Pty Ltd v Cullia

[2009] VCC 1161

IN THE COUNTY COURT OF VICTORIA Revised

Not Restricted

AT MELBOURNE

CIVIL DIVISION

Case No. CI-08-04231

GEORGE MIHOS	First Plaintiff
TODAY NOT TOMORROW INSTITUTE	Second Plaintiff
FINANCE PTY LTD
TODAY NOT TOMORROW INSTITUTE PTY	Third Plaintiff
LTD
v
JOSEPH CULLIA & MARY CULLIA	Defendants

---

JUDGE:	HER HONOUR JUDGE COHEN
WHERE HELD:	Melbourne
DATE OF HEARING:	14, 17, 18 and 19 August 2009
DATE OF JUDGMENT:	10 September 2009
CASE MAY BE CITED AS:	Mihos, George & Today Not Tomorrow Institute Finance Pty Ltd v Cullia
MEDIUM NEUTRAL CITATION:	[2009] VCC 1161

REASONS FOR JUDGMENT

---

Catchwords: Contract law – claim for repayment of amounts allegedly loaned; whether amounts advanced were loans; whether first advance repaid; whether ostensible authority in first defendant to contract on behalf of second defendant; credibility of witnesses.

---

APPEARANCES:	Counsel	Solicitors
For the Plaintiffs	Mr A Flower	Lewis Janover
For the Defendants	Mr G McCormick	Francis Daniel
HER HONOUR:

1          The plaintiffs claim from the defendants the sum of $117,000 plus interest, being the amount of alleged loans made between December 2005 and January 2007. The defendants deny any liability to the plaintiffs. They allege that only the first payment, $50,000 was a loan, that it was wholly repaid in January 2006, and that subsequent payments were not loans but repayments of money owed to the first defendant.

Background facts

2          Mr George Mihos and Mrs Mary Cullia are cousins. In March 2005 Mr Mihos first met his cousin’s husband, Mr Joseph Cullia. At the time Mr Mihos ran businesses involving attracting investors to wealth seminars, through the second and third plaintiffs (“TNTIF” and “TNTI” respectively), of which he was sole director and shareholder. Mr Cullia was a self-employed horse syndicator, operating through a registered business name, Australasian Racing Syndicates (“ARS”). They recognised in each other similar business approaches and opportunities.

3          By October 2005 Mr Cullia had moved into Mr Mihos’ then business offices, and they were setting up a business venture together whereby a company controlled by them, but for which outside investors would be sought, would hold distribution rights for colostrum based products. This opportunity came from Mr Cullia’s contact with the directors of a company called Trakport Pty Ltd (“Trakport”) which was wholesaler of product manufactured by a South Australian company. A seminar to attract investors was held utilising Mr Mihos’ investor lists, and enough interest was shown to cause both men to anticipate investment funds in the order of $1million.

4          In late October 2005 a company called Micul Nominees Pty Ltd (“Micul”) was formed, with Mr Mihos and Mr Cullia as directors and equal shareholders. That company was used in negotiations with Trakport and apparently acquired distribution rights to the product. However, a company called BC Fore Corporation Pty Ltd (“BC Fore”) was incorporated on 9 December 2005 to be the entity into which investor funds would be directed. It was a shelf company of which Mr Mihos and Mr Cullia believed they were intended to become the directors[1] and majority shareholders, with minority shareholdings to outside investors. From mid-December this company was operating with Mr Mihos handling bookwork and accounts, and Mr Cullia the salesman. In late December and January investors’ funds began to be received, and were paid into this company’s bank account.

[1]             It was suggested in cross-examination that neither became a director on the records until many months later, but there is no evidence to clarify that timing, and it is at odds with each version of when large directors’ fees were taken by them from the company’s funds.

Issues in dispute

5          There is no dispute that by agreement between Mr Mihos and Mr Cullia payments totalling $117,000 were made as follows.

• On 20 December 2005, $50,000 was paid by electronic transfer from the bank account of TNTIF to the bank account of J Cullia trading as ARS.

• On 19 October 2006, $17,000 was paid by electronic transfer from TNTI’s bank account to a bank account of Mrs Cullia.

• 22 December 2006, $15,000 was paid from TNTIF’s bank account into first defendant’s bank account.

• On 16 January 2007, $15,000 was paid by electronic transfer from TNTIF’s bank account into Mr Cullia’s bank account.

• On 16 January 2007, $20,000 by electronic transfer from TNTIF’s bank account into Mrs Cullia’s bank account.

6          The defendants acknowledge that the first payment of $50,000, on 20 December 2005, was indeed a loan, but say that no interest was agreed to be paid as it was intended to be very short term. They say that it was in fact fully repaid on 16 January 2006 as part of a sum of $150,000 transferred to the second plaintiff from a bank account of the newly established company, BC Fore. Further, Mr Cullia alleges that the balance of that payment, namely $100,000, was to be invested for him by Mr Mihos, repayable on demand and attracting 20% interest. Mr Cullia alleges that the payments made on 19 October 2006 and the last payments totalling $50,000 in December 2006 and January 2007 were, in part repayment of that $100,000. Mrs Cullia denies being party to any loan agreements.

7          Counsel for both parties submit that this is a case which rests on the competing credibility of Mr Mihos and Mr Cullia, and each urges me to disbelieve the other. Neither Mr Mihos nor Mr Cullia gave me the impression that he was an entirely reliable witness, and in my view each was not to be believed about certain matters. I agree that the credibility of Mr Mihos and Mr Cullia is central to this decision, as there was no written recording of what was agreed between them. However, the case does not therefore fail entirely if I am not convinced of Mr Mihos’s credibility, as there are a number of contemporaneous documents which shed some light on their dealings and intentions. The only other witness called was Mrs Cullia.

The “first loan”

8          There is no dispute that $50,000 was transferred on 20 December 2005 from the bank account of TNTIF to the bank account of Mr Cullia, and that the nature and purpose of this payment was a loan to assist the defendants in the purchase of their new home at Ascot Vale.

9          Mr Mihos insists that it was a “personal loan” from him, but he paid the money from the second plaintiff which is the corporate trustee of his family trust – he says because “at the time that’s how I was managing my affairs”[2] and the family trust was the vehicle for operating his personal business interests and through which he derived his personal income[3]. He says that Mr Cullia told him that due to bad credit he could not access the standard borrowing of up to 80% “loan to value ratio” with institutional lenders, and therefore needed a bigger than normal deposit. Mr Cullia denies that his credit rating was bad, but says that he did not want to exceed the 80% loan to value ratio because he would have had to pay for mortgage insurance.

[2]             T8, lines 24-25

[3]             T9, lines 4-8

10        Mr Mihos says that discussions about this loan commenced in November 2005, that it was further discussed at the defendants’ home on Mr Cullia’s birthday on 5 December as Mr Cullia walked him out of the house to go home, when the sum of $50,000 was specified as the amount needed and for up to about 12 months. He says that they discussed that a monthly interest rate of one per cent (or 12% per annum) would be a fair interest rate. He says that discussions continued and were finalised on 20 December, and that Mr Cullia provided the relevant bank details for transfer of the funds.

11        I am satisfied that this loan was in fact a loan from the second defendant, TNTIF, to Mr Cullia. Notwithstanding that it was negotiated by Mr Mihos, there is no evidence that would justify it being recovered personally by him as opposed to the entity from which he paid the money (rightly or wrongly given that it was a corporate trustee of a trust of which Mr Mihos was not sole beneficiary). During the course of the hearing as this issue loomed, there was an amendment granted to add the second and third defendants to the proceeding.

12        Mr Cullia says that he asked for the $50,000 to be advanced for a short period as “it would just save me pulling money out from other places that I had invested”[4]. He says that Mr Mihos was due to be away, and that he and Mrs Cullia were house hunting, and had seen the particular house they did indeed buy. Mr Cullia says that as he and Mr Mihos had already discussed that once investors’ funds were received into BC Fore there would be a payment to each of them of directors fees – on his version $150,000 each - the loan of $50,000 for the house purchase was only intended to be until the directors’ fees were paid, and Mr Mihos’ could reimburse himself from those. He says on that basis the loan was to be short-term – a matter of weeks – with no interest payable. He says these conversations occurred in the two weeks prior to his birthday on 5 December, during which time they had also agreed on the directors’ fees, and that the conversations occurred in the office that they shared without any input from or presence of his wife.

[4]             T 139, lines 18-20 and 24-26

13        Mrs Cullia gave evidence and denied ever having discussions with Mr Mihos about this or any other loan.

14        The Ascot Vale property was purchased solely in the name of Mrs Cullia, pursuant to a contract of sale dated 17 December 2005 for a sale price of $587,000. There is no evidence as to the amount or timing of payment of the deposit, but Mr Cullia’s bank records show two withdrawals totalling $55,000 on the same day as the $50,000 was transferred from TNTIF[5]. Documentation records the property as settling on 20 February 2006.

[5]             Exhibit C

15        The defendants do not claim to have made any direct payment to Mr Mihos or TNTIF in repayment of the loan of $50,000, but Mr Cullia says that money paid from BC Fore to TNTIF constituted such repayment.

Payment of $150,000 from BC Fore to second plaintiff

16        The central factual dispute in this case is the characterisation of a payment on 16 January 2006 of $150,000 transferred from the account of BC Fore to the account of TNTIF.

17        Mr Cullia says that it was payment of his director’s fee in BC Fore, which he requested be directed to TNTIF, in repayment of the $50,000 loaned on 20 December 2005, together with the balance of $100,000 to be invested at 20% return and repayable on demand.

18        Mr Mihos says that that payment was reimbursement to the second plaintiff of part of the funds which it had advanced to launch the new business, and in particular to make pre-payments for product as was required by Trakport from Micul Nominees. Bank records show payments from the second plaintiff to Trakport – on 24/11/05 of $100,000[6], on 4/12/05 of $50,000[7], 3/1/06 of $75,000 and on 31/1/06 of $75,000[8]. Mr Mihos says these were prepayment for product, effectively corresponding with prepayment amounts set out in a draft of a contract between Trakport and Micul[9]. From inconsistent clauses (as to a grace period, and minimum orders) I infer that that was not a final version of such contract. However, I do not believe Mr Cullia’s denial of any knowledge of there needing to be prepayment for product before January 2006, and I am satisfied on the balance of probabilities that there had been a need for funds to pre-pay for product to launch the business, and that those funds were advanced by TNTIF.

[6]             Exhibit Q

[7]             Exhibit R

[8]             Exhibit S

[9]             Exh

19        Bank statements record the electronic transfer on 16 January 2006 of the sum of $150,000 from the account of the company BC Fore Corporation Pty Ltd to the second plaintiff’s bank account. In the BC Fore bank statement it is recorded as “FNDSTFR REIMB TNTI FINANCE 14 JAN”.[10] I take that notation to be an abbreviation of “funds transfer reimbursement TNTI Finance 14 January”. Receipt of that payment is recorded in the bank records of TNTIF[11] as “REIMB FROM BCFORE 14 JAN”, which I take to mean “reimbursement from BC Fore 14 January”. I agree with the submission of the defendants’ counsel that these descriptions should not be taken to be definitive of the intended purpose at the time. The words with which they were recorded were wholly in the hands of Mr Mihos, not Mr Cullia, and Mr Mihos was not entirely consistent in describing what he says were further repayments from BC Fore of the other amounts prepaying for product[12]. Further, and more importantly, Mr Mihos admits describing another transaction in the company’s records as other than what he understood it to be[13].

[10]           Exhibit T

[11]           Exhibit

[12]           Exhibit T – “funds transfer 31 Jan” and “fnds tfr TNTIFin – 8 Feb”

[13]           Purported payment by BC Fore to Micul for “license fee”, in fact distributed as to $80,000 each to him/TNTIF and Mr Cullia on 120 February 2006 which he says were in fact payment of directors’ fees – Exhibit Y; and Invoice – Exhibit X.

20        I note that apart from copies of bank statements, no records of BC Fore were tendered, recording the characterisation in that company’s books of this payment of $150,000. Not only would I expect documents recording that information to exist, I would expect Mr Cullia to have been able to produce them as he says that he is still operating that company as its sole director[14], and I am not satisfied that any reasonable explanation was offered for his not doing so. I draw the inference that I can more readily accept other evidence on this issue, including the recording of the transactions in the bank statements, and in the ledger of the second plaintiff [15].

[14]           T 113, lines10-15

[15]           Exhibit U

21        Mr Cullia’s evidence that the $150,000 was his director’s fee includes that Mr Mihos took his equal amount in director’s fees some weeks later because Mr Mihos “didn’t want to leave the account empty, so he waited for those other funds to come in.”[16] Mr Cullia says payments of $100,000 on 31 January and $50,000 on 8 February from BC Fore to TNTIF were Mr Mihos taking his director’s fee, whereas Mr Mihos identifies those two payments as repayments of further pre-payments by TNTIF for product. In my view Mr Cullia’s version is unlikely to be true because my impression of Mr Mihos is that he would be unlikely to be allowing Mr Cullia a more financially advantageous arrangement than he was receiving himself. I do not believe he would have agreed to allow Mr Cullia to draw the whole of a $150,000 amount allegedly owing equally to each of them, while he delayed taking his equal amount even for a matter of weeks. Even more unlikely is that this would have occurred in circumstances where he would enable Mr Cullia to “invest” $100,000 of the payment with Mr Mihos or his company at 20% interest, the whole amount being repayable on demand.

[16]           T 99, lines 18-27

22        I find that both Mr Mihos and Mr Cullia viewed the funds from investors in BC Fore as available for them to recoup their respective input, of personal effort and time and any funds, as soon as possible. Indeed on Mr Cullia’s version, not only were they each to be paid directors’ fees wholly in advance for the following 18 months of personal time and input, but they were also entitled to receive, and did receive a month later, from the investors’ funds in BC Fore, $80,000 each for the distribution right or licence fee apparently obtained by Micul Nominees without any input of funds. He says that there was also to be an ongoing commission payable to Micul, and therefore to himself and Mr Mihos, for sales by BC Fore of product, whereas Mr Mihos says that the venture was effectively assigned to BC Fore by Micul. I do not need to decide that area of difference, or even whether or not Mr Mihos’ version of directors’ fees of $80,000 each being paid under disguise of a capital payment for the license fee in February 2006 is correct.

23        I am satisfied that Mr Mihos would not have delayed seeking repayment to the company he treated as the vehicle for his personal and business affairs – TNTIF – or to himself for directors fees, while allowing Mr Cullia to draw the full limit of his entitlements. I am satisfied that Mr Cullia’s version of the agreement as to directors’ fees, and as to the intent, purpose, and discussions about the payment of the $150,000 on 16 January 2006 from BC Fore to TNTIF, is not to be believed.

24        On the basis of the combined evidence of Mr Mihos, the bank records of TNTIF recording payments to Trakport “4 Micul” or “- Micul”, and the draft agreement between Trakport and Micul for prepayment for product, I am satisfied on the balance of probabilities that TNTIF had funded payments to assist in the launch of the colostrum product business, and that the payment of $150,000 on 16 January 2006 was to reimburse two of those prepayments. It follows that I am not satisfied that that payment represented repayment of the personal loan to Mr Cullia of $50,000 on 20 December 2005, nor investment at call of a further $100,000.

25        I am satisfied that the admitted loan of $50,000 made 20 December 2005 was not repaid in January 2006, and is still outstanding. I am also satisfied on the balance of probabilities that there was an agreement to pay interest of 12% per annum. I am satisfied that it is owed to the second plaintiff.

The alleged second loan

26        Both Mr Mihos and Mr Cullia say that the amount of $17,000 was paid after Mr Cullia told Mr Mihos he urgently needed money to pay outstanding accounts of himself and his wife, and that he produced a bundle of documents evidencing overdue accounts (or demands or warrants) for traffic or parking infringements of Mrs Cullia, utilities, repayments of finance on her Saab car, registration of his Mercedes car, and the accounts of her obstetrician for the recent birth of their baby[17]. There is no dispute that the money was paid, on 19 October 2006 into Mrs Cullia’s account.

[17]           Exhibit E

27        Mr Mihos says that the agreement for this payment was that it was a loan, to tide the Cullias over a time of financial difficulty, and to be repaid in December 2006 with the original $50,000.

28        Mr Cullia says that although he told Mr Mihos that bills were piling up, and produced a bundle of them as proof, this was in the context that he wanted repayment of his money – the $100,000 that had been invested by him with Mr Mihos. For reasons already given I do not believe that the payment of 16 January 2006 from BC Fore to TNTIF was of any of Mr Cullia’s funds, and it follows that I do not accept that he was owed the amount he alleges by Mr Mihos or TNTIF. I am therefore satisfied that the payment of $17,000 was a loan, which I find was from the third plaintiff as the money was transferred from that company’s account to Mrs Cullia’s, and there is no evidence of Mr Cullia having an entitlement to recover it personally. There is no suggestion that it was repaid.

The alleged “third loan”

29        Mr Mihos says that in December 2006 he and Mr Cullia had discussions involving delaying the repayment of the first and second loans. He says that Mr Cullia asked him to advance a further $50,000 to enable cosmetic work to be done to two properties to optimise their value in the then rising property market, which would allow refinancing from which all of the loans could be repaid. He says he agreed to extend the existing loans to June 2007, to lend the further $50,000, but that the interest rate agreed was 3% per month, this being less than the 5 to 6% being asked by conventional financiers given Mr Cullia’s circumstances.

30        There is no dispute that there were payments made of $15,000 on 22 December 2006, and on 16 January 2007 of $35,000 being $20,000 to Mrs Cullia’s bank account and $15,000 to Mr Cullia’s.

31        Mr Cullia says that each of these payments was in part repayment of the $100,000 allegedly invested by him with Mr Mihos on 16 January 2006. For reasons already stated I do not accept that such amount was owing to him.

32        I am satisfied on the balance of probabilities that these amounts were properly characterised as further loans, and that because the second defendant was the source of the payments it is the party entitled to recover them.

33        Mr Cullia denies that there was any agreement to pay interest on these sums because he denies that they were loans as opposed to repayments of moneys owed to him. Although I do not accept Mr Cullia’s version of the purpose of the payments, I have difficulty accepting that he would have agreed to pay Mr Mihos interest as high as 36% per annum (or 3% per month). First, if the money was as described by Mr Mihos for the purpose of cosmetic work to optimize valuations of properties to be refinanced (a purpose denied by Mr Cullia), such a high interest rate would seem to be self-defeating. More importantly, my impression of Mr Cullia’s attitude to money and investments is such that he would not have been likely to agree to pay such high interest, especially not to his wife’s cousin. While he would have been happy to receive 20% interest on funds invested with Mr Mihos or his companies – had there been such investment - I am not satisfied that he would have agreed to pay such high interest, especially if he was really in the financial difficulty that Mr Mihos alleges.

34        I am therefore satisfied that the amount of $50,000 is owed, but not the claimed interest rate on it of 36% per annum.

Is Mrs Cullia liable for any of the loans?

35        In relation to the first loan, there is no evidence, even from Mr Mihos, that Mrs Cullia was present when its terms were concluded, or when other conversations negotiating it occurred. The stated purpose of the loan was to assist with the purchase by Mr and Mrs Cullia of a new family home, and also took context from Mrs Cullia being Mr Mihos’ cousin. The property purchased was in fact registered solely in the name of Mrs Cullia, although that was not made known to Mr Mihos. The plaintiff’s counsel argues that it was enough that the conversations by Mr Cullia with Mr Mihos were to the effect that “we” want it to purchase a new home, and that she got the benefit of the loan. Mrs Cullia denied being part of the conversations, but was not asked whether she knew about this loan. It was made by a transfer into the account of Mr Cullia.

36        As to the second loan, it was organised in the absence of Mrs Cullia at a time when she had given birth only a week or two previously after what was said to be a difficult pregnancy. The evidence is clear that she took no part in any conversations with Mr Mihos about it. The evidence is also clear that the $17,000 was paid into her bank account, the number having been supplied by Mr Cullia. That was an account from which the house mortgage repayments came. A substantial proportion of the overdue accounts were in respect of her, so she certainly received the benefit of the loan.

37        Finally, in relation to the so-called third loan – consisting of three payments- some of the money was paid into Mrs Cullia’s bank account, again at the direction of Mr Cullia. She took no part in any of the conversations about that loan or those payments, and says that she left all business matters to her husband at this time in her life.

38        The plaintiff’s counsel argues that Mrs Cullia had equipped her husband with ostensible authority to contract for her, so as to bind her jointly to each of the loans. It is argued that she had so equipped him by leaving management of the family finances to him and giving him access and authority to use her bank account.

39        The relevant principles applicable to ostensible authority, as summarized in Pegela Pty Ltd v National Mutual Life Association of Australasia Ltd [18], are that the scope of any ostensible authority is to be assessed by reference to the representations of authority made by the principal.[19] The relevant inquiry, in all cases is whether the acts of the principal constitute a representation that an agent had a particular authority and were reasonably so understood by the third party[20]. The representation may either be express or implied from a course of dealings or it may arise from conduct which permitted the agent to act in some way in the conduct of the principal’s business. The representation cannot come from the agent but must be made by the principal, or by the principal’s previous course of dealing with the agent or by putting the agent in a position or by allowing him to act in a position from which it can be inferred that the agent’s actual representation of authority in himself is correct. [21] The plaintiff bears the onus of proving ostensible authority[22].

[18] [2006] VSC 507

[19]           at para 492

[20]           Egyptian International Foreign Trade Co v Soplex Wholesale Supplies Ltd per Browne-Wilkinson LJ [1985] 2 Lloyd’s Rep 36 at 41. Cited in Pegela at para 493

[21]           Pegela at para 493

[22]           Pegela at para 496

40        Notwithstanding that Mrs Cullia received the benefit of these loans, both directly and indirectly, and had authorized her husband to make payments into and out of her bank accounts, I am not satisfied on the evidence that she made any representation to Mr Mihos that her husband was authorised to borrow money from him on her behalf. I am not satisfied that merely because she gave her husband the means to arrange payments into and out of her bank accounts, or by leaving him to pay many of the family’s bills, she held out to others, or to Mr Mihos specifically, that her husband was authorised to borrow money on her behalf . If the evidence had gone so far as to confirm that she knew of each loan at the time it was made and did nothing to inform Mr Mihos that although moneys were being paid into her account she had not requested that loan, my decision might well have been different. However, as the evidence stands I am not satisfied on the balance of probabilities that Mrs Cullia gave ostensible authority to her husband to agree to these loans on her behalf.

Conclusions

41        I am satisfied that the sum of $50,000 was loaned by the second plaintiff to the first defendant on 20 December 2005, initially for up to 12 months with that period extended to June 2007, at an agreed interest rate of 12% per annum, and that none of the principal nor interest has been repaid to date.

42        I am satisfied that the sum of $17,000 was loaned by the third plaintiff to the first defendant, initially repayable in December 2006 then extended to June 2007, at an interest rate of 12 % per annum, and that none of it has been repaid.

43        I am satisfied that a further $50,000, consisting of $15,000 on 22 December 2006 and $35,000 was loaned by the second plaintiff to the first defendant, repayable by June 2007, but I am not satisfied as to any agreed interest rate. I am satisfied that none of this loan has been repaid.

44        There will be judgement for the second plaintiff against the first defendant for $100,000 together with interest to be calculated according to the above findings. There will be judgement for the third plaintiff against the first defendant for $17,000. I shall hear argument about statutory interest on this sum.