In the High Court decision of Stubbings v Jams 2 Pty Ltd [2022] HCA 6 (16 March 2021), the High Court was required to determine whether the respondent (Jams) engaged in unconscionable conduct when it secured an asset-based loan from the appellant (Stubbings).
The resolution of this issue ultimately hinged on what Jams’ agent knew.
Stubbings had lived in a rental property and worked repairing boats for the property owner. But, after Stubbings fell out with the owner, he found himself unemployed and needing to move.
Stubbings’ personal finances were also something of a mess. He was in arrears on rates payments for two houses he owned in Narre Warren (both mortgaged), and Stubbings had not filed tax returns for several years.
After his home loan application was rejected by a bank, Stubbings was introduced to Zourkas. Zourkas styled himself as a consultant who introduced potential borrowers to Ajzensztat Jeruzalski & Co (AJ Lawyers). AJ Lawyers assisted clients, like Jams, in making secured loans.
Stubbings told Zourkas he wanted to buy a little house to live in. Instead, Zourkas persuaded Stubbings to purchase a five-acre property with two houses on it in Fingal, in a green wedge, for about $900,000.
Zourkas told Stubbings that he could borrow a sum of money to discharge the mortgages over the Narre Warren properties, buy the Fingal property and have $53,000 left over to pay the first three months’ interest on the loan. Zourkas also advised Stubbings that he could sell the unencumbered Narre Warren properties and, with the proceeds of the sale, reduce the loan to about $400,000 which he could then refinance with a bank at a lower rate of interest.
Convinced by Zourkas that this was a solid plan, Stubbings signed a contract to purchase the Fingal property and paid only $100 towards the required $90,000 deposit. Zourkas then introduced Stubbings to Jeruzalski, a partner at AJ Lawyers.
AJ Lawyers had the Fingal and Narre Warren properties valued. Satisfied that the properties could support a loan, AJ Lawyers provided two letters of offer, on behalf of Jams, to provide first and second mortgage finance to a company controlled by Stubbings. Each offer was conditional on Stubbings acting as guarantor with the three properties as security for his guarantee.
The first mortgage loan was for the sum of $1,059,000 at an interest rate of 10% per annum and a default rate of 25% per annum. The second mortgage loan was for the sum of $133,500 at an interest rate of 18% per annum and a default rate of 25% per annum. The second loan was to pay Zourkas’ fees, other expenses and the first month’s interest – which had to be paid in advance.
Zourkas later gave Stubbings two letters from AJ Lawyers which advised Stubbings that they had been instructed to approve the two loans and enclosed documents for execution by the company and Stubbings. The documents included a certificate of ‘independent financial advice’ and a certificate of ‘independent legal advice’.
Zourkas presented each certificate to Stubbings in a sealed envelope – one labelled ‘accountant’ and the other labelled ‘solicitor’ – together with the business cards of an accountant and a lawyer. Zourkas directed Stubbings to get the enclosed certificates signed. That same day Stubbings visited the accountant and the lawyer and got their signatures on the certificates.
The accountant completed the certificate of independent financial advice by inserting a note to the effect that the purpose of the loan was to set up and expand the company’s boat repair business. With the documentation complete, the loans were settled, Jams’ mortgages were registered and Stubbings purchased the Fingal property.
Stubbings sold assets to pay the second month’s interest but defaulted on payment of the third month’s interest. Jams then commenced proceedings to enforce the guarantee.
Stubbings represented himself at trial. The primary judge (Robson J) held that the loans were procured by unconscionable conduct. His Honour found that Stubbings laboured under circumstances of a special disadvantage by reason of the fact that Stubbings’ financial position was “bleak” and Stubbings himself was “unsophisticated, naïve and had little financial nous”.
His Honour formed this view, in part, by the way in which Stubbings defended himself at trial. His Honour did not consider Stubbings’ disadvantage was overcome by advice from the accountant and/or lawyer because His Honour did not consider that this advice was truly independent.
And, His Honour found that Jams’ agent, Jeruzalski – principal of AJ Lawyers – was wilfully blind to Stubbings’ financial and personal circumstances. His Honour inferred that Jeruzalski’s failure to make inquiries – even though he knew that the asset-based loan was a risky undertaking and that the Fingal property was in a green wedge (unsuitable for a boat building business) – reflected a concern that his knowledge of such matters may undermine Jams’ ability to enforce the mortgages.
His Honour found that Jeruzalski’s conduct conformed with AJ Lawyers’ standard practice. His Honour also noted that this standard practice included the insertion of an express condition in all loans that they were not for personal, domestic or household purposes.
Jams appealed successfully to the Court of Appeal. The Court of Appeal (Beach, Kyrou and Hargrave JJ) considered that Robson J’s adverse view of asset-based lending “as a concept” had overwhelmed his determination of the unconscionability issue. The Court of Appeal held that Jeruzalski had no notice, whether actual or constructive, of Stubbings’ special disadvantage. And, the Court of Appeal held that Jeruzalski was entitled to rely on the certificates.
The Court of Appeal did not consider that there was any basis for inferring, as Robson J did, that the certificates did not reflect truly independent advice. But, importantly, the Court of Appeal considered that, without the certificates, Jeruzalski’s knowledge may have led to a finding that it was unconscionable for him not to have made inquiries.
Stubbings – now legally represented – appealed to the High Court. The High Court was unanimous in finding that Jams procured the loans by unconscionable conduct. In a joint judgment, Keifel CJ, Keane and Gleeson JJ recognised, at [42]-[44], that the outcome of the appeal turned on the extent of Jeruzalski’s knowledge of Stubbings’ circumstances.
And their Honours, at [47], considered that the Court of Appeal had no basis for disregarding Robson J’s findings as to Jeruzalski’s knowledge. After all, Robson J, their Honours noted, had had the benefit of hearing Jeruzalski give evidence over two days.
Their Honours also observed, at [48], that there was nothing in the certificates to suggest that Stubbings had actually turned his mind to the question of how he would service the loans. Indeed, their Honours – noting the boilerplate language and the obvious lie as to the loan’s purpose – described the certificates, at [49], as being “a precautionary artifice”.
Their Honours considered that the use of such artifices pointed to an exploitative state of mind. Both Gordon and Steward JJ (in separate judgments) also found that Jams’ conduct was unconscionable. Their Honours also went even further to find that AJ Lawyers’ very system in facilitating the procurement of asset-based loans was unconscionable.
Dr Michelle Sharpe is a Victorian barrister practising in general commercial, real property, disciplinary and regulatory law, 03 9225 8722, email msharpe@vicbar.com.au. The full version of these judgments can be found at austlii.edu.au.
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