Backhaus v Baker
[2017] NZHC 1507
•30 June 2017
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2014-404-1006 [2017] NZHC 1507
BETWEEN MARK DANIEL BACKHAUS, LINDA
BACKHAUS, MAX DANIEL BACKHAUS AND ERICA ANNE BACKHAUS
Plaintiffs
AND
CHRISTOPHER BAKER First Defendant
ANDREW DAVID SIMKIN Second Defendant
GRANT THORNTON NEW ZEALAND Third Defendant
Hearing: 23 - 27 May, 30, 31 May and 1 - 3 June 2016 Appearances:
J S Cooper and N W Taefi for Plaintiffs
First Defendant in person
C T Patterson and R A Dellow for Third DefendantJudgment:
30 June 2017
JUDGMENT OF PETERS J
This judgment was delivered by Justice Peters on 30 June 2017 at 5.30 pm pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Date: ...................................
Solicitors: Jones Young, Auckland
JT Law, Wellington
Counsel: J S Cooper, Auckland
N W Taefi, Auckland
C T Patterson, Auckland
R A Dellow, Auckland
Copy for: First Defendant
BACKHAUS v BAKER [2017] NZHC 1507 [30 June 2017]
Introduction
[1] The plaintiffs, Mr Mark Backhaus, his wife Mrs Linda Backhaus, and their two adult children Max and Erica (“Mrs Backhaus”, “Max” and “Erica”), seek to recover
$600,000 in respect of two investments they made between June 2010 and February
2011. I refer to the first of these as the “Trident investment” and the second as the
“Moneylink loan”.
[2] The principal wrongdoer in the events giving rise to this proceeding is Mr John
Munro. Mr Munro is a bankrupt and is believed to be overseas.
[3] The defendants are Mr Christopher Baker, a financial adviser, and Grant Thornton New Zealand Limited (“GTNZ”), a firm of accountants. GTNZ were accountants for Mr Munro, Trident and other entities involved in the events and in due course became Mr Backhaus’s accountants, at least for some types of work.
Mr Munro’s principal contact at GTNZ was a partner then at the firm, Mr Paul
McCormick.
[4] The plaintiffs have resolved their claims against Mr Andrew Simkin, the second defendant, who was also a financial adviser at the material time. Mr Simkin paid $60,000 in full and final settlement of the claim against him, which must be recognised in due course. Mr Simkin was a witness for Mr Baker.
Trident investment
[5] Each of the plaintiffs invested in the Trident investment. Trident Capital Limited Partnership, in liquidation (“Trident”) was a limited partnership registered in June 2010 to investigate the acquisition of a loan book from Kaupthing Singer & Friedlander (“KSF”), a bank. KSF was in administration and Ernst & Young, London (“EY”) its administrators.
[6] Mr Baker introduced Mr Backhaus to the Trident investment in May 2010. The other plaintiffs were introduced to the Trident investment subsequently, with
Mr Baker’s approval.
[7] In due course, the plaintiffs purchased eight units in Trident, two each, at a total cost of $400,000. They each purchased their first unit in two instalments of $25,000, paid in June and August 2010 respectively, and their second by lump sum payments of $50,000 in February 2011.
Moneylink loan
[8] Mr Backhaus is the sole plaintiff in respect of the loan to Moneylink Group
Limited, also now in liquidation (“Moneylink”). The loan was of $200,000, made on
8 September 2010 at 10 per cent per annum, unsecured and repayable on demand. Demand was made on 1 August 2011 but the loan was not repaid.1
Events leading to litigation
[9] On 4 June 2011, GTNZ alerted Mr Backhaus to discrepancies in Trident’s financial affairs after Mr Munro had failed to provide information required to complete Trident’s financial statements.2 The BNZ froze Trident’s account for a period but removed that freeze on 22 August 2011. Some funds in the account disappeared thereafter, presumably to Mr Munro.
[10] On the plaintiffs’ application, the Court appointed Mr Damian Grant the interim liquidator of Trident on 23 August 2011, made a final order on 27 October
2011 and the Court also appointed him as liquidator of Moneylink on 13 December
2011. The plaintiffs commenced this proceeding in April 2014.
Evidence
[11] I heard evidence from Mr and Mrs Backhaus, Max and Erica, and Mr Grant the liquidator; from Mr Baker and Mr Simkin; and for GTNZ from Mr McCormick, Mr Colin de Freyne and Mr Murray Brewer, the last two being partners in GTNZ’s tax team at the time. The evidence of Mr Roger Sutherland, an investment adviser
associated with but independent of GTNZ at the relevant time, was taken as read.
1 Brief of Evidence (“BOE”) M D Backhaus dated 14 March 2016 at [87].
2 Email from M D Backhaus to GTNZ dated 4 June 2011 at Common Bundle (“CB”) 1577.
[12] The plaintiffs also called expert evidence from Mr Allen Hoffman, an authorised financial adviser, his evidence relating to the case against Mr Baker. Also, the plaintiffs and GTNZ called evidence from Mr John Hagen and Mr Keith Goodall respectively, both highly regarded expert accountants. I mean no disrespect to any of these experts but given the view of take of the legal issues it has not been necessary to refer to their evidence in detail.
[13] I address below:
(a) the causes of action pleaded against each defendant;
(b)the sequence of events as regards each investment and the matters relied on to establish liability, or the lack of it, and quantum;
(c) the plaintiffs’ case against Mr Baker in respect of the Trident investment;
(d)Mr Backhaus’s case against each of GTNZ and Mr Baker in respect of the Moneylink loan;
(e) the plaintiffs’ case against GTNZ in respect of the Trident investment;
(f) the orders that follow (c) to (e).
Pleadings
[14] The plaintiffs allege that each of Mr Baker and GTNZ is liable to them in respect of the Trident investment and Mr Backhaus likewise in respect of the Moneylink loan. The defendants deny any liability and plead several affirmative defences.
[15] On the Trident investment the plaintiffs sue each defendant for breach of fiduciary duty, in negligence and for breach of the Fair Trading Act 1986 (“FTA”).
[16] The plaintiffs also sue Mr Baker under s 56 Securities Act 1978 (“Securities
Act” – now repealed) and GTNZ for breach of contract.
[17] On the Moneylink loan, Mr Backhaus pleads two causes of action against
Mr Baker – breach of fiduciary duty and in negligence, and the same four causes of action against GTNZ.
[18] In closing submissions Ms Cooper, counsel for the plaintiffs, advised that their primary claims were for breach of fiduciary duty.
Contributory negligence/affirmative defences
[19] Mr Baker was not represented at trial but denied all claims against him. In respect of the first $200,000 paid to Trident, Mr Baker’s defence was that he was passing on information provided by Mr Munro. As to the $200,000 paid in February
2011, Mr Baker denied any knowledge that the plaintiffs intended to purchase additional units in Trident. He denied any involvement in the loan to Moneylink.
[20] If liability is established, Mr Baker pleads that the plaintiffs/Mr Backhaus were contributorily negligent. He also seeks contribution from Mr Backhaus in respect of any liability he may have on the Trident investment.
[21] GTNZ has also pleaded contributory negligence in respect of all causes of action, and that the causes of action under the FTA are out of time.3
Chronology
[22] I turn now to the chronology but several points should be borne in mind when reading it.
[23] First, Mr Backhaus had the vast majority of dealings with the defendants. In large part the plaintiffs’ claim is through him.
[24] Secondly, GTNZ had no direct dealings with any of the plaintiffs until 23 June
2010. That has implications for any possible liability that GTNZ might have on the first Trident instalments (totalling $100,000), which were paid before then.
[25] Thirdly, the plaintiffs contend that Mr Backhaus at least, if not the other plaintiffs, became a client of GTNZ from 9 July 2010. GTNZ accepts that
Mr Backhaus became a client. The issue (on the evidence, if not the pleadings) is when – July 2010 or February 2011 – and for what services.
[26] Fourthly, the plaintiffs paid their second instalments (another $100,000) and Mr Backhaus put GTNZ in funds to make the loan to Moneylink on 27 August 2010. This followed an important meeting between Mr McCormick and Mr Backhaus earlier that day at which, on my finding, Mr McCormick made two critical representations, one that Mr Munro was “reliable” and the other that the Trident investment was fully subscribed.
[27] Fifthly, it is part of the plaintiffs’ and Mr Backhaus’s case that GTNZ, through Mr McCormick, should have been on enquiry as to the propriety of Mr Munro’s activities by early October 2010 and certainly before 25 February 2011, being the date Mr and Mrs Backhaus purchased their second units in Trident. As it was, GTNZ did not inform Mr Backhaus of any concerns until 4 June 2011. However matters might appear in retrospect, Mr McCormick denied that he had deliberately closed his eyes to the various warning signs. The information that GTNZ received and when it did so is important as regards that part of the claim.
Mr Backhaus
[28] Mr Backhaus and his family are from the United States. In 1994, Mr Backhaus with others purchased the master franchise rights for Burger King in New Zealand (“BKNZ”), a start up business requiring the building and operation of Burger King outlets. Mr Backhaus had a senior role, and was responsible for acquiring sites suitable for development.4 Mr Backhaus was experienced in such (real estate) matters,
having done similar work in the United States and in Singapore where he was responsible for Burger King Corporation’s developments in the Asia–Pacific region.
[29] By September 2009, Mr Backhaus sold what was by then a 50 per cent share
in BKNZ. He was subject to particular US tax laws for a year after sale, these laws affecting several decisions he took in the period in dispute. Mr Backhaus ceased to be subject to these laws by mid-September 2010.
[30] I am satisfied that at the time of the events in issue Mr Backhaus (but not his family) was experienced in business matters including the need to undertake due diligence and obtain professional advice as required. For instance, whilst he had an interest in BKNZ, the company had acquired a 50 per cent interest in the same business in Australia, as well as another franchise, Hell Pizza. Mr Backhaus had also made investments in three private companies.5 Mr Backhaus had obtained accounting and tax advice from Deloitte and Mr Keith Young, a commercial lawyer in Auckland, since
2002.
Messrs Munro and Simkin
[31] Mr Baker introduced Mr Backhaus to Messrs Munro and Simkin in March 2010. Mr Baker was a financial adviser at the time and was holding himself out as such.
[32] Mr Baker’s career in the financial sector has/had spanned 40 years. He had been Mr and Mrs Backhaus’s “personal banker” at the ANZ for eight years to December 2008, dealing with matters such as their mortgage lending and credit cards.
Mr Backhaus did not invest in any investment that Mr Baker offered him during this period. Mr Baker re-established contact with Mr Backhaus after learning that he had sold his interest in BKNZ, asking if he were “interested in investments” which
Mr Backhaus was.6
[33] In early 2010, Mr Baker asked whether Mr Backhaus wished to meet
Mr Munro in respect of a potential investment opportunity, then referred to as
5 BOE M D Backhaus, above n 1, at [6].
6 NOE 18.
Interbank, subsequently Integris (as I shall refer to it).7 Mr Munro was seeking to launch this company, the purpose of which was to extend credit to exporters, and
Mr Simkin, another former ANZ employee, had a mandate to seek finance for the company. Mr Simkin contacted Mr Baker as he had “a good client base of investors”.8
[34] I accept Mr Backhaus’s evidence that Messrs Baker and Simkin introduced
Mr Munro as an expert in trade finance with many years experience and conveyed that they knew Mr Munro well and that he was trustworthy.9 This was despite Mr Simkin having only one prior dealing with Mr Munro and Mr Baker none.
[35] The discussions regarding Integris took place in March and April 2010.
Mr Backhaus was not willing to invest as much as $2 million. However, he explored the proposal fully. He reviewed drafts of a detailed Information Memorandum, cashflow projections prepared by GTNZ, and drafts of a share subscription agreement. Mr Backhaus also had a meeting with a Mr Mills who was to be involved in the business, and he took tax advice, and legal advice from Mr Young.10
Acquisition of first unit in Trident
[36] Mr Baker introduced the Trident investment to Mr Backhaus on 17 May 2010, as follows:11
Hi Mark
Herewith background to the purchase of the KSF loan book.
The UK people we are dealing with on this project are Barclays Bank, the administrators CAs – Thorntons UK and lawyers.
Due diligence starts Monday.
The potential is to swap the loan book with the Bank of England at the book value and negotiate with the administrators for a lesser sum, potentially as much as 20%. This would be attractive to the administrators because we would give them an earn out opportunity.
7 NOE 19.
8 NOE 335.
9 BOE M D Backhaus, above n 1, at [10].
10 NOE 20 21, 81.
11 Email from C L Baker to M D Backhaus dated 17 May 2010 at CB 333.
The surplus funds generated would offer substantial opportunity, all sorts of margin open up on this deal.
Talk tomorrow
Cheers
Chris
[37] The background information referred to a draft Information Memorandum (“IM”) and a “Report to Creditors” by EY, to 7 April 2010. EY’s report referred to a proposed sale of KSF’s loan book.
[38] The IM said:
• that it was proposed to create a New Zealand limited partnership of
12 “habitual” investors to acquire the part of KSF’s loan book secured against large yachts and aircraft, the book value of those loans being
£250,000,000;
•“initial investigations” showed an opportunity to acquire the book “at a deep discount to book [value]”, with “substantial upside potential” to an acquisition;
•that an offer had been tendered to the Administrators, subject to due diligence to be completed by 28 May 2010 and the entire acquisition to be completed by 30 June 2010 if it proceeded;
•each partner in the limited partnership was to subscribe $125,000 payable in instalments;
•up to $10,000 of a partner’s first instalment was to be at risk if the acquisition did not proceed; and
•Messrs Munro, Baker and Simkin had “agreed to act” for the general partner.
[39] However implausible such a proposal might appear now – and it appears to have been a complete sham – it did not appear so at the time to professionals familiar with it, such as Mr McCormick.
[40] Mr Baker acknowledged in evidence that he had no knowledge of the truth of any of the matters in the IM, or that referred to below. Nor had he any dealings in the firms referred to in his email of 17 May 2010, or whether the “potential”, “opportunity” was as he said. Mr Baker’s evidence was that Mr Munro drafted the IMs, although he saw them before they were sent.
Final information memorandum
[41] On 3 June 2010, Mr Baker sent Mr Backhaus what became the final version of the IM. The revised proposal was for:12
•20 units at $50,000 each payable in two instalments of $25,000. The reduced cost per unit reflected difficulty in finding investors;
•each partner to be at risk for up to $5,000 in due diligence costs if the deal did not proceed;
•due diligence had been completed on 28 May 2010, with Moneylink having funded $100,000 of the costs and “Grant Thornton International” having been involved. There is no “Grant Thornton International”; and
•subsequent capital calls were to occur if certain “milestones” were achieved but a call for the second instalment could be expected on
14 July 2010.
[42] On 9 June 2010, there was a meeting between Messrs Backhaus, Munro, Simkin and Baker. Mr Baker accepted in evidence that the purpose of this meeting
was to encourage Mr Backhaus to invest.13 By this time, Mr Backhaus had asked
12 Email C L Baker to M D Backhaus dated 3 June 3010 at CB 590.
13 NOE 218.
Mr Baker if the other plaintiffs were “qualified” to invest, and Mr Baker had confirmed that they were.14 Mr Backhaus’s evidence was that he relayed to the plaintiffs “the main features of the investment which were set out in the [IM]”, including that only $5,000 was at risk. He told them that the investment had a “very good rate of return” and that “Chris Baker ... from the ANZ would be looking after this investment”.15 The other plaintiffs confirmed this evidence. Mr Baker knew the other plaintiffs were going to invest but said he did not know how much information
Mr Backhaus had provided them.16 Mr Baker must have expected Mr Backhaus to
relay everything Mr Baker had told him. I am satisfied Mr Backhaus informed the other plaintiffs of the material statements made to him.
[43] Mr Baker made several representations to Mr Backhaus at the 9 June meeting
that are critical to the plaintiffs’ claim against Mr Baker. He said he and Mr Simkin would be directors of the general partner (“TCAML”), would “look after” the limited partners, that partners’ funds would be in a bank account under their control, that no more than $5,000 per partner would be at risk, and that GTNZ would manage or “keep track” of the funds.17 All of these statements were or proved to be false. In cross- examination, Mr Baker accepted that he knew Mr Backhaus was relying on what
Mr Baker had told him and expected him to take those statements into account in deciding whether or not to invest. I consider that must apply equally to the other plaintiffs.18
[44] The following day, 10 June 2010, Mr Baker left a voicemail message for
Mr Backhaus, the relevant part of which was:19
Mark, Chris Baker ... we have basically got 27 units committed now, including your four. We have got to get things tidied up – the documentation. We believe the discussions that you’ve got with your advisors, the documentation and the structure is appropriate for individuals, whether that is in joint names or individual names. We would just like to discuss with you getting those documents signed in individual names and we can wait for a day or two for the funding to come though because we are at a stage where we are getting
14 NOE 27.
15 BOE M D Backhaus, above n 1, at [30] and [31].
16 NOE 228.
17 NOE 105.
18 NOE 218.
19 Transcript of Voice Messages at CB 3.
pressured from other unit holders, potential unit holders to settle and get things organised. Just give me a call, or John. Cheers Mark
[45] There were not 27 committed units. There were 10 including the plaintiffs. Mr Baker’s evidence was that he was relaying information from Mr Munro, but he did not say that in the message. Mr Baker knew it was important to the plaintiffs that the investment was fully subscribed before they agreed to invest.20 Mr Baker’s voicemail message assured them that it was.21
Execution of limited partnership agreement
[46] Each plaintiff executed a limited partnership agreement (“LPA”) at a meeting with Mr Munro and Mr Baker on 13 June 2010. Mr Baker was present because he was advising the plaintiffs, and he witnessed the plaintiffs’ signatures as “advisor”.22
[47] The partnership commenced on registration (14 June 2010) and was to continue indefinitely.
[48] Clause 10.2 required the general partner, TCAML, to report to each investor on the conduct and performance of the partnership and provide unaudited financial statements at each quarter, and audited annual statements at year end. Trident and TCAML engaged GTNZ to prepare these statements. In fact they were never prepared. It was Mr Munro’s repeated failure to provide information that brought matters to a head.
Payment of first instalments
[49] On 14 June 2010, Mr Munro sent Mr Backhaus details of the account (“Christchurch account”) into which the plaintiffs should pay their first instalments, as they and all other investors did. As it turned out, Trident had two bank accounts.
Mr Baker and Mr Simkin controlled the Auckland account. Mr Munro had sole control of the Christchurch account. Neither Mr Baker or Mr Simkin received
statements on the Christchurch account.
20 NOE 219.
21 BOE M D Backhaus, above n 1, at [33]; and BOE L L Backhaus dated 14 March 2016 at [10].
[50] Although Mr Munro copied his email to Mr Baker and Mr Simkin that same day, neither informed the plaintiffs that they did not control the Christchurch account. Mr Baker said he and Mr Simkin considered Mr Munro’s actions:23
… unsatisfactory as we promised that the funds would be in a jointly controlled account … there was confusion over whether the funds should be in the [limited partnership’s account or TCAML’s account] … we monitored
… the balances in the BNZ Christchurch account to make sure that the funds weren’t disappearing … but that’s all we could do, we had no idea of other transactions in that account.
[51] Mr and Mrs Backhaus paid their first instalments on 14 June 2010 and Max and Erica on 16 June 2010 – $100,000 in total. The plaintiffs might not have paid these funds, alternatively retrieved them, had Mr Baker or Mr Simkin informed them of the correct position, which they did not. On the evidence there would have been no diminution in these funds until 18 June 2010, and even then the diminution would have been minimal – $15,000 shared by 6 investors, so 10 percent – to 30 June 2010.
[52] Thereafter, Trident paid various fees to each of Mr Baker and Mr Simkin. This included brokerage on the plaintiffs’ June and later their August instalments. Mr Munro had also promised Mr Baker a unit in the partnership, if the acquisition proceeded.24
Moneylink loan
[53] I turn now to the Moneylink loan which came next in time. Mr Backhaus’s primary argument on the loan is that he was a client of GTNZ and it was advising him on the loan and that GTNZ owed him (fiduciary) duties either to state clearly that they had a conflict of interest and recommend he take independent advice or to disclose all material information to him. GTNZ did neither and, on Mr Backhaus’s case, is liable for the $200,000. The material but undisclosed information was that Mr Munro and at least one of his companies – Seaward Securities Limited (“Seaward”) – were in
financial difficulty.
23 NOE 191, 192.
[54] Mr McCormick’s stance was that Mr Backhaus was not a client of GTNZ, that he acted for Mr Munro and not Mr Backhaus and that Mr Backhaus and Mr Munro settled the terms of the loan between themselves and without reference to him. In the course of cross-examination, Mr McCormick admitted that by the time the loan was actually made he was acting for both parties to the Moneylink loan.25
[55] The loan was the culmination of discussions which commenced shortly after the plaintiffs had paid their first instalments to Trident and continued until late August
2010. Mr Munro asked Mr Backhaus to lend money to Integris, the company referred to in [33] above, which Mr Backhaus understood “was still going ahead with the trade finance plan”.26
[56] Two quite different proposals were considered before the terms of the loan were agreed. One required an investment of $2 million. The second was a loan of
$500,000. Mr Munro was overseas for much of the time.
Mr Backhaus’s introduction to GTNZ
[57] Mr McCormick had been Mr Munro’s accountant since at least 2003.27 GTNZ had incorporated at least nine companies for him and had registered the Trident limited partnership and TCAML. GTNZ’s offices were the registered office for most if not all of these companies. GTNZ had been engaged by Trident and TCAML to act as their accountants and business advisors.28 On 1 June 2010, Mr McCormick signed a letter on GTNZ letterhead “To whom it may concern”, advising of GTNZ’s engagement “as accountants, including tax and corporate advisory” for Trident and TCAML, in advance of the “proposed acquisition of the UK domiciled [KSF] aviation and marine loan book”.29 The letter was drafted by Mr Munro, apparently with the aim of attracting investors. There is no evidence that the plaintiffs saw the letter, but
Mr Backhaus knew that GTNZ was to be involved.
25 NOE 492.
26 BOE M D Backhaus, above n 1, at [45]
27 NOE 415.
28 GTNZ Letter of Engagement at CB 573.
29 GTNZ Letter of Engagement at CB 565.
[58] Although Mr Backhaus’s accountants at the time were Deloitte, at Mr Munro’s suggestion, on 23 June 2010, Mr Backhaus attended what all agreed was an “introductory” meeting with Mr McCormick and Mr de Freyne, a tax partner of GTNZ. Mr Munro was also present.
[59] Mr McCormick’s handwritten notes of the meeting record that Mr Backhaus said he required an “investment strategy” and tax advice, referred to several current investments that he had, that Mr Backhaus was presently “currency trading” and that he was “looking for investments”.30 Mr Backhaus also referred to Max and Erica and said they were likely to live in the US.
[60] Mr Backhaus’s evidence was that while he would not:31
... immediately move all my tax files from Deloitte as they were working on resolving an outstanding US tax issue for me, and I didn’t want to disrupt that, but I indicated that I would do so once that issue had been resolved. I gave them all my financial information for the purpose of getting an estimate of what it would cost if I moved my accounts to Grant Thornton. I also wanted to get a feel for whether they could deal with the international tax aspects of my financial affairs. They assured me that they had the expertise to be able to assist me. It was agreed that that Murray [Brewer] and Colin [de Freyne] would provide me with tax advice, initially in conjunction with Deloitte, and that Paul [McCormick] would provide me with business and investment advice ...
[61] This last point of Mr Backhaus’s evidence – that Mr McCormick would provide investment advice – is disputed. Mr McCormick denied any such agreement. It was not GTNZ’s practice to provide such advice and it had an arrangement in place to refer such work to Mr Sutherland (see [11] above).
[62] Three weeks later, on 9 July 2010, Mr de Freyne prepared and sent
Mr Backhaus a written proposal to provide professional services. This document requires discussion later in the judgment but for reasons given below, I accept GTNZ’s submission that it did not include an offer to provide Mr Backhaus with investment
advice.
30 NOE 449, 450.
31 BOE M D Backhaus, above n 1, at [39].
$2 million proposal
[63] In late June/early July 2010, Messrs McCormick, Munro, Baker and Simkin were meeting to discuss how Integris might be funded.32 They settled on a share issue, and Mr Munro’s first proposal was that Mr Backhaus or his company, Pacific Brands Limited (“Pacific Brands”), would underwrite the share offering by:33
... [placing] an additional $2 million of capital in Trident to underwrite the pending issue of a prospectus for Integris, for which Trident was to hold 30% of the equity ...
[64] To put Integris in funds to pay associated costs, $50,000 was transferred from the Christchurch account to Integris on 1 July 2010.34 This was done under the guise of a fee by Trident for an option to take the equity stake. Mr Baker knew this transfer of what were investors’ funds was improper and carried with it the risk of loss, as appears from his email to Messrs Munro and Simkin of 1 July 2010:35
Hi John & Andrew,
Further to discussion re equity stake in Integris by Trident LP (TLP). As Directors we should be matching our risks.
1. Mark’s funds are not able to be repaid in 120 days by TLP other than from the potential funds emanating from Integris prospectus or KSF funds.
2. Trident LP at risk because we have funded Integris thru TLP and TLP
does not have the ability to repay.
3. TLP does not have ability to fund balance of unpaid capital in Integris without successful KSF.
4. TLP term sheet implies funding for seed capital for obtaining projects. We should cancel the $50,000 cheque to Integris and proceed with Mark on a
basis that does not risk TLP.
Your thoughts, please. Cheers
Chris
32 NOE 446, 447.
33 BOE M D Backhaus, above n 1, at [45].
34 NOE 334.
35 Email C L Baker to J Munro and A D Simkin dated 1 July 2010 at CB 961a.
[65] Mr Simkin agreed as follows by email to Mr Munro and Mr Simkin the same day:36
… I agree that we need to keep to the spirit of the original memo. That was we put only $5k of their money ‘at risk’ until after the due diligence is done and a binding Memorandum of Agreement is in place. As per page 5 of the memo, total expenses under call 1 are limited to $100k or $5k per LP.
On this basis until there is a documented MOA I don’t believe we can do the
2nd call.
We therefore can’t commit the TLP money to other activities at this juncture.
...
I am not sure of how we document MB - LP - TLP - Integris?
[66] Neither Mr Baker nor Mr Simkin informed Mr Backhaus of the payment and the $50,000 was never repaid to Trident.
[67] On 29 June 2010, Mr Backhaus had a meeting with Mr McCormick about the proposal and the US tax issues to which it might give rise, following which there was further negotiation of the proposed terms between Messrs Munro, Backhaus, Simkin and Baker.37 The possibility that Trident would hold a 30 per cent stake in Integris does not appear to have concerned Mr Backhaus, although it was a far cry from the proposal in the IM.
[68] P, another investor that Mr Baker had introduced to Trident, had objected to any suggestion that Trident might be free to embark on some other venture if it did not acquire the KSF loan book. By emails to Mr Baker from 1 July 2010, P made it clear that he wished to have his investment refunded and he began to question whether the KSF proposal had ever existed. Ultimately, when P could no longer be kept at bay,
Mr Baker personally guaranteed to repay him. As it turned out Trident, not Mr Baker,
repaid P his $25,000 on 25 January 2011, from funds in the Christchurch account.
36 Email A D Simkin to C L Baker and J Munro dated 1 July 2010 at CB 960.
37 Emails between A D Simkin, M D Backhaus, C L Baker and J Munro dated 5 and 6 July 2010 at
CB 962 – 965.
[69] Messrs Backhaus, Munro and McCormick met for further discussions for approximately two hours on 16 July 2010.38 As Ms Cooper for the plaintiffs pointed out, this was a lengthy meeting and must have involved a thorough discussion of what was proposed.
[70] Ultimately, Mr Backhaus declined the $2 million proposal. His evidence was that, aside from anything else, his resources were limited until 15 September 2010 when he could invest the proceeds of sale of BKNZ with impunity.39
$500,000 proposal
[71] The second proposal was that Pacific Brands would lend $500,000 to Moneylink, which Moneylink would apply to acquire redeemable preference shares in Integris. Buddle Findlay as Integris’s solicitors were to retain $350,000 in escrow, with Integris to apply the balance as working capital.
[72] This proposal was outlined in an email from Mr Munro to Mr McCormick dated 28 July 2010, which Mr McCormick then sent to Mr Backhaus and suggested they discuss the next day, which they did.40 Mr McCormick said they discussed whether Mr Backhaus was “going to go ahead with the loan”, but denied advising Mr Backhaus or encouraging him to do so. Mr McCormick was unable to explain why he, rather than Mr Munro, was communicating with Mr Backhaus.41 Mr McCormick said he did not advise Mr Backhaus “on the details” and said he had no “[input into] the commercial aspects of the various things that were happening”, which he considered were settled between Mr Munro, Mr Backhaus and Buddle Findlay.42
Mr McCormick’s evidence was that:43
... While we were happy to assist with accounting aspects of the investment for John’s company, and give effect to Mark’s wishes if he chose to invest, it was Mark’s decision whether to invest or not.
38 Email chain between A D Simkin, J Munro and M D Backhaus dated 6 July 2010 at CB 963.
39 NOE 111.
40 Email from P J McCormick to M D Backhaus dated 28 July 2010 at CB 990.
41 NOE 463.
[73] In contrast to Mr McCormick’s evidence, Mr Backhaus said that
Mr McCormick “encouraged me to go ahead” and that he “felt [Mr McCormick] was pushing me to lend the funds and was being very persistent about it”.44
[74] On several occasions Mr Backhaus referred to being pressured and pushed to make the loan, and particularly by Mr McCormick. Even if this were correct,
Mr Backhaus had shown himself capable of rejecting other proposals, including the initial investment proposed in March 2010 and the more recent one of $2 million. He had not rushed to invest in Trident and as appears below he rejected this $500,000 proposal.
[75] Shortly after this, on 2 August 2010, Buddle Findlay sent Mr Munro and
Mr McCormick draft legal documents in respect of the $500,000 transaction.45 Again, it was Mr McCormick who sent those documents to Mr Backhaus saying:46
… The attached draft documents are those that are required to give effect to the advance you are currently contemplating to fund Integris. These will give you more idea of the securities etc that are available. Please feel free to discuss this with John or myself if you wish. I am also conscious that you are away shortly – do you think you will be in a position to make a call on this before then?
[76] The reference to Mr Backhaus being “away” was to the fact that he was to be overseas for a month from the end of August 2010. Mr McCormick said he was not giving Mr Backhaus “a bit of a hurry up” but simply pointing out that his trip imposed a timeframe if he wished to proceed before he went away.47 Ms Cooper asked the same questions of Mr McCormick about why he was communicating directly with Mr Munro, and got the same answers.48 Mr McCormick accepted that by offering to discuss the proposal with Mr Backhaus he was holding himself out as being in a position to do just that. Mr McCormick’s explanation was that he intended to “assist
if [Mr Backhaus] needed it” by “[trying] to interpret what [the documents] were”.49
44 BOE M D Backhaus, above n 1, at [48].
45 Letter Buddle Findlay to J Munro dated 2 August 2010 at CB 1000.
46 Email P J McCormick to M D Backhaus dated 3 August 2010 at CB 1038.
47 NOE 465, 466.
[77] Buddle Findlay’s documents included a deed of acknowledgment of debt that set out the terms in [71] above. This draft is much more comprehensive than the deed that was ultimately executed which did not require Moneylink to apply the funds for any particular purpose. The deed also provided for Mr Munro to guarantee repayment and to give an unregistered mortgage over a property he was said to own.
[78] Messrs Munro, McCormick and Backhaus met for two hours on 12 August
2010 which Mr McCormick recorded as being about “investing $500k, documentation, call [Buddle Findlay] re updates, etc”. In cross-examination,
Mr McCormick agreed that he was “fully aware of what was being proposed” at the time and was “an active participant” in the two hour meeting.50 On 12 August 2010, Buddle Findlay sent a “re-draft of the documents” to each of Mr Munro,
Mr McCormick and Mr Backhaus, following “our discussions of earlier today”.51 A
variation followed the next morning, following a direct request from Mr Munro.52 By this time, the advance was to be the US$ equivalent of NZ$500,000, interest was to be paid at 25 per cent per annum, and Integris was a party.
GTNZ fees
[79] At the same time, Mr McCormick was corresponding with Mr Munro in an attempt to get Mr Munro to pay fees that he or his companies owed GTNZ, totalling
$26,500. Some had been outstanding since April 2009 and GTNZ had been seeking payment for several months.53 Mr Munro “was always paying next month”.54 On
6 August 2010, Mr McCormick sent Mr Munro an email headed “HELP”, saying:55
... I have been telling the team for several months now that you are paying next week / next month based on the discussions we have had. This won’t wash again ...
50 NOE 467.
51 Letter Buddle Findlay to J Munro, P J McCormick and M D Backhaus dated 12 August 2010 at
CB 1103.
52 Email J Munro, P J McCormick and M D Backhaus dated 13 August 2010 at CB 1089.
53 Emails GTNZ and J Munro regarding payments dated 30 June and 8 July 2010 Supplementary
Bundle (“SB”) at 14 and 15.
[80] Mr McCormick said that there would be a “stop work” on all accounts and related entities, including “Trident [and] Integris”, if the bills were not paid. All this resulted in was a payment of approximately $3,300.56
[81] Mr McCormick had also received an enquiry regarding Mr Munro from Grant Thornton Isle of Man on 29 July 2010. His response was that Mr Munro had been a client for a number of years, had been involved in a number of projects, and that:57
We have found him to be very honest and ‘straight up’ although he has been tardy in paying our fees. We have always collected but not without some delay. I suggest you request funds up front for any work you may do. Otherwise I am not aware of any reason why you should not engage with him.
Advice from Deloitte and Mr Young
[82] On 13 August 2010, Mr Backhaus sought advice from Deloitte and from
Mr Young.58 There is no evidence as to the nature of Deloitte’s advice. However,
Mr Young advised Mr Backhaus not to proceed with the transaction.59 His opening words were “Three words. No, No, No”. Mr Young’s overall objection was Pacific Brands’ inability to compel the events that would be required to bring about repayment, such as Integris redeeming its shares and, if it did, Moneylink repaying Pacific Brands.
[83] Mr Backhaus emailed the advice to Mr Munro who relayed it to Messrs McCormick, Baker and Simkin. Mr McCormick emailed his comments to Mr Munro. There was no evidence that Mr Munro sent it to Mr Backhaus but presumably he relayed the essence of it.
[84] Much of Mr McCormick’s response was that Mr Young’s advice did not reflect commercial realities and he said several times “at the end of the day Mark still has your personal guarantee and [a mortgage of] your house”, and he also said that Mr
Backhaus needed to make a “risk/reward assessment”. Regardless, Mr McCormick
56 Email J Munro to P J McCormick dated 8 August 2010 at CB 1080
57 Email P J McCormick to Grant Thornton Isle of Man dated 29 July 2010 at CB 992.
58 BOE M D Backhaus, above n 1, at [51].
accepted that by this email he was “getting involved in a discussion with Mr Munro about the commercial merits of the deal”.60
Directors
[85] The upshot of Mr Young’s advice was that Mr Backhaus was to become a director of Moneylink, which Mr McCormick acknowledged would be so he could have “some control” over how the funds were spent.61 Mr Backhaus’s evidence was that as a director he “could have access to the accounts and some transparency as to how the funds were spent” but he “could not be a signatory on the account ... for US tax and compliance reasons” and that he relied on GTNZ to have “visibility” of the funds.62
[86] As Mr Backhaus said in evidence, GTNZ was to and did receive Moneylink’s bank statements but I am not persuaded that provides grounds to expect GTNZ to monitor the use of the funds. Mr McCormick’s evidence, accepted by both Mr Hagen and Mr Goodall, was that receipt of bank statements simplifies preparation of financial statements and in GTNZ’s case they went to an employee who accumulated them, quite possibly unopened, until year end. Both experts said this was the normal course.63
The Moneylink loan
[87] By 27 August 2010, Mr Munro and Mr Backhaus had agreed that the latter would make a loan to Moneylink of US$175,000 or the NZ dollar equivalent, say
$250,000 at the time, at 10 per cent per annum, repayable on demand.64
[88] Mr Backhaus decided he “just wanted to do a simple loan that could be basically called at any time” and that he:65
... insisted that John actually contribute some capital (of $250,000) to
Moneylink, and that I would match the funds. I thought that if matching funds
60 NOE 469, 470.
61 BOE M D Backhaus, above n 1, at [52]; and NOE 484.
62 NOE 30.
63 NOE 637.
64 Email J Munro to M D Backhaus dated 27 August 2010 at CB 1151.
65 BOE M D Backhaus, above n 1 at [53].
were provided by John then the repayment of my money would be covered. The share issue idea was abandoned.
[89] Mr Backhaus was to become a director of Moneylink when the funds were advanced. He did not become a signatory on Moneylink’s bank account because this would have required him to “do filings in the US and to have a phenomenal amount of accounting work ... and if there was matching funds provided by John there would’ve been adequate funds in there to help pay me back”.66 However,
Mr Backhaus did not explain how this would give him any security. It could only do
so if someone was controlling the funds either with or instead of Mr Munro and
Mr Backhaus made no arrangements to do that.
[90] By the time of his meeting with Mr McCormick, Mr Backhaus had executed the deed of acknowledgment of debt. The deed did not require Moneylink to apply the funds for a particular purpose and it made no provision for security. Mr Backhaus said that he was under pressure from Mr Munro and Mr McCormick to make the loan before he went away the following day.67 Mr McCormick denied this.68 As I have said, I do not consider Mr Backhaus would have bowed to pressure. I am satisfied that he wished to complete the matter before he went away.
[91] At the meeting, Mr Backhaus asked Mr McCormick the two questions to which I referred in [26] above. In fact, Mr Backhaus asserts that he asked more than that, an assertion I shall consider later. For the moment it is enough to say that I accept
Mr McCormick represented that his experience of Mr Munro had been that he was reliable.
[92] After the meeting Mr McCormick emailed Mr Backhaus the details of GTNZ’s trust account into which Mr Backhaus was to deposit his funds for the loan. Mr McCormick asked for instructions as to “the terms of the payment out of these monies”.69 Mr Backhaus arranged for the transfer of $250,000 to the trust account.
He then sent the following email to GTNZ, Deloitte and Buddle Findlay:70
66 NOE 30.
67 NOE 31.
68 NOE 466.
69 Email P J McCormick to M D Backhaus dated 27 August 2010 at CB 1150.
70 Email M D Backhaus to P J McCormick dated 27 August 2010 at CB 1174.
Hello Paul, Darren and Mark,
I have asked Paul McCormick to set up a trust account for myself to hold the
$250,000NZD which I have asked ANZ to transfer [to GTNZ’s trust account]. Please release funds [to Moneylink] when funds from Moneylink (John Munro) $250,000 NZD or USD equivalent have also been deposited at an equal amount are confirmed.
Please make note of the attached signed Deed of Acknowledgment of Debt. Please confirm when the Trust account funds arrive and when John Munro
deposit[s] and matching funds have been made. Please also send signed copy
of executed agreement after John Munro has signed.
...
[93] Mr McCormick responded to this:71
Hi Mark
All understood, I will be in contact as requested.
[94] Mr Hagen’s opinion was that such a transaction, that is holding monies in trust, would only be undertaken for a client.72 Mr McCormick rejected that and said it was commonplace for firms to hold money in trust for third parties. I am not persuaded that Mr Hagen’s evidence is determinative but, whatever else might be said, the fact that Mr Backhaus remitted the funds to GTNZ evidenced that he trusted them to comply with his instructions regarding payment out. I do not think the point can be taken further than that.
Call for payment of second instalment to Trident
[95] On 23 August 2010, Mr Munro had sent the plaintiffs a “Partnership Progress Report” and given notice to them, and them alone as it turned out, to pay their second instalments.73 The report referred to statements in the IM that the second instalment would be called at the time of execution of a Heads of Agreement with EY but stated
that prevailing market conditions required immediate payment.
71 Email P J McCormick to M D Backhaus dated 28 August 2010 at CB 1174.
72 BOE in Reply J C Hagen dated 18 May 2016 at [8].
73 Partnership Progress Report dated 20 July 2010 at CB 980.
[96] Mr McCormick knew that Mr Munro proposed to make a call on investors to pay their second instalment and Mr Baker likewise.74
[97] Mr Baker criticised the plaintiffs for paying the second instalments given the lack of any evidence of progress and the absence of any statement that the required “milestones” had been achieved. I do not consider the plaintiffs were at fault in taking the report at face value and paying the second instalments. Mr Baker could have warned them not to if he wished. That said, having been asked to pay the second instalment, the plaintiffs must have proceeded on the basis that the $5,000 cap on loss no longer applied. There would be no point in asking for the second instalment if
$20,000 of the first one remained intact.
What was said at the meeting on 27 August 2010
[98] The plaintiffs allege that at the meeting on 27 August 2010, Mr Backhaus asked
Mr McCormick:75
30.At that meeting, Mr Backhaus Snr specifically asked Mr McCormick if he thought that Mr Munro was reliable, whether he could make the advance to Moneylink Group, and whether Moneylink Group would be able to repay the loan Mr Munro sought to have Mr Backhaus Snr make to it. Mr McCormick assured him that Mr Munro was reliable and that Moneylink Group would be able to repay the advance as he had been doing business with them both for a number of years (the Moneylink representation).
46.At that meeting, Mr Backhaus Snr asked Mr McCormick for details of the other investors in Trident. Mr McCormick said that the information was confidential but pointed to a large pile of documents and said that they were the investor applications/partnership agreements for Trident, thereby implying that there were a number of investors and that it was fully subscribed.
[99] GTNZ makes confined admissions in respect of both of these allegations.
[100] In so far as concerns the evidence given at trial, there is no real dispute about what was asked regarding Trident or Mr McCormick’s response. Mr Backhaus’s
evidence was that he asked Mr McCormick:76
74 NOE 235, 500.
75 Fourth Amended Statement of Claim dated 31 May 2016 at [30] and [46].
76 BOE M D Backhaus, above n 1, at [57].
… about the identity of the other investors in Trident and whether the investment was fully subscribed (I already understood that it was but was seeking confirmation of this). [Mr McCormick] told me that the information was confidential but he pointed to an approximately 10 cm high pile of documents on his desk and said they were the investor applications and partnership agreements for Trident.
[101] Mr McCormick agreed that he had pointed to a pile of LPAs in answer to
Mr Backhaus’s question, accepted that he had told Mr Backhaus the information was confidential, even though it was not and that the plaintiffs’ decision to pay their second instalments might be affected by whether the investment was fully subscribed.77 In the circumstances, Mr McCormick’s conduct was a representation to Mr Backhaus that the investment was fully subscribed and I accept that the plaintiffs relied upon this when they paid their second instalments.
[102] As to Moneylink, Mr Backhaus’s evidence was that he asked
Mr McCormick:78
Is John Munro reliable? And he said, Yes.
And that he asked this:79
… because, unlike Trident where [Mr Baker] and [Mr Simkin] had oversight over the accounts (or so I had been told), Moneylink was John’s company, and I needed to know whether John was reliable…
[103] Mr Backhaus also said (and it is agreed) that Mr McCormick told him Grant Thornton had dealt with Mr Munro and his companies for several years, had been involved in a variety of ventures in diverse areas, and that he “was not aware of anything untoward about Mr Munro or his companies”.80 Mr McCormick also accepted that the reason he was being asked was because he had acted for Mr Munro for a long time and would have known Mr Munro’s prior history.81 Mr McCormick
did not tell Mr Backhaus that he had a conflict of interest, or that he was unable to
77 NOE 503, 504.
78 NOE 114.
79 BOE M D Backhaus, above n 1, at [55],
80 NOE 115, 116, 485, 487.
disclose information about Mr Munro and he did not advise Mr Backhaus to seek independent advice.82
[104] Although he agreed the question as to reliability was asked, Mr McCormick denied saying that Mr Munro was reliable.83 In his evidence in chief, Mr McCormick said that he gave Mr Backhaus the same answer that he had given Grant Thornton Isle of Man (see [81] above), which he described as:84
… that GTNZ had dealt with John and his companies for several years as clients and that he had been involved in a variety of ventures in diverse areas, not all of which had been successful, and that while John was a slow payer of our invoices, I was not aware of anything untoward about him or his companies.
[105] Under cross-examination, however, Mr McCormick agreed that he had essentially told Grant Thornton Isle of Man “not to extend credit” and that was not what he said to Mr Backhaus.85 Moreover, the statement that he was not aware of anything “untoward” was incorrect because he knew that Seaward was in financial difficulty and Mr Munro as a result.86
Seaward
[106] Seaward owned land in Auckland. It had defaulted on its mortgage to the BNZ and in April 2010 the BNZ had served notice, at GTNZ’s offices, demanding more than $360,000.87 Mr McCormick acknowledged that it was likely Mr Munro had personally guaranteed repayment of the BNZ’s loan.88 To compound matters, as recently as 23 August 2010 Mr McCormick had a discussion with Mr Munro regarding the second mortgagee who Mr McCormick thought may have been requiring repayment.89 In addition, Seaward was likely to face a substantial GST liability, and
it had not filed a tax return since 2005.90
82 NOE 490.
83 NOE 485.
84 BOE P J McCormick, above n 43, at [53].
85 NOE 485, 486.
86 NOE 488.
87 Demand from BNZ to Seaward Securities Ltd at CB 321.
88 NOE 488.
[107] Mr McCormick’s evidence was that he “told it how he saw it” and that he was focusing on Moneylink when he answered. I do not accept that evidence because how Mr McCormick saw it was that Mr Munro was not paying his bills. Regardless, whatever words were used, I am satisfied that Mr McCormick represented that his experience, over many years, had been that Mr Munro was reliable which, given the context of the discussion, conveyed that Mr Munro met his financial obligations. I accept that Mr Backhaus relied on this statement in making the loan and that he would not have made the loan if Mr McCormick had said that Mr Munro was a slow payer or that some of Mr Munro’s ventures had been unsuccessful.
[108] Mr Backhaus also gave evidence that he asked whether “Mr Munro would be able to lend equivalent funds to Moneylink and whether Moneylink would be able to repay”, and that Mr McCormick said that Moneylink would be able to repay.91 I do not accept this question was asked. Mr McCormick could not recall it. But even if it were asked, I accept Mr McCormick’s evidence that the only answer he could have given was that he did not know, as Moneylink was a shell company.92 Mr Backhaus would have known that Moneylink’s ability to repay would depend on its financial position at the time of demand, and he also knew that Moneylink had a nil balance in its account at the time of the loan.93 That is one of the reasons Mr Backhaus wished
Mr Munro to make an advance.
Matching funds
[109] On the face of it Mr Munro did advance funds to Moneylink. On 8 September
2010, Mr Munro gave Mr McCormick a bank cheque for $200,000 – not $250,000 or other NZ$ sum equivalent to US$175,000. As later became known, Mr Munro’s funds derived from Trident’s Christchurch account, and in large part from the plaintiffs’ first and second instalments.
[110] Mr McCormick transferred the funds and $200,000 of Mr Backhaus’s funds to
Moneylink and registered Mr Backhaus as a director. He advised Mr Backhaus of
91 BOE M D Backhaus, above n 1, at [55]
these matters and Mr Backhaus gave him instructions as to where his remaining
$50,000 should be paid.94
[111] Mr McCormick did not ask Mr Munro about the source of the $200,000, or how he was able to produce such an amount when he was unable to meet his other debts to the BNZ or GTNZ. GTNZ’s invoices were still unpaid and ultimately were written off.95 Mr McCormick denied any knowledge that he knew the funds had come from Trident.96
[112] Once the funds were deposited in Moneylink’s account, Mr Munro
immediately withdrew $200,000 and repaid it to the Trident Christchurch account.
[113] Mr Backhaus alleges that Mr McCormick acted in breach of his instructions by advancing $200,000 rather than $250,000 and in amending the deed of acknowledgment of debt to reflect the lesser sum, as he did. Mr Backhaus is correct of course and it may be that the transaction would never have proceeded if
Mr McCormick had required the full amount from Mr Munro. Mr McCormick’s evidence was that the deal had changed so many times he assumed it was just another variation and I have no reason to doubt this.97 In any event, Mr Backhaus did not object when he was notified and I am not persuaded that he can fairly object now.
$200,000 in Moneylink’s account
[114] Mr Munro applied the remaining $200,000 in Moneylink’s account as his own.
[115] The statements for Moneylink’s account show the two deposits of $200,000 on
8 September 2010; the withdrawal of $200,000 and another of $16,500 on 9 and 10
September in favour of Trident; and relatively modest payments to GTNZ (in respect of an invoice from Moneylink), Seaward and Buddle Findlay on 30 September 2010.98
There were also numerous payments to Mr Munro and his partner, and one
94 Email P J McCormick to M D & L Backhaus dated 8 September 2010 at CB 1186.
95 Email P J McCormick to J Munro dated 5 September 2010 at CB 1078; and NOE 516.
(unexplained) of more than $50,000 on 28 October 2010 to the trust account of a firm of solicitors.
[116] $32,218.28 remained in Moneylink’s account by 31 December 2010 and
$898.15 by 8 August 2011. The only deposit was one of $9,979.27 from Trident. But for that, the account would have had a nil balance by 17 February 2011.
[117] Mr McCormick said he would have been concerned by these payments had he looked at Moneylink’s bank statements but he did not.99 Nor was he put on enquiry by Moneylink’s payment (of $4,858.75) to Seaward on 30 September 2010, although he accepted that there was no reason for such a payment.100 Rather, on receiving notice of the payment, Mr McCormick sent an email to Mr Munro asking whether Seaward would pay any of the funds to GTNZ, presumably in reduction of its outstanding fees.101
[118] Mr McCormick did not notify Mr Backhaus, by then a director of Moneylink, of the payment to Seaward. Mr McCormick said that it was not his practice to refer such matters to a director, notwithstanding Mr Backhaus’s reasons for becoming a director.102
Events from September to December 2010
[119] In September 2010, Mr Baker and Mr Simkin were seeking to prepare Trident’s first quarterly report and financial statements. They had the statements on the Auckland account but not the Christchurch account which is where the investors’ funds were.
[120] They did, however, obtain the statement on the Christchurch account to
14 September 2010 (“September statement”), which showed various unexplained withdrawals and the withdrawal/deposit of the $200,000. In response to their
99 NOE 506.
questions, Mr Munro said that he had put the $200,000 on call. Mr Baker accepted this made no sense but he sought no further explanation.103
[121] Mr Simkin sent several emails to Mr Munro and Mr Baker at about this time expressing concern about their failure to abide by undertakings to ensure investor funds were subject to their control. He also referred to Mr Baker’s discovery of “a major disparity”. These passages from his emails on 8 and 15 October 2010 are indicative of his concerns:104
Secondly, I am concerned about the investors funds not being placed in the designated account with the multiple signatories. I had given the investors this specific undertaking that funds couldn’t be touched with Chris or my signature. I have given the bank statements to Chris and asked him to do a reconciliation and I understand this is a major disparity here. We undertook to return to the investors $20k each if the deal did not proceed and based on the fact that we have no tangible information to show them ANYTHING about this transaction, I expect that we will refund them this amount at the very least. I am prepared to return my brokerage to make this happen, but we need to review the shortfall.
...
John, the investors that came on board did so because they trusted Chris or I. We now have reputational risk as if one of them asked for an audit trail of info (or confirmation that we have seen [the] same), we have ZERO to show them.
[122] At trial Mr Baker agreed that investors had “come on board” because they trusted him or Mr Simkin.105
[123] Mr Simkin repeated his reference to “a major disparity” in his email of
15 October 2010, when he said that Mr Baker had spoken to Mr McCormick about the “anomally” in Trident’s bank account and he said Mr McCormick did not have any information. On Mr Baker’s evidence, the “anomally” was that “the numbers [in the Christchurch account] didn’t stack up in terms of amounts and dollars and information”.
[124] It may be that Mr Baker spoke to Mr McCormick at about this time but
Mr McCormick could not recall any conversation and I am not able to make any finding on the point.
[125] By 20 October 2010 GTNZ had the bank statements on the Auckland account, and were making arrangements to get the statements on the Christchurch account, that arrangement being in place by 14 November 2010.106 They still did not have the earlier statements on the Christchurch account and they were not sent the September statement until much later – 21 February 2011. Again, the Moneylink bank statements which they had would have shown the deposit of $400,000 and the $200,000 going out immediately, as well as all the other withdrawals and payments to which I have referred, but Mr McCormick did not look at them.
28 October 2010
[126] On 28 October 2010, Mr Baker circulated the “Trident Operating Report for the period ended 30 September 2010”. Much, if not all, of the report was untrue. It included statements such as:107
•From mid July through September we have had to endure limited progress due to the UK/Europe summer holiday period ...
•However, during this period our focus has been on developing the optimal capital structure for acquisition ...
•... we have been actively involved in bid negotiations with various investment banking and specialized capital markets operators
•The parties that we have been dealing with have substantial fund management and market operations ...
[127] Mr Baker accepted that, although limited partners would assume that “we” included him, he had not been involved in any negotiation or had any contact with any of the institutions or parties referred to.108 Any reference to “we” was a misnomer.
[128] The report did not disclose that the investment was not fully subscribed and that the funds were not in Mr Baker or Mr Simkin’s control or that $50,000 had been paid to Integris.109 On the contrary, the report said:
• In the meanwhile, the GP will continue to generate income on partnership capital through interest on short term deposits, higher yielding commercial paper; and other treasury activities to cover the ongoing operational costs that have to be met.
[129] Mr Baker accepted this statement was included in the report to indicate that investors’ funds were safe. In fact, the balance of the Christchurch account as at
30 September/28 October were $149,194.69 and $137,518.24, against investor funds deposited of $350,000.
[130] The report promised quarterly financial statements to 30 October 2010, followed by statements for two months to 31 December, and then statements at year end of 31 March 2011. None of these were ever provided.
[131] By December 2010, Mr Backhaus had plainly formed a good working relationship with Mr Munro and between them they were looking at other investment proposals. This included travelling to Kuala Lumpur and Singapore 5 and 9 December
2010 with a Mr Findlay. The purpose of the trip was to investigate the purchase of a ship for possible use as emergency accommodation in Christchurch after the earthquake.110 As I say below, they repeated this trip in April 2011. In the course of this December trip, Mr Munro told Mr Backhaus that Trident was progressing and that there were some more units available because another investor had “pulled out for personal reasons”.111 This led to the plaintiffs’ acquisition of four more units ($200,000) in February 2011.
2011
[132] By 2011, Trident’s October and December 2010 quarterly financial statements were overdue and GTNZ had received more demands against Munro companies.
These comprised a demand from the BNZ of Seaward for more than $2.2 million,112 from Fletcher Steel against Seaward for $6,534.24 and from Buddle Findlay against Integris and Seaward for $20,756.25.113 Further demands were served in the first quarter, from Fletcher Steel against Seaward and “High Himalayas” against Integris for more than $17,400.114
[133] On 25 January 2011, Mr Simkin advised Mr McCormick that Mr Munro was due back in New Zealand shortly and that:115
... there is a lot to discuss and also I want a full reconciliation of the accounts for the Trident group of accounts as [Mr Baker] and I are in the dark on some of the expenditure and whereabouts of the partners funds. Apparently you are working on the Dec accounts at date? ...
[134] Ms Cooper questioned Mr McCormick about his reaction to the statement that Mr Simkin and Mr Baker were in the dark as to the whereabouts of the investors’ funds:116
Q. ... Had Mr Simkin previously discussed with you that he didn’t know where the partners’ funds were?
A. I don’t know whether he had discussed it before ... he would have been aware that we were chasing information from John Munro ...
...
Q. ... [were you] concerned when you got this email ... or was it confirming what you already knew?
A. Well the key to it was for us to get the information from John Munro and without that we couldn’t prepare the accounts.
Q. Did it occur to you ... that there was a bigger issue than [the accounts]
which was where partners’ funds were? A. Not at this point in time, no.
...
Q. ... were you not alarmed [that Mr Simkin and Mr Baker] didn’t know where the partners’ funds were?
112 Statutory Demand on Seaward Securities Ltd dated 12 November 2010 at CB 1245; and NOE 521.
113 Statutory Demand on Integris Financial Group Ltd dated 17 December 2010 at CB 1256 and 1257;
and NOE 524.
114 Statutory Demands on Seaward Securities Ltd dated 10 February 2011 and Integris Financial
Group Ltd dated 9 March 2011 at CB 1308 and 1475.
115 Email A D Simkin to P J McCormick dated 25 January 2011 at CB 1269.
A. Yes ... we needed the information to report that.
Q. But did it not occur to you that you had an obligation to do something about the fact that potentially investors funds were missing?
A. At that stage we had no knowledge of any investors funds missing ... we were trying to ... get the details of the transactions and the bank accounts ...
[135] Mr Hagen and Mr Goodall differed on whether Mr Simkin’s email was sufficient to put Mr McCormick on enquiry. Mr Hagen was adamant that it was.
[136] Mr Goodall did not consider Mr McCormick should have been put on enquiry. Having regard to the demands of a busy practice, he considered that Mr McCormick was doing what he could to get the information from Mr Munro and that, although
Mr McCormick might have checked the bank statements and/or telephoned
Mr Simkin, he was not required to do so.117 Given the view I take of the legal claims, I am not persuaded that anything turns on when Mr McCormick should have been on enquiry but if I were obliged to make a finding on it, I would date it to 21 February
2011, as to which see below.
[137] By 9 February 2011, GTNZ was seeking information regarding transactions on the Trident Auckland account. However, the list did not include any transactions on the Christchurch account. Mr McCormick’s explanation for this at trial was again unconvincing. He said that GTNZ did not know what those transactions were but that was precisely why GTNZ was seeking information regarding the Auckland transactions.
[138] Having received no response from Mr Munro, on 18 February 2011
Mr McCormick emailed the list to Mr Simkin who replied on 21 February 2011, attached the September statement and said:118
There is another Bank account opened in Christchurch being 020800-082746-
00. John has signing authority on this account.
There is an issue here, as one of the arrangements with the majority of the partners investing the money, was that all their funds went into an account where there was dual signing authority.
117 NOE 707, 708.
118 Email A D Simkin to P J McCormick and J Munro dated 21 February 2011 at CB 1318.
Unfortunately, the bulk of the funds went into the 2nd account which we don't have access too. I will sort this with John on his eventual return, but in the meantime we (on behalf of the LP's) need a full reconciliation of both accounts.
There was 10 partners in for $25k each being $250k. On top of this the Backhaus Family topped up another $100k (2nd call for 4 LP’s) as they were going to be away during the latter part of 2010.
On this basis we need a full reconciliation on the total $350k.
I only have 1 Bank statement for Christchurch account? John must have the rest? I also understand that he put some of the funds on deposit, possibly with Rabobank, but again I don’t have the details?
[139] Mr Simkin’s “$350k” did not include an additional $100,000 that Max and Erica had deposited on 8 February 2011, as the purchase price for their second units. Subject to legitimate expenses, the balance in the Trident Christchurch account should have been $425,000, given the $25,000 paid to P. In fact as at 14 February 2011, the balance was $181,562.07.
[140] Again, Mr McCormick could not recall whether he looked at the September statement or even then at the most recent statements for the Christchurch account. Mr McCormick said that even if he did look at the September statement, he still did not connect the $200,000 withdrawal/deposit shown on the statement to the matching funds on the Moneylink loan. This would have been readily apparent if he had looked at Moneylink’s statements.
[141] Although Mr Simkin did not say so in his email, by 16 February 2011 he and
Mr Baker knew that EY had abandoned the sale of the KSF loan book as far back as June 2010, information which Mr Simkin said could be “easily download[ed]” from the KSF website. Again, no step was taken to alert investors.
Acquisition of second units in Trident
[142] As I have said, on 8 February 2011 Max and Erica each deposited $50,000 in the Christchurch account being the purchase price for their second units.
[143] On 24 February 2011, Mr Backhaus had a meeting with Mr McCormick and
Mr Brewer. By this stage, Mr Backhaus was instructing Mr Brewer on tax matters.
There is no dispute that Mr Backhaus was a client of GTNZ by this time. Mr Brewer had no knowledge of the serious concerns that had been raised regarding investors’ funds.
[144] Mr Backhaus said that he intended to acquire further units in Trident. His evidence, again denied, was that Mr McCormick encouraged this. Mr McCormick’s evidence was that he was neutral, as Mr Backhaus’s investments were his own to decide. Mr McCormick did not disclose the concerns raised in the Simkin emails of
25 January or 21 February, or any of the notices of demand that GTNZ was continuing to receive.
[145] Mr and Mrs Backhaus met Mr McCormick again the following day. They executed second LPAs but other than that Mr McCormick could not recall any discussion regarding Trident. GTNZ billed Mr Backhaus for these meetings.
[146] Mr and Mrs Backhaus made no enquiry of Messrs Baker or Simkin before acquiring their second units.119 Nor had Max and Erica made any enquiry. Mr and Mrs Backhaus deposited the purchase price for their second units in the Christchurch account on 25 February 2011. There was an issue at trial about whether Mr and Mrs Backhaus’s purchase was made on 8 February 2011. However, the funds were deposited on 25 February and that was the date of execution of the LPAs. I am satisfied they purchased their second two units after GTNZ had received Mr Simkin’s email of
21 February 2011.
[147] On 9 March 2011, GTNZ sent to Mr Munro and Mr Baker a list of transactions on the Christchurch account, absent the statements prior to September 2010 and the statement for October 2010. Despite Mr Baker referring to the $200,000 in response, Mr McCormick said he still did not make any connection to the Moneylink loan.
[148] In April 2011, Mr Backhaus and Mr Munro repeated their trip to
Asia (see [131] above). Mr Backhaus’s evidence was that he became suspicious of
Mr Munro during that trip.120 He gave an example that several important meetings
that Mr Munro had arranged were cancelled at the last minute. Despite this,
Mr Backhaus was not concerned about the lack of progress on Trident. His evidence was that he asked Mr McCormick “what was going on” and was told that GTNZ were still working on Trident’s financial statements and that he did not know whether the delays were reasonable. Although Mr Backhaus said he continued to believe Messrs Baker and Simkin were “looking after” it, he made no enquiry of either.121
4 June 2011
[149] There was then a hiatus, at least on Trident, until 4 June 2011. On 4 June 2011, Mr McCormick emailed Mr Munro “further analysis” and “updated ... Trident cashbook analysis”, copying Mr Backhaus and Mr Brewer.
[150] Amongst other things, Mr McCormick attached a schedule of “cash payments” on the Christchurch account. This showed the $200,000 withdrawal and an “advance” of $200,000 into the Christchurch account the same day. Although Mr McCormick asked Mr Munro a series of questions, he did not refer to these transactions.
[151] However, Mr Backhaus questioned the payments immediately and asked if
Mr McCormick had Moneylink’s bank statements.122 Mr McCormick’s evidence was that he probably checked the statements on receipt of Mr Backhaus’s email but, regardless, this was when he connected the withdrawal of $200,000 from the Christchurch account to the bank cheque that Mr Munro had given him on
8 September 2010. Despite that, Mr McCormick did not reply to Mr Backhaus’s question, then or at any time afterwards.
[152] Shortly after the 4 June email, Mr McCormick, with Mr Backhaus’s approval, asked the BNZ to freeze the funds in the Christchurch account which the BNZ agreed to do until 22 August 2011.
[153] The last statement on the Christchurch account in evidence is to 14 August
2011. The balance at that date was $223,517.33, but this included $100,000 which the
ANZ, for the Backhaus Family Trust, had transferred in error. Accordingly, the true balance of the account was $123,517.33,
[154] By the time of Mr Grant’s appointment as interim liquidator on 23 August
2011, some $76,000 remained in the account. In round terms that leaves $50,000 unaccounted for. The only possible explanation is that Mr Munro was able to withdraw that sum. Mr Grant’s evidence at trial was that there is no prospect of any return to investors.
[155] Mr Patterson, counsel for GTNZ submitted, and I shall assume that Mr Baker endorses this submission, that the plaintiffs failed to mitigate their loss by not obtaining a Court order to preserve the funds in the Christchurch account and, in any event, the plaintiffs have not proved loss on either Trident or Moneylink. The submission is that there is no evidence that Trident or Moneylink are unable to repay, that the plaintiffs have failed to take steps against Trident or Moneylink and in fact have not even filed a proof of debt in the liquidation of Moneylink.
[156] I do not accept there is any merit in these points.
[157] GTNZ and Mr Backhaus acted together in persuading the BNZ to freeze the Christchurch account. Likewise, they made a joint decision to seek the appointment of an interim liquidator to Trident. I am not persuaded that the plaintiffs were at fault in seeking this appointment as opposed to obtaining a mareva injunction in respect of the funds in the Christchurch account. Nor is there evidence that GTNZ advised the plaintiffs to seek such an order.
[158] As for the matter of loss, there is no evidence to suggest that funds could be recovered from Trident or Moneylink and I consider it most unlikely that anything could be recovered. Mr Grant’s view was that it would be a pointless exercise to seek any such recovery. In short, the plaintiffs would be throwing good money after bad. I am satisfied that the plaintiffs have suffered a complete loss of their $600,000.
[159] I turn now to consider the various causes of action.
Plaintiffs’ claims against Mr Baker in respect of the Trident investment
[160] The plaintiffs’ case is that their loss on Trident is the combination of their investment and an inability, though no fault of their own, to retrieve their funds or as much of them as possible.
[161] The plaintiffs allege that this loss was caused by Mr Baker’s breach of obligations to them, whether fiduciary duties which is the plaintiffs’ primary case or a duty of care owed in respect of his conduct of the investment and/or the information provided in relation to Trident. Alternatively, the plaintiffs submit the loss was caused by Mr Baker’s misleading or deceptive conduct or conduct likely to mislead or deceive, in breach of s 9 FTA, for which they seek relief pursuant to s 43 FTA, and as I have said, they have claimed under the Securities Act.
[162] Turning to the primary case for breach of fiduciary duty, the duties the plaintiffs allege Mr Baker owed were to protect their confidential information; to act in good faith and in their best interests; to avoid and/or disclose any conflict of interest; and to disclose all material information. They also allege that Mr Baker owed them a duty to ensure that the funds that they invested “were accounted for, were under [his] control, were used solely as set out in the [IM], and were protected”.123 All but the last of these are “facets” of the fiduciary’s “distinguishing obligation” of loyalty.124
On the facts of this case, the last duty that the plaintiffs allege would be encompassed by this broader obligation and in essence is part of the requirement that the fiduciary act in good faith.
[163] The duty of loyalty is inherent in certain categories of relationship, such as solicitor/client, trustee/beneficiary and doctor/patient. Outside these established categories, it is necessary to consider the circumstances between the parties and whether their relationship is one in which the duty is owed,125 as to which the Supreme
Court has said:
123 Fourth Amended Statement of Claim, above n 75, at [94].
124 Premium Real Estate Ltd v Stevens [2009] NZSC 15, [2009] 2 NZLR 384, citing Bristol and West
Building Society v Mothew [1998] Ch 1 (CA) at 18.
125 Chirnside v Fay [2006] NZSC 68, [2007] 1 NZLR 433 at [75].
[80] It is clear from the authorities that relationships which are inherently fiduciary all possess the feature which justifies the imposition of fiduciary duties in a case which falls outside the traditional categories; all fiduciary relationships, whether inherent or particular, are marked by the entitlement (rendered in Arklow as a legitimate expectation) of one party to place trust and confidence in the other. That party is entitled to rely on the other party not to act in a way which is contrary to the first party’s interests. There can be little doubt that, at least prima facie, the relationship between Mr Chirnside and Mr Fay was such that Mr Fay was entitled to repose and did repose trust and confidence in Mr Chirnside. Hence their relationship was, at least prima facie, of a fiduciary kind.
[164] The relationship between Mr Baker and the plaintiffs does not fall within any of the established categories, so it is necessary to consider whether the plaintiffs were entitled to repose, and did repose, trust and confidence in Mr Baker.
[165] Counsel for the plaintiffs referred me to Cook v Evatt (No 2) as a case in which the Court determined that the defendant, a financial adviser, owed his client fiduciary duties.126 In that case, the client placed her entire faith in the adviser, who held himself out as offering impartial investment advice and services. The adviser recommended to the client that she purchase residential units in which he had a beneficial interest, but did not disclose that interest to her. Fisher J found that the adviser was obliged to avoid a conflict between his interests and the client’s, and to disclose his interest in the units. The client recovered the profit the adviser made on her purchase.
[166] The matters on which the plaintiffs rely are Mr Baker’s role as their financial adviser, his promotion (in the general rather than “Securities Act” sense of the word) of the Trident investment to them and the statements he made to Mr Backhaus at the meeting on 9 June 2010. These were that he, Mr Baker, would be a director of the general partner, that he would “look after” the limited partners, and that the plaintiffs’ funds would be in an account under his control and protected. In addition, the plaintiffs say that they were dependent on the advice and information Mr Baker gave Mr Backhaus when deciding to invest and/or make further investments, that Mr Baker must have known that Mr Backhaus would relay that advice and information to them and that they placed their trust and confidence in him.
[167] Mr Baker was not the plaintiffs’ financial adviser in the sense that there was a long term relationship of that ilk or a formal engagement, whether or not there should have been. On the evidence, Mr Baker was offering or touting investments to Mr Backhaus from time to time. Mr Backhaus himself said that Mr Baker “was always trying to sell” him something.127 That said, Mr Baker was known to Mr Backhaus as someone whose career had been and remained the giving of investment advice.
[168] On the face of the IMs, the Trident investment was complex to say the least. It is difficult, if not impossible, to comprehend exactly how the loan book would be managed and realised, even if a part of it could possibly be acquired given the sums involved. Mr Baker would have known the investment fell well outside
Mr Backhaus’s experience, let alone the other plaintiffs’. I should record here that Mr Hoffman, the plaintiffs’ expert financial adviser could not have been more critical of Mr Baker’s conduct towards the plaintiffs and listed the numerous respects in which Mr Baker’s conduct fell short of appropriate standards. Again, I mean no disrespect of Mr Hoffman when I say it is unnecessary to refer to his evidence in detail.
[169] The manner in which Mr Baker introduced the investment to Mr Backhaus – as to which see the 17 May 2010 email – and the content of the IMs which Mr Baker saw before they were sent carried clear representations that Mr Baker was involved in carrying the transaction forward. I refer here to statements such as that “due diligence” had been completed by 28 May 2010, that an offer had been tendered to EY, and that Messrs Munro, Baker and Simkin had agreed to act for the general partner. This was not a case of an adviser recommending a proposal being pursued by third parties but one which Mr Baker was pursuing with two colleagues.
[170] The most important matters for me, however, are the statements made at the
9 June meeting. Mr Baker’s statement that he would be a director of the general partner was a statement that he would have a governance role. His statement that the plaintiffs’ funds would be in a bank account under his control was advice that he would act as a trustee of the plaintiffs’ funds and ensure their proper application. In the first instance, up to $5,000 of the first instalment could be spent on due diligence costs and
thereafter in progressing matters. Mr Baker’s statement that he would “look after” investors was a statement that he would act in their best interests. These expectations would have been reinforced on 13 June 2010, when Mr Baker obtained the plaintiffs’ signatures to the LPAs.
[171] In those circumstances, Mr Backhaus was entitled to repose trust and confidence in Mr Baker and likewise the plaintiffs, and I am satisfied that they did so. As Mr Simkin said in his email of 15 October 2010, and Mr Baker agreed with this statement when he gave evidence, the plaintiffs “came on board” because they trusted Mr Baker.
[172] Mr Baker breached his obligations to the plaintiffs by failing to ensure that he fulfilled the commitments he had made and/or failing to disclose all material information to them. Mr Baker did not ensure that he was a director or that he was in control of the funds or that the $5,000 cap was observed. He did not inform the plaintiffs that their funds were in Mr Munro’s sole control, or that $50,000 had been paid to Integris, or that they were the only investors given notice to pay the second instalment and that they should refrain, or that he had concerns as to the whereabouts of investors’ funds or that he had learned that the loan book was not for sale. The
28 October 2010 report was deliberately misleading as regards the security of investors’ funds.
[173] Of course, many of these matters might equally constitute a breach of a duty of care and some at least of s 9 FTA. However, no submission was made that a fiduciary’s breach of the duty of loyalty may not also constitute a breach of a duty of care or of s 9.
[174] The plaintiffs must then prove that the breach caused the loss in the sense that the breach was material to the loss.128 I am satisfied that Mr Baker’s breach caused the plaintiffs’ loss of their first $200,000.129 Had Mr Baker fulfilled his commitments
or disclosed the material information to which I have referred, the plaintiffs would not
128 Premium Real Estate Ltd v Stevens, above n 124, at [85], citing Bank of New Zealand v New
Zealand Guardian Trust Co Ltd [1999] 1 NZLR 664 (CA) at 687.
129 Premium Real Estate Ltd v Stevens, above n 124, at [85].
have paid the first and/or second instalments or they would have taken steps to recover whatever they had paid by the time of disclosure.
[175] I turn now to the plaintiffs’ purchase of the second units in February 2011. Ms Cooper submitted that the plaintiffs would also not have purchased the second units had they known of the various matters to which I have referred, and thus the breach of duty caused this loss also.
[176] I accept this submission is correct although record also that Mr Baker made no submissions in opposition as to causation and the legal issues which arise. The effect of the Supreme Court’s decision in Premium Real Estate Ltd v Stevens is that the fiduciary may only avoid liability if he or she can establish that the loss would have occurred regardless of the breach.130 The loss of the second $200,000 would not have occurred had the duty been performed, and so on the basis of the submissions before me, causation is established. My reservations as to requiring Mr Baker to bear the entire loss on the second units is that he did not know the purchases were proposed and no enquiry was made of him prior to those units being acquired.
Contributory negligence
[177] As Ms Cooper also acknowledged, in her closing submissions, an issue arises as to whether the Court can reduce the sum otherwise payable by the fiduciary, that is
Mr Baker, on account of the plaintiffs’ neglect of their own interests, essentially contributory negligence. The Court of Appeal upheld such a reduction in Day v Mead but that followed a concession by the affected party.131 The approach in subsequent cases such as Premium has been stricter and I am not satisfied there is any scope for a reduction on such grounds.
[178] Even if it were open to me to do so, I would not have reduced the damages on account of contributory negligence or ordered Mr Backhaus to make a contribution as regards the loss incurred in respect of the first units. I have already addressed most of
Mr Baker’s pleaded case on these affirmative defences. The only outstanding
130 At [85].
131 Day v Mead [1987] 2 NZLR 443 (CA).
allegation is that the plaintiffs relied on their own “information, due diligence, and judgment”. I am satisfied they relied on Mr Baker.
[179] If it were open to me to do so, I would have made some reduction in the award against Mr Baker in respect of the purchase price of the second units. I consider the following omissions by the plaintiffs to be material: the failure to make any prior enquiry of Mr Baker before purchasing, the failure to require a current report on the investment, the failure to make any enquiry as to the value of the units as at the time of purchase, and failing to require the October and December 2010 quarterly financial statements in advance of the purchase. These are significant omissions and it is most unlikely the purchase would have been made if the plaintiffs had taken any of these steps.
[180] I have considered whether Mr Baker’s liability would have been different if I had dismissed the plaintiffs’ case for breach of fiduciary duty and considered the matter by reference to their claim in negligence/negligent misstatement. Given the evidence, Mr Baker must have owed a duty of care to the plaintiffs. The statements he made were for the purpose of inducing them to invest. The plaintiffs relied on those statements and Mr Baker foresaw or must have foreseen that they would do so.132
Given that, it would be fair, just and reasonable to find that Mr Baker owed the
plaintiffs a duty of care. There is no doubt the duty was breached, and that the breach caused the loss of the first $200,000. Whether the plaintiffs could prove causation on the second $200,000 and, if so, what reduction should be made for contributory negligence would have been significant issues in this judgment.
[181] Given the findings above, it is unnecessary for me to address the plaintiffs’
claims against Mr Baker under the FTA and the Securities Act.
Mr Backhaus’s causes of action against GTNZ on the Moneylink loan
[182] Mr Backhaus alleges that his loss on the Moneylink loan was caused by GTNZ’s breach of fiduciary obligations to him. His alternative claims are for breach of contractual and tortious duties of care and for breach of s 9 FTA.
Contract of retainer
[183] With the exception of the claim under the FTA, it is a fundamental part of
Mr Backhaus’s case that he was a client of GTNZ from 9 July 2010, after his receipt and acceptance of GTNZ’s proposal of that date, which in turn gave rise to a contract of retainer. GTNZ admits the acceptance and the retainer. Mr Backhaus also alleges and GTNZ admits that GTNZ owed him fiduciary and contractual duties, and a duty of care, from that date.
[184] After the trial, GTNZ sought to amend its statement of defence, to retract its admission that Mr Backhaus became a client from 9 July 2010. The effect of the amendment would have been to date the retainer from 24 February 2011 when
Mr Backhaus first sought (tax) advice from GTNZ. I declined that application because the plaintiffs had run their case on the pleading as it stood at trial and because I did not, and do not, consider the amendment of any real consequence given the matters to which I refer below.
[185] The admissions by GTNZ in its statement of claim are not as straightforward as might appear from the above because there is a dispute as to precisely what services and advice GTNZ offered to provide and whether it included advice on the Moneylink loan or the Trident investment or any similar matter. GTNZ’s submission is that the services it offered to provide in the proposal were confined to tax and business advisory services, that neither of these include advice on investments or transactions such as those in dispute, and that the retainer and its duties were likewise confined.
[186] I accept GTNZ’s submission. On its face, the document is a “Proposal for tax services”. In his covering email to Mr Backhaus, Mr de Freyne, who prepared the proposal, said it was for Mr Backhaus’s “tax and accounting needs”.133 The executive summary in the proposal is to the effect that Mr Backhaus was “looking for reliable and relevant advice” and particularly “tax advice for ... activities which effectively deals with your US and New Zealand positions” and the need for an “effective tax framework”. The “Your needs” section referred to Mr Backhaus’s requirement to receive “first class US/NZ tax advice”. The tax partners to be involved were
Mr de Freyne and Mr Brewer. Mr McCormick was nominated as a partner who specialised in:
... business strategy, structuring and development, business and estate planning, cashflow forecasting and budgeting, financial management, taxation advice and efficiencies and franchising.
[187] Mr Patterson submits, and again I accept, that this description of
Mr McCormick’s areas of specialisation does not on its face include advising on the merits of transactions or investments such as Trident or Moneylink.
[188] Accordingly, I reject Mr Backhaus’s submission that there was an accountant/client relationship between GTNZ and him in respect of the Moneylink loan based on his acceptance of the proposal. This in turn determines Mr Backhaus’s cause of action for breach of contract on the Moneylink loan because it is premised on terms arising from the retainer.
[189] For the sake of completeness, I add that I do not consider the proposal was an offer to provide services of any description to the other plaintiffs, as they allege in the statement of claim. The proposal was addressed to Mr Backhaus alone and it does not refer to the Backhaus family.
Breach of fiduciary duty
[190] Coming back to the cause of action for breach of fiduciary duty, Mr Backhaus contends that the duty was owed to him as a client – formal retainer or not – and that GTNZ was bound to disclose to him that Mr Munro was in financial difficulty, that Mr Munro owed GTNZ money, that other creditors were chasing him for payment and so on. If he were a client, then Mr Backhaus would have a straightforward case for recovery of the amount of the loan because the accountant/client relationship is one in which the fiduciary duty of loyalty is inherent.134
[191] However, on the facts of this case, I do not accept that Mr Backhaus was a client of GTNZ’s in respect of this transaction, particularly before the loan was made
134 Irdoss Computer Systems Ltd v Arthur Andersen HC Auckland CL21/92, 27 November 1996 at
52.
or before the funds were lost, which they largely were by the end of 2010. The relevant matters are these.
[192] First, as is apparent from the evidence, there was interaction between
Mr McCormick and Mr Backhaus from the time the loan was first raised in late June
2010 until 27 August 2010. I have referred to the meetings that took place, to
Mr McCormick’s emails to Mr Backhaus, and his offers to discuss matters with
Mr Backhaus. However, it is not uncommon for an adviser to meet or communicate directly with a party to a transaction, and indeed to make his or her views known. It is for that other party to conduct their affairs as they see fit. That fact alone could not give rise to any duty on the part of the adviser.
[193] Secondly, Mr McCormick was a party to discussions with Mr Backhaus and Mr Munro on how to provide Mr Backhaus with security after Mr Young’s advice that Mr Backhaus should not proceed with the $500,000 loan without securing his position. GTNZ staff also assisted with the preparation of Companies Office documents. For instance when the share subscription was being considered, GTNZ prepared a declaration of solvency. GTNZ also prepared the form required to appoint Mr Backhaus as a director of Moneylink. Ms Cooper calculated, and Mr McCormick agreed, that he spent significant time – at least 10.34 hours, giving Mr McCormick the benefit of the doubt on every entry – on the Moneylink loan between 16 July and 31
August 2010.135 I accept Ms Cooper’s point that this could not all have been spent on
explaining documents but again consider more than that is required.
[194] Thirdly, in cross-examination Mr McCormick accepted that by 27 August he was “acting for both parties” to the Moneylink loan and that the applicable code of ethics required him to disclose the conflict and that he should have disengaged from the transaction.136 It is fair to say however that this concession was entirely contrary to the tenor of Mr McCormick’s earlier evidence, given over many hours, that
throughout he was advising Mr Munro.
135 NOE 471.
136 NOE 492, 493.
[195] Notwithstanding the meetings, time spent and the concessions, I am not persuaded that GTNZ was acting for or advising Mr Backhaus. This is because
Mr Backhaus knew that Mr McCormick acted for Mr Munro. This was a longstanding professional relationship and it was because it was so longstanding that Mr Backhaus thought Mr McCormick would be well placed to answer his question as to whether
Mr Munro was reliable. Mr Backhaus’s evidence that he felt pressured and pushed by Mr McCormick can only have indicated to Mr Backhaus that Mr McCormick was acting for Mr Munro, not him.
[196] Mr Backhaus also knew that Mr McCormick did not act for him. Mr Backhaus took his own advice from his longstanding advisers, Deloitte and Mr Young.
[197] Mr Backhaus alleges and states that Mr McCormick advised and encouraged him to make the loan.137 There is no supporting evidence of any such advice. There are no emails or file notes recording advice or, for instance, suggestions as to the terms on which the loan might be made. On the contrary, the evidence is that Mr Backhaus and Mr Munro settled the terms of the loan between themselves. Mr Backhaus decided he wished to have a “simple loan”, he stipulated for the matching funds and decided against taking any security. On the evidence, GTNZ was only informed late on 26
August or early 27 August as to what Mr Backhaus and Mr Munro had agreed upon. Nor was there any discussion between Mr McCormick and Mr Backhaus regarding GTNZ’s fees.
[198] For these reasons, I am not persuaded that GTNZ advised or acted for
Mr Backhaus, or that it owed him the fiduciary duty alleged.
Duty of care
[199] That brings me to Mr Backhaus’s next cause of action on the Moneylink loan which is that GTNZ owed him a duty to exercise reasonable skill and care in relation to the loan and in providing information and advice to him. Mr Backhaus alleges that GTNZ breached this duty by failing to carry out due diligence on Moneylink, failing
to advise of the overdue debts etc, advising that Mr Munro was reliable, failing to
137 Fourth Amended Statement of Claim, above n 75, at [146.3] and [153.3].
disclose what was apparent on the face of the Moneylink bank statement which was that Mr Munro had withdrawn his matching funds for the loan, and failing to disclose the emails from Mr Simkin in January and February 2011. Again, given that the funds were lost in large part by the end of 2010, these later matters are of no real consequence on this cause of action.
[200] Ms Cooper referred me to Bartle v GE Custodians as a case in which Randerson J held that a solicitor, Mr Mathias, owed a duty of care in respect of advice given to Mr and Mrs Bartle, prior to any retainer and in the absence of expectation of a fee for the advice he gave at that time.138 In that case, however, Mr Mathias was not acting for any other party to the transaction, as GTNZ was in this case, whether that other party was Moneylink or Mr Munro. There is other relevant authority which is to the effect that, generally, a lawyer’s duty – and there is no good reason to differentiate accountants as far as I am aware – is owed to his or client alone.139 As Randerson J said in another case:140
[19] Both counsel accepted that it is well established that a lawyer’s duty generally is owed to his or her client alone. As Cooke J stated in Allied Finance and Investments Ltd v Haddow & Co [1983] NZLR 22, 24 (CA):
... the relationship between two solicitors acting for their
respective clients does not normally of itself impose a duty of care on one solicitor to the client of the other. Normally the relationship is not sufficiently proximate. Each solicitor is entitled to expect that the other party will look to his own solicitor for advice and protection.
[20] The principal rationale for this proposition is that the fiduciary nature of the solicitor/client relationship requires the solicitor to act with undivided loyalty in the client’s best interests. As a general rule, there is no assumption of responsibility by a solicitor to the opposite party to a transaction who is represented by his or her own legal adviser.
[201] The facts I have referred to above in rejecting Mr Backhaus’s submission for a fiduciary duty are equally relevant to his allegation that GTNZ owed him a duty of care.
138 Bartle v GE Custodians [2010] 1 NZLR 802 (HC).
139 Burmeister v O’Brien [2010] 2 NZLR 395 (HC) at [234]-[239]. See also Brownie Wills v
Shrimpton [1998] 2 NZLR 320 (CA) at 324 and 328.
140 Radisich v Templeton [2009] 3 NZLR 276 (HC).
[202] As is apparent from the passage in Allied Finance to which the Judge referred, the relationship between the adviser of one party, in this case Mr McCormick, is not usually considered sufficiently “proximate” to the other party, in this case Mr Backhaus, to permit the recognition of a duty of care. Mr McCormick was acting for Moneylink or Mr Munro and Mr Backhaus was consulting his own advisers as he saw fit. In these circumstances, it would not be reasonable for Mr Backhaus to rely on Mr McCormick to advise him on why making the loan might be unwise or against his interests. GTNZ’s obligations were to its client and not to Mr Backhaus.
[203] I am not persuaded that it would be fair, just and reasonable to recognise a duty of care owed by GTNZ to Mr Backhaus as regards the making of this loan and particularly in advising him as to why it might be unwise. I reject this claim accordingly.
Claim against GTNZ under s 9 FTA – Moneylink loan
[204] I turn now to the representation as to Mr Munro’s reliability that
Mr McCormick made to Mr Backhaus at the meeting on 27 August 2010.
[205] Section 9 FTA provides that:
9 Misleading and deceptive conduct generally
No person shall, in trade, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.
[206] There is no dispute that GTNZ was in trade at the time.
[207] In Red Eagle Corporation Ltd v Ellis, the Supreme Court explained the purpose and application of s 9 as follows:141
[28] ... [Section 9] is directed to promoting fair dealing in trade by proscribing conduct which, examined objectively, is deceptive or misleading in the particular circumstances. Naturally that will depend upon the context, including the characteristics of the person or persons said to be affected. Conduct towards a sophisticated businessman may, for instance, be less likely to be objectively regarded as capable of misleading or deceiving such a person than similar conduct directed towards a consumer or, to take an extreme case, towards an individual known by the defendant to have intellectual difficulties.
141 Red Eagle Corporation Ltd v Ellis [2010] NZSC 20, [2010] 2 NZLR 492.
... The question to be answered ... is accordingly whether a reasonable person in the claimant’s situation – that is, with the characteristics known to the defendant or of which the defendant ought to have been aware – would likely have been misled or deceived. If so, a breach of s 9 has been established. ...
(footnotes omitted)
[208] I am satisfied that a reasonable person in Mr Backhaus’s situation would likely have been misled or deceived by Mr McCormick’s answer to Mr Backhaus’s question as to whether Mr Munro was reliable. This was a business meeting, prior to Mr Backhaus making a loan of what was then expected to be the NZ$ equivalent of US$175,000. Mr Backhaus asked the question because he knew that Mr McCormick would be well informed. Mr McCormick’s answer had the capacity to mislead or deceive because Mr Munro was not reliable, at least not in financial matters. Not only did Mr Munro have long outstanding bills, but he had not honoured promises as to payment that he had made to Mr McCormick in the past. Each of those matters rendered him “unreliable”.
[209] The next issue is to consider whether Mr Backhaus suffered loss or damage “by” Mr McCormick’s conduct, within the meaning of s 43(1), the relevant parts of which provide:
43 Other orders
(1) This section applies if, in proceedings under this Part or on the application of any person, a court ... finds that a person (person A) has suffered, or is likely to suffer, loss or damage by conduct of another person (person B) that does or may constitute any of the following:
(a) a contravention of a provision of Parts 1 to 4A ...
[210] As to this, in Red Eagle the Supreme Court said:
[29] ... The language of s 43 has been said to require a “common law practical or common-sense concept of causation”. The court must first ask itself whether the particular claimant was actually misled or deceived by the defendant’s conduct. It does not follow from the fact that a reasonable person would have been misled or deceived (the capacity of the conduct) that the particular claimant was actually misled or deceived. If the court takes the view, usually by drawing an inference from the evidence as a whole, that the claimant was indeed misled or deceived, it needs then to ask whether the defendant’s conduct in breach of s 9 was an operating cause of the claimant’s loss or damage. Put another way, was the defendant’s breach the effective cause or an effective cause? Richardson J in Goldsboro spoke of the need for,
or, as he put it, the sufficiency of, a “clear nexus” between the conduct and the loss or damage.
[30] Another operating cause of loss or damage may perhaps have been the claimant’s own conduct in failing to take reasonable care to look after his or her own interests. The court should therefore ask itself whether the claimant’s carelessness, if there were any, should be regarded as the sole or a contributory operative cause of the loss. The fact that the claimant may have contributed by carelessness to his or her own downfall does not disqualify the claim. ...
(footnotes omitted)
[211] I am satisfied that Mr Backhaus was misled or deceived by Mr McCormick’s representation. He understood, naturally, that Mr Munro was reliable financially and that there was no reason, on that score at least, not to make the loan to Moneylink. I am satisfied the loan would not have been made, and the loss would not have been suffered, in the absence of Mr McCormick’s assurance.
[212] This brings me to the question of the cause of the loss. The Court may decide that only part of the amount of the loss or damage should be paid by, in this case, GTNZ to Mr Backhaus.
[213] Mr Backhaus’s carelessness has contributed to his loss. Mr Young had advised Mr Backhaus only two weeks earlier that he should not proceed to make an admittedly larger advance without securing his position as to repayment. Mr Backhaus’s answer to this at trial was that the loan ultimately agreed upon was a different transaction. However, Mr Young’s objection remained valid because there was no security. Also, Mr McCormick’s statement was not an assurance that Moneylink would repay the loan. Repayment would inevitably depend on Moneylink’s circumstances at the time of demand. In addition, Mr Backhaus could have insisted on being a signatory on Moneylink’s account or, at the very least, having online access to that account. He did neither. Had either of these requirements been imposed, the loan might never have been made or prompt action to freeze the account might have been taken. Mr Backhaus’s reasons for not doing so related to his financial or tax position. They cannot relieve him of the consequences of his decisions.
[214] On the other hand, Mr McCormick knew why the question was being asked. He was not required to discuss Mr Munro’s affairs with Mr Backhaus. He chose to
make the statement and he made no attempt to correct it. Mr McCormick had time to reconsider what he had said and to correct the position before the loan was made some
10 days later. Also, Mr McCormick was an experienced partner of a professional services firm which would give his words additional significance.
[215] Weighing all of these matters, I attribute 70 per cent of the loss to GTNZ and the remaining 30 per cent to Mr Backhaus’s failure to take steps to protect his own interests.
[216] The only other matter I am required to consider as regards this cause of action is whether it is out of time. Section 43A FTA provides:
43A Application for order under section 43
A person may apply to a court or the Disputes Tribunal for an order under section 43 at any time within 3 years after the date on which the loss or damage, or the likelihood of loss or damage, was discovered or ought reasonably to have been discovered.
[217] GTNZ pleads that the effect of Mr Young’s advice on 13 August 2010 was to advise Mr Backhaus of the likelihood of loss if he were to make the advance and that is why the proceedings, issued on 30 April 2011, were out of time.
[218] That is not the proper construction of Mr Young’s advice. Mr Young’s advice was that Mr Backhaus should take steps to obtain security. It did not purport to be based on any knowledge of Moneylink’s financial position or potential breach of the FTA. It was advice that any good commercial lawyer would give their client.
[219] On the evidence the earliest possible point in time at which Mr Backhaus ought reasonably to have discovered loss or damage was 4 June 2011, that is the proceedings were issued in time. That makes it unnecessary for me to consider Ms Cooper’s further submission as to the effect of the Supreme Court’s decision in Commerce Commission
v Carter Holt Harvey Ltd.142
142 Commerce Commission v Carter Holt Harvey Ltd [2009] NZSC 120, [2010] 1 NZLR 379.
Claims against Mr Baker on the Moneylink loan
[220] It remains necessary to determine Mr Backhaus’s two claims against Mr Baker in respect of the Moneylink loan, which are for breach of fiduciary duty and breach of duty of care.
[221] On the first of these, Mr Backhaus alleges that Mr Baker owed these duties for the reasons referred to in [166] above, and Mr Baker’s “knowledge of and role in” promoting the Moneylink loan.
[222] As to the second, Mr Backhaus alleges that Mr Baker owed him a duty of care in relation to the information and advice provided regarding investment opportunities with Mr Munro.
[223] It is a substantial part of these claims that, had Mr Baker complied with his obligations in respect of Trident and made disclosure as required, the loan would not have been made or, I suppose, recovered in part.
[224] I am not persuaded that there is any substance in these claims. Mr Baker’s duties were to the plaintiffs, in respect of the Trident investment. The gist of
Mr Backhaus’s case is that a breach by Mr Baker of his duties in respect of that investment expose him to liability on a different transaction with a different corporate entity, as to which he was largely uninformed. I am not persuaded that a fiduciary’s liability would extent to such a loss and I dismiss these claims.
Plaintiffs’ claims against GTNZ on the Trident investment
[225] I turn now to the plaintiffs’ claims against GTNZ in respect of Trident. These are that GTNZ owed them a fiduciary duty or duty of care in respect of that investment generally; alternatively that GTNZ, or rather Mr McCormick, engaged in misleading or deceptive conduct both by his representation at the 27 August 2010 meeting and his various attendances on Mr Backhaus in respect of the Moneylink loan and his subsequent attendances with Mr and Mrs Backhaus on 24 and 25 February 2011.
[226] First, I do not consider that GTNZ owed any fiduciary, contractual or tortious duties to the plaintiffs in respect of the Trident investment, at least not prior to
24 February 2011.
[227] I have already set out my reasons as to why GTNZ did not owe these specific duties to Mr Backhaus and the plaintiffs’ claims to be owed such duties have less substance.
[228] Mr McCormick, and Mr Brewer for that matter, were questioned at trial about GTNZ’s letter of 1 June 2010, addressed “To whom it may concern” and referred to in [57] above. This letter states:
[GTNZ] have been engaged and accept the appointment as accountants, including tax and corporate advisory for the Trident Capital Limited Partnership and its General Partner Trident Capital Limited. It is acknowledged that this appointment is pre the proposed acquisition of the UK domiciled [KSF] (in Administration) Private Bank aviation and marine loan book which is set to follow the Creditors’ Committee meeting on 7 June 2010. As a New Zealand partnership, [GTNZ] will utilise the resources of Grant Thornton International’s offices to handle matters associated with the initial portfolio acquisition and future business opportunities.
[229] In my view, this letter does not assist the plaintiffs. That is because there is no evidence that Mr Backhaus or the other plaintiffs saw the letter at any time. Accordingly, it cannot have had any bearing on their decision to invest in Trident, or to pay any part of their $400,000.
[230] Moreover, any obligations that GTNZ assumed by this letter were owed to
Trident and the general partner, not to individual investors such as the plaintiffs.
[231] That said, I am satisfied that Mr McCormick’s representation to Mr Backhaus at the meeting on 27 August 2010, to the effect that the Trident investment was fully subscribed, was in breach of s 9 FTA and for reasons I shall set out shortly, I am satisfied that GTNZ should bear the loss that the plaintiffs incurred in paying their second instalments as they did.
[232] That leaves the claims that might give the plaintiffs recovery from GTNZ in respect of the purchase price of their second units in February 2011.
Max and Erica’s second units
[233] I do not consider Max and Erica have any claim in respect of the loss they have suffered as regards the purchase of their second units on 8 February 2011, because GTNZ did not owe them any duty as regards that acquisition. Max and Erica’s evidence was to the effect that Mr Backhaus telephoned them while they were overseas and said that they should deposit their funds, which they did without further enquiry.
[234] The position is different as regards Mr and Mrs Backhaus’s acquisition which followed on 25 February 2011. On 24 February 2011, Mr Backhaus had a meeting with Mr McCormick and Mr Brewer. Mr Backhaus’s evidence was that meeting was lengthy and that they discussed his investments, including Trident. Mr McCormick accepted that Mr Backhaus’s investments were discussed at the meeting and, in particular, his intention to acquire further units in Trident.
[235] On 25 February 2011, Mr and Mrs Backhaus met with the two partners again. Mr Backhaus’s evidence was that they discussed Trident again and Mrs Backhaus confirmed this in her evidence. Mr McCormick could not recall this specifically. It was at that meeting that Mr and Mrs Backhaus signed fresh LPAs and later that day they transferred the purchase price for the two units to the Christchurch account. GTNZ invoiced Mr Backhaus for these attendances and accordingly must have been treating Mr and Mrs Backhaus as clients in respect of the matter.
[236] As I have said, I consider Mr McCormick should have been on enquiry from
21 February 2011 as to serious concerns as to the whereabouts of investors’ funds. Moreover, at the same time Mr Simkin had provided him the September statement, the content of which I have already discussed. Whether GTNZ owed Mr and Mrs Backhaus a fiduciary duty or a duty of care, Mr McCormick was bound to disclose the concerns that had been raised as to the security of the investors’ funds. Mr and Mrs Backhaus would not have proceeded with their purchase had Mr McCormick done so.
[237] It follows that I am satisfied that GTNZ is liable to the plaintiffs, or at least
Mr and Mrs Backhaus, in respect of that $100,000.
Claim against GTNZ under s 9 FTA – Trident investment
[238] The final matter to address is the plaintiffs’ claim against GTNZ in respect of
Mr McCormick’s representation to Mr Backhaus at the 27 August 2010 meeting, to the effect that the Trident investment was fully subscribed.
[239] I am satisfied that a reasonable person in Mr Backhaus’s situation would likely have been misled or deceived by this representation, and I am also satisfied that Mr Backhaus was misled or deceived. The only issue is whether I should direct GTNZ to pay the entire instalment or whether the plaintiffs should bear some of the loss. I am not persuaded that the plaintiffs should bear any of the loss in respect of this instalment. It would have been a simple matter for Mr McCormick to inform
Mr Backhaus of the correct position or to say if he did not know, if that were the position. Mr McCormick’s gesture borders on deliberate deceit, and by a professional in a highly respected firm of accountants. I have already set out why I do not consider the plaintiffs can be criticised or were at fault for paying the second instalment. In the circumstances, pursuant to s 43(3)(f) FTA, I direct GTNZ to pay $100,000 to the plaintiffs to compensate them for their loss.
Result
[240] I make the following orders.
(a) I enter judgment for the plaintiffs against Mr Baker in respect of their fourth cause of action against him, the effect of which is that Mr Baker is liable to the plaintiffs in the sum of $400,000.
(b)I direct GTNZ to pay the plaintiffs $100,000 in respect of their first cause of action against GTNZ.
(c) I enter judgment for the first and second named plaintiffs against GTNZ in respect of their fourth cause of action against GTNZ, but in the sum of $100,000 only, being the sum those plaintiffs paid to acquire their second units in Trident on 25 February 2011. GTNZ is also to restore
to those plaintiffs any fees paid to GTNZ in respect of any attendances incidental to that acquisition.
(d)I direct GTNZ to pay Mr Backhaus $140,000 in respect of his sixth cause of action against GTNZ.
[241] I award interest on all claims from the date the proceeding was served, such interest to be calculated by reference to the Judicature Act 1908 rate prevailing from time to time.
[242] In the absence of agreement, I shall await the parties’ submission on costs and the application of the funds paid by Mr Simkin to satisfy the claim against him.
Mr Simkin’s liability would have been confined to Trident. My provisional view is that his settlement funds should be applied pro-rata to all awards, including interest and costs, in respect of the Trident investment.
[243] I reserve leave to apply.
Peters J
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