Chao v Li
[2014] NZHC 516
•20 March 2014
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2013-404-004500 [2014] NZHC 516
UNDER Section 145A of the Land Transfer Act
1952
IN THE MATTER
of an applicaton for an order that caveat
ID Number 927789.1 not lapseBETWEEN
CATHERINE CHAO AND ZHONGJIAN (TOM) PENG
Applicants
AND
XIAOXI (RICHARD) LI and YUAN CHEN
Respondents
Hearing: 18 March 2014 Counsel:
M A Karam for the Applicants
C R Andrews and E L Moore for the RespondentsJudgment:
20 March 2014
JUDGMENT OF ASSOCIATE JUDGE CHRISTIANSEN
This judgment was delivered by me on
20.03.14 at 4:30pm, pursuant to
Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
C CHAO AND Z PENG v X LI and Y CHEN [2014] NZHC 516 [20 March 2014]
[1] On 16 October 2013 the applicants applied for an order that their caveat over the respondent’s property situated at 1/18 Inverary Avenue, Epsom (“the property”) not lapse. That application was heard on 21 February 2014 before Wylie J who noted that:
(a) the factual background was disputed and whilst the applicants asserted they were parties to a joint venture agreement involving the respondent Mr Li, Mr Li denied they were parties to a joint venture agreement involving the property;
(b)Mr Li accepted that he had obtained money from the applicants but said that this was to repay him for monies he had advanced in an earlier joint venture investment which failed;
(c) the applicants claim was solely against Mr Li and their evidence confirmed they had no dealings with the respondent Ms Chen;
(d)counsel for the applicants acknowledged the caveat was inappropriately worded by its reference to a claim over Ms Chen’s interest in the property; and
(e) counsel for the applicants acknowledged the application to sustain the caveat should be dismissed.
[2] For consideration here is the applicants’ application pursuant to s 148 of the Land Transfer Act 1952 seeking leave to lodge a second caveat. Leave is sought to lodge a caveat over the interest of Mr Li alone who holds a joint interest in the property.
[3] The application for leave confirms the error made when the original caveat was registered but said such an error was justifiable in the circumstances. It is asserted there would be no unavoidable prejudice “to parties acting in reliance on the register and in the belief that the caveator was not pursuing the claim”.
Background
[4] The applicants are husband and wife. They have known Mr Li since early
2009 or about three years prior to the alleged agreement giving rise to an interest in the property.
[5] The applicants and Mr Li, with others, have been involved in a number of property development projects between 2009 and 2012. The applicants say these were loose oral arrangements which were not recorded in writing but did involve numerous transfers of funds between their various bank accounts, and cash transactions.
[6] In 2011 the applicants and Mr Li invested in a gym business called “Harbour Fitness”. The business was set up and operated by a Mr Bing Xu who sought investment from a number of individuals.
[7] The applicants invested over $900,000 into the business, and Mr Li invested over $400,000. Mr Li contends his investment was made at the insistence of the applicant Mr Peng. Mr Peng denies he had anything to do with Mr Li’s investment other than to introduce Mr Li to Mr Xu.
[8] Mr Li alleges the $400,000 he advanced was transferred into “a bank account that Tom Peng designated”. He produces an ASB bank customer transaction inquiry form, which evidences a bank cheque in the amount of $400,000 made out to “BNJ Albany Ltd”.
[9] Mr Xu, the operator of the gym business, deposes that BNJ Albany Ltd is his company and that he was the person who told Mr Li to make a bank cheque out to that entity. He said Mr Peng had nothing to do with that payment and that Mr Peng “had no involvement in obtaining other investors in the business or any other involvement in the business outside of being an investor himself”.
[10] The gym business failed around late 2011 and investors lost their contributions.
[11] The applicants allege that in early April 2012 Mr Li approached them about a further development project involving Mr Li’s own home at 1/18 Inverary Avenue and the neighbouring property at 2/18 Inverary Avenue. The properties were on a cross-lease title. The applicants say the redevelopment proposed by Mr Li involved the two properties being merged from a cross to a freehold title, enabling the two properties to be subdivided with new townhouses developed on freehold titles for resale.
[12] The applicants say Mr Li’s proposal was:
(a) that the two properties were each valued at $725,000;
(b)that an agreement for sale and purchase had been entered into with the owner of the neighbouring property which was to be settled on 4 May
2012;
(c) the applicants’ contribution would be 35 per cent of the overall value of the two properties ($1,450,000) which amounted to a financial contribution by them of $507,500. Mr Li’s contribution would be his property as well as an additional $217,500 bringing his contribution to
65 per cent. The parties would then jointly own both properties in accordance with their respective contributions, and proceeds from the development and sale of the properties would be applied on this basis; and
(d)the development would be undertaken by Mr Li who was to be project manager. The applicants would be silent partners, as had been the case for earlier development projects.
[13] The applicants paid Mr Li the sum of $507,500 by bank transfers on 29 April
2012 and 30 April 2012. These payments were funded by a loan arranged through the Kookmin Bank. The broker involved noted:
Mr Peng purchased a section jointly with [h]is friend for investment. He would like to use their freehold residential house as security to finance
$500,000 for their investment. The loan requested is $500,000. The security is $970,000.
[14] Subsequently the applicants say they made a number of inquiries and requests of Mr Li regarding the purchase of the neighbouring property and the status of the development.
[15] In December 2012 Mr Peng said Mr Li told him the property “had nothing to do with him”. This resulted in an altercation between the two men. Inquiries through the applicants’ solicitors determined that Mr Li had not purchased the neighbouring property. A caveat was lodged shortly after on the property that had been intended to have comprised part of Mr Li’s contribution to the development.
[16] Mr Li does not deny receiving payment of $507,500 in April 2012, but he contends the money was paid because it was owing to him by the applicants due to his investment in Harbour Fitness. The evidence is that Mr Li held the applicants responsible for his losses in the gym business and that this was the reason for his not returning the money paid to him by the applicants.
[17] Mr Li’s position is that there was no such proposal for property development as the applicants contend. Mr Li denies that any agreement was ever discussed much less concluded. He contends the applicants voluntarily paid him $507,500 which was owing to him in April 2012 in relation to the gym investment and sundry other debts.
[18] Mr Li deposes also that he was never authorised by his wife Ms Chen, the property co-owner, to permit a proposal along the lines the applicants suggest.
[19] The applicants contend they placed their trust and confidence in Mr Li but that Mr Li exploited this and was simply attempting to trick the applicants out of their funds.
[20] It is Mr Li’s position that from the time the applicants demanded he repay the
sum of $507,500 that the alleged investment agreement was then cancelled.
[21] The other challenge by Mr Li was that claims by the applicants of a 35 per cent interest in both properties assumed that Ms Chen was a party to the proposed development.
[22] As earlier noted Mr Li disputes entirely the allegations of a discussion, agreement or understanding concerning the properties at 18 Inverary Avenue – he says such were a fiction. The payment he received in April 2012 was “due to him” as repayment of loans and as guaranteed returns given to him.
Legal principles
[23] The application for leave to lodge a second caveat requires an order of the High Court. As noted by Thorp J in Mueller v Montagnat1 the Court is given an unfettered discretion under s 148 but will have general regard to:
(a) the strength of the case made by the applicant to support the claimed interest in the land;
(b) any explanation for failure to exercise the caveator’s rights under
s 145; and
(c) whether unavoidable prejudice would be suffered by those who have acted in reliance on the register and in the belief that the caveator would not pursue the claim.
[24] As noted by Randerson J in Lowther v Kim:2
Thorp J, rightly in my view, did not accept the submission made to him that an order under s 148 should only be made in exceptional cases. In considering the strength of the applicant’s claim to an interest in the land, it is appropriate to adopt the standard of a reasonably arguable case as identified in Sims v Lowe [1988] 1 NZLR 656, 659-660 (CA), but with the reminder that careful scrutiny is required when leave to lodge a second caveat is sought.
1 Mueller v Montagnat (1986) 2 NZCPR 520,523-524.
2 Lowther v Kim [2003] 1 NZLR 327.
[25] A Court may, and indeed on a number of occasions previously has granted leave to lodge a second caveat when the caveator has incorrectly lodged a caveat over the whole title but where a claimed interest was more appropriately related to part of the ownership interest. This has occurred where there was no doubt that there was a basis for a caveatable interest. Likewise a second caveat has been permitted if the initial caveat did not describe with sufficient certainty the nature of the interest claimed.
Opposition to the application for leave
[26] Counsel acknowledge that the applicants must establish an arguable case to sustain a caveat.
[27] Counsel agree that the summary procedure for removal of caveats is highly unsuitable for determination of disputable questions of fact; that the balance of convenience favours maintenance of the caveat until the proceedings in those situations are determined.
[28] To sustain a caveat a caveator must have a present, as distinct from a potential future, interest in land.
[29] In this case the applicants claim an interest in the land as beneficiary under a constructive trust. In both its first caveat and upon its leave application for a second caveat, the applicants’ claim is expressed as: “… A beneficial interest in the land … as cestui que trust …”.
[30] Also by the second caveat leave application the claim of an interest is confined to a 35 per cent interest in the property being held by Mr Li as constructive trustee for the applicants.
[31] In this case the applicants contend they have an arguable case to retain a caveat based on their claim as beneficiaries pursuant to an institutional constructive trust i.e. where Mr Li has received or held property in knowledge of a breach of trust or has given dishonest assistance to effect such a breach.
[32] Two key elements are required if a claim of institutional constructive trust is to be recognised:
(a) There is an intention (usually by the property owner) to create such property rights or such may objectively be deemed to occur; and
(b) That a landowner’s denial of the claim of an interest of another
contrary to a previous agreement or understanding, is unconscionable.
[33] In opposition to the applicants’ claim of an interest Mr Andrews for Mr Li submits that, at best, the applicants might have been able to argue for a potential future equitable estate or interest in the whole property at 18 Inverary Avenue; but however any future interest depended on Mr Li acquiring his wife’s interest so as to be holding the legal and/or equitable interest in the whole property. Only then could he have been in a position to perform that part of the agreement the applicants claim existed. Therefore Mr Andrews submits that at best the applicants might hope that at the end of a trial in the substantive proceeding that they might procure a proprietary remedy in the nature of a remedial constructive trust subject to proof of fraud or deceitful conduct on Mr Li’s part.
[34] Therefore and essentially because the applicants now acknowledge that they have no claim to Ms Chen’s interest in 1/18 Inverary Avenue (because there is no evidence presently available suggesting Mr Li in any way acquired or agreed to acquire his wife’s interest therein) then hopes of a claim of a constructive trust in the total property were dependent upon events yet to occur. Therefore at best there was available to the applicants a claim for a remedial constructive trust, which type of trust does not exist until it is created by an order of the Court and thus does not give rise to a caveatable interest before that time.
[35] Mr Andrews submits that in terms of the species of constructive trust which vindicate existing equitable property rights, the estate or interest claimed by the applicants does not correspond to the property which is the subject of their alleged agreement, and therefore there was no existing equitable property right to be vindicated. It follows from this argument that only if Mr Li was to subsequently
acquire his wife’s interest that he would then hold an equitable estate warranting vindication of the applicants’ claim of an interest.
[36] Mr Andrews submits there is no precedent supporting actions of a Court to allow a second caveat to be lodged against a single joint tenant’s interest where the initial caveat was erroneously placed over the entire property.
[37] Mr Andrews submits further that the alleged agreement provided at all times for all of the property at 1/18 Inverary Avenue to become part of the joint venture and development, and therefore that it was only after 2/18 Inverary Avenue was purchased with the applicant’s money and following the further contribution by Mr Li, that it could be argued the parties would hold shares in the joint venture development.
[38] The other element to Mr Li’s opposition focuses upon claims that, by their own evidence, the applicants cancelled the agreement they rely upon as proof of their claim of an interest in the property. Therefore, Mr Andrews submits, any equitable estate or interest they may have had in 1/18 Inverary Avenue has been extinguished.
[39] As Mr Andrews notes, by the amended statement of claim the applicants, when they discovered the defendant had not purchased 2/18 Inverary Avenue, made numerous demands for the return of the money they paid to Mr Li in April 2012. Indeed it is to be inferred that the caveat was lodged after the applicants made demand for repayment of the sum of $507,500. Therefore, it is submitted, the demands for a refund clearly amounted to a cancellation of the parties’ agreement. Also, the demand for a refund was not qualified in any way, nor expressed to be contingent or optional. This position is, Mr Andrews submits, reinforced by the position taken by the applicants in their substantive proceeding filed on 3 October
2013. Mr Andrews submits that claims that a sum of money was owed amounts to clear evidence that the applicants were treating the agreement as cancelled. It follows that any subsequent election to affirm is of no effect if cancellation has occurred. Therefore claims of an interest in the property cannot be pursued when that interest has been renounced in favour of a claim for repayment of that sum that was paid to secure that interest.
Considerations
[40] The applicant’s position is that there was never any intention by Mr Li to go ahead with the Inverary Avenue development. They say Mr Li had presented an investment proposal which involved the property Mr Li part owned. They say Mr Li said he had an agreement for the purchase of the other property which would form part of the proposal. In response to Mr Li’s request they paid a sum equivalent to 35 per cent of the value of the two properties as Mr Li had informed them. An element of trust was involved. There had been a history of similar dealings in the recent past.
[41] The evidence is that the sum paid by the applicants was deposited to the joint account of Mr Li and his wife Ms Chen. This fact notwithstanding, the applicants have felt constrained to concede there is presently insufficient evidence that Mr Li had the authority of his wife when, as they say it was, the proposal was discussed and the payment was made.
[42] The claims against Mr Li are akin to allegations of fraud. In October 2013 the applicants filed a proceeding in the High court alleging, among other causes, misrepresentations and deceit by Mr Li for the purpose of obtaining the payment he then received.
[43] It is the thrust of the arguments for Mr Li that the applicants rights of recovery are confined to claims about the failure of their development expectations and therefore no rights of recovery arose nor was any interest in the property created until the development proposal failed. In any event, it is argued for Mr Li that when the applicants demanded repayment they did at that time also cancel their contract with Mr Li and in that result have relinquished any claim to an interest in the property.
[44] This judgment will address those aspects of Mr Li’s challenges to the availability of a caveat over his interest in the property. Also the form of the caveat is challenged because of the lack of detail about the particular elements of the trust for which it is said the applicants’ interest was retained.
[45] On this point and in the circumstances of the case the Court’s view is clear, namely that it is unnecessary to require the precise basis from which an interest claimed by a beneficiary arises.3
[46] Also it is not necessary for the extent of the claim to the land to be quantified, in particular in relation to cases where a constructive or resulting trust is claimed.4
[47] Mr Andrews has submitted the applicants’ claim is of a remedial constructive trust and not of an institutional constructive trust. He says claims of an interest arise only in the determination of any losses that may have occurred following the failure of the development. Respectfully the Court disagrees.
[48] In Fortex Group Limited (In receivership) v MacIntosh5 Tipping J for the
Court of Appeal noted the difference between the two forms of trust:
An institutional constructive trust is one which arises by operation of the principles of equity and whose existence the Court simply recognises in a declaratory way. A remedial constructive trust is one which is imposed by the Court as a remedy in circumstances where, before the Order of the Court, no trust of any kind existed.
The difference between the two types of constructive trust, institutional and remedial, is that an institutional constructive trust arises upon the happening of the events which bring it into being. Its existence is not dependent on any Order of the Court. Such order simply recognises it came into being at the earlier time and provides for its implementation in whatever way is appropriate. A remedial constructive trust depends for its very existence on the Order of the Court; such order being creative, rather than simply confirmatory. This description should not be regarded as definitive or as precluding further developments in this area of the law when greater refinement may be necessary.
[49] As noted in Blanchard6, equity will construe an institutional constructive trust where “it was necessary either to vindicate the implications of certain equitable obligations or to prevent the defendant fraudulently reneging on his or her
undertaking with respect to the property”.
3 Zhong v Wang (2006) 5 NZ Conv C 194, 308 at [57].
4 Buddle v Russell [1984] 1 NZLR 537, 539.
5 [1998] 3 NZLR 171 at 172.6 Civil Remedies in New Zealand [2nd ed, Brookers, 2011] at 10.2.3.
[50] Mr Karam submits and this Court agrees that if the applicants’ version of events is accepted or for present purposes is considered to be arguable, then Mr Li has fraudulently reneged on his undertaking in respect to the property, thereby giving rise to an institutional constructive trust.
[51] It is the intention of the parties that is critical to an assessment about when a breach occurs. As noted in Blanchard7:
… the crucial point is that, as a matter of doctrinal analysis, when the Court recognises the plaintiff’s equitable ownership of a particular asset in all of these cases, it is merely giving effect to a trust which is held to have come into existence at some earlier time by virtue of the intention of the parties. The (institutional) constructive trust arises because of the parties’ intentions and the set dates from a point in time well before the trial at which the Court acknowledges the existence of that trust. Therefore, at the time of trial, the property rights are, as a matter of doctrine, already in existence, and all the Court is required to do is to give effect of those rights by ending the defendant’s interference with them.
[52] In this case when there is a trial upon the applicants’ substantive proceeding for recovery, the Court will, when assessing Mr Li’s intentions, look to see what Mr Li ought to have done with the funds upon receipt of them, rather than assess what was actually done with those. If the applicants’ version regarding payment is proved then the Court will consider whether Mr Li should have pursued the purchase of the other property and proceeded with the development of both properties.
[53] Equity enables access to claims of breach of trust from that time payment is made. It follows that the applicants’ claim of an interest in Mr Li’s part ownership of the property is about a claim that arose from the time payment was made, and not subsequently on a date from which the extent of loss can be proved.
[54] The backup position argued for Mr Li is that because the applicants’ claim of an interest in the property is related to a development proposal then their claim of an interest ended when they cancelled the development agreement because that is what
happened when they demanded a refund.
7 Supra at 430.
[55] The Court does not accept that argument. Although by their substantive proceeding the applicants have pleaded a breach of contract and other causes of action as well, they have, as earlier noted pleaded deceit and breach of trust.
[56] Issues of breaches of contract and cancellation are not the immediate concern of this Court. Rather, this Court is concerned about issues of allegations of fraud and of access to equitable remedies.
[57] The present application is not about an agreement to purchase. Rather it is about claims of Mr Li’s fraud giving rise to an institutional constructive trust giving rise, in turn, to a claim for a caveatable interest in that part of the property it is claimed Mr Li promised to commit to that development for which the applicants’ payment was made.
Other considerations
[58] For reasons explained by the evidence, the error of including Ms Chen’s
interest in the first caveat, is excusable.
[59] As noted earlier in this judgment the applicants have filed substantive proceedings. There is no indication these are not being pursued expeditiously. Extensive affidavit evidence has already been filed by both parties in the caveat proceedings. Likely the Court’s focus of attention will be upon the cross examination of affidavit deponents.
Conclusion
[60] There is a strong dispute of relevant facts. Only a trial will determine the outcome of claims suggesting that Mr Li dishonestly obtained funds from the applicants upon false promises those would be applied to a development involving a property in which Mr Li held a registered interest.
[61] It is clear the separate interest of Mr Li in that property may be caveated.
[62] Although there is some responsibility to define the nature of a claim of a beneficial interest in any caveat it will usually be permissible for that to be given by the evidence offered in support of claims of an arguable interest.
[63] In this case it is arguable that a trust came into existence at that time when a payment was made upon the promise it would be applied for a development involving property in which the promisor had a registered interest.
Judgment
[64] Leave is granted to the applicants to file a second caveat.
[65] The applicants have until 4:00pm 28 March 2014 to lodge their second caveat for registration.
Costs
[66] It is appropriate to award costs to the applicants on a 2B basis for a hearing time of half a day. The applicants are also entitled to payment of their reasonable
disbursements.
Associate Judge Christiansen
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