Crawford v Odin Enterprises Pty Ltd

[2009] NZCA 199

IN THE COURT OF APPEAL OF NEW ZEALAND

CA702/2008
[2009] NZCA 199

BETWEENCRAIG STIRLING CRAWFORD AND LOIS JEAN YELCICH

Appellants

ANDODIN ENTERPRISES PTY LTD, SARAH MARY ROBERTS AND RODERICK CHARLES JENDEN AND MARTIN VICTOR RICHARDSON AS TRUSTEES OF THE JENDEN BUSINESS TRUST

Respondents

Hearing:23 March 2009

Court:Chambers, Randerson and Potter JJ

Counsel:P T Finnigan for appellants

G J Toebes and B N White for respondents

Judgment:21 May 2009 at 4 pm

JUDGMENT OF THE COURT

A        THE APPEAL IS DISMISSED.

BCosts are reserved.

________________________________________________________________

REASONS OF THE COURT

(Given by Potter J)

Introduction

[1]       The appellants are guarantors of a second mortgage in favour of the respondents secured over three properties at respectively Mangawhai, Matekohe and Ruawai which are owned by three mortgagor companies of which the appellants are directors.

[2]       By judgment dated 17 October 2008 (HC AK CIV 2008-404-581) Associate Judge Faire granted summary judgment against the appellants for $1,351,074.41, being the balance owing under the second mortgage after crediting the proceeds of the mortgagee sale of the Ruawai property by the respondents, plus interest at 29.5% from 30 January 2008. 

[3]       The appellants contended the sale of the Ruawai property for $1.2m was at an undervalue.  The Judge stayed execution of the judgment in respect of the sum of $629,500 and interest of 29.5% from 30 January 2008, on the basis that there was prima facie evidence of a sale at an undervalue by some $600,000, of the “home block” which comprised part of the Ruawai property, resulting in loss to the appellants.

[4]       It was made a condition of the stay that the appellants file and prosecute with due diligence proceedings against the respondents alleging breach of equitable duty owed by the respondents to the appellants to take reasonable care to obtain the best price reasonably obtainable for the home block at the time of sale.  The appellants’ company, Ruawai Properties Limited, has now commenced that proceeding: Ruawai Properties Limited v Davies & Co Solicitors Nominee Company Limited and Odin Enterprises Pty Limited and Others HC AK CIV 2008-404-7634 (“the pending proceeding”). 

[5]       The appellants appeal against the amount for which the stay was ordered.

Appellants’ position

[6]       The appellants contend the amount for which the judgment was stayed should have been $714,000 greater and that the Judge erred in rejecting the appellants’ contention that they had an arguable counterclaim under three additional heads, arising from the alleged failure by the respondents to obtain the best price reasonably obtainable for the Ruawai property.

[7]       The appellants say that if the value of these losses, $714,000, is added to the amount for which the stay was ordered, $629,500, the stay would be for approximately $1,343,000 which is near to the amount for which summary judgment was entered, namely $1,351,074.41.  Therefore, it is contended, summary judgment should not have been entered, and the respondents should not be in a position to proceed in bankruptcy against the appellants until the proceeding against the respondents for alleged breach of equitable duty has been heard and determined.

Respondents’ position

[8]       The respondents maintain Associate Judge Faire was correct to find there was no basis for the amount stayed to include any of the three additional heads of loss claimed.  Further, even if the judgment were stayed for the claimed value of those additional losses, there would still be a residual sum of $37,074.41 (plus interest and costs), which would not be subject to a stay.

Factual background

[9]       The following background is adapted from the summary in the judgment of Associate Judge Faire. 

[10]     The appellants are directors of three property companies, Sand Hills Developments Limited, Church Road Corporation Limited and Ruawai Properties Limited.

[11]     Sand Hills Developments Limited owns a property at Mangawhai, Church Road Corporation Limited owns a property at Matakohe and Ruawai Properties Limited owned two blocks – one a 32.2669 hectare block at Ruawai which is referred to as the “farm block”, and the other a 4.289 hectare block nearby, which is referred to as the “home block”. 

[12]     On about 27 July 2006 the respondents advanced $770,075 to Sand Hills Development Limited, Church Road Corporation Limited and Ruawai Properties Limited.  The loan was for a period of six months from the date of the first draw-down.  Interest was required to be paid at 19.5% per annum.  Second mortgages were required over the properties at Mangawhai, Matakohe and Ruawai.  The appellants executed a written deed of guarantee and indemnity also dated 27 July 2006. 

[13]     On or about 6 December 2006 Sand Hills Development Limited, Church Road Corporation Limited and Ruawai Properties Limited entered into a second term loan agreement with the respondents.  The sum advanced was $390,000.

[14]     On or about January 2007, about six months after the original advance had been made, Sand Hills Development Limited, Church Road Corporation Limited and Ruawai Properties Limited breached their obligations under the July 2006 mortgage and failed to pay moneys due.  On or about March 2007 the same companies defaulted in respect of the December 2006 obligation.

[15]     In August 2007 notices under s 92 of the Property Law Act 1952 were issued.  They were not complied with. 

[16]     A mortgagee sale followed.  The Ruawai farm and home blocks were sold by the respondents to Black Developments Limited for $1,200,000 plus GST.  Black Developments Limited then on-sold the farm block to Mr Mark Stanaway, a neighbour, for $1,100,000 plus GST. 

The judgment under appeal

[17]     The appellants’ defence to summary judgment being entered was on two grounds:

a)Breach of equitable duty by the respondents as mortgagees resulting in sale of the securities at an undervalue;

b)The terms and conditions of the loan contracts were oppressive.

[18]     The Judge rejected both grounds of defence.  He referred to a provision in the security documents, including the guarantee, which provided that all payments to be made to the lender were to “be made without set-off, counterclaim or deduction”.  The appellants do not appeal from that holding, save indirectly, as we shall explain. 

[19] The Judge, while holding the appellants had no defence, nonetheless held he had power to stay execution of the judgment, on terms, if he “was satisfied that there was a foundation for breach of the equitable duty of good faith”: at [32]. Mr Toebes, for the respondents, did not dispute before Associate Judge Faire, or before us, that the High Court does have such power.

[20]     After considering the valuation evidence provided by Mr S R McNally, the appellants’ valuer, and the evidence of the on-sale of the farm block to Stanaway for the price of $1.1m, the Judge held there was an arguable case that the sale of the home block by the respondents was at an undervalue of $600,000, which he described as “an indicative figure”.  Adjusted for inclusion in the amount of the summary judgment of interest at 29.5% to 30 January 2008, he assessed the sum to be the subject of the stay at $629,500 plus interest on that sum at 29.5% from 30 January 2008.

[21]     The Judge declined to include in the amount of the stay losses claimed by the appellants under the following three heads, which are the subject of this appeal:

a)        Silage crop on farm block - $64,000

[22]     The appellants pleaded that the mortgagors had suffered a loss of $64,000 because at the time of sale “the mortgagors were just going to cut grass for silage for sale”.

[23]     The Judge held at [38]:

The loss of the silage is the loss of a crop.  There is no evidence that the plaintiffs (Odin) ever had possession of the silage.  The silage only has relevance if, in fact, its existence on the land would cause a person assessing what is a reasonable price for the land to assess the value at a higher figure.

There is no evidence of that specifically before me.

(b)      Subdivision potential of the farm block - $500,000

On the authority of Harts Contributory Mortgages Nominee Co Limited v Bryers HC AK CP 403-IM00 19 December 2001 and Tse Kwong Lam v Wong Chit Sen [1983] 3 All ER 54 (PC) the Judge held at [39] of his judgment that the loss of potential to subdivide the land is not claimable. At [33(e)] he cited [43(e)] of the judgment in Harts Contributory Mortgages v Bryers:

There is no obligation to postpone the sale in the hope of a better price later, or to break up the assets and sell in a piecemeal manner if this can only be carried out over a substantial period or at a risk of loss.

(c)       Potential for sale of a water right on the home block - $150,000

[24]     The Judge rejected this claim on the same basis as (b) above.

Outcome sought on appeal

[25]     Mr Finnigan, for the appellants, contended the Judge had been wrong in limiting the stay to $629,500.  The sum stayed should have included the additional figures listed under the three items (a) to (c) above.  These heads of loss, Mr Finnigan submitted, were all arguable. 

[26]     If he succeeded on that, he had a rather hopeful follow-up argument.  He noted that, if the stay figure were increased by the value of the three items, $715,000, one got near to the amount of the summary judgment ordered against the appellants.  It might therefore be arguable, he submitted, that the court, in its discretion, should have refused summary judgment.  With respect, there is no logic in that argument, and we dismiss it. 

The stay jurisdiction

[27]     Neither counsel before us analysed the stay jurisdiction.  It is, however, the key to this appeal.  Once it is understood, it is clear this appeal cannot succeed. 

[28]     The normal rule is that a defendant to a claim for debt who may have a counterclaim (for an unliquidated amount) simply has to pay the debt that is indisputably owing and then do his or her best to bring the counterclaim on for hearing as quickly as possible.  There are exceptions to that normal rule.  One has possible relevance in this case.  A defendant may be able to persuade a court to stay execution of the judgment under what was r 565 of the old High Court Rules: see now r 17.29.  Although Associate Judge Faire did not mention that rule, it is clear that must have been the rule under which he granted the stay:  see McGechan on Procedure (looseleaf ed) at [HR12.12.02], previously at [HR142.02].  The rules envisage that, if a defendant wants a stay, he or she has to apply for it: see not only the words of the rule but also New Zealand Food Group Limited v Cannell [1986] 2 NZLR 593 at 595. Here, the appellants did not apply for a stay; they should have filed that application at the same time as they were filing their notice of opposition to the summary judgment application. But nothing hinges on that failure; the Judge no doubt had jurisdiction to accept an oral application for stay or, perhaps, to raise the appropriateness of a stay during general discussion with counsel.

[29]     What does a defendant have to establish in order to get a stay?  Under r 565 (or now r 17.29), he or she must satisfy the court “that a substantial miscarriage of justice would be likely to result if the judgment were executed”.  If the defendant satisfies the court on that, then the court is empowered to give “relief on such terms as appear just”.  Although the Judge did not expressly mention that test, we think it is reasonably clear from his judgment that he regarded it as met – up to a point.  The test is quite a stringent one.  The miscarriage of justice which is likely to result must be substantial.  And it is not sufficient that a miscarriage of justice might result: it must be “likely to result” ie probably result.  See all the cases cited in McGechan at [HR17.29.02]. 

[30]     Stays are often granted where a defendant has a counterclaim which, without a stay, would be defeated because the defendant would be bankrupted before the counterclaim could be heard: see McGechan at [HR17.29.04].  The appellants’ affidavits disclose nothing about their financial position.  However, the Judge must have been satisfied that their financial position was such that a substantial miscarriage of justice would be likely to result if the judgment was not stayed to the extent he directed, and that determination was accepted before us.  It is clear that the mortgagors had been in default under the mortgages for many months and had been unable to remedy the defaults by refinancing the mortgages or any other means.

[31]     The Judge determined that overall justice would be met if the judgment in favour of the respondents was stayed in part.  That was very much a discretionary decision.  It should not lightly be interfered with.  There would need to be, we think, a compelling case now to increase the extent of the stay. 

[32]     Mr Finnigan presented his appeal on an assumption that all he had to establish in respect of the three items was that they were arguable.  That is not the test.  He had to establish in the High Court that, unless the stay embraced the value of these items, a substantial miscarriage of justice would be likely to result.  He failed to establish that in the High Court.  What he now has to establish in this Court is that the Judge’s exercise of discretion in that regard was plainly wrong.  That requires far more than simply establishing the three items are arguable. 

Did the Associate Judge err?

[33]     We consider the three items in turn.

Item (a) :silage

[34]     The respondents as mortgagees sold the Ruawai property to Black Developments Limited for $1.2m by agreement for sale and purchase dated 15 November 2007.  The possession and settlement date was 20 December 2007.  The sale was of bare land.  The schedule to the agreement provided for the listing of all chattels included in the sale, but no chattels were listed.

[35]     While apparently proceeding on the basis that the uncut silage crop growing on the land was a chattel and not part of the security which the respondents were entitled to sell as mortgagees, the appellants submitted the Judge’s view that the mortgagees did not have “possession” of the silage ought not to deny the appellants a right to advance the loss claimed as a defence, because had they not proceeded with “indecent haste … the mortgagees could have realised the additional losses claimed to reduce the indebtedness to them”. 

[36]     If it be correct that the silage crop is a chattel which did not pass on sale, the mortgagor and registered proprietor of the land, Ruawai Properties Limited, would retain title to the silage.  It may have a claim in conversion against the purchaser, Black Developments Limited, if the purchaser declined to yield the crop or its proceeds to Ruawai Properties Limited.  But that situation would not implicate the respondents, nor assist the appellants who are simply guarantors of the obligations of Ruawai Properties Limited under the mortgage.  The appellants cannot seek to increase the amount of the stay by the value of an asset which is not part of the mortgage security.

[37]     On the other hand, if the silage crop is part of the land, it is part of the security which the respondents as mortgagees have sold to Black Developments Limited.  The value of the crop, being part of the security, would then be relevant in determining whether, and the extent to which, the respondents may have sold the security at an undervalue.

[38]     There is clear authority that parties may contract to deal with growing crops separately from the land: for example see Jones v Flint (1839) 113 ER 285 and Scully v South [1931] NZLR 1187.

[39]     However, at [15.016] of Hinde & others Hinde McMorland & Sim Land Law in New Zealand (looseleaf ed), the authors state that the general rule is that growing crops form part of the land, and are thus subject to the mortgagee’s security.  The authors cite no authority for this rule, but the English Court of Appeal in Saunders v Pilcher [1949] 2 All ER 1097 at 1104 stated this to be the generally applicable rule. The Federal Court of Australia assumed and applied this general rule in Official Trustees v Westpac Banking Corporation (1987) 77 ALR 677 at 681. The passage from Saunders v Pilcher was applied in the recent case of Fisk v C R Grace Limited HC WN CIV 2007-454-543 18 November 2008 at [41].  See also Rose v Rose [2009] NZSC 46 at [31]; [2008] NZFLR 167 at [56] (CA).

[40]     It is unnecessary that we determine this issue.  As we have explained above, whether the silage crop is to be treated as a chattel or as part of the land, it cannot assist the appellants in their claim that the amount of the stay should be increased.

[41]     The status of the silage crop will remain to be determined in the pending proceedings.  In that proceeding all evidence bearing on ownership and the intention of the parties in respect of the silage crop, including that of the purchaser, will be relevant.  If it is treated as part of the land, it will be a factor relevant to establishing the value of the security and the extent of the undervalue (if any) at which the respondents sold the land. 

[42]     That proceeding will also provide the proper context to determine whether the manner of sale unreasonably affected the sale price obtained by the respondents.  We merely observe that we were provided with no authority, and have found none, to support the appellants’ contention that the respondents owed some duty or obligation to the mortgagor and the guarantors, beyond the mortgagees’ notice of sale under s 92 of the Property Law Act 1952, to advise of the impending sale to Black Developments Limited, so as to enable the mortgagor to harvest the silage crop ahead of sale.

[43]     For the sake of completeness we mention clause 24.7 of the agreement, referred to in oral submissions by Mr Finnigan.  It provided:

Nothing in the nature of a fixture or chattel shall be deemed to be included in the sale and shall not pass with the property if the vendor has no right to sell it as part of its security and no warranty by the vendor that any such thing is included in the sale is implied.

The clause simply states that the vendor cannot pass title to the purchaser in an item, fixture or chattel, that the vendor has no right to sell.  The issue which will need to be determined here is whether the respondents had the right to sell the silage.  Clause 24.7 does not assist either way.

[44]     We are not persuaded there is any basis to interfere with the exercise of the Judge’s discretion to decline a stay in respect of the sum of $64,000 for item (a).

Items (b) and (c): subdivision and water right

[45]     The appellants allege the Judge erred in his application of the law to the facts of this case.  They take no issue with the authority of Harts Contributory Mortgages Nominee Co Limited v Bryers cited by the Judge, including his reliance on the passage from [43(e)] of the judgment set out at [23] above, but they submitted the Judge failed to take into account the following evidence:

Item (b)From 31 October 2007, Stanaway was willing to purchase the farm block together with one half of the water dam area of two acres from the home block, from Yelcich for $1.25m; then to allow Yelcich to subdivide off six acres from the farm block, without any payment back to Stanaway.

The appellants submitted this was “an opportunity without any real downside for the mortgagee-vendor, because, at worst, if the resource consent was refused, Stanaway had agreed to pay a further $85,000 plus GST for the six acres”.

Item (c)Yelcich intended to sell to Stanaway and another neighbour, Hart, the water dam area located on the home block, for $150,000.  The appellants submitted there was no disadvantage to the mortgagees in allowing this arrangement to proceed so as to receive the benefit available from the water right.

[46]     The appellants’ contention that in the circumstances of this case, the mortgagee was under an obligation to the mortgagor to postpone sale to enable potential opportunities to achieve a better price following subdivision, to be realised, is contrary to the principles established in Harts Contributory Mortgages Nominee Co Ltd v Bryers and Kwong, as the Judge stated at [39].

[47]     The respondents referred also to the judgment of this Court in Taylor v Westpac Banking Corporation (1996) 5 NZBLC 104,104.  The Bank as mortgagee had rejected a plea from the appellant mortgagors for further time to enable works and a subdivision agreed with the tenant of the mortgaged property to be carried out.  The Bank considered there was no certainty that the subdivision would be approved or undertaken and there was no evidence that it would materially increase the value of the property.  This Court held at 104,109 that the perceived detriment to the value of the property by proceeding to sale, if there was such a detriment, was:

… an inevitable corollary of the Banks’ decision to exercise its power of sale and its decision not to delay the exercise of that power … It is, after all simply exercising its power of sale in the manner contemplated by the parties to the contract.

[48]      Further, in relation to the claimed potential for greater benefit from subdivision, the following factors emerge from the evidence currently before us:

Item (b)·   There is no evidence of a concluded agreement by Ruawai Properties Limited with Stanaway. 

·There is no mention in the “informal agreement” between Ruawai Properties Limited and Stanaway of an $85,000 payment if the six acres subdivision was not achieved.

·A resource consent would have been required for the six acres (2.687 hectares) proposed subdivision from the farm block.  Mr McNally, the appellants’ valuer, in an affidavit sworn 14 April 2008, says that the property was zoned rural under the Kaipara District Council Plan.  Four hectare minimum area lots were a discretionary activity, subject to assessment criteria.  The proposed subdivision of a lot significantly smaller in area than the required minimum of four hectares would appear to face considerable difficulties in obtaining a resource consent, on that ground alone.

·The value placed on the six acres as a separate title by Mr McNally in his affidavit of 14 April 2008 was $150,250.  To realise potential value approximating $500,000 as claimed by the appellants would have required further subdivision incorporating the farm block.  Mr McNally says such a subdivision would trigger a fully notified resource consent application.  And by then, Ruawai Properties Limited would have sold the farm block to the Stanaways so would no longer have had title to the land to be subdivided.

Item (c)·   There is no evidence of a concluded agreement with Stanaway and Hart relating to the sale of the water dam area on the home block.  The Stanaways’ view of the arrangement described by their solicitor, Mr Dennis, in his affidavit of 8 May 2008, differs from Mr Yelcich’s expressed intention. 

[49]     Further, there is no evidence the appellants have the resources to carry out the subdivisions in order to realise the alleged potential value.

[50]     These factors support the conclusion that the appellants’ claims in respect of items (b) and (c) are weak factually, as well as legally.  We are not persuaded the Judge was plainly wrong to decline to increase the amount of the stay for the claimed value of items (b) and (c).

[51]     Any potential for subdivision of the property will no doubt be built into the assessment of value of the property, which will be part of the evidence relevant to determining the ultimate issue in the pending proceeding, i.e. whether the mortgagees obtained a fair and reasonable price when they sold pursuant to their power of sale.

Conclusion

[52]     The appellants have failed to persuade us that the Judge erred in the exercise of his discretion in declining to increase the amount of the stay for the three items claimed.  It remains open for the appellants to raise these heads of claim in the pending proceeding.  That claim involves parties not presently before us.  The evidence to be presented in that proceeding might be quite different from the evidence currently before us.  But on the evidence currently before us, the claim in respect of all three items appears rather weak.

[53]     The appeal is dismissed.

Costs

[54]     By memorandum dated 23 April 2009, Mr Finnigan advised that the appellants’ application for legal aid remains under consideration by the Legal Services Agency.  Accordingly, costs are reserved.  Once the decision of the Legal Services Agency is available, if counsel cannot then agree costs, counsel for the respondents should file and serve a memorandum as to costs, to which the appellants should reply within five working days.  We will determine costs on the papers.

Solicitors:
Buddle Findlay, Wellington, for Respondents