Crown Money Corporation Limited v Hertzke and Hertzke

[2010] NZHC 1041

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2007-404-004943

BETWEEN  CROWN MONEY CORPORATION LIMITED

Plaintiff

ANDMH HERTZKE AND MM HERTZKE AS TRUSTEES OF THE M3H3 TRUST

First Defendant

ANDJUTTA ILSE HERTZKE Second Defendants

Hearing:         19 April, 6 and 28 May 2010

Appearances: Ms K Davenport for Applicant

Mr A R Gilchrist for Respondents

Judgment:      28 May 2010

(ORAL) JUDGMENT OF LANG J

[on application for directions regarding disbursement of proceeds of execution]

Solicitors:

Alexander Dorrington, Auckland
Wardill Paisley & Associates, Whangaparaoa
Counsel:

Ms K Davenport, Auckland

Mr A R Gilchrist, Auckland

CROWN MONEY CORPORATION LIMITED V MH HERTZKE AND MM HERTZKE AND ANOR HC AK CIV-2007-404-004943  28 May 2010

[1]      The plaintiff, Crown Money Corporation Limited (“Crown Money”), loaned monies to Mr and Mrs Hertzke in 2005.  Mr and Mrs Hertzke obtained those loans in their capacities as the trustees for a trust known as the M3H3 Trust.  The amount now owing to Crown Money is approximately $540,000.

[2]      The evidence confirms that the trust was involved in property development on a reasonably large scale.   It appears that from time to time it was involved in developing and selling upwards of 20 individual properties.

[3]      The trust fell on hard times and Mr and Mrs Hertzke defaulted on the loan to Crown Money.  As a result, Crown Money took steps to execute a writ of sale over a property situated in Waimaukau that Mr and Mrs Hertzke owned in their capacities as trustees of the trust.

[4]      The property has now been sold for the sum of $440,000 plus GST.   Mr Hertzke’s mother, Mrs Jutta Hertzke, held a mortgage over that property.   Crown Money accepts that the mortgage is valid.  It contends, however, that the mortgage secures a maximum sum of $187,000.  It has agreed to that sum being paid to Mrs Hertzke from the proceeds of sale.  The balance now held in trust amounts to just over $224,000.

[5]      The issue that I am required to determine is whether the mortgage that Mr and  Mrs  Hertzke  gave  to  Mrs  Hertzke  Snr  extends  to  the  balance  of  the  sale proceeds.

The competing arguments

[6]      The case for Mrs Hertzke is she has advanced a total sum of $520,000 to Mr and Mrs Hertzke in their capacities of the trustees of the M3H3 Trust.  She contends that  two  term  loan  agreements  documented  advances  totalling  $420,000.    The balance of $100,000 was not documented in any way.

[7]      The advances were made in eight separate tranches.  Crown Money accepts that the first two tranches, totalling $170,000, were documented by way of a term

loan  agreement  dated  24  May  2006.     For  that  reason  it  has  agreed  to  the disbursement of the sum of $187,000 to Mrs Hertzke.   That sum comprises the principal sum of $170,000, together with one year’s interest calculated at ten per cent per annum.  Crown Money contends that none of the other advances are secured by the mortgage.

[8]      At the heart of Crown Money’s argument is its contention that Mrs Hertzke made all the remaining advances to a company called Fastlane Autos Limited.  Mr Hertzke operated that company and it carried on business as a dealer in used motor vehicles.  There is no dispute that Mrs Hertzke paid each of the remaining advances by way of individual cheque into Fastlane’s account.  Crown Money contends that this fact means that the advances were not made to Mr and Mrs Hertzke in their capacities as trustees of the M3H3 Trust.   Rather, they were advances to Fastlane which remained operating its business throughout the period during which the advances were made.

Analysis

[9]      In order to examine the validity of Crown Money’s argument, it is necessary to view the matter objectively and having regard to the all the evidence.   This is derived from a number of sources.   First, there are the witnesses who gave oral evidence before me.  These comprised Mr Ellery, the accountant who acted for the Hertzke family in relation to both the trust and also the affairs of Fastlane.  Next, there was Mrs Jutta Hertzke and, finally, there was Mr Hertzke.  In addition, I have received affidavit evidence tendered on behalf of Crown Money relating to a number of issues, some of which I touch on later in this judgment.

[10]     In addition, there is the documentary evidence, such as it is, in relation to the affairs of the trust and the company during the period with which the proceeding is concerned.

[11]     The case for Mrs Hertzke is that she made the advances to her son and his wife in their capacities as trustees of the M3H3 Trust.   She denies that she ever

advanced funds to Fastlane.   She says that the evidence to which I have referred bears out her contention.

[12]     I consider that several factors combine to decide the issue.  First, there is the manner in which the parties documented at least some of the advances.   The term loan agreement that the parties entered into on 24 May 2006 recorded that Mrs Hertzke was to advance to the trustees a total sum of $220,000.   Part of this sum comprised the sum of $100,000 which remained owing to Mrs Hertzke in relation to another advance that she had made in relation to an earlier property development, and in respect of which she had not been repaid.  The sum of $70,000 was paid to the trustees through the trust accountant of Sellars & Co on or about 9 June 2006. Neither of those transactions is disputed, and they form the basis of the monies that have already been paid out to Mrs Hertzke.

[13]     In my view it is no coincidence that the next advance that Mrs Hertzke made was in the sum of $50,000 and occurred on 31 July 2006, just two months after the term loan agreement was signed.  I consider that the fact that this loan was for the sum of $50,000 suggests that it was the final advance made under the term loan agreement dated 24 May 2006.

[14]     The next three advances occurred on 29 September 2006, 14 November 2006 and 30 January 2007.  They were advances in the sums of $100,000, $50,000 and

$50,000 respectively.  On 18 September 2006, just 11 days before these advances, the parties entered into another term loan agreement that recorded further advances in the sum of $200,000.  The fact that the next three advances were for exactly that sum suggests to me that they were made pursuant to the second term loan agreement.

[15]     Supporting this proposition is the fact that during this period the trustees were engaged in developing a property situated at Amber Place, Waimaukau.  This was obviously a substantial development, and required major capital expenditure.   Mr Ellery said that, by this stage, the property development business as a whole was in trouble, and that the Amber Place project was seen as a source of possible salvation. He was firmly of the view that the advances that Ms Hertzke made were for the purpose of enabling the trustees to complete the Amber Place project, and thereby

gain some financial stability.   He said, in fact, that he warned Mrs Hertzke not to lend further monies to her son but she ignored his advice.

[16]     Mr Hertzke was adamant that the funds were made to the trustees in their capacities as trustees and for the purpose of completing the Amber Place development.  He maintained that during this period the business affairs of Fastlane were nearly at an end.  By this stage Mr Hertzke had shifted his business operations to Kumeu.   He said that by that stage Fastlane was in the final stages of winding down its operation.  It was selling off items of surplus plant and equipment and was generally winding up its affairs.

[17]     He said that the trust had earlier had a bank account with the National Bank. That account had reached its credit limit, however, and the bank was not prepared to extend any further facilities.  For that reason he had decided not to use the National Bank account any more.   Given the fact that Fastlane’s bank account was still in operation, he decided to conduct the trust’s financial affairs through that account.  It was for this reason, he said, that he asked his mother to pay all of the advances into the Fastlane bank account.

[18]     The final two payments, namely payments of $50,000 each on 17 May and 27

July 2007, were not made pursuant to any formal term loan agreement.

[19]     As I have said, I accept that the existence of the two term loan agreements, coupled  with  the  fact  that  advances  totalling  the  sums  referred  to  in  those agreements, suggest that the advances were in fact made pursuant to the agreements. I need, however, to determine whether or not the advances were, as Crown contends, actually made to Fastlane and not to the trustees.

[20]     On this point I have had the benefit of a considerable amount of documentary evidence.   This has caused the hearing to be extended somewhat, because I have required Mr Hertzke to produce further documentation to ensure that the Court had a full picture regarding Fastlane’s operations as at the relevant periods between 2006 and July 2007.

[21]     I  have  now  been  provided  with  Fastlane’s  GST  returns  and  invoices  in respect of the periods between 1 May 2006 and 28 February 2007.  These show that Fastlane was conducting some operations during this period.  By and large, however, the scale of the operations was very small.  By way of example, between 1 May 2006 and 30 June 2006, the company derived income totalling just $8,392.00 and incurred expenditure of $6,155.00.  Between 1 July 2006 and 31 August 2006 it derived total income  of  $13,809.00  and  incurred  expenditure  of  $19,806.00.     Between  1

September and 31 October 2006 it earned $2,290.00 and spent $4,594.00.  Between

1 November and 31 December 2006 it earned $2,499.00 and spent $3,470.00.  The

GST return in respect of the period ended 28 February 2007 was a Nil return.

[22]     Mr Ellery and Mr Hertzke both said that the trustees continued to use a Mobil card in the name of Fastlane for convenience, even after Fastlane effectively ceased trading.   Fastlane also clearly incurred a small amount of expenditure during the relevant periods.

[23]     Importantly, however, the company derived virtually no income during this period.  The only major capital items that were sold, and that therefore provided the company with income, were the sale of go-carts and an Audi motor vehicle that Mr Hertzke disposed of to his brother-in-law.  This suggests to me that by 1 May 2006 the company had effectively ceased its business as a used motor vehicle dealer.

[24]   Taken as a whole, the documentary evidence in relation to Fastlane demonstrates, in my view, the correctness of the evidence of both Mr Ellery and Mr Hertzke.  It confirms that Fastlane had effectively ceased trading during the period in which the advances were made.  That being the case, it begs the question as to why the company would need significant cash injections from Mrs Hertzke during the same period.  Fastlane would have no need of those advances given the very limited nature of the activities in which it was then engaged.

[25]     An analysis of the expenditure that flowed through the Fastlane bank account during this period demonstrates that significant sums were, in fact, expended on the Amber Place development.  That expenditure did not, however, equate to the total amounts advanced by Mrs Hertzke.  This led counsel for Crown Money to submit

that the company was clearly spending money on items unrelated to the Amber Place development.  That may be the case, but it does not necessarily affect the basis upon which the funds were originally advanced.

Decision

[26]     Viewing matters as a whole, I have reached a clear view that the payment of

$50,000 on 31 July 2006 was in fact advanced to the trustees in terms of the term loan agreement dated 24 May 2006.  Likewise, I have concluded that the sums that Mrs Hertzke paid into the Fastlane account between 29 September 2006 and 30

January  2007  were  advanced  pursuant  to  the  term  loan  agreement  dated  18

September 2006.  This leaves the two advances of $50,000 in May and July 2007, in respect of which there is no term loan agreement.

[27]     All of the evidence suggests that by May 2007 Fastlane had ceased trading completely.  The Amber Place development, however, was clearly ongoing.  On that basis I have no hesitation in concluding that those advances, too, must have been to Mr and Mrs Hertzke in their capacities as trustees of the trust.

[28]     This means that Mrs Hertzke advanced a total sum of $520,000 to the trustees of the M3H3 Trust.  As such, those advances were secured by the mortgage that the trustees executed in her favour on 24 May 2006.

[29]     I reach that conclusion notwithstanding the fact that, in a letter dated 22

December 2009, Mrs Hertzke’s solicitors advised the solicitors acting for Crown

Money of the following:

It is accepted that the advances which exceed the principal sum recorded of

$240,000 and $200,000  respectively cannot  be (and  are  not) claimed  in priority to monies owing to Crown.

[30]     I do not know why Mrs Hertzke’s solicitors appear to have conceded that funds over and above those recorded in the term loan agreements could not be claimed in priority to monies owing to Crown.  The terms of the mortgage clearly secure all advances that Mrs Hertzke’s made to her son and daughter-in-law in their

capacities as the trustees of the M3H3 Trust up to the sum of $1 million.  I therefore do not place any weight on the apparent concession contained in that letter.

[31]     Mrs Hertzke is also entitled to claim interest in respect of the two advances that she made pursuant to the loan agreements.  The agreements recorded, however, that interest could only be claimed in the event that Mrs Hertzke made demand for interest within three months after the date of each anniversary of each agreement. Only one demand for interest has ever been made.  That occurred on 18 December

2009.   As a result, interest at the rate of ten per cent per annum on each of the advances documented by the two loan agreements, or $42,000 in total, would be payable to her.   It follows that a total sum of $562,000 must be repaid to Mrs Hertzke.

[32]     During the evidence there was some question as to whether or not a payment of $50,000.00 that Mr Hertzke made to his daughter, Madeline, might amount to a repayment of part of the sum that the trustees owed to Mrs Hertzke.   It is not necessary for me to determine that issue, because it may need to be determined in the future as between Madeline, Mr Hertzke and Mrs Hertzke.   Even if that sum was deducted from the amount that I have found to be owing, it makes no practical difference for present purposes.

[33]     Similarly, it is clear that Mrs Hertzke has received rental from the property over which she holds security.  This amounts to $36,287.00.  Even taking that sum into account, the amount that was realised on sale is still insufficient to discharge the trustees’ obligations to Mrs Hertzke under the mortgage.

[34]     I have therefore concluded that the balance of the sale proceeds remains subject to the security in favour of Mrs Hertzke, and I make a direction that they are to be paid to Mrs Hertzke.

Costs

[35]     I  consider  that  Crown  Money  is  entitled  to  costs  in  relation  to  the interlocutory hearing that has taken place before me since the date of the auction.

That is to be calculated on a category 2B basis and on the basis that the hearing occupied two full days.  Mrs Hertzke is also entitled to any disbursements in relation to those hearings.

[36]     Crown Money, on the  other hand, succeeded in opposing Mrs Hertzke’s application for an injunction.   At that time she ran an unsuccessful argument regarding the legal effect of the bankruptcy of Mr Hertzke and his wife.  She also failed to persuade the Court that it was appropriate to defer the auction.  She was therefore the unsuccessful party at that hearing.   I award Crown Money costs in relation to that hearing on a Category 2B basis together with disbursements as fixed by the Registrar.

Lang J