FM Custodians Limited v Pavan HC Wellington CIV-2010-485-835

[2010] NZHC 2347

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

CIV-2010-485-835

BETWEEN  FM CUSTODIANS LIMITED Plaintiff

ANDJOHN JOSEPH PAVAN Defendant

Hearing:         9 August 2010

Appearances: E.J. Horner - Counsel for Plaintiff

J.J. Pavan - the Defendant in person

Judgment:      12 August 2010 at 3.30 pm

JUDGMENT OF ASSOCIATE JUDGE D.I. GENDALL

This judgment was delivered by me

on 12 August 2010

at 3.30 pm pursuant to r 11.5 of the High Court Rules.

Solicitors:           Morrison Kent, Solicitors, PO Box 10-035, Wellington

Introduction

FM CUSTODIANS LIMITED V JJ PAVAN HC WN CIV-2010-485-835  12 August 2010

[1]      The plaintiff, FM Custodians Ltd, seeks summary judgment against the defendant,  Mr  Pavan  under  guaranteed  loan  arrangements  for  a  principal  loan amount of $230,000 plus fees and interest. It claims that Mr Pavan breached his obligations under a personal guarantee of a loan agreement by failing to repay all sums owed by the debtor, the Pavan Partnership, to the plaintiff pursuant to the agreement.

[2]      Mr Pavan opposes the summary judgment application.

Facts and Background

[3]      On 15 April 2004, Mr Pavan and his sister, Maria Ann Bryce, who together trade as the Pavan Partnership, entered into a Loan Agreement to borrow $230,000 from the plaintiff. The loan was secured by way of a first ranking mortgage over a property at 2 Disraeli Street, Johnsonville (“the property”), together with a personal guarantee by Mr Pavan. The guarantee included the following clauses:

2.3 Unenforceability of Obligations

As a separate and continuing undertaking the Guarantor unconditionally and irrevocably undertakes to the Lender that, should the Guaranteed Indebtedness not be recoverable from the Guarantor under this Deed for any reason, including a provision of this Deed or an obligation (or purported obligation) of the Debtor to pay Guaranteed Indebtedness or to perform or comply with a Guaranteed Obligation being or becoming void, voidable, unenforceable or otherwise invalid ...  the  Guarantor will,  as  a  sole  and independent obligation, pay to the Lender on demand the amount which the Lender would otherwise have been able to recover (on a full indemnity basis). ...

...

3.1 Liability as a Sole Principal Debtor

As between the Guarantor and the Lender (but without affecting the obligations of the Debtor) the Guarantor is liable under this Deed as a sole and principal debtor and not as a surety.

3.2 No Discharge

The Guarantor is not to be discharged, nor are the obligations to be affected, by anything which, but for this clause, would or might have discharged the Guarantor or affected the Guarantor’s obligations, including:

...

d.    the failure to obtain, or the failure of a person to execute or otherwise be bound by, a Relevant Document or another security interest, guarantee, indemnity or other agreement;

e.    the  enforcement of,  or  failure  to  enforce,  a  Relevant  Document or another security interest, guarantee, indemnity or other agreement; or

...

h.    the illegality, invalidity, unenforceability of, or defect in, a provision of a Relevant Document or a Relevant Party’s obligations under any of them for  any reason whatsoever, and  whether or  not  known to  the Lender; or

i.    any other matter or thing whatsoever.

[4]      The term “Relevant Documents” was defined as including the deed and “any other agreement, present or future, evidencing or securing” the loan. The loan was repayable upon demand.

[5]      In June 2007, the Loan Agreement was renewed on the same or similar terms and a new Loan Agreement (“the Agreement”) entered into on 23 May 2007.  Mr Pavan signed the Agreement on behalf of the Pavan Partnership and as guarantor. Like  the  previous  agreement,  the  renewed  loan  Agreement  was  payable  upon demand and pending demand by 1 May 2012 with interest payable in the mean time. The principal sum, however, was recorded at $230,500.00. There was no notice requirement.

[6]      On 16 April 2010, the plaintiff made demand on the Pavan Partnership, and on Mr Pavan in his capacity as guarantor, seeking repayment of all sums due under the Agreement. Neither the Pavan Partnership nor Mr Pavan made any repayments on the loan. Despite demand having been made, the plaintiff continued to send monthly letters advising that interest payments were due. No such payments were made however.

Parties’ Submissions and My Decision

[7]      The application before me seeks summary judgment.   The principles to be applied  for  summary  judgment  applications  were  summarised  by  the  Court  of Appeal in Krukziener v Hanover Finance Ltd [2008] NZCA 187, [2010] NZAR 307:

[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: Pemberton v Chappell [1987] 1 NZLR 1; (1986) 1 PRNZ 183 (CA), at p 3; p

185. 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: MacLean v Stewart (1997) 11

PRNZ 66 (CA). 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: Eng Mee Yong v Letchumanan [1980] AC 331; [1979] 3 WLR 373 (PC), at p 341; p 381. 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: Bilbie Dymock Corp Ltd v Patel (1987) 1 PRNZ 84 (CA).

[8]      Before me, the plaintiff argued that Mr Pavan has no arguable defence to its claim because the amount owed by Mr Pavan represents an advance of money that was repayable on demand; demand has been made on both the Pavan Partnership and Mr  Pavan;  and  all  conditions  precedent  for  payment  pursuant  to  Mr  Pavan’s guarantee of the obligations of the Pavan Partnership have been fulfilled.

[9]      In response, Mr Pavan raises several matters in defence. First, he argues that the plaintiff should be obliged to realise the security they hold for the loan before seeking repayment pursuant to the guarantee. The plaintiff disputes that it is required to do this, however, arguing that the guarantee did not require it to realise one security before enforcing another. The plaintiff refers to para 238 of Laws of New Zealand, where it is stated that there is no duty on a creditor to realise securities for the benefit of the  guarantor. The authority cited in support of this statement is Alexander v Westpac Banking Corporation (1991) 3 NZBLC 102,188 (CA). Having regard to this established principle, I agree that Mr Pavan’s argument on this point must fail.

[10]     Before  me,  Mr  Pavan  then  endeavoured  to  argue  that,  contrary  to  the plaintiff’s  submission,  the  conditions  precedent  for  payment  pursuant  to  the guarantee had not been fulfilled because the plaintiff did not have a “perfected

mortgage security” over the property. It appears that there has been some confusion surrounding the title to the property, which records Mr Pavan and his sister as registered proprietors “for life”, and their children as proprietors of “the remainder in fee simple”.  The plaintiff’s mortgage security may thus have been simply registered over the life interests of Mr Pavan and his sister rather than the whole property interest including that of the “remaindermen”.

[11]     Mr Pavan argues that it was the fault of the plaintiffs that this uncertainty regarding the security has arisen, and that he should not be asked to take responsibility for the debt in the circumstances.   The plaintiffs on the other hand, submits that any issues regarding the security are irrelevant and do not affect the guarantee here.

[12]     It is true, of course, that a guarantor’s obligation under a guarantee is subject to an equitable duty by the creditor to maintain the security granted by the debtor. In New Zealand Bloodstock Leasing Ltd v Glyn Crawford Morse Jenkins HC Auckland CIV-2004-404-5795, 19 April 2007, Winkelmann J stated this principle in the following terms:

[67] Equity recognises a duty owed by a creditor to guarantors to maintain security granted by the principal debtor for the debt. The security must be maintained so that it is available to be applied in reduction of that debt, and so the guarantor may exercise its right of subrogation to the security, if the guarantor makes payment of the principal debt. The equitable duty extends to a duty to perfect by registration any securities obtained from the principal debtor as security for the guaranteed debt: Wulff v Jay (1872) LR 7 QB 756; Yorkshire Bank plc v Hall [1999] 1 All ER 879, 893.

[13]     However, in that case the Judge then continued:

[68] Parties to a guarantee can, by contract, exclude the usual operation of the  principles  of  suretyship  which  absolve  guarantors of  liability if  the creditor  has  released,  or  through  positive  actions  or  through  neglect, impaired securities: Bank of New Zealand v Baker [1926] NZLR 462 , 476 and 487. The contractual provisions relied upon must be interpreted in light of the principle that contracts of guarantee are to be construed strictly in favour of the guarantor. No liability should be imposed upon the guarantor unless it is clearly and distinctly imposed by the contract: Blest v Brown (1862) 4 De GF & J 367 , 376); Beale (ed.) Chitty on Contracts (29th ed,

2004) at [44–055].

[14] It follows, therefore, that a contract can “maintain the guarantor’s liability in circumstances where a guarantor would normally be released”: at [69]. Clearly, the contract of guarantee in the present case, does provide for independent liability of Mr Pavan as a debtor rather than as a mere surety. At cl 2.3, the guarantee provides for a “separate and continuing undertaking” by the guarantor should the debt not be recoverable under the deed “for any reason”, and states that “the Guarantor will, as a sole and independent obligation, pay to the Lender on demand the amount which the Lender would otherwise have been able to recover”. Moreover, cl 3.1 provides for liability of the guarantor as “Sole Principal Debtor”, and cl 3.2 states that the guarantor’s obligations are not to be affected by any defect in the security.

[15]     In my view, these provisions are sufficient to maintain Mr Pavan’s liability here, assuming that his obligations as guarantor could otherwise have been affected in some way by the irregularities in the security. The provisions are similar in nature to the clauses that were successfully relied upon by the creditor in New Zealand Bloodstock Leasing Ltd v Glyn Crawford Morse Jenkins (see [69]-[84]) and in UDC Finance Ltd v Whitley HC Auckland CIV-2008-404-608, 17 December 2009 (see [44]-[55]). There is also no suggestion of any kind here that Mr Pavan was unduly influenced  in  entering  into  the  guarantee  agreement.  Before  me,  he  made  no argument to this effect, and in addition, I note in passing that he may well have had legal advice on signing the guarantee as his signature on the deed was witnessed by a solicitor.

[16]     I also dismiss Mr Pavan’s argument that it was a condition precedent or a term of the guarantee that the plaintiff would perfect their security interest. Having regard in particular to cl 3.2 of the guarantee, and considering that there is nothing in the document to suggest that it was somehow conditional on the enforceability of the accompanying security, the guarantee cannot be construed in this way: cf New Zealand Bloodstock Leasing Ltd v Glyn Crawford Morse Jenkins at [116], [127].

[17]     Mr  Pavan  also  placed  some  reliance  on  cl  21  of  the  Agreement,  which provides for the right to apply for changes to be made to the Agreement in case of “unforeseen hardship”.  This clause states:

The Credit Contracts and  Consumer Finance Act 2003 gives Borrowers under a consumer credit contract the right to apply for changes to be made to the contract where they have suffered an “unforeseen hardship”. Where the Borrower, in terms of the Credit Contracts and Consumer Finance Act 2003, is unable reasonably, because of illness, injury, loss of employment, the end of a relationship or other reasonable cause, to meet the obligations under this Agreement then  the  Borrower  may  apply to  the  Lender  to  change  this Agreement  in  one  of  the  manners  set  out  in  section  56  of  the  Credit Contracts and Consumer Finance Act 2003. The Borrower must reasonably expect to be able to discharge his or her obligations of the terms of this Agreement that were changed in that manner. The Borrower may not make such an application if:

(a)  The Borrower has made a default in payment that has not been remedied

(to the extent that it can be remedied);

(b)  The Borrower has caused a credit limit to be exceeded; or

(c)  It  was  reasonably  foreseeable  to  the  Borrower  at  the  time  this Agreement was made that the Borrower would be unlikely to be able to meet his or her obligations under this Agreement because of the illness, the injury, the loss of employment, the end of their relationship, or other reasonable cause.

[18]     The plaintiff contends, however, that this clause cannot apply here because there is no evidence that Mr Pavan has previously made an application under cl 21 or s  56  of  the  Credit  Contracts  and  Consumer  Finance  Act  2003,  and  cl  21(a) specifically provides that the Pavan Partnership may not make an application once it is in default of its obligations under the Agreement. Section 57(1)(a) is to the same effect, stating that a debtor may not make an application if there has already been a default in payment. While this provision may appear harsh in a case like the present, where  repayment  is  due  on  demand,  the  Pavan  Partnership  has  clearly been  in default of its obligations for some time, both in terms of interest repayments and the principal amount. There is also no indication that the Pavan Partnership has made an application of this nature.  In my view, Mr Pavan is therefore unable to rely on cl 21.

[19]     There was also some suggestion before me that the plaintiff should have issued a s 119 notice pursuant to the Property Law Act 2007 before demanding payment of the loan. I agree with the plaintiff’s submissions here that a s 119 notice was not required, however, because the loan was repayable “on demand”. Section

119, on the other hand, is limited to amounts that are payable under an acceleration clause. An acceleration clause is a term which provides that, “if there is a default, any amounts secured by a mortgage become payable ... earlier than would be the case if there had not been a default”: s 4. Here, the due date for repayment was the

date of demand, and hence was not accelerated by a default: cf Commodore Pty Ltd v

Perpetual Trustees Estate & Agency Co of NZ Ltd [1984] 1 NZLR 324 at 342.

[20]     In my view, this conclusion is also unaffected by the plaintiff’s monthly capitalisation of interest. Any default in interest payments did not change the fact that the loan was repayable upon demand.

[21]     Finally,  Mr  Pavan  submitted  that  he  is  currently  in  a  difficult  financial situation due to the actions of another finance company, and that an extension of time should be granted in the circumstances to allow him to regularise his position. The plaintiff in response maintains that any difficulties with third parties cannot be raised as a defence to the present summary judgment application, and that sufficient time has elapsed since the demand was made to give Mr Pavan an opportunity to remedy the situation.

[22]     While I agree at one level it may seem that Mr Pavan’s circumstances here are somewhat unfortunate, there is no reason in the present case why the plaintiff should not be entitled to enforce its rights under the guarantee agreement. In any event, it seems that Mr Pavan’s position would not have differed greatly if the plaintiff had decided to enforce its rights under the Agreement against the Pavan Partnership. The Agreement limits the liability of Mr Pavan’s sister to the value of her half share in the property, with the effect that Mr Pavan will ultimately be liable for at least any remaining amount.

Conclusion

[23]     For  all  these  reasons,  the  plaintiff’s  application  for  summary  judgment succeeds.

[24]     Summary judgment is sought by the plaintiff against the defendant Mr Pavan for the principal loan amount of $230,000 and the following amounts outlined in the statement of claim:

(a)  Capitalised interest for 13 months  $  39,334.58

(b) Rates added to loan balance	$    4,391.60
(c)  Legal fees added to loan balance	$      601.00
(d) Loan fees added to loan balance	$      600.00
(e)  Penalty interest accrued to 10 March 2010	$  17,441.67
$292,368.85

[25]     In addition, the plaintiff seeks penalty interest on the outstanding amount at

17 per cent from 1 April 2010 to 9 August 2010 totalling $15,866.77, and indemnity costs of $13,054.50 (pursuant to cl 15 of the Agreement) as outlined in a 9 August

2010 affidavit of Amanda Lee Hill.

[26]     Mr Pavan did not dispute any of these figures.  In my view they are justified here.  In addition, I reach the conclusion that this matter is one entirely suitable for summary judgment.   In my view, the plaintiff has clearly put sufficient material before the Court to show that the defendant has no defence to the claim outlined in its statement of claim.

[27]     I enter summary judgment for the plaintiff against the defendant, Mr Pavan, for $292,368.85 and penalty interest on this outstanding amount of $15,866.77 up to

9 August 2010 together with an additional three days penalty interest at 17% p.a. up to 12 August 2010.

[28]     It is clear in this case that the plaintiff’s statement of claim does not purport to seek interest beyond judgment.  Before me, however, Ms Horner for the plaintiff in her Memorandum dated 9 August 2010 appeared to seek post judgment penalty interest “to accrue until the date of payment”.  I reject this claim, however.  I have been quite unable to see any reference in the Agreement or current loan documents between the parties allowing awards of post-judgment interest as opposed to simply “interest to the date of payment”.   Specific performance orders in reliance on any post-judgment interest provisions are therefore inappropriate here – see Nottingham v RSL (in liq) (1998) 12 PRNZ 625, FM Custodians Ltd v Patullo, High Court,

Christchurch,  4/6/2010,  CIV-2010-409-684,  AJ  Osborne  and  Westpac  v  Wright,

High Court, Auckland, 11/8/2010, CIV-2010-404-1023, AJ Bell.

Costs

[29]     Again before me Mr Pavan did not dispute the plaintiff’s claim for indemnity costs here, a claim that would appear to be justified on the basis of the contractual arrangements between the parties.  A detailed breakdown and explanation of those costs has been provided by the plaintiff.  In my view, the indemnity costs sought are appropriate under all the particular circumstances here.

[30]     Costs are awarded to the plaintiff against the defendant on an indemnity basis amounting to $13,054.50 together with any additional disbursements as may be approved by the Registrar.

‘Associate Judge D.I. Gendall’