High Court dismisses defendants' summary judgment motion, upholding bank's claim for loan repayment based on facility letters.

Neutral Citation Number [2012] IEHC 197

THE HIGH COURT

[2011 No. 1059 S.]

BETWEEN

THE GOVERNOR AND COMPANY OF THE BANK OF IRELAND

PLAINTIFF

AND

JOHN FLANAGAN AND GERARD LILLIS

DEFENDANTS

JUDGMENT of Mr Justice Sean Ryan dated the 14th May 2012

The Claim

This is a motion for summary judgment brought by the Bank to recover €1,743,896.15 plus accruing interest in respect of two loan

accounts held by the defendants. The Bank claims that the money was advanced to the defendants pursuant to a series of facility

letters, as follows:

1. 20th March, 2006 issued in respect of a loan of €1,500,000 by way of commercial mortgage. The letter was accepted

by the defendants on the 22nd March, 2006. The loan was on terms and conditions set out in the letter.

2. 31st May, 2007 for €230,000 by way of bridging loan on terms and conditions as contained in the letter which was

accepted by the defendants on the same date as the letter.

3. 2nd January, 2008 was a restructuring of the bridging loan and it was accepted by the defendants on the 22nd

February, 2008.

4. 4th March, 2009 was intended to restructure the loans that had previously been advanced by way of commercial

mortgage and bridging loan respectively and this letter was accepted by the defendants on the 24th March, 2009. This

fourth facility letter is the relevant one for the purpose of this application but the Bank takes the position that if for any

reason this letter is found to be defective it is entitled to rely on the previous letters.

In fact the Bank has sued on the basis of two loans accounts that arose by virtue of the advances that the Bank made for the

commercial mortgage of €1,500,000 and the bridging loan of €230,000.

At para. 7 of the grounding affidavit Mr. Derek O'Neill sets out the default on which the Bank relies. He says that the defendants

failed to pay the bridging loan in accordance with the terms of facility letter No.4 and they also failed to repay the commercial

mortgage. The defendants' failure to make payments in accordance with the terms and conditions of that facility letter amounted to

an event of default.

By letter of the 19th August, 2010 the Bank wrote to the defendants notifying them that their loan repayments were significantly in

arrears and by letter of the 10th November, 2010 the Bank demanded payment of the balances due on the two loans. The Bank's

solicitors wrote on the 1st February, 2011, formally demanding payment of the amount outstanding as of the 31st January, 2011,

which was €1,752,257.28.

It is not in dispute that the defendants borrowed the money and have not kept up their repayments as they fell due.

The Defendants' Response

The first defendant, Mr. Flanagan filed affidavits on his own behalf and on behalf of the other defendant Mr. Lillis. At the hearing of

this motion for summary judgment, Mr. Flanagan represented himself and his co-defendant.

The defences put forward by Mr. Flanagan on his and Mr. Lillis's behalf may be summarised as follows:-

1. Each facility letter had as one of its terms that security consisting of a deed of covenant in respect of an intoxicating

liquor licence for the premises whose purchase was being funded by the loans was to be put in place.

2. Following the execution by signing of facility letter No. 4, by the defendants, discussions continued in regard to the

loan terms between the defendants and the Bank and this invalidates the Bank's reliance on that letter as a completed

contract.

3. Facility letter No.4 is an unenforceable contract because money was never actually drawn down and there was also no

consideration.

4. The Bank misrepresented these loans for regulation purposes to make them look like performing loans and this again

furnishes a defence.

5. The Bank is limited to trading profits from the hotel premises only.

6. In addition, Mr. Flanagan argued at the hearing that there was not a formal event of default or, alternatively, that the

Bank had not notified him and his co-defendant of same.

The Test

In Aer Rianta v Ryanair [2001]4 I.R. 607, the Supreme Court endorsed two tests from the English jurisprudence that the Court had

previously adopted in First National Commercial Bank v. Anglin [1996] 1 l.R. 75. In the latter case, Murphy J delivering the judgment

of the Court said:

"For the court to grant summary judgment to a plaintiff and to refuse leave to defend it is not sufficient that the court

should have reason to doubt the bona fides of the defendant or to doubt whether the defendant has a genuine cause of

action (see Irish Dunlop Co. Ltd. v. Ralph (1958) 95 I.L.T.R. 70).

"In my view the test to be applied is that laid down in Banque de Paris v. de Naray [1984]1 Lloyd's Law Rep. 21, which

was referred to in the judgment of the President of the High Court and reaffirmed in National Westminster Bank Plc v.

Daniel [1993]1 W.L.R. 1453. The principle laid down in the Banque de Paris case is summarised in the headnote thereto in

the following terms:-

'The mere assertion in an affidavit of a given situation which was to be the basis of a defence did not of itself

provide leave to defend; the Court had to look at the whole situation to see whether the defendant had satisfied

the Court that there was a fair or reasonable probability of the defendants having a real or bona fide defence.'

"In the National Westminster Bank case, Glidewell L.J. identified two questions to be posed in determining whether leave

to defend should be given. He expressed the matter as follows:-

'I think it right to ask, using the words of Ackner L.J. in the Banque de Paris case, at p. 23, 'Is there a fair or

reasonable probability of the defendants having a real or bona fide defence?' The test posed by Lloyd L.J. in the

Standard Chartered Bank case, Court of Appeal (Civil Division), Transcript No. 699 of 1990 'Is what the defendant

says credible?', amounts to much the same thing as I see it. If it is not credible, then there is no fair or reasonable

probability of the defendant having a defence.'"

In Aer Rianta, McGuinness J. identified the issue "whether the proposed defence is so far fetched or so self contradictory as not to be

credible." Hardiman J asked: "Is it 'very clear' that the defendant has no case? Is there either no issue to be tried or only issues which

are simple and easily determined? Do the defendant's affidavits fail to disclose even an arguable defence?"

The Court took the nature and context of the dispute into account. Hardiman J referred to the facts of the cases in the authorities

cited and observed that in First National Commercial Bank v. Anglin [1996]1 I.R. 75, "the indisputable documentation of a commercial

transaction rendered the alternative chronology proposed by the defendant quite untenable."

The plaintiff must establish a clear case befire it can get judgment. But that is not enough. Even in the face of an apparently strong

prima facie case, the defendant will be allowed to defend and the matter will be sent for plenary hearing if he is able to demonstrate

a basis of defence in law or fact that achieves a minimum level of arguability and /or credibility.

The jurisdiction in summary judgment is not limited to a case in which no ground of defence is to be found in the papers. The

procedure exists for a plaintiff to recover judgment if no bona fide basis of resisting the claim is shown, albeit that the threshold is

high where the facts are put in issue.

Discussion

It is not in dispute that the defendants defaulted in payments on the fourth facility letter. Mr. Flanagan complains that the Bank did

not actually specify the precise extent of the non-payment at the time when it sent letters of default to the defendants. It is clear,

however, that the account was indeed in default and significantly so. The defendants were not making the agreed payments and

such payments as they were making went nowhere near what was agreed. In the circumstances, therefore, the defendants could

have been under no illusion as to their failure to meet their liabilities and a glance at their statements of account would have revealed

the extent to their failures if they were not otherwise apprised of that simple fact. The Bank was entitled to call in the loans in full on

default by the defendants. There is no doubt that the defendants are in default and that the Bank was entitled under the terms of

the facility letter to call in the loans.

The first point of defence raised by Mr. Flanagan in his affidavits is breach of the terms and conditions of the facility letter, as he

alleges. He says that each of the loans was conditional on the provision of security in the form, inter alia, of a deed of covenant in

respect of an intoxicating liquor licence in the premises whose purchase was funded by the loans. He says that the Bank did not see

to it that this security was in place and this he raises as a defence. He points out correctly that this term was a condition of each of

the loans and it is described in the facility letters as a condition precedent.

Clearly, the Bank would have been entitled to withhold advancing the loans until that security was in place. In fact, it appears that it

proved to be impossible to have the licence attached to the relevant premises and so that element of the security was not actually

put in place. But the fact that the loan was nevertheless advanced was in ease of the borrowers and represented a waiver by the

lender of its right to require that piece of security. It is quite illogical and frankly makes no sense to suggest that because the Bank

agreed to waive this element it is thereby prevented from recovering its loan. That amounts to absurdity, in my view, and it is equally

illogical to suggest that even if the Bank is not prevented from recovering or claiming the recovery of the money it lent, there is

nevertheless some reduction of the Bank's entitlement.

Mr. Flanagan cited the case of Bauer v. Bank of Montreal [1980] 2 S.C.R. 102, a decision of the Supreme Court of Canada, in a case

concerning the liability of a guarantor to a creditor where the creditor had failed to preserve the security for the loan that the

creditor guaranteed. The case has no application to the facts of the present application. There is no question here of the Bank having

damaged or diminished the security. What happened was that the Bank agreed implicitly to forgo this part of the security that it

would otherwise have been entitled to insist upon. Neither is there any question of the defendants being in the position of a guarantor

where the lender has actually imperilled or diminish the value of the security.

Mr. Doherty, counsel for the Bank cited China and South Sea Bank Limited v. Tan Soon Gin (Alias George Tan) [1990] 1 A.C. 536. The

case is not directly in point but has some potential relevance by way of analogy. Again, this case concerned a surety and the Privy

Council held that the creditor owed no duty to the surety to exercise its power of sale over the mortgaged securities and could

decide in its own interest whether to sell and when to do so.

This point does not have any legal validity.

The second point that Mr. Flanagan makes also does not have merit. This is that the defendants continued to make representations

to the Bank after they signed facility letter No. 4; therefore, there was no concluded contract in existence because negotiations were

continuing. In fact, on the correspondence it is hard to see how this factual proposition can be justified. The defendants signed and

returned the facility letter and made suggestions or proposals as to how they might make the payments to which they had just

agreed. The Bank corresponded in return. There is nothing to stop parties entering into an agreement and then making and

considering proposals which would have the effect of altering the agreement that they previously reached. They can renegotiate as

much as they like. The only time it becomes relevant is if they reach a new agreement that is to replace or alter the previous

contract. Mr. Flanagan does not suggest that that ever happened and there is nothing in the affidavits and exhibits to warrant such a

conclusion or inference. Therefore, the mere fact that the defendants made suggestions to the Bank has no legal significance in

undermining the Bank's entitlement to recover.

The third point is that there was no actual drawdown of funds as stated in the facility letter in question- number 4. But drawdown

refers to the new basis of the loans and not a further advance by the Bank of more money to the defendants. The facility letter put

in place a new arrangement between the parties which replaced the earlier provisions and this was done by agreement between them.

In return for the agreement by the defendants to make the payments as now scheduled in the facility letter, the Bank agreed to give

up its entitlement to enforce the agreements that were previously in place. The submission that there was no actual transfer of cash,

either from the Bank to the defendants or internally from one place to another in the Bank, is a misunderstanding of what happened

as a matter of contract between the parties when this last facility was agreed.

The fourth point that Mr. Flanagan makes is that the Bank misrepresented this loan facility as a performing loan when it reported to

the regulatory authorities and that it sought to "window dress" the facility. I do not see how this proposition can be of any assistance

to the borrowers. Even if what Mr. Flanagan says is for the purpose of argument accepted in its entirety, and it is only fair to point

out that this matter is wholly disputed by the Bank, it is of no assistance to Mr. Flanagan and his colleague and does not furnish a

defence. How could it? It is nothing to do with the defendants; they are not involved in the process; their liability is not increased or

diminished; they are not in any way prejudiced or indeed affected. This point also is a misunderstanding.

The final point that Mr. Flanagan makes is that the Bank is limited in its recourse on foot of the loans to the trading profits from the

hotel premises that were the purpose of the loan and to those profits only. This matter is mentioned for the first time in Mr.

Flanagan's supplemental affidavit of the 26th January, 2012, para. 8, that is as follows:-

"I say and believe that it was at all times understood and expressly agreed between the parties that the trading profits

from the Tir Gan Ean House Hotel was the only available income to service the interest on the loan facility and ultimately

repay the debt and I say that the plaintiff was never relying on any other income and/or assets of the defendants or any

performance of these loans facilities."

There is no reference in correspondence or in the earlier affidavit or in any pre-trial exchanges between solicitors - at the time the

defendants were represented by solicitors -to this suggested restriction on the Bank's capacity for recourse.

Counsel for the Bank points out that this matter was denied in a further affidavit filed on behalf of the Bank and that in his last

affidavit Mr. Flanagan did not return to the topic and challenge the Bank's rebuttal.

It seems to me that this suggested factual issue was raised for the first time in the course of the proceedings - in fact in January of

this year - without any explanation for its omission from previous exchanges. It is moreover wholly inconsistent with the course of

conduct of the defendants previously and with the documents and transactions between the parties. There is nothing in the

circumstances of the case, including the documents, the correspondence or the affidavits to demonstrate any basis for this

suggested factual issue. It is clear to me therefore, that there is no genuine or credible issue of fact to be decided in order to

determine this application.

I am also satisfied that there is no arguable legal proposition that would constitute a defence.

Conclusion

In the circumstances, therefore, applying the legal tests set out by the Supreme Court and which are summarised above, there must

be judgment for the plaintiff in the amount claimed.