Love for Life

Fritz and Ingrid Walter ran a successful business in Germany, had acquired a reasonable nest egg and lived a comfortable life. Several holidays in Australia generated an interest in migrating permanently to this country. In the late 1980s, the Walters attended a seminar at Frankfurt sponsored by Australian government officials on the attractions of business migration to Australia. They met Victorian government officials who promoted the Albury/Wodonga area, reinforced by local officials when the Walters visited the area in 1994. In particular, local officials were promoting the ‘Gateway Island’ project (adjacent to Sydney/Melbourne traffic) as a tourist attraction.

The website of the Victorian government’s Frankfurt office has promoted Victoria as possessing a large number of fundamental ingredients for doing business. These ingredients include ‘a cost efficient place to do business’; ‘secure and familiar legal and financial infrastructure and services’; and ‘strong safeguards for your intellectual property’. The language has to be seen as hyperbole in the light of the Walter family experience.

By 1997 the Walters bought land in the ‘Gateway Island’ domain, planning a brewery and restaurant. They hired as consultant an Australian-based compatriot with a track record in boutiques breweries. Funds for the purchase and development of the property came predominantly from the disposal of existing family assets, generating $712,000 in capital. Later, sale of another asset added $202,000, totaling $914,000 in family capital. Additional funds were made available from sale of the Walter family business in Germany for $2.2m.

The Walters moved to Wodonga in February 1998. Construction had begun in July 1997 and the brewery was officially opened by the then Victorian Premier. Jeff Kennett, in May 1998.

The Walters began banking with the National Australia Bank, and developed a good relationship with the Wodonga branch manager. The Walters obtained a short-term overdraft, a housing loan and equipment leasing facilities from the bank.

By October, it was clear that business turnover was not up to expectations. There was cost overruns due to the high quality of construction and outfitting. Some locals claim that the restaurant did not cater to local tastes. The Walters claim that they were let down by the Council which had not proceeded with the precinct project. Moreover, the Council had failed to install traffic lights on the main thoroughfare that would make the business accessible to traffic passing in the opposite direction.

The Walters approached their manager via their accountant and asked for a restructuring of their loan facilities to reduce monthly repayments. The then manager claimed that the request would probably be acceptable to his superiors. At about this time, the Walters’ manager resigned, and was replaced.

It was not until two months later, in December, that the branch organised a response to the Walters’ request. The Walters’ accountant had requested a single bills facility. The Walters were offered $1.38m. (their existing total indebtedness), comprising a principal and interest combination loan of $380,000 and a fixed interest one-year bank-funded loan of $1m. This mix of debt seemed bizarre to the Walters. According to the Walters (albeit denied by the manager at trial), the new manager declined to explain the loan’s quantum or character, and offered it on a ‘take it or leave it’ basis. The new manager’s general response to questioning was that ‘it is best for your business’. In particular, the Walters presumed that the fixed interest component would be turned over (subject to interest rate movements), and they were not disabused of this belief (see below). The discussion generally focused on the interest rate payable; there was no discussion regarding repayment of principal.

In May 1999, Carmen Walter wrote to the bank querying the account fees. After a delay of almost four weeks, the bank replied that their accounts had been reviewed and demanded a reduction in the debt of $100,000 through other asset sales. In the meantime, the second Wodonga manager had left to be replaced by an interim manager, and by September a fourth person was in the position. One of the first actions of this new manager was to turn up unexpectedly at the business and try to sell the Walters life insurance.

Although the fixed interest facility was due for reconsideration in late December, no correspondence was forthcoming. However, in late February 2000, advice was received that interest rates had increased to 12.25%, up from 7.9%. The Walters’ accountant complained, and was met with an April response from Asset Structuring expressing concern regarding the company’s profit and loss position. The Walters would not have known, nor were they advised, that their account’s location in Asset Structuring meant that they had been downgraded to an impaired status (this had occurred in October 1999), and were now attracting a penalty interest rate.

The Walters explained that they were applying a depreciation regime to the brewing equipment as advised by their accountant, which was generating the paper loss. On their terms, they were just breaking even. In response the bank replied on 12 April, demanding sale of the business and the home by 30 June. Visits to senior management were met with the response “we don’t want you”. This is in spite of the fact that the Walters had never been in default with their monthly payments under either of their loan facilities. Moreover, business prospects were improving, with their brewing products increasingly attracting adherents.

On 30 November, the bank withdrew almost $15,000 from the company account (consistent with regular payments on the two loans). On the next day a bank-appointed receiver (D’Aloia Handberg) arrived and took possession of the brewery and subsequently froze the account. The Walters were denied access to the balance of the account, estimated at $30,000. A receiver appointed Melbourne-based valuer valued the property in the range of $800,000 to $1m. This valuation contrasted with a May 1999 appraisal by a local valuer at between $3-3.5m., with a ‘fire sale’ valuation of $2m. The receiver closed down the business in mid February 2001. The property was auctioned on 2 March 2001, the sale price being $1.03m, inclusive of all chattels.

Carmen Walter has naturally sought discovery of documents from the bank. In this endeavour, the bank has responded belatedly with dribs and drabs, on each occasion insisting that all relevant documents have been discovered.

Service of court documents by the bank has eschewed formalities. On one occasion, a process server handed the Walters loose documents not in an envelope as they were going to church on Sunday morning. On another occasion, loose documents not in an envelope were dropped on the front doormat.

Fragments of bank statements obtained by the Walters (belatedly through discovery) are instructive. After informal demand was issued by the bank in May 2000 (formal demand was issued in November), the ‘address’ for the statements for the $1m. interest only account was changed from the Walters’ home address to ‘Do not mail, refer to manager’. This practice of withholding statements of account from customers defaulted by the bank was examined and condemned by a parliamentary committee shortly after the Walters experience commenced (Chapman Committee, 2000). The Walters thus had no idea that their account was being loaded with legal costs and their extent, or that the account was subject to a partial bad debt write-off.

Carmen Walter has gone to the Victorian courts persistently. Without legal representation (for lack of resources) or training, her representations have floundered. The Walter residence, quarantined during litigation, shortly faces foreclosure.

Initial Walter representations in court centred on the illegality of seizure, due to ownership of property through a family trust. But the courts kept returning to the fundamental fact that the bank possessed registered mortgages and a debenture against the Walter assets, guaranteed by the Walters. For the law, a contract is a contract. The divergence between legal formalities and substance was captured neatly by Justice Beach:
“I feel a deal of sympathy for the Walter family. From the material before the court it is clear that their life’s dream of establishing the brewery and restaurant at Wodonga has been shattered. However … I am required to administer the law as I find it to be and I can simply find no basis upon which the first-named defendant can lodge any caveat in relation to the property in question”. (Handberg v Walter & Anor, 2001, p.2)

The broad spectrum of the bank-Walter relationship was covered (albeit selectively) in recent litigation (National Australia Bank v Walter, 2004). Several generalisations are warranted. That the Walters’ brewery and restaurant business was in trouble is clear. What is also clear, however, is that conventional litigation involving banks and small business customers, well represented by this 2004 Walter judgment, does not get to the nub of the relationship or the key sources of the ensuing crisis.

Much of the time of learned judges is devoted to exploring the intricacies of what or was not said at crucial meetings, with the necessity for the judge to make up with inference for the paucity of information and for conflicting accounts (not least because of the prevalence of verbal exchanges rather than documentary records). In the Walter case, it appears that extant documents might have been handled more productively. At the 16 December 1998 meeting at which the new facilities were offered to the Walters, including the ‘time bomb’ 12-month interest-only loan, Carmen Walter had the letter of offer in front of her, and on it she wrote the words she heard from the new manager at time of hearing, “it will be renewed year by year”. This document, with annotations, was submitted to the court, without effect. The bench sees only the terms of the letter of offer: “ … The Balance Owing shall be repaid in full on the Maturity Date”.

Perennially, bank staff claim that they do not remember the substance of particular meetings, but that ‘it was their normal practice to …’, etc. Perennially also does His/Her Honour conclude that bank staff were ‘disinterested and honest witnesses’ (ibid.: par.361), and that the borrower(s) was ‘evasive and unco-operative’ (par.173), or words to that effect. Partly, the latter judgment is leveraged on apparent borrower resort to claims of duress or incapacity.

The courts will not or cannot dig beneath such ephemera to confront an underlying structural asymmetry embodied in the nature of facilities dictated to the borrower and in the potential draconian clauses contained therein. The terms on which borrowers go into the relationship and are subsequently forced out of the relationship are generally hidden in the black box called ‘commercial discretion’.

Somewhere in the interstices of a judgment, convention dictates a learned disquisition on legal precedent. On the matter of fiduciary duty, pleaded by the Walters, Judge Dodds-Streeton expounded (without explicit summation) that the law is entirely contradictory in this domain (pars.277-285). As is customary with her peers, Her Honour then moved on to make a very human evaluation of the case at hand under the constraints just outlined.

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7. Correspondence with the Premier’s office has not elicited any concern for the integrity of the website’s offerings.

8. The Walters would not have known that the first set of facilities offered to them were not necessarily functional either. An October 1998 internal credit memorandum stated that ‘lending to this connection has in the past been based on security held’ (National Australia Bank v Walter, 2004: par.101). That is, the Walters’ business relationship with the NAB had been founded not on business needs and prospects but on the value of the Walters’ existing assets.

9. In the major court case involving the Walters and the NAB (VSC36), Judge Dodds-Streeton found that this lower valuation was more realistic, and thus the sale price not under-value (National Australia Bank v Walter, 2004: pars.286-314).

10. In VSC36, Judge Dodds-Streeton found that the bank practices described as standard “are explicable by legitimate internal record-keeping and accounting requirements of the NAB” (National Australia Bank v Walter, 2004: pars.254-264). Her Honour was surprisingly unaware that Parliament had changed the ethical goalposts regarding these practices.

11. Selectivity of coverage is reflected, for example, in two representations. First, the business’ financial status is reported from the bank’s perspective (par.182), without acknowledgement that there was disputation over the significance of the figures regarding viability. Second, Judge Her Honour states that the Walters were “in default under the interest-only loan … [which] constituted a default under the home loan” (par.185). One cannot tell from the judgment transcript that the default refers to the loan status after the bank had issued demand.

A side issue that nevertheless excites some commentators is that of potential ‘apprehended bias’ of the bench. Judge Dodds-Streeton disclosed, belatedly in par.198, that she was the beneficiary of 8,000 shares in the NAB. Her Honour did preface the opening of the court case with the acknowledgment of share ownership, but had to correct the details on the second day, from a total of 3,000 shares to 8,000. At $30 a share, that holding would be worth a not inconsiderable quarter of a million dollars. Nevertheless, Her Honour declined to disqualify herself on the grounds that “a fair-minded observer with knowledge of the material facts would not reasonably apprehend that I might not bring an impartial mind to the resolution of the questions to be decided in the proceedings”.