FM Custodians Limited v Rabinska

[2012] NZHC 816

IN THE HIGH COURT OF NEW ZEALAND ROTORUA REGISTRY

CIV2011-463-000642 [2012] NZHC 816

BETWEEN  FM CUSTODIANS  LIMITED Plaintiff

ANDHELEN JEAN RABINSKA First Defendant

ANDEDWARD JUZWA Second Defendant

Hearing:         24 April 2012

Appearances: J Krebs for the Plaintiff

J H Olphert for the Defendants

Judgment:      30 April 2012

JUDGMENT OF ASSOCIATE JUDGE CHRISTIANSEN

This judgment was delivered by me on

30.04.12 at 4:30pm, pursuant to

Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date……………

Solicitors/Counsel:

J Krebs, Barrister, Napier – [email protected] / [email protected]

J Olphert, Olphert & Associates Ltd, Rotorua –  [email protected]

FM CUSTODIANS  LIMITED V HELEN JEAN RABINSKA AND EDWARD JUZWA HC ROT CIV 2011-

463-000642 [30 April 2012]

Background

[1]      The defendants are guarantors of the obligations of their company Centorini Limited (the company) in respect of the company’s borrowings which were secured by a mortgage in favour of the plaintiff.

[2]      In June 2005 the defendants purchased the property at 673 Whangamata Road, Taupo.  The company was incorporated for the purpose of subdividing it and selling lots for sale.  In February2006 the plaintiff agreed to advance $1,871,500 to the company for that purpose.  Security was to be provided by a mortgage, and the defendants’ guarantees.

[3]      The defendants  claim that there were discussions with the plaintiff’s  Mr Harrison at the time; that finance would be provided for a 12 month term only following which period the defendants would have to apply for a renewal of the loan. According to the defendant Mr Juzwa, Mr Harrison stated:

(a)       He expected the renewal of the loan would be no problem; and

(b)It was unlikely any personal guarantee would be enforced because the loan amount was a fraction only of the security property’s value; and renewal would be virtually automatic because when resource consent for the development was granted the value of the property would be significantly increased; and

(c)      The plaintiff had several borrowers who had renewed loans four or five times; and that if the loan went into default usually the plaintiff would take possession and then would sell it as a mortgagee sale; and

(d)At mortgagee sale the property would be sold at a fair market price as opposed to just “getting it sold”, and in this outcome personal guarantees would not be called upon.

[4]      The defendants do not challenge their liability pursuant to their guarantees. In particular that:

(a)      The loan was for an initial period of 12 months with interest payable monthly;

(b)That subsequently the loan was renewed and was due for repayment on 28 August 2008;

(c)      That the company was unable to repay the loan; thereupon that the plaintiff required the defendants to pay the principal, outstanding interest costs and other payments pursuant to their guarantee; that they failed to make those payments; that the defendants were jointly and severally   liable   as   principal   debtors   to   meet   the   company’s obligations; and on 19 September 2008 the company made demand upon the company and informed the defendants action would be taken against them as guarantors.

[5]      On 26 November 2008 the defendants were served with Property Law Act notices.  In December 2009 the plaintiffs issued summary judgment proceedings in respect of the sums owing.   The defendants filed a notice of opposition and an affidavit in opposition.

[6]      On 17 March 2010 the defendants met with representatives of the plaintiff in Hastings.  This judgment will refer to that meeting in greater detail in due course.  In the outcome of it agreement was reached that the plaintiff’s court proceedings would be withdrawn and later a notice of discontinuance was filed.

[7]      The present proceeding and the plaintiff’s summary judgment application

was filed about one and a half years later on 5 October 2011.

[8]      The defendants do not dispute their obligations pursuant to their guarantee and  in  particular  that  they  unconditionally  and  irrevocably  guaranteed  the  due

payment of their company’s indebtedness; and that they would be liable as if they were the sole and principal debtors and not as sureties.

[9]      Indeed by their affidavit in response to the plaintiff’s summary judgment application they acknowledge their liability for the company’s indebtedness.

[10]     Instead, their defence relies upon claims of assurances given at the time the loan was taken out and as was repeated in the parties discussions on 17 March 2010, that it would not take any steps against the defendants as guarantors in the event of any default, until the plaintiff had exercised its remedies by way of mortgagee sale. They say the plaintiff has made no attempts to market the property and has not made any attempt to try and sell the property before taking the steps under the defendant’s personal guarantees; that they were encouraged to enter into the loan agreement by the plaintiff’s representations; that the plaintiffs first summary judgment application was resolved when it was withdrawn in terms of the agreement by which no action was to be taken at all upon the guarantees until after the security property was sold.  .

Summary judgment principles

[11]     There is not a dispute that the defendants are bound by their guarantees. Accordingly and in response to a summary judgment application founded upon a claim that a defendant has no defence to the claim i.e. no real question to be tried, the defendant bears an onus to provide a credible basis for disputing guarantee obligations.  In this case the defendants must demonstrate that notwithstanding clear and apparent contractual obligations to provide an indemnity of their company’s commitment there is a lawful and arguable reason to resist those.

[12]     A Court will usually refuse summary judgment when the affidavit evidence discloses material conflicts of evidence; where it is best to assess the credibility of affidavit deponents by cross examination at trial.

[13]     Notwithstanding the summary judgment process encourages robustness in cases like this the process should not readily disqualify claims of a defence in the face of clear written evidence of obligations.

[14]     Anecdotally case authority encourages the Court to refer to the written and uncontroverted evidence on the one hand and on the other the evidence supporting claims of contradiction.   Usually the Court is reluctant to attribute significance to unsupported claims of representations which are contrary to the undisputed commitment  of contractual  obligations.    Obviously it  is  a matter for  individual assessment according to the particular case.   A Court ought to be weary against adopting a position which is inclined to reject the claims of a party that borrowed funds  insisting  claims  were  made  that  those  payment  obligations  would  not  be rigidly enforced.

[15]     The defendants assert there is evidence which provides equitable relief to estop the plaintiff from resiling from the assurances given to them.  Therefore they assert the plaintiff is estopped because the defendants were encouraged to believe their strict legal obligations would not be enforced; that the plaintiff was aware of the defendants understanding of this; and that the plaintiff encouraged the defendants in this belief.  In short the defendants claim the plaintiff is estopped from relying upon the terms of the contract which binds the parties.

[16]     Upon this summary judgment application the focus is upon the evidence supporting the claims of the defendants that  there were implied pre contractual assurances given by Mr Harrison that are not reflected in the express agreement signed by the defendants.   Mr Olphert acknowledges that it may appear that the evidence of the defendants is “inconsistent with undisputed contemporary documents”.  He says the defendants’ position is that they do not dispute the express terms of the guarantee.   Rather that the plaintiff assured the defendants that in consideration of their execution of the guarantee and later by the arrangement struck on 17 March 2010 that precedence would be given to a mortgagee sale and that such has not occurred and until it does they had no liability to the plaintiff.

[17]     The defendants’ position relies upon the Court accepting as arguable that such assurances were given in consideration of an agreement that the guarantees would not be enforced.

[18]     It is clear from the initial submissions filed on behalf of the defendants that their focus was upon a claim of pre contractual representations.  In oral submissions before me the defence of promissory estoppel focussed upon the parties’ meeting on

17 March 2010 and the deal the defendants say was agreed in that outcome.  The Court apprehends this change of emphasis has occurred in the outcome of the Court of Appeal’s decision in Krukziener v Hanover Finance Limited [1].  In that case Mr Krukziener focussed on representations made in the course of pre contractual negotiations. The Court responded at para [40]:

Even  if true, the facts asserted by Mr Krukziener could not establish a promissory estoppel. The doctrine is concerned with circumstances in which the court will enforce a voluntary promise to create legal relations, or to refrain from existing pre-existing legal rights.  Where negotiations resulted in a contract, the promises exchanged are no longer voluntary, and the question whether the contract will be enforced falls to be determined under the law of contract.  We conclude that the defence promissory estoppel is not available in law.

[1] [2010] NZLR 307.

[19]     Hence, in submissions before me Mr Olphert focussed upon a ‘deal’ done by which the defendants argued it was agreed no action at all would be taken on their guarantees until after the sale of the security property.

[20]     Finally, the defendants rely upon s 120 of the Credit Contracts and Consumer Finance Act 2003 (CCCFA) to request a reopening of their credit contract on the basis that the plaintiff induced the defendants to enter into the contract by oppressive means.  The defendants submit the plaintiff has breached the “reasonable standards of commercial practice” by holding out to the defendants that the loan would be renewed and that any repayment of the loan would be sought through the borrower before the guarantee was invoked.

[21]     In summary it is the defendants’ case that:

(a)       There are material conflicts of evidence that require a trial hearing to resolve those conflicts.

(b)There is a credible defence of estoppel because the plaintiff said it would take steps to sell the property before looking to enforce the defendants’ guarantees.

(c)      The  plaintiff  has  breached  reasonable  standards  of  commercial practice by holding out to the defendants that the loan was renewable and that a mortgagee sale would be sought before personal guarantees.

[22]   For present purposes the Court considers its focus should be upon the defendant’s claims of evidence demonstrating the existence of a conflict which requires the determination of a trial.

The 17 March 2010 meeting

[23]     Mr  Juzwa said  the defendants  were summoned  to  that  meeting;  that  the meeting  was  an  attempt  to  force  the  defendants  to  withdraw  their  notice  of opposition.  He said the plaintiff’s representatives stated that the judgment would not be enforced and that they were “merely positioning themselves in the first instance”. Mr Juzwa recalls the term “just shaking the tree to see what will fall out” being used. Mr Juzwa then deposed:

28.      We asked why the Plaintiff had not taken possession of the property and effected a mortgagee sale.   We were told that they wanted to avoid the stigma of a mortgagee sale at all costs which would significantly reduce their returns.   We pointed out that the consequences  of  their  action  would  be  the  Liquidation  of  the company and the GST would also be prioritised to the IRD instead of the Plaintiff.   We being adjudicated Bankrupt would be counterproductive.  The Plaintiff’s stance changed and it put forward an alternative proposal, which required our co-operation.  We made it clear that they needed to withdraw the proceedings and not invoke the Personal Guarantees. Agreement was reached on that basis.

29.      We were given assurances that proceedings would be withdrawn and that we would not be pursued personally in the future, so consequently there was no reason to discuss re-commencement of proceedings.    We  did  not  countersign  the  letter,  we  asked  the Plaintiff to amend the letter of agreement accordingly and return the amended version of us for signing (email 21 April 2010 – Exhibit “F”).

30.      However, we had no response so consequently we were left with no other option but to strike out the offending phrases, countersign and return the letter. The proceedings were then withdrawn on that basis.

[24]     Mr Harrison’s account on behalf of the plaintiff follows:

...

26.      At the meeting the second defendant stated that the security property was affected by a number of earthquake faultlines which would have resulted in the subdivisional resource consent not being granted had the Taupo District Council and the Environment Court known of them.

27.      Mr Juzwa threatened to reveal the existence of these fault lines to the Taupo District Council and all prospective purchasers if the Plaintiff continued with the proceedings against him.

28.      Such  an  action  would  have  destroyed  most  of  the  value  in  the security property.

29.      Agreement was reached at the meeting that the Court proceedings against them would be withdrawn in consideration of both defendants:

(a)       Working  co-operatively  to  bring  the  subdivision  of  the property to a conclusion and the defendants not taking any steps which would frustrate that process; and

(b)      Both  parties,  [the  plaintiff]  and  the  defendants  would endeavour to secure contracts on 6 lots of subdivision.

30.      The Plaintiff has subsequently discovered that the fault lines referred to by Mr Juzwa at the meeting were minor and disclosed to the Taupo District Council and the Environment Court during their consideration   of   the   resource   consent   applications   and   the subdivision consent was granted in the knowledge of their existence.

Considerations

[25]     The defendants have sworn on oath as to their account of representations made to them pre contract and the extent to which those were reiterated by the arrangement made post contract about two and half years later when the plaintiffs first proceeding claim and summary judgment application was discontinued.

[26]     Mr Olphert urges the Court to consider this is a proper case for the summary judgment application to be dismissed because of an arguable case for the defence to it; that the proper occasion to test the defendants’ sworn evidence is at trial.

[27]     As was referred to earlier in this judgment, the Court is reluctant to reach conclusions about matters which are important in the outcome where the affidavit evidence of the opposing parties appears to be in conflict.

[28]     But, here there is reason to seriously doubt the defendants’ claims of a ‘deal’ done on  17  March  2010.   The  evidence discloses that  from  the time  of initial mortgage default until the plaintiff issued its first proceeding claim the plaintiff’s deferred action to enable the defendants an opportunity to promote its development sale without the label of ‘mortgagee sale’ attaching.  This was an act meant to benefit the defendants as well as the plaintiff.  It is in that context it is difficult to attribute any meaning to the defendants’ statement at paragraph [26] “we pointed out that the consequences of their action would be liquidation of the company and the GST would also be prioritised to the IRD instead of the plaintiff”.   It is not easy to understand what that statement means.  In the circumstances GST was going to be payable  in  any event.    Regardless,  the  defendants  assert  that  because  of  it  the plaintiff withdrew its proceedings.

[29]     Nor does the notice of continuance subsequently filed by the plaintiff support

the contention of any ‘deal’ in terms claimed by the defendants.

[30]     The notice of discontinuance stated:

...

2.A specific agreement has been reached between the parties whereby the  defendants  will  undertake  certain  steps and the plaintiff  will discontinue its summary judgment application and substantive proceedings herein.

3.It  is  expressly  agreed  and  understood  between  the  parties  and between counsel that the said discontinuance is “without prejudice” to the plaintiff’s right to recommence the proceedings in identical terms or otherwise.

...

[31]     The notice of discontinuance was signed by counsel for the plaintiff and counsel for the defendants.

[32]     Clearly, and by its terms the plaintiff did not forego the opportunity to sue the defendants as it had done before.

[33]     A reasonable inference from these circumstances is that the defendants were provided with an extended opportunity to market their development without the taint of a ‘mortgagee sale’ tag.

[34]     In undated letters pre the 17 March 2010 meeting Mr Juzwa responded to what the defendants perceived was considerable pressure from the plaintiff for proposals to effect reductions in borrowings.   Curiously, in those, there was no reference to the matter of pre contractual representations preventing recovery from the  defendants.    Rather  the  focus  was  upon  the  defendants’  lack  of  financial resources.  But, the letters also contained a hint of defiance.  In one of those letters he stated:

If your aim is to recoup the monies outstanding I respectfully suggest that you need to initiate a dialogue that is not based on callously pursuing us into bankruptcy.   That strategy only predisposes us to reciprocate, resulting in Taupo District Council being informed of discrepancies in the resource consents for both the properties in which you have a financial interest.  As you can see from the copies of the Consent, Council has the authority to nullify them.

[35]     It is clear those letters were written before the 17 March 2010 meeting.   I have already referred to the accounts of the defendants and Mr Harrison with respect to a potential resource consent issue.  In response to Mr Harrison’s complaint of a threat, the defendants responded by deposing:

Regarding the fault lines referred to in paragraph 26 of Mr Harrison’s affidavit, the plaintiff had already engaged a firm of Planning Consultants that closely scrutinised the original Resource Consent Applications and the Environment Court Proceedings where the fault line issues were prominently discussed and obviously they were already cognisant of their existence.

[36]     Contrary to the assertions of the defendants, it seems clear that the plaintiff only became aware of the Council’s knowledge of fault line issues, after the notice of discontinuance was filed on 15 April 2010.

[37]     What is contended for by the defendants’ claim of promissory estoppel is that their affidavit evidence supports the claim of an assurance given to them at the 17

March 2010 meeting that the plaintiff’s legal rights would not be enforced against them, at least not until the security properties were sold and if need be by mortgagee sale.

[38]     For estoppel to apply there had to be a promise that was intended to affect the parties’ legal relationship and by which the plaintiff agreed not to insist on its strict legal rights against the defendants.

[39]     The plaintiff denies there was such a promise.

[40]     If it is a promise then such must have been clear or unequivocal if it is to prevent the plaintiff from losing its legal rights because it granted some indulgences before purporting to exercise its recovery claims.

[41]     For the plaintiff to be estopped it must be shown that its alleged promise or misrepresentation in some way influenced the conduct of the defendants.  Also, the defendants must show that they have suffered some detriment in reliance on the promise.   Usually this means the promisee must have done something that he/she was not previously bound to do and as a result suffered a loss.  Certainly in this case the defendants would have to show they altered their position in reliance upon the promise so that it would be inequitable to allow the plaintiff to act inconsistently with it.

[42]     But, in this case there is no evidence of the defendants having been burdened by or suffering some detriment because of the deal they say was struck on 17 March

2010.  Indeed the contrary would appear to be the case.  Even on their account the plaintiffs ‘promise’ provided a benefit to them, by providing more time for payment to be affected.  There is no evidence of them doing something that otherwise they would not have done, but for the promise they say was made.

[43]     In addition to their promissory estoppel claims the defendants contend there is an arguable case for reopening the parties’ credit contract pursuant to the CCCFA. This claim focuses upon the pre contractual representations to which there has been reference earlier in this judgment.   The defendants contend that the plaintiff has

breached ‘reasonable standards of commercial practice’ when they said the one year loan would be renewed and that repayment of the loan would be sought from the defendant’s company before the guarantees were invoked.

[44]     The difficulty the defendants face with that defence is the fact that there are no contemporary documents available to assist their case.  Indeed, it appears this line of defence has been raised for the first time upon the current proceeding.  The claims are vague and were not mentioned in correspondence pre the 17 March 2010 meeting nor do they appear to have been the subject of express reference at that meeting.

Conclusions

[45]     The defendants’ claims of a promise appear unclear from their account.   It seems that indulgences granted by the plaintiff have been assumed by the defendants as  providing  promises  to  them.    But,  what  is  contended  for  on  behalf  of  the defendants is an unlikely scenario which makes no commercial sense in the context of the defendants’ acknowledgement of being bound by their guarantees.  Wherein it appears no adverse consequences at all flowed from the alleged promise, the defendants face an improbable task of proving a claim of promissory estoppel based on a claim that the plaintiffs would not strictly enforce their legal rights against them.

Result

[46]     Judgment  is  granted  to  the  plaintiff  against  the  defendants  jointly  and severally in the sum of $3,194,346.16 inclusive of interest to 24 April 2012.

[47]     There is a declaration that the defendants are liable to pay interest at the

parties’ contract rate until such time as the judgment is paid.

[48]     The defendants are ordered to pay the plaintiffs’ costs on a solicitor/client

basis, subject to the Court’s approval of the level of those fees.

Associate Judge Christiansen