Body Corporate v Donovan
[2018] NZHC 145
•14 February 2018
IN THE HIGH COURT OF NEW ZEALAND
TAURANGA REGISTRY
I TE KŌTI MATUA O AOTEAROA
TAURANGA MOANA ROHE
CIV-2017-470-030 [2018] NZHC 145
BETWEEN BODY CORPORATE
Plaintiff/Respondent
AND
MICHAEL PHILIP DONOVAN Defendant/Applicant
Hearing: 12 February 2018 Appearances:
D M Fraundorfer for Plaintiff/Respondent
D G Hayes for Defendant/ApplicantJudgment:
14 February 2018
JUDGMENT OF ASSOCIATE JUDGE CHRISTIANSEN
This judgment was delivered by me on
14.02.18 at 4.30 p.m, pursuant to
Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
BODY CORPORATE v DONOVAN [2018] NZHC 145 [14 February 2018]
The judgment
[1] On 26 June 2017 the plaintiff obtained judgment against the defendant in the sum of $322,200 together with interest in the amount of $58,084.95 together with costs and disbursements in the sum of $9,074 amounting to a total of $389,358.95. Also the plaintiff obtained an order granting it vacant possession of Units of which the defendant was the registered proprietor in a complex located at 30 Willow Street, Tauranga.
[2] The plaintiff is the Body Corporate for that unit title complex and is the second mortgagee it having purchased that mortgage from Belgrave Finance Limited (in receivership and in liquidation) in 2006.
Application to set aside judgment
[3] The defendant took no steps in relation to the summary judgment application. He now applies to set aside those orders made on 26 June 2017 on a variety of grounds. He claims it is in the interest of justice for the Court to require a full hearing because he says he has arguable defences and counter-claims. Those include:
(i)That the plaintiff’s judgment debt was a debt provable in his bankruptcy as at 28 January 2009 and that his personal liability for the loan had been released on his discharge from bankruptcy;
(ii)That the quantum of the alleged mortgage debt is not evidenced and cannot be proved with certainty;
(iii)That the claimed debt has not been acknowledged for more than six years in that none of the mortgages have been paid during that time, raising an arguable limitation defence;
(iv)That the Body Corporate has acted ultra vires in purchasing the mortgage and that it did not have the statutory power to use Body Corporate funds to purchase a mortgage;
(v)The Body Corporate has misused its powers, when acting against the personal interests of one of its members, in that it used its position to benefit itself at the disadvantage of a fellow member thereby acting in conflict of interest and in breach of implied term to act in all owners’ interests or breach of obligation of good faith, or; individual members of the Body Corporate devised a scheme to benefit themselves to the disadvantage of a family member thereby acting in breach of all owners’ interests or in breach of obligations of good faith;
(vi)The Body Corporate breached the legal requirement of the notification of the Body Corporate meeting of 3 February 2016 vitiating any decision of the meeting and/or defeating the defendant’s rights under s 210 Unit Titles Act 2010;
(vii)The plaintiff’s solicitors acted in conflict of interest in that they purportedly provided advice to body corporate members in their personal capacities, wherein by this proceeding they seek to advise the Body Corporate in circumstances where it should have had independent legal advice.
Opposition to the setting aside application
[4] The setting aside application is opposed. It claims:
(a) It is able to enforce its rights over bona vacantia property without the need for a vesting order;
(b)The judgment debt was a debt provable in the defendant’s bankruptcy, s (4)(c) of the Insolvency Act 2006 providing that that Act does not
apply to a secured creditor’s power to realise or otherwise deal with with a charge as if the Act had not been passed;
(c) The mortgage quantum of $321,000 is recorded in the deed of variation of term loan agreement executed by the defendant in 2007;
(d)There is no limitation defence to the plaintiff’s claim, the relevant limitation period being 12 years from the date in which the right to receive money under the relevant mortgage accrued (s 20 of the Limitation Act 1950);
(e) The defendant had the statutory power to purchase the mortgage;
(f) At all material times the officers of the defendant were required to act and did act in the best interests of the defendant;
(g)The defendant was in breach of his obligation to pay levies and was not entitled to vote at the body corporate meeting on 3 February 2006;
(h)There has been no miscarriage of justice and the justice of the case lies in favour of the application being denied.
The case for setting aside
[5] Mr Donovan deposes having been made bankrupt on 28 January 2009 and discharged on 31 December 2013. It is his understanding that the claimed debt was a debt provable in his bankruptcy and therefore the judgment against him should not have been entered for that debt. He believes Belgrave Finance receivers must have known about the bankruptcy otherwise they would not have sold the mortgage off to the plaintiff for $500 for an alleged debt of $300,000 plus.
[6] Mr Donovan’s investigation of the Body Corporate accounts to 31 March 2017 reveal there was no record in the assets section of the purchase of the asset of the Belgrave mortgage. He says that missing information raised doubts as to whether the transaction occurred as stated. He believes those Belgrave records are in disarray and
says the plaintiff has provided no accounting records to show how the balance allegedly owed was made up.
[7] He says he has not made any payment on any of the three mortgages since his bankruptcy and discharge from bankruptcy and has therefore not acknowledged the alleged debt for nearly nine years.
[8] He questions whether the Body Corporate had the power to do all that it did because s 77 of the Unit Titles Act does not, he says, entitle the Body Corporate to enter into any deal to buy the mortgage but rather can only do things “performing its duties and powers”. Those he says do not grant the power to buy up mortgages of unit holders. He does not believe therefore that the Body Corporate was acting legally when it purchased the mortgage and therefore should not be allowed to enforce such an unlawful arrangement in Court.
[9] The defendant accepts that some Body Corporate fees were overdue and that a charging order over the property to protect their interest was fairly obtained. He assumes the Body Corporate could have sought a sale order but says he has no knowledge of the third mortgage to the first mortgagee taken out on 30 July 2009 six months after his bankruptcy commenced.
[10] He believes that what has happened requires a further explanation to avoid a miscarriage of justice. He says “Something is not quite right here …”. He believes there should be no prejudice in granting his applications and the plaintiffs security possession remains unchanged although they may be owed less than they expected when they purchased the mortgage.
[11] The defendant’s concern is that the Court was not informed of his bankruptcy when the judgment was obtained. He believes the bankruptcy discharged his liability under all of the mortgages and loans upon his discharge from bankruptcy. He says the real ownership of the second mortgage has not been disclosed given that the Body Corporate accounts do not record it as an asset. He believes also that the real debt under the second mortgage has not been proven.
[12] In summary it is the defendant’s position that he has an arguable defence because he believes the money judgment should never have been made as it was debt provable in bankruptcy and secondly the possession order is mute because it does not include all the occupants and in any event the mortgage upon which it was based does not prove the quantum of the debt and therefore is unenforceable. He believes the order should be set aside pending a full hearing.
[13] The defendant considers the plaintiff has sat on its right for years; that he was in ignorance of his rights and disclaimer; that there are issues of redactions which have not been determined and which are appropriate in the circumstances. He says while a member of the Body Corporate the defendant devised a scheme to take over the second mortgage.
[14] The defendant says issues concerned a property which had three mortgages and that after his bankruptcy on 28 January 2009 the Official Assignee disclaimed any interest in the property on 1 March 2011; that many years passed until the Body Corporate decided on 27 March 2017 to take the action they did by means wherein they obtained judgment on 18 July 2017.
[15] It is the defendant’s case that the debt owed under the mortgage was a debt provable in his bankruptcy and upon discharge from bankruptcy a debtor is no longer liable for any debts including those owned on a mortgage. Section 231 of the Insolvency Act 2006 provides that a provable debt is one that a creditor may prove in the bankruptcy and this includes a debt or liability owed at the time of adjudication or after adjudication and before discharge; and because s 304 of the Insolvency Act provides that on discharge a bankrupt is released from all debts provable in bankruptcy except those which were incurred by fraud or fraudulent breach of trust.
[16] It is not accepted on behalf of the defendant that because the plaintiff was a secured creditor and had the power to deal with the charge that this somehow meant the charge was still a personal liability and not provable in the bankruptcy. There is provision to enable a secured creditor power to realise or otherwise deal with the charge despite bankruptcy but that is limited to a secured creditor’s right to deal with the charge by selling the charge to/mortgage of the property regardless of the actions
available to the Official Assignee or creditors under the Insolvency Act 2006. It is not, it is submitted for the defendant, established that the mortgagor still has a liability and it does not maintain the personal liability in spite of bankruptcy and discharge wiping all provable debts.
[17] Regardless of whether that position is correct or not, it is argued on behalf of the defendant that it is at least arguable if not obviously wrong that the defendant remains personally liable for the debt.
[18] The defendant has provided evidence raising, he considers, issues regarding how the mortgage was obtained by the Body Corporate and then attempted to be enforced – and that some of those relate to whether the defendant was a member of the Body Corporate or not. It must be arguable, he says that given the Official Assignee disclaimer of the property, then he may indeed not own it at all.
[19] The Body Corporate purchased the debt for $500 but it is now claimed to be worth nearly $400,000. He challenges evidence provided by the plaintiff to prove the quantity claimed when there is no sufficient evidence he says about how much of the alleged loan had been drawn down or had been repaid – and that this may explain why the Belgrave receivers “let it go for $500”.
[20] The defendant questions whether the Body Corporate had proper business in buying the mortgage over the properties; and whether the buying of a mortgage was an exercise of a duty or power. The defendant considers the mortgage was used as a device to evict him but if he was not a member of the Body Corporate because he was not the owner then it would have been a simple process to obtain an eviction order.
[21] Also no steps have been taken at all by the first mortgagee to realise its security.
[22] It appears that a Mr Bolton is now the first mortgagee having apparently taken over that mortgage from Rice Craig solicitors on 10 October 2003. As at 10 December
2006 Rice Craig agreed they wanted to be secured for $213,000. The defendant says there was no evidence as to what happened since.
[23] For the defendant it is submitted there are a number of defences capable of investigation if the judgments are set aside, to review whether the defendant is liable personally after discharge from bankruptcy, and whether the mortgage is enforceable.
[24] For the defendant it is submitted that because the OA has disclaimed any interest in the property pursuant to s 118 of the Insolvency Act, then the property becomes a bona vacantia and vests in the Crown and in the absence of a specific vesting order the mortgagee is still entitled to exercise any powers under the mortgage.
[25] If in this case that has occurred then that means the defendant has been occupying Crown Land without challenge by the Crown or any party applying for a vesting order. If that is the case that would mean the defendant was not a member of the Body Corporate and if that was so it would be the case he was not entitled to attend Body Corporate meetings nor was liable for Body Corporate expenses.
[26] It is submitted for the defendant that all parties have to date conducted proceedings as if the defendant was a member of the Body Corporate when, it would appear he was not.
[27] Also it is submitted that the possession order obtained appears inadequate because it only applies to one occupant of the Body Corporate when the evidence says that the defendant has sublet the property under a residential tenancy agreement commencing in November 2013. It is submitted therefore that the current order for possession is inadequate as it gives no exclusive possession; that an order against all occupants is required when there is another person present under a residential tenancy.
[28] It is submitted therefore the possession order can be set aside until it can be established that all occupants are served; and the plaintiff has a right to issue a possession order, and the first mortgagee consents to the order over its own right of possession.
[29] In short it is the defendant’s position that the plaintiff should never have sued him for money.
The plaintiff ’s case in opposition
[30] The plaintiff’s position is there is insufficient evidence to establish an actual or possible miscarriage of justice has occurred because the plaintiff was able to obtain the orders notwithstanding that the property had vested in the Crown as bona vacantia. The plaintiff was it says a secured creditor whose rights were not affected by the defendant’s bankruptcy – as the Official Assignee has, the plaintiff says, confirmed. The quantum of the mortgage is evidenced in the loan agreements and no evidence has been provided by the defendant challenging those amounts. There is, the plaintiff says no limitation defence to the orders; that the plaintiff has acted in accordance with its statutory powers when it acquired the mortgage and insufficient evidence has been provided to explain the defendant’s failure to defend the summary judgment application.
[31] In December 2006 Belgrave agreed to lend the defendant $280,000 and in return, and among other securities, provided a second registered all obligations mortgage over the property and a registered general security over all present and after acquired personal property. The clear evidence is that the mortgage limit was increased and as at 31 December 2007 amounted to $321,000.
[32] Belgrave went into liquidation on 23 April 2010 and took no steps in relation to the defendant’s default under the agreement.
[33] The plaintiff purchased the loan agreement pursuant to a Commercial Loans Sale Deed dated 11 August 2016 and the mortgage was subsequently transferred to the plaintiff on 31 October 2016.
[34] The evidence is that as at 3 November 2016 no loan agreement principal sums have been paid, and Body Corporate levies were in arrears. A Property Law Act notice was served personally on the defendant on 8 November 2016 and on the first mortgagee on 2 December 2016. The plaintiff issued proceedings and neither the first nor second defendant failed to respond.
[35] The plaintiff says on 6 September 2017 it became aware that the Official Assignee had, on the defendant’s bankruptcy, disclaimed its interest in the property. Further, on 12 September 2017 the Treasury confirmed that the property had accordingly vested in the Crown as bona vacantia. The defendant’s name remained on the title to the property, and the Treasury had beneficial ownership.
[36] Initially it had been submitted on behalf of the defendant that the plaintiff would need to obtain an order under the Insolvency Act vesting the property in the plaintiff. However, it is submitted for the plaintiff that the case law is clear that a mortgagee can enforce its rights over bona vacantia land without the need for a vesting order and to the extent that Treasury has a beneficial interest in the land it has confirmed that it has disclosed that interest in this case and does not wish to be heard.. It follows counsel submits that although vested in the Crown there is no barrier to the order sought nor any defence provided thereby to the plaintiff.
Assessment
[37] It is the defendant’s position that the plaintiff’s judgment debt was a debt provable in his bankruptcy but was discharged on his discharge from bankruptcy.
[38] It is clear that s 4(c) of the Insolvency Act 2006 does not affect a secured creditor’s power to realise or otherwise deal with the mortgage charge. A secured creditor can generally realise his or her security even though a bankrupt is discharged of any liability for those debts.
[39] As the Official Assignee noted when he wrote to the plaintiff’s solicitors on 9
January 2018:
(a) As the mortgagee did not surrender its charge and elect to prove a claim in Mr Donovan’s bankruptcy, neither his adjudication nor the disclaimer affected your client’s power to realise or otherwise deal with its security (see respectively s 4(c) and 118(b) of the Insolvency Act
2006).
[40] It follows therefore that the disclaimer by the Official Assignee “does not affect the rights, interests, or liabilities of any other person”.
[41] The defendant challenges the sufficiency of the evidence to prove the amount of the debt owed. The Court agrees the defendant has offered insufficient evidence to challenge the plaintiff ’s calculations of the debt amount.
[42] The defendant claims the plaintiff “acted ultra vires in purchasing the mortgage and that it did not have the statutory power to use Body Corporate funds to purchase a mortgage,” and asserts improper action by the plaintiff’s purchase of the mortgage; that it acted against the personal interest of one of its members i.e. the defendant. However the defendant provides neither particular nor sufficient reason for the assumptions made. Clearly at the time the defendant had long since been in default of payment obligations.
[43] If indeed the defendant was a Body Corporate member as at 3 February 2016 he was, regardless, well in default of his requirement to pay levy payments. That default probably disentitled him to vote at the 3 February 2016 meeting.
[44] However, the plaintiff’s judgment has to be set aside. It follows that the order for possession must too be rescinded.
[45] A claim for a money sum for a mortgage debt should not have been brought against the defendant even though he had borrowed the money for which security was given over his body corporate property.
[46] When Mr Donovan was bankrupted the mortgagee/s did not submit a claim in Mr Donovan’s bankruptcy. Nor was any action taken by the mortgagee/s to obtain or sell the property.
[47] The Official Assignee disclaimed the property which brought an end to the Assignee’s (as well as Mr Donovan’s) right, interest and liability in relation to the property – as the assignee confirmed to the plaintiff’s solicitors.
[48] Confusion has been caused by the fact that Mr Donovan was sued for the amount the present mortgagee (the plaintiff) has calculated remains unpaid of the mortgage debt. Any liability of Mr Donovan was provable in his bankruptcy. The fact is he has now no mortgage debt. It follows no judgment can be entered against him for a debt that is no longer his.
[49] It follows that the order for possession made by this Court must now be rescinded.
[50] Although it appears the property remains registered in Mr Donovan’s name it is unclear whether that property indeed is his.
Judgment
[51] The application to set aside judgment is granted. Likewise is the order for possession of the secured property.
[52] The respondent shall pay the applicant’s costs on a 2B basis, together with disbursements approved by the Registrar.
Associate Judge Christiansen
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