The CBA has apparently accepted that the Bank itself had a duty which it – not Storm - had to perform, to make margin calls and that it failed to fulfil it.
Justice Rares made a similar finding in Goodridge’s case against Macquarie Bank, decided two weeks ago, finding that where the Bank had not exercised its Power of Sale in accordance with a margin loan contract, it had to keep the loan on foot until it did so or until the loan expired.
Rares J. decided that the client had to be put back in the position at the date of the Judgment, where it still retained the assets which had been wrongly sold from under them.
By contrast, the CBA’s offer to margin borrowers produces less than the minimum formula available to a Court for the calculation of damages.
SICAG’s lawyers, Slater & Gordon, have endorsed “agreed compensation principles” despite there being a number of causes of action available to Storm clients against the Bank and approaches to the calculation of damages which would produce an outcome similar to Justice Rares’ verdict in Goodridge’s case and much more than on offer to Storm margin borrowers from the CBA.
The Bank has not even offered to reinstate the Storm margin borrowers fully to the position which they should have been in, had the CBA made a valid margin call. It has taken 90% as the LVR at which a margin call should have been made (which was the imprudently high margin call threshold agreed between the Bank and Storm but not formally notified by the Bank to Storm clients) and then has only offered to pay back a percentage, just 90%, not 100%, of the difference between where the client would have been had a margin call been made, as opposed to where the client finished up.
Writing-off negative equity debt in these circumstances is hardly an act of generosity. The interest rate which the Bank is proposing to apply to the payback is not the 9.5% interest rate which the Courts apply to Judgment Debts but we believe, a much lower rate.
TESTING OF ALL LEGAL ISSUES
The Slater & Gordon/CBA media release states that “compensation principles negotiated between the Bank and Slater & Gordon, followed an extensive “test case” process, which involved six (6) typical claims. During the test case, all relevant legal issues, it is claimed, were exhaustively tested before an eminent, independent panel of lawyers.
All relevant legal issues do not appear to have been exhaustively tested, from the term of the Slater & Gordon CBA compact.
THE CLASS ACTION, COSTS AND FUNDING
Levitt Robinson, which represents a significant number of clients, involved in the resolution process – approximately 70 – was formally denied the right to participate in the test case presentation, or event to audience what was being presented. The test cases were heard by Ian Callinan, QC, Roger Gyles, AO, QC and Robert Gotterson, QC, ‘in camera’ and apart from Slater & Gordon and its Counsel, the CBA representatives and the Bank’s Counsel and the Panel in attendance.
There are a number of issues which do not appear to have been addressed, including the entire legality of the “scheme” in operation between the CBA/Storm and to which Storm clients contributed their equity.
Misleading and deceptive conduct, including by omission, in terms of representations allegedly made by the Bank or to which the Bank was an alleged accessory and the basis on which damages would flow from such allegations being proved, also were evidently not tested in the closed door hearing.
There is no reason to believe from anything written by Slater & Gordon or published by the CBA or from the way in which “the deal” has been presented, in particular, that these matters had been the subject of the “test case” process.
To-date the Resolution process has been conducted in a manner which has been both exclusive and restrictive – excluding participants other than Slater & Gordon and the Bank, and restricted to them.
We do not even know for certain the nature of the six (6) cases which were presented, how representative they were and what factual categories they represented or legal issues they threw up.
From Levitt Robinson’s point of view, the issue about the Bank’s liability goes far beyond the mere management of margin loans but rather, cuts to the nature of the relationship between the Commonwealth Bank, Storm and Storm clients and how those alleged relationships may have affected and infected the entire process of margin borrowing, from the point of making an imprudent equity/home loan all the way down to the failure to make margin calls.
“AGREED COMPENSATION PRINCIPLES” – HOW THEY WILL WORK
It is unclear how the system will work for people whose homes were both over-valued and who would not have received their loans had ordinary serviceability tests been applied.
It is also unclear when “hardship provisions” will cut in, rather than a lower and more realistic valuation being used by the CBA as the benchmark for a mortgage to be rewritten.
What happens if the real estate valuation was realistic but the ability to service the debt was substantially or entirely based upon the dividend expected to be received from Storm-branded investment funds?
The Slater & Gordon/CBA deal is also silent on how margin borrowers’ break costs on fixed term loans and the reversal of the pre-payment of interest will be dealt with, given that not only were these substantial costs imposed but also, Storm clients who lost virtually everything as a result of the repayment to them of prepaid interest and its application towards Bank debt, now have a substantial income tax liability as well. What would have been a deduction was converted back to income.
Who is going to pay the tax?
SUPERANNUATION
Where elderly Storm clients used their superannuation funds as equity to raise margin loans to borrow against to invest in Storm-branded index funds, the only compensation being offered appears to be what is generally being offered to margin borrowers: just 90% of that figure or the difference between 90% and roughly 100% of their equity, namely somewhere around 9% of their equity at near the bottom of the stock market.
This means the destitution of the elderly superannuees through the operation of the CBA/Storm Scheme has not been fairly or adequately addressed. The same comments with respect to break costs and tax imposts, relate to them.
THROWING DOWN THE GAUNTLET
On 5 February, 2010, Alexandra Chubb of the CBA, on behalf of the Resolution Scheme, indicated that “the Bank may consider offering Borrower Lawyers with a comparatively large number of clients, such as Levitt Robinson, a small number, (approximately two), of their own test cases.”
Levitt Robinson has briefed former Federal Court Judge, the Hon. Ron Merkel, QC, Noel Hutley, SC, Jeremy Stoljar, SC, Kate Eastman, Alistair Pound and Daniel Klineberg of Counsel. Phillip Crutchfield, SC has also lent his assistance, as has Diana Harding of Counsel.
Levitt Robinson, on behalf of its participating clients, is now offering to have the Statement of Claim, which we proposed to file in the Federal Court as a Class Action, dealt with on a preliminary non-binding basis, before former Justices Callinan and Gyles and Robert Gotterson, QC, to see whether it can operate as the springboard to an improved settlement deal.
We would propose to have three (3) representative cases considered by the Panel and that the determination of the Panel with respect to the submissions made, should be the basis for the negotiation of an improved compensation offer to our clients and indeed, to all CBA client participants in the resolution process.
However, this offer, nevertheless is subject to our reserving our right to agitate the case in the Federal Court as a Class Action if an acceptable outcome cannot be produced through the current Resolution process.
THE CLASS ACTION, COSTS AND FUNDING
Levitt Robinson believes that it will be in a position to file the Class Action, prior to Easter 2010.
In the Federal Court, matters are case-managed by a Judge and are most often heard within 12 months.
There may be appeals and there may be points of law taken by the CBA along the way, which could slow things down. However, the vast majority of litigation is settled without ever proceedings to a trial and participation in a “Resolution Scheme”, essentially run by the Defendant, has never before been a condition for a matter proceeding to a settlement.
There is no reason to believe that the Bank would be precluded from settling a claim whether there was a Resolution Scheme or not.
We have already discussed the matter with a major litigation funder who told us that, subject to Counsel’s advice, her company would wish to fund the litigation. We anticipate that Senior Counsel’s advice, when given, will result in a decision being made to proceed to fund the litigation.
The way litigation funding works is that all downside risk is removed and you are not required to contribute funds to the running of the case but your ultimate compensation is reduced by a percentage, retained by the funder, who also recovers its costs in the event of a successful outcome.
A funder cannot look to a Plaintiff for any contribution towards the costs which the funder has outlaid, except from the damages or settlement monies which may become available.
The client is not required to provide any guarantee to the funder, or any security beyond the claim which it has.
The funding arrangement would also provide protection against any adverse costs orders, eg. any order for costs made in favour of the Bank.
Every detail with respect to the procedure to be followed in order to found a Class Action and to ensure that it is sustainable and has sound prospects of success is being attended to by a team of eminent jurists whom we have hired, both in Sydney and Melbourne.
It is to be noted that the Goodridge Case was heard in the Federal Court and took less than a year to come on for trial against the Macquarie Bank and Leveraged Equities.
Whilst it is true that there are some exceptional cases which can drag out, that is probably even more true of cases involving personal injuries. Our Counsel are of a calibre that they would not permit this to occur.
To-date, we have been able to fund the matter going forward through some of our devoted and committed clients who still retain some resources, without the need yet to have had recourse to litigation funding. Their contributions to-date would need to be repaid with modest (bank rate) interest, from any global settlement achieved in the Class Action.
Dated: 24 February, 2010
With compliments
LEVITT ROBINSON
STEWART A. LEVITT
Principal Solicitor & Advocate
