Burmeister v O'Brien HC Tauranga CIV 2005-470-0396

[2008] NZHC 1359

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IN THE HIGH COURT OF NEW ZEALAND TAURANGA REGISTRY

CIV 2005-470-0396

UNDERthe Land Transfer Act 1952, the Credit Contracts and Consumer Finance Act 2003 and the Fair Trading Act 1986

BETWEEN	KENNETH SIDNEY BURMEISTER AND VALERIE JOAN BURMEISTER Plaintiffs
AND	JOHN LESLIE O'BRIEN First Defendant
AND	GILLIAN SANDRA O'BRIEN Second Defendant
AND	PATRICIA ELIZABETH PATTERSON Third Defendant
AND	GEOFFREY PETER CLAYTON Fourth Defendant
AND	JOHN FREDERICK CLAYTON Fifth Defendant
AND	MARK HENLEY-SMITH Sixth Defendant
AND	AUCKLAND SAVINGS BANK Seventh Defendant
Hearing:	22 July 2008

Appearances: D Chesterman for the Plaintiffs

M Robinson for the Seventh Defendant

Judgment:      2 September 2008

JUDGMENT OF STEVENS J

This judgment was delivered by me on Tuesday, 2 September 2008 at 3pm pursuant to r 540(4) of the High Court Rules.

Solicitors/Counsel:

Registrar/Deputy Registrar

D Chesterman, Sharp Tudhope, Private Bag 12020, Tauranga Mail Centre 3143

M Robinson, Simpson Grierson, Private Bag 92518, Wellesley Street, Auckland 1141

BURMEISTER V O'BRIEN AND ORS HC TAU CIV 2005-470-0396  2 September 2008

Table of Contents

Para No

Introduction  [1] Factual background  [2] The Burmeisters’ claim  [10] The Associate Judge’s decision  [14] Pleadings against the ASB  [17] Issues for determination  [29] Application of the CCCF Act  [31] Impact of the CCCF Act on the indefeasibility provisions of the

Land Transfer Act  [42]

Imputation of knowledge of the common solicitor to the ASB  [51] Submissions for the ASB  [63] Discussion  [68] Result  [87]

Introduction

[1]      The Burmeisters live at 1 Lotus Avenue in Mt Maunganui.  In 2001 they fell prey to a buy-back scam.   About a year after entering into an investment scheme with the fourth and fifth defendants they discovered that their previously debt-free home had been transferred to a party they did not know and the title to the property was encumbered by a mortgage to ASB Bank Limited (the ASB) for $172,000.  The Burmeisters filed a claim against all those involved, including a claim against the ASB seeking to set aside the mortgage.  The ASB filed an application to strike out the claim.  It succeeded.  This is an application to review the decision to strike out the claim.   It raises some very difficult points of law, but I am satisfied that the decision to strike out was correct.

Factual background

[2]      The background facts are not in dispute.  The Burmeisters’ home at 1 Lotus Avenue (the property) was debt-free.   They had paid the principal and all interest payments owing under a loan from the BNZ, although the BNZ mortgage had not been discharged.  Out of a desire to use the equity in their home to generate some capital payments and a weekly income, the Burmeisters entered into an investment scheme with Messrs Geoffrey and John Clayton, the fourth and fifth defendants, between June and September 2001.   The Burmeisters understood that under the

scheme, title to their home would be transferred for a term of three years to “a secure family trust” administered by a group of companies known as the ICMG group.  In return, they were to receive a weekly income of at least $200 and two lump sum payments of $15,000 and $7,000 respectively, the ICMG group was to pay rates and insurance   for   the   property   and   the   property  was   to   be   returned   to   them unencumbered at the end of three years or any extension of the investment term.  All of the negotiations and discussions were held with Geoffrey and John Clayton.

[3]      In September 2001, the Burmeisters signed a document presented to them by Geoffrey  Clayton  which  they  believed  was  an  acknowledgement  that  they  had agreed to join the scheme.  Then, at Geoffrey Clayton’s request they collected title documents to the property from the BNZ, obtained a discharge of the BNZ mortgage and passed the title documents to the first defendant, Mr John O’Brien, who they understood was an associate of Geoffrey Clayton.  What occurred next is not entirely clear from the pleadings but it seems that following the collection of title documents, various steps were taken by Mr O’Brien which eventually led to the registration of a transfer of the property to the first, second and third defendants as trustees of the O’Brien Family Trust (the trustees).

[4]      Mr O’Brien obtained a valuation of the property which was used to support an application to the ASB for a loan to purchase the property.  On or about 5 October

2001 the trustees granted a mortgage in favour of the ASB to secure an advance made to them by the ASB (the ASB mortgage).   The loan secured by the ASB mortgage funded the purchase price of the property.   The execution of the ASB mortgage by the trustees was witnessed by the sixth defendant, a solicitor, who also certified the ASB mortgage correct.

[5]      The sixth defendant first became involved in the transaction when he was instructed by the trustees to act for them as their solicitor on the purchase of the property.   What the sixth defendant knew about the circumstances in which the trustees were acquiring the property will be decided at trial.  However, for present purposes, it is sufficient to note that, following completion of the negotiations regarding  the  terms  and  conditions  of  the  mortgage  between  the  ASB  and  the

trustees, the trustees nominated the sixth defendant as the solicitor to whom the ASB

should forward the loan and mortgage documents for completion and registration.

[6]      As instructed by the ASB, the sixth defendant arranged for the loan and mortgage documents to be executed by the trustees.  On or about 14 November 2001, the sixth defendant presented the BNZ discharge, the transfer of title to the property to the O’Brien Family Trust and the ASB mortgage for registration.

[7]      The Burmeisters started receiving the weekly payments under the scheme in October 2001.   They also gave instructions to Geoffrey Clayton to invest the first payment of $15,000 through the ICMG group, as a result of which the weekly payments became $220 rather than the original $200.   In December 2001, the Burmeisters received payment of the $7,000 lump sum promised under the scheme.

[8]      In  about  April  2002,  Geoffrey  Clayton  contacted  the  Burmeisters  and requested that they sign further documentation in connection with the scheme.  This involved signing a deed of agreement and a deed of acknowledgement of debt with parties  associated  with  the  ICMG  group.    The  Burmeisters  complied  with  the request.

[9]      In November 2002, the Burmeisters discovered that title to the property had been  transferred  to  the  O’Brien  Family  Trust  (the  O’Brien  transfer).     The Burmeisters plead that the transfer of the property to the trustees of the O’Brien Family Trust took place without their knowledge or consent.  In particular, they say that they did not sign the transfer.

The Burmeisters’ claim

[10]     The Burmeisters have made a number of allegations of fraud under the Land Transfer Act 1952.   First, the Burmeisters have pleaded that the first and fourth defendants forged documents in respect of the transfer of the property.   Secondly, they allege that the trustees took title to the property knowing that the O’Brien Family Trust was not a bona fide purchaser for value.

[11]     Thirdly, they have pleaded that actions of the sixth defendant constituted fraud in that he:

a)      Certified as correct the BNZ discharge without any authority or instructions from the plaintiffs or their solicitors; and

b)Certified as correct the transfer of the property to the trustees in the knowledge that there was no executed and unconditional agreement for the sale and purchase of the property for $215,000 between the plaintiffs and the O’Brien Family Trust; and

c)       Certified  as  correct  the  O’Brien  transfer  without  verifying  the signatures of the plaintiffs; and

d)Certified as correct the O’Brien transfer in the knowledge that the plaintiffs had not received the consideration of $215,000; and

e)       Registered  the  discharge  of  the  BNZ  mortgage  and  the  O’Brien transfer in the knowledge that his certification was incorrect; and

f)        Failed to account to the plaintiffs for the proceeds of sale by paying the monies advanced to the O’Brien Family Trust by the ASB to the ICMG group in the knowledge that the O’Brien Family Trust was not a bona fide purchaser for value.

[12]     The  Burmeisters  also  sought  relief  against  Messrs  Geoffrey  and  John Clayton, the trustees of the O’Brien Family Trust and the ASB.   The Burmeisters claimed that the investment scheme was a “buy-back transaction” for the purposes of s 8 of the Credit Contracts and Consumer Finance Act 2003 (the CCCF Act) as the trustees granted them a right to occupy the property over the term of the scheme with a right to re-purchase at the end of its term.  They further claimed that the said buy- back transaction was “oppressive” because the trustees became the registered proprietors of the property through fraud under the  Land Transfer  Act, and the transaction may therefore be re-opened by the Court pursuant to s 120.  Therefore,

the Burmeisters pleaded that “the mortgage held by the seventh defendant [the ASB]

be set aside pursuant to s 127(2)(e) of the CCCF Act”.

[13]     Although it was not pleaded in the first statement of claim, the Burmeisters also claimed that the ASB mortgage should be set aside on the basis of the fraud exception to the principle of indefeasibility under the Land Transfer Act.   They argued that in  the course of  acting for  the trustees  as  mortgagors,  the solicitor instructed by the ASB acquired knowledge regarding the circumstances in which title to the property had been acquired.   The Burmeisters submitted that such knowledge ought to be imputed to the ASB.

The Associate Judge’s decision

[14] The Burmeisters’ claim against the ASB was struck out in a carefully reasoned decision of Associate Judge Abbott dated 9 November 2005 and reported at (2006) 7 NZCPR 440. Associate Judge Abbott held first that “the ASB mortgage is not a security interest for the purpose of the CCCF Act, and was not taken in connection with the buy-back transaction”: at [49]. Secondly, he concluded that the provisions of the CCCF Act were not intended to override the registered interest of a bona fide purchaser for value contrary to the indefeasibility principles of the Land Transfer Act: at [52]. Thirdly, he observed that he could find no law or obligation which required that the knowledge of the ASB’s solicitor, acquired when acting for the trustees as mortgagors, be imputed to the ASB so as to bring the case within the fraud exception to indefeasibility: at [66].

[15]     The Burmeisters contend that the Associate Judge’s analysis and application of the provisions of the CCCF Act was wrong in law.  They submit that, although it is accepted that the ASB was at all times an innocent bona fide mortgagee for value, the ASB mortgage was nevertheless tainted by what the Burmeisters allege is the fraudulent knowledge of its solicitor.  Counsel for the Burmeisters relied strongly on the decision of the Court of Appeal in Nathan v Dollars & Sense Finance Ltd [2007]

2 NZLR 747 and the principles articulated by the Supreme Court on appeal: see Dollars & Sense Finance Ltd v Nathan (2008) 6 NZ ConvC 194,594.   Although counsel did not abandon the other grounds argued before the Associate Judge, he

relied largely on the ground of imputation of knowledge as a means of establishing the fraud exception to indefeasibility.

[16]     The ASB’s position was that the Associate Judge’s decision was correct in law.  First, it submitted that the provisions of the CCCF Act do not apply to the ASB mortgage.  Secondly, it submitted that neither the decision of the Court of Appeal nor the decision of the Supreme Court in Dollars & Sense Finance supports the proposition  that  the  knowledge  of  the  ASB’s  solicitor  should,  on  the  facts,  be imputed to the ASB.   Rather, those decisions were said to support the ASB’s submission that the solicitor must have acquired any knowledge (or committed any fraudulent acts) outside the very limited scope of his agency for the ASB.  Thus, the ASB mortgage was valid and the application for review must be dismissed.

Pleadings against the ASB

[17]     The only cause of action currently pleaded against the ASB is the claim seeking relief under the CCCF Act.  However, none of the pleadings alleges fraud under the Land Transfer Act against the ASB directly, and counsel for the Burmeisters did not offer any such amended pleading at the hearing.  It is therefore necessary to look to counsel’s submissions for the basis upon which such an allegation of fraud might be advanced against the ASB.

[18]     The specific pleading against the ASB is in the following paragraphs of the first amended statement of claim:

97.  The advance from the seventh defendant to the first, second and third defendants to purchase Lotus Avenue from the plaintiffs was secured by a first mortgage over Lotus Avenue.

98.  The ASB mortgage was a security interest that was linked with and therefore formed part of the buy-back transaction.

[19]     The pleadings in this part of the case are less than satisfactory and lack particulars in several respects.  For example, there is no specific pleading of the basis upon which it is said that the ASB mortgage is linked to the buy-back transaction.  It seems, however, that the only respects in which the ASB was involved with the title

to the property were that the trustees of the O’Brien Family Trust signed a first mortgage  over  the  property  in  favour  of  the  ASB  and  that  the  mortgage  was registered at the same time as the transfer to the trustees.  Importantly, there is no allegation in the pleadings, nor was any suggestion made by counsel for the Burmeisters at the hearing, that the ASB otherwise had any direct knowledge of, or any role in, the events leading to the transfer of the title to the trustees.

[20]     But at the hearing, as he had done before Associate Judge Abbott, counsel for the Burmeisters submitted that any knowledge of  the sixth  defendant  gained  in relation to his instructions from the trustees as purchasers of the property can be imputed to the ASB because of his appointment as common solicitor acting for the ASB to execute the loan agreements and register the mortgage.   In the context of such a claim, the precise nature of the mandate given to the sixth defendant by the ASB assumes importance.

[21]     From the documents submitted at the hearing it emerges that, after receiving a copy of the valuer’s report on the property, the ASB gave written instructions to the solicitor on 11 September 2001 in respect of the proposed ASB mortgage.  The letter of instructions appears to be in standard terms regarding an intended loan to the trustees.  A fourth trustee is named in the letter (later omitted from the mortgage) but nothing turns on this.  The solicitor was instructed as follows:

The Bank has  agreed  to  provide  finance to  the  above  named  borrower. Please prepare, attend to execution and registration of the enclosed Loan Agreement(s) and Securities.   Memorandum of Mortgage Forms, Loan Agreement  (including  the  Standard  Terms  and  Conditions).    Disclosure copies and Solicitor’s Certificate are enclosed.  On receipt of the completed Certificate, the Bank will be in a position to make payment of the advance(s) and, failing any arrangement to the contrary, the completed Memorandum of Mortgage and all other security documents must be produced to the Bank not later than two months after the payment is made.

If there are circumstances where you consider that you cannot act, or it would be inappropriate for you to act, as solicitor for the Bank in terms of this letter, please advise us immediately.

Please note that finance has been approved on the basis that;

(a)       the Bank receives a mortgage from all the registered proprietors of the land.  If there is any registered proprietor who is not a borrower

or who has not guaranteed the obligations of the Borrower to the

Bank, please contact the Bank immediately before proceeding to execute the enclosed documents.

(b)The purchase price recorded on the Agreement for Sale & Purchase is the actual price paid on settlement.  If there is any difference in these prices please contact the Bank immediately before proceeding to execute the enclosed documents.

[22]     The letter draws attention to a number of “additional points”, including at 5, 6 and 8 respectively:

5.No alteration or addition to the loan agreements, or the printed form of mortgage, is to be made without prior reference to the Bank.  Please ensure that the Bank’s mortgage is fully completed by inserting the correct names of the parties concerned and the correct legal description of the property charged.   Please notify the Bank immediately if there is any uncertainty in respect of the legal description of the property.

6.It is your responsibility to ensure that the mortgagor has the power to enter into the mortgage, that the person(s) executing the mortgage have the authority to do so and that they execute the mortgage in accordance with that authority so that the mortgage is valid and binding on the mortgagor.

8.It is your responsibility to positively identify all Borrowers and any guarantor(s) and to make full disclosure within the meaning of the Credit Contracts Act 1981 to each Borrower and any Guarantor.

[23]     The purchase price mentioned in (b) refers to an agreement for sale and purchase in favour of the O’Brien Family Trust and/or nominee.  The purchase price shown in the agreement is $215,000.  This is the same as the amount shown as the consideration  in  the  transfer  dated  5  October  2001,  which  the  sixth  defendant certified correct.   The agreement for sale and purchase referred to the vendor as “ICMG Property Ltd” and the purchaser as “O’Brien Family Trust and/or Nominee” but is signed (apparently) by the Burmeisters.

[24]     Following  the  initial  letter  of  instructions  from  the  ASB  to  the  sixth defendant on 11 September 2001, further discussions took place between the ASB and the trustees.   This led to the issuing on 3 October 2001 of a second letter of instructions to the sixth defendant.  The letter relevantly provided:

Further to our recent letter of instructions, I have to advise that, after discussion with our abovenamed customer(s), there has been a material change to some aspect(s) of the facility arrangements as originally documented in the Facility Agreement forwarded to you.

Enclosed is the revised Facility Agreement (and other supporting documentation, if any) to be executed in accordance with our original instructions.

No alteration or addition to the loan documentation is to be made without prior reference to the Bank.  (A copy of any altered documentation is to be received by the Bank prior to funds being advanced).

In order to avoid any confusion we suggest you destroy the copy of the

Facility Agreement originally forwarded to you.

[25]     The enclosed instructions are also dated 3 October 2001 but are in identical terms to the earlier letter of instructions.

[26]     The required solicitor’s certificate in respect of the ASB mortgage transaction was signed by the sixth defendant and dated 8 October 2001.  It certified inter alia that the solicitor has taken a mortgage over the land described in the mortgage form provided by the ASB.  It noted that the mortgagors have full power and authority to execute both the mortgage and the loan agreement.   It confirmed that the solicitor would now (or will upon the advance being made) be in a position to register the mortgage as a first mortgage.  The solicitor undertook to do so and to forward the mortgage to the ASB with appropriate documents of title as soon as registration was completed.   Both the loan agreement and the mortgage were executed by the mortgagors.  A trustee certificate was attached.

[27]     Counsel for the Burmeisters submitted that there was a sufficient basis upon which the Court could impute the knowledge of the sixth defendant to the ASB. This submission relied upon the following facts as yet unpleaded against the ASB:

a)        The sixth defendant was the agent of the ASB and allegedly acquired knowledge of the fraud after becoming the ASB’s agent.

b)       The  sixth  defendant  himself  allegedly  committed  fraud  under  the

Land Transfer Act because he:

i)Certified as correct the memorandum of transfer from the Burmeisters to the trustees in the knowledge that there was no executed and unconditional agreement for sale and purchase of

the property between the Burmeisters and the O’Brien Family

Trust.

ii)Certified   as   correct   the   transfer   without   verifying   the signatures of the Burmeisters.

iii)      Certified  as  correct  the  transfer  in  the  knowledge  that  the

Burmeisters had not received the consideration of $215,000.

iv)Knew  that  the  O’Brien  Family  Trust  was  not  a  bona  fide purchaser for value because the purchase money did not go to the Burmeisters but rather to a company in the ICMG group.

v)Certified as correct the BNZ mortgage discharge without any authority   or   instructions   from   the   Burmeisters   or   their solicitors.

vi)Registered the BNZ mortgage discharge and the transfer in the knowledge that his certification was wrong.

vii)     Registered  the  transfer  without  any  instructions  from  the

Burmeisters.

viii)Had   knowledge   of   the   oppressiveness   of   the   buy-back transaction at the time he was dealing with the transaction.

[28]     It is unclear whether it would be necessary for the plaintiff to prove all such allegations to sheet  home the allegation  of  fraud  against  the solicitor.    For  the purpose of this review application, I assume that the Burmeisters would successfully prove the allegation of fraud.  But as noted, counsel candidly accepted that there was no evidence that the ASB was fraudulent or otherwise had any direct knowledge of how  the  trustees  of  the  O’Brien  Family  Trust  acquired  title  to  the  property. Therefore, the Burmeisters’ claim against the ASB based on the fraud exception to indefeasibility could only succeed if any knowledge of the sixth defendant could be imputed to the ASB on the basis of his role as common solicitor.

Issues for determination

[29] The parties were agreed that to succeed in its strike-out application, the ASB must satisfy the Court that the Burmeisters’ claims, as pleaded, do not have a reasonable prospect of success and that no amendment of the pleading along the lines described at [29] above could cure this. As Associate Judge Abbott determined the application in favour of the ASB, the Burmeisters as the parties seeking review bear the burden of persuading the High Court that the decision was wrong: see Wilson v Neva Holdings Ltd [1994] 1 NZLR 481. The High Court’s task is to make its own assessment as to whether the original decision is wrong: see Austin Nichols

& Co Inc v Stichting Lodestar [2008] 2 NZLR 141 (SC) at [16]. [30] On review, the issues for determination are therefore:

a)       Whether the ASB mortgage is a security interest under the CCCF Act taken in connection with the buy-back transaction;

b)        Whether the CCCF Act overrides the principle of indefeasibility in the

Land Transfer Act; and

c)       Whether the knowledge of the sixth defendant can be imputed to the ASB   so   as   to   bring   into   operation   the   fraud   exception   to indefeasibility.

Application of the CCCF Act

[31]     As noted, this part of the case on review was not advanced as strongly as the argument about imputed knowledge.  This was not surprising as the reasoning in the decision of Associate Judge Abbott is comprehensive and compelling.  Moreover, I consider that his decision was correct.   But because the reliance on the relevant provisions  of  the  CCCF  Act  was  not  abandoned,  I  propose  to  deal  with  it  as succinctly as possible.

[32]     There is no dispute that the Court has power to order that a mortgage be set aside if it is a security interest covered by the CCCF Act and the Court has decided to re-open a buy-back transaction: see s 127(1).  The Court may re-open a buy-back transaction which is found to be oppressive or where a party to it has induced another party to enter into it by oppressive means: see s 120 of the CCCF Act.  It is also common ground that neither the ASB mortgage nor the underlying loan agreement falls within the definition of a buy-back transaction in s 8 of the CCCF Act.    But  under  s  119  of  the  CCCF  Act,  if  a  “security  interest”  is  “taken  in connection with a buy-back transaction”, it is to be treated as part of the transaction for the purposes of re-opening oppressive transactions under s 120.

[33]     The term “security interest” is defined in s 5 of the CCCF Act as follows:

security interest means an interest in property created or provided for by a transaction that, in substance, secures payment or performance of an obligation under a credit contract, consumer lease, or buy-back transaction, without regard to—

(a)   the form of the transaction; and

(b)   the identity of the person who has title to the property that is subject to the security

[34]     For the purposes of the strike-out application, counsel for the ASB accepted that the scheme pleaded by the Burmeisters is a buy-back transaction as defined in s

8 of the CCCF Act.  However, counsel for the ASB says that the Burmeisters are not able to show that the ASB mortgage is a “security interest” for the purpose of the CCCF Act or that it was “taken in connection with the buy-back transaction” as required by s 119(1).

[35]     Counsel for the ASB submitted that the ASB knew nothing of the scheme and hence could not be treated as providing security for payment or the performance of an obligation under it.  Rather, the sole purpose of the mortgage was to secure the obligations of the O’Brien Family Trust under the loan agreement with the ASB. Importantly, there is no pleading either that the ASB was a party to the scheme or that the scheme is referred to in the mortgage, and nor was there any suggestion to amend the pleading in these respects.  For the same reasons, counsel for the ASB

submitted that the ASB mortgage cannot be said to be “in connection” with the buy- back scheme.

[36]     The Burmeisters submitted that the policy of the legislation required a wide interpretation to be given to the term “security interest” and to the provisions in s 119 in order to achieve the intended purpose of giving relief from oppressive buy- back transactions.   Counsel argued that it was appropriate to extend the Court’s powers of relief to cover the actions of innocent financiers who made the transaction possible, as there would most likely be only a relatively small number of such transactions.   As they were in a better position to protect themselves than comparatively unsophisticated homeowners it was reasonable to place the risk of loss on the financial institutions.

[37]     This  argument  did  not  find  favour  with  Associate  Judge  Abbott.    He concluded:

[40]  I accept that the CCCF Act has been drafted widely: nevertheless, it is not without bounds. It is clear from its definition that the security interest which the Act seeks to capture has to be determined by reference to the transaction which creates it, and the relationship between that transaction and the buy-back transaction.

[41]  The ASB mortgage arises under a loan agreement between the O’Brien Family Trust and the ASB. The mortgage secures nothing more than repayment of the advance made under that agreement. The substance of the loan agreement, therefore, is to provide money to the O’Brien Family Trust for an outright purchase of Lotus Avenue, and repayment of that money in due course.

[42]    It  would  be  unrealistic,  in  my  view,  to  interpret  the  words  “in substance, secures payment or performance of an obligation under a … buy- back transaction” as extending the loan agreement to payments or performance of obligations of which ASB knew nothing.

[38]     In view of such pleadings, the Associate Judge held at [45] that:

[45]   The need for a meaningful connection between a captured security interest  and  the  buy-back  transaction  is  repeated  in  the  requirement  in s 119(1) of the Act that it must be “taken in connection with” a buy-back transaction before it is treated as part of it. In my view, this requires a sufficient connection, in fact, between the loan transaction and the buy-back transaction. In my view, this requires that the ASB be a participant of some form in the buy-back transaction. However, the terms of the buy-back transaction do not include, or contemplate involvement of, ASB. It had no knowledge of the buy-back transaction, or direct knowledge of or dealings

with Mr and Mrs Burmeister or the promoters. It had no duty to enquire into the circumstances by which the O’Brien Family Trust came to be purchasing Lotus Avenue, or to see to the application of the money it advanced: s 182

Land Transfer Act 1952.

[39]   I agree with this reasoning.   The buy-back transaction pleaded by the Burmeisters arguably includes obligations on them, the fourth and fifth defendants, the ICMG group and the O’Brien Family Trust.  But there is no pleading that, and nor  did  counsel  for  the  Burmeisters  suggest  any  basis  upon  which,  the  loan agreement or the ASB mortgage were to secure the performance of obligations in the buy-back  transaction.    I  also  agree  with  the  Associate  Judge  that  the  policy underlying the CCCF Act does not warrant a broad interpretation which gives preference to the homeowner over the innocent financier.  The CCCF does not result in a shift of rights to relief as between innocent parties.  If the litigation brought by the Burmeisters is successful, they could still recover their home, subject to the registered mortgage of the financier.  They would also have rights to seek other relief against the perpetrators of the buy-back transaction, those who might have engaged in any fraud, and to seek compensation under s 172 of the Land Transfer Act.

[40]     The interpretation contended for by the Burmeisters would cut across the principles of indefeasibility and create considerable uncertainty for lenders.  Such an outcome would require express enactment.  I am satisfied that neither the definition of security interest, nor the wording of s 119(1) of the CCCF Act, should be so interpreted.   Incidentally, such an interpretation draws support from s 75(5) of the CCCF Act, under which the rights of bona fide purchasers for value are protected under the CCCF Act.

[41]     I therefore agree with the conclusion of the Associate Judge at [49] that the ASB  mortgage  is  not  a  “security  interest”  for  the  purposes  of  the  CCCF  Act. Further, it was not “taken in connection with a buy-back transaction” such as would mean, pursuant to s 119(1), that the ASB mortgage and the buy-back transaction were “linked transactions”.  Accordingly, the ASB mortgage is not to be treated as part  of  the  buy-back  transaction  for  the  purposes  of  any  re-opening  of  that transaction.  This ground of review cannot succeed.

Impact of the CCCF Act on the indefeasibility provisions of the Land Transfer

Act

[42]     The ASB submitted that, as a result of holding a registered mortgage under the Land Transfer Act, the ASB has an indefeasible interest in the property notwithstanding that the mortgagor, the O’Brien Family Trust, may have been registered as proprietor on the title through fraud: see ss 62, 63, 64, 75, 182 and 182 of the Land Transfer Act.

[43]     The application of the indefeasibility principles to the interest of a bona fide mortgagee was considered in the leading case of Frazer v Walker [1967] NZLR

1069 (PC).  This case was later applied to protect the registered interest of a bona fide mortgagee: see Congregational Christian Church of Samoa Henderson Trust Board v Broadlands Finance Ltd [1984] 2 NZLR 704 (HC). In that case, Barker J held at 712 that:

Prior to the determination of Frazer v Walker by the Privy Council, there had been considerable debate amongst legal writers on the Torrens system as to whether the principle should be one of deferred, as opposed to immediate, indefeasibility.    The Privy Council ruled in favour of immediate indefeasibility.  This concept confers on any bona fide registered proprietor or registered mortgagee (such as the defendant) all the benefits, rights and interests consequent  upon  registration,  irrespective  of  any irregularity or error leading to the registration of the instrument, falling short of fraud on the part of the person seeking registration.  This is clear from the advice of the Board delivered by Lord Wilberforce at p 1075; he pointed out that registration, once effected,  must  attract  the  consequences  which  the  Act attaches to registration whether that registration was regular or otherwise.  In order words, the fact of registration determines the rights and interests of the parties in relation to the land.

[44]     Counsel for the Burmeisters relied upon a dictum from the Court of Appeal decision in Miller v Minister of Mines [1961] NZLR 820 to submit that the CCCF Act impliedly overruled the indefeasibility principles in respect of buy-back transactions. The dictum was in the judgment of Cleary J at 839 where he stated, on the topic of whether certain interests under the Mining Act 1926 should prevail, that:

…the  fundamental  reason  why  statutory  interests  have  been  accorded priority over the registered title is neither because they were in the nature of easements nor because they aided some public purpose, but because the provisions of the particular statute required that they have priority…   The

determination of the question must depend upon the purpose and interpretation of the statute under which the interest arises.

[45]     Counsel referred also to the decision of the Privy Council in the same case, which  concluded  that  a  mining  privilege  takes  priority  over  the  rights  of  the registered proprietor of the land affected by it, notwithstanding s 62 of the Land Transfer Act.  The judgment of their Lordships was delivered by Lord Guest who noted that the Mining Act provided its own separate and independent code for the registration of mining licences.  The Privy Council held that if the licence were not registrable under the Land Transfer Act and the indefeasibility provisions of that Act are to override the grant, the licence would be of no value to the licensee, except as against the original owner of the land.  Hence, their Lordships did not consider that this could have been the intention of the legislature in enacting the compendious code for mining privileges in the Mining Act.  The judgment added at 569 that:

It is not necessary in their Lordships’ opinion that there should be a direct provision overriding the provisions of the Land Transfer Act.  It is sufficient if this is proper implication from the terms of the relative statute.

[46]     Counsel for the Burmeisters submitted that such an interpretation is to be inferred from the underlying policy of the CCCF Act, namely to protect victims of oppressive buy-back transactions.  Counsel relied in particular on the power of the Court upon re-opening a buy-back transaction to order that any security interest in connection with the transaction be set aside in whole or in part: see s 127(2)(e) of the CCCF Act.

[47] Such an interpretation was rejected by the Associate Judge at [52]. He held that although the powers of the Court under s 127 of the CCCF Act might extend, in appropriate cases, to making orders divesting a registered interest, he did not accept that such power was intended to override the interests of a bona fide purchaser for value. He stated: “that is such a long-standing principle that, in my view, it could only be overridden by express words.”

[48]     Applying the principles outlined in Miller, I consider that the provisions of the Act as a whole and the provisions regarding the re-opening of oppressive buy- back  transactions  in  Part  5,  in  particular,  can  operate  effectively  to  protect

homeowners against the activities of those parties involved in buy-back transactions without cutting across the interests of innocent registered mortgagees for value. Counsel was unable to point to any particular provision of the CCCF Act which required that any re-opening of buy-back transactions should extend to re-open a loan transaction or a registered mortgage of an innocent third party lender.

[49]     Further, applying the test as set out in the Privy Council in Miller outlined in [45] above, I am not satisfied that the proper implication from the provisions of the CCCF Act should be to override the provisions of the Land Transfer Act.  Again, Part 5 of the CCCF Act is silent on the point.  Counsel could point to no particular provisions that gave rise to such “proper implication”.  Further, if one considers the provisions of s 75(5) dealing with restrictions where the disclosure requirements in Part 3 have not been complied with, it is clear that the indefeasibility provisions in the Land Transfer Act are not to be overridden.

[50]     Accordingly, I conclude that the CCCF Act is not intended to override the interest of a bona fide mortgagee for value.  This ground of review cannot succeed.

Imputation of knowledge of the common solicitor to the ASB

[51]     Counsel for the Burmeisters devoted most of his oral submissions to this ground of review.  The respective positions of the parties on the point are as follows.

[52]     Counsel for the Burmeisters submitted that it was arguable that fraud could be imputed to the ASB through the knowledge acquired by the sixth defendant when acting  as  a  common  solicitor.    Counsel  pointed  to  the  pleading  that  the  sixth defendant had knowledge that the O’Brien Family Trust was not a bona fide purchaser for value.  He argued that such knowledge could be imputed to the ASB as the sixth defendant was acting as its agent and, because he was also acting for the trustees, must also have been aware that the mortgage was an integral part of the fraudulent buy-back transaction.

[53]     Counsel for the ASB submitted that there is no basis on which it could be said that the ASB mortgage was tainted by fraud so as to allow the Burmeisters to

rely on that exception to the indefeasibility principle.   There was no pleading or suggestion that the ASB was a party to the buy-back transaction or had any knowledge itself of the transaction or dealings with any of the parties to it which might implicate it in any fraud.  It was common ground that the ASB had no duty to inquire into the circumstances by which the O’Brien Family Trust as mortgagor became registered, or to see to the application of the money advanced to the mortgagor for the purchase of the property.  Further, there was no basis in law by which any knowledge acquired by the sixth defendant in the course of acting for the trustees of the O’Brien Trust could be imputed to the ASB simply because they chose a common solicitor to act on the completion of the loan documentation and registration of the mortgage.

[54]     The sixth defendant acted for the ASB in completing the instructions, which were limited to attending to the execution and registration of the loan agreement and relevant securities.  A memorandum of mortgage form and loan agreement (together with disclosure copies and solicitor’s certificate) had been enclosed with such instructions.  The sixth defendant provided the required solicitor’s certificate to the ASB shortly thereafter.

[55]     Before the Associate Judge, counsel for the ASB relied on a line of English authorities where solicitors for a bank also acted for the borrower for the purpose of making the borrower fully aware of the nature and content of the charge being registered.   These authorities involved an application of the broad principle that a solicitor, like any agent, may be instructed to act for a party for a particular purpose only.  The solicitor will be an agent for that purpose only, and only the knowledge acquired while carrying out that specific instruction is to be imputed to the party giving that instruction.  Counsel submitted that the ASB was entitled to rely on the assurance of the solicitor that he had carried out the instructions of the ASB and that knowledge of any deficient advice to the borrowers could not be imputed to the ASB.

[56]     In the light of this submission, the Associate Judge held as follows:

[59]  It is a common and generally unobjectionable practice for a borrower’s solicitor to be instructed by a lender bank, and to provide the bank with its

required solicitor’s certificate. In undertaking this work, the solicitor is said to be acting in a ministerial capacity. The solicitor may also be advising a signatory to the mortgage, but in doing so acts exclusively for the signatory and not for the lender. It is accepted law that knowledge acquired by the solicitor in the course of providing independent advice to a signatory of the mortgage is not knowledge acquired as agent for the lender bank: Barclays Bank plc v Thomson; Royal Bank of Scotland v Etridge (No.2) [2001] 4 All ER 449.

[60]  It is also well established law that knowledge of a transaction effected by an agent is not imputed to the principal where the transaction itself is founded in fraud: Fisher & Lightwood, Fisher  and  Lightwood’s  Law  of Mortgage (11th ed, 2002) at 699. This is based on the premise that an agent will not have passed on knowledge of facts which would reveal his fraud: Kennedy v Green (1834) 3 MY & K 699.

[57]     The  Associate  Judge  also  referred  to  decisions  of  the  High  Court  in McCord v Afele HC AK CIV 2003-404-4426 22 September 2003, Salmon J and Waller v Davies [2005] 3 NZLR 814 (HC). In the latter case, Harrison J found that the solicitor’s knowledge of a promoter’s dealings with the owners could not be imputed to the mortgagees. At [131]-[133], Harrison J concluded:

[131]   In summary, these authorities establish that Mr Davies’ knowledge about CH Finance’s dealings with the original owners cannot, in the absence of an express obligation or rule of law to the contrary, be imputed to the mortgagees whom he represented because:

(1)Mr  Davies  acquired  his  knowledge  about  the  owners’  adverse interests  while  performing  his  obligations  to  CH  Finance  on different transactions and under a different agency. He did not owe a duty to CH Finance to communicate this information (Wyllie; El Ajou). His agency was not then common. Disclosure of the information would have been outside the scope of his duties to CH Finance  (Re  Hampshire  Land  Co),  and  he  would  have  been  in breach in making disclosure (Deep Sea Fishery Co).

(2)In  any  event,  Mr  Davies  did  not  owe  a  correlative  duty  to  the mortgagees to inquire into the relationship between CH Finance and accordingly the owners had no right of receipt (Re Hampshire Land Co). The mortgagees were not bound to make that inquiry. Thus any information acquired independently by Mr Davies, “otherwise than as agent”, is outside the scope of his authority from and irrelevant to the mortgagees (David Payne; El Ajou).

(3)Even if Mr Davies did owe a duty, knowledge will not be imputed where the agent suppressed disclosure out of self-interest; it was not within the scope of his duties to either principal to give and receive notice of his own fraud against other parties (Re Hampshire Land Co).

[132]  This result is entirely consistent with New Zealand authority. While he did not discuss the English cases, in Jessett Properties Hardie Boys J at p 143 stated:

“. . . it is apparent that knowledge acquired before the agency began, or probably even during its currency but outside the scope of the engagement, should not in general be imputed to the principal.”

[133]    In  Niak  Paterson  J  adopted  Morritt  LJ’s  statement  in  Halifax

Mortgage Services Ltd v Stepsky [1996] Ch 207 (CA) at p 216 that:

“. . . knowledge once acquired remained with the solicitors and cannot be treated as coming to them again when they were instructed on behalf of the lenders.”

[58]     Counsel for the Burmeisters sought to distinguish the decision in Waller v Davies and the cases referred to by Harrison J.   The Associate Judge, however, concluded:

[64]  I accept that the Court in Waller v Davies was not applying the CCCF Act.  However, for the reasons already given, I do not consider the Act to be inconsistent with, and therefore to have overridden these well established agency  principles.  Nor  do  I  consider  the  presence  of  Mr  and  Mrs Burmeister’s name on the title as a basis for holding that the sixth defendant acquired his knowledge while acting for ASB.  ASB is not bound to enquire into the background circumstances: s 182 Land Transfer Act 1952.

[65]  Finally, even if the Court in Waller v Davies did consider it possible to purchase the solicitor’s prior knowledge (which is not a clear finding) there is nothing to suggest that there is any basis for such a pleading here. I can think of no  reason  why  ASB  would  wish  to  purchase  this  information. Further, it is common practice for costs associated with a bank mortgage to be met by the mortgagor. There is no suggestion that that is not the position here.

[66]   I find no obligation or rule of law which requires knowledge of the sixth defendant acquired while acting as agent for any party involved in the buy-back transaction to be imputed to ASB. I note that the same conclusion has been reached in the District Court in awarding summary judgment to ASB against the first, second and third defendants under the loan agreement.

[59]   On review, counsel for the Burmeisters again sought to distinguish the authorities relied upon  by  the  Associate  Judge.    He also  relied  upon  an  article entitled “Imputed Knowledge in Agency Law – Knowledge Acquired Outside Mandate” [2005] NZ Law Rev 307 by Professor Peter Watts.

[60]     Counsel submitted that the decision of the Supreme Court in Dollars & Sense

Finance  was  of  assistance  when  considering  issues  pertaining  to  the  scope  of

authority.  In particular, he cited the principle from Vicarious Liability in the Law of

Torts by Professor Atiyah, noting that:

…there  are  two  stages  of  enquiry:  first,  what  acts  has  the  principal authorised and, secondly, is the agent’s act so connected with those acts that it  can  be  regarded  as  a  mode  of  performing  them?    It  is,  Atiyah  said, essential to keep these two stages of the enquiry distinct.

[61]   With reference to the connection of the agent’s act with the mode of performance of the agent’s mandate, counsel then cited the passage of Lord Millett in Dubai Aluminium Co Ltd v Salaam [2003] 2 AC 366 (HL) at [124]:

…if  regard  is  paid  to  the  closeness  of  the  connection  between  the wrongdoing and the class of acts which the wrongdoer was employed to perform, and to the underlying rationale of vicarious liability (a loss distribution device based on grounds of social and economic policy by which liability is imposed for all those torts which can fairly be regarded as reasonably incidental risks to the type of business being carried on), “there is no relevant distinction to be made between performing an act in an improper manner  and  performing  it  for  an  improper  purpose  or  by  an  improper means”.

[62]     Counsel used this passage to mount a submission that as a matter of policy the actions of the sixth defendant as solicitor for the O’Brien Family Trust in respect of the acts carried out in the course of his instructions from the Trust should be imputed to the ASB as mortgagee because the same solicitor had been instructed. He submitted that on review the Court should not apply the principle relied on by Harrison J in Waller v Davies, which Professor Watts described as the “mandate- confined rule of imputation” because it holds that principals are affected only by knowledge of facts learnt by agents in the course of carrying out their mandate for the principal.  Rather, the Court should impute the knowledge of the solicitor to the ASB, based on a series of cases referred to by Professor Watts which had not been cited  to  Harrison  J  in  Waller  v  Davies.    These  cases  were  said  to  justify  a qualification to the mandate-confined rule of imputation where a principal uses the same solicitor as the other party to the transaction, in which case knowledge acquired by the agent while acting for the other party is imputed to the principal even though the agent’s knowledge was acquired before the transaction in issue: see Watts at 318.

Submissions for the ASB

[63]     Counsel for the ASB submitted that the decision of the Associate Judge was correct.   Counsel submitted that the ASB gave the sixth defendant a very limited mandate which was properly characterised as “ministerial” by the Associate Judge. Counsel relied on the decision of the Court of Appeal in Niak v Macdonald [2001] 3

NZLR 334 as support for the proposition that any knowledge gained by the sixth defendant in his capacity as solicitor for the O’Brien Family Trust ought not be imputed to the ASB, which had for reasons of administrative convenience and consistently with normal conveyancing practice, instructed the sixth defendant to carry out different specifically defined tasks.

[64]     Counsel  submitted  that  the  Burmeisters’  reliance  on  the  decision  of  the Supreme Court in Dollars & Sense Finance was misplaced.  Rather, the decision of Blanchard J, properly understood, provided support for the submission of ASB that the sixth defendant must have acquired any fraudulent knowledge (or committed any fraudulent acts) outside the scope of his very limited agency for ASB.  Moreover, the facts in the Dollars & Sense Finance were distinguishable.   There, the fraudulent acts were committed by a sub-agent engaged by the mortgagee’s agent (its solicitor) in the course of carrying out the mortgagee’s mandate.

[65]     Counsel cited particular passages from the Supreme Court decision regarding the correct approach to determining whether fraudulent acts are conducted within the agency, in particular, the observations of Blanchard J at [30]:

The scope of the task that an agent is appointed to perform must be determined in a commercially realistic way according to the circumstances, especially when there is no general agency and the agent therefore has a limited function. It may matter how that task is framed when the Court is considering whether the agent’s conduct was within its scope.

[66]     Next, counsel referred to a passage at [39] and [40] as follows:

It  is  worth  remarking,  also,  that  although  the  question  of  whether  the principal was liable for an agent’s conduct is often addressed by asking whether that conduct fell within the scope or course of the agent’s authority, this methodology has the capacity to suggest that the conduct of the agent for which a third party seeks to make the principal liable must have been authorised in some way by the principal.  That, as we have seen, is not the

case, but the concept of authority can unconsciously influence the inquiry in an unhelpful way. The more precise formulation is whether the conduct of the agent fell within the scope of the task which the agent was engaged to perform.

In order to determine that question, the Court must concentrate on the nature of the tasks to be performed on behalf of the principal and on how the use of the agent for that purpose has created risk for the third party. Without a sufficiently close connection between the task for which an agent was engaged and the unlawful action of that agent, so that the wrong can be seen as a materialisation of the risk inherent in the task, it will be neither fair nor proper to impose vicarious (strict) liability on a principal who has not necessarily been guilty of any personal negligence and so would not be directly liable to the claimant. Strict liability of this kind is exceptional and is not to be imposed unless fully justified by these considerations. Certainly, just the opportunity to commit the wrongful act or the existence of some merely incidental connection will not suffice.

[67]     Finally,  counsel  cited  from  [49]  dealing  with  features  of  conveyancing practice:

As to the practices of financiers, which have of course responded since the events in this case in 1996 to decisions of the House of Lords such as O’Brien and Etridge [Royal Bank of Scotland plc v Etridge (No 2) [1998]

4 All ER 705 (CA)] (and Wilkinson v ASB Bank Ltd in this country), all it is necessary to say is that what occurred in this case, where the borrower was

left to get the guarantors’ signatures, with no direct communication to them

of the need to take legal advice, is quite contrary to normal practices. If the practices recommended in those cases are followed there is little danger of

an allegation of agency of the kind established in this case being successfully

made.

Discussion

[68]     Clearly, the starting point for analysis must be the scope of the  agency, interpreted in a commercially realistic way: Dollars & Sense Finance (SC) at [30]. Here, the tasks that the sixth defendant was engaged to perform are defined by the instructions dated 11 September 2001 quoted at [23] above, as confirmed in the subsequent letter dated 3 October 2001.

[69] It is apparent that all of the negotiations and discussions with the trustees as to the terms of the loan took place between an officer of the ASB and a representative of the trustees. The sixth defendant played no part in the discussions. This may be inferred from the letter of 3 October 2001 (quoted at [25] above). The

role of the ASB is confirmed by the emphasised reference in the letter that “[n]o alteration or addition to the loan documentation is to be made without prior reference to the Bank”.

[70]     The mandate of the sixth defendant for ASB was to complete and attend to execution of the loan agreement and the mortgage.  Particular points for the solicitor to check were set out at (a) and (b) of the letter of instructions.  Point 5 of the same letter repeated the instruction about not altering or adding to the loan agreement or the printed form of mortgage without reference to the ASB.   Once execution was completed, the mortgage was to be registered and the solicitor’s certificate returned to the ASB.  The ASB was responsible for making payment of the advance to the mortgagors.

[71]     The  role  which  the  sixth  defendant  was  undertaking  for  the  ASB  was described by the Associate Judge as “ministerial”.  Whether such a characterisation is helpful to the analysis is uncertain.   But it was common ground between the parties that, when the ASB acceded to a request by the trustees for the ASB to instruct their solicitor to undertake the instructions just described, the ASB was following a common conveyancing practice.   The purpose of such practice is to follow an efficient process for a limited, formal function and so keep the costs which will fall to the borrower to pay to a minimum.

[72]     What then does the law say about whether the knowledge of the solicitor instructed on that basis gained in the course of acting for the mortgagors can be imputed to the mortgagee?  The series of cases cited by Professor Watts in support of imputation of knowledge comprises four English decisions of considerable antiquity. Professor Watts suggested that these cases represented the proposition that a mortgagee who employs the same solicitor as the mortgagor is prima facie deemed to know what the solicitor knows as the solicitor for the mortgagor, whenever that knowledge was acquired.   Hence, while the use of a common solicitor by the mortgagee  was  permissible,  to  do  so  was  “very  perilous”.    It  is  instructive  to consider the facts of each case to determine their applicability or otherwise to the present case.

[73]     In  Brotherton  v  Hatt  (1706) 2 Vern 574; 23 ER 973 one Sir Edward Hungerford mortgaged his manor successively in favour of Mr Marsh, Mr Gunter and Mrs Hatt. The same shop of scriveners (or notaries) prepared the documents for all three mortgages. Sir Edward, together with Mr Marsh as the first mortgagee, agreed with Mrs Hatt that Mr Marsh would hold the land for her once he was paid, which he duly was. The issue was whether Mrs Brotherton (the daughter and successor of the intermediate mortgagee, Mr Gunter) should be paid next after Mr Marsh, her security being the next in time, or whether Mrs Hatt should be preferred in light of her agreement with Mr Marsh and Sir Edward. Cowper LK (later Lord Cowper LC) held that Mrs Hatt was unable to enforce her mortgage ahead of Mrs Brotherton, even though she personally had not known of Mr Gunter’s pre- existing equitable interest. The use of the same scriveners was fatal to Mrs Hatt’s position. The scriveners were said to be “in nature of agents to all the several lenders”. Notice to the scriveners of Mr Gunter’s interest was therefore good notice to Mrs Hatt, even though the scriveners learned of Mr Gunter’s interest well before they acted for Mrs Hatt.

[74]     Then there is Jennings v Moore (1708) 2 Vern 609; 23 ER 998. In that case, a Mr Carleton Whitlock mortgaged his lands in 1699 in favour of a Mr Carew Guidott (whose executor Mr Jennings was the plaintiff in the action). The security was not presented at the next court sitting as it ought to have been, and the security became void against bona fide purchasers for value. In 1703 Mr Whitlock entered into negotiations to sell the lands to a Mr Blincorne. In the course of negotiations Mr Blincorne became aware of Mr Guidott’s pre-existing equitable interest. Mr Blincorne then arranged for the purchase to be made in the name of a Mr Moore, from whom he had no instructions. However, Mr Moore was later content to ratify the sale in his name. The issue was whether Mr Moore, who was not aware of Mr Guidott’s pre-existing equitable interest when he paid the purchase price, was a bona fide purchaser of his interest such that he could take the property unencumbered. Lord Cowper LC held that Mr Moore was bound by Mr Blincorne’s knowledge, notwithstanding that Mr Blincorne had become his agent only by ratification: “the defendant Blincorne was the agent of the defendant Moore, touching the said purchase of the said estate, and that the defendant Moore is bound by the fraud of the defendant Blincorne”.

[75]     The point was considered again in Le Neve v Le Neve (1747) 1 Ves Sen 64;

27 ER 893. The first defendant, Edward Le Neve, was the father of the plaintiffs, who were the children of his first marriage and the beneficiaries of a settlement trust he made upon that marriage. That settlement was never registered. Some 25 years after that settlement, Mr Le Neve attempted to settle the same property on his second wife, the second defendant, as part of his marriage settlement with her. The second defendant employed as a solicitor a Mr Norton, who had been Mr Le Neve’s solicitor for many years, to prepare the marriage articles. Mr Norton had, on Mr Le Neve’s instructions, taken counsel’s opinion as to the best way to disown or avoid the first settlement. Thus, the issue was whether the second wife, who personally did not know of the first settlement, could take the property unencumbered by the plaintiffs’ prior equitable interest. The second wife was found not to be a bona fide purchaser of her interest. Though personally innocent, the notice of the solicitor Mr Norton was imputed to her as she had engaged him as an agent by consenting to his preparing the articles.

[76]     The next case was Fuller v Benett (1843) 2 Hare 394; 67 ER 162. Sir John Dillon arranged to sell his property to the first defendant, Mr Benett. Sir John consulted Mr Benett’s solicitors relating to the title. He then agreed to execute a mortgage to a Mr Chitty over the same property, which Mr Chitty then assigned to the plaintiff. The plaintiff’s solicitors, Messrs Smith & Allistons, gave notice of the assignment to Messrs Farrer & Co. Sir John’s sister Henrietta Dillon as executrix later entered into an agreement under which Mr Benett purchased the property at a reduced sum. Mr Benett then conveyed the estate to the second defendant, Edward Marjoribanks, by way of security for a mortgage. Messrs Farrer & Co acted as solicitors for both Mr Benett and Mr Marjoribanks in this transaction. The issue was whether Mr Benett and Mr Marjoribanks had notice of the mortgage agreement with Mr Chitty such that they were not bona fide purchasers of their interests. Sir James Wigram VC held that Mr Benett had notice of the agreement with Mr Chitty through the notice provided to Messrs Farrer & Co, and that therefore Mr Marjoribanks was bound also.

[77]     Sir  James  Wigram  VC  apparently  considered  that  notice  to  the  solicitor would not always be imputed to the client.  “Whatever the solicitor, during the time

of his retainer, knows as solicitor for either party may possibly in some cases affect both, without reference to the time when his knowledge was first acquired”: at 404. He held that whether or not the notice would be imputed turned on the likelihood of the solicitor recalling it:

The puisne incumbrancer affected with constructive notice of the prior incumbrances; for having, in that case, employed the mortgagor’s solicitor, he would necessarily be affected with notice of the prior transaction, unless it should be held that the common solicitor (in his character of solicitor to the mortgagor) was not to be considered as recollecting the old transactions when engaged in the new.

[Emphasis added]

[78]     On the facts there was good reason to consider that the solicitor recollected the notices.  The solicitor gave evidence that he remembered the notices, there was evidence that the notices formed the subject of a conversation between the solicitor and the defendant Mr Benett, and Mr Benett had actually produced the notices in evidence.

[79]     A further case which is consistent with the above and which was discussed by Harrison J in Waller v Davies is Jenkins v NZI Finance Ltd [1989] 3 BCR 535 (CA). Mr Jenkins sought a loan from NZI Finance to be secured by a number of debentures and a mortgage over the family home to NZI Finance.  NZI agreed, contrary to its usual practice, that the securities be drafted and prepared by Mr Jenkins’ solicitor.  In a meeting with the solicitor, Mr Jenkins’ wife conveyed her unwillingness to grant a mortgage over the family home.   The solicitor explained the mortgage to her, although  the  extent  of  explanation  was  disputed,  and  Mrs  Jenkins  signed  the mortgage before leaving under some urgency.  The Jenkins later sought to set aside the mortgage as, inter alia, either being obtained through undue influence or as an unconscionable bargain.   The Court of Appeal concluded that the solicitor’s knowledge that Mrs Jenkins was unwilling to sell, gained during the course of an interview, was imputed to NZI Finance.

[80]     A consideration of the facts in these cases shows that the agents or solicitors in  Brotherton,  Jennings,  Le  Neve  and  Jenkins  were  intimately  involved  in  the relevant transactions confirming the mortgages.  In Brotherton v Hatt, the scriveners prepared the documents for all three mortgages in a succession of transactions for the

borrower.  In Jennings v Moore, the agent Mr Blincorne discovered the pre-existing equitable interest in the course of his negotiations to purchase the property and personally arranged the later tainted sale and purchase transaction.  In Le Neve v Le Neve, while it is unclear whether the solicitor was involved the preparation of the first marriage settlement, he had been consulted as to ways of avoiding the first settlement and prepared the articles of the second marriage settlement.  In Jenkins v NZI Finance, the solicitor drafted and prepared the security documents, and was in the process of personally explaining them when he obtained knowledge of Mrs Jenkins’ reluctance to sign.  It is not possible from the case report in Fuller v Benett to discern the solicitors’ level of involvement.

[81]    In each case, therefore, the agents’ task could not be characterised as a “ministerial”  one  in  Professor  Watts’  words  at  316.     Unlike  the  solicitor’s instructions from the ASB which were heavily circumscribed and were limited to the particular function of attending to have the documents executed and the mortgage registered, the roles of the common solicitors in the older cases analysed were of much broader scope.  Hence, it was not plausible to contend that the agents “may not have even adverted to the other interests that would be defeated”: see Professor Watts at 316.  This plainly accords with the rationale of the mandate-confined rule, namely that an agent, by virtue of a large clientele and a surfeit of information, might readily be expected to forget or overlook information gained while working on files for other clients.

[82]     But  equally  an  agent  might  also  be  expected  to  forget  or  overlook information by reason of his or her limited and brief involvement either with the files from which the information was gained or with the files to which the information was later relevant.  To confine the qualification suggested by Professor Watts to flow from these cases to instances where the agent has more than a “ministerial” role in the transaction does no more than to insist that the mandate-confined rule of imputation be applied consistently with its animating rationale.  Such an approach is also consistent with sound commercial policy and currently widely accepted conveyancing practice, as greater efficiencies for lenders and borrowers alike are gained where they share a common solicitor to perform purely formal tasks.

[83]     To refuse to impute the knowledge of the sixth defendant to the ASB on the particular facts of this case is also consistent with the approach of the Court of Appeal in Niak v Macdonald cited by Mr Robinson.  Giving judgment for the Court, Paterson J referred at [26] to the principle that the knowledge of an agent is not automatically imputed to the agent’s principal: see Fridman’s Law of Agency (7ed

1996) at 349 and Jessett Properties Ltd v UDC Finance Ltd [1992] 1 NZLR 138 (CA). The judgment quoted from the decision of Hardie Boys J in Jessett Properties at 143:

…it  is  apparent  that  knowledge  acquired  before  the  agency  began,  or probably even during its currency but outside the scope of the engagement, should not in general be imputed to the principal.

[84]     A final point concerns the case of Etridge which was relied upon and applied by the Associate Judge by drawing an analogy between the principles applied in this case and those applicable when a common solicitor acted for the bank and a wife joining in the grant of a charge to the bank.  The English Court of Appeal had held that the bank is entitled to expect the solicitor to regard himself as owing a duty to the wife alone when giving her advice, regardless of who introduced the solicitor to the wife and asked him to advise her, or who was responsible for his fees.   If the solicitor  accepts  the  bank’s  instructions  to  advise  the  wife,  he  still  acts  as  her solicitor and not the bank’s solicitor when he interviews her.  For present purposes, it is only necessary to note that in the passage from the judgment of the Supreme Court in the Dollars & Sense Finance case cited at [67] above, it is clear that the principle that  the  knowledge  of  the  solicitor  gained  when  advising  the  wife  will  not  be imputed to the bank was approved.

[85]     I  therefore  conclude  that,  given  the  limited  mandate  given  to  the  sixth defendant by the ASB, any knowledge of the sixth defendant gained when acting for the trustees of the O’Brien Family Trust should not be imputed to the ASB.  I am satisfied that the qualification suggested by Professor Watts to the mandate-confined rule which would permit imputation does not apply to the particular circumstances of this case.   This is consistent with the exclusion that Professor Watts himself contemplated where a common solicitor was exercising a ministerial function for one of his principals.   To have held otherwise would have necessitated a significant

change to current  conveyancing practice which is widespread  and justifiable on various practical, policy and efficiency grounds.

[86]     It follows that this ground of review advanced on behalf of the Burmeisters cannot succeed.

Result

[87]     The result is that the application for review of the Associate Judge’s decision must be dismissed.

[88]     If the ASB wishes to make an application for costs, I will entertain it, if the parties cannot otherwise agree.  The ASB may wish to reflect in this regard on the fact  that  both  parties  were  innocent  victims  in  different  ways.     Given  the Burmeisters’ unfortunate position as victims of the buy-back scam, the ASB may

consider that costs should lie where they fall.

Stevens J