Downtown House (no.2) Limited v Ensom

[2019] NZHC 724

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2018-404-2452

[2019] NZHC 724

BETWEEN

DOWNTOWN HOUSE (NO.2) LIMITED

Plaintiff

AND

MARK ROBERT ENSOM

Defendant

Hearing:	4 April 2019
Appearances:	D J Chisholm QC and W M Irving for the Plaintiff A S Ross QC and P Murray for the Defendant
Judgment:	4 April 2019

ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELL

Solicitors:

Russell McVeagh (M Kersey/W N Irving), Auckland, for the Plaintiff Atmore & Co (Graeme Atmore), Auckland, for the Defendant

Copy for:

David Chisholm QC, Auckland, for the Plaintiff Adam Ross QC, Auckland, for the Defendant

Paul Murray, Barrister, Auckland, for the Defendant

DOWNTOWN HOUSE (NO.2) LIMITED v ENSOM [2019] NZHC 724 [4 April 2019]

[1]                 Downtown House (No.2) Ltd sues Mr Ensom under a guarantee he gave for a loan by Downtown House (No.2) Ltd to his company, Pomegranate Recording Ltd. Downtown House (No.2)  Ltd has applied for summary judgment.   In  response,   Mr Ensom challenges part of the claim for default interest. He has also applied under r 4.4(3) of the High Court Rules 2016 for leave to join a third party with a view to all issues being determined in a hearing between the plaintiff, the defendant and the third party.

The summary judgment application

[2]                 The principles on which a plaintiff’s summary judgment application are decided are well known. The Court of Appeal restated them in Krukziener v Hanover Finance Ltd:1

[26]      The principles are well settled. The question on a summary judgment application is whether the defendant has no defence to the claim; that is, that there is no real question to be tried. … The Court must be left without any real doubt or uncertainty. The onus is on the plaintiff, but where its evidence is sufficient to show there is no defence, the defendant will have to respond if the application is to be defeated. … The Court will not normally resolve material conflicts of evidence or assess the credibility of deponents. But it need not accept uncritically evidence that is inherently lacking in credibility, as for example where the evidence is inconsistent with undisputed contemporary documents or other statements by the same deponent, or is inherently improbable: … In the end the Court’s assessment of the evidence is a matter of judgment. The Court may take a robust and realistic approach where the facts warrant it. …

[27]      Under r 141A, the defendant need not file a statement of defence. The onus remains on the plaintiff, and summary judgment will be denied if on the hearing of the application it appears that there is an issue worthy of trial.

(Citations omitted)

[3]                 Downtown House (No.2) Ltd is not ordinarily a financier. Its directors are Tiffany Olsen, her sister, Georgia, and their mother, Lynley. They are also the shareholders of the company. Georgia is married to Sam McDonald, who is a friend of the defendant, Mark Ensom. Mr Ensom is the director and shareholder of Pomegranate Recording Ltd. He has other companies, one of which is Fishbowl

1      Krukziener v Hanover Finance Ltd [2008] NZCA 187, (2008) 19 PRNZ 162.

Trustee Ltd. Mr Ensom carries on business as a property developer. He has been involved in numerous projects over the years with Mr McDonald. He says that their standard arrangement was that Mr Ensom would have a 60 per cent share and that Mr McDonald would have a 40 per cent equity share. He says that their projects have been invariably profitable, at least until this one.

[4]                 Pomegranate Recording Ltd borrowed $3.3m from Downtown House No.2 Ltd under a loan agreement of 13 January 2017. The background is that in 2016, another of Mr Ensom’s companies, MR8 Construction Ltd, made an agreement to buy a property in Great North Road, Auckland. The settlement date for the purchase agreement had been put back until December 2016. By that time, Mr Ensom had not arranged finance to complete the purchase. In the event, Downtown House (No.2) Ltd provided the finance. The purchase was taken over by Pomegranate Recording Ltd. Settlement  was required  by 15 January 2017.  Mr Ensom  says that  he  spoke to  Mr McDonald about him getting involved in the project and they agreed that they would have the usual 60/40 per cent split.

[5]                 For the loan agreement, the parties had separate lawyers. The transaction was at arm’s length. The loan agreement is a standard commercial loan agreement of the sort used by financiers. The term of the loan was six months from the first drawdown date, which was 13 January 2017. Accordingly, the loan was repayable on 13 July 2017: both principal and accrued interest. Interest was to be capitalised. In the event, it was capitalised monthly. The default interest was payable if the borrower failed to pay any amount due. The ordinary interest rate was 10 per cent per annum; the default interest rate was 20 per cent.

[6]The loan agreement provides for fees. There was an establishment fee of

$300,000 which was paid by capitalising the loan account. There are also extension fees under cl 6.2 of the agreement:

6.2      Extension Fees:

(a)If the Facility has not been repaid in full within three (3) months from the Drawdown Date the Borrower will pay an extension fee of

$50,000 (plus GST, if any) on that date. The fee shall be paid by capitalisation to the loan account and will bear interest accordingly.

(b)If the Facility has not been repaid in full within six (6) months from the Drawdown Date the Borrower will pay an extension fee of

$50,000 (plus GST, if any) on that date. The fee shall be paid by capitalisation to the loan account and will bear interest accordingly.

(c)If the Facility has not been repaid in full within nine (9) months from the Drawdown Date, the Borrower will pay an extension fee of

$50,000 (plus GST, if any) on that date. The fee shall be paid by capitalisation to the loan account and will bear interest accordingly.

[7]                 Non-payment is defined as one of the events of default and is a trigger for charging default interest. The agreement also provides that Downtown House (No.2) Ltd can recover the costs of enforcing the loan, including legal fees. As security for the loan, Pomegranate Recording Ltd gave a general security deed and a mortgage over the Great North Road property. Mr Ensom gave an all-obligations guarantee. The guarantee contains terms that are normally found in guarantees which financiers require sureties to give. Mr Ensom is a principal debtor under the guarantee. The primary words of guarantee are found in cl 3.1. Clause 8.1 provides for payment of default interest on any overdue amount. Clause 8.2 deals with calculation of default interest and states that default interest is chargeable (in default of election by the creditor) at monthly intervals. There is also a costs recovery clause, cl 14.1, for any enforcement steps.

[8]In March 2017, Downtown House (No.2) Ltd advanced a further sum of

$500,000 to Pomegranate Recording Ltd. This advance was recorded in a letter signed by Downtown House (No.2) Ltd, the Fishbowl Trustee Ltd as a guarantor, Mr Ensom as a guarantor and Pomegranate Recording Ltd as the borrower. Mr Ensom explains that those funds were required to make a number of payments for the Great North Road property. His affidavit explains how the funds were dispersed.

[9]                 Mr Ensom says that the Great North Road property was listed for sale by tender but no sale resulted. He and Ms McDonald then considered a project under which the property would be developed with a 98-room accommodation block. They had done a similar development before. He says there were discussions about the Olsens taking part and contributing the land as their share. In other words, exchanging debt for equity. He says that in the end, the Olsens were not willing to consider this. In August 2017, he and Mr McDonald began talking to another property investor about

undertaking a joint venture with the property. While those discussions began in August 2017 and continued into 2018, by May 2018 the discussions had broken down. In the meantime, the loan to Downtown House (No.2) Ltd had fallen due on 13 July 2017.

[10]              After referring to the funds advanced on the loan having become repayable by 13 July 2017, Tiffany Olsen says:

However, the parties have subsequently treated 13 October 2017 as the Repayment Date (which operates in the defendant’s favour in respect of the accrual of default interest).

I will come back to that part of her evidence later. She has not given any specific evidence showing an actual agreement to defer the payment date to 13 October 2017.

[11]              For his part, Mr Ensom agrees that the date of repayment was deferred but he does not say that any specific date for repayment was fixed. He says that in July 2017 he was still talking to the other property developer about a possible joint venture. He alleges that the Olsens were involved in these discussions and did not make demand for repayment at that time. He says that Mr McDonald was actively involved in trying to get the joint venture over the line. Mr Ensom’s evidence is that the Olsens gave no indication that they were going to charge default interest.

[12]              In the statement of claim, Downtown House (No.2) Ltd has treated default interest as having accrued from 13 October 2017. It also says that there have been payments to reduce indebtedness. There was a payment of $10,000 on 6 June 2018 by MR8 Construction Ltd, another of Mr Ensom’s companies. In September 2018 Pomegranate Recording Ltd paid $2,862,287.38, the net proceeds of sale of the Great North Road property. It was not enough to clear the debt. Downtown House (No.2) Ltd gave a discharge of the mortgage, although Mr Ensom complains that Downtown House (No.2) Ltd was tardy in giving its release. On 4 October 2018, Fishbowl Trustee Ltd paid $500,000 to Downtown House (No.2) Ltd.

[13]              On 9 October 2018, the lawyers for Downtown House (No.2) Ltd made demand on Mr Ensom under the guarantee. Downtown House (No.2) Ltd pleads that the amount due under the loan agreement at 2 November 2018 is $2,114,666.77. It

has updated and amended that calculation to arrive at a figure of $2,231,048.63  for  4 April 2019.

[14]              For the hearing today, Mr Chisholm tendered with his submissions two schedules showing alternative calculations for the amount claimed. The first schedule sets out a calculation on the assumption that the date of repayment did not occur until 10 May 2018 to give $1,842,651.74. The second schedule calculated the amount due today on the assumption that normal interest accrued up until 9 October 2018 when Downtown House (No.2) Ltd’s lawyers made their demand and that default interest has run only from that date. On that basis the debt is calculated at $1,684,008.43 as at today.

[15]              These alternative amounts have been put forward because of matters raised by Mr Ensom. He does not accept that the loan went into default on either 13 July 2017 or on 13 October 2017. His argument was that there was something of a holding over. The Olsens were prepared to hold their hand while he and Mr McDonald tried to proceed with the development of the Great North Road property. The loan contract did envisage a process if there were to be a formal extension of the term of the loan. That is set out in cl 6.2(c). There was, however, no formal documentation to record the extension of the term. Admittedly the contract provides that any amendments to the loan contract have to be made in writing, but Mr Ross submitted for Mr Ensom that these parties also dealt with each other informally. There were text messages between them, oral conversations and the like.

[16]              For the purpose of summary judgment, it is arguable for Mr Ensom that there was a form of holding over after 13 July 2017 without the parties putting into place any fresh arrangement for repayment. In particular, Ms Tiffany Olsen’s evidence simply makes an assertion as to the extension to the 13 October 2017, but that assertion is not enough for summary judgment purposes to show a clear and fixed arrangement between the parties that the loan was extended to that date.

[17]              The evidence is consistent with Ms Olsen believing that there had been such an arrangement, but there is nothing in the evidence that ties Mr Ensom into such an understanding. Mr Chisholm referred to a passage in Mr Ensom’s first affidavit:

[55]At the time Downtown House (No.2) Ltd says the loan expired in October 2017 we were still talking to Peter about a possible joint venture.

(This is a reference to the developer they were having talks with.)

There he simply refers to Downtown House (No.2) Ltd’s position as to when the loan expired. His affidavit says the Olsens were involved in the process and did not make demand for repayment of the loan. And he says that is because Mr McDonald was actively involved in trying to get the joint venture over the line. His next paragraph begins:

[56]After the loan expired the Olsen’s encouraged me and Sam to pursue this option.

Mr Chisholm says that this is an acknowledgement by Mr Ensom that the loan had already expired on that date. In my judgment, the plaintiff is pushing too hard on that statement. It looks, if anything, as though it is somewhat carelessly drafted. I do not regard it as an unequivocal acceptance by Mr Ensom that the loan had already fallen due in October 2017.

[18]              The point remains arguable that there was no fixed arrangement that the loan was to fall due on 13 October 2017. At least for summary judgment purposes, it remains arguable that there was, as Mr Ross put it, a “holding over”.

[19]              The evidence shows, however, that Downtown House (No.2) Ltd tried to regularise the position. From October 2017 until February 2018, Downtown House (No.2) Ltd invited Mr Ensom to agree to extensions of the loan. These extensions would all have involved payment of an extension fee of $50,000. The lawyers acting for Downtown House (No.2) Ltd wrote to Pomegranate Recording Ltd’s lawyers on 5 October 2017, then on 16 October 2017 and again on 30 October 2017. Tiffany Olsen followed up with Mr Ensom personally in early November 2017 and again at the end of November 2017. Mr Ensom did not respond to any of these. communications.

[20]On 7 February Ms Olsen texted Mr Ensom:

…The extension (that you didn’t get round to signing lapsed) on 12 January. We need to extend for another three months. I’m sorry We have to add a fee to this one. We didn’t last time but the reality is we are missing out on other deals.

That again shows an assumption on her part that there had been some extension from 13 October 2017. It is simply an assertion on her part and does not show anything on Mr Ensom’s part where he agreed to such an extension. Her February 2018 text proposed an extension of 15 months from the first draw down date - that is, to 13 April 2018. But again, there is no sign of any agreement from Pomegranate Recording Ltd or Mr Ensom to this proposal.

[21]              This correspondence shows attempts by Downtown House (No.2) Ltd to obtain some agreement with Mr Ensom to establish a new repayment date, but it does not show any agreement by Mr Ensom to fix a repayment date. The position remained that, on Mr Ensom’s case, there was a holding over. On the basis of a holding over, it was open to the creditor at any stage to require repayment. The matter is analogous to a loan made where no repayment date is fixed. Mr Ross accepted the conventional analysis that a loan made without any repayment date is repayable upon demand by the creditor. In a similar way, when there has been a holding over after the repayment date has passed - the holding over being by consent of the parties - it is open to the creditor to give notice that the holding over period has come to an end. The parties’ communications in May 2018 need to be considered in the light of that.

[22]              Ms Tiffany Olsen emailed Mr Ensom on 10 May 2018. Of interest, she copied the email to Mr McDonald. She recorded in her email that she had had conversations with Mr McDonald. Her email includes this:

I have not received the executed copies of the two loan extension docs I have given you since its expiry in October 17, which means that the loan is in default and accruing penalty interest at 20%. This was not our intention hence issuing the extensions to keep interest at the initial agreed amount.

Her email gave the option of a further extension. She included with the email a proposed letter agreement for an extension of three months. It required that interest that had accrued up to 31 March 2018 would be capitalised, but that from 1 April 2018 interest  would  be  payable  monthly.    The  borrower  would  pay  extension  fees of

$150,000.  Attached was also a draft unsigned notice to Pomegranate Recording Ltd

attached. That notice recorded, amongst other things, that the loan became due and payable on 13 October 2017 and has not been repaid. It contains a reservation of rights, and records that Downtown House (No.2) Ltd was willing to consider a formal extension of the repayment date until 13 July 2018.

[23]              Having received the text with the attachments, Mr Ensom could have been under no doubt at all that Downtown House (No.2) Ltd regarded the loan as already having fallen due, that is, in October 2017. Even if he did not understand that position before, he knew on receiving the 10 May 2018 communication that Downtown House (No.2) Ltd did not agree to any extension unless he actually entered into an extension arrangement of the sort proposed. When a creditor asserts that funds have fallen due in the past, even if the borrower does not accept that or understand that the money was payable in the past, that communication is notice by the creditor to the borrower that the funds are now regarded as due and payable. The letter of 10 May 2018 is, in my judgment, effective to end any holding-over period and to make the funds payable as from that date – subject, of course, to any extension agreement that the parties might enter into. In the event, Pomegranate Recording Ltd and Mr Ensom did not enter into any extension agreement. Any arguable holding-over finished on 10 May 2018. From that time on the loan was in default, and default interest could be charged. Accordingly, I find that the amount payable as at today is as set out in the first schedule to Mr Chisholm’s submissions tendered today - $1,842,651.74.

[24]              Mr Ensom resists judgment being entered today for that amount because he contends that the court should not decide the matter until he has been given the opportunity to pursue his third party claim against Mr Sam McDonald.

Application for leave to issue a third party notice

[25]              A draft statement of claim against Mr McDonald has been provided. It pleads that Mr Ensom and Mr McDonald had been partners in earlier projects, with the 60/40 equity split, and that in any such project liabilities were shared in the same proportions. It is pleaded that Mr Ensom managed the design and construction of the development, and Mr McDonald managed the funding and finances. The pleaded case is that the development in Great North Road was another such project between the men whom

Mr Ensom regards as friends – at least until now. It is pleaded that on 5 January 2017, Mr Ensom and Mr McDonald orally agreed to undertake the development in Great North Road on the same terms as they had with their previous projects. They would share the profits on the normal 60/40 split. Liabilities would be shared in the same proportions. Mr Ensom pleads that if Downtown House (No.2) Ltd succeeds against him, he is entitled to be indemnified by Mr McDonald for 40 per cent of the liabilities he incurred in the business partnership. He pleads the matter under two causes of action: the first in contract and the second a general claim for contribution or indemnity. His evidence shows some participation by Mr McDonald in the Great North Road project, including arranging finance.

[26]              The  question  here  is  whether  everything  should  be  put  off  to  allow   Mr McDonald to be joined in the proceeding so that questions of contribution and indemnity can be decided at the same time as any residual issues in Downtown House (No.2) Ltd’s claim against Mr Ensom.

[27]              In Barclay’s Bank v Thom, Scrutton LJ described the objectives of the third party procedure:2

Now I think it is important to keep clearly in mind what the third party procedure is. A plaintiff has a claim against a defendant. The defendant thinks if he is liable he has a claim over against a third party. With that matter between the defendant and the third party the plaintiff has obviously nothing to do. He is not concerned with the question whether the defendant has a remedy against somebody else. His remedy is against the defendant. But the defendant is much interested in getting the third party bound by the result of the trial between the plaintiff and himself, for otherwise he might be at a great disadvantage if, having fought the case against the plaintiff and lost, he had then to fight the case against the third party possibly on different materials, with the risk that a different result might be arrived at. The object of the third party procedure is then in the first place to get the third party bound by the decision between the plaintiff and the defendant. In the next place it is directed to getting the question between the defendant and the third party decided as soon as possible after the decision between the plaintiff and the defendant, so that the defendant may not be in the position of having to wait a considerable time before he establishes his right of indemnity against the third party while all the time the plaintiff is enforcing his judgment against the defendant. And thirdly, it is directed to saving the extra expense which would be involved by two independent actions. With these objects in view the third party order usually provides that the third party may appear at the trial between the plaintiff and the defendant.

2      Barclay’s Bank v Thom [1923] 1 KB 221 (CA), 223-224.

[28]              Here I have already decided on a summary judgment basis that there is an amount for which Mr Ensom is unarguably liable to Downtown House (No.2) Ltd. In Druids Friendly Society v Westpac Merchant Finance Ltd, Master Thomson described the general approach.3

It is apparent from the authorities that where a plaintiff in a summary judgment application has a clear case to obtain judgment against a defendant then a defendant will not be permitted to apply for a third party to be joined simply to obtain contribution or indemnity from such third party and with the prime view of putting off the day when he will be required to meet his obligations to the plaintiff. In other words, the Court will not allow a defendant to delay the plaintiff the fruits of a judgment when liability is clear: to in effect grant the defendant a stay while issues of liability, indemnity, or contribution are determined by the Court as between the defendant and a third party.

Master Thomson went on to note that there may be cases where a third party will be joined. He cited authorities including this dictum of Smellie J in Nissan Datsun Holdings Ltd v R Savory Ltd:4

… It is a question of weighing the respective interests of the parties and in this case comparing the prejudice of delay and possible escalation of issues to be argued as far as the plaintiff is concerned against the danger faced by the defendant of having to conduct two trials with possible inconsistent results.

[29]                The argument for Mr Ensom is that this case does not fall within the normal run of commercial cases because of the connections with Mr McDonald, a friend of Mr Ensom, and with the Olsen family. That was meant to put a different light on matters. In support, Mr Ross pointed to the way the parties conducted themselves informally and did not necessarily document everything they did. In support, Associate Judge Doogue’s decision in Gough Finance Ltd v C & J Harvesting Ltd5 was cited. That was a case where Gough Finance financed by way of lease machinery which had been supplied by another company in the Gough group. The lessee, sued by the financier, was allowed to join in the supplier of the machinery, given the close connection between the financier and the supplier. While that is an interesting example of how leave can be granted under r 4.4(3) of the High Court Rules, it is not determinative for this case.

3      Druids Friendly Society v Westpac Merchant Finance Ltd (1996) 9 PRNZ 644 (HC) at 5.

4      Nissan Datsun Holdings Ltd v R Savory Ltd HC Auckland A336/84, 6 October 1986 at 4, as cited in Druids Friendly Society v Westpac Merchant Finance Ltd (1996) 9 PRNZ 644 (HC) at 5 and 6.

5      Gough Finance Ltd v C & J Harvesting Ltd HC Rotorua CIV-2006-463-9146, 6 September 2007.

[30]              While there was a background of friendship which it appears led to the loan, the parties did proceed on a formal basis at the outset. They were independently represented, the loan was formally documented, and proper securities were put in place.  Mr  McDonald’s  involvement  is  separate  from  plaintiff’s  claim  against Mr Ensom. Mr McDonald was not a director or shareholder of Downtown House (No.2) Ltd, nor was he a director or shareholder of Pomegranate Recording Ltd. While Mr Ensom may have a right of recourse against Mr McDonald, it is not clear that Downtown House (No.2) Ltd could have a right of recourse against him. Certainly it would not have been a clear right of recourse. It might involve having to establish that Mr Ensom was an agent for an alleged partnership. That would be a difficult case to run and there is no reason for Downtown House (No.2) Ltd to run such a case. Like any creditor with a range of remedies, Downtown House (No.2) Ltd is entitled to choose which sureties it will pursue, which securities it will realise and in what order it will enforce its remedies. There is no reason why Downtown House (No.2) Ltd should be delayed in exercising its remedies because Mr Ensom wishes to pursue a contribution claim against Mr McDonald. I also accept the submission for Downtown House (No.2) Ltd that any recourse against Mr McDonald would be for 40 per cent of any liability that Mr Ensom is under. Mr Ensom has a residual liability which he cannot hope to share with Mr McDonald.

[31]              In these circumstances, I am not attracted to deferring the matter by not entering judgment for Downtown House (No.2) Ltd for the amount for which liability has been established. I have not, however, given Downtown House (No.2) Ltd judgment for the full amount it has sought. It will still be able to pursue a claim (if it wishes) for the amount for the balance of its claim - the difference between the judgement given today and the $2,231,048.63 it claims is due today. That will continue as an ordinary proceeding. Mr Ensom will be entitled to file a statement of defence to that part of the claim and, on filing a statement of defence, he will have the normal period in which to issue a third party notice as of right. In the light of that, it is not necessary for me to grant leave under r 4.4(3) because Mr Ensom will be able to join Mr McDonald as of right.

[32]              That leaves Mr Ensom exposed to enforcement of judgment for the amount for which I will enter judgment. If he wishes to oppose enforcement, that is more appropriately dealt with by a stay application. I am not able to decide any stay application now.

Outcome

[33]              I summarise.   Downtown House (No.2)  Ltd has proved its claim against   Mr Ensom for the sum of $1,842,651.74 and has judgment for that sum. That is only a partial success because it claims $2,114,666.77 plus interest accrued since November 2018. It will be entitled to continue its claim in the ordinary way for the amount for which it has not succeeded today. It will be entitled to recover interest at the contractual rates on the amount for which I have entered judgment.

[34]              Downtown House (No.2) Ltd seeks costs on an indemnity basis under the contractual provisions to that effect. No figures for costs have been provided today. I trust that counsel will confer and agree costs. If they cannot, memoranda may be filed. If costs are contested, there should be proper affidavit evidence proving the costs, setting out the time records and charging rates so that I can determine any matters in issue between the parties. The parties are also warned that if costs are seriously contested, there are options for determining costs other than my deciding them. I refer counsel to the Court of Appeal’s decision in Black v ASB Bank:6 arranging for an independent practitioner to determine the costs, or having costs taxed by the Registrar, or referring the matter to the Law Society under the Lawyers and Conveyancers Act 2006.

[35]              I direct the Registrar to convene a first case management conference for further case management directions.

……………………………….

Associate Judge R M Bell

6      Black v ASB Bank [2012] NZCA 384.