Asset lending is done on the basis of the value of the assets securing the loan without regard to the borrower’s capacity to repay loan instalments because adequate security is available in the event of default.
Jams is such a lender who advanced $1.6 mil to Jeff Stubbings’ company that had had no assets and had never traded, on security of his personal guarantee and mortgages over his other properties.
Stubbings owned two houses in Melbourne mortgaged to CBA but was financially illiterate. He lived in rental premises on the Mornington Peninsula where he worked repairing boats for the owner of the property.
Due to a falling out with the owner, he ceased work, lost the rental and sought to purchase another property nearby.
After a home loan application to ANZ was rejected for lack of financial records, he was introduced by Mr Zourkas – a broker of ‘second tier’ finance – to AJ Lawyers whose business it was “to facilitate the making of secured loans” by lending syndicates such as Jams.
After discussions with the AJ introducer as to how he “would have no problem” securing finance and manage repayment, Stubbings signed a contract in June 2015 to purchase a local property for $900,000.
AJ Lawyers secured a valuation of the two Melbourne properties and that at Mornington Peninsula at $1,570,000 and then issued two letters of offer on behalf of Jams to provide first and second mortgage finance to the company on the security of a personal guarantee and mortgages from Stubbings.
The first mortgage was for $1.6 mil at an interest rate of 10% (17% in default). A second mortgage for $134k an interest rate of 18% (25% in default) funded the introducer’s consultancy fees, loan procuration fees, and AJ’s legal costs together with the first month’s interest.
In reality, the loans threatened Stubbing’s equity in his two homes with high repayment instalments – that he never had any prospect of meeting – and with and “obscene” procuration and legal fees totalling $59k.
Jams approved the loans with no financial information from Stubbings – alleged misrepresentation by intermediary as to surplus funds
Jams eventually liquidated the secured properties to remedy the inevitable default on the loans.
Stubbings resisted a summary judgment application brought in September 2016 alleged that the opportunistic loan was made in reliance of certificates of independent financial and legal advice in circumstances where adequate advice was withheld. He also alleged misrepresentation by the intermediary introducer, accountant and solicitors as to the availability of surplus funds to meet repayments.
The primary judge found that Stubbings’ indebtedness had been procured by unconscionable conduct on the part of the lawyers and others. That decision was overturned by Victoria’s Court of Appeal.
Stubbings appealed the High Court of Australia where Jams argued – and Stubbings agreed – that there is nothing inherently unconscionable about asset-based lending.
The borrower contended though that the particular circumstances of the loans to the company and Stubbings’ guarantee made the enforcement of the lender’s rights unconscionable.
Chief Justice Susan Kiefel and Justices Patrick Keane and Jacqueline Gleeson found the borrower had no understanding of his rights and obligations or of the financial implications of the loans and was “completely out of his depth” in understanding the features of the transaction.
They ruled that AJ’s Myer Jeruzalski had “knowingly and deliberately shut his eyes” to those circumstances and his conduct could be attributed to his lender principal.
“The arrangement secured the only outcome that it objectively could: the enrichment of individuals at the expense of the appellant and his loss of two properties and potentially also his home. The appellant was never warned that this was a likely, or indeed even a possible, outcome. Such a warning or explanation should have been given. In such circumstances, there has been unconscionable exploitation of the appellant’s special disadvantage. The primary judge’s finding that AJ Lawyer’s conduct was unconscionable was correct”.
“Not only was the fee paid to Mr Zourkas ‘obscene’, but the same description should also apply to the fees charged by AJ Lawyers,” noted the appeal judges.
The orders granting relief to Stubbings made by the primary judge in the Victorian Supreme court – that Mr Stubbings be returned to a pre-transaction position of holding a property with equity of $530k – were reinstated.