Wells Fargo Bank Northwest, National Association v Victoria Aircraft Leasing Limited [2004] VSC 70

Supreme Court of Victoria|2004-03-12|Before: HABERSBERGER J

PRACTICE AND PROCEDURE - Security as condition of defeating summary judgment application - Existence of power to sell in dispute - Security for the giving of the usual undertaking as to damages in respect of the grant of an injunction - Security to be assessed against future risk arising from restraint not past loss or damage.

This application was argued before me on 4 March 2004. It was stood over until 2.15 p.m. on the following day to allow me to consider my decision on the application and to hear argument on other matters remaining in dispute between the parties. Although I was in a position to deliver oral reasons for my decision on 5 March 2004, it became inconvenient to do so. I therefore announced my decision and indicated that I would publish my written reasons at a later date. Those reasons follow.

By a summons dated 4 February 2004, the plaintiff applied to the Court for a number of orders including an order that the claim be heard separately from the counterclaim and the third party claim and an order that the defendants pay to the plaintiff's solicitors the sum of US$325,484.71 to be held by the plaintiff's solicitors until the hearing and determination of this proceeding as security in respect of the aircraft which is the subject of this proceeding.

The plaintiff, Wells Fargo Bank Northwest, National Association, which is incorporated in the State of Utah in the United States of America, sues in its capacity as Security Trustee for the Export-Import Bank of the United States ("Eximbank"). The charter of Eximbank reveals that it is a corporation which is "an agency of the United States", all of the shares in which are held by the President of the United States, and it is funded by the Treasury of the United States. In 1993 Eximbank financed the purchase of a Boeing 747-400 aircraft by the first defendant, Victoria Aircraft Leasing Limited ("VALL"), which is incorporated in the Cayman Islands. It is unnecessary on this application to descend into the particulars of the complicated financing arrangements other than to say that it is alleged by the plaintiff, and apparently not disputed by the defendants, that VALL entered into a First Priority Aircraft Mortgage in respect of the aircraft.

Since at least June 1998, if not earlier, the second defendant, Nauru Aircraft Corporation (ARBN 074 712 351) ("NAC"), which is incorporated in the Republic of Nauru and registered as a foreign corporation in Australia and which carries on business as an airline under the name "Air Nauru", has used the 747-400 aircraft in operating its business.

It is said in the statement of claim that by reason of defaults in the repayment of the principal and interest in respect of the amount borrowed by VALL, on 9 June 2003 the balance outstanding of approximately US$13.63 million became immediately due and payable by VALL to Eximbank.

On 27 June 2003, the plaintiff commenced this proceeding against VALL and NAC seeking certain orders including a declaration that the security created by the mortgage was enforceable in relation to the aircraft, an order for foreclosure, a declaration that the plaintiff was entitled to take possession of the aircraft and a mandatory injunction requiring the defendants to effect delivery of the aircraft to the plaintiff.

On 2 July 2003 the parties appeared before me in order for NAC, through its counsel, to give undertakings to the Court that it would not take any steps to move the aircraft from the Qantas Airways Ltd Boeing 737 maintenance base in Melbourne prior to the completion of the heavy maintenance overhaul and that it would not take any steps to move the aircraft from the maintenance base after the completion of the heavy maintenance overhaul without giving the plaintiff and Eximbank at least two clear business days' notice of any intention to do so.

NAC did give notice to the plaintiff that it wanted to remove the aircraft, so the plaintiff issued a summons on 4 July 2003 seeking an injunction restraining NAC from doing so. That application came before Gillard J in the Practice Court on 7 July 2003. On that day, his Honour accepted an undertaking from the defendants and the Government of the Republic of Nauru that pending the hearing and determination of this proceeding or further order they would not take any steps to sell, dispose or in any way encumber the aircraft the subject of this proceeding pending the hearing and determination of this proceeding and any appeal; that the aircraft would only be used to carry on the business of providing NAC's normal commercial passenger and cargo airline business in accordance with its Air Operator's Certificate and to perform charter work with the written consent of the plaintiff; and that, if so ordered, they would deliver the aircraft the subject of this proceeding to the plaintiff at Melbourne International Airport or to such other location as might be reasonably requested by the plaintiff. His Honour then made certain orders including that the defendants pay to the plaintiff's solicitors US$455,879.78 by 8 July 2003 and US$1,678,930.21 by 11 July 2003. These amounts were to be held in trust by the plaintiff's solicitors pending the hearing and determination of this proceeding or further order. I was told by counsel that the two payments in question were offered by the defendants. Subsequently, on the application of the defendants the amount of the second payment was reduced by his Honour to US$800,000.

Gillard J later described the two payments as "a show of good faith on the part of the defendants to allay fears that this may go on forever and just be an excuse to avoid paying a debt". Those comments were made by his Honour on 24 July 2003 after he had given judgment dismissing an application by the plaintiff for summary judgment and in response to a submission by the plaintiff that the full amount originally offered by the defendants should now be paid. His Honour refused that application saying in part that the plaintiff was "well protected by having the security over the plane and the amount of money that in fact has been paid into the plaintiff's solicitors' trust account".

In his reasons for judgment on the summary judgment application[1], Gillard J said at the end of paragraph 28:

"In my opinion, a grave injustice would be caused to the defendants if they were denied the opportunity of seeking to enforce the agreement and/or the representations made leading to an expectation that Eximbank would not seek to enforce its rights against Victoria Leasing. In my opinion, the defendants have satisfied the court that there is a question to be tried. In my view, there should be a trial of the issues and to deprive the defendants of that opportunity would, at this stage, be a grave injustice."

His Honour continued in paragraphs 29 and 30 as follows:

"This proceeding is in the Commercial List. One of the objects of the list is to case manage the interlocutory matters so that the proceeding is ready for trial within a period of three months after institution of the proceeding. The judge in the list will fix a date for trial and the trial date should be in the order of six months' time. The question arises as to what the court should do in relation to the claim for interlocutory relief brought by the plaintiff in respect to the aircraft. The effect of the interlocutory relief to date is that Air Nauru has been given permission to continue to fly the plane. It has paid approximately US$1.2 million as a sign of good faith to the plaintiff's solicitors to be held in trust. The aircraft has recently undergone a very expensive repair and maintenance service and in my opinion the value of the aircraft will not deteriorate to any great degree over the next six months. I am prepared to give directions to ensure that the interlocutory steps are carried out expeditiously. Of course, the further conduct of the proceeding will be a matter for the judge in the Commercial List. Mr Brett QC submitted if summary judgment was denied, the right of the defendants to defend the proceeding should be subject to a condition, namely, payment of the whole or a substantial part of the debt into court. The prospects of the defendants or the Republic of Nauru complying with such a condition, in the short term, are remote. It would be unjust in my opinion in the circumstances of this case if they were denied the opportunity to defend the proceeding. Further, their defence goes to the very question of the liability to pay the amount."

The orders made by his Honour on that day included an order that:

"Pending the hearing and determination of the proceeding or further order, the plaintiff and its servants and agents be restrained from taking any step or action whatsoever which would have the effect of preventing the second defendant from using the Aircraft in connection with its normal business of Air Nauru."

Prior to the making of this order, the defendants gave the usual undertaking as to damages.

The only evidence before his Honour as to the value of the aircraft was a valuation dated 28 October 2002 by Avmark Inc prepared for the defendants as part of a finance restructuring proposal that was put to Eximbank in November 2002. It valued the aircraft at US$16.67 million.

The timetable anticipated by Gillard J has not eventuated largely, but not entirely, as a result of delays brought about by the defendants' attempt to join the United States of America as a third party. On 20 February 2004, that party was eventually served but it does not have to enter an appearance until early June. Whether or not an appearance will be entered is unknown, but the history of the matter would suggest that this is unlikely to occur.

In the proceeding itself the position has now been reached that, subject to compliance with an order that a further category of documents be discovered by the plaintiff, the interlocutory steps have been all but completed. I therefore indicated to the parties during argument that I was of the mind to tentatively fix a date for the hearing, which would have to be reviewed once the position of the third party became known. The tentative trial date has now been fixed at 23 August 2004, which is some six or seven months later than that anticipated by Gillard J.

The Additional Security Sought by the Plaintiff

Having set out the background at some length, I return to the application before me. Mr Brett QC, who appeared on behalf of the plaintiff, accepted that it was, in the circumstances, no longer appropriate to seek an order that the counterclaim be heard separately from the claim or that, at this stage, the third party claim be severed. Further, as I understood him, instead of seeking payment to the plaintiff's solicitors of the sum of US$325,484.71, he sought an order requiring the defendants to pay to the plaintiff's solicitors the sum of AUD$200,000 per month. The written submissions on behalf of the plaintiff had sought an order that the defendants pay US$5,602,803.82 by 11 March 2004 and US$40,000 monthly from 4 April 2004. It was submitted by Mr Brett that as the value of the aircraft and moneys held in trust was now substantially less than the amount of the debt, the plaintiff was entitled to seek additional security, albeit not perhaps to the extent suggested in the written submissions.

According to the affidavit of Edward William Moon sworn 4 February 2004, the amount of US$325,484.71 was calculated to be the amount of the shortfall as at 4 February 2004 between the amount of the debt (US$13.95 million) and the estimated value of the aircraft (US$12.36 million) and the moneys held in trust (US$1.26 million), based on the plaintiff's material that was before the Court on the first return date of the plaintiff's summons. The figure of US$12.36 million was a preliminary estimate of the market value of the aircraft.

The amount of AUD$200,000 per month was arrived at in the following circumstances. The basis of the defendants' defence is that the representatives of the Government of the Republic of Nauru, which has been added as the third defendant in this proceeding, entered into an agreement with representatives of the Government of the United States to the effect that if Nauru took certain steps requested of it by the United States, the United States would:

(a) ensure that Eximbank would give Nauru the additional time to pay its debt to Eximbank, sufficient to ensure the operating viability of Air Nauru;

(b) provide funds to Nauru sufficient to eliminate any problems Nauru might have in relation to repayment of the Eximbank financing; and

(c) not permit Eximbank to exercise any strict contractual rights which it might have to take possession of and sell the aircraft.

When asked for further and better particulars of this allegation, the defendants responded on 26 September 2003:

"On present projections, NAC can afford to pay no more than AUD 2.461 million annually in aircraft lease payments. The United States is obliged to ensure that Eximbank reschedules the financing instalments accordingly."

The amount of AUD$200,000 per month is roughly equivalent to AUD$2.461 million annually. However, no further payments have been made by the defendants since the two payments referred to above.

Before turning to the competing submissions, I should say something about the evidence relating to the valuation of the aircraft. The situation was complicated because the security held by Eximbank was over the aircraft itself and two engines identified by serial numbers 857592 and 857593. However, engine number 857593 had been removed from the aircraft because it was in need of an overhaul and replaced by Air Nauru's engine number 857662 over which Eximbank had no security. It seems to me that in looking at the valuation question, one has to take into account the above facts including that one has to ignore the value of engine number 857662.

There were two valuations before the Court, a new one by Avmark Inc (a worldwide aviation marketing and management service) dated 23 September 2003, upon which the defendant relied, and the other by Phillip Leslie Seymour, the Managing Director of IBA Group Ltd, trading as International Bureau of Aviation, and who is a Senior Certified Appraiser by the International Society of Transport Aircraft Trading. Both valuations accepted that any fair market valuation figure would have to be reduced by about 35% to take account of the forced or distressed nature of the sale. I accept Mr Brett's submission that in considering the value of the security, the appropriate figure is the latter one.

In summary, Mr Seymour's figure for the market value of the aircraft package was US$12.829 million and US$8.125 million for the distressed value. In his calculations, Mr Brett used a figure of US$1 million for the cost of the overhaul of engine 857593. This was a matter of some uncertainty, as it could be either less or more than that amount. However, assuming that the figure of US$1 million is correct, Mr Brett submitted that this left the distressed sale value of the aircraft the subject of the security at US$7.125 million. Adding in the US$1.26 million paid into trust, one reached an amount of US$8.38 million for the total value of the security against the current amount of the debt of US$13.98 million, or a shortfall of US$5.6 million.

Avmark's figure for the market value of the aircraft package was US$15.86 million and US$10.31 million for the distressed value. This latter figure appeared to take into account the cost of overhauling engine number 857593. Nevertheless, even after adding in the amount in trust, the total value of the security based on Avmark's valuation was still only US$11.57 million, leaving a shortfall of US$2.41 million.

Mr Brett therefore submitted, and I accept, that currently there is a shortfall in the plaintiff's security of between US$2.41 million and US$5.6 million. The midpoint of these two figures is US$4 million. However, as I have said, Mr Brett sought an order for payment of AUD$200,000 per month and not the payment of a significant lump sum. This makes it unnecessary to say anything further about the merits of the competing valuations. On any view, there is an existing shortfall in the security based on distressed sale value.

In support of his application for additional security, it seemed to me that Mr Brett put his argument in two ways. The first way is that although Gillard J rejected the argument that the defendants' right to defend should be subject to a condition that the whole or a substantial part of the debt be paid into court (as set out in the passage already referred to above), he nevertheless indicated to the plaintiff in the discussion following judgment that it could renew that application if the security turned out to be insufficient. The second way in which Mr Brett put his argument was that given the admitted poor financial position of all of the defendants who are all incorporated outside the jurisdiction and the shortfall in the security position, the plaintiff was entitled to ask that the defendants provide security in support of their undertaking as to damages.

Mr Manetta of counsel, who appeared on behalf of the defendants, submitted that because this was a case of a mortgagor challenging the very existence of a mortgagee's powers of enforcement, there was no rule that the mortgagor must pay into court, or otherwise secure, the whole of the secured debt, and that the terms of any restraint on the mortgagee's powers of enforcement should be framed to adequately protect the mortgagee against the risk posed by the restraint, but no more. The risk to the mortgagee in this case, he submitted, was not that the security might turn out to be insufficient, because on the plaintiff's material this was already the case, but that the security might depreciate or a particularly advantageous sale opportunity be lost, as a result of the restraint. Secondly, whilst the undertaking as to damages was the mortgagee's traditional protection against the risks posed by the restraint and in appropriate cases the Court could require security to be provided to support that undertaking, in evaluating the risk that the continuation of an injunction would entail for the mortgagee, the Court can look only to the future and cannot by requiring security for damage already said to have occurred, vary the terms of the initial injunction retrospectively.

In respect of the first way in which Mr Brett put his argument, I do not accept that Gillard J was suggesting that the plaintiff could renew his obligation that the defendants only be permitted to defend on condition of payment into court of the debt, should the assumptions he had made, namely sufficient security already provided, more money to be paid over time by the defendants and trial within six months, turn out to be incorrect. Rather, his comments were directed towards the suggestion that the defendants should be required to give security to support their undertaking as to damages. In my opinion, Gillard J had made his view clear that the defendants should have the opportunity to seek to enforce the alleged agreement and representations, that is, to challenge the existence of the mortgagee's powers of enforcement and the defendants' liability to pay any amount. In restraining the plaintiff from exercising its claimed security rights, without requiring the debt to be brought into Court, in my opinion Gillard J was following the approach set out by Sugarman J in Harvey v McWatters[2], when the existence of the power to sell is itself the subject matter of the dispute.

Even if I am wrong in my understanding of Gillard J's judgment and subsequent comments, I am not bound by his Honour's remarks and, whilst according them the greatest respect, I have to decide the application now made to me. In my view, insofar as the argument for further security is based on a submission that I should require further security to be paid by the defendants as a condition of the continuation of leave to defend, because certain assumptions initially made have turned out to be incorrect, I reject it. The plaintiff's summary judgment application was dismissed by Gillard J. It was not adjourned for my further consideration. But even if it had been, I would not be disposed to revisit the question of leave to defend on condition of payment into court of the debt. If the defendants are successful in their defence, then at most the amount that would be payable to the plaintiff would only be what the defendants could afford. If the defendants are held to the projection in their further and better particulars then that would be an amount of AUD$2.461 million by 26 September 2004. On the other hand, that was only a projection and it may be that the financial position of the defendants is such, or becomes such, that this figure is, or becomes, no longer valid. To require the defendants to pay, at this stage, further security as a condition of defending the claim would be quite unfair and inappropriate in my opinion.

I turn therefore to the second way in which I understood Mr Brett to be putting his argument for further security, which was that it was now clear that further security was required to support the defendants' undertaking as to damages. Mr Brett pointed to the deficiency in the security of between US$2.41 million and US$5.6 million and to the fact that the debt claimed by the plaintiff increases by approximately US$40,000 per month. Based on the admitted financial difficulties of the defendants, he submitted that there was a real risk that the defendants' undertaking as to damages would be valueless.

However, in a thoughtful and persuasive submission, Mr Manetta argued that it was irrelevant that there was or might be a deficiency in the security represented by the aircraft package. The price paid by the defendants for the initial injunction restraining the plaintiff from seizing the aircraft was the usual requirement that the defendants undertake to pay any damages which resulted from that restraint. The Court could impose further conditions in respect of the future operation of a fresh injunction, but it could not, he submitted, order payment to be made or security to be provided and it could not impose a condition based on a loss or damage said to have already occurred. In support of this submission, Mr Manetta referred me to passages to this effect in the decision of the Full Court of the Federal Court of Australia in First Telecom Pty Ltd v Telstra Corporation Ltd[3], a decision of Beaumont, Burchett and Emmett JJ.

That was why Mr Manetta submitted that it was irrelevant that there might be a shortfall in the security. If there were, that shortfall had already occurred and was not affected by the continuation of the restraint on the plaintiff into the future. He submitted that the same applied to the future increase in the debt as a result of interest being added to the outstanding amount. If the debt were now unsecured to some extent, then all future interest payments were already unsecured.

Mr Manetta further contended that the only risk that any continued restraint posed for Eximbank was the risk of depreciation of the aircraft security between now and judgment. He submitted, however, that there was no evidence before the Court as to the extent of that risk, if any. Mr Brett, on the other hand, submitted that it was clear from the way in which the two valuations had been prepared that continued use of the aircraft would cause the value of the aircraft to depreciate. But he could not point to any evidence quantifying such a risk. I consider that the continued use of the aircraft does involve a risk that the value of the security will depreciate, but that I am in no position to quantify that risk. Further, it is said on behalf of NAC that engine number 857593 will be overhauled at its cost, which will increase the value of the security. Again, I am not in a position to quantify by how much, although I agree with Mr Brett that it is likely to be some fraction only of the amount expended on the overhaul. In the absence of evidence about these matters, it seems to me that strictly the plaintiff had not established its case based on the risk of the aircraft depreciating.

Mr Manetta argued that the likely head of damages which would be sought by the plaintiff should the defendants be called on to honour their undertaking was the loss of income from the funds which it would have received from the sale of the aircraft had it not been restrained. Presumably, Eximbank would argue that the injunction caused it to lose income it could have generated by lending these funds to other borrowers. On the valuation evidence, this would be loss of income to be earned from an amount of between US$7.125 million and US$10.31 million.

Perhaps in anticipation of my view, which I now state, that some security should be provided to cover in a general way the above matters, the defendants offered to pay as security for the undertaking as to damages in the future, interest at the contractual rate of 3.4625% on the principal sum as at 9 June 2003 of US$13,158,174.76 to the plaintiff's solicitors to be held in trust pending the trial. As a rounded figure, I was told that this comes to US$27,000 per month. It was said by Mr Manetta that this was the amount that the defendants now anticipated that they could prudently pay based on an up to date cashflow forecast for the period from 27 February to 31 December 2004 prepared by NAC's Acting Chief Financial Officer, William Keith Herdman. This showed that based on certain assumptions, NAC's cash position would deteriorate over that period from an amount of AUD$2.36 million to AUD$412,000, apart from about another $280,000 to $300,000 held in a variety of foreign currencies.

Mr Brett described the amount offered as "derisory". He submitted that as NAC currently had over AUD$2 million in cash reserves, it could afford to pay AUD$200,000 per month at least until the hearing. Whether or not that is so, I do not consider that the security to be provided should extend that far. In my opinion, Mr Manetta's argument was correct. Therefore, bearing in mind the possible depreciation in the value of the aircraft and the loss of use of the likely proceeds of the sale of the security, namely the aircraft package, between now and the hearing, which are matters on which the plaintiff is at risk as a result of the continuation of the injunction, I consider that the plaintiff is adequately protected by monthly payments of US$27,000. Although it is not interest at the default rate on the current amount of the debt, it is interest at Eximbank's contractual rate on a sum greater than the likely proceeds of the sale of the security if the restraint were to be lifted.

As explained above, my decision was announced on 5 March 2004. Orders were accordingly made on the same day to the effect that, upon the defendants by their counsel giving the usual undertaking as to damages and undertaking that:

"Pending the hearing and determination of this proceeding or further Order, they will, before the end of each calendar month, pay to the Plaintiff's solicitors the sum of US$27,000, to be held in trust, pending the determination of the proceeding or further Order, as security for the undertaking as to damages given this day."

and repeating other undertakings previously given with respect to the use of the aircraft or its delivery to the plaintiff, if so ordered by the Court, the plaintiff be released from the restraint imposed by paragraph 6 of the Order made by the Honourable Justice Gillard on 24 July 2003 and that pending the hearing and determination of the proceeding or further order, the plaintiff and its servants and agents be restrained from taking any step or action whatsoever which would have the effect of preventing the second defendant from using the aircraft the subject of the proceeding in connection with its normal business of Air Nauru. As emerged from the discussion with counsel on that day, it was necessary to release the plaintiff from the earlier restraining order and to make a fresh order restraining the plaintiff based on its agreement to pay the monthly instalments as security for its future undertaking as to damages. Further, the original undertaking remains, pending the plaintiff successfully concluding the proceeding and calling on the defendants to honour that undertaking.

At a glance

Court

Decision date

Before

Source

Judgment (50 paragraphs)

Parties

Cases Cited (1)