Gittany v Gittany [2014] NSWSC 761 | Case summary

Supreme Court of NSW|2014-05-07|Before: McCallum J, Hope JA, Street CJ, Campbell JJ

Judgment 1HER HONOUR: Joe Gittany and Charles Gittany are brothers. Both are builders. In November 2002, Joe Gittany mortgaged three properties owned by him in order to borrow over $1 million for him to on-lend to a building development project to be undertaken by Charles Gittany. On 1 November 2012, Joe Gittany commenced proceedings to recover amounts allegedly remaining unpaid under that agreement. Charles Gittany failed to file a defence to the claim and, on 25 February 2013, Joe Gittany obtained judgment by default in the sum of $1,057,350.82. 2On 17 May 2013, after being served with a bankruptcy notice based on the default judgment, Charles Gittany filed a notice of motion seeking to have the default judgment set aside (for reasons not explained in the material before me, the motion was not listed for hearing until almost a year later, on 7 May 2014). This judgment determines that application.

Nature of the power to set aside a judgment entered by default 3The application invokes rule 36.16 of the Uniform Civil Procedure Rules 2005, which provides that the court may set aside or vary a judgment or order after it has been entered if it is a default judgment (other than a default judgment given in open court). 4Many of the authorities as to the proper exercise of the power to set aside a judgment entered by default were decided before the introduction of the Civil Procedure Act 2005. That is not to say that those authorities no longer apply but only to note that, since the introduction of that Act, the Court is under a statutory duty to seek to give effect to the overriding purpose of facilitating the resolution of the real issues in the proceedings in a manner that is quick and cheap as well as just. Cost and delay cannot be excused as the necessary price of justice but are seen as aspects of its dictates. 5One of the decisions frequently cited as to the relevant principles is the decision of the Court of Appeal in 1986 in Adams v Kennick Trading (Int'l) Ltd (1986) 4 NSWLR 503. The power under consideration in that case required the applicant to show "sufficient cause" to set aside a default judgment (cf rule 36.15). The decision was nonetheless cited by the applicant in the present case, correctly in my view, as being applicable to the exercise of the power under r 36.16. 6In Adams v Kennick, Hope JA noted (at 506E) that the Court must look at the whole of the relevant circumstances. His Honour stated that "the most relevant matters to consider" are the existence of a bona fide ground of defence and an adequate explanation for the failure to defend and any delay, but that there may be other matters. 7Hope JA referred to the decision of the Court of Appeal in Simpson v Alexander (1926) 26 SR (NSW) 296 at 301 where Street CJ, with whom Gordon and Campbell JJ agreed, said: All that is required on an application of this kind is that the defendant should swear to facts which, if established at the trial, will afford a defence; and should establish his bona fides in setting up that defence. Although, however, issues of fact cannot ordinarily be gone into on an application of this kind, and although it is not usual to go beyond the evidence put forward by the defendant for the purpose of disclosing a defence on the merits, there is, so far as I know, no inflexible rule of law or of practice preventing affidavits in answer from being received. 8Hope JA made the following remarks in respect of that statement (at 507C): Whatever else this statement means, in my opinion it means that evidence can be received, by cross-examination or otherwise, as to the bona fides of the applicant in seeking to rely upon the defence, even though the evidence adduced relates to the issues which would be determined if the matter went to trial. However the question to which this evidence is directed is not simply whether the applicant has shown a defence on the merits; it goes rather to the composite question whether the applicant has shown a bona fide defence on the merits. If the judge hearing the application concludes that the applicant has deliberately lied about the alleged defence and is thus dishonest in raising it, the applicant would fail to establish that he had a bona fide defence on the merits. But if in such a case the judge merely concluded that he preferred the evidence of the respondent to that of the applicant, or anything as to credit short of a disbelief by the applicant in the facts he relied on to found the defence, he would not on that account alone be entitled to find that the applicant had failed to establish that he had shown a bona fide defence on the merits. If he did so, he would be trying the issue to be determined at the trial, and this would be an error of law. 9As to the requirement that there be an adequate explanation for the failure to defend or for any delay, the applicant relied upon the decision of the Court of Appeal in Cohen v McWilliam (1995) 38 NSWLR 476. That is an example of a decision to which, in my respectful opinion, the introduction of the Civil Procedure Act may invite reconsideration (not as to the outcome in that particular case but as to the principle for which it stands). 10In the judgment at first instance, Bryson J had refused an application by Mrs Cohen to amend her defence at the hearing of the proceedings. His Honour expressed the view that the matter put forward by Mrs Cohen in her affidavit could not be regarded as a strong case for reliance on the statutory defence in question. In determining her appeal against that decision, Sheller JA held that Bryson J had proceeded on an erroneous basis in regarding the need for the Court efficiently to dispose of its business as determinative. 11Cole JA disagreed. His Honour was of the opinion that it is not an error of the type referred to in House v The King (1936) 55 CLR 499 for the views of an appellate court to differ from those of a primary judge as to the strength of the defence (at 494A). 12Priestley JA agreed with Sheller JA and said that, had Cole JA not agreed with Bryson J, he would have thought Sheller JA's conclusion "almost beyond argument". His Honour noted that the contrary views of Cole JA and Bryson J seemed to flow from their taking "the modern approach to the conduct of litigation and concepts of judicial administration" to a length Priestley JA regarded as unacceptable (at 478A). 13The applicant in the present case placed emphasis on a passage cited by Priestley JA in Cohen v McWilliam (at 481) taken from the decision of the Federal Court in Davies v Paget (1986) 10 FCA 226, as follows: The fundamental duty of the court is to do justice between the parties. It is, in turn, fundamental to that duty that the parties should each be allowed a proper opportunity to put their cases upon the merits of the matter. Any limitation upon that opportunity will generally be justified only by the necessity to avoid prejudice to the interests of some other party, occasioned by misconduct, in the case, of the party upon whom the limitation is sought to be imposed. The temptation to impose a limitation through motives of professional discipline or general deterrence is readily understandable; but, in our opinion it is an erroneous exercise of the relevant discretion to yield to that temptation. The problem of delays in the courts, egregious as it is, must be dealt with in other ways: for example, by disciplinary actions against offending practitioners and by a comprehensive system of directions hearings or other pre trial procedures which enable the court to supervise progress - and, more pertinently, non progress - in all actions. 14It is that particular statement of principle, cited with approval by the majority in Cohen v McWilliam, which may require reconsideration following the introduction of the Civil Procedure Act. The overriding purpose stated in s 56 of the Act is expressly sustained by the duty of the Court in s 56(2) and the duty of a party in s 56(3). The relevance of those considerations in the present case is considered below.

Circumstances in which the claim is brought 15It is common ground that Joe Gittany mortgaged three properties owned by him to secure the following loan advances: (a) A loan in the sum of $487,500 from Trilogy Mortgage Securities (loan 1); (b) A loan in the sum of $160,000 from Trilogy Mortgage Securities (loan 2); (c) A loan in the sum of $550,000 from Home Loan Central (Aus) Pty Ltd (loan 3). 16Joe Gittany accepts that he used part of the funds advanced in loan 1 to repay an existing mortgage. He paid the balance of $317,000 to Charles Gittany on 5 December 2002. The whole amount of loans 2 and 3 was paid to Charles Gittany in late November 2002. 17According to Joe Gittany, those amounts were advanced to Charles Gittany after a conversation between the two brothers in September or October 2002 in the following terms: CG: I need you to lend me one million dollars or a bit more if you can get it. I will only need your money for about 18 months. I will pay it back out of the sales from Shackel Ave. I will give you between $250,000 and $300,000 on top of that, for lending me the money. I guarantee to pay you at least $250,000. If we do really well with the sales, having regard to how much you put in, I will increase that to $300,000. JG: Ok. I'd like to get the money back in that time. I will probably want to do my own project. 18Joe Gittany contends that, in a subsequent conversation, Charles Gittany agreed to service the whole of loan 1 through the development project even though Joe Gittany was only lending him $317,000 of the funds advanced through that particular loan. All of the loans were "interest only". 19In late November 2004, most of loans 2 and 3 were repaid. The sum of $150,000 was repaid on loan 2, leaving a balance of $9,309.82. At the same time, $495,000 was repaid on loan 3, leaving a balance of $55,000. According to Joe Gittany, loan 1 was not repaid. Further, the additional payment allegedly agreed of "at least $250,000" as the consideration for providing finance was not paid. 20In April 2007, Charles Gittany stopped making payments on the three loans. Since that date, Joe Gittany has been servicing the loans out of his own funds. 21Joe Gittany accordingly alleges that he is owed the following amounts: (a) $317,000 on loan 1; (b) $9,309.82 on loan 2; (c) $55,000 on loan 3; (d) the sum of $250,000 promised as payment for providing the finance. 22In addition, Joe Gittany claims amounts for loan establishment costs and interest payments made by him at the outset of the period of the loans, together with interest. Calculating interest in accordance with s 100 of the Civil Procedure Act, the total amount sought in the application for default judgment was $1,056,031.23.

Proposed defence 23In support of his application to set aside the default judgment, Charles Gittany swore an affidavit annexing a draft defence. The draft defence does not respond in terms to each paragraph of the statement of claim. With commendable optimism Mr Ash, who appears for Charles Gittany, submitted that, if the Court were minded to grant the present application, there should be an order requiring the plaintiff to replead his own case so as to address its alleged "prolixity and complexity". While an approach of perfectionism may have produced a more succinct pleading, I do not think there should have been any difficulty pleading a response, in terms, to each separate paragraph of the statement of claim as filed. 24The principal issue raised by the draft defence is the contention that the loan was made not to Charles Gittany personally but to a company, Gittany Constructions Pty Ltd, which is now in liquidation. Between May 1993 and December 2009, Charles Gittany was a director of that company together with another brother, Anthony Gittany. In December 2009, well after payments to Joe Gittany stopped, Charles Gittany resigned as a director leaving Anthony Gittany as the only director. In January 2012, the company went into voluntary liquidation. 25Leaving aside the contention that the borrower from Joe Gittany was the company, not Charles Gittany personally, there is a deal of common ground acknowledged by Charles Gittany. In particular, he: (a) agrees that he approached Joe Gittany to borrow between $1 million and $1.03 million for the purpose of contributing to the development of a strata project; (b) agrees that, as to the first loan, it was agreed that the whole of the loan would be serviced by the company until completion of the project but says that Joe Gittany was to account to the company for that part of the loan servicing which related to the benefit he obtained and that "the company would be liable to pay the balance of the principle and interest then due"; (c) agrees that loans 2 and 3 were advanced but says that the company was the borrower; (d) agrees that the loans were repayable upon the conclusion of the project together with "a share in the profit up to an estimate of $250,000". 26The draft defence does not expressly traverse the allegation made by Joe Gittany that Charles Gittany agreed to pay all of the interest on all three loans. However, it is implicit in the disagreement about loan 1 that there is no dispute on that issue in respect of loans 2 and 3. The position as to loan 1 is that Joe Gittany says Charles Gittany agreed to meet the cost of servicing that part of the loan of which Joe Gittany obtained the benefit, whereas Charles Gittany says that Joe Gittany agreed to account to the company for that part of the servicing of the loan at the conclusion of the project. Accordingly, it would appear that Charles Gittany does not dispute that the borrower (whether that was him or the company) agreed to service loans 2 and 3 at his or its own cost. 27In support of the contention that the borrower was the company and not Charles Gittany personally, Charles Gittany's affidavit sworn 26 May 2013 states (at paragraph 11): In or about November 2002, I had a conversation or conversations with the plaintiff to the following effect: (a) The company wished to borrow money for the purpose of contributing to the development of a strata project at Brookvale. (b) The plaintiff would lend money to the company. He would do this by lending money which he himself would raise by mortgage against real estate which he owned or controlled. The first loan would be $487,500. The second would be $160,000. The third would be $550,000. (c) As to the first loan, this would be by increasing a current debt of $164,631.88. While the company would receive only the additional amount (the difference between the $487,500 and the $164,631.88), it would service the whole of the $487,500. After completion of the project, the plaintiff would account to the company for that part of the servicing (whether principal or interest) which related to the $164,631.88, while the company would be due and liable to pay the balance of the principal and interest then due. (d) As to the second and third loans, the company would receive the full loans, it was to service them, and it was to pay out the loans on project completion. (e) The company would also pay the plaintiff a share in the profit, with the share to be up to $250,000. 28It will be noted that the affidavit contains no express form of words allegedly stated by Charles Gittany so as to make clear that the borrower was the company and not him personally. 29Separately, the draft defence alleges that repayments have been made to Joe Gittany in two ways, listed in schedules A and B to the draft defence. Schedule A is said to be a list of payments "to the plaintiff from the company's bank account". The sum of those payments is $327,337. The regularity and consistent amounts of those payments suggests that they are payments of interest on the three loans, an issue considered further below. 30Secondly, schedule B lists "payments to third parties for the benefit of and at the request of the plaintiff". The sum of those payments is $78,439.74.

Cross-examination of Charles Gittany 31At the hearing of the application Mr Penhall, who appears for Joe Gittany, sought to cross-examine Charles Gittany on his affidavits. Mr Penhall accepted that cross-examination is not ordinarily permitted on such an application but contended that course should be allowed where a plaintiff who has obtained default judgment wishes to contend that the proposed defence is not raised in good faith and that the application to set aside the judgment is accordingly an abuse of process. After some argument, the course proposed by Mr Penhall was not opposed and Charles Gittany agreed to be cross-examined. 32After hearing the cross-examination, I am not persuaded that the proposed defence is raised in good faith. Charles Gittany was an argumentative and difficult witness. The effect of his evidence was, variously, that the money is owed by another legal entity rather than him and that in any event it has been repaid. It is of course always open to a defendant to raise alternative defences. However, in the present case, the effect of Mr Gittany's explanation of the alternative contentions was that each completely undermined the other. 33As to the alleged agreement to pay an additional $250,000 to Joe Gittany, after considerable prevarication, Charles Gittany ultimately conceded that it was agreed that Joe Gittany would receive at least $200,000 and, if the project went well, up to $250,000 (T37). Charles Gittany repeatedly asserted, however, that Joe Gittany has already been paid that money. An example of the kind of exchange that took place on that issue is as follows (at T25): Q: You say the agreement was that the company would pay your brother Joe a share up to $250,000? A: Correct. Q: Does that mean that the company might pay Joe nothing? A: It doesn't mean anything. If you check the documents I don't think the judge has seen. We have already paid him the money. I don't know why it hasn't come up. 34Charles Gittany was right about one thing in that evidence. I have not seen, in the evidence before me, any document to establish any payment of the kind which it was ultimately conceded had been agreed (that Joe Gittany would receive "at least $200,000"). 35The authorities considered above make it clear that I should not, on the present application, attempt to determine the issues that would arise at the trial if the defence were raised at that stage. Some of the cross-examination was directed to issues which I do not think I should take into account at this stage. That includes cross-examination as to an alleged written acknowledgement of the debt allegedly signed by Charles Gittany. Charles Gittany denies signing that document and it is not appropriate for me to attempt to determine its authenticity. 36However, there is of course a degree of overlap between a consideration of the apparent strength of the defence and its bona fides. I do not think the principles stated in the authorities considered above require me to overlook glaring deficiencies in the defence in assessing whether it is raised in good faith. The simple fact is that nothing in the surrounding circumstances supports the contention that the loan was made to the company rather than to Charles Gittany personally. As already noted, Charles Gittany has not even deposed in direct terms to any conversation to sustain that defence. 37Mr Penhall relied on the fact that, in the liquidator's records, there is no relevant acknowledgement of the debt owed to Joe Gittany (he did lodge a proof of debt but it related to other matters). However, in light of the fact that Charles Gittany was not a director at the time the company went into liquidation and in the absence of any evidence from Anthony Gittany, I do not think I should take that evidence into account on the present application. 38The fact remains, however, that there is no evidence as to any involvement of the company in the development project at the time Charles Gittany approached Joe Gittany for the loan. The loan funds were obtained by Joe Gittany in late November 2002 and had all been advanced to Charles Gittany by early December 2002. Documents in evidence before me showed that the land for the development was purchased in March 2003. It was bought in two lots, each acquired for $1.3 million. The purchasers were Charles Gittany as to six-tenths, Anthony Gittany as to two-tenths and Gittany Constructions Pty Ltd as to two-tenths. Both purchases were completed on 3 March 2003. Even allowing for development costs (estimated by Joe Gittany to be an additional $2 million), the amount advanced by Joe Gittany allegedly to the company exceeded the company's interest in the project (two-tenths of $4.6 million). 39Charles Gittany did not accept that the site was acquired for only $2.6 million. He said that the "actual land" was 165 x 22 (apparently a calculation made by reference to the number of units proposed to be built in the development) such that the real purchase price was $3.63 million. He said (at T29): I think the way that the real estate agent set it up was that we paid him his million dollars. It think it was a million dollars on top of that so it was about 3.6 odd. We paid him a million and then plus these two were transferred, you know, that's how the deal was done because he did his assignment. The real estate agent did his assignment and that's how he wanted to deal, that's how the deal worked. 40In explaining the apparent disparity between the amount he alleges was lent to the company and the share the company took in the development project (of only 20 per cent) he said (at T30): No, see I had my money, that is why I took 60 per cent. The company needed a million dollars. He lent the company 20 per cent. I had my money. 41In response to questions as to whether he had told his brother Joe Gittany that the company was going to be involved in the project or that the company share would only be 20 per cent, he persistently answered "he knew". 42Charles Gittany accepted that all of his personal debts (guaranteed by him and his wife) in respect of the property development were discharged before Gittany Constructions Pty Ltd went into liquidation. He said that he had ceased to be a director of that company because he and his brother Anthony had decided to go their separate ways. 43Charles Gittany agreed that the company stopped making payments to Joe Gittany in repayment of the three loans in about April 2007. He said they had stopped making the payments "because we paid him all the money" (T40). On that issue, there was the following exchange (at T40.37): Q. Do you say the amounts of money referred to in your defence add up to $1,027,000? A. I can give you them exactly. There was probably about 120, 130 left and he, Anthony wanted to work out a deal with him. And he just wouldn't do it. And we said that is all we owe you, we can prove all the money we paid you. It is in his bank accounts and I'm still here defending $1 million. 44Shortly afterwards, it was put to Charles Gittany that the defence does not say Joe Gittany has been repaid. His response (at T41.5) was: He is suing me. He was supposed to be suing Gittany Constructions. I have nothing to do with it. That is what the defence is. 45Mr Penhall pressed Charles Gittany as to the payments in schedule A to the proposed defence, which amount to $325,000 and have the appearance of interest payments. In answer to the proposition that they were only mortgage instalment payments paying interest, he said: We put lump sum. I can show you. If you look at them correctly you will see the money going in. But he is denying it. If it goes from my account - I have his bank statements. 46The simple fact is that the proposed defence sworn to by Charles Gittany identifies no such payments. It was put to Charles Gittany that he had left those amounts out of his defence, to which he responded: How can I leave them out? 47That evidence made no sense. The proposition that the payments in schedule A were the interest payments on the three loans (which it is common ground the borrower agreed to pay) was not disputed. 48Charles Gittany insisted that Joe Gittany has been repaid in full in lump sums. He identified four specific payments (at T41.27). They were $150,000, $495,000, $185,000 and $115,000. As already explained, the payments of $150,000 and $495,000 are accounted for by Joe Gittany in his statement of claim. As to the $185,000 and the $115,000, there is no contention in the proposed defence of any payment of those sums as a lump sum. The only payments identified in the proposed defence are those which it appears are accepted to be periodic interest payments and a series of payments apparently made to contractors totalling $78,000. 49For those reasons, I am not persuaded that Charles Gittany genuinely believes that the loan funds he accepted from his brother, which have not been repaid, were advanced by way of loan to the company, Gittany Constructions Pty Ltd. I am satisfied that the contention that the loan was to the company and not to Charles Gittany personally is a deliberate confection. I am not persuaded that it is a defence raised in good faith.

Explanation for the failure to put on a defence 50Charles Gittany does not dispute that the statement of claim was served on 5 November 2012. The evidence did not establish when he retained his solicitor. On 30 November 2012 the solicitor sent an email to Mr Penhall, as follows: I should have a defence filed in about seven days. If you can hang off obtaining a default judgment please. 51A defence was not filed within seven days (or at all) and there was no further correspondence sent to Mr Penhall, who waited until 14 February 2013 before moving the Court for default judgment. Having regard to the terms of the request made to him, the suggestion made in submissions on behalf of Charles Gittany that Mr Penhall ought to have been the one to resume the correspondence (by warning of his intention to move for default judgment) was unfounded, in my view. 52The evidence did not seek to explain the failure to file a defence between 30 November 2012 and 1 February 2013. On that date, the solicitor wrote to Charles Gittany (but not to Mr Penhall) advising him of a serious injury he had acquired in an accident and telling him "you need to get another solicitor ASAP". The evidence was silent as to whether any consideration was given to the need to contact Mr Penhall to explain the inevitable further delay after that date. For my part, I think it is doubtful whether the explanation is adequate. However, I should record that Mr Penhall did not resist the present application on that basis, resting primarily on the contention that the defence is not raised in good faith, together with the prejudice to Joe Gittany of having to continue to meet interest payments on loans obtained for the benefit of his brother, as he has been required to do since April 2007.

Conclusion 53Section 56(2) of the Civil Procedure Act places me under a duty to seek to give effect to the overriding purpose of facilitating the just, quick and cheap resolution of the real issues in the proceedings when exercising any power under the Rules. The decision of the Court of Appeal in Cohen v McWilliam stands as authority for the proposition that, whilst the matters compendiously referred to by Priestly JA as "court efficiency" may be taken into account in an application such as the present, the more basic need is that both sides should be heard before a dispute is decided. 54This, however, is not a case in which Charles Gittany has not been heard (as effectively occurred when Mrs Cohen was refused leave to amend her defence at the hearing). In accordance with longstanding authority the defendant has sworn to the facts which, if established at the trial, he contends would afford a defence. Also in accordance with established authority, his bona fides in setting up that defence has been tested and, in my assessment, has been found wanting (as to the appropriateness of allowing cross-examination on such an application: see Richards v High (1920) 37 WN (NSW) 262; Australian Executor Trustees Ltd v Lanmar [2008] NSWSC 549 at [46] to [48] per Adams J; and see Adams v Kennick at 507C). To the extent that Charles Gittany claims there have been additional payments made to Joe Gittany which were not addressed in the proposed defence or in evidence before me, those claims can be raised in the bankruptcy proceedings. 55For those reasons, I am not persuaded that I should exercise the power to set aside the default judgment, subject to one qualification. 56The affidavit sworn in support of the default judgment appears to contain two possible errors in calculation. The first is that the "current amount owing" as stated in the affidavit of Joe Gittany affirmed 11 February 2013 is $984,798.40, whereas the amount claimed in annexure A to the statement of claim is $982,768.40. I am unable to find any explanation for that discrepancy. For the reasons made clear in the following paragraph, the difference does not appear to be explained by the addition of interest between the date of commencement of the proceedings and the date of the application for default judgment. 57The second apparent discrepancy is that the calculation of interest following the commencement of the proceedings relates to the period from 1 November 2011 to 11 February 2013, whereas the proceedings were not commenced until 1 November 2012. Accordingly, it appears that interest may have been claimed for an additional year. It will be necessary to hear the parties as to those matters of calculation so as to consider whether the judgment should be varied accordingly. 58Leaving aside that issue, the orders I propose are: (1)That the motion to have the default judgment set aside be dismissed. (2)That the defendant pay the plaintiff's costs of and incidental to the motion.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 17 June 2014

Gittany v Gittany

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