Eureka 2 Holdings Pty Limited v Palasty

Agar v Hyde (2000) 173 ALR 665 Citibank Pty Ltd v Simon Fredericks Pty Ltd [1993] 2 VR 168 CASES CITED : Daewoo Australia Pty Ltd v Porter Crane Imports Pty Ltd/ t as Betta Machinery Sales [2000] QSC 050 General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 L.U. Simon Builders Pty Ltd v H.D. Fowles [1992] 2 VR 189

PARTIES : Eureka 2 Holdings Pty Limited John Palasty (aka John Horvat)

IN THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION

2009/295457 Eureka 2 Holdings Pty Limited v John Palasty (aka John Horvat)

JUDGMENT 1 HIS HONOUR: By notice of motion filed on 14 December 2009, the plaintiff, Eureka 2 Holdings Pty Limited, seeks an order pursuant to Uniform Civil Procedure Rules (UCPR) 13.1 for summary judgment against the defendant John Palasty on the statement of claim filed 17 July 2009. The plaintiff, in the alternative, asks for an order that the amended defence and cross-claim filed on 16 November 2009 be struck out in whole or in part. An order that the cross-claim be summarily dismissed is no longer sought.

2 At the commencement of the hearing, Mr D Allen of counsel appeared for the defendant but requested leave to withdraw as he had "nothing constructive to add." Leave was granted and Mr Allen left the court. Mr T Maltz of counsel appeared for the plaintiff. The application proceeded in the defendant's absence. 3 It is apposite to note that the defendant had been ordered to serve evidence in relation to the notice of motion by 15 March 2010 and to file and serve written submissions by 14 May 2010. No evidence or written submissions were served or filed for the defendant. Affidavits of Andrew Partridge and Robert Thomas Kelly both sworn on 5 February 2010 are relied upon by the plaintiff. A further affidavit of Mr Partridge sworn 24 May 2010 was provided at my direction in which he calculates the monies claimed by the plaintiff to be outstanding up to the date of judgment. 4 The genesis of the dispute between the parties is found in a loan of $1.4 million from the plaintiff to Lennox Tower Pty Ltd (Lennox). It is the plaintiff's case that the defendant guaranteed the loan, that it has not been repaid and summary judgment is sought for the money lent with interest and costs. 5 The plaintiff submitted that the defendant's answer to the claim was to say that monies were owed by entities associated with the plaintiff to entities associated with him which could be used as a set-off so as to overwhelm the plaintiff's claim. The plaintiff's principal submission was that the relevant financing and guarantee documents prohibited the use of a set-off to delay or prevent the demand for the money payable under the guarantee. The plaintiff argued that the defence of set-off was excluded by these contractual provisions. A further contention was that as neither the plaintiff nor the defendant were parties to the matters pleaded by way of set-off to the plaintiff's claim, the claims could not be raised by the defendant. 6 UCPR 13.1 relevantly provides: (1) If, on application by the plaintiff in relation to the plaintiff's claim for relief or any part of the plaintiff's claim for relief: (a) there is evidence of the facts on which the claim or part of the claim is based, and (b) there is evidence, given by the plaintiff or by some responsible person, that, in the belief of the person giving the evidence, the defendant has no defence to the claim or part of the claim, or no defence except as to the amount of any damages claimed,

the court may give such judgment for the plaintiff, or make such order on the claim or that part of the claim, as the case requires. 7 Mr Kelly deposed to his belief that the defendant has no defence to the plaintiff's claim.

8 As the plaintiff seeks summary judgment, the plaintiff must demonstrate that the defendant's defence is so obviously untenable that it cannot possibly succeed: General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 per Barwick CJ at 129. The defendant is not to be denied the opportunity to have his case heard in the ordinary way unless the absence of a defence is clearly established. As was explained in Agar v Hyde (2000) 173 ALR 665 by Gaudron J at 57:

"The test to be applied has been expressed in various ways, but all of the verbal formulae which have been used are intended to describe a high degree of certainty about the ultimate outcome of the proceeding if it were allowed to go to trial in the ordinary way."

9 In the absence of evidence, submissions or any assistance from the defendant it is only from the pleadings that the defendant's grounds of defence can be discerned. Accordingly, before proceeding further, it is necessary to review the pleadings. The pleadings 10 The plaintiff commenced proceedings against the defendant by filing a statement of claim on 17 July 2009. The plaintiff claims that by an agreement dated 14 November 2007 and subsequently amended by deeds (the Loan Agreement), the plaintiff agreed to advance by way of loan an amount of $1.4 million upon terms as to interest and repayment to Lennox. The particulars provide that the amending deed is dated 3 April 2008 and the further amending deed is undated, although bearing the date of 22 July 2008 in typescript. The plaintiff pleads that by deed dated 3 April 2008 the defendant, in the name of John Horvat guaranteed (the Horvat Guarantee) the due repayment of the amounts owing under the Loan Agreement and indemnified the plaintiff against any liability or loss arising or any costs suffered or incurred in connection with any default by Lennox or by the defendant. The plaintiff pleads that by further deed, the defendant, in the name of John Palasty guaranteed the due repayment of the amounts owing under the Loan Agreement and indemnified the plaintiff against any liability or loss arising or any costs suffered or incurred in connection with any default by Lennox or by the defendant. The particulars provide that the further deed is the Palasty Guarantee and Indemnity (the Palasty Guarantee) which is undated although bearing the date of 22 July 2008 in typescript. The plaintiff claims that despite demands, the defendant has failed to pay the amount due and payable under the Loan Agreement. The sum of $1.4 million is claimed together with interest. 11 The defendant filed an amended defence on 16 November 2009. The amended defence: States at par 3 that the defendant had commercial dealings with an entity called Eureka Funds Management Limited (EFM). EFM is asserted to have "made use of various legal entities as vehicles for the purpose of conducting transactions with the Defendant." Legal entities utilised by EFM "included the Plaintiff and other entities with similar names" such as those detailed at par 3 (i)-(vi). One of those entities is Eureka 2 Project 10 Pty Limited (E2P10). The defence asserts that the defendant dealt with EFM and "in a similar fashion made use of a nominee and various legal entities in which he held interests." The entities which are detailed at par 3 (vii)-(xiv) include Lennox. Admits that on 3 April 2008 the defendant executed a document entitled "Horvat Guarantee and Indemnity" as "Guarantor" with the plaintiff as "Financier." This document was executed by the defendant using the surname Horvat "which is a name used by him": par 4(a). Denies that the Horvat Guarantee related to an alleged "Further Amending Deed undated although bearing the date of 22 July 2008 in typescript": par 4(b). Asserts that on 3 April 2008 and after the defendant executed the Horvat Guarantee a document entitled "Termination Deed-Parramatta Profit Sharing Deed" was executed by E2P10 and Lennox. The defence asserts that "in terms of this Deed Lennox was released from all liability to E2P10 and accordingly any obligations undertaken by the Defendant in respect of advances totalling $2,900,000.00 became extinguished": par 4(c). Pleads in pars 7-8 a set-off in answer to the plaintiff's claim as follows: "7. In the event that it is found that the Defendant is liable under a guarantee the Defendant pleads that the amount of his liability is equal to any liability of any of his associated or related entities and because of the contractual relationship between the defendant and EFM, the defendant is entitled to all the rights of any of his associated or related entities. That liability is not for the sum of $1,400,000.00 and the defendant expressly denies liability for the payment of the sum of $1,400,000.00 or any portion thereof. To determine the amount of any liability of the Defendant (which liability is denied) the defendant is entitled to an equitable set-off or an accounting from the plaintiff as set forth hereunder. 8. The Plaintiff and/or its related entities became indebted to the Defendant and/or his associated or related entities in respect of the following matters: (a) The failure by the Plaintiff to effect payment of the sum of $980,000.00 in respect of GST payable by E2P10 under the Contract for the Sale of Land dated 14 November 2007 with Lennox. Payment by the plaintiff to Lennox as ought to have occurred would have reduced any liability by the defendant at that time. The plaintiff owed to Lennox and to the defendant a duty to mitigate any of its losses which duty it breached by non-payment. (b) The wrongful actions by the Plaintiff in purporting to act under a mortgage which was not valid and the failure by the Plaintiff to account to the Defendant or Janos Northbridge Pty Ltd for the sale of the property by Eureka 1 Project 13 Pty Limited at 139 Towrang Road Towrang. The value of that property was in the sum of $880,000.00. Payment by the plaintiff to Janos Northbridge Pty Ltd as ought to have occurred would have reduced any liability by the defendant at that time. The plaintiff owed to Janos Northbridge Pty Ltd and to the defendant a duty to mitigate any of its losses which duty it breached by non-payment. (c) The failure by the Plaintiff or Eureka 1 Project 13 Pty Limited to effect payment or provide an accounting to the Defendant or Mycorp Investments Pty Ltd of or in respect of the sum of $275,000.00 in terms of the arrangements between the parties pertaining to the termination of the North Goulburn Profit Sharing Deed. (d) The failure by the Plaintiff or Eureka 1 Project 13 Pty Limited to effect payment to the Defendant or Mycorp Investments Pty Ltd of an amount equal to $4.00 per square metre for the identification and contribution by the Defendant or Mycorp investments Pty Ltd of the RTA Land to the joint venture subsisting between the parties. The RTA Land measured approximately one hundred hectares. The amount due by the plaintiff or by Eureka 1 Project 13 Pty Limited and owing to the Defendant or Mycorp Investments Pty Ltd is in the sum of $4,000,000.00. Payment by the plaintiff or Eureka 1 Project 13 Pty Limited to the Defendant or Mycorp Investments Pty Ltd as ought to have occurred would have reduced any liability by the defendant at that time. (e) The failure by the plaintiff or Eureka 1 Holdings Pty Limited to effect payment to the defendant or his nominee Ilona Horvat of the sum of $500,000.00 in respect of the sale of shares by Ilona Horvat in the company called Mycorp Corporation Pty Ltd. (f) The failure by the plaintiff or Eureka 1 Holdings Pty Limited to effect payment to the defendant or his nominee Ilona Horvat of the sum of $2,531.00 in respect of the GST refund received by the plaintiff pursuant to the sale of shares by Ilona Horvat in the company called Mycorp Corporation Pty Ltd referred to in (e) above." 12 The total amount that the defendant claims ought to have been paid "by the plaintiff or its associated and related entities for the ultimate benefit of the defendant" is $6,637,531.00. If it is found that the sum of $1.4 million is owing by him to the plaintiff, the defendant claims that a set-off has occurred automatically, alternatively he is entitled to claim an equitable set-off, alternatively any claim ought to be stood over pending the determination of the cross-claim. The defendant denies any liability for any payment to the plaintiff and refers to the cross-claim. 13 The cross-claim repeats the contents of the amended defence. The cross-claimant claims:

2. Alternatively if it is found that the defendant is liable to the plaintiff for the payment of the sum of $1.4 million (which is denied) payment of the sum of $5,237,531.00;
3. Alternatively the plaintiff is liable to pay damages to the defendant. 14 The plaintiff denies in its defence to the cross-claim each of the defendant's allegations.

15 Apart from the set-off it is difficult to discover any defence to the plaintiff's claim which is raised by the amended defence. The suggestion that the defendant's liability for the monies lent by the plaintiff to Lennox may have been extinguished by the Termination Deed referred to in par 4(c) is quickly despatched by the realisation that it is E2P10 and not the plaintiff which is asserted to have released Lennox from all liability to it. 16 The defendant's denial in par 4(b) that the Horvat Guarantee related to the further amending deed is, upon examination of the further amending deed, plainly of no substance. The plaintiff and Lennox are parties to the deed and the defendant is one of the guarantors. Clause 4.4 provides:

"Guaranteed Money and Secured Money Each party acknowledges that the definition of "Guaranteed Money" in the A.P.I.D. Guarantee - A$ Loan Agreement, Guarantee - A$ Loan Agreement and Horvat Guarantee and Indemnity and the definition of "Secured Money" in the Security includes any amount payable under the Original Document as amended by this deed." (italics added). 17 I am satisfied to a high degree of certainty that none of these matters raise a triable issue. I now turn to the claim of set-off. 18 The plaintiff's evidence establishes that by deed dated 14 November 2007 the plaintiff entered into a document styled as a "Loan Agreement" with Lennox under which a loan facility was provided with a limit of $2.9 million plus GST. These monies were advanced to Lennox by way of four tranches. The plaintiff received payment of the sum of $250,000 plus GST from Lennox. 19 On 3 April 2008, the plaintiff entered into a deed styled as a "Loan Amending Deed" with Lennox. The plaintiff agreed to provide a facility with a limit of $1.4 million to Lennox with the date of repayment of 3 July 2008 conditional upon the provision of security which included a guarantee by the defendant. 20 By the Horvat Guarantee dated 3 April 2008 between the plaintiff and the defendant in the name of John Horvat, the defendant as guarantor "unconditionally and irrevocably guarantees payment to the Financier of the Guaranteed Money": clause 2.2. The plaintiff is the "Financier" and Lennox is the "Debtor". The definition of Guaranteed Money in clause 1.1 includes "all amounts that:

(a) are payable, are owing but not currently payable, are contingently owing, or remain unpaid, by the Debtor to the Financier; or (b) the Financier has advanced or paid on the Debtor's behalf or at the Debtor's express or implied request." 21 Clause 8.1 relevantly provides under the heading "Guarantor's rights are suspended": "As long as there is any Guaranteed Money, the Guarantor may not, without the Financier's consent: (a) reduce its liability under this guarantee and indemnity by claiming that it or the Debtor or any other person has a right of set-off or counterclaim against the Financier."

Clause 12.1(a) provides that "the Guarantor agrees to make payments under this guarantee and indemnity: (a) in full without set-off or counterclaim and without any deduction in respect of Taxes unless prohibited by law." 22 Lennox drew down the amount of $1.4 million on 3 April 2008. By deed dated 30 June 2008, the plaintiff entered into a further loan amending deed with Lennox extending the maturity date to 11 September 2008. On or about 22 July 2008, the defendant in the name of John Palasty entered into the Palasty Guarantee which contained conditions identical to those in Horvat Guarantee. Save for the payments of interest referred to in pars 20-21 of Mr Kelly's affidavit, the loan has not been repaid by Lennox. Letters of demand were forwarded by the plaintiff to the defendant on 4 November 2008 and 24 April 2009. On 17 August 2009, the plaintiff credited the sum of $382,208.71 to the loan from monies which the plaintiff had received from its sale as mortgagee in possession of property, known as folio identifier 4/598077 owned by Janos Northbridge Pty Ltd. As at 26 May 2010, the outstanding balance of the loan is $1,513,331.69. 23 The plaintiff points to clauses 8.1(a) and 12.1(a) in the Horvat Guarantee and if considered necessary to the corresponding provisions in the Palasty Guarantee and submits that the defence of set-off has been excluded. 24 It is well-established that a right to a set-off can be excluded by agreement between the parties: see Daewoo Australia Pty Ltd v Porter Crane Imports Pty Ltd/t as Betta Machinery Sales [2000] QSC 050; L.U. Simon Builders Pty Ltd v H.D. Fowles [1992] 2 VR 189; Citibank Pty Ltd v Simon Fredericks Pty Ltd [1993] 2 VR 168. If the parties intend to exclude the right to set-off clear words must be used. 25 In my opinion, clauses 8.1(a) and 12.1(a) in clear and unequivocal words express the agreement of the parties that the right to set-off (and to cross-claim) will not be used by the defendant to reduce or delay the plaintiff's claim for the Guaranteed Money. Any right that the defendant may have had to set-off has been excluded. I am satisfied to a high degree of certainty that the claim of set-off cannot succeed. 26 There are other difficulties with the set-off as pleaded. Paragraph 8 of the amended defence refers in sub-pars (a), (c-f) to the "failure by the plaintiff" and in sub-par (b) to the "wrongful actions by the plaintiff." There are references in the sub-paragraphs to the plaintiff's failure "to account to the defendant" and to the duty owed to the defendant "to mitigate any of its losses." An examination of each of the pleaded transactions, other than the matter pleaded in par 8(b), reveals that neither the plaintiff nor the defendant was a party to the transaction. The defendant, it seems, seeks to raise rights in answer to the plaintiff's claim that third parties may have. 27 The defendant was not a party to the mortgage referred to in par 8(b), however, the plaintiff was. It appears from the terms of the mortgage (ex B) between Janos Northbridge Pty Ltd as mortgagor and the plaintiff as mortgagee that the monies secured by the mortgage include any amount payable "under any Transaction Document as varied or replaced." Included within the definition of Transaction Documents is "any profit sharing deed" entered into between Lennox and the mortgagee or its nominee in accordance with the terms of the "call option". Call option is defined in clause 1.1 to mean the call option for the purchase of land known as 109-113 George Street Parramatta between Lennox as grantor and the mortgagee as grantee. Should the defendant have sought to rely in some way upon whatever these dealings may have been between the plaintiff and Lennox, par 8(1)(b) is wholly inadequate for this purpose. 28 All of these matters reinforce my view that the claim of set-off cannot possibly succeed. I am unable to identify any other triable issues raised by the amended defence. I conclude that plaintiff is entitled to summary judgment. 29 As the cross-claim relies upon the set-off I conclude that the cross-claim as pleaded is untenable and doomed to fail. I accede to the plaintiff's application that the whole of the pleading be struck out: UCPR 14.28. 30 The orders I make are:-

1. Judgment for the plaintiff against the defendant in the sum of $1,513,331.69;
2. the cross-claim filed on 16 November 2009 is struck out;

3. the defendant/cross-claimant is to pay the plaintiff/cross-defendant's costs.

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