Crummer Trustees no.83 Limited v Bank of New Zealand
[2016] NZHC 1539
•12 July 2016
IN THE HIGH COURT OF NEW ZEALAND TAURANGA REGISTRY
CIV 2015-404-000571 [2016] NZHC 1539
BETWEEN CRUMMER TRUSTEES NO.83
LIMITED Plaintiff
AND
BANK OF NEW ZEALAND First Defendant
PARK ROAD CONSOLIDATED LIMITED
Second Defendant
XFHNZ LIMITED Third Defendant
Classic BUILDERS GROUP LIMITED Fourth Defendant
PETER DESMOND COONEY Fifth Defendant
Hearing: 5 July 2016 Appearances:
M C Black for the Plaintiff
S Bisley/J Maltby for the First DefendantJudgment:
12 July 2016
JUDGMENT OF ASSOCIATE JUDGE CHRISTIANSEN
This judgment was delivered by me on
12.07.16 at 11:30am, pursuant to
Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
CRUMMER TRUSTEES NO.83 LIMITED v BANK OF NEW ZEALAND AND ORS [2016] NZHC 1539 [12
July 2016]
[1] The first defendant (BNZ) applies for an order that the plaintiff (Crummer) pay into Court at least $80,000 as security for costs in respect of its claim against BNZ. Crummer claims BNZ has financial responsibility for losses incurred by it in the outcome of a residential property development near Katikati (the development).
Background
[2] In 2004 the Winning Trust and the Nexus Trust embarked on that development. The Winning Trust represented interests associated with Mr Richard Black (Mr Black) and the Nexus Trust represented the interests of Mr David Macfarlane (Mr Macfarlane). Crummer is the trustee of the Winning Trust.
[3] Mr Black and Mr Macfarlane through their respective trusts settled the Davric Trading Trust (the Davric Trust) and incorporated the second defendant (Park Road) as the corporate vehicle through which the development was carried out. The Winning Trust, as is the Nexus Trust, a discretionary beneficiary of the Davric Trust.
[4] The fourth defendant (Classic) owned Classic Builders Limited which was contracted to manage the development and construction of (approximately) 80 houses planned to be built.
[5] The fifth defendant (Mr Cooney) and Mr Lagerberg were both directors of
Classic.
[6] In 2009 Mr Black borrowed $150,000 from Hallenstein Projects Limited (Hallenstein) of which Mr Cooney was at all times the sole director, and Classic was the shareholder. At that time Mr Black asked Mr Cooney to buy half his share in the development. Mr Cooney says he and Mr Black agreed that Mr Cooney would purchase half of the Winning Trust’s interest for $300,000 and the loan from Hallenstein would be applied to the purchase price. The arrangement was documented as a loan from Hallenstein on the basis that Hallenstein would receive
25 per cent of the net profit from the development.
[7] In 2010 the third defendant (XFHNZ) of which Mr Cooney is a director and Classic a shareholder, purchased Mr Macfarlane’s Nexus Trust interest in the development and XFHNZ replaced the Nexus Trust as a beneficiary of the Davric Trust and the balance of the Nexus Trust’s current account was transferred to XFHNZ.
[8] Later Mr Black and Mr Cooney signed an undated document recording their understanding that Mr Black was entitled to 25 per cent of the profits from the development and Classic was entitled to 75 per cent. For tax purposes, the profits were to be recorded as earnings of the Winning Trust.
[9] On 22 February 2013 Mr Black was adjudicated bankrupt. He was removed as a director of Park Road, but retained internet banking access to the two BNZ bank account opened for the development.
[10] Issues arose regarding access to and the use of those two bank accounts. Mr Cooney says that to ensure Mr Black did not withdraw funds from those BNZ accounts he set up a Westpac account in the name of Classic into which some of the development proceeds were paid directly or were transferred from the BNZ accounts.
[11] The development has concluded.
[12] Crummer’s claim focuses upon those two BNZ accounts. They comprise a cheque account and an On Call account set up in August 2010 by Park Road’s accountant KPMG. Initially two authorised signatures were required for transactions on those accounts. Initially Mr Black and Mr Macfarlane as directors of Park Road were both authorised signatories. Additional authorised signatories were Ms Preston-Lett and Mr Lee of KPMG.
[13] On 18 January 2011 BNZ sent Park Road an Internet Banking for Business (IB4B) registration form. Mr Black and Ms Lagerberg (Classic’s office assistant) signed the form and returned it to BNZ. Mr Black became an “administrator” of IB4B and Ms Lagerberg became an “authoriser” at the time.
[14] On 1 July 2013 and after Mr Black had been removed as a director of Park Road (following his bankruptcy), Mr Black was removed as an authorised signatory on the accounts. On Park Road’s instructions Mr Black retained full IB4B access to those accounts.
[15] On 21 October 2014 and without permission from Park Road, Mr Black transferred $335,000 from Park Road’s cheque account using his personal internet banking access. After BNZ reversed the transfer on Park Road’s instructions, Mr Black asked BNZ to freeze the accounts on the basis that the funds in those were in dispute. BNZ froze the accounts from 24 October 2014 until 27 February 2015 while it made enquiries about the dispute. It then expressly declined Mr Black’s requests that it freeze those accounts pending the filing of court proceedings.
[16] BNZ says it lifted the freeze because it was satisfied that there were no grounds to maintain the suspension on the basis of Mr Black alleging that he was authorised to operate the accounts. However, the accounts were frozen again after this proceeding was served on BNZ. Mr Black claims that when the accounts were unfrozen BNZ breached its banking mandate by permitting access to Mr Cooney’s interest, which has caused significant losses to Crummer.
The security for costs application
[17] BNZ says there is reason to believe that if it is successful in defending Crummer’s claim at trial that Crummer will be unable to pay its costs if ordered to do so because:
(a) Crummer is a corporate trustee and has no assets other than a claim to a distribution from the Davric Trust;
(b)There is uncertainty about whether a distribution would be forthcoming or sufficient to meet an adverse costs award because:
(i)Whether Crummer is entitled to a distribution and the amount of any such, is a matter of legal and factual dispute in this proceeding;
(ii)Crummer is the trustee of the Winning Trust, which is expressed to be a discretionary beneficiary of the Davric Trust and as a discretionary beneficiary the Winning Trust has no more than a “mere hope” that the trustee of the Davric Trust (Park Road) will exercise its discretion in Winning Trust’s favour.
(c) The second to fifth defendants have filed evidence that, even if the Winning Trust was not a discretionary beneficiary, its entitlement to a distribution may be nil.
[18] If the claim proceeds to trial BNZ says the costs incurred by it will be substantial for five of the ten causes of action had been pleaded against them and considerable factual enquiry will be required and as well expert evidence will have to be called.
[19] BNZ says it has conservatively estimated its reasonable costs on a 2B basis to be $78,548.50 – assuming a 12 day trial – which estimate does not include disbursements such as expert witness fees and counsels out-of-town expenses. BNZ says its actual trial costs could easily triple that amount.
[20] BNZ believes it is likely to be successful in defending the claim. It notes a previous costs award against Crummer was paid by a third party and that no detail of any third party funding agreement has been provided. Further, Crummer’s “representative” is Richard Black a bankrupt.
[21] By its notice of opposition Crummer claims:
(a) Further distributions and payments are due to the plaintiff from the joint venture controlled and managed by the second to fifth defendants;
(b)Sufficient funds will be derived from the joint venture to meet any order for costs if BNZ was successful at trial;
(c) Crummer’s claim has merits, including:
(i)that BNZ did not comply and/or breached internet banking terms and conditions; and
(ii) BNZ breached representations and/or an agreement that the
Davric Trust account was to remain frozen.
BNZ’s previous summary judgment/strike out application
[22] Soon after Crummer’s proceeding was initially filed in the Auckland High Court the BNZ applied for summary judgment against Crummer and in the alternative for strike out of the three causes of action pleaded against it namely:
(a) Breach of mandate.
(b) Breach of fiduciary duty; (c) Negligence.
[23] Wylie J held that summary judgment was inappropriate for each of the three pleaded causes of action. His Honour considered it was not clear on the available evidence that the Bank did comply with its mandate and it was for this reason he held it would be inappropriate to award summary judgment on any of the three causes of action.
[24] However, the three causes of action were struck out by His Honour. He accepted that Crummer appeared to have no status to sue BNZ for the reasons then claimed.
[25] His Honour did not accept argument that because the accounts in question were in the name of the Davric Trust that it was the customer. To His Honour it was clear that Park Road as trustee was the owner of the Davric Trust accounts notwithstanding those accounts were in the name of the Davric Trust. Furthermore, His Honour noted that Crummer was not a beneficiary of the Davric Trust but rather was the corporate trustee of the Winning Trust and that the Winning Trust was a discretionary beneficiary of the Davric Trust.
[26] His Honour also noted that there was no claim or evidence that Crummer had asked Park Road to bring a claim against BNZ for breach of mandate, or that Park Road had refused or was unable to bring such a claim.
[27] Regarding the claim of breach of fiduciary duty His Honour noted Crummer pleaded that BNZ knew or ought to have known of Crummer’s trustee proprietary rights and interests in the Davric Trust accounts. Crummer pleaded that BNZ knew or ought to have known that the accounts were being manipulated and dissipated by the actions of the second to fifth defendants. BNZ’s response was that the Winning Trust was a discretionary beneficiary and that it did not have any legal or equitable interest in Davric Trust’s property and that there was no duty of impartiality on Park Road in managing the Davric Trust.
[28] Because it was Crummer’s case in essence that BNZ dishonestly assisted the second to fifth defendants’ breach of the Davric Trust, Wylie J noted the onus in such cases was high but that there was nothing in any of the affidavits filed to suggest either actual knowledge or wilful blindness of the kind pleaded. His Honour held that there was no reasonably arguable cause of action for breach of fiduciary duty.
[29] By its third cause of action against BNZ, Crummer alleged the bank owed it a duty of care to exercise reasonable care and skill in managing and supervising Davric Trust’s accounts.
[30] BNZ responded it would be very unusual for a bank to owe wider duties in tort than in contract and that it was not for a bank to enquire into the nature of or the purpose of instructions given in accordance with the valid mandate, and that a bank only owes a duty in tort to ignore its customer’s instructions if a reasonable and honest banker would have considered that there was a serious or real possibility that its customer was being defrauded.
[31] Wylie J agreed with BNZ’s assessment of its responsibilities. His Honour said he could not see that any duty of care which BNZ owed to Park Road as its customer, extended to Crummer which itself was only a trustee beneficiary of the Davric Trust. Again His Honour considered the claim, as then pleaded, was untenable and stood no reasonable prospect of success.
Crummer’s second amended statement of claim
[32] By a second amended statement of claim filed after Wylie J struck out all causes of action against BNZ, some 10 causes of action were pleaded and of those five were pleaded against BNZ.
[33] By the first of those, Crummer sought leave to sue BNZ on behalf of Park Road in circumstances where it is alleged Park Road was in breach of its duties to Winning Trust. Crummer pleads that Park Road had unreasonably refused to take steps to bring a claim regarding the Trust’s funds and assets which were the subject of the Davric Trust internet banking trust account mandate managed by BNZ.
[34] By the second cause of action Crummer pleads BNZ owed a primary duty of care as the bank managing the trust account, to honour its customer’s instructions and to make payments strictly in accordance with the Davric Trust requirements and account mandate.
[35] The third cause of action pleads a breach of the Fair Trading Act 1986 when BNZ made representations to Crummer that the Davric Trust account would remain frozen.
[36] By its fourth cause of action against BNZ, Crummer claims BNZ knew or ought to have known of Crummer’s proprietary rights and interests in the proceeds paid into the Davric Trust account from the joint venture agreement.
[37] By the fifth cause of action it is claimed BNZ breached a duty of care and negligence when it knew, or ought or to have known, that Crummer’s monies receipted into the Davric Trust account were for Crummer’s benefit and interest as a co-owner and beneficiary.
Claims against the second to fifth defendants
[38] The causes of action pleaded against the second to fifth defendants focus upon claims of breach of fiduciary duties as a joint venture development partner including the failure to account for profits made. Much of Crummer’s pleadings focuses upon claims of the lack of adequate records from which to assess a distribution of development profit; and about the manner in which Mr Cooney’s interests have utilised the BNZ accounts. In that regard Crummer claims BNZ’s
‘unlawful’ actions have assisted Mr Cooney’s interests and deprived Crummer from the entitlement it says was due.
[39] By counsel’s memorandum on behalf of the second to fifth defendants Mr Brittain confirms those defendants neither support nor oppose the security for costs application.
[40] Mr Brittain refers to the affidavits of Mr Cooney and Ms Lagerberg sworn in that regard. He says the purpose of those was to assist the Court by providing further information regarding the strength of Crummer’s claims against the second to fifth defendants. Based on that evidence Mr Brittain submits it appears that the range of possible outcomes for Crummer at best are to recover approximately $500,000 and at worst a nil recovery and an award of costs to the second to fifth defendants.
[41] Mr Brittain submits that if the Court is prepared to order security in favour of BNZ then it is the position of the second to fifth defendants that any orders made should not in any way tax or effect the interests of Crummer as trustee of the
Winning Trust in its capacity as a beneficiary of the Davric Trust, or of Park Road in its capacity as the trustee of the Davric Trust.
[42] Mr Brittain submits it is common ground that the Winning Trust is impecunious and if the second to fifth defendants are successful in the litigation then it is likely Crummer would be unable to meet any order for costs in favour of the second to fifth defendants.
[43] Mr Brittain notes that depending on the Court’s judgment in the substantive proceeding and the resulting financial position of the Davric Trust, Park Road (in its capacity as trustee of the Davric Trust) will be able to consider its discretionary powers under the trust deed regarding the final distributions to be made to beneficiaries; and that any unpaid award of costs in favour of the second to fifth defendants will be a factor that the trustee can take into account at the time.
[44] Therefore, it is submitted that if Crummer’s interests as a beneficiary of that trust is taxed or affected in any way as a result of security for costs, then that will directly prejudice the position of the second to fifth defendants on a final distribution from the Davric Trust.
Security for costs
[45] While some attention has been focussed upon previous pleading issues dealt with in the judgment of Wylie J, and while the Court has briefly endeavoured to review the new statement of claim filed in that outcome, it is clear that the primary focus of the security for costs application is on the ability of Crummer to pay costs if its case does not succeed against BNZ.
[46] In that regard and as earlier noted by Crummer’s notice of opposition, it expects it will succeed against all defendants, and believes its claim against BNZ has merit. Equally it is also clear that Crummer presently has no funds to meet a security for costs order if made.
[47] In support Crummer relies upon the affidavits of Mr Gregory Hall and Mr
Richard Black, and latterly also upon the affidavits of Mr Lane and Mr Cleaver.
[48] Mr Hall has provided affidavit evidence as an expert. He is an authorised financial advisor and his working experience has predominantly been in banking and financial services. Mr Hall confirms he has only a preliminary understanding of the issues and says that after the discovery of banking records has been completed he will be in a better position to give an opinion on the BNZ’s role and duties. Mr Hall then sets out his assessment of the range of documents he will need to access in order to provide a greater in-depth analysis.
[49] Mr Black deposes that Crummer is the trustee of ‘the Winning Trust’ and that he represented the trust’s interests during the time the Davric Trust account was managed by BNZ. The account was opened he said for the sole purpose of the development/subdivision and the sale of approximately 80 residential houses known as the “Harbour Park Lifestyle Estate Katikati”.
[50] Mr Black provides an account of his understanding of those circumstances in which he believed the Bank to have been in breach of its obligations.
Legal principles
[51] Rule 5.45 empowers the Court to make an order for security for costs if there is reason to believe a plaintiff will be unable to pay those if unsuccessful in its claim. In that regard the Court will review evidence of surrounding circumstances from which an inference of inability can reasonably be drawn.1
[52] The less meritorious the claim, the more likely that security is required.2
[53] An assessment of Crummer’s sufficiency of assets may include any
entitlement to a distribution from a trust, provided there is no uncertainty about that expectation of an entitlement.
1 Totara Investments v Abooth Ltd HC Auckland CIV 2007-404-990, 4 March 2009 at [28].
2 Highgate on Broadway Ltd v Devine [2012] NZHC 2288.
[54] The Court needs to balance considerations between the parties – of a plaintiff’s right to access to justice whilst acknowledging a defendant’s entitlement to protection from being drawn into unjustified litigation.
[55] Any order of the Court that may stifle a claim should only be made after careful consideration and where the claim has little chance of success.3
[56] The reasonable availability of resources from associated third parties including shareholders is a factor that may be taken into account when making an order for security.
[57] Security is fixed in such an amount that the Court considers fit in the circumstances and need not necessarily be fixed by reference to a likely costs award. However and not uncommonly any sum fixed for costs usually has relativity with any order for costs that might be made if a plaintiff is unsuccessful.
Considerations
[58] Crummer’s claim relies upon persuading a court of its entitlement as a trustee of a contributory trust, to receipt of funds from a discretionary trust in the control of another entity i.e. Park Road. Crummer’s case focuses upon an entitlement to a profit share by an arrangement established in somewhat uncertain circumstances following the acquisition by Mr Cooney’s interests of those entities established by Mr Black’s former development partner Mr Macfarlane. Those arrangements included the operation of the BNZ accounts. The terms and conditions of those acknowledged Mr Black’s position as a supervisor and when, following his bankruptcy, Mr Black was removed as an authorised signatory on the accounts he retained nevertheless full internet access to those accounts.
[59] This judgment has already reviewed the background to the actions of BNZ in freezing the accounts, and then lifting the freeze when it considered Mr Black no
longer had the authority or control of those accounts.
3 A S McLachlan Ltd v MEL Network Ltd (2002) 16 PRNZ 747 at [15] – [16].
[60] Counsel’s submissions on behalf of Crummer focussed upon claims that those funds which had been frozen later then became all but dissipated by the actions of others on behalf of the second to fifth defendants and in circumstances, it is claimed, that were precipitated by BNZ’s failure to retain the funds in a frozen account. Hence, the focus of claims contained in the second amended statement of claim.
[61] In essence Crummer is claiming from BNZ that measure of loss it believes is owed to it by the other defendants. Losses its says would not have occurred when after freezing the accounts BNZ then permitted access to the Cooney entities.
[62] Recently Crummer has obtained affidavit evidence from Mr Cleaver a chartered accountant and also the sole director of the plaintiff, and as well from Mr Lane a chartered and forensic accountant who offers evidence as an expert.
[63] Mr Cleaver complains about the lack of sufficient costing material available from Classic and from which an evaluation of true and verifiable costs of the development could be obtained. In Mr Cleaver’s view the Winning Trust is entitled to a further distribution or allocation from the joint venture of approximately
$500,000. By Mr Lane’s analysis he concludes the sum payable to Winning Trust
could amount to $765,000.
[64] It is the position on behalf of all defendants including BNZ that claims for reassessment of profit share need to be considered by reference to adjustments to a draft KPMG report for the 2015 financial statements. BNZ believes after those adjustments have been made the Winning Trust’s current account could be at most about $98,000 and XFHNZ’s current account would be about $230,000. Thereafter Mr Cooney says deductions would need to be made for Park Road’s legal and accounting costs – in the outcome of which there may be no balance at all owed to the Winning Trust.
[65] It is a tribute to counsels patience and thoroughness that so much time was spent in explaining why the positions of both sides were each strongly arguable. In that process and as advised to counsel it is not this Court’s purpose to decide who
might likely better predict the outcome. Plainly a lot of evidence and cross examination will occur before any conclusions are reached.
[66] What is clear is that any claims against BNZ will likely fail unless the claims against the other defendants are sustained. As Mr Bisley submits there is a significant dispute as to the Davric Trust’s financial position that cannot be resolved in this interlocutory application. It does appear clear however that if Crummer’s claim against Park Road fails then it has no claim to trust assets and in that regard its claim against BNZ will likely fail. In that outcome costs will be awarded to BNZ but Crummer will not be able to meet payment of that costs order because it has no assets.
[67] The restraint of lack of assets has not impeded Crummer thus far. It has engaged the services of expert witnesses. Through third party means it has paid previous cost orders. Counsel advises his services are provided without cost unless (the Court infers) Crummer’s claim succeeds.
[68] As earlier identified, considerations of fairness and justice are important. In that respect it is noted counsels’ estimates of trial time vary from between eight and
12 days. Presently there remain discovery issues to be resolved.
[69] Crummer has experienced pleading difficulties. Wylie J referred to a lack of sufficient evidence to rule upon defendants’ summary judgment applications. In this case it is clear a significant factual enquiry will need to be undertaken at trial.
[70] The availability of claims against BNZ relies upon claims against the other defendants succeeding. Perhaps Crummer’s proceeding has engaged the bank sooner than it needed to.
[71] In the overall balance of these factors the Court considers a requirement for security should be ordered notwithstanding any apparent inability for costs to be paid except by its successful claim against the other defendants.
Result
[72] The application for security for costs is granted.
[73] The Court directs security for costs be paid in the sum of $50,000 of which
$30,000 is to be paid into Court by 30 August 2016 and the further sum of $20,000 is to be paid two weeks prior to the close of pleadings date.
Judgment
[74] BNZ’s application for security for costs is granted.
[75] Crummer shall pay BNZ’s costs calculated on a 2B basis together with
disbursements approved by the Registrar which shall include the travel costs of senior counsel.
Associate Judge Christiansen
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