Bartle v GE Custodians HC Auckland CIV 2008-404-003460
[2009] NZHC 998
•30 September 2009
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IN THE HIGH COURT OF NEW ZEALAND
CIV 2008-404-003460
BETWEEN BRUCE LEONARD BARTLE AND DOROTHY JUDITH BARTLE
First Plaintiffs
ANDBARTLE PROPERTIES LIMITED Second Plaintiff
ANDGE CUSTODIANS First Defendant
ANDTASMAN MORTGAGES LIMITED Second Defendant
ANDJONATHAN MATHIAS Third Defendant
Hearing: 20-24, 27 & 28 April and 12 May 2009
Appearances: P J Dale and D W Grove for Plaintiffs
R B Stewart QC, M V Robinson and B J Upton for First Defendant
N Tetzlaff for Second Defendant (Granted leave to withdraw) A Challis and R Scott for Third Defendant
Judgment: 30 September 2009
INTERIM RESERVED JUDGMENT OF RANDERSON J
This judgment was delivered by me on 30 September 2009 at 11 am, pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Solicitors: Ellis Law, PO Box 4516, Auckland
Simpson Grierson, Private Bag 92518, Auckland
McElroys, PO Box 835, Auckland
Counsel: D W Grove, PO Box 130, Auckland 1140
R B Stewart QC, PO Box 2302, Auckland 1140
BARTLE AND ANOR V GE CUSTODIANS AND ORS HC CIV 2008-404-003460 30 September 2009
INTRODUCTION ............................................................................................................................. [1]
THE ISSUES .................................................................................................................................... [14]
THIRD DEFENDANT (MR MATHIAS)............................................................................................... [14] FIRST DEFENDANT (GE) ................................................................................................................ [14]
THE CASE AGAINST MR MATHIAS......................................................................................... [15]
THE FACTS..................................................................................................................................... [15] EVENTS PRIOR TO THE SIGNING OF THE AGREEMENT FOR SALE AND PURCHASE ON
29 SEPTEMBER 2006...................................................................................................................... [16] THE FIRST MEETING WITH MR MATHIAS........................................................................................ [36] EVENTS AFTER THE FIRST MEETING WITH MR MATHIAS ................................................................ [70] THE COMPLETION OF THE AGREEMENT FOR SALE AND PURCHASE.................................................. [93] EVENTS AFTER THE AGREEMENT FOR SALE AND PURCHASE WAS SIGNED....................................... [99] THE MEETING BETWEEN THE BARTLES AND MR MATHIAS ON 7 NOVEMBER 2006 ...................... [105] EVENTS IN 2007 ...........................................................................................................................[107]
FACTUAL CONCLUSIONS IN RELATION TO THE CASE AGAINST MR MATHIAS .. [111]
DID MR MATHIAS OWE THE PLAINTIFFS A DUTY OF CARE AS ALLEGED IN PARAGRAPHS 53 AND 53A ASOC? ......................................................................................... [128]
DID MR MATHIAS BREACH ANY DUTY OF CARE OWED TO THE PLAINTIFFS IN ANY OF THE RESPECTS ALLEGED IN PARAGRAPHS 56, 56A AND 57 ASOC? ................... [146]
DID THE PLAINTIFFS CONTRIBUTE TO THE LOSSES SUSTAINED BY THEM IN ANY RESPECT IDENTIFIED IN PARAGRAPH 23 OF MR MATHIAS’ STATEMENT OF DEFENCE? .................................................................................................................................... [161]
WHAT RELIEF, IF ANY, ARE THE PLAINTIFFS ENTITLED TO AGAINST MR MATHIAS? .................................................................................................................................... [164]
CAUSES OF ACTION AGAINST THE FIRST DEFENDANT (GE) ...................................... [167]
INTRODUCTION ............................................................................................................................ [167] TML AND EML ........................................................................................................................... [173] THE NEW ZEALAND MASTER TRUST AND SECURITY TRUST DEED AND THE MASTER ORIGINATION AND SERVICING AGREEMENT (MOSA) DATED 22 JUNE 2006 .....................................................[176] THE CORRESPONDENT DEED ....................................................................................................... [180] THE OPERATIONS MANUAL ......................................................................................................... [187] GENWORTH FINANCIAL ............................................................................................................... [190] AMS LOAN PRODUCTS................................................................................................................ [192]
THE BARTLES’ FIRST LOAN - $137,484.00 IN NOVEMBER 2006 ..................................... [197]
THE SECOND AND THIRD LOANS OF $125,791 AND $366,291 MADE IN SEPTEMBER
2007 ................................................................................................................................................. [213] ALTERATION OF DOCUMENTS ............................................................................................. [232] AUDIT CHECKS........................................................................................................................... [240]
WERE TML OR BLUE CHIP (NZ) LIMITED AGENTS OF GE ON THE BASIS ALLEGED IN PARAGRAPH 35 ASOC IN ANY RESPECT AND, IF SO, WHAT WAS THE SCOPE OF THE AGENCY?............................................................................................................................. [250]
WAS TML THE AGENT OF GE? .................................................................................................... [251] WAS BLUE CHIP THE AGENT OF GE? ........................................................................................... [277]
DID TML HAVE KNOWLEDGE OF THE MATTERS IDENTIFIED IN PARAGRAPHS 32
AND 33 ASOC AND, IF SO, IS ANY SUCH KNOWLEDGE ATTRIBUTABLE TO GE AT THE TIME EACH OF THE LOAN AGREEMENTS WERE MADE? ................................... [280]
DID ANY OF THE LOAN AGREEMENTS CONSTITUTE AN UNCONSCIONABLE BARGAIN BY REASON OF ANY OF THE MATTERS IDENTIFIED IN PARAGRAPH 36
ASOC? ............................................................................................................................................ [283]
LEGAL PRINCIPLES ...................................................................................................................... [286] EVALUATION OF THE FACTS AS TO UNCONSCIONABILITY............................................................ [288] THE NATURE OF THE FASTDOC 70 LOANS ................................................................................... [297] CONCLUSIONS ON THE UNCONSCIONABILITY CAUSE OF ACTION ................................................ [304]
WERE THE LOAN AGREEMENTS OR ANY OTHER CONTRACTS ENTERED INTO BY THE BARTLES SUBJECT TO THE CREDIT CONTRACTS AND CONSUMER FINANCE ACT 2003 AND, IF SO, WERE THE TERMS OF ANY SUCH CONTRACTS OPPRESSIVE OR INDUCED BY OPPRESSIVE MEANS AS ALLEGED IN PARAGRAPHS 45 AND 46
ASOC? ............................................................................................................................................ [312]
CONCLUSION ON THE CAUSE OF ACTION UNDER THE CCCF ACT................................................. [343]
DID GE OWE A DUTY OF CARE TO THE PLAINTIFFS AS ALLEGED IN PARAGRAPHS
49 AND 50 ASOC AND, IF SO, WAS GE IN BREACH OF ANY SUCH DUTY IN ANY OF THE WAYS IDENTIFIED IN PARAGRAPH 51 ASOC?......................................................... [344]
WERE THE LOANS PROCURED BY FRAUD ON THE PART OF TML OR THE BLUE CHIP GROUP AS ALLEGED IN PARAGRAPH 48 ASOC AND, IF SO, IS ANY SUCH FRAUD ATTRIBUTABLE TO GE? ........................................................................................... [356]
SUMMARY AND DISPOSITION ............................................................................................... [360]
Introduction
[1] The first plaintiffs Mr and Mrs Bartle are pensioners. In 2006 they owned an unencumbered home at Amber Drive, Whangarei worth about $400,000. They had modest savings and a combined income of about $21,000 per annum. In this proceeding they seek to recover damages for substantial losses flowing from their investment in a scheme promoted by the Blue Chip group of companies which collapsed in early 2008.
[2] The Bartles became aware of the investment opportunity through an advertisement by Blue Chip New Zealand Limited. This company was a member of the Blue Chip Group of companies the largest shareholder in which was Mr Mark Bryers. The Blue Chip proposals were said to be attractive to people who were “asset rich but cash poor”. People like the Bartles could use the equity in their home to assist with the purchase of a residential apartment to secure an income stream. The Bartles say they understood Blue Chip would be responsible for all costs and expenses including payments due under any loans required. After four years, the apartment would be sold and the Bartles would receive a small share of any capital gain. In the meantime, they would have had the benefit of an augmented income of $451 per fortnight (before tax) with no cash outlay from themselves.
[3] The Bartles were introduced to a Mr Michael Davis who acted as the sales agent for Blue Chip throughout. Mr Davis recommended to the Bartles that they obtain legal advice from the third defendant Mr Mathias. He is a sole practitioner practising in Auckland who was said to be familiar with the Blue Chip investment transactions.
[4] After making such inquiries as they could and taking advice from
Mr Mathias, the Bartles signed an agreement for sale and purchase on
29 September 2006 to purchase unit number 701 in an apartment building being refurbished at 135 Symonds Street, Auckland. The purchase price was $552,000. Although no finance had been confirmed at that stage, the agreement was unconditional. Finance was subsequently arranged and advanced in three tranches by the first defendant GE Custodians (GE). The advances were:
• 8 November 2006 $137,484 • 28 September 2007 $125,791 • 28 September 2007 $366,291 $639,566
[5] The first two advances totalling $263,275 were made to the Bartles personally and secured over the Amber Drive property. The third advance was made to the second plaintiff Bartle Properties Limited, a company formed by the Bartles for the purpose of purchasing the Symonds Street unit. The Bartles provided personal guarantees of the obligations of Bartle Properties Limited to GE in respect of the third advance and their guarantees were secured by the mortgage over Amber Drive. Effectively therefore, Mr and Mrs Bartle personally are ultimately responsible for all the advances. They stand to lose their Amber Drive property and the investment unit unless they are successful in this proceeding.
[6] The Bartles understood their investment was to be a joint venture with the Blue Chip group. While they realised they would have to borrow the initial advance of $137,000 (and possibly another sum of $50,000), they say they did not understand they would be responsible for the total borrowing. Rather they understood that Blue Chip would provide any additional funding as well as taking care of all payments and expenses. It is a critical feature of this case that, at the time the Bartles signed the agreement for sale and purchase, the joint venture agreement had not been signed or shown to them. That did not occur until 7 November 2006, more than a month after they were committed to the purchase.
[7] The parties to the joint venture agreement were the Bartles and Blue Chip Joint Ventures Limited, a Blue Chip subsidiary with negligible capital. There was no guarantee from the parent.
[8] Mr and Mrs Bartle (or their newly formed company) also entered into other agreements in connection with the investment including a deed of lease and a property management agreement. The purchase of the Symonds Street unit was completed in September 2007 and the title registered in the name of Bartle Properties Limited. The fortnightly payments of $451 which the Bartles had been receiving
from December 2006 ceased shortly after the purchase of the unit was completed. Investors were advised in November 2007 that Blue Chip was restructuring and the group finally collapsed in early 2008 with substantial losses for a large number of investors. Unsecured creditors are most unlikely to be able to effect any recovery from that source. The mortgages secured over the Bartles’ Amber Drive property and the Symonds Street unit are in default and the value of the Symonds Street unit has dropped to a level thought to be about $250,000.
[9] It is common ground that subsequent analysis has shown that the Blue Chip Group was insolvent at all times material to this proceeding. But it was accepted that this fact was not known at material times by any of the parties to this proceeding.
[10] Mr and Mrs Bartle seek to recover damages from GE and Mr Mathias. The second defendant, Tasman Mortgages Ltd (TML), is in liquidation and has taken no steps. The Bartles had no direct dealings with GE, which is a company independent of the Blue Chip group. TML and a related company, Executive Mortgages Limited (EML), were parties to a “Correspondent Deed” with GE under which TML and EML undertook certain responsibilities including obtaining financial information from borrowers for the purpose of supporting loan applications. For present purposes, TML and EML may be viewed collectively.
[11] The case against GE as lender raises a number of causes of action. It is said that GE knew or ought to have known that the Bartles had no means to repay the loan and that the loans constituted an unconscionable bargain or were oppressive under the Credit Contracts and Consumer Finance Act 2003. It is also said that GE owed a duty of care to the Bartles and breached that duty by advancing funds to them when they knew or ought to have known that the plaintiffs had no independent means to meet the mortgage payments. GE denies liability and says it had no association with the Blue Chip group and no knowledge that the advances were being made in connection with transactions marketed by or involving the Blue Chip group. In this respect, the Bartles plead that TML and Blue Chip New Zealand Limited were agents of GE and that the knowledge held by those companies as agents can be attributed to GE as principal. GE denies the agency alleged. Fraud is also alleged against GE but was not strongly pressed.
[12] The plaintiffs’ case against Mr Mathias is that he owed them a duty of care in giving them legal advice in connection with their investment. A key allegation against Mr Mathias is that he failed to warn the Bartles that the success of the investment rested wholly or mainly on the viability of the Blue Chip group, and that if the Blue Chip group failed, they would be responsible for the whole of the advances made by GE with the risk of losing their previously unencumbered home. Mr Mathias denies liability and says there was no contract of retainer between himself and the Bartles until after the agreement for sale and purchase was signed. Any meetings with the Bartles prior to that time were preliminary in nature. Only general matters were discussed without reference to any identified property.
[13] It is said that this proceeding is a test case for over 300 Blue Chip investors who entered similar transactions. For present purposes however, the focus must be solely upon the case brought by the Bartles.
The Issues
[14] Against this background, the following issues arise. It is convenient to refer first to the case against Mr Mathias and the judgment will proceed on that basis. The issues are:
Third Defendant (Mr Mathias)
• Did Mr Mathias owe the plaintiffs a duty of care as alleged in paragraphs 53 and
53A of the amended statement of claim (ASOC) of 23 April 2009. If so, what was the scope of any retainer and when did any such retainer arise?
• Did Mr Mathias breach any duty of care owed to the plaintiffs in any of the respects alleged in paragraphs 56, 56A and 57 ASOC?
• If there was a breach of a duty of care by Mr Mathias, did the plaintiffs contribute to the losses sustained by them in any respect identified in paragraph
23 of his statement of defence?
• What relief, if any, are the plaintiffs entitled to against Mr Mathias?
First Defendant (GE)
• Were TML or Blue Chip New Zealand Limited agents of GE on the basis alleged in paragraph 35 ASOC in any respect and, if so, what was the scope of the agency?
• Did TML have knowledge of the matters identified in paragraphs 32 and 33
ASOC and, if so, is any such knowledge attributable to GE at the time each of the loan agreements were made?
• Did any of the loan agreements constitute an unconscionable bargain by reason of any of the matters identified in paragraph 36 ASOC?
• Were the loan agreements, or any other contracts entered into by the Bartles subject to the Credit Contracts and Consumer Finance Act 2003 and, if so, were the terms of any such contracts oppressive or induced by oppressive means as alleged in paragraphs 45 and 46 ASOC?
• Did GE owe a duty of care to the plaintiffs as alleged in paragraphs 49 and 50
ASOC and, if so, was GE in breach of any such duty in any of the ways identified in paragraph 51 ASOC?
• Were the loans procured by fraud on the part of TML or the Blue Chip Group as alleged in paragraph 48 ASOC and, if so, is any such fraud attributable to GE?
• If any causes of action are established against GE, what relief, if any, are the plaintiffs entitled to against GE?
The case against Mr Mathias
The Facts
[15] The key witnesses in relation to the claim against Mr Mathias are the Bartles and Mr Mathias. In addition, the Blue Chip sales agent Mr Davis gave evidence and there was expert evidence from two lawyers, Mr P H Nolan for the Bartles and Mr R V Eades for Mr Mathias. There is a substantial volume of documentary evidence. Although a significant part of the factual background is not in issue, there is a strong factual dispute as to the timing of meetings, who was present and what was said at them.
Events prior to the signing of the agreement for sale and purchase on
29 September 2006
[16] Mr and Mrs Bartle are a retired couple who, at the time of the transactions, were aged in their mid 60s. Neither has any professional qualifications. For some
28 years, Mr Bartle was a qualified meat inspector and later purchased a small one- man cleaning business which he operated until his retirement in 2003. In the past they had owned some rental properties on a small scale.
[17] In 2006 their unencumbered Amber Drive property was valued at approximately $400,000. They had savings of about $65,000 and a combined income of $21,736. They had no other assets of significance.
[18] I had the opportunity to see Mr and Mrs Bartle cross-examined at length. I have no doubt as to their honesty although they were willing to accept that, in some respects, their recollection of events may have been faulty. I find that the Bartles are a couple of normal intelligence but who lacked sophistication in business matters. That led them to misunderstand some aspects of what they were told and what they read about the investment, but this does not affect my overall conclusions. In important respects, their evidence is supported by Mr Davis.
[19] In mid 2006, they saw an advertisement about the Blue Chip group in the New Zealand Herald. They made contact with Blue Chip and Mr Davis visited them at their home on 22 June 2006. The meeting extended for some one and a half hours. According to Mr Bartle, Mr Davis gave the Blue Chip group “a glowing recommendation”. Mr Davis supported Mr Bartle’s evidence on this point. His evidence was that the management of Blue Chip held regular meetings with the sales staff which were upbeat in tone. They were instructed that Blue Chip was offering an innovative and technical product of real advantage to the clients; Blue Chip sales were backed up by independent valuations and rental appraisals; investors were able to obtain independent advice from solicitors recommended by Blue Chip; Blue Chip were experienced in the property market, knew the developers, and had a significant market advantage through buying properties in bulk. In relation to joint venture transactions, sales staff were told to emphasise to prospective investors that the deposit remained in a solicitor’s trust account; investors had a guaranteed return and income stream backed up by Blue Chip guarantees; Blue Chip guaranteed to buy back the apartments; and there was “no risk to the investors”.
[20] Mr Davis said that the joint venture product was ideally suited for the type of persons who usually had a modest income but significant equity in their home. He told investors they would benefit from the investment proposed. In cross- examination he agreed he would have been enthusiastic in his promotion to the Bartles of the Blue Chip product which he believed in at the time. He agreed he would have assured the Bartles that Blue Chip would “ take care of everything” and that Blue Chip had the ability to pay all relevant fees and costs including the mortgage payments. He was not concerned that the investors would be responsible for the mortgage payments if anything went wrong because he and the other sales staff were assured that Blue Chip was highly profitable with substantial backers from merchant banks who were well funded. He agreed it was not in his interests or those of Blue Chip to identify any risks involved with the investment. He emphasised however that he told the Bartles and other investors it was important to obtain independent legal advice before entering the transaction.
[21] Mr Davis also agreed that he and other sales staff were trained to say that investing through Blue Chip was comparable to having money invested on term deposit with a bank with a guaranteed interest rate over a particular term. He added:
We would never say “hey there is a possibility the bank is going to fall over and you won’t get your money back...”.
[22] He went on to say that he and other sales staff were told to promote the product on the basis that the investment was as safe as a term deposit because with the joint venture structure and Blue Chip’s involvement, “they [Blue Chip] took [on] board all risks”
[23] At or soon after the first meeting with the Bartles on 22 June 2006 Mr Davis gave them a brochure from Blue Chip New Zealand described as “Your Guide to Financial Planning Using Smart Residential Property Solutions”. Blue Chip New Zealand is described in the brochure as a subsidiary of Blue Chip Financial Solutions Limited, a publicly listed company on the New Zealand Exchange. The brochure emphasises the innovative solutions offered by Blue Chip investments, the company’s experience and expertise in property investment, the experience and prominence of its directors and the substantiality of its shareholders. A note made by Mr Bartle in the brochure supports his evidence that he was questioning how the transaction would work. His note reads:
Query
To physically take ½ property value from 16 Amber Drive makes an immediate mortgage. Who is going to pay that back? The money cannot be in 2 places at once!! The tenant can only pay so much.
[24] The brochure outlined the “cashflow positive” nature of the investment taking into account rent, tax efficiencies and any necessary working capital. Potential projected outcomes were stated. These were based on certain assumptions including Blue Chip exercising an option to buy the investment property after four years; one hundred per cent funding through borrowed money; a mortgage interest rate of 7.8 per cent per annum; a 6 per cent rental yield; and Auckland property values doubling every 9.5 years.
[25] At the meeting on 22 June 2006, Mr Davis also obtained basic details from the Bartles about their financial position which he recorded in a file note prepared soon afterwards. The Bartles informed Mr Davis they were intending to travel to Australia to see family but would be returning on 9 August 2006. Mr Davis records in his file notes that the Bartles were “very keen” to hear back from him then with an analysis of the proposed transaction. Mr Bartle was inclined to downplay the level of enthusiasm he and his wife had for the transaction at that point but I accept they were certainly very interested to receive further information.
[26] Mr Bartle said that at the first meeting or possibly the second one, Mr Davis told them that the Blue Chip group was underwritten by Lloyds of London and this gave him some additional comfort.
[27] During the first meeting, Mr Bartle said he raised some questions with Mr Davis, stressing that he and his wife were on a fixed income by way of superannuation and had no other means of supporting a mortgage. Mr Bartle questioned how the transaction could work. He mentioned that the tenant of the investment property would have to pay a substantial rent in order to cover the mortgage payments and provide the contemplated fortnightly return to himself and his wife. It was in that context that Mr Bartle says Mr Davis assured him there would be no cash payments required on their part and that the Blue Chip proposal “does work”. The Bartles were concerned to make sure the investment was safe and that they were not risking their home. Mr Davis gave them those assurances because he believed there were no risks.
[28] The Bartles completed a finance application dated 23 June 2006 (the day following the first meeting with Mr Davis). The application is addressed to EML and provides basic details of the Bartles’ assets and their income and outgoings. Their occupations in each case were described as “Retired”. The Bartles both say they would never have described themselves as self-employed since it was not true. This evidence is material to an allegation I later deal with that various finance application forms signed by the Bartles were altered subsequently by others to show their occupations as self-employed (the suggestion being that this was done to enhance their prospects of obtaining finance). The finance applications also give the
dates of birth for both Mr and Mrs Bartle as 1939 and 1940 respectively so that all who saw these documents in 2006 and subsequently would have been aware that the Bartles were in their mid-sixties.
[29] While the Bartles were in Australia, Blue Chip sent to them a document described as a “Sample Analysis” dated 6 July 2006. These analyses were revised on several occasions thereafter. The sample analysis of 6 July 2006 was made on certain financial assumptions and did not relate to an identified property. The first
page contained the following summary of the proposed investment:
Yourinitialcontributionwillbe: $197,494 Plus an additional amount of: $ 83,700 Thetotal investment willbe: $671,794 Thepropertypurchaseprice willbe $593,000
[30] The sample analysis went on to set out “Guaranteed total extra income before tax” amounting to $9,625 per annum which, over four years, would total $38,500. A sum of $370 per fortnight (described elsewhere as a “procurement fee”) was said to be:
...the payment you will receive from Blue Chip every second week, from the date you pay your contribution until the date the property is sold. In addition to this payment, Blue Chip will meet the interest on any associated borrowing. The payment is made to you as income, without a deduction for tax. At the end of each tax year you are required to submit a tax return and pay tax, at your marginal rate, on a portion of the amount you received.
[31] In addition there could be a small portion of the net gain payable to the Bartles when the property was sold, depending on the sale price. This portion was estimated in the sample analysis to be $2,211 calculated on the basis of a “Joint Venture Capital Split” of 97 per cent to the “Guarantee Party” and 3 per cent to the “Equity Party”. This would be “in addition to the return of your contribution”.
[32] The weekly rental for the investment property was shown as $690 in the sample analysis. There would be a “working capital” requirement for the joint venture of $50,500.
[33] The Summary of Investment Outlay stated:
“Clients Equity Available in Existing Property $294,000 Deposit Payable $118,700 Total Conveyancing Expenses $28,294 Working Capital Facility $50,500 Clients Initial Contribution Required (Part One) $197,494 Clients Initial Contribution Required (Part Two) $83,700 Total Initial Contribution $281,194 =======
Client’s Cash Contribution $0 Client’s Contribution to Borrow Against Existing Property – Part One
$197,494
Client’s Contribution to Borrow Against Existing Property – Part Two $83,700 Total Amount to Borrow Against Investment Property $390,600 Total Outlay $671,794”
[34] In this sample analysis, it is clear that the client’s “contribution” to borrow against their existing property would be in two parts borrowing $197,494 as part one and $83,700 as part two. The amount to be borrowed against the investment property is stated to be $390,600 but the responsibility for this additional borrowing is not stated. A cash flow analysis refers to a contribution of $148,737 from the “Guarantor Party” but this is said to be “pre Top Up from Guarantor” which suggests further contributions from Blue Chip as Guarantor. The subsequent analyses provided were in the same standard form. None made it clear that the Bartles would have ultimate responsibility for the total borrowings.
[35] At some point after the first meeting with Mr Davis, the Bartles began to have cold feet about the Blue Chip investment and decided not to proceed. But after they returned from Australia, the Bartles spoke again with Mr Davis. They remained cautious and wanted further detail about the joint venture proposal. A second meeting took place, the date of which is not certain. Emails from Mr Davis make it clear that it must have been prior to 5 September. The Bartles and Mr Davis suggested it was not until the second meeting that a joint venture arrangement was discussed but this is inconsistent with the file note made by Mr Davis at the first meeting on 22 June and with the sample analysis prepared on 6 July. I am satisfied that the joint venture was mentioned at both meetings as Mr Bartle accepted when cross-examined on this point.
The first meeting with Mr Mathias
[36] The Bartles had a number of questions and Mr Davis recommended that they take legal advice from a lawyer who “could explain the product better” than himself. Mr Davis confirmed that the Bartles specifically sought an explanation of “how the transaction worked”. Mr Davis said he knew the Bartles had a lawyer in Whangarei but he suggested they use a “Blue Chip lawyer” who would understand the Blue Chip product whereas the Bartles’ own lawyer might not. Mr Davis emphasised to the Bartles that the lawyer recommended by Blue Chip was independent and would act in their best interests. He recommended Mr Mathias because he had met him and introduced investors to him on other occasions. He considered Mr Mathias to be good to work with and he had no reason to doubt his integrity.
[37] Thereafter, Mr Davis contacted Mr Mathias, sending him a “profile” of the Bartles. No separate profile document was produced but I infer that the material sent to Mr Mathias at this stage was either the EML finance application completed by the Bartles on 23 June 2006 or a document containing very similar information including their names, contact information and financial details. Mr Davis followed up his initial communication to Mr Mathias with an email dated 5 September 2006 inviting Mr Mathias to telephone Mr Bartle “to firm up a meeting tomorrow”. The email from Mr Davis was headed “J/V clients” which indicated clearly to Mr Mathias that the Bartles were prospective clients contemplating entering into a joint venture transaction with Blue Chip.
[38] Here, there is an important conflict of evidence which I must resolve concerning the timing of meetings between the Bartles and Mr Mathias in 2006. All three agree there were only two meetings between them in 2006. It is also agreed that both of these meetings occurred at the Bartles’ home at Whangarei to which Mr Mathias travelled from Auckland. In an affidavit filed at an earlier stage of the proceedings, Mr Bartle said the first meeting with Mr Mathias took place on
27 October 2006 (after the agreement for sale and purchase was signed on
29 September). In his written brief before me, Mr Bartle said he was sure that his recollection of the meeting date must have been incorrect and that the date of the
first meeting with Mr Mathias was on 29 September 2006 when the agreement for sale and purchase was signed.
[39] The Bartles say the second meeting with Mr Mathias was on 7 November
2006 when the loan agreement for the sum of $137,000, the associated mortgage and the joint venture agreement were signed. There is no dispute about this date and those who were present.
[40] But Mr Mathias says the first meeting he had with Mr and Mrs Bartle was on
7 September and the next meeting was not until 7 November. He says he was not present when the agreement for sale and purchase was signed.
[41] Both the Bartles and Mr Mathias accepted that, at least in part, they had to rely on the contemporaneous documents in order to assist their recollection as to dates. Mr Mathias has a very sketchy file note written on the email to him of
5 September received from Mr Davis asking him to contact the Bartles to make a meeting for the following day. The file note reads:
met with Bartles.
7.9.06.
answered all questions
[42] Mr Mathias’ diary also confirms that he had an appointment with the Bartles at 4 pm on 7 September. That followed a meeting he had with another Whangarei client at 3 pm. There is no record in Mr Mathias’ diary of any meeting with the Bartles on 29 September (a Friday). His diary shows two meetings scheduled for
8.30 am and 10 am which he believes were meetings in Auckland. He said it was unlikely he would have visited the Bartles in Whangarei on a Friday since this is a day on which conveyancing transactions are normally settled in Auckland.
[43] Mr and Mrs Bartle stated in evidence that they met with Mr Mathias on
29 September when the agreement for sale and purchase was signed and that they provided lunch for him. They said the visit lasted some two and a half hours. Mr Mathias stated that he did not have lunch or any other meal with the Bartles on
29 September or on any other occasion. He explained that he suffers from diabetes and makes his own arrangements for meals. He recalled a conversation with
Mrs Bartle about diabetes (since she apparently suffers from the same condition) and also recalled Mrs Bartle showing him some paintings. However, he was sure this happened either at the meeting on 7 September or at the later meeting on
7 November. He has a file note of the meeting on 7 November which indicates it took place between 6 and 8 pm. Neither that time nor the 4 pm meeting time in his diary for 7 September are consistent with a lunchtime meeting.
[44] I am satisfied, for reasons which I later outline, that it was Mr Davis who was present when the agreement for sale and purchase was signed on 29 September and not Mr Mathias.
[45] I conclude that, on the balance of probabilities, the first meeting between the Bartles and Mr Mathias took place on 7 September 2006 and that they did not meet again until the 7 November meeting. That is consistent with the files notes and diary entries kept by Mr Mathias and my conclusion that it was Mr Davis (not Mr Mathias) who was present when the agreement for sale and purchase was signed by the Bartles on 29 September 2006. Although there are some further emails between 15 and 26 September suggesting that the Bartles had more questions about the proposed investment, there is no evidence that any meeting or discussion between the Bartles and Mr Mathias took place other than those on 7 September and
7 November.
[46] While I have concluded that Mr and Mrs Bartle were mistaken about the date of their first meeting with Mr Mathias I nevertheless accept in general terms the truth of their evidence about what Mr Mathias told them at the meeting which I have found took place between them on 7 September, prior to the Bartles signing the agreement for sale and purchase. My impression was that the Bartles recalled the details of their conversations well while Mr Mathias (understandably since he dealt with many investors) was much more reliant on his usual practice than specific recollections. His file notes are scant in the extreme.
[47] It is not in dispute that Mr Davis referred the Bartles to Mr Mathias because of his experience and knowledge in the structure and operation of the Blue Chip investment products and all related documentation including the form and structure
of the joint venture agreement. Mr Mathias informed the Court that he had represented 50 or 60 Blue Chip investors in 2005. This continued into 2006 when he had two staff in addition to himself specifically dealing with Blue Chip conveyancing transactions at the rate of five or six a month. Blue Chip investors were referred to him by Mr Davis and several other Blue Chip sales staff.
[48] Mr Bartle’s evidence was that he and his wife had a number of questions they wished to have answered before agreeing to proceed with the proposal. Mr Bartle prepared a list of issues in the following form:
Blue Chip Proposal
Considerations re. B L & D J Bartle 16 Amber Drive Whangarei
Trust and proposal to purchase property. The price & locality of the new property?
The Costs would have to be all taken from the equity in 16 Amber Drive!
Tax return each year? Is this mandatory?
Costs Administration Quotable Values Trust
Deposit for new property
Rates & Insurance
Question I heard an ad on Radio Pacific for property and they mentioned
Blue Chip investment. Is this part of your organisation?
The WINZ payments especially Judy who is receiving more each fortnight due to Diabetes. Is this going to be acceptable by WINZ as we would be earning more than the $80.00 per week
Choice of Trust people?
Proposed new bedroom addition to be financed by our funds.
Suppose the venture as a hard luck situation and we have to find plan b
The house would be mortgaged so would there be enough left over to be able to us (sentinel) this facility?
After the 4 year period what happens?
Making of a will. Advantages & Disadvantages Essential requisite. How long would this take to eventuate?
Returns as offered. $130.00 *52 weeks = $6,760.00 *4 years = $27,040.00
An undisclosed return at the sale of the property. Concern of losing control over our freedom that we.
[49] The list of issues is undated but there are several indications which help to clarify at least the period during which it must have been prepared. First, it raises a question about the price and locality of the new property. It is probable that the Symonds Street unit was not identified as the property to be purchased until
26 September or shortly before. An analysis dated 13 September 2006 referred to a property in Albert Street, Auckland and a net cashflow of $259 per fortnight. An email from the Bartles to Mr Davis on 22 September referred to the purchase of “a unit close to Queen Street in Auckland” and the fortnightly net return of $259 earlier cited for the Albert Street property. The first reference to the Symonds Street unit appears in a note made by Mr Mathias on an email sent to him by Mr Davis on
26 September referring to “Unit 7.1 Madison Symonds Street”. By this stage, the analysis prepared on that date shows a purchase price of $522,000, total investment cost of $634,284 and a net fortnightly return of $387 (or $451 before tax).
[50] A further indication of the period in which the list of issues was prepared by the Bartles is the reference to the return offered of $130 per week. This was broadly the figure included for the first time in the sample analysis of 6 July ($261 per fortnight) and repeated in the analysis of 13 September 2006 ($259 per fortnight).
[51] I conclude that the list of issues was prepared by the Bartles sometime between 6 July and 26 September. Since they did not return from Australia until
31 July, the period can be further restricted to some time after the date of their return from Australia on that date until 26 September.
[52] Mr Bartle’s evidence was that he prepared the list of issues and discussed them both with Mr Mathias and Mr Davis. A number of the issues raised are legal questions such as the making of a will and questions about the formation of a trust. Others relate to the structure and risks of the transaction, particularly the risk to their home if the venture turned out to be “a hard luck situation and we have to find
plan b”. The list also refers to their concern about losing control over their freedom which I infer probably relates to the formation of the trust.
[53] Mr Davis was very clear in his evidence that he referred all the Bartles’ questions of a legal nature and those to do with the structure of the transaction to Mr Mathias and accounting issues to a Mr Kahn. The Bartles did not meet Mr Kahn at any stage but say they directed their issues and questions about the transaction to Mr Mathias. That is consistent with Mr Mathias’ file note relating to the
7 September meeting in which he refers to answering all the Bartles’ questions.
[54] I am satisfied on the balance of probabilities that when the Bartles met with Mr Mathias on 7 September they had already prepared the list of issues referred to at [48] above and used the list as the basis for their discussion with him. Mr Mathias accepted the meeting lasted up to an hour.
[55] The list of issues prepared by Mr Bartle is consistent with his oral evidence, supported by Mrs Bartle, as to the content of the conversation they had with Mr Mathias. Their evidence was that there was a general discussion about the risks associated with the transaction and they also asked him a number of questions. Whenever issues were raised by them with Mr Mathias about costs or payments, he assured them Blue Chip would take care of everything. Mr Bartle said they raised the same concerns as he had earlier noted in the Blue Chip brochure and expressed to Mr Davis. When these concerns were raised with Mr Mathias, he told them that Blue Chip had the ability to pay all the fees and costs. When they pointed out to Mr Mathias that they did not have any financial backing other than their home, they were continually assured by Mr Mathias that there were no problems with the transaction.
[56] There were questions about a comparison between the Blue Chip investment proposal and another with a company named Sentinel. Mr Bartle also remembers asking Mr Mathias a question about the four year period of the transaction and what would happen at that stage. He was told that the fortnightly payments would then cease, the investment property would be sold and the equity taken earlier from the Bartles’ home would be returned to them. There was discussion about a will and
establishing a trust. Mr Bartle said Mr Mathias told them he would prepare the will and set up a trust for ownership of the property.
[57] The impression Mr and Mrs Bartle received at the meeting was that Mr Mathias had a great deal of confidence in Blue Chip. They agree he told them there was risk with every investment but when he was asked what would happen if Blue Chip collapsed, he replied “I have every confidence in bricks and mortar, trust me I am a lawyer”. Mr Bartle says he also raised a question with Mr Mathias about the rental received from the transaction since Mr Bartle knew a little about rental properties from his previous experience. Mr Bartle told Mr Mathias he could not see how Blue Chip could afford to pay the procurement fee. Mr Mathias assured him Blue Chip would honour the agreement and take care of all the costs. Mr Bartle felt that Mr Mathias was reinforcing everything Mr Davis had told them to the same effect. The Bartles reminded Mr Mathias they were on a fixed income and were retired with no funds to supplement any investment scheme if things went wrong. Mr Bartle says that no warnings of any kind were given to them at the meeting. Mr Mathias did not explain how the joint venture agreement worked except in the very general terms that “Blue Chip would take care of everything”.
[58] Both Mr and Mrs Bartle said in evidence that Mr Mathias told them Blue Chip would be responsible for any borrowing beyond their initial contribution. This was consistent, they said, with their understanding that the proposal was for a joint venture with Blue Chip. In the light of this understanding they did not consider it unreasonable that Blue Chip should, at the end of the four year period, receive virtually all of the capital gain anticipated when the investment unit was sold.
[59] Mr and Mrs Bartle were very clear in their evidence that they would not have entered into the transaction without the assurance and comfort received from their discussion with Mr Mathias prior to signing the agreement for sale and purchase. While they were also influenced by Mr Davis and by a later discussion Mr Bartle had with an acquaintance who had already invested through Blue Chip, their evidence was that it was the advice received from Mr Mathias as a lawyer which was critical to their decision to proceed.
[60] In a number of respects, Mr Mathias disputed the evidence given by the Bartles as to what took place at the critical meeting which I have found took place at the Bartles’ home on 7 September 2006. He accepted from the outset that he had little independent recollection of the meeting and was largely dependent upon the documents on his file and his appointment diary. He expressed his evidence largely in terms of his general practice with Blue Chip investors such as Mr and Mrs Bartle. He spoke of what he would have said if he had been asked to give advice of the kind the Bartles said they were seeking from him. Mr Mathias did not recall seeing the list of questions Mr Bartle had prepared but accepted in general terms that questions were asked of him at the meeting.
[61] The general tenor of Mr Mathias’ evidence was that the meeting was of a preliminary or introductory nature. He did not regard himself as having been retained as a solicitor to advise the Bartles at that point because there was no specific transaction in view at that time and any information provided to the Bartles was general in nature. He did not regard the meeting as one at which he gave legal advice and did not consider it was any part of his role to give advice to the Bartles about the wisdom of the transaction. He did not regard himself as having a retainer from the Bartles until he received a copy of the executed agreement for sale and purchase several weeks after it was signed by the Bartles on 29 September 2006 and he did not formally open a file until 7 November 2006. Any incidental communications received in writing prior to that were kept on a general file of correspondence in case he was later instructed formally to act for the Bartles in connection with the transaction. Even then, he saw his role as strictly limited to undertaking the conveyancing aspects of the transaction.
[62] There was some common ground between the Bartles and Mr Mathias about certain aspects of their first meeting. Mrs Bartle agreed in cross-examination that Mr Mathias had told them that he had previously acted for Blue Chip investors; that he had not been informed by any of those who had entered Blue Chip investments that they had experienced any significant problems; that Blue Chip was a publicly listed company with audited accounts and high profile directors such as Wyatt Creech and John Luxton; that a nominee company would be provided to purchase the investment property; that the deposit for the property fees and other
costs would be raised by a mortgage over their home; that they would enter into a joint venture with Blue Chip under which Blue Chip would be responsible for meeting the payments under the mortgage and other expenses, less rent recovered; that they would receive a fortnightly procurement fee from Blue Chip shortly after signing the agreement for sale and purchase and throughout the term of the joint venture; that after four years the property would be sold, with their share of the net profit being about 10 percent with the larger share going to Blue Chip; that the Bartles would not need to deal with the tenants or manage the property or collect the rent; and that the unit would be subject to a lease and managed on their behalf.
[63] Where the Bartles and Mr Mathias parted company was in relation to the risks of the transaction and further borrowing beyond the initial $137,000 which the Bartles understood would be secured over their home. Mr Mathias said that if he had been asked what would happen if Blue Chip collapsed, he would have told them that they would be personally liable and that the promise to reimburse expenses given by Blue Chip was “only as good as the company making it”. He denied making any statements to the effect that Blue Chip would be taking out any additional mortgages; that it was a bricks and mortar investment; that he could be trusted because he was a lawyer; or that Blue Chip would take care of everything and would honour their agreements.
[64] While Mr and Mrs Bartle were willing to accept that they may have been mistaken as to the timing of meetings with Mr Mathias, they remained substantially unshaken in cross-examination on those areas where their evidence conflicted with that of Mr Mathias. In general, I find that Mr and Mrs Bartles’ account of the first meeting with Mr Mathias is likely to be correct, although I accept they may have misinterpreted parts of what they were told by Mr Mathias. It is clear that the Bartles went to the meeting specifically to seek advice from Mr Mathias as the lawyer recommended to them by Mr Davis with experience in Blue Chip investment transactions. They went with a list of questions which I am satisfied were raised in discussion with Mr Mathias even if the list itself was not produced for his inspection. I am also satisfied that Mr Mathias knew that he was being approached by reason of his specialised knowledge of Blue Chip transactions including their general structure and how the joint venture investments worked.
[65] Mr Davis supports the evidence of Mr and Mrs Bartle that they sought the advice of Mr Mathias because they wanted to know “how the transaction worked”. While there may be room for doubt about the precise words used by Mr Mathias at the meeting, I am satisfied that the general impression he conveyed to Mr and Mrs Bartle was that the Blue Chip investment proposal was safe and that there were no unusual risks associated with it. I am also satisfied that, in general terms, he repeated the assurances the Bartles had received from Mr Davis that Blue Chip would be responsible for all costs and expenses along with the outgoings in relation to the borrowings. While Mr Mathias may not have stated in explicit terms that any finance beyond the Bartles’ initial contribution would be borrowed by Blue Chip, the Bartles would have been under the impression from the written materials and from the discussions with both Mr Davis and Mr Mathias that Blue Chip would be responsible for arranging the mortgage finance and meeting all costs and payments due under the mortgages.
[66] In cross-examination, Mr Mathias volunteered that he regarded the first meeting with the Bartles as “a PR type trip” to talk to them about his previous investor clients and the fact that they had been paid their procurement fees without any problem. His possibly unguarded use of the description of the meeting as a “PR” exercise suggests he expected or at least was hopeful of receiving formal instructions in due course to act for the Bartles in connection with the transaction. I am satisfied however that the Bartles regarded the matter as much more than an opportunity to meet Mr Mathias and were entitled to treat the meeting as a serious occasion upon which the considered view of Mr Mathias as an experienced lawyer was being sought.
[67] Critically, Mr Mathias did not draw to the attention of Mr and Mrs Bartle the fact that they would be personally responsible for the entire borrowings in the event of Blue Chip failing. While there was no specific unit proposed for the Bartles’ investment at the time of the first meeting, Mr Mathias was well aware of the general structure of the joint venture agreement.
[68] In cross-examination, Mr Mathias acknowledged that the Bartles were taking the entire risk of the transaction in the event that Blue Chip were to fail. He knew
that Blue Chip would not be assuming any responsibility to the lender by way of personal covenant or guarantee and must have appreciated the vital importance to the investor of the joint venture agreement. Yet he gave no advice to Mr and Mrs Bartle to that effect, but instead gave them the impression it was safe to proceed with the transaction. At the time of the meeting, Mr Mathias was aware that the Bartles were pensioners and were most unlikely to have the means to meet borrowings for the Blue Chip joint venture transactions which typically required total borrowings of
$500,000 to $600,000.
[69] While Mr Mathias had a thorough working knowledge of the structure of the joint venture agreements used in transactions of this type, the Bartles had no such knowledge. They did not receive advice about the structure of the joint venture agreement from Mr Davis, Mr Mathias or anyone else prior to entering the agreement for sale and purchase on 29 September 2006. Having signed the agreement they were committed to the transaction. Yet the joint venture agreement was not signed until 7 November 2006. Even then, Mr Mathias accepted that the focus of the discussion at that time was the execution of the loan agreement and mortgage relating to the initial advance of $137,000 and that there was little discussion or advice given to the Bartles about the joint venture agreement and how it operated.
Events after the first meeting with Mr Mathias
[70] On 13 September 2006 Blue Chip sent to the Bartles a further analysis, this time described as an “Actual Analysis” in respect of a unit in the Barclay development in Albert Street, Auckland. This analysis was in the same form as the sample analysis of 6 July 2006 but with different sets of figures. The key figures stated in the summary were:
Your initial contribution will be: $165,837 Payable immediately Plus a second contribution of: $117,650 Payable at settlement The total investment costs will be: $669,187
The property purchase price will be: $586,000
[71] The fortnightly procurement fee was stated to be $317.00 per fortnight or
$259.00 after tax.
[72] The analysis was otherwise in the same form as the earlier sample analysis and showed that the client’s initial and second contributions were to be borrowed against the existing property. A further sum of $385,700 was to be borrowed against the investment property but, as with the earlier sample analysis, responsibility for this borrowing was not explicitly stated. Once again, it was stated that Blue Chip would meet all interest payments on the borrowing.
[73] On 15 September 2006, Mr Davis sent an email to Mr Mathias and also to Mr Khan attaching a copy of the joint venture analysis for the Barclay unit and the Bartles’ “profile”. Mr Davis informed Mr Mathias and Mr Khan that the Bartles were “keen to proceed” and advised that he would “request they sign an ATP form to get things moving”.
[74] The “ATP” was an authority to proceed confirming the appointment of Blue Chip New Zealand Limited to carry out certain actions including applying for finance on their behalf “from lenders approved by Blue Chip” based on the completed Loan Application of 23 June 2006. An unsigned and undated form of authority to that effect was produced. The authority went on to state that if a signed letter of offer of finance was received from a lender approved by Blue Chip, Blue Chip was to proceed immediately to prepare a draft sale and purchase agreement of a residential property located in the greater Auckland area. The form also authorised Blue Chip to collect personal information about the Bartles.
[75] The email from Mr Davis of 15 September 2006 asked Mr Mathias to call the Bartles the following week “to clarify a quick question about setting up a Family Trust”. Mr Mathias noted on a copy of this email that he had telephoned Mr Bartle on 20 September 2006 but was informed he was at the doctors. Mr Mathias said that he did not have any contact again with either Mr Bartle or Mrs Bartle until after the agreement for sale and purchase was signed.
[76] On 22 September 2006 the Bartles sent an email to Mr Davis advising they were happy to go ahead with the Blue Chip proposal from which they understood they would receive $259 per fortnight. The email refers to Mr Davis having sent them some further details but the communication from Mr Davis has not been located. The Bartles’ understanding of the transaction at that stage was expressed as follows:
What we are able to do is offer our home as collateral for the purchase of a unit close to Queen Street in Auckland and we understand a mortgage would be taken out on of [sic] our property almost immediately. This provides finance for Blue Chip to build the unit, which in four years should be up, and rentable. At this point it would be sold back to Blue Chip.
Your figures indicate that each fortnightly Friday evening a figure of
$259.00 would be deposited into our bank account. This figure is a tax paid amount. At the end of the four years this contract ceases and the property would be bought back from us. The lesser of the sold amount would be returned back to us. This figure is not yet determined.
We understand that it would be in our best interest to have our business made into a trust. This we believe would be financed by Blue Chip including the associated cost ie. Valuation of our property 16 Amber Drive Whangarei, legal fees, resource consent, any insurance costs, rates to whatever council ie costs to finance the property.
[77] This communication shows that the Bartles were aware that their home would be used as collateral for the purchase of the unit and that a mortgage would be taken out on their property almost straight away. They also understood the return they would receive. It also tends to confirm their understanding that Blue Chip would be responsible for certain costs. However, the email is expressed only in general terms and does not focus on the extent of borrowing. It serves to underline the Bartles’ evident misunderstanding about the true nature of the transaction.
[78] Certain other questions were outlined in the Bartles’ email of 22 September
2006 to Mr Davis but they tend to focus on minor details relating to tax and superannuation payments.
[79] Mr Davis responded to the Bartles on the same day indicating they had “a pretty good understanding of how it all works...”. Mr Davis said he would contact Mr Khan to arrange for him to telephone the Bartles to clarify the issues raised. He gave the Bartles the contact details for Mr Khan and also for Mr Mathias although he
does not otherwise refer to Mr Mathias in the email. It is not clear why the contact details for Mr Mathias were given since he had already met the Bartles. Mr Davis repeated what he had already told the Bartles about these two gentlemen:
I have recommended them for you as they have looked after hundreds of Bluechip clients and have a thorough understanding on our Joint Venture investment and therefore are in a position to give you prudent informed advice whilst being independent of Bluechip.
They are also experts in Property Investment structuring and tax and can therefore process all the components involved efficiently therefore reducing the cost to you and for us which is a good thing.
[80] There was no evidence of any further communications between the Bartles and Mr Khan or Mr Mathias around this time.
[81] On 26 September 2006 Mr Davis sent a further email to the Bartles with a copy to Mr Mathias and Mr Khan. This email stated:
Hi Bruce and Dorothy
Find attached revised Analysis.
Nett fortnightly income now $387 p/fortnight with Purchase Price of
$552,000.
Good result and I am happy to deliver it to you.
Will advise Jonathan Mathias on your behalf regarding formation of Family Trust and call you in the next few days to confirm an appointment with you to get the Sale & Purchase Agreements signed and get the ball rolling.
Look forward to seeing you.
[82] The email refers to a revised analysis being attached. The first page of a “Sample Analysis” dated 26 September 2006 was produced but the remaining pages have not been located. It may be assumed that they are in similar form to the previous analyses. For the first time, the analysis related to the Symonds Street unit in the Madison development. The summary of the proposed investment stated:
Your initial contribution will be: $137,484 Payable immediately Plus a second contribution of: $131,750 Payable at settlement The total investment costs will be: $634,284
The property purchase price will be: $552,000
[83] The gross fortnightly return is stated to be $451 or $387 after tax. As with the previous analyses, it is stated that “Blue Chip will meet the interest on any associated borrowings”.
[84] Mr Mathias agreed that over the period from 15 September 2006 onwards, the investment proposal was gathering pace. He accepted it was likely he would be instructed to act in connection with the transaction although he maintained he had not been formally instructed and had not received any relevant documents other than the emails and analyses from Mr Davis. Mr Mathias noted on the email of
26 September from Mr Davis that it related to Unit 7.1 at the Madison development in Symonds Street. The email also noted that Mr Davis would advise Mr Mathias on behalf of the Bartles about the formation of a family trust. This suggests that the Bartles were likely to have requested Mr Mathias (through Mr Davis) to proceed with the family trust or at least to advise them about its formation.
[85] On 27 September 2006, Blue Chip New Zealand Limited prepared a letter to Mr and Mrs Bartle providing certain documents and explaining the process for their investment. The letter stated that Blue Chip had now selected the property which would form the basis of the Bartles’ investment. The letter stated it was enclosing a financial analysis; the agreement for sale and purchase; a property management agreement; a deed of lease; invoices for the “Initial Contribution” which comprised the deposit due on the property, a brokerage fee, valuation fees, contingencies for costs and working capital due to the joint venture and, if applicable, furniture costs; and a disclosure acknowledgement.
[86] It is unclear whether this letter was posted to the Bartles at their Whangarei address or was taken to them on 29 September when the documents were signed. Either way, the Bartles would have had very little time to analyse the letter and the enclosures.
[87] The nature of the transaction was described in the following terms:
The transaction has been designed to provide you with a secure passive income stream, with the risk and responsibility of interest payments transferred to Blue Sky Holdings Limited.
Under the terms of the transaction a corporate trustee will acquire title to the legal property to be held in accordance with the terms of a “Joint Venture” between yourself and Blue Sky. Under the terms of the Joint Venture you are entitled to:
• Interest on the borrowings you raised to make this investment (which will be adjusted to take account of any subsequent increase or decrease in interest rates);
• A fixed fortnightly procurement fee, which is payable from the date of payment of your Initial Contribution until such time as the property is sold;
• Depreciation on the structural component of the property, which can be used to defer the tax liability on your procurement fee; and
• An agreed share of the net sale proceeds on sale of the property. You are the sole shareholders and directors of the corporate trustee.
Essentially, the Joint Venture will receive the rental income on the property and pay all ownership costs. To the extent that the working capital collected in your initial contribution by the Joint Venture is insufficient to meet these Blue Sky will make a contribution to the Joint Venture.
The Joint Venture will appoint Blue Sky Holdings as the manager to deal with matters of administration. To the extent that matters require approval of the Joint venture parties you will control what is permitted by way of voting rights.
The transaction continues until either you choose to wind it up or the property is sold. On termination the property is sold and the sale proceeds are applied:
• firstly to discharge the balance loan secured against the property;
• then to return the amount of your Initial Contribution,
• any surplus is then split in accordance with the sharing arrangement detailed in the joint venture.
[88] The letter goes on to say that the Blue Chip investment advisor will take the Bartles through each of the documents and answer any questions. The documents will then be returned to Blue Chip for onward transmission to the Bartles’ solicitor “along with the agreements that form the joint venture arrangement you are entering into with Blue Sky Holdings Limited”. The Bartles were advised in the letter that their solicitor would contact them to meet to advise on the joint venture documents.
[89] As to the initial contribution, the Bartles were advised in the letter that:
The initial contribution, which includes the deposit on the property, is payable immediately. The joint venture does not commence until this amount is paid in full. Upon payment you will start receiving the procurement fee and payments in respect of interest on borrowings.
[90] The letter advised further that the purchase of the investment property would not be settled until construction of the property was complete, legal title was issued and any necessary certifications had been issued by approving authorities. The letter advised that the agreement for sale and purchase would be in the standard Auckland District Law Society form with certain modifications. The letter continued:
Blue Chip will not permit you to add “Special Conditions” to the Agreement. As such you should not sign the agreement unless you are confident that you are able to raise both the deposit and balance required to settle the property. To provide you with comfort our Investment Advisor will have given you a letter of offer of finance from a lender confirming the availability of funding. You should consider carefully any conditions imposed by the lender in that offer letter and your ability to satisfy these conditions.
[91] As to risks, the letter concluded:
Every investment has its risks. You should make sure that you are fully aware of the risks and are satisfied with the investment before sign the Agreement for Sale and Purchase of real Estate.
In undertaking this transaction your risks include:
• The actual amount of capital gain and therefore your share of the net sale proceeds on a specific property;
Blue Sky Holdings Take the risk of:
• Interest rate variations.
Should you have any residual concerns we encourage you to seek independent advice before entering into the Agreement for Sale and Purchase of Real Estate.
[92] The points of significance emerging from this letter are:
a) The joint venture is described only in general terms. The joint venture agreement was not provided but was to be made available subsequently.
b)The Bartles were advised that a corporate trustee would acquire title to the property and would hold it in terms of the joint venture agreement. When the documentation was later concluded, Bartle Properties Limited held the title as trustee for the parties to the joint venture, namely the Bartles and Blue Sky Ventures Limited (a
company not mentioned in the letter or at any other stage prior to the signing of the agreement for sale and purchase).
c) The Bartles were advised that the joint venture would be responsible for the interest on the borrowings raised by them for the investment and the fortnightly procurement fee. As well, Blue Sky would make up any shortfall in the working capital required as a contribution to the joint venture.
d)The Bartles’ initial contribution would be borrowed and was payable immediately. This was the sum the Bartles understood was $137,484. This sum comprised:
• Deposit on agreement for sale and purchase $ 55,200
• Brokerage fee (2.95% of purchase price) $ 16,284
• Working capital $ 55,200
• Registered valuation fee $ 400
• JV agreement fee $ 3,500
• Chattels and fit-out valuation $ 350
• On account of legal fees $ 2,700
• Contingencies on legal fees $ 1,500
• Trust formation costs $ 2,000
• Bare trustee incorporation fee $ 350
• Total $137,484
e) Various invoices and statements supporting these figures were prepared at some point. It is not clear whether they were received by the Bartles before they signed the agreement for sale and purchase. Two undated statements and related invoices dated 28 September
2006 suggest they were not prepared prior to the letter of
27 September. The Bartles have no recollection of seeing these statements and invoices at the time the agreement for sale and purchase was signed and Mr Mathias said he did not receive copies of them until some time later.
f) The focus of the letter is on the initial contribution but also indicates that the Bartles had to be confident that they could raise both the
deposit for the property and the balance required to settle the purchase. However, this statement is immediately followed by reference to a letter of offer of finance from a lender “confirming the availability of funding”.
g) The general tenor of the letter confirms the Bartles’ understanding that Blue Chip would be responsible for arranging the finance and meeting all costs (including interest). Since all the loans were “interest only” for the first five years and it was anticipated the investment unit would be sold after four years, no capital repayments would be required if the sale occurred within the five year period.
h)The letter makes no reference to the mortgage and guarantee arrangements whereby the Bartles became personally responsible for the total borrowing by way of personal guarantee and an all- obligations mortgage over their Amber Drive property.
i)The statement about risk is of a general nature identifying only one specific risk in relation to the amount of capital gain (about which the Bartles understood they would be receiving only a very small share in any event).
j)The letter does not identify the critical risk of the Bartles becoming fully responsible for the total borrowing in the event of Blue Chip failing and the obvious risk that they would lose their home in that event.
k)The reference to seeking independent advice had been effectively satisfied before this letter. On the recommendation of Mr Davis, the Bartles had already seen Mr Mathias for advice which Mr Davis assured them was independent.
The completion of the agreement for sale and purchase
[93] Earlier in this judgment, I touched on the conflict of evidence as to whether Mr Mathias was present on 29 September 2006 when the Bartles signed the agreement for sale and purchase at their home. I find that they were mistaken in this respect and must have confused this occasion with one of the other several meetings they had at their home with Mr Mathias in 2006 and 2007. There was nothing in
Mr Mathias’ diary to suggest he was present when the agreement for sale and purchase was signed. The letter from Blue Chip of 27 September sets out the usual practice of having the Blue Chip advisor present when the documents were signed. The investment advisor would then return the documents to Blue Chip and ultimately they would be sent to the solicitor.
[94] Significantly, Mr Davis entered a number of details in the agreement in his own handwriting including the address and contact details for the Bartles on the front page of the agreement; entering Mr Mathias’ name as the solicitor for the purchaser on the front page; and entering the date of 29 September 2006 on the second page of the agreement along with further contact details for the Bartles as purchaser. And, even more importantly, Mr Davis has witnessed the signatures of Mr and Mrs Bartle on the property management agreement they entered into on the same day,
29 September 2006. In cross-examination, Mr Davis accepted it was possible he had uplifted the letter of 27 September from Blue Chip and taken it along with the relevant documents to see Mr and Mrs Bartle. He also accepted it was possible that they signed the documents in front of him. Although he suggested this was unlikely, I find that this is what in fact occurred.
[95] The vendor under the agreement for sale and purchase is Symonds Street Development Limited, a company not associated with Blue Chip. Evidence was given by a director of Symonds Street Development Limited that this company was responsible for the Madison development and had an underwriting agreement with Blue Chip in terms of which Blue Chip would underwrite the sale of the apartments in return for a commission from Symonds Street Development Limited. The total
purchase price for the Bartles’ unit in the development was $552,000 comprising:
• Unit $478,000 • Furniture package $ 24,000 • Carpark $ 50,000 • Total $552,000
[96] The evidence is unclear as to when the agreement for sale and purchase was executed by Symonds Street Development Limited. In accordance with usual
business practice, it is likely the agreement was executed by the vendor subsequent to 29 September when it was signed by the Bartles. It was not until 26 October that Blue Chip emailed signed pages of the agreement for sale and purchase to Mr Mathias. This was followed up on 9 November 2006 with the delivery of a bundle of documents to Mr Mathias including the agreement for sale and purchase, the deed of lease, the property management agreement and the statements and invoices which had been mentioned in the letter to the Bartles of 27 September. I conclude that the agreement for sale and purchase was executed by the vendor of the unit somewhere between 29 September and 26 October but it is impossible to be any more specific.
[97] A deposit of 10 percent was payable upon the signing of the agreement and the balance of the purchase price was to be paid on the settlement date which was defined as 15 business days after a certificate of practical completion, title and the relevant code compliance certificate were issued. Attached to the agreement were plans and specifications. The agreement was unconditional so far as the Bartles as purchasers were concerned.
[98] The unit was sold subject to a lease from Symonds Street Development Limited to a Blue Chip subsidiary, ART Apartments Limited, with Blue Chip New Zealand Limited as guarantor. The lease was for a term of four years with an annual rent of $33,280 or $640 per week (including GST). The lease contained a right of first refusal under which Blue Chip could purchase the property if the lessor decided to sell before the expiry of the term or received an offer to purchase.
Events after the agreement for sale and purchase was signed
[99] Mr Bartle sent an email to his brother on 29 September 2006 extolling the virtues of the Blue Chip investment signed that day. He stated his understanding of the arrangement in these terms:
We are explaining this to you as we feel if its suitable to you then why not use it. The property in Symonds street is our unit from the date of settlement which is very soon. The fortnightly taxable amount of $451.00 will be deposited into our account. We expect to pay tax on this as arranged by the accountant with Blue Chip. There are neither administration costs nor any
bills to pay. A trust will be formed and this too will be paid for by Blue Chip. After four years the unit will be sold and there are no real estate fees to pay. We are then free to do it all again if we wish. Blue Chip also arranges the accountant to manage the end of years transactions for tax purposes.
Each two weeks $451x26=$1126.00 multiplied by 4 years = $46,904.00 before tax of course is a very good return and then we also receive an undisclosed sum after the 4 years as well.
Had we taken the Sentinel option we would have surrendered a given figure from which the family would have had to forfeit during that time. That is the interest charges would have been adding up.
[100] Mr Bartle then goes on to explain in the email that he and his wife had considered the opportunity many times, they had examined every aspect and could not find any defects in the proposal. He also mentioned a former customer of his cleaning business who was very satisfied with an investment she and her husband had made with Blue Chip.
[101] It is clear from this email that the Bartles’ focus was on the fortnightly return. No reference is made to borrowings or to any anxiety in that respect. Given the enthusiastic salesmanship of Mr Davis and the lack of any warning from Mr Mathias of the obvious risks involved, it is not surprising that Mr Bartle wrote to his brother in the terms outlined.
[331] Beazley JA delivered the leading judgment. He concluded at [56]:
In my opinion, notwithstanding that the respondent did not have knowledge of the appellant’s lack of education and her language and domestic difficulties, her lack of income, in the circumstances of this transaction – that is a large borrowing secured over her only asset, in circumstances where the application form failed to disclose any income for either husband or wife – placed her in a special position of disadvantage. Though the full extent of that special position of disadvantage was not known to the respondent, nonetheless the absence of any relevant financial information was sufficient to put the respondent on notice of the appellant’s lack of capacity to meet the repayment obligations under the mortgage. That left as the only source of repayment the selling of her only asset, as again the respondent must be taken to have known.
[332] A submission on behalf of the respondent that it did not need to be concerned with the fact that the borrowers had no income because the loan was amply secured was not accepted. However, this was on the express basis that the respondent knew the appellant had no income (at [57]).
[333] This decision is also distinguishable on the footing that the appellant was found to be under a special disability and, unlike the present case, there was evidence that the lender knew (or was taken to have known) that the borrowers could not meet the mortgage payments. A further distinguishing fact is that the lender in Elkofairi was not aware of the purpose for which the funds were being borrowed. In the present case, GE knew that the advances were for the purpose of investing in a residential unit for which it had a registered valuation showing there was ample security.
[334] The last of the Australian cases cited is Perpetual Trustee Co v Khoshaba [2006] NSWCA 41. There are some similarities with the present case. The appellant, Perpetual Trustee Company Limited, had entered into the loan agreement as trustee for a securitised mortgage programme managed by an entity called Resimac Ltd which, in turn, had entered into a Mortgage Origination and Management Deed with a company named Australia Mortgage Wholesalers Pty Limited (AMW). It was the latter’s role to assess the loan on behalf of Resimac. It does not appear to have been in dispute that AMW was the agent of Resimac.
[335] Mr and Mrs Khoshaba were pensioners and members of the Assyrian community in Sydney. They became aware of a pyramid investment scheme. They were persuaded by others to borrow $120,000 from the appellant to invest in this scheme. The scheme turned out to be fraudulent and the Khoshabas lost all their money. They sought relief under the Contracts Review Act 1980 (NSW) when Perpetual sought to enforce the loan against them. Perpetual was unaware of the investment in this scheme.
[336] The Khoshabas were both pensioners and had limited understanding of English. There were some serious shortcomings in the loan application. Mr Khoshaba was falsely stated as being employed and earning a salary of $43,000. He was not aware that this information had been included in the application. The part of the application which inquired as to the purpose of the loan was left unanswered. After the loan application was submitted, it was amended (without the knowledge of the Khoshabas) to show Mrs Khoshaba as a joint applicant. Her signature on the form had been forged.
[337] Another feature of the case was that the Mortgage Origination and Management Deed required AMW to satisfy itself as to the correctness of the information contained in the loan application by carrying out certain steps prescribed by Resimac’s internal lending guidelines. Those steps were not taken. The trial Judge found that Perpetual, through AMW, should have been aware of matters which rendered the loan agreement unjust and that AMW had sufficient notice to demand that steps be taken to ensure the Khoshabas knew what they were doing. The trial Judge also found that if AMW or Resimac had discovered that the respondents were
pensioners, the loan would never have been made. The trial Judge noted further that if AMW had carried out its responsibilities correctly, it would have been plain that the Khoshabas were the putative victims of a fraud and the loan would never have proceeded. He was also satisfied that Resimac and AMW should have ensured that the Khoshabas were given the opportunity of obtaining independent legal or accounting advice. If that advice had been obtained, any company professional would have advised against entry into the transaction. It was held that the absence of sufficient evidence of the Khoshaba’s employment or income or details of the loan purpose “called out for simple inquiry of the Khoshabas as to whether or not they had been independently advised” (at [21]).
[338] The principal judgment on appeal was given by Spigelman CJ. He considered that the relevant factors (not all of which favoured a finding that the loan agreements were unjust) included:
• Perpetual had no involvement in and no knowledge of the investment.
• There was a failure to comply with Perpetual’s own guidelines, particularly the failure to establish the purpose of the loan.
• There was also a failure by AMW to carry out its obligation to verify employment and income details of the borrowers and to ensure documents were properly executed.
• The security granted was over the family home of a low income earner and a pensioner.
• The fact that Perpetual was content to lend on the value of the security without relevant inquiry into the Khoshabas’ income.
• The failure to recommend independent advice was not considered to be relevant because Spigelman CJ considered that the Khoshabas were likely to have entered the transaction regardless of any recommendation as they were persuaded by what he described as “the overwhelming enthusiasm of their compatriots in the Assyrian community...” (at [91]).
• The fact that the Khoshabas were unaware of the deficiencies and false statements made in the loan application.
[339] Spigelman CJ concluded at [92]:
The conflicting considerations are finely balanced. Had the Appellant or its representatives made any inquiries about the purpose of the loan I would have allowed the appeal. I do not mean to suggest that the Appellant had to determine that the proposed investment was reasonable and capable of servicing the loan. It is the indifference, suggesting that the Appellant was content to proceed on the basis of enforcing the security, which I find determinative.
[340] Handley JA focused his attention on AMW’s failures as Resimac’s agent in neglecting to satisfy itself that the information on the loan application was correct and to approve or reject applications in accordance with Resimac’s guidelines (at [102] – [103]). Basten JA pointed out at [115] that the Contracts Review Act (NSW) may permit relief in circumstances where the conscience of the defendant is not affected. Basten JA considered the relevant factors to be the failure to verify the accuracy of the income figures stated in the loan application (which he said meant that “....the lender should be taken not to have relied upon the ability of the borrowers to make instalment repayments on time...” (at [124]); the failure to inquire as to the purpose of the loan; the fact that Perpetual was content to lend money which would be immediately dissipated; and the disadvantages the Khoshabas were under, having regard to their relative lack of education and experience in business. Although those circumstances would probably not, in Basten JA’s view, have justified a finding that the Khoshabas were under a special disadvantage or disability for the purposes of the equitable principles of unconscionable dealing, they were sufficient to satisfy the requirements of the particular public interest in treating “pure asset lending” contracts as unjust. In this last respect, Basten JA said at [128]:
To engage in pure asset lending, namely to lend money without regard to the ability of the borrower to repay by instalments under the contract, in the knowledge that adequate security is available in the event of default, is to engage in a potentially fruitless enterprise, simply because there is no risk of loss. At least where the security is the sole residence of the borrower, there is a public interest in treating such contracts as unjust, at least in circumstances where the borrowers can be said to have demonstrated an inability reasonably to protect their own interests, for the purposes of, for example, s 9(2)(e) or (f). That does not mean that the Act will permit intervention merely where the borrower has been foolish, gullible or greeedy. Something more is required: see Esanda Finance Corp Ltd v Tong (1997) 41 NSWLR 482 at 491 (Handley JA) cited with approval in Elkofairi (supra) at [77] by Beazley JA.
[341] The Khoshaba case is clearly distinguishable. The Bartles were not under any disability that could not have been met by independent legal advice, which GE
was entitled to assume they received; GE knew the loans were to enable the purchase of an investment unit and the funds were applied to that purpose; TML did not make any false representations to AMS; TML was not the agent of AMS; the operations manual did not require TML to obtain details of the borrower’s income; TML certified to AMS that no adverse circumstances were known; the Bartles declared they could meet the loan commitments; and there was nothing to put GE or AMS on inquiry as to their ability to service the loans.
[342] As a general proposition, I accept that a lender who advances money with actual or constructive knowledge that the borrower has no means to meet his or her commitments under the terms of the advance may in some circumstances be taken to have acted unconscionably and in breach of reasonable standards of commercial practice, but the existence of any such knowledge on the part of GE has not been established in this case.
Conclusion on the cause of action under the CCCF Act
[343] For the reasons given, I am not persuaded that there is any basis to conclude that the loan contracts were oppressive within the meaning of the CCCF Act.
Did GE owe a duty of care to the plaintiffs as alleged in paragraphs 49 and 50
ASOC and, if so, was GE in breach of any such duty in any of the ways identified in paragraph 51 ASOC?
[344] The ASOC asserts that GE owed a duty of care to the plaintiffs because of its knowledge and expertise as a lender of mortgage funds to residential purchasers and its knowledge that many of those who borrowed from it were unsophisticated investors; GE’s knowledge of prudent lending criteria; and the commercial risks involved.
[345] It is pleaded that GE owed a duty to the plaintiffs:
a) Not to advance mortgage monies when there was no, or no reasonable, expectation that the borrower would be able to service the loan;
b)Not to take advantage of the vulnerability of investors who were entering into imprudent commercial transactions;
c) To ensure that potential borrowers had sufficient income to meet the mortgage commitments;
d)To make reasonable inquiries into the financial circumstances of the borrowers, including ascertaining whether they were reliant upon any assurances or promises from any third party and whether there was a reasonable foundation for believing that any such assurances or promises were a sufficient safeguard to the plaintiffs; and
e) To exercise reasonable care and skill. [346] It is said that GE breached its duty by:
a) Lending through TML when it knew that TML had, on previous occasions, fraudulently altered loan applications;
b)Having actual or constructive knowledge that the plaintiff had no independent means to meet the mortgage payments;
c) Having actual or constructive knowledge that the plaintiffs were only entering into a loan transaction as a result of representations made to them by Blue Chip.
[347] Mr Dale acknowledged in his closing submission that the Court would be obliged to reject this cause of action on the basis of decided authority, suggesting that the matter might require closer analysis by the appellate courts.
[348] Mr Dale did not cite any authority for the proposition that a lender owes to a borrower a tortious duty of care of the kind alleged. A lender may owe a duty of care to the borrower where the lender’s advice is sought and given but a lender is not under a duty to give unsolicited advice about the wisdom of projects in which the borrowed funds are to be invested: Banbury v Bank of Montreal [1918] AC 626 per Lord Finlay LC at 654-655. For further authority, see Chapman v Barclays Bank Plc [1998] PNLR 14 per Otton LJ and Lloyds Bank Plc v Cobb (unreported, Court of Appeal 18 December 1991 per Scott LJ at 3). See also Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548. Outside cases of that kind, a lender owes no duty of care in
tort to the borrower and is entitled to act in its own interests without regard to those of the borrower.
[349] Mr Stewart also referred to the New Zealand Court of Appeal’s decision in Dovey v Bank of New Zealand [2000] 3 NZLR 641 at [36] where Tipping J, delivering the judgment of the Court, rejected a submission that there was an implied term of the contract between banker and customer to advise on the wisdom of a customer’s proposed transaction. I note too the decision of Stevens J in Krtolica v Westpac Banking Corporation [2008] NZCCLR 24 where the Court rejected the proposition that the bank owed a duty of care in tort not to deepen the borrower’s insolvency by advancing further funds that could not be repaid (at [97] – [101]).
[350] Finally, mention should be made of Tipping J’s decision in Shivas v Bank of New Zealand [1990] 2 NZLR 327, 368-369 where the Court rejected the proposition that a bank owed a duty of care to explain the guarantee, warn the guarantor, or recommend that the guarantor obtain separate advice.
[351] In the light of the authorities, I find that GE did not owe to the Bartles a duty of care of the kind pleaded. In order to protect its own interests, a lender will usually make inquiries to ascertain that it is commercially sensible to make the loan. But it is not bound to do so and the nature and extent of any such inquiries is entirely a matter for the lender’s own judgment. If it lends without making adequate inquiries, it only has itself to blame. Equally, a borrower must assume responsibility to protect his or her own position and take such advice as he or she considers appropriate. It would be a curious state of affairs if a borrower could seek funds from a lender and then complain that the lender had complied with that request. It is a different matter of course if the borrower seeks advice from the lender and the lender then gives negligent advice. In such circumstances there may be an assumption of responsibility which does not ordinarily apply. But that is not the case here.
[352] There are other formidable difficulties in the way of this cause of action. These include the Fastdoc declarations made by the Bartles that they could comfortably afford all repayments and their acknowledgement that they were not relying on AMS/GE to verify or review their financial position. Secondly, the
Bartles were advised to obtain independent legal advice and did so. In these circumstances, the Bartles could not establish that they placed any reliance on GE or that GE assumed any responsibility towards them.
[353] There is no sound policy reason to impose upon a lender a duty of care in tort to the borrower given the wide range of other remedies available, including a claim for negligent misrepresentation; a claim under the Contractual Remedies Act 1979 for innocent misrepresentation; the equitable remedies available in cases of unconscionability; a claim based on fraud or duress; and the statutory remedies available under the CCCF Act; all of which provide substantial protection to lenders against exploitation.
[354] On the facts, there is no evidence of any breach of duty in any of the respects identified in the ASOC.
[355] I conclude that this cause of action must fail.
Were the loans procured by fraud on the part of TML or the Blue Chip Group as alleged in paragraph 48 ASOC and, if so, is any such fraud attributable to GE?
[356] This issue may be quickly resolved on the basis of my factual findings. It was not alleged that GE or AMS were guilty of fraud. The only basis upon which this cause of action could succeed is that there was fraud on the part of TML or Blue Chip and that such fraud could be attributed to GE on the basis of agency. In view of my findings rejecting the proposition that TML or Blue Chip were agents of GE, this cause of action must fail.
[357] It must also fail for another reason. There was no evidence of fraud on the part of Blue Chip and I am not satisfied that TML was guilty of fraud through the alteration of documents. As discussed earlier in this judgment, some documents were altered by employees of TML. I am satisfied that the alterations were immaterial and most were made for the innocent purpose of correcting errors. They were not intended to and did not deceive anyone.
[358] The main complaint was about the description of the Bartles as “self- employed investors”. I am satisfied that the description of the Bartles in this way was not material. There is no evidence to support the allegation originally made that descriptions of the Bartles as “retired” were altered to read “self-employed investors”. It is true that in some documents they were so described, but the Bartles themselves acknowledged that they may have signed documents in which they were described in that fashion. I am satisfied on the balance of probabilities that they did sign some documents in which they were described in that way.
[359] I have also concluded that the expression “self-employed investors” is to be understood in the context of the particular loan products offered by GE/AMS. The expression was used to denote proposed borrowers who did not have employment and were therefore unable to provide verified income. In the context in which the phrase was used, it was not inaccurate. It was not intended to deceive, and it did not deceive, AMS or GE. I am confident that if this had been explained to the Bartles at the time, they would not have been concerned. Their objective was to obtain the loans so that the transaction could proceed. No actions on the part of TML were inconsistent with that objective.
Summary and Disposition
[360] The claim by the first and second plaintiffs against the first defendant GE Custodians is dismissed. The first defendant is entitled to judgment against the first and second plaintiffs.
[361] The first plaintiffs are entitled to judgment against the third defendant
Mr Mathias on the issue of liability.
[362] I will refrain from formally entering judgment at this stage. This judgment is issued on an interim basis with the following issues reserved for further consideration:
a) The assessment of damages against the third defendant in favour of the plaintiffs.
b)Whether judgment should be entered against the third defendant in favour of the second plaintiff as well as the first plaintiffs.
c) Whether judgment should be entered against the second defendant on the claim for indemnity brought by the third defendant.
d) Costs.
[363] The Registrar is requested to arrange a telephone conference with counsel as soon as convenient to discuss how and when these remaining issues can be promptly
disposed of.
A P Randerson J Chief High Court Judge
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