Bradley v Bradley
[2016] NZHC 2460
•14 October 2016
IN THE HIGH COURT OF NEW ZEALAND BLENHEIM REGISTRY
CIV-2015-406-035 [2016] NZHC 2460
UNDER the District Courts Act 1947 IN THE MATTER OF
an appeal against a decision of the District
Court at BlenheimBETWEEN
PETER ARCHIE BRADLEY AND GAIL LINETTE BRADLEY
Appellants
AND
KIM SUZANNE BRADLEY Respondent
Hearing: 3 October 2016 Counsel:
B A Fletcher and D P Neild for appellants
S J Zindel for respondentJudgment:
14 October 2016
RESERVED JUDGMENT OF DOBSON J
Contents
Factual context .................................................................................................................................. [4] Issues in the District Court ............................................................................................................. [13] Arguments on appeal ...................................................................................................................... [17]
Orders under the Property Law Act 2007..................................................................................... [17] Unjust enrichment: was there a constructive trust? ..................................................................... [46] Equitable lien ............................................................................................................................... [64]
Summary .......................................................................................................................................... [83]
Costs ................................................................................................................................................. [85]
BRADLEY v BRADLEY [2016] NZHC 2460 [14 October 2016]
[1] The first-named appellant (Peter) and the respondent (Kim) are siblings. Before a falling out in their family, Peter and his wife (Gail) made a loan to Peter and Kim’s mother (Mrs Pearce). Mrs Pearce contrived not to repay the loan. She effected that in a manner that Peter and Gail claim sufficiently implicated Kim to entitle them to a remedy against Kim, either in equity or under the Property Law Act
2007 (the Act).
[2] Peter and Gail now appeal from a judgment of Judge Zohrab in the District Court at Blenheim that rejected their claim.1 Without opposition, Peter and Gail have added substantially to the grounds for relief sought on appeal. Kim did not oppose there being argument on the additional grounds and it is appropriate to consider all of the issues raised. I accordingly grant the leave required to file amended grounds for the appeal.
[3] Considering the issues as fully argued on the appeal traverses substantially different considerations to those confronting the District Court.
Factual context
[4] In May 1996, Peter and Gail entered into a loan agreement with Mrs Pearce.
[5] It appears from the terms of the loan agreement that the advance of $10,500 had already occurred, and was specified as being for renovations to Mrs Pearce’s home in Blenheim (the property). The loan was notionally repayable upon demand. During Mrs Pearce’s lifetime she had to be given a year from service of any demand to effect repayment. Interest was to accrue from 15 June 1995, but was not payable during Mrs Pearce’s lifetime while she remained the registered proprietor of the property.
[6] The loan agreement provided that the interest indebtedness was to be compounded annually, but there has been argument on the scope of that obligation.
The initial interest rate was 9.5 per cent per annum, which rate was to be reviewed
1 Bradley v Bradley [2015] NZDC 17919.
annually and adjusted to the most favourable rate commonly charged at the time to first home buyers by Trust Bank New Zealand Limited.
[7] The loan was repayable four months after Mrs Pearce’s death or upon settlement of the sale or disposal of the property. Mrs Pearce undertook not to enter into any charge against the property whilst monies remained owing to Peter and Gail without their prior consent.
[8] In August 2010, Mrs Pearce registered a mortgage against the property in favour of Sentinel Custodians Limited (Sentinel). She did so without obtaining the consent of Peter and Gail.
[9] In December 2013, Mrs Pearce sold the property to Kim. By that time, there had been a falling out between Mrs Pearce and Peter and Gail. It appears that the falling out extended, to a greater or lesser degree, to Mrs Pearce’s two other children, David Bradley and Jan Sutherland. Kim, the youngest of the children, was living with Mrs Pearce and taking care of her. Peter and Gail lived next door.
[10] The property was sold for what had been ascertained to be its market valuation at the time, $227,500. The maximum Kim could pay at that time was
$125,000, which was applied:
· first, as to around $117,000, to repay the mortgage to Sentinel;
· secondly, as to around $2,500, in legal fees to the solicitors acting for
Mrs Pearce and Kim; and
· thirdly, as to around $5,100, paid by the solicitors acting into
Mrs Pearce’s account.
[11] The remainder of the purchase price, amounting to $102,500, was the subject of an acknowledgement of debt completed by Kim in favour of Mrs Pearce on settlement date. At the same time, Mrs Pearce completed a forgiveness of that debt, which freed Kim of any obligation to pay further amounts for the property, thereby
reducing Mrs Pearce’s net assets by that extent. The Judge found that transaction was structured to frustrate Peter and Gail’s prospects of obtaining repayment of the loan.
[12] On 9 March 2014, Mrs Pearce died.2 Ten days later, Peter and Gail despatched a letter of demand for the outstanding loan to the solicitors acting for Mrs Pearce’s estate. No payment was made in response to the demand. Peter and Gail only became aware of the mortgage that had been registered in favour of Sentinel, and the sale of the property to Kim, after Mrs Pearce’s death.
Issues in the District Court
[13] In the District Court, Peter and Gail claimed that a constructive trust over the property in their favour ought to be recognised, and that equitable interest provided grounds to require Kim to pay the amount outstanding under the loan agreement. Judge Zohrab’s judgment makes one reference to there being a claim that a remedial constructive trust might be recognised over the property,3 and thereafter cites analyses of institutional and remedial constructive trusts as having material differences.4 The remainder of Judge’s Zohrab’s analysis related to the prospect of an institutional constructive trust. Mr Neild accepted that was what had been sought.
[14] Kim’s defence to the claim included a denial that she was aware of the loan agreement and therefore was not complicit in Mrs Pearce’s initiatives to frustrate the ability of Peter and Gail to obtain repayment of the loan. On that factual issue, the Judge found against Kim. Various parts of the evidence satisfied the Judge that Kim was indeed aware of the terms of the loan, and also of her mother’s resolve to frustrate its repayment. On the appeal, Kim accepted that finding “reluctantly”.
[15] The Judge characterised the loan agreement as evincing an intention by the parties to immediately create a chose in action. Mrs Pearce assumed obligations to
repay the loan, giving Peter and Gail status as unsecured creditors. Their case in the
2 In her affidavit filed in the District Court, Kim states the date of death as 10 March 2014.
9 March 2014 is the date in a chronology filed for the appellants and referred to elsewhere in the documents.
3 At [4].
4 At [53], citing Fortex Group Ltd (in receivership and liquidation) v MacIntosh [1998] 3 NZLR
171 (CA) at 172–173.
District Court was that an institutional constructive trust ought to be recognised in respect of the proceeds of the debt created on Mrs Pearce’s sale of the property to Kim. Peter and Gail’s argument was that any consideration received on the sale or disposal of the property was to be applied first to repay the loan. Kim’s acknowledgement of debt comprised part of the relevant sale proceeds, and Mrs Pearce’s failure to repay Peter and Gail from the sale proceeds triggered an institutional constructive trust over that asset.
[16] The Judge proceeded on the basis that one of the requirements for an institutional constructive trust is evidence that the parties intended such a trust to arise by virtue of the arrangements between them. This could arise either by their subjective intentions, or by an intention objectively deemed to exist. The Judge found that Peter and Gail had failed to make out any understanding or intention that they would have an equitable interest in the proceeds of sale of the property, if Mrs Pearce had not repaid the loan at that time. As a result, Peter and Gail were confined to their position as unsecured creditors of Mrs Pearce’s estate.
Arguments on appeal
Orders under the Property Law Act 2007
[17] The first of the additional grounds for relief raised on Peter and Gail’s appeal was under ss 344 to 350 of the Act. Those provisions create powers for the Court to order the setting aside of dispositions that prejudice creditors. The terms of s 346 are as follows:
346 Dispositions to which this subpart applies
(1) This subpart applies only to dispositions of property made after
31 December 2007—
(a) by a debtor to whom subsection (2) applies; and
(b) with intent to prejudice a creditor, or by way of gift, or without receiving reasonably equivalent value in exchange.
(2) This subsection applies only to a debtor who—
(a) was insolvent at the time, or became insolvent as a result, of making the disposition; or
(b) was engaged, or was about to engage, in a business or transaction for which the remaining assets of the debtor were, given the nature of the business or transaction, unreasonably small; or
(c) intended to incur, or believed, or reasonably should have believed, that the debtor would incur, debts beyond the debtor’s ability to pay.
[18] The definition of insolvency is a usual one, provided in s 345(1)(d). The debtor must be treated as insolvent if unable to pay all his, her or its debts as they fell due from assets other than the property disposed of.
[19] Establishing Mrs Pearce’s insolvency at the time of the transfer to Kim was the only contentious element of the requirements for s 346 to apply. Mr Neild argued that insolvency could readily be inferred. The District Court Judge found that Mrs Pearce intended to render herself insolvent by the transaction. He also went further: his analysis was that by forgiving the debt owed by Kim for the balance of the purchase price, the transaction “… thereby dispose[d] of all Mrs Pearce’s assets
and frustrate[d] the plaintiffs’ chose in action …”.5 This obiter observation that was
not necessary for the analysis on the existence of a constructive trust was not directly challenged on behalf of Kim in argument on the appeal.
[20] The inability of Mrs Pearce’s estate to meet the demand some four months after the transaction tended to corroborate the inference that she had achieved her intention at the time of the sale.
[21] For Kim, Mr Zindel argued that more evidence was required, given the prospect that Mrs Pearce had other assets and there was insufficient evidence to establish her net asset position in December 2013.
[22] When she transferred the property to Kim, Mrs Pearce became liable to repay the loan out of the proceeds of sale. The interest calculations in evidence in the District Court6 include numerous alterations, but as at either March or June 2014 the amount required to repay was calculated by Peter and Gail at $37,774.17. I
acknowledge that the last interest calculation purports to be for nine, rather than 12,
5 Bradley v Bradley, above n 1, at [72].
6 Bundle at 110.
months (to 10 March 2014, rather than 10 June 2014), but a difference of three
months’ interest entitlement is immaterial in this context.7
[23] Mr Zindel argued that the contractual terms did not provide for compounding interest whilst Mrs Pearce remained alive. The interest provision in the loan agreement specified as follows:8
4. INTEREST on the principal shall accrue from the 15th day of June
1995 at the rate of 9.5 per centum per annum but shall not be payable by the Borrower to the Lenders during the lifetime of the Borrower, or so long as she remains the registered proprietor of her said home, but upon the death of the Borrower or upon the sale or disposal of the said property interest at the above rate (reviewable as hereinafter provided) shall be calculated on a simple interest basis from the date of advance of each advance as may have been made by the Lenders to the Borrower down to the date of repayment and shall be compounded annually.
[24] I am satisfied that this provision required interest to be calculated from the date of the advance, with the interest to compound annually, despite the payment obligation being deferred during Mrs Pearce’s lifetime.
[25] Accordingly, the debt Mrs Pearce was required to pay in December 2013 was not less than $37,700. One detail of her asset position at that time that is known is that a balance of some $5,100 was paid to Mrs Pearce as the remainder of the
$125,000 paid by Kim towards the purchase price.
[26] Further evidence of Mrs Pearce’s financial dealings between December 2013 and her death is contained in two bank statements that were before the District Court.9 For one account (the -00 account), transactions for the period from
30 January to 28 March 2014 are detailed. The opening balance was $657.01 and the closing balance was $63.75. The deposits into the -00 account in that two month period comprise five amounts from the second account (the -55 account) totalling
$2,900. The only other deposit was for $52.02 described as “AMI” and therefore
potentially an insurance payout. The solicitor’s trust account statement indicates that
7 I recognise the prospect that the relevant date may have been intended to be 10 June, because that is the pattern of calculations for all prior years.
8 Bundle at 109.
9 Bundle at 133–134.
the net proceeds of sale of some $5,100 were paid into the -00 account on
20 December 2013, so at least the majority of that deposit into the account had been disbursed before 30 January 2014.
[27] The withdrawals from the -00 account comprised a cheque presented on
10 March 2014, which is the day of, or the day after, Mrs Pearce’s death. It is speculative, but with Kim living with her, being responsible for her day-to-day care and Mrs Pearce being blind, it seems likely that Kim was in some way involved in, or at least aware of, that cheque being drawn. The withdrawals from the -00 account also include two automatic teller machine withdrawals totalling $1,200, the second being for $800, again on 10 March 2014, the day of or after Mrs Pearce’s death.
[28] The bank statement for the second (-55) account shows deposits of New Zealand superannuation fortnightly on 10 and 24 March 2014, with the only withdrawals being Mrs Pearce’s transfers to the -00 account, including a $1,300 transfer processed the day after she died. That account had an opening balance on
1 March 2014 of $2,061.35, and a closing balance of $1,686.63, including a superannuation payment of $828.64 a fortnight after Mrs Pearce’s death.
[29] There is a ready inference that Mrs Pearce’s estate was smaller than would have been required for her executors to repay the loan. It was a debt properly payable by the estate and the case has been argued on the premise that the executors took no steps to pay or make a contribution to repayment of the debt. In the District Court, the executors of the estate were joined as second defendants, but took no steps. Judgment has been entered against them by default. I took Mr Neild to accept that the executors’ liability would have been limited to the assets of the estate, so with the estate being insolvent, the executors are not vulnerable personally. The issue therefore is whether Peter and Gail can make out that Mrs Pearce was also insolvent in the relevant sense for the four months or so prior to her death.
[30] The evidence of Mrs Pearce’s financial position is incomplete. As Mr Zindel suggested, there was a prospect, for example, that a part of the 2010 mortgage advance from Sentinel, quantified in its repayment statement at $93,695, was still available to Mrs Pearce. However, there is no detail as to whether that sum treated
as “principal” in Sentinel’s repayment statement included capitalised unpaid interest. I note that the interest outstanding in addition to the principal was some $22,700, suggesting (at an interest rate of 7.25 per cent) that interest commitments on the loan had not been serviced for some time.
[31] Mr Zindel made as much of the various doubts about Mrs Pearce’s financial position as he could. Despite that, I am satisfied on the balance of probabilities that Mrs Pearce successfully designed the terms of the sale to Kim and her contemporaneous forgiveness of the debt outstanding to reduce her overall net assets to well below the amount that Peter and Gail were entitled to be paid, had they been given notice of her disposition of the property. Therefore, for the purposes of s 346 of the Act, she became insolvent as a result of making the disposition by way of forgiveness of debt.
[32] If the insolvent status of Mrs Pearce was resolved in favour of Peter and Gail, Mr Zindel nonetheless argued that Kim was protected from any order under the Act by the terms of s 349, which provides:
349 Protection of persons receiving property under disposition
(1) A court must not make an order under section 348 against a person who acquired property in respect of which a court could otherwise make the order and who proves that—
(a) the person acquired the property for valuable consideration and in good faith without knowledge of the fact that it had been the subject of a disposition to which this subpart applies; or
(b) the person acquired the property through a person who acquired it in the circumstances specified in paragraph (a).
(2) A court may decline to make an order under section 348, or may make an order under section 348 with limited effect or subject to any conditions it thinks fit, against a person who received property in respect of which a court could otherwise make the order and who proves that—
(a) the person received the property in good faith and without knowledge of the fact that it had been the subject of a disposition to which this subpart applies; and
(b) the person’s circumstances have so changed since the receipt
of the property that it is unjust to order that the property be
restored, or reasonable compensation be paid, in either case in part or in full.
[33] I am not satisfied that Kim can bring herself within the circumstances contemplated in s 349(1)(a). The transaction was structured to include a substantial element of gift by Mrs Pearce’s forgiveness of the balance of the purchase price. That was almost 45 per cent of the market valuation of the property, which Mrs Pearce had obtained when she conceived the terms of the transaction. Both Mrs Pearce and Kim must have been conscious of that under-sale and Kim’s payment of $125,000 could not constitute valuable consideration. I am also not persuaded that she acquired the property in good faith without knowledge of the fact that it was a disposition structured by Mrs Pearce with intent to prejudice her brother Peter as a creditor of Mrs Pearce. Mr Zindel’s submission was inconsistent with the Judge’s findings, for which there was ample evidence.
[34] Accordingly, Kim is not a person protected by s 349 from orders under that part of the Act.
[35] The forms of relief provided for in the Act include an order requiring the person who acquired the property through the disposition to pay reasonable compensation to the person prejudiced by that disposition.10 I find that Peter and Gail are entitled to an order that they be compensated, in respect of Mrs Pearce’s forgiveness of the debt owing on disposition of the property, for the principal and a reasonable calculation of interest outstanding on their loan to Mrs Pearce. If relief in
this form was granted, Mr Neild sought leave to file a memorandum updating the interest calculation, in the contemplation that there might then be judgment for the finite sum. I have subsequently received his memorandum that quantifies the outstanding principal and interest at $43,052.29 as at 5 October 2016.
[36] I did not hear any argument on how “reasonable compensation” should be quantified for the purposes of an order under s 348(2)(b) of the Act. Implicitly, Peter and Gail equated reasonable compensation with the extent of the debt, including interest charged on a compounding basis in terms of the loan agreement. I am not
satisfied that, in the circumstances in which Peter and Gail have now obtained
10 Property Law Act 2007, s 348(2)(b).
statutory relief, continued enforcement of the contractual interest obligation assumed by Mrs Pearce does amount to reasonable compensation ordered against Kim.
[37] By 2016, the original advance of $10,500 in 1995 has ballooned to more than four times that. At the time of Mrs Pearce’s forgiveness of debt, the prior obligation to Peter and Gail was some 35 per cent of the debt forgiven. Clearly, the transaction as structured would have been impossible had Mrs Pearce honoured her contractual obligation to Peter and Gail.
[38] This basis for a claim under the Act was not advanced in the District Court. Therefore, if Kim had been advised that she could successfully defend the claim as it was pursued in the District Court, her position was vindicated.
[39] A file note of the solicitor who took instructions from Mrs Pearce for the
December 2013 transaction included the following:11
This transaction was her [Mrs Pearce’s] idea – she’s been thinking of ways to frustrate [Peter] for the past couple of years. She realises that [Peter] could make Kim’s life difficult after she passes away but thinks that Kim will be able to cope.
[40] That note recorded Mrs Pearce’s perception that Kim was of modest financial
means. Kim has been granted legal aid to defend these proceedings.
[41] In all these circumstances, I do not consider it reasonable that the contractual regime for charging interest should continue until the debt is repaid. This is a situation in which I consider the Judicature Act 1908 rate ought to apply from the date of commencement of the proceedings in the District Court, with interest thereafter being recoverable only on a simple basis. The Judicature Act rate has been five per cent per annum throughout that period. It may not make a significant difference but reflects a more appropriate measure of compensation to Peter and Gail in the circumstances of the case.
[42] A consequential issue arises under the Act as to the terms on which relief should be ordered. Section 350 of the Act provides relatively confined categories of
11 Bundle at 136.
those in whose favour a compensation order might be made. After providing, in subs (1), for orders in favour of the Official Assignee where a debtor is bankrupt, or the debtor in certain narrow circumstances, subs (2) provides as follows:
350Person in or to whom order under section 348 vests property or makes compensation for it payable
…
(2) A direction under this subsection must specify that the property vests in, or the compensation is payable to, the following person (for the following purpose, if any):
(a) a trustee for the debtor’s creditors; or
(b) the debtor (for the purpose only of enabling the carrying out of any execution or similar process against the debtor or the administration of a future bankruptcy or liquidation of the debtor or arrangement with the debtor’s creditors).
…
[43] There is further provision in subs (3) empowering the making of directions where an order is in favour of a trustee for the debtor’s creditors, to make further orders to deal effectively with the compensation received.
[44] Mr Zindel did not take the point that Peter and Gail, as the only creditors, were disqualified from standing to make a claim under this subpart of the Act. Given the remedial purpose of the subpart, I would be reluctant to entertain such narrowing of the scope of those entitled to invoke it. There is no suggestion that Mrs Pearce died with other creditors who have not been paid. In that circumstance, a trustee for her creditors is unnecessary. I am prepared to short-circuit what would be the sequential steps under s 350(2) and (3) by directing that the compensation is payable to Peter and Gail as the creditors entitled, on the basis that they are the only creditors with a claim against the forgiveness of debt by Mrs Pearce.
[45] In case I am wrong in granting relief on this first basis, I address the alternative grounds advanced by Mr Neild for recovery of the unpaid loan.
Unjust enrichment: was there a constructive trust?
[46] Mr Neild advanced argument that Kim was unjustly enriched at the expense of her brother. A claim for unjust enrichment required Peter and Gail to make out trust obligations owed to them in respect of the property or the proceeds of its sale. For Kim to have been unjustly enriched, she would have to be fixed with an awareness that she was receiving property that had been transferred to her in breach of a constructive trust. That proposition is contrary to Judge Zohrab’s conclusions on the absence of any constructive trust.
[47] The elements required to make out unjust enrichment were summarised by
Mr Neild as comprising:12
(a) the defendant has been enriched;
(b) the enrichment was gained at the claimant’s expense; (c) the enrichment at the claimant’s expense was unjust; (d) there is no defence.
[48] Kim has clearly been enriched in the relevant sense by her acquisition of the property, valued at $227,500, for the amount of $125,000.
[49] It can also be argued that the enrichment was at Peter and Gail’s expense. Kim’s enrichment from the forgiveness of debt derives from the asset that Mrs Pearce and Peter and Gail contemplated in the loan agreement would be applied to repayment in the event that the loan was outstanding when the property was sold.
[50] The third requirement that the enrichment gained at the claimant’s expense was unjust is contentious. The equivalent component of Peter and Gail’s argument in the District Court was that Kim had afforded dishonest assistance to Mrs Pearce in
her breach of trust. However, the proposition advanced on appeal was that she was
12 Applying Commissioner of Inland Revenue v Stiassny [2012] NZCA 93, [2013] 1 NZLR 140 at
[92] citing Goff and Jones The Law of Unjust Enrichment (7th ed, Sweet & Maxwell, London,
2011) at [1.09].
implicated by knowing receipt of property impressed with a constructive trust of which Peter and Gail were the beneficiaries.
[51] Mr Neild submitted that Judge Zohrab applied the wrong test in reaching his conclusion that a constructive trust did not arise. The Judge analysed the criteria necessary for the Court to recognise an institutional constructive trust. He treated an academic analysis of these requirements as reflecting the state of New Zealand case law.13 The Judge reasoned:
[58] … Ms Palmer poses that a close analysis of the established institutional constructive trust cases suggests that an intention to vest beneficial interest in the claimant, either once existed, or ought to have existed, and continues to operate despite the legal owner no longer holding the intention. This intention is either subjectively held or objectively deemed by the law as a matter of good conscience to be appropriate in the circumstances. The trust therefore arises at the time of the intention which creates the claimant’s interest in seeking performance of the trust by order of the Court.
[52] Relying principally on the Court of Appeal’s decision in Lankow v Rose, Mr Neild argued that the requirement to find a requisite common intention of the parties confused the relevant requirement in other Commonwealth jurisdictions, with the requirement in New Zealand for an objectively determined reasonable expectation, which the parties are deemed to have had at the requisite time, for the
creation of an equitable interest.14
[53] Mr Neild argued that a constructive trust ought to be recognised if the claimants could make out:
(a) contributions, direct or indirect, to the property in question; (b) the expectation of an interest therein;
(c) that such expectation is a reasonable one; and
(d)that the defendant should reasonably expect to yield the claimant an interest.
13 Jessica Palmer Attempting Clarification of Constructive Trusts (2010) NZULR 113.
14 Lankow v Rose [1995] 1 NZLR 277 (CA).
[54] That formulation is from the judgment of Tipping J in Lankow v Rose.15 The focus of the judgments in that case is on the predicament of one partner to a de facto relationship who has made material contributions to property where legal ownership was solely vested in the second partner, during a relationship in the nature of marriage. Lankow v Rose was decided before the 2001 amendment to the statutory relationship property regime.16 That context is clearly significant in the formulation.
[55] Mr Neild argued that the Judge erred by assessing the evidence (principally the terms of the loan agreement) as to whether a common intention was made out that a constructive trust would arise over the proceeds of the sale of the property. Instead, Mr Neild argued that the Court ought to adopt the test from Lankow v Rose.
[56] In this appeal, it is unnecessary to decide whether the requirements defined in Lankow v Rose ought to apply in the same way in the different context of intra- family transactions that go wrong.17 Mr Neild’s analysis of what the parties’ reasonable expectations ought to have been was coloured by hindsight as to what subsequently transpired. First, that there was a falling out between mother and son that progressed to the point of a determination on the mother’s part to frustrate the son’s ability to achieve repayment of the loan. Secondly (although not so directly relevant), the mother’s earlier breach of the terms of the agreement by granting a
mortgage over the property, which created a prior secured claim over a significant component of her equity in the property.
[57] There was some evidence that Peter was concerned about the adequacy of his position at the time the loan agreement was documented. The Palmerston North solicitor acting for Mrs Pearce (who had long-standing links with the family) acknowledged a possible concern from Peter’s point of view as to whether he would be secure under the loan agreement in recovering the amount of the loan in circumstances such as where the sale proceeds of the property might be utilised to
pay the cost of Mrs Pearce’s care. That letter provided the assurance:
15 At 294.
16 Property (Relationships) Amendment Act 2001.
17 The test was applied in Bennett v Bennett HC Christchurch CP99/00, 10 April 2001, in the context of a son’s claim of unjust enrichment against his brothers and his father’s estate, where he alleged he contributed materially to a family partnership.
I simply cannot foresee any circumstances where a situation would arise which would debar Peter from recovering his loan and interest on it under the terms of the agreement.
[58] The loan agreement was signed a week after the date of that letter. The loan agreement required Mrs Pearce to undertake not to charge the property. That would have been in part to provide comfort to Peter that no third parties would obtain an ability to control the property or proceeds of its sale and that the value of the asset, seen as the source of repayment of the loan (or at least the most likely source), would not be diminished by borrowings secured against it.
[59] I agree with the Judge that the terms of the transaction when the loan was documented did not give rise to any objective expectation that Peter and Gail would be given an interest in the property in return for their financial contribution to renovations to it. As best I can tell, the advance of $10,500 was approximately
10 per cent of the then value of the property. The loan agreement acknowledged a debtor/creditor relationship and the prospects of repayment were enhanced by preventing the borrower from securing any other borrowings by way of a charge against the property. The loan agreement also committed Mrs Pearce and her estate to effect repayment out of the proceeds of its resale.
[60] At the time of the loan agreement, Peter and Gail had made the advance to Mrs Pearce to help her renovate her property. There was no suggestion at that time that they would acquire an interest in her property in return for making the advance. Instead, they had her acknowledgement that they had advanced that amount, and a contractual commitment to make repayment. From that point, there were prospects both of Peter and Gail making further advances, and of Mrs Pearce repaying the loan without disposing of the property. Although the prospects of the loan being repaid from independent sources may have been remote at the time, there may have been a subsequent change in Mrs Pearce’s financial position that allowed her to do so.
[61] Potentially different considerations arise in assessing whether Peter and Gail would have an expectation of a subsequent proprietary interest in the proceeds of sale, if their loan remained outstanding when the property was sold. If Mrs Pearce complied with the terms of the loan agreement, any such interest would be
unnecessary as repayment would be effected as a component of the conveyancing on sale of the property. It would only be if, whether by accident or by design, the contractual obligation to make repayment out of the proceeds was not honoured that Peter and Gail would become interested in any dispositions to third parties by Mrs Pearce or her estate of the fund out of which they expected, as a matter of contract, to be repaid. That is contextually and temporally different from the type of reasonable expectations the Court of Appeal contemplated would arise when recognising a constructive trust claim for a de facto partner who did not enjoy legal ownership of assets to which he or she had contributed.
[62] To reconstruct what Peter and Gail’s reasonable expectations might have been when they agreed on the terms for the advance with Mrs Pearce, one would need to take into account the contingencies of Mrs Pearce subsequently determining to break the contract by structuring a sale of the property to shed assets so that she no longer had the money to repay the loan. I am not satisfied that such a reasonable expectation could be recognised where it involved so many contingencies. Such an expectation could not be accepted as objectively being in the minds of Peter and Gail at the time the contractual arrangement was entered into. The reasonable expectation was that they could rely on the contract.
[63] Accordingly, I agree with the Judge’s characterisation of the debtor/creditor relationship, as reflected in the loan agreement at the time it was created, that dictated his decision to deny the existence of a constructive trust.
Equitable lien
[64] A third basis for obtaining relief was that the Court should recognise an equitable lien over the property received by Kim in consequence of her involvement in unjust features of the transaction.
[65] The prospect of an equitable lien as a basis for recovery was not raised in the District Court, but its possible application was argued fully on the appeal. An equitable lien may be imposed as a charge over property that is in the defendant’s possession. Mr Neild argued that one recognised category is that a child who spends money on his or her parents’ property may have a lien arising out of the relationship
of parent and child. He cited comment in Halsbury’s Laws of England for this proposition.18 The context in which this comment is made is as follows:
875 Lien arising from family relationships.
It seems that where the person on whose behalf money is spent is the husband or wife of the person who incurs the expenditure, a lien may arise from the relationship of the parties. Thus a wife who spends her own money in payment of building society and hire purchase instalments has an equitable lien on the proceeds of sale of the property. It seems also that a child who spends money on the parent’s property will have a lien arising from the relationship of parent and child. Conversely, if a parent spends money on the child’s property, then, even though the parent is a trustee for the child, the parent will be debarred from claiming a lien in circumstances where the presumption of advancement arises.
[66] The footnote for the italicised sentence is:
This seems to be the corollary of the reasoning contained in the judgments in Re Sims Question [1946] 2 All ER 138 and Re Roberts, Public Trustee v Roberts [1946] Ch 1.
[67] Mr Zindel argued that the relevant proposition from Halsbury is not a correct statement of the law, or at least ought not to be treated as such in New Zealand. He argued that neither of the cases cited in support of the proposition make it out.
[68] In Sims, a wife had met the payments on various hire purchase contracts during her husband’s absence on service during the Second World War. At least the majority of the wife’s financial resources came from a separation allowance paid by the Army directly to her. Those payments were funded partly by deductions from the salary the husband would otherwise get, and partly by the government. She claimed a lien over certain of the items subject to the hire purchase contracts on the basis that she had made the payments for them out of her own money. In the Chancery Division, Wynn-Parry J found that she could not make out her separate source of the payments, and that the separation allowance was not paid to her simply for the purposes of enabling her to spend it on herself. Therefore she could not discharge the burden of establishing that the payments she made were out of her own monies.
That was the stated ground for denying her a lien. The Judge did observe:19
18 Halsbury’s Laws of England (5th ed, 2008, online ed), vol 68 Lien at [875] (citations omitted).
19 Re Sims Question [1946] 2 All ER 138 at 140.
I am not saying that the decision might not be otherwise in a case where the court has acceptable evidence that a wife in similar circumstances, well aware of the legal implications, so arranges her financial affairs that she shows beyond a peradventure out of what source each payment was made. On a claim made in such circumstances, different considerations would arise; …
[69] I agree with Mr Zindel that the analysis in this judgment as to why an equitable lien did not arise is an inadequate foundation for making out the corollary that, if a child has made payments from his or her own financial resources to support the property of a parent, an equitable lien will then arise.
[70] In the second case cited, Re Roberts, Public Trustee v Roberts, a father took out a life insurance policy on his son, and the father paid the annual premiums on the policy for some 33 years.20 In the father’s will, he directed his trustees to continue paying the premiums on the policy, and provided that when the proceeds of the policy were received on his son’s death, they were to be paid to the son’s widow and his two daughters, or such of them as survived. The trustees paid three further
premiums after the father’s death, before the son died. The residuary beneficiaries in the father’s estate (a second wife and children of that second marriage) claimed a lien over the proceeds of the policy paid out by the insurer for all of the premiums that had been paid during the father’s lifetime, and the premiums paid by the trustees of his estate since his death.
[71] Evershed J, sitting in the Chancery Division, refused to recognise a lien because of a presumption that amounts paid by a parent for the benefit of a child amount to advancement. The parties did not dispute that the trustees of the father’s estate were entitled to be reimbursed from the proceeds of the policy for the premiums they had paid since the father’s death. Evershed J observed:21
… the right answer to be given to the question is in favour of the son. True it is that the testator, having constituted himself in express terms a trustee for a beneficiary, would as such prima facie be entitled to an indemnity for moneys provided by him to preserve the trust property; but against that view must be set the fact that the trustee here was a father and the beneficiary was his own son. It is well-established that a father making payments on behalf of a son prima facie, and in the absence of contrary evidence, is to be taken
20 Re Roberts, Public Trustee v Roberts [1946] Ch 1.
21 At 5.
to be making and intending an advance in favour of the son and for his benefit.
[72] Again, I agree with Mr Zindel that the reasoning in Roberts is an inadequate basis for recognising the corollary that amounts paid in respect of specified property by a child, for the benefit of a parent, would give rise to an equitable lien for repayment of that amount out of the proceeds of the specified property. In other circumstances, payments by children for the benefit of parents might well be treated as gifts made out of natural love and affection, and received as such by their parents at the time. Recasting the character of the transaction subsequently to recognise a lien for repayment of the amount in such cases simply because of the relationship between the parties would not be justifiable on any equitable analysis.
[73] I am therefore not prepared to find grounds for an equitable lien by relying on the statement from Halsbury.
[74] In that event, Mr Neild argued in the alternative that the circumstances in which equitable liens can be recognised are not closed, and cited the High Court of Australia’s decision in Hewett v Court as providing guidance that would enable recognition of an equitable lien in the present case.22
[75] In Hewett, a manufacturer of pre-fabricated houses completed them at its work site and then transported them to the purchasers’ land. The company had received two out of four instalment payments for a house as provided for in its contract with the purchasers. Shortly before the commencement of winding up the building company, it entered into an agreement with the purchasers of the particular house that the purchasers would take the unfinished house on payment of the value of the work done in addition to stages of work already paid for. The liquidator of the building company sought to recover the value of the house immediately before that agreement on the ground that the agreement involved a preference. The purchasers asserted an equitable lien over the house to secure progress payments under the
contract.
22 Hewett v Court (1983) 149 CLR 639 (HCA).
[76] Gibbs CJ observed that the absence of equitable liens being recognised in the same circumstances previously did not preclude finding one:23
… The rules of equity are not so rigid and inflexible that it is necessary to discover precise authority in favour of the existence of a lien before one can be held to have been created. I do not of course intend to suggest that the courts may proceed on general notions of justice without regard to settled principles.
[77] Of the Judges in the majority,24 Deane J cast the prospects of recognising an equitable lien in the broadest circumstances. He stated that it was difficult, if not impossible, to formulate any satisfactory statement of the necessary or sufficient circumstances where an equitable lien could be implied as applicable to any specific relationships. Deane J’s judgment set out what he considered the sufficient circumstances for implying an equitable lien between the parties in a contractual relationship. These were:25
(i) that there be an actual or potential indebtedness on the part of the party who is the owner of the property to the other party arising from a payment or promise of payment either of consideration in relation to the acquisition of the property or of an expense incurred in relation to it …
(ii) that that property (or arguably property including that property …) be specifically identified and appropriated to the performance of the contract; and
(iii) that the relationship between the actual or potential indebtedness and the identified and appropriated property be such that the owner would be acting unconscientiously or unfairly if he were to dispose of the property (or, if it be appropriate, more than a particular portion thereof) to a stranger without the consent of the other party or without the actual or potential liability having been discharged.
[78] The majority of the High Court of Australia found that the purchasers did have an equitable lien over the property that had been the subject of the contract.
[79] Mr Neild argued that Peter and Gail could satisfy Deane J’s requirement for an equitable lien in this case. First, Mrs Pearce was indebted to them in relation to an expense incurred in relation to that property. Secondly, the property could be
specifically identified (that is, the proceeds of sale) and sufficient of those proceeds
23 At 649.
24 Wilson and Dawson JJ dissented.
25 At 668.
were appropriated to the performance of the contract in that they were to be applied in repayment of the loan. Thirdly, there was a sufficient relationship between Mrs Pearce’s indebtedness and the proceeds of sale of her property for the Court to find that she would be acting unconscientiously or unfairly if she disposed of the property to Kim without Peter and Gail’s consent, or without discharging her liability to them.
[80] In Hewett, if an equitable lien was not recognised, then the liquidator of the building company would get to retain the partially completed house, and the substantial payments made specifically towards the cost of its construction. Gibbs CJ implied into the contract a recognition that if the purchasers terminated the contract, they would be entitled to the product of the work for which they had paid.26
[81] The contest in Hewett between the liquidators and the purchasers of the pre- fabricated house is different from the relationship involved here. Mr Neild’s written submissions did not make clear whether the property over which the equitable lien was asserted was Mrs Pearce’s home, or the proceeds of its sale. I took his oral submissions to contend for the latter, in that the terms of the contract contemplated that the loan would be repaid out of the proceeds of the sale of the property. However, as Mr Zindel emphasised, although that was the most likely source of repayment, it was not contractually necessary for that to occur. If the loan was not repaid beforehand, then the contract required Mrs Pearce or the executors of her estate to effect repayment out of the proceeds of its sale. That is what ought to have happened, but was not necessarily the way the contract would be performed when it was entered into. That means that the proceeds of sale were not appropriated to the performance of the contract in the sense I consider was intended by Deane J in the second of his requirements.
[82] Mr Neild supported the application of an equitable lien because it is another means by which the Court can prevent an unjust enrichment. I accept there was unjust enrichment of Kim on the basis of the Judge’s finding that she was aware of her mother’s intention to ignore her obligation, and frustrate Peter and Gail’s ability
to recover the amount of the debt owing to them. Kim was unjustly enriched when
26 At 648.
she accepted Mrs Pearce’s forgiveness of the debt she assumed for the balance of the purchase price of the property. That in principle justification for contemplating an equitable lien does not enable the Court to overlook the requirement for an identity of interest between the relevant property in issue, and the subject matter of the lien.
Summary
[83] I have found that the requirements of s 346 of the Property Law Act 2007 have been made out, entitling Peter and Gail to an order for reasonable compensation.27
[84] In other respects, I have found that Peter and Gail could not make out either a constructive trust or an equitable lien.
Costs
[85] Kim is legally aided. There will be no order as to costs.
Dobson J
Solicitors:
Gascoigne Wicks, Blenheim for appellants
Zindels, Nelson for respondent
27 See [41] above.
2
1