Secure Funding Pty Ltd v Terranova

[2014] WASC 476

JURISDICTION     :   SUPREME COURT OF WESTERN AUSTRALIA

IN CHAMBERS

CITATION:   SECURE FUNDING PTY LTD -v- TERRANOVA [2014] WASC 476

CORAM:   MASTER SANDERSON

HEARD:   1 DECEMBER 2014

DELIVERED          :   16 DECEMBER 2014

FILE NO/S:   CIV 2214 of 2014

BETWEEN:   SECURE FUNDING PTY LTD

Plaintiff

AND

SALVATORE TERRANOVA
ANGELINA TERRANOVA
Defendants

Catchwords:

Summary judgment - Proper interpretation of security documents - Turns on own facts

Legislation:

Rules of the Supreme Court 1971 (WA)
Transfer of Land Act 1893 (WA)

Result:

Judgment for the plaintiff

Category:    B

Representation:

Counsel:

Plaintiff:     Mr M F Holler & Mr N White

Defendants:     Mr M C Goldblatt

Solicitors:

Plaintiff:     Norton Rose Fulbright Australia

Defendants:     Lawton Gillon

Case(s) referred to in judgment(s):

Agricultural & Rural Finance Pty Ltd v Atkinson [2010] NSWSC 1396

Bakker v Chambri Pty Ltd (1986) 4 BPR 9234

Terranova v Secure Funding Pty Ltd [2014] WASC 208

1. MASTER SANDERSON:  This was the plaintiff's application for summary judgment.  The application was supported by an affidavit of Kerry‑Leigh Pallas sworn 28 August 2014.  In pars 3 ‑ 5 of her affidavit Ms Pallas refers to related proceedings heard by Allanson J:  see Terranova v Secure Funding Pty Ltd [2014] WASC 208. Although those reasons deal with a different issue his Honour deals with the relevant facts at [5] ‑ [13]. These reasons should be read with his Honour's judgment.

2. The requirements of O 14 r 2 of the Rules of the Supreme Court 1971 (WA) have been complied with - that is to say the statement of claim is verified by Ms Pallas and she swears she believes there is no defence to the claim. The evidentiary onus then shifts to the defendants. It is for them to establish there is a serious question to be tried. As the application played out the real issue between the parties was what was the applicable interest rate to be applied to the loan. This had a significant effect on the indebtedness of the defendants and if the defendants' argument succeeded judgment could not be granted because recalculation of the amount owing would be necessary.

3. It is convenient to summarise the defendants' argument in this way (what follows is taken largely from the written submissions filed in opposition to the application).  The defendants hold two registered mortgages securing two separate sums which total $2,750,000 which were advanced by them to their son and daughter‑in‑law.  The defendants have, since the initial loans of $2,750,000, advanced further amounts to their son and daughter‑in‑law secured by their mortgages.  The aggregate amount advanced by the defendants to their son and daughter‑in‑law is approximately $7 million.  None of that has been repaid.  The defendants' daughter‑in‑law was the registered proprietor of certain Malaga property.  She mortgaged these properties to the defendants and the mortgage was registered on 20 July 2007.  The defendants were further secured by mortgages over a property in Carine owed by their son and daughter‑in‑law.  There are two further mortgages registered over the Malaga property.  One is held by the plaintiff.  The plaintiff also held a mortgage over the Carine property.

4. On or about 18 February 2008 the defendants' son and daughter‑in‑law entered into a loan agreement with the plaintiff pursuant to which the plaintiff advanced them the principal sum of $2,600,000 on certain terms and conditions.  That is referred to in the defendants' submissions as the 'Loan Agreement'.  On or about 26 March 2008 the plaintiff, the defendants and others executed a document entitled 'Priority Deed' which provided for the priority in which the various parties securities were to rank in relation to both the Malaga property and the Carine property.  On the plaintiff's loan of $2,600,000 under the Loan Agreement the plaintiff has been paid by the defendants' son and daughter‑in‑law an aggregate amount of $3,569,166.96.  The Carine property has been sold and the plaintiff has reduced the debt owed to it by the defendants' son and daughter‑in‑law from the proceeds of sale.  The amount received at sale was $1,192,853.97.  The plaintiff received these funds pursuant to its priority under the Priority Deed.

5. The plaintiff claims that it is entitled, in priority to the defendants, to the full amount of the debt owed to it by the defendants' son and daughter‑in‑law under the Priority Deed.  The amount claimed is $2,683,252.36 as at 25 August 2014 with interest and fees from that date.  The defendants say the plaintiff has not identified the rate of interest or fees which it claims is accruing.  The plaintiff's loan statement on which it relies identifies the rate of interest as 21%.  The defendants say the plaintiff is not entitled to interest at this rate.

6. The defendants say under the heading 'Priorities' cl 3 of the Priority Deed provides that, despite other features of the parties' securities, the parties' securities will rank and operate at law and in equity so as to confer a first priority on the plaintiff's mortgages over the Malaga and Carine properties 'up to and including the amount specified in item 5'.  Item 5 of the Priority Deed specifies the amount of $2,600,000 plus interest, costs, fees, charges, duties and expenses (including legal expenses) 'which may be debited to the account under the terms of the [plaintiff's mortgages over the Malaga and Carine properties]' (emphasis added by counsel) including relevantly, 'where interest has not been paid on due date ... interest at the higher rate payable under the [plaintiff's mortgages]'.

7. The defendants say the mortgage over the Malaga property does not contain an operative clause allowing for the charging of interest. They therefore say the plaintiff's entitlement to charge interest can only arise under s 133 of the Transfer of Land Act 1893 (WA). Section 133 does not provide that the interest may be compounded or capitalised. Unless there is a clear agreement to pay compound interest, interest is taken to be simple interest. Reliance is placed on the decisions of Bakker v Chambri Pty Ltd (1986) 4 BPR 9234, 9236 and Agricultural & Rural Finance Pty Ltd v Atkinson [2010] NSWSC 1396 [130].

8. The amount of $2,600,000 in item 5 of the Priority Deed is the amount provided for in the mortgage over the Malaga property as the principal sum secured.  The word 'under' in item 5 of the Priority Deed, so it is submitted, refers to an entitlement to debit the relevant account which has been created by or under the authority of the mortgage over the Malaga property.

9. The defendants argued the Priority Deed thus expressly limits the amount in respect of which the plaintiff's mortgages which were later in time will enjoy first priority and does so by reference, not to any amounts owing under the Loan Agreement, but to the plaintiff's mortgages as the charging documents.  The priority amount is expressly limited to the principal sum of $2,600,000 and amounts 'which may be debited to the account [of the defendants' son and daughter‑in‑law] under the terms of the [plaintiff's mortgages]' (emphasis added by counsel).  It follows then on the defendants' case to the extent the defendants' son and daughter‑in‑law paid any part of the principal amount to the plaintiff the priority amount of $2,600,000 is thereby reduced.  The words 'plus interest' in item 5 of the Priority Deed referred as simple interest on the principal amount of $2,600,000 or such sum to which such principal amount is reduced as a result of the repayments.

10. The principal sum of $2,600,000 has been reduced by repayments by the defendants' son and daughter‑in‑law as reflected in the plaintiff's loan statement.  Further the mortgage over the Carine property has already been discharged and the plaintiff received the full proceeds of sale.  To that extent the plaintiff has consumed the amount $1,192,853.97 over which it is entitled to priority under the Priority Deed and the amount of the principal sum to which the plaintiff is entitled to priority under the Priority Deed is further reduced by such amount.  The effect of these payments and the inability of the plaintiff to claim priority in respect of compound interest or interest charges in excess of 15% per annum is that the plaintiff has substantially overstated the amount in respect of which it is entitled to priority under the Priority Deed.

11. There is a slightly different argument in relation to the Malaga property.  The mortgage over the Malaga property is contained in the mortgage form and provisions of memorandum filed and registered at the Department of Land Information.  The issue, the defendants submit, as identified by cl 3 and item 5 of the Priority Deed, is what 'may be debited to the account [of the defendants' son and daughter‑in‑law] under the terms of the [plaintiff's mortgages]'.  The issue is not what amount owed by the defendants' son and daughter‑in‑law to the plaintiff is secured by the plaintiff's mortgages over the Malaga and Carine properties.  The defendants say if that was the case it would have been a simple matter for the Priority Deed to have said that priority is given with respect to all amounts, of whatsoever nature and howsoever arising, owing by the defendants' son and daughter‑in‑law to the plaintiff.  It does not do that.  Instead specific words of limitation were used in the Priority Deed to circumscribe the amount in respect of which priority was afforded to the plaintiff.

12. The defendants point out the mortgage over the Malaga property provided for an interest rate of 15%, payment of interest monthly and allowed the plaintiff to debit to the account of the defendants' son and daughter‑in‑law relevantly fees payable in connection with the mortgage or any other arrangement with the plaintiff.  There is no operative clause in the mortgage allowing for the charging of interest.  Furthermore the mortgage does not provide for interest to be capitalised or for a higher rate of interest to be paid in the event of default.  It is submitted then the plaintiff does not enjoy priority in relation to any interest charged above 15% or any amounts which it claims by reasons of its capitalisation of interest.  Further from 23 September 2013 the plaintiff's priority in relation to interest is limited to 15% on the outstanding principal sum at that time less the sum of $1,192,853.97.

13. It is the defendants' position that the proper construction of cl 3 and item 5 of the Priority Deed is not assisted by the terms of the Loan Agreement.  Clause 30.1 of the Memorandum of Common Provisions does not provide for the mortgage to be read with the Loan Agreement.  It provides only for defined meanings in the Loan Agreement to have the same meaning in the mortgage unless expressly defined in the mortgage.  Further the defendants say it does not avail the plaintiff to refer to the definition of 'amount owing' in cl 30.2 of the Memorandum of Common Provisions.  Item 5 of the Priority Deed limits the amount in respect of which priority is afforded to the plaintiff to the sum of $2,600,000 and ancillary amounts which may be debited under the terms of the mortgage and not by reference to an amount owing under any other transaction document.

14. Furthermore the defendants say the plaintiff is not assisted by referring to cl 18 of the Memorandum of Common Provisions.  That clause is headed 'Costs and Indemnities'.  The plaintiff relies upon two provisions.  First cl 18.1(b).  The defendants say that clause deals only with taxes, fees and charges and is not therefore relevant.  The plaintiff also relies on cl 18.3.  The defendants say the indemnification found in that clause is not dealing with amounts which the defendants' son and daughter‑in‑law are contractually bound to pay the plaintiff.  It is dealing with liability, loss or costs which the plaintiff suffers or incurs in circumstances specified in the subparagraphs of cl 18.3.

15. Drawing all of that together the defendants say the plaintiff's priority under the Priority Deed is:

    1.the principal sum of $2,600,000 less any repayments made in reduction of the principal sum from time to time;

    2.fees and charges under the mortgage, the Loan Agreement and the variation to the Loan Agreement, the only item of which dealt with specifically by the plaintiff is the Rateable Termination Fee of $104,000; and

    3.simple interest on the outstanding principal sum from time to time at the rate of 15% per annum pursuant to s 113 of the Transfer of Land Act.

16. Accordingly it follows on the defendants' case the plaintiff has not properly calculated the amount owing to it by the defendants.  The defendants do not say the application ought be dismissed.  Rather they say the matter ought be adjourned to allow for an accounting exercise consistent with the submissions they have made in relation to the Priority Deed.

17. The plaintiff takes a different view.  Counsel began with cl 1.2 of the mortgage.  That is in the following terms:

    For the purpose of securing to us the payment of the amount owing, you mortgage to us all your estate and interest described in this mortgage in the land described in this mortgage, together with each structure, fixture or improvement on it or fixed to it, subject to the encumbrances described in this mortgage.

18. The words 'amount owing' are italicised which means they are a defined term.  Clause 2.1 of the mortgage is the usual provision about incorporating a memorandum of common provisions into the mortgage.  The mortgage specifies the rate of interest as 15%.

19. The plaintiff then moves to the Memorandum of Common Provisions.  In the introductory words it is explained that words in italics are defined in cl 30 of the document.  Further cl 1.3 is in the following terms:

    You agree to pay us on demand that part of the amount owing specified in the demand.  However, as long as you are not in default, this is subject to any contrary agreements in writing between you and us.

20. The plaintiff then moves to cl 30.1 of the memorandum.  That clause is in the following terms:

    A term which has a defined meaning in the loan agreement has the same meaning when used in this mortgage unless it is expressly defined in this mortgage when the meaning in this mortgage prevails.

21. Clause 30.2 then defines the expression 'amount owing'.  I will not quote it in full.   It is a very wide definition which says in essence the expression means any money owing under the mortgage 'or any other transaction document'.

22. The plaintiff then moves to the Loan Agreement.  In cl 17 of that document the expression transaction documents is defined to mean 'this agreement, all securities and any other document that we notify you to be a transaction document'.

23. In relation to capitalising of interest and the default interest rate the plaintiff refers to a document entitled 'Commercial Loan Agreement and Guarantee Schedule'.  Under the heading 'default rate' that expression is defined to mean the interest rate plus a margin of 4% per annum.  The plaintiff then refers to cl 8.4 to cl 8.6 of the commercial loan agreement as dealing with the higher interest charges and the capitalising or compound provisions.  It is the plaintiff's position the way it has treated the claim against the defendants is consistent with the documents and the amount claimed is due and payable.

24. In my view the plaintiff's submissions ought be accepted.  It is perhaps ironic that the transaction documents are drafted in a style which used to be referred to as 'plain English'.  They are certainly readable and made more comprehensible by discarding the Dickensian prose used in years gone by.  But it remains no easy matter to trace through the various documents the plaintiff's entitlement to treat the defendants' liability as they have.  But I am satisfied that is the correct approach.  There was a suite of documents entered into and they have to be seen as inter‑related.  Simply treating the mortgage in isolation as the defendants do is to ignore the commercial reality of the tri‑partied arrangement.  But even leaving that to one side I am satisfied the argument put by the plaintiff is both logical and consistent and the various definitions can be transferred from one document to the next.  Accordingly I am satisfied the plaintiff is entitled to the judgment that it seeks.

25. I will hear the parties as to the precise form of orders and as to costs.