PJ Scahill & Associates Pty Ltd v Mertes

1. [1]

   HIS HONOUR: By notice of motion filed 9 August 2016 the second defendant, Gerd Rolf Mertes, sought orders in these proceedings being proceedings number 84978 of 2016 (the “2016 proceedings”), for leave to file and serve a further amended defence, that judgment made and entered on 12 November 2015 in proceedings 420826 of 2010 (the “2010 proceedings”) be set aside, an order that the 2010 proceedings be consolidated with the 2016 proceedings and such other order or further orders as the Court sees fit.

2. [2]

   The notice of motion was listed before me today together with a notice of motion filed by the plaintiffs seeking leave to file and serve an amended statement of claim including one that joined some banks who were first mortgagees of the properties to which I will refer. That notice of motion was resolved by such leave being granted. It would follow from the fact that the plaintiff has been granted leave to file and serve an amended statement of claim that the defendant would correspondingly have leave to file and serve an amended defence. To that extent the first part of Mr Mertes' notice of motion will be acceded to. However, the real issue concerns the application to set aside the judgment made on 12 November 2015 in the 2010 proceedings.

3. [3]

   To explain how this comes about it is necessary to set out the background to this litigation and the 2010 proceedings. At the outset it is appropriate to note that the argument put in favour of setting aside the judgment of 12 November 2015 in the 2010 proceedings did not raise the grounds that are traditionally invoked by way of a collateral challenge to orders made in different proceedings, specifically fraud. Instead, the application to set aside a judgment was based on the principles usually applicable to setting aside a default judgment.

4. [4]

   For that reason, and with the agreement of the parties, this notice of motion was also treated as also having been brought in the 2010 proceedings so as to allow a proper focus on whether the order should be set aside.

Background

1. [5]

   Sometime in 2010 the plaintiff, P J Scahill & Associates Pty Limited, filed a statement of claim against Ingeborg Mertes, Mr Mertes' late wife, seeking recovery of various amounts which appear to arise out of transactions between the plaintiff and Mr and Mrs Mertes in 2008. The amount claimed in the statement of claim was $1,184,100. It is common ground that in August 2008 Mr and Mrs Mertes had mortgaged property at Pennant Hills to the plaintiff as mortgagee (the “Pennant Hills mortgage”).

2. [6]

   The 2010 proceedings were effectively settled in 2013. On this day there was filed in Court a document entitled, "Terms of Settlement". Placed before me on this application is that document, which bears the stamp of this Court. It is necessary to set out its full terms as follows:

3. [7]

   Following the handing up of the terms of settlement, on 12 March 2013 orders were issued by the Court which, as I understand it, reflect what is recorded on Justice Link. The relevant parts of that judgment record as follows:

4. [8]

   It can be seen that there is a potential discrepancy between the judgment/order recorded on Justice Link and the terms of settlement that were said to have been initialled, dated and placed on the file by his Honour. The terms of settlement record the Court noting an agreement between the parties as set out above, whereas the order on Justice Link appears to give that agreement and its individual clauses the force of an order in their own right.

5. [9]

   In the end result and on the view I take it is not necessary to determine whether there is such a discrepancy and to rectify it. Given that the Court is dealing with both the 2010 proceedings and the 2016 proceedings, there is no impediment to it doing so. However, I will proceed on the basis most favourable to Mr Mertes, namely that what occurred in 2013 was the entering into of an agreement between the parties resolving the 2010 proceedings, which was not the subject of any order of the Court and instead the Court merely noted the effect of an agreement.

6. [10]

   Payments were made throughout 2013 and 2014 in accordance with the instalment arrangements referred to above. Sadly on 9 November 2014 Mrs Mertes passed away. It seems clear that the plaintiff did not become aware of that until 2016. Despite that payments continued to be made under the instalment arrangements noted above, presumably by Mr Mertes on his wife's behalf, until the middle of 2015 but thereafter they ceased.

7. [11]

   In October 2015, the plaintiff filed an application for the entry of judgment pursuant to the agreement referred to above. The application was served upon the various addresses last known for Mrs Mertes. It seems likely it came to the attention of Mr Mertes as well.

8. [12]

   On 12 November 2015, judgment was entered in the 2010 proceedings requiring Mrs Mertes to pay the plaintiff $730,000.

9. [13]

   On 18 March 2016, the plaintiff commenced the 2016 proceedings. They named Ingeborg Mertes as the first defendant and Mr Mertes as the second defendant. The statement of claim recounted the entry into the Pennant Hills mortgage and the events leading up the entry of judgment in November 2015. It also recounted the entry into of a mortgage dated 5 April 2013 over the property referred to in 1f of the terms of settlement, noted above, namely the property at Swansea (the “Swansea mortgage”).

10. [14]

    The statement of claim also pleaded the service of the notices under s 57(2)(b) of the Real Property Act in January 2016 and sought orders for possession of the property the subject of the Pennant Hills mortgage and the Swansea mortgage respectively.

11. [15]

    According to Mr Mertes it was around this time that he says he became aware of the entry of judgment in November 2015. He states that, following the death of his wife, he was in a prolonged period of grief. Thereafter, it became clear to the plaintiff that Mrs Mertes had passed away. It seems there was difficulty in appointing a representative, but ultimately Mr Mertes was appointed in August of 2006 to be the representative of Mrs Mertes.

12. [16]

    Further, the plaintiff realised that it was necessary to join the first mortgagees of the properties the subject of the Pennant Hills and Swansea mortgages respectively. In addition it appears they discovered that there was a writ of possession already entered in respect of one of them. It is not necessary to discuss that further. It suffices to state that the amended statement of claim, to which I referred earlier, seeks to resolve the position as between the plaintiff and the first mortgagee over the property the subject of the Pennant Hills mortgage.

13. [17]

    The 2016 proceedings takes as a given the indebtedness established by the order made in November 2015 and seeks to build upon that by pleading that a default under the various mortgages gives rise, so it is said, to a right to possession, subject to any superior right of a bank, and a power to exercise the power of sale depending upon the validity of the s 57(2)(b) notices.

14. [18]

    Mr Mertes mounts two attacks upon the entry of the 2015 judgment. The first is the calculation of the judgment debt of $730,000. Paragraph 1a refers to the sum of $1,000,000 being entered as judgment against Mrs Mertes in the event of default of the "below agreed payment arrangement". The judgment that was entered was for $730,000. That amount was calculated by taking the $1,000,000, referred to in paragraph 1a, the $50,000 referred to in paragraph 2.5 and then deducting the agreed figure for the instalments that were paid of $320,000.

15. [19]

    It is to be noted that it is not disputed, on this application, that there was in fact a default in making payments under the instalment regime provided for in 2.1 to 2.4.

16. [20]

    The argument that is sought to be raised is that, on its proper construction, the terms of settlement only allowed for the entry of judgment of $1,000,000 excluding the amount for costs referred to in paragraph 2.5 such that in the event of default the relevant judgment that is to be entered is $1,000,000 less the instalments paid.

17. [21]

    The premise of the argument is that the matter is to be approached on the basis that what was entered was a default judgment. Given that neither Mr nor Mrs Mertes attended in November 2015 that premise appears to be made good and is to be taken as accepted for the purposes of this judgment (see Uniform Civil Procedure Rules 36.16(2)(b)).

18. [22]

    Ordinarily an application to set aside a default judgment requires, as a necessary but not sufficient condition, that a defence upon the merits be established. That approach does not preclude the Court giving detailed consideration to a pure question of construction such as that which is raised by Mr Mertes on this application. In my view, on a proper consideration of the terms of settlement the point sought to be raised by Mr Mertes does not have sufficient strength to meet the threshold of an arguable defence.

19. [23]

    The principal argument in favour of the point raised by Mr Mertes is the fact that the requirement to pay the plaintiff's costs and disbursements is founded within a part of the terms of settlement described as “2.5” and which in the layout of the document appears under 1b. On its face, the location of that obligation to pay suggests that it is part of the instalment regime provided for in 1b. The difficulty is an arithmetic one in that 1b refers to the payment of $700,000 which ties in with the reference to the sum of $700,000 in the opening part of 1a. However, $700,000 is the total of the amounts referred to in paragraphs 2.1 to 2.4. If the amounts in 2.1 to 2.5 are added together they result in a figure of $750,000.

20. [24]

    Hence, the only sensible way of reading the first sentence of 1a, which refers to the sum of $700,000 “payable … in accordance with instalment payments noted in paragraph b below”, is as a reference to the instalment payments noted in that part of paragraph b constituted by paragraphs 2.1 to 2.4. When one turns to paragraph 1d it refers to a failure to pay the instalments in clauses 2.1 to 2.5 on or before the due date. As a matter of construction that can be seen as contrasting with the reference to the “instalment payments noted in paragraph b below” in 1a. As I have stated, it is not in dispute that there was ultimately a failure to pay one of the instalments noted in clauses 2.1 to 2.5 on or before the due date, specifically the instalment referred to in 2.3 that was required to be made on 1 September 2015.

21. [25]

    Clause 1d then refers to the plaintiff being at liberty to enter judgment on the "undischarged sum”. Given that, as a matter of arithmetic, the $50,000 referred to in 2.5 does not form part of the $700,000, referred to in 1a or the opening words of 1b, I think it is clear that any unpaid portion of that amount must, in fact, form part of the judgment for the “undischarged sum”.

22. [26]

    Accordingly, I think the only sensible construction that can be taken from the terms of settlement is one that involves a rejection of the first point sought to be raised by Mr Mertes.

23. [27]

    The second point to be made by Mr Mertes is that, as formulated, the terms of settlement entered in May 2013 embody a penalty. The traditional position is that an instalment regime that involves an acknowledgement of a higher amount in the terms of settlement accompanied by an agreement for a lesser amount to be paid does not constitute a penalty (see generally Lachlan v HP Mercantile Pty Limited (2015) 89 NSWLR 198; “Lachlan”).

24. [28]

    One matter that could be said about these terms of settlement is that they do not contain any express acknowledgement of an indebtedness on the part of Mrs Mertes of the sum of $1,000,000. Nevertheless, two matters should be noted in that regard.

25. [29]

    First, it is not necessary that the acknowledgement of the indebtedness be express; it can be implicit (see Lachlan at [43]). In my view that is certainly the case in respect of the terms of settlement. Second, I think it is reinforced when one has regard to what is known about the background to those terms of settlement in that the statement of claim filed in the 2010 proceedings sought recovery of an amount that exceeded $1.18 million and which presumably with interest by 2013 had grown to a larger amount.

26. [30]

    In my view, on the material that has been presented on this application, there is no arguable basis for concluding that the terms of settlement embody a penalty. For the sake of completeness I would add, that nothing in Paciocco v ANZ Banking Group Limited (2016) HCA 28 would seem to cast any doubt on that analysis.

27. [31]

    In light of these conclusions it is not necessary to consider the extensive material concerning delay. It seems to have taken a long time for the application to be brought on. Against that there are two particular matters, namely the obvious grief that Mr Mertes was suffering from over a prolonged period as well as the fact that the orders entered in the 2010 proceedings have an ongoing significance for the 2016 proceedings. In the end, I am not in a position to make any findings about whether delay would have operated to warrant the refusal of Mr Mertes' notice of motion had an arguable defence been raised to the claim that led to the entry of the 2015 order.

28. [32]

    Finally, I just note one matter concerning the further progress of the proceedings. As I have stated the plaintiff has been granted leave to file an amended statement of claim and that will necessitate the filing of a further defence if the proceedings continue to be defended. The failure of this motion would appear to preclude any collateral attack upon the order/judgment entered in November 2015. However, I do not consider it appropriate to make orders directing Mr Mertes about what he can and cannot plead in any amended defence.

29. [33]

    Accordingly, the Court will make the following orders: