Love for Life

Ned and Joy Somerset were successful farmers and graziers. In 1952 the Somersets commenced as soldier settlers who acquired balloted land in the first Brigalow land development scheme in Wandoan in Queensland. After 32 years on the land producing wheat, sheep and cattle, the Somersets sold their western rural holdings and retired to Toowoomba in Queensland. In the development of their properties, the Somersets had had numerous dealings with banks and bank officers, finding them to be institutions and people of integrity. This relationship of trust was to underpin the mentality that they brought to an engagement with the National Australia Bank, an engagement whose terms would be radically transformed.

In semi-retirement in Toowoomba, the Somersets became interested in a property called Gunnadoo, priced at $625,000 and sited overlooking the city. Figures produced by the vendor showed the property returning above $400,000 per annum. The Somersets did not believe the valuation and the vendor, in an endeavour to encourage a sale, introduced the Somersets to his own bank manager of the NAB in Toowoomba, Mr ‘Lancer’.

Mr Somerset discussed the property with Lancer on 30 October and 1 November 1984, as well as the financial investment and cash flow of the vendor, before signing a contract on 2 November.

The Somersets were denied access to the title deed at settlement of Gunnadoo. The title deed would have disclosed two NAB mortgages on the property worth $260,000. Yet the property contract signed by the Somersets records encumbrances as ‘NIL’. It later transpired that the vendor paid the mortgages and eliminated the encumbrances out of the deposit paid to him by the Somersets immediately prior to settlement.

Mr and Mrs Somerset both met with Lancer and became NAB customers on 6th November. Further reassurances were given regarding the property’s cash flow and profitability.

Settlement of Gunnadoo was to be on 16 November. The Somersets informed Lancer that they had previously been interested in another property called Glenhaven, a run-down 100 acre property near Gunnadoo. However, with their investment in Gunnadoo they were not in a position to proceed. Lancer told the Somersets that Gunnadoo had an excellent cash flow; he also complimented the vendor.

The Somersets were advised that the manager could assist with the Somerset's acquisition of Glenhaven but that the Somersets would have to transfer their business to the NAB. Lancer indicated that the Somersets would have no difficulty servicing a bill finance facility of $300,000. An appointment was made for the Somersets on 8 November 1984, the day preceding the sale of Glenhaven by auction on 9 November 1984. On 8 November, Lancer advised the Somersets that the NAB had approved the sum of $300,000 to assist in the purchase of Glenhaven, to be auctioned the next day by the NAB as mortgagees in possession.

At auction, the Somersets successfully bid $320,000 and contracted the property Glenhaven. The contract required settlement within 30 days. However, settlement did not take place until 22 March 1985, due to a South East Queensland Electricity Board requisition order, in force since September. This was not advertised nor disclosed at the auction. Discovered documents highlight that NAB officers knew of the existence of this major charge on the property. The bank threatened to sue the Somersets if they tried to rescind the contract.

From 8 November 1984 to 1 February 1985 the Somersets met with Lancer on numerous occasions to complete the financial documents. However, the manager departed on leave, leaving everything in abeyance.

On 13 November 1984 the Somersets transferred their banking business to the NAB branch in Toowoomba. The relieving manager, Mr ‘Brittan’, during his manager’s absence, obtained approval for three loans totaling $575,000. The loan documents were signed on 14 March 1985.

Gunnadoo proved to be immediately and dramatically less productive than the promises of vendor and bank manager. Gross income for the 13 ½ months of operation amounted to $140,000; net income summed to $9,000. By contrast, Lancer had written to NAB State Administration in December 1984 claiming that cash flow was confirmed at $50,000 per month “as is”, although it had never exceeded $15,000 per month. By July, the loans were in default. The Somersets walked off the property in December. Repayments which had been made were from the Somerset’s savings.

In May 1985, the vendor’s son informed the Somersets that they had been `conned'. The vendor had a criminal record for fraud. The son estimated that his father’s NAB overdraft had increased from $50,000 to $260,000 and, after being extended by a bridging loan, faced an ultimatum from the bank for the 31 October 1984. This information, consistent with the Somerset’s experience of Gunnadoo’s profitability, was contrary to what Lancer had led them to believe.

The Somersets instituted Supreme Court proceedings against the vendor for fraud and won the case. However, the vendor had disposed of all of his assets and the Somersets received nothing. The Somersets received legal advice that they should sue the National Australia Bank in the Federal Court for false and misleading conduct under section 52 of the Trade Practices Act.

The Somersets' solicitor engaged on their behalf a retired NAB manager. His examination of bank records revealed that the vendor’s account with the NAB had a history of chronic irregularity. The vendor was unable to service the overdraft indebtedness in the twelve months prior to the contracted sale date. The overdraft had escalated from $55,000 to $240,000 in the previous three years. No other income was shown and none of this was disclosed by the bank.

Lancer increased the market value of the Gunnadoo property/business from $260,000 to $475,000 in November 1984. In September, some 10 weeks prior to this November revaluation, Lancer had increased the property’s market value from $210,000 to $260,000 in bank records. On both occasions, the effect of the revaluation was to allow the terms to fall within the Regional Manager’s delegated lending authority (avoiding the necessity to send details ‘upstairs’). The September revaluation facilitated localised approval of a bridging loan to the vendor; the November revaluation facilitated localised approval of the loan to the Somersets. Moreover, the property was correctly recorded in bank records as two hectares in the property vendors’ name; however, when comparable bank records are raised by Lancer in the Kabwand name, the area was recorded as four hectares.

Before taking annual leave and leaving the loan application in abeyance, Lancer increased the market value of Gunnadoo a third time, by $100,000 to $575,000, offering no evidence for the increase. The further revaluation assured the success of the application processed by the relieving manager.

Lancer stated in court (G65) that improvements by the Somersets had justified the increase. However, the ‘improvements’ were a demountable building, and the NAB held no security over it. There were no fixed improvements to Gunnadoo which would justify the revaluations.

The Somersets took the NAB to the Federal Court but the judgment, in September 1988, was against them (G65). The trial hearing had commenced without full discovery from the Bank. Moreover, some duplicate documents produced as evidence at the trial were different in content to those produced in discovery which had been produced and stated in interrogatories as the original documents. It is surmised that the ‘original’ documents were reconstructions.

Discounting the questionable documents and inadequate document discovery, Justice Neaves considered that bank staff were more reliable witnesses than the Somersets. Justice Neaves did not believe the Somersets’ claim that meetings took place between them and bank manager Lancer on 30 October and 1 November 1984 (the meetings at which the Somersets were given distorted representations of Gunnadoo’s prospects). Rather, said Neaves, the Somersets had already made up their mind to purchase Gunnadoo before first meeting Neaves.

An appeal was heard and dismissed in April 1989 (G355). Leave to amend the appeal pleadings to include fraud was denied because fraud had not been a component of the original pleading. The Somersets appealed to the High Court on twenty five grounds with five specific orders sought. The High Court appeal was dismissed on all counts.

The Somersets were declared bankrupt in November 1991.

In his adverse judgment in the Appeal Court, Justice Lockhart noted that Justice Neaves “found that no complaint of alleged misleading conduct by Mr. [Lancer] was made to any officer of the respondent before the commencement of the proceedings in this Court and that such complaints as were made related to other matters” (G355, par.36). This claim was not made during the trial but appears in Neaves’ judgment. Not merely is the claim made by Neaves and repeated by Lockhart, but it is repeated anew by the bench in the two hearings regarding bankruptcy proceedings against the Somersets and in the Somersets’ attempt to access the High Court. It transpires that, on all five occasions, the source of the judges’ information was the NAB’s counsel through their instructing solicitors.

Yet this claim, an integral element of adverse judgments against the Somersets, was seriously inaccurate. The Somersets had a bitter row with Lancer immediately following the disclosures to them by the vendor’s son. Given the refusal of Lancer to acknowledge their complaints, the Somersets initiated and participated in a lengthy meeting with senior bank officials in the offices of the NAB’s State Administration on the 23 August 1986. The bank’s external solicitors were also present.

The Somersets came to the National Australia Bank in 1984 with net assets in the order of $700,000. The initial trial and the appeal cost approximately $800,000, with the Somersets paying their solicitors approximately $400,000, with the balance being met by Legal Aid. The Somersets are now penniless, are in receipt of a Department of Veterans Affairs pension, and are living in rented accommodation.

Kabwand is now regularly cited in court judgments. However, the significance of the Kabwand case lies in domains other than those presumed in the citations.

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16. The first part of the Somerset/Kabwand account draws heavily on documents provided by Democrat Senator Paul McLean (1990) who also wrote the book with Barrister James Renton - Bankers and Bastards.