AFI Management Pty Ltd v Lepionka & Co Investments Ltd
[2017] NZHC 3116
•14 December 2017
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2015-404-2836 [2017] NZHC 3116
IN THE MATTER of the Property Law Act 2007 BETWEEN
AFI MANAGEMENT PTY LIMITED Applicant
AND
LEPIONKA & COMPANY INVESTMENTS LIMITED Respondent
…………….……………………………/continued
Hearing: 19 to 21, 24 to 31 July and 1 to 8 August 2017
(Further evidence 4 October, further submissions 10 and 20
November 2017)Counsel:
TJ Shiels QC and PM Hubbard for AFI Management Limited
DW Grove for GLW Group Limited
MD OʼBrien QC, MG Colson and MM Ollivier for defendantsJudgment:
14 December 2017
Reissued:
5 February 2018
JUDGMENT OF FITZGERALD J
This judgment was delivered by me on 14 December 2017 at 4 pm, pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
AFI Management Pty Limited v Lepionka & Company Investments Limited [2017] NZHC 3116 [14 December
2017]
Solicitors: Downie Stewart, Dunedin
Foy Halse, Auckland (G Halse) Bell Gully, Wellington (J Stevens)
CIV-2015-404-2168
BETWEEN GLW GROUP LIMITED First Plaintiff
GARTH BOWKETT PATERSON Second Plaintiff
ANDLEPIONKA & COMPANY INVESTMENTS LIMITED First Defendant
LEPIONKA & COMPANY LIMITED Second Defendant
STEFAN JOZEF JOHN LEPIONKA and NIGEL WARREN HUGHES as trustees of the SJ Lepionka Family Trust
Third Defendants
STEFAN JOZEF JOHN LEPIONKA Fourth Defendant
Table of Contents
Overview and summary of claims ..................................................................... [1] The issues ............................................................................................................. [7] Observations on the witnesses/evidence .......................................................... [17]
Factual background
Initial development of Property – 2009 – mid 2013 ....................................... [25]
First sale to Lepionka ..................................................................................... [37] GLW’s financial difficulties and initial arrangements with AFI ..................... [44] Re-engagement with Mr Lepionka .................................................................. [49] After entry into the Lepionka Purchase Contracts – problems still exist........ [55] Mr Lepionka implements a “self-help” remedy .............................................. [75] LCIL’s first actions as mortgagee – adoption, completion ............................. [81] GLW’s request to redeem the First Mortgage and LCIL’s response ............... [88] The “Coltart offers” – April to May 2015 ...................................................... [96] LCIL changes to the resource consent .......................................................... [115] TTL “offer” and AFI’s proceedings – November and December 2015 ........ [118] Later events – sale of Lots 2 and 6 and HBHB caveat proceedings ............. [134]
Does an adoption pursuant to s 179 of the Act amount to the exercise of a mortgagee’s power of sale?
Introduction ................................................................................................... [142]
Submissions - LCIL ....................................................................................... [145] Submissions – GLW/AFL .............................................................................. [150] A preliminary issue: does an adoption render the mortgagee liable for the
mortgagor/vendor’s obligations?........................................................... [153]
Analysis – is an adoption the exercise of the power of sale? ........................ [180]
Did LCIL validly adopt the Lepionka Purchase Contracts, and if so, on what date?
Introduction ................................................................................................... [191]
Do the terms of the adoption notice render it invalid? ................................. [192]
When did the adoption take effect (if at all)? ................................................ [207]
Did LCIL wrongfully refuse to allow GLW to redeem the mortgage?
Introduction ................................................................................................... [249]
Submissions – GLW/AFI ............................................................................... [251] Submissions - LCIL ....................................................................................... [255] Analysis ......................................................................................................... [257] GLW’s estoppel claim .................................................................................... [277]
Did LCIL breach either or both of its equitable and statutory duties?
Introduction ................................................................................................... [285]
Mortgagee’s duties – the law......................................................................... [288] A preliminary issue – the interaction between GLW and AFI’s claims ......... [290] Submissions - LCIL ....................................................................................... [298]
Submissions – GLW/AFI ............................................................................... [307] Analysis ......................................................................................................... [312] Other breaches pleaded by GLW .................................................................. [332]
Remedy – should the adoption/Lepionka Purchase Contracts be set aside?
Introduction ................................................................................................... [343]
Submissions – GLW/AFI ............................................................................... [348] Submissions - LCIL ....................................................................................... [350] Analysis ......................................................................................................... [351]
Quantum of damages – approach and issues
Introduction ................................................................................................... [358]
Assessment of damages in this case – the problem ....................................... [362] Submissions – GLW/AFI ............................................................................... [369] Submissions - LCIL ....................................................................................... [372] Analysis – next steps in relation to damages................................................. [374]
What was the best price reasonably obtainable at the time of sale?
Submissions - LCIL ....................................................................................... [380]
Submissions – GLW/AFI ............................................................................... [383]
Analysis ......................................................................................................... [386]
GLW’s claim as to AFI’s acceptance of $2 million
Introduction ................................................................................................... [421]
Analysis ......................................................................................................... [424]
Are LCIL’s costs charged to the First Mortgage reasonable?
Introduction ................................................................................................... [433]
Submissions – GLW/AFI ............................................................................... [435] Submissions - LCIL ....................................................................................... [437] Analysis ......................................................................................................... [439]
GLW’s miscellaneous claims
Introduction ................................................................................................... [456]
Oppressive conduct under the Credit Contracts and Consumer Finance
Act 2003 .................................................................................................. [459] Unlawful sales by LCIL................................................................................. [464] Unjust enrichment ......................................................................................... [468] Conspiracy to injure by unlawful means....................................................... [471]
LCIL’s counterclaim against AFI
Introduction ................................................................................................... [480]
Submissions - LCIL ....................................................................................... [483] Submissions - AFI ......................................................................................... [485] Analysis ......................................................................................................... [489]
Conclusions and result .................................................................................... [494]
Overview and summary of claims
[1] At its core, this case concerns a mortgagee’s statutory and equitable duties, and the remedies to be granted in the event those duties are breached. In its broader context, it concerns competing claims to a picturesque 24-hectare block of land situated on the banks of the Tukituki River in the Hawkes Bay region (“Property”).
[2] The plaintiff in proceeding CIV-2015-404-2168 (“GLW”) purchased the Property in 2009. In doing so, it borrowed from Westpac Bank, which took a mortgage over the Property as security (“First Mortgage”).
[3] GLW’s principal is Mr Garth Paterson. GLW/Mr Paterson set about developing the Property, intending to subdivide it into lifestyle blocks for sale on the open market. GLW/Mr Paterson initially worked on the project with a Mr Coltart, a well-known designer and developer in the Hawkes Bay region. From late 2009,
Mr Coltart lived in one of the two houses on the Property (known as “the Homestead”).
[4] In September 2010, GLW sold proposed Lot 1 of the development to EHNP Nominee Ltd (a company associated with the Edgar family) (“Edgars”). The sale settled a year later. Under the agreement for sale and purchase, the Edgars were given a “right to roam” over the intended common area of the Property.1
[5] By 2012, Mr Paterson had fallen out with Mr Coltart. A settlement was reached, pursuant to which GLW granted Mr Coltart an option to purchase proposed Lot 2 (on which the Homestead was located). The contractual arrangements also gave Mr Coltart a right to roam over the Property’s common area.
[6] Mr Coltart and the Edgars subsequently lodged caveats to protect their rights, including each party’s “right to roam”.
[7] GLW continued to market other proposed Lots in the Property. In January
2014, GLW entered into agreements for sale and purchase with each of Lepionka
1 The common area was to be Lot 7.
& Company Ltd (“Lepionka Company”) and Stefan Lepionka and Nigel Hughes, as trustees of the SJ Lepionka Family Trust (“Lepionka Trust”).2 Deposits of $463,000 were paid.
[8] A number of difficulties subsequently arose:
(a) First, GLW was in serious financial trouble. In September 2013, AFI Management Pty Ltd (“AFI”)3 had proposed to loan GLW a further
$1,300,000. A loan agreement was ultimately entered into in July 2014 (despite some of the borrowings already having been drawn down by GLW). AFI also took a mortgage over the Property (“Second Mortgage”). During 2014, GLW’s financial position became serious enough that AFI was funding GLW’s monthly interest payments under the First Mortgage.
(b)Second, in entering into the Lepionka Purchase Contracts, GLW had contracted to sell the Lepionka Purchasers something GLW could not deliver. In particular, aspects of those contracts were inconsistent with the pre-existing contractual arrangements between GLW and the Edgars and Mr Coltart. As a result, the Lepionka Purchase Contracts could not settle unless the Edgars’ and Mr Coltart’s caveats were removed.
[9] In the latter half of 2014, Mr Paterson and Mr Lepionka explored options for amending the Lepionka Purchase Contracts, or for the contracts to come to an end.
Mr Paterson was also negotiating a “back up” sale of the Property to Mr Coltart. Discussions between Mr Paterson and Mr Lepionka continued into early 2015, when an impasse was reached. By this time, Westpac had also issued default notices to GLW under the First Mortgage. In February 2015, Mr Paterson sent an email to
Mr Lepionka, stating that Westpac was soon to be replaced as first mortgagee, and in
the absence of a resolution between GLW and the Lepionka Purchasers, the new
2 I will refer to Lepionka Company and the Lepionka Trust together as the “Lepionka Purchasers”, and to the agreements for sale and purchase between each of those entities and GLW as the “Lepionka Purchase Contracts”.
3 The plaintiff in proceeding CIV-2015-404-2836.
mortgagee would “look to liquidate its position quickly”. He said “how their future actions may affect your existing unsecured deposit funds is something I am unable to advise you on”. In cross-examination, Mr Paterson characterised his email as a “focussing of the minds”.
[10] This appears to have galvanised Mr Lepionka’s position. He candidly acknowledges he took a “self-help” remedy as a result, entering into discussions with Westpac with a view to acquiring the First Mortgage. Lepionka & Company Investments Ltd (“LCIL”) was incorporated in March 2015 and in early April 2015, took an assignment from Westpac of GLW’s debt and the First Mortgage. Immediately upon acquiring the First Mortgage, LCIL adopted the Lepionka Purchase Contracts4 and entered into possession. It also entered into a “Completion Agreement” with the Lepionka Purchasers, pursuant to which it committed to complete the development of the Property and agreed to pay substantial compensation to the Lepionka Purchasers if that did not occur, or if the First Mortgage was redeemed by GLW.
[11] Upon learning of the assignment to LCIL, in early April 2015 GLW said it wanted to redeem the First Mortgage. In addition, a number of alternative offers were made to LCIL to purchase the Property, including by Mr Coltart. LCIL did not accept any of those offers, primarily on the basis that it had already exercised its power of sale through its adoption of the Lepionka Purchase Contracts. For the same reason, it said it was too late for GLW to redeem the First Mortgage. It similarly rejected an offer in November 2015 to purchase the Property from Tuki Tuki Ltd (“TTL”), a company associated with Mr Coltart’s nephew.
[12] It is LCIL’s actions as mortgagee, briefly summarised in the preceding paragraphs, which are at the heart of these proceedings:
(a) GLW says LCIL breached both its statutory and equitable duties as mortgagee in adopting the Lepionka Purchase Contracts; entering into the Completion Agreement; refusing to permit GLW to redeem the First Mortgage in April 2015; and/or failing to accept Mr Coltart’s offer in
April 2015 to purchase the Property. GLW seeks an order setting aside
4 Pursuant to s 179 of the Property Law Act 2007 (“Act”).
the adoption of the Lepionka Purchase Contracts, or alternatively damages, based on what GLW says could have been achieved from a sale to Mr Coltart in April 2015, or alternatively, what it says the true market value of the Property was at that time.
(b)AFI also says LCIL breached its duties, and in particular, that it wrongly refused to permit GLW to redeem the First Mortgage in early April
2015, or alternatively, failed to engage with TTL in November 2015 in relation to a potential sale of the Property. It seeks a declaration that LCIL account to AFI, as second mortgagee, on the basis that the First Mortgage had been redeemed in April 2015, or alternatively that LCIL had sold the Property to TTL in November 2015.
(c) LCIL denies it breached any of its duties. It says that in adopting the Lepionka Purchase Contracts and proceeding to complete the development, it was simply doing what GLW had proposed to do from the outset, namely maximise the realisable value of the Property. It also says its adoption of the Lepionka Purchase Contracts amounted to the exercise of its power of sale, meaning it had no duty to consider alternative offers for the Property and that it was too late for GLW to redeem the First Mortgage. It further says GLW did not have the funds to redeem the First Mortgage in any event, and close examination of the other offers demonstrates they were not viable alternative options.
[13] A complicating factor is that, given these and other related proceedings, LCIL has charged very substantial legal costs against the First Mortgage. LCIL says the legal costs have largely been driven by GLW’s and, to a certain extent, AFI’s actions, the net result being there is no equity remaining in the Property for them. This is in contrast to what LCIL says would have been the position had it been left to “get on with” the development and settle the Lepionka Purchase Contracts. In that scenario, LCIL says there would have been a substantial surplus available to AFI and/or GLW. It therefore says GLW and AFI have effectively caused their own loss.
[14] The two sets of proceedings were heard together over three and a half weeks. Combined, they plead nine causes of action and eight counterclaims/affirmative defences. The claims give rise to a number of factual conflicts, as well as a range of complex and in some cases novel legal issues. A key legal issue is whether a mortgagee’s adoption of an existing agreement for sale and purchase amounts to the exercise of the mortgagee’s power of sale. This has not previously been considered by the New Zealand courts.
[15] The balance of the judgment is structured as follows:
(a) First, I set out the key issues I must determine.
(b)Second, given the competing factual contentions, I then make some brief observations as to the credibility and reliability of the witnesses who gave evidence at the hearing.
(c) Third, I provide more detail of the factual background to the dispute.
(d)Fourth, I set out the parties’ submissions, and my analysis and findings, in relation to each of the identified issues.
The issues
[16] I have distilled the pleaded claims and defences into the following issues for determination:
(a) Does an adoption of an existing agreement for sale and purchase pursuant to s 179 of the Act amount to the exercise of a mortgagee’s power of sale?
(b)Assuming the answer to (a) above is “yes”, did LCIL validly adopt the Lepionka Purchase Contracts for the purposes of s 179 of the Act? In particular:
(i) Does the fact that LCIL’s adoption notice was “subject to” the
Completion Agreement mean the adoption was invalid?
(ii)If not, when did the adoption take effect (if at all)? This turns on whether the adoption notice was validly served on the Lepionka Purchasers, and if so, when it was served.
(c) Did LCIL wrongfully refuse to allow GLW to redeem the mortgage in early April 2015?5
(d)Did LCIL breach its equitable duties as mortgagee by, among other matters, adopting the Lepionka Purchase Contracts and concluding the Completion Agreement?6
(e) Assuming the adoption did amount to the exercise of LCIL’s power of sale, did LCIL breach its duty pursuant to s 176 of the Act to obtain the best price reasonably obtainable at the time of sale, including failing to pursue negotiations with Mr Coltart in relation to a sale of the Property?7
(f) Did LCIL act in bad faith by not giving bona fide consideration to TTL’s offer in November 2015 to purchase the Property?8
(g)If the answer to any of (c) to (f) above is “yes”, what is the appropriate remedy? Specifically:
(i)Should the adoption notice/Lepionka Purchase Contracts be set aside?
(ii)Alternatively, is GLW’s remedy in damages, and if so in what amount?
5 This alleged breach is pleaded by both GLW and AFI.
6 As pleaded by GLW. The full list of steps taken by LCIL and which GLW says were in breach of
LCIL’s equitable duties is set out at [285] below.
7 As pleaded by GLW. The particular alleged failures by LCIL in this context are listed at [286]
below.
8 As pleaded by AFI.
(iii)Is LCIL obliged to account to AFI (as second mortgagee) on the basis of “wilful default”, on the basis that there was a redemption of the First Mortgage on 9 April 2015, or alternatively, sales proceeds from the TTL offer would have been received by LCIL on or about 1 December 2015?
(h)Are the costs LCIL has and proposes to charge to the First Mortgage reasonable?
(i)Finally, and given LCIL’s counterclaim against AFI, does the loan agreement between AFI and GLW only cover advances directly made by AFI to GLW?
Observations on the witnesses/evidence
[17] Given the range of factual conflicts in this matter, it is appropriate to make some general observations in relation to the evidence and witnesses in this hearing.
[18] Mr Paterson was the principal witness for GLW. I regret to say I did not find him to be a particularly credible or reliable witness. Concerns in relation to
Mr Paterson’s credibility and reliability stem in large part from his deeply entrenched view that he has been significantly wronged by Mr Lepionka in relation to the events which are the subject of this proceeding. This clouded many aspects of his evidence. For example, his evidence was continuously punctuated by gratuitous remarks as to Mr Lepionka’s approach, personality and style in relation to the matters in dispute. This unfortunately distracted from and undermined Mr Paterson’s evidence more generally. It was also clear from Mr Paterson giving evidence that he has become somewhat “fixated” with this matter and his view of where the respective moralities lie.
[19] Mr Paterson was frequently evasive when answering questions put to him in cross-examination, and on many occasions, rather than answering the question being put to him, simply reiterated his “theme” that Mr Lepionka was ultimately to blame for events which have given rise to these proceedings. Ultimately, Mr Paterson sought to lay the blame for events at others’ feet, primarily Mr Lepionka, but also Mr Coltart,
the Edgars and Westpac. Having reviewed extensive amounts of the contemporaneous documents in this proceeding, that is also a feature of Mr Paterson’s written communications.
[20] Aspects of Mr Paterson’s evidence was also inconsistent with the contemporaneous record. I have referred to instances of this where necessary in the balance of this judgment. Further, and as discussed later in this judgment, Mr Paterson has also been willing to actively mislead others (namely Mr Lepionka and Mr David Johnson of AFI).9
[21] Mr Lepionka was the primary witness for LCIL and the Lepionka Purchasers.10
In the main, I found him to be a credible and reliable witness. He was clear and direct in answering questions put to him, and acknowledged certain matters which were adverse to LCIL’s interests. I observe, however, that like Mr Paterson, Mr Lepionka struck me as having become somewhat personally “captured” by this matter. Nevertheless, his evidence was broadly consistent with the contemporaneous documents, though, not surprisingly, often with a “spin” supportive of the Lepionka parties’ interests.
[22] Mr Johnson gave evidence for AFI. I found Mr Johnson to be a particularly “straight up”, credible and reliable witness. His evidence was largely consistent with the contemporaneous record and he has clearly found himself in an invidious position, given the very significant lending by AFI to GLW and what must now be slim prospects of recovery. The documentary record also demonstrates Mr Johnson worked hard to broker sensible outcomes and settlements, including a settlement which was reached between AFI and LCIL, but which Mr Paterson and GLW refused to consent to.
[23] Mr David Wallace of Gibson Sheat gave evidence for LCIL. I found
Mr Wallace to be a credible and reliable witness, and he candidly acknowledged
9 See [67] below in relation to Mr Lepionka (concerning the use to which the Lepionka Purchasers’ deposits had been put; and [60] below in relation to Mr Johnson (concerning a GLW share transfer form he provided to Mr Johnson).
10 This of course reinforces the inherent conflict between LCIL, as mortgagee, and the Lepionka
Purchasers.
matters where it was not clear that all appropriate steps had been taken.11 Mr Matthew Holder also gave evidence for LCIL, in relation to the resource management and planning aspects of the Property’s development. Again, I found him to be a credible and reliable witness. He was very matter-of-fact when giving evidence, and is clearly very knowledgeable of the Property’s development. He also properly acknowledged matters where it was appropriate to do so. In large part, I did not consider his evidence to be challenged under cross-examination.
[24] Finally, Mr Schellekens of PricewaterhouseCoopers gave expert valuation evidence on behalf of LCIL. I have no reason to doubt Mr Schellekens evidence. He was a careful and credible witness. His expertise was not challenged. And like
Mr Holder, his evidence was not undermined to any significant extent by cross- examination.
Factual background
[25] Given the factual and legal issues which arise in these proceedings, it is necessary to traverse the factual background in some detail.
Initial development of Property – 2009 – mid 2013
[26] As noted, GLW purchased the Property in 2009. The purchase price was $2.7 million. Of this, GLW borrowed approximately $1.625 million from Westpac, secured by the First Mortgage. Mr Paterson planned to subdivide the Property into lots and sell all but one of those lots, which was to be retained for himself and his family.
[27] Mr Paterson gave evidence that, after settlement of the purchase, he entered into a verbal arrangement with Mr Coltart pursuant to which Mr Coltart was to work with Mr Paterson to project-manage the subdivision of the Property. Mr Paterson said this was for a fee of $500,000, but was subject to him being “happy with [Mr Coltart’s] work”. Mr Paterson gave evidence that the verbal arrangement with Mr Coltart later changed, and in return for Mr Coltart’s services, GLW agreed to sell the Homestead to
Mr Coltart, with Mr Coltart’s “earning” being applied towards the sale price.
11 For example, in relation to service of the adoption notice.
[28] In September 2010, GLW agreed to sell proposed Lot 1 to the Edgars. Proposed Lot 1 was shown on a plan attached to the agreement for sale and purchase. The further terms of sale included that:
(a) GLW would incorporate a company which would be responsible for among other things, general garden maintenance on the common area of the Property (i.e. proposed Lot 7) and ensuring the construction of a single-storey fishing hut and a caretaker’s/implements shed on the common area.
(b)The registered proprietors of each of Lots 1, 2 and 3 would own one share each in that company and could each appoint one director. The constitution of the company would provide that each shareholder had the right to use the fishing hut and implements shed, in common with the other shareholders.
(c) The Edgars, together with their invitees, would have a right to roam over Lot 7 (i.e. the common area). The right to roam was protected by way of covenant and was formally consented to by Westpac (as mortgagee).
[29] As noted in the introductory section of this judgment, by early 2012,
Mr Paterson had fallen out with Mr Coltart. In his evidence, Mr Paterson blamed
Mr Coltart for much of the delay in the development to this point, and alleged
Mr Coltart had misled him as to what could be done by way of the Property’s development. On 22 February 2012, Mr Paterson informed Mr Coltart that his services were no longer required. This led to a settlement in August 2012 pursuant to which Mr Coltart was given an exclusive option to purchase proposed Lot 2, which included the Homestead.
[30] An agreement for sale and purchase was attached to the settlement agreement with a purchase price of $630,272.00. The settlement agreement provided that
Mr Coltart’s option could be exercised by notice within a short timeframe of him being advised that title had issued for Lot 2. Mr Coltart also agreed that, if called upon by
the “Paterson parties” within five years of the date of the settlement, he would provide one concept design, plus two revisions of each design, for two more dwellings (and their accessory buildings) and one additional fishing hut on the Property.12 No fee was to be paid for those designs. As will be seen later, the requirement for Mr Coltart to provide these designs ultimately found its way into the Lepionka Purchase Contracts.
[31] Like the Edgars’ agreement for sale and purchase, the agreement for sale and purchase annexed to the settlement agreement granted Mr Coltart the right to roam over proposed Lot 7. The further terms of sale also obliged GLW to cause a fishing hut and caretaker’s (implements) shed to be built. Mr Coltart’s access to and use of the fishing hut and caretaker’s shed was to be recorded and preserved by way of a covenant.
[32] On 9 October 2012, GLW lodged an application for resource consent, which was granted on 30 October 2012 (“First GLW Resource Consent”). The application sought consent in relation to several lifestyle blocks on the Property (Lots 2, 3, 4, 5, 6 and 8), the common area (Lot 7) and two further lots to accommodate the proposed fishing hut and implements shed (Lots 9 and 10).13 Further, and relevant to claims discussed later in this judgment, the application for consent noted that the proposed fishing hut measured approximately 35.1sqm, and the proposed implements shed approximately 108.5sqm. The consent granted provided that the fishing hut not exceed 40sqm and the implements shed 120sqm.
[33] Relevant to claims by GLW concerning proposed Lot 8, GLW’s application also recognised there may be issues in respect of that lot’s suitability for development. Given this, GLW’s application noted that acceptable conditions of the resource consent would be that (inter alia):
[N]o building shall be permitted on Lot 8 without a site specific geotechnical investigation confirming the site’s ability and/or suitability to accommodate such a building.
12 The “two more dwellings” were dwellings for proposed Lots 5 and 6.
13 At the time of the sale to the Edgars, only Lots 1, 2, 3, 4 and 7 had been proposed. By the time of the First GLW Resource Consent, title for Lot 1 had already issued. A later variation to the Edgars’ agreement for sale and purchase included reference to Lots 5 and 6, and that if title to those lots were issued, Lot 7 would be transferred to the company referred to in the original sale and purchase agreement. Mr Paterson intended to keep Lot 6 for his own use.
…
[Lot 8] shall be held in the same certificate of title with balance Lot 7 by way of amalgamation, until such time as the above conditions can be adequately satisfied (if in fact at all)…
[34] The First GLW Resource Consent accordingly contained an amalgamation condition that Lots 7 and 8 were to be held as one certificate of title.
[35] GLW applied for a subsequent consent on 15 January 2013, which was granted on 5 April 2013 (“Second GLW Consent”). This granted variations to the First GLW Consent to provide for the staging of the Property’s development.
[36] Mr Paterson gave evidence that around this time, he found out details that “undermined the entire basis” for Mr Coltart’s option agreement. In February 2013, Mr Paterson advised Mr Coltart that he considered the option agreement was void.
Mr Coltart disagreed and to protect his position, he lodged a caveat over the Property.14
First sale to Lepionka
[37] In around May 2013, Mr Lepionka and Mr Paterson first began discussing
Mr Lepionka (or entities associated with him) purchasing some of proposed lots in the Property. Mr Lepionka had originally been introduced to the Property by Mr Coltart, with whom he had been working on the design of a house in Auckland. Mr Lepionka gave evidence that Mr Paterson advised him at this time that he (i.e. Mr Paterson) had a very broad discretion to deal with the Property as he wanted, and its unzoned nature assisted this. Mr Lepionka also said he told Mr Paterson that he wanted to be able to build two of his own fishing huts on the common area and Mr Paterson assured him that would be possible.
[38] As a result of these negotiations, in May 2013, GLW and Mr Lepionka entered into an agreement for sale and purchase of proposed Lots 3, 4, 5, 7, 8, 9 and 10 for
$5,680,696 (plus GST, if any). The agreement included a due diligence clause.
14 This caveat led to subsequent litigation between Mr Coltart and LCIL, as discussed further below.
[39] The Edgars became aware of the proposed sale, and by their solicitor’s letter dated 16 May 2013, advised Mr Lepionka of several issues with his proposed purchase. These were that:
(a) Lot 1 was to have the right to roam over Lot 7 (which was included in the lots to be sold to Mr Lepionka).
(b)A company was to be incorporated to manage Lot 7, with the shareholders being the owners of the four other lots.
(c) GLW was to have provided certain utilities and services to Lot 1, but had not done so by settlement date, such that the Edgars were retaining funds pending this occurring.
(d)GLW and the Edgars had entered into a variation agreement, which recorded that:
(i) Two further lots were to be sub-divided (i.e. Lots 5 and 6);
(ii)If separate titles were issued for those lots, then Lot 7 was to be transferred to the ownership of other lot owners (so that a one- sixth share in Lot 7 would attach to Lot 1).
(iii)Lot 1 was to benefit from an exclusive occupation covenant for a strip extending ten metres from its northernmost boundary, for the length of its boundary.
(iv)A further fishing hut was to be built on Lot 7, and Lot 1 was to have the right of casual use of it.
[40] The letter concluded that “the Edgars are concerned that the full extent of these obligations may not have been conveyed to you”. To protect their position, on the same day as sending the letter to Mr Lepionka, the Edgars lodged a caveat against the Property. Mr Coltart also lodged a (further) caveat in May 2013, to protect his right
to roam.
[41] As will be appreciated from the above, a key issue was GLW purporting to sell Lot 7 to Mr Lepionka, when it had already agreed with the Edgars that Lot 7 was ultimately to be held by a company owned by and for all lot owners. At the time these issues arose, Mr Paterson sought to deflect “blame” onto Mr Coltart, stating in an email to Mr Lepionka that “Coltart had made various comments to the Edgars about the potential for Lot 7 to be split between the owners, but as I mentioned to you this was done without my consent and it will not happen.” Mr Lepionka cancelled the agreement for sale and purchase (pursuant to the due diligence clause) on 7 June 2013.
[42] Shortly afterwards, in July 2013, Mr Paterson again got in touch with
Mr Lepionka in relation to the Property. By email dated 2 July 2013, he advised
Mr Lepionka the following:
Just thought I’d let you know the Edgars have agreed to sell to me and Andy
[Coltart] has also agreed to give up the right to roam.
Therefore, if you still have any interest, I am now able to deliver to you the items listed below. You would now be able to have all the fishing huts and shed – and pretty much everything else, to do as you may.
[43] It transpired, however, that only one of the Edgar brothers had indicated a willingness to sell to GLW, and had not discussed that with his brother. Ultimately the Edgars did not agree to sell. Mr Paterson said in cross-examination that while he had reached an arrangement with Mr Coltart in respect of his right to roam, the arrangements with the Edgars and Mr Coltart were “contingent upon each other and when the Edgars said no, that was the end of that”.
GLW’s financial difficulties and initial arrangements with AFI
[44] It was common ground that, at this time, GLW was experiencing serious financial difficulties. Mr Paterson was also facing bankruptcy in Australia.
[45] Mr Paterson/GLW had first been introduced to AFI as a potential lender in
2010. In August 2013, Mr Paterson approach Mr David Johnson, AFI’s director, about possible further funding. He outlined his and GLW’s (then current) financial position, noting “it is a very serious matter” and “I am happy to remunerate you in whichever way you see fit”.
[46] In September 2013, AFI offered to lend GLW “a further amount” of up to AU$1.3 million, secured by a mortgage over the Property (and other Australian properties owned by GLW or related entities). The loan’s term was initially six months, expiring on 31 March 2014. The costs of the facility were, on any view, steep:
(a) On the sale of Lot 3 of the Property, a fee of NZ$250,000 was to be paid, and on the sale of Lot 8, a further fee of NZ$100,000.
(b) In the event both lots were not sold and settled during the loan’s term, then:
(i)An establishment fee of 5 per cent of the amount advanced would be charged (to be capitalised into the loan and repayable with the loan);
(ii)Interest of 3 per cent per month would apply, compounding monthly; and
(iii)Any amount owing at the end of the loan term would attract interest at 4 per cent per month, compounding monthly.
[47] Mr Paterson responded to AFI’s offer the following day, noting that “as Lot 8 has certain works etc to be done prior to being ready for sale”, the loan term should be to 30 April 2014. Mr Johnson confirmed that was acceptable.
[48] As noted earlier in this judgment, a formal loan agreement was not entered into until July 2014. However, between September 2013 and June 2014, AFI (or entities associated with it) advanced a total of AU$1,453,953.60 to GLW (or entities associated with it).
Re-engagement with Mr Lepionka
[49] In November 2013, GLW marketed proposed Lot 4 through an international tender. Mr Paterson also got in touch with Mr Lepionka again, to see if he might be interested in renewing negotiations in relation to the Property.
[50] In an email to Mr Lepionka dated 26 November 2013, Mr Paterson outlined what he said were arrangements he had reached with the Edgars and Mr Coltart, to the effect they would give up their respective rights to roam (and release GLW from its obligation to construct the implements shed and fishing hut) if GLW could ensure certain matters, including to transfer to them strips of land adjacent to their respective lots. Mr Paterson also said that he had a “genuine offer” for Lot 4 (which had a newly- built house on it) of $2.8 million. In his email, he proposed to sell Lot 4 to Mr Lepionka, along with proposed Lots 3, 5, 7, 8 and 10, for a total price of $4.5 million plus GST. Mr Paterson said that given the alternative offer for Lot 4 and that he had valuations for the remaining lots, he considered $4.5 million “to be a fair and reasonable price”.
[51] In light of Mr Paterson’s assurances, Mr Lepionka renewed negotiations for a potential purchase of lots in the Property. In an email dated 3 December 2013, Mr Paterson reassured Mr Lepionka that in relation to the proposed purchase of Lot 4, the Lepionka Purchaser would have the same right to roam as the Edgars and Mr Coltart. He also said that he did not understand there to be any issue with the Lepionka Purchaser putting a separate building or fishing hut on the Lot 4 land, as both could be done as a matter of right.15
[52] By email on 12 December 2013, Mr Lepionka set out several negotiating points and queries, including in relation to the proposed Coltart designs/plans (see [30] above). Mr Lepionka asked how access to those designs could be “cemented” into the proposed agreements for sale and purchase without Mr Coltart’s acknowledgement. Mr Paterson responded that “those rights are assignable and I will assign them to you”. I interpolate to note that this is somewhat inconsistent with Mr Paterson’s earlier stance vis-a-vis Mr Coltart, namely that the option agreement was void and his purported cancellation of that agreement.
[53] In parallel with his negotiations with Mr Lepionka, Mr Paterson was negotiating with a Mr John Johnston, an American citizen, for the purchase of Lots 3,
4 and 5. In mid-January 2014, Mr Paterson emailed Mr Lepionka, stating that he was
keen to have him and his family in the development rather Mr Johnston, with whom
15 This fishing hut became known as the “Lot 4 fishing hut” but was actually to be situated on the common area (i.e. Lot 7).
he had a draft agreement for the sale and purchase of Lots 3, 4 and 5 for $4.6 million. Mr Paterson said there was a limited window to buy before the agreement with Mr Johnston was formalised.
[54] Ultimately, on 28 January 2014, the Lepionka Purchase Contracts were signed. Lot 4 (and its associated fishing hut) was sold to the Lepionka Trust for $3.3 million, including GST. Lots 3, 5 and 8 were sold to Lepionka Company for $1,330.435, plus GST (if any). A total of $463,000 was paid to GLW by way of deposit.
After entry into the Lepionka Purchase Contracts – problems still exist
[55] It soon became apparent, however, that conflicts remained between GLW’s contracts with the Edgars and Mr Coltart on the one hand, and the Lepionka Purchasers on the other. The two key issues were:
(a) First, the Lot 4 fishing hut, which GLW had contracted with the Lepionka Purchasers on the basis it could be built on the common area of the Property (with a separate title issuing, Lot 11). This impacted on the Edgars’ and Mr Coltart’s right to roam over the common area.
(b) Second, the new location of Lot 8, which also affected the Edgars’ and
Mr Coltart’s right to roam over the common area.
[56] In short, like the first sale contract with Mr Lepionka, the Lepionka Purchase Contracts could not be settled until these issues were resolved with Mr Coltart and the Edgars. In turn, without the Lepionka Purchase Contracts settling, it was unlikely AFI would get repaid.
[57] A significant aspect of each of Mr Paterson and Mr Lepionka’s evidence at the hearing was who was to blame for these issues. Mr Paterson said Mr Lepionka had reassured him that he (i.e. Mr Lepionka) would be able to sort out the issues with the Edgars and Mr Coltart; while Mr Lepionka said that Mr Paterson had assured him that the issues could be or had been resolved. While it is not strictly necessary for me to resolve this conflict of evidence in the context of the issues I must determine, I record that I generally prefer Mr Lepionka’s evidence on this point. It is more consistent with the contemporaneous documents, as well as my overall impression of the witnesses’
credibility and reliability. Mr Paterson also accepted in cross-examination that
he/GLW “bore the risk” of being able to settle the Lepionka Purchase Contracts.
[58] On 4 April 2014, Mr Adam Edgar emailed Mr Lepionka, setting out the
Edgars’ concerns in relation to the new contracts:
Stefan see below from our lawyer - put simply our major issue here is when we brought this place when there were 4 sites, going to be one small fishing hut shared by all parties and an implement shed. Now what Garth is trying to sell you is a very different proposal and gives a lot to you and him without any benefit to us.
Anyway let me know thoughts on this and happy to chat. We are in no way trying to stop what you are doing but do think what Garth is telling you completely misrepresents what was agreed with us.
[59] Mr Lepionka forwarded this email to Mr Paterson, who sought to reassure Mr Lepionka that these were “out of the blue issues” and that he didn’t believe there were any truly genuine issues at all. Mr Paterson also observed that:
…the subdivision situation … has become somewhat of a moveable feast from the very beginning – primarily as a result of the mishandling of the original applications by my previous “agent” for that process, Mr Andy Coltart.
[60] GLW continued to deal with AFI in relation to the further lending. With the passage of time, Mr Johnson was, not surprisingly, increasingly concerned that formal loan and security documentation was still not in place. Mr Paterson had earlier agreed to transfer his shareholding in GLW (held via trust) to AFI, and on 28 September 2013 provided AFI with a share transfer signed by him. However, as the shares were held in trust, the transfer needed to be signed by the trustee, not Mr Paterson. On 11 July
2014, Mr Paterson sent Mr Johnson a further transfer purporting to be signed by the trustee. However, Mr Paterson later told Mr Johnson that he had simply “copied and pasted” this signature into the transfer document.16
[61] AFI and GLW (eventually) entered into a loan agreement on 14 July 2014. The agreement was for a term loan facility to a maximum amount of AU$4.2 million, in
respect of which the parties agreed that AU$4,109,480 had already been drawn down.
16 Mr Paterson said in cross-examination that this was because he could not get a signed original from the trustee at that time.
The interest rate was 20 per cent (calculated daily), with a default interest rate of 25 per cent. The loan agreement required GLW to repay all outstanding moneys by 14
October 2014. At the same time, GLW executed a mortgage over the Property to secure the borrowings (i.e. the Second Mortgage). This was never registered.
[62] Over the second half of 2014, there were significant negotiations between GLW and the Lepionka Purchasers, at times involving the Edgars and/or Mr Coltart, to try and resolve the conflicting contractual arrangements. LCIL also points to a conversation which Mr Lepionka said took place at this time between himself and a Mr Mark Steed, a senior Westpac employee. As well as being first mortgagee in relation to the Property, Westpac was banker to the Lepionka interests. Mr Lepionka said he told Mr Steed about his concerns in relation to GLW and the Property, and that Mr Steed had told him that, “if there was anything untoward in GLW’s dealings with the Property, then Westpac would support the Lepionka Purchase Contracts”. I mention this conversation because LCIL submits it amounted to Westpac’s consent to the Lepionka Purchase Contracts, meaning that the first mortgagee could not convey tile to the Property clear of the Lepionka Purchasers’ interests.
[63] In the latter half of 2014, GLW/Mr Paterson began to pursue a “back up” option of selling of the Property to Mr Coltart, in the event GLW could extract itself from the Lepionka Purchase Contracts. This potential sale involved an “on-sale” of several the lots from Mr Coltart to Mr Johnston (i.e. the American citizen referred to earlier).
[64] On 30 September 2014, the Lepionka Purchasers’ right to cancel the Lepionka Purchase Contracts crystallised, due to GLW’s failure to deliver title by that time. The Lepionka Purchasers’ solicitor, Mr Horton, wrote to GLW’s solicitor setting out the Lepionka Purchasers’ concerns. Mr Horton said the Lepionka Purchasers intended to enforce their rights under the Lepionka Purchase Contracts, but would refrain from taking action for a period of two months. Mr Horton copied his letter to Westpac.
[65] There was some dispute at the hearing as to whether copying the letter to Westpac triggered GLW’s account being transferred to the bank’s Loan Management Unit. There was documentary evidence that the account had been in difficulties prior
to that time. Nevertheless, by letter dated 1 October 2014, a private adviser with
Westpac wrote to Mr Paterson noting that:
…in view of these concerns [as set out in Mr Horton’s letter of 30 September
2014] management of your account has been transferred to the Bank’s Loans
Management Unit based in Auckland.
[66] No-one from Westpac was called to give evidence on these matters. It is therefore not possible for me to take this issue further. Nor is it strictly necessary to do so, given it is not in dispute Westpac subsequently took enforcement steps under the First Mortgage. GLW’s claim originally challenged the legality of those steps, but GLW abandoned those claims at the conclusion of the hearing.
[67] In October 2014, Mr Lepionka asked Mr Paterson for information about the use of the Lepionka Purchasers’ deposits. The Lepionka Purchase Contracts provided that, while 50 per cent of the deposit could be released immediately to GLW, the remaining 50 per cent was to be utilised only in relation to the development. On
3 October 2014, Mr Paterson sent Mr Lepionka a schedule of invoices against which he said the Lepionka Purchasers’ deposits had been applied. However, in cross- examination, Mr Paterson accepted that he had withdrawn some of the deposits from his solicitor’s trust account to meet personal expenses, in what he characterised as a “temporary breach” of the Lepionka Purchase Contracts. Mr Paterson also accepted that some of the invoices he sent to Mr Lepionka, purporting to evidence the use to which the deposits had been put, did not in fact relate to those matters. It is concerning that Mr Paterson was prepared to deliberately mislead Mr Lepionka in this way.17
[68] On 12 November 2014, a further resource consent was granted to GLW (GLW’s application having been filed in March 2014) (“Third GLW Consent”). This consent included new Lot 11 (being the fishing hut associated with Lot 4), a new Lot
12 (being a further fishing hut to be located on the common area) and Lot 8 was moved
to a different location.
17 Mr Paterson said he was “embarrassed” and simply needed the money. However, he reiterated that all of the deposit monies had ultimately been spent on the development. This was not explored further in the evidence, but I have some difficulty with this, as it would have required Mr Paterson to have reimbursed whatever deposit monies he had used for personal purposes. There was no dispute, including from Mr Paterson himself, that he was in a dire financial position at that time.
[69] In early December 2014, Mr Johnson told Mr Paterson that, other than some “reserves” to continue to pay the interest on GLW’s Westpac loans, no further funds were available from AFI.
[70] On 23 January 2015, Westpac served GLW with a notice pursuant to s 119 of the Act. The notice specified that defaults under the First Mortgage needed to be remedied by 5 March 2015, absent which Westpac’s rights under the First Mortgage would be triggered.
[71] In the meantime, and desperate to get further sales of the Property settled, GLW continued to negotiate the back-up sale to Mr Coltart/Mr Johnston. Mr Lepionka was aware of the potential “back-up” contract by this time, as Mr Horton corresponded with GLW’s solicitor about this in a letter date 10 February 2015:
We are aware that your client has received a formal offer to acquire the [Property] for $5.85 million (plus, as we understand it, other consideration), from or via Andy Coltart, and your client is simply seeking to exit our client’s Agreements to avail himself of that opportunity.
[72] Mr Horton’s letter then set out a number of options for resolving the impasse that had been reached and sought a response by 5pm the following day. In the event, none of those options were pursued to completion.
[73] On 11 February 2015, Mr Paterson emailed Mr Jonty Edgar about the “back- up” he was negotiating with Mr Coltart. He described the deal as being for “my entire land holding, including Lot 6 and the existing residence that [Andy Coltart] resides in”. Relevant to later aspects of this judgment, he went on to state that:
My accountant has informed me that the back up contract actually delivers a lesser net result [than the Lepionka Purchase Contracts], due to a greater amount of tax that will be due.
[74] Mr Lepionka said in evidence that around this time, he was also in direct communication with Mr Coltart, who had offered him $500,000, and then up to a
$1 million in compensation, if the Lepionka Purchasers would voluntarily back out of the Lepionka Purchase Contracts.
Mr Lepionka implements a “self-help” remedy
[75] Mr Paterson gave evidence that by early 2015, the situation was “desperate”. He said he had agreed with AFI that AFI would acquire GLW’s debt and the First Mortgage from Westpac, but AFI had requested he take further action to try and resolve the situation before formal steps were taken. Mr Johnson disputed this and said there was no “arrangement” that AFI would acquire the First Mortgage. He said:
There had certainly been discussions in the sense that Mr Paterson was persistently telling me it was in AFI’s interest to buy or fund repayment of the first mortgage. I had dealt with that by informing Mr Paterson that it was something I was reluctant to do but would keep an open mind to it. My preference and expectation was that Westpac would sell the property as first mortgagee.
[76] On 15 February 2015, Mr Paterson sent Mr Lepionka an email in reply to
Mr Horton’s letter of 10 February (see [71] above), in which he said the following:
The contract you refer to with Coltart is simply a back-up contract for when your contracts are no longer. That back-up contract is for the entire land holding, including Lot 6 and the existing residence that Coltart resides in.
Ironically, my accountant recently informed me that the back-up contract actually ultimately delivers me a lesser net result, due to a greater amount of Tax that will be payable.
As you know, all I want to do is sell my property and move on, but I seem to be stuck in the middle of issues between yourself and other parties. I too am deeply disappointed about how things have transacted and have also very much questioned the seeming lack of honour, morality and honesty in which some people seemed to have acted.
…
You would have undoubtedly received the notice from Westpac this week regarding the mortgage. This situation has come about solely as a result of this transaction taking so long to complete, and your direct and ill-advised, one- sided communication with Westpac. As a result of your afore mentioned actions, Westpac will soon be replaced as first mortgagee, with the new mortgagee having all the rights and benefits of the existing first mortgage assigned to them ...........
[77] Mr Paterson’s email concluded as follows:
As you know, I myself am a relatively simple person, whilst others around me are somewhat more commercially sophisticated. Please be aware that if you and I do not reach agreement prior to the cut-off date below [being close of business 17 February 2015], I have been advised that this matter will be dealt with relatively quickly, simply and finally, and perhaps not how you would
like it to be. Although the future actions of the new mortgagee are as yet unknown, given the level of secured debt, and subsequent lack of real equity, I have a feeling that they may look at liquidating their position relatively quickly. How their future actions may affect your existing unsecured deposit funds is something I am unable to advise you on.
[78] On 17 February 2015, Mr Lepionka sent an email to his contacts at Westpac, noting that GLW “appears to be trying to extract themselves to take a better offer”.
Mr Lepionka noted that “we would be hugely disappointed if the mortgage has been passed on or sold as [Mr Paterson] has highlighted, as Westpac has known for some time of this situation”. Importantly in the context of GLW and AFI’s claims,
Mr Lepionka went on to state the following:
We would be willing to buy your mortgage to protect our position, and to be clear our commitment to take/buy out the mortgage from Westpac is not only to protect our $467k deposit but to avoid any unnecessary future litigation.
…
At the end of the day, all I want is to own the properties that I wanted to buy for my family.
[Emphasis added]
[79] GLW and AFI were unaware of Mr Lepionka’s discussion with Westpac about acquiring the First Mortgage. However, recognising the situation was becoming somewhat fraught, on 3 March 2015, AFI registered a caveat against the Property to protect its position as (an unregistered) second mortgagee. On 16 March 2015, Mr Johnson undertook an analysis of options for recovery in New Zealand. His analysis compared the expected net proceeds from the Lepionka Purchase Contracts with the Coltart/Johnston offer then being considered by GLW. Consistent with Mr Paterson’s earlier advice as to his accountant’s view of the respective transactions, Mr Johnson concluded the Lepionka Purchase Contracts could realise a net amount of $1.5 million (including the sale of the Homestead lot to Mr Coltart at the agreed price of $630,000), compared to a net result of $1.1 million from the sale to Mr Coltart/Mr Johnson. The analysis of the net recovery based on a sale to Mr Coltart/Mr Johnston included
$400,000 payable to the Lepionka Purchasers (presumably as some form of compensation to avoid litigation), together with the return of their deposits, plus interest and legal fees.
[80] Mr Lepionka and his solicitor, Mr Horton, thereafter negotiated with Westpac to take an assignment of GLW’s debt and the First Mortgage. LCIL was incorporated on 25 March 2015 for this purpose. Mr Wallace of Gibson Sheat was instructed to act on LCIL’s behalf as mortgagee. Mr Horton continued to act for the Lepionka Purchasers. LCIL moved quickly, and on 1 April 2015 took an assignment of the First Mortgage from Westpac. The debt due under the First Mortgage at that date was
$2,682,345.
LCIL’s first actions as mortgagee – adoption, completion
[81] Later on 1 April 2015, Mr Wallace (on behalf of LCIL) signed a “notice of adoption” of the Lepionka Purchase Contracts. Mr Wallace did not send a copy of the adoption notice to the Lepionka Purchasers. However, he said that he told
Mr Lepionka and Mr Horton on 1 or 2 April 2015 that he (i.e. Mr Wallace) had signed the notice. Mr Lepionka said that he had been advised by Mr Wallace that he had signed the adoption notice. It is not in dispute that a physical copy of the adoption notice was not provided to Mr Horton or to Mr Lepionka until 7 April 2015. Mr Hughes, the other trustee of the Lepionka Trust, did not receive a copy of the adoption notice until around 11 September 2015. However, Mr Hughes said that he had been informed by Mr Lepionka of the adoption and while he could not recall the precise date, he was “certainly aware of this by 2 April 2015”. I return to these issues in more detail later in this judgment, in the context of GLW and AFI’s claim that the adoption notice was not validly served.
[82] The adoption notice stated that it was “subject to” the Completion Agreement. That agreement is also dated 1 April 2015, though it was not executed by all parties until 2 April 2015. Its key features and terms are as follows:
(a) Recital E records that “[LCIL] recognises that completion of the Subdivision and settlement of the [Lepionka Purchase Contracts] is in the best interest of [LCIL].”
(b)As the Lepionka Purchasers had the ability at that time to cancel the Lepionka Purchase Contracts,18 the Lepionka Purchasers agreed not to cancel the contracts in the coming six months. They also agreed to pay
$50,000 towards completion of the subdivision.
(c) In return, LCIL agreed to use commercially reasonable endeavours to complete the subdivision within six months.
(d)Notably, the agreement went on to state that “in the event that the Mortgage is redeemed or assigned”, or the subdivision was not completed within six months, LCIL would pay to the Lepionka Purchasers the following amounts:
(i) The $50,000 referred to at (b) above, plus interest at 12 per cent;
(ii) $463,000, being the deposits paid under the Lepionka Purchase
Contracts, plus interest at 12 per cent;
(iii)The Lepionka Purchasers’ solicitors’, accountants’ and other costs from the date of the Completion Agreement; and
(iv)$750,000 “compensation” for the possible non-completion of the subdivision and the Lepionka Purchase Contracts.
[83] AFI and GLW describe LCIL’s willingness to take on these additional liabilities as akin to a “poison pill”, i.e. aimed at deterring GLW and AFI from seeking to redeem or take an assignment of the First Mortgage. Mr Lepionka acknowledged in cross-examination that this aspect of the Completion Agreement did have an element of a “poison pill”. He explained the purpose of the agreement as follows:
The intention of this agreement was to bring certainty to the whole mix … of completing the subdivision in a timely manner without any interference or game [playing] or positioning from parties so we could bring titles down and do what GLW promised to do to all parties that were involved in the land …
18 Given GLW had not delivered title under those contracts by 30 September 2015.
[84] Mr Lepionka also said the figure of $750,000 compensation was the midway point of the amounts Mr Coltart had suggested to him for the Lepionka Purchasers to voluntarily walk away from their contracts.
[85] On 2 April 2015, LCIL entered into possession of the Property and served formal notice to this effect on GLW.
[86] Also on 2 April 2015, Mr Wallace instructed “Valuation Plus” to carry out a range of valuations of the Property.
[87] The following day, Good Friday, 3 April 2015, Mr Lepionka corresponded with Mr Holder, then of Cardno Limited, who had been working with GLW on the planning aspects of the Property’s development. Mr Lepionka asked Mr Holder to provide an update on the works required to complete the development.
GLW’s request to redeem the First Mortgage and LCIL’s response
[88] Also on 3 April 2015, Mr Paterson emailed Mr Wallace stating he would “like to redeem the mortgage”. Later the same day, Mr Paterson emailed Mr Wallace a second time, stating “please be advised that the second mortgagee has also given notice of their intention to exercise their right to purchase the first mortgage debt and security”. Mr Paterson asked for a repayment statement for 9 April 2015, and noted his lawyers would be in touch to finalise the conveyancing arrangements.
[89] GLW itself did not have the funds available at that time to redeem the First Mortgage. Mr Paterson and Mr Johnson said AFI was willing to advance the funds to GLW. However, AFI also did not have the funds. Mr Johnson gave evidence that his late father’s cousin, Mr Arthur Johnson, to whom Mr Johnson is very close, was willing to provide the necessary funds. Arthur Johnson did not give evidence.
[90] Mr Wallace replied on 4 April 2015, indicating that LCIL would aim for the “Wednesday the following week”, i.e. 8 April 2015, but could not guarantee that date, given Gibson Sheat’s office was closed for Easter and Mr Lepionka was away on holiday. Mr Wallace said in evidence that at that time, he had not turned his mind to the effect of the adoption of the Lepionka Purchase Contracts on GLW’s right to
redeem, and that he had not come across this situation before. However, by 7 April
2015, Mr Wallace had evidently turned his mind to the possible implications of the adoption, stating in email correspondence with Mr Paterson and Mr Toebes (GLW’s solicitor) that day that:
Given the adoption you may not now have the power to redeem the mortgage as the adoption may be akin to a sale by the mortgagee under a power of sale. Once we have Mr Toebes’ request for a discharge of mortgage we will turn our minds to it.
[91] There was discussion between Mr Wallace and Mr Toebes the following day, (i.e. 8 April 2015), in which Mr Toebes sought a repayment statement. Mr Wallace’s views on the implication of the adoption notice had also firmed up. On 9 April 2015,
Mr Wallace advised Mr Toebes that:
In relation to the repayment figure, we are awaiting on some final amounts and hope to have that with you shortly. As indicated this is provided on a without prejudice basis as it is our view that your client has no right to redeem
the mortgage given that our client has now taken steps to sell the property using its power of sale under the adoption of the agreements for sale and
purchase under section 179 of the Property Law Act.
[92] There was no evidence of what became of these discussions; for example, whether a repayment statement was actually provided and if so, what GLW did in response. Mr Johnson (of AFI) said that after LCIL had indicated it was too late to redeem the First Mortgage, he did not give further consideration as to how any funding of GLW for that purpose would have been structured. Mr Paterson referred to a demand made by LCIL on 13 April 2015 for payment of the mortgage sum then due ($2,712,576.39), and stated that he wanted to pay that sum and redeem the First Mortgage, but was concerned about triggering the payments under the Completion Agreement. Mr Paterson said he “therefore decided to wait and see if the entire matter could be settled”.
[93] I return to these matters, including whether GLW in fact had funds available to redeem the First Mortgage, in more detail later in this judgment, in the context of GLW and AFI’s claim that LCIL wrongfully refused GLW’s attempt to redeem.
[94] Also by letter dated 9 April 2015, Mr Wallace wrote to Mr Coltart’s solicitors giving notice pursuant to s 178(2) of the Act that LCIL cancelled the option agreement
between GLW and Mr Coltart. The letter noted Mr Coltart and his family were residing in the Homestead and required vacant possession within 10 working days.
[95] On 24 April 2015, Mr Holder provided his initial report to Mr Lepionka on the costs to complete the subdivision. He estimated these costs to be $275,000 (plus GST). There is no dispute, however, that this estimate was too low. By June 2015,
Mr Holder’s estimate had risen to between $720,000 and $845,000. Mr Holder said his April 2015 estimate was high level only, as he had not been able to inspect the Property at that time. Mr Holder also gave evidence that at that point in time, six months to complete the development (as recorded in the Completion Agreement) was overly optimistic, and a more realistic estimate would have been around 12 months (taking into account variables such as the weather).
The “Coltart offers” – April to May 2015
[96] Mr Coltart was obviously anxious to protect his position, given he and his family were residing in the Homestead on Lot 2, on which he had already spent significant funds. As a result, over the period 10 April 2015 to 1 May 2015,
Mr Coltart, via his solicitor (Mr Chan of Carlie Dowling) made a number of offers to LCIL to purchase the Property, on an “as is, where is” basis. As Mr Coltart’s interest lay only in Lot 2, Mr Coltart proposed to on-sell the rest of the lots to Mr Johnston, the American citizen. GLW relies on these offers for its claim that, by not accepting
Mr Coltart’s offer of 1 May 2015, LCIL breached its equitable and statutory duties at mortgagee. As noted earlier, AFI does not rely on these offers. Rather, it relies on a later November 2015 offer by TTL. Mr Johnson (of AFI) nevertheless gave evidence that he had been the driver behind Mr Coltart’s offers in April/May 2015, in an attempt to bring about a resolution to the situation that had developed.
[97] The first of Mr Coltart’s offers was made on 10 April 2015, and was to purchase the Property for $5.8 million. Mr Chan’s letter to Mr Wallace conveying the offer was accompanied by a draft agreement for sale and purchase (which LCIL was invited to amend to include the usual terms for sale by a mortgagee). By email dated
13 April 2015, Mr Wallace replied to Mr Chan, stating:
Our client is in the process of obtaining two real estate agents’ appraisals of the property, together with a valuation, with a view to completing a mortgagee sale. Once our client has all of this information, in particular the valuation, it will deal with your client’s offer.
[98] Mr Wallace also noted that, as LCIL had adopted the Lepionka Purchase Contracts, those agreements “would have to be dealt with and some form of compensation payable to the Lepionka entities as purchasers in order for these contracts to be nullified”. Mr Wallace further noted that there were several issues to work through if any offer by Mr Coltart “would be able to be entertained”, including LCIL’s obligations under s 176 of the Act. Mr Wallace concluded:
If the property is not marketed prior to sale then our client exposes itself to a claim that the property is not being sold for the best price possible. The likely claimants of course would be [GLW and AFI]. It is likely that we need to involve them in order to avoid any claim against our client.
[99] Mr Wallace followed up with a further email to Mr Chan on 13 April 2015, noting that he understood there had been some direct discussions between LCIL and
Mr Coltart. Mr Lepionka gave evidence that he had discussed matters with Mr Coltart, and it was evident from those discussions that Mr John Johnston, i.e. the American citizen, was to be involved in any purchase. Mr Wallace’s email attached a draft agreement for sale and purchase which he said would need to be used when a revised offer was submitted. The purchase price in the agreement attached to Mr Wallace’s email was left blank. The draft agreement contained a warranty that the purchaser does not constitute an “overseas person” under the Overseas Investment Act 2005 (“OIA”) and Overseas Investment Regulations 2005.
[100] On 17 April 2015, Mr Coltart made an updated offer of $5.65 million (plus
GST, if any). This was based on the draft agreement for sale and purchase attached to
Mr Wallace’s email of 13 April 2015, together with various amendments and additional terms. Notably, the additional terms included a new clause to the effect that the agreement was conditional upon GLW and Mr Paterson entering into a settlement deed with Mr Coltart in a form annexed to the agreement. The draft deed of settlement provided that:
(a) Mr Coltart, GLW and Mr Paterson settled and forever released each other from any claims relating to the development of the Property and the arrangements between Mr Paterson and Mr Coltart in 2012;
(b) GLW and Mr Paterson taking all necessary steps to transfer to
Mr Coltart the resource consent in relation to the Property; and
(c) GLW and Mr Paterson transferring to Mr Coltart ownership of all the chattels and contents of the house located on proposed Lot 4 of the Property.
[101] Mr Wallace forwarded Mr Coltart’s proposal to GLW’s solicitor, Mr Toebes, on 17 April 2015. Mr Wallace noted that LCIL had not made up its mind either way in respect of the proposal, but sought Mr Toebes’ confirmation as to GLW’s position.
Mr Wallace also noted that should LCIL wish to enter into the agreement with
Mr Coltart, it would need to cancel its existing agreements with the Lepionka Purchasers, with the likely consequence that compensation equal to the amount specified in the Completion Agreement would be demanded. Mr Wallace concluded “we make it clear that our client has not made any decision and is unlikely to put itself in any risk position should your client not give consent to the sale”.
[102] Mr Wallace had further communications with Mr Coltart’s solicitors on
17 October 2015. Mr Wallace raised LCIL’s concern that the purchaser under the revised offer would in fact be an American citizen (i.e. Mr Johnston), for whom
Mr Coltart was a “front”. Mr Wallace sought further information on this from
Mr Chan. He also stated that “I agree your client’s proposal may net the mortgagor and second mortgagee more than completing the Lepionka contracts. Who knows what the sale prices would be at mortgagee sale”.
[103] Mr Wallace also corresponded that day with Mr Hubbard (acting for AFI). He sought an indication of whether the purchase price being proposed by Mr Coltart was acceptable to AFI, bearing in mind that if LCIL decided to contract with Mr Coltart, the Lepionka Purchase Contracts would need to be cancelled. Mr Wallace noted this would trigger the compensation payments payable under the Completion Agreement,
estimated in a schedule attached to Mr Wallace’s email to be $1.45 million.19
Mr Shiels QC for AFI submits this was the “poison pill” in action.
[104] By 23 April 2015, no response had been received from either GLW or AFI. Mr Wallace accordingly emailed Mr Toebes and Mr Hubbard that day, noting LCIL’s instructions were to continue with the subdivision and complete the Lepionka Purchase Contracts. Similar advice was given to Mr Chan on behalf of Mr Coltart.
[105] On 28 April 2015, Mr Coltart made a further offer to purchase the Property, for a sum of $6.15 million. That offer was also conditional on the amendments and additional terms set out in the documents attached to Mr Chan’s 17 April 2015 letter. In his 28 April letter, Mr Chan sought to reassure LCIL that no OIA issues arose.
Mr Chan also raised a number of concerns in relation to LCIL’s conduct to that point, including that the adoption of the Lepionka Purchase Contracts breached LCIL’s duties. This offer was again forwarded by Mr Wallace to Mr Toebes, asking for an indication as to whether GLW would consent to a sale at that price and its terms.
[106] On 30 April 2015, Mr Wallace replied to Mr Chan’s letter of 28 April, including his criticism of LCIL’s actions as mortgagee. Mr Wallace said the following:
Mr Coltart cannot criticise the adoption of the Lepionka agreements when he himself is trying to enforce a sale and purchase agreement for $630,000. That
is approximately a third of the value of the land. Our client's assignment of the mortgage was for full value and no criticism can be made that it will allow for performance of the Lepionka purchase agreements. It will create a far
greater recovery for the second mortgagee.
The Lepionka purchase agreements are at the then market value and well above what the mortgagee would, according to expert opinion, achieve at mortgagee sale. That is because the mortgagee cannot offer the same terms and conditions as an arms-length vendor which GLW Group Limited, as mortgagor, was when it sold to Lepionka.
The suggestion of unreasonable conduct by our client, as mortgagee, is rejected. The sale of the intended lot 2 will result in enough·money to allow our client mortgagee to complete the subdivision and the Lepionka agreements. There will be sufficient funds to repay the first mortgage and a substantial part of the second mortgage.
19 Comprising the $750,000 compensation payment; the return of the subdivision contribution of
$50,000 (plus interest); the return of the Lepionka Purchasers’ deposits (plus interest); and the
Lepionka Purchasers’ solicitors’, accountants’ and other costs, then estimated to be approximately
$123,000.
[107] Before any response had been received from GLW/Mr Toebes to the 28 April offer, on 1 May 2015, Mr Coltart made an increased offer of $6.93 million. Again, it was conditional on the amendments and additional terms outlined in the documents attached to Mr Chan’s 17 April 2015 letter. It was framed as “one final offer to purchase the whole of the property” and that this was “the highest that our client is able to offer”. Mr Chan’s letter noted that the agreement would not be binding until all parties had signed the necessary documents. The offer was again distributed to GLW and AFI for consent.
[108] On 5 May 2015, Mr Hubbard, for AFI replied noting that AFI consented to the sale but subject to a number of conditions. These were:
(a) Cancellation of the Lepionka Purchase Contracts and a termination fee of not more than $400,000 being payable;
(b)The final amount of the debt and costs incurred by LCIL as mortgagee to that point being reasonably satisfactory to AFI;
(c) GLW’s written consent being obtained; and
(d)Importantly, entry into a deed by all relevant parties in full and final settlement of all outstanding claims against the other parties, but excluding any claim AFI may have against GLW and Mr Paterson personally in relation to debts that would remain outstanding to AFI.
[109] On the same day, Mr Toebes emailed Mr Wallace stating:
GLW Group Ltd, and Mr Paterson, agree in principle to sale to Coltart on unconditional basis (with prompt settlement) of the property, as is, for
$6,930.000 (plus GST if any).
[110] Mr Wallace said that prior to receipt of Mr Toebes’ email, he had spoken with Mr Toebes and specifically asked whether GLW would consent to the offer price and its terms, and in particular, entry into the settlement deed, but had not had a response.
Mr Wallace characterised Mr Toebes’ email of 5 May as a carefully crafted response to the request for consent. I agree.
[111] On 8 May 2015, Mr Wallace informed Mr Chan that the 1 May offer was with the Lepionka Purchasers for consideration. On 29 May 2015, Mr Wallace informed all parties that the offer was not accepted, given:
(a) LCIL remained concerned about the OIA implications and was not prepared to put itself at risk of breach; and
(b) The Lepionka Purchasers had not agreed to cancel the Lepionka
Purchase Contracts.
[112] For completeness, I note LCIL waived privilege over advice it received from its solicitors as to the OIA risk. The Property is “sensitive” land under the OIA. Based on the factual circumstances of the proposed sale to Mr Coltart,20 Gibson Sheat advised LCIL that the risk of the offer breaching the OIA was “high”.21
[113] Also in May 2015, LCIL commenced High Court proceedings to remove
Mr Coltart’s caveat over the Property. This was necessary to progress the subdivision and in particular, to allow title for Lot 2 to be issued.
[114] There were evidently some discussions in June 2015 between LCIL and AFI in respect of LCIL possibly purchasing GLW’s debt to AFI and the Second Mortgage. By email dated 5 June 2015, Mr Wallace emailed a proposal to Mr Hubbard, namely that LCIL would purchase the debt and Second Mortgage for approximately $1 million. In his email, Mr Wallace explained the basis for that price, being the likely realisation to AFI in the event the subdivision was completed (as planned by LCIL). Mr Grove, for GLW, submits this is a very important email, as it is the “best contemporaneous evidence” of the likely realisation from the subdivision. This email was put to Mr Wallace in cross-examination, who said the numbers contained in it needed to be treated with some caution, given they reflected a “negotiation” between
[455] These, and likely other issues, will need to be considered in the context of the taking of an account.
GLW’s miscellaneous claims
Introduction
[456] In addition to its primary claims of breach by LCIL of its duty to permit redemption, breach of its equitable duties and breach of s 176 of the Act, GLW pleaded a range of other “miscellaneous” causes of action. Most of these were given little or no attention at the hearing. Mr Grove also accepted that some of them merely support but do not add to GLW’s key complaint of LCIL’s breach of mortgagee duties.
[457] Parties are to be discouraged from advancing such “supporting” claims unless they genuinely add to the overall position. This is particularly so when the claims are ultimately not addressed in any detail at the hearing itself.
[458] I accordingly deal briefly with the remaining causes of action pleaded by GLW.
Oppressive conduct under the Credit Contracts and Consumer Finance Act 2003
[459] GLW’s fourth cause of action pleads that the debt and securities assigned by Westpac to LCIL are credit contracts for the purposes of s 7 of the Credit Contracts and Consumer Finance Act 2003 (“CCCFA”). GLW relies on the same conduct on which it relies for breach of LCIL’s equitable and statutory duties for the purposes of
its claim of oppressive conduct. GLW seeks an order that the credit contracts are
217 The approach taken by O’Regan J in Agio Trustees Company Ltd v Harts Contributory Mortgages Nominee Company Ltd (2001) 4 NZ ConvC 193,480 (HC) at [159], when (briefly) addressing whether an allowance ought to be made in that case for legal costs.
reopened by the Court under s 120 of the CCCFA, and seeks the same relief sought in relation to its claims of breach of LCIL’s equitable and statutory duties.
[460] LCIL accepts the three GLW Westpac loans are credit contracts, and that the Westpac mortgage is a collateral contract to be treated as forming part of the loans, for the purposes of Part 5 of the CCCFA.
[461] Responsibly, Mr Grove acknowledged that the claim of oppressive conduct in this case does not add to GLW’s complaints of breach of LCIL’s equitable and statutory duties. For that reason, while it is clear that the exercise by a mortgagee of a power of sale is not inherently oppressive,218 a case for oppressive conduct under the CCCFA may have been made out, given my earlier finding of breach by LCIL of its equitable duties.
[462] Pursuant to s 127 of the CCCFA, the court has a wide discretion to grant a range of remedies. Relevantly for current purposes, these include an order that an account be taken, extinguishing an obligation or directing any party to do or refrain from doing any act or thing in relation to any other party. Pursuant to s 127(4), an order may be made on any terms and conditions that the court thinks fit.
[463] Ultimately, however, GLW did not advance any particular position under the CCCFA other than the very general approach outlined above. The key point is that this claim, as Mr Grove acknowledged, adds nothing to the primary causes of action. Accordingly, given I have considered the proper relief to be granted in relation to those primary causes of action, I would not have considered it appropriate to make any further orders pursuant to s 127(1) of the Act, even if oppressive conduct had been established.
Unlawful sales by LCIL
[464] GLW’s sixth cause of action pleads that the “sales” by LCIL to the Lepionka
Purchasers are “unlawful” in that:
218 Taylor v Westpac Banking Corporation Ltd (1996) 5 NZBLC 104,104 (CA).
(a) The Lepionka interests have been unjustly enriched by the conduct of
LCIL;
(b) GLW apprehends that the s 179 notice has been backdated to 1 April
2015; and
(c) The agreements for sale and purchase have been significantly varied without the legal right to do so, or the consent of GLW.
[465] No underlying legal cause of action is advanced in relation to these allegations. Further, the evidence does not demonstrate that the s 179 notice had been backdated to 1 April 2015 in any event. I accept Mr Wallace’s evidence that that did not occur.
[466] In relation to the pleading that the agreements for sale and purchase had been varied without the legal right to do so, GLW did not make any submissions or refer to any case law to support this as a free-standing cause of action. On the face of it at least, there is no prohibition in s 179 of the Act on a mortgagee varying adopted contracts, either at the time of adoption or subsequently.
[467] However, in the absence of GLW making any submissions in relation to this cause of action, I do not consider it appropriate to consider these matters further. The sixth cause of action is accordingly dismissed.
Unjust enrichment219
[468] As its seventh cause of action, GLW simply pleads that “the conduct of the defendants is “unconscionable” and has and is being undertaken in bad faith”. No further particulars are given of the conduct that is said to be unconscionable. Nor did GLW address this cause of action in its submissions.
[469] “Unconscionable conduct” in and of itself is not a cause of action. Rather, unconscionability can be a component of other established causes of action.
219 Although the seventh cause of action is headed “unjust enrichment”, it does not appear to be an orthodox pleading of an unjust enrichment cause of action.
[470] In the absence of any details or submissions from GLW in relation to this cause of action, it is dismissed.
Conspiracy to injure by unlawful means
[471] By its eighth cause of action, brought against Mr Lepionka personally, GLW
pleads the following:
(a) Mr Lepionka conspired with LCIL and the Lepionka Purchasers to commit a wrong in breach of LCIL’s duties to GLW.
(b)Mr Lepionka, as the sole director and shareholder of LCIL, took a number of steps which were unlawful and in breach of LCIL’s duty to GLW “for the principal benefit of Mr Lepionka personally and his family”.
(c) Mr Lepionka conspired with LCIL to incorporate that company and thereafter pursue a course of action which was unlawful and in bad faith.
(d)Mr Lepionka as a director of LCIL and Lepionka Company and one of two trustees of the Lepionka Trust, has conspired with these entities to commit a wrong in breach of LCIL’s duties to GLW.
(e) That conduct has been undertaken by Mr Lepionka, using LCIL, to benefit himself personally (as well as LCIL and the Lepionka Purchasers).
[472] Mr Grove submits the evidence demonstrates that what is referred to by GLW as the “scheme” (namely the assignment of the First Mortgage and the adoption of the Lepionka Purchase Contracts) was constructed by Mr Lepionka, with his legal advisers, with a view to achieving his personal goal of purchasing the properties which were the subject of the Lepionka Purchase Contracts. GLW refers to Prest v Prest for the proposition that a director may conspire with his or her company to
commit a wrong.220
[473] LCIL submits this cause of action, at least as pleaded by GLW, wrongly conflates two different and separate forms of the tort of conspiracy: conspiracy to injure and conspiracy to use unlawful means. Having set out GLW’s pleadings and noting that it appears to be directed to conspiracy to use unlawful means, LCIL submits that GLW has not discharged the burden on it to prove the existence of an agreement between the relevant parties, that the agreement involved at least one of them using unlawful means against GLW, and at least one of the purposes of the agreement was an intention to injure GLW.221 LCIL further submits there is no policy reason for breach of any equitable duty of good faith or the statutory duty to obtain the best price reasonably obtainable to constitute “unlawful means” for conspiracy purposes (being an action in tort). This is because if the Court were to find any of those other causes of action are made out, there is a sufficient remedy available to GLW through those specific causes of action.
[474] Addressing GLW’s claim on the basis that it is intended to plead conspiracy to injure by unlawful means, the elements of this cause of action are as follows:222
(a) The existence of a combination;
(b) Unlawful action (unlawful means);
(c) Intention to injure the claimant; and
(d) Actual damage caused to the claimant.
[475] Ultimately, and as the Court of Appeal stated in Wagner v Gill:223
220 Prest v Prest [2013] UKSC 34, [2013] 2 AC 415. This decision does not appear to stand for the proposition for which it is cited; rather it is directed at piercing the corporate veil. However, as I noted in an earlier interlocutory judgment in this matter, there is support for the proposition that a director can conspire with the company of which he or she is director: see AFI Management Pty Ltd v Lepionka Company Investments Ltd [2017] NZHC 1176 at [151].
221 LCIL acknowledges that, unlike the tort of conspiracy to injure, this need not be the predominant motive of the conspiracy.
222 Wagner v Gill [2014] NZCA 336; [2015] 3 NZLR 157 at [49]–[50].
223 At [49]
The tort of unlawful means conspiracy is said to be committed where two or more persons combine and agree that at least one of them will use unlawful means to cause damage to the claimant.
[476] Even assuming the first element set out at [474](a) above could be made out in this case, it is by no means clear that breach of a mortgagee’s equitable and statutory duties would be “unlawful action”/“unlawful means” for the purposes of the tort. As the Court of Appeal observed in Wagner v Gill, the concept of “unlawful means” is a controversial and difficult one, on which there are inconsistent authorities.224 The Court noted that if the party advancing a claim of conspiracy to use unlawful means has alternative remedies for the same conduct, those factors will militate against the conduct complained of being considered “unlawful means” for the purposes of the tort. This is because policy reasons in such circumstances do not drive a need for the encroachment of the common law on economic torts into the regulation of economic competition.225 So, for example, in Wagner v Gill itself, the plaintiff already had remedies available under the Companies Act and the Property Law Act, such there was “no gap in the law”. A similar situation could be said to exist here, where there is a clearly articulated equitable duty, buttressed by the statutory duty enshrined in s 176 of the Act, which appropriately responds to the misconduct complained of by GLW.
[477] But even assuming for present purposes this second element was met (and GLW did not make any submission on this point), I am satisfied the third element of intent is not established. It is not necessary to prove that the conspirators’ sole or predominant purpose was to injure the plaintiff.226 However the Court of Appeal in Wagner v Gill held that a plaintiff is required to prove something more than that it was reasonably foreseeable that the unlawful conduct was likely to cause the plaintiff harm.227 Having examined in some detail leading English authorities on this element of the tort, the Court concluded that “on balance, our preference would be to retain the requirement that the conduct must be directed at the claimant”, i.e. rather than adopting a more expansive approach which would accommodate the plaintiff’s loss being either
the desired end result itself, or the intended means of achieving the desired end.228 In
224 At [54].
225 At [79].
226 Wagner v Gill [2014] NZCA 336; [2015] 3 NZLR 157 [89].
227 At [106].
228 As adopted by the House of Lords in OBG Ltd v Allan [2007] UKHL 21, [2008] AC 1.
this context, the Court of Appeal cited with approval commentary in The Law of Torts in New Zealand that this broader approach means the intention to inflict loss must be a cause of the defendant’s conduct.229
[478] I do not consider Mr Lepionka, LCIL or the Lepionka Purchasers had the necessary intent on either of the approaches outlined above. Mr Lepionka’s intent at the time was to take action which I am satisfied he genuinely considered would deliver a surplus to GLW/AFI. Specifically, I am not satisfied that loss to GLW was either the desired end result itself, or the intended means of achieving the desired end result (being the protection of the Lepionka Purchasers’ interests).
[479] GLW’s eighth cause of action is accordingly dismissed.
LCIL’s counterclaim against AFI
Introduction
[480] In its counterclaim against AFI in proceedings CIV-2015-404-2836, LCIL pleads that the loan agreement between AFI and GLW of July 2014 covers only advances made by AFI to GLW (i.e. rather than advances that may have been made to other entities at Mr Paterson’s request). While LCIL’s pleading states that advances by AFI to GLW total only $54,000, in its closing submissions, it accepts that AFI has advanced GLW approximately AU$480,000. This compares with the total amount said in the loan agreement to have been advanced by AFI to GLW of AU$4,109,280.
[481] LCIL accordingly seeks a declaration that “the GLW Loan Agreement only covers advances directly made by AFI to GLW”. On that basis, LCIL seeks further declarations that the advances made by AFI to GLW are only $54,000 and that LCIL,
as first mortgagee, need not account to AFI for more than $54,000.230
229 At [97]; see Cynthia Hawes “Interference with Business Relations” in Stephen Todd (ed) The Law of Torts in New Zealand (6th ed, Brookers, Wellington, 2013) 667 at 696.
230 Presumably given the acknowledgement in LCIL’s pleadings as to the AU$480,000 figure, the amounts set out in the second and third declarations sought should also be amended to that figure.
[482] While LCIL acknowledges this is an issue primarily between GLW and AFI (and I interpolate to note that GLW has not advanced a position in relation to it), LCIL says that it is (potentially) relevant to LCIL in two ways:
(a) First, the actual funds advanced by AFI which went into the Property’s subdivision may be relevant to the overall equities if relief is considered; and
(b)Second, AFI can only have an interest in an account to the extent of its lending.
Submissions - LCIL
[483] LCIL made brief submissions on its counterclaim at the conclusion of its closing submissions. It bases its position on the wording of the loan agreement itself:
(a) It notes that the main operative clause (clause 2.1) states that GLW acknowledges that “the Facility has been advanced and received by it prior to entry into this Agreement” (emphasis added).
(b)It further submits that “Facility” is defined as “the term loan facility whereby the Lender agrees to make the drawings available to GLW”, noting the use of the future tense.
(c) Finally, “Drawings” mean up to AU$4.2 million “including the AU$4,109,480 drawings previously made, to be made or deemed to be made by the Borrower under the Facility”.
[484] LCIL accordingly submits that “the overall intent is that it [i.e. the loan agreement] only covers funds made, or to be made available to GLW. Those funds are only just over AU$480,000”.
Submissions - AFI
[485] AFI points to the dealings between GLW and AFI from September 2013 (when
Mr Paterson first approached Mr Johnson of AFI for further funding), the
correspondence between Mr Paterson and Mr Johnson at that time,231 and the terms of the resulting loan agreement. Mr Shiels refers to Mr Johnson’s unchallenged evidence that he was regularly updating Mr Paterson in relation to the outstanding balance of the borrowings in the lead up to the loan agreement being executed, and that he “almost certainly” showed Mr Paterson a spreadsheet with a total figure of AU$4,109,280 at that time. Correspondence between AFI’s and Mr Paterson’s solicitors dated 13 June 2014 also noted several matters which “need to be incorporated into the security documents”, including “loan already advanced is
$4,109,480”.
[486] Mr Shiels also refers to the following terms of the loan agreement:
(a) Clause 2 of the loan agreement, which reads:
The Borrower acknowledges that the Facility has been advanced and received by it prior to entry into this agreement on the terms contained herein.
[Emphasis added]
(b) The definition of “Facility,” which is defined as:
the term loan facility whereby, on the terms set out in this Agreement, the Lender agrees to make the Drawing available to the Borrower.
(c) “Drawing,” which is in turn defined as:
The maximum sum in aggregate of AU$4,200,000 including the AU$4,109,480 drawings previously made, to be made or deemed to be made by the Borrower under the Facility…
[Emphasis added]
(d)Clause 6, which includes an obligation on GLW to repay any “Outstanding Moneys by no later than the Expiry Date”, and that “Outstanding Moneys”, by reference to the definition of “Outstanding
Amount”, include the Drawing.
231 See the factual background section above, at [46] to [47].
(e) Finally, Mr Shiels note that Recital B to the loan agreement records that it is acknowledged that “certain of the funds have already been advanced and this Agreement also records the terms of those prior advances”.
[487] Mr Shiels accordingly submits that even looking at the loan agreement devoid of any broader context, it would be highly strained to conclude that it did not create an obligation on GLW to repay the sum of AU$4,109,480 (plus interest) on the expiry date. Mr Shiels submits that the pre-contractual context, and those matters referred to at [485] above only strengthens the position.
[488] Finally, Mr Shiels submits that an estoppel by convention or deed would arise as between GLW and AFI in any event, relying on Helmich v Thorp.232 In that case, a mortgage deed acknowledged that a certain amount had been advanced to the mortgagor by the mortgagee, when extrinsic evidence demonstrated that that amount had not in fact been received by the mortgagor. Fisher J, referring to estoppel by convention or by deed, stated the following:233
It is perfectly open to parties to a transaction to decided that a convenient formula for recording their bargain is to recite a set of hypothetical facts followed by a stated set of consequential rights and obligations. Whether the factual assumptions bear any relation to reality is beside the point. Their role is simply to provide a set of premises against which stated rights and obligations can be better understood. The recitals are thus an aid to construction, not an assertion of facts for their own sake. A deed is not an affidavit. It may not be a wise drafting method to deliberately adopt fictional assumptions for this purpose but in principle there is nothing to prevent it. And of course nothing turns on the question whether the recited fact appears in that part of the document normally associated with operative provisions or in the “recitals” as that expression is commonly used by conveyancers.
Analysis
[489] I accept AFI’s submissions. In my view, the loan agreement, when read as a whole, is plain that as between AFI and GLW, prior drawings in the sum of
232 Helmich v Thorp [1997] 3 NZLR 86 (HC).
233 At 92. Fisher J also referred to observations of the Court of Appeal in National Westminster Finance NZ Ltd v National Bank of New Zealand Ltd [1996] 1 NZLR 548 (CA) at 550, in which Tipping J, giving the judgment of the Court, stated “Put at its simplest, parties may for the purposes of a particular transaction agree either expressly or implicitly that black shall mean white and vice versa. Although both know that their assumption is, in truth, erroneous they will be held to it if the remaining indicia of convention estoppel are present”.
AU$4,109,480 have been previously made “or deemed to be made” by GLW and are covered by the terms of the facility. Indeed the terms go somewhat further than those considered by Fisher J in Helmich v Thorp, in that the relevant provisions are not
limited to a statement of fact that the prior drawings had been made by GLW, but they are also expressly “deemed” (by the parties) to have been made by GLW. I accordingly consider it would be quite artificial to interpret the loan agreement as applying only to sums advanced directly to GLW itself.
[490] Further, and if necessary, I would have held that an estoppel by convention or deed arises in this case. As set out by the Court of Appeal in National Westminster Finance NZ Ltd v National Bank of New Zealand Ltd, the following matters must be established to give rise to such an estoppel:234
(a) The parties have proceeded on the basis of an underlying assumption of fact, law, or both, of sufficient certainty to be enforceable (the assumption).
(b)Each party has, to the knowledge of the other, expressly or by implication accepted the assumption as being true for the purposes of the transaction.
(c) Such acceptance was intended to affect their legal relationship in the sense that it was intended to govern the legal position between them.
(d)The proponent was entitled to act and has, as the other party knew or intended, acted in reliance upon the assumption being regarded as true and binding.
(e) The proponent would suffer detriment if the other party were allowed to resile or depart from the assumption.
(f) In all the circumstances it would be unconscionable to allow the other party to resile or depart from the assumption.
234 At 550.
[491] In this case, the evidence demonstrates that (a) to (d) above are satisfied. Both GLW and AFI were aware of the basis upon which the loan agreement was being drawn up, including that it was to cover the prior advances of AU$4,109,480. Clear notice of this amount had been given to GLW, via its solicitor, in the lead up to the agreement being executed.
[492] Further, AFI has relied to its detriment on the factual assumption being regarded as true and binding, including by making further advances to GLW between
mid-June 2014 and entry into the loan agreement, and after entry into the loan agreement. In addition, and to GLW’s knowledge, AFI has commenced and fully participated in these proceedings (and the background negotiations and offers in relation to the Property) based on the full amount being covered by the loan agreement and thus secured by its Second Mortgage. GLW has never challenged or disputed the fact that the loan agreement extends to the full AU$4,109,480. There is no doubt AFI would have taken a quite different approach if its security extended only to AU$480,000.
[493] For these reasons, LCIL’s counterclaim against AFI is dismissed. I decline to make the declarations sought.
Conclusions and result
[494] By way of summary, and for the reasons set out in this judgment, I have reached the following conclusions:
(a) A mortgagee’s adoption of an existing sale and purchase agreement pursuant to s 179 of the Act is the exercise of the mortgagee’s power of sale.
(b)LCIL’s adoption of the Lepionka Purchase Contracts was effective as of 7 April 2015.
(c) LCIL did not wrongfully refuse to permit GLW to redeem the First Mortgage in April 2015. GLW’s second cause of action is accordingly dismissed.
(d)LCIL breached its equitable duties as mortgagee, in that it exercised its power of sale for an improper purpose. However, it did not breach its duty by failing to accept the Coltart offer of 1 May 2015 or the TTL offer of November 2015.
(e) Given (c) and (d) above, LCIL is not required to account to AFI on the basis of “wilful default”.
(f) While LCIL failed to take reasonable precautions to obtain the best price reasonably obtainable at the time of sale, whether it breached its statutory duty pursuant to s 176 of the Act is not yet known. That will turn on an assessment of the final (net) price to be achieved by LCIL from the sale of the Property, compared to the best price reasonably obtainable for the Property in April 2015.
(g)The best price reasonably obtainable for the Property at the time of sale (April 2015) was $4.3 million (being the upper end of Mr Shellekens’ market valuation of the Property at April 2015).
(h) It would be inequitable to set aside the Lepionka Purchase Contracts.
GLW’s remedy is accordingly confined to damages. Any damages are to be taken into the accounts of LCIL as first mortgagee.
(i)The orders made by Peters J at [38](a)(i) and (ii) of Her Honour’s judgment in this proceeding, dated 17 March 2017, are accordingly rescinded.235
(j)A final assessment of damages will need to be made after completion of the subdivision, and after hearing further from the parties on matters arising from this judgment.
(k)There is to be a general account by LCIL in relation to the costs charged and to be charged to the First Mortgage (including legal costs).
235 GLW Group Ltd v Lepionka & Company Investments Ltd [2017] NZHC 491.
(l)GLW’s first, fourth, sixth, seventh and eighth causes of action are dismissed.
(m)The loan agreement between GLW and AFI does not cover only amounts advanced to GLW itself. LCIL’s counterclaim against AFI is accordingly dismissed.
[495] The parties will obviously need some time to consider the contents of this judgment. The Registry is accordingly directed to allocate a telephone conference with counsel in mid-February 2018 to consider and make any necessary timetabling
orders in relation to next steps.
Fitzgerald J
Postscript
This judgment has been re-issued to correct a small number of typographical errors.
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