Clear & Precise Loan Documents defeat “sophisticated” borrower By Lisa Dorman & David McCrostie | June 2010 Area of Expertise | Commercial Disputes & Insolvency
Summary Financiers can take comfort from the recent decision of the Supreme Court of New South Wales in ANZ –v- Liebmann (1) where the Court rejected a series of defences offered by a former partner of a law firm as to why monies due under loan agreements with the Bank were not repayable.
Who Does This Impact? Banks, lenders and borrowers
What Action Should Be Taken? Lenders can take comfort in loan documentation that it is clear and unambiguous but they must ensure the lending procedures have been followed carefully.
The Facts In 2001, Mr Liebmann was an equity partner of a law firm known as Coudert Brothers Australia (‘CBA Partnership’). In 2002, Mr Liebmann was an equity partner in Coudert Brothers LLP (then a legal liability partnership registered in New York) (‘CBLLP’). The Bank claimed that in 2001 and 2002, Mr Liebmann entered into loan agreements with it for the purpose of advancing capital to CBLLP. In December 2001 Mr Liebmann executed a power of attorney appointing Mr Noble as his attorney to, amongst other things, execute, complete and give effect to the ‘Transaction Documents’. Transaction Documents included a Drawdown Notice and Irrevocable Authority. Mr Liebmann, through his attorney, executed in 2001 (the ‘2001 Agreement’). The 2001 Agreement provided for equity partners of the firm to subscribe to capital for the partnership. Those funds would then be loaned to ‘Coudert Brothers Worldwide’. The agreement set out the method by which an equity partner could draw down funds which he or she would be personally liable for. ANZ received a Drawdown Notice from Mr Liebmann requesting an amount of US $99,750 be provided to him as a loan under the 2001 Agreement. The Drawdown Notice specifically provided: I will be personally liable to pay accrued interest, fees and other outstanding amounts on, and to repay, the loan made to me consequent upon acceptance of this drawdown request and to pay interest and charges on that loan. The liability will arise whether or not the Partnership complies with the Irrevocable Authority given by me to the Partnership.
A similar agreement was entered into in 2002 (the ‘2002 Agreement’). The 2002 Agreement was offered as a replacement for the 2001 Agreement and that provided any loans made under the 2001 Agreement, were deemed to have been made under the 2002 Agreement. The amount drawn down by Mr Liebmann under the 2002 Agreement was US $15,000.
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Clear & Precise Loan Documents defeat “sophisticated” borrower by Lisa Dorman & David McCrostie
In August 2005, CBLLP ceased trading and filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code.
In September 2005, ANZ wrote to the CBA Partnership and those equity partners who were a party to the 2002 Agreement, and gave notice of its view that the resolution for bankruptcy constituted an event of default under the general conditions of the agreement. ANZ sought to recover the monies loaned to Mr Liebmann under the 2001 Agreement and 2002 Agreement.
The Defence Mr Liebmann defended ANZ’s claims, raising the following specific issues in his defence: • • • •
whether the power of attorney under which Mr Noble signed the 2001 Agreement was invalid: specifically, Mr Liebmann submitted that the power of attorney was not valid as it was not executed in accordance with the Powers of Attorney Act 2003; whether the party liable to repay the alleged debt under the agreements was CBLLP rather than Mr Liebmann; whether there was consideration sufficient to support the loan contracts (where the loan funds were paid directly to CBLLP); and whether the agreements were void for uncertainty.
In addition to the above, Mr Liebmann raised the following general defences: • • • • •
the ‘Fiduciary Duty Issue’, namely whether ANZ was a partner in the business conducted by Coudert Brothers and if ANZ had breached a fiduciary duty to Mr Liebmann in failing to act in a diligent and timely manner. whether ANZ was estopped from making a claim against Mr Liebmann because it had not taken proceedings against CBLLP or proven in the Chapter 11 bankruptcy. whether ANZ was guilty of laches; whether ANZ had failed to mitigate its loss; and whether the terms of the facility documents and general conditions are ‘unenforceable by reason of being unconscionable under the Trade Practices Act.’
Evidence at Trial ANZ relied upon a number of witnesses who gave evidence as to the documents and the procedures in place. Mr Liebmann was called to give evidence. Mr Liebmann accepted he: • • • • •
had been a solicitor for in excess of thirty years, practising primarily in the areas of commercial and corporate law; was capable of reading complex legal documents and understanding them; had borrowed moneys before for non business purposes; had taken legal advice in respect of his obligations to ANZ; and had intended to make a capital contribution to become an equity partner in the CBA Partnership and CBLLP.
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Clear & Precise Loan Documents defeat “sophisticated” borrower by Lisa Dorman & David McCrostie
Mr Liebmann argued that he believed ANZ was loaning money to the partnership. This was notwithstanding the fact that the Drawdown Notices clearly stated that the loan was being made to him personally and that he would be liable to pay the amount outstanding on the loan. Mr Liebmann believed that the partnership would repay the loan on his behalf and that he would only be asked to repay it ‘as a person of last resort’ (2).
The Decision In dealing with the specific defences raised by Mr Liebmann, the Court found: • •
• •
The power of attorney was valid. The 2002 Agreement was executed by Mr Liebmann himself. The 2002 Agreement governed his liability with respect to both the 2001 Agreement and 2002 Agreement. CBLLP was not the party liable to repay the debt under the facilities. The documents made it clear that the obligation was that of Mr Liebmann notwithstanding the funds were paid to the partnership. It is commonplace for borrowers to direct payment of loan proceeds to a third party. The consideration received by Mr Liebmann under the agreements was the benefit of monies advanced under those agreements. Those monies were applied, at his direction, to discharge liabilities he had in respect of partnership capital contributions. Neither agreement was void for uncertainty. At paragraph 34, his Honour concluded: The terms and nature of the contractual relationship so created are sufficiently unambiguous to satisfy the requirements of contractual formation (3).
In dealing with the general defences, his Honour found: • • • • •
ANZ was not Mr Liebmann’s business partner. ANZ was and remained a financier only. No equitable estoppel existed as a result of ANZ not making a claim in the Chapter 11 bankruptcy. Laches cannot operate as an equitable defence to a legal claim – the defence therefore has, limited relevance to the contractual claim (4). ANZ’s claim was for a liquidated debt, not for unliquidated damages and therefore the question of a duty of care to mitigate any loss does not arise (see White & Carter (Councils’) Ltd -v- McGregor [1962] AC 413). The case was simply about a standard commercial transaction in which a sophisticated borrower does not wish to repay his loan.
As a result, the Court found in favour of ANZ. A successful application for indemnity costs was made by the Bank based on an unaccepted offer of compromise that had been served.
End Notes (1) (2) (3) (4)
Australian and New Zealand Banking Group Limited -v- Richard Kay Liebmann [[2010] NSWSC 545 At paragraph 22 At paragraph 34 At paragraph 42
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Clear & Precise Loan Documents defeat “sophisticated” borrower by Lisa Dorman & David McCrostie
For more information, please contact: Lisa Dorman Senior Associate T: 02 8257 5734 lisa.dorman@turkslegal.com.au
David McCrostie Partner T: 02 8257 5711 david.mccrostie@turkslegal.com.au
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