A1 Catering Services Pty Ltd v Manassen Holdings Pty Ltd

1. [1]

   These proceedings concern a claim by the plaintiff, A1 Catering Services Pty Ltd (A1 Catering) against its former mortgagee, the second defendant, Manassen Holdings Pty Ltd (Manassen). The plaintiff seeks the return of $300,000.00 (the Security) held by Manassen, plus interest. The Security is the amount of surplus funds retained by Manassen following the sale of certain mortgaged properties and discharge of various mortgages securing a loan agreement entered into between Manassen as lender and the plaintiff and an associated company, RMW Services Pty Ltd (RMW), as borrowers. Manassen says that it was and continues to be entitled to retain that amount as security for costs in relation to reasonably anticipated litigation threatened by A1 Catering and RMW.

Background

1. [2]

   On 6 November 2007, A1 Catering and RMW entered into a loan agreement with National Australia Bank (NAB) for a loan of $600,000.00 and provided a mortgage as security. The loan balance gradually increased over time, and further security was provided to NAB on 13 September 2009, when RMW granted NAB a mortgage over Lot 9 in Deposited Plan 250857.

2. [3]

   On 14 December 2011, A1 Catering granted mortgages in favour of NAB over various properties, being Lot 2 of Strata Plan 5325, Lot 42 of Part 7 of Deposited Plan 773, Lot 5 of Strata Plan 3517, and Lot 3 of Strata Plan 4371. On the same date, Mr Roger Whalebone (Mr Whalebone), a director of A1 Catering and RMW, granted a mortgage in favour of NAB over Lot 416 of Deposited Plan 12567.

3. [4]

   On 19 February 2013, a sequestration order was made in relation to Mr Whalebone by the Federal Magistrates Court of Australia, and he ceased to be a director of RMW.

4. [5]

   By 19 November 2013, the amount owing to NAB under all the loans secured by the mortgages granted by Mr Whalebone, A1 Catering and RMW was $3,383.477.43. On 20 November 2013, NAB issued a default notice to A1 Catering and demanded payment of $35,544.41.

5. [6]

   On 19 December 2013, Mr Whalebone ceased to be a director of A1 Catering.

6. [7]

   On 13 February 2014, NAB demanded payment of $3,381,233.51, being the amounts owing under all the loans secured by the various mortgages. On 10 April 2014, following continued non-payment, NAB commenced possession proceedings against Mr Whalebone, A1 Catering and RMW in respect of various properties under the mortgages. On 30 June 2014, NAB obtained default judgment in those proceedings and on 10 July 2014 writs of possession were issued in relation to two properties.

7. [8]

   On 30 July 2014, Mr Whalebone’s bankruptcy was annulled and subsequently he was reappointed as a director of A1 Catering and RMW. However, enforcement action by NAB continued with notices to vacate issued by the NSW Sheriff for various properties in September 2014.

8. [9]

   In October 2014 Mr Whalebone engaged a mortgage broker to assist him in obtaining refinance to repay the loans owing to NAB. Between January and March 2015, Mr Whalebone received a number of offers for finance from various lenders including Chifley Securities Pty Ltd (Chifley) which was formerly the first defendant in these proceedings. Mr Whalebone signed a letter of offer issued by Chifley on 24 February 2015. On 26 February 2015, Chifley approached Manassen to provide the funds for the loan. Ultimately, Manassen became the entity that would lend the money to A1 Catering and RMW.

9. [10]

   On 13 March 2015, the loan agreement, mortgages, deeds of guarantee and other documents were executed by Manassen and Mr Whalebone and his wife (Ms Whalebone) on behalf of A1 Catering and RMW. The total amount advanced by Manassen was $3,925,000 of which approximately $3,466,639.01 was paid by direction of the borrower to discharge the NAB facility. The effect of the transaction was that the NAB facility was discharged and Manassen became the mortgagee of the various properties. Ultimately, it emerged that these documents were not properly executed by Mr and Ms Whalebone.

10. [11]

    On 16 September 2015, Manassen issued default notices under the loan documents seeking repayment of the amount advanced. On 20 October 2015 Summer Lawyers, the solicitors engaged by Manassen, noted in an email that Mr Whalebone contended that the loan amount claimed by Manassen was wrong.

11. [12]

    On 4 November 2015, Manassen commenced proceedings in this Court against Mr and Mrs Whalebone, A1 Catering and RMW seeking orders for specific performance for the proper execution of the loan documents. On 13 May 2016, orders were made requiring the execution of the loan documents and on 18 May 2016, those documents were properly executed.

12. [13]

    In those proceedings, Mr Whalebone filed an affidavit dated 22 January 2016 in which he stated that he disputed that the debt was due and payable, that Manassen’s conduct was misleading and deceptive, and he called the loan a ‘scam’. At the hearing of the proceedings before White J on 13 May 2016, Mr Ardino, the solicitor representing the defendants (including A1 Catering and Mr Whalebone) said:

13. [14]

    Later, after a short adjournment, Mr Ardino said to White J:

14. [15]

    On 25 May 2016, Manassen appointed Mr Bradd Morelli of Jirsch Sutherland as receiver and manager of RMW and A1 Catering. Mr Hayden Asper, an employee of the receiver, had day-to-day carriage of the matter.

15. [16]

    On 6 June 2016, the mortgages in favour of Manassen were registered. On 10 June 2016, Manassen’s solicitors stated that the ‘payout figure’ for the loans was $4,538,498.18. This included legal and receivership fees.

16. [17]

    On 28 June 2016, Manassen issued fresh default notices requiring payment of $4,423,498.18 owing as at 30 June 2016, an amount which excluded legal fees.

17. [18]

    On 30 June 2016 the receiver appointed a real estate agent to sell properties subject to mortgages in favour of Manassen.

18. [19]

    On 13 August 2016, solicitors engaged on behalf of A1 Catering and RMW proposed a partial discharge of the loan, along with a proposal for a deed of release to be provided to A1 Catering’s new lender.

19. [20]

    On 18 August 2016, solicitors on behalf of A1 Catering sent a letter to Manassen’s solicitors with the following statement:

20. [21]

    A1 Catering also proposed in that letter that Manassen and the receiver provide an assurance that payment of the ‘final payout figure’ would discharge the liabilities of A1 Catering and RMW to Manassen and the receiver.

21. [22]

    In response, on 19 August 2016, Summer Lawyers, the solicitors for Manassen (who also acted for the receiver) sent a letter that contained the following:

22. [23]

    On 22 August 2016, A1 Catering’s solicitor replied stating that there was no basis on which Manassen could assert that a dispute had arisen or was reasonably anticipated to arise in relation to the Manassen loans. The question was then directly put in an email from Manassen’s solicitor on the same day in the following form:

23. [24]

    A1 Catering’s solicitor responded by email on the following day which stated that:

24. [25]

    By an email on the same day, Manassen’s solicitor replied as follows:

25. [26]

    Four properties subject to mortgages in favour of Manassen were sold by auction in August 2016 and settled in mid-October 2016. Following the sales there was a surplus of approximately $700,000. On 27 October 2016, Manassen’s solicitor sent an email to A1 Catering’s solicitor, which indicated that it intended to retain $300,000 of the surplus moneys as security for costs unless a deed of settlement and release was entered into.

26. [27]

    In reply to this email, on 10 November 2016, A1 Catering’s solicitors sent a letter stating:

27. [28]

    On 15 November 2016, an itemised breakdown of the application of the sales proceeds was provided. On 1 December 2016, A1 Catering sent an email to Manassen’s solicitors requesting ‘fully itemized legal accounts’ relating to money that was used from the sales proceeds to pay the fees of the receiver and Summer Lawyers, and referred to the loan transaction as a “loan scam”.

28. [29]

    On 31 January 2017, A1 Catering’s solicitors sent a letter stating:

29. [30]

    Throughout February 2017 correspondence between the solicitors continued. Manassen’s position was that on the basis of Mr Whalebone’s conduct (and therefore by extension A1 Catering and RMW) they would have a reasonable apprehension of litigation unless and until a deed of release was entered into. A1’s position was that it had advised Manassen that it did not have an intention to pursue litigation, and Manassen could not hold the money as a bargaining chip to require the execution of a deed of release.

30. [31]

    On 22 February 2017, Summer Lawyers wrote a letter to A1 Catering’s solicitor stating that it was possible that ‘an appropriately drafted letter from your office (that our client will rely upon as an absolute bar)’ would be sufficient to satisfy Manassen.

31. [32]

    In June 2017, Mr Whalebone sent letters of demand to Summer Lawyers and the receiver relating to funds held by the former or inappropriately distributed by the latter.

32. [33]

    By a letter dated 31 August 2017, Mr Whalebone instructed his solicitor to prepare a statement of claim ‘for the recovery of lost monies, overcharging fee, rip off monies, also fire sale of our properties’.

33. [34]

    In December 2017, Mr Whalebone sought an assessment of the fees paid to Summer Lawyers out of the proceeds of sale of the four mortgaged properties which had been sold.

34. [35]

    On 16 March 2018, discharges of the registered mortgages were provided to Mr Whalebone for the mortgaged properties which had not been sold.

35. [36]

    On 17 February 2021, A1 Catering commenced these proceedings.

36. [37]

    On 29 August 2022, A1 Catering commenced proceedings against the receiver, Mr Asper and Jirsch Sutherland relating to the sale by the receiver of two of the mortgaged properties seeking equitable compensation. The claim is essentially that the plaintiff was denied the opportunity to purchase the properties at the auctions. It is not in dispute that if an amount is recoverable by way of equitable compensation, the receiver will have a claim against Manassen by way of indemnity.

37. [38]

    Mr Reese, the solicitor at Summer Lawyers who acted for Manassen at all relevant times, gave evidence in his affidavit about the view he had formed at the time he sent his letter of 19 August 2016 referred to at [22] above regarding the prospect of litigation between the parties:

38. [39]

    It was not in dispute that [75]–[78] of Mr Reese’s affidavit accurately summarise the types of allegations which were in dispute at the time the $300,000 was withheld as security for costs.

Relevant provisions of the loan documents

1. [40]

   I will now set out the provisions of the transaction documents which are relevant to a claim for costs by Manassen against A1 Catering or the other mortgagors.

2. [41]

   The loan agreement between Manassen as lender and RMW and A1 Catering as borrowers includes cl 13, which requires each borrower to pay to Manassen on demand all expenses (including legal costs and disbursements on a solicitor and client basis) incurred by Manassen in connection with (emphasis added):

3. [42]

   The real property mortgages given by each of A1 Catering and RMW, as mortgagor, to Manassen, as mortgagee, impose an obligation on the mortgagor to pay the Secured Moneys to the mortgagee. The term "Secured Moneys" is defined in the mortgage as follows (emphasis added):

4. [43]

   I note that the reference to "Mortgagee" in the chapeau to this definition is an error of a typographical nature and should read as "Mortgagor". In my view, on the proper construction of the mortgage and this definition, that should be regarded as an obvious slip and it should be construed as “Mortgagor”, not “Mortgagee”. See P Herzfeld and T Prince, Interpretation (Thomson Reuters, 2nd Ed, 2020) at [22.140].

5. [44]

   A separate provision of the mortgage headed "Indemnities" contains an indemnity which provides relevantly as follows (emphasis added):

6. [45]

   A separate provision of the mortgage headed "Discharge", sets out the circumstances in which the mortgagor can require a discharge of the mortgage as follows:

7. [46]

   These provisions refer to Transaction Documents, a term defined to include a collateral security and which encompasses the loan agreement and a document entitled "general security deed" which was entered into between Manassen (referred to as the Secured Party) and A1 Catering (referred to as the Grantor) at the same time as the other documents were executed and has not been discharged. Clause 17.1, 17.2 and 17.3 of the general security deed provide for a broad indemnity for costs, relevantly as follows:

Principles

1. [47]

   Where a mortgagor seeks a discharge of a mortgage from the mortgagee at a time when a contingent liability is owing to the mortgagee which is secured by the mortgage, the mortgagee is entitled to require not merely payment of the amount presently secured by the mortgage but also payment of an amount which is a reasonable estimate of that contingent liability: see Liberty Funding Pty Ltd v Steele-Smith [2004] NSWSC 1100 at [24]–[29], Overton Investments Pty Ltd v Cuzeno RVM Pty Ltd [2003] NSWCA 27 at [63], and Australia and New Zealand Banking Group Ltd v Mishra [2012] NSWSC 1333 at [27]–[41]. This is because the mortgagor is not entitled to redeem the mortgage while such amounts are contingently owing: see also the decision of the English Court of Appeal in Re Rudd and Son Ltd (1986) 2 BCC 98,955. In the present case, this is confirmed by the discharge clause in the mortgage itself, set out above.

2. [48]

   As illustrated by Mishra's case, the principle that a mortgagee can require the payment of a sum as security for a contingent liability which is secured by the mortgage extends to costs reasonably anticipated to be incurred by the lender in the event of an anticipated dispute with the borrower at the time the discharge is sought where the mortgage provides or secures an indemnity for such costs.

Consideration

1. [49]

   It was not in dispute that the issues which arise in this case are two-fold: first, whether Manassen, a mortgagee, was entitled to retain the sum of $300,000 on the asserted basis that it was security for anticipated costs of litigation or other dispute with the borrowers; second, if the answer to that question is yes, whether the amount retained as security was reasonable.

2. [50]

   As to the first issue, the primary basis on which Manassen sought to justify its retention of the amount of $300,000 is the principle which I have summarised at [47] above. I am satisfied that the clauses in the loan agreement, the mortgages and the general security deed will catch expenses incurred by Manassen in the event of a dispute between Manassen regarding the three matters set out in Mr Reese's affidavit. In particular, the costs of defending each of those claims described in Mr Reese's affidavit would give rise to legal costs and expenses for which Manassen could claim an indemnity under the clauses of the loan agreement and the mortgage set out at [41] and [44] above and were amounts contingently owing to the Mortgagee which fell within the definition of Secured Moneys in the mortgage. Ultimately, whether it is entitled to that indemnity will depend on the circumstances, eg in the case of the indemnity in the mortgage, it will depend on whether the carveout for fraud, negligence or wilful default in the relevant provision applies. However, that is not to deny that there was a contingent liability for such costs at the time A1 Catering and the other related parties sought the discharge of the mortgages. I reject the submission for A1 Catering that there was no such contingent liability.

3. [51]

   My conclusion on this point makes it unnecessary to consider the scope of the mortgagee's right to retain a surplus for the purposes of so-called redemption proceedings dealt with in the decisions in Project Research Pty Ltd v Permanent Trustee of Australia Ltd (1990) 5 BPR 11,225 and Ginelle Pty Ltd v Singh [2010] NSWSC 116. Those cases did not concern the principle on which Mishra's case was decided and the line of authority relied upon by Davies J in that case.

4. [52]

   I am also satisfied that, from 19 August 2016, it was reasonable for Manassen to anticipate that it was likely that there would be litigation with A1 Catering or one of its related entities regarding the matters set out in [75]–[78] of Mr Reese's affidavit, whose evidence I accept.

5. [53]

   I turn now to the second issue which is whether the amount retained by Manassen was a reasonable estimate of the likely costs Manassen would incur in the event that any of the anticipated disputes arose. Mr Reese explains in his affidavit, in the passages I have set out above, why he formed the view in August 2016 that the amount of $300,000 was a reasonable estimate of the likely fees and expenses that would be incurred. In my view, that is a rational and coherent explanation of the basis of the calculation that he made. It is not, as submitted for A1 Catering, merely a sum which was left over after distribution of the balance of the proceeds of sale.

Conclusion

1. [54]

   Accordingly, for all these reasons, I have concluded that prayers 3 and 4 of the amended statement of claim should be dismissed.

2. [55]

   The parties have not made submissions on costs. My preliminary view is that costs should follow the event. However, as the parties wish to be heard on costs, I will make orders for submissions on costs.

3. [56]

   Therefore, I will make the following orders:

   1. (1)

      Prayers 3 and 4 of the plaintiff’s Amended Statement of Claim are dismissed.

   2. (2)

      The second defendant to file and serve submissions (of no more than five pages) and any affidavit evidence with a copy to be emailed to the Associate to Justice Richmond by Friday, 8 March 2024.

   3. (3)

      The plaintiff to file and serve submissions (of no more than five pages) and any affidavit evidence with a copy to be emailed to the Associate to Justice Richmond by Friday, 15 March 2024

   4. (4)

      The second defendant to file and serve any submissions in reply (of no more than two pages) with a copy to be emailed to the Associate to Justice Richmond by Wednesday, 20 March 2024.