Pacanowski, D. v Wygoda, H
[1992] FCA 968
•18 DECEMBER 1992
Re: DAVID PACANOWSKI
And: HARRY WYGODA and OFFICIAL TRUSTEE IN BANKRUPTCY
No. G819 of 1991
FED No. 968
Number of pages - 18
Bankruptcy
COURT
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Neaves(1), Wilcox(2) and Spender(2) JJ.
CATCHWORDS
Bankruptcy - Proof of debt - Application for expungement - Proof of debt claiming indemnity as co-surety of one-half of a debt owed to a bank - Debt owed by company controlled jointly by creditor and bankrupt - Nature of agreement between the parties - Whether the facts found by the trial judge displaced the prima facie rule that a guarantor who pays the principal debt is entitled to contribution from his co-surety.
Bankruptcy Act 1966, s.99.
HEARING
SYDNEY
#DATE 18:12:1992
Counsel for the Appellant: B A J Coles, QC and
C R C Newlinds
Solicitors for the Appellant: Van Aalst Roth
Counsel for the First
Respondent: A J Sullivan, QC
Solicitors for the First
Respondent: Goldsmiths
Counsel for the Second
Respondent: B Skinner
Solicitor for the Second
Respondent: Australian Government
Solicitor
ORDER
The Court orders that:
1. The appeal be dismissed.
2. The appellant pay the costs of the respondents.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
JUDGE1
NEAVES J. The appellant, David Pacanowski, has appealed from the judgment of a judge of this Court expunging, pursuant to s.99(1) of the Bankruptcy Act 1966 (Cth), the proof of debt in the sum of $181,661.20 lodged by the appellant in the bankrupt estate of the first respondent, Harry Wygoda, and admitted in whole by the Official Trustee in Bankruptcy, the trustee of the bankrupt's estate. The first respondent became a bankrupt upon the making of a sequestration order against his estate on 8 November 1989.
The amount of $181,661.20 is said to represent one half of the amount paid by the appellant to the Commonwealth Bank of Australia ("the Bank") pursuant to the terms of a deed of guarantee given to the Bank in respect of advances made by the Bank to a company known as Galite Holdings Pty Limited ("Galite"). There is some discrepancy in the figures as it appears that the amount paid to the Bank by the appellant was $364,584.67, that payment being made on 4 December 1990. The appellant claims that, in the circumstances to which reference will be made, he is entitled to be indemnified by the first respondent as to one half of the amount paid by him to the Bank.
In January 1987, a meeting took place between the appellant, the first respondent and a Mr Bernard Edelstein who had previously been the appellant's accountant. At this meeting it was agreed that a company be formed to carry out a business venture involving the purchase, re-development and sale of real estate, that the shareholders would be the appellant and the first respondent in equal shares and that they would be the sole directors. Galite was acquired and it opened a bank account at the Botany branch of the Bank. That branch of the Bank had been the appellant's banker for some time previously.
On 27 April 1987, both the appellant and the first respondent signed a deed of guarantee in favour of the Bank in respect of loans to be made by the Bank to Galite. By this deed, the appellant and the first respondent became personally liable to pay to the Bank on demand all moneys (including moneys advanced by way of loan for fixed term or provided by way of overdraft) becoming owing or payable to the Bank by Galite. On 14 October 1987 and again on 11 March 1988, the first respondent signed letters of acknowledgment of his personal liability as a guarantor pursuant to the deed. The earlier of the two letters referred to a maximum limit upon Galite's liability to the Bank of $550,000. The second letter raised that limit to $1.42 million.
Pursuant to the arrangements between the appellant and the first respondent, Galite purchased and re-sold several properties. The money for those purchases came entirely or in large measure from the Bank by way of loans to Galite. The ventures were, however, not profitable and in December 1990 Galite was indebted to the Bank in the sum of $364,584.67.
The learned primary judge has recorded that, apart from the facts to which reference has already been made, the appellant and the first respondent were not able to agree on any other matters relevant to the dispute between them. His Honour, in his reasons for judgment, canvassed in some detail the evidence given by the participants, including the appellant and the first respondent, as to what took place at various meetings in December 1986, January and March 1987 and March 1988. His Honour also made reference to a letter dated 16 March 1990 from the appellant to the first respondent which referred to the fact that both the appellant and the first respondent had given their personal guarantees to the Bank to cover Galite's liability. His Honour then said:
"There are few matters which are clear in this case. There is no doubt that a joint venture was undertaken and that the vehicle for putting that enterprise into effect was a company in which the shares were equally held by both the
(appellant) and the (the first respondent). There is also no doubt that in general terms the (first respondent) was to be responsible for the building work and the (appellant) for the financing side of the operation. It is further clear that the operation was largely funded by loans from the bank arranged and substantially if not wholly secured by the
(appellant). Beyond that there appears to have been a somewhat spectacular failure or neglect by the parties and their accountants to crystallise the details of the partnership including what would happen in the event of any losses incurred by or net liabilities of the company."
His Honour continued:
"There are two critical issues to be resolved. First is whether the relevant conversations between the parties prior to and after the commencement of the venture amounted to a contractually binding agreement relating to the sharing of losses. The finding on this issue must be made almost solely on credit. Because neither party was entirely truthful, and the corroboration was at best patchy, this is not a simple task. The second issue is whether the agreement amounted to an indemnity of the (first respondent) by the (appellant) so as to alter the (appellant's) normal right to a half contribution by the (first respondent) towards the losses which occurred or whether the (first respondent's) signature on the deed of guarantee represented or manifested an agreement or a variation of the agreement with the (appellant) to pay a half share of the losses."
His Honour found that, in all probability, the parties "did
not expressly turn their minds to the possibility of any losses and, consequently, that they did not discuss who would be liable for them". In his Honour's opinion, there was "no express agreement that the (first respondent) would have any, or any significant, monetary responsibilities in the venture". His Honour, however, concluded:
"In my view, the parties' clear overriding intention that the (appellant) would be the financier and the (first respondent) the builder implied that if there was a need for money, such as to provide any outgoings or make good any losses, the (appellant) would provide it either directly or through loan arrangements with his bank backed by security provided by him. This in turn meant that if the venture failed and the security was called on, the (appellant) would have to bear the loss of or under the security. I find that the parties agreed that the (first respondent) was not to bear any liability in such eventuality."
His Honour then posed the question "what if any effect on that conclusion is wrought by the (first respondent's) guarantee to the bank" and concluded that it did nothing to alter the position as between the first respondent and the appellant. His Honour added:
".... (the first respondent's) guarantee did nothing to alter the position as between (the first respondent) and (the appellant). It was after all not an agreement between the (first respondent) and (the appellant). Its terms did not obligate the (first respondent) to share equally with the (appellant) any losses incurred to the bank. By his guarantee signed, as I find, as part of his agreement with the (appellant), the (first respondent) contracted to pay the bank all of what was owing when called on. As I see it, what the (first respondent) did, in relation to the
(appellant), by signing the guarantee was to facilitate and permit the carrying out by the (appellant) of his obligation to the partnership of providing the necessary finance to enable the company to operate and pay its debts. In other words, the guarantee did not constitute or evidence an agreement between the (first respondent) and (appellant) to restore an entitlement in the (appellant) to an equal share of the losses which he had earlier agreed to waive or indemnify. It merely satisfied the bank's need or desire for security for its advances, probably only in a formal sense because there is no evidence that the bank knew or sought details of the (first respondent's) financial situation or had any belief in his capacity to honour the guarantee in any way."
Although the primary judge said that a finding on the issue "whether the relevant conversations between the parties prior to and after the commencement of the venture amounted to a contractually binding agreement in relation to the sharing of losses" had to be made "almost solely on credit", there is no explicit statement in his reasons whether he accepted, in whole or in part, the evidence of the appellant or that of the first respondent. It is clear that his Honour did not regard either as a wholly satisfactory witness.
The first respondent asserted that his role in the joint venture was to identify properties suitable for redevelopment, to arrange for the necessary plans to be prepared and the necessary building work to be carried out by sub-contractors to Galite, and to supervise the building work. According to the first respondent, the appellant's role was to provide from his own resources the necessary funds to enable the properties to be acquired and the necessary redevelopment to occur. According to the first respondent, any profits arising from the joint venture were to be shared equally. The first respondent appears to have contemplated that, before the sharing of any profits, the appellant would be entitled to receive an amount by way of interest on the moneys made available by him to finance the venture and that he, the first respondent, should be entitled to receive a building fee equal to the amount of that interest. The primary judge found that it was never agreed between the parties that the first respondent was to receive a building fee but the fact that the first respondent was pressing an entitlement to such a fee would be understandable only if the appellant was to provide the necessary funds from his own resources rather than to provide security against which Galite was to borrow. The appellant always asserted that his responsibility was limited to arranging the necessary finance for the venture and providing security for the funds borrowed by the company.
It is beyond doubt that the joint venture was never conducted in accordance with the arrangements deposed to by the first respondent. Except as to a sum of $18,000 - as to which the evidence was inconclusive - all the moneys required to purchase the properties and to provide the labour and materials to enable the building work to be undertaken were paid out of the bank account of Galite. The funds in that account had their source either in advances made by the Bank or, at a later point of time, the net proceeds of the sale of properties that had been purchased by Galite. The Bank, in accordance with its usual practice required security for the moneys advanced. According to the appellant's evidence, security was initially provided over the appellant's residence and later over land owned by a company, Makawe Pty Limited, which was wholly owned by the appellant and his wife. Security was also taken by the Bank over some, if not all, of the properties held from time to time by Galite for development purposes.
Galite purchased four properties. The first property purchased was situate at 38 Cooper Street, Maroubra, that purchase being effected in February 1987. It was sold sometime in 1988 after being redeveloped. The other three properties were purchased at various dates later in 1987. All were situate at Maroubra and are respectively described as 104 Moverley Road, 226 Gale Road and 154 Gale Road. All were subsequently sold, some without the proposed development work being carried out or, at least, completed.
It is apparent that the parties believed that the sale of the redeveloped properties would yield a profit which was to be divided equally between them. They did not contemplate that the venture would result in a loss and, as the primary judge found, they did not turn their minds even to the possibility of a loss, let alone to the question who was to bear it or in what shares.
In the light of the finding that the parties did not discuss who would be liable for any losses incurred, it is not clear on what basis his Honour concluded that the parties agreed that the first respondent was not to bear any liability in respect of any such loss. There are no primary facts found by his Honour which support that conclusion.
But whatever may be the position so far as losses generally are concerned, the crucial question is whether the facts as found are sufficient to displace the principle recognised by the law that, in the absence of agreement to the contrary, a guarantor who pays the principal debt is entitled to contribution from his co-surety.
The deed of guarantee bears date 27 April 1987, that is to say some two months after the first property was purchased by Galite. The circumstances in which the deed came to be executed are not satisfactorily explained by the evidence. The first respondent's evidence was that, although his signature appears on the document, he did not read the deed, was not otherwise apprised of its contents and was not aware until much later that he had, in fact, executed a deed under which he guaranteed the indebtedness of Galite to the Bank. He also disclaimed any understanding of the significance, at the time he signed them, of the letters dated 14 October 1987 and 11 March 1988 acknowledging his personal liability to the Bank as a guarantor pursuant to the deed. The primary judge did not accept his evidence and concluded that:
".... the nature of the guarantee and of the two letters of acknowledgment, and the unsatisfactory features of the (first respondent's) oral evidence, lead me to believe that the (first respondent) knew quite well not only that he was signing a guarantee to the bank, but that he fully or at least relevantly understood what a bank guarantee was and what obligations he was, at least in theory, undertaking."
The appellant's evidence was to the effect that on more than one occasion, either in conversation or in correspondence, the first respondent had been told, that he, the first respondent, was liable for half of any loss incurred by the venture and that the first respondent did not demur to that proposition. It seems clear that his Honour did not accept this evidence but its rejection provides no foundation for the conclusion which his Honour reached that the appellant had agreed to indemnify the first respondent in respect of any liability assumed by him by executing the deed of guarantee. Nor am I able to read any of the findings of primary fact as supporting an agreement by the appellant so to indemnify the first respondent.
It follows that, in my opinion, his Honour erred in expunging the proof of debt lodged by the appellant. That, however, is not the end of the matter. During the course of the hearing of the appeal doubts were expressed as to the quantum of the debt for which the appellant is entitled to prove in the bankrupt estate. Those doubts arose because it appeared that the amount of $181,661.20 may well have reflected, in part, advances made by the Bank after the date of the first respondent's bankruptcy and interest accrued after the date of bankruptcy on moneys advanced prior to that date. This aspect of the matter had not been the subject of investigation by the second respondent and was not raised as an issue before the primary judge. In consequence, the material before this Court is not sufficient to enable the question to be resolved and I would, therefore remit the matter to the primary judge, or another judge of the Court, to determine the amount of the debt for which the appellant is entitled to prove.
In my opinion, the appeal should be allowed and the judgment and orders appealed from set aside. In lieu thereof, I would declare that the appellant is entitled to prove in the estate of the first respondent in an amount to be determined, for which purpose the matter is remitted to the primary judge or to another judge of the Court. The costs of the appellant and of the second respondent of the proceedings at first instance and on appeal should be paid by the first respondent.
JUDGE2
WILCOX AND SPENDER JJ. The facts of this appeal are set out in the judgment of Neaves J. As his Honour identifies, "the crucial question is whether the facts as found are sufficient to displace the principle recognised by the law that, in the absence of agreement to the contrary, a guarantor who pays the principal debt is entitled to contribution from his co-surety."
The primary judge found that there was an agreement to the contrary. His expression of findings causes some difficulty, but it must be said that the resolution of the factual disputes between the two principal protagonists was not an easy task. Neither man was found to be entirely truthful. Corroboration was "at best, patchy". As a consequence, to make findings of fact was "not a simple task".
Notwithstanding these difficulties, the primary judge found that there was an agreement between the appellant and the first respondent which amounted to an indemnity of the first respondent by the appellant. The judge found:
"... the parties' clear overriding intention that the respondent (the now appellant) would be the financier and the applicant the builder implied that if there was a need for money, such as to provide any outgoings or make good any losses, the respondent would provide it either directly or through loan arrangements with his bank backed by security provided by him. This in turn meant that if the venture failed and the security was called on, the respondent would have to bear the loss of or under the security. I find that the parties agreed that the applicant was not to bear any liability in such eventuality;"
that is, the eventuality of loss.
This finding did not stem from direct evidence of any such agreement. The parties did not expressly direct their minds to the possibility of loss. The judge's conclusion was derived from his consideration of their whole relationship. But it was supported by evidence. For example, there was evidence from the first respondent that the appellant said to him:
"What if we went into business so that you build as you know what to do and I'll put the money up."
To which he replied:
"I can't put any money in. I haven't got any."
The appellant said:
"Money won't be a problem. All you have to do is build."
This evidence is consistent with the appellant's own account of the formation of the relationship. He said that he met the first respondent and his wife on a social occasion in October 1986. During the course of conversation, the first respondent mentioned that he was building a new house and that he had taken time off from his shop because it was not doing so well. The appellant deposed that he asked the first respondent why he did not continue building houses, seeing that he had made money on previous sales. He said that the first respondent replied that he had no money or security and that he (the appellant) had replied:
"If that was the only thing that was standing in your way I am in a position to put up some security if you ever wanted to do something together".
A few weeks later, according to the appellant, there was a further conversation during which the first respondent asked how their relationship would be arranged. The appellant said that he replied:
"We should be equal partners. You do the work and I put up the security. We should speak to our accountants and organise something formally"
Mr Pacanowski also quoted himself as telling his accountant: "Harry will build and I will put up the security".
The appellant confirmed this view of the case in the course of his oral evidence:
"Well, you knew he didn't have any money didn't you?---No, that's to build he didn't have any money, no.
And so what you realised - and I take it you'd agree you didn't have any of the same skill or expertise as he had in regard to this type of project?---That's right.
So on the one hand, putting things neutrally at the moment, the idea of this union between you and he for this purpose was to complement each other's skills wasn't it?---Yes.
And the skill that he was giving was the one I've already indicated, namely his knowledge of the Maroubra area and of being able to get these things done quickly. Would you agree with that?---Mm. You'll probably have to say yes?---Yes, yes, yes. And on the other hand the skill you had was your - would you agree - your financial resources and your financial connections?---Yes."
Later, Mr Pacanowski gave this evidence:
"Did you tell the bank that you were to be responsible for financing of this project and also for providing the security?---Yes, but I am not denying that. I am not denying that I said it to you, I don't remember if I said it to the bank.
I am asking did you tell the bank - - -?---Well I don't recall telling it to the bank but yes that was the arrangement that I had, that I would provide the security, that is right."
In the context of a relationship where one party was contributing expertise as a builder and actively supervising the building work and the other's role was only to provide finance, almost all of which was borrowed, Mr Pacanowski's admitted obligation to "provide the security" must, in our opinion, be understood as a concession that he bore the risk of any monetary loss. There is nothing harsh about that result. If the venture proved unsuccessful, the first respondent was also a loser; he lost the value of his time and work.
The submissions on behalf of the first respondent to the trustee, as to why the proof of debt sought to be lodged by the appellant should be rejected, included a reference to a document called "Preliminary Application for Company and Business Advances" prepared by the Commonwealth Bank immediately after the initial request by Galite for facilities by the bank. The submission refers to a statement at p.3 of the document:
"Mr Pacanowski will be responsible for the financing of the project and is also providing the security."
This information obviously came from the appellant.
It seems to us that the concept of the appellant providing security is consistent only with the appellant taking upon himself the risk of loss, as between himself and the first respondent. This is not negated by the first respondent's acceptance of liability vis-a-vis the bank; an acceptance which was apparently necessary if the appellant was to play his part by arranging finance. The primary judge found that:
"... in all probability the parties did not expressly turn their minds to the possibility of any losses and, consequently, that they did not discuss who would be liable for them."
This finding involves a rejection of the evidence of the appellant, who said in an affidavit that the nature of the arrangement was:
"We set up a company with two directors and 50/50 split on the profits and liabilities and we both guarantee the loans."
In considering whether a first instance finding should be disturbed, appellate courts often refer to the advantage possessed by the trial judge in having seen and heard the witnesses. This comment is most often made in relation to the evaluation of matters of credit. But the advantage of the trial judge is not confined to the evaluation of credit. Most cases require a trial judge to determine the probabilities in connection with past events. Such a determination often involves, at least as one element, an assessment of the characters and personalities of the principal actors; not only in relation to their truthfulness but also because their characters and personalities may provide insight into the probabilities of past behaviour. In a case where a determination about those events depends to any significant extent upon such matters, the trial judge enjoys a significant advantage over an appellate court. This is such a case. Much must have depended upon the types of people the appellant and first respondent were. Bearing this in mind, and having regard to the express evidence to which we have referred, we are not prepared to disturb the finding that there was an implied agreement displacing the usual entitlement to contribution. The appeal should be dismissed with costs.
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