RE TODD GILMER EVERTS

HCB 4767/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO. 4767 OF 2012

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REASONS FOR JUDGMENT

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1. This is a petition by Gerald Gorn ("the petitioner") for a bankruptcy order against Todd Gilmer Everts ("the debtor") based on the debtor's failure to comply with a statutory demand dated 28 June 2012. At the conclusion of the hearing the petition was dismissed with costs. My reasons appear below.

Background facts

2. The petitioner and the debtor have been close friends since about 2008 and kept in constant contact.  The debtor is a director of Wall Street Global LLC ("WSG").

3. In 2009, the petitioner made 2 transfers to WSG. It is common ground that on 30 June 2009, the petitioner transferred to WSG a sum of $215,000 and four months later, on 30 October 2009 he transferred a further sum of $85,000.  In respect of each of these transfers, the petitioner and WSG signed an agreement headed "Term Sheet-RAN Series "F" US $500,000 Senior Bridge Note Agreement".  These were debt instruments issued by WSG, the petitioner being the subscriber.

4. For convenience, these agreements will hereafter be referred to as "the First Note" and "the Second Note" respectively and collectively as "the Notes".  They were in identical terms save for the amounts subscribed and the dates for payment of interest and principal.  The holder was entitled to be paid 12% simple interest annually on the anniversary of the advance or loan.  Prepayment was permissible and any principal outstanding was repayable on the fourth anniversary of the Note in 2013.

5. The debtor guaranteed WSG's obligations under the Notes and for that purpose he gave 2 written guarantees, namely the "First Guarantee" dated 16 June 2009 and "the Second Guarantee" dated 30 October 2009 (collectively "Guarantees") which, for practical purposes, are in identical terms.

6. Clause 3 of the Guarantees gave the petitioner the option, upon default, of seeking recourse against either WSG or the debtor.

7. WSG failed to pay the interest due on 30 June and 30 October 2010 and 30 June and 30 October 2011.  By November 2011 the only payments made by WSG consisted of HK $15,000 comprising three payments of $5000 each made in May, June and July of  2010 towards principal.

8. As a result of WSG's repeated breaches of its obligations to make interest payments, the petitioner informed the debtor in a conversation that the petitioner had decided to recall his loans.  When that conversation took place is unclear but it was followed up in an e-mail dated 1 December 2011 in which, after stating that he would accept the late payment of the interest charges on the two loans, the petitioner went on to say:

"I would like to know when I can expect the loan to be paid back in full".

9. On 2 December 2011, the debtor paid the interest that should have been paid on the anniversaries of the Notes in 2010 and 2011.  Thereafter various conversations and e-mail exchanges took place between the petitioner and the debtor.  In paragraph 5 of the debtor's second affirmation, it is stated that:

"… between December 2011 and May 2012, the petitioner asked me daily about repayment.  I was receiving a barrage of calls and messages from the petitioner.  The petitioner had said that the loan was ending in June 2012 which made me believe that was in fact the case."

10. On 16 May 2012, the debtor sent the petitioner “our calculation for the June payment” showing both the principal and interest due under the Notes amounting to $317,600.

11. On 15 June 2012 the petitioner was informed that payment would not be made.

12. After an abortive ultimatum, the petitioner caused the statutory demand to be served on 28 June 2012.  The demand described the debt as a loan incurred in June 2009 showing an amount due of $317,600.

13. A month or so later, the debtor through a subsidiary of WSG paid interest due on both loans for 2012.  The payment was credited against the sum claimed in the statutory demand.

14. The petition is dated 23 July 2012.  Paragraph 2 set out the basis upon which the debtor was said to be indebted to the petitioner.  After describing the essential terms of the Notes and the Guarantees and recording that WSG had defaulted on payment of interest and that the petitioner had made demands to WSG and the debtor in respect of the same, it stated that:

"(f)  By an e-mail dated 1 December 2011, the Petitioner claimed that the terms of [the Notes] had been breached and made demand of the Debtor for payment of the full debts under [the Notes].

 (g)  By e-mails dated 19 April 2012 and 15 May 2012 to the Petitioner, the Debtor admitted the debts due under [the Notes] and confirmed that the debts would be paid in full on 16 June 2012 by [WSG].  [WSG] defaulted on the said payment on 16 June 2012 and the sums due under [the Notes] and [the Guarantees] became immediately due and payable."

The petitioner's case

15. At the hearing of the petition, the petitioner's counsel Mr Julian Lam abandoned any contention that under the terms of the Notes, the petitioner was entitled to call in the loans and be repaid the principal amounts together with interest totalling $317,600 following WSG's default.  Mr Lam accepted that nothing in the Notes conferred on the petitioner any right to be repaid the principal amounts together with interest whether for the late payment or non-payment of interest and principal was only repayable at the end of the 4-year term.

16. That concession was only forthcoming at the hearing although the point had been taken in the skeleton submissions dated 22 February 2013 of Mr Kelvin Liu, counsel for the debtor in which, in answer to the claim, the debtor relied on the principle of co-extensiveness.  Simply put, as a general rule, the surety's liability is no greater and no less than that of the principal, in terms of the amount, type of payment and the conditions under which the principal is liable.  If WSG were under no obligation to make repayment of the principal amounts, under the co-extensiveness principle, the surety (whose liability being a secondary liability) also would not be liable. In the event, it became unnecessary for the court to consider the principle and its application.

17. Mr Lam's written submissions also relied on the debtor's subsequent agreement to repay the two loans with interest as an independent ground and the point was made that the petitioner's actual forbearance from taking legal action constituted good consideration for the debtor's agreement.  However, that submission was premised on there being no doubt that the petitioner "was entitled to recall the two loans with interest" from either WSG or the debtor on WSG's failure to pay interest: see paragraph 21 (1) of the written submissions.  Differently put, it was based on a valid claim.

18. The petitioner's new case is that the e-mail correspondence evidenced a freestanding agreement (said to arise from the exchange of e-mails subsequent to November 2011) that is binding and enforceable between the petitioner and the debtor although based on an invalid claim in law.

19. The new argument raised only in oral submissions is that the claim while clearly invalid in law was a "reasonable claim" and the rule that making or performing a promise to give up a doubtful claim can constitute consideration for a counter-promise applies, citing Chitty on Contracts, Vol. 1, 31^st Edn at § 3-052.  Mr Lam did not elaborate on what would constitute a "reasonable claim" but appeared to consider that a mistaken belief on the part of the petitioner and the debtor that the principal amounts were repayable with interest upon default was "reasonable".  Absent authority on point, I am not prepared to accept that an invalid claim arising from a common mistake is necessarily a "reasonable claim".

20. Chitty opines that a “reasonable claim” is one made on reasonable grounds.  In the present case, the terms of the Notes are clear and do not give rise to any ambiguity or doubt as to their meaning.  There is no evidence to show how or why the petitioner thought he was entitled to call in the loans.  In those circumstances, what would constitute a "reasonable claim" clearly is fact-sensitive and falls for determination in another court on another occasion. The hearing of the petition is neither the appropriate time nor place for its determination.

21. That aside, the petitioner's case bristles with difficulties.  First and foremost, what the petitioner now relies on is not the case pleaded in the petition.  For example, the e-mail dated 19 March 2012 from the debtor to the petitioner now relied on is not mentioned in the petition.  That e-mail read:

“You are correct the loan with interest will be paid in full in Jun.”

22. The "debt" now being asserted is not the debt that was said to found the statutory demand.  Further, paragraph 3 of the petition refers to a "Judgment debt" but the statutory demand is not founded on a judgment debt.  While during the course of the hearing, Mr Lam commented that if necessary, he would amend the petition, no application was made for that purpose.  In any event, no such application would be entertained in the absence of a draft of the proposed amendments.

23. Further, the petitioner's case is based on a "reasonable interpretation" of the e-mail exchanges.  The e-mail of 19 March (see §21 above) was prompted by a succession of 3 e-mails from the petitioner:

“... I trust the loan will also be paid off this June too (since I’m calling it in, but giving you time til June since you said you needed it) - June 16 is the date of the contract between us, so lets use that.” (14 March) (emphasis added)

“Do you intend to pay off the loan in full along with the interest charges in June?" (17 March)

"Todd, hope you will answer my e-mail below. Thought you would have by now. I won't be able to wait until June if you can't answer the e-mail below." (18 March)

It will be noted that the contract i.e. the First Note was not made between the petitioner and the debtor as the e-mail of 14 March might suggest: rather, it was made between the petitioner and WSG.

24. Then on 19 April, the debtor wrote to the petitioner as follows:

"Wall street Global Alternatives, LTD plans to full repay the outstanding loan plus interest due on June 16, 2012 which was personally guaranteed by me Todd G Everts.  Rita will calculate this amount."

The calculation mentioned was sent to the petitioner on 16 May by e-mail and described as "our calculation for the June payment". (emphasis added)

25. Those e-mails were exchanged between friends and were loosely written in an informal way, often lacking in precision.  It is unclear who was undertaking to make repayment, the debtor, WSG or one of WSG's subsidiaries.  Until the hearing, the petitioner obviously thought the paying party was WSG (see para 2(g) of the petition (§ 14 above)). Nevertheless, it remains a matter of construction whether or not the e-mail exchanges created an enforceable contract and who the parties to that contract were.  That is not a task that can or should be undertaken at the hearing of the petition.

26. Even if the e-mail exchanges created a contract between the petitioner and the debtor, there are issues relating to its enforceability by reason of mistake and/ or misrepresentation.  The debtor's evidence is in paragraph 5 of his second affirmation:

“... The Petitioner had said that the loan was ending in June 2012 which made me believe that that was in fact the case. That was the reason why I had said in e-mails that everything was intended to be repaid in June 2012. It was only after checking the documents in June 2012 did I realize (sic) that the full repayment was not actually due until June 2013 and October 2012 respectively."

27. Mr Lam submitted that the debtor could not have been labouring under any mistake because he had drafted the Notes and the Guarantees.  While in his reply to the debtor's second affirmation, the petitioner asserted that the debtor had drafted those documents, there is no evidence to demonstrate that that was the case.  The Notes are in standard form. While I am prepared to accept that the Notes and the Guarantees emanated from WSG, it is a quantum leap to conclude that the debtor was responsible for drafting the documents.

28. The final point made by Mr Lam was that if the debtor was acting on behalf of WSG rather than for himself personally in the e-mail exchanges, the subsequent agreement would have varied WSG's obligations under the Notes.  It was submitted that it is not open to the surety who consents to the alteration of the terms of or obligations under the principal contract to assert his right to be discharged, citing Witmann (UK) v Willdav Engineering SA [2007] EWCA Civ.824 at§ 33.  But as Mr Liu pointed out, the critical proviso is that "the new terms fall within the matrix or general ambit of the obligation guaranteed".  At the very least, whether the new terms fall within the general ambit and whether the debtor assented to those terms are triable issues.

Conclusion

29. For the reasons stated above, the petition fell to be dismissed.