IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2009-404-5046

BETWEEN	WESTPAC NEW ZEALAND LTD Plaintiff

AND	LAKOV LIMITED First Defendant

AND	CHRISTINE HERRON Second Defendant

AND	CHRISTINE HERRON AS TRUSTEE OF THE HERRON TRUST
Third Defendant

Hearing:	8 July 2010

Counsel:	M Pascariu for Plaintiff
E Grove for Second and Third Defendants

Judgment:	9 July 2010 at 12 pm

JUDGMENT OF ASSOCIATE JUDGE CHRISTIANSEN

This judgment was delivered by me on 9 July 2010 at 12 pm pursuant to
Rule 11.5 of the High Court Rules

Registrar/Deputy Registrar

Date ..........................

Solicitors:

Miner Ellison Rudd Watts, P O Box 3798, Auckland
Graeme Skeates Law, PO Box 56179, Auckland

WESTPAC NEW ZEALAND LTD V LAKOV LIMITED AND ORS HC AK CIV-2009-404-5046  9 July 2010

The summary judgment claim

[1]       This is a summary judgment application by the plaintiff (“Westpac”) against the second and third defendants Mrs Herron and the Herron Trust for the sum of
$709,177.25 which Westpac alleges remains due and owing pursuant to a guarantee dated 27 September 2007.  The application is opposed.

[2]       Along with other guarantors Mrs Herron admits signing personal guarantees relating to the borrowings of the first defendant (“Lakov”) from Westpac.  For Mrs Herron it is asserted that in March 2008 the Herron Trust arranged to repay Trust borrowings of $506,105.86 to Westpac so that Westpac’s mortgage over a property at Waiheke, which secured those borrowings, would be released.  Mrs Herron claims that contemporaneously additional consideration was provided to Westpac including:

a)	A payment of $111,000 in reduction of the amount owing by Lakov under its September 2007 loan contract with Westpac; and

b)	Increasing  Westpac’s  mortgage  priority  amount  in  respect  of  a secured property at Devonport from $1.4 million to $1.53 million.

[3]       For Mrs Herron it is claimed the additional consideration was provided on the basis of an express oral agreement with Westpac that in return Mrs Herron would be released from all of her guarantees to Westpac.

Background – chronology

[4]       On  27  September  2007  Westpac  and  Lakov  entered  into  a  first  loan agreement under which Westpac advanced Lakov the sum of $1.2m.  On that date Mr Herron, Mrs Herron and the Herron Trust provided unlimited personal guarantees and indemnity to Westpac to secure the obligations in Lakov.

[5]       On 2 October 2007 a first registered mortgage was entered into securing the obligations of Lakov over the Devonport property.  On 20 March 2008 the priority amount for this mortgage was varied from $1.4m to $1.53m.

[6]       On  19  October  2007  Westpac  and  Lakov  entered  into  a  second  loan agreement under which Westpac advanced Lakov $350,000.  On the same date a first registered mortgage was entered into to secure the loans to Lakov, over a property situated at Whangaparaoa.

[7]       Following  default  by  Lakov  under  the  first  and  second  loan  agreements Westpac issued Property Law Act notices on 27 September 2008.   Those notices expired on 31 October 2008, unremedied.

[8]       On 12 November 2008 a further demand was made on Mrs Herron and the

Herron Trust.  On 9 March 2009 the Whangaparaoa property was sold and on 2 April

2009 the Devonport property was sold.  Lakov is in liquidation.

[9]       On  7  July  2009  a  demand  for  repayment  of  the  outstanding  amount  of

$709,177.25 was made on Mrs Herron and the Herron Trust

Relevant legal principles

[10]     Westpac needs to prove there is no defence to its claim.   Whereas here Westpac’s evidence is prima facie sufficient to show there is no defence, Mrs Herron and the Herron Trust need to respond if the summary judgment application is to be defended.

[11]     Usually the Court will not resolve material conflicts of evidence or assess the credibility of deponents but will be wary of claims of a defence when such are inconsistent with undisputed contemporary documents, or where such are inherently improbable.

The defence

[12]     There is only one factual issue in dispute between the parties.

[13]     Affidavits in defence have been filed by Mr Herron and Mrs Herron.   Mr Herron’s evidence is that in September 2007 he undertook the loan negotiations with Westpac and in particular with an employee named Ms Shaw.  He deposes at that time it was never intended that Mrs Herron be a guarantor.  Later in March 2008, in his discussions to repay the mortgage over the Waiheke property owned by the Herron Trust, he said one of the main reasons was to remove Mrs Herron as a trustee.  That, he claimed was the reason for the additional payment of $111,000, and an agreement to increase Westpac’s mortgage priority.

[14]     Mr Grove submits Ms Madden’s affidavits as an officer of and on behalf of Westpac highlight reasons why it would be inappropriate to enter summary judgment for Westpac.  These reasons include:

a)        Ms  Madden  does  not  purport  to  have  any  personal  knowledge regarding the negotiations that occurred between Mr Herron and Westpac.

b)        No evidence has been given for Westpac by Ms Shaw regarding what was or was not represented to Mr Herron, nor is there any evidence or explanation why Ms Shaw has not provided an affidavit.

c)	Ms Madden’s evidence is that:

i)         She has reviewed Westpac’s file and cannot find any mention of Mrs Herron being released from her guarantees; and

ii)        She  believes  the  payment  of  $111,000  and  increase  in mortgage priority amount must have been required by Westpac to  improve  its  security  position  and  was  imposed  as  a condition   of   releasing   the   mortgage   over   the   Waiheke property.

[15]     It is Mr Grove’s submission that the substance of Mr Herron’s claims that there was an agreement with Ms Shaw that Mrs Herron would be released from her

guarantees,  has  not  been  squarely addressed  or  apparently even  investigated  by Westpac.    Mr  Grove submits  that  Ms Madden’s  claim  that  Westpac refused  to provide a discharge of the Waiheke property mortgage was on account of additional consideration being required.  Such a refusal by Westpac was neither commercially justified nor lawful; that the Herron Trust was entitled to receive a discharge of that mortgage on repayment of those mortgage borrowings to Westpac and the Herron Trust did repay those borrowings.  There was, Mr Grove submits, no obligation on the Herron Trust to go further and make an additional $111,000 payment to Westpac, or  increase  Westpac’s  priority  mortgage  amount  in  relation  to  the  Devonport property, in order to obtain the release of that mortgage.

[16]     At the time the Herron Trust wanted to repay its Waiheke property mortgage it owed  about  $500,000 under  that  mortgage.    Mortgage payments  were  not  in arrears.  The Lakov loans were not at that time in arrears.  The Lakov loans had been secured by mortgages over the Devonport and Whangaparoa properties not over the Waiheke property.  Mr Grove submits there is no link in the guarantees by reference to the Waiheke property over which Westpac also held a first mortgage security. The plaintiff has pleaded by its statement of claim that Lakov’s obligations under the loan agreement was secured by registered mortgages over the Devonport and Whangaparoa properties and also by the personal guarantees of the defendants.  It is not pleaded that the loan agreements were also secured by a mortgage over the Waiheke property.  It follows therefore Mr Grove submits that the Waiheke property was not provided as security for the loans and was not available to Westpac for that purpose.  Accordingly all that Westpac could require for repayment of the Waiheke mortgage was the amount then owing under that mortgage.  To view the matter in any other way would be to assume that the Westpac bank could call up the whole of the amount owing by Lakov at any time, even if there had been no default in loan repayment obligations.

[17]     For  these  reasons  and  due  to  claims  of  an  arrangement  to  release  Mrs Herron’s guarantee obligation it is submitted that the allegations made on behalf of Mrs Herron and the Herron Trust have sufficient credibility and cannot be dismissed as being patently spurious.   Therefore it would be unjust to dismiss her defence

without giving her the opportunity to have it tested by way of evidence given at trial, or provided by discovery and the issue of interrogatories.

[18]     In this case Mr Grove submits there are two sources of evidence which are likely to be relevant but which are not available in the summary judgment context; including  the  opportunity  to  call  witnesses  from  Westpac  employees  actually involved in the negotiations with Mr Herron; and to inspect via discovery Westpac’s relevant files.   Only then could the Court determine the reasons why additional consideration was  agreed to be provided to Westpac in March 2008.    It is not unrealistic or incredible, Mr Grove submits, that a bank might well be willing to surrender a guarantee from an individual in return for the tangible benefit of the
$111,000 repayment of existing debt and a further $130,000 in the priority amount of a secured interest over a valuable property.  If Westpac did agree that Mrs Herron and the Herron Trust would be released from their guarantees in return for the consideration (the repayment and the increase of the mortgage priority amount) that would mean they had an accrued and enforceable contractual right to be released from their guarantees.

[19]     In  summary  the  defendant’s  claims  cannot  be  considered  unsupportable. Rather,  there  is  a  sense  of  commercial  reality  about  them  and  they  are  not undermined by Mrs Madden’s hindsight perspective based on her perception of the bank’s reasons for acquiring additional security at the time the Waiheke mortgage was repaid.   Although it is the law that an oral or collateral agreement must be consistent with the written terms of the agreement, that rule does not preclude the written agreement being subject to later variation upon terms being orally agreed between the parties concerned.

Considerations

[20]     By their terms the guarantees provided:

a)        Westpac was able to demand the guarantors pay some or all of the guaranteed money when it is payable and the amount demanded must immediately be paid.

b)        The  guarantees  are  a  continuing  guarantee  and  related  to  all  the money which Lakov owed to Westpac.

c)        The guarantor must pay the guaranteed money whenever Westpac makes written demand from them.

d)        The guarantee imposes on the guarantors the principal obligation by which the guarantors agreed to perform the obligations of Lakov as if the guarantor was Lakov.   The guarantors have an independent and unconditional liability which is not affected by any transaction or arrangement  that  Westpac  might  otherwise  make  with  Lakov  or anyone else.

e)        Any security is independent of the guarantee and nothing affecting that security will affect a guarantor’s liability.

f)	A guarantor is able to halt his/her obligations by writing a letter to

Westpac advising his/her obligations are to be stopped.

g)        A  guarantor  is  not  entitled  to  a  final  discharge  until  Westpac  is satisfied that all the guaranteed money and any other amount owing under the guarantee has been repaid in full.

[21]     The net effect of the words used in the guarantee establishes that following Lakov’s default the guarantee imposes a clear obligation on Mrs Herron and the Herron Trust to pay on demand the amounts outstanding under the loan agreements. The release of the guarantee requires precise actions to be completed by Mrs Herron and/or the Herron Trust but there is no evidence in this case of any appropriate steps taken to release them from the guarantee.   The claim of a release relies upon Mr Herron’s claim and upon a submission that Mrs Herron and the Herron Trust had no responsibilities beyond its mortgage obligations in relation to the Waiheke property.

[22]     It was claimed that Mrs Herron initially executed the documentation without appreciating that her guarantee was provided.  But, there is no evidence showing that

Mrs Herron took any care in establishing the nature of the documentation prior to execution.  Indeed it appears plain that the guarantee was executed by Mrs Herron in the presence of her solicitor.   A claim of lack of understanding, will not without more, succeed in this case.  And, there is no more provided in this case.

[23]     The primary grounds in defence appear to rest upon claims of estoppel and a failure to provide consideration for the guarantee.   I am of the view that neither provides an arguable basis for a defence in this case.

[24]     A claim for estoppel rests on a belief or expectation having been created or encouraged through some action, representation or omission by Westpac.  But, there is no evidence that Westpac represented to Mrs Herron that she in her personal capacity or as a trustee would be released from her guarantee.  Rather she says that she proceeded on the assumption that the guarantee would be released.  Her evidence is:

It was never explained to me when I executed the documentation in March
2008 for the refinancing that I was not being removed as a guarantor.

[25]     But, at the time Mrs Herron and the Trust were represented by independent solicitors.   Westpac was entitled to assume they were being properly advised.   A letter from the defendant’s solicitors post document execution made no reference to a claim of release from guarantees.

[26]     The loan arrangements with Lakov provided a financing agreement with a group of entities including Mr Herron and the Herron Trust.   The Herron Trust’s asset was the Waiheke property.  Lakov owned the Devonport and Whangaparoroa properties.  The loans of all three defendants were secured by mortgages to Westpac. Mr Pascariu submits and I accept that all securities were bundled under cross guarantees binding Mrs Herron and the Herron Trust.

[27]     A claim that Mrs Herron did not understand that she was entering into a guarantee when completing the loan documents in September 2007 was not pursued in submissions.   It could not be for reasons I have earlier identified in connection with Mrs Herron receiving independent legal advice at the time.   Any claim Mrs

Herron may have in respect of receipt of that advice is not a matter that should delay consideration of Westpac’s summary judgment application.

[28]     The focus of the defence case is based around claims and inferences that may be  drawn  from  the  circumstances  of  the  repayment  of  the  Waiheke  property mortgage  in  March  2008.    However,  to  an  extent  the  claim  of  a  variation  of guarantee obligations suffers for the same reason: i.e. because Mrs Herron and the Trust were again receiving independent legal advice at that time.  Yet there is a claim of an oral agreement of variation.  Mr Grove has submitted that claim can only be properly  examined  upon  hearing  the  evidence  of  the  particular  bank  officers involved including Ms Shaw.  Also Ms Madden who has provided Westpac’s two affidavits in support of its summary judgment claim has deposed to having read the relevant file and has said there is no record upon it referring to an agreement of the kind claimed on behalf of the defendants.  As Ms Madden has said there is no record then the Court has no reason to go beyond that sworn testimony.

[29]     Claims by Mr Herron of a discussion with Ms Shaw and another are of doubtful assistance.    As Mr Herron noted any discussions with Ms Shaw did not endure beyond January 2008.  In reality all Westpac has available is its file in respect of which Ms Madden has already provided evidence.

[30]     Had  Westpac  provided  a  release  of  the  guarantee  in  the  circumstances claimed then it is reasonable to expect such would have been recorded and would be on the file.  Ms Madden asserts none exists.  She gives her explanation based upon her experience as a senior manager of Westpac about the March 2008 dealings.  At the time Westpac secured its mortgage over the Waiheke property the mortgage advance amounted to about $500,000.  Yet, Westpac’s security priority amount was
$1.2 million.  This indicated a significant equity in the Waiheke property.

[31]     When the Herron’s asked Westpac to release its mortgage over the Waiheke property Westpac had to consider what its general exposure was to Lakov and to the Herrons.  The obligation to the Herron Trust was to secure Lakov’s loan obligations. Because the guarantor’s obligations were bundled over the three security properties Westpac could have demanded security to the extent of its mortgage priority amount.

Therefore the submission that there was no consideration provided for the additional payment to the Lakov account of $111,000, or for the mortgage priority increase, is not correct.

[32]     Ms  Madden  reasons,  and  commercially  it  is  entirely  acceptable  that  the Trust’s mortgage release was agreed to in consideration of the continuing security of Lakov’s loans, and not for reasons related to Mrs Herron’s release of guarantee.

[33]     The  guarantees  of  Mrs  Herron  and  the  Herron  Trust  were  clearly  of fundamental importance to Westpac’s loan arrangements.  No release from guarantee was assured until all monies agreed to be paid were paid albeit that security was provided for those payments.   There was no purpose for the Herron Trust to be involved save for the security provided by its Waiheke property.   The Trust’s obligations enured beyond the extent of the mortgage to Westpac because of its guarantee of Lakov’s loan obligations.

Conclusions

[34]     Claims of mortgage and security variation agreements are unsupported by reference to contemporary written documents.  Marginally only are they supported by claims that it is commercially wrong and unlawful for Westpac to have required additional security/payment in consideration of its agreement to discharge a property mortgage for the amount then owing under that mortgage.   By that mortgage the mortgagee’s obligations extended well beyond the property for which security was provided.  It extended to accomplish the obligations to guarantee related companies borrowings for which security was also provided over two properties owned by that company.   Claims that Mrs Herron or the Herron Trust were released from their guarantees  are  not  reasonably  supportable  because  Westpac’s  file  makes  no reference to same and nor does correspondence from the defendant’s independent solicitor who provided advice throughout.

[35]     In that result the Court is entitled to deal with the claims raised by or on behalf  of  Mrs  Herron  and  the  Herron  Trust  as  no  more  than  unsubstantiated

assertions.  This is a proper case for the Court to act robustly to grant Westpac the judgment it is entitled to.

Judgment

[36]     The application for summary judgment is granted.

[37]     Judgment shall be awarded in favour of Westpac against Mrs Herron and the Herron Trust in the sum of $709,177.25, together with interest on that sum at the plaintiff’s default interest rate from 13 May 2009 until date of judgment.

[38]     Westpac is entitled to payment of its legal costs on a full solicitor/client basis in such sum as is approved by this Court.

Associate Judge Christiansen