A. Levitt Robinson’s response to Passages Extracted from Slater & Gordon Presentation, Concerning the Federal Court Decision in Goodridge
Slater & Gordon:
- "You may have recently read media reports regarding a Federal Court judgment concerning a Macquarie Bank margin loan of a Sydney barrister. The claimant’s name was Goodridge.
“We examined this judgment in detail before finalizing our agreement with the Bank. The judgment reinforces that the arguments we advanced before the Independent Panel were correct and that the key elements of the Proposal Framework are entirely appropriate in the case of Storm investors.
“Although still potentially subject to appeal, the Court’s decision has clarified both the liability of a margin lender to a customer as well as the way to approach the remedy that should apply when a margin lender fails to give proper notice of a margin call. The Proposal Framework adopts broadly the same approach adopted by the Court. That is, where a lender has failed to give proper notice of margin call, the borrower should be put back in a position, at least as good as the position he or she would have been in, had the lender given them proper notice."
Levitt Robinson’s comment:
Unfortunately, we cannot test the Slater & Gordon claim that the arguments which Slater & Gordon advanced before the Independent Panel were correct because no one is prepared to publish them to us and we were locked out of the process. The decision of Rares J. appears to make it clear that the CBA would be held liable at law, not just as Slater & Gordon asserts, for the failure to give proper notice of margin call but rather, as per Rares J. in Goodridge’s Case, for the wrongful exercise of Power of Sale.
It is wrong for Slater & Gordon to advance the proposition that the Court found in Goodridge’s Case that the borrower should be put back in a position at least as good as the position he would have been in, had the lender given them proper notice.
That was not the decision of the Court.
His Honour found that the victim, Goodridge, was entitled to be restored to the position that he would have been in had the breach not occurred, ie. the sale of his securities without margin call; not just to be restored to the position he would have been in had the Bank made a margin call.
As expressed by Rares J.:
“His (Goodridge’s) damage was not just the loss of securities when they were wrongly sold but the deprivation of his legal entitlement to be provided with a margin loan to hold those securities. He lost both and is entitled to be put in the position he would have had if the breach had not occurred.” (para. 227 at page 73).
Slater & Gordon:
"The Court found that the margin call given to Mr Goodridge by Leveraged Equities was invalid for several reasons. One of them related to the legal doctrine of "novation". This is connected with Macquarie Bank’s agreement to sell its "margin loans portfolio” to Leveraged Equities. The Court held that aspects of this agreement were invalid and consequently the transfer of loans from Macquarie to Leveraged Equities was legally ineffective. Leveraged Equities’ therefore did not have power to make a margin call to Mr Goodridge rendering it invalid. This was an issue which attracted much of the Court's attention (and much media attention), but this is not an issue in your case. The other arguments accepted in Goodridge relating to invalidity of margin calls were advanced by Slater & Gordon in the test case process and are central to the treatment of margin loans in the Proposal Framework.
Levitt Robinson’s comment:
It is true that there were specific facts which provided an additional reason why His Honour, Rares J. made the findings which he did in favour of Goodridge but quite separate from his findings with regard to the transfer of loans from Macquarie to Leveraged Equities and the impact that they had, His Honour made a number of other findings, which gave direct support to the case against CBA and the case under preparation against Macquarie.
An additional matter which assists CBA Storm clients is that there is a letter from Craig Keary, General Manager of CGI to Emmanuel Cassimatis, dated 18 May, 2007, wherein it was written that CGI would maintain the 80% LVR and 10% buffer for existing business retained or newly written, in respect of specific clients, but there would be a requirement imposed that “Storm Financial will not gear a client above 65%” and that: “(I)n the unlikely event of a margin call, Colonial Geared Investments and Storm Financial will work in partnership to clear the margin call.”
This agreement between Storm and CGI makes it clear that the Bank knew what was prudent but failed to follow its prescription or to convey to its own customers what its requirements would be and to ensure that its lending parameters to CBA Storm clients were applied in accordance with its own prescriptions.
It is noteworthy that in writing of the effect of the deal between Slater & Gordon and the Bank in the Resolution Scheme, the Bank has assumed a notional margin call at 90%, not 80% or 65%, for that matter. In the event, the CBA exercised Power of Sale (unlawfully) without making a margin call at any point.
Slater & Gordon:
“Crucially the Court accepted Mr. Goodridge’s evidence that he had the capacity to meet the relevant margin call. Mr Goodridge had not only recently met a margin call, he also demonstrated that he had a strategy to ‘ride out the market downturn’ and most importantly that he had access to up to as much as $400,000 at short notice. Furthermore, prior to receiving a margin call Mr. Goodridge consolidated his investments into a single stock (Macquarie Country Wide Trust), a stock that he had identified as robust enough to survive the downturn. The performance of this stock meant that he did not enter into margin call until February 2009 (just before the very bottom of the market which occurred in early March 2009). The judge also found that Mr Goodridge’s loan would not have been subject to any further margin calls.”
Levitt Robinson’s comment:
While Rares J. did find that Mr Goodridge had access to borrowings of $400,000.00 from a friend and that the friend was likely to honour a commitment to lend him $400,000.00, His Honour nevertheless ruled that:
“Any damage which results from a breach of contract and was reasonably in the contemplation of the parties when the contract was made, is recoverable, even thought he claimant’s impecuniosity contributed to it: Burns v MAN Automotive (Aust) Pty Limited (1986) 161 CLR 653 at 658 to 659 per Gibbs, CJ. The Chief Justice held that a wrongdoer is liable for the consequences flowing from his wrongful act, notwithstanding that the victim was unable, because of lack of funds, to take the steps to mitigate his loss: Burns 161 CLR at 659, see too at 674 to 675 per: Brennan J. (para. 228 at page 73 in Goodridge’s case).”
Slater & Gordon:
"First, Storm investors most often entered margin calls in the second half of 2008. Our work has shown that most would have faced several substantial margin calls before the market ‘bottomed out’. Secondly, the Storm model encouraged investors to be highly leveraged. Very few clients had access to sufficient cash reserves available at short notice. Thirdly, Storm was encouraging investors to “convert to cash” from about October 2008. Overwhelmingly, Storm investors followed Storm's advice. Converting to cash is inconsistent with an intention to meet margin calls when made.”
Levitt Robinson’s comment:
It was not only Storm which encouraged CBA Storm clients to be highly leveraged. The Commonwealth Bank worked with Storm to achieve that outcome. Indeed, the elasticity of lending practices permitted by the Bank, was spelled out in the Letter of Agreement, dated 18 May, 2007, co-signed by Craig Keary, General Manager of CGI and Emmanuel Cassimatis for Storm. It specified that:
“Storm Financial will not gear a client above 65%. Should a client find themselves at LVR of 65% or above, then any additional gearing will only occur if the client’s buffer increases.”
CBA endorsed the Storm strategy to the extent of even setting up a dedicated branch at Aitkenvale at the beginning of July,2008 for Storm CBA clients:
Cassimatis and Keary signed-off on the following:
“Storm Financial must…advise the client that a departure from Storm’s advised strategy will lead to a rebalancing of their facilities with Colonial Geared Investments.” (18 May, 2007 Letter of Agreement).
It is true that Storm obtained authorities from clients to convert to cash, from about 8 October, 2008, but neither the Bank nor Storm, in their “partnership” or otherwise, acted on those authorities in a timely manner - hence the disaster which befell Storm Index Fund Clients, with CGI Margin Loans.
Moreover, the signed client authorities did not relieve the CBA of its obligation to discharge its contractual obligations to its clients, namely NOT to exercise a Power of Sale before or without giving reasonable notice to its clients, via margin call.
Slater & Gordon:
"Fifthly, while there has been a marked improvement in the Australian equity market in the last 12 months that improvement has largely returned the market (and broad based indexes) to the levels they were at immediately prior to the events of late 2008.
One of the claims examined by the Independent Panel during the test case process involved a borrower who had access to up to $350,000 in cash and who had expressly declined to follow Storm’s advice to convert to cash. Tellingly, an assessment of his situation demonstrated that he would likely have needed up to about $450,000 to have met all of the margin calls that would have occurred in his loan between October 2008 and March 2009. The Independent Panel was not persuaded that the borrower could (or would) have met the calls.
For these reasons, the Proposal Framework generally recovers 90% of the equity in each borrower’s portfolio when the first margin call was made to them. Importantly, if you believe that you would and could have remained in the market the Proposal Framework entitles you to press that claim before the Independent Panel.
Importantly, borrowers who elect to take that course will need to present compelling evidence of both their capacity to meet each call as well as evidence demonstrating that this is what is likely to have occurred, rather than a view formed with the benefit of hindsight."
Levitt Robinson’s Comment:
Again, Slater & Gordon is incorrectly asserting that the Rares Judgment is authority for the proposition that damages are to be calculated on the basis that the CBA had performed according to its contractual obligations, rather than for victims to be compensated in full for the loss which they suffered because the Bank had totally failed to perform its contractual obligations.
As stated by Rares J. at paragraph 227 on page 73:
“His (Goodridge’s) damage was not just the loss of securities, when they were wrongly sold but the deprivation of his legal entitlement to be provided with a margin loan to hold those securities. He lost both and is entitled to be put in the position he would have had if the breach had not occurred.”
In para. 231, His Honour stated:
“A banker that breaches its existing contractual obligations to provide finance to its customer, force selling his property and then alleges the customer failed to mitigate his loss by not buying that property back then and there, must show that this highly unlikely scenario has an air of reality. Without finance, Mr Goodridge could not buy back stock, nor is it sufficient that he had some finance. Mr Firth’s offer was not equivalent to and fell far short of a contract with a banker to provide a margin loan facility of $4.8 million, allowing him to purchase MCW Trust Units with a Loan Valuation Ratio of 70%...After the breakdown in his relationship with his financier on 24 February, Mr Goodridge could not reasonable be expected to have confidence in borrowing from it and committing Mr Firth’s loan in an effort to recoup his loss…If as a result of the treatment of Mr Goodridge, the damages the Respondent must pay or the sum that they must now outlay, has increased, they have only themselves to blame, not him.” (para. 232, page 74)
B. FURTHER CONSIDERATION OF GOODRIDGE v MACQUARIE BANK LIMITED [2010] FCA 67 per: RARES J., DECIDED 12/02/2010 IN THE FEDERAL COURT OF AUSTRALIA, AT SYDNEY
- A factor which weighed in favour of Mr Ross Goodridge in Goodridge v Macquarie Bank Limited (“Goodridge’s Case”), was the fact that Mr Goodridge, if given the minimum time allowed under the Macquarie Loan and Security Agreement to have met a margin call, would have been in a position to have raised the funds by way of a loan from a friend (para. 58) and Rares J. (the Judge in Goodridge’s Case), relied on the decision of Lord MacMillan in the House of Lords Decision of Banco de Portugal v Waterlow and Sons Limited [1932] AC 452 at 506, to this effect:
“The law is satisfied if the party placed in a difficult situation by reason of the breach of a duty owed to him has acted reasonably in the adoption of remedial measures, and he will not be held disentitled to recover the costs of such measures, merely because the party in breach can suggest that other measures less burdensome to him might have been taken.”
In other words, a party whose breach of contract occasions difficulty cannot complain that the measures which were taken by the victim’s breach, to deal with the consequences of the breach, were not the best, least expensive or burdensome which could have been taken. (para. 62 at page 22 of Goodridge’s Case).
But this was in the context of a margin call being made to Mr Goodridge with inadequate notice; not of Mr Goodridge being sold down without the making of any margin call at all.
- Rares J. believed Mr Goodridge had set in train an arrangement whereby he could borrow $400,000.00 from a friend, Mr Firth, to meet a margin call and Mr Firth would probably be good for his word.
- Rares J. also found at paras. 85 and 86, that the Bank had to give the minimum period of notice of a margin call, provided for in its loan and security documents and since it had not done so, “no event of default could have occurred”, until the contractual notice period had expired.
- At para. 88, His Honour found that:
“Of course, it is not possible to assign obligations under a contract. Only rights can be assigned.”
The implications for this finding are that neither Macquarie Bank nor CBA could have assigned the obligation to make a margin call to Storm.
- At para. 173 His Honour, Rares J. referred to the principle in Federal Commissioner of Taxation v Orica Limited [1998] 194 CLR 500 at 513, per: Brennan, CJ and at page 530 (paras. 67 and 68) per Gaudron, McHugh, Kirby and Hayne, JJ to the effect that liabilities to pay debts and obligations are not assignable. And then at para. 176, applying this principle, Rares J. found that:
“However, because its obligation to provide the loan or further advances to Mr Goodridge had not been transferred, the Bank remained bound to him under the Loan and Security Agreement.”
- Then at para. 183, page 60:
“His (Goodridge) agreement was incapable of assignment since it contained not only rights but also obligations that the Bank owed to Mr Goodridge.”
- In considering whether or not Leveraged Equities had acted unconscionably (s.12CB(5)), His Honour, Rares, J. gave consideration at para. 209 to the purpose for which margin loans are ordinarily acquired and in doing so, found that Mr Goodridge had invested in the MCW Trust Units for his retirement, which was the purpose for which he had acquired financial services from the Bank consisting of the loan, security agreement, margin loan and the ability to operate those facilities (para. 210).
The Basis for Damages
- At para. 213, Rares J. found:
“That the Bank and Leveraged Equities, having put Goodridge in the position that they did, I am of the opinion that they ought completely to restore Mr Goodridge to the position he would have been in, had they not wrongly exercised Power of Sale. This includes compensating Mr Goodridge for any lost dividend payments. You must bring into account any interest he would have had to pay on the margin loan, had it continued at the level it was at on 24 February, 2009. However, since no margin call was validly made, he need not give credit for a call he was never asked to meet.”
- At para. 214, Rares J. quoted with approval from Gibbs J. in Wenham v Ella [1972] 127 CLR 454 at 473 (at para. 214): dealing with a contract which was breached by the unauthorised sale of his property, His Honour stated:
“a plaintiff can receive compensation by way of damages for breach of contract by being allowed:… ‘to recover the value of a lasting asset to which he was entitled under a contract and for which he had paid in full, in addition, the loss of profits sustained during the period from the date of the breach until Judgment’.”
In the words of Rares J. at para. 215:
“Here, Mr Goodridge paid for the units in full when he acquired them and met all of his obligations to the bank to maintain them. I am of the opinion that it is specious of the Respondents to argue that, having created the difficulty for Mr Goodridge, he then had to get them out of the loss he had suffered while they have persisted in insisting that he could simply have gone back into the market, either while they sold up all his units, or soon after.”
- At para. 218 (at page 70), Rares J. said this:
“Next, Leveraged Equity said that Mr Goodridge should only receive damages for the difference of about $2,600.00 between his authorisation or instruction to Mr Norval on 24 February to sell at 12 cents per unit and what four million units were sold for. I reject that argument. First, Leveraged Equities rejected that he has never acted on that authority. Secondly, as I have found, it was withdrawn later that day. Thirdly Mr Goodridge only gave the instruction because of the wrongful conduct of Leveraged Equities peremptorily demanding payment by 3:50pm that afternoon.” (para. 218, page 70)
- Crucially at para. 231, Rares J. stated:
“A banker that breaches its existing contractual obligations to provide finance to its customer, force selling his property and then alleges that the customer failed to mitigate his loss by not buying that property back, then and there, must show that this highly unlikely scenario has an air of reality. Without finance, Mr Goodridge could not buy back. Nor is it sufficient that he had some finance. Mr Firth’s offer was not equivalent to and fell far short of a contract with a banker to provide a margin loan facility of $4.8 million, allowing him to purchase MCW Trusts with a Loan Valuation Ratio of 70% (albeit that this ratio could be varied).
“Moreover, as the market for the MCW Trust units began to rise during March, 2009, the cost of recouping Mr Goodridge’s previous holdings also increased. After the breakdown of his relationship with his financier on 24 February, Mr Goodridge could not reasonably be expected to have confidence in borrowing from it and committing Mr Firth’s loan in an effort to recoup his loss.”
Rares J. approach to the concept of damages, did not involve having to speculate as to what position the borrower would have been in had the Bank discharged its responsibility. Rather, the measure of damages is the position that the Bank had placed the customer/Plaintiff in as a result of its failure to discharge its obligations and the Bank bore the onus of proving a failure by Mr Goodridge to mitigate (para. 229).
- At para. 228 His Honour ruled:
“Any damage which results from breach of contract and was reasonably in the contemplation of the parties when the contract was made, is recoverable, even though the Claimant’s impecuniosity contributed to it: Burns v Man Automotive (Aust.) (1986) 161, CLR 653 at 658 to 659 per Gibbs, CJ. The Chief Justice held that the wrongdoer is liable for the consequences flowing from his wrongful act, notwithstanding that the victim was unable, because of lack of funds, to take the steps to mitigate his loss, Burns 161 CLR at 659; See too at 674 to 675 per Brennan J.”
C. LEVITT ROBINSON, Q & A
- Four questions have been addressed to us by Frank Ainslie:-
(i) What legal costs will people be up for if they instruct Levitt Robinson to act for them:
A: Levitt Robinson will act conscientiously to advance the interests of its client who are Participants in the CBA Resolution Scheme within the framework of the Scheme Rules, including as to payment of lawyers.
(ii) If CBA customers convert to your company, will they be up for CBA interest charges and house repayments still or will such be suspended pending a legal outcome?
A: Levitt Robinson already represents more than 70 CBA borrowers who are Storm clients participating in the CBA Resolution Scheme so any protection afforded to Participants in the Resolution Scheme, will be afforded to transferring clients if we take over your representation in the Resolution Scheme.
(iii) What is the position where people have had to sell down their shares rather than having their shares sold out under them by the Banks?
A: We contend that the arrangements between Storm, the Bank and the Storm client Borrowers, renders the Bank liable for clients’ funding themselves in the predicament where they had to sell out of their positions, having got into extreme debt through the unlawful arrangements between Storm and CBA.
(iv) Will you be able to handle the influx of new business following the possible defection of many Slater & Gordon clients?
A: Yes we are putting in place systems and arrangements to meet such a contingency.
CLASS ACTION
- It should be understood that we are close to being able to file a representative (“class) action in the Federal Court against the CBA (and Macquarie will not be far behind):
(i) However, we have formally offered to have the proposed representative action against the CBA run in the context of the CBA Resolution Scheme, before the “Independent Panel” without prejudice to our right to take it to Court if we are unhappy with the outcome for CBA Storm victims from that process; We have so far received no response to our offer; and
(ii) Up until the time when we file in Court, we will continue to use our best endeavours to produce the best possible result for our clients through negotiations with the Bank, representing our clients in the CBA Resolution Scheme vigorously and without fear or favour.
We will work for our clients to ensure that the negotiations proceed along lines where the rights and obligations of the Bank to Storm clients who have suffered through its unlawful actions are compensated fully, with the only discount being the recognition that a mediated settlement removes the risks and accelerates the conclusion of a dispute, otherwise litigated in Court.
Dated: 1 March, 2010
With compliments
LEVITT ROBINSON
STEWART A. LEVITT
Principal Solicitor & Advocate
