Soyfer v Earlmaze Pty Limited

• 7 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

2818/00 ILYA SOYFER & ANOR V EARLMAZE PTY LTD & ORS

1 By judgment of 22 November 2000 and supplementary judgment of 24 November 2000 Justice Hodgson then Chief Judge in Equity dealt with the main issues in this action. Declarations and orders pursuant to the judgment were made on 24 November 2000. It is necessary to read those judgments with this judgment. In brief terms the plaintiffs had lent $500,000 to Mr Mater, the second defendant, under a loan agreement dated 23 October 1998. Under the terms of that agreement Mr Matar was to repay the plaintiffs $625,000 on completion of a development at Bondi or at the expiration of 14 months, whichever came first, and if the development was not completed within the 14 months then in addition he was to pay "interest incurred by the bank" - (which must have meant "paid to the bank") and certain other moneys. In addition Earlmaze Pty Ltd, the first defendant (Earlmaze), which was the registered proprietor of the land subject to the development, granted to the plaintiffs an option to purchase a particular lot in the development for $1,000. That option was subsequently varied to put in a substituted lot in place of the original lot. The option agreement provided the grantee could not exercise the option if Mr Matar repaid the loan advanced to him.

2 The loan moneys were not repaid. The plaintiffs purported to exercise the option and sought specific performance of the contract which they claimed was brought into existence upon the exercise. The judgment determined that the option agreement as varied was valid; that the option had been exercised; and that the contract formed on exercise should be specifically performed. However, it was held that the rights under the option agreement were not in substitution for the debt but security for it. The debt owed by Mr Matar at entry of judgment was $655,010.52, judgment being entered in favour of the plaintiffs against him for that amount. As it will be necessary to refer to the declaration and orders made on 24 November 2000, a copy is attached at the end of this judgment for convenience of reference.

3 The unit, the subject of the option, was transferred to the plaintiffs pursuant to the order for specific performance. Earlmaze entered a caveat to protect its equity of redemption. After considerable difficulty the property was sold in March 2004 for $850,000, the net proceeds of sale being $820,687.58. From the proceeds of sale the sum of $666,262.30 was paid to the vendor plaintiffs. That sum represented the amount of the original judgment against Mr Matar, plus interest under s95 of the Supreme Court Act 1970 from the date of judgment until completion of the contract brought into existence by exercise of the option pursuant to the order for specific performance. The amount of $183,737.70 is held by the plaintiffs' solicitors in a controlled money account pending the decision on the present motion. That sum is the difference between $850,000 and $666,262.30.

4 By notice of motion filed on 26 May 2004, Earlmaze seeks orders (a) for payment to it of the sum of $183,737.70 referred to; (b) for judgment against Matar and Elcham, the cross-defendant for $665,010.52; (c) for judgment against Matar and Elcham for $40,000 and interest being the costs payable by Earlmaze to the plaintiffs, which Earlmaze was entitled to recover from the cross-defendants under the orders, although not necessarily that amount. The claim under (b) arises from the declaration in paragraph 5 of the orders and the liberty to apply under paragraph 14. The claim under (c) is made pursuant to paragraph 17 of the orders. It seems the motion is brought pursuant to the leave in paragraph 9 of the orders.

5 On the hearing of the motion the plaintiffs and Earlmaze were each represented by counsel and Mr Matar was represented by a solicitor. There was no appearance by Mr Elcham, although he had been served.

6 It is convenient to mention a few matters which at one stage may have appeared to be in issue. The plaintiffs have provided accounts. Save in respect to one matter there is no longer any dispute about the accounts. Earlmaze accepts that the costs and expenses of the sale of the property the subject of the security are properly chargeable to the mortgage account. That is clearly correct. Secondly, no claim was pursued for an occupation fee during a period when the property subject to the security was occupied by the plaintiffs. Again there was good reason for that. Finally, there was an alteration to the figures brought in by the plaintiffs as a result of adjustment being made for certain rents received by Earlmaze but later paid to the plaintiffs. As a result of this the only question to be decided on the motion, as between the plaintiffs and Earlmaze, is whether or not the property held as security was security not only for the sum of $655,010.52, but in addition for interest accrued on that amount pursuant to s95 of the Supreme Court Act.

7 The matter got off to a somewhat difficult start because the written outline of the applicant's argument was generally quite misconceived and it is fair to say was not relied upon at the hearing, but it was that case which was answered by the respondents in their written submissions. Ultimately the case of Earlmaze was quite clear. It was that pursuant to the declaration in paragraph 4 of the orders, the plaintiffs held the unit as security for the judgment debt in favour of the plaintiffs against Mr Matar; that judgment debt was $655,010.52; and that amount only could be retained by the plaintiffs from the proceeds of sale of the property held as security. The additional amount claimed as interest on the judgment was not subject to the security. On that argument it is difficult to understand the basis on which it was apparently accepted that s95 interest up to the date of completion of the contract pursuant to the order for specific performance was accepted as payable out to the plaintiffs from the proceeds of sale of the security, but that is not a matter which need be considered further.

8 The simple argument of counsel for the applicant Earlmaze is that (a) any entitlement to interest on the loan contract merged in the judgment; Ex parte Fewings; In re Sneyd (1883) 25 ChD 338; (b) paragraph 4 of the orders means what it says. The equally simple argument for the respondents is that in the absence of other orders s95 provides that interest at the prescribed rate is payable on the judgment; and that the total sum is covered by paragraph 4 of the orders.

9 There is no doubt about the doctrine of merger. It brought about the wording of the usual covenant in mortgages to pay interest at a stated rate "on the principal sum or on any judgment in which that sum should become merged", the purpose being to retain the right to an interest rate higher than the relatively low rate formerly applicable on judgments. That has no bearing whatsoever on the question now before the court. Either judgment debt means the amount of the judgment or it means the amount of the judgment and its fruits, namely interest; that is the debt owing pursuant to the judgment.

10 At the very least I consider that there is an ambiguity. In ordinary parlance, judgment debt can mean the amount payable pursuant to the judgment which carries the interest on it. It is therefore possible to look at the judgment to see whether it gives any assistance: See Ecrosteel Pty Ltd (t/as Packs Business Form Brokers) v Pefor Printing Pty Ltd (unreported Santow J 12 November 1997) and cases referred to in that judgment. The relevant paragraphs are 111, 112, 117 and 118 which are as follows (Soyfer v Earlmaze Pty Ltd [2000] NSWSC 1068.): REMEDY TO PLAINTIFF

[111] Mr. Alexis did not contest that, if the decision is otherwise in favour of the plaintiffs, the plaintiffs were entitled to specific performance. However, he submitted that there should be a condition imposed ensuring that they do not benefit from the agreement to any greater extent than the amount owing to them from Mr. Matar. Mr. Gleeson submitted that there was no evidence that the unit was worth any more than the debt owing.

[112] In my opinion, the Court can reach a conclusion as to the true nature of the transaction, as being not an outright option to purchase, but rather an option to acquire title to the unit as security for payment of the moneys due by Mr. Matar; and accordingly, in my opinion, Earlmaze has an equity of redemption in the property, and the plaintiffs do not acquire outright ownership of it. On that analysis, the unit can either be released to Earlmaze at an agreed value, or alternatively the plaintiffs can sell it in effect as mortgagees. That approach was not explicitly argued before me, and if either party wishes, I would be prepared to hear further submissions on it.

[117] For the reason I have given, in my opinion the plaintiffs are entitled to specific performance of the option. However, subject to further submissions, I would propose to declare that they will hold the unit as security for Mr Matar's debt, and I would grant liberty to apply in relation to further relief arising from that position.

[118] I will give judgment against Mr Matar for the amount of the debt, and interest. However, I would make an order appropriate to prevent any double recovery.

11 Earlmaze could have redeemed the security at any time upon payment of the amount due by Mr Matar. It did not do so. The plaintiffs sold as mortgagees. It is not suggested they could or should have sold earlier or that if they had there would have been a better result for Earlmaze. I consider that the examination of the judgment leads to a conclusion that the security was intended to be security for amounts due by Mr Matar to the plaintiffs pursuant to the judgment.

12 It follows that the claim in paragraph 1 of the notice of motion should be dismissed. On the evidence it is established that the whole of the moneys should be paid to the plaintiffs, as there will still be a shortfall between that amount and the amount owing to them pursuant to the judgment against Matar. To save further application, an order should be made now that the sum held by the solicitors in the controlled money account be paid out to the plaintiffs.

13 So far as the claim of Earlmaze against Matar and Elcham is concerned, the applicant Earlmaze is, pursuant to paragraph 5 of the orders entitled to indemnity against loss caused to it in essence as guarantor. That loss would appear to be the proceeds of sale of the unit, as it is not, I think, suggested that the unit would have been retained by the company. That figure is $820,687.58. It is different from the figure of $655,010.52 sought in the motion, but the increased figure was sought at the hearing and should I consider be awarded.

14 So far as the sum of $40,000 is concerned, I said at the hearing that the cross-defendants would not be bound by a figure established by agreement between plaintiff and first defendant. It follows that the claim in paragraph 2(b) of the notice of motion should be dismissed. That does not mean that the cross-defendants would not be well advised to accept that figure, but that is a matter for them.

15 The orders I propose are therefore as follows: 1. Order that the claim in paragraph 1 of the notice of motion be dismissed. 2. Order that the sum of $183,737.66 plus interest on that amount held by the plaintiffs' solicitors in a controlled money account pending the outcome of these proceedings be paid to the plaintiffs.

3. Judgment for the first defendant against the cross-defendants in the sum of $820,687.58.

4. Order the applicant's claim in paragraph 2(b) of the notice of motion be dismissed.

5. Order that the applicant pay the costs of the plaintiffs/respondents to the notice of motion.

6. No order as to costs in respect of paragraphs 2(b) of the notice of motion.

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