Reale v Reale

6004/2002 Reale Bros Pty Limited v Ludmilla Marika Reale JUDGMENT 1 MASTER: This is the hearing of an application to set aside a statutory demand dated 28 November 2002 served by the defendant on the plaintiff. The demand was for a sum of $252,820.89. The plaintiff company has two equal shareholders. They are Rocco Reale and Nicola Reale who are brothers. The company has for some years carried on business through a trading Trust as a shoe repairer and a seller of shoes. 2 Both brothers were directors of the plaintiff until Rocco Reale resigned as a director on 24 December 2001 as a result of falling out between them. The defendant was the wife of Rocco Reale. The background facts 3 In January 2000 the plaintiff company borrowed from the Commonwealth bank through two different facilities a sum of $300,000. The bank took security by way of a first registered mortgage over the home owned by Rocco Reale and Ludmilla Reale at 11 Fairholm Street Strathfield. They owned the home as joint tenants. There was also a joint and several unlimited guarantee given by the plaintiff and Nicola Reale. 4 On 7 April 2000, Rocco Reale and his wife Ludmilla Reale separated and on 10 December 2001 the Family Court of Australia made consent orders in relation to their property. The consent orders provided for a transfer of the property at 11 Fairholm Street Strathfield to the wife Ludmilla Reale. She was to take their property subject to the mortgage to the Commonwealth bank and within 12 months payout that liability. The husband Rocco Reale retained under the consent orders the share which he owned in the plaintiff and also received other benefits. 5 The transfer of the Strathfield property by Rocco Reale to Ludmilla Reale did not occur and the property was sold on 18 February 2002 under a contract signed by Rocco Reale and Ludmilla Reale. On settlement of the sale the bank was paid out $252,820 and the bank's mortgage was discharged. This is the sum which is referred to in the statutory demand and the claim in that demand is based upon the defendant's contention that she is entitled as surety for the plaintiff to recover the amount paid by her pursuant to the indemnity which he had given to the bank when she and her husband executed the mortgage over their home at Strathfield. Defect in the demand 6 Apart from raising various alleged genuine disputes, the plaintiff submitted that there was a formal defect in the demand in that it had only been signed by the defendant. The plaintiff submitted that the right to indemnity would result as a consequence of a debt owed by the plaintiff to the defendant and Rocco Reale. The plaintiff relied on Manzo v 555/255 Pitt Street (1991) 21 NSW LR 1. In particular the plaintiff referred to conclusions of Hogdson J. in these terms: "In my view, whatever may be the position if a joint debt is a joint debt at law and in equity, and nothing more, where the joint debt is one in respect of which, for some reason or other, equitable principles are applicable, a s364 notice must be executed by all the joint creditors. Otherwise, the debtor would face the possibility, if he complied with a notice, of a subsequent claim by creditor who did not sign the notice ... In this case, equitable principles of contribution may be involved; but in any event, it seems to me that by reason of the orders made by Powell J, to which I have referred, this debt can no longer be regarded as no more than a joint debt in law and in equity. For those reasons, in my view, the s364 notice in this case is invalid". 7 It is clear that under the terms of the mortgage which was signed by both Rocco and Ludmilla Reale that they were jointly and each of them severally liable to the mortgagee in respect of the debt owed by the plaintiff the bank. It is also clear that although the sale of the Strathfield property was made by both of them that Rocco Reale had no beneficial interest in the proceeds as a result of the terms of the consent orders which were entered into on 10 December 2001. The relevant terms were as follows: "Orders and declarations; 1. The husband shall, within 28 days after the date of making of the within orders, do all acts and things necessary to transfer to the wife the whole of his right, title and interest in the former matrimonial home known as 11 Fairholm Street, Strathfield being the whole of the property contained in certificate of title, Folio identifier 12/7489. 2. The wife shall accept the transfer of the former matrimonial home subject to all secured monies outstanding to the Commonwealth bank of Australia as at the date hereof and the wife shall, within 12 months of the date of making of the within orders, do all acts and things necessary to discharge such liabilities. ……………………………… 4. The husband is restrained from doing any act or thing to increase the amount due to the Commonwealth bank pursuant to the business loan and overdraft loan over and above the balances of such loans as at the date hereof and the husband shall further make all interest payments and other repayments required in respect of such loans until the date they are discharged and the husband shall indemnify and save harmless the wife in respect of any increased liability pursuant to such financial arrangements. 5. The husband's indemnity pursuant to the preceding order is hereby secured by charge over the husband's shareholding in Reale Brothers Pty Ltd ACN 001 663 841 and, subject to such charge, the husband is declared to be the sole beneficial owner of all such shares. 8 The legal foundation of the right of indemnity depends upon the circumstances in which the guarantee was given. In the circumstances of this case where there was a request by the plaintiff there is an implied contract of indemnity or an implied term of the contract of guarantee to a similar effect. A guarantor, in the absence of any agreement to the contrary, is not entitled to claim indemnity until he or she pays the principal debt or some part of it. It would thus be a fundamental right to claim on the indemnity that the guarantor made the payment. In the present case, on the terms of the documentation both guarantors are entitled to the indemnity but only one has in effect made a payment. In these circumstances it seems to me that there is no basis for suggesting that both the defendant and her husband Rocco Reale should have signed the statutory demand. 9 There was also a submission by the plaintiff that in some way the defendant held her indemnity in equity on behalf of her husband Rocco Reale. This is said to be based upon the fact that under the Family Court settlement the husband retained his interest in the plaintiff and accordingly was to obtain the benefit of the payment to the bank. I myself do not see how that can arise. The various genuine disputes alleged by the plaintiff. 10 The plaintiff submitted that the following areas of general dispute were made out:

1. An express agreement that the right to indemnity was waived. 2. Waiver of the right to indemnity as a result of settlement of proceedings 1430 of 2002.
2. Estoppel arising from settlement of proceedings 1430 of 2002. 4. Anschun estoppel. 5. Whether the principal debtor was the Plaintiff company or Rocco Reale. 6. An offsetting claim.

11 I had the benefit of having a number of submissions in respect of the principles to be applied and I think the most useful summation of what is a genuine dispute is that given by McLelland CJ in Equity in Eyota Pty Limited v Hanave Pty Limited (1994) 12 ACLC 669. At page 671, His Honour made the following comments in respect of the expression "Genuine dispute": "It is, however, necessary to consider the meaning of the expression 'genuine dispute' where it occurs in s.459H. In my opinion that expression connotes a plausible contention requiring investigation, and raises much the same sort of considerations as the 'serious question to be tried' criterion which arises on an application for an interlocutory injunction or for the extension or removal of a caveat. This does not mean that the Court must accept uncritically as giving rise to a genuine dispute, every statement in an affidavit 'however equivocal, lacking in precision, inconsistent with undisputed contemporary documents or other statements by the same deponent, or inherently improbable in itself, it may be' not having 'sufficient prima facie plausibility to merit further investigation as to (its) truth' (cf Eng Mee Yong v Letchumanan (1980) AC 331 at 341), or 'a patently feeble legal argument, or an assertion of facts unsupported by evidence' (cf South Australia v Wall (1980) 24 SASR 189 at 194). But it does mean that, except in such an extreme case, a Court required to determine whether there is a genuine dispute should not embark upon an inquiry as to the credit of a witness or a deponent whose evidence is relied on as giving rise to the dispute. There is a clear difference between, on the one hand, determining whether there is a genuine dispute and, on the other hand, determining the merits of, or resolving, such a dispute. In Mibor Investments (at ACLC 1066; ACSR 366-7) Hayne J said, after referring to the state of the law prior to the enactment of Division 3 of Part 5.4 of the Corporations Law, and to the terms of Division 3: 'These matters, taken in combination, suggest that at least in most cases, it is not expected that the Court will embark upon any extended inquiry in order to determine whether there is a genuine dispute between the parties and certainly will not attempt to weigh the merits of that dispute. All that the legislation requires is that the Court conclude that there is a dispute and that it is a genuine dispute.' In Re Morris Catering (Australia) Pty Limited (1993) 11 ACLC 919 at 922; (1993) 11 ACSR 601 at 605 Thomas J said: 'There is little doubt that Division 3 prescribes a formula that requires the Court to assess the position between the parties, and preserve demands where it can be seen that there is no genuine dispute and no sufficient genuine offsetting claim. That is not to say that the Court will examine the merits or settle the dispute. The specified limits of the Court's examination are the ascertainment of whether there is a "genuine dispute" and whether there is a "genuine claim". It is often possible to discern the spurious, and to identify mere bluster or assertion. But beyond a perception of genuineness (or the lack of it) the Court has no function. It is not helpful to perceive that one party is more likely than the other to succeed, or that the eventual state of the account between the parties is more likely to be one result than another. The essential task is relatively simply - to identify the genuine level of a claim (not the likely result of it) and to identify the genuine level of an offsetting claim (not the likely result of it).' I respectfully agree with those statements." An express agreement that the right to indemnity was waived. 12 This is said to arise from some discussions initially in September 1997 and later in 2001. The initial discussions between the brothers were to the effect that Rocco instead of putting $300,000 into the business as his brother had done would arrange for the company to borrow such sum and he would repay it over a period of 10 years. During 2001 there were discussions between the brothers following upon Rocco's decision to try and sell his house. The effect of the discussions were that if Rocco was to withdraw his money from the business then Nicola would also be able to get his money back out of the business. 13 The plaintiff's submissions were that that agreement was impliedly varied so that the defendant and Rocco were not entitled to be indemnified for monies paid in reduction of the bank debt unless a similar amount was paid to Nicola Reale in reduction of his loan account. There are two obvious answers to this claim. The first is that the discussions were not with the defendant. There is nothing to suggest that Rocco was acting as agent for his wife in these discussions or that she allowed him to be held out as her agent. The second is that the alleged agreement was only that if company funds were used to repay the bank debt Nicola's advance would also be repaid. There is nothing preventing the plaintiff repaying that debt and certainly there is nothing that the defendant's husband has done in that respect. These are quite simple answers to this alleged agreement and I am not satisfied that there is a genuine dispute on this aspect. Waiver as a result of settlement of proceedings 1430 of 2002 14 The plaintiff's submissions were that the conduct of the defendant in earlier Supreme Court proceedings 1430 of 2002 commenced by the defendant and Rocco against, inter alia, the plaintiff and the settlement of those proceedings, proceeded upon the basis that the defendant and Rocco had waived the right to indemnity from the plaintiff. These submissions identified why it was said their was a waiver in these terms: 1. On 10 December 2001 the defendant and Rocco Reale entered into consent orders by way of property settlement in the Family Court of Australia. Paragraph 2 of the consent orders provided that the defendant shall accept the transfer of the Strathfield home subject to the Bank mortgage and that she shall do all things necessary to discharge that liability. Paragraph 3.4 provided that upon sale of the Strathfield home the defendant shall discharge the first mortgage to the Bank, pay agent's commission, legal costs and receive the whole of the balance of proceeds of sale. Pursuant to paragraph 5 of the orders Rocco Reale is declared to be the sole beneficial owner of his shareholding in Reale Bros.

2. On 20 December 2001 the defendant and Rocco Reale agreed to sell the Strathfield home for $1,225,000. On 17 January 2002 the defendant agreed to purchase a home at Bondi for $690,000. In order to complete the sale of the Strathfield property and to obtain a discharge of the Bank mortgage over it, the defendant and Rocco Reale commenced Supreme Court proceedings 1430 of 2002 by which they sought orders, inter alia, that Nicola Reale and Reale Bros execute all such documents and do all such things as may be necessary to discharge from the proceeds of sale of the Strathfield home the Bank's mortgage. The affidavit evidence filed in 1430 of 2002 on behalf of the defendant and Rocco Reale proceeded upon the basis that the defendant upon discharging the Bank's mortgage would not be entitled to an indemnity for such amount from Reale Bros. 3. In his affidavit sworn 8 February 2002 James Moustacas, solicitor for the defendant, and Rocco Reale in 1430 of 2002 stated at paras 21 and 22 that on settlement of the sale of the Strathfield property the defendant will receive approximately $950,000 net after the payment of the Bank's debt and that after completion of the purchase of the Bondi property (for $690,000) she will receive approximately $268,000. That money will be used to support herself and her four children. The second plaintiff has no other source of income". This statement by the defendant's solicitor proceeds upon the assumption that she would have no recourse to any other moneys including any indemnity for moneys paid to the Bank on behalf of Reale Bros. Proceedings 1430 of 2002 were settled in accordance with the terms of settlement being annexure "C" to Nicola Reale's 26 February 2003 affidavit. In his judgment on 14 February 2001 in those proceedings on the question of costs, Brownie AJ observed at p5:

"In particular, it seems to me, on the evidence now available, a significant consideration was the position of the second plaintiff. On the evidence, she had no source of support, except the funds hoped to be obtained from the sale of the former matrimonial home". 15 One thing that is now obvious, particularly to the parties, is that there is no provision in either the Family Court settlement or the settlement of proceedings 1430 of 2002 to deal with the obvious right of a surety to recover after payment to the creditor. It would seem unlikely that any term to this effect could be implied. The only evidence to which the plaintiff points is that in the solicitor's affidavit. The omission or, perhaps more properly, the assumption made by the solicitor is equally likely to have been predicated on the fact that the matter of indemnity was not even thought of at the time. The likelihood is that the indemnity would not have been thought of because if it had the parties obviously would have addressed the matter in concluding their arrangements. 16 The submission did not deal with the nature of the waiver. Assuming it is waiver in the sense of an election, there is no evidence of a conscious election between rights and thus it is a matter of whether the conduct of the defendant and Rocco in commencing or settling the proceedings would be justifiable only if an election had been made one way or the another. There is nothing in the commencement of the proceedings which would suggest an election. Similarly, the settlement itself is not an election. The terms of the solicitor's conduct more properly should be considered under the next section. Estoppel arising from the settlement of proceedings 1430 of 2002. 17 The plaintiff also put the same facts as the basis of Estoppel. It is clear that there is no evidence of any representations by the defendant to found some estoppel in paix. The plaintiff's submissions suggest that there is an estoppel by convention as a result of the proceedings being run and settled on the mutual assumption of fact that the defendant and Rocco Reale would not thereafter claim an indemnity. 18 The defendant's answer to this claim is that there is no evidence that the defendant and the plaintiff chose to conduct their mutual dealings on any basis different from the true facts and more importantly a mutual assumption of fact for the purposes of conventional estoppel means mutual assumption about an existing fact, not mutual assumption about a future course of action. See Con-Stan Industries of Australia Ltd v Norwich Winterhur Insurance (Aust) Ltd (1986) 160 CLR 226 The Court at 244 -- 245. 19 I should consider whether any equitable estoppel might arise. 20 The current formulation of the Australian position is said in the 4th edition of Meagher, Gummow and Lehane Equity Doctrines and Remedies to be encapsulated in the judgment of Brennan J in Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387. At 428 he said:- "In my opinion, to establish an equitable estoppel, it is necessary for a plaintiff to prove that (1) the plaintiff assumed that a particular legal relationship then existed between the plaintiff and the defendant or expected that a particular legal relationship would exist between them and, in the latter case, that the defendant would not be free to withdraw from the expected legal relationship; (2) the (1987) 164 CLR 387 at 429 defendant has induced the plaintiff to adopt that assumption or expectation; (3) the plaintiff acts or abstains from acting in reliance on the assumption or expectation; (4) the defendant knew or intended him to do so; (5) the plaintiff's action or inaction will occasion detriment if the assumption or expectation is not fulfilled; and (6) the defendant has failed to act to avoid that detriment whether by fulfilling the assumption or expectation or otherwise. For the purposes of the second element, a defendant who has not actively induced the plaintiff to adopt an assumption or expectation will nevertheless be held to have done so if the assumption or expectation can be fulfilled only by a transfer of the defendant's property, a diminution of his rights or an increase in his obligations and he, knowing that the plaintiff's reliance on the assumption or expectation may cause detriment to the plaintiff if it is not fulfilled, fails to deny to the plaintiff the correctness of the assumption or expectation on which the plaintiff is conducting his affairs. 21 The authors point out that the statement should be understood as holding, particularly in cases involving an assumption about a state of affairs, that reasonable notice of an intended departure from the assumption may avoid any sufficient detriment. See The Commonwealth v Verwayen (1990) 170 CLR 394 Deane J at 442. 22 In this case the statement by the solicitor in the affidavit was in these terms:- "On settlement of the sale of the property, the second plaintiff will receive approximately $950,000 net (including after the payment to the third defendant referred to below). After completion of her purchase of the Bondi property and after payment of her legal fees and stamp duty fees the second plaintiff will receive approximately $268,000.00. That money will be used to support herself and her 4 children. The second plaintiff has no other source of income." 23 That says nothing about the right to claim as surety but the argument would be that it was implicit in what was being said that she would have no other assets. In Foran v Wight (1989-90) 168 CLR 385 Mason CJ at 410-11, Brennan J at 435-6 and in Legione v Hateley (1983) 152 CLR 406 Mason and Deane JJ at 435-7 the High Court has stressed the need for a representation to be clear and unequivocal if it is to work an estoppel, saying that a party should not be estopped on an ambiguity. 24 Although I accept that minds may differ I would have thought that the statement was not too ambiguous and that there may be room for an argument for promissory estoppel. Detriment is obvious and reliance would be arguable. 25 In my view, there is a genuine dispute in this area. Anschun estoppel 26 In Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589, Gibbs CJ, Mason and Aickin JJ at 598 approved the following statement of principle in Henderson v Henderson (1843) 3 Hare at 115: "The critical issue, then, is whether the case falls within the extended principle expressed by Sir James Wigram VC in Henderson v Henderson. The Vice-Chancellor expressed the principle in these terms: 'Where a given matter becomes the subject of litigation in , and of adjudication by, a Court of competent jurisdiction, the Court requires the parties to that litigation to bring forward their whole case, and will not (except under special circumstances) permit the same parties to open the same subject of litigation in respect of matter which might have been brought forward as part of the subject in contest, but which was not brought forward, only because they have, from negligence, inadvertence, or even accident, omitted part of their case. The plea of res judicata applies, except in special cases, not only to points upon which the Court was actually required by the parties to form an opinion and pronounce a judgment, but to every point which properly belonged to the subject of litigation, and which the parties, exercising reasonable diligence, might have brought forward at the time". 27 It was submitted by the plaintiff that the claim on an indemnity pursuant to the statutory demand was intimately related to the subject matter of the earlier Supreme Court proceedings and reasonable diligence ought to have dictated that the claim be brought at that time rather than the present time. The problem with this submission is that if the defendant had tried to raise it in that matter before she made the payment she would have been met with a defence that the question was hypothetical because her right to claim on the indemnity does not arise till after payment has been made. As is plain from the proceedings, the settlement was before the completion of the sale of the property and the payment to the bank. My view is that although it is true that the circumstances in which an Anschun estoppel might apply are never closed it seems to me absolutely unlikely that any such claim could succeed in the circumstances of this case. Was the principal debtor the plaintiff or Rocco Reale? 28 Cases such as AGC (Advances) Ltd v West (1984) 5 NSWLR 590 at 603-4 establish that one can have regard to extrinsic evidence in cases concerning guarantees, to determine who is in substance a guarantor, and who is in substance a principal debtor. 29 This is said to arise, inter alia, because of a recital in the property settlement to the following effect: "The said former matrimonial home is encumbered by a registered first mortgage in favour of the Commonwealth bank of Australia. The mortgage is registered as dealing number 354-5788 and the security for monies borrowed by the husband for business purposes by way of a business loan with a current balance of $250,000 and overdraft with a current balance of approximately $50,000." 30 All that can be said of these words is that they are perhaps somewhat equivocal and if one looks at the documents that the parties executed there is absolutely no suggestion that the principal debtor was other than the plaintiff company. In addition the accounts of the plaintiff company did not reflect any suggestion that Rocco Reale was the principal debtor. 31 However, when one has regard to the arrangements between the brothers to the effect that Rocco Reale was to personally repay the loan and that it was for the purpose of him providing a similar level of funds to the company as had been provided by his brother, the truth and substance of the transaction would tend to suggest that the principal debtor was Rocco Reale. 32 In my view there is a genuine dispute as to who is the principal debtor. Offsetting claim 33 There was a claim to offset a debt of $129,499 owed by the defendant and Rocco Reale to the plaintiff. However, given that the claim is by the defendant it was submitted that there can be no set off as a joint debt cannot be set off against a separate debt. See S R Derham Set Off Ch 5 note 3. The plaintiff did not press the claim, which is probably appropriate as the debt prima facie is a joint debt and cannot be claimed against one debtor alone. Conclusion 34 In my view the plaintiff has established a genuine dispute and, accordingly, I make order 1 in the application. I will hear submissions on costs. **********

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