Conning v Martoni Limited HC Auckland CIV-2010-404-005351
[2011] NZHC 756
•1 July 2011
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2010-404-005351
BETWEEN GRAEME EDWARD CONNING AND OTHERS
Plaintiffs
ANDMARTONI LIMITED First Defendant
ANDTONCI EDI MARINOVIC Second Defendant
ANDROY LESLIE ANDREW Third Defendant
ANDGORDON ALLEN MARTINSEN Fourth Defendant
ANDMSC CONSULTING GROUP LIMITED Fifth Defendant
ANDNORTH SHORE CITY COUNCIL Sixth Defendant
ANDMAURICE HERBERT HINTON AND ALEX JAMES WHORWOOD
Seventh Defendants
ANDHER MAJESTY'S ATTORNEY- GENERAL FOR NEW ZEALAND Eighth Defendant
ANDBRENT SALTER AND PAUL SALTER Ninth Defendants
ANDJOHN BISSETT LIMITED Tenth Defendants
AND BODY CORPORATE NO. 204090
Eleventh Defendant
ANDANTHONY JOHN STEPHEN LESTER & ORS
Twelfth Defendants
CONNING AND OTHERS V MARTONI LIMITED HC AK CIV-2010-404-005351 1 July 2011
Hearing: 30 June and 1 July 2011
Appearances: J A McBride for Plaintiffs
P Rice for Defendants
Judgment: 1 July 2011
ORAL JUDGMENT OF WHATA J
Solicitors:
Bell-Booth, PO Box 33002, Takapuna, Auckland
Haigh Lyon, PO Box 119, Auckland
Copy to:
J A McBride, PO Box 5643, Wellesley Street, AucklandP Rice, PO Box 4341, Auckland
[1] This matter concerns an application to maintain freezing orders in respect of properties and moneys belonging to the second defendant, Tonci Eddie Marinovic. Charging orders in respect of that property are also sought. I deal with this matter under urgency given the nature of the applications and the concerns of all of the parties.
[2] Interim orders were previously granted by Toogood J. The reason for the grant by Toogood J was succinctly stated as follows:
I considered that, while Mr Marinovic may have taken a correct view in law that he was not under any obligation at that time to make any disclosure of the net value of the assets available to him or the first defendant, his refusal to give such information in the light of what the plaintiffs regarded as “alarming” recent developments in his property dealings provided some basis for the plaintiffs’ concerns. I considered the plaintiffs’ fears of a dissipation of assets to be not entirely fanciful. I concluded that, not only was I not prepared to remove the freezing orders on the bank accounts and properties, except as far as Mrs Marinovic was concerned, the freezing orders should be extended to any other bank accounts not known to the plaintiffs which may be in the names of Mr Marinovic and/or the first defendants.
[3] I have the de novo task of determining whether his orders (or varied orders)
should remain pending the outcome of the substantive proceedings.
Background
[4] The background facts can be stated simply. The plaintiffs own units which are part of a complex constructed by the first defendant Martoni Ltd. The complex is blighted with leaks. Their remedy will cost in the order of $1.25 million according to a recent Weathertight Homes report.
[5] The plaintiffs say the first defendant and its director, the second defendant, are liable to pay for that remedy, together with other damages including for expert costs and stress etc.
[6] Very soon after proceedings were issued the second defendant began the process of disposing of his assets. He also remortgaged properties to the effect that
mortgage priorities were substantially increased. The plaintiffs point to what they say are potentially radical changes in the equity of the second defendant, with a reduction in such equity of $2.3 million in the period August 2010 to April 2011.
[7] Within this context Toogood J felt compelled to preserve the position, taking into account the refusal by the second defendant to explain what he was doing with the property and why.
[8] Since the orders were granted, according to the plaintiffs the following has occurred:
(a) The sale of 7 Papahia Street was settled on 29 April 2011.
(b) There has been no disclosure of the second defendant’s net proceeds
of the 7 Papahia Street sale.
(c) A sale of the second defendant’s/Parkland’s Trust’s title in the Beach Haven Road “joint venture” was due to be settled, with plaintiffs’ consent, on 3 June and has presumably occurred.
(d)The second defendant’s reply affidavit says that the Hinemoa Street property has been taken off the market.
(e) In light of the second defendant’s affidavit, the plaintiffs accept that
he is not a significant flight risk.
(f) The new WHRS report has itemised remedial costs at an estimated total of $1.251 million, inclusive of GST.
[9] This basic narrative is not disputed.
Framework for analysis
[10] The plaintiffs usefully provide the general frame as follows:
(a) Good arguable case in the substantive proceedings. (b) Assets within the jurisdiction.
(c) Danger of dissipation. (d) Undertaking required. (e) Discretionary.
[11] It was also accepted that ultimately I must also look to the overall justice in determining whether the orders ought to be granted or not.
Good arguable case
[12] There is agreement between the parties that for the purposes of this element I ought to adopt the test described by Mustill J in Ninemia Maritime Corp v Trave Schiffahrtsgesellschaft mbH & Co KG; The Niedersachsen1 as:
… a case which is more than barely capable of serious argument, and yet not necessarily one which the judge believes to have a better than 50% chance of success.
[13] As with all negligence claims the plaintiffs must show that the defendants owed a duty of care, breached that duty and that the breach was causally connected to the damages claimed by the plaintiffs.2
[14] The type of inquiry that needs to be made was succinctly described by
Tipping J in Attorney-General v Carter:3
The outcome of a duty of care issue should not depend on what analytical method is employed. The ultimate inquiry is whether it is fair, just and reasonable to require the defendant to take reasonable care to avoid causing the plaintiff loss or damage of the kind for which compensation is being sought. Each case will have its own particular combination of circumstances against which the necessary judgment must be made.
1 Ninemia Maritime Corp v Trave Schiffahrtsgesellschaft mbH & Co KG; The Niedersachsen [1984]
1 All ER 398 at 404.
2 Refer Chee v Stareast Investment Ltd HC Auckland CIV 2009-404-005255, 1 April 2010 at [111].
3 Attorney-General v Carter [2003] 2 NZLR 160, at 169.
[15] Furthermore, as Cooke P (as he then was) said in McElroy Milne v
Commercial Electronics Ltd:4
… the ultimate question as to compensatory damages is whether the particular damage claimed is sufficiently linked to the breach of the particular duty to merit recovery in all the circumstances.
[16] The present facts are coloured by the presence of the first defendant, being the company set up by the second defendant to undertake the property development.
[17] This raises an immediate issue of proximity or lack thereof between the plaintiffs and the second defendant.
[18] The superior Courts have required evidence of control exercised by directors on the matters causing loss in order to establish the requisite proximity. I refer in this regard to the helpful observation of Harrison J in Body Corporate 188273 v Leuschke Group Architects Limited5 where he states:
[61] It is apparent from Hardie Boys J’s careful examination of the facts in Morton that control of the development simpliciter is not enough to found liability. There must be evidence of the director’s assumption of a degree of personal responsibility for an item of work which was subsequently proved to be defective. In Morton liability rested on the director’s knowledge, actual or implied, of the piling problem, and his failure to implement remedial measures when it was within his power and control to do so.
[19] As the Court said in Body Corporate 202254 v Taylor referring to Morton the presence of intervening legal structures may cast doubt on the assumption of responsibility or control and requisite proximity:
[42] … It is fair to say, however, that proceeding along these lines is unlikely to be of much assistance to the owners. The legal structures associated with the development indicate a clear attempt by Mr Taylor to distance himself from liability and, even without Mr Taylor’s affidavit denials of a direct role in what happened, what we know about the development indicates that Mr Taylor’s participation was very different from that of the directors in Morton.
[20] I do note that Taylor concerned a strike out application and that the Court reinstated the negligence claim even though the facts seemed problematic.
4 McElroy Milne v Commercial Electronics Ltd [1993] 1 NZLR 39 at 41
5 Body Corporate 188273 v Leuschke Group Architects Limited (2007) 8 NZCPR 914.
[21] The plaintiffs’ primary contention is that the second defendant at all times was in control of the first defendant. It is true that the second defendant was a director of the first defendant, with overarching responsibility for the project, including assembling all inputs and payment of invoices for services.
[22] The second defendant, the plaintiffs say, took an active role throughout the process and all available minutes show that the second defendant was present throughout. The plaintiffs highlight the following matters in particular:
(a) Martoni Ltd was set up specifically and solely to carry out this project, and the second defendant was sole director and shareholder.
(b) The architect was an architectural draftsman.
(c) The site minutes show the second defendant’s significant role in
decision making.
(d) The second defendant attended site meetings.
(e) The second defendant clearly spent a lot of time on the site. (f) Meetings did not occur without him, indicating that he was a
lynchpin.
(g)The missing minutes appear to be important and it is likely that the work that produced the leaky defects came during the period for which the site minutes are lost.
(h)The second defendant tabled the National Bank letter to the QSs acting for the bank and a meeting was arranged between the bank and QSs.
(i)The site manager, Mr Aaron Dobby, was not present in the critical period and at a meeting on 21 December 2000.
(j)The missing documents raise a question as to whether the project manager and/or builder stopped or at least downgraded their involvement from August, when most of the work resulting in the leaky defects would have been done.
(k)The agreement with the project manager is cursory with no references to quality control, accountability or PI insurance.
(l)The relatively low project manager flat fee ($50,000) plus 5 per cent margin on materials and sub-contracts would be incentive for the second defendant to save on margin payments.
[23] The first and second defendants assert the following:
(a) That the second defendant was removed by several degrees from the leaky defects, having engaged a project manager, site manager and architectural draftsman.
(b)No specific works leading to defects can be attributable to the second defendant.
(c) There was proximity either through ownership of the affected property or a direct contractual relationship with the persons who did the work.
(d)The profits of the project were held by the first defendant not the second defendant.
[24] The plaintiffs accept that there is no evidence directly linking the second defendant to any works that caused the defects noted. At most the plaintiffs can point to evidence that the second defendant exercised control at a high level, overseeing the project manager.
[25] The facts against the second defendant, as presented to me, are far from compelling.
[26] The plaintiffs rightly conceded that there was no evidence to show that the second defendant exercised direct control over the numerous matters identified as causing loss. The paucity of probative information was so large that the plaintiffs could not point to a single piece of documentary evidence to support a finding that the second defendant was in any way in control of even one of the actions that caused the loss. To illustrate the scope of the actions in question, I attach as an addendum an extract from the WHRS report (section 12.3).
[27] On my reading, all of the available evidence points in the other direction. The second defendant was involved in ancillary matters such as fittings and/or cosmetic issues.
[28] The plaintiffs do highlight a complete absence of documentation in the critical period. I am invited to draw an adverse inference that it must be more than coincidental, and that the second defendant must have done something with this potentially inculpatory material.
[29] The second defendant makes two simple points. This all occurred over ten years ago. It is remarkable that he has any material at all. Secondly, a large part of the works process was covered by the available minutes and other information. If there was something at all, the second defendant says surely it would have manifested itself in the available material.
[30] I agree with the second defendant that it is a long bow for me to draw the adverse inference sought by the plaintiffs. If there was at least a scintilla of documentary evidence in the available material that supported a direct causal nexus (let alone a breach) I might be able to draw it. But really there is none. That is not a proper basis to conclude that there is a good arguable case.
[31] I observe that even if a duty of care is established, the plaintiffs must also show that the second defendant breached that duty and it was causative of the loss.
[32] There are problems facing the plaintiffs here too. The evidence does not link the second defendant’s “personal” control to the losses. As Chambers J said in the Taylor case at [128]:
It is enough if his conduct “is a contributory cause; [it does not need to be] in some sense a main or primary cause”: see Todd (gen ed) The Law of Torts in New Zealand (4ed 2005) at [21.2.02].
[33] In this case there is no evidence that “his” (the second defendant’s) conduct is
a contributory cause.
[34] I should not be taken to have concluded that the plaintiffs’ case is hopeless. It may be that the plaintiffs can, through evidence from the project manager, site manager, builders or other persons establish that the second defendant did exercise such control. But I do not have the evidence before me, as the plaintiffs properly concede. For my part I consider that a good arguable case needs at least some probative evidence of a direct responsibility and causal nexus.
[35] Accordingly, this important element is not satisfied for the purposes of the grant of freezing orders.
Charging orders
[36] Before moving to the second limb of the inquiry, I want to address whether there is enough evidence to justify a “seriously arguable” case. It appears from argument that a charging order, with its slightly less invasive effect, may be imposed on this lesser threshold.
[37] The second defendant conceded that the facts were “threatening a serious issue to be tried”, but also foreshadowed a strike out claim. I also consider that the facts are “threatening a serious issue to be tried”. The plaintiffs have, as I have said, established that the second defendant had at least high level control, as the sole director of the company. The first defendant accepted that there was a good arguable
case against the company. These elements combined tend to suggest that there is a seriously arguable case, with potential for evidence to be produced to buttress the case. In light of my other findings, however, on the evidence before me it is borderline.
[38] I am nevertheless prepared to proceed on the basis that there is a bare seriously arguable case.
Dissipation/Intention to defeat creditors
[39] The second key issue is the risk of dissipation. The plaintiffs now accept that flight risk is small or as counsel put it, a sideshow. I agree. The defendant clearly has his roots in this country. I refer to the following passages from his evidence:
65. … Clearly, I am still here two years later and, at 74, have no intention of leaving the country. I have lived in New Zealand for the past 60 years and returning to Croatia is not a realistic proposition. Even if I wanted to, my wife is a New Zealander and would not live in Croatia. Our daughter (in fact my step-daughter, but I look upon her as my daughter) and her children live here. I have no close relatives in Croatia apart from my elderly sister and her children.
…
76. … It is fanciful to suggest that my wife and I would leave our daughter and grandchildren here in New Zealand where we have lived virtually all our lives to live with my older sister in Croatia where my wife knows no one and does not speak the language.
[40] I also understand that the second defendant no longer now intends to sell his Hinemoa Street property now that he has the cash to fund his defence and for Martoni Ltd to pay its share of any remediation costs was satisfied on the sale of 7
Papahia Street. The second defendant in fact records at paragraph 52 of his affidavit:
52. Instead, we accepted an unconditional offer for 7 Papahia Street received after the auction. The sale of Papahia Street suited our purposes better so Hinemoa Street was withdrawn from the market with our tenants none the wiser.
[41] I acknowledge the plaintiffs’ concerns (reiterated by Toogood J) that the failure to disclose the position in respect of the key properties put the plaintiffs and the Court in a difficult position when combined with the flurry of activity to dispose
of the real property. It certainly justified the interim orders to preserve the position of the plaintiffs to this point. But I am not satisfied that there is a sufficient basis to find a real risk or danger of dissipation for the purposes of a permanent order at this time.
[42] As I have said, I am prepared to accept that the second defendant will not sell his Hinemoa Street property during these proceedings. Apart from the initial flurry mentioned above, I have no other information to suggest that the second defendant presents as a credit risk. He is not at all in the category of the sophisticated and evasive debtor that confronted Gault J in Bank of New Zealand v Hawkins.6
[43] In terms of an intention to defeat the plaintiffs’ claim, for the purposes of the charging orders, while it does not call for proof of nefarious intent, it does require proof of intent.7
[44] Objectively assessed, the flurry of recent activity might justify such a finding. I weigh this against the affidavit evidence of current intent. I note that Mr Marinovic is not a flight risk. A judgment call is required, having regard also to the wider context including the nature of the claim (it is not a liquidated damages claim) and the background information that the second defendant is not and does not have a history of credit risk or presents as one. Overall I am not satisfied that the requisite intent has been established to justify, at this time, charging orders.
[45] I qualify this in one key respect. I have placed considerable weight on the fact that Mr Marinovic does not propose to sell the Hinemoa Street property during the proceedings. If it came to light that in fact he intended to sell or dispose of his interests in that property without notice to the plaintiffs, I wish to record that my view on this conclusion would change. I propose to address this aspect with
directions.
6 Bank of New Zealand v Hawkins (1989) 1 PRNZ 451 (HC).
7 Refer McKay v 314 Mt Maunganui Road Ltd HC Auckland CIV 2007-404-7434, 30 April 2008, at
[25].
Overall justice
[46] It is not strictly necessary for me to address this. But given the careful argument presented, it is appropriate that I record my initial view.
[47] Both parties agree that, even if the qualifying criteria are met, I must be satisfied that it is in the overall justice to impose freezing and/or charging orders.
[48] I agree that there is no real prejudice to Martoni Ltd if orders were granted in relation to the two Rugby Road units. The first and second defendants accept that there is a good arguable case against the first defendant. I therefore grant the orders in respect of those properties accordingly.
[49] As to the balance, both freezing orders and charging orders are invasive to the extent that they substantially derogate from the property rights and freedoms of affected persons. Balanced against this is the need to preserve the ability of the plaintiffs to protect their claims from the futility of pursuing an asset-less defendant. A distinguishing feature of this case is that there are multiple defendants and yet only the first and second defendant have been singled out for attention. This may derive from the sale of the properties. Nevertheless in an assessment of overall justice, care should be taken in singling out defendants given the overall risk to the plaintiffs is spread across multiple defendants. I am not suggesting that in a multiple defended case freezing orders cannot be obtained against individual defendants. But I have not seen evidence that the plaintiffs will be unable to recover from other defendants, who on the information before me plainly had a direct and more direct causal connection to the damage caused. This in my view militates against invoking this Court’s invasive powers to the significant detriment of a single defendant.
[50] While I make no final resolution on this aspect, the plaintiffs may consider it prudent to provide the Court with reasons why a defendant should be singled out for special attention, beyond the risk factors identified.
Directions
[51] Accordingly, I make the following directions:
(a) I grant the freezing and charging orders sought in relation to the
Martoni Ltd properties.
(b) I vacate the interim orders in respect of the other properties.
(c) I direct that the second defendant must give at least three working days’ notice of any intention to dispose (including by way of additional mortgage) any of the properties listed in the application to the plaintiffs.
(d)I reserve the right to the plaintiffs to renew this application in the event that they receive notice of such an intention to dispose of the above mentioned properties.
Costs
[52] As to costs, I propose to reserve them at this stage. I do so for two reasons. The second defendant’s actions in disposing of his property, without full disclosure, naturally put the plaintiffs in a position of having to act with some speed. Secondly, I have exercised my judgment here in favour of the second defendant on the basis of indications that further properties will not be sold and in particular the Hinemoa Street property. If that should change, then my view both on the substantive
application and costs will be significantly affected.
Whata J
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