Marcus Julian Friedlander v Marcus Julian Friedlander and Lynley Janine Faber

IN THE COURT OF APPEAL OF NEW ZEALAND

CA285/01

BETWEEN	MARCUS JULIAN FRIEDLANDER
First Appellant

AND	MARCUS JULIAN FRIEDLANDER AND LYNLEY JANINE FABER AND ANCHOR TRUSTEES LIMITED
Second Appellants

AND	MARCUS JULIA FRIEDLANDER AND LYNLEY JANINE FABER AND KERRY JOEL KNIGHT
Third Appellants

AND	STARI HOLDINGS LIMITED
Respondent

Hearing:	15 July 2002
Coram:	Keith J Fisher J Salmon J
Counsel:	R J Asher QC and H P Holland for the Appellants D K Wilson for the Respondent
Judgment:	8 August 2002

JUDGMENT OF THE COURT DELIVERED BY KEITH J

Summary judgment against covenantors

The appellants challenge a summary judgment given by Priestley J in the High Court in Auckland requiring them to make payments to the respondent. The respondent’s claim was based on a term loan contract of 23 July 1999 under which on 11 August 1999 it lent $1,800,000 to Lincoln Road Developments Limited, the nominee of Mr Timothy Bartells, as purchaser, under an agreement for sale by the lender of land in Lincoln Road, Henderson. In breach of the agreement Lincoln failed to repay the moneys to the lender. The lender then demanded payment by the three appellants as convenantors and as additional convenantors under the following provisions of the loan contract:
B. Liability of Covenantors
The liability of each of the Covenantors hereunder, Timothy Ross Bartells and Marcus Julian Friedlander, to the Lender, Partmaster Limited [which became Stari Holdings Ltd], is unlimited and each such Covenantor shall be personally liable to the Lender herein as if such covenantor was the Borrower hereunder. The liability of the Covenantors hereunder is both joint and several.
C. Additional Convenantors
1.Save for the personal liability of Marcus Julian Friedlander, which is unlimited, the liability of each of the additional covenantors hereunder to the Lender is limited at all times to the net assets of the respective trusts which the additional covenantors are trustees of.
. . .

By the time of the summary judgment application, Mr Bartells had been declared bankrupt.

Priestley J held that the three appellants had no defence to the claim and entered judgment in the respondent’s favour against the three appellants for the sum of $2,256,602.70, made up of the loan and interest.

Grounds of appeal

Mr Asher QC for the three appellants challenges the judgment on the grounds that
(1)the second and third appellants were liable only to the extent of the net assets of the trusts they represented and that limit was not recognised in the judgment;
(2)there was an arguable defence that there was a collateral contract or estoppel to the effect that the borrower could satisfy the repayment obligations by transferring certain land;
(3)there was an arguable defence that the respondent was in breach of its duty to disclose information about the financial position of Mr Bartells who was the instigator of the transaction, the borrower and co-guarantor;
(4)the Court should have exercised its discretion against entering summary judgment on the ground that Davenports, a firm of solicitors who were said to be acting for Mr Friedlander, should have been joined as a third party;
(5)again as a matter going to discretion, discovery was incomplete.
On the first point, the respondent accepts that the judgment should be adjusted to limit the liability of the trustees in terms of cl C1 set out above. At the point of any enforcement of the judgment against those trustees, the necessary calculations would have to be done in accordance with the clause.

Was there a collateral contract or estoppel?

Priestley J held that there was no credible defence available to the appellants based on the alleged collateral contract or estoppel.
No such collateral contract or estoppel is included in the loan contract or indeed recognised it in the slightest way. Accordingly it must be oral. The appellants’ argument was based on conversations about which Mr Friedlander testified between him and a representative of the lender, on his understanding of the existence of a property transfer arrangement, and on the correspondence exchanged in the period leading up to a meeting on 16 July 1999. That meeting led directly to the loan agreement of 23 July.
It is convenient to record at this point the correspondence which followed immediately from the meeting of 16 July. On that day Snedden and Associates (solicitors for the lenders) wrote to Davenports (solicitors for Mr Bartells and possibly also for Mr Friedlander, a dispute into which we need not enter) referring to the meeting held at their offices that morning and attended by representatives of the lender, Mr Friedlander, Mr Bartells, Mrs Cathie Pongia (a partner in Davenports) and the writer (a partner in Sneddens). The letter set out variations in the original contract for sale and purchase between the lender (also the seller) and Mr Bartells whose nomination of Lincoln was accepted on the basis that he remained personally liable for the obligations of the purchaser under the agreement. The letter then dealt with repayment and with security for the loan. The purchase price of $12,000,000 was to be satisfied:
. . .
(a)by a payment of $10,200,000 in cash or bank cheque in one sum; and
(b)the purchaser and the covenantors/guarantors entering into vendor loan documents securing a loan of $1,800,000 by our client to Lincoln Road Developments Ltd
5.The terms of the vendor loan are as follows:
(a)Principal Sum                   -     $1,800,000
(b)Interest rate  -     10% ordinary, 14% penalty
(c)Term  -     12 months
(d)Interest to be paid in one sum on 16 July 2000
(e)The loan to be personally guaranteed by Tim Bartells and Marcus Friedlander
(f)The additional securities in clause 6 below are to be given on settlement date.
6.The security to be offered for the vendor loan, in addition to the unlimited personal guarantees from Mr Bartells and Mr Friedlander, will be by the registered proprietors of each of the below-mentioned properties granting a mortgage over such properties to Partmaster Ltd. These mortgages will remain unregistered, although secured by caveat at our client’s option, but will be registerable in the event of a default by the borrower of its obligations under the vendor loan contract. The properties to be secured are:
(a)the property at 131 Lincoln Road to be owned by Lincoln Road Developments Ltd;
(b)the property at 7A Tennessee Ave, Mangere owned by Marcus Friedlander, Lynley Faber and Anchor Trustees Ltd as trustees of the Tennessee Trust;
(c)the property at 6/77 The Strand, Parnell owned by Marcus Friedlander, Lynley Faber and Kerry Knight as trustees of the Louden Trust;
(d)the properties at 9-15 Elliott Street, Papakura owned by the trustees of the Louden Trust.
Save for the personal liability of Mr Friedlander, which is unlimited, the liability of the remaining trustees will be limited at all times to the assets of their respective trusts.
. . .

The term loan contract and mortgage documents were attached.

Davenports replied on Monday 19 July and agreed in these terms:
. . .
4.Agreed subject to clauses 8 and 10. [This qualification is not relevant.]
5. Agreed.
6.Agreed subject to the agreement of the independent trustees. Please note that we do not act for the Tennessee Trustees in this matter nor the Louden Trustees.
. . .
The letter then recorded the writer’s understanding that the vendor loan documents had been signed by all parties except for Anchor Trustees who were to sign on the following day. As already noted, the term loan contract is dated 23 July although some of the signatures, including Mr Friedlander’s, are dated 16 July.
In his first affidavit opposing the summary judgment application, Mr Friedlander said this about the alleged collateral contract:
20.From early on in the time I became involved in the negotiations to be part of the purchase of the Lincoln Road property, there were discussions with the vendors, the current plaintiff, as to how the funding that was expected to come from the plaintiff vendor, was to be repaid. A Heads of Agreement was entered into where the plaintiff agreed to accept property in exchange for the second mortgage debt. I do not have a copy of that document but believe the plaintiff will have, as will Davenports on behalf of Lincoln Road Developments Limited.
21.I talked to Steve Covic, who represented the plaintiff, on more than one occasion and he told me that the plaintiff would take “any property” to clinch the deal so long as after debt was repaid it had a valuation which was equal to the amount said to be outstanding. I clearly remember bringing up this subject with Steve Covic because when it was contemplated that there would be a third vendor mortgage to be repaid within one year, my question to him was how that was going to be able to be funded within that time period, as I knew that it was not able to be funded from cash given the high level of lending already on the purchase of Lincoln Road. I am absolutely clear in my mind that Steve Covic agreed that the property transfers would be accepted and we expected that those would take place over the course of that year. After we had settled, Steve Covic told me that he had discussed the matter with his father, Tony Covic and he had said that they did not intend to take on any more property. I considered this advice directly contradictory to the position I had understood to exist and I would not have entered into the third mortgage and guarantee and represented the other defendants allowing them to enter into these arrangements, had I known that the plaintiff did not intend to go forward with property transfers. . . .
Mr Friedlander then mentioned a letter of 26 June from the lender’s solicitors to Davenports “which confirms my understanding of the arrangements with the plaintiff . . . [and] which outlines the property – transfer option for the purchaser which [he] believed was part of the agreement” (see paras [18] and [19] below). He continued:
22.There is another letter dated 16 July 1999 in the documents received from Davenports by Knight Coldicutt [Mr Friedlander’s solicitors in this litigation] from the plaintiff’s solicitors to Davenports which puts forward a different proposal without the property transfer options [para [7] above]. I do not recall seeing this letter before. . . . I note the letter of 16 July 1999 refers to a meeting including me. I did attend a meeting about then. The agreement however on my understanding was still in terms of the 26 June 1999 . . . . letter.
Further correspondence, especially in June and July 1999, became available to Mr Friedlander before he swore his third affidavit. On inspecting it, he said, he
13.. . . found that there is significant correspondence indicating that there were many proposals and arrangements [about repayment by transfer of land] discussed between the solicitors involved and I confirm that it was my understanding at all relevant times that there would be a property transfer to discharge the plaintiff’s debt. [He then listed letters “which confirm these arrangements were contemplated”.]
14.I expect that the plaintiff will say that no matter what I understood the arrangement to be in relation to the land transfer arrangement, the agreement ended up not including an arrangement for a property transfer to discharge the debt. If that is the end result, I was not informed of the actual arrangement by anyone. . . .
The respondent’s affidavits did not address those issues. Mr Wilson for the respondent said that there was no need to. Mr Friedlander’s evidence, he submitted, did not begin to establish the existence of the contract. We agree. At the most the evidence stated what he understood. The most critical piece of evidence is that relating to the meeting of 16 July when the terms of the agreement were worked out. All that Mr Friedlander says of that is that
the agreement however on my understanding was still in terms of the 26 June 1999 . . . letter [a letter to which we return].
He does not begin to provide an evidentiary basis for saying that the other parties represented at the meeting even knew of his understanding let along agreed to it. And the agreement which he signed on that day does not in any way reflect his understanding.
The first sentence of para 14 of Mr Friedlander’s third affidavit quoted in para [12] above “really says it all” as Priestley J remarks. That sentence also provides a link to the agreement of 23 July which, to repeat, is silent about a land transfer as a means of meeting the loan debt. We now turn to the correspondence exchanged in the lead up to that agreement.
Mr Asher referred us to five letters from that period exchanged between the two firms of solicitors:
•     25 June Davenports to Sneddens
•     26 June Sneddens to Davenports
•     12 July Davenports to Sneddens
•     13 July Sneddens to Davenports
•     15 July Davenports to Sneddens
We recall that the meeting at which the terms of the loan agreement were settled followed on 16 July; we have already set out the correspondence which immediately followed that meeting.
The significant part of the five earlier letters concerned the options to repay the vendor loan. In the first letter from the borrower’s solicitors possible options were put in these terms:
(e)The vendor mortgage is to be secured by personal guarantees by Marcus Friedlander and Timothy Bartells as well as caveats over Lincoln Road, St Aubyns Apartments in New Plymouth and the Bethlehem sections of Herald Developments Limited. As the sections are still in one title, there will be one caveat over the Head Title.
We understand that the purchaser has the option to repay the vendor mortgage earlier than 12 months by:
(i)Cash in one lump sum;
(ii)Transfer of sections at the Bethlehem Heights development of Herald Developments Limited to a market value of $1.3 million net of GST;
(iii)The transfer of the St Aubyns development in New Plymouth once construction has been completed.
Mr Asher emphasised subparas (e)(ii) and (iii). Sneddens, in their reply, included a fourth option, again involving the transfer of a combination of parts of the two properties, and amended each to require cash of $500,000 or more in each, with the clear title to the sections in each of the second and fourth to have a value of $1,300,000. The two sums together would meet the debt of $1,800,000. Davenports’ 12 July reply might at first glance be read as broadly accepting the amended proposal, but Snedden’s response the next day raised matters of detail. Any possible prospect of an agreement being constructed out of the developing detail of that correspondence was however put back by Davenport’s letter of 15 July, the day before the crucial meeting, which put the repayment option on a markedly different footing, relating to just one of the properties:
3(e)(ii), (iii) & (iv)
After further discussion with Mr Bartells this morning, the preferable way to repay the vendor loan may be by the transfer of the St Aubyns Development, completed with a minimum value of $1.8million. Mr Bartells envisages that the development will be worth in excess of $1.8million but is not suggesting any repayment of any amounts to him over and above $1.8million.
Mr Bartells is comfortable with your client’s nominated valuer of Ian Gunn by providing a valuation at the time of completion, such that if there are any disputed valuations, they will be submitted for determination by an independent arbitrator as suggested in your letter.
We are told that the total debt on St Aubyns will be $1.3million and over the next year’s time, with the completion of the Herald Developments Limited subdivisions, there will be sufficient funds to repay all outstanding debts.
We are still liaising with Gerald Williams in relation to the transfer of the Herald Developments Limited shares and this is expected to be resolved in the next few days. However, the above proposal keeps the Herald Development sections out of the equation and keeps the deal between our respective clients more straight forward.
Could we please hear from you once you have had a chance to take instructions from Mr Covic.
There is no evidence of any further progress on the property transfer method of repaying the loan. On the contrary, on the very next day a loan contract in sharply different terms is concluded. The correspondence does not begin to establish a collateral contract or estoppel.
There is a further complete obstacle to this possible defence. There is no evidence that Mr Bartells at any point offered to exercise a property transfer option to pay off the debt – or indeed that he was in any position to do that. Mr Friedlander did depose that the lender refused an offer of two apartments in the St Aubyn’s project “each of which were considered to be worth $300,000”, but that falls well short of the sum owing and in no way matches the possible options included in the correspondence.
This defence has absolutely no prospect of succeeding.

Did the lender have a duty of disclosure and was it in breach of it?

Priestley J held that even if the lender did have reservations about Mr Bartells’ creditworthiness it was not under any legal duty to disclose those reservations to the appellants.
Mr Asher submits that the lender who was privy to financial information about Mr Bartells, the instigator of the loan and the co-guarantor, had a duty to disclose that information to Mr Friedlander. It did not and, as a result, cannot claim from the appellants.
The lender’s knowledge relates to Mr Bartells’ actions – or lack of them – under the sale and purchase agreement he signed on 24 December 1998 for $12,000,000. The deposit was only 1% or $120,000. There was constant contact with Mr Bartells’ solicitors for six months before that was finally paid by means of a Home Bond in June. Mr Friedlander first became involved in the transaction in late May or early June, probably the earlier time. The lender’s knowledge of Mr Bartells’ lack of ability to complete was by then, according to the appellants, well established. But it told the appellants nothing about it.
Mr Asher depended on the judgment of this Court in Scales Trading Ltd v Far Eastern Shipping Co Public Ltd [1999] 3 NZLR 26, 33-34 (reversed, but not on this point, by the Privy Council, [2001] 1 NZLR 513). In that case this Court accepted, as did counsel, the proposition that a creditor who had obtained a guarantee without disclosing to the guarantor unusual aspects of the underlying relationship with a debtor may later be disqualified from enforcing the guarantee. The duty is to disclose “unusual aspects”. The Court quoted this passage from Tipping J in Shivas v Bank of New Zealand [1990] 2 NZLR 327, 364:
What I am saying is that the bank’s duty of disclosure must be assessed against what the bank might reasonably have expected the intending guarantors to know already or to be able to ascertain without difficulty should they have been minded to do so.

and this passage from Hardie Boys J in Westpac Securities Ltd v Dickie [1991] 1 NZLR 657, 662:

A creditor’s failure to disclose to a guarantor a material fact known to him will vitiate the guarantee if the non-disclosure amounts to a misrepresentation. That will be so if the fact is inconsistent with the presumed basis of the contract of guarantee.

The Court concluded

What is or is not “unusual” is always a question of fact, tempered by commonsense. It will depend to a major extent upon context.

Mr Asher also referred us to the Laws of New Zealand Guarantees and Indemnities (Austin Forbes QC and Shuna Lennon) para 35 calling particular attention to the emphasised sentence:
35. When disclosure is required
With respect to guarantees, disclosure will be required in some circumstances, despite the fact that there is no general common law duty of disclosure. A creditor must answer a specific question from the intending guarantor fully and truthfully. A creditor must not mislead the guarantor by volunteering only part of the truth. The creditor has a duty to disabuse the intending guarantor of any misunderstanding of the principal debtor's position which the guarantor displays. The creditor must disclose anything in his or her relationship with the principal debtor which would not normally be expected, to the extent that the creditor is aware of the unusual circumstance. Failure to disclose a material fact will vitiate the guarantee if it amounts to a misrepresentation. Failure to disclose a fact inconsistent with the presumed basis of the guarantee will be a misrepresentation. Failure to make disclosure as required will be a misrepresentation entitling the guarantor to remedies under the Contractual Remedies Act 1979. (references omitted; emphasis added)

We return to the facts. Was there anything unusual in the lender’s relationship with Mr Bartells which it knew and which it should have disclosed? If there was, might the lender reasonably have expected the intending convenantor to have known of that fact or to have been able to ascertain it without difficulty?
Mr Friedlander’s relationship with Mr Bartells concerning the transaction in issue began in late May or early June 1999 when Mr Bartells approached him to take up an interest in the property. That was six weeks or more before he signed the loan agreement. As early as June he was a shareholder of the Lincoln Road company, a consequence of being a trustee, he says, of the Bartells Investment Trust. On 1 July he wrote to Davenports confirming the requirements that he had in relation to the shareholding he expected to receive on settlement of the Lincoln Road property, were he to become involved in the transaction. The involvement was expected to be by way of guarantee and additional security. Among other things he was to have 50% shareholding of two companies and, with a stated deduction, he would control the monies from the Lincoln Road property. He also annexed to his affidavit accounts sent to him and Mr Bartells by Davenports for the “structure” of the Lincoln Road company. He testified that he did not believe the structure was ever completed as he required.
The initial sale and purchase agreement was signed on 24 December 1998. Mr Friedlander deposes that he could not recall seeing the agreement until litigation concerning the sale and purchase began. The lender and its agents, he said, knew far more about Mr Bartells’ financial position than he did, but did not disclose this information to him. Mr Friedlander was however planning, according to his account, to take financial and other interests in Mr Bartells’ business activities. The activities related directly to the Lincoln Road property. Mr Friedlander provides no indication at all that he made any inquiry about his proposed associate’s creditworthiness in general or the arrangements for the purchase of the property in particular. He did not, for instance, on his evidence, inquire into the original agreement signed as long ago as six months earlier or discover that the deposit was only 1%, was not actually paid by Mr Bartells and was not indeed paid until after he became involved. There is no reason at all why the lender should have expected that Mr Friedlander should not have and could not have sought out that information itself. Whatever duty may lie on the lender, it does not absolve the guarantor from undertaking prudent inquiries, in this case, in the first instance, from Mr Bartells on his initial approach.
We do not in any event see any basis for saying there was anything unusual in the relationship between the lender and Mr Bartells. It was, it seems, the not uncommon event of a purchaser’s difficulty in completing a transaction that led to Mr Bartells approaching Mr Friedlander to take up an interest – an approach which the lender in the end would have to agree to.
We accordingly conclude that this proposed defence also has no prospect of success.

Should summary judgment have been refused because a third party should have been added and discovery allowed?

Mr Asher, referring to “the fraught situation in terms of Davenports”, submitted that the Judge in the exercise of his discretion ought not to have entered summary judgment. The third party application should have been decided first and discovery completed.
The lender has made out its claim for summary judgment. No possibly tenable defence has been suggested. As stated in a related appeal, we take the view that at least in the vast majority of cases it would not be an appropriate exercise of the discretion to deny a plaintiff otherwise entitled on the basis that the defendant had an independent claim against a third party. That would defeat the very purpose of a summary judgment procedure which is to provide a simple and speedy remedy in cases where there is no arguable defence. We reject this submission.
There is no basis for the argument that the proposed discovery of Davenports’ files would be relevant to the proceedings brought by the lender against the appellants.

Result

The appellants have failed to establish an arguable defence. Their appeal is accordingly dismissed, save for the adjustment in respect of the liability of the second and third appellants indicated in para [4] above. The respondent is entitled to costs of $5,000 together with disbursements, including reasonable accommodation and travelling expenses, to be fixed in the absence of agreement by the Registrar.

Solicitors

Knight Coldicutt, Auckland for the Appellants
Snedden & Associates, Auckland for the Respondent

[2002] NZCA 196

8 August 2002