Bank of New Zealand v Chapple HC New Plymouth CIV 2011-443-000213

[2011] NZHC 2031

IN THE HIGH COURT OF NEW ZEALAND NEW PLYMOUTH REGISTRY

CIV 2011-443-000213

BETWEEN  BANK OF NEW ZEALAND Plaintiff

ANDTANYA LOUISE CHAPPLE Defendant

Hearing:         6 December 2011

Appearances: J T Toebes for plaintiff

Defendant in person

Judgment:      23 December 2011

JUDGMENT OF ASSOCIATE JUDGE ABBOTT

In accordance with r 11.5 High Court Rules

I direct the Registrar to endorse this judgment

with a delivery time of 2.30 p.m. on 23 December 2011.

Solicitors:      J T Law, PO Box 25443, Wellington 6146

Copy To:       T L Chapple, 118A Huatoki Street, New Plymouth

BANK OF NEW ZEALAND V TANYA LOUISE CHAPPLE HC NWP CIV 2011-443-000213 23 December

2011

[1]      Bank of New Zealand (“BNZ”) has applied for summary judgment against Tania Louise Chapple for the unpaid balance of a loan that BNZ made to Stormalong Limited   (“Stormalong”).   Ms   Chapple  was   sole  director   and   shareholder  of Stormalong and guaranteed its obligations to BNZ.

[2]      The loan was secured by a mortgage over a multi-unit property owned by Stormalong.  It operated a business similar to a boarding house using the property. The income from that business was used to meet Stormalong’s obligations under the loan and mortgage.

[3]      Stormalong failed to pay two instalments of interest.  BNZ issued Property Law Act 2007 notices and after they went unremedied, exercised its powers under the mortgage both to appoint a receiver of rents pending sale, and to sell the security property.  It now seeks judgment for the balance due under the loan agreement after crediting the proceeds of sale and net rental collected by the receiver.

[4]      Ms Chapple is representing herself.  She does not dispute that the loan was made, or that she guaranteed it, nor that notices under the Property Law Act were issued and expired unremedied.   She says  that  judgment should not be entered because the shortfall is due to BNZ’s actions in failing to inform her of shortfalls in interest payments, and failing to accept an offer for the security property made prior to the mortgagee sale and in failing to obtain the best possible price for the property under the mortgagee sale process.   In addition, she says that there has been insufficient accounting for income received from the security property whilst it was under the control of a receiver of rents.

The legal principles

[5]      The  principles  that  the  court  applies  when  deciding  an  application  for summary judgment are well established.   They succinctly are summarised in the following passage from the Court of Appeal’s decision in Krukziener v Hanover Finance Ltd1

[26]      The principles are well settled. The question on a summary judgment application is whether the defendant has no defence to the claim; that is, that there is no real question to be tried: Pemberton v Chappell [1987] 1 NZLR 1 at 3 (CA). The Court must be left without any real doubt or uncertainty. The onus is on the plaintiff, but where its evidence is sufficient to show there is no defence, the defendant will have to respond if the application is to be defeated: MacLean v Stewart (1997) 11 PRNZ 66 (CA). The Court will not normally resolve material conflicts of evidence or assess the credibility of deponents. But it need not accept uncritically evidence that is inherently lacking in credibility, as for example where the evidence is inconsistent with undisputed contemporary documents or other statements by the same deponent, or is inherently improbable: Eng Mee Yong v Letchumanan [1980] AC 331 at 341 (PC). In the end the Court’s assessment of the evidence is a matter of judgment. The Court may take a robust and realistic approach where the facts warrant it: Bilbie Dymock Corp Ltd v Patel (1987) 1 PRNZ

84 (CA).

[6]      A plaintiff seeking summary judgment has the onus of showing that there is no arguable defence.   Notwithstanding that overall onus, a defendant seeking to resist summary judgment must provide some evidential foundation for the defences relied upon: Australian Guarantee Corporation (NZ) Ltd v McBeth2.

The plaintiff ’s claim

[7]      BNZ’s claim is supported by affidavit evidence of Lorraine Gillian Ramsay, its Manager, Strategic Business Services.  She has given evidence that Stormalong failed to pay the full amount of interest due in August and September 2009, or before

6 February 2010 when BNZ issued notices of default under the mortgage and in accordance with the Property Law Act 2007.   The notices required Stormalong to remedy the defaults.  It did not do so.  It clearly had cash flow difficulties.

[8]      It appears that Ms Chapple had accepted by the beginning of 2010 that the realistic course for Stormalong was to sell the property.  She informed BNZ in early January 2010 that she had decided to put the property on the market in late January, and hoped that it would be sold before May (when the loan was due in any event). In about late March 2010 she informed BNZ that she had a potential purchaser or investor  and  asked  BNZ  to  extend  the  term  of  the  loan  to  allow  time  for  an

arrangement to be reached with the potential purchaser/investor.   When BNZ was unwilling to do so, the defendant presented an offer of $1 million (including GST) from a third party.   The offer was conditional on several matters, including a due diligence investigation and obtaining the consent of the second mortgage holder. BNZ was unwilling to  accept that offer before the property was marketed, and because of concerns about the solvency of the offeror.

[9]      In late April 2010 BNZ exercised powers given to it under the mortgage both to appoint a receiver of income from the mortgaged property and to sell the property. It appointed an experienced chartered accountant as the receiver of rents, who in turn appointed a local property management company to manage the property on a day to day basis.  BNZ obtained a market price appraisal ($1.4m – $1.5m) from a local real estate agent and a recommendation as to the manner of sale and the marketing process.  In accordance with the real estate agent’s advice, it arranged a four week marketing programme for a sale of the property by tender.   Three tenders were received ranging from a conditional offer of $1,050,000 to what is described as an “indicative” offer of $1,125,000.  BNZ did not accept any of these efforts.  Shortly afterwards, BNZ received and accepted a conditional tender for $1,435,000 (plus GST if any).  However, that contract was not made unconditional and lapsed.

[10]     Subsequently  BNZ  received  an  expression  of  interest  in  purchasing  the property at that same figure ($1,435,000), but now as a going concern (in other words, inclusive of chattels which were subject to a security in favour of Dominion Finance Group Limited (in receivership)). After further negotiations, which included Dominion Finance Group, BNZ entered into an agreement to sell the property as a going concern, on the basis that the agreed value of the chattels ($18,850) would be paid to Dominion Finance Group from the proceeds of sale.

[11]     The sale of the property as a going concern settled in late November 2010. BNZ received net proceeds of sale totalling $1,372,823.60, which were applied first to clear Stormalong’s overdraft, then to pay accrued interest, and the balance was credited against the outstanding principal.  This left a principal sum of $129,816.70 still payable as at 22 November 2010.   BNZ seeks judgment for that sum plus

interest accrued since November 2010, but less a credit for $22,000 received from the receivers of rents.

[12]     I am satisfied on the evidence provided by BNZ that it has established a prima facie case for judgment.   I now turn to consider the various matters put forward by the defendant as grounds for an arguable defence.

BNZ caused the losses

[13]     The first ground of defence advanced by Ms Chapple is that BNZ caused the loss by reacting prematurely to cash flow difficulties experienced by Stormalong. This submission appears to be based on several factors, including the contentions that Stormalong failed to pay the full amount of the interest due in August and September 2009 because of a lack of advice as to the amount payable, as BNZ failed to  give  notice  of  the  shortfall  following  the  default,  as  BNZ  withdrew  of Stormalong’s overdraft facility and demanded immediate payment of the overdrawn amount of $5,000, and then BNZ “prematurely dissolved the business relationship” by giving notice in October 2009 of its intention to issue notices under the Property Law Act.

[14]     None of these matters gives rise to any ground for defence.

[15]     Ms Chapple’s and Stormalong’s difficulties appear to have started in the early part of 2009 when a property manager that they had appointed was running the property.  It seems that the occupancy rate dropped, and with it the cash flow needed to run the business.  Ms Chapple stepped back into the management role, personally. In order to protect Stormalong’s ability to meet operating costs, Ms Chapple redirected income from the property to an account at a different bank and planned to deposit sufficient money each month into Stormalong’s trading account with BNZ (to which interest instalments were debited).   Unfortunately for Ms Chapple, she appears  to  have  misunderstood  the  basis  on  which  interest  instalments  were calculated (a daily basis) and hence that interest could fluctuate from month to month depending on the number of days in a month.  Be that as it may, she deposited insufficient money to meet the payments for August and September 2009.  Although

there is no evidence as to whether Stormalong was in a position to pay the full amount of interest in those months, there is no reason to make BNZ responsible for its failure to do so.  That responsibility lies with Ms Chapple, and her decision to divert Stormalong’s cash flow.

[16]     Similarly, there is no merit to the arguments that BNZ is responsible for not issuing a separate notice of the shortfall.  Firstly, it had no obligation to do so. To the contrary, Stormalong (and Ms Chapple) must be taken to have known the basis on which interest was to be charged, and that it could vary, and to make enquiries of BNZ if there was any doubt as to the amount required.  In any event, BNZ did notify Ms Chapple (by an email sent on 18 August 2009) of the interest debited on 17

August 2009, and the resultant shortfall after crediting the funds that Ms Chapple had deposited.  Furthermore, Stormalong and Ms Chapple were given advice of the interest amount (and hence the shortfall) in bank statements issued for the periods to

21 August 2009 and 18 September 2009.

[17]     It is clear from the evidence before the court that BNZ was entitled to issue notices under the Property Law Act by mid October 2009.  Even if BNZ’s decision to issue those notices could be considered harsh in light of Ms Chapple’s efforts to turn around the cash flow problems on the property (and I make no finding on that), it had that right under the loan agreement and mortgage.   It is what the parties

agreed: Taylor v Westpac Banking Corporation Ltd3.

[18]     Lastly, I record that Ms Chapple did not contend that BNZ was in breach of any legal  obligation  in  withdrawing  Stormalong’s  overdraft  accommodation  and requiring immediate repayment of the overdrawn amount.  She argued instead that BNZ ought to have been more reasonable in allowing her time to keep the business afloat.  The legal answer to that is the same as with the issue with the Property Law Act notices – BNZ’s steps were in accordance with the agreement between the parties.   The practical response is that BNZ did not issue the Property Law Act

notices until 6 February 2010.  If the cash flow difficulties were as temporary as Ms

3 Taylor v Westpac Banking Corporation Ltd (1996) 5 NZBLC 104,104 (CA).

Chapple sought to portray, there was time enough for Stormalong to have remedied the default.

[19]     Although she presented this as a separate ground, Ms Chapple took issue with BNZ’s decision to appoint a receiver, which seems to be another allegation that BNZ caused its own loss.   This argument derives from Ms Chapple’s contention that Stormalong’s  business  required  specialised  management  to  maximise  occupancy (and hence income) and minimise expenses.  She submitted that failure to achieve that affected the price obtained for the property.  She argued that she was the best person to provide the management required, and produced advice from a local valuer as to the nature of management required for the property and the potential effect on value  if  their  management  was  not  provided.     Ms  Chapple  argued  that  the appointment of the receiver of rents precluded her from continuing to manage the property, and that the income and expenses reported by the receiver support her contentions:  she  says  that  there  was  a  fall  off  of  income  whilst  the  receiver’s manager was in charge.  She also challenges a number of the expenses.

[20]     The receiver was appointed in late April 2010.  The property was marketed mainly in June 2010 (tenders were due on 6 July 2010).   It is unlikely that the receiver’s management of the property would have had any significant effect either on the occupancy or ultimate sale price during that period. As the eventual sale price was similar to the price negotiated after close of the tenders (in the agreement that did not become unconditional) it also seems unlikely that the receiver ’s management had a significant effect on the outcome.  However, that is not the decisive aspect.  Ms Chapple’s argument is met by the fact that she and Stormalong gave BNZ the right to appoint a receiver (clause 28 of the mortgage), and expressly agreed that the receiver was deemed to be Stormalong’s agent (clause 28.2):

28.2     Receiver’s powers Every appointment of a receiver shall be subject to the following provisions:

(a)       the receiver may be appointed notwithstanding that the power of sale conferred by this mortgage may not have become exercisable,

(b)       the receiver shall be deemed to be the agent of the Mortgagor who shall be solely responsible for the receiver’s acts or defaults whether such  acts  or  defaults  shall  be  done  or  made  in  relation  to  the purposes mentioned in this mortgage or otherwise.

(c)       the receiver shall have the power:

(i)        to demand and recover (and give receipts in respect of) all the   income   of   the   mortgaged   property   by   issuing proceedings, making applications, effecting distress or otherwise in the name either of the Mortgagor or the Bank to the full extent of the estate or interest of the Mortgagor, and

(ii)      to exercise any powers which may have been delegated to the receiver by the Bank pursuant to this mortgage,

...

(g)       for the purposes expressed or implied in this mortgage the receivers shall have the power to appoint managers, officers and agents upon such terms as the receiver may determine,

....

[21]     Ms Ramsay’s evidence is that BNZ did not do anything other than exercise its right to appoint the receiver.   It did not have any obligation to oversee the management of the property.  If Stormalong or Ms Chapple have an issue with the receiver (and for the reasons I have already given, there must be serious doubt as to any basis for the claim) it is not a matter for which BNZ is responsible.

[22]     I see no possible basis for a defence based on BNZ’s actions in requiring

payment.

Sale at undervalue

[23]     As I understood Ms Chapple’s argument, she relies on two matters to support an argument that BNZ sold at undervalue.  I have already referred to the first, being that value was lost as a result of the receiver’s management.  For the reasons I have already given, I find that there is no merit to this point.

[24]     The second matter advanced is that the price for which the building was sold ($1,435,000) was significantly below its value as evidenced by an offer to purchase made in 2006 (through the same agent) for $1,700,000.  (Ms Chapple also relied on this fact to support her argument about the affect of the receiver’s management.)

[25]     Ms Chapple argued that the earlier agreement was evidence that BNZ had not obtained the best possible price for the property.  However, that is not the test.  A mortgagee’s duty of care when exercising its power of sale is set out in s 176(1) of the Property Law Act:

176      Duty of mortgagee exercising power of sale

(1)       A mortgagee  who  exercises  a power to sell mortgaged  property, including exercise of the power through the Registrar under  section 187, or through a court under  section 200, owes a duty of reasonable care to the following persons to obtain the best price reasonably obtainable as at the time of sale:

(a)       the current mortgagor: (b)       any former mortgagor: (c)       any covenantor:

(d)       any mortgagee under a subsequent mortgage:

(e)       any holder of any other subsequent encumbrance.

....

[26]     There is well established authority to the effect that the obligation is not to obtain the best price reasonably obtainable but to take reasonable care to obtain the best price reasonably obtainable.4     Furthermore, the “best price reasonably obtainable” is not the same as “true market value”.5

[27]     The  time  for  assessing  whether  the  price  is  the  best  price  reasonably obtainable is the time of sale.6

[28]     The following principles are also relevant to the present case:

(a)       In assessing compliance with the duty under s 176, the matter must be looked at broadly and in a realistic way (it must be viewed in practical

commercial terms).7

4 Agio Trustees Co Ltd v Harts Contributory Mortgages Nominee Co Ltd (2001) 4 NZConvC 193,480

5 Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] 2 All ER 633 (CA) and Agio v Trustees Co Ltd v Harts Contributory Mortgages Nominee Co Ltd at [75]

6 Tse Kwong Lam v Wong Chit Sen [1983] 1 WLR 1349 (PC).

(b)Generally, a mortgagee must take all reasonable steps to ensure that a sale by the chosen method is as successful as possible.  In particular, care should be taken with the advertisement and the description of the property.8   However, not every error in description will mean a breach of the duty:   the errors must be clear and serious to give rise to a serious question to be tried.9

(c)      Where the security is substantial, or specialised property is involved, it will usually be necessary for the mortgagee to obtain and act upon specialised advice as to the method of sale.   Although appointing a competent agent to sell the property will not of itself discharge the mortgagee’s duties, putting it into the hands of a competent agent will

usually go a long way towards discharging those duties.10

[29]     Ms Chapple has not provided any evidential foundation for her contention that BNZ did not discharge its duty. The prior offer to purchase was six years earlier. The property market had gone through a turbulent period in the intervening times. BNZ took advice on the best method of sale, and acted in accordance with what appears to be perfectly reasonable advice (sale by tender and with a four week marketing programme).    BNZ did  not  accept  the tenders  initially received, and initially negotiated a sale price that was within the range of the agent’s market appraisal at that time.  It was substantially more than the other offers, including those indicated or put forward by Ms Chapple.

[30]     Ms Chapple took issue with some aspects of the agent’s appraisal for BNZ (most notably reference to the property having 21 units rather than 22 units).  She submitted that this would have affected value.   However, I regard that as a small inaccuracy that had no significance.  The difference may have been a typographical error: the property was advertised as 22 units.   However, even if the agent did

misunderstand the number of units when giving the appraisal, the correct number is

7 Apple Fields Ltd v Damesh Holdings Ltd[2001] 2 NZLR 586 (CA).

8 Earlston Farms Ltd v Trusteebank Wanganui (1986) 2 NZCPR 528 (HC).

9 Wallace v Bank of New Zealand HC Auckland CIV-2009-404-3534, 1 July 2009.
10 Tse Kwong Lam v Wong Chit Sen.

unlikely to have altered  the agent’s appraisal significantly, but in any event, as already mentioned, it was ultimately advertised accurately.   That is the key requirement in terms of BNZ fulfilling its duty.

[31]     I find that there is no basis to this ground for defence.

Quantum - inadequate explanation of income and expenses during receiver’s management

[32]     Ms Chapple contends that there are issues over the amount of the judgment being sought by BNZ, arising out of the income and expenses during the period of management by the receiver:

(a)      First, she argues that BNZ has failed to show why only $22,000 has been credited for net rent when a statement by the receiver for the period from 24 April 2010 to 27 October 2010 (the latter being just over three weeks prior to settlement of the sale) showed cash on hand of $25,437.70.

The short answer to this point is BNZ’s evidence that it only received

$22,000.  The inference to be drawn is that the balance was taken up in costs either of the property or the receiver’s costs.   There is no reason to question BNZ’s clear evidence as to the amount it received (recalling that the receiver is deemed to be Stormalong’s agent).

(b)In  his  statement  of  27  October  2010  the  receiver  declared  rent received of approximately $94,000.   Ms Chapple said that she had been unable to reconcile the reports by the property manager (Quinovic) appointed by the receiver with the total sum stated in the receiver’s report.

Again, this is not a matter on which BNZ can report or for which BNZ is responsible.  The receiver (as agent for Stormalong) has accounted to BNZ.  BNZ accepts that accounting (the receiver is a professional

with considerable experience in this field).   If Ms Chapple and Stormalong have an issue over the accounting, they can take that up with the receiver.

(c)       Ms Chapple questions how the receiver could have obtained a GST

refund, when income is stated to be higher than expenses.

The  point  is  answered  in  the  same  way  as  the  other  issues  over income.

(d)Ms Chapple queries several of the items of expenditure set out in the receiver’s statement, contending either that the expenses should not have been incurred or that there has been insufficient justification for them.

This  point  is  answered  again  in  the  same  way  as  the  arguments relating to income.

Quantum – generally

[33]     Ms  Chapple  also  raised  two  further  issues  relating  to  the  amount  being sought.  The first related to the amount paid to Dominion Finance Group for chattels. The second was a perceived inconsistency in the demands made on her prior to issue of this proceeding.  In her affidavits in opposition she also questioned the difference between the net proceeds of sale received by BNZ and the amount credited against the principal of the loan.  She did not pursue that point in the hearing – the difference having  been  explained  to  be  the  amount  credited  to  the  debit  balance  on Stormalong’s current account as at time of receipt of the net proceeds of sale.

[34]     Ms Chapple’s point over the amount paid to Dominion Finance Group is that she considered that the amount paid was more than the value of the chattels in the units (being the property charged to Dominion Finance Group).  This does not give Ms Chapple any ground for defence.  The sum paid to Dominion Finance Group was an agreed figure, presumably based on some assessment of the replacement cost of

the chattels and hence the value to a purchaser of the property as a going concern, and was the amount that Dominion Finance Group required to discharge its mortgage and allow the sale to proceed.  There is no evidence as to the chattels, in fact, having a substantially different value.  In the circumstances, I consider it was reasonable for BNZ to proceed with the sale on the basis of the negotiated figure.   It can be assumed that the purchaser was content to pay that sum for the chattels.

[35]     BNZ served two demands on Ms Chapple prior to issuing this proceeding. The first was on 14 January 2011, and was for the amount advised to Ms Chapple following settlement of the sale ($129,816.70).   The second demand was on 18

January 2011, for the sum of $131,971.90.  Ms Ramsay has identified the difference as the interest on the unpaid principal from the date of settlement up to 18 January

2011. There is no ground for defence in this.

Decision

[36]     I  am  satisfied  that  BNZ  has  established  its  claim  and  that  there  is  no evidential foundation for any of the matters advanced by Ms Chapple as grounds for an arguable defence.

[37]     BNZ   is   entitled   to   judgment   against   Ms   Chapple   (as   guarantor   of

Stormalong’s obligations) for:

(a)      $110,725.08, being the balance of principal due under the loan after crediting the available net proceeds of sale of the security property ($129,816.70), reduced by the money received from the receiver of rent ($22,000) and increased by interest of $2,908.38 for the period from date of receipt of the net sale proceeds to 17 February 2011 (all as set out in paragraph 24 of the statement of claim); and

(b)Interest on the sum of $110,725.08 at the rate of 10.11% per annum (being the rate agreed in the loan agreement) from 18 February 2011 to date of judgment; and

(c)       Costs and disbursements totalling $9,306.74, being costs calculated on a scale 2B basis as set out in a memorandum of counsel for the

plaintiff dated 6 September 2011, handed to the court in the hearing.

Associate Judge Abbott