Violet Home Loans Pty Ltd v Schmidt  VSCA 56
By Samantha Cipriano
In this case Mr Schmidt obtained a line of credit facility from Perpetual Trustees Australia Limited (Perpetual) and gave a mortgage over his home as security for the facility. Violet Homes Pty Ltd (Violet) was the mortgage originator and manager and processed the loan application on behalf of Perpetual. Mr Schmidt borrowed the money to invest in what he thought were property developments. He was duped into doing so by Mr Maddock, who has since been convicted of fraud. Most of the money advanced by Perpetual to Mr Schmidt was paid directly or indirectly to Mr Maddocks and was lost.
In essence the question is who should bear the loss – Mr Schmidt or the appellant, Violet, that company effectively having indemnified Perpetual for any loss sustained by reason of Violet’s conduct.
The trial judge decided this question in favour of Mr Schmidt. He held that Violet acted unconscionably and in breach of the general law, s 51AC of the Trade Practices Act 1974 (Cth) (TPA Act) and s12CB of the Australian Securities and Investment Commission Act 2001 (Cth) (ASIC Act). The judge determined that the loan contract and the mortgage should be set aside on condition that Mr Schmidt was required to repay to Perpetual an amount that he owed under an existing mortgage that was discharged at the time that this loan was advanced. An order that Violet indemnify Perpetual was also made.
The court of appeal dismissed the appeal. It found that the trial judge was correct in finding that Violet was guilty of unconscionable conduct because it failed to make further enquiries after having been put on notice that there may be irregularities’ with the loan application. Accordingly, Violet’s conduct was unconscionable pursuant to s.12CB of the ASIC Act.
Violet submitted that the judge erred in finding that this provision had been contravened as the services acquired by Mr Schmidt were of a kind ‘ordinarily acquired for personal, domestic or household use.’ The court rejected this submission and said that:
“In our opinion the financial services provided here were of a kind ordinarily acquired for personal use. It is true that Mr Schmidt declared that the credit to be provided to him was to be applied wholly or predominantly for business or investment purposes. However that does not show that the kind of financial services acquired by Mr Schmidt were not of a kind ordinarily acquired for personal use.”
The court of appeal also found that it did not need to decide whether his Honour was correct in relation to the applicability of s 51AC of the TPA Act or in relation to the unconscionability at general law. It found that Mr Schmidt did not acquire the services for the “purpose of trade or commerce” because he was not engaged in the business of investing.
The court of appeal said that:
“In circumstances where three different figures were given for income, Violet, through Ms Bonnici, ought to have delved further. There was only one question that had to be asked – a question about the different levels of income stated in the various forms. This is a case that is unusual in the extreme – three differing versions of income and the failure to call the witness that might have explained why, in those circumstances, no contact was made with Mr Schmidt. Whether one classifies the lending as asset based lending or not, to make no inquiry is, in the absence of an explanation, entirely unacceptable. As his Honour held, had the inquiry been made, the truth as to Mr Schmidt’s income and his status as a pensioner would ‘inevitably’ have emerged…
Whilst a failure to conduct an interview and thus comply with the guidelines may not of itself constitute unconscionable conduct in the generality of cases, in the circumstances of this case, that failure strongly supports the proposition that Violet’s conduct was unconscionable.”