Fai Money Limited v Johnston
[2015] NZHC 2060
•28 August 2015
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2012-404-1201 [2015] NZHC 2060
BETWEEN FAI MONEY LIMITED
Plaintiff
AND
EDWARD ERROL JOHNSTON First Defendant
AND
GAVIN CRAWLEY AND RICHARD ANTHONY JOHNSTON
Second Defendants
AND
SEABREEZE TRUSTEES LIMITED (IN LIQ) AND JOHNSTON ASSOCIATES TRUSTEES LIMITED (IN LIQ)
Third Defendants
Hearing: 8 - 10 June 2015 Appearances:
B D Gustafson for Plaintiff
No appearance for First Defendant
S I Perese for Second Defendants
No appearance for Third DefendantsJudgment:
28 August 2015
JUDGMENT OF KEANE J
This judgment was delivered by me on 28 August 2015 at 11am pursuant to r 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Solicitors:
Macky Robertson, Parnell, Auckland for Plaintiff
Walters Law, Auckland for Second Defendants
FAI MONEY v JOHNSTON [2015] & ORS NZHC 2060 [28 August 2015]
[1] In this action FAI Money Limited seeks judgment for $386,267, and default interest against Gavin Crawley and Richard Johnston, as guarantors of a loan, dated
23 December 2009, and made to Edward Johnston, then a West Auckland lawyer, who in late 2011 defaulted under the agreement and has since been adjudicated bankrupt.
[2] Richard Johnston, who is Edward Johnston’s brother and is an accountant, and Mr Crawley, who is Edward Johnston’s father in law and is a flight attendant, gave the guarantees in issue as trustees of Edward Johnston’s two family trusts, the Puketaha Trust and the Puketaha No 1 Trust, which at the time of the loan owned in equal shares Edward Johnston’s family home at Puketaha Road, Swanson.
[3] The trustees bear the full brunt of this claim. FAI does not pursue its claim against Edward Johnston. Nor, equally understandably, does it pursue the two companies linked with Richard Johnston’s accountancy practice, Seabreeze Trustees Limited and Johnston Associates Trustees Limited, which have since early 2012 owned the Swanson property on behalf of the Ullaru Trust, the principal beneficiary of which is, I understand, Edward Johnston’s wife. Those companies have been in liquidation since 7 March 2014.
[4] In pursuing the trustees as guarantors, moreover, FAI has elected not to pursue them for the sum outstanding under the loan agreement, relying instead on the indemnity under the guarantees they gave in the event of Edward Johnston’s default, as to which their liability is unconditional and irrevocable. Under that indemnity FAI’s recourse against the trustees is confined to the two trusts’ assets. Once the Swanson property was sold in February 2012, the trusts ceased to have any asset worth.
[5] When, therefore, Edward Johnston defaulted on FAI’s notice of demand, dated 29 November 2011, and FAI evidently anticipated that recourse to the trust assets might prove insufficient, FAI’s solicitors gave the trustees notice by letter, dated 13 December 2011, that it intended to pursue them personally for their own distinct breaches of their undertakings.
[6] Under the loan agreement and the guarantees, FAI has that ability, though the ability is expressed in those documents in different ways, if it is deprived of recourse to the trusts’ assets because the trustees have acted without capacity, power or authority, or dishonestly, or negligently, or in breach of trust.
Causes of action
[7] In its second amended statement of claim FAI advances three causes of action alleging breaches on the part of the trustees as guarantors. FAI has abandoned its third cause of action in which it alleges that they encumbered the Swanson property to Dorchester Finance Limited, after the loan was made, in breach of their negative pledges. FAI continues to pursue its first two causes of action.
[8] In the first, FAI contends, the trustees are in breach of a duty it attributes to them, under the loan agreement and guarantees, to ensure that the statement Edward Johnston made as to his assets and liabilities and those of his wife, on which FAI had relied when making the loan, was accurate. The statement was inaccurate, Mr Johnston defaulted, and FAI has suffered loss in consequence.
[9] In the second, FAI contends, the trustees are in breach as a result of the sale of the Swanson property to Seabreeze and Johnston Associates in February 2012. That sale, FAI contends, was not in the two trusts’ normal course of business and was in breach of the loan agreement. As a result, FAI contends, it was deprived of recourse to the only trust asset of any worth.
[10] In both these causes of action FAI contends that the trustees are in breach because they were negligent, and in the second originally also because they were fraudulent. It has ceased to contend that they were fraudulent. It continues to contend that they were negligent. It seeks to amend those two causes of action to contend also that the trustees acted in breach of trust; an application the trustees oppose.
Three issues
[11] The first issue, arising on these two causes of action, is whether and to what extent under the loan agreement and guarantees FAI is entitled to pursue the trustees, as guarantors, for breaches of their undertakings, beyond the assets of the trusts and to the extent of their personal assets. That is an issue governed by the terms of those documents.
[12] The second issue is whether FAI is able to establish:
(a) The two breaches it contends for, for which under the first cause of action it must show negligence, and under the second negligence or fraud (although it has abandoned the latter); and
(b)It has been deprived, as a result, of recourse to the trusts’ assets and to that extent must be entitled to recourse against the trustees’ personal assets.
[13] The third issue is whether FAI has recourse against Mr Crawley, first as to the trust assets and then as to his own assets. In contrast to Richard Johnston, he became a guarantor as a result of Edward Johnston exercising, as he says unbeknown to him and without his authority, the power of attorney Edward Johnston held on his behalf.
Salient events
[14] In April 2009 Edward Johnston, acting through a mortgage broker, applied to FAI for a 12 month interest only $273,000 loan, attracting a $27,000 loan fee, in order to purchase a building in East Tamaki in which he was described as having a half interest. (Apparently he held half the shares in Caram Property Trustees Limited, which held the property, and he wished to buy out the other shareholder.)
[15] On 14 December 2009 FAI made a loan offer to Caram assuming, incorrectly, that it was to be the borrower. On 15 December 2009 it made the loan offer in issue to Edward Johnston. To secure the advance it was to make, it required Edward Johnston to subscribe to a first ranking general security agreement as to his existing
and future property in his law firm, and a specific security agreement as to his firm’s
then and future debtors. It required guarantees from the two trustees.
[16] In the event, the trustees not only gave the guarantees in issue, that on behalf of the Puketaha Trust on 21 December 2009 and that on behalf of the Puketaha Number 1 Trust on 23 December 2009. As guarantors, they also became parties to the loan agreement itself, which Edward Johnston entered into on the latter date.
[17] Richard Johnston signed those three documents, and a trustee’s certificate and an acknowledgement as guarantor. Mr Crawley did not sign any of them. His evidence is that he was never made aware of this transaction. All documents were signed, purportedly on his behalf, by Edward Johnston under a power of attorney, dated 1 December 2003, which enabled him to exercise Mr Crawley’s powers as trustee, when Mr Crawley was overseas or under a physical incapacity.
[18] Edward Johnston’s lawyer certified to FAI’s lawyers that he had explained the nature and the effect of the three documents to Edward Johnston and the trustees and that he had told the trustees that they were entitled to independent legal advice. That could only have been so as to Richard Johnston. Edward Johnston’s lawyer also explained to FAI’s lawyer that Mr Crawley was then overseas, a fact not established in evidence.
[19] Some 14 months later, under an agreement to mortgage, dated 24 February
2011, Edward Johnston gave the first of two mortgages to Dorchester Finance Limited over the Swanson property to secure a $116,0000 debt he then owed. (The basis for the abandoned third cause of action.) On this occasion he signed all the relevant documents, on behalf of both trustees, as their attorney. (The power of attorney he held from Richard Johnston is not in evidence.)
[20] That mortgage was registered on 9 March 2011 and discharged on 3 August
2011. By then Edward Johnston had entered into a second agreement with Dorchester, this time to give a mortgage securing his then debt, $75,371. That later mortgage was registered on 3 August 2011, the day on which the earlier mortgage
was discharged. On this occasion also Edward Johnston signed every document on behalf of both trustees, as their attorney.
[21] On 4 August 2011 the FAI loan agreement was varied by deed, which Edward Johnston signed for both trustees as their attorney. The deed stated that the loan balance then stood at $386,267 (the principal sum now claimed against the trustees).
[22] Edward Johnston also made an admission of claim that day, accepting liability as to the sum set out in the varied deed. He also made that admission for the trustees as their attorney, but qualified the admission he made on their behalf. They made their admissions as independent trustees, expressly on the basis that they had no beneficial interest in the two trusts’ assets and that their liability was limited to those assets.
[23] On 30 November 2011, as I said at the outset, Edward Johnston was served with a notice of demand by FAI, and the two trustees were served with copies. On
13 December 2011, in the further letter to which I have referred, FAI’s solicitors advised them that FAI intended to pursue them personally for allowing the Dorchester mortgages to be registered against the title, in breach of their negative pledges in their guarantees. (The third cause of action it has abandoned.)
[24] Then, on 17 February 2012, as I also said at the outset, the Swanson property was sold for $900,000 to Johnston Associates and Seabreeze in equal shares, as trustees of the Ullaru Trust, the primary beneficiary of which is apparently Edward Johnston’s wife. (The trust deed is not in evidence.) As a result Westpac was paid out $898,679 in discharge of its first mortgage.
[25] This sale, which was by private treaty, gave effect to an unconditional agreement for sale and purchase, entered into on its face in excess of a year before on 8 January 2011 with Millbrook Rd Developments Limited, or its nominee, subject to a tenancy in favour of Edward Johnston and his wife. The sale may also have been called for by a relationship property agreement between Edward Johnston and his wife. (That apparent agreement is also not in evidence.)
[26] In this final instance, once again, Edward Johnston signed every document on behalf of the trustees as their attorney; and the certificate of title reveals that, when on 20 February 2012 the transfer was registered, the Westpac first mortgage was discharged and its place was assumed by a mortgage given by the new owners in favour of the ASB Bank Limited. (That mortgage is not in evidence either.)
[27] On 4 July 2012 an interim charging order was registered against the title by Secure Financial Services Limited. Then, on 21 August 2012, a caveat was registered by Donald and Ailsa Reyland and Edward Johnston claiming two distinct interests as mortgagees under an agreement to mortgage, dated 1 June 2005, apparently securing $225,000. (This final document is not in evidence.)
Breach of trust amendment
[28] There remains the preliminary issue whether, as well as contending that the two trustees were negligent, FAI should now be permitted to amend its second amended statement of claim to allege that they were equivalently in breach of trust.
[29] Such an amendment calls for leave under HCR 7.7 and that is given only exceptionally. An applicant must surmount “formidable hurdles”,1 especially where an application is made on the eve of or, as in this case, during the trial.2
[30] That is the immediate difficulty FAI faces. It not merely applied to amend well after the date by which pleadings were to be complete, it did so well into the hearing, after the trustees had conducted their defence assuming that they had to answer allegations of negligence and fraud only.
[31] If, moreover, in seeking this amendment, FAI contends only that the trustees were in breach of trust to the extent that they were negligent, that may not expand the case the trustees face evidentially. But it does expose them to a further source of liability at a late stage, and in an unhelpfully abstract way. Even the trust
instruments are not in evidence.
1 Elders Pastoral v Marr (1987) 2 PRNZ 383 (CA).
2 Body Corporate 325261 v McDonough [2014] NZHC 1821.
[32] If, on the other hand, FAI seeks to contend that the trustees were in breach of trust in some wider way (most notably by contending that Mr Crawley had to have been in breach by abdicating his duty as trustee to Edward Johnston), that would call for an equally wide and more explicit pleading and corresponding evidence. That could not begin to be countenanced at this late stage and thus far there is no indication of what that evidence might be.
[33] For those reasons I do not consider that it would be just to allow FAI this eleventh hour amendment to its second amended statement of claim. I decline the application.
First issue - recourse to personal assets
[34] Clause 14.4(f) of the loan agreement, on which FAI relies primarily, allows recourse against the trustees, beyond the assets of the two trusts, and to the extent of their personal assets. It says this:
Notwithstanding any trustee limitation provision included in this Agreement or the Securities, FAI will have recourse to the personal assets of any trustee entering into this agreement where FAI is unable to recover any part of the Loan, any Fees and any interest (whether accrued or compounded) under this Agreement or the Securities as a result of any breach of trust by that trustee, solely or together with any person, any lack of capacity, power or authority of that trustee to enter into this agreement or to incur any indebtedness for the loan, any Fees and any interest (whether accrued or compounded), or any dishonesty of that trustee.
[35] Clause 14.4(f), therefore, requires FAI to establish two things. First, that the trustees were in breach of trust or lacked relevant capacity or authority or were dishonest. Secondly, that, as a result of that breach, they deprived FAI of the ability to recover all or some of the debt then owed from the assets of the two trusts. (On the present pleading that claim is confined to one in dishonesty, which FAI does not pursue.)
[36] The deeds of guarantee and indemnity, on which the trustees rely, are more obviously prescriptive. Clause 18.1.1, on the face of it absolutely, confines FAI to recourse against the trustees out of the assets of the two trusts only. It says this:
No trustee will be liable to pay or satisfy any obligations or liabilities under this Deed other than out of the assets of the Puketaha Trust in respect of which the trustee has entered into this Deed and in no circumstances will that trustee be called upon or liable to satisfy any of those obligations or liabilities out of its personal assets.
[37] Clause 18.1.2 then qualifies cl 18.1.1, in a somewhat awkward way. It says this:
The Lender may only enforce its rights against a Trustee to the extent of that trustee’s right of indemnity out of the assets held by it in respect of the Puketaha Trust and provided that, if the trustee acts fraudulently, negligently, or in breach of trust with a result that:
(a) that trustee’s right of indemnity, exoneration or recruitment of the trust property of the Puketaha Trust; or
(b) the actual amount recoverable by that trustee in exercise of those rights, is reduced in whole or part or does not exist, then to the extent that such right or amount so recoverable is reduced or does not exist, the trustee may be personally liable.
[38] Despite the difference between these two clauses and cl 14.4(f), I consider that they are essentially to the same effect. FAI is entitled to recourse out of the personal assets of a trustee only if, and to the extent that, a qualifying breach by the trustees deprived it of recourse to the trust assets.
[39] To the extent that there is any difference between cl 14.4.(f) and the two clauses, and one is more permissive than the other, FAI is entitled under cl 23.3 of the loan agreement to elect on which it will rely. Clause 23.3 says “in the event of any conflict between the provisions of this Agreement and any of the securities, then FAI shall determine in their absolute discretion which prevails”.
[40] Clause 14.4(f) may appear more permissive, but FAI does not contend that the trustees lacked capacity, power or authority, or rely on dishonesty; and I have denied FAI the ability to contend for a breach of trust. FAI does have recourse to the trustees’ personal assets under cl 18.1.2, if it can establish that its lack of recourse to trust assets resulted from their negligence.
First cause of action - false financial statement
[41] In its first cause of action FAI contends that the loan offer it made to Edward Johnston on 15 December 2009 was contingent on the accuracy of the statement he made as to his and his wife’s assets and liabilities, dated 24 April 2009; and that this statement proved, after the loan was advanced, to contain highly material inaccuracies.
[42] Edward Johnston, and the trusts, proved not to have gross assets worth
$20,015,500. Their liabilities proved not to be $8,868,500. They did not have net assets worth $11,147,000. The Swanson property did not, when the loan was made, have a $1.5M net value. Nor were the liabilities it secured “nil”. Westpac was owed at least $3.03M under its first mortgage, and under a related general security arrangement. Westpac also enjoyed a $1.1M priority right.
[43] The trustees’ breach, FAI contends, lay in not verifying this statement of assets and liabilities. They did not ask FAI for a copy of the latest financial information it had from Edward Johnston. Nor did they ask Edward Johnston for all documents verifying his statement. They did not obtain a market valuation of the Swanson property, or review the Westpac mortgage, or any related guarantees or the
2005 Reyland agreement to mortgage, to establish the property’s actual net worth.
[44] At the hearing the trustees did not contest the inaccuracies FAI asserts. Nor did they contest FAI’s valuer’s evidence that in December 2009, at the time of the loan, and in February 2012, at the point of sale, the Swanson property was worth no more than $1.15M. Richard Johnston agreed that to be the likely 2009 value. He did not contest that to be the 2011 value. Mr Crawley did not and could not comment.
[45] Richard Johnston accepted that, at the date of the loan, his brother must have owed Westpac about $3M under the general security allowing Westpac recourse to the Swanson property. Edward Johnston himself, in a declaration he seemingly made in December 2011, disclosed that the property was subject to a $3.7M liability. (He then also disclosed that his liabilities exceeded his assets by in excess of $3M.)
[46] The trustees deny that they made any representation to FAI before the loan was made concerning Edward Johnston’s worth or that of his wife and the trusts. They deny that they were under any duty to verify and endorse Edward Johnston’s representations; and deny equally that they were or could have been negligent.
Representations and warranties
[47] I agree, however, with FAI’s submission that the trustees are fixed with the representation and warranty that they and Edward Johnston made and gave under cl 7.1(c) of the loan agreement as to “financial information”:
The financial information most recently forwarded to FAI disclosing the financial condition of the borrower and each guarantor presents a true and fair picture of the relevant parties at the date of that information, and there has been no substantial adverse change in that condition since the date of that information.
[48] That representation and warranty, like the others the trustees and Edward Johnston gave in cl 7, was not confined to financial information they gave about themselves. It included the most recent information FAI had from Edward Johnston, concerning “the financial condition of the borrower and each guarantor”. They were deemed by cl 7 to join in and to endorse his representation and warranty.
[49] Under cl 7.1(c), therefore, the trustees represented and warranted to FAI that Edward Johnston’s statement of assets and liabilities, dated 24 April 2009, presented “a true and fair picture” of his financial circumstances and that there had been no adverse change. Implicitly, that imposed on them a prior duty to verify that statement, and a shared liability for any misrepresentation or breach of warranty.
[50] The representations the guarantees deemed the trustees to have given as to their solvency, and the absence of any material change, under cls 5.1.6 – 7, did extend beyond themselves to equivalent representations as to the continuing solvency of any “group member”. But Edward Johnston was not in that wider category; “a person controlled by the guarantor and any other relevant party”.
[51] The undertaking the trustees gave under cl 6.1.7 of the guarantees that all factual information provided to FAI in connection with the relevant documents was
true and accurate, by contrast, did extend to Edward Johnston, because as the debtor he was a “relevant party”, but that undertaking applied only after the guarantees took effect.
[52] These distinctions do not assist the trustees. Under cl 23.3 of the loan agreement FAI is entitled to rely on the representation they made and the warranty they gave under cl 7.1(c) and they are not limited to the representations and undertakings in the guarantees.
Richard Johnston
[53] On the evidence I am satisfied that Richard Johnston negligently breached cl 7.1(c) of the loan agreement, firstly by failing even to appreciate that he had made any representation or given any warranty as to the accuracy of Edward Johnston’s statement of assets and liabilities, dated 24 April 2009, on which FAI relied.
[54] That can only mean that Richard Johnston did not read with any care the loan agreement or the guarantees he says that he is likely to have read. Nor did he review them with the care required when he discussed them with Edward Johnston’s lawyer, who advised him as to their effect before he signed them. But that apart, as a professional trustee, Richard Johnston failed to bring to his decision whether to make the representation and give the warranty required, the care he must have known was essential.
[55] As FAI’s expert opinion evidence confirmed, and I accept, before signing the loan agreement and guarantees, Richard Johnston, as a prudent professional trustee, should first have obtained from his brother all that he needed to verify the accuracy of the 24 April 2009 statement of assets and liabilities; and if he was not satisfied as to its accuracy, he should not have made the representation or given the warranty required. In reality he should not have become a guarantor at all.
[56] As Edward Johnston’s accountant, furthermore, Richard Johnston knew his brother’s circumstances at the date of the loan, in some apparent detail on the face of his evidence. Had he reviewed his brother’s assets and liability statement, dated 24
April 2009, he would have seen at a glance that it contained highly material inaccuracies. His failure to make that review resulted in FAI accepting the statement of assets and liabilities at face value, as a result of which it has suffered loss.
[57] I find that Richard Johnston was in negligent breach of cl 7.1(c), firstly because as Edward Johnston’s brother and his accountant, he subscribed as guarantor both to the loan agreement and to the deeds of guarantee with a high level of understanding about Edward Johnston’s affairs. On that basis FAI is entitled to recourse against Richard Johnston’s personal assets.
Gavin Crawley
[58] The issue whether Mr Crawley is equivalently liable to Richard Johnston remains and, as to that, I accept that FAI is entitled to recourse against him, to the extent of assets of the trusts, on the loan agreement and guarantees executed on his behalf by Edward Johnston under the power of attorney.
[59] Mr Crawley, who has no obvious commercial expertise, on the evidence, played no part in this transaction. He has disclaimed ever having seen the documents or knowing of the transaction; and there is no evidence to the contrary. It is clear that he did not sign the primary documents or have any advice as to their effect from Edward Johnston’s lawyer.
[60] If Mr Crawley is to be held accountable for a negligent breach under cl 7.1(c), therefore, that can only be on the formal and notional basis that as a party to the loan agreement and guarantees he is deemed to have vouched for the accuracy of Edward Johnston’s 24 April 2009 statement of assets and liabilities; a liability he only incurred as a result of Edward Johnston’s exercise of the power of attorney Mr Crawley gave him on 1 December 2003.
[61] FAI seeks also to contend that Mr Crawley was negligent on the wider sense that he must have abdicated entirely his responsibility as trustee to Edward Johnston, who is a beneficiary. But that goes beyond the evidence. If Mr Crawley is to be held accountable, that can only be for giving Edward Johnston the power of attorney in
the first place. That puts in issue the purposes for which he did so and the extent of
Edward Johnston’s authority.
[62] Section 19(1) of the Property Law Act 2007 made Mr Crawley responsible for Edward Johnston’s acts on his behalf as if they were his own. Furthermore, as Fisher J said in National Bank v Fahey,3 an innocent third party, as FAI is, is entitled to rely on a document executed under an apparently valid power of attorney.
[63] Analogously also, FAI is entitled to rely on the fact that the documents were apparently duly executed on the more general principle stated by the High Court of Australia in Toll [FGCT] Pty Ltd v Alphapharm Pty Ltd:4
… where there is no suggested vitiating element and no claim for equitable or statutory relief, a person who signs a document which is known by that person to contain contractual terms, and to effect legal relations, is bound by those terms, and it is immaterial that the person has not read the document.
[64] In evidence all that Mr Crawley was able to say was that he was unaware of the transaction. That is not enough to vitiate it. Any claim for relief he might have could lie only against Edward Johnston.
[65] The issue remains, however, whether FAI is able to show that, as a result of any negligent breach on Mr Crawley’s part, it was deprived of recourse to the trust assets. I do not consider that it can.
[66] Mr Crawley was not in breach of trust in granting the power of attorney to Edward Johnston. Section 29(1) entitles a trustee to employ an agent to transact business on his or her behalf “and shall not be responsible for the default of any such agent”. Section 29(2) enables a trustee to appoint an agent or attorney for specific purposes “by reason only of his having made any such appointment, be(ing) responsible for any loss arising thereby”. Section 29(3) also says that as to the power to appoint agents it describes, “a trustee shall not be chargeable with breach of trust by reason only of his having made or concurred in making any such
appointment.”
3 National Bank v Fahey [1990] 2 NZLR 480.
4 Toll [FGCT] Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 at 19.
[67] Furthermore, the purposes for which Mr Crawley, in his capacity as a trustee as opposed to his personal capacity, granted the power of attorney to Edward Johnston are equally material.
[68] Those limited powers stand in stark contrast to the very wide power granted in National Australia Finance Limited v Fahey. Their syndicate members authorised their attorney “… to act for me in [his] uncontrolled discretion … in every respect concerning all my present and future affairs relating to my interest and property in a partnership known as, … Spygirl Syndicate in New Zealand and elsewhere, in as full and ample a manner as I could do if personally present …”. 5
[69] By contrast the ability Mr Crawley granted Edward Johnston to exercise his powers as trustee were those which ss 31 expressly recognises. It permits powers to be delegated if a trustee is absent from New Zealand or is temporarily incapable as a result of physical infirmity “notwithstanding any rule of law or equity to the contrary”. Section 31(3) says:
In any proceedings brought by any person beneficially interested under the trust against the donor of a power of attorney given under this section in respect of any act or default by the donee of the power it shall be a defence for the donor to prove that the donee was appointed by him in good faith and without negligence.
[70] The power of attorney, dated 1 December 2003, which Mr Crawley, in his capacity as trustee, gave to Edward Johnston, was expressly confined to those s 31 contingencies:
IN EXERCISE of the powers contained in s 31 of the Trustee Act 1956 I DELEGATE to my Attorney (… DURING MY ABSENCES FROM NEW ZEALAND AND DURING ANY PERIODS OF TEMPORARY PHYSICAL INCAPACITY the exercise and execution of all the trusts powers and discretions for the time being vested in me as trustee under any … instrument of trust whereof I may be the Trustee or one of the Trustees …
AND
I APPOINT my Attorney … to be my Attorney … during such absences and periods to act for me in my name and on my behalf in all matters connected with the affairs of the estates and assets subject to the trusts of each and every such … Instrument of Trust and in all matters in which any of the said
5 Above, n 2, at 483.
estates and assets may be interested as I could if personally present at my
Attorney’s absolute discretion ….
[71] In granting that ability to Edward Johnston, furthermore, Mr Crawley was entitled to rely on Edward Johnston, as a fiduciary, exercising that ability solely when one or other of those contingencies came into play.6 He was entitled to anticipate that, before doing so, Edward Johnston would obtain from him express authority to exercise the power.
[72] On Mr Crawley’s evidence, Mr Johnston never did so but on FAI’s evidence Mr Crawley was held out to be overseas; a possibility not established in evidence. The possibility is that Edward Johnston simply exercised the power without advising Mr Crawley because it was convenient to do so. In any event, FAI cannot begin to establish that in the breaches it asserts against Mr Crawley, as well as Richard Johnston, it is able to establish that Mr Crawley was ever distinctly negligent.
[73] The result is that in Mr Crawley’s case, while FAI may be entitled to judgment against him to the extent of the trust assets, if any, it is not entitled to recourse to his personal assets.
Second cause of action – Swanson property sale
[74] In its second cause of action FAI contends that the trustees negligently or fraudulently sold the Swanson property to Johnston Associates and Seabreeze on 8
January 2012, in breach of cl 14.4(d) of the loan agreement, under which they had undertaken not to permit the property to be sold without FAI’s prior written consent “otherwise than in the normal course of the business of the trust”.
[75] FAI contends that the sale of the property, the principal asset of the two trusts to which it had access, was not in the ordinary course of business. It was sold without any marketing and without any independent valuation, at a price $600,000 below the value Edward Johnston had ascribed to it in his 24 April 2009 statement.
It was made, without FAI’s consent, one month after FAI had made demand.
6 Powell v Thompson [1991] 1 NZLR 597 (HC) at 605; Public Trust v Vernon [2015] NZHC 1928 at 133 – 135; Lines v Pikia [2013] NZHC 503 at [22].
[76] FAI may well consider that Edward Johnston engineered this sale to put the property beyond its reach and was fraudulent. But as against the trustees, FAI no longer alleges that they were fraudulent. It contends that they had to be negligent and, if allowed an amendment to its statement of claim, had also to be answerable for a related breach of trust.
Conclusions
[77] I reject Richard Johnston’s evidence that he was unaware of the sale of the
Swanson property until Edward Johnston presented him with a fait accompli.
[78] On the evidence it may be that Edward Johnston signed the unconditional agreement for sale and purchase, dated 8 January 2011, on behalf of his brother and Mr Crawley as their attorney; and, if the agreement is taken on its face, he must have done so before any demand was made, though FAI puts that in issue. Whether Edward Johnston also executed any other documents called for is not in evidence. But, even if he did, Richard Johnston was also on the other side of the transaction.
[79] The purchaser under the agreement for sale and purchase was Millbrook Rd Developments Limited, a company registered on 1 September 2011 by Edward Johnston, or a nominee. In the event, the purchase was made by Johnston Associates, of which Richard Johnston was sole director, and Seabreeze, the sole director and shareholder of which was an employee of his accountancy practice. Furthermore, Richard Johnston considered that the sale served the legitimate purpose of protecting Edward Johnston’s family home for the ultimate beneficiaries of the two trusts.
[80] Clearly, therefore, Edward Johnston knew of and acceded to the sale and purchase made knowing that it was to the prejudice of FAI, yet played an enabling part. That was a negligent action. As to Mr Crawley, I conclude here too that FAI is simply unable to establish that he knew about the sale, let alone that he enabled it in negligent breach of his obligations.
Extent of recourse to personal assets
[81] Because FAI is only entitled to recourse to Richard Johnston’s personal assets to the extent that his negligence deprived FAI of access to trust assets, the extent to which it is entitled to recourse depends on the breach on which it relies.
[82] To obtain recourse as a result of its first cause of action, FAI has sought remedies under two different principles: the loss of chance principle, which applies in lottery and like cases, and the “but for” principle.7
[83] FAI contends that as a result of the trustees negligently failing to verify Edward Johnston’s assets and liabilities statement, dated 24 April 2009, it lost two opportunities. One was to decline outright to make the advance to Edward Johnston. The other was to require a more stringent level of security. FAI could, for instance, have required the trustees to give a mortgage over the property instead of merely requiring a negative pledge.
[84] FAI’s measure of loss on the basis that it might have declined the advance is likely to be the advance itself, coupled with interest at the ordinary judgment rate. (It could not claim default interest if the loan agreement was never entered into.) However, FAI did not go so far as to contend that it would have declined the advance. It contended only that it lost that chance. The other possibility was that it might have required a more stringent security arrangement.
[85] What the measure of loss would have been on that second approach is less easy to assess. As at the date of the loan the trust’s property was intact. But it did not have the value to FAI that Edward Johnston had held it out to have. It was not worth $1.5M. At most it was worth $1.15M. More to the point, the property was not free from any liability. It was subject to the Westpac mortgage with a $1.1M priority. FAI could only have taken a second ranking security.
[86] Furthermore, FAI itself must carry some measure of responsibility for its decision. It may have been entitled to rely on Edward Johnston’s assurances in his
7 Farrell v Snell (1990) 72 DLR (4th) 289.
statement. But the certificate of title, which FAI required and received before making the loan, showed the Westpac mortgage. A further inquiry could easily have identified the $1.1M priority. In those senses FAI was on notice and was contributorily negligent.
[87] For all of those reasons, it is difficult to assess what the measure of FAI’s loss would have been on the first cause of action, let alone what recourse it might have had against Richard Johnston’s assets. Its claim under the second cause of action seems to me less complicated. By negligently enabling the sale to FAI’s prejudice, Richard Johnston did deprive FAI of recourse to trust assets. FAI must have equivalent recourse against his personal assets.
[88] Here too, as FAI realistically accepts, it cannot claim recourse to the full extent of its loss, the sum due on Edward Johnston’s default as to which it had the trustees’ indemnity under the loan agreement and guarantees. It can only obtain from Richard Johnston what it could have obtained from the trust itself had the sale not taken place.
[89] The highest sale price FAI might have achieved on a sale, assuming it was able to force one in the face of Westpac’s prior security, was $1.15M; and if that were a forced sale, the price is likely to have reduced by at least 10 per cent. Furthermore, Westpac enjoyed the $1.1M priority. Thus FAI is fortunate that Westpac itself apparently forced the sale at $900,000, in order to recoup on settlement $898,000. That makes Westpac’s $1.1M priority irrelevant to the recourse to which FAI is entitled.
[90] On that basis I consider that FAI ought to be entitled to recourse against the personal assets of Richard Johnston, on the following basis:
Actual market value $1,150,000
Forced sale value: 90% of market value $1,035,000
Less Westpac mortgage $898,000
Loss $137,000
Outcome
[91] In the result I grant judgment in favour of FAI against Richard Johnston, to the extent of his personal assets, as to $137,000. Conversely, on FAI’s claim against Mr Crawley, I give judgment in his favour.
[92] Costs must follow the event. FAI is entitled to a scale 2B award against Richard Johnston and disbursements as fixed by the Registrar. Mr Crawley, conversely, is entitled to a scale 2B award and any costs as fixed by the Registrar, against FAI. I invite counsel to settle costs on that basis with the Registrar.
[93] If there is some issue of principle involved, which cannot be agreed or resolved with the Registrar, counsel are to advise me by joint memorandum what it is and set out their competing calculations. That memorandum is to be filed no later
than the beginning of October 2015.
P.J. Keane J
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