran over time, they would be able to pay any interest in excess of the six months’ interest paid in advance.

Applicant:	Lynette Kay Hamaty
Amount of Investment:  $12 000
Key Documents Received:  Investment Summary

158               Although the investment was in the name of Ms Hamaty, all decisions were made in conjunction with her husband, John Hamaty, who also swore an affidavit.  Ms Hamaty had read his affidavit and agreed that the matters which he described as important in deciding to invest in the Yandina project were important to her and that the affidavit was otherwise accurate.

159               Mr Hamaty said that his first dealings with the firm were in 1998 when his accountant recommended first mortgage investments as an investment option and referred him to MDRN.  His first contact was with Mr Ryan.  Subsequent contact was with Mr Gill.  On one occasion he attended an investment seminar conducted by MDRN at which Messrs Ryan, McCarthy and Durie were present.  He invested in numerous projects apart from the Yandina project and spoke regularly to Mr Gill.  If a particular investment attracted him he would let Mr Gill know.  Mr Hamaty first heard of the Yandina project in a letter from Mr Gill dated 15 June 1999, enclosing an investment summary.  Among other things the letter stated:

‘The director, John Rivett, has extensive experience in property development law having practised has a Barrister and as an Executive Director of Forrester Parker Group Ltd.  …  We are advised all twelve units are pre-sold.’

160               There was then reference to particulars of the loan, including the LVR of 70 per cent. 

161               Mr Hamaty said that the following matters in the investment summary were important to him:

·                investment in retirement accommodation was ‘very viable’;

·                the security of a registered first mortgage, together with a director’s guarantee and the pre-sale of six units;

·                Mr Rivett’s credentials and assets;

·                attractive interest rate of 9.25 per cent;

·                pre-payment of six months’ interest which effectively covered interest for half of the term of the loan; and

·                twelve month term of the loan – Mr Hamaty preferred a short-term investment.

162               He said that on numerous occasions ‘both in respect to the Yandina Greens Project and others’ Mr Gill told him that all applications were ‘evaluated very carefully, and that the valuers used were local, registered and well respected.’  He said that the LVR of 70 per cent was also very important.

163               On or about 24 June 1999 he instructed the firm to invest $12 000 in the Yandina project.  He did this on behalf of his wife.

Applicant:	Dr Keith Edward Holmes (as trustee of the Melztner Trust)
Amount of Investment:  $10 000
Key Documents Received:  Investment Summary

164               Dr Holmes is the principal trustee of the Meltzner Trust, a discretionary family trust.  The trust invests from time to time.  Dr Holmes is assisted in investment decisions by his daughter, Ingrid, one of the beneficiaries.  The Meltzner Trust placed funds in twelve investment projects with MDRN, of which seven were successful.

165               In or about June 1999 Dr Holmes received from his daughter a copy of an investment summary for the Yandina project.  He relied upon it in deciding to invest $10 000 in the project.  In his affidavit he identified the following statements as being important to him:

·                that the application had been approved under the firm’s private mortgage loan application assessment programme;  he relied upon the ‘standing and integrity’ of the firm;  he had also spoken with Mr Durie who gave him a personal assurance;

·                LVR of 70 per cent, which he considered to be a safe ratio to protect his investment in the event that the project did not proceed;

·                valuation by Mr Ludlow, recognized as one of the most experienced valuers of this type of development in Queensland who reported positively on the overall project, leading Dr Holmes to believe that the valuation was important as ‘an unbiased assessment of the value of the project and the security of same’;

·                Mr Rivett’s ‘strong asset position evidencing a net surplus of $1 790 000’ and Project Results’ nett asset position of $640 000, which amounts Dr Holmes considered to be ample to see the project through in the event of difficulties;

·                director’s guarantee and registered mortgage debenture over the assets and undertaking of Project Results, indicating sufficient financial backing to complete the project;

·                the existence of contracts to sell all of the units in Stage 1 at $85 000 and the statement that pre-sale of all units in Stage 1 would be in place, meaning that all twelve units were sold and that there was an appropriate cash flow in place for Stage 1 with ‘little likelihood of any delay’;

·                trading profits of Mr Rivett’s companies being available to provide interest coverage, indicating ‘certainty for our monthly payments’;

·                a “residual” of approximately $400 000 remaining following sale of all units and management, meaning that there would be a surplus of $400 000 at the completion of Stage 1, assuring the return of capital; and

·                contribution by the borrower of $400 000 towards the purchase of land and $238 677 towards the construction of Stage 1, meaning that there had been contributions by Mr Rivett or Project Results totaling $638 677 in cash towards the project from external sources, leading Dr Holmes to believe that the project was completely financially assured.

166               Dr Holmes said when he decided to invest he had not heard of trade dollars.  Had he known that trade dollars were being used in the contracts for the sale of units, he would not have invested.

167               In or about July 1999 the trust invested $10 000 in the project. 

168               In cross-examination Dr Holmes demonstrated that he understood that, notwithstanding the content of his affidavit, the reference to a ‘residual’ of $400 000 must have been to a debt.  He said that his understanding of the various statements concerning pre-sale of units was that there were contracts for the sale of all of the units but that it was only necessary that contracts be sighted for six of them prior to the advance being made.  He understood that Mr Rivett controlled a company called Barter Pacific Property and Finance which specialized in property and finance using trade dollars.  He seems also to have been aware of the concept of trade dollars, despite his statement to the contrary in his affidavit.  He had not understood that they were being used in connection with the Yandina project.

169               Had he been told that MDRN had not checked the asset position of Project Results or Mr Rivett or the statements made by Mr Rivett about such asset positions, he ‘would have been very reluctant to go ahead … in those circumstances’.  Had he been told that there had been no inquiries into the trading profits of the other companies, which profits were said to be available to cover interest payments.  He would have been most concerned and reluctant to go ahead. 

170               These last matters were extracted by counsel for the first cross-respondent.  To the extent that they may indicate that Dr Holmes relied upon statements other than those identified in his affidavit, I would be reluctant to act upon such evidence.  He was asked by counsel for the second cross-respondent whether his decision would have been affected had he not been told anything concerning the asset position of Mr Rivett or his company.  He said that he would have been reluctant to go ahead.  He also said that had there been no statement ‘about how the interest coverage might be covered’, he would have been reluctant to invest.  He would have needed information concerning the cash flow and how interest was to be paid.  He relied on the standing of MDRN and the fact that they employed an independent assessor to look at things.  A combination of things made him invest. 

171               Again, I am unwilling to give any great emphasis to Dr Holmes’ evidence, to the extent that goes beyond the content of his affidavit.

Applicant:	Dr Patrick Fysk Howden
Amount of Investment:  $20 000
Key Documents Received:  Investment Summary

172               Dr Howden had dealt with MDRN for many years prior to his involvement in the Yandina project.  He often received promotional material from them.  When he received such material he would read it.  If he was interested, he would telephone MDRN and ask for further information which would come in the form of an investment summary.  He received an investment summary for the Yandina project.  He had a set of criteria which had to be met before he would invest in a project.  Those “criteria” were:

·                that the project be in Brisbane or in the surrounding area;

·                that it involve a stable investment which did not include farms or resorts;

·                LVR was important, although he did not have a set LVR;

·                he proceeded on a ‘project by project basis on the advice of MDRN.’; and

·                the interest rate which ‘often does not correlate to the risk involved’.

173               The suggestion that Dr Howden acted on MDRN’s advice is curious.  It seems inconsistent to have a list of criteria and then abdicate the decision-making process to another.  He considered that the Yandina project satisfied his criteria and decided to invest $20 000. 

174               Dr Howden was not cross-examined.

Applicant:	Jillian Anne Hughes
Amount of Investment:  $15 000
Key Documents Received:  Investment Summary

175               Ms Hughes is a retired book-keeper.  She was first introduced to MDRN by a friend whose husband was a conveyancing clerk with them.  In July 1997 she retained the firm for a conveyancing matter.  Thereafter, in connection with mortgage investments, she spoke to Mr Gill.  She first invested in 1997.  In mid-1999 capital from that investment was returned.  Mr Gill advised her to consider spreading her risk amongst different investments.  She had just received some promotional material concerning various investments on offer by MDRN.  She decided to split the amount of $25 000 between projects. 

176               She received the investment summary for the Yandina project under cover of a letter dated 19 July 1999.  She understood that Project Results and Mr Rivett had together invested a total of $638 677 in Australian currency in the project, showing that Mr Rivett was heavily involved in it, and that it offered security for that reason.  She understood from the statement that the ‘Director’s personal statement of Asset and Liabilities’ was available on request, that the firm had verified the contents of the document, and that any assertion as to Mr Rivett’s financial position had been carefully checked and verified by the firm.  The summary of Mr Rivett’s background was also a source of comfort as it showed that he was experienced in investments of this kind.  She understood that all twelve units in Stage 1 had been sold and that this was further evidence of the soundness of the investment, showing that there was a high demand for the units.  That interest was being pre-paid indicated that Mr Rivett was paying it from his own resources, again evidencing his financial strength.

177               Ms Hughes understood that the trading profits from Mr Rivett’s companies would be available to provide interest coverage.  This showed there was another source of funds which could sustain the project in the event of financial trouble.  She assumed that the statements concerning Mr Rivett’s nett assets and those of Project Results had been verified by the firm.  She also understood that when the summary spoke of units having been sold for $85 000, this meant $85 000 in cash.  She had not at that stage heard of trade dollars.

178               In oral evidence-in-chief she was asked to identify the aspects of the investment summary which were influential in her decision to invest.  She said that relevant factors were location, Mr Rivett’s personal details and the fact that he was putting money into the project as well as borrowing.  The details about Mr Rivett which influenced her were the fact that he had gone to university, was a lawyer, had worked for different firms and been involved in property investment, particularly in the Mooloolaba area.  She assumed that he was of good repute and had been investigated by MDRN.  She said that it would have influenced her decision had she known that his assets and those of Project Results were significantly less than the sums which appeared in the investment summary.  Had she known that he had previously entered into an arrangement with his creditors, she would not have considered the investment.  It was important to her that the units had been sold.  It meant that money was going to be available to pay back the investment.  She said that if she had been told that only three or four of the units had been sold, it would have influenced her decision.  She would not have entered into the agreement.

179               In cross-examination Ms Hughes said that she had not understood that the advance payment of interest was to be from loan funds.  She understood that evidence of the sale of six units was to be provided prior to the advance being made.  At the relevant time she had no understanding of trade dollars and did not associate the use of trade dollars with the contracts for sale of the units.  Trade dollars were explained to her in the course of evidence.  She would not have invested had she known that part of the purchase price of each unit might be paid in trade dollars.  Similarly, she would not have invested in the Yandina project had she known that the financial contribution to be made by Project Results towards the development was to be in trade dollars.

180               In re-examination she said that she probably had not thought about the source of the pre-payment of the interest.

Applicant:	Infotec MS Pty Ltd
Amount of Investment:  $10 000
Key Documents Received:  Investment Summary, Autumn 1999 Newsletter, Winter 1999 Newsletter

181               Mr Mohajerani is a director of Infotec MS Pty Ltd and seems to have made the decision to invest in the Yandina project.  He first learned of MDRN from an advertisement in a Sydney newspaper and subsequently received brochures explaining the services which they offered in connection with investments.  Between March 1998 and June 2001 he participated in a number of their first-mortgage investment schemes.  On 16 March 1998 he invested $10 000 in the Ammbar project.  In December 1998 he invested $10 000 in another project, Pacific Vista.  Both were successful.  On 12 November 1998 he lent $10 000 to a company called Blue Haven Estate.  In 1999 Mr Mohajerani received the autumn 1999 newsletter which contained an article explaining how applications for mortgage loans were assessed by MDRN.  Several months later he received the winter 1999 newsletter which described the security offered by a private mortgage investment organized through MDRN.  In or about June 1999 he received the investment summary. 

182               He noted the interest rate (which was better than that offered by banks) and the LVR of 70 per cent.  He also noted that the loan was secured by a mortgage over five vacant allotments and a charge over the assets of Project Results.  He formed the impression that the loan was ‘secure’.  He noted the director’s guarantee and that the amount of the loan was ‘not very big for this type of project and therefore could be managed’.  He lived in Sydney and was not in a position to verify the information in the prospectus.  He trusted MDRN to do that for him.  On 13 July 1999 he telephoned Mr Gill and told him that Infotec would invest $10 000 in the Yandina project.  Mr Mohajerani was not cross-examined.

Applicants:	John Fraser Kennedy and Vivian Jessica Kennedy
Amount of Investment:  $25 000
Key Documents Received:  Investment Summary

183               Mr Kennedy became aware of MDRN in about 1998 when he passed its office in Old Cleveland Road, Capalaba and noticed a sign offering 10 per cent interest on investments.  He spoke to David Gill who gave him some printed material.  This included investment summaries for a project at Carindale and a caravan park at Mt Isa.  Mr Kennedy understood from this material that loan applications were approved by an external entity.  He was impressed by the fact that investments were checked by this ‘external entity’.  Thereafter, he and his wife discussed the possibility of investing with MDRN.  At about this time they also saw newspaper advertisements for such investments.  In mid-1998 they decided to invest $25 000 in the Carindale project and $25 000 in the Mt Isa project.  The Carindale advance was repaid within ten months and by June 1999, the amount of $25 000 was in MDRN’s trust account.  Mr Kennedy then spoke to Mr Gill about re-investing the money.  He received two further investment summaries, one of which was for the Yandina project and the other, for a development at Yeppoon.  Mr Kennedy formed the view that the Yandina project was ‘a winner’.  He was particularly impressed by the fact that all units had been sold.  He particularly relied upon the following statements:

·                that certain information was available on request, including a disclosure statement by the borrower and pre-sale contracts for the units;

·                that the units were being sold for $85 000 with Mr Rivett saying that all had been sold; and

·                that Mr Rivett had successfully secured contracts to sell all units in Stage 1 and had strong expressions of interest for units in the remaining two stages.

184               Mr Kennedy understood this to mean that all of the units had been sold ‘off the plan’ for $85 000.  He assumed that contracts had been entered into and deposits paid.  He assumed that such payments were in Australian money.

185               He also noted the statement ‘This proposal is submitted for your consideration and supported on the basis of … Pre-sale of all units in place (with clear evidence to be provided of at least 6 sales prior to the first draw-down).’  Mr Kennedy understood this statement to imply that all units had been pre-sold.  He thought that the words in brackets concerning evidence of six sales was ‘a safeguard in case some contracts had fallen over’. 

186               He was also influenced by the fact that Mr Rivett appeared to be a person of substance.  This opinion was based upon the references in the investment summary to his experience and qualifications and the statement in the investment summary that:

‘We believe Mr Rivett has the necessary experience and qualifications to successfully undertake this project.  From meetings held with him we believe him to be very credible.’ 

187               Mr Kennedy referred also to the statement concerning his and Project Results’ financial strength as follows:

‘The Director and Guarantor John Rivett has a strong asset position evidencing a net surplus of $1,790,000.  The applicant company also shows a net asset position of $640 000.00.’

188               Mr Kennedy understood this to mean that Mr Rivett had personal assets totaling $1.79 million and that the company had further assets totalling $640 000. 

189               Certain parts of the summary were highlighted in red when it was given to Mr Kennedy.  They also impressed him.  The marked parts referred to the fact that six months’ interest would be paid in advance and that the trading profits from Mr Rivett’s companies could provide interest coverage.  Mr Kennedy understood that Project Results would pay the first six months’ interest to MDRN which would hold the money and pay it to investors when interest payments fell due.  He did not understand that the money was to be paid from funds to be advanced.

190               Mr Kennedy was impressed by the reference to the valuer, Mr Ludlow ‘… who is recognised as one of the most experienced valuer of this type of development in Queensland’.  He also noted that, ‘The valuer reports positively of the overall project.’  He was also impressed by the statement that ‘Valuation from Stanton Hillier Parker to be confirmed as current and addressed to Lawyers Private Mortgages Pty Ltd for mortgage security purposes.’  He understood this to mean that MDRN had commissioned independent valuers who had checked out the value of the site and ensured that there was sufficient security to cover the loan.

191               He was impressed by the proposition that a quantity surveyor acceptable to the trustee company was to confirm overall project costs and authorize progress payments on a ‘cost to complete basis’.  He understood this to mean that there was an independent person who would check that everything was above board.  He also considered that the LVR of 70 per cent meant that ‘the land value would cover the loan should the project go belly-up’.  He claimed that he had been led to believe this by MDRN.

192               He referred to the reference to a ‘residual’ of $400 000 and said that he understood it to mean that at the end of Stage 1, there would be enough made from the sale of units to repay the loan, and that Mr Rivett would have $400 000 in hand.  He would then approach MDRN seeking a further loan of $550 000 to build Stage 2.  Mr Kennedy believed that MDRN had assessed Mr Rivett’s proposal and concluded that there would be sufficient profit from Stage 1 to repay the loan.  The investment summary gave him the impression that MDRN had checked that all assertions and statements contained in it were true and accurate.  The principal statement creating this impression was:

‘The Borrower’s application has been approved under MDRN Private Mortgage’s loan application assessment programme and is now available for contribution by you’.

193               In oral evidence-in-chief Mr Kennedy said that he was particularly impressed by the description of Mr Rivett and his assets.  He was also impressed by the fact that all of the units had been pre-sold, that a quantity surveyor was to be appointed and that MDRN had commissioned independent valuers.  He said that had he been told that Mr Rivett’s assets amounted to less than $100 000, he would not have considered investing.  Had he been told that only three or four of the units had been pre-sold, it may not have deterred him from investing, but he would have given it a lot of thought.  Had he been told that pursuant to the contracts of sale which were in place, 40 per cent of each purchase price was to be paid in trade dollars, he would not have considered the investment.

194               In cross-examination he agreed that the requirement was that there be pre-sales of six units in Stage 1.  He conceded that the passage concerning Mr Rivett’s association with the trade dollar industry may indirectly have indicated the possibility of trade dollars being used in the sale of units.  He had not taken much notice of it.  

195               Although he claimed in his affidavit that he had not understood that the pre-payment of interest was to come out of the advance, he conceded in cross-examination that the wording of the brochure suggested as much.  He also conceded that the reference to the ‘residual’ of $400 000, in conjunction with the reference to an LVR, made it clear that the reference was to a debt of $400 000.  In cross-examination he also said that he had relied completely on the fact that MDRN had checked everything out, including the borrower’s assets.

Applicant:	Michael Colin Mellish
Amount of Investment:  $15 000
Key Documents Received:  Nil

196               Michael Colin Mellish and Wade Richard Mellish are brothers.  MDRN acted as solicitors for the entities which conducted family businesses and handled their conveyancing.  Such entities frequently held large sums of money in MDRN’s trust account.  In 1994 Mr Ryan approached Colin Mellish, the father of Michael and Wade, suggesting that he invest funds with MDRN.  Subsequently Mr Gill made a similar suggestion to Michael Mellish.  Such an investment would earn interest ‘several percentage points higher than what banks would provide’.  Mr Mellish understood that the private mortgage business was a ‘division’ of MDRN.  He made several investments but cannot recall the amounts or details.  Other members of his family and entities conducting family businesses also made investments.  Not infrequently, members of the family were asked to ‘prop up’ a loan by investing in a particular project.  Once MDRN had sufficient other investors in that project, the Mellish investments would be repaid. 

197               In or about July 1999 Mr Gill telephoned with relation to the Yandina project.  Mr Mellish did not see an investment summary but relied upon ‘… the due diligence that MDRN had undertaken in assessing the merits of the proposed loan and the general comments David Gill made regarding the loan.’  He recalls Mr Gill telling him that there was sufficient security over the assets of the borrower and guarantor and that the loan was ‘a good one’.  As a result Mr Mellish invested $15 000 in the Yandina development.  In cross-examination he said that he relied upon the recommendation made by Mr Gill and also ‘from all the other investments which were undertaken with them’.  Had he been told that the asset position of Project Results and Mr Rivett had not been checked by MDRN, he would not have invested. 

Applicants:	Wade Richard Mellish
Amount of Investment:  $25 000
Key Documents Received:  Nil

198               Mr Wade Mellish first invested with MDRN in late 1998.  Until early 2000, he and his family had a close working relationship with them.  Mr Gill would frequently ring and ask either Mr Colin Mellish or Mr Wade Mellish to fill the balance of a loan where MDRN was short of investors.  They would then fill the loan fund until there were enough investors to take over such investments.  They only remained in such projects for a couple of months.  In July 1999 Mr Gill telephoned concerning the Yandina project.  Mr Wade Mellish agreed to invest $25 000.  By this stage the family had invested in perhaps twenty such mortgages.  He did not receive an investment summary.  He relied on the firm’s ‘word that they had done the research and we relied on word of mouth, mainly by David Gill.’ 

199               Mr Mellish recalled Mr Gill saying words to the effect that the development was a retirement village with a great site and a great population and that it ‘stacks up’.  He said that there was a good valuation and that Mr Rivett was a solicitor on the coast with ‘… “heaps of money and heaps of property”.  There was a director’s guarantee and security over assets.  It was a “good loan”.’

200               In cross-examination Mr Mellish said that Mr Gill told him that the project involved a retirement village in Yandina and that ‘We’ve done all the checks.  We’ve gone through the proposal that’s been put to us.  We’ve verified it with the information.  It’s short term.  We can’t get you anything else, but this is the facts of what’s in the summary document.  MDRN has investigated the loan, further looked through the credentials, and it’s a good proposition.  It’s a good proposition for you.’

201               Mr Mellish’s version in cross-examination of the assurances given him by Mr Gill was not particularly persuasive, especially when taken in conjunction with his evidence that family investments were usually short-term and designed to meet shortfalls in subscriptions to particular projects.  It seemed to be a case of reconstruction.  I accept that Mr Gill indicated that the proposal was “good”, and that there was security.  I am otherwise unpersuaded by Mr Wade Mellish’s evidence.  Given that his family’s investments were usually very short-term, it is not surprising that he should have invested with little information and less consideration.

Applicants:	Eric James Mitchell and Julie Anne Mitchell (as trustees of the Mitchell Retirement Fund)
Amount of Investment:  $100 000
Key Documents Received:  Investment summary

202               Mr Mitchell and his wife are the trustees of the Mitchell Retirement Fund.  Their first contact with MDRN was in 1999 when they saw an advertisement in a local newspaper.  Mr and Mrs Mitchell spoke to Mr Gill and Mr Ryan, discussing MDRN’s investment schemes.  They received documents, including investment summaries, which they took home.  As a result of their study of those documents they invested money in two investments.  In June 1999 they received a letter concerning the Yandina project.  Accompanying the letter was an investment summary.  Mr Mitchell claims to have relied upon the ‘truthfulness and accuracy of the statements in the summary’.  This provided him with a level of comfort in his later decision to invest in the project. 

203               In particular Mr Mitchell believed that there was an LVR of 70 per cent and that this represented an acceptable level of security.  He also understood that Mr Rivett was investing $400 000 in Australian dollars from his own money and a further sum of $238 677 to fund the construction of Stage 1.  Mr Mitchell had never heard of trade dollars.  They were not mentioned by MDRN or its representative.

204               Mr Mitchell believed that there was a valuation and statement of Mr Rivett’s assets which had been verified by MDRN.  He had no reason to doubt MDRN’s procedures.  He took comfort from Mr Rivett’s experience in similar types of development.  He understood that all twelve units and the manager’s accommodation had been sold.  He also understood that the interest for the loan was ‘… capitalised within the loan, and that Rivett was not funding it from his own sources’.  There was to be a surplus of $400 000 at the end of Stage 1.  Mr Rivett’s companies would provide a source of funds which could service the loan.  He said that:

‘I understood that there was a total pool of assets of $2,430,000 ($1,790,000 + $640,000) that were being used as security for this loan and that could be utilized in the case of any financial difficulties that may be encountered.  I believed this due to the use of the word “also” in the description on page 3 [of the investment summary] meant that [Project Results] also shows a nett asset position of $640,000.’

205               He understood that the units had been sold for $85 000, that there were contracts in existence for all of them and that they had been sold for Australian dollars.  Subsequently, at the MDRN offices, they saw further material relating to the Yandina project. 

206               Concerning pre-sale of units, Mr Mitchell understood that Mr Rivett had said that all had been sold, and that evidence of sale of six units was to be produced prior to the advance of funds.  He agreed that the paragraphs relating to Mr Rivett’s involvement with Barter Pacific Property and Finance and trade dollars indicated that trade dollars would be involved in the purchase prices of the units.  He did not consider that at the time.

207               In cross-examination he was referred to par 12 of his affidavit in which he said:

‘I believe that the fact that the valuation and the statement of the Director’s assets existed, and that MDRN had verified the contents of the valuation and personal statement and found them to be accurate and acceptable.  I trusted MDRN’s analysis of these documents and had no reason to doubt MDRN’s processes.’

208               The basis of such belief is not clear.  He seems to have concluded that it was “their job”.  He was asked about the effect upon his decision had he known that MDRN had not checked the assets of Project Results or Mr Rivett.  He said that he would have walked away.  Had he been told that the assets of Projects Results and Mr Rivett were less than $100 000 he would not have had anything to do with the project.  Had he known that the contribution of $238 677 towards construction costs was to be partly in trade dollars, he would not have gone into the investment.  He had no idea what a trade dollar was.  Had he known that part of the purchase price of each unit was to be paid in trade dollars he would ‘have asked a lot of questions’.

Applicants:	Ronald John Mohr and Margaret Stewart Mohr
Amount of Investment:  $10 000
Key Documents Received:  Investment summary

209               Throughout the 1990s the Mohrs had made investments through another firm of solicitors.  In the first half of 1999 they saw an advertisement lodged by MDRN, indicating that they did ‘mortgage investment type of work’.  She rang MDRN to ask for particulars and subsequently received information concerning investments, including an investment summary for the Yandina project.  She and her husband decided to invest, acting upon information contained in that document.  Ms Mohr understood that the project involved retirement units.  She felt that this was a good project.  She read about Mr Rivett’s assets and thought that the amounts were substantial and would secure the loan.  She also noted the LVR ratio of 70 per cent and that the interest rate was acceptable.  She believed that MDRN had ‘done their homework’ and that the statements in the investment summary were true. 

210               In her oral evidence-in-chief she said that she was principally influenced by the fact that the project was for pensioners, by Mr Rivett’s curriculum vitae and his asset position.  She thought that a firm dealing with such investments would check out the viability of the project and structure of the loan.  She was asked what her attitude would have been had she known that Mr Rivett and Project Results had assets of less than $100 000.  She said that it would have influenced her decision.  In cross-examination she was referred to the statement in the investment summary that:

‘The borrower’s application has been approved under MDRN Private Mortgage’s loan application assessment programme.’ 

211               She understood that MDRN had approved the loan and the structure of the loan and that they thought it was viable.  She was also asked whether, if she had been told that the asset positions of Project Results and Mr Rivett had not been checked, it would have affected her decision.  She said that she probably would not have become involved.

Applicants:	Allan John Morrison and Patricia Joy Morrison (as trustees of the A & P Morrison Pension Fund)
Amount of Investment:  $20 000
Key Documents Received:  Investment Summary

212               Mrs Morrison first had contact with MDRN in 1981 in her capacity as a receptionist for a firm of accountants.  Her sister worked with MDRN, and her parents had invested with them.  In late 1997 or early 1998 Mr and Mrs Morrison were looking for a good return on their superannuation fund.  In late 1998 Mr Morrison saw advertisements in a local newspaper and, as a result of those advertisements, telephoned MDRN and spoke to Mr Gill.  They later met him and were given a booklet which they read.  They relied upon the experience and processes of MDRN in assessing and approving the investments which they offered to the public.  Sometime in 1998 they invested $10 000 in the Pacific Vista scheme and thereafter received promotional material in the mail on a periodic basis.  In 1998 they invested in a project at Laguna Beach and in June 1999, in the Yandina project.  They first became aware of it on 22 June 1999 as a result of a letter received from MDRN.  Enclosed with the letter was an investment summary which Mr Morrison read.  He and his wife discussed the matter and, relying upon a number of statements made in the investment summary, decided to invest. 

213               Mr Morrison believed that investment in a retirement village was a sound concept ‘as there was no similar pensioner accommodation in the Nambour/Yandina area.’  He perceived Mr Rivett to be a man with very good business credentials, knowledgeable in this type of development and of considerable means.  He was impressed by the list of businesses which Mr Rivett had managed, the property developments he had undertaken, the positions he had held and that he had a law degree and had practiced.

214               Mr Morrison noted that valuations had been carried out.  He believed that MDRN had conducted proper checks to ensure the valuation was conducted properly and that it provided the true value of the project, and therefore a level of security in case of financial difficulties with the loan.  He believed that Mr Rivett was a person of considerable wealth, that he had an excess of assets over liabilities of $1 790 000 and that in addition, Project Results had an excess of assets over liabilities of $640 000.  As to the question of a “residual” of $400 000, he understood this to mean that there would be a surplus of $400 000 after completion of Stage 1.  He was impressed with the investment summary and believed that the firm had checked out the proposal.  There would be sufficient profit out of Stage 1 to repay the loan.  There was no commitment to continue funding thereafter.

215               He understood that the borrower would pay the first six months’ interest and that such funds would be held for payment to investors as the interest fell due.  He appears to have understood that the interest would come from Mr Rivett’s companies and not from moneys advanced by investors. 

216               Mr Morrison understood that each unit had been sold for $85 000, indicating that the investment was a good one and that contracts had been exchanged and deposits paid.  The purchase prices would be payable in Australian dollars.  He had never heard of trade dollars and did not consider that any part of the purchase prices would be paid in ‘barter’.  The LVR of 70 per cent meant that there would be sufficient equity to cover the loan should ‘the project go belly-up’.  He understood that there had been an independent valuation and that the independent valuer had ‘confirmed that the value of the site gave sufficient security for the loan to be approved’.  He also understood that an independent quantity surveyor would check that everything was ‘above board’.  He noted that the proposal was submitted for consideration on the basis that all units had been pre-sold ‘(with clear evidence to be provided of at least six sales prior to the first draw-down)’.  He claimed not to have understood the significance of the qualification as to evidence of six sales.  He understood all units to have been sold and that the words in brackets were there in case one or two of the contracts collapsed. 

217               He noted that the wording of the investment summary for the Yandina project differed from other investment summaries which he had seen in that it did not refer to the loan having been ‘approved by an independent entity’.  He assumed that MDRN had checked that the statements in the investment summary were true and accurate.  In this regard he relied upon the statement that the application had been approved under their assessment programme. 

218               In his oral evidence Mr Morrison said that he received newsletters from MDRN which he read carefully.  He was shown the autumn 1999 newsletter and said that he understood it to be ‘the basis of [MDRN’s] ten point assessment plan’.  He could not be sure that he had received it.  He recalled having heard something about such an assessment plan in which ‘the credibility of the borrower, the valuations, the leverage, they were all considered and assessed by their finance minister, Mr Dale Blackadder.’  He had heard the expression ‘a ten point plan’. 

219               In the course of his oral evidence he was taken to ex 49 (the brochure) and invited to make comments concerning its content.  However his evidence in that regard was quite speculative.  I am by no means satisfied that he placed any reliance upon the brochure in making the decision to invest.  He understood all of the units to have been sold ‘off the plan’.  This was significant to his decision.  He claimed to believe that MDRN ‘had a team of experts to check Mr Rivett’s credibility’.  He said that had he been told that only three or four of the units had been sold, it may not have made a difference given ‘the additional criteria that this gentleman had to meet’.  He did not know what trade dollars were.  He was referred to the heading ‘Notes’ on p 2 of the investment summary.  He considered everything there to be significant and, in particular, the statement that the borrower’s application had been approved under MDRN’s assessment programme.  He expected MDRN to check Mr Rivett and Project Results’ financial strength.  It would be hard to say what he would have done, had he known that MDRN had not checked these matters.  Had he been told that Mr Rivett had previously entered into an arrangement with his creditors under the Bankruptcy Act, he would not have invested.  The basis of the recommendation on p 5 of the investment summary was also said to have been instrumental in his decision-making. 

220               The evidence-in-chief of this witness was particularly unsatisfactory, at least in part because of the way in which he was questioned.  He was, in effect, invited to comment on specific aspects of various documents and accepted the implicit invitation to respond in ways which were favourable to his case.  

221               In cross-examination he was shown the questionnaire circulated by ASIC (ex 3).  He was asked whether he agreed that the interest rate which he received on the investment was roughly double that being offered by the Commonwealth Bank.  He was aware of that.  He was asked if he understood that the interest rate reflected the risk.  He said that he did not have that understanding because of MDRN’s ‘track record’.  They had told him that they had never had an investment which failed and that at the most, he might lose his interest.  He understood that there was an additional element of risk in this investment, but given ‘that you had such incredibly extensive range of checks in place to check the credibility of the financial history of these people – yes, there was some risk, I suppose, but it was minimal given that.  I was also led to believe that not all applicants pass our criteria.’ 

222               He agreed that one of the aspects which appealed to him was the capacity to make his own decision as to whether the investment was worthwhile.  Mr Rivett’s qualifications were important to him.  He was looking for an investment where ‘the person behind it knew what he was actually doing’.  In the event of default he would expect to be repaid out of the proceeds of the sale of the land.  That was why the 70 per cent LVR was important.  He understood the LVR to relate to the relationship between the value of the undeveloped land and the loan.  He understood the reference to a $400 000 ‘residual’ to be to a cash surplus but was unable to explain the reference to LVR.  He eventually accepted that he may have misinterpreted the investment summary in this regard.  He was asked whether he had read page 2 of the investment summary concerning the purpose of the loan and the way in which the project was to be financed.  He said he could not remember.  He had been ill.

223               The witness struck me as anxious to present his case in the best way that he could.  He may have been a little suggestible. 

Applicant:	Delia Murdoch
Amount of Investment:  $10 000
Key Documents Received:  Investment summary

224               Ms Murdoch first became aware of MDRN in about June 1999 when a friend gave her brochures.  She subsequently received a telephone call from Mr Gill.  He provided information concerning particular projects, including the Yandina project.  The following aspects of the investment summary were of importance to her:

·                the term of the investment;

·                that it was a new project from which she could remove her money after twelve months;

·                Mr Rivett’s experience, his law degree and financial strength;

·                that the first six month’s interest was to be pre-paid;

·                that all the units had been pre-sold;

·                the interest rate which, she thought, indicated that the project was safer than projects offering 10 and 11 per cent; and

·                the LVR of 70 per cent.

225               She was asked to comment upon the effect on her decision had she known that Mr Rivett had assets of less than $100 000.  She seems not to have understood the question.  She would not have invested had she been told that only three or four of the units had been pre-sold.  She had marked certain passages in her own copy of the investment summary as being of importance to her.  She was cross-examined about her understanding of the requirement that six months’ interest be pre-paid.  Again, she seems not to have really understood the question.  She eventually agreed that she understood that the interest was to be paid from the advance.  

226               She was asked by counsel for one of the cross-respondents what she would have done had she known that Project Results and Mr Rivett’s assets had not been checked by MDRN.  Although the answer was a little unclear, it seems that she would not have invested.  However the statement was really led from her.  I have some doubts as to its veracity given that the issue was not addressed in her affidavit.

Applicant:	Brian Christian Nielsen
Amount of Investment:  $20 000
Key Documents Received:  Brochure, Investment Summary

227               Mr Nielsen was first introduced to MDRN in early 1998, at which time they were offering interest of 11 per cent.  He met Mr Ryan at a social function and asked him to explain how the investment scheme worked.  Mr Ryan said that he would send more information.  Mr Nielsen subsequently received the brochure entitled ‘MDRN Private Mortgages McCarthy Durie Ryan Neil Solicitors’.  He was particularly impressed by the following statements:

‘Security

All loans are secured by first registered Mortgage over real estate (up to 70% of valuation)’

and:

‘Evaluation

The applicants for mortgages are externally evaluated and a recommendation document in each application is lodged with us with a valuation for mortgage purposes carried out by a member of a panel of registered values.  You are sent a copy of the recommendation document prior to your funds being placed.’

228               He subsequently received a list of available projects and invested $20 000 in one project.  In June 1999 he received a letter from MDRN advising that that loan had been repaid and offering him investment in two other loans, one of which was the Yandina project.  A copy of the investment summary was enclosed. 

229               In deciding to invest in the Yandina project, Mr Nielsen was particularly impressed by Mr Rivett’s background, experience and financial strength.  In particular he was influenced by his asset position evidencing a nett surplus of $1 790 000 and Project Results’ nett asset position of $640 000.  He believed that their available assets were worth the total of those two amounts.  He was also impressed by the information which MDRN was said to have available on request, in particular the valuation, the statement of assets and liabilities of the director, a disclosure statement by the borrower and pre-sale contracts.  He assumed ‘especially because of the procedures, outlined in the MDRN booklets, … that MDRN had looked carefully at the documents and independently verified that the securities and guarantees … had a real and sufficient value.’  He also took comfort from the fact that there was a valuation and that the loan was secured by the value of the land.  He did not see the valuation.

230               In oral evidence-in-chief he said that the LVR ratio of 70 per cent influenced his decision to invest.  He considered that it related to the unimproved value of the land.  He was also influenced by the representations concerning Mr Rivett and his assets and the fact that the whole project had been pre-sold.  Aspects of the brochure which impressed him were the fact that loans were for 70 per cent of the valuation of the property and the procedure for evaluation of the borrower.  He claimed that at the time of his decision to invest in the Yandina project he still had these matters in mind.  Had he known that Mr Rivett’s assets and those of Project Results totaled less than $100 000, it would have affected his decision to invest.  He would have wondered about their capacity to carry out the project.  He said that had he known that only three or four units had been sold, and that they had been sold at purchase prices of which 40 per cent could be paid in trade dollars, it would also have affected his decision.  He said that he did not then understand how trade dollars worked.

231               In cross-examination he agreed that now realized that the property would improve in value as construction proceeded, and that the increased value would be available to meet repayment of the loan.  His attention was also drawn to a note on the fourth page of the brochure which reads:

‘As with any investment we advise that you consider the recommendation document carefully as we cannot guarantee or indemnify you with respect to any loss of principal or interest that may occur.’

232               He said, however, that he had seen other notes elsewhere which may have contradicted this statement.  He seemed to be referring to the fact that the firm claimed to have considerable insurance to protect the scheme or to protect him.  He thought that MDRN would have verified the accuracy of information concerning Mr Rivett. 

Applicant:	Karen Rose Parker
Amount of Investment:  $20 000
Key Documents Received:  Investment Summary

233               In 1999 Ms Parker received money from a property settlement.  She had no experience in investing.  A friend suggested that she contact MDRN.  She spoke to Mr Gill who gave her information concerning two projects, one of which was the Yandina project.  She subsequently invested $20 000 in that project and $20 000 in another project.  In investing in the Yandina project she was influenced by the statements in the investment summary concerning the borrower’s background and the ‘solid backing of property being used against the loan’.  She was particularly influenced by statements at pp 2 and 3 concerning Mr Rivett and the recommendation at p 5.  She understood Mr Rivett to be a part-owner and builder of all of the projects in which he was said to have been involved and that he was experienced.  She understood there to be ‘solid backing to the borrower’.  She trusted MDRN to have checked the information concerning the assets and financial strength of Mr Rivett. 

Applicants:	Peter John Perring
Amount of Investment:  $20 000
Key Documents Received:  Investment Summary

234               On or about 23 June 1999 Mr Perring contacted MDRN, requesting information in relation to investments which they were offering.  He received a copy of the investment summary under cover of a letter dated 23 June 1999.  He studied the summary.  The following aspects were important to him:

·                pre-sale of all units for $85 000 each, which statement he assumed MDRN had checked;

·                valuation and security, including LVR, valuation by Mr Ludlow of Stanton Hillier Parker, recognized as one of the most experienced valuers of this type of development in Queensland who reported positively on the project;

·                valuation to be confirmed as current and addressed to the trustee company for mortgage security purposes;

·                security of a first bill of mortgage, his assumption that the valuation was done by competent professionals and that MDRN had exercised quality control measures to verify the accuracy of the valuation;

·                return of 9.25 per cent which he considered to be attractive for a twelve month period;

·                Mr Rivett’s credentials and finances, including the availability of a statement of assets and liabilities, his significant experience and ability, his control of Barter Pacific Property and Finance, that trading profits of Mr Rivett’s companies would be available for interest coverage, that Mr Rivett had a strong asset position with a nett surplus of $1 790 000 and that Project Results had an asset position of $640 000;

·                interest being pre-paid by the borrower; and

·                the statement that MDRN believed that Mr Rivett had the necessary experience and qualifications to undertake the project.

235               Mr Perring assumed that MDRN had ‘all the homework and due diligence completed by reliable persons who were selected and controlled by [MDRN] …’. 

236               In numerous conversations with Mr Ryan and Mr Gill, Mr Ryan repeatedly asserted his confidence in Mr Rivett and the success of the Yandina project.   He also said that the firm was successful in this type of fund-raising and only dealt with professionals, and that the pre-sale indicated that the project could not fail.  Mr Perring was not cross-examined.  

Applicant:	Keith Prince
Amount of Investment:  $25 000
Key Documents Received:  Investment Summary

237               MDRN had acted for Mr Prince since about 1985, primarily in connection with conveyancing services.  In 1996 he received a letter from them entitled ‘Private Mortgage Investment – 11.5% interest’.  He was impressed by the statement in the letter that borrowers in the private mortgage market were excellent quality applicants, prepared to offer first mortgage security on the basis that the loan would not exceed 70 per cent of the value of their properties.  He rang MDRN to obtain further information.  He was told that some people did not want to deal with banks, that MDRN was able to recommend finance more quickly than a bank, that the amount of a loan was covered by the value of the land and that if the worst came to the worst, the land would be sold and lenders would get their money back. 

238               Mr Prince and his wife made a number of investments and, in June or July 1999, Mr Gill telephoned concerning the Yandina project.  Mr Gill said that Mr Rivett was ‘a QC who had significant experience and ability to successfully undertake this project’ and that they needed $50 000 to complete it.  He said that he would send an investment summary, which he did.  In deciding to invest, Mr Prince was particularly influenced by:

·                the fact that all units had been sold for $85 000 each, which he understood to be payable in Australian currency; and

·                the qualifications, experience and financial assets of Mr Rivett and the valuation of the land. 

239               He understood the statement concerning the sale of units to be at $85 000 each in Australian currency.  He understood that Mr Rivett had been successful in other undertakings and that he had ‘done this type of development before and knew what he was doing’.  Mr Prince inferred that MDRN had checked out everything about him and the Yandina project and that what was said in the investment summary was correct.  He understood that Mr Rivett had assets totalling $2 430 000, and that they would be available to repay the loan and interest in the event of any shortfall.  He also understood that Mr Rivett had enough money to pay six months’ interest in advance, that his companies’ trading profits had been checked and that MDRN was satisfied that they would be able to pay any further interest.  He did not realize that the pre-payment of interest was to be from loan funds. 

240               He understood that Stanton Hillier Parker had independently valued the land, and that the valuation confirmed that the loan was secured by the value of the land.  He seems to have understood that this related only to the land on which the development was to be built, and that additional blocks were also being made available as further security.  He said in evidence-in-chief that he understood that eight of the twelve units had been sold.  Had he known that only three or four of the units had been sold, and that about 40 per cent of each purchase price was payable in trade dollars, he would have considered it to be of significance.  Had he been told that Mr Rivett had previously made an arrangement with his creditors under the Bankruptcy Act he ‘wouldn’t have touched it’.  Had he known that Mr Rivett and the company’s assets were significantly less than those set out in the investment summary, he would not have invested.

241               In cross-examination he agreed that the investment summary made it clear that pre-paid interest was to come from funds advanced.  He had not realized that at the time.  He expected MDRN to make the inquiries that a reasonable and prudent lender would have made.  In re-examination he said that a reasonable and prudent lender would have checked everything out, and that this would have been done by MDRN before the documents were sent to him.  In particular, they would have checked that Mr Rivett ‘had the finances, that it was financially viable from their surveyor’s point of view’.

Applicants:	Nicola Scott
Amount of Investment:  $70 000
Key Documents Received:  Investment Summary

242               Prior to May 1999 Ms Scott knew people who had made investments with MDRN.  She decided to inquire concerning such investments and spoke to Mr Gill.  She said that she required a safe investment.  Mr Gill said that she couldn’t lose her money, and that investors had first mortgage security on the basis that the loan would not exceed 70 per cent of the value of property.  The worst that could happen would be that she might not get all of her interest.  He said that this had occurred on three occasions.  She subsequently received investment summaries relating to the Ammbar project and the Yandina project.  In reading the investment summary for the Yandina project she said that she relied on MDRN for the comments and statements of fact and opinion contained in the summary.  She noted that it had been approved under their private mortgage loan application assessment programme.  She placed particular weight upon:

·                LVR of 70 per cent;

·                the interest rate of 9.25 per cent;

·                that there was to be a mortgage over the land which was valued at more than the loan; and

·                the director’s guarantees. 

243               She said that the investment summary gave her the impression that the assets and liabilities of Mr Rivett had been checked out and that the nett assets of Mr Rivett and Project Results would be available to investors if anything happened to the project.  She thought that Mr Rivett’s experience had been checked, and that MDRN could attest that he was reliable and trustworthy.  She noted the observation at p 5 that the proposal was submitted for her consideration and supported on the basis of the experience and qualifications of the director, his asset position, the LVR ratio of 70 per cent and the pre-sale of all units.

244               She understood that the units were to be sold at $85 000 each and that contracts would be entered into.  She understood that the price would be paid in ‘real funds’.  She believed that MDRN had checked the application for loan and that statements in the investment summary could be accepted.  Ms Scott was not cross-examined.

Applicant:	Narelle Vida Shallard (as trustee of the C & N Shallard Superannuation Fund)
Amount of Investment:  $30 000
Key Documents Received:  Investment Summary, Winter 1999 Newsletter

245               Mrs Shallard is now the sole trustee of the C & N Shallard Superannuation Fund.  She and her husband were previously joint trustees.  Mr Shallard died on 5 August 2004.  Prior to his death, he swore an affidavit in these proceedings. 

246               Mr and Mrs Shallard first heard of MDRN when they saw an advertisement in the early part of 1999.  Mr Shallard telephoned Mr Gill, requesting information concerning investment schemes.  A short time later they received a letter and certain investment summaries.  They invested $30 000 with Ammbar Pty Ltd, which investment was successful.  At about the same time they received the winter 1999 newsletter which stated that:

‘Loans Manager Dale Blackadder conducts full checks for every prospective borrower and no loan is approved unless it meets our Ten Point Assessment Plan (see autumn 1999 newsletter).’ 

247               Mr Shallard understood from this statement that the firm had an experienced loans manager who made checks to verify and assess the quality of loan applications.  These were in accordance with the ten point assessment plan.  Mr and Mrs Shallard did not see the assessment plan as set out in the autumn newsletter.  They relied upon MDRN’s ‘integrity in making this statement that they follow this process in all applications they assessed’.

248               On about 22 June 1999 they received the investment summary for the Yandina project.  Mr Shallard considered the following matters to be important:

·                that the development was a retirement village;

·                LVR of 70 per cent which he considered satisfactory, leaving a safety margin if any difficulty arose;

·                MDRN had arranged for a quality valuation of the site and verified all applicable loans/debts ‘in making this LVR statement’;

·                the term of twelve months;

·                use of a quantity surveyor ‘to confirm the project viability and costings’;

·                interest rate;

·                the skills and professionalism of MDRN in assessing the viability of the project and that they had managed other investments;

·                approval by MDRN of the loan application, which approval Mr Shallard understood to have involved a structured process for assessing the suitability of applications;

·                Mr Rivett’s experience and work history;

·                that all units in Stage 1 had been sold, to be settled within twelve months in Australian dollars;

·                the asset position of Mr Rivett and Project Results, with total available of assets of $2 430 000;  MDRN having conducted ‘sufficient checks to verify the authenticity of statements such as these’;

·                “residual” of approximately $400 000 at the end of Stage 1, which Mr Shallard understood to mean that there would be a surplus of $400 000 available at the end of Stage 1; and

·                units being sold for $85 000 each in Australian dollars.

Applicants:	Ian Archibald Stewart and Dorothy Stewart
Amount of Investment:  $50 000
Key Documents Received:  Investment Summary

249               Mr and Mrs Stewart had first contact with MDRN through Mr McIntyre who acted as their solicitor from about 1990.  Whilst they were finalizing their wills they observed leaflets and promotional material concerning investment schemes.  They asked Mr McIntyre about these investments.  He advised them to go to the office at Capalaba where the investment operation was based.  On 15 June they spoke to Mr Gill at the Capalaba office, advising him that they wanted to invest $250 000.  Mr Gill advised them to spread their money between several investments in order to spread the risk.  He provided them with written information including investment summaries, one of which was for the Yandina project.  They considered that the LVR of 70 per cent was adequate and inferred that Mr Rivett had contributed a total of $638 677 in Australian dollars ‘already into the project’, indicating that he was committed to it.  The valuation by Stanton Hillier Parker was also important.  Mrs Stewart asked for a copy.  Mr Gill said that he would send it but did not do so.  Mr and Mrs Stewart assumed that it would ‘corroborate’ the LVR of 70 per cent. 

250               They noted that the application had been approved under MDRN’s private mortgage loan assessment programme.  They understood that MDRN had a formal process for assessing applications and that ‘all proper checks had been conducted before approving this loan’.  They considered that Mr Rivett’s experience offered comfort and that he had successfully secured contracts to sell all units in Stage 1.  They understood that interest on the loan was to be pre-paid.  They seem to have appreciated that the pre-payment was to come from the advance.  They understood the reference to ‘a residual of $400 000’ to refer to a residual surplus.  However, later in his evidence, Mr Stewart conceded that it must have meant a residual debt.  They took comfort from the fact that Mr Rivett’s companies could provide interest coverage from trading profits and from the strong asset position of Mr Rivett and Project Results.  They understood the figure of $640 000, representing Project Results’ assets, to be included in the amount of $1 790 000 attributed to Mr Rivett.  They understood that the units were to be sold for $85 000 each, in Australian dollars.  They had never heard of trade dollars.  They decided to invest $50 000 in the Yandina project. 

251               In oral evidence-in-chief Mr Stewart said that had he been told that Mr Rivett had assets of less than $100 000, it would probably have influenced his decision.  He probably would not have proceeded with the investment.  In cross-examination, Mr Stewart agreed that he was aware that there was a risk that the investment might fail.  For that reason he had spread his investments.  As to the LVR, the witness seemed to agree that at the time of the initial advance, up to 70 per cent of the value of the land was to be advanced and that as development costs were incurred, no more than 70 per cent of those costs was to be advanced.  He understood that MDRN would have assessed the loan application in the manner of a reasonably prudent lender and that, in particular, in examining Mr Rivett’s assets, they would have made an assessment of the sort that a reasonably prudent lender would have made.

252               Mr Stewart accepted that Mr Rivett’s contribution to the project comprised the land rather than actual cash, and building work to the estimated value.  When he read the investment summary, he understood that the building works were to be completed within the first six months.  He considered that there was always the possibility of over-run.  He understood the reference to sales of the manger’s accommodation and units to mean that people had indicated willingness or intention to buy.  He understood that there were to be six pre-sale contracts.  He thought that he had read that there were offers on others.  He agreed that there was a reference to trade dollars in the investment summary and that he must previously have heard of them.  It was clear that Mr Rivett controlled Barter Pacific Property and Finance which specialized in property and finance, using trade dollars.  He said in re-examination that he did not understand that the purchase prices of the units would be paid partially in trade dollars.

Applicants:	Warren George Trotman and Carmel Mynetta Trotman (as trustees of the WGCM Trotman Superannuation Fund)
Amount of Investment:  originally $133 000, $80 000 later, $163,000 in total
Key Documents Received:  Investment Summary

253               Mr and Mrs Trotman were first introduced to MDRN in 1997/98.  They spoke to Mr Gill on several occasions.  He explained the services offered by MDRN.  As a result they invested money in a scheme.  In about June 1999 they received an investment summary for the Yandina project.  They noted that it involved a registered first mortgage over five adjoining allotments, a registered mortgage debenture and a director’s guarantee.  Interest was to be pre-paid for the initial six month period.  The trading profits of Mr Rivett’s companies were to be available to provide interest coverage.  Mr and Mrs Trotman assumed that MDRN had verified documents supporting the statement concerning interest coverage.  They noted the information concerning the asset positions of Mr Rivett and Project Results and assumed that it had been verified by MDRN, that there was a valuation by Mr Ludlow, recognized as one of the most experienced valuers of this type of development in Queensland, and that he reported positively on the project.  Mr Trotman understood the valuation to be as at the completion of Stage 1.  He considered that 9.25 per cent was a moderate level of return, reflecting a low to medium level of risk.  He noted the LVR of 70 per cent and the reference to a ‘residual’ of $400 000.  He interpreted this as a reference to a surplus.  He noted also that the units were being sold for $85 000 each, and that Mr Rivett had advised that all had been sold.  He took this to mean that each had been sold for $85 000 in Australian dollars. 

254               In deciding to invest he was influenced by:

·                security offered;

·                serviceability;

·                financial strength of Mr Rivett and Project Results;

·                valuation of the scheme;

·                return on the investment;

·                LVR; and

·                pre-sales in existence.

255               Mr and Mrs Trotman invested $133 000 in the name of their superannuation fund and $80 000 in the name of Mrs Trotman.  There is reference in pars 27 and 28 of the affidavit to a sum of $141 000, but its significance is not clear.  Subsequently, the investment of $80 000 was transferred into the name of the superannuation fund, so that its total investment was $213 000.  In April 2000, $50 000 of the investment was put elsewhere, thereby reducing the total investment to $163 000.

256               When Project Results defaulted, Mr Trotman requested information concerning Mr Rivett’s financial position.  He also requested a copy of the valuation.  He asked Mr Blackadder why Mr Rivett could not put in $260 000 to finish the project.  Mr Blackadder said that he did not have the money.  Mr Trotman asked if Mr Blackadder had checked to see if Mr Rivett and his companies had the assets shown.  Mr Blackadder said that they had only checked some.  Mr Trotman then asked why MDRN did not put in the $260 000.  Mr Blackadder said that it was not his responsibility to put that to the partners.  Mr Trotman asked what backgrounds checks had been done on Mr Rivett.  Mr Blackadder said that one of the partners’ wives knew him.  Mr Trotman said ‘That was it?’ and Mr Blackadder said ‘Yes’.  Mr Blackadder later informed him that:

·                MDRN was optimistic that the matter could be resolved by bringing in a partner;

·                Mr Rivett was arranging money from overseas to pay everybody out;

·                the builder was arranging a consortium to buy the development;

·                the money would be forthcoming from Mr Rivett’s overseas borrowings; and

·                MDRN was communicating with several parties with a view to forming a joint venture to salvage the scheme, including parties from Townsville and a consortium organized by the builder.

257               At a later stage Mr Trotman saw Mr Rivett at his office in Mooloolaba.  He asked him why he would not pay to finish the project.  Mr Rivett said that he had experienced a bad year and that he didn’t have any money.  He was also separating from his wife.  At a later meeting at Mooloolaba Mr Rivett said that he was ‘… close to obtaining the money required to finish the job’ and ‘… that the cavalry was coming to the rescue’. 

258               In his oral evidence-in-chief Mr Trotman said that matters which affected him at the time of investment were:

·                that the loan was for a relatively short time and a relatively small amount of money, with an LVR of 70 per cent;

·                that the interest was to be paid from Mr Rivett’s ‘investments’, presumably his companies;

·                Mr Rivett’s asset position which was more than adequate to repay the investment should the project fail; and

·                that twelve units had been pre-sold at $85 000 each.

259               If only three or four units had been sold, it may have influenced Mr and Mrs Trotman, but ‘not overwhelmingly’.  By ‘sold’ Mr Trotman understood that contracts were held.  Mr Trotman was not then aware of trade dollars.  Had he known that about 40 per cent of the purchase price of each unit was payable in trade dollars, it would have caused concern.  Had he known that Mr Rivett had assets of less than $100 000, he would not have gone into the project.  Mr Trotman said in cross-examination that he had discussed the Yandina project with Mr Gill and Mr Blackadder and that ‘They reassured us that the information provided was correct.’ 

260               On one occasion prior to the Trotmans deciding to invest, Mr Gill asked him by telephone whether he had met Mr Rivett.  When Mr Trotman said that he had not, Mr Gill said that he was an impressive character.  As a result Mr Trotman asked Mr Ryan if he could meet Mr Rivett to discuss his competence in this sort of work.  He inspected the site and met Mr Rivett for about twenty minutes.  Mr Trotman was impressed by Mr Rivett. 

261               Mr Trotman knew that the pre-payment of interest was to come from loan funds.  He also understood that there was to be a surplus of $400 000 at the end of Stage 1, but accepted in cross-examination that it was a residual debt.  He was influenced by the fact that there had been pre-sale of twelve contracts and seemed not to think that the provision for production of six contracts detracted from that.  He understood from the investment summary that there was a prospect that trade dollars would be used to pay for the units, but he did not fully understand the meaning of the expression ‘trade dollars’.  In re-examination he said that he felt that some of the purchase prices might be paid in trade dollars, but he considered that Mr Rivett would have to pay $85 000 because ‘trade dollars wouldn’t be any use to us’. 

Applicant:	WJ and AM Luke Pty Ltd ACN 000 884 266
Amount of Investment:  $30 000
Key Documents Received:  Investment Summary

262               Mr Luke had first contact with MDRN in 1995 when he purchased a home.  In 1996 he saw an advertisement for their mortgage investment business.  At that time he had funds available for investment and spoke to Mr Ryan.  His first investment was made in April 1996.  After that he placed a number of investments with them.  Most of his contact was with Mr Gill.  He rarely visited MDRN’s offices.  Ms Pimpenella has been his main contact since Mr Gill left, about a year prior to Mr Luke swearing his affidavit on 6 May 2004.  He enjoyed a good working relationship with MDRN.  In July 1999 he received a letter from them, together with an investment summary.  He did not retain a copy of the investment summary.  Mr Luke recalled that the loan was for a period of twelve months, with an LVR of 70 per cent, and that Mr Rivett had a suitable background for property development.  Based on what he saw in the investment summary and the letter, he decided to invest $30 000. 

263               In his oral evidence-in-chief he said that matters relevant to his decision to invest were:

·                the LVR ratio of 70 per cent;

·                Mr Rivett’s qualifications and reputation;

·                his assets and those of Project Results;

·                that the units in Stage 1 had already been sold or were being sold;

·                that Mr Rivett had put something like $600 000 of his own money into the project;

·                that MDRN had approved the application; and

·                all the paperwork had been done.

264               Had he been told that the $400 000 contribution was borrowed, he would not have invested.  Had he been told that the $238 677 to be invested in construction and sale was not in Australian currency but trade dollars or barter, he would not have invested.  Had he been told that in 1984, Mr Rivett entered into an arrangement with his creditors, he would not have invested, nor if he had known that only three or four units had been sold.  However, had he been told that Mr Rivett and Project Results had assets significantly less than those disclosed, he would not have invested.

265               In cross-examination, he said that he had assumed that MDRN had checked the assets of the borrower and the guarantor.  His evidence is a little unclear on this point.  He seems to have meant that he would never have received the investment summary had the checks not been done, presumably meaning that MDRN would not have sent it had they not done the checks.

Applicant:	Graham Robert Watt and Patricia Anne Watt
Amount of Investment:  $20 000
Key Documents Received:  Investment Summary

266               In about 1997 or early 1998 Mr Watt saw an advertisement in a local newspaper for MDRN’s mortgage investment business.  He telephoned and spoke to Mr Gill.  He and his wife later invested in a number of first mortgage loans.  On or about 30 June 1999 they received a letter from MDRN, together with a copy of the investment summary.  Mr Watt read the statement.  He was particularly impressed by the information concerning Mr Rivett’s property development experience and his personal and company assets which were to be available as security.  He concluded that Mr Rivett was connected with the well-known company Bartercard.  On re-reading the summary he realized that this was not the case.  He understood Mr Rivett’s personal assets to be $1.79 million and that Project Results had nett assets of $640 000.  He was also impressed by the fact that there was to be a fixed-price building contract and that twelve units had already been sold for $85 000 each.  He understood this to mean that there were signed contracts of sale.  He inferred that the building costs had been checked. 

267               The fact that there was to be first mortgage security was important to him, as was his belief that the valuation had been performed by a reputable valuer.  He may not have thought so highly of the project had he known that all twelve units had not been sold.  However he would have entered into the contract even if only six or, maybe, three had been sold.  Had he been told that about 40 per cent of the purchase price for the units which had been sold was to be paid in barter dollars, he would not have invested.  He considered that the process of investigation carried out by MDRN was significant to his decision to invest.  Had he been told that Mr Rivett had entered into an arrangement with his creditors in 1984, it would have affected his decision.  Had he been told that Mr Rivett’ assets were substantially less than $100 000, he would not have invested.  He understood the valuation to be of the five titles.  He did not understand it to be a notional valuation of the land with the proposed buildings erected. 

268               The bases of the recommendation on p 5 of the investment summary were also relevant to his decision.  Had he been told that MDRN had taken Mr Rivett’s statement of assets at face value without checking it, he would not have invested.  Had he known that they had not obtained copies of the contracts for sale of units, he would not have invested.  Had he known that MDRN had not made checks to see that all units had been sold, he would still have invested.  He understood that the project might take more than six months to build.  He considered that MDRN would investigate the matter as a bank would, making sure that the figures were right.  However he did not know how a bank would go about it.  He assumed that MDRN would have checked Mr Rivett’s assets and those of Project Results.  He would not know how to go about that process.  He said that MDRN were always very diligent in checking those sorts of things.  He was aware of the possibility of a shortfall.

Applicant:	Annie Catherine Webb
Amount of Investment:  $10 000
Key Documents Received:  Nil

269               Ms Webb sues as executor of her deceased husband’s estate.  She said that he made numerous investments through MDRN, the first in 1998.  He would study the material provided by MDRN before deciding whether to invest.

Applicant:	Dieter Holman (in his own right and as executor of the Estate of Mildred Holman)
Amount of Investment:  $20 000
Key Documents Received:  Brochure, Investment Summary

270               Mr and Mrs Holman (now deceased) first dealt with MDRN in February 1997 and subsequently made several investments with them.  In late April 2002 Mr Holman was telephoned by Mr Gill who had been introduced to them as the person responsible for dealing with investing clients.  Shortly thereafter, a prospectus, advisory services guide and an investment summary were sent to them.  The following matters in the investment summary were significant to their subsequent decision to invest:

·                LVR of 70 per cent;

·                term of twelve months;

·                interest rate of 9.25 per cent;

·                the asset position of Mr Rivett and Project Results, showing a total of $2 430 000 available as security for the loan in the case of financial difficulty; and

·                that all units in Stage 1 had been sold, meaning that there were contracts in place for all twelve units.

271               Mr Holman believed that MDRN had conducted their own quality control checks to verify that all statements were correct.  He had no reason to believe otherwise.  He would not have made the decision to invest if it were not for the statements in the investment summary.  In the prospectus, evaluation procedures were discussed.  He believed that such discussion was also relevant to the investment summary.  The prospectus stated that:

‘×         Mortgage investments are identified and evaluated by MDRN. Where MDRN determines that the potential loan is suitable for investment (using the criteria set out in Section 4) then a Mortgage Investment Summary is sent to registered investors.

×          Mortgage Investments – An investor will be provided in each Mortgage Investment Summary with details of a particular mortgage investment.

×          A strict process is used by MDRN in evaluating each loan proposal that is submitted to it by applicant borrowers and the monitoring of any loan that is made.  This process includes:

(1)       Enquiry into the applicant borrower – the applicant borrower’s ability to service and repay the loan is critical in the evaluation process … credit checks are carried out in all cases.

(2)       Valuation support … .

(3)               Registered mortgage security …  .

(4)               Adequate insurance … .

(5)               Prudent LVR … .

(6)               External professional supervision … .

(7)               Loan monitoring.’

272               Mr Holman considered that this showed that detailed checks were performed in assessing the quality of loans before offering them to potential investors.  He understood that this process had been carried out in the case of the Yandina project.  The expertise and experience of Mr Ryan and Mr Blackadder were also discussed.  Mr Holman considered that they had levels of experience upon which he could rely.  It was of particular importance that there was a process for evaluation of applications and ongoing monitoring of loans.

273               As to the brochure, Mr Holman’s confidence was boosted by the following statements:

‘×         Evaluation – The applicants for mortgages are professionally evaluated and a recommendation document on each application is lodged with us.

×          Evaluation Procedure – The evaluation of applicants is provided by experienced professionals who have had extensive banking experience.  They examine the debt service capacity and good credit history of each applicant and obtain a valuation of a security property to ascertain that the loan/security ratio does not exceed 70%.

×          How secure are Secure Private Mortgages?

(a)       …

(b)       loan to value ratio is a maximum 70% of valuation.

×          Summary – Credit assessment by experienced professionals.

×          How to get started – a summary of [approved applications] will provide you with the following:

…

The terms of the loan,

The loan to value ratio to a maximum of 70 per cent,

…

Confirmation of the full credit check has been completed through the Credit Reference Association of Australia,

Summary of borrower’s financial details.’

274               In oral evidence-in-chief Mr Holman said that it was significant to his decision to invest that applications were professionally evaluated and that a valuation was obtained from a panel of registered valuers.  He understood that evaluation of applications was carried out by experienced professionals who had extensive banking experience.  He took comfort from the fact that Mr Rivett had a strong asset position.  Had he known that this was not the case, he would not have invested.  Had he known that Project Results did not have substantial assets, he would not have invested.  Had he known that the loan was in default at the time that he invested, he would not have done so.  It was of importance to him that all units were said to have been sold.  Had he been told that only three or four had been sold, he would not have invested.

275               In cross-examination he conceded that in a letter dated 19 April 2000 (ex 22), he had been told, prior to investing, that interest for the period from 23 February to 22 March 2000 remained unpaid, that it was to be paid in the immediate future and that a notice of default had been issued.  It is of some concern that this letter emerged only in cross-examination.

Applicant:	Alice Joyce Tangey (in her own right and as executor of the estate of Kevin Herbert Tangey)
Amount of Investment:  $30 000
Key Documents Received:  Investment summary

276               Mr Tangey died on 27 September 2003.  His wife, Mrs Tangey is executor of his estate.  Mr Tangey died before swearing an affidavit in this matter.  Mr Turner, an officer of ASIC, drafted his affidavit and read it to him over the telephone before he died.  He affirmed its contents by telephone.  The affidavit is received pursuant to s 63(2)(b) of the Evidence Act 1995 (Cth).  There was no objection. 

277               Mr Tangey first heard of MDRN in or about late 1999 or early 2000.  He saw an advertisement.  In or about March 2000 he saw another advertisement and contacted MDRN by telephone to discuss investment schemes.  He spoke to Mr Gill, saying that he was interested in investing $60 000.  Soon after that, he received a letter from Mr Gill, together with an investment summary.  He was told that he could invest for only three months in the Yandina project as the loan expired on 22 July 2000.  It seemed like a good opportunity to invest quickly.  He perused the investment summary and the letter and satisfied himself that the investment was worthwhile.  He was attracted by the high interest rate and the security offered by Project Results and Mr Rivett.  He was also impressed by the investment summary and said that MDRN seemed to be a very professional operation.  He felt confidence in Mr Rivett.  The investment summary gave a glowing recommendation of him as a successful businessman with a law degree. 

278               At the time of making the investment he did not know that Project Results was already in default, although he had been informed by Mr Gill that there had been a delay in payment of interest.  In view of the explanation contained in Mr Gill’s letter of 7 April 2000, it did not occur to him that the loan was actually in default.  The letter suggested that the delay had been caused by postponement of a settlement which was to have occurred at the end of February.  Mr Tangey would not have proceeded with the investment had he known that it was not a sound investment.  He had been assured by Mr Gill that it was sound, that everything was fine and that any delay in the payment of interest had been caused by the postponement of settlement.

The Respondents

279               Having addressed the evidence of the applicants’ complaints, it will be convenient now to consider the evidence of the respondent partners in MDRN and Mr Blackadder.

Philip Ashley Ryan

280               Mr Ryan was admitted as a solicitor in 1983.  He holds the degrees of a bachelor of laws and graduate diplomas in legal practice and applied finance and mortgage lending.  He is an associate of the Securities Institute of Australia and a fellow of the Tax Institute of Australia.  Prior to joining MDRN in 1988, he worked predominantly in the areas of tax law and financial planning.

281               Mr Ryan said that MDRN carried on the mortgage business as part of its legal practice.  The trustee company operated as ‘a bare trustee company utilized for the purpose of holding investment funds in the course of [MDRN’s] practice.’  MDRN commenced its mortgage business in about 1995.  Mr Ryan supervised it.  He had ‘limited direct contact’ with investors in the Yandina project, usually referring any inquiries to staff, chiefly Mr Gill who was MDRN’s client relations manager.  Mr Ryan’s affidavit filed on 1 April 2005 deals with the conduct of the mortgage business.  He said that from 1998 until 2000 he and Bruce Campbell were the joint managing directors of MDRN Investments Limited.  At the time of making the advance to Project Results, according to Mr Ryan, the ‘… business of MDRN Private Mortgages ran concurrently with the business of MDRN Investments Limited.’  It seems that MDRN Investments Ltd held a securities dealer’s licence.  Mr Campbell is a solicitor of considerable experience in the corporate, commercial and property areas and has had considerable involvement in transactions concerning matters such as retirement villages. 

282               In September 1998 MDRN employed Mr Dale Blackadder as the general manager of finance, apparently to work in the mortgage business.  Previously, loan proposals were assessed externally by a company called National Mortgage and Development Ltd.  It prepared investment summaries for distribution to potential lenders.  MDRN decided to undertake this procedure ‘in house’ and sought to employ somebody with the relevant banking (including commercial lending) experience.  Mr Blackadder had extensive experience in commercial lending through his previous employment with Westpac and Metway.  In the course of previous dealings with MDRN, the partners had been impressed by his honesty and competence. 

283               Mr Ryan referred to one of Mr Blackadder’s affidavits which has been filed in these proceedings, in which he set out what he described as two important aspects of assessing a loan application for commercial development.  Mr Blackadder identified firstly the “commercial aspect” ‘… which involved primarily assessing the viability of the transaction in which the funds were sought, the level of security being offered and the like’; and secondly, the ‘transactional aspect’ which involved ‘performing appropriate searches to ensure that the corporate borrower was controlled by the persons actually making the loan application, that the proposed borrower in fact was the registered proprietor of the land being offered as security and the subject of the valuation, and that there were not encumbrances on the titles of that land which were not accounted for in the valuation’.  Mr Blackadder said that the two aspects could not, in a practical sense, be divorced from each other.  To my mind, the distinction is between the commercial decision to lend and the necessary legal formalities.

284               Mr Ryan agreed with Mr Blackadder’s analysis and asserted that it reflected the practice of all established lenders for commercial development.  He said that assessment was performed by either himself or Mr Blackadder under his supervision.  The work was divided up according to each’s respective expertise.  Mr Blackadder assessed loan applications in the first instance, including the borrower’s financial ability, the valuation, financial searches and assessment of the loan from a commercial perspective.  Mr Ryan was primarily responsible for assessing loan applications from the transactional perspective, including the conduct of relevant searches and preparation of relevant legal documents.  He also supervised Mr Blackadder’s work.  He said that Mr Blackadder would discuss loans with himself, Mr Campbell, Mr Gill and/or the other partners.  In discussion they would address the nature of the project, the LVR and proposed interest rate.  Mr Ryan regularly became involved in Mr Blackadder’s assessment process, for example by participating in interviews with potential borrowers and conducting site inspections.  Mr Campbell and Mr Gill would also assist from time to time. 

285               Once Mr Blackadder had completed his assessment and recommended proceeding with a particular loan, he would provide a review to Mr Ryan and a facility letter to the potential borrower.  The letter would indicate that finance was available subject to a series of criteria being met.  This was not a formal letter of offer, but rather an identification of matters about which MDRN would require to be satisfied before it would make the loan.  The letter sought the prospective borrower’s confirmation that it was willing to proceed on that basis.  At the time of preparation of the facility letter Mr Blackadder and Mr Ryan would typically have a further discussion concerning the commercial aspects of the loan assessment and the transactional aspects yet to be performed.  Mr Ryan would then consider the legal searches still required and the documentation.  Once the borrower had accepted such an offer ‘the emphasis of the loan assessment process would shift from the commercial to the transactional aspect.’ 

286               Mr Blackadder would then prepare an investment summary, the first draft of which would be circulated to Mr Gill and Mr Ryan who would make suggestions concerning its content.  A final draft of the investment summary would be circulated to MDRN partners, Mr Campbell and Mr Gill.  Further suggestions and comments might be made and incorporated into the draft.  If there were any concerns with the proposal, or if anybody thought that it should not go ahead, it would not proceed.  Following this process the summary would be circulated to potential investors, and Mr Ryan would commence the necessary legal searches and preparation of the documents.  If the legal searches were not satisfactory the proposed loan might not proceed. 

287               Mr Ryan asserted that the partners had not delegated to Mr Blackadder the entire role of assessing applications and approving them.  This was specifically the case in relation to the loan to Project Results.  Although Mr Blackadder was primarily concerned with the commercial aspects of the assessment, he performed that task in consultation with others.  The loan would only be settled after the commercial and transactional aspects were completed.  Assessment of the loan and preparation and distribution of the investment summary were all performed under the supervision of the partners.

288               Mr Ryan also dealt with specific allegations made by various applicants.  However I do not understand any of those matters to be relevant, given rulings made in the course of the trial and/or the way in which counsel dealt with the case in their final submissions.

289               Mr Gill was employed in August 1992 as a “paralegal”.  He had extensive conveyancing experience.  He was subsequently employed as ‘Client Relations Manager’ to liaise with investors and potential investors regarding investment opportunities.  In late 1994, Mr Gill began to suffer mental health problems.  He took six weeks’ leave, returning on 2 January 1995.  He continued to demonstrate mental anxiety and nervous stress which affected his work and his workmates.  In 1997 he suffered a relapse, resulting in further time off work.  Mr Gill was insubordinate towards the partners and senior staff members, particularly the practice manager and in-house accountant.  His employment was terminated on 24 November 2000.

290               On 4 April 2000 MDRN gave notice of default to Project Results after it failed to pay the interest due on 22 March 2000.  At the same time notice of default was given to Mr Rivett as guarantor.  Prior to the issue of these notices Mr Blackadder and Mr Ryan had been in constant contact with Mr Rivett, the quantity surveyor and other parties as a result of construction difficulties.  Various possible options for completing the project had been discussed.  Mr Ryan nonetheless believed, on the strength of the representations made by Mr Rivett and advice from Mr Carey, the quantity surveyor, that the project could be successfully completed on time.  Prior to default he had no real concern in that regard.  Following notice of default Mr Blackadder and Mr Ryan ‘communicated more intensely’ with Project Results and Mr Rivett concerning the available options.  Refinancing appears to have been a prospect.  Eventually, a meeting of investors was called for 13 October 2000.  About 30 of the investors attended.  Mr Ryan circulated a summary of the position, including apparent reasons for default.  Mr Ryan has no recollection of any complaint by investors at the meeting concerning the investment summary.  The meeting was amicable and focused on seeking solutions.  Mr Mitchell suggested that he might finish the project.  Mr Trotman also made ‘substantive comments’.

291               Mr Ryan concluded that it was unlikely that they could obtain unanimous approval for any one course of action.  In early September 2000, MDRN had sought marketing appraisals from numerous qualified real estate agents.  After the meeting MDRN engaged Mr Weir of PRD Real Estate in Maroochydore to market the property pursuant to the notice of exercise of power of sale.  Mr Weir was a local agent who knew the property and Mr Rivett.  MDRN believed that he was the best person to undertake the marketing and sale of the property.  He was instructed to conduct a tender programme but to be alert to the possibility of selling the parcels of land in total or piecemeal.  On 15 May 2001 the firm sent a circular to investors advising of progress.  At this stage a sale was imminent.  Mr Rivett was also trying to arrange alternative finance.  On 13 September 2001, Mr Jessup was appointed to wind-up the scheme.  Mr Ryan reported to him by letter dated 13 September concerning outstanding offers for the property. 

292               Mr Ryan was referred to numerous documents and letters connected with the implementation of the loan to Project Results, apparently in order to demonstrate his close supervision of the loan.  I am not sure that this evidence goes very far.

293               Mr Ryan’s attention was drawn to the autumn 1999 newsletter and to the ten point assessment plan of which much was heard in the course of the trial.  He said that in the period from May to September 1999 the assessment of a proposed loan involved an interview with the proposed borrower to establish his, her or its credibility.  Such interview would be with Mr Blackadder and/or Mr Ryan, Mr Campbell or Mr Gill.  The application would be assessed to determine whether it contained a resumé, a statement of assets and liabilities and background.  MDRN would obtain a valuation.  Mr Ryan said that it also involved:

‘… due diligence in terms of the loan coming to fruition - for example, if it’s a construction loan that a quantity surveyor is to be engaged; that there’s a take-out in terms of sales at the end of the project; that there’s a builder and typically we would require a fixed-price contract in relation to that and also that the building site was appropriate, etc.  So in general terms if that’s what you’re after that would be required in terms of assessing.’

294               After the first interview either Mr Blackadder or Mr Ryan would seek extra information.  They would ensure that any valuation was obtained by MDRN, presumably as opposed to being obtained by the potential borrower.  I infer that this was to ensure that the valuer would be liable to the investors in the event of any error in the valuation.  In some cases there would be ‘a check report typically from a real estate agent or from another valuer.’  They would talk to the building contractor, a quantity surveyor and the valuer.

295               Mr Ryan said that he would speak with Mr Blackadder daily, their offices were nearby.  Mr McCarthy, Mr Campbell and Mr Gill were also located nearby.  Generally, Mr Blackadder looked after commercial assessment and Mr Ryan was involved in the assessment ‘from a transactional basis’.  He would be doing searches, preparing legal documents and ‘processing loans through to completion.’  He said it was very much a team atmosphere with the commercial and transactional aspects overlapping.  Mr Ryan was often involved in site visits, usually with Mr Blackadder.  He would usually interview borrowers with Mr Blackadder and be involved in discussions with valuers, quantity surveyors and real estate agents.  

296               Mr Ryan discussed the Yandina project with Mr Blackadder and with Mr Campbell.  Mr Ryan had previous experience in pensioner accommodation lending and considered that the site had to be relatively cheap, but close to amenities.  He did not know much about Yandina and wanted Mr Blackadder to satisfy him that it had the amenities which would attract tenants.  He said that ‘The crucial point in pensioner unit accommodation is getting the tenant, because if you can get the tenant there is no problem … in seeking ultimate sales.  … the reason for that is that the tenants are essentially government guaranteed.’  Mr Ryan also asked Mr Blackadder about comparative sites.  He had been unable to find any in Nambour which was the closest town.  It is very hilly and presumably unsuitable for older people.

297               Mr Ryan was impressed by Mr Campbell’s comment that he considered Mr Rivett to be a ‘blue chip’ character.  He understood that Mr Rivett had previously been a director of Forrester Parker which operated retirement villages.  He had also been a solicitor and barrister.

298               At that time credit checks could be done using the services of an organization called Credit Reference Association of Australia (“CRAA”).  Such checks were done “on line”.  MDRN’s service company, Hisfield, had an account with CRAA.  Mr Blackadder was responsible for conducting such checks.  As to valuation, ‘we’ would seek someone who is appropriate in each case.  Mr Ryan knew Mr Ludlow from previous experience with other pensioner accommodation.  He was a reputable valuer and ‘appropriate’. 

299               As to capacity to repay, Mr Ryan said that it depended on the type of loan.  In the case of residential premises, it was a question of looking at income.  If it was a commercial property then it was a question of ensuring that leases were in place.  If there was no guaranteed income flow, it would be necessary to look at the viability of the project itself, in order to see whether it was likely to provide a return.  As to assessing the asset position of borrowers, the practice was to obtain a statement of assets and look at it ‘from a comparative point of view’.  If there were assets which were inconsistent with expectations as to the particular person ‘then that would ring alarm bells’.  If assets comprised expensive art, furniture or intangibles, again ‘that would ring alarm bells’.  Mr Blackadder was responsible for this aspect of the business.  Mr Ryan had no direct involvement in it.  However he and Mr Blackadder would meet every day and discuss each loan in detail.  Mr Ryan always wanted to know the identity of each borrower and his or her asset position.  They would discuss the type of assets held by a borrower.  Assessment of character was carried out at the interviews.  In some cases information would come from other partners.  From time to time brokers or other lawyers were contacted.  There was also substantial feedback from investors. 

300               In the period from June to September 1999 Mr Blackadder was responsible for preparing investment summaries.  Mr Ryan and Mr Gill would then review them and provide feedback.  Once they were satisfied, they were sent to the other partners for feedback.  Mr Blackadder had no authority to issue an investment summary without consultation.

301               Once circulation of the investment summary was complete, Mr Blackadder would prepare a facility letter in Mr Ryan’s name.  It was a conditional letter.  In particular, it was conditional upon the respondents being able to raise the money from investors.  Mr Ryan’s understanding was that a proposed loan was never finally approved until the advance was actually made.  

302               Mr Blackadder’s remuneration was by way of salary.  He was not remunerated in proportion to the amount of money lent.  Mr Ryan was asked whether he had given Mr Blackadder any instructions as to the attitude he was to take to lending.  Mr Ryan responded that MDRN wanted him to be ‘conservative’ and ‘not to asset lend , or … equity lend on the strength of a valuation only.’  There were occasions when there was money available to invest but no proposed loan.  In those circumstances the money would be kept in the bank and interest paid to investors.

303               In cross-examination Mr Ryan was referred to a letter dated 27 July 1998 (ex 44) from him to Mr Blackadder.  It set out Mr Blackadder’s duties as follows:

‘(1)      To source loans directly and through finance brokers and to then assess them for submission to our Private Mortgage System;

(2)       Assessment shall include analysis of pertinent financial data provided by each borrower and checking of same, organising external valuations and on-site visits, checking CRAA details, liaising and organising QS reports and preparation of loan summaries for investors to peruse;

(3)       On construction and development loans, to visit the site regularly and check QS reports and updated valuations where necessary;

(4)       To liaise with investors concerning queries they may have about any loan proposal submitted;

(5)       To liaise and negotiate with borrowers, brokers, valuers and real estate agents concerning any default by the borrower in payment of interest or principal;

(6)       To assist our Property Syndication Department in finding suitable investment properties and to perform due diligence in respect of same and to negotiate lending terms with the financial institutions.’

304               Mr Ryan was cross-examined concerning the benefits to MDRN of involvement in the mortgage business.  They derived fees from acting for the borrower in relation to the transaction and a loan application fee which, at the relevant time, was about $3 000.  Other fees were charged, including an application fee and an administration or monitoring fee.  A letter dated 2 June 1999 (tab 22 in ex 1) demonstrates the fees payable with respect to the Yandina project.  Mr Ryan agreed that fees totalled about 1.5 per cent of the amount of the loan, or at least that is my understanding of the evidence at TS 1962. 

305               Referring to the ten point plan identified in the autumn 1999 newsletter, Mr Ryan said that he had authorized its issue.  The emphasis to be given to each point might vary from loan to loan.  Mr Ryan’s attention was drawn to ex 52, a letter dated 26 September 2000 from Mr Trotman to Mr Durie, and to Mr Durie’s response dated 4 October 2000, which is ex 51.  These documents are of some importance as indications of the steps taken by the first and second respondents in connection with the making of the advance to Project Results.  In ex 52, Mr Trotman made a number of inquiries as to various aspects of the transaction and as to steps being taken, given that it was, by the time of the letter, in default.  However Mr Durie’s response is important to the extent that it deals with MDRN’s method of considering loan applications.  For convenience I will set out Mr Trotman’s relevant questions and the answers thereto:

‘Q.       Was a valuation undertaken with respect to the security property and if so would you please provide me with a copy?

A.        A valuation was undertaken with respect to the security property and adjoining lands at Stephens and Lowe Streets, Yandina by Stanton Hillier Parker (Qld) Pty Ltd.  This report is enclosed for your reference together with the formal assignment and extension of responsibility of this report by the valuer to Lawyers Private Mortgages Pty Ltd.

Q.        Was the valuation on the project property done on the basis of an “as is” and on completion value?

A.        The valuation by Stanton Hillier Parker assessed the properties on various bases, these included:

(a)        the value of the pensioner units site with approvals “as is” at $400,000.00;

(b)        Gross Realisation of the site, the management rights and balanced land with approvals following completion of Stage 1 at $1,645,000.00;

(c)        Gross Realisation on completion of the entire development (stages 1,2 and 3 as if complete) at $3,895.000.00; 

(d)        The value of lots 2, 3 and 4 Lowe St Yandina at $360,000.00 “as is”.

…

Q.        Are there any assets in John Rivett’s name on which the guarantee may be in force?  I understand it is possible to undertake a search of property owned by persons in Queensland and I would suggest that this be undertaken.

A.        We enclose for your reference copies of signed statements of position for Mr John Rivett, a group structure for Rivett and his associated companies, assets of Rivett Project Results Pty Ltd, Oakwill Pty Ltd (an associated company), Robinson Rivett Trading Pty Ltd (an associated company), and Barlake Pty Ltd (an associated company).

We note there are real estate assets owned or controlled by Rivett, specifically residence at Alexandra Headlands, units at Maroochydore, industrial property at Kunder Park and land at Nambour.  You will note that these statements are dated March 1999.  Certain checks will be undertaken to confirm the validity of these assets and to determine in fact they are still retained by Rivett. 

Q.        Were any real estate agents checks undertaken prior to the advance to confirm the values placed on the security property, in terms of the initial land content, and on completion of Stage 1.  Further were any real estate agents’ opinions obtained as to the viability of the development as a whole?

A.         During the course of investigations prior to approval of the loan checks were undertaken to ensure the validity of the valuation.  You will also note that as part of the comprehensive valuation prepared by Stanton Hillier Parker significant sales evidence is provided in the report in support of the values of the units.  A significant proportion of the sales highlighted in the report and the sales prices achieved were known to be factual.  Therefore the assessment made by the valuer and as a result of the supporting sales evidence provided, in this report, it was our opinion that the assumptions made by the valuer were reasonable and did in fact support the stated value.

Further investigations undertaken as to the feasibility of the project prior to the advance were made.  Questions to the valuer with respect to the suitability and feasibility of a retirement pensioner accommodation at Yandina were raised.  The valuer was in support of the overall project.

Included in the valuation was an assessment of the aged care accommodation industry which was used as part of the assessment by the valuer.  We have also sighted assessments from various other bodies (Herron Todd White Pty Ltd, Prime Life Pty Ltd, QCC Limited) supporting the overall pensioner accommodation industry as a whole.  In summary these reports indicated a growing need for pensioner accommodation and the demand for the of this accommodation provision by private enterprises. 

With respect to the adjoining blocks of land, several professional agents were contacted and the valuation was supported.  We do note however that a directly comparable sale, within the 12 months, of an adjoining block of land was provided in support by Stanton Hillier Parker.

Q.        Was the condition precedent that pre-sale contracts for at least six units were to be provided prior to the first draw satisfied and more particularly did MDRN view these pre-sale contracts and were they unconditional?

A.        We enclose copies of Contracts and letters from agents confirming at least seven units were under contract prior to the advance.  The units under contract in Stage one included in these contracts were Lots 1, 2, 5, 6, 7, 8 and 16.  In addition to these, another 13 units were under contract for the latter stages of the development.

Q.        Was a quantity surveyor’s costings for the project obtained and if so what was the cost of development ascertained by the quantity surveyor?

A.        We enclose copies of correspondence and certifications from the Quantity Surveyor together with his background and his consent to act on MDRN’s behalf with respect to the project at Yandina.  We confirm that the costs of construction were confirmed and certified by the Quantity Surveyor.

Q.        Was a fixed building contract provided and if so what was the amount of the building contract and did it correspond with a quantity surveyor’s estimate of the cost of construction?

A.        A fixed-price building contract was provided prior to the advance and this is enclosed for your reference together with the certifications and breakdowns with respect to stage 1.  This builder was Lenkbray Constructions Pty Ltd, the initial builder.

…

Q.        Was a thorough check made of John Rivett’s business background particularly in regard to his direct or indirect involvement with other companies prior to the loan being approved?

A.        The usual checks were undertaken by MDRN on Mr Rivett.  CRA reports were completed and found to be clear and in order.  Mr Rivett was known to an associate and his background confirmed.  Phone calls to local people on the Sunshine Coast did not reveal anything adverse with respect to Mr Rivett and his background.’

306               Mr Ryan said that he had, in consultation with Mr Blackadder, provided the information contained in Mr Durie’s response.  Mr Ryan agreed that MDRN obtained check reports on valuations where it appeared to be ‘particularly relevant’, if the development was in some way unusual, or if there were concerns about the valuation.  There was no system in place for checking Mr Blackadder’s work. However Mr Ryan worked with him on a daily basis.  There seems to have been no record of steps taken by Mr Blackadder in assessing any particular application.  Some form of checklist was introduced in November 1999.  It appears to have been a statutory requirement.  Mr Ryan said that a borrower’s balance sheet was required as part of the assessment process.

307               In the course of cross-examination Mr Ryan was referred to a letter dated 23 October 2000, apparently sent by MDRN to investors following the meeting of 13 October 2000.  The letter (ex 65) provided information concerning the circumstances surrounding the advance.  To that extent it is appropriate that I quote the following extract:

‘This loan was made on 22 July 1999 to Rivett to construct twelve pensioner units and a manager’s residence in the first stage on site at Yandina which is five minutes north of Nambour.

The developer planned to sell the units to investors attracted to the steady return offered by the fact that occupants would pay an amount of 85% of their pension for accommodation and meals in a development which would be managed by someone like Tricare.

The loan was to be $1,400,000.00 which was to be 70% of the value of the completed stage of the development.

As a development loan the advance was to be made progressively.  The first advance was $434,000.00 towards the land purchase at a 57% valuation.

Further advances were made towards construction costs on the certification by a Quantity Surveyor that the money claimed by the developer was expended in accordance with projected construction costs.

In assessing suitable mortgage proposals we must rely on outside experts.  Our first and foremost is the valuer and in this project we used Allan Ludlow of Stanton Hillier Parker who is considered reputable and most experienced in assessing retirement and pensioner unit accommodation.  In assessing his valuation, Allan examined acquisition costs of the property, construction costs and marketability of the final product. 

In a project such as Yandina involving a construction component, we also engaged the services of a Quantity Surveyor to confirm firstly that the costings by the builder are accurate and secondly to approve all payments to the builder and other contractors to ensure that all work is done within specification and thirdly to report that sufficient funds are retained to complete the project.  Additionally the Quantity Surveyor was also engaged to report on the project regularly and to comment on the performance of the builder, engineers and contractors.  In this case we used Lloyd Carey Consultants who was a Quantity Surveyor with ten years experience specialising in certification of costs for development projects and tax depreciation work.  They had acted previously as Quantity Surveyors for private lending groups and banks such as Westpac Banking Corporation, Metway Bank Ltd and National Australia Bank Ltd.  They advised that they had been appointed by Project Services as an approved Quantity Surveyor for Queensland Government and were also involved in developments in the Asia-Pacific area including Indonesia, Solomon Islands, Vanuatu and Singapore.

Interest was paid on the loan from part of the loan retained for that purpose up until February 2000.

The first stage was due to be completed by December 1999 but this has not occurred. 

There are a number of reasons for the developer’s failure to complete Stage 1 and which have conspired to increase construction costs beyond projections.

A number of factors have contributed to the position … .’

308               Numerous problems are then listed including soil condition, drainage and water issues, problems with the builder, roadworks, GST issues, kitchen upgrade and other building issues.  The letter then continued:

‘All this has resulted in the loan expenditure being insufficient to complete Stage 1 and thus sales could not be made to repay debts.

Carey and Rivett had estimated that an additional $266,000.00 is required to complete Stage 1.’

309               At a later stage in the letter the writer addressed issues raised by investors as follows:

‘1.        Rivett’s assets

Rivett appeared to be a man of considerable means and the question was raised why he could not afford to complete Stage 1 out of his own resources.

To date we have not taken personal action against Rivett given his attempts to refinance.  We have been disappointed that he has not used his own resources to supply funds for the shortfall.  To get some understanding of his current position, we are conducting searches on ASIC records to ascertain which companies he is a shareholder and director in and also from valuer-general’s records to ascertain what property he owns himself.  Public records however do not provide an estimate of value for any of his assets nor do they show the amount of debt that might attach to these.  This will only become evident after legal proceedings have been instituted judgment obtained against Rivett where he is either orally examined or bankrupted.

2.         Action against advisors

Another issue concerned the action that we believed was available against our professional advisors who we relied upon in this project.

Action can be taken against the builder, the valuer, the quantity surveyor and engineer who were relied upon in relation to the project.  The builder is unlikely to have professional indemnity insurance and therefore showed little prospect of recovery.   At the commencement of the project the quantity surveyor and valuer advised that they had professional indemnity insurance in the amount of $1 million each and every claim. 

3.         Status of contracts

The question was raised concerning the validity of existing contracts held in respect of existing pensioner units.

Due to the delays in completing this project contracts cannot be relied upon and the property will have to be remarketed. 

4.         Contributions by MDRN

Another issue that was raised by one investor was whether the partners of MDRN would pay for the costs of completion of Stage 1 of the project.

 

The partners of MDRN had never provided a capital guarantee with respect to loans made.  If we were to make up the shortfall on this loan then investors in any other loan which had a similar problem might consider that a precedent has been set and that they too would have a capital guarantee.

…’

310               Mr Ryan understood that Mr Blackadder would check the statement of assets and liabilities of a potential borrower to see whether or not he or she had assets appropriate to his or her age and experience.  He would also ‘make comparisons as to anything which might allude him to be suspicious.’  He was asked whether he thought that the fact that funds were held in a discretionary trust would be a basis for inquiry.  He said that was a matter for Mr Blackadder as a banker.  In 1999 he did not know whether Mr Blackadder knew what a discretionary trust was.  He said that the statement of assets and liabilities was a ‘make-weight’.  It was more a question of looking at the viability of the project in order to ensure that the loan was going to perform than of looking at the asset position.  The primary source of repayment would be the proceeds from the project rather than any assets made available by way of security. 

311               Mr Ryan said that the ten point plan ‘came from our marketing manager wanting to provide investors in a newsletter a guide as to what things [Mr Blackadder] considers, and in fact what the mortgage department considers, when we actually assess a loan.’  It was apparently only an item used in the newsletter.  There was no policy document in the office which prescribed it.  Mr Blackadder may have provided its content.  He was qualified to assess whether or not proper care had been exercised by a valuer in preparing a valuation.  Mr Ryan said:

‘Well, you expect a valuer to do a proper valuation but, in the course of reading a valuation, you always read it to ascertain whether, in your opinion, you think it’s adequate or not.’

312               To my mind, that is a reasonable and sensible approach.  Mr Ryan considered that the quantity surveyor was responsible for the failure of the Yandina project.  The site had been a sawmill.  This posed construction problems, partly because of previous earth works and partly because of logs which remained on the site.  Mr Ryan was concerned that these matters would lead to a massive cost overrun, but the quantity surveyor advised that any additional costs could be ‘overcome’.  He also recommended that a commercial kitchen be installed at a cost of $10 000.  It actually cost $30 000. 

313               Mr Ryan was cross-examined concerning his view that a loan was not approved until the funds were advanced.  He said that the partners were responsible for the decision to advance moneys and had overall responsibility.  He agreed, nonetheless, that the word “approval” is commonly used to describe an advance indication of the availability of funds.  He considered that the so-called facility letters sent to borrowers were “conditional”.  He agreed that in his ASIC examination he had said that ‘The approval [of a loan] at the end of the day would have been evidenced by the facility letter which would have gone to the borrower.’  He said in cross-examination that this statement was ‘from a commercial assessment point of view’, and that he had been ‘guilty of using that parlance interchangeably’ himself.  However he claimed not to believe that there had been approval ‘from a legal point of view’. 

314               He agreed that there was no check on Mr Blackadder’s work to see if he was making misrepresentations.  He said, concerning the finance application for the Yandina project, that he expected Mr Blackadder to ‘dissect it to ascertain what was Mr Rivett’s personal assets and what was not.’  As to Mr Rivett’s interest in the Fritton Trust, which was a trust of which Mr Rivett’s father was the trustee, Mr Ryan agreed that given such an “asset”, it would be possible to ask for a guarantee from the trustee or alternatively, exclude the assets of the trust from the statement of assets and liabilities.  Mr Ryan was not concerned that some assets were in the joint names of Mr Rivett and his wife.  He was disappointed that Mr Blackadder had not checked the pre-sale contracts.  He was surprised that they provided for payment in trade dollars. 

315               Mr Ryan was cross-examined at some length concerning Mr Blackadder’s authority to approve loans.  In his ASIC examination (pp 18-19) he agreed that Mr Blackadder essentially approved loan applications.  He said, however, that if he, Gill or another partner saw something ‘materially wrong’ in the synopsis of the loan, he would raise it with Mr Blackadder.  He said in cross-examination that:

‘Well, the approval as in issuing the facility letter delegated to Dale in consultation with myself, that’s the way I read that – I interpreted that question.’ 

316               This seems to mean that he considered himself to be jointly responsible with Mr Blackadder for issuing the facility letter.  He said, with respect to the Yandina project, that he and Mr Blackadder were responsible for assessing it.  It seems that Mr Blackadder primarily attended to the commercial assessment whilst Mr Ryan attended to the transactional assessment.

317               Mr Ryan was referred to a letter dated 26 May 2004, from Clayton Utz (ex 67), the solicitors for the second cross-respondent.  That firm enquired as to the way in which the mortgage business was conducted.  In the response stated 3 June 2004 (also part of ex 67) a number of points were made, including that:

·                the lending business was carried on by MDRN and not by the trustee company;

·                the trustee company operated as a nominee company with the sole function of holding securities ‘as bare trustee on behalf of the investors who had contributed to each loan’;

·                the directors of the trustee company did not ‘approve’ or ‘sign off’ on any loan; and

·                the trustee company played no role in approving brochures, newsletters or investment summaries, those tasks being undertaken by MDRN; and

·                at the time of the Yandina project, applications were ‘sourced and assessed’ in the first instance by Mr Blackadder. 

318               These statements seem to be correct, having regard to the evidence but seem to be inconsistent with the admissions in par 8 of the defence of certain matters pleaded in the statement of claim.

319               According to ex 67 Mr Blackadder assessed applications, checked details of same, organized external valuations and on-site visits, checked CRA details, ‘etc’.  He was also responsible in the first instance for issuing facility letters.  Such letters would require that specified terms be satisfied in order that the loan be ‘progressed’.  He would subsequently prepare the investment summary for circulation.

320               Mr Blackadder was the highest paid employee in the firm, on a salary more than double that of any of the employed professional staff.  He had been “headhunted” from his position as a commercial lending manager with Suncorp Metway Bank.  He had the authority to approve each loan and typically, once an investment summary was prepared, he would distribute it by email to partners and relevant staff.  At the same time it would be distributed to potential investors for their consideration.  Mr Gill was responsible for liaising with investors and distributing the summary to potential investors.  Mr Ryan was in charge of the mortgage business.  Mr Gill and Mr Blackadder were answerable to him.  Mr Ryan’s role included preparation, stamping and registration of security documents including undertaking appropriate searches.  He was responsible for administering any defaults including preparation of notices of exercise of power of sale and any selling programmes.  Mr Blackadder reported regularly to the partners, usually monthly, as to the status of loans and management of the overall portfolio.

321               According to ex 67, the brochure referred to in the statement of claim was prepared by an outside marketing consultant after consultation with Mr Ryan.  It was superseded by another brochure distributed to investors after Mr Blackadder was appointed.  Mr Johnson, who was the office marketing manager, appointed in December 1998, retained an outside marketing consultant to prepare the latter brochure.

322               Newsletters were prepared by Mr Johnson from time to time.  The ten point assessment plan was prepared by Mr Johnson in consultation with Mr Blackadder.  Mr Ryan recalled Mr Johnson showing him the newsletter which outlined the ten point plan.  Mr Blackadder confirmed to Mr Ryan that the plan accurately reflected his work.  Usually, each newsletter would be discussed at a partners’ meeting.

323               The letter (ex 67) stated that no part of the Yandina project application, valuation or pre-sale contracts was read by the partners prior to settlement of the loan.  Mr Ryan read this material some time after the loan went into default and discussed the file with other partners.  The various brochures, newsletters and investment summaries were read by them at, or after, publication and distribution. 

324               I am inclined to accept ex 67 as representing the MDRN partners’ collective recollection of the way in which the mortgage business was conducted.  It seems most unlikely that MDRN would be foolhardy enough to provide inaccurate information to their insurers, given the position in which they found themselves at the time at which the letter was written.  As concerns Mr Blackadder’s role, Mr Ryan’s evidence at the ASIC examination was to similar effect.  I accept that Mr Blackadder was primarily responsible for approving loans and preparing facility letters and investment summaries.  Of course, he worked for MDRN, and the partners no doubt retained the power to overrule any decision which he took.  This matter will be of more importance in considering the cross-claims than for present purposes.

325               Mr Ryan made it clear in the ASIC hearing that he did not believe that Mr Rivett’s assets were of particular materiality to the loan.  He considered that the loan was viable ‘in terms of itself’.  This view appears to have been based on the sale price of the units, costs, the building contract, comments by the quantity surveyor and the valuation.  He thought that Mr Blackadder would have looked at those items and Mr Rivett’s assets and liabilities.  However he did not know whether this was so.  Mr Ryan himself had certainly not done so. 

326               The newsletter was aimed at current investors rather than prospective investors.  It was ‘a general information document rather a marketing document’.  It went out on a quarterly basis to keep investors informed generally about the practice.  In the winter 1999 newsletter MDRN emphasized the fact that it did not merely ‘equity lend’ up to 70 per cent of the valuation of the property.  They wanted to demonstrate that they were doing something more.  The document asserted that other firms ‘don’t examine the financial history of the borrowers, their current financial capacity, nor their commitments, nor do they run credit checks against the borrower and guarantors’.  Mr Ryan was asked whether this implied that MDRN undertook such checks.  Mr Ryan conceded that it implied that they followed the ten point plan, although on an ‘holistic basis’.  That seems to have meant that different weight or emphasis was given to different points, depending upon the loan in question.

327               It was pointed out to Mr Ryan that Mr Ludlow had valued the property on instructions from Project Results rather than from MDRN on behalf of investors.  He said that Stanton Hillier Parker had indicated their willingness to ‘to assign and extend our responsibility to the extent of our valuation report and this letter to Lawyers Private Mortgages Pty Ltd for mortgage security purposes.’  Mr Ryan was asked why there had been no other independent valuation.  He said that Mr Ludlow’s standing was such in connection with pensioner accommodation that he did not think it was necessary.  He considered him to be relevantly independent.  He had no idea who had paid for the valuation.  He was questioned concerning the extent to which Project Results had demonstrated its capacity to service the loan and responded that it had done so ‘through the viability of the project’.

328               In the course of the ASIC examination, Mr Ryan conceded that it would not have been possible, on the projected figures for all investors to have been repaid at the end of Stage 1.  He agreed that MDRN must have been relying upon a certain percentage of investors allowing their investments to be extended to subsequent stages.  This typically occurred.  He believed that the statement concerning the “residual” sufficiently disclosed that prospect to investors.

329               Mr Ryan offered a number of other reasons for the failure of the project.  It was an extraordinarily wet period.  This substantially delayed completion.  The timing of the project coincided with the introduction of the goods and services tax.  This made it difficult to find contractors and materials.  That tax also increased the cost of the project.  He was asked whether he was aware that following default in payment of interest, new investors were introduced in substitution for former investors.  He said that there was a policy that any incoming investor be made aware of default.  He also understood that any substitution had to be ‘between related parties’.  He probably meant that it was permissible to substitute a related party or an unrelated party, provided that the incoming investor was made aware of any default. 

330               Mr Ryan conceded that in choosing to invest, Mrs Blackwell probably relied upon the investment summary.

Bruce Michael Durie

331               Mr Durie was admitted to practise in December 1977.  He practises principally in the areas of commercial law, estate planning and administration and conveyancing.  The private mortgage business was under the day-to-day supervision of Mr Ryan.  Mr Blackadder was employed by MDRN in or about September 1998.  He became known to Mr Durie whilst he was employed as a commercial lending manager with Metway Bank.  Mr Durie’s knowledge of the operation of the mortgage business was derived from information provided by Mr Ryan at partners’ meetings and in other conversations.  Investment summaries for proposed loans were circulated to the partners for information and comment.  Mr Durie could not remember reading the investment summary.  He knew virtually nothing about the assessment of Mr Rivett’s proposal.  He denied that MDRN had delegated to Mr Blackadder the function of assessing and approving applications for finance. 

332               In cross-examination Mr Durie was referred to exs 51 and 52, the correspondence between him and Mr Trotman.  He said that he had derived the relevant information for his reply from Mr Ryan.  Mr Durie was also referred to the correspondence between Clayton Utz, solicitors for the second cross-respondent, and MDRN, concerning the conduct of the mortgage business (ex 67).  He said that he was not consulted about the contents of the response which was written by either Mr Ryan or Mr Neil.  He agreed with the account of the way in which applications for finance were assessed.  He disagreed with the assertion in the letter that investment summaries were distributed to potential investors at the same time as they were distributed to partners.  The partners had resolved that they should see them before they were distributed.  They would then have an opportunity to intervene if anything concerned them, or if they had some particular knowledge which might affect the transaction.  Mr Durie had not seen the source material upon which the investment summary for the Yandina project was based.  He had not read the loan application.  As he understood MDRN’s practice, no partner would have read the application prior to settlement of the loan. 

Jonathan James McCarthy

333               Mr McCarthy is a partner in MDRN.  He was admitted to practise in February 1976.  He practises primarily in the areas of property and commercial law.  He was not involved in the day-to-day assessment of individual loans.  However he was aware of activities in that area of the practice as a result of almost daily meetings with Mr Ryan and discussion of issues arising, including the progress of various loans.  The partners would lunch together on at least three days each week for the express purpose of providing support and backup to Mr Ryan in his area of practice.  Mr McCarthy’s knowledge of the mortgage business was based upon information supplied by Mr Ryan at such meetings.  Investment summaries were circulated to partners for review and comment.  Mr McCarthy often spoke to staff, including Mr Blackadder, Mr Campbell and Mr Gill.  He recalled speaking to Mr Campbell about the Yandina project.  Mr Campbell said that Mr Rivett was known to him and, to Mr Campbell’s knowledge, had a sound reputation.  Mr McCarthy recalled seeing the investment summary for the Yandina project at the time it was issued.  He was not involved in the assessment of loans and had no knowledge of what was done in connection with such assessment.  He denied, as did Mr Durie, that the firm had delegated responsibility for assessing and approving loans to Mr Blackadder.  His attention was directed to ex 67.  To the extent that the matters there addressed were within his knowledge, he did not dispute them.  However he said that in mid-1999 he thought that partners’ meetings might have been fortnightly rather monthly.

Ian Alexander Neil

334               Mr Neil was admitted to practise in 1989.  He practises principally in the areas of litigation and town planning.  He had no direct involvement in the day-to-day operation of the mortgage business.  However he was generally aware of the operation of the business as a result of information derived from Mr Ryan at partners’ meetings.   Investment summaries would be circulated to him for review and comment.  He cannot recall ever raising any concern about a particular proposal, which concern resulted in the loan not proceeding.  He did, however, contact Mr Ryan and Mr Blackadder from time to time to make general comments about proposals.  He also reviewed most of the summaries for his own purposes.  He occasionally invested in private mortgages.  He recalled seeing the investment summary for the Yandina project. 

335               Mr Blackadder was well-known to him in 1999.  He knew him in his capacity as a branch manager with the Metway Bank at Capalaba.  He understood him to be experienced in commercial and financial matters.  He had a high regard for his integrity. 

336               After seeing the investment summary, Mr Neil made some comments concerning the Yandina project.  He said that Mr Rivett seemed to be a reasonably impressive person, that he knew the Yandina area and that it would suit a ‘pensioner-type’ development.  He had made comments on other investment summaries.  On occasions he attended site inspections.  He drafted at least part of the MDRN letter, ex 67, having discussed the matter with Mr Ryan.  Mr Ryan may have drafted part of it.  The letter was based in large part upon a previous statement provided to the solicitors for MDRN.  The second last paragraph on p 2 (in which it is said that the loan application, valuation and pre-sale contracts were not read by the partners prior to settlement) was a little imprecise in that it failed to reflect the fact that they had seen the investment summary.

Dale Leslie Blackadder

337               Mr Blackadder was first employed by MDRN on 1 September 1998.  He had worked with Westpac from 1980 to 1989, which employment included consumer credit assessment, small-business lending and accounts management and control.  From 1987 to 1989 he worked as assistant to the commercial lending manager in the North Sydney branch, in which role he assessed commercial, business and construction loans.  In 1989 he moved to Queensland and worked for Metway bank until 1998.  He was initially employed as a branch manager, which position he held until 1995.  In that capacity he initially had lending authority for small-business facilities up to $100 000 and subsequently, up to $300 000.  He both assessed loans himself and supervised loan assessments by his two assistant managers.

338               In 1993 he was seconded to the Metway credit department where he worked as lending manager.  His responsibilities included the assessment of consumer, small business and housing loans.  He had a lending authority of $500 000 and supervised 25 managers who would submit loan applications to him for approval.  Some proposals involved amounts in excess of $500 000.  Mr Blackadder would assess such applications and then forward them for further consideration at a higher level.  During his time in that position he was a member of a committee which prepared ‘a structured format for loan assessment’, presumably for use by other employees in assessing loan applications.  From 1995 until 1998 he worked as property finance manager for Metway.  His responsibilities included the supervision of a portfolio of existing clients and the writing of new business for the bank.  He continued to have lending authority up to $500 000 and was responsible for the assessment of commercial property finance applications.  He also assessed construction loans.  The average size of the loan applications which he assessed was between $2 and $3 million.  He would assess the application and prepare a submission.  After 1997 Metway reduced the lending authority of all managers. 

339               He considered that in his work with MDRN, he was responsible for assessing and approving all loan applications.  At the time of swearing his affidavit filed on 4 October 2004, he was working for MDRN Investments Ltd, a company which is, as I understand it, not directly relevant to the present case.  I take the references in pars 13 and 14 of the affidavit to be to his employment with the firm rather than with MDRN Investments Ltd.  I also take him to be referring to the practices which obtained at times relevant to the present proceedings. 

340               In assessing loan applications Mr Blackadder would consider a number of factors in determining ‘at the initial stage’ whether the application was worth considering.  They included:

·                the security offered;

·                location of the development;

·                estimated value, including the cost of construction and the proposed end sale price for the development;

·                whether the necessary development approvals have been obtained and the project was ready to proceed;

·                what the proposal was like; and

·                whether the applicant appeared knowledgeable and the development, well thought out.

341               If the initial assessment were satisfactory, then it would be necessary to obtain further details, including: 

·                acceptable and current valuations of the security;

·                certification from a quantity surveyor as to the cost of the project;

·                contact with the builder to ascertain whether it had the experience necessary to undertake the proposed project;

·                details of the project, status of approvals,  type of construction contract;

·                if the facility was for commercial construction, evidence of pre-sales;

·                the timing of the loan and whether its length matched the proposed timing for the project;

·                the borrower’s personal details and statement of assets and liabilities ‘to determine whether they appear to be a person of some substance who demonstrates some financial acumen’;

·                site inspection; and

·                credit checks, concerning which he said that ‘It is standard practice for the borrower be made personally responsible for the loan by way of some type of collateral security.  However, this type of security can only ever be regarded as make-weight security.  The purpose of this security is primarily to ensure that the borrower is committed to the project and personally tied into the deal.’

342               This last passage is of some concern.  It seems to confuse the position of borrower and that of a guarantor.  Obviously, anybody described as a ‘borrower’ will be personally responsible for repayment of the borrowing.  This seems not to be the position to which Mr Blackadder was referring.  The reference to ‘make-weight security’ appears to be in anticipation of the applicants’ complaints concerning the discrepancy between Mr Rivett’s actual asset position and that asserted in the investment summary. 

343               MDRN only approved loan applications which offered registered mortgage security.  The feasibility of the project was also of key importance.  Collateral securities were obtained as a matter of practice.  These were known as ‘make-weight’ securities, that is ‘secondary security’ or the ‘icing on the cake’.  The primary purpose in obtaining this type of security was to commit the borrower to the deal.  Other relevant matters were the type of project, its suitability and appropriateness, the type of person borrowing, repayment plan, exit strategy for the investors, site inspection, amount of the loan and availability of funds for investment.  Only one in ten loan applications was successful. 

344               It was Mr Blackadder’s normal practice in considering an application to:

·                inspect pre-sale contracts;

·                conduct credit checks;

·                obtain and consider a statement of assets and liabilities, evaluating the information provided to determine whether there was anything that appeared to warrant further investigation;

·                assess whether the applicant was a person of substance and had assets appropriate to his/her age and experience, of which he said that ‘The guarantee provided by an applicant was, by its nature, make-weight security, but it provided an integrity check to determine if the applicant was committed, had some financial success previously and displayed some financial acumen …’; and

·                when the applicant was a company, obtain a company search to determine when it had been founded and if it had given any charges over its assets.

345               Having decided that a loan should proceed, or ‘was worth proceeding with’, Mr Blackadder would prepare a proposal and circulate it to the partners.  They might suggest changes.  If everything was satisfactory the loan would proceed, and solicitors would conduct appropriate searches.

346               Concerning the Yandina project Mr Blackadder said that in early May 1999 the Project Results application was sent to Mr Ryan by Mr Rivett’s finance broker, Mr Bob Quinn.  Mr Quinn telephoned Mr Blackadder to elaborate on the proposal.  Mr Blackadder believed Mr Quinn to be an experienced finance broker.  On 10 May 1999 he received the loan application, together with copies of a valuation, development plans, a statement of feasibility, Mr Rivett’s resumé, memorandum and articles of association of Project Results, initial report from the quantity surveyor, Lloyd Carey, an extract from the building contract and Mr Rivett’s statement of assets and liabilities. 

347               Mr Blackadder considered the application to be comprehensive.  On 27 May 1999 he met with Mr Quinn and Mr Rivett to discuss the proposed development, Mr Rivett’s background and experience, the funding structure and pricing of the loan.  Mr Rivett identified the site and said that the demographics of the area demonstrated that there was a need for this type of development.  Other information was given concerning the project.  MDRN had previously been involved in funding retirement villages.  They had all been successful. 

348               Mr Rivett told him that the valuer was presently undertaking a review of his initial valuation as an adjoining parcel had recently been sold and units erected thereon.  Mr Rivett said that the valuer had indicated that as a result he was prepared to revalue the blocks at $90 000 each.  Mr Blackadder noticed that the proposal incorporated ‘a portion of trade dollars’.  He was concerned by this as he considered them to be of limited value and essentially worthless.  He asked Mr Rivett to demonstrate how he could add value to them.  Mr Rivett said that Barter Pacific acted as a clearing house to convert trade dollars.  By coincidence Mr Blackadder later spoke to a person called Lance Gibney who was employed by Barter Pacific.  He more or less confirmed the information derived from Mr Rivett. 

349               The project seemed to be worth considering, but a number of matters required further consideration, including the value of the property.  Mr Blackadder also required further information concerning the sale price of the units, the proposed amount of the loan, how the project was to be funded and its feasibility, Mr Rivett’s background and his financial position.  He subsequently obtained further details from Mr Quinn and Mr Carey.  He also obtained satisfactory details concerning Mr Rivett from Mr Campbell, a consultant to the firm.  Mr Campbell knew of Mr Rivett’s experience in property development.  He had known him whilst he was practising in Townsville.  The matters contained in Mr Rivett’s curriculum vitae were true to the best of Mr Campbell’s knowledge. 

350               Mr Blackadder saw the valuation from Mr Ludlow whom he knew to be well-respected as an independent valuer with experience in the area of retirement villages.  He considered the valuation to be in keeping with others that he had seen in connection with similar types of projects.  It was of both the vacant allotments in Lowe Street and the land in Stephen Street.  The Stephen Street land alone was valued at $400 000, subject to the pre-sale of all units.  The Lowe Street land was valued at $360 000.  He considered that the initial advance to be made would result in a lower LVR than 70 per cent ‘so that there would be in the early stages a contingency amount in the loan.’  He considered that Mr Rivett’s contribution by way of vendor finance was ‘good, being 50% essentially and was all being contributed upfront.’  I am not sure what that means.  Mr Blackadder understood that the debt owed to the vendor of the land was not repayable during the term of the proposed loan, nor during the following year.  For this reason Mr Blackadder was not concerned that Mr Rivett’s contribution was not from his own funds.  He considered vendor finance to be commercially more desirable because it meant that there was no drain on Mr Rivett’s funds.  From a security point of view it was irrelevant as there was to be a first mortgage to protect the interests of the investors. 

351               He was shown contracts for the sale of units.  He understood that all units in Stage 1 had been sold.  He remembered seeing ‘many contracts of sale (or at least the relevant pages thereof)’.  He took copies of these contracts and kept them on file.  The sale price of each unit was $85 000.  He was aware that there was a trade dollar component in that price.  He considered that the price was consistent with the market value assessed by Mr Ludlow although, as Mr Blackadder conceded, Mr Ludlow had made no provision for trade dollars.  The price was also equivalent to the price obtained in another development of the same kind with which MDRN had been involved.  It was an attractive selling point that units in the Yandina project were slightly larger than the average for such units. 

352               In May 1999 Mr Blackadder spoke to Mr Ludlow with a view to having the valuation ‘assigned to Lawyers Private Mortgages Pty Ltd’.  He had a general discussion with Mr Ludlow concerning the valuation.  He seemed ‘supportive of the project and of Mr Rivett’.  He considered the project to be well located.  Mr Ludlow confirmed that he was updating his valuation, having regard to the sale of the adjacent land. 

353               Mr Blackadder then conducted various searches.  The land was noted on the contaminated land register but there were no adverse notations made against it.  He was aware that soil tests had been conducted.  Prior to settlement of the loan he conducted further searches.  Some of his colleagues knew Mr Carey who was the quantity surveyor for the project.  This gave Mr Blackadder some comfort. 

354               He first spoke to Mr Carey by telephone in May 1999, asking for more detail concerning costings.  He subsequently received detailed costings.  He asked Mr Carey if he would certify the costs and the project draws on a “cost-to-complete” basis.  Mr Carey said that he would.  He discussed the use of trade dollars in paying construction costs and raised the need to ensure that cash was available to complete the project.  Mr Carey said that Mr Rivett was a major player in trade dollars and that if anyone could utilize trade dollars he could.  They discussed the amount of cash available to pay for building works, assessed at about $900,000.  Mr Carey confirmed that such a sum would be sufficient to meet the cash component of the building contract.  On the basis of that assurance, Mr Blackadder understood that there was a fixed-price contract in place for construction, and that adequate cash was available.  Mr Carey knew the builder and considered that he was capable of doing the work.  The project was not overly complex.

355               Mr Blackadder saw a copy of the soil report prepared by Mr Gribble.  It was satisfactory.  He first made contact with the builder, Mr Glen Brady of Leknbray, in June 1999.  Mr Brady was satisfied with the costing of the project and happy to do the work.  He was ready to commence. 

356               On 2 June 1999 Mr Blackadder conducted a site inspection with Mr Campbell and Mr Rivett.  Mr Carey was also present.  Mr Carey had previously been involved in a number of retirement village developments in the Cleveland area.  He also knew Mr Rivett.  They inspected the general area and, in particular, looked for other suitable sites in Nambour.  They identified none.   They saw some other ‘retirement-oriented sites’ between Nambour and Yandina, primarily caravan parks, which apparently had similar zoning requirements.  They saw no other suitable sites at comparable prices.  

357               Mr Blackadder considered that the arrangement for the pre-payment of interest from the amount of the advance was an ‘accepted norm in construction finance’.  It allows the developer to fund interest payments until completion.  The period of six months was chosen because Mr Carey considered that Stage 1 would be completed and sold within that period.  Mr Blackadder ensured that the LVR at the end of Stage 1 would comply with the 70 per cent requirement.  He noted that from Mr Ludlow’s valuation of 14 July 1999, the market value of Lots 2 to 5 was $360 000.  Mr Ludlow assessed the value of the remainder of the land on Lot 6, after completion of Stage 1, at $300 000.  At that time there would be other land to the value of $660 000, of which 70 per cent was $462 000.  Mr Blackadder was concerned to ensure that at the end of Stage 1, the residual debt did not exceed that figure.  He said that it was not unusual for there to be a residual debt at the end of the first stage of a project.  The first stage may be disproportionately expensive as a result of the need to install infrastructure for the development, the cost of which is not replicated in subsequent stages, or at least not to the same extent.  Given that there was more risk involved in the early stages, it was appropriate that the LVR at the end of Stage 1 be of the order of 60 per cent.  He therefore fixed the figure of $400 000 as the permissible residual debt.  This was also designed to ensure that in the event that MDRN did not wish to finance Stages 2 and 3, there would be no difficulty in obtaining other finance.

358               Mr Rivett proposed that during Stage 1, repayment be made from the proceeds of sale of the units.  To do so, it would be necessary that cash, as opposed to trade dollars, be derived from the sale of units.  He initially indicated that ten of the units would be sold for 60 per cent cash and 40 per cent trade dollars and two units, for 80 per cent cash and 20 per cent trade dollars.  Mr Blackadder calculated that this would yield $646 000 in cash.  Mr Rivett said that sale of the management unit and management rights would yield $240 000 and $200 000 respectively.  Mr Ludlow had valued the unit and rights at $325 000 in total.  Although Mr Blackadder considered Mr Rivett’s figure to be reasonable, he chose to rely on Mr Ludlow’s figure.  This meant that total proceeds for the sale of Stage 1, using Mr Rivett’s proposal, would be $971 000, leaving a residual of $429 000.  This represented an LVR of 65 per cent, comfortably within the 70 per cent limit.  However Mr Blackadder was not willing to recommend the loan on that basis.  He considered that in the early stages of the development, repayment should be at the rate of 80 per cent of the market value of security being released.  I understand this to mean that he required 80 per cent of the nett proceeds of sale of any one unit. 

359               On 27 May 1999 he discussed the matter with Mr Quinn and Mr Rivett, indicating that he would only be interested if the balance of the loan, after completion and sale of Stage 1 and the manager’s unit and management rights, did not exceed $400 000.  They discussed the “split” on the various unit contracts, that is the proportion of trade dollars in each sale price.  Mr Blackadder favoured a maximum of 20 per cent in trade dollars.  Mr Rivett wanted 40 per cent.  Mr Blackadder suggested that if six of the units were sold with a cash component of 80 per cent, then the remaining six units could be sold with a cash component of 60 per cent to achieve the following results:

$85 000 x 80 per cent x 6                                   $   408 000

$85 000 x 60 per cent x 6                                   $   306 000

Manager’s unit and rights at valuation                 $   325 000

Total                                                                 $1 039 000

360               Given a loan of $1.4 million, this would show a residual debt of $361,000.  Mr Rivett agreed to this approach.  Mr Blackadder said that he would require that at settlement there be six contracts, each with a cash component of 80 per cent.  This was the genesis of the requirement in the contract for evidence of six sales.  He saw such contracts prior to settlement.  He would not have settled without having seen them. 

361               Mr Rivett advised that trading profits from his companies could cover interest payments.  Mr Blackadder did not consider this to be of importance because of the other arrangements to which I have referred.  He considered that the director’s guarantee and registered mortgage debenture over the assets and undertaking of Project Results were ‘make-weight securities’, different from the mortgage over the land which was part of the development.  The value of Mr Rivett’s assets might alter from time to time.  Mr Blackadder examined them to see whether they appeared reasonable for a person of his age and background.  He then checked the level of gearing against those assets to identify the lenders and the amounts of the loans.  He considered that there was nothing in Mr Rivett’s statement of assets and liabilities which appeared adverse.  Nothing appeared unreasonable.  He had no reason to doubt that the position was reasonably accurately reflected in the statement.  He was concerned to establish only that there were some assets and funds available to Mr Rivett at the time of the application.  He considered this to be the standard practice in commercial lending.  It was the approach which a prudent and reasonable lender would take. 

362               Mr Rivett also provided him with statements of assets and liabilities for a number of companies in which he had controlling interests.  Mr Blackadder examined them to determine whether or not they appeared reasonable.  He considered the gearing of any liability against assets.  His primary interest was to see that Mr Rivett had some other assets and had demonstrated a level of financial acumen.  He also regarded these assets as ‘make-weight security’.  It was not MDRN’s standard practice or standard industry practice to undertake detailed checks of the asset position of an applicant or associated company.  The primary security was the first mortgage.  Mr Blackadder’s main concern was to satisfy himself as to the value of that security.

363               Mr Blackadder said that he had conducted a credit check.  He never approved a loan or submitted it for approval without having done so.  The credit checks were undertaken with CRA.  He also conducted an ASIC search in respect of Project Results.  He did not recall anything adverse arising from the credit check or the ASIC search.  Having conducted these checks Mr Blackadder was prepared to submit the loan application for approval by the partners, and accordingly prepared the investment summary.  The summary was then circulated to the partners, particularly Mr Ryan, and to Mr Campbell and Mr Gill.  There were various comments and suggestions which he adopted where appropriate.  He then circulated the final document to potential investors.

364               Mr Rivett struck him as an experienced and responsible property developer, knowledgeable about the issues which might arise in a development of this nature.

365               As to the ten point plan, Mr Blackadder said that prior to August 1999 Mr Johnson asked for an article explaining the process by which loans were assessed.  He wished to use it for marketing purposes.  In conjunction with Mr Johnson and Mr Ryan, Mr Blackadder drafted the ten point plan.  It depicted ‘a textbook process of loan assessment procedures as I learned them at Metway and Westpac’.  Whilst the ten points represented various matters to which Mr Blackadder turned his mind in the assessment of a proposal, the weight given to each aspect would vary from proposal to proposal. 

366               The loan was approved on 11 June 1999.  Prior to the first advance, Mr Blackadder discussed with Mr Rivett the conditions precedent to the loan, including Mr Carey’s certification, provision of the six pre-sale contracts and the assignment of the valuation.  Mr Carey’s certificate arrived in late June and the six pre-sale contracts were sighted prior to settlement.  There were also negotiations regarding the building contract.  At some stage Mr Blackadder received a telephone call from Mr Trotman who asked if he and his wife could meet Mr Rivett.  Mr Blackadder arranged the meeting.  After the meeting Mr Trotman telephoned to say that they had been very impressed by Mr Rivett and supported him and the project wholeheartedly. 

367               On 23 July 1999 the loan was settled and the first cheque issued to fund the purchase of land.  In mid to late August Mr Carey telephoned, saying that there were some issues with the subsoil at the site.  In particular, large tree trunks and debris had been uncovered during the initial excavation.  There was also some concrete.  Mr Carey was concerned that there might be a cost blowout.  Mr Blackadder telephoned Mr Rivett and, on 25 August 1999, met with Mr Rivett, Mr Carey, Mr Ryan and the soil tester, Mr Gribble, on site.  Various solutions were discussed.  Mr Carey indicated that he considered that the costs could be contained.  At worst he thought that there would be a $10,000 escalation.  Mr Carey recommended that the project proceed.  It was agreed that he should complete a fresh costing.  Mr Ryan and Mr Blackadder made it clear that the firm would not agree to proceed until they had reviewed that costing.  Construction therefore stopped pending receipt of the costing.  It was received in the week commencing 6 September 1999.  Mr Blackadder discussed it with Mr Carey and with Mr Ryan.  They decided to proceed.

368               In late September Mr Carey advised that the builder was not on site, and that Mr Rivett had released it from the contract.  Mr Blackadder telephoned Mr Rivett who confirmed that he had released the builder and appointed a new builder, Mr Moore.  Mr Rivett said that there had been a dispute between the partners of Leknbray, the previous builder, as to whether to proceed with the project, primarily because of variations to the contract.  Mr Blackadder expressed concern about the release of the builder.  Mr Rivett said that Mr Carey supported Mr Moore as the new builder.  Mr Blackadder telephoned Mr Carey.  He indicated that he was supportive of Mr Moore, and that because Mr Moore would be the on-site builder and supervisor, there would be cost savings.  Mr Moore commenced work in late September or early October.  Mr Blackadder undertook regular inspections and was in regular telephone contact with Mr Rivett and Mr Carey.  Progress was slow.  Mr Rivett and Mr Carey attributed this to weather conditions.  Labour and supplies were also difficult to obtain due to the imminent onset of the GST system. 

369               On 22 October 1999 Mr Blackadder met with Mr Rivett, Mr Moore and Mr Carey.  He received an assurance that the development would be finished early in January 2000.  In January 2000 Mr Blackadder met with Mr Rivett to discuss delays in construction and any consequential cost overruns.  He was told that there had been no overruns.  They discussed completion and sale.  Mr Rivett said that he had some sales involving 60 per cent cash components.  Mr Blackadder said that MDRN would not accept sale contracts where a large proportion of the sale price was to be paid in trade dollars.  Interest payments were also discussed.  Mr Rivett said that he could meet the interest payments and that the development would be finished within six weeks.  Mr Blackadder confirmed these matters with Mr Carey.  Mr Carey recommended that construction continue.  He said that costs were containable.  Any cost escalation would not exceed $20,000.  In February and March 2000, Mr Blackadder expressed concerns to Mr Rivett and Mr Carey about the slow rate of progress, suggesting that Mr Moore was not the appropriate builder to complete it.  By the end of March Mr Carey indicated that he tended to agree. 

370               Mr Rivett failed to make the February interest payment.  Mr Ryan and Mr Blackadder telephoned him on numerous occasions.  Mr Rivett said that he had various schemes for paying the interest and any shortfall in funding.  MDRN issued default notices, including notice of exercise of power of sale.  In April the builder was dismissed because of lack of progress.  Mr Carey and Mr Rivett appointed Lee Murphy as replacement builder.  Mr Carey indicated that costs were still ‘contained’.  In May 2000 Mr Carey telephoned Mr Blackadder and informed him of a cost escalation of $230 000.  Mr Blackadder called a site meeting which was held on 31 May 2000.  Mr Blackadder, Mr Rivett, Mr Carey, the builder and Mr Ryan attended.  Somebody said that there were defects in Mr Moore’s construction work, and that extra cost would be incurred in finishing construction.  Mr Blackadder or Mr Ryan pointed out that there would be a shortfall in funding as a result of such escalation, and that the project could not be finished.  Possible solutions were discussed.  The new builder, Mr Murphy, indicated that he represented a group which might be interested in assuming ownership in exchange for finishing the construction.  Mr Rivett was agreeable to this proposal and indicated that he was also considering other proposals, including alternative funding sources.  Mr Carey and Mr Murphy recommended that work proceed to lock-up stage on eight units and the manager’s unit.

371               Some days later Mr Ryan and Mr Blackadder met with Mr Murphy at his office.  They discussed possible contributions towards completion costs and the reasons for the cost escalation.  Mr Murphy said that such escalation had been caused by the initial footing and subsoil issues, and that although there were some defects in the building work, he also suspected some theft from the site.  He considered that Mr Rivett’s lack of day-to-day attention to the project was also a contributing factor.  Mr Murphy suggested that whatever money was needed to complete eight units to lock-up stage should be spent for security reasons, and it should otherwise be left to Mr Rivett to find the money to finish the project.  This suggestion was supported by Mr Carey.  After the eight units reached lock-up stage, work stopped.  The builder and the subcontractors declined to proceed.  Various options were suggested, but none adopted.  In May and June 2000 Mr Ryan and Mr Blackadder spoke to Mr Witt who was the second mortgagee, having provided vendor finance.  He was a builder in his own right and indicated that he was prepared to assist.  Nothing came of this. 

372               At a meeting of investors on 13 October 2000, it was decided to list the property for sale.  MDRN engaged Mr Weir of PRD Maroochydore to market it.  They received other submissions, but Mr Weir’s was the best.  He undertook a marketing programme over four to six weeks, commencing in January 2001.  Several offers were received but none was acceptable.  The firm negotiated with various other parties regarding sale, including Messrs Rolls and Burke, to whom it was eventually sold by Mr Jessup as liquidator.  In September or October 2001 Mr Blackadder took Mr Jessup on a site inspection and gave him a detailed summary of the works.

373               As did Mr Ryan, Mr Blackadder distinguished between the commercial aspect of the assessment of a proposed loan and the transactional aspect.  He said that Mr Ryan supervised him in his work.  Mr Ryan also performed the transactional aspects of the loan assessment.  He and Mr Ryan would regularly discuss loan applications.  Mr Blackadder also frequently discussed loan applications with Mr McCarthy, Mr Campbell and Mr Gill.  He was not authorized to approve loans at the time of the Yandina project.  Once he had formed the view that the commercial aspect of a proposal indicated that it was worth proceeding he would draft the letter of offer or facility letter.  That letter was never in a form capable of acceptance.  It rather set out steps to be taken before it would make the loan and sought confirmation that the potential borrower was willing to enter into a loan on those terms.  This was said to be an industry practice. 

374               Mr Blackadder understood that such offers only became unconditional at the time of settlement.  In other words MDRN reserved the right, until settlement, to refuse to make the advance.  Before the letter of offer was sent, Mr Blackadder would give it to Mr Ryan for review.  ‘At that point the emphasis of the requirements of the loan assessment shifted from the commercial aspect to the transactional aspect.’  He and Mr Ryan would have a further discussion, reviewing the commercial aspect and discussing the transactional aspect.  If a borrower accepted the letter of offer, Mr Blackadder would commence to draft the investment summary.  A first draft would be circulated to Mr Ryan and Mr Gill for their comments and feedback.  Any suggestions would be incorporated.  The final draft would then be sent to each of the partners, Mr Gill and Mr Campbell, for their comments and feedback.  Any suggestions or comments would be incorporated into the document.  If any of the partners had any concerns about the deal or thought it should not proceed, it would not proceed.  This happened on a number of occasions.  Once each partner had been given an opportunity to respond to the draft investment summary, it would be sent to potential investors.  Even at that stage there was a prospect that Mr Ryan, in carrying out the transactional aspects of the matter, might discover something of concern, in which case the deal might not proceed. 

375               Mr Blackadder said that it was his practice to assess any proposal in terms of its viability as well as having regard to available security.  In the case of a development such as the Yandina project, success depended primarily on the commercial viability of the project.

376               In a subsequent affidavit Mr Blackadder said something more about the meeting on 13 October 2000.  He also said that he had maintained diary notes concerning the performance of his duties.  However none of those matters seems to be directly relevant.  He also referred to the affidavit of Mr Trotman and in particular, to pars 46 and 48 thereof.  These paragraphs relate to Mr Trotman’s meeting with Mr Rivett.  He denied certain matters asserted by Mr Trotman, in particular that he had said that MDRN had checked only some of Mr Rivett’s companies.  He denied having said that one of MDRN’s partners knew Mr Rivett.  As to par 48 of the affidavit, he said that even before the notice of exercise of power of sale, both MDRN and Mr Rivett were making extensive enquiries with a view to finding a joint venture partner for the project or other alternative funding.  Mr Ryan or Mr Blackadder had discussions with persons who had expressed interest in taking over the project, including persons identified in the affidavit. 

377               In his oral evidence-in-chief Mr Blackadder’s attention was drawn to the document which is at tab 22 of ex 1.  This is a letter dated 2 June 1999 to Project Results, advising of the approval of loan application, subject to conditions, presumably the so-called “facility letter” relevant to the Yandina project.  It largely supports the view expressed by Mr Ryan and Mr Blackadder that there was no binding commitment to make an advance until the advance was actually made.  It expressly says so.  This matter is of some importance to the cross-claims.  On an attached schedule a number of ticks have been placed against some of the lender’s requirements.  Mr Blackadder said that he may have ticked them to indicate that he thought that they were fair, reasonable and appropriate.  He said that similar ticks on the document at tab 30 of ex 1 (a letter dated 14 July 1999 from MDRN to Project Results listing certain outstanding requirements) indicated that the various conditions had been satisfied.

378               In the course of cross-examination Mr Blackadder was questioned concerning his approach to calculating the LVR of 70 per cent.  He said that he had adopted estimated gross amounts to be realized on the sale of units at $1.645 million and added the revised value of lots 2 to 5, yielding a total of $2 005 000.  The amount of the loan was $1.4 million, showing an LVR of 69.8 per cent.  (See TS 1533.)  This evidence may be compared with the evidence in his affidavit, to which I have referred above, concerning the way in which he calculated the residual debt of $400 000. 

379               Mr Blackadder was cross-examined at length about his failure to check the information contained in Mr Rivett’s statement of assets and liabilities.  Clearly, there was little or no checking.  It is the respondents’ case (and Mr Blackadder’s opinion) that extensive checking was unnecessary because of the “make-weight” nature of the personal guarantee and floating charge.  He was also cross-examined at length about his use, in the investment summary, of the information provided in the statement of assets and liabilities.  I will address that matter at a later stage.

380               Mr Blackadder agreed in cross-examination that he had no knowledge as to whether Mr Rivett’s companies had the capacity to pay the interest from trading profits.  He did not investigate that matter.  He was cross-examined at length concerning the quantity surveyor’s report (tab 7 of ex 1), particularly in connection with a cash flow document.  In the course of cross-examination Mr Blackadder accepted that no search was carried out with CRAA, the relevant credit agency.  Such a search would not have revealed Mr Rivett’s previous arrangements with his creditors.  A search with the Insolvency and Trustee Service Australia (“ITSA”) would have done so.

381               A matter of significant concern emerged from the cross-examination.  It was a condition of the loan that evidence of six contracts be produced prior to the advance being made.  Mr Blackadder claimed to have seen six contracts for sale with payment of 80 per cent in cash and the balance in trade dollars.  However no such contracts have been produced.  Six contracts have been produced but only three of them relate to Stage 1.  All showed a 60/40 split.  No satisfactory explanation has been given for the absence of the six contracts to which Mr Blackadder referred.  It is possible, but unlikely that they have been lost.  It is also possible that Mr Blackadder was dishonest in asserting that he had seen six such contracts.  Mr Blackadder was not an impressive witness.  His recollection of the circumstances surrounding the transaction was disconcertingly imprecise.  Despite his claim to have kept notes, they were not produced.  Although the trial took place many years after the relevant negotiations, the project failed very shortly after the advance was made, at a time when, according to Mr Blackadder, he was closely involved in supervision.  In those circumstances, one might reasonably have expected that he would have taken steps to record his actions at a time when his recollection was quite fresh.  I am unable to accept his evidence that he sighted six contracts for the sale of units in Stage 1 with an 80/20 apportionment of each purchase price. 

382               I also have difficulty with Mr Blackadder’s attitude to Mr Rivett’s statement of assets and liabilities.  I accept that it was appropriate to look to the proceeds of sale of the development as the primary source of repayment.  If it were unlikely that the project would succeed so as to make such repayment possible, there would be no justification for lending the funds.  Similarly, it is understandable that he saw the first mortgage as being a more important assurance of repayment than either Mr Rivett’s guarantee or the floating charge over the assets and undertaking of Project Results.  As was observed in the course of the trial, unsecured assets can be sold or otherwise lost.  The rights of other creditors may intervene.  However the value of such assets is still of some importance.  Further, Mr Blackadder included such information in the investment summary, suggesting that he thought it likely to be of some interest to potential investors. 

383               A professional investor, risking his or her own money or that of his or her employer, might treat such matters as being of little importance compared to other sources of repayment, but MDRN and Mr Blackadder were providing information to potential investors in order that they might decide on the worth of the proposed investment.  It was almost inevitable that at least some potential investors would treat this information as relevant to their decisions.  To some extent, MDRN recommended the project to such investors.  If they were not taking responsibility for the accuracy of such information, one would have expected them to have said so in clear terms.  I will return to this matter at a later stage.

Other witnesses for the applicants

384               A number of other witnesses were called on behalf of the applicants.  Only some need be discussed.  

Mervyn John Moloney

385               Mervyn John Moloney is an employee of ITSA.  ITSA keeps a record described as the “National Personal Insolvency Index”.  In it are entered names of persons who have been made bankrupt, persons who have presented their own petitions in bankruptcy and persons who have entered into Part X arrangements.  The index has been in existence since at least 1996.  I infer that prior to that date, a similar record was kept by this Court in its bankruptcy jurisdiction.  On 27 September 2004 Mr Moloney conducted a search against Mr Rivett’s name.  It revealed that a file was commenced on 21 February 1984 and entered on the National Personal Insolvency Index on 18 December 1996.  This record was available for public search in June 1999.

Bradley Vincent Hellen

386               Mr Hellen is an accountant.  His evidence goes to two issues.  One is prudent lending practice.  The other is the nett worth of Mr Rivett and associated companies and trusts.  As to the first matter, Mr Hellen said that a prudent lender would be sceptical about the claimed values of assets offered as security in the absence of valuation evidence.  Likely difficulty in realization should also be kept in mind.  Assets must be clearly described and the borrower’s claims to them identified.

387               Mr Hellen assessed Mr Rivett’s nett asset position as, at 11 June 1999, as $21 989 and Projects Results, a deficiency of $77 710.  I have not found those figures to be of much use largely because Mr Hellen made numerous assumptions which have not been justified by the evidence.  However some of Mr Hellen’s evidence was helpful.  It will be more convenient to deal with it in detail at a later stage.

Moira Kathleen Carter

388               Ms Carter is an accountant and partner in the firm of Jessup and Partners who were appointed to wind-up the mortgage business, including the advance to Project Results.  She took possession of the relevant books of account and handed them to ASIC.

389               Ms Carter was also involved in the decision to sell the Yandina property.  Her affidavit demonstrates, as far as it goes, an appropriate and responsible approach to the question of sale.  Ms Carter’s evidence was primarily directed to complaints made by the respondents concerning the sale of the property.  I will discuss these matters in more detail in considering Mr Jessup’s evidence.

Ian David Jessup

390               On 13 September 2001, the Supreme Court appointed Mr Jessup to wind up the mortgage business.  His firm took possession of the books and records relating to the Yandina project and subsequently forwarded them to ASIC.  The site was sold and the proceeds distributed to investors.  A total of 59.497 per cent of invested capital was returned.  Mr Jessup concluded that Mr Rivett did not have sufficient assets to justify seeking to enforce the guarantee.

391               The site was sold for a purchase price of $1 million plus $103 624.64, the estimated liability of Project Results for GST.  Making allowance for interest on the purchase price and settlement adjustments, the nett proceeds of sale were $1 142 653.90.  The sale was effected in reliance upon a valuation of $850 000 as at 25 February 2002.  Prior to the sale Mr Jessup had inquired concerning any movement in the market since the date of the valuation.  Having so enquired, he did not consider that there was any need to remarket the property before sale.

392               At some stage the purchaser sought an extension of the date for settlement in order to enable it to review certain declarations made by Mr Jessup in connection with the sale.  Mr Jessup agreed to an extension until 31 March 2003, acting upon advice from his solicitors.  The respondents inferred that Mr Jessup could have rescinded the contract and resold at, as they allege, a higher price.  A right to rescind could only have arisen if the purchaser had evinced an intention not to perform the contract or an inability to do so.  There is no evidence of either occurrence.  That is really an end of the matter.  For the sake of clarity, I should say a little more. 

393               The respondents asserted that Mr Jessup had extended the time for settlement by almost a month, based upon the fact that the contract was apparently dated 2 August 2002.  However Mr Jessup said, and it has not been contradicted, that the parties agreed that the date of execution was actually 12 August 2002.  It allowed 30 working days from that date until the so-called “due diligence” date.  During this period the purchaser was given the opportunity of conducting certain investigations.  The expression ‘30 working days’ is a little difficult to interpret.  One infers that it means days upon which offices are normally open, that is Monday to Friday.  However 14 August 2002 was the Brisbane Exhibition holiday.  As I understand it, not all of Queensland had a gazetted holiday on that day.  Mr Jessup was in Townsville, the purchaser was in Sydney and the property was in Yandina.  Pursuant to cl 25.1, in the absence of any agreement to the contrary, settlement was to take place at the place specified in Item R, namely Townsville.  The due diligence date was either 23 or 24 September 2002, depending upon whether or not the Brisbane Exhibition holiday was to be included.  Pursuant to special condition 8, settlement was to occur on the earlier of a day 30 days after the date on which the purchaser advised the vendor in writing that it required settlement or six months after the due diligence date.  In the event the latter was the operative provision, so that settlement was due on either 23 or 24 March 2003.  Thus, as Mr Jessup correctly observed, the extension was for a period of one week or eight days, depending upon the status of the Exhibition holiday.  Under the terms of the contract interest was payable from 24 September 2002 at 7 per cent per annum. 

394               In cross-examination Mr Jessup’s attention was drawn to the fact that at the time of his giving evidence, his firm retained a sum in excess of $47 000 from the proceeds of sale.  In a subsequent affidavit he explained that there was little chance that any of that money would become available to investors because of other outstanding debts and claimed debts.  In re-examination Mr Jessup said that he had a ‘fairly poor view’ of the Yandina property market at the time of sale.

Mr Rivett

395               Mr Rivett was called by the applicants.  As a result, counsel for the applicants could not cross-examine him, whilst counsel for the respondents were able to do so.  This difficulty, from the applicants’ point of view, was alleviated to some extent by the fact that counsel for the cross-respondents thought it appropriate to cross-examine him in a way which may have been of assistance to the applicants and to the respondents’ detriment.  He identified profit and loss statements and balance sheets for Project Results and for other relevant companies and trusts.  Financial statements for years prior to 1998-1999 were in existence at the time of his dealings with MDRN in June 1999.  Mr Rivett said that at that time, he had figures for the 1998/1999 financial year and could have produced them if requested.  Of his own financial position he said:

‘I currently have no assets of any value, and I have about 40 creditors to whom I owe funds of over one and a half million dollars, excluding the Yandina loan.  Some of these creditors have obtained judgments for the debts and are in a position to proceed to bankrupt me at any time.  [Project Results] has nothing and has not traded in the past few years.  Barter Pacific Realty Pty Ltd, Barter Pacific Pty Ltd, Oakwill Pty Ltd and Barlake Pty Ltd are in the process of being deregistered.  They have nothing.’

396               In cross-examination Mr Rivett said that he had been willing to accept trade dollars in the purchase of units because they were easier to sell on that basis.  He was also trying to build up a real estate marketing business specializing in trade dollars.  In mid-1999 six or eight brokers in his office were ‘doing property’ and a couple were ‘doing finance as well’, ‘basically specialising in trying to sell properties using trade dollars.’ 

397               When he provided the statement of assets and liabilities to MDRN, he believed it to be true.  He was examined concerning its content.  The valuation of the Alexandra Headlands house at $220 000 was based on a written valuation of $190 000 given six months earlier.  The market had risen substantially.  As to the Maroochydore units, he said he purchased them at $65 000 each upon the basis of a written valuation and had subsequently renovated them at a cost of about $10 000 each.  Thus he valued the two of them at $140 000.  The valuation of the shares in Barlake at $100 000 reflected its ownership of four vacant residential blocks in Nambour.  They were bought for $55 000 each, using trade dollars.  Mr Rivett subsequently borrowed against them, reducing his “equity” to $100 000.  One must wonder about the effect on the price of the use of trade dollars.

398               Project Results, in its own right, owned the management rights in connection with a building called Sun Coast Resort, which rights had been valued at $180 000.  Of the balance of $100 000, $80 000 was the discounted value of certain tax losses.  As to the John Rivett Family Trust, in which Mr Rivett claimed an interest valued at $440 000, its assets were:

·                shares in public companies valued at $20 000;

·                units in Western Pacific Property Trust valued at $50 000 (the value of nett equity in real estate);

·                50 per cent interest in SME Venture Capital Brokers, valued at $20 000, representing the value of office equipment and “goodwill”; and

·                $350 000 being the nett worth of the ISC Trust representing the value of two businesses – the first, Holiday Mooloolaba, involving management of accommodation units, such management rights having a recognized market value per unit, leading to a value of  $250 000;  the second being Mooloolaba Backpackers Resort.

399               The latter business may or may not have been operating in mid 1999.  At TS 1142 Mr Rivett said that it was ‘new’;  at TS 1143, he said that it may not have opened at that time.  Valuation of the business at $100 00 may have been based on a forecast of the value of a twenty-year management agreement.

400               As to the interest in the NJT Trust valued at $200 000, this figure was said to represent a half-interest in land held with another person for the purposes of a development which had not yet commenced.

401               The valuation of the Fritton Trust was based upon information derived from Mr Rivett’s father who controlled it.  Mr Rivett conceded that he could only access assets of that trust if his father agreed. 

402               Mr Rivett also gave evidence concerning the reasons for failure of the Yandina project, which reasons were substantially similar to those given by Mr Ryan.  He thought that he had shown MDRN a CRAA check relating to himself.  He had possibly shown it to Mr Blackadder.  Mr Rivett gave hazy evidence concerning the extent of his compliance with the requirement to produce evidence of six contracts prior to the advance.  He had a ‘feeling of complying with it’.  I am unpersuaded by that evidence.  Such absence of persuasion would not normally lead me to conclude that such contracts were not provided.  However, taken with the absence from the records of Project Results and the trustee company of evidence of such contracts, I so infer.

403               In cross-examination Mr Rivett was unable to disagree with the suggestion that on 30 June 1999 Barter Pacific Realty was about to report an annual loss of $64 710.  He seems to have asserted that some part of the business of the company made a profit whilst other parts made losses, and that the losses were of value for tax reasons.  At 30 June 1999 the company had accumulated tax losses of $421 280.  It made a trading loss in 1998-1999. 

404               Mr Rivett’s attention was directed to tab 18 of ex 1, a cash flow statement for the Yandina project prepared by Mr Carey.  Mr Rivett said that he expected a negative cash flow throughout Stage 1, Stage 2 and well into Stage 3.  It is not presently necessary that I discuss other matters canvassed with Mr Rivett in his evidence. 

405               Mr Rivett appears to have had a very optimistic attitude to his financial position in 1999.  Such documentary evidence as there is concerning that position offers no support for such optimism or for the statement of assets and liabilities.  Other evidence discloses the following positions for the relevant companies and trusts as at 30 June 1999:

Barlake Pty Ltd

406               This company was incorporated on 18 January 1999.  On 13 May 1999 a charge was registered with ASIC in favour of Stay-Dry Pty Ltd.  This may relate to the debt of $120 000 which Mr Rivett disclosed in his statement of assets and liabilities.  There is also a bank statement showing a debit balance of $8 826.68 as at 22 June 1999.  None of this necessarily detracts from Mr Rivett’s claim that the company’s assets were valued at $100 000.  There is no apparent reason to reject Mr Rivett’s claim that the company owns land, although I would be a little unwilling to attribute substantial weight to Mr Rivett’s estimated valuation.  This is particularly so, given his claim that he purchased the relevant land using trade dollars.  The evidence suggests that there would have been some degree of discounting of such trade dollars.  There are no accounts for this company. 

Project Results

407               A bank statement as at 30 June 1999 shows a credit of $1.87.  The balance sheet for 1998-99 shows a nett loss for the year of $1 442.  There were, however, substantial profits in earlier years.  The balance sheet as at 30 June 1999 shows nett assets of $26 319 as against the nett value of $170 000 claimed in Mr Rivett’s statement of assets and liabilities.  Its primary asset is said to be shares in Barter Pacific Pty Ltd valued (at cost) at $85 003.  Its major liability is a loan to that company of $57 956. 

408               The balance sheet for Barter Pacific Pty Ltd as at 30 June 1999 shows a nett deficiency of $16 919.  Its primary asset is shown as shares in Barter Pacific Realty Pty Ltd valued at $82 002, ‘less provision for diminution’ at $82 002.  I do not pretend to understand the meaning of that statement.  It suggests that the total value of assets attributable to the shares is nil.  Liabilities include a loan from Barter Pacific Realty Pty Ltd in the amount of $15 460.  The balance sheet for Barter Pacific Realty Pty Ltd as at 30 June 1999 shows a nett deficiency of $316 973.  Its primary assets appear to be loans to Barter Pacific Pty Ltd and to Project Results, together with goodwill at cost of $120 000  ‘Less Accumulated Amortization’ in the amount of $92 537, giving a nett value of $27 463.  Again I do not claim to understand the meaning of that statement.  The liabilities are primarily amounts owed to banks totalling more than $270 000, with another $87 000 owed to creditors and $62 000 owed to Western Pacific Property Trust.

409               One readily accepts that a balance sheet may not tell the whole story.  A company may be conducting a valuable and profitable business which value and profitability are not necessarily reflected in its balance sheet.  Nonetheless one would have thought that given Mr Rivett’s position as a potential borrower, the balance of convenience may well have lain with having a balance sheet which maximized, rather than minimized, the value of his assets.  It is not necessary to speculate about that matter.  The profit and loss account for the year ended 30 June 1999 shows a nett loss of $64 710 and accumulated losses as at that date of $421 280.  Total income was $7 417 and expenses $72 127.  The major “expenses” appear to have been for ‘amortization’ of $17 143, interest of $22,451, motor vehicle leasing expenses of $11 562 and other motor vehicle expenses of $6 041.  None of that suggests the operation of a business having a substantial value.  In the circumstances I am not willing to accept Mr Rivett’s evidence as to the value of his interest in Project Results.  On balance I conclude that the company had no nett assets of any value held in its own right.

John Rivett Family Trust

410               The balance sheet for the John Rivett Family Trust as at 30 June 1999 showed a total deficiency of $2 165, and a nett loss for the year of $394.  Income received was $51.  The assets were shares in unlisted companies at cost, and units in the ISC Unit Trust and the Western Pacific Property Trust, all of which were of nominal value.  The primary liability was a loan from Barter Pacific Realty in the amount of $4 532. 

411               The balance sheet for Western Pacific Property Trust shows a nett deficiency as at 30 June 1999 of $15 091.  Its primary assets were freehold land at cost, said to be valued at $92 155, and an industrial building at cost, said to be valued at $154 242.  Current liabilities totalled $264 235, most of which was represented by a bank loan and a tax debt. 

ISC Trust

412               There is no balance sheet as at 30 June 1999 for this trust.  The statement for the year ended 30 June 1998 shows a nett profit for the year of $201 993 and total assets of $861 971 against total liabilities of $659 968.  Of the assets $276 217 was in short-term deposit.  Goodwill ‘at costs’ was said to be worth $419 559.  Current liabilities included $57 622 owed to trade creditors and for accrued expenses, almost $15 000 owed to Esanda and unit-holders’ loans totalling $576 568.  This financial statement was apparently prepared in support of an application for a loan by Mr and Mrs Rivett. 

413               It seems likely that the ISC Unit Trust was generating a substantial income from its “Holiday Mooloolaba” business.  There is no reason to reject Mr Rivett’s estimate of its value at $250 000.  However, as to the Mooloolaba Backpackers Resort, Mr Rivett’s uncertainty as to whether the business had commenced at any relevant time and his assertion that the estimated value of $100 000 was a forecast, cause me to have substantial doubts about the reliability of his evidence concerning such value.  There is good reason to doubt that Mr Rivett or his family trust owned the whole beneficial interest in the trust. 

414               There is one other entity which must be considered in this regard.  Mr Hellen indicated that corporate searches suggest that Mr Rivett was only one of two directors, each of whom was also an equal shareholder.  The other director was Mr Bruce Robinson.  The records of the company show loans to unit holders, C Rivett and B S and J A Robinson, and to beneficiaries, including the BS Robinson Family Trust and the Rivett Family Trust.  All of this suggests that Mr Rivett was not in sole control of the trust or the trustee, nor was his family trust the sole beneficiary.  In cross-examination at TS 1170, he seems to have conceded that his interest was only 50 per cent.  In the course of preparing these reasons, I requested further submissions concerning the matter, but it seems that the evidence discloses nothing more of relevance.  I proceed upon the basis that Mr Rivett and/or his family had, at most, a 50 per cent interest in the trust assets. 

NJT Trust

415               The balance sheet for the year ended 30 June 1999 shows a nett loss of $1 017 and a deficiency of assets over liabilities of $2 311, with nett assets of $78 025, made up of about $40 000 being the ‘Global Trade Exchange - trade a/c’, over $23 000 attributed to the Riverview Greens project and over $12 000 attributed to the Yandina Greens project.  There is no reference to real estate of the value to which Mr Rivett referred.  He said that his claim was based on ‘somebody’s valuation’.   He said ‘I’m not sure whose it was at that time, but we did have it valued, because we had to borrow some money.’  However the only apparent loans were a bank overdraft for $2 988 and a loan, apparently from Mr and Mrs Rivett, in the amount of $34 523. Mr Rivett’s evidence appears to be completely inconsistent with the balance sheet.  In those circumstances I reject it.

Summary of the asset position of Mr Rivett and Project Results

416               This case is not concerned with Mr Rivett’s conduct but with the conduct of MDRN in its preparation and distribution of the investment summary.  However the cause of action pursuant to s 995 requires consideration of the difference between the relevant representations in the investment summary and the facts.  It is therefore necessary to determine those facts as at June 1999.  Out of fairness to Mr Rivett, I observe that at least some of the statements in the investment summary misrepresented the information which he had supplied in the statement of assets and liabilities.  Although he claimed interests in trust assets which were not, in a legal sense his, he at least disclosed the fact that he had done so.  He also identified assets owned jointly with his wife.  Mr Blackadder did not make similar disclosures in the investment summary.  Doing the best I can on the basis of my findings, it would seem that as at June 1999, Mr Rivett’s assets were as follows:

half nett value of the house                    $  40 000

half nett value of units                            $  25 000

shares in Barlake Pty Ltd                       $100 000

shares in Project Results                        Nil

Total                                                     $165 000

417               That leaves for consideration only the value of the interests in the trusts. 

418               Accepting Mr Rivett’s valuation of the Holiday Mooloolaba business at $250 000, of which Mr Rivett or his family owned half, and treating the Western Pacific Property Trust as being worth nothing, the total value of the trust assets of the John Rivett Family Trust seems to be less than $300 000.  Accepting that figure at face value, and adding the value of his own assets ($165 000), his nett worth was something less than $500 000.  I attribute no value to the as assets in the NJT Trust.  As to the Fritton Trust, Mr Rivett has agreed that he had no direct access to its assets.  There was no basis upon which it could be other than misleading to include the claim for the whole of the corpus of the trust in any valuation of Mr Rivett’s asset position.  Of course, there is no real justification for including any trust assets in his estimated nett worth.  There is no real reason to believe that he could deal with them as if they were his own.  Thus his real nett worth was, at most, $165 000.  In my view the statement in the investment summary that he had a ‘net surplus of $1,790,000.00’ was misleading.

419               As to the claim that Project Results had a nett asset position of $640 000, it should be noted that it applied for the loan as trustee of the NJT Trust as appears from the investment summary.  In that capacity it had the assets of that trust which I have found are probably worth nothing.  Project Results’ own assets were also worth nothing.  Mr Blackadder conceded at TS 1514 that he had derived the figure attributed to Project Results by adding together the asset position for the NJT Trust and that for the John Rivett Family Trust.  On any view of it, the outcome was misleading.

Rebecca Barbour

420               Ms Barbour is public access manager for Baycorp Advantage Business Information Services Ltd.  That company was previously Credit Reference Association of Australia.  It changed its name in 1998.  It maintains a data base of information concerning both natural persons and corporations in Australia. This includes writs issued against such persons and judgments entered against them.  It also has bankruptcy information and some information concerning overdue accounts, ownership of shares and directorships of companies.

421               In 1999 subscribers had access to the data base through computer contact or by telephone.  In 1999 MDRN was a subscriber.  It was possible to obtain a hard copy of any search by printing the online search.  In the event of a telephone search, a hard copy could be faxed to the subscriber.  Records are kept of inquiries made by subscribers or other persons.  The only record of any enquiry by MDRN for information concerning Mr Rivett was of an enquiry made on 26 November 2003.  Although the evidence is a little confusing, it seems that a search conducted in 1999 would not have disclosed Mr Rivett’s arrangement with creditors in 1984. 

Mark McIvor

422               Mr McIvor is the solicitor and chief executive officer of Equity Trust Ltd, his duties being the oversight of the lending business of that company.  It is now a merchant bank but began as the mortgage investment division of a solicitor’s firm of which Mr McIvor was a partner. He was asked to provide ‘an independent expert report in relation to the prudent lending practices of mortgage lending schemes generally and to draw conclusions about the appropriateness of the lending practices of … [MDRN] in relation to a loan provided … to Rivett Project Results Pty Ltd.’  He considered that the following criteria would be relevant to the assessment of a finance application by a prudent lender exercising due care and skill in 1999:

·                appropriate security for the debt;

·                established value of the security based on competent independent valuation;

·                level of understanding of the feasibility of the development;

·                available means to ensure appropriate debt clearance from sale;

·                lending ratio; and

·                borrower’s experience and financial position.

423               Mr McIvor said that an LVR of 65-70 per cent should be the maximum.  He also said that, ‘The equity provided by the borrower ought not have been less than 20 % of the total development cost.  This equity must be real and exist or be contributed at the commencement of the project.’  Ordinarily, a lender should investigate:

·                the background and history of the borrower;

·                the corporate structure of the company or group and associated companies if applicable;

·                its track record and experience in similar projects;

·                the status of current and past development activities;

·                credit history of the borrower and associates;

·                the borrower’s asset and liability position to ensure it can support the repayment of the loan in the event of any problem; and

·                availability and verified value of any additional security.

424               Mr McIvor considered that a strata-titled retirement home was a ‘special use property’, not commonly encountered.  It would require specific expertise in development, sale and ongoing management.  Because of these “special use” characteristics, there was additional risk inherent in any delay in completion and sale.  The inherent value of the project was linked to the management of the facility.  It represented an unwarranted risk unless both lender and developer were specialists in the field of residential retirement development sales and ongoing management.

425               Mr McIvor considered that aspects of Mr Ludlow’s valuation should have caused a lender to refrain from placing particular reliance upon it.  It is not for the moment necessary to refer to those matters.  He considered that the acceptance of trade dollars for the purchase of units represented an unacceptable risk to a prudent lender.  The trade dollar industry lacked credibility in the private finance industry.  Prudence dictated that trade dollars not be treated as representing equity in any purchase contract or an acceptable medium of exchange.  The use of trade dollars would mean that the vendor would have to release certificates of title to purchasers without receiving full payment.  Payment in trade dollars was virtually worthless to the lender.  He considered that prudent private mortgage practice required the identification of the nett asset position of a borrower or guarantor in cash assets, real property or liquid securities.  He considered that a prudent mortgage lender would not have advanced funds on the security of beneficial interests in trusts or treated them as part of a valuable security package.

426               As to the LVR, Mr McIvor considered that in this case, the management rights of the completed project had been taken into account in the valuation ‘when they did not exist and would not do so until project completion.’  They ought to have been ignored, in which case the LVR would not have been acceptable.  He also said that lots 2, 3, 4 and 5 in Stephen Street valued at $380 000 were incorrectly shown as ‘borrower equity’.  He considered that this was incorrect in view of the fact that the purchaser held a second mortgage for payment of the purchase price.

427               Although I accept his evidence as fairly reflecting his own experience and as being well-founded in common sense, I considered that Mr Wild, who was called by the respondents, was better able to explain the underlying principles based upon his academic training and extensive practical experience.  Similarly, Mr Miller’s evidence was based on broader experience than was Mr McIvor’s.

Kevin Patrick Walsh

428               Mr Walsh valued the property as at 25 February 2002 at $850 000 (ex 39).  He considered that a sale price in excess of $1 million as at 2 August 2002 reflected market value.  He agreed that the market rose in 2003 and that the difference between his own valuation in February 2002 and the actual sale price in August of that year indicated a substantial increase in that six month period.  This trend would have continued into 2003.  However he considered that the acceleration may only have become evident in mid-2002.  I accept Mr Walsh’s evidence.

Frank Kendt

429               Mr Kendt is a broker with Service Alternative Pty Ltd, trading as Currency Alternative, a trade exchange which acts as a third-party record keeper to facilitate trading between its members and other trade exchanges. He has had substantial experience in facilitating trade transactions between members and between trade exchanges for combined cash and trade dollar consideration.  Trade exchanges operate by facilitating the exchange of goods and services between members and between different trade exchanges.  Members sell their goods and services to other members of the exchange and thereby receive trade dollar credits in their accounts.  They are then able to purchase goods and services from other members, using such credits.

430               A potential seller will telephone the trade exchange to obtain an authorization number, so ensuring that the potential purchaser has sufficient trade dollars.  The seller then completes a voucher, itemizing the transaction details and stating the authorization number.  The purchaser signs this.  After completion of the voucher the seller delivers the product or service and forwards the voucher to the trade exchange.  It debits the purchaser’s account and credits the seller’s account.  The trade exchange charges a fee on the transaction, which fee supports its operation.  It also charges a monthly account-keeping fee.

431               In 1999 the trade exchanges operating in Queensland included Bartercard, BBX, IBEX and Global.  Global was the smallest and had approximately 1000 to 1500 members, with approximately 800 of them trading actively.

432               Trade dollars are designed specifically for trading between members of a particular exchange.  They are not readily convertible to cash.  The rules of trade exchanges stipulate that they are not so convertible.  In practice, a member may wish to convert trade dollars to currency, perhaps because he or she has accumulated a very large credit which cannot be readily utilized by way of exchange.  The Australian Tax Office treats trade dollars as being the same as Australian currency.  Tax liability may be reduced by selling them at a discount to another member who is seeking to accumulate more trade dollars to facilitate a particular transaction.  In 1999 Global trade dollars were being sold or converted to cash at the average rate of $0.15 to $0.18 per trade dollar and occasionally, as high as $0.23 per trade dollar.  By comparison Bartercard trade dollars were being sold for between $0.45 and $0.50 per trade dollar. 

433               Mr Kendt said in cross-examination that the price at which trade dollars were traded for cash was not the same as the price at which they were traded for goods and services.  In the latter cases, their value would be higher.  The use of trade dollars is widespread in the building industry, in which industry they attract something approaching a ‘dollar for dollar’ value.  The transaction fee would keep them below parity.  

Respondents’ evidence

Alan Ronald Ludlow

434               Mr Ludlow is a licensed valuer.  He has substantial experience in valuing hotels, motels, resorts, licensed clubs, health and fitness centres, golf courses, caravan parks, mobile home parks, management rights, nursing homes and retirement villages.  He claims particular expertise in the area of retirement villages and pensioner accommodation.  In 1999 no other valuer in Queensland had similar experience in that area.  Mr Ludlow had no dealings with Mr Rivett prior to being asked to value the Yandina project in 1999.  In January of that year he inspected the Yandina site and the proposed plans.  He initially recommended to Mr Rivett that the design be reworked to reflect aspects of Mr Ludlow’s experience.  Mr Rivett, at least to some extent, incorporated Mr Ludlow’s suggestions into his proposal.  In April 1999 Mr Ludlow saw revised plans for the project.  He considered it to be viable. 

435               He amended his original valuation in July 1999.  Since preparing the valuation he had become aware of a directly comparable sale of which he was not aware in April 1999.  The valuation is at tab 23 of ex 1. 

436               In his valuation, Mr Ludlow’s assumed that all 42 units and the management rights were sold prior to the commencement of the development.  Mr Rivett asked Mr Ludlow to make that assumption.  Mr Ludlow valued the manager’s unit and rights at $325 000.  He agreed that having a good manager was important to the success of such a project.  The manager undertakes responsibility for providing meals to pensioner residents.  The amount which the management rights will fetch depends upon the number of units in the “pool”.  It would be unlikely that a buyer would pay $325 000 for such rights unless all units had been sold.

437               Mr Ludlow conceded that his valuation necessarily assumed completion of the project and that there was a market for the units.  At TS 1433 Mr Ludlow appears to have agreed that his valuation of the management rights also depended upon the assumption that all 42 units would be available for letting, and that the value would be less if some units were not yet available for letting.  He agreed that his valuation ought only be treated as reliable upon the basis that all units had been sold.  He did not recall telling Mr Blackadder or anybody else at MDRN that the project was likely to be successful.

Tony Sergiacomi

438               Mr Sergiacomi is a valuer.  He valued the subject land as at March 2003 at $1 580 000.

Robert Charles Quinn

439               Mr Quinn practised as a real estate agent between 1969 and 2002 and conducted finance broking as an adjunct to his real estate agent’s business.  He put Mr Rivett’s loan application to MDRN.  In considering a proposal for finance he would first ensure that the potential borrower was a person of acceptable character and that the proposal appeared to be viable.  It would not otherwise be worth his while to spend time on it.  He would usually make discreet inquiries about the potential borrower.  If his first impression was that the proposal was sensible and the borrower reasonable, then he would develop the project to a stage where he could submit it to potential financiers.  At that stage he would ensure that there was an appropriate valuation, proper explanation of the project and sufficient information to demonstrate that the loan made commercial sense and that the borrower would be in position to answer the sorts of question which the lender would have.

440               Mr Quinn knew Mr Rivett.  Mr Rivett approached him, seeking finance for the Yandina project.  He considered the proposal to be both professional and thorough.  The statement of Mr Rivett’s assets and liabilities was not of great relevance ‘given security over these assets was not being proposed’.  He thought it unlikely that any lender would have considered Mr Rivett and Project Results’ asset positions other than to determine whether they seemed reasonable in the circumstances.  Mr Quinn considered that Mr Ludlow’s valuation would have been acceptable to lenders generally.  He approached MDRN and spoke to Mr Blackadder.  Mr Blackadder was thorough in his questioning of the proposal.  He asked the questions, and required the clarifications and confirmations that Mr Quinn would have expected from a competent, reasonable loan assessor.  Mr Quinn believed that had MDRN not approved the loan, he would have been able to obtain finance from other sources.

441               In cross-examination Mr Quinn said that he had brokered hundreds of loan applications and had declined to take on as many.  If the lender were taking security over assets, there would have been a complete investigation of them, including valuations.  This would have included verifying the extent of any claimed liability. 

442               Given that Mr Quinn facilitated the proposal to MDRN, it would be a little surprising if he thought that it lacked relevant detail or that Mr Blackadder was other than searching in his examination of it.  To my mind his evidence was more a matter of personal opinion than of practice in the marketplace.

William Elliott Wild

443               Mr Wild holds the degrees of Master of Laws in Deakin University and Bachelor of Commerce and Bachelor of Laws in the University of Queensland.  He is completing a PhD in finance at the Queensland University of Technology and is an associate lecturer in the School of Economics and Finance in that university.  Until 2001 he was Vice-President of the Bank of America NA, based in Hong Kong and Australia.  It is one of the world’s largest commercial banks.  From 1999 until 2001 he was responsible for the origination and distribution of syndicated corporate loans in Australasia.  In 1997 and 1998 he was responsible for the origination and distribution of project finance loans in Asia.  In 1998 he was responsible for developing an Asian loan research capability for the bank.  He has wide experience in corporate and structured loans in Australasia and Asia.  In his view, ‘… the vast majority of loans made by financial institutions in Australia would be described as speculative by the standard criteria.’

444               He gave evidence concerning the relationship between interest rates and risk, including the mechanism by which financial institutions seek to spread risk by incorporating provision for it in interest rates and by diversifying their portfolio of lending.  He considered that lending practice would be considered prudent so long as the credit risk of the loan was commensurate with the credit spread.  Credit spread is the amount by which the rate of return on any debt instrument exceeds the risk-free rate of return for an investment of equal time to maturity. 

445               He considered that the term ‘imprudent lending practice’ described entry into a loan which had a credit risk materially greater than the credit risk of alternative debt instruments which offered a comparable credit spread for the same investment period.  At higher levels of lending, a lender bases the assessment of credit risk on public debt ratings such as those granted by Moody’s or Standard and Poors.  At a lower level, financial institutions undertake their own assessment of credit risks, directed to generating a credit rating according to some internal scale.  This can then be translated into an estimate of the expected loss which is used as the basis for determining the credit loss provision, and thus the required credit spread on the loan.  In a competitive market for debt capital there is a positive relationship between the credit risk of a debt instrument and the credit spread demanded by lenders and investors to provide or hold it.  In the witness’s experience sophisticated financial institutions often draw different, but equally defensible, conclusions as to the credit risk of a given loan proposal. 

446               Assessment involves:

·                identification of the primary or anticipated source of repayment of the obligation;

·                identification of the conditions or circumstances in which the primary source of repayment will be insufficient to meet the loan obligation; and

·                assessment of the likelihood that this will occur.

447               In many cases it will be contemplated that should the primary source fail, there will be secondary or tertiary sources of repayment.  Where a subsequent source of repayment is assessed to be stronger than the primary source and independent of it, the credit risk of the loan is usually taken as the credit risk of that source.  An example of this is where a lender has a guarantee from a third party which is financially stronger than, and unrelated to, the borrower.  Where the strength of the subsequent source is weaker than the primary source, or not independent of it, then the credit risk is usually taken as the credit risk of the primary source.

448               In Mr Wild’s view it is reasonable to assume, in a competitive market, that the average borrower seeks more expensive private finance because it cannot meet a bank lender’s lower credit risk tolerance threshold.  This may be attributable to the private borrower’s unwillingness to accept bank loan conditions, to its own underlying circumstances or to its unwillingness or inability to provide the information required to reduce the bank lender’s uncertainty as to its underlying circumstances. 

449               Mr Wild said that in mid-1999 the twelve month Australian dollar LIBOR was 5.315 per cent.  ‘LIBOR’ is the London Interbank Offered Rate.  It is the rate at which one strong international bank will accept a deposit from another and is a widely accepted benchmark for a risk-free rate of return.  In the present case the loan (at 9.25%) offered a credit spread of 3.935 per cent per annum for a term of one year.  This credit spread implies a market estimate of the rate of credit loss on that security of up to 3.6 per cent per annum.  The credit rating agency, Moody’s, has estimated that for investments rated by them as “rate B”, the average loss rate is 4.14 per cent.  Their next highest category “Ba” has an average annual loss rate of .77 per cent per annum.  Thus the Yandina project loan was at a rate appropriate to a loan rated somewhere between “B” and “Ba” on the Moody’s scale.  These are described as ‘speculative grade ratings’.  Moody’s describes them as follows:

‘Bonds which are rated B generally lack characteristics of the desirable investment.  Assurance of interest and principal payments or of maintenance of the other terms of the contract over any long period of time may be small.  …  Bonds which are rated Ba are judged to have speculative elements; their future cannot be considered as well-assured.  Often the protection of interest and principal payments may be very moderate, and thereby not well safeguarded during both good and bad times over the future.  Uncertainty of position characterizes bonds in this class.’

450               Research by the Reserve Bank of Australia shows that in December 1998 the average credit spread on bank loans to small business in the amount of $500 000 to $2 million was 3.3 per cent per annum.  In Mr Wild’s opinion the average loan to a small business could, in 1999, only reasonably have been considered as speculative.  The credit spread of the present loan was higher, suggesting a higher risk.

451               In April 1999 the Reserve Bank reported that credit spreads on housing loans secured by residential real estate were in the range of 1.25 to 1.5 per cent per annum.  Housing loans are usually long-term.  There is said to be a ‘positive relationship’ between the credit risk and time to maturity of any debt instrument.  Loans of shorter maturity have, all else being equal, lower credit spreads than loans of longer maturity.  The present loan had a credit spread substantially higher than that for housing loans when one might normally have expected it to be less, given its short term.  That can only have indicated a relatively high risk.

452               Mr Wild said of Mr McIvor’s claim that he had no history of investor loss on loans:

‘… .this suggests either that the number of private finance loans he refers to is too small to draw reliable statistical conclusions, that the observed outcome of no credit loss is a low probability outcome, or that the credit risk on the loans provided by Mr McIvor was very significantly less than that of other instruments in the market carrying similar credit spread.

In general, if it is to be judged by observation of actual lending outcomes, imprudent lending practice can reasonably be inferred only by observing that the average losses over a statistically large sample of loans by a particular lender significantly exceeded the average loss implied by the credit spread on those loans.  It is not valid to draw conclusions as to the validity of a credit assessment methodology based on the adverse outcome of a single loan.’

453               Mr Wild said, concerning Mr Rivett’s guarantee:

‘66.      It is my further opinion that the guarantee of John Rivett was a tertiary source of repayment for the loan which was neither strong nor independent of the primary source, and in a prudent loan assessment would have borne little weight in determining the credit risk of the loan.

67.       I would identify the primary source of repayment of the loan as twofold, cashflow from the proceeds of unit sales and the proceeds of loan refinancing after 12 months.  The secondary source of repayment I would consider to be the proceeds from the sale of the mortgaged assets.  The proceeds of enforcement of the John Rivett guarantee I would thus consider to have been a subsidiary source of repayment.

68.       I would have considered the John Rivett guarantee to be an inherently weak source of repayment compared with the primary and secondary source because it was a claim over the net assets of small business operations, subject to what I assume were the claims of commercial bank lenders, and over residential property but only after what I assume to be the prior secured claims of commercial bank lenders.  In addition there was no restriction on John Rivett dealing with the assets, which I would have expected were this source of repayment considered by the lender as integral to the credit risk of the loan.

69.       I would also consider the John Rivett guarantee lacked independence from the primary source of repayment.  It would have seemed reasonable to anticipate that, should the Yandina Greens project have come into difficulty, John Rivett would contribute additional amounts of capital to remedy the situation prior to reaching the point of default under the loan.  At the point of default under the loan, representing a failure of the primary source of repayment, it would be reasonable to expect that the net asset position of John Rivett to have deteriorated from that existing at the time the loan was entered into.’

454               A particular criticism of Mr Wild’s evidence was that it was at too high a level to be applicable to loans of this kind.  I accept that Mr McIvor’s evidence was couched in terms which were more familiar in the private mortgage market than was Mr Wild’s, but I prefer Mr Wild’s evidence.  My primary reason for this is that it was based on principles distilled from extensive academic and practical experience and had statistical underpinning.  It recognized that lending takes place in a market, and that the interest rate will reflect the level of risk as it is perceived and valued in that market.  A lender who seeks too high a credit spread, having regard to the risk, will lose the business to another lender.  In particular, I accept Mr Wild’s assessment that loans to small businesses are speculative, and that the interest rate offered in the present case reflected that speculative quality.

455               I also accept Mr Wild’s views concerning Mr Rivett’s asset position.  There is much merit in the observation that by the time the project had failed, Mr Rivett’s asset position would probably have deteriorated.  Similar comments apply to the charge given by Project Results and its assets.  That does not necessarily lead me to conclude that a prudent lender would take no step to ascertain the reliability of information concerning a borrower’s assets and liabilities and those of a guarantor.  However those matters would not have been as important as the applicants and Mr McIvor have suggested.  Of course that does not undermine the strength of their case pursuant to s 995.

Geoffrey Ian Miller

456               Mr Miller has had substantial experience as a bank officer, including experience in various managerial positions, and substantial experience in lending.  Since 2001 he has been employed by Brisbane Mortgage Finance Pty Ltd, a finance broker dealing in consumer and business lending activities.  Lending money is an inherently risky business.  The lender must assess the risk and make a decision as to whether the risk is acceptable.  If it is, then the lender must seek a return which recognizes the risk involved.  This is the process described by Mr Wild.  Most lending proposals offer two sources for repayment.  A prudent lender will identify a primary source of repayment and, in case it fails, an alternative source or sources.  The focus should be on the primary source of repayment.  Where one lends to a developer, the primary source will generally be sale of the completed project.  A prudent assessment of that primary source will involve an assessment of the market price for the finished product, expected costs and the likelihood of sufficient sales being achieved in an acceptable timeframe. 

457               Lending is a highly competitive market.  Return reflects the risk.  In the present case, in Mr Miller’s view, investors were exposed to an enhanced level of risk and were being rewarded with an enhanced return.  Because lenders are in competition, it may not be possible for a lender to take all of the steps which might be necessary in order to ensure that no borrower ever defaults and that there can never be a loss.  These views reflect Mr Wild’s theoretical, but also very practical, explanation.  The alternative or secondary source of repayment also requires prudent and reasonable consideration by a lender, but the main focus will be on the primary source of repayment. 

458               In assessing a loan application, one of the first things addressed is the asset position of the borrower.  This will give the potential lender some initial impression of whether the applicant has a reasonable surplus of assets over liabilities for his age and type of employment, and whether he is ‘over geared’, with a higher than normal level of debt.  If the surplus is lower than would be expected, it would indicate to a prudent lender a need for further investigation.  There may be an explanation, for example a divorce or a period of unemployment which has diluted assets, or the applicant may have a poor history of business activities which has prevented asset accumulation.  The nature of the assets and liabilities may also trigger the need for further investigation.  In Mr Miller’s view it would be unusual to investigate the strength or ‘realism’ of the assets disclosed in a statement of assets.  However it is not unusual for a discussion of assets and liabilities to take place between the representative of the lender and the potential borrower at the time that the statement of assets and liabilities is compiled.

459               In Mr Miller’s view, the private mortgage finance market is ‘somewhat more focused’ on the alternative or secondary source of repayment than it is on the cash that the project will generate. He did not agree with Mr McIvor’s view that the special nature of a strata-titled retirement home made it unsuitable for private mortgage financing.  In Mr Miller’s experience, any such concern could be addressed by giving particular attention to the viability of the project and, if necessary, adopting a lower LVR ratio than would otherwise be the case.

460               Mr Miller considered that Mr Rivett’s resumé suggested that he was well-educated, with a background in the law.  Having been the managing partner of a large legal firm, he might be thought to have a highly developed level of commercial expertise.  He also had experience as a project manager with a highly regarded organization and had been involved in a number of successful projects.  The fact that Mr Ludlow revised his valuation would not have caused Mr Miller to doubt its accuracy.  A reasonably prudent lender would accept a revised valuation from a reputable firm.  Mr Miller addressed other aspects of the valuation, but it is not necessary that I consider them at this stage.  As to Mr McIvor’s concern that some of Mr Rivett’s assets were held in trust, Mr Miller considered that if such assets were to be relied upon as part of the overall security package, then individual charges should have been taken over them.  To place reliance upon assets over which no security is held is to distort the assessment process.  I understand this to mean that such a process would distract attention from an analysis of the viability of the project which should be the primary source of repayment.  It also invites reliance on assets which may not be available when repayment falls due.  Mr Miller agreed with Mr Wild that a guarantor’s assets and floating charges are likely to be worth little because they are likely to be lost in the early stages of financial difficulty.  He considered that a director’s guarantee ‘is as much about connecting the human element of the borrower to the borrowing entity and therefore ensuring his commitment to the successful outcome of the project’ as it is about securing repayment. 

461               Mr Miller referred to Mr McIvor’s criticism concerning the inclusion of lots 2, 3, 4 and 5 as ‘borrower’s equity’, that as they were subject to vendor’s finance, they were the vendor’s assets.  Mr Miller considered that the terms of such finance made this a favourable aspect of the loan application rather than a deficiency.  It meant that the developer’s assets were not unduly tied up and provided a cheap form of funding.

462               Mr Miller considered Mr Hellen’s focus on the asset position of Mr Rivett and Project Results to be unhelpful.  As these assets were not being made available as security, a detailed valuation was not called for in the circumstances of this loan, although it may have been of some value in assessing the loan.  Mr Miller had never seen an analysis in such depth as Mr Hellen’s assessment of the likely value of Mr Rivett’s guarantee, given that the guarantee was unsupported.  In this context, ‘unsupported’ seems to mean “unsecured”. 

463               In Mr Miller’s view, Project Results’ application would have been successful elsewhere in the industry in 1999, the focus being on the likelihood of repayment from the sale of the completed units and the value of residual land at the end of Stage 1.  There was adequate evidence, in his view, to support such adequacy, including:

·                the number of pre-sale contracts;

·                the valuation report;

·                the involvement of a quantity surveyor to assess project costing and approve progress payments; and

·                the experience and background of the project manager.

464               He noted also that Mr Blackadder appeared to have a sound background in commercial lending. 

465               In cross-examination he said that in considering the asset position of a company you would seek access to the relevant balance sheets and/or financial statements.  If a fixed and floating charge was to be taken, then it would be appropriate to ascertain the assets of the relevant company.  Mr Miller seemed to agree that in considering Mr Rivett’s assets, a potential lender would have inquired as to the basis of valuation of the various corporate and trust interests and as to the terms of the trust arrangements.  He also agreed that in valuing property upon the basis that proposed improvements would be completed, it would be necessary to keep in mind the ‘as is’ value.  He considered the assumption made in the valuation that 42 units had been pre-sold was a little unrealistic.  Developers tend not to pre-sell more than a handful of units because it is usually necessary to discount the price in order to do so.  He said that given the unrealistic nature of the condition, it would be necessary for a lender to make his or her own assessment based upon the reliable number of pre-sales actually made.

466               Mr Miller said that the number of pre-sales was particularly important in assessing such an application.  He would be looking for formal contracts of sale, not merely offers to purchase or expressions of interest.  He would want to see the contracts.  Sale of the manager’s unit and management rights was also important.  It was not so much the number of units sold which was important, but that there be several contracts.  Mr Miller agreed that in assessing the project, you would ascertain whether the developer had the resources necessary to complete the development to the extent that resources in addition to loan funds were necessary. 

467               Mr Miller had no experience with trade dollars.  Had he been assessing a loan in which part of the proceeds of sale of the development was to be received in trade dollars, the main consideration would be whether or not there was sufficient cash coming out of the proceeds of sale to repay the debt.  It would be necessary to investigate the trade dollars to assess their value. 

468               Mr Miller thought that the project had merit in itself, but he had not really assessed the impact of trade dollars upon it.  His favourable view was based upon his acceptance at face value of many other matters such as Mr Rivett’s asset position.  Although his opinion of the project may not be persuasive because of doubts concerning his acceptance of such matters, I accept his more general evidence concerning prudent lending practice.  Much of it re-inforces Mr Wild’s views which I have also accepted.  To the extent of any divergence of opinion, I prefer Mr Wild’s evidence and that of Mr Miller to other evidence, especially that of Mr McIvor. This preference is based upon the wide experience of both Mr Wild and Mr Miller and Mr Wild’s substantial academic background.  Both described an objective approach to a business issue, recognizing the competitive nature of the lending market.  Mr McIvor seemed to be more concerned with avoiding risk than evaluating it.  Such an approach might lead a lender to become uncompetitive in the market.

Mr Leck

469               Mr Leck is a builder by trade and has extensive experience as a project manager on large projects on the Sunshine Coast.  He has owned a house in Yandina and was aware that the Yandina site had been a sawmill.  In 1999 he was in partnership with Mr Glenn Brady, trading under the name of Lekenbry Builders.  Mr Brady was an estimator, experienced in costing building jobs and finding building work.  Mr Brady told Mr Leck that he could obtain the building work for the Yandina project.  Mr Leck knew that Mr Witt had obtained development approval for the site and undertaken filling and leveling on the land.  Mr Leck checked the development approval to satisfy himself as to council requirements but left it to Mr Brady to cost the project and submit a contract to Mr Rivett.  He obtained an engineer’s report from Mr Rivett, the report being by David Gribble.  Mr Leck inquired of Mr Witt whether or not the site had been cleaned up after the sawmill operation.  Mr Witt said that it had been cleared of any contamination and filled with good clean fill.  He had used a lot of sand from a building project which he had undertaken on the coast. 

470               Lekenbry Builders were engaged as builders on a set-price contract.  The contract was flexible with regard to fit-out but rigid with regard to earthworks and site preparation.  The builders obtained the site approval from the council and when building approval was obtained, they took possession of the site.  Mr Leck then undertook the usual preliminary work, ordering and engaging material and tradesmen.  He had been on the site for about a week when he became concerned about the subsoil.  Upon further testing and excavation it became apparent that the subsoil conditions were different from, and less satisfactory than, those predicted by the Gribble report.  In mid-August the contract was terminated.

Findings of Fact

471               I find that MDRN engaged in the business alleged in par 4 of the statement of claim and sought funds to advance to Project Results for the purposes of the Yandina project.  Exhibit 67 provides a sufficient basis for these findings.  In my view the mortgage business was conducted by MDRN.  The trustee company was simply a nominee company, appointed to hold securities on behalf of investors and to take appropriate action to enforce such securities where necessary.  The scheme for lending pooled funds was a managed investment scheme as defined in s 9 of the Corporations Law.  The allegations contained in subpars 6(a), 6(b) and 6(d) are admitted.  I therefore find that:

·                the MDRN partners were solicitors admitted to practise in Queensland, carrying on their practice at Capalaba and Cleveland;

·                they held themselves out as having particular skill, expertise and experience in private mortgage lending transactions on behalf of private lenders and had done so since 1985; and

·                each of the partners in MDRN was a director of the trustee company.

472               Subparagraph 6(c) is not admitted.  I am not persuaded that a mortgage business conducted by a solicitor from his or her office is necessarily part of his or her legal practice.  I doubt whether it matters. I will address the matter again if any party seeks further findings for the purposes of these proceedings.

473               Paragraph 7 is effectively admitted.  In par 8 it is alleged that both respondents compiled and produced the brochure, the autumn 1999 newsletter and the winter 1999 newsletter.  In par 9 it is alleged that they compiled and produced the investment summary.  Paragraph 9 is admitted, but par 8 is admitted only as against the trustee company.  Given my findings as to par 4, it follows that I am satisfied that MDRN also produced the documents identified in par 8 in the course of the mortgage business.  The alleged content of each document is pleaded in pars 10-14.  It is not necessary to make findings concerning all of those allegations.  At a later stage I shall make such findings as are necessary. 

474               Paragraph 15 pleads that in or about June 1999 the investment summary was supplied to each of the first to nineteenth and twenty-second to thirty-seventh applicants.  This is not formally admitted but, with one exception, I do not understand there to be any challenge to the evidence that each of those applicants received it.  As to the thirty-seventh applicant, Mrs Webb, the evidence establishes that her husband was a client of the MDRN mortgage business from some time in 1998.  Thereafter, he received promotional material.  MDRN’s practice was to distribute investment summaries to existing clients.  Mrs Webb recalled that her husband had invested in the retirement village at Yandina.  I infer on the balance of probabilities that he received a copy of the investment summary.  I find that the first to nineteenth and twenty-second to thirty-seventh applicants all received that document. 

475               Some applicants rely on documents other than the investment summary.  In par 16, the applicants plead that the respondents provided to certain of them the brochure and/or the autumn 1999 newsletter and/or the winter 1999 newsletter.  In some cases, those applicants claim to have relied upon aspects of those documents as well as the investment summary.  Given the approach taken by the applicants in their final address, only the autumn 1999 newsletter is now relevant to their claims.  However the winter 1999 newsletter may have some peripheral relevance to the cross-claim against QBE.

476               The twentieth and twenty-first applicants rely solely upon statements by Mr Gill and their prior dealings with MDRN.  The thirty-eighth and thirty-ninth applicants received copies of the investment summary.  The thirty-eighth applicant also received the MDRN Select Mortgage Fund No 1 Prospectus, an advisory services guide and a brochure inviting completion of an investment authority.  It will not be necessary to deal with those documents in detail.  The thirty-eighth and thirty-ninth respondents also rely upon letters received by them from MDRN on 14 and 7 April 2000 respectively.  It is alleged that the respondents failed to communicate certain information to them, in particular that the loan was in default at the time at which favourable representations concerning it were made to them.  I will first deal with the claims based on the investment summary and then with these other bases of claim.

477               As alleged in par 28 of the statement of claim, on or about 23 July 1999 MDRN paid $1.4 million to the trustee company to facilitate the making of a loan to Project Results.  This is admitted.  Paragraph 29 alleges that, but for the conduct of the respondents as particularized in the pleading, the applicants would not have made their respective contributions to the sum advanced.  This is denied.  Paragraph 30 pleads certain duties allegedly owed by the trustee company to all thirty-nine applicants.  The respondents admit that the trustee company owed to each applicant a duty:

‘(a)      to act bona fide in their best interests;

(b)       to act in accordance with the Authorities and the terms of the trust constituted by the establishment of the trust fund (“the Fund”) on the terms contained in the Authorities;

(c)        to take reasonable care not to recommend, or alternatively not to make, an imprudent investment; … .’

478               The “Authorities” were documents executed by investors.  They prescribed the terms upon which they were placing money with MDRN.  They were not addressed in detail in the course of final submissions.  It is therefore not necessary to deal with them in detail. 

479               Whilst par 30 deals with the duty of the trustee company, par 31 deals with the duty of MDRN.  It is admitted that MDRN acted as solicitor for the applicants with respect to the making of the loan and that it owed to the applicants a duty to exercise reasonable skill and care in so acting.  It otherwise denies the allegations contained in par 31. 

480               In par 32 it is alleged that:

‘Notwithstanding the representations referred to in paragraphs 10, 12, 13(b) and (c), and 14, no checks, or no proper checks were made with respect to the character, personal wealth, asset position, background and experience, credit history or personal wealth and asset position of the borrower or the guarantors.’

481               The respondents now admit this allegation to the extent that it relates to the matters referred to in subpars 14(b) and (i), namely the financial positions of Mr Rivett and Project Results. 

The Cause of action pursuant to s 995 of the corporations Law

482               Subsection 995(2) relevantly provides:

‘A person shall not, in or in connection with:

(a)       any dealing in securities; or

(b)       without limiting the generality of paragraph (a):

(i)         the allotment or issue of securities;

(ii)        a notice published in relation to securities;

(iii)       the making of, or the making of an evaluation of, or of a recommendation in relation to, offers under a takeover bid;

(iv)       the carrying on of any negotiations, the making of any arrangements or the doing of any other act preparatory to or in any other way related to any matter referred to in subparagraph (i), (ii) or (iii);

engage in conduct that is misleading or deceptive or is likely to mislead or deceive.’

483               For reasons already given, the applicants’ interests were interests in a managed investment scheme and therefore securities.  See s 92.  As I understand it, the only question is whether or not the conduct of either respondent was misleading or deceptive.  Section 765 provides:

‘(1)      When a person makes a representation with respect to any future matter (including the doing of, or the refusing to do, any act) and the person does not have reasonable grounds for making the representation, the representation shall be taken to be misleading.’

(2)       …

(3)       Subsection (1) shall be deemed not to limit by implication the meaning of a reference to a misleading representation, a representation that is misleading in a material particular or conduct that is misleading or is likely or liable to mislead.’

484               It should be noted that at the relevant time, s 765 did not contain a provision analogous to s 51A(2) of the Trade Practices Act 1974 (Cth) (the “Trade Practices Act”).

485               Subsection 1005(1) of the Corporations Law provides:

‘Subject to the following sections of this Division, a person who suffers loss or damage by conduct of another person that was engaged in contravention of a provision of the Part may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention, whether or not that other person or any person involved in the contravention has been convicted of an offence in respect of the contravention.’

486               I have avoided reference to certain statutory amendments which complicate the matter.  As I understand it, they are not presently relevant.  I turn to the alleged misrepresentations relied upon by the applicants in their final submissions.

Borrower’s contributions of $400 000 and $238 677

487               I have previously set out the table which appears on pp 1 and 2 of the investment summary, under the heading ‘Loan Details and Highlights’.  It is said that the table was misleading in that it suggested that $400 000 had already been invested in the project by Project Results (or Mr Rivett) in acquiring land when, in fact, that sum (or, more precisely, $398 000) was owing and secured by a second mortgage.  It is also said that the suggestion that Project Results would contribute $238 677 towards development and sale costs was misleading, given that Mr Rivett intended to use trade dollars.  This intention appears from the quantity surveyor’s report which was submitted to MDRN in support of Project Results’ loan application.

488               As I understand the applicants’ submissions the complaint is that the table gave a false impression of the assets available to the borrower.  It is clear from subpar 14(k) and par 54 of the statement of claim that the allegation is as to a present fact, namely the arrangements then existing as to funding.  It has not been suggested that the table contained a prediction.  Thus there is no reliance on s 765. 

489               To my mind, the table showed how the loan was to be applied and how the project was otherwise to be funded.  The sum of $1 400 000 was to come from loan funds and the balance, from the borrower.  The table certainly indicated that the borrower was to contribute $238 677 towards the project, in addition to the funds to be borrowed through MDRN.  However the document says nothing about how Project Results was to meet this commitment.  It was for Project Results and/or Mr Rivett to provide the funds.  The investment summary said only that they would do so;  not how they would do so.  It was not a statement about ability to pay, but about responsibility for payment.  This complaint is really another way of expressing the complaint concerning the information provided as to the asset positions of Mr Rivett and Project Results.  It is possible that individual applicants misunderstood the table, but I do not consider that it was in any way misleading or deceptive.

Approval of the loan

490               On p 2 of the investment summary it is said that:

‘The Borrower’s application has been approved under MDRN Private Mortgage’s loan application assessment programme and is now available for contribution by you.’

491               Paragraph 12 of the statement of claim pleads that:

‘The [investment summary] represented and contained advice that the application from Rivett for an advance on specified security referred to in the [investment summary] had been approved by the Respondents under its loan application assessment programme, that being in accordance with the procedure referred to in paragraph 10.’

492               Paragraph 10 pleads representations in the brochure and newsletters concerning steps taken in assessing loan applications.  Thus it is claimed on behalf of those applicants who received the brochure and/or either or both of the newsletters that they understood the investment summary as referring to one or more of those other documents.  See par 39 of the applicants’ written submissions.  As I understood the applicants’ final submissions only those applicants who received the autumn 1999 newsletter now rely on this alleged misrepresentation in the investment summary.  It will be convenient to deal with this aspect after I have dealt with the other, more commonly shared, complaints.

Pre-sale of units

493               On pp 3 and 5 of the investment summary there are statements which suggest that all units (ex 54A) or all units in Stage 1 (ex 54B) have been sold.  I have previously set out relevant passages from pp 2, 3, 4 and 5 and given my reasons for concluding that a reader would take the statements in ex 54A as referring to pre-sale of all units in Stage 1.  See [38]-[46].  The difference in wording between ex 54A and ex 54B is of no consequence in this regard. 

494               In submissions, the applicants focused upon the statement on p 3, that Mr Rivett  had secured contracts to sell all units, and that on p 5, that the proposed loan was ‘supported on the basis of [inter alia] presale of all units … (with clear evidence of six sales prior to the first drawn down).’  One cannot look at those paragraphs in isolation from the rest of the document, particularly the other references to sales, pre-sales, contracts and pre-sale contracts.  In particular, on p 2 there is a reference to ‘presale contracts of the units’.  On p 4 it is said that Mr Rivett had stated that all units had been sold.

495               The meaning of the word ‘presale’ is not clear.  I have found no relevant dictionary definition.  The word “pre-sale” is apparently a French word meaning a salt meadow.  That is clearly not the present meaning.  The prefix “pre-” usually means “before”.  This suggests that the word ‘presale’ refers to an event occurring prior to a sale.  However it is more likely in the present context that the expression implies a transaction prior to some other event.  What that other event may be is not clear.  It may be commencement of construction, or completion of such construction, or registration of an appropriate plan which would enable the transfer of legal title to each unit.  The term describes some arrangement concerning purchase of a unit in the proposed development, which arrangement was in place as at the date of the investment summary, or perhaps, at the date of its distribution.  The use of the expression “sale” suggests a binding commitment to buy.  However the expression “pre-sale contract” suggests something different from that.  The distinction on p 5 between pre-sale of all units and the provision of evidence of sale of six units also suggests that “pre-sale” implies something less than a binding commitment to purchase.  On the other hand, references to contracts to sell and the statement that all units have been sold are unequivocal.  Perhaps one can say little more than that the investment summary conveyed the impression that persons had at least conditionally committed themselves to buy, or had indicated interest in buying.

496               Exhibit 37 contains a number of contracts.  One is a sale to Pearlyn Pty Ltd which appears to have predated the investment summary.  There is correspondence dated 1 June 1999 dealing with such a contract.  It seems to have related to unit 19.  However there is also a contract dated 22 June 1999 for the sale of ‘lot 19’ to Pearlyn.  In any event unit 19 was not in Stage 1.  There is also a contract with Frank and Carmel Lowe, apparently relating to ‘lots 14 and 16’.  Lot 14 was not in Stage 1.  Lot 16 was the manager’s unit.  There is correspondence dated April 1999 concerning contracts for sale to Elliott of units 5 and 6.  Those units were in Stage 1.  I understand that there are other contracts in a bundle of documents which was marked ‘E’ for identification.  However they are not in evidence before me.

497               At tab 25 of ex 1 there are a number of contracts which seem to have been produced from the records of Project Results.  One relates to the sale of lot 19 to Pearlyn.  Another is for the sale of units 5 and 6 to Elliott.  Those units were in Stage 1.  The sale to Medhurst of lots 11, 12, 13, 23 and 24 dated 21 May 1999 involved two lots in Stage 1, lots 11 and 12.  The sale to Lowe of lot 16 dated 22 March 1999 was of the manager’s unit.  There is a memorandum to Mr Rivett from a Mark Curchin dated 28 June 1999 which confirms that units 1, 2, 7 and 8 have been sold.  Thus the evidence suggests a basis for suspecting that lots 1, 2, 5, 6, 7, 8, 11, 12 and 16 had been “sold” prior to the first advance, but it does not demonstrate that all twelve units in Stage 1 and the manager’s unit had been sold as at the date of the investment summary or distribution thereof.

498               There is also unsatisfactory evidence from Mr Rivett and Mr Blackadder concerning this matter.  Mr Blackadder said that he recalled seeing six contracts in ‘an acceptable form’ prior to settlement of the loan, and that he would not have settled without having done so.  The first advance was made on 23 July 1999.  The apparent absence of any such documents from the records of Project Results and of the respondents suggests otherwise.  In any event the question is whether or not all units in Stage 1 had been sold as at the date of the investment summary or distribution thereof.  Mr Blackadder said that he had seen ‘many presale contracts’, including contracts other than those which satisfied the requirement that there be evidence of six sales prior to the advance.

499               In Mr Durie’s letter to Mr Trotman dated 4 October 2000 (ex 51) he said that units 1, 2, 5, 6, 7, 8 and 16 were under contract, unit 16 being the manager’s unit, suggesting  that the condition of the loan requiring evidence of six contracts had been satisfied.  Copies of these contracts were provided to Mr Trotman in response to his inquiry concerning satisfaction of the condition precedent.  Mr Durie also referred to sales of units in ‘the latter stages of the development’.  However there was no suggestion that the balance of units in Stage 1 had been sold.  Mr Trotman had enquired only as to the contracts sighted prior to the advance as provided for in the investment summary, but one would have expected Mr Durie to give the full picture concerning sales of Stage 1 units.

500               Mr Rivett’s evidence concerning this aspect of the matter was not at all convincing.  He said that he remembered having ‘the feeling of complying with’ the requirement to produce evidence of six sales.  Mr Rivett was asked at TS 1163 how many signed contracts he held in mid-1999.  He said:

‘Well, I am sure that we had sold the 12 units in Stage one but when I say sold, I don’t necessarily mean that the contracts were fully signed up and completed because in some of the cases we had a form of, what do you call it, offer to purchase or some sort of preliminary document which was signed and a deposit paid and that happened before we actually got the contract signed.  … 

The reason that this happened was that there was a considerable expense in preparing these contracts and I was trying to delay that to the last minute to save the cost if the project failed or flopped at that stage.  So we would sign people up on an offer to purchase-type document and then later on have them complete the full contract.  So my recollection was some of the units were at the stage of offer to purchase, some of them were at full contract stage, but my practice was to send the contracts to the solicitor as late as possible if they were subject to something because I didn’t like running up the costs if the finance failed or if a condition failed.’

501               He was then asked where the contracts were and said that he had thrown them away.  He was asked when he did that and said: 

‘It would have been about three and a bit years ago.  It was in 2001 I moved all of my filing cabinets and files from Mooloolaba office up to a house that I rented at Maleny and I got them all taken - all my files and filing cabinets taken up there and I cleared a lot of what was then junk out.  And I had these contracts in a two-drawer filing cabinet and I cleared them all out because they had all expired.’

502               He was asked what he meant by ‘expired’ and said:

‘Well there was a clause in the contract that self-executed them.  If you didn’t complete the project by a certain time the contracts were voided or - and in this case we hadn’t completed so I just cleared everything out.’

503               He was asked how many he had thrown out and said that it was a dozen or fifteen ‘or something like that’.  He thought twelve or fifteen had been signed.

504               This evidence is a little curious given that Mr Jessup was appointed on 13 September 2001.  Mr Rivett’s evidence was given in October 2004, so that the disposal of the contracts ‘three and a bit years’ earlier would have been at about the time of such appointment.  Mr Durie’s letter (ex 51) demonstrates that by late in the year 2000 MDRN were exploring ways of recouping moneys lost by applicants as a result of the loan to Project Results.  The debt was substantial, and Mr Rivett had given a guarantee.  He must have at least sensed the possibility of litigation.  In all of those circumstances it is difficult to accept that Mr Rivett, a lawyer, would have disposed of documents which could only have assisted in demonstrating his own good faith.

505               In cross-examination Mr Rivett was referred to a statement in the loan application to the effect that all units had been ‘committed to purchasers on offers to purchase’.  He said that this meant that there was no binding contract.  Such a document was designed ‘to feel out the market as much as anything, to see whether people are prepared to sign one of those and put up a deposit.  You get a feeling that they will go to contract, so you can test the demand.’  There was further cross-examination of Mr Rivett concerning this matter, but I did not find it of particular assistance.  I reject Mr Rivett’s evidence concerning this matter as unreliable.

506               The evidence as to sale or pre-sale of units is, at best, confused and, to some extent, contradictory.  Whether or not Mr Blackadder saw documents which looked like contracts for the sale of six units prior to the drawdown of the loan, I am unable to conclude that all twelve units had been sold at the time of the investment summary or at any time thereafter.  There may have been some offers of the kind described by Mr Rivett in cross-examination.  They might accurately be described as “pre-sales”, but they were not “contracts” or “sales”.  In any event there is no document evidencing expressions of interest in the purchase of all units in Stage 1.  I would have expected, at the very least, a list.  On balance, I infer that such documents as have been located in the records of Project Results and the respondents are probably the only documents concerning this matter which were brought into existence.

507               The applicants bear the onus of establishing the falsity of these representations.  In the circumstances of this case it is not easy for them to do so.  However the absence of documentary evidence strongly suggests that all units in Stage 1 had not been “pre-sold”, whatever that expression might mean.  I do not accept Mr Rivett’s assertion that he disposed of contracts.  I infer, on the balance of probabilities, that although there were contracts of sale and pre-sale offers for some of the twelve units in Stage 1, there were not sales of, offers for or expressions of interest in, all twelve units.  It follows that the investment summary was misleading in this respect.

508               I turn to the question of reliance.  As I have said there is a difficulty with the meaning of the expression “pre-sale”.  A “pre-sale contract” can hardly be the same thing as a “contract to sell”.  The former expression implies an arrangement not yet constituting a sale, while the latter conveys the idea of a concluded agreement for sale.  It is difficult to know how a potential investor would have understood the overall effect of the investment summary in this respect.  If, as some applicants considered, it conveyed the idea of something less than a sale, then it is less likely that the applicants would have relied upon it than if the overall meaning was that there were binding contracts of sale.

509               The overall effect of the investment summary was to represent that any arrangements concerning sales of the units were something less than binding.  The subject is first addressed on p 2 where the expression used is ‘presale contracts of the units’.  References to sale and contracts of sale thereafter should be read as qualified by that earlier statement.  The most prominent reference is on p 5 where the distinction between “pre-sale” and “sale” is clearly drawn.  I have difficulty in accepting that investors would rely on such equivocal statements.  If an applicant considered the matter important, he or she would have sought clarification.  As some applicants suggest, the statement may have indicated demand for the product.  Each decision to invest was no doubt based upon numerous considerations including, as many applicants claim, the available security and alleged assets of Mr Rivett and Project Results.  On Mr Wild’s approach demand for the product might well be an important consideration.  However, in this case, I must assess the effect of the representation that all units had been “pre-sold”, with all the inherent ambiguity of that term.  In general, I doubt whether an investor would rely on such equivocal statements without clarifying their meaning.  For reasons which I will give at a later stage, I take a different view of the position of Mr Bengston, the seventh applicant.

510               I do not understand the applicants, in this aspect of the case, to rely on the requirement that there be six contracts in place prior to the advance.  That was a requirement of the loan rather than a representation.  If the advance was made other than in accordance with that requirement, then the applicants may have remedies accordingly, but those remedies do not arise out of any statutory cause of action based upon misleading or deceptive conduct.

Trade dollars

511               The applicants complain of the absence from the investment summary of any disclosure concerning the proposed use of trade dollars.  This relates to two aspects of the transaction.  Firstly, it is said that as Project Results proposed to fund its contribution of $238 677 towards construction costs using trade dollars, this should have been disclosed.  For reasons given in connection with the complaint about the borrower’s contribution, I consider the complaint to be misconceived. 

512               The second aspect of this complaint concerns the statement on p 4 of the investment summary that, ‘The units are being sold for $85 000 each with Mr Rivett advising that all units in Stage 1 have been sold.’.  This statement is said to have been misleading in that such contracts provided for part of each sale price to be paid in trade dollars.  It is also said that the failure to disclose this matter rendered the statement as to sales at $85 000 misleading.  I have previously given brief reasons for rejecting this complaint. 

Trading profits

513               At p 3 of the investment summary it was said that:

‘The trading profits of Mr Rivett’s companies can provide interest coverage.’

514               This was a statement as to present capacity, asserting that the companies were then in a position to pay interest as it fell due from their trading profits.  The applicants submit that it was also a representation as to future capacity.  However no attempt has been made to identify with precision the exact nature of that alleged meaning.  The argument might be that it was a prediction as to the future capacity of the companies to provide interest coverage or that they would meet interest payments in the future.  I think it unlikely that a reader would have understood the statement as a prediction by MDRN as to the future profitability of the companies.  This would imply a detailed examination of the affairs of, possibly unidentified, companies which were completely unconnected to the transaction.  The statement also could not have been read as predicting that such unidentified companies would pay the interest.  The statement addressed current profitability and capacity to pay.  I will proceed accordingly.

515               There was no legal obligation upon any company other than Project Results to meet interest payments.  The statement really concerned Mr Rivett’s (and, through him, Project Results’) access to cash, the implication being that there were profitable companies which could lend to Project Results or Mr Rivett.  Whether such money would be made available in any particular situation was a different matter.  This again raises the question of the extent to which it is likely that an investor would have relied on such a statement.  A further problem is to identify the companies in question.  When can a company be described as “Mr Rivett’s”?

516               Setting aside those problems, the capacity of any company to meet interest payments would depend in part upon the amount falling due.  The loan was for twelve months, but interest for six months was to be pre-paid.  The following passage on p 3 of the investment summary outlined the proposal with respect to repayment of the loan:

‘Repayment of the loan will be provided through the sale proceeds of the units.  The cash flows provided indicate construction and sales to occur within 4 to 5 months.  Costs and timing of the project has been confirmed by a qualified Quantity Surveyor.  The project budgets are reasonable.’

517               One version of the investment summary then stated:

‘Investor funds repaid before the end of the loan will attract one month’s penalty interest in addition to interest paid the date of repayment of funds.’

518               The other version stated:

‘Interest coverage is met from this prepayment.’

519               The expectation seems to have been that the loan would be repaid within six months, but the term of the loan was twelve months.  See p 1 of the investment summary.  Theoretically, the maximum amount of interest to be paid (other than that which was to be pre-paid) would be for six months at 9.25 per cent.  That is about $65 000, or something under $11 000 a month.  Assuming that the relevant companies were those identified in the course of the trial, it is necessary to look at their available trading profits to see if they had the capacity to meet that obligation from such profits.  The relevant profit and loss accounts are exhibits to the affidavit of Mr Glynn, although their admissibility was established by Mr Rivett.  Project Results showed nett losses for 1996 of $1 066, for 1997, of $68, for 1998, of $264 and for 1999, of $1 442.  It seems that in none of those four years was there any income.  Project Results as trustee of the NJT Trust showed no income and losses of $116 for 1998 and $1 017 for 1999.  For 1997 there was a profit of $11 925, the bulk of which was derived from the sale of assets.  In its capacity as trustee of the John Rivett Family Trust, Project Results made a nett profit of $4 in 1998 and a nett loss of $394 in 1999.  In 1997 it made a nett loss of $39.  Barter Pacific Realty Pty Ltd showed a nett profit for 1997 of $31 137 and for 1998, of $13 918.  For the year ended 30 June 1999, it showed a nett loss of $64 710.  Barter Pacific Pty Ltd showed a nett loss for the year 1998 of $264 and for 1999, of $1 976.  For 1997 there was a loss of $99.  For Oakwill Pty Ltd, as trustee of the Western Pacific Property Trust, there was a nett loss for 1998 of $3 412 and for 1999, of $11 688. 

520               As to the ISC Trust, in which Mr Rivett’s company had a 50 per cent interest, it made an operating profit of $201 993 in 1997-98.  However the trustee was wound up by a petitioning creditor in the year 2000.  Mr Rivett said that this occurred because of one large bad debt.  There are no financial statements for 1998-99.  Mr Rivett said that the “Holiday Mooloolaba” business conducted by the trustee had a ‘cash flow’ of $8 000 - $10 000 a month and up to $16 000 a month in peak months.  Cash flow is not the same thing as trading profit.  The business in question involved the management of accommodation units.  Even accepting Mr Rivett’s evidence, it seems unlikely that after making allowance for its own outgoing, it would have had sufficient profit in each month to meet the monthly interest payment of almost $11 000.  However accumulated trading profits may have been sufficient to discharge the total interest debt.  Interest for the period from July 1999 to January 2000 had been pre-paid.  Thus no interest payment would have been payable until January or February.  By that stage Robinson Rivett would presumably have accumulated some amount by way of trading profits for July-January which, with profits derived thereafter, may have been sufficient to meet interest due for the period from February until June or July. 

521               The applicants bear the onus of establishing misleading effect.  Assuming access to half of the nett profits, it is quite possible that the Rivett share of profits for one year would have been sufficient to pay interest for six months.  I am not satisfied on the balance of probabilities that the statement was misleading or deceptive.

Asset positions of Mr Rivett and Project Results

522               At p 3 of the investment summary it was said that Mr Rivett had a ‘strong asset position, evidencing a net surplus of $1,790,000.00.  The applicant company also shows a net asset position of $640,000.00.’

523               These are clear statements of fact.  I reject the suggestion that an investor might have understood that Project Results had assets to a value of $640 000 which formed no part of the $1 790 000 claimed for Mr Rivett.  Anybody reading the investment summary would have inferred that Mr Rivett had a financial interest in Project Results, although not necessarily extending to the whole worth of that company.  It is inconceivable that a reader would have assumed that Mr Rivett had no interest whatsoever in that company.  It follows that there was nothing misleading about use of the word “also” in the above statement.

524               I have previously given my reasons for concluding that Mr Rivett’s nett assets were probably substantially less than $500 000 and that Project Results had no nett worth.  It follows that the statement was misleading. 

Reliance BY APPLICANTS OTHER THAN the twentieth and twenty-first applicants

525               The respondents admit that all applicants other than the seventh, eleventh, twentieth, twenty-first, thirty-eighth and thirty-ninth applicants, in deciding to invest in the Yandina project, relied upon the misleading statement in the investment summary concerning the asset positions of Mr Rivett and Project Results.  Accordingly, each is entitled to judgment on that basis.

526               The seventh applicant, Mr Bengston, said that a number of aspects of the investment summary ‘encouraged’ him to invest in the Yandina project.  However I cannot find that he relied on the statement concerning the assets of Mr Rivett and Project Results.  At TS 599 he said:

‘Well, I thought the project was strong.  It had everything going for it, and when asked the question about Mr Rivett I read his assets and suchforth, but I didn’t place any importance on the amount of his assets.’

527               This is very much the approach urged by Mr Wild.  I infer that Mr Bengston took a similar attitude to the statement concerning the asset position of Project Results.  However, in assessing the project, Mr Bengston placed weight upon the statement that all the units had been sold.  It is clear that he understood the position to be that all units in Stage 1 had been sold.  See par 19 of his affidavit and TS 599.   He understood that this meant that ‘somebody had put their name down on a list for a particular unit’.  He considered that it showed that there was sufficient demand for the product.  Had he known that only three or four “sales” had been made, it would have made a difference to his decision to invest.  I have found that the effect of statements in the investment summary concerning “pre-sales” was misleading.  I have also indicated my reservations concerning the likelihood of reliance by investors upon those statements, given their ambiguous overall effect.  However Mr Bengston is in a special category.  He attributed to the investment summary the best possible meaning from the point of view of the respondents, namely that people had indicated an interest in purchasing each of the twelve units without committing themselves legally to doing so.  He said that he relied on that understanding and explained why. 

528               It is true that in the course of oral evidence-in-chief, he said that had he known that ‘perhaps three or four of them at most out of the 12 in Stage 1 … had been sold …’, it would have affected his decision.  Presumably, the question reflected counsel’s understanding of the evidence, or the evidence as he then expected it to be.  My findings suggest that there may well have been expressions of interest or contracts for more than three or four units.  It might be argued that in those circumstances, the evidence does not establish a misrepresentation upon which Mr Bengston relied.  However the question and answer should not be taken as limiting the extent to which Mr Bengston relied upon such representations.  He made his primary statement concerning these matters in par 19 of his affidavit. 

529               Mr Bengston’s willingness to eschew reliance upon various other aspects of the investment summary, in particular Mr Rivett’s asset position, leads me to conclude that he was an honest and reliable witness.  For that reason I accept his assertion that the representations concerning pre-sale contracts significantly influenced his decision to invest. 

530               As to the eleventh applicant, Mr McIntyre said in his affidavit that he was looking for an investment with directors’ guarantees and with assets sufficient to save the investment in the event of financial difficulty.  He claimed to have relied upon the total asset position of $2 430 000, representing the combined nett worth of Mr Rivett and Project Results as shown in the investment summary.  In his oral evidence he said that had he been told that Mr Rivett had assets of less than $100 000, ‘the figures wouldn’t stack up if that was the case.’  In cross-examination he said that he knew that MDRN had not guaranteed the accuracy of information provided to them by Mr Rivett.  However he thought that they would have assessed the information provided in the manner that a reasonably prudent lender would have done.  Had the statements in the investment summary accurately reflected the information provided to Mr Blackadder, that evidence may have been fatal to the claim.  However those statements did not accurately reflect that information.  Mr McIntyre understood and accepted that MDRN had not checked the accuracy of the information provided in support of the loan application.  He did not know or accept that the statements in the investment summary did not reflect that information.  Implicit in his evidence is the assertion that he understood the investment summary to reflect information provided to MDRN in support of the loan application.  That is the interpretation which is urged by the respondents.  Even on that view it was misleading.

531               In cross-examination Mr McIntyre agreed that he understood that Project Results was a company owned by Mr Rivett and that the reference to Mr Rivett’s assets included the value of Project Results’ assets.  He eventually agreed that his statement in par 39 as to the aggregate value of the assets of both was incorrect.  Mr McIntyre also conceded in cross-examination that other statements in his affidavit were wrong, particularly statements concerning his understanding of the investment summary.  He attributed this to erroneous drafting of his affidavit, combined with a failure by him to detect errors which had occurred prior to signing.  In some cases, Mr McIntyre readily conceded the errors.  In others he conceded them only after he had been significantly pressed.  I am inclined to think that there was probably some truth in his explanation that the affidavit was drafted in a way which did not reflect the instructions which he had given, and that he either failed to detect the errors or chose not to correct them. 

532               Counsel for the respondents urged me to reject his evidence in its entirety on that basis.  However I did not form the view that Mr McIntyre was dishonest.  The problems with his evidence highlight the difficulties inherent in asking any person to remember specifically the aspects of a document which led to a particular decision.  Where the decision is based on oral representations, the relevant person is likely to recollect the aspects which were important to the decision in question, simply because he or she will have remembered the important things and forgotten the unimportant.  There will be little external inducement to reconstruct after the event.  Where, as in this case, an applicant relies upon a written document, the temptation to read it carefully after the event and to claim reliance upon every conceivable aspect must be difficult to resist.  From time to time throughout the trial, I formed the view that this was occurring.  Indeed, to some extent, counsel encouraged the applicants by inviting them to refer to the investment summary in their evidence-in-chief.

533               Where, as here, legal advisers are presenting numerous cases which have some common, and some unique, features, there will be a tendency to stress common features.  That process may result in unconscious encouragement to some applicants to broaden their claims to include reliance on statements other than those which actually prompted their decision-making.  Understandable as that phenomenon may be, it is neither desirable nor permissible.  It may well be that the risk of contamination of a witness’s evidence, particularly on a question such as reliance, is so great that litigation of this kind, involving claims on behalf of  a large number of unrelated applicants whose cases share only some common features, should not readily be instituted.  Such proceedings may seem to assist applicants of limited means to pursue small claims, but they may well have a potential capacity to undermine legitimate claims. 

534               In the present case I accept that Mr McIntyre relied upon the availability of a guarantee from Mr Rivett and the statements concerning Mr Rivett and Project Results’ assets in the sense which I have explained.  In those circumstances I conclude that Mr McIntyre acted upon the misrepresentation in the investment summary as to such assets.

535               The thirty-eighth applicant, Mr Holman, is in a somewhat different position from the other applicants to whom I have so far referred.  He and his wife (who is now deceased, and of whose estate he is executor) received the investment summary in late April 2000.  They also received other documents which do not otherwise feature in these proceedings.  I do not understand counsel for the applicants ultimately to have relied on those other documents.  Mr Holman said that he relied on the information in the investment summary concerning the asset positions of Mr Rivett and Project Results.  I accept that evidence.

536               Mr Holman also said that he and his wife were not informed that the loan was in default at the time at which they were invited to invest.  However, on pp 1-2 of a letter dated 19 April 2000 (ex 22) this passage appears:

‘Interest is presently being paid from trading profits from Mr Rivett’s companies.  In this regard we advise that interest for the period 23 February 2000 to 22 March 2000 remains unpaid at this point in time and we have been advised by the Borrower that outstanding interest will be paid to our Trust Account in the immediate future.  The delay in the payment of interest has been caused by the postponement of a settlement which was to be completed in mid-March and from which considerable funds were to be received by the Borrower.  We are led to believe that settlement of that matter will be completed in the near future and delay in settlement has placed a strain on the cash flow of [Project Results] in the short-term.  As a precaution and in terms of our usual practice default notices have been issued on the Borrower to protect the interests of investors in the loan.  Due to the previous excellent conduct of the loan we believe that it is unlikely that a similar breach in loan conditions will occur in the future.’

537               It seems quite clear that the Holmans were told of the default.  The only case pleaded in the statement of claim arising out of the letter is the alleged failure to inform them of default in interest payments.  In submissions counsel sought to mount a broader case arising out of the statement, ‘Due to the previous excellent conduct of the loan we believe that it is unlikely that a similar breach in loan conditions will occur in the future’.  However that is not the case pleaded.  This aspect of the claim must fail.

538               The thirty-ninth applicant, Alice Joy Tangey, sues in her own right and as executor of the estate of Kevin Herbert Tangey, her husband.  An unsworn statement by Mr Tangey is in evidence.  The Tangeys received the investment summary.  Mr Gill told Mr Tangey that he could only invest in the Yandina project for three months as the loan was due to expire on 22 July 2000.  This conversation took place in late March or early April 2000.  Mr and Mrs Tangey received a letter dated 7 April 2000 which contained a paragraph concerning default in payment of interest.  That paragraph was similar to that which appeared in Mr Holman’s letter of 19 April 2000.  I have quoted the latter paragraph above.  Mr Tangey said that ‘It did not occur to me that the loan was actually in default’ I find this difficult to accept.  It appears to be based on a distinction between delay in payment of interest and default.  Mr Tangey claimed to have relied upon advice given by Mr Gill and upon the investment summary.  He was attracted to the investment by the higher rate of interest offered, and the security provided by the borrower and Mr Rivett.  I infer from that statement that Mr Tangey relied upon Mr Rivett’s guarantee and the assets apparently available to support it.  I am, however, unable to accept that he was unaware that the loan was in default, given the content of the letter of 7 April 2000. 

Autumn 1999 newsletter and the investment summary

539               As I have said, some initial investors also claim to have relied on other documents in addition to the investment summary.  As appears from par 16 of the statement of claim the sixth, eighth, twelfth, twenty-fourth and twenty-sixth applicants claim to have relied on the brochure, the eighth, twelfth, thirteenth, eighteenth, seventeenth and twenty-fourth applicants claim to have relied on the autumn 1999 newsletter and the eighth, twelfth, eighteenth, thirty-second, second, thirteenth, seventeenth, twenty-fourth and thirtieth applicants claim to have relied on the winter 1999 newsletter.  In the applicants’ submissions, only the autumn 1999 newsletter was addressed.  It is said to have given context and meaning to the statement at p 2 of the investment summary that:

‘The borrower’s application has been approved under MDRN private mortgage’s loan application assessment programme and is now available for contribution by you.’

540               In the autumn 1999 newsletter under the heading ‘How Loans are Assessed The MDRN Ten Point Assessment Plan’ the following passage appears:

‘All applications for private mortgage loans through MDRN are thoroughly evaluated before approval.  The investigation takes place right up to settlement to ensure that the loan is going to perform and that investors are fully secured.

Our ten point loan assessment plan is briefly set out below:

۰                Applicant … Character, personal wealth and asset position, background and experience are all checked.

۰                Credit history … Must be satisfactory, and past repayment history is reviewed.

۰                Security … Availability of first mortgage, guarantees and company charges.

۰                Valuation … We must be satisfied that the valuation has been properly done and meets the security requirements for the loan.

۰                Valuer … Must be an independent, recognised and experienced valuer.  We also seek check reports. 

۰                Property … We check area, type, location and condition.  In most cases we personally inspect the property.

۰                Servicing … The applicant must demonstrate a clear ability to meet the loan commitment.

۰                Financial strength … We inspect the balance sheet and any other relevant financial records.

۰                General knowledge … We check to see if there is anything adverse known about the applicant, the property or the proposal.

۰                Purpose of the loan … We ensure that it is commercially acceptable.’

541               It is possible that those applicants who received both the autumn 1999 newsletter and the investment summary understood the passage on p 2 of the latter document to refer to the ten point plan outlined in the former document.  However it seems a little unlikely that they would have referred back to the newsletter as some sort of supplement to the investment summary.

542               It is then submitted that the investment summary, read with the autumn newsletter, was misleading in numerous respects.  The case depends upon the assumption that the newsletter should be read as asserting that each step in the ten point plan was carried out in the case of every loan.  I have some difficulty with that interpretation.  Mr Blackadder provided the information upon which the ten point plan was based.  He said that he applied the points in each case to the extent that they were appropriate.  In my view that is how a reader would have understood the document.  It is not difficult to imagine circumstances in which it would be absurd to take some of these steps.  If a borrower were a company, recently incorporated for the purposes of a particular venture, it may well have no assets and no balance sheet.  A loan proposal might, nonetheless, be attractive because of secured guarantees or because assets were to be acquired at a favourable price and, when acquired, provide adequate security for the loan.  In such a case, there could be no question of “checking” character, personal wealth, asset position, background or experience of the applicant, nor of reference to balance sheet or credit history.  Other aspects of the ten point plan were also unlikely to be applicable in the case of every loan application.  In many, perhaps most, cases it would be simply a waste of money to obtain a “check report” on a valuation.  Not every loan application would involve a company charge or guarantee.  A reading of the newsletter as a whole reveals that it represented that applications were ‘thoroughly evaluated before approval’.  The ten point plan should be read as explaining that process rather than asserting that all steps would be taken in connection with all loan applications.

543               I turn to the particular complaints arising out of a combined reading of the two documents.  Firstly, it is submitted that the investment summary, read in light of the newsletter, implied falsely that MDRN had checked the personal wealth and asset position of Mr Rivett.  However the newsletter did not assert that MDRN checked the character, personal wealth and asset position, background and experience of principals of applicant companies, only that it checked those matters in connection with applicants for loans.  In the present case the applicant was Project Results.  It is alleged that its asset position was not checked, that there was no check to ensure that Project Results had demonstrated a clear ability to meet the loan commitment and that the balance sheet was not inspected.  It seems to me that these allegations do not go beyond the allegation that the statements concerning the asset positions of Mr Rivett and Project Results were misleading.

544               It is also alleged that Mr Blackadder did not consider the terms of, and qualifications to, the valuation provided by Mr Ludlow, nor did he seek a check report.  The ten point plan said that MDRN would satisfy itself that the valuation ‘has been properly done and meets the security requirements for the loan.’  It also required that the valuer be independent and stated that, ‘We also seek check reports’.  There is no apparently misleading statement concerning the valuation in the investment summary itself.  The only possibly misleading effect is that it represented that the procedure identified in the ten point plan as outlined in the newsletter had been followed.

545               In the end, there was no challenge to the qualifications and experience of the valuer or to the methodology of the valuation.  There was a faint challenge to the valuer’s independence.  The valuation was originally obtained on the instructions of Mr Rivett or Project Results.  However the valuer indicated that it would agree to “assignment” of it.  This seems to have meant that it was aware that borrowers might rely on it, and that it would stand behind it in that context.  I see no reason to treat the valuation as other than independent. 

546               Although the newsletter asserted that in the assessment process, check reports were obtained, it is unlikely that potential investors would have understood that to mean that this step was taken in all cases.  They would rather have understood it to mean that check reports were obtained if thought necessary.  Such a view is reinforced by the fact that there was no reference to a check report in the investment summary, although there were references to the valuation.  It is unlikely that an applicant would infer that a check valuation had been completed but not mentioned in the investment summary.

547               The only other statement in the newsletter concerning valuations was that MDRN would be satisfied that each valuation ‘meets the security requirements for the loan’.  The suggested deficiency in this regard seems to be that the value of the property was not sufficient to meet the 70 per cent LVR requirement.  However I do not discern in the applicants’ submissions any explanation as to how they demonstrate this.  At its highest the statement concerning the LVR must have meant that at each stage of the project, total lending would not exceed 70 per cent of the current value of the property, taking into account the development works performed to date.  The initial advance would have been in the amount necessary to fund the purchase of land at $400 000 and the advance interest payment of $75 250, a total of $475 250.  In order to provide an LVR of 70 per cent at that point, the value of the properties offered by way of security would have had to be something slightly under $679 000.  The two blocks had been purchased for $800 00, or perhaps a little under that sum.  However the valuer assessed them as being worth, in the case of the development site, $400 000 and in the case of the other four allotments, $360 000.  The valuation of the development site was conditional upon appropriate approvals being in place and was said to be ‘subject to all units being presold’.  Other aspects of the valuation indicate that the reference to ‘other units’ was to all 42 units in the overall development.  Clearly, that condition was not met.  There seems to be no evidence as to the effect upon the valuation of that fact, but one assumes that such effect can only have been negative.  Nonetheless I am unable to conclude that either at the date of the investment summary or at the date of the first advance, the value of the land was insufficient to satisfy the 70 per cent LVR requirement as it applied to that advance. 

548               Thereafter, as I understand it, moneys were to be advanced for building works, with the quantity surveyor ensuring that the total amount of the advances did not exceed 70 per cent of the increasing value of the property.  As to the position at the end of the transaction, that is at the completion of Stage 1, the applicants’ allegation seems to be that pleaded in par 51 of the statement of claim.  It is there alleged that the cash cost of the development would be $1 324 318 and the sale proceeds, $1 086 000.  It is said that in those circumstances it would not be possible for there to be a surplus of $400 000 as asserted in the investment summary.  However, as I have pointed out, in my view it is clear that the reference to $400 000 is to an outstanding debt and not to a surplus.  Secondly it is alleged that the LVR at the end of Stage 1 could not be below 70 per cent.  On the figures cited above, there would be a cash shortfall of $238 318 secured against nett assets valued at $660 000, $360 000 attributable to lots 2, 3, 4 and 5 and $300 000 attributable to the balance of the land not yet developed.  This shows an LVR of just over 36 per cent.  As Mr Blackadder demonstrated in evidence, if the shortfall at that stage were $400 000 the LVR would still be only just over 60 per cent.  I should say that the valuation of the balance of the development site may to some extent, have been affected by the assumption that all units had been pre-sold.  However the valuer does not say that.  As far as I can see it is only par (i) of the valuation which is so qualified. 

549               I do not fully understand the way in which the applicants put this aspect of the case.  It seems to be asserted that Mr Blackadder did not consider the terms of, or the qualifications to, the valuation.  I infer that this means that he did not satisfy himself that the valuation met the security requirements for the loan.  He gave evidence as to how he had taken the valuation into account in negotiations with Mr Rivett.  I see no reason to reject that evidence.  There is no substance in this complaint.

550               In any event the applicants who received the newsletter will all recover on another basis.

Michael and Wade Mellish

551               The twentieth and twenty-first applicants, Mr Michael Mellish and Mr Wade Mellish, also make claims pursuant to s 995.  MDRN had previously acted for various family members and their business entities.  Some had also invested money through the mortgage business.  Mr Michael Mellish said that in or about July 1999 Mr Gill telephoned him concerning the Yandina project.  He did not receive an investment summary but ‘relied upon the due diligence that MDRN had undertaken in assessing the merits of the proposed loan and the general comments David Gill made regarding the loan.’  Mr Mellish recalled Mr Gill telling him ‘that there was sufficient security over the assets of the borrower and the guarantor, and that the loan was “a good one” ’. 

552               In cross-examination he agreed that he had relied upon the fact that he had been told that the investment was a good one and upon his previous dealings with MDRN.  In subsequent cross-examination he was again asked whether he had been told only that the investment was a good one.  He said that this was correct. 

553               Mr Mellish’s claim poses certain problems.  He claims to have relied on three things.  The first is his previous dealings with MDRN.  That does not give rise to a cause of action under s 995.  The second is that he was told that the loan was ‘a good one’.  In cross-examination he said that this was the only statement upon which he relied.  In his affidavit, however, he said that Mr Gill also told him that there was ‘sufficient security over the assets of the borrower and guarantor’.  Although it was not specifically put to him that such representation was not made, counsel for the respondents put to him that the basis of his investment was his history with MDRN and the statement that the investment was a good one.  He agreed.  In cross-examination Mr Barlow for the second cross-respondent suggested that he had been told only that ‘the investment was a good one’.  He agreed, adding the words ‘a good place to put our money in order to get a high return’.  In the circumstances I am not satisfied that any representation was made to him concerning the adequacy of the securities.  It is possible that he so understood the statement that ‘the loan was good one’.  In the end, I conclude that he relied upon the assertion that the investment was a good one and upon his previous dealings with MDRN.

554               The statement that the investment was ‘a good one’ cannot be construed as a guarantee of performance.  Once that proposition is accepted, it is difficult to give the statement any clear meaning.  The most likely meaning is that the investment offered a good return for the risk involved.  In view of Mr Mellish’s desire for a higher return, he probably so understood it.  In assessing the accuracy of such a statement, it is necessary to take account of Mr Wild’s evidence that this was a speculative investment, yielding a rate of interest appropriate to such an investment.  Further, with varying degrees of enthusiasm, Mr Wild, Mr Miller and Mr Quinn indicated that they would have expected funding to be available for the Yandina project.  No real attempt was made in argument to demonstrate any factual basis upon which I could conclude that this was not a good investment in the sense to which I have referred.  In those circumstances I am unpersuaded that the statement that it was ‘a good investment’ was misleading.  Mr Mellish’s claim under s 995 must fail. 

555               Mr Wade Mellish was also aware of the previous association between MDRN and his family and had also made previous investments with MDRN.  Mr Mellish seems to have used MDRN as a source of short-term deposit opportunities.  MDRN, in turn, used him as a source of short-term finance.  MDRN would seek deposits from him if funds were needed to complete loans.  He understood that his money would be returned in less than the twelve month nominal period of each loan.  He ‘relied on MDRN’s word that they had done the research and on word-of-mouth mainly by David Gill.’  He recalled Mr Gill saying words to the effect that ‘the development was a retirement village with a great site and a great population – it “stacks up” ’.  He said that there was a good valuation; Mr Rivett was a solicitor on the coast with ‘heaps of money and heaps of property’; there was a director’s guarantee and security over assets; and it was a ‘good loan’.  He was asked in cross-examination what he had been told about the loan and said:

‘David Gill either made a phone call to me that they had a loan they were looking to fill and complete up at Yandina and would we help them out by completing the loan so it could be rolled over and paid.’

556               He was asked if that was the extent of what he had been told and replied:

‘No.  Well, with anything in a commercial transaction, we’ll ask questions.  “Well what’s its about” or they’d offer some information.  It’s a retirement village at Yandina.  We’ve done all the checks.  We’ve gone through the proposal that’s been put to us.  We’ve verified it with the information.  Its short-term.  We can’t get you anything else, but this is the facts of what’s in the summary document.  MDRN has investigated the loan, further looked through the credentials, and it’s a good proposition.  It’s a good proposition for you.’

557               When asked what he actually remembered he said that:

‘It’s a retirement village at Yandina proposed by a solicitor operating on the Coast.  Done development before, it’s a good loan, it’s a good proposition.  It’s been - had a bank valuation.  And it stacks up in terms of sort of the investments that’s in there.’

558               I find it difficult to escape the conclusion that the vast bulk of Mr Wade Mellish’s evidence was reconstruction.  I am unpersuaded that he was told anything more than that the loan was ‘a good one’.  His relatively short-term interest would not have required much more, particularly in light of his previous experience with MDRN.  For the reasons which I have given I am not satisfied that the statement that the loan was a good one was misleading.  In those circumstances Mr Wade Mellish’s claim under s 995 must also fail.

Damages – s 995 claim

559               I turn to the question of damages.  Exhibit 81 is an agreed schedule of loss, in the sense that the arithmetic is conceded to be correct.  It identifies the principal advanced by each applicant (including, for the sale of completeness, Messrs Mellish), interest paid to February 2000, amounts received from the liquidator in April and December 2003 and the outstanding balance.  The agreed figures are as follows:

Applicant No:	Principal	Interest Payment to Feb 2000	Distribution April 2003	Distribution Dec 2003	Loss
First	$30,000.00	$1,618.75	$16,671.24	$1,178.57	$10,531.44
Second	$50,000.00	$2,697.92	$27,785.41	$1,964.29	$17,552.38
Third	$5,000.00	$269.79	$2,778.54	$196.43	$1,755,24
Fourth	$10,000.00	$539.58	$5,557.08	$392.86	$3,510.48
Fifth	$50,000.00	$2,697.92	$27,785.41	$1,964.29	$17,552.38
Sixth	$20,000.00	$1,079.17	$11,114.16	$785.71	$7,020.96
Seventh	$250,00.00	$13,489.58	$138,927.03	$9,821.43	$87,761.96
Eighth	$20,000.00	$1,079.17	$11,114.16	$785.71	$7,020.96
Ninth	$100,000.00	$5,395.83	$55,570.81	$3,928.57	$35,104.79
Tenth	$10,000.00	$539.58	$5,557.08	$392.86	$3,510.48
Eleventh	$10,000.00	$539.58	$5,557.08	$392.86	$3,510.48
Twelfth	$10,000.00	$539.58	$5,557.08	$392.86	$3,510.48
Thirteenth	$50,000.00	$2,697.92	$27,785.41	$1,964.29	$17,552.38
Fourteenth	$12,000.00	$647.50	$6,668.50	$471.43	$4,212.57
Fifteenth	$10,000.00	$539.58	$5,557.08	$392.86	$3,510.48
Sixteenth	$20,000.00	$1,079.17	$11,114.16	$785.71	$7,020.96
Seventeenth	$15,000.00	$809.38	$8,335.62	$589.29	$5,265.71
Eighteenth	$10,000.00	$539.58	$5,557.08	$392.86	$3,510.48
Nineteenth	$25,000.00	$1,348.96	$13,892.70	$982.14	$8,776.20
Twentieth	$15,000.00	$809.38	$8,335.62	$589.29	$5,265.71
Twenty-First	$25,000.00	$1,348.96	$13,892.70	$982.14	$8,776.20
Twenty-Second	$100,000.00	$5,395.83	$55,570.81	$3,928.57	$35,104.79
Twenty-Third	$10,000.00	$539.58	$5,557.08	$392.86	$3,510.48
Twenty-Fourth	$20,000.00	$1,079.17	$11,114.16	$785.71	$7,020.96
Twenty-Fifth	$10,000.00	$539.58	$5,557.08	$392.86	$3,510.48
Twenty-Sixth	$20,000.00	$1,079.17	$11,114.16	$785.71	$7,020.96
Twenty-Seventh	$20,000.00	$1,079.17	$11,114.16	$785.71	$7,020.96
Twenty-Eighth	$20,000.00	$1,079.17	$11,114.16	$785.71	$7,020.96
Twenty-Ninth	$25,000.00	$1,348.96	$13,892.70	$982.14	$8,776.20
Thirtieth	$5,000.00	$269.79	$2,778.54	$196.43	$1,755,24
Thirty-First	$70,000.00	$3,777.08	$38,899.57	$2,750.00	$24,573.35
Thirty-Second	$30,000.00	$1,618.75	$16,671.24	$1,178.57	$10,531.44
Thirty-Third	$50,000.00	$2,697.92	$27,785.41	$1,964.29	$17,552.38
Thirty-Fourth	$163,000.000	$11,493.15	$90,580.42	$6,403.57	$54,522.86
Thirty-Fifth	$30,000.00	$1,618.75	$16,671.24	$1,178.57	$10,531.44
Thirty-Sixth	$20,000.00	$1,079.17	$11,114.16	$785.71	$7,020.96
Thirty-Seventh	$10,000.00	$539.58	$5,557.08	$392.86	$3,510.48
Thirty-Eighth	$20,000.00	$0.00	$11,114.16	$785.71	$7,020.96
Thirty-Ninth	$30,000.00	$0.00	$16,671.24	$1,178.57	$10,531.44
TOTALS	$1,400,000.00	$75,541.70	$777,991.32	$55,000.00	$491,466.98

560               All applicants other than the seventh, twentieth and twenty-first applicants, have established cases based upon representations as to the asset position of Mr Rivett and/or Project Results, which representations were misleading.  The seventh applicant has made out a case based on misleading statements concerning the pre-sale of units.  Subject to two matters, the respondents have not disputed causation of damage. 

561               The first matter is that the respondents submit that the calculation of damages must take into account the possibility that Mr Rivett or Project Results have, or had, assets which should have been pursued, and that there is no satisfactory evidence that they are insolvent.  It is said that Mr Jessup ought to have obtained a judgment against them and ‘at least orally examine[d] Mr Rivett as to what assets he might have.’  This submission overlooks the fact that Mr Rivett said on oath that neither he nor Project Results had any assets.  He claimed to owe creditors over one and a half million dollars, excluding the Yandina loan.  Counsel for the respondents did not challenge this or put to Mr Rivett that he had other assets, although it was obliquely suggested that he may have tailored his evidence to benefit himself.  At TS 1168, he was asked whether he had been told why he was required to provide information as to his asset position and those of Project Results and other companies.  He said that he knew that it went to the question of whether applicants would be able to recover from him.  Whilst this may have given Mr Rivett a motive for asserting that he has no assets, it did not demonstrate that he had assets.  It may be that counsel would not have been permitted, in effect, to conduct an oral examination in these proceedings, but there is still no reason to reject Mr Rivett’s assertion that neither he nor Project Results has any assets.  The evidence as to his actual asset position at the time of the project and as to its history is consistent with his evidence.  Whilst the applicants may bear the onus of establishing the absence of assets, the onus has been discharged.  I am so satisfied.

562               The respondents’ second point is that any loss suffered by the applicants was to some extent occasioned by supervening events for which they are not liable, the first event being Mr Jessup’s failure to obtain a valuation prior to sale of the property.  The second is his failure to terminate the contract in March 2003 in light of the rising market.  To my mind, these aspects were not fully investigated.  There was no attempt to identify the duty imposed upon Mr Jessup in connection with the sale of the premises, nor the powers which he acquired as a result of his appointment by the Supreme Court.  I infer that he sold as mortgagee in possession rather than pursuant to any statutory power that he may have acquired as a result of such appointment.  If Mr Jessup properly discharged the duty imposed upon him by the Supreme Court and/or as mortgagee in possession, then it would be difficult to see how his conduct could have compromised the applicants’ claims.  Similarly, the legal entitlement of the applicants to guide or direct Mr Jessup in the performance of his functions was not canvassed.  Some applicants were cross-examined as to their knowledge of, and participation in, decisions relating to sale of the subject property.  However the matter was not addressed in written submissions.   

563               In any event, I am of the view that these complaints fail for factual reasons.  The property was valued at $850 000 as at 25 February 2002.  On or about 12 August 2002, Mr Jessup sold the property for $1 103 624.64.  The contract provided for settlement six months after the due diligence date, which date was 30 days after the date of the contract.  Interest was payable on the amount of the unpaid purchase price at 7 per cent per annum from the due diligence date. 

564               The only possible reason for getting another valuation would have been the possibility that, as at August 2002, prices had risen substantially since February 2002.  There is general agreement that throughout 2003, land prices in the area were increasing.  Mr Walsh, who performed the valuation in February 2002, said that in August 2002 it was very much a seller’s market, suggesting that by that time prices were rising.  However he said that the upward trend probably first appeared in mid-2002.  In those circumstances it is difficult to see how it can be said that there was any culpable conduct in Mr Jessup’s selling the property in August 2002 at a price which reflected a substantial increase over the valuation obtained in February of that year. 

565               Just prior to settlement, the purchaser sought a short extension of time.  The respondents say that Mr Jessup was therefore entitled to rescind.  The respondents assert that Mr Jessup could, and should, have rescinded the contract.  I have already demonstrated that this argument is based upon a misconception.  Firstly, it is by no means clear that the purchaser would have been in default had it refused to settle.  Mr Jessup’s legal advice was that he should consent.  Secondly, had the extension been refused, the purchaser may have settled.  There is simply no evidence that Mr Jessup was entitled to rescind the contract.

566               Although, at the trial, the respondents disputed certain of Mr Jessup’s outgoings, which have been deducted from the proceeds of sale of the property, these matters were not addressed in final submissions.  I assume that such complaints were abandoned.

567               The starting point in assessing damages is to identify the difference in value between the benefit acquired by each applicant and the price paid for that benefit.  Each applicant acquired the right to be repaid the amount of his or her deposit, together with interest at the specified rate for the period of the loan.  Assuming competence in the way in which the matter was handled by the respondents and, subsequently, by Mr Jessup, and assuming no operative intervening circumstances, one would readily infer that the value of the benefit received by each applicant was the amount eventually received.  For such benefit each applicant paid the amount of his or her deposit and gave up the opportunity to earn interest from some other investment during the period of the loan.  Such an approach requires identification of the rate of interest which would have been received had each applicant not made this investment but invested elsewhere.  One might select the interest rate being offered by MDRN at the time, presumably the rate payable by Project Results, 9.25 per cent.  However ex 75 demonstrates that until 1999 banks were offering 4 per cent per annum on twelve month fixed deposits.  By July 2000, the rate was 5.65 per cent.  The difference between these rates and the MDRN rate is, presumably, largely, if not entirely, attributable to risk.  MDRN’s rate of 9.25 per cent was, as Mr Wild said, a rate appropriate to a speculative investment.  A fixed deposit with an Australian bank would usually be considered to be anything but speculative.

568               If I were to award interest to the applicants at 9.25 per cent, I would then have to discount the award to recognize the risk that any alternative investment at that rate would also have been speculative and might also have failed.  On the other hand, if the bank deposit rate is used, there will be no need for further discounting for contingencies.  The better course is to use the bank deposit rate as at July 1999, 4 per cent.  Implicit in this approach is my understanding that the measure of damages does not aim to compensate the applicants for the lost benefit of their investments, but rather to place them, as far as possible, in the positions in which they would have been had the misrepresentations not occurred.  Taking this approach, the first applicant’s loss should be calculated as follows:

Amount advanced	$30,000
Interest at 4% for 1 year	1,200
	31,200
LESS
Amount of interest received to Feb 2000	1,618.75
Amount received April 2003	16,671.24
Amount received Dec 2003	1,178.57
	19,468.56
NETT LOSS	11,731.44

569               The above calculation includes interest for the twelve months of the loan.  The award will bear interest from 23 July 2000 until judgment.  There should also be a further allowance of interest to reflect the delayed receipt of the two distributions paid in April and December 2003. 

570               The applicants seek compound interest.  They submit that the decision of the High Court in Hungerfords v Walker (1988-1989) 171 CLR 125 is authority for the proposition that compound interest may be awarded by way of damages.  The decision is certainly authority for that proposition.  Such an award is distinct from an award of interest pursuant to the statutory power conferred upon this Court by s 51A of the Federal Court of Australia Act 1976 (Cth) (the “Federal Court Act”).  It is clear from the reasons of Mason CJ and Wilson J at 149 (Brennan and Deane JJ concurring) that an award of compound interest must be for ‘a foreseeable loss, necessarily within the contemplation of the parties, which is directly related to the defendant’s breach of contract or tort’.  In that case, the plaintiff conducted a business and had borrowed substantial amounts for that purpose.  The award was designed to compensate the plaintiff for specifically identifiable losses.  Compound interest was not allowed by way of damages on amounts which would have been spent for private purposes.

571               As far as I am aware, none of the applicants has asserted a case of the kind considered in Hungerfords.  Given the relatively small amounts of most investments and the personal circumstances of many of the applicants, it is likely that many would have expended any interest on living expenses and other private outgoings.  The loss of interest may have caused them a degree of hardship or discomfort, but they cannot be compensated for that in dollar terms.  It is not appropriate, in this case, to award compound interest as damages.

572               As to the rate at which the awards should bear interest pursuant to s 51A, ex 74 contains information as to bank deposit rates for the period from July 1999 until September 2004.  The table shows monthly fluctuations in interest rates for various types of deposit and for various periods.  Given that the applicants have been out of their funds since 23 July 2000 it seems appropriate to adopt the rate payable for the longest available term which is five years.  The average rate over the period from 23 July 2000 until September 2004 is 4.9 per cent.  The awards will bear interest at that rate from 23 July 2000 until the date of judgment.  To this sum will be added, in the case of each applicant, interest at the same rate on the amount of the first distribution for the period of 2.75 years and on the amount of the second distribution for 3.8 years.  There may have to be further adjustments in the cases of the thirty-eighth and thirty-ninth applicants.  I will hear further submissions after publication of these reasons.

573               It might be thought that this approach involves the award of interest upon interest, which approach is not permitted by s 51A.  I refer to my inclusion of an amount for interest in calculating the award of damages and then allowing interest on the amount of the award.  However I do not understand s 51A to regulate the calculation of damages.  It rather addresses the award of interest after such calculation.  It does not authorize compound interest on an award. 

574               After publishing these reasons I will adjourn the matter so that the parties can calculate the amounts in which judgment should be entered in favour of each successful applicant.

breach of duty

575               The findings made in connection with the statutory cause of action (largely based upon the respondents’ late admissions) will lead to judgments in favour of all applicants other than the twentieth and twenty-first applicants.  There is no suggestion that the measure of damages in the cause of action for breach of duty should differ from that for the statutory cause of action.  However there may be some possibility of a different outcome in the event of an appeal, and so I must deal with the alleged breaches of duty for that reason.  I must, in any event, deal with the twentieth and twenty-first applicants’ cases in connection with that cause of action. 

576               This aspect of the applicants’ case is somewhat difficult to understand.  The difficulty may spring from uncertainty on their part as to the role of each respondent in the conduct of the mortgage business and their failure to distinguish between the duties of the MDRN partners as solicitors and their duties (if any) as facilitators of lending transactions.  This confusion seems to have led to an attempt to establish a duty of care on their part as promoters of mortgage transactions.  It seems, too, that the respondents’ attitudes to these matters may have changed since the commencement of the proceedings, particularly as concerns the role of the trustee company. 

577               The applicants submit that the relationship between each applicant and each respondent gave rise to a duty to take positive steps to ensure that the Yandina project was “good”, or “prudent”, in effect to guard against any loss by an applicant.  The respondents admit that the trustee company had a duty to take reasonable care not to recommend or make an imprudent investment, whatever that may mean.  They also admit that the MDRN partners owed each applicant a duty to perform their professional services (as solicitors) with all due care and diligence in relation to the asset positions of Mr Rivett and Project Results ‘and in the capacity as solicitors recommending a lending transaction’.  I am not sure of the meaning to be attributed to the words in quotes.  The only additional duty as a solicitor in that situation would be to avoid conflicts of interest. 

578               The difficulty with all of this is that it seems to be an attempt to create a professional negligence case out of what is really a negligent misstatement case.  The “profession” in question seems not to be that of solicitor.  I am not aware of any general duty imposed upon a solicitor in connection with a client’s business judgment to lend money, as opposed to his or her duty to document such a transaction.  I am also unaware of any other profession of which either the trustee company or any of the MDRN partners is said to be a member, the recognized standards of which might be presently relevant.  The distinction is important for this reason.  The applicants seem to argue that there was a duty upon the respondents to make appropriate enquiries, which duty was independent of any duty not to make negligent misstatements.  Save to the extent of the respondents’ admissions, I am unable to identify any such duty.  It is convenient to deal separately with the claims against the trustee company and the MDRN partners.

The trustee company – breach of duty

579               The respondents concede that all applicants other than the seventh, eleventh, twentieth, twenty-first, thirty-eighth and thirty-ninth are entitled to judgment against the trustee company on this cause of action.  That concession seems to be on the basis that the trustee company:

·                engaged in the mortgage business (statement of claim par 4 and defence par 4);

·                owed to each applicant a duty to:

·         act bona-fide in their interests; and

·         take reasonable care not to recommend and make an imprudent investment (statement of claim par 30 and defence par 36);

·                failed to check the accuracy of the statements concerning the asset positions of Mr Rivett and Project Results; and

·                issued the investment summary (statement of claim par 11, defence par 13) which contained incorrect representations concerning the asset positions of Mr Rivett and Project Results (statement of claim par 14, defence par 16), in reliance upon which the relevant applicants invested moneys in the project and suffered loss.

580               In oral submissions, counsel for the respondents indicated that they understood the claim of breach of duty to be a claim for negligent misstatement.  I infer that the admissions made at the end of the trial reflected that understanding.  The duty admittedly owed by the trustee company to each applicant may offer some support for a broader claim of the type suggested by the applicants, but it should be kept in mind that the admission of that duty was made before the trial and not as part of the later admissions to which it was probably unrelated.  Despite my uncertainty as to the basis of the admissions, I am content to enter judgment against the trustee company and in favour of those applicants, given that the respondents concede liability.  The quantum of each of those claims will be the same as that awarded in connection with the respective statutory claims.

581               I turn to the claims made by the seventh, eleventh, twentieth, twenty-first, thirty-eighth and thirty-ninth applicants.  The applicants’ case is outlined in par 61 of their written submissions.  It is said that the respondents were negligent in recommending the investment in the investment summary and, independent of the investment summary, in assessing and recommending the loan application.  They go so far as to assert that the application should have been declined. This highlights the applicants’ misunderstanding of their case.  There can have been no duty to decline the application.  The only duty can have been in connection with the statements made to the applicants and upon which they acted.  Such statements may have been as to facts or as to opinions, including recommendations.  No doubt the investment summary spoke positively of the proposed loan.  On p 5, it was said that MDRN ‘supported’ it.  That cannot be transformed into actionable investment advice.  The case is properly understood as a claim of negligent misstatement.

582               However there is the admission of a duty not to recommend, or make, an imprudent investment.  I am not satisfied that this investment was imprudent.  Mr Wild suggested that the interest rate was appropriate to a speculative investment.  In other words, the potential risk matched the potential return.  Mr Quinn considered that he could have obtained funding elsewhere, suggesting that the market would have seen the proposal as viable.  Mr Miller, to some extent, supported that view.  I accept their evidence in that regard.  It follows that the applicants cannot recover on the basis of a breach of the admitted duty.

583               I turn to the question of negligent misstatement.  I have some doubts as to whether such a cause of action has been pleaded, but there is no doubt that the parties understood the case to be framed in that way.  In submissions, the applicants sought to rely on statements in the investment summary concerning the following matters:

·                 the asset position of Mr Rivett and Project Results;

·                 the fact that the valuation of the site was conditional upon all units in Stage 1 having been presold prior to the commencement of the development;

·                 the LVR of 70 per cent which, as it is alleged, would only be achieved if the figure at the top of the range of values attributed to the units was adopted;

·                 contracts of sale of units produced to Mr Blackadder which were subject to finance, the dates for approval of which had past;

·                 the fact that no attempt had been made to ascertain how Mr Rivett or his companies would service any interest payments once the pre-payment of interest for six months had been ‘used up’;

·                 the fact that Mr Blackadder had made no attempt to ascertain from the builder whether the builder was prepared to be paid in trade dollars;

·                 the fact that Mr Blackadder made no attempt to verify the claim that Mr Rivett had $238 677 in trade dollars available to him; and

·                 the valuation which was not ‘independent’ in the sense that it had been obtained by the borrower and was predicated upon an assumption (as to sale of all units) which was not made good and ‘seems universally regarded as being unusual’.

584               Some of this language is more appropriate to a case involving alleged breach of a positive duty, reflecting the misconception to which I have referred.  It will be necessary to identify aspects of the investment summary which deal with these matters in order to identify any negligent misrepresentation.

585               I have already dealt with the statements in the investment summary concerning the asset position of Mr Rivett and Project Results.  There was no justification for those statements in the information provided by Mr Rivett to MDRN.  It was certainly negligent to make such statements in those circumstances.  For reasons I have given in connection with the statutory cause of action, it follows that as Mr McIntyre relied upon those statements, he is also entitled to judgment for damages for breach of duty as against the trustee company.  The measure of damages will be the same as that for the statutory cause of action.  It also follows that the thirty-eighth and thirty-ninth respondents should recover judgment for breach of duty.  They, too, acted in reliance upon those statements.  The twentieth and twenty-first applicants did not so rely. 

586               The seventh applicant (Mr Bengston) did not rely on the relevant statements.  However the statement that all units in Stage 1 had been pre-sold was also misleading.  For present purposes, it is necessary to show that it was also made negligently.  That raises the question of the enquiries which Mr Blackadder ought to have made in order to verify the assertion in the loan application.  Considering the prominence given to the matter in the investment summary, it is reasonable to infer that he considered it to be of some importance.  The pre-sale of units was also a significant issue in connection with the valuation.  Further, Project Results’ application included copies of the then existing contracts for the sale of units, suggesting that Mr Rivett and/or Mr Quinn thought it important to any decision by MDRN to market the proposal. 

587               In those circumstances I infer that it was negligent to represent that all units had been “pre-sold” without ascertaining the actual position by enquiries of Project Results and, where possible, by reference to existing documents.  It is relatively clear that Mr Blackadder made no enquiries, although he saw some contracts.  As I have observed in connection with the statutory cause of action, in view of the very vague and inconsistent statements made concerning pre-sale of the units, it is difficult to understand how anybody could sensibly have acted upon those representations without at least making some enquiry with a view to clarifying their meaning.  However, as I have also said, Mr Bengston was in a special position in this regard.  He recognized the probability that the representations meant only that there had been expressions of interest or something similar, but nonetheless chose to act upon that understanding.  I have no reason to believe to the contrary.  In the circumstances, I consider that he, too, is entitled to judgment for damages for breach of duty.

588               As to the other matters relied upon in support of this cause of action and identified above, many are not the subject of any identifiable misstatement in the investment summary.  Of the balance, I have already explained why I consider them to be misconceived.  In any event, only the Mellishes have failed to recover judgment on some other ground.  As they did not receive the investment summary, there is no basis upon which they can recover for any negligent misstatement contained therein.

MDRN – breach of duty

589               The applicants put their claim for breach of duty against MDRN in the same way as against the trustee company.  However the respondents have not admitted that MDRN owed a duty not to recommend or make an imprudent investment.  In this discussion I will continue to refer to the individual second respondents collectively as “MDRN”, and to their individual duties as solicitors, and any duties in connection with the mortgage business, as being, collectively, those of MDRN.  However it is important to keep in mind that I am discussing the individual duties of each partner.

590               For reasons previously given, I do not consider that MDRN bore any duty to check the accuracy of the information contained in the investment summary other than in connection with the avoidance of negligent misstatements.  This claim must therefore be seen as a claim for negligent misstatement.  As the respondents’ final position was that both the trustee company and MDRN distributed the investment summary, it follows that, for the reasons given in connection with the claim against the trustee company, each applicant, other than the twentieth and twenty-first also succeeds on the basis of negligent misstatement.  On this claim, the twentieth and twenty-first applicants also fail for the reasons which I have given in connection with the claim against the trustee company.

Cross-claim against ST PAUL

591               MDRN pleads a contract of indemnity insurance between it and St Paul for the period from 1 July 2000 to 30 June 2001 (the “St Paul policy”), and that each MDRN partner was an assured person within the meaning of that policy.  It was originally effected pursuant to an arrangement fostered by the Queensland Law Society (Inc) but for present purposes, it is accepted that St Paul was the insurer.  The risk insured against was:

‘… all loss to the Assured (including Related Costs incurred by the Assured and claimants costs) whensoever occurring arising from any claim or claims first made against the Assured during the Period of Insurance in respect of any description of civil liability whatsoever incurred in connection with the Practice other than loss arising out of any circumstances or occurrence in respect of which the Assured is entitled to indemnity under any other insurance.’

 

592               Clause 4(b) of the General Conditions applicable to the St Paul policy provided that:

‘The Assured shall give notice in writing to the Insurer … as soon as is practicable of any claim the subject of the Insuring Clause hereof made during the Period of Insurance against the Assured.  The Assured shall also give notice in writing as soon as is practicable to the Insurer of any circumstances of which the Assured is or shall become aware during the Period of Insurance which may give rise to a claim.  If the Assured shall give notice to the Insurer during the Period of Insurance of circumstances which may give rise to a claim any claim subsequently made arising from the circumstances so notified shall be deemed to have been made during the Period of Insurance.’

593               MDRN pleads that in the course of its practice, it acted for the applicants in respect of investments in a private mortgage lending transaction and, in June 2001, was aware of circumstances which might give rise to a claim by such investors.  It accordingly gave notice by letter dated 20 June 2001 and claimed indemnity.  On 12 January 2004, St Paul declined to indemnify MDRN, alleging that it had breached its obligations under the St Paul policy.  MDRN seeks indemnity and/or damages. 

594               By its defence, St Paul relies on subclause 5(e)(v) which provided that the St Paul policy did not cover loss:

‘brought about by the dishonest or fraudulent act or omission of the Assured including any Partner or former Partner of the Assured or any person employed in connection with the Practice (including any articled clerk and any solicitor or conveyancer who is a Consultant or Associate with the Firm …’

595               St Paul alleges that:

·                in the newsletter, the brochure and the investment summary, MDRN made statements which were false;

·                Mr Blackadder caused such statements to be made with knowledge of such falsity or recklessly indifferent whether they were true or false;

·                such conduct was dishonest or fraudulent; and

·                it brought about any relevant loss suffered by MDRN. 

596               Although St Paul alleges that numerous statements were false and made fraudulently or dishonestly, in light of my reasons in respect of the claims, it is only necessary that I consider those statements in the investment summary upon which any applicant has recovered judgment, namely:

·                statements concerning the asset positions of Mr Rivett and Project Results; and

·                statements concerning the pre-sale of units.

597               It is appropriate that I say a little concerning the case as a whole.  The applicants’ case has suffered because those conducting it have failed to identify appropriately its relevant strengths and weaknesses.  Many aspects of the case were, in my view, either unarguable or difficult to argue.  I have referred to some of them.  Similar comments apply to St Paul’s case.  Such an approach is unfortunate.  Firstly, it results in a great waste of time and money.  Secondly, it makes it difficult for the parties to form realistic and objective assessments of their prospects.  Thirdly, in this case, it has generated an emotional approach to issues which has almost assumed dishonesty, or at least gross incompetence, on the part of MDRN and/or its employees. 

598               In the end the investment summary is the primary source of the applicants’ complaints.  Reading it again, with the benefit of all of the evidence, all of the arguments and my own reflections upon it, I find that only two matters emerge as clearly causing concern.  They are the two matters in respect of which findings favourable to the applicants have been made, namely statements concerning the asset positions of Mr Rivett and Project Results and the representation concerning pre-sale of units. 

599               Many of the allegations against the respondents were misconceived.  Some assumed obligations which did not exist.  The applicants have attempted to treat the respondents as insurers against loss.  Whilst the investment summary supported investment in the Yandina project, it did not warrant that there would be no loss in any circumstances.  For one reason or another, individual applicants may have concluded that there was no risk of loss but, if so, that was a business judgment.  The investment summary did not say that.  I have, on a number of occasions, indicated that I do not accept that the evidence establishes, on the balance of probabilities, that the proposal was one which no reasonable lender could ever have accepted.  In this regard I have relied upon the evidence of Messrs Wild, Miller and Quinn.

600               There is no doubt that the investment summary was misleading in the aspects which I have identified.  The question is whether such misleading effect was created fraudulently or dishonestly.  MDRN sought to define narrowly the words “dishonest” and “fraudulent”, particularly so as to exclude recklessness, and to stipulate that such conduct must be motivated by personal interest in order that it be so described.  Conduct found to be dishonest or fraudulent must be wilfully so.  The term “reckless” is sometimes used to describe conduct by a person who refuses to see what must be obvious.  In some circumstances, that will be fraudulent, but only if it is actually dishonest.  I doubt whether the question of recklessness is relevant for present purposes.  As to the question of motivation, it cannot be the law that in order to demonstrate dishonesty or fraud, one must prove motive.  Even in criminal proceedings it is not generally necessary to do so.  Evidence of motive is often part of the evidence offered to prove fraud or dishonesty.  Such evidence may tend to exclude an innocent explanation of the relevant conduct.  However it does not follow that in order to prove dishonesty or fraud, one has to prove that the conduct in question advanced, or was expected to advance, some interest of the alleged perpetrator.  I do not consider that matter to be a major issue in this case.

601               I turn to the asset positions of Mr Rivett and Project Results.  The relevant statement was that Mr Rivett had ‘a net surplus of $1,790,000.00 and that [Project Results] had a net asset position of $640,000.00’.  This information was apparently based upon the statement of assets and liabilities provided by Mr Rivett with the loan application.  I have previously set out various parts of it.  I have also demonstrated why I consider it to be inaccurate.  However, for present purposes, the significant point is that Mr Blackadder did not accurately incorporate its contents into the investment summary.  Mr Rivett had identified the assets which were held in trust and those which he held jointly with his wife.  He did not claim to control the Fritton Trust.  He said that his father controlled it.  Its assets represented $750 000 of the claimed value of Mr Rivett’s assets.  Assets allegedly worth $640 000 were disclosed as being in other trusts.  Mr Blackadder made no enquiries about the terms of the trusts, but included the amounts in the total of Mr Rivett’s nett worth.

602               Accepting that Mr Blackadder is not a lawyer, I nonetheless cannot accept that a person with his banking experience would not have understood that there were likely to be limitations upon the rights to the assets of trusts exercisable by a person who claimed to “control” it.  I did not understand him to assert such lack of understanding.  In any event he clearly knew that Mr Rivett did not claim to ‘control’ the assets of the Fritton Trust.  It was therefore misleading to say that they were Mr Rivett’s assets.  Similarly, it was clear that the house at Alexandra Headlands, with a nett value of $80 000, the units at Maroochydore, with a nett value of $50 000 and the shares in Project Results were jointly owned by Mr Rivett and his wife.  To include the values of those assets in the total value of Mr Rivett’s sole property was a substantial deviation from the truth. 

603               I am unable to identify any way in which Mr Blackadder could honestly have made such errors.  His evidence offered no assistance in that regard.  I have taken into account the view expressed by Mr Blackadder, and to some extent supported by other witnesses, that the asset position of Mr Rivett and Project Results may not have been as fundamental to the project as the applicants have sought to establish.  However Mr Blackadder, in preparing the investment summary, was deliberately providing information to potential investors.  He can only have included the information concerning Mr Rivett’s asset position because he thought that it would be of some relevance to decisions to invest.  I cannot accept that in compiling the investment summary, a person in Mr Blackadder’s position could conceivably have simply looked at the “bottom line” of the statement of assets.  Even the most cursory examination of the document would have identified the fact that Mr Rivett did not “own” the assets of the Fritton Trust and that other assets were held jointly with Mrs Rivett.  Mr Blackadder must have noticed those matters and deliberately chosen not to include that information in the investment summary. He must also have known that the effect was misleading in connection with any decision to invest.  I have no doubt that Mr Blackadder deliberately created a false picture of Mr Rivett’s asset position in order to induce investment in the project.  

604               In coming to that conclusion I have kept in mind the seriousness of the allegations and the need for convincing evidence of dishonesty or fraud.  Mr Blackadder did not strike me as being dishonest.  However the facts speak for themselves.  If I were to speculate about why he may have gone so far in order to induce investment in the project, I would suggest that he was under pressure to ensure that the mortgage business performed at a level which would justify its continued operation.  However it is not necessary for me to speculate.  My view is based upon the documents and the absence of any satisfactory explanation as to how Mr Blackadder came to represent that Mr Rivett had the asset position which appears in the investment summary.

605               Similar comments apply to the statement concerning the asset position of Project Results.  The figure of $640 000 appears to be the total value of assets which, as Mr Rivett claimed, were owned by Project Results as trustee of the John Rivett Family Trust and the NJT Trust.  Project Results was acting as trustee of the latter trust in connection with the Yandina project.  The claimed value of the assets of that trust was $200 000.  The claimed value of the assets of the John Rivett Family Trust was $440 000.  The shares in Project Results were said to be worth $170 000 nett, presumably reflecting their nett asset backing.  In the absence of any satisfactory explanation by Mr Blackadder of the way in which he chose the figure of $640 000, I infer that he simply added the amounts claimed as the asset values of the two trusts.  Of course, in the case of NJT Trust, Project Results would have been entitled to an indemnity out of its assets to meet obligations incurred in connection with the Yandina project.  However the figure of $640 000 is still well in excess of the value of those assets and the other beneficially owned assets of Project Results excluding the assets of the John Rivett Family Trust.  I am unable to see any honest way in which Mr Blackadder could have derived the figure of $640 000.  In those circumstances I infer dishonesty.

606               I should add that in considering the question of fraud, I have accepted at face value, Mr Rivett’s claims concerning his asset position and that of Project Results.  However, as I have demonstrated, those claims were incorrect.

607               I turn to the question of pre-sale of units.  I have previously given my reasons for concluding that the investment summary should be read as representing that there had been pre-sales of all units in Stage 1.  In the loan application, Project Results claimed that all units had been committed to purchasers on ‘Offers to Purchase’, that it was ‘presently signing up contracts’ and that it would accept that as a condition of the loan, ten of the twelve Stage 1 units be on contract and that Stages 2 and 3 ‘go ahead subject to satisfactory presales’.  In section 10 of the loan proposal, it was said that:

‘All units have been under Offer to Purchase and the presale contracts are in the process of being signed.

The applicant will accept the condition that 10 out of 12 of Stage 1 be on contract before commencement.

Negotiations are under way with a purchaser for the Management Rights who is an expert in aged care but she has to sell another property. 

Now that the income is $51,600 pa the Management Rights will not be difficult to sell and if they are not sold, a Manager can be employed and stage 2 and 3 can continue as set out in the Cash Flow.’

608               I consider that Mr Blackadder should have checked this information before making any representation concerning it, but his failure to do so does not necessarily mean that he was dishonest.  Acting honestly, he might well have accepted the information at face value and included it in the investment summary.  I am not satisfied to the requisite standard that Mr Blackadder was dishonest in this regard.

609               Two other matters require comment.  MDRN submits that it was not dishonesty on the part of Mr Blackadder which brought about MDRN’s liability but rather the issue of the investment summary.  That may be so, but St Paul’s case is that the relevant misrepresentations in the investment summary were representations made to potential investors by the respondents, and that Mr Blackadder included those representations in the investment summary knowing that it was to be so distributed.  He was primarily responsible for the content of the investment summary, although the partners may have had some opportunity to review that content.  He was a senior employee, and they seem to have had no reason to doubt his competence or honesty.  I have no difficulty in concluding that it was his conduct in including the misrepresentations in the investment summary, and in failing to draw the partners’ attention to the various inaccuracies of which he must have been aware, which caused them to be communicated to potential investors and the subsequent liability incurred by MDRN.

610               MDRN seeks to narrow the construction of cl 5(e)(v) of the St Paul policy, submitting that it does not operate to deprive an innocent partner of indemnity where loss is the result of the dishonest or fraudulent act of an employee.  The point is clearly unarguable.  Clause 5(e)(v) specifically excludes indemnity where the loss occurs in those circumstances.  The argument would result in the clause having no effect whatsoever.  MDRN sought to rely upon the decision of the Full Court of South Australia in Gilmour v AMP General Insurance (1997) 9 ANZIC 61-372.  However it is relatively clear that the case did not involve a clause such as cl 5(e)(v).  There is nothing in this argument.

611               As I understand it, my findings lead to the conclusion that St Paul is obliged to indemnify MDRN only in the amount of Mr Bengston’s claim.  However I will invite the parties to make further submissions should they wish to do so.

612               One other matter requires comment.  St Paul submits that the fees charged by Mr Jessup are not recoverable by the applicants.  The applicants do not claim them as damages.  However they were deducted from moneys received by Mr Jessup and so the amount thereof was not passed on to investors.  The amount of each claim has been increased as a result of such deduction.

613               St Paul submits that incurrence of those fees was not a reasonably foreseeable consequence of MDRN’s conduct, did not flow naturally from such conduct and was not reasonably within MDRN’s contemplation ‘when it accepted the applicants’ retainer’.  The reference to the retainer is irrelevant in view of my approach to the applicants’ claims. 

614               I have previously observed that the circumstances surrounding the appointment of Mr Jessup as liquidator, the statutory provisions which regulated such appointment and his conduct of the liquidation have not been canvassed in great detail in these proceedings.  For that reason I find it difficult to address this question. 

615               As a result of a change in the regime for regulating this aspect of the finance industry, mortgage schemes administered by solicitors’ firms were no longer permissible, save where ASIC chose to apply a particular exempting provision.  It had done so in connection with MDRN’s mortgage business, but the exemption was to continue only until 31 October 2001 in order to enable existing schemes to be completed.  Until Mr Jessup’s appointment MDRN and the trustee company were attending to that process in connection with the Yandina project.  When legal proceedings were threatened, the trustee company and MDRN were concerned that a conflict of interest might arise.  Mr Ryan asked ASIC to revoke the exemption.  It did so with effect from 6 September 2001.  The Queensland Law Society (Inc) had previously agreed to the appointment of a liquidator of the scheme, and so the trustee company and MDRN applied for Mr Jessup’s appointment as liquidator.  On 13 September 2001 Mr Jessup was appointed accordingly.  It seems that the only step to be taken in connection with the loan to Project Results was to realize the available securities, including Mr Rivett’s guarantee.  I note that Mr Jessup was appointed liquidator of the runout mortgage scheme, not of the trustee company

616               In oral submissions counsel for St Paul submitted (at TS 2518):

‘All of these solicitors had to apply at about that time and they did, in respect of schemes that were so-called run-out schemes, where you had default, and when you have default, you almost certainly have a potential conflict of interest.  So we say that the suggested distinction, that in Bells case it was one brought on the eve of the, or after the, exemption from ASIC expired, isn’t a material difference.  The writing was on the wall here.  There would have had to have been a liquidator put in, in any event.’

617               The reference to ‘Bells case’ is to the decision of Chesterman J in Moloney & Anor v Bells Securities Pty Ltd & Ors [2005] QSC 013.  In that case his Honour declined to allow as damages the costs of a liquidator appointed in circumstances similar to those in the present case.  St Paul’s argument seems to be that as the period of the ASIC exemption was to expire on 31 October 2001, a liquidator would have been appointed in any event.  It is said to follow that the costs incurred by Mr Jessup were not a consequence, or perhaps a foreseeable consequence, of any conduct on the part of the respondents, particularly MDRN.  The applicants did not take this point in argument, but it addresses the measure of damages in their claims against MDRN.

618               In causes of action for misleading and deceptive conduct and negligent misstatement, the relevant measure of damages is designed to put the applicant in the position in which he or she would have been, had the relevant conduct not occurred.  That is often achieved by awarding the difference between the value of the property acquired as a result of the relevant conduct and the price paid for it.  However there are limits upon the extent of permissible recovery.  I accept that for present purposes, the test of reasonable foreseeability provides such limit.  Had Project Results discharged its obligation, the loan would have been repaid in 2000.  At the time of the relevant conduct it was reasonably foreseeable that the applicants would suffer loss as a result of Project Results failing to meet such obligations.  It was also reasonably foreseeable that in that event, the applicants would have to resort to available securities, including Mr Rivett’s guarantee, in order to recover their investments and interest.  It was similarly foreseeable that, as a result of their conduct, MDRN and the trustee company would be unable to attend to such realization, and that somebody else would have to do so.  That was likely to cost money. 

619               In my view it was reasonably foreseeable that as a result of the conduct of the trustee company and MDRN, additional costs would be incurred in realizing the securities.  That is sufficient to permit recovery by the applicants from MDRN of the reasonable costs so incurred.  See South Australia v Johnson (1982) 42 ALR 161.  The prospective expiry of the ASIC exemption played no causal role in the incurrence by the applicants of their costs, nor did it render them too remote to be recoverable in these proceedings. 

cross-claim against QBE

620               MDRN pleads professional indemnity policies with QBE for the periods from 6 September 1998 to 6 September 1999 (the “1998 policy”), 6 September 1999 to 6 September 2000 (the “1999 policy”) and 6 September 2000 to 6 September 2001 (the “2000 policy”).  Clause 1.1 of each policy provided:

‘QBE agrees to indemnify the insured against legal liability for any Claim for compensation first made against the Insured during the Period of Cover and which is notified to QBE during the Period of Cover, in respect of any civil liability whatsoever and howsoever incurred in the conduct of the Professional Business Practice.’

 

621               Pursuant to cl 5.1 the period for notification of a claim was extended to include the period of 28 days after the end of the period of cover.  Clause 5.2 provided:

‘If during the Period of Cover the Insured becomes aware of any fact or circumstance that might give rise to a Claim under this Policy and elects to give notice in writing to QBE of such fact or circumstance, then any Claim which may subsequently arise out of such fact or circumstance shall be deemed to be a Claim made during the Period of Cover PROVIDED ALWAYS THAT such written notice is given to QBE during the same period of cover or within 28 days after its expiry.’

622               For the moment it will be convenient to consider only the 1999 and 2000 policies.

1999 and 2000 policies - notification

623               MDRN claims to have notified QBE of the circumstances out of which the applicants’ claims arose in its proposal for the 2000 policy, (which proposal was dated 24 August 2000) or to have notified the claim and/or such circumstances by a letter dated 4 July 2001.  The proposal is part of exhibit “H” to the affidavit of Sarah Hume filed on 8 March 2005.  It is relevant for numerous purposes.  I will summarize its content.

624               MDRN stated that its activities or business included:

‘Mortgage Investments Management

Property Syndications

Development Syndications

Solicitors’.

 

625               Mortgage investment management accounted for 24.3 per cent of its business, syndication management for 3.2 per cent and the legal practice for 72.5 per cent.  In answer to a question as to advice given in the course of its business, it answered:

‘Prospectus and supplementary prospectus in respect of MDRN Investments Ltd.  General practice advice from law firm.’

626               MDRN disclosed that it provided reports to clients identified as ‘newsletters, brochures, etc’.  Fees for the five largest contracts undertaken during the preceding five years were $60 000, $65 000, $75 000 and $90 000 in respect of four loans and fees of $150 000 in respect of a property syndication.  In the course of its business it engaged valuers, engineers and quantity surveyors.  Asked if it envisaged any substantial changes in its activities during the following twelve months, MDRN said:

‘MDRN Investments Ltd has an unreserved dealers licence & has entered into arrangements with Professional Investment Service & Damian Ferguson to provide a financial planning service to clients of MDRN Solicitors & Francis Allen & Co Chartered Accountants.’

 

627               MDRN provided copies of brochures describing its activities which it issued in the course of its business. 

628               Questions 23 and 24 in the proposal are of particular importance.  Question 23 was:

‘Have any claims for negligence or breach of professional duty been made in the last ten (10) years against the Practice or any of their predecessors in business or any prior Practice of any of their present or former Partners, Principals or Directors, or have circumstances been notified to insurers that might give rise to a claim?’

629               In reply MDRN identified three claims in 1996, 1999 and 2000, none apparently relating to the present proceedings.

630               Question 24 was:

‘Are any of the Partners, Principals or Directors, AFTER ENQUIRY, aware of any claim or circumstance that might give rise to a claim against the Practice or any prior Practice or any of their present or former Partners, Principals or Directors which matter is not referred to in Question 23 above?’

 

631               MDRN answered ‘yes’ and provided particulars in an attached document which summarized various projects.  Relevantly, the document stated:

‘As from 17 December 1999 all new loans have been made through MDRN Investments Limited and existing loans conducted through the law firm MDRN Solicitors are subject to a run out scheme whereby they may be extended until October 2001.

Consequently no new loans have been made by the law firm since 17 December 1999 and although no claims have been against it, we have set out hereunder a schedule of non-performing and expired loans at the present.  It is anticipated that in the event of a loss, that a claim in the first instance would be taken against the valuer of each property.’

632               Under the heading ‘Rivett Project Results Pty Ltd’ it was said that:

‘Loan of $1.4 million relating to partly completed first stage of a development project.  We attach current letter which is being dispatched to investors outlining solutions.  In the event of an unsatisfactory outcome we envisage a claim against the Quantity Surveyor on the project.’

633               The attached letter is a circular sent to investors in the Yandina project.  It is dated 21 August 2000.  At that stage Mr Rivett was apparently still seeking to complete the project.  The letter stated that he had been assured that other funds would be available within 10 to 14 days ‘to enable the completion of construction works for Stage 1 of the Yandina Greens Village’.  The writer assured investors that MDRN believed that they would recover their investments with interest and penalties.  However it said nothing about the conduct of MDRN in connection with the soliciting of funds for the project.

634               MDRN alternatively claims to have relevantly notified QBE by its letter dated 4 July 2001 which read:

‘Run-out Private Mortgage Lending

We refer to our recent advice concerning run-out mortgage loans carried on by this practice. 

We advise that we have received a notice from some investors which we have enclosed for your attention.  We have acknowledged receipt of same to the investors concerned.’

635               Attached was a copy of a facsimile transmission from Mr Wade Mellish.  It read as follows:

‘RE:  Lawyers Private Mortgages Pty Ltd

As per my meeting with Mr Ian Neil at your Cleveland office on Friday 28^th June 2001.

I act on behalf of the following:

Wade Richard Mellish

Michael Colin Mellish

Colin Richard Mellish

Rütta Analia Mellish

Felco Pty Ltd

Holmwood Highgate (Aust) Pty Ltd

Delaview Pty Ltd for the Homewood Engineering Group Super Fund

Take note that we will be suing you for negligence.

Please acknowledge the receipt of my fax at your earliest convenience.’

636               The cover under both the 1999 and 2000 policies was for liability for claims made during the relevant period of insurance, including claims arising out of circumstances notified to the insurer during such period.  Such notice had to be given within the period of cover or within 28 days after its expiry.  The proposal dated 24 August 2000 was given to QBE prior to the commencement of the period of cover for the 2000 policy and during the period of cover of the 1999 policy.  Prima facie, it may have been notification for the purposes of the 1999 policy, but not for those of the 2000 policy.  The letter dated 4 July 2001 was within the period of cover of the 2000 policy.  However QBE pleads that the 2000 policy contained the following clause:

‘Additional Exclusions

Proposal Form Exclusion

Any claim made against an insured directly or indirectly based upon, attributable to, or arising from matters as detailed in questions 23 and 24 of the QBE Proposal Form dated 24 August 2000 and attached addendums.’

637               QBE also relies on section 4 of the policy, headed ‘Exclusions’, which relevantly provided:

‘QBE shall not be liable under this Policy to provide indemnity in respect of any Claim against the Insured:

4.1       (a)        made, threatened or intimated against the Insured prior to the Period of Cover;

            (b)        directly or indirectly based upon, attributable to, or in consequence of any fact or circumstance:

                       (i)         of which written notice has been given, or ought reasonably to have been given, under any previous policy; or

                       (ii)        of which the Insured first became aware prior to the Period of Cover, and which the Insured knew or ought reasonably to have known had the potential to give rise to a Claim under this Policy.

4.2       Directly or indirectly based upon, attributable to, or in consequence of:

            …

            (b)       any act or omission of any Insured or their consultants, sub-contractors, or agents committed or alleged to have been committed with a reckless disregard for the consequences thereof; …’

638               I have previously referred to cll 23 and 24 of the proposal form and the answers given by MDRN.  MDRN has, itself, asserted that those answers constituted notification of circumstances out of which the present claims arose.  Whether QBE relies on the Additional Exclusions clause or cl 4.1 of the policy, the result is that the present claims are not covered by the 2000 policy.  I did not understand MDRN to contend to the contrary.  It is therefore not necessary to consider the application of cl 4.2 in this respect.  However I will, at least indirectly, do so in dealing with other aspects of this matter.

1998 policy - notification

639               I have previously mentioned the 1998 policy.  MDRN does not assert that it gave notice of a claim, or of circumstances which might give rise to a claim, during the period of cover or the following 28 days.  Rather, it purports to do so by par 19 of its cross-claim, relying on s 54 of the Insurance Contracts Act 1984 (Cth) (the “Insurance Contracts Act”). 

640               Section 54 relevantly provides:

‘Insurer may not refuse to pay claims in certain circumstances

 

(1)       Subject to this section, where the effect of a contract of insurance would, but for this section, be that the insurer may refuse to pay a claim, either in whole or in part, by reason of some act of the insured or of some other person, being an act that occurred after the contract was entered into but not being an act in respect of which subsection (2) applies, the insurer may not refuse to pay the claim by reason only of that act but the insurer’s liability in respect of the claim is reduced by the amount that fairly represents the extent to which the insurer’s interests were prejudiced as a result of that act.

(2)       Subject to the succeeding provisions of this section, where the act could reasonably be regarded as being capable of causing or contributing to a loss in respect of which insurance cover is provided by the contract, the insurer may refuse to pay the claim.

(3)       Where the insured proves that no part of the loss that gave rise to the claim was caused by the act, the insurer may not refuse to pay the claim by reason only of the act.

(4)       Where the insured proves that some part of the loss that gave rise to the claim was not caused by the act, the insurer may not refuse to pay the claim, so far as it concerns that part of the loss, by reason only of the act.

(5)       Where:

(a)       the act was necessary to protect the safety of a person or to preserve property; or

(b)       it was not reasonably possible for the insured or other person not to do the act;

the insurer may not refuse to pay the claim by reason only of the act.

(6)       A reference in this section to an act includes a reference to:

(a)       an omission; and

(b)       an act or omission that has the effect of altering the state or condition of the subject-matter of the contract or of allowing the state or condition of that subject-matter to alter.’

641               The decision of the High Court in FAI General Insurance Co Limited v Australian Hospital Care Pty Limited (2001) 204 CLR 641 at [40] – [46] (per McHugh, Gummow and Hayne JJ) demonstrates that QBE is not entitled to avoid payment pursuant to the policy upon the basis of MDRN’s failure to notify this claim during the period of cover, save to the extent permitted by s 54.  Although MDRN’s pleading does not say so, the relevant “act” for the purposes of s 54 is that failure.  It may be that the decision in FAI v Australian Hospital Care can be distinguished for present purposes.  I say that in view of the language of “election” contained in cl 5.2 of the present policy.  The language of the policy in that case seems not to have contained that concept.  It may be arguable that the High Court was not addressing a situation in which the parties had stipulated for an election, and that an election may not accurately be described as an “omission”.  However the contrary is also arguable.  In any event, I proceed upon the basis that the decision is relevant to MDRN’s claim to indemnity under the 1998 policy. 

642               The cross-claim was amended to add the claim under the 1998 policy and reliance on s 54.  The amendment was provoked by QBE’s plea of non-disclosure and misrepresentation in connection with the 1999 policy.  Paragraph 18 of the cross-claim asserts:

‘If the matters alleged by QBE in its amended defence do constitute non-disclosure or misrepresentation in respect of the 1999 policy, then those matters, or certain of them, would constitute a fact or circumstance that might give rise to a claim for the purpose of cl 5.2 of the previous year policy.’

643               This method of pleading is unsatisfactory.  The matters so alleged by QBE are numerous.  They relate to MDRN’s system for loan approval and particular aspects of its conduct concerning the Yandina project, in particular, compilation of the investment summary.  It would have been helpful had MDRN specified the precise matters which it claims to have omitted to notify.  In any event, QBE denies that such matters could have given rise to a claim under the 1998 policy.  It also denies that during the term of that policy, MDRN became aware of such matters.  It is said to follow that MDRN ‘are not, and were not during the term of the (1998) policy, entitled to give notice’ of such matters, and that cl 5.2 of the 1998 policy therefore does not apply so as to deem there to be a claim under that policy, regardless of any question of late notification.  As it is MDRN’s primary position that it is entitled to indemnity pursuant to the 1999 policy, it will be best to leave consideration of the argument concerning the 1998 policy and the application of s 54 until the issue of liability under the 1999 policy has been determined. 

1998 policy – continuous cover

644               In submissions, MDRN sought to advance a second basis for reliance upon the 1998 policy.  Clause 2.1 of each of the 1998, 1999 and 2000 policies provided:

‘Continuous Cover

2.1       QBE agrees that, notwithstanding Exclusion 4.1 (Prior or Pending), should a Claim which should have been notified, or a fact or circumstance which could have been notified, to QBE under an earlier Professional Indemnity Insurance Policy issued by QBE, then QBE will accept notification of such Claim, fact or circumstance under this Policy.  PROVIDED ALWAYS THAT:

            (a)       QBE has continuously been the insurer under a professional Indemnity Insurance Policy between the date when such notification should have been given and the date when such notification was, in fact, given; and

            (b)       the terms and conditions applicable to this extension and to that notification shall not be those of this Policy but shall be the terms and conditions (including the limit of indemnity and deductible) applicable to the QBE Professional Indemnity Insurance Policy under which the notification should have been given.’

 

645               Words appear to have been omitted from the introductory paragraph, but the intention was to allow notification, under a current policy, of a claim or circumstances which should, or could, have been notified during a prior period of cover.  Such a claim was to be treated as a claim under the current policy, but upon the terms which would have applied had the earlier policy still been in force and applicable to the claim. 

646               QBE correctly submits that no such case has been pleaded.  MDRN seems to assert that such a case arose out of its pleaded reliance on s 54.  However that section, in effect, extends the time within which a claim may be made under, in this case, the 1998 policy.  As I have observed, the effect of cl 2.1 is to permit claims which ought to have been notified in an earlier year to be made under a current policy, as if it were in the form of the relevant earlier policy.  Paragraphs 16 to 22 of the cross-claim raise no such claim.  Firstly, the language of pars 18 and 19 clearly raises a claim under the 1998 policy rather than any current policy.  Secondly, the reference in par 21 to s 54 would be completely irrelevant to a claim under cl 2.1.  Thirdly, those paragraphs were added to the cross-claim in 2005, but there is no pleading of any extant policy with QBE as at that date.  Finally, there is no reference to cl 2.1.  In my view reliance on cl 2.1 has not been pleaded.  QBE asserts that had such reliance been raised at the trial, further factual issues would have been addressed.  It is impossible to discount that possibility.  I will not permit reliance on cl 2.1 at this late stage. 

1999 policy – non-disclosure and misrepresentation

647               QBE disputes liability under the 1999 policy on the grounds of non disclosure and misrepresentation.  The insured’s duty of disclosure is prescribed by s 21 of the Insurance Contracts Act as follows:

‘(1)      Subject to this Act, an insured has a duty to disclose to the insurer, before the relevant contract of insurance is entered into, every matter that is known to the insured, being a matter that:

(a)       the insured knows to be a matter relevant to the decision of the insurer whether to accept the risk and, if so, on what terms; or

(b)       a reasonable person in the circumstances could be expected to know to be a matter so relevant.

(2)       The duty of disclosure does not require the disclosure of a matter:

(a)       that diminishes the risk;

(b)       that is of common knowledge;

(c)        that the insurer knows or in the ordinary course of the insurer’s business as an insurer ought to know; or

(d)       as to which compliance with the duty of disclosure is waived by the insurer.

(3)       Where a person:

(a)       failed to answer; or

(b)       gave an obviously incomplete or irrelevant answer to;

a question included in a proposal form about a matter, the insurer shall be deemed to have waived compliance with the duty of disclosure in relation to the matter.’

648               In summary, the insured must disclose every matter which is known to him or her if:

·                he or she knows it to be relevant to the insurer’s decision; or

·                a reasonable person, in the circumstances, could be expected to know that it was so relevant.

QBE must prove these matters.

649               Sections 23 to 27 deal with misrepresentations, but they seem to assume an existing duty not to misrepresent, rather than create such a duty.  It is not necessary to refer to them.  Section 28 provides:

‘General insurance

(1)       This section applies where the person who became the insured under a contract of general insurance upon the contract being entered into:

(a)       failed to comply with the duty of disclosure; or

(b)       made a misrepresentation to the insurer before the contract was entered into;

but does not apply where the insurer would have entered into the contract, for the same premium and on the same terms and conditions, even if the insured had not failed to comply with the duty of disclosure or had not made the misrepresentation before the contract was entered into.

(2)        If the failure was fraudulent or the misrepresentation was made fraudulently, the insurer may avoid the contract.

(3)        If the insurer is not entitled to avoid the contract or, being entitled to avoid the contract (whether under subsection (2) or otherwise) has not done so, the liability of the insurer in respect of a claim is reduced to the amount that would place the insurer in a position in which the insurer would have been if the failure had not occurred or the misrepresentation had not been made.’

650               QBE’s case is that, but for the alleged non-disclosure and misrepresentations, it would not have extended cover for 1999-2000.  In other words it seeks to establish that MDRN’s non-disclosure and/or misrepresentations led to its decision to insure.

651               In considering this aspect of the case, it is necessary to address a further body of evidence.  Ms Hume is an employee of QBE.  She holds the degree of Bachelor of Commerce in the University of Queensland and has completed some law subjects in that university.  Following a period of training with QBE, Ms Hume commenced work as an underwriter in the professional liability division.  By August 1998 she had been promoted to the position of senior underwriter and was, in 1998, appointed to manage the professional liability division in Queensland.  She moved to Brisbane in early 1999.  At the end of 1999 she resigned from QBE and travelled to London where she again worked for QBE in establishing a professional liability division.  She has since returned to Australia and continues to work for QBE.

652               Ms Hume first became involved with MDRN in late August or early September 1998 through MDRN’s insurance broker, AON Risk Services Australia Ltd.  QBE had carried MDRN’s professional indemnity insurance in connection with its mortgage business since 1998.  It did not otherwise insure the firm.  Ms Hume assessed MDRN’s proposal for insurance for the 1998-1999 year.  In so doing, she primarily considered:

·                MDRN’s claim history, as at the last renewal and currently;

·                gross fee income for either the last twelve months or the last financial year, whether there had been any increase or decrease as compared to the corresponding period and any reasons for such increase or decrease; and

·                the quality of the risk, and whether the nature of the risk had changed substantially since the last renewal.

653               MDRN’s proposal was made on a broker’s proposal form rather than the form generally used by QBE at that time.  The QBE form sought details of the precise nature of the insured’s activities or business, advice given in relation to such activities or business, any envisaged substantial changes in such activities, and whether any brochures or other promotional material were issued, in which case copies would be requested.  I understand this evidence to have been led in support of the evidence from Ms Hume that such matters were relevant to her decision to insure MDRN.

654               In assessing the quality of the risk, Ms Hume considered that any changes or proposed changes were of some importance, primarily because they might affect the relevance of the past claims record.  In this case she concluded that there had been a substantial change in the risk since the 1997-1998 renewal in that MDRN had established MDRN Investments Ltd to manage property syndication.  That company was not insured by QBE.  MDRN anticipated a 32 per cent increase in fee income and an increase in the percentage of its business which related to mortgages.  Ms Hume recommended a 10 per cent increase in the premium.  She also recommended that the new policy:

·                exclude cover for MDRN’s legal practice;

·                be limited to mortgage management and origination work;

·                not cover advice in respect of joint venture development projects; and

·                not cover the operations of another company, National Mortgage & Development Ltd.

655               Ms Hume then referred the proposal and her recommendations to the national underwriting manager, Mr Hunter.  He approved Ms Hume’s recommendations, with some variations.  On 24 September 1998 the policy issued, ‘limited to cover mortgage assessment, mortgage management/origination work and property syndication only’.  This cover was slightly broader than that recommended by Ms Hume and extended to other entities which are not presently relevant.

656               Ms Hume also considered MDRN’s proposal for the 1999-2000 year.  By that time she had moved to Brisbane and had authority to accept the proposal.  MDRN indicated that from 1 November 1999, ASIC was to assume responsibility for the regulation of solicitors’ mortgage practices, which activities had previously been regulated by the Queensland Law Society (Inc).  Ms Hume concluded that the risk remained substantially unchanged.  The premium was increased by 15 per cent to reflect an increase in fee income.  The 1998 endorsements were applied to the 1999 policy.  There were also exclusions in relation to the partners’ family trusts.  Renewal was effected on that basis. 

657               Ms Hume considered that the business practices of an applicant for professional indemnity insurance were directly relevant to the decision to insure.  This was because such insurance was in connection with the conduct of professional business practices.  In assessing MDRN’s proposals, Ms Hume relied on information provided by MDRN regarding such business practices, including brochures and other promotional material used by it in the mortgage business.  The fact that such business was conducted in conjunction with the MDRN legal practice was relevant to her considerations.  She noted that MDRN had ‘aggressively promoted itself’, by which she meant that it had promoted its mortgage business as an adjunct to its legal practice.  Her decision to accept the proposal for the 1999 policy was ‘significantly influenced by the fact that the mortgage lending business was backed up by an apparently reputable firm of solicitors and, particularly, the experienced partners of the firm.’  To her mind, the understanding of legal risks brought to the business ‘additional knowledge that comes from a legal understanding of these types of transactions’.  She said that:

‘In my experience, usually solicitors have a high level of honesty and integrity as qualified professionals, while this was not necessarily always the case with respect to financiers and loan scheme promoters.’ 

658               Ms Hume considered that lawyers would generally exercise more diligence, be more likely to structure the arrangements appropriately and comply with the requirements of the law, thus reducing the risk to QBE. 

659               Ms Hume noted that MDRN’s promotional material described the risk minimisation strategies employed by MDRN to safeguard investors’ funds.  As lawyers, MDRN would have known that representations made to the public in promotional material could lead to consequences in the event of any misleading or deceptive conduct.  She accepted at face value representations made by MDRN regarding its business activities.  She considered that the promotional material stressed the involvement of the legal practice and the partners in assessing proposed loans.  In particular, Ms Hume concluded that:

·                the MDRN private mortgage team, headed by partner Philip Ryan, was expert in private mortgage lending;

·                the mortgage business was backed by a long-established and respectable legal firm;

·                MDRN’s mortgage business had an unblemished track record and strove continually to provide a low risk, quality service;

·                an experienced investment team carefully assessed all loans and did not “equity lend”;

·                all loans were carefully assessed by staff who had extensive experience in legal and banking spheres;

·                the loan assessment procedure was strict;

·                persons with legal and banking experience examined material which included:

·         a full property valuation by an acceptable valuer;

·         financial statements of the borrower;

·         financial statements of directors and guarantors, where applicable;

·         satisfactory searches; and

·         credit checks;

·                as Mr Ryan was the only lawyer mentioned as a member of the team, he would undertake the assessment role in conjunction with Mr Blackadder;

·                MDRN’s mortgage business was backed by the legal firm, providing legal security and certainty to investors;

·                MDRN had solicitors’ fidelity insurance and professional indemnity insurance;

·                funds were to be placed in the solicitors’ trust account; and

·                responsibility for approving all loans rested with Philip Ryan and the partners of MDRN, together with Mr Blackadder.

660               Ms Hume identified a number of ‘scenarios’, apparently to demonstrate the ways in which knowledge of various matters may have affected her decision to insure MDRN for 1999-2000.  Firstly, she addressed her understanding that, in reality:

·                the partners relied entirely on Mr Blackadder to evaluate loan applications, security valuations, financial information and supporting documentation;

·                they only read the investment summary and did not, themselves, check the correctness of representations, or strength thereof; and

·                investors were not provided with loan application source material unless they requested it. 

661               Ms Hume said that had she been aware of these matters, she would not have renewed the policy for 1999-2000 because:

‘Firstly, the named insureds were the partners of the law firm and not Dale Blackadder.  He was their employee.  The responsibility for the loan recommendations rested with the partners and in my view they could not have verified the information contained in the Investment Summary and ought not have endorsed the strength of the recommendation to investors without at least one of the partners reading and understanding the loan application source material.  This absence of review would give a distorted picture of the assessment and it would have been unacceptable to me for the partners to just look at the Investment Summary as the sole basis for ascertaining the virtues of each loan.  The lack of partner involvement would have been unacceptable to me notwithstanding Mr Blackadder’s level of experience as a banker.  Mr Blackadder’s experience did not derogate from the limitations, namely that Mr Blackadder did not have a financial stake in the business and had no legal qualifications. 

Secondly the information … does not conform to the representations and my understanding of them, referred to in [the documents supplied by MDRN].  Had the information … been disclosed to me, I would have been very concerned that MDRN had misrepresented to investors the role played by the law firm and, in particular, Mr Ryan, in the loan assessment process.  Not only does this go to the nature of the risk that QBE was underwriting, but also the moral risk in terms of MDRN’s ethics and integrity.  I would not have been prepared to underwrite an insured that appeared to misrepresent their business practices in this fashion to potential clients.

In summary, there was a combination of a lack of control and supervision and that MDRN were actually assessing the loans in a different way to that represented to the investors and QBE.’

662               These statements are, to some extent, difficult to accept.  Generally speaking, I cannot see that legal training has much to do with considering and approving a loan application.  After all, one knows from common experience, and can infer from Mr Blackadder’s evidence, that loans are regularly approved by financial institutions using the services of persons who are not legally qualified.  The primary role for a legally qualified person in connection with such matters is to attend to the security documentation.  Mr Ryan was responsible for that.  The only necessary legal knowledge in assessing this loan application was in connection with the concepts of joint ownership of assets and trusts.  In my view, few people with rudimentary business experience would lack an understanding of those concepts.  I have previously indicated that I consider that Mr Blackadder must have understood them. 

663               Ms Hume also seems to have thought that solicitors would have a better understanding than an experienced banker of the dangers of misrepresentation.  Such dangers must be well-known to most people in business.  The argument would lead to the conclusion that all commercial public relations must be checked by lawyers.  I do not accept that basic questions of factual accuracy and honesty are matters with which lawyers enjoy any peculiar affinity.  I also reject the suggestion that lawyers are more likely to be aware of the importance of being truthful and accurate in promotional material.  It was reasonable for the partners to rely upon Mr Blackadder to compile the investment summary.  In business it is common for senior personnel to rely upon executive summaries provided by subordinate employees whom they trust.  There were good reasons for their trusting Mr Blackadder.  He was a senior employee with substantial relevant experience.

664               It is not really correct to assert that Mr Blackadder was not supervised.  Mr Ryan said that he had regular, virtually daily, discussions with him.  He saw investment summaries before they were distributed.  He had adequate opportunity to check them against information sources if he considered that necessary.  I have no doubt that Mr Ryan and Mr Blackadder both understood that the former was supervising the latter.  Mr Blackadder was, in a practical sense, responsible for deciding whether to proceed with loan proposals, but Mr Ryan had the authority and opportunity to overrule him.

665               There has been a tendency in this case to treat MDRN (and Mr Blackadder) as having the responsibility for deciding whether or not to lend to potential borrowers.  In fact MDRN, through Mr Blackadder, decided only to market a particular loan proposal.  Mr Ryan and Mr Blackadder’s evidence and the letter approving this proposal (ex 1, tab 22) demonstrate that there was no commitment to lend at the time at which the investment summary was issued.  In fact, individual investors decided whether to lend.  This tendency has, to some extent, unduly influenced the conduct of the case.  It is really about how MDRN canvassed for funds, not about how it decided whether to lend.  That does not detract from the seriousness of Mr Blackadder’s misconduct, but it is an important aspect of the relationship between Mr Ryan and Mr Blackadder. 

666               Had Mr Ryan been asked whether he supervised Mr Blackadder’s work, he would have said that he did.  That would have been an honest answer.  Ms Hume, with the benefit of hindsight, may consider that such supervision was inadequate, but the question is whether there was relevant non-disclosure or misrepresentation.  People are usually unaware of their own neglect, at least until it produces unfavourable results. 

667               I do not fully understand Ms Hume’s concern about the fact that investors would only be shown loan application source material if they asked to see it.  That would hardly be a matter of concern if the information in the relevant investment summary was accurate.  Perhaps the relevance of this matter depends upon acceptance of the assertion of lack of supervision.

668               In scenario 2, Ms Hume dealt specifically with the ten point plan contained in the autumn 1999 newsletter, the winter 1999 newsletter and alleged differences between the content of these documents and Mr Blackadder’s actual practice.  Although the applicants plead reliance on the winter 1999 newsletter, they did not ultimately rely on it.  I have therefore not previously outlined its content.  As far as I am aware, it is only relevant to this aspect of the case.  Relevant statements appear to be that:

·                MDRN did not “equity” lend, that is ‘automatically approve a loan if it is less than 70% of the valuation of the property concerned’; and

·                ‘Loans Manager Dale Blackadder conducts full checks for every prospective borrower and no loan is approved unless it meets our Ten Point Assessment Plan (see the Autumn 1999 Newsletter).’

669               There is also a derogatory reference to other organizations which ‘don’t examine the financial history of the borrower, their current financial capacity, nor their commitments.  Nor do they run credit checks against the borrower and guarantors.’

670               My earlier comments concerning the descriptive effect of the autumn 1999 newsletter (as opposed to the prescriptive effect urged by the applicants and cross-respondents) apply to the winter 1999 newsletter.

671               Ms Hume observed that there was no system in place for reviewing documents prepared and issued by Mr Blackadder.  She considered that MDRN should have reviewed a cross-section of loans, checking compliance with the ten point plan.  She said that had MDRN disclosed the absence of such an audit system, QBE would not have issued the 1999 policy.  She said that such a practice was followed in QBE’s office.  However that can hardly be a basis for assuming that all businesses followed it.  It is difficult to see any reason for disclosing the absence of such a system unless there was some reason to believe that QBE understood that it existed.  I see no reason why Ms Hume would have assumed the existence of such a practice.  If it were so important, one might have expected an appropriate question in the proposal form.  Ms Hume did not suggest that QBE’s proposal form contained such an inquiry.  There was no evidence that such a practice was common in the finance industry.  In any event, in such a small undertaking, Mr Ryan’s ongoing contact with Mr Blackadder could have been as effective a means of supervision as that proposed by Ms Hume.

672               Scenario 3 related specifically to the Yandina project and the contents of the investment summary.  I have already identified the aspects of the investment summary about which valid complaint might be made by the applicants.  They are:

·                the asset positions of Mr Rivett and Prospect Results; and

·                the assertion that all units in Stage 1 had been pre-sold.

673               Such matters, if known to MDRN, should have been disclosed.  Ms Hume also identified other matters of concern, including:

·                the failure to comply with the ten point assessment plan;

·                other aspects of Mr Rivett and Project Results’ finances and the capacity to meet loan commitments, including interest payments;

·                absence of an independent valuation;

·                absence of a check valuation;

·                acceptance of trade dollars in part payment for units;

·                sale of units at prices below $85 000;

·                negative cash flow for Stage 1;

·                use of trade dollars in meeting development costs; and

·                borrower’s contribution of its own funds.

674               Mr Hume claimed that QBE would not have accepted the 1999 proposal if these matters had been disclosed.  I accept that non-compliance with the ten point plan, as previously notified to some investors, was a matter which may have been relevant to the risk to be undertaken by QBE.  However, for reasons which I have given, I consider that the effect of the ten point plan has been greatly overstated by the applicants.  QBE’s reliance on it for present purposes also depends upon a certain degree of over-statement.  I will return to this matter at a later stage.

675               I have given my reasons for rejecting the applicants’ complaints concerning the valuation, the use of trade dollars and Project Results’ ability to meet interest payments.  Those reasons lead to the conclusion that no question of disclosure arose in connection with those matters.  As to the alleged negative cash flow for Stage 1, the borrower was to meet loan repayments from the proceeds of sale of units, with an expected shortfall of $400 000.  This was disclosed.  The point concerning the borrower’s contribution of funds is part of the trade dollar complaint.  The only other point is the suggestion that units were sold for less than $85 000.  To the extent that this allegation concerns some issue other than the acceptance of trade dollars, I do not understand its factual basis to have been ventilated during the trial.  It was not addressed in submissions.  I take it to be abandoned. 

676               Ms Hume was cross-examined concerning her knowledge of the activities undertaken by MDRN in connection with the mortgage business.  She said at TS 2251

‘My understanding is that they, as I said before, that they were - they introduced investors to different investment opportunities and that, I guess, as part of that they would have to ensure that there was the validity of the investment opportunity, so they would, presumably, perform checks of some description in terms of it was in relation to investing in a property and the property was adequately valued.’

677               This seems to assume a “free-standing” duty of care rather than a duty not to engage in misleading or deceptive conduct or make negligent statements.  At 2251-2 she was asked whether she understood such activities to be of a ‘banking nature’; and whether she understood that people with the skills of a banker or ‘allied skills’ would perform them.  She replied at 2252:

‘Yes, I understand that they would be involved in that process, but the documentation and other aspects as to the structure of transactions possibly would be done out of - by somebody else.’

678               She was asked:

‘… would it be fair to say that in ’98 and ’99 you recognised this dichotomy for a mortgage origination there would be, on the one hand, the commercial aspects that would be a matter for assessment (by) a person with banking skills, and on the other hand, the transactional aspects, for example, proper documentation of the loan and affecting of the mortgage, which would be in the hands of persons with appropriate skills, including legal skills, to do that?’

679               She agreed.  It was pointed out to Ms Hume that in a proposal for insurance made in 1996, MDRN had informed QBE that proposed loans were evaluated externally by ‘the Finance Division of the Brannelly Group (Brannelly Finance Pty Ltd), a long established and highly respected superannuation and estate planning consultancy who also act as managers of lawyers private mortgages.’  It was said that Brannelly examined the debt-servicing capacity and good credit history of each applicant and obtained a valuation of the security property to ensure that that the loan/security ratio did not exceed 70 per cent.  Ms Hume referred to the 1996 proposal in fixing the premiums for the 1998 and 1999 policies and noted the reference to external evaluations.  It seems unlikely in that context that she would have assumed that assessment of proposed loans was done by lawyers.  See ex 77.  Similar information was supplied to QBE in 1997.  See ex 78.  Under the heading ‘The Evaluation Procedure’ it was said that:

‘The evaluation of applicants is provided by experienced professionals who have had extensive banking experience.

They examine the debt service capacity and good credit history of each applicant and obtain a valuation of the security property to ascertain that the loan/security ratio does not exceed 70 %.  This is set by the Queensland Law Society.’

680               Ms Hume said that the change from external to internal assessment did not lead her to vary the premium for 1998 and following years.  Exhibit A to Ms Hume’s affidavit is the 1998 proposal.  Attached were documents sent to investors.  In one document it was said that:

‘The evaluation of applicants is provided by experienced professionals who have had extensive banking experience.’

681               Ms Hume agreed that she was not concerned about whether a valuation was performed internally or externally, provided that there was a proper evaluation process.  At TS 2289 the following questions and answers appear:

‘Q:       And the relevant point of inquiry was that the person performing the evaluation was somebody with the appropriate banking experience?

A:        I do believe that there was - in the other attachments it actually may mention other than banking experience, but that they had relevant experience was important.

Q:        And that included banking experience?

A:        For purposes of this, this is a document that indicates that they had banking experience.  I believe elsewhere it also states legal experience, in one of the other documents.

Q:        But for the purpose of the risk you were considering underwriting, banking experience was important?

A:        It was considered, yes, as an aspect of its, yes.

Q:        And, indeed, where it talks about there, they examined the debt service capacity and a good credit history, you certainly wouldn’t have expected solicitors to be making those sorts of evaluations.  You thought that was a matter properly performed by people with banking skills.  Correct?

A:        I didn’t assume that it was performed by a certain person that had banking experience.

Q:        Well, can I suggest to you that when you read what appears under the evaluation procedure, it’s inescapable that the persons performing it for MDRN are persons with banking experience?

A:        It indicates that, yes.

Q:        All right.   So you were certainly content to recommend underwriting the risk on the basis that loan applications were evaluated by people with banking experience?

A:        Evaluated?

Q:        Yes.

A:        That’s -  only as to the aspect of evaluated, yes.

Q:        But you don’t understand any difference between the expression “evaluated” and “assessed” in this context do you?

A:        Evaluated and assessed?  No. 

Q:        So if it had said the assessment procedure, “The assessment of applicants is provided by experienced professionals who have had banking experience”, that wouldn’t have changed your attitude to it.  Correct? 

A:        No.’

682               In this same document it was said that:

‘(a)      We have lodged a bank guarantee and have secured Fidelity Insurance through the Queensland Law Foundation, a division of the Queensland Law Society to protect you in case of misappropriation of your funds by us.

(b)       We also have professional indemnity insurance cover obtained through the Queensland Law Society in case of our being negligent as solicitors together with additional cover with QBE Insurance Ltd in respect of our being negligent in the establishment and monitoring of each loan.’

683               Ms Hume was asked: 

‘Q:       And you understood that the risk you were contemplating taking was that MDRN might become liable for the negligent establishment of a loan, the evaluation or assessment of which had been performed by a non lawyer?’ 

A:        Yes.’

684               In the course of her cross-examination, Ms Hume said that she understood that Brannelly was part-owned by MDRN.  She was asked if she expected ‘legal involvement’ in respect of documents such as the loan agreement and said that she would have expected the partners to have been involved ‘more so than just on the agreement side’.  At TS 2292 the following questions and answers appear:

‘Q:       And you knew to that stage that is in ’96, ’97, ’98 the solicitors themselves had never assessed or evaluated the loan applications.  Correct?

A:        No I can’t confirm that’s the case.  They may have been involved.  They - I mean, I would expect them to be involved in part of the process, if not from the assessment side.

Q:        Well, from the information you saw on a review of the file, there was no reference to the solicitors being involved in the assessment or evaluation process, was there?

A:        There was one of the documents I did believe had mention - no, I thought it was in the ’97 file that in addition to the one that you showed me - that actually had reference to legal and banking experience.

Q:        All right.  But in relation to reference to legal and banking experience, you agreed with me earlier that there’s a distinction between those commercial aspects of the loan assessment, and the transactional aspects.  Correct?

A:        Yes.’

Q:        And you understood that people with the banking experience to look after the commercial.  And legal experience to look after the transactional.  Correct?

A:        The information that was provided in addition to the loan, the document you showed me talked about the partners being involved in the approval process as well.’

685               Although Ms Hume asserted to the contrary, I am inclined to think that this evidence supports my view that the involvement of lawyers in the assessment process was not a matter of importance, and that Ms Hume did not, at the time, consider that it was. 

686               A significant amount of time was taken in cross-examining Ms Hume concerning ex 80.  This is a proposal and policy issued by QBE to another client company conducting a solicitor’s mortgage business.  The proposal was accepted by Ms Hume.  QBE had not previously insured the relevant company.  Ms Hume assessed the proposal at “3”, which was rated as moderate/average, to be quoted only with caution.  In the proposal it was asserted that the business had suffered no capital loss in six years.  An “audit certificate” was enclosed.  Counsel’s intention in connection with this cross-examination seems to have been to demonstrate that Ms Hume was willing to accept the proposal, notwithstanding the fact that on at least one view, it was less attractive than that on behalf of MDRN.  It seems that this proposal was the only other proposal in connection with a solicitor’s mortgage business considered by Ms Hume at the relevant time. 

687               QBE also called another employee, Stephen Robert Keith.  He is the senior underwriter (financial institutions) within the professional liability division.  He first became involved with MDRN in September 2003 when he considered a proposal for renewal of its cover.  Mr Keith’s superior had requested further financial documentation and résumés for external compliance committee members.  In the proposal MDRN disclosed that in the 2001-2002 proposal it had notified QBE of certain claims.  Mr Keith spoke to the QBE claims officer concerning the claims arising out of the Yandina project.  It was not to be covered by the prospective 2003 policy.  He also noted that the proposals for renewal in 2001 and in 2002 had been generally positive and not indicative of any apprehension that a formal claim would result, or that there would be any loss.  He noted that in the 2001 renewal proposal MDRN had noted that a loss to investors was possible but had indicated that action would be commenced against the quantity surveyor and the valuer.  Investors had been advised that they could still recover principal and some interest.  Mr Keith therefore concluded that any claim would not be significant.  He also understood from MDRN’s prior disclosure that most run-out loans were likely to have been resolved by 31 October 2001.  As a result of this he eventually accepted the proposal.

688               He considered a further proposal in October 2004.  In the course of his assessment he discovered that in addition to the Rivett claim, proceedings had been initiated against MDRN in connection with two other loans and that there was notice of a third possible claim.  The total of the three actual claims was in the order of $5.8 million.  Mr Keith also learned that ASIC had been investigating the Rivett loan for some time, and that this had not previously been disclosed to QBE in connection with earlier renewals.  Mr Keith considered that there were significant flaws in MDRN’s loan assessment and approval process.  In particular it had:

·                promoted loans to investors without conducting appropriate “due diligence” in circumstances where even limited “due diligence” would have demonstrated the non-viability of the loan;

·                in the case of the Rivett loan, not complied with the ten point plan which was actively promoted to investors;

·                delegated the loan approval process to an employee, Mr Dale Blackadder, without any, or any adequate, partner supervision or other checks and balances;

·                substituted investors in defaulting loans without properly informing the new investors of the repayment history;

·                promoted refinance loans in circumstances when the borrower was in default with the existing lender; and

·                failed to inform investors of (a) to (e).

689               These matters had not been disclosed in connection with the 2001 and 2002 renewal proposals.  Mr Keith considered that they should have been disclosed.  In the end cover for 2004/2005 was declined. 

690               MDRN also called evidence on this issue.  Mr Ryan said that from 1996 until 2004, he was primarily responsible for effecting MDRN’s cover with QBE.  In cross-examination Mr Ryan said that had he realized that in assessing the Yandina project, MDRN had not adhered strictly to the statements made in marketing brochures as to the process for approving such proposals, he would have drawn it to the attention of QBE in the 1999 proposal (TS 1984). 

691               He spoke to Mr Blackadder on a daily basis.  Their offices were adjoining.  He had not fully examined the Rivett application until ‘we were in the recovery process’.  He said that heunderstood ‘that Mr Blackadder would look at the assets of a borrower in light of what you would expect a borrower of that standing or age to have and he would make comparisons as to anything which might alert him to be suspicious.  For example, if there is a lot of, for want of a better expression, art work or intangibles or something like that.’ (TS 1990)

692               The following questions and answers appear at TS 2005-6:

‘Q:       Funds held in discretionary trusts, would that be a reason to be a bit worried?

A:        Well funds held in discretionary trusts are - may well be typical in a particular borrower.

Q:        So that wouldn’t be a particular cause for concern requiring in your view anyway, Mr Blackadder necessarily to go any further than the usual course?’

A:        It could.  I mean, he’s a – he’s the banker and he’d be the appropriate person to answer that.’

693               He was asked at TS 1991-2:

‘And because you understood that Mr Blackadder’s purpose in looking at the assets and liability was only to determine whether the person had assets of a character or extent appropriate to that person’s stage in life and position, you didn’t expect him to be looking at them for the purpose of ensuring that the loan was going to be repaid?’

694               Mr Ryan replied:

‘The statement of assets is not relevant to whether the loan is repaid because, in a project, you’re looking at the proceeds providing the way the loan is going to be repaid.’

695               Mr Ryan was somewhat equivocal in his answers concerning this matter (at TS 1991 and 1992) but I understood the general thrust of his evidence to be that he did not expect Mr Blackadder to check a borrower’s asset position other than in the general way outlined above.  Further checking was unnecessary because, in Mr Ryan’s view, it was appropriate to look to the project itself as the source of repayment rather than to the assets of the borrower.  He said that the ten point plan set out in the autumn 1999 newsletter was based upon his understanding of what Mr Blackadder normally did in assessing a loan proposal, which information he checked with Mr Blackadder. 

696               Concerning the letter to investors dated 23 October 2000 (ex 65), Mr Ryan was asked why he had not identified the possibility of proceedings against MDRN by investors.  He said that he did not believe that they had been at fault.  He considered that, for reasons which I have given, the quantity surveyor was primarily responsible for the failure.

697               In the course of his cross-examination Mr Ryan made it clear that he did not consider that loans were approved until such time as the funds were advanced.  As I have previously indicated, this view is consistent with the letter concerning the proposed advance in this case (ex 1, tab 22).  He was ultimately responsible for determining whether or not to make the advance. 

698               Mr Ryan was cross-examined at some length concerning the statements of assets and liabilities provided by Mr Rivett for himself and for Project Results, particularly as to whether they constituted balance sheets.  This seems to me to have been little more than a matter of terminology.  I doubt that anything hangs on it.  The more important question is the adequacy and accuracy of the information supplied and included in the investment summary.  Mr Ryan also said in cross-examination that in the period from May to October 1999 he would generally read valuations submitted in support of loan applications.  He did not do so in the case of the Yandina project.  Mr Ryan agreed that he may have indicated, in the course of the ASIC inquiry, that he did not recall discussing the content of the autumn 1999 newsletter with Mr Blackadder.  However I accept his evidence that he subsequently recalled such conversation.

699               In the course of cross-examination Mr Ryan also said that although he had not been involved in assessment of the Rivett application, he had, in connection with other transactions, interviewed the prospective borrowers and attended to other aspects of such transactions.  He and Mr Blackadder had a “team” approach.  However his major role was in connection with the preparation of legal documents, recovery work and loan management. 

700               Perhaps unfortunately, counsel chose to cross-examine Mr Ryan in great detail concerning the process for assessment and approval of loan applications.  Much of the cross-examination was, in my view, largely semantic.  It is quite clear that the primary role, both in assessing each application, and in making the decision as to whether or not it was worth taking forward (to use a neutral term), was Mr Blackadder’s.  On the other hand Mr Ryan worked closely with him and would read any investment summary prior to its distribution to potential investors.  He understood that the other partners also did so, but they clearly had a subordinate role in the process.  No doubt it was relatively unusual for either Mr Ryan or any of the other partners to intervene once Mr Blackadder had decided that the proposal was worth pursuing.  However, equally clearly, Mr Ryan and the other partners could, if they wished, intervene.  There is nothing very unusual in such an arrangement.  Once it is accepted that Mr Blackadder was well versed in lending, there was no reason why such an arrangement should not have been effective. 

701               Messrs Durie, McCarthy and Neil all gave evidence.  However Mr Ryan was primarily responsible for dealing with insurance matters concerning the mortgage business.  Little of relevance appears from their evidence.  Each appears to have been aware of ex 67 (the letter written by Mr Neil to the solicitors for the second respondent).  Mr Neil said that he obtained the information contained in that letter from Mr Ryan.  I will refer in more detail to the evidence of the other partners should it be necessary.

702               MDRN called Frank Leopold Gaston Hoffman, an insurance consultant.  He conducted an insurance broking business from 1952 until the early 1970s.  From that time until the early 1990s, he managed a broking company.  He has been the national president of the Corporation of Insurance Brokers of Australia, president of the Insurance Institute of New South Wales, an honorary consultant to the Australian Law Reform Commission, a nominee of the Commonwealth Government to the claims panel of Insurance Enquiries and Complaints Ltd and national president of the Australian Insurance Law Association.  In 1997, he was appointed by the Attorney-General of Victoria to make recommendations in relation to the Victorian Solicitors’ Compulsory Professional Indemnity Scheme.  He has lectured and written extensively on insurance-related matters, including good broking practice and the avoidance of professional indemnity claims.  He has given technical and claims advice to insurers and brokers. 

703               He said that in considering a proposal for indemnity insurance in connection with a mortgage business, the insurer might ask:

(a)        What is the largest single mortgage anticipated for origination or lending?

(b)        How many mortgages have been effected in the last twelve months?

(c)        Are independent, qualified valuers invariably used?  Does the mortgage broker check that their professional indemnity insurance is for sums greater than any valuation required of them?

(d)        Are there levels of lending authority for various officers?   

704               Mr Hoffman considered that in 1999-2000 the ‘relatively onerous risks involved in mortgage generation and syndication’ were well known to experienced professional indemnity underwriters and insurers.  At that time insurers were ‘less conservative in accepting risks than at other times, particularly since that time’.  This was the most competitive time in the professional liability market.  It was not long before the collapse of HIH, which company had introduced fierce premium competition into the market.  As it was the largest insurer of general professional liability in the Australian market, that market was an ‘insured’s market’ in terms of premium and terms.  This evidence is of some importance in assessing Ms Hume’s evidence.

705               Regarding Ms Hume’s concern that Mr Blackadder was not a lawyer, Mr Hoffman pointed out that the risks covered by the policy were not those of a legal practitioner, but ‘rather the commercial risks and consequences of this particular business which is mortgage lending and syndication of such mortgages to investors.  The key skills in this business are commercial skills.’  At the relevant time insurers did not require that lawyers be involved in approving loans, as opposed to preparing documentation and conducting searches.  Mr Blackadder’s background made him ‘eminently more qualified than a lawyer to discharge loan assessment duties’.  Mr Hoffman did not accept that a lawyer who is subject to review by his or her professional association is more reliable in promoting mortgages than a non-lawyer.  A professional indemnity underwriter with an understanding of the processes involved in mortgage evaluation would not have been concerned by the fact that Mr Blackadder was not a lawyer.  The underwriter would have regarded Mr Blackadder’s appointment ‘as a sound progression for a lending institution’. 

706               As to Ms Hume’s concern that Mr Blackadder was an employee and had no financial stake in the business, Mr Hoffman considered that this was not material to the risk accepted by QBE.  He pointed out that many corporations, including government corporations, carry professional indemnity insurance, with not one person being a stakeholder in the relevant sense.  In his view there is no criterion relevant to this form of insurance which would suggest that there is a greater risk where no stakeholder is involved as compared to the situation in which a person with a direct pecuniary interest is involved.

707               As to the extent of delegation to Mr Blackadder, Mr Hoffman said at pars 31 and 32 of his affidavit:

’31.      In a commercial sense, an insurer would not expect a company, employing a general manager finance of sound experience and background, to have a partner or director sign off a transaction by de novo examining all the source documentation provided to the general manager finance, but rather could rely on a summary and recommendation by the general manager finance.  Ms Hume notes that the investors were entitled to ask for source material …and it follows that the partners could do the same.

32.       If the partners received only investment summaries and not source documentation, I do not consider that that was a fact material to the risk QBE was being asked to accept, provided the author was a person of appropriate background and experience.  More particularly, this is borne out by the fact that it was not a matter that QBE considered germane to the risk by asking questions in the proposal and then later, on learning the appointment of a general manager finance, seeking no clarification as to the extent of his authority.’ 

708               As to the question of moral risk addressed by Ms Hume, Mr Hoffman said at 34:

‘In any event, “moral risk” is a term in the insurance industry which goes to something in the character of an insured which might lead to the insured deliberately bringing about losses to make a claim or falsifying his claim, say to arson, untrue statements in the making of a claim or making a fraudulent claim.  It is not a matter of ethics or integrity per se, or something which an insurer would normally consider in relation to sales material.  In my experience, insurers reading such sales material would anticipate a level of “puff” which they would not consider to be relevant to moral risk.’

709               As to non-compliance with the ten point plan, Mr Hoffman understood that the autumn 1999 and winter 1999 newsletters were not part of the proposal, and that compliance or otherwise therewith played no part in Ms Hume’s decision to accept the risk.  He also did not consider that the existence of those documents was itself a matter requiring disclosure, particularly as QBE ‘did not ask any questions about the actual workings of the lending business and it was sales type material’ (par 35).  Mr Hoffman considered that had it been disclosed that Mr Blackadder had not complied with the ten point plan in relation to the Rivett loan assessment, an insurer would not have declined cover but would have increased the premium and required to be satisfied that steps had been taken to prevent future similar occurrences.  In cross-examination Mr Hoffman said that promotional material distributed by MDRN was not a reliable or relevant basis for assessing risk.  He considered that it would be a poor underwriter who acted on such information.  I take this to mean that Mr Hoffman would not assess the risk upon the assumption that such material was accurate.  However I did not understand him to mean that an underwriter would treat as irrelevant the fact that the practice followed by the insured diverged from the procedures identified in that material.  He dealt with that matter at a later stage.

710               He said that insurers may have been less conservative in accepting risks in 1999.  They were ‘not terribly fussy about how they accepted a risk … .’  He agreed that an underwriter might react to competition in the marketplace by reducing premiums rather than by accepting increased risk, but both approaches were available.  He said that it was not a matter of accepting greater risks, but rather of accepting risks that were not fully understood. 

711               It was suggested to Mr Hoffman that lawyers might have expertise in checking the accuracy of information against sources.  I have some difficulty in accepting that as being a skill typical of lawyers.  No doubt it is a desirable legal skill.  Mr Hoffman also said that he would expect ‘some auditing’ of the performance of a person in Mr Blackadder’s position.  In my view it is at least feasible that such “auditing” might have been provided by the close day-to-day relationship that Mr Ryan had with Mr Blackadder.  Mr Hoffman said that absence of such auditing would be material to the risk.  However, as far as I am aware, there is no evidence that such a system of auditing was an established feature of the mortgage finance industry at the relevant time.  I am therefore unable to see that there was any relevant non-disclosure.  Mr Hoffman did not consider it relevant to moral risk that a partner might be aware that assessment of loans was not done in accordance with a notified practice such as the ten point plan.  However he considered it relevant to actual risk.  It would be a matter of great concern and a reason for not granting cover.  He agreed that misrepresentation or negligence in respect of a previous loan would be a relevant matter for disclosure, together with information as to steps taken to remedy the defect and to avoid repetition.

712               MDRN also called evidence from Mr Scott Willmot, who is the national manager of professional and consumer services at AON Risk Services Australia Ltd, the insurance broker in connection with MDRN’s insurance.  He submitted the 1996 proposal which was accepted.  The policy was also renewed in 1997, 1998 and 1999.  In the proposal for renewal of the policy for the year 2000-2001 MDRN notified QBE of circumstances which might give rise to a claim, namely the circumstances associated with the Yandina project and a number of other loans.  This is the document attached to the proposal to which I have previously referred.  QBE renewed the insurance for the 2000-2001 year.  In 2001 MDRN gave notice of circumstances relevant to renewal for the 2001-2002 year, attaching the letter from Mr Wade Mellish to which I have previously referred.  The policy was renewed for 2001-2002 and, in 2002, for 2002-2003.  In August 2003 MDRN notified QBE that the present proceedings had been commenced.  The policy was renewed for the 2003-2004 year.  Mr Willmot was not subsequently involved in dealings between MDRN and QBE. 

713               Mr Willmot’s place was taken by Andrew MacKenzie who has also sworn an affidavit.  He submitted a proposal for renewal on 17 October 2004 and was advised on 28 October that the proposal had been declined upon the basis that it fell outside underwriting guidelines. 

714               Although the second cross-respondent’s pleading raises a most complex network of facts and circumstances said to comprise either material non-disclosure or misrepresentation, and although their written submissions to some extent reflected that complex web, the case eventually put in oral submissions was much simpler.  Senior counsel said, at TS 2525:

‘On the 1999 policy the first defence we raise is the non-disclosure-misrepresentation defence.  It really covers the same ground.

The non-disclosure covers three topics.  They are, firstly, the non-disclosure of MDRN’s practice as to how it went about checking or, you could say “non-checking”, the assets and liabilities of borrowers.  The second is the non-disclosure of the actual misrepresentation made in the Rivett investment summary.  The third is what might be described as the lack of supervision or lawyer involvement.  Unfortunately, the evidence has tended to focus on the third.  I won’t be saying any more about it in oral submissions, because the first two are really simpler and, we say, a very straight forward way to get there.’

715               As QBE has proceeded upon the basis of non-disclosure, it is not necessary to consider any case based on misrepresentation.   

716               To rely upon non-disclosure, QBE must establish non-disclosure of a matter:

·                known to the insured; and

·                which is known by the insured to be relevant to the insurer’s decision, or which a reasonable person, in the circumstances, could be expected to know to be so relevant.

717               For present purposes, QBE must also establish that had the matter been disclosed, it would not have accepted the proposal for the 1999-2000 year.  It is convenient first to consider this matter.  It is primarily addressed in the evidence of Ms Hume and Mr Hoffman.

718               I have a clear preference for the evidence of Mr Hoffman over that of Ms Hume.  This preference is based upon three considerations.  Firstly, Mr Hofmann has substantially more experience than Ms Hume had at the relevant time and has now.  Secondly, her evidence had the ring of ex post facto justification about it.  In particular, her view that legal skills were relevant to the assessment of a loan proposal seemed to me to border on the irrational.  Her evidence concerning supervision of Mr Blackadder was also somewhat unrealistic.  I much preferred Mr Hoffman’s approach.  Thirdly, Mr Hoffman is clearly independent.  Ms Hume does not enjoy that luxury.  I do not mean to imply that Ms Hume’s evidence was of no use or was in any sense dishonest, but her own involvement in the transaction cannot be overlooked.  I suspect that it has affected her objectivity.

719               I reject Ms Hume’s evidence concerning the significance to her of legal involvement in approving loan proposals.  That function did not call for legal qualifications.  Ms Hume seems not to have been concerned by the fact that in earlier years, assessment was conducted externally by a company which was not apparently providing legal services.   Whoever accepted those proposals apparently saw no difficulty in doing so.  As to supervision of Mr Blackadder, there is no evidence that it was an established practice in the mortgage investment industry to audit the files of senior employees such as Mr Blackadder to ensure compliance with prescribed procedures.  I have some difficulty in seeing how, in those circumstances, QBE could have expected that such a system was in place.  If there was no such reasonably based expectation, then I cannot see that there was any failure to disclose the absence of such a system.  In other words there is no basis for inferring that MDRN knew that the matter was relevant to QBE’s decision or that a reasonable person, in the circumstances, could be taken to know that such matter was relevant.  The absence of an audit system could only be known to be relevant if it were known that QBE believed that there was such a system.  It is true that Mr Hoffman also expected some system of that kind.  However, in the absence of evidence that it was usual in the finance industry or any part of it, that insurers might think such a practice to be desirable does not entitle them to assume that it occurs, nor does it mean that a potential insured must be aware of such belief. 

720               In my view the only matters of concern which arguably should have been disclosed in the 1999 proposal, if MDRN was relevantly aware of them, were:

·                the misstatement in the investment summary concerning the asset positions of Mr Rivett and Project Results;

·                the misstatement in the investment summary concerning the pre-sale of units; and

·                if it be the case, any divergence between statements in the newsletters as to mortgage assessment practice and actual practice.

721               I am satisfied that a reasonable person, in the circumstances, could have been expected to know that such matters would be relevant to QBE’s decision.

722               The question, then, is whether any of the three matters mentioned above was known to MDRN, and if so, whether it knew that any such matter was relevant to QBE’s decision to accept the proposal, or whether a reasonable person, in the circumstances, could have been expected to know that such matter was relevant.  It is appropriate to consider the meaning of each of the words “known”, “knows” and “know” in s 21.  Two questions arise for consideration.  The first is whether the required knowledge must be actual, or whether it is sufficient that it can be inferred from other matters known to the insured.  The second is the extent to which the knowledge of some person other than the insured is to be imputed to him or her.  The Insurance Contracts Act seems not to deal with either question other than in the bald terms of s 21.  However the cases establish, with respect to the first question, that it is actual knowledge which must be disclosed.  Thus in Permanent Trustee Australia & Anor v FAI General Insurance Co Ltd (1998) 44 NSWLR 186 at 247, Hodgson CJ in Equity (as his Honour then was) said:

‘In my opinion, “known” in s 21(1) means more than “suspected” or “believed”.  What is required is that the matter should be the subject of a true belief, held with sufficient assurance to justify the term “known”.  However, it must be remembered that a belief may sometimes itself be a matter relevant to the decision of an insurer.  An insured may know that it has a particular belief, and know that its having that belief is relevant to the decision of an insurer, in which case that belief itself is a matter which must be disclosed.’

723               On appeal (at (2001) 50 NSWLR 679) Handley JA said at [45] et seq (Meagher and Powell JJA concurring):

’45.      The problem of defining, for legal purposes, the boundary between belief and knowledge did not arise for the first time in this case.  The problem has been considered in a number of legal contexts, and in general it may be said that, for legal purposes, our knowledge includes the facts, apart from matters of religious faith, that we believe to be true. 

46.       Thus out of court admissions are receivable in evidence against a party if they disclose an intention to affirm or acknowledge the existence of a fact whatever the party’s source of information or belief;  see Lustre Hosiery Ltd v York (1935) 54 CLR 134 at 143.  However, as the Court said (at 144):

“If it appears that [the party] had no knowledge, or that, although he had some means of knowledge, he had formed no certain or considered belief and indicated nothing amounting to a personal judgment or conclusion of his own, the probative force of the admission may be so small that a jury ought not to be allowed to act upon it alone, or in preference to opposing evidence.”

…

54.       …  When a person, on the basis of some information, holds a belief on which that person is prepared to act in the world of practical affairs, he or she knows that fact for most legal purposes, and certainly for the purposes of s 21.’

724               In Midaz Pty Ltd v Peter McCarthy Insurance Brokers Pty Ltd [1999] 1 Qd R 279, the Court of Appeal of Queensland addressed the question of whether a person who was aware of certain facts should be taken to have knowledge of a reasonably available inference from those facts.  Of that proposition Pincus JA said at 283-4 (Moynihan SPJ and Byrne J concurring):

‘Acceptance of that argument must depend on adoption of a construction of section 21(1) which is rather generous to insurers:  that the section means that if an insured knows matter A which is not in itself relevant to insurance, but the insured should reasonably infer from matter A a further matter B which is so relevant, then the duty to disclose matters A and B arises.  This construction is in practical terms little different from reading the introductory part of section 21(1) as if it included the expression “… every matter that is known to or should be inferred by the insured”. 

I have found no authority which supports such a reading, nor does it appear to be one which must be adopted to give section 21(1) a sensible operation.’

725               As to imputed knowledge, in Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1987) 4 ANZ Ins Cas 60-813, Young J said at 74,998:

‘Although the language of section 21 is awkward, in my view it means that if a reasonable person in the circumstances could be expected to know that a matter is relevant it must be disclosed and whether that be the case or not, if the insured actually knows the relevant thing, that is enough.  However, the insured must have actual knowledge of the thing, the mere fact that he ought in the ordinary course of business to have known is insufficient.’

726               Nonetheless, in some cases, knowledge of an agent will be imputed to the principal.  In Peter MacDonald Eggers, Simon Picken and Patrick Foss, Good Faith and Insurance Contracts (2^nd ed), Insurance Law Library, London, 2004, the authors assert at par 13.49:

‘The agents whose knowledge principally is imputed to the assured are those agents who are concerned with the custody, care or status of the subject matter insured, general agents who are so placed with respect to the assured that they may be said to make decisions for the assured generally and agents who are charged with arranging the insurance.’

727               The authors of MacGillivray on Insurance Law (10^th ed) say at par 1812:

‘It is not all agents whose knowledge is imputed in that way for purposes of non-disclosure but only those agents who are “agents to know” that is to say, are responsible for keeping the assured informed about the subject matter of the insurance, either because they are responsible for placing the insurance or because they have the management of it for the assured.  If such an agent owes a duty to communicate information which is relevant to the insurance, but fails to do so, the assured is deemed to know what in the ordinary routine of his business he should have been told if the agent had performed his duty, but he will not be deemed to know facts which, whether or not owing to the deficient organization of the business, no agent was responsible for communicating to him.’

See also Lindsay v CIC Insurance Ltd (1989) 16 NSWLR 673 and Ayoub v Lombard Insurance Co (Aust) Pty Ltd (1989) 5 ANZ Ins Cas 60-933.

728               McNair J discussed the matter at length in Australia and New Zealand Bank Limited v Colonial and Eagles Wharves Limited (1960) 2 Lloyd’s Rep. 241.  In that case his Lordship assumed that at common law, rules derived from the Marine Insurance Act 1906 (Imp) applied to non-marine insurance.  After reference to the authorities, his Lordship observed at 254:

‘These judgments make it clear to my mind that it is not the knowledge of all agents or servants that is imputed to the proposer of any marine insurance, but only the knowledge of quite a limited class, namely, the broker who actually places the insurance, the master or the ship agent, or, to use Lord Halsbury’s phrase, “his general agent for the management of his shipping business.”  On the facts of the present case, Henderson was not within that limited class.  Though, in a sense, the key man in the sense that a mistake by him would mean the failure of the system his duties were almost entirely clerical; it was not established that he had any discretion or executive authority; he was not superior to the head clerks in the warehouses but co-ordinate with them.  He was not, in my judgment, a person within the class of those who were under a duty to report to the company.’

See also Sutton’s Insurance Law in Australia (3^rd ed) at pars 3.183 and 3.184, and Tarr’s Australian Insurance Law at 104-105.  It seems to be generally accepted that the position under the Insurance Contracts Act reflects the common law position.

729               Mr Ryan was responsible for MDRN’s mortgage business.  Mr Blackadder was employed as the General Manager (Finance) or “Lending Manager”.  His duties as set out in his letter of appointment (ex 44) were

‘1.        To source loans directly and through finance brokers and to then assess them for submission to our Private Mortgage System;

2.         Assessment shall include analysis of pertinent financial data provided by each borrower and checking of same, organizing external valuations and on-site visits, checking of CRAA details, liaising and organising QS reports and preparation of loan summaries for investors to peruse;

3.         On construction and development loans to visit the site regularly and check QS reports and updated valuations where necessary;

4.         To liaise with investors concerning queries they may have about any loan proposal submitted;

5.         To liaise and negotiate with borrowers, brokers, valuers and real estate agents concerning any default by the borrower in payment of interest or principal;

6.         To assist our Property Syndication Department in finding suitable investment properties and to perform due diligence in respect of same and to negotiate lending terms with financial institutions.’

730               MDRN has been at pains to point out that Mr Blackadder was a senior employee, receiving a high salary relative to other employees, including employed solicitors.  Clearly, he was expected to assume substantial responsibility in connection with the assessment of loan proposals.  According to ex 44 his contact with potential investors was limited to liaison ‘concerning queries’.  However his duties also included the preparation of investment summaries for distribution to potential investors.  His responsibility for assessing loan proposals and drafting investment summaries placed him at the centre of the mortgage business.  I infer that he had an implied duty to report to the partners as to strengths and weaknesses of each proposal and as to the content of any investment summary.  The applicants and the cross-respondents assert the absence of any system of accountability or supervision.  However I reject that assertion.  Mr Ryan had daily contact with Mr Blackadder.  He read investment summaries before they were distributed.  The other partners also saw copies, although at a later stage.  I infer that Mr Blackadder also had an implied duty to report to the partners concerning any serious irregularity in his area of responsibility, including any matter which might lead to litigation against MDRN or the trustee company.  His knowledge of such matters should be imputed to each of them, subject only to one qualification which is discussed below.  As to the relationship between Mr Ryan and the other partners, Mr Ryan supervised the mortgage business and was responsible for negotiating the cover for it.  In those circumstances it follows that the other partners had imputed knowledge of relevant matters known to Mr Ryan, again subject to one qualification.

731               The general principles to which I have referred are subject to a critical qualification.  In ANZ Bank v Colonial Wharves (supra) McNair J said at 254:

‘There is, however, another answer in law to the third party’s contention on this point, namely, that assuming that he was within the class of persons who were under a duty to report so that his knowledge was to be imputed to his principal, he, on the principle stated in Bell & Anor v Lever Bros Ltd & Ors [1932] A.C. 161, and J C Houghton & Co v Nothard, Lowe & Wills Ltd [1928] A.C. 1 … was under no duty to report his own dereliction of duty, and his knowledge of that dereliction is not to be imputed to his principals.’  Lord Atkin ([1932] A.C. 6, at p 228) puts the matter succinctly in the following passage:

“…  The servant owes a duty not to steal, but, having stolen, is there super-added a duty to confess that he has stolen?  I am satisfied that to imply such a duty would be a departure from the well established usage of mankind and would be to create obligations entirely outside the contemplation of the parties concerned …”.’

732               Sutton observes, concerning that decision, at 339:

‘What had to be considered was what an honest and competent agent would have communicated to the assured in the ordinary course of business, and such an agent would not have had any dishonesty to reveal.’

733               Similarly, MacGillivray observes at 18-16:

‘An agent’s knowledge of his own fraud or misconduct and matters relevant to it will not be imputed to the assured … because it cannot be supposed that in the ordinary course of business an agent will disclose his own fraud, misconduct or serious breach of duty to his principal.  Thus another reason for the decision in Australia and New Zealand Bank v Colonial and Eagle Wharves that the knowledge of the assured’s chief entry clerk concerning the company’s delivery systems was not to be imputed to the assured was that it would have revealed his own misconduct and he had no duty to report that to his superiors.’

734               As the duty to disclose extends only to matters which the insured knows, only matters actually known to a relevant agent will be imputed to him or her.  In Commercial Union Assurance Co of Australia Ltd v Beard (2000) 11 ANZ Ins Cas 61-458, Davies AJA (Meagher JA and Foster AJA concurring) said at 75-259:

‘The terms “known” and “knows” are used in their common law sense.  Their primary denotation refers to that which is actually known; but it would be wrong to import the word “actually” into a provision such as section 21.  The section does not use it.  The terms “known” and “knows” are used in their ordinary sense.  Whether a matter is known is a question of fact for the judge or jury.’

735               In Hammer Waste Pty Ltd v QBE Mutual Ltd [2002] NSWSC 1006, Palmer J referred to that decision and said:

‘… (I)n s 21(1) … the word “know” is used in its ordinary sense; it implies actual, not constructive, knowledge both on the part of the insured and on the part of any agent or employee of the insured whose “knowledge” is to be imputed to the insured.  The obligation to disclose something “known” can attach only to something which, at the time for disclosure, a person actually has in his or her consciousness or else something which exists in some record or other source of information which the person actually knows about and to which the person has access.  So, for example, I “know” my driving licence number for the purposes of s 21(1) … even though I cannot recite it off hand because I actually know that it is to be found in the plastic card in  my wallet.’

736               I return to the three matters which may have required disclosure.  I am satisfied that a reasonable person, in the circumstances, could be expected to know that each of those matters would be relevant to QBE’s decision.  I have indicated with respect to the third of those matters, divergence between contents of the newsletters and actual practice, that I am not satisfied that there was any significant divergence.  However, for reasons which appear below, it is not necessary finally to decide that question. 

737               QBE asserts that Mr Ryan was familiar with the content of the investment summary and knew that Mr Blackadder did not carry out detailed checks of the asset positions of applicants for loans as allegedly asserted in the newsletters, or credit checks against guarantors as asserted in the winter 1999 newsletter.  It is said to follow that he had knowledge which should have been disclosed.  In my view unless asked, Mr Ryan had no duty to disclose either the content of the newsletters or the actual practice which was adopted.  At least for present purposes, neither matter, by itself, exposed either MDRN or QBE to risk.  The relevant matter was the alleged divergence between the two.  As I have said, I do not necessarily accept that there was a significant divergence.  It is at least arguable that the practice as described by Mr Blackadder and Mr Ryan was a form of checking in the sense in which the term was used in the newsletters.  Potential investors may have understood the newsletters to imply something more, but for present purposes we are looking at the subjective states of mind of Mr Blackadder and Mr Ryan.

738               Once it is accepted that the language of the newsletters is not as precise in meaning as is submitted by QBE (and the applicants), and that Mr Blackadder’s practice varied, depending upon the exigencies of a particular application, it becomes very difficult to identify the point at which divergence between statement and practice may have occurred.  If the fact in issue were whether or not there was such a divergence, it would be necessary to determine that question.  However, for present purposes, it is only necessary to determine whether or not either Mr Ryan or Mr Blackadder knew that there was a divergence.  Whilst I have no doubt that Mr Blackadder was conscious of his own fraud, I am not satisfied that the practice which he otherwise followed, or claimed to have followed, was, to his knowledge, inconsistent with the statements in the newsletters.  It is probable that in providing information for the autumn 1999 newsletter, he used the expression “checking” (or whatever expression he used to convey that idea) to describe the approach which he described in evidence.  Nothing in his evidence suggested to me that he was aware at the time of any divergence between those statements and the practice which he actually followed.  Whilst it may be arguable that the interpretation placed by QBE (and the applicants) upon the newsletters, particularly the autumn 1999 newsletter, is correct, it does not follow that Mr Blackadder held that view.  It also does not follow that he was aware of any divergence between such statements and his practice.  I am similarly not satisfied that Mr Ryan was aware of any such divergence.  In explaining this view I should say something about certain assumptions which appear to underlie much of the applicants’ case and also those of both cross-respondents. 

739               From time to time in this case, it has been suggested or assumed that the respondents were simply unconcerned about the investors’ interests, that they were concerned only to make a profit for themselves.  No doubt such a short-term view often guides the actions of those who attract the attention of ASIC.  However it is quite unlikely that these respondents had that attitude.  MDRN is a firm of solicitors practising in the suburbs of Brisbane.  They have done so for some years and, as far as can be seen, propose to continue doing so.  No doubt the firm’s reputation is an important asset.  The mortgage business was primarily marketed to clients of the legal practice.  The evidence discloses that numerous investors participated in loans on more than one occasion, reflecting a degree of satisfaction with their previous investments.  It is most unlikely that the MDRN partners intended to throw away both their professional reputation and their mortgage business for short-term gains derived from careless assessment of proposed loans.  It cannot be seriously suggested that they expected Mr Blackadder to do anything other than ensure that investments would be secure, and that investors would continue to be clients of both the legal practice and the mortgage business.

740               I am not saying that lawyers are presumptively incapable of fraud or recklessness.  I am rather saying that it is unlikely that the MDRN partners would have seen it as being in their interests to take a quick profit at the expense of their clients and investors.  Mr Ryan’s evidence must be understood in that context.  No doubt he expected Mr Blackadder to assess loan applications in a way which would minimize the risk of loss to investors who were, almost by definition, making speculative loans.  Mr Ryan understood the ten point plan to be an explanation of Mr Blackadder’s general approach.  I see no reason to conclude that he was conscious of any departure from his understanding of it or other aspects of the newsletters.  It follows that I am not satisfied that he was aware that the statements concerning the asset positions of Mr Rivett and Project Results had not been checked (as he understood the practice) or that he was aware of the inaccuracies in the investment summary concerning those matters and the pre-sale of units.  He was certainly not aware of Mr Blackadder’s fraud.  I therefore conclude that Mr Ryan possessed no knowledge which he failed to communicate to QBE.  It follows that no such knowledge can be imputed to the other partners.

741               As to Mr Blackadder’s knowledge, for reasons which I have given, I am also not satisfied that, save for his fraud, he was aware of any divergence between statements in the newsletters and his practice.  As to his fraud, his knowledge of it cannot be imputed to the MDRN partners. I consider that his negligence in connection with the statements about the pre-sale of units was sufficiently serious to be described as serious misconduct.  As I have said, it was obviously an important topic in the loan application, the investment summary and for the purposes of the valuation.  Knowledge of that matter is also not to be imputed to the MDRN partners. 

742               It follows that there was no failure to disclose or misrepresentation for the purposes of s 28 of the Insurance Contracts Act.

The 1998 policy

743               I should say something about the alternative claim under the 1998 policy, relying on s 54 of the Insurance Contracts Act.  The 1998 policy covered claims notified during the relevant period of cover or circumstances which might give rise to such a claim, of which circumstances the insured became aware during the relevant period of cover, and of which notice was given.  Section 54 might operate to excuse non-notification, but the cover will only extend to circumstances of which the insured became aware during the period of cover.  I am not persuaded that any matter came to the knowledge of any of the partners during the period of cover of the 1998 policy, of which they could have given notice to QBE.  It therefore follows that cl 5.2 of the policy was not engaged so as to extend cover under the 1998 policy to claims arising out of any such matter.   Section 54 has no relevant operation.

Severability and Non-Imputation – cl 2.2

744               I should also say something about cl 2.2 of the policy.  It provided:

‘QBE agrees that where this Policy insures more than one party, any conduct on the part of any party or parties whereby such party or parties:

(a)       failed to comply with the duty of disclosure in terms of the Insurance Contracts Act 1984; or

(b)       made a misrepresentation to QBE before this contract of insurance was entered into; or

(c)        failed to comply with any terms or conditions of this Policy;

shall not prejudice the right of the remaining parties to indemnity as may be provided by this policy.  PROVIDED ALWAYS THAT such remaining parties shall:

(a)       be entirely innocent of and have had no prior knowledge of any such conduct; and

(b)       as soon as is reasonably practicable after becoming aware of any such conduct, advise QBE in writing of all known facts in relation to such conduct.’

745               MDRN submits that the clause exempts the partners, other than Mr Ryan, from the consequences of non-disclosure by them of information known to him.  My conclusions as to the state of his knowledge mean that I need not consider that argument.  However I should say a little about the clause.  No doubt it would excuse the other partners from the consequences of any non-disclosure or misrepresentation by Mr Ryan.  However each of the other partners had his own duty to disclose and not misrepresent.  The question is whether cl 2.2 excused them from disclosing a matter known to Mr Ryan but not disclosed to them.

746               Prima facie I am inclined to think that the clause would not operate to protect the other partners from their own failure to disclose such information, knowledge of which was imputed to them by virtue of its being within Mr Ryan’s knowledge.  However use of the expression ‘non-imputation’ in the side note might suggest to the contrary. As with Mr Blackadder, knowledge of fraud or serious breach of duty by Mr Ryan would not be imputed to the other partners.  As I have said, it is not necessary to decide the question.

Recklessness

747               I have previously referred to s 4 of the policy which deals with “Exclusions”.  It provided that:

‘QBE shall not be liable under this Policy to provide indemnity in respect of any Claim against the Insured:

‘4.1      …

4.2       directly or indirectly based upon, attributable to, or in consequence of:

(a)        any actual or alleged dishonest fraudulent criminal or malicious act or omission of any Insured or their consultants, subcontractors or agents; or

(b)        any act or omission of any Insured or their consultants, subcontractors or agents committed or alleged to have been committed with a reckless disregard for the consequences thereof; or

(c)        wilful breach of any statute, contract or duty by any Insured or their consultants, subcontractors or agents.’

748               However cl 2.3 extended the cover as follows:

‘QBE agrees to provide coverage in respect of any Claim which would otherwise be excluded by reason of exclusion 4.2 (Fraud and Dishonesty).  PROVIDED ALWAYS THAT:

(a)       such coverage shall not be provided to any person committing or condoning any act, omission or breach excluded by reason of Exclusion 4.2 (Fraud and Dishonesty);

(b)       such coverage shall not apply to loss of money, negotiable instruments, bearer bonds or coupons stamps, bank or currency notes.’

749               This aspect of the case has taken different forms at different times.  In QBE’s defence it pleaded that it was not obliged to indemnify MDRN because it had been reckless, relying on cl 4.2 without regard to the extension clause, cl 2.3.  In reply MDRN pleaded the latter clause.  In its submissions QBE apparently accepted this difficulty and abandoned any allegation of recklessness, other than as against Mr Ryan.  It is said that he condoned ‘reckless acts and omissions that gave rise to the applicants’ claims so that MDRN are not assisted by cl 2.3.’

750               There are two difficulties with this approach. Firstly, it seems to revert to the pleaded case of reliance on cl 4.2 against all MDRN partners.  However the heading of that part of the submissions and other aspects of them, including par 77, suggest that the defence is only relied upon against Mr Ryan.  Secondly, the argument seems to be that Mr Ryan condoned conduct by MDRN, implying that he condoned his own conduct, particularly as he was the partner primarily responsible for the mortgage business.  A third difficulty emerges from the written submissions.  In some places, it seems to be asserted that Mr Ryan’s condonation was reckless.  Clause 2.3 of the policy deals relevantly with condonation of recklessness, not reckless condonation of other conduct.  The best that I can do with this aspect of the case is to treat it as an allegation that Mr Ryan condoned recklessness by Mr Blackadder, although such a case is probably not pleaded and is only obliquely raised in QBE’s submissions.  It may also be intended to allege actual recklessness by Mr Ryan.  If proven, such conduct would lead to exclusion of cover pursuant to cl 4.2(b).  Clause 2.3 would not extend cover to Mr Ryan to the extent that his own conduct was reckless.  No question of condonation would arise in that context.  I should point out that in the context of cll 2.3 and 4.2, the words ‘Fraud and Dishonesty’ seem to include recklessness.

751               It is necessary to say something about condonation.  The word previously had a particular legal meaning in connection with matrimonial proceedings.  It concerned the attitude of one spouse to the other’s adultery or other matrimonial offence.  The term also has a specialized meaning in the law concerning the relationship of master and servant.  According to the Shorter Oxford Dictionary, to condone is to ‘Forgive or overlook’, ‘Make appear forgiveable’, ‘Approve, sanction, esp reluctantly; acquiesce in’.  Clearly, mere knowledge of relevant misconduct will not constitute condonation, but knowledge will be necessary in order that there be condonation. 

752               In its written submissions, QBE purports to rely upon the factual matters referred to in pars 22, 25, 26, 28, 29, 34 and 35 of its submissions.  Once again that comprehensive reference to multiple allegations raises many possible ways of arguing the case.  However the submission seems to be limited to the allegation that loans were not assessed in the way outlined in the newsletters.  As the applicants eventually relied only upon the autumn 1999 newsletter, it is not necessary, in this regard, to refer to the winter 1999 newsletter.  No relevant claim arises out of its contents.  It seems to be alleged that Mr Ryan condoned Mr Blackadder’s recklessness in adopting assessment practices which were inconsistent with statements in the newsletter.  I have previously concluded that Mr Ryan was not aware of any such inconsistency.  There can therefore be no question of condonation.  Of course, I am also not persuaded that there was any inconsistency.

753               As to the question of Mr Ryan’s own recklessness, concerning inconsistent practices, I have found that he was not aware of them (if there were any).  Mr Ryan could only have been reckless if his lack of knowledge was itself reckless.  I see no basis for such a conclusion.  It may be arguable that his supervision of Mr Blackadder was inadequate, but given the latter’s experience and background, he was not reckless.

Conclusion

754               There will be judgment for damages in favour of each of the applicants, other than the twentieth and twenty-first applicants, both on the statutory cause of action and for negligent misstatement.  The damages should be calculated in accordance with the method identified in my reasons.  After delivering these reasons I will adjourn the matter to enable the parties to carry out the appropriate calculations. 

755               As to the cross-claims, my understanding is that MDRN should recover judgment against St Paul in the amount of the seventh applicant’s claim.  It should recover judgment against QBE in respect of all of the amounts recovered against it by the applicants.  In the case of the cross-claims there may be outstanding issues concerning limits on the amount of the cover and/or excesses.  Some such issues were raised in the pleadings but not addressed in argument.  I will receive further submissions if necessary.  It may also be necessary to receive further submissions concerning orders to be made as between St Paul and QBE.

756               The claims and cross-claims are multi-faceted.  I may have overlooked some aspects.  It is important that the parties identify any further findings of fact which they require so that, to the extent that I think it appropriate, I can address them at this stage, whilst the evidence is relatively fresh in my memory.  I wish to avoid the situation in which further findings are necessary at some time in the future.  The question of costs will also have to be addressed.  I suspect that it will be necessary to receive further submissions in that regard.

757               In those circumstances it is my intention to publish these reasons and then to adjourn the matter.  This will enable the parties to calculate the quantum of damages for each successful applicant, identify any requirements for further findings, otherwise consider the forms of order to be made and address the question of costs.

I certify that the preceding seven hundred and fifty-seven (757) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Dowsett.

 

 

 

 

Associate:

 

Dated:              12 May 2006

 

Counsel for the Applicants:	Mr P E Hack SC Mr P J Roney
Solicitor for the Applicants:	Australian Insurance and Investment Commission
Counsel for the Respondents:	Mr P Dunning Ms E Longbottom
Solicitor for the Respondents:	McCarthy Durie Ryan Neil
Counsel for the First Cross-Respondent:	Mr P Applegarth SC Mr M Brady
Solicitor for the First Cross-Respondent:	Minter Ellison
Counsel for the Second Cross-Respondent:	Mr H Fraser QC Mr K Barlow
Solicitor for the Second Cross-Respondent:	Clayton Utz
Dates of Hearing:	20-24, 27-30 September 2004 7 October 2004 4-8, 11-15, 18-22 April 2005
Date of Judgment:	12 May 2006