Property developers are known to use ingenious arguments to forestall possession orders sought by their lenders, after the lender calls up the loan.
But mostly, they are clutching at straws. The property developers will lose the arguments and their properties, as two recent decisions of the New South Wales Court of Appeal illustrate.
How the Court treated the property developer’s arguments in Carnemolla
In Carnemolla v Adelaide Bank  NSWCA 122, Sebastian Carnemolla and his wife Lucia, appealed unsuccessfully against an order for possession made against their family home in Smithfield. The orders were made due to their default in making loan repayments since February 2007 on a loan obtained for a development site. The loan was secured by mortgage against their home.
Carnemolla was a builder who in the 1990s had developed a property with five two-storey townhouses. Their family home was one of those townhouses.
The development site was land at Cabramatta (in western Sydney) was purchased in 2003. They obtained development consent. But the development was not feasible. The development site was sold at a loss in 2007.
The Court of Appeal (McColl JA; Barrett JA; Tobias AJA; jointly) considered four arguments raised by the Carnemollas, which they rejected for these reasons –
- Unconscionable conduct – Although the Carnemollas were parents of senior years, they were not able to use their age or lack of education to avoid enforcement of the loan against their home because they had benefitted as borrowers from mortgaging their home. This situation was unlike other cases where parents of senior years guarantee a loan made to their adult children, and receive no benefit. Also, their experience in the purchase and financing of real estate and in the development of building sites weighed against this argument.
- Mental health - Sebastian Carnemolla gave evidence that in 2008 he was suffering either from schizophrenia or paranoid delusions or both. However the evidence needed to be given as of December 2004, when the loan was taken out.
- Forged signatures – The Carnemollas alleged that their signatures were forged on the loan application which the mortgage broker said was signed at a coffee shop in Earlwood. But no evidence from a handwriting expert was adduced at the trial, and on appeal the evidence tendered was rejected as it was qualified and too late.
- The mortgage broker’s misleading and unconscionable conduct – The allegation was that the mortgage broker falsified the asset values and the tax returns to have the loan application approved. The Court took the sanguine view that it was more likely that the borrower would paint his ‘financial position far more rosy than was the case’ than the mortgage broker would falsify the information [para 74]. They also claimed that the mortgage broker acted unconscionably in arranging the refinance for them. The Court said that it was a legitimate business decision to refinance to pay out the existing loan and to use the excess funds to pay the mortgage for a reasonable time to allow them to sell the Cabramatta site [para 65].
Later, the Court of Appeal rejected a stay of the possession order pending an application for leave to appeal to the High Court, saying that it has not been shown that the appellants have any real prospects of success at all (Barrett JA)  NSWCA 166.
The result was that the family home was lost, with the loan debt of over $1 million likely to exceed the proceeds of the mortgagee sale.
How the Court treated the property developer’s arguments in Caporale
In National Australia Bank v Caporale  NSWC 1014, Giuseppe Caporale, his brother Tommaso Caporale and his sister Rosa Caporale, their building and property companies, were unsuccessful in resisting orders for possession made against 15 properties they owned including family homes, investment properties and commercial development sites.
The Corporale family were experienced property developers, and had completed a high rise residential strata development at 17 MacMahon Street, Hurstville.
The property development project was: to create an education hub for the Illawarra region comprising teaching, training and special education facilities, and also residential homes and student accommodation. Between 2004 and 2006, the National Australia Bank extended loan facilities which totalled approximately $7.726 million to purchase land at Darkes Forest near Helensburgh (south of Sydney) for the project. The loan fell into default in February 2007.
The only argument raised for consideration by the Court (Beech-Jones J) was that the lender (the NAB) was estopped from seeking recovery and possession by virtue of the latitude it extended; and by various statements made by its bank officers to Rosa Caporale in the period from February 2007 until April 2009 that –
- The monthly interest payments to the NAB could be deferred or capitalized until the property development project had reached a more advanced stage.
- The NAB would fund the whole property development project.
- The NAB would not press for repayment until the project finances were restructured.
The Court rejected the argument saying – At no point did the NAB ever state that it would preclude itself from enforcing its rights until some unspecified point in the future development of the project... The failure of the NAB to take any enforcement action other than issuing letters does not amount to any representation.
Nor did the evidence show that it was unconscionable for the NAB to pursue its enforcement rights. There was no reliance (to their detriment) by the Caporale family upon Bank representations to reorganise their financial affairs. In fact, they contracted in March 2008 to purchase a larger property at Dapto for the property development project, without the Bank’s financial involvement. There lay the problem – the Corporale family decided that instead of a small scale project near Helensburgh, they would pursue it as a much larger $500 million project at Dapto (south of Wollongong).
The Court entered judgment for a debt of about $11 million and made possession orders against the property securities.
Later, the Court of Appeal rejected a motion for a stay of execution of Writs of Possession and an injunction to prevent the sale of property already in the Bank’s possession pending hearing of an appeal on the basis that there is very little ground to show that there is a viable appeal. (Young AJA)  NSWCA 427.
Footnote: The Hurstville property securities have been sold progressively this year by mortgagee auction sales.