First Mortgage Custodians Limited v Herbert
[2020] NZHC 2874
•3 November 2020
IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY
I TE KŌTI MATUA O AOTEAROA AHURIRI ROHE
CIV-2020-441-29
[2020] NZHC 2874
BETWEEN FIRST MORTGAGE CUSTODIANS LIMITED
First PlaintiffFIRST MORTGAGE MANAGERS LIMITED
Second PlaintiffAND
ANOTHONY JAMES HERBERT and
STEPHEN PETER LUNN as trustees of the Thackeray Trust
First Defendants
AND OTHERS
Second to Ninth Defendants
CIV-2020-441-31 BETWEEN
FIRST MORTGAGE CUSTODIANS LIMITED
First PlaintiffFIRST MORTGAGE MANAGERS LIMITED
Second Plaintiff
AND
MALCOLM ANDREW HERBERT and
STEPHEN PETER LUNN as trustees of the Thorn Place Trust
First Defendants
AND OTHERS
Second to Fifth Defendants
Hearing: 22 September 2020 Appearances:
D Fraundorfer and R Rosser for plaintiffs in both proceedings D J O’Connor for defendants in both proceedings
FIRST MORTGAGE CUSTODIANS LIMITED v HERBERT and [2020] NZHC 2874 [3 November 2020]
Judgment: 3 November 2020
JUDGMENT OF ASSOCIATE JUDGE JOHNSTON
Introduction
[1] Before the Court for determination are summary judgment applications by the plaintiffs in these two related proceedings. At the centre of both proceedings are loan transactions, and the plaintiffs’ summary judgment applications seek orders for the enforcement of what they assert are their contractual rights following alleged defaults by the borrowers in each case.
[2] The factual background in each case is not so much complicated as detailed. Accordingly, the pleadings, or, rather, the plaintiffs’ statements of claim, and the parties’ affidavit evidence in support of their applications for summary judgment and notices of opposition to the same, are voluminous, as they needed to be. However, the overwhelming majority of the background is uncontroversial and can be summarised briefly.
Parties
[3] Throughout the history of the loan arrangements, some of the parties involved have changed. The first plaintiff (FMC) owns the assets of a substantial investment fund. The second plaintiff (FMM) manages the fund. The entities that have performed these roles over the relevant period of time have apparently changed. As to the defendants, the loan arrangements were varied over their terms and this involved the introduction of additional guarantors and securities.
[4] However, nothing turns on these changes. Counsel argued both cases ignoring them as inconsequential. I will follow their lead in this.
CIV-2020-441-29 – the Thackery proceeding
[5] In May 2018, the parties entered into loan arrangements, the purpose of which was to finance a commercial development in Munroe Street in Napier.
[6] These involved an interest only loan, with the principal repayable at a fixed date in the future and interest payable monthly.
[7] The lenders were FMC and FMM. The borrowers were the first defendants, the trustees of the Thackeray Trust (the Thackeray trustees). The obligations of the Thackeray trustees were guaranteed by the second to ninth defendants (the Thackeray guarantors). The Thackeray trustees and the Thackeray guarantors all provided security. Ultimately, the principal sum was $11,000,165 repayable on 10 March 2021.
[8] By March 2020, the plaintiffs had concluded that the Thackeray trustees were in default, and resolved to call in the loan and if necessary exercise their rights as security holders.
CIV-2020-441-31 – the Thorn proceeding
[9] In September 2018, the parties entered into loan arrangements, the purpose of which was to finance a commercial development in Raffles Street in Napier.
[10] These involved an interest only loan, with the principal repayable at a fixed date in the future and interest payable monthly.
[11] The lenders were FMC and FMM. The borrowers were the trustees of the Thorn Trust (the Thorn trustees). The obligations of the Thorn trustees were guaranteed by the second to fifth defendants (the Thorn guarantors). The Thorn trustees and the Thorn guarantors all provided security. Ultimately, the principal sum was $1,021,000, repayable on 10 October 2021.
[12] By March 2020, the plaintiffs had concluded that the Thorn trustees were in default, and resolved to call in the loan and if necessary exercise their rights as security holders.
Demand
[13] In a letter dated 3 March 2020 the plaintiffs’ solicitors wrote to both the Thackeray trustees and the Thorn trustees alleging various defaults on their parts, and requiring these to be remedied. This letter was written pursuant to cl 6 of the loan agreement in each case, which required the plaintiffs, before foreclosing on the loan or looking to their securities, to give the borrowers notice of the allegations of default and a period of seven days to remedy the same.
[14] The plaintiffs say that the trustees did not remedy their defaults, and that they then foreclosed on the loans and moved to exercise their rights as security holders. The trustees sought injunctive relief on an ex parte basis and on 24 July 2020 Gwyn J made an interim order effectively preventing the sale of any of the properties involved. The plaintiffs have sought a review of that interim order, but that is yet to be set down for hearing.
The substantive issue
[15] Ultimately, the trial issue in these cases will be whether, in the case of each loan, the plaintiffs can establish a default on the part of the borrowers entitling them to foreclose on the loans and proceed as they have.
[16] That brings me to the present applications, that is to say the plaintiffs’ application in each case for summary judgment.
Summary judgment principles
[17] Part 12 of the High Court Rules provides for summary judgment. In the case of an application by a plaintiff, the leading case is Krukziener v Hanover Finance where the Court of Appeal said:1
The principles are well settled. The question on a summary judgment application is whether the defendant has no defence to the claim; that is, that there is no real question to be tried: Pemberton v Chappell [1987] 1 NZLR 1 at 3 (CA). The Court must be left without any real doubt or uncertainty. The onus is on the plaintiff, but where its evidence is sufficient to show there is no defence, the defendant will have to respond if the application is to be defeated:
1 Krukziener v Hanover Finance Ltd [2008] NZCA 187 at [26]–[27].
MacLean v Stewart (1997) 11 PRNZ 66 (CA). The Court will not normally resolve material conflicts of evidence or assess the credibility of deponents. But it need not accept uncritically evidence that is inherently lacking in credibility, as for example where the evidence is not consistent with undisputed contemporary documents or other statements by the same deponent, or is inherently improbable: Eng Mee Yong v Letchumanan [1980] AC 331 at 341 (PC). In the end the Court’s assessment of the evidence is a matter of judgment. The Court may take a robust and realistic approach where the facts warrant it: Bilbie Dymock Corp Ltd v Patel (1987) 1 PRNZ 84 (CA).
Under r 141A the defendant need not file a statement of defence. The onus remains on the plaintiff, and summary judgment will be denied if on the hearing of the application it appears that there is an issue worthy of trial.
[18] Accordingly, the immediate issue before the Court in each case is whether the plaintiffs can demonstrate that the Thackeray trustees and the Thorn trustees have no arguable defences available to them.
The scope of the plaintiffs’ obligations
[19] The first submission advanced by Mr O’Connor on behalf of both the Thackeray trustees and the Thorn trustees is that the plaintiffs, whatever the merits of their substantive claims might or might not be, have not complied with their obligations to the Court in applying for summary judgment, and that summary judgment should be refused on that basis alone.
[20] He contended that a “party seeking summary judgment has a duty to disclose anything within its knowledge that would amount to a defence and summary judgment may be declined where that duty is breached”.
[21] In advancing that contention Mr O’Connor relied on Camalco-CCH v Chapman,2 Elvidge v ASB Bank Ltd3 and ERB Holdings Ltd v Van Duyn.4
[22] It is necessary to be careful in advancing all-embracing propositions, particularly in relation to duties owed to the Court. In my view, Mr O’Connor’s submission is not an accurate description of the law. It appears to me to conflate and confuse three interrelated but independent principles.
2 Comalco-CCH v Chapman (1992) 5 PRNZ 382.
3 Elvidge v ASB Bank Ltd [2015] NZHC 44.
4 ERB Holdings Ltd v Van Duyn [2019] NZHC 3325.
[23] It is true that some observations made by Master Gambrill in Camalco might appear to support something like the proposition advanced by Mr O’Connor. It is true, too, that other – especially some early – authorities concerning the obligations of applicants in summary judgment proceedings, emphasise that such applicants must take care to ensure that the Court is presented with a complete picture of the facts.5 However, a careful analysis of the Master’s judgment in Camalco and the other cases suggests the reasoning is simply that, having regard to the obligation of a plaintiff applying for summary judgment to establish that there is no defence, it is incumbent on it to put before the Court any facts – as opposed to legal arguments – known to it that might provide a foundation for a defence.
[24] Elvidge and ERB appear to me to deal with an altogether different principle. Both address the more general issue of the obligations of parties and their representatives not to mislead the Court. In Elvidge, the relevant section of Associate Judge Bell’s judgment does not concern the defendant’s summary judgment application in that case, but an earlier application by the defendant for security for costs dealt with by Associate Judge Osborne (as he was). In ERB, Gordon J was dealing with an application by the plaintiffs for costs against the solicitors acting for three defendants who had opposed the plaintiffs’ summary judgment application. The solicitors had acted for the three defendants in the filing and service of a notice of opposition to the summary judgment application, and affidavit evidence in support, and the focus of the judgment was again on whether the solicitors involved had consciously or unconsciously misled the Court. All litigants and their solicitors and counsel have an absolute duty not to mislead the Court – in their pleadings, evidence and argument. This duty is not dependant on the type of proceeding involved. It is universal. It is that obligation with which the Courts were dealing in Elvidge and ERB.
[25] There are of course particular circumstances where parties and their solicitors and counsel do have a duty carefully to identify and articulate arguments against their position. The obvious example is an ex-parte application for relief where the opposing party will not have an opportunity to have its say. Indeed, the form of application in such cases requires the applicant’s solicitor to certify that all such information has
5 See for example Foodstuffs (Auckland) Ltd v Schweiger [1986] 1 NZLR 463; (1986) 1 PRNZ 173;
Middleditch v NZ Hotel Investments Ltd (1992) 5 PRNZ 392 (CA);
been put before the Court. But summary judgment applications are never ex-parte, so that rule has no application here.
[26] In the course of advancing this argument Mr O’Connor referred me to the judgment of Duffy J in Westpac New Zealand Ltd v Cooper where her Honour said:6
The purpose of an application for summary judgment is to provide a robust and efficient means of obtaining judgment in cases where the defendant has no available defence. This should be done in a clear and cogent manner by way of the original documents the applicant files in the Court. Applicants whose cases get off to a poor start through material failures to plead the claim properly, and to provide all the necessary and relevant evidence in the original affidavits should not be able to keep such cases going through filing reply evidence, which result in defendants then needing leave to respond. What is intended to be a quick and efficacious remedy becomes instead something that is long and drawn out. As a matter of policy, I consider that it is wrong in principle for applicants for summary judgment to bring poorly prepared applications and then to attempt to repair them once the defendant has identified the deficiencies.
[27] There, her Honour was addressing the strength of the case which a plaintiff applying for summary judgment must put up, and her comments appear to me to have nothing to do with the applicants’ obligations to the Court in terms of disclosure.
[28] In my view, in summary judgment applications, the applicant’s obligation is not consciously to mislead the Court in any way by misstating the facts or the law, and ensure that it puts before the Court all relevant facts known to it, whether they support its case or not.
[29] The essential complaint made on behalf of the Thackeray trustees and the Thorn trustees in this case is that whilst the plaintiff put before the Court their solicitors’ letter of demand dated 3 March 2020 they did not put before the Court the detailed response from the solicitors acting for the defendants and guarantors in each case.
[30] Whilst it is invariably more powerful for a plaintiff to deal up front with contentions that it knows will be advanced against it, and frame these in its own terms rather than leave the other side to frame them in the way that suits it, that is a matter
6 Westpac New Zealand Ltd v Cooper (2010) 20 PRNZ 568.
of advocacy. It is not, in my view, misleading for a party in proceedings which are commenced inter-parties to elect not to put in correspondence from the other side’s solicitors advancing arguments against their claim, at least where – as here – such correspondence simply develops legal argument and does not include any otherwise undisclosed facts.
[31] In my judgment, there is nothing in the defendants’ contention that the plaintiffs have not, in these two proceedings, discharged their obligations to the Court in relation to the disclosure of information in their summary judgment applications.
[32] That brings me back to the bases upon which the plaintiff sought to foreclose on the two loans as set out in their solicitors’ letter of 3 March 2020.
[33] In relation to both loans, the plaintiffs claimed to be relying on a number of alleged defaults. However, in the end, the cases were argued on the basis of the primary alleged default in each case.
[34] Insofar as the Thackeray loan is concerned, the primary alleged default was said to be the Thackeray trustees’ breach of a contractual obligation to secure a code of compliance certificate for the Munro Street development by 1 March 2020.
[35] Insofar as the Thorn loan is concerned, the primary alleged default was that the Thorn trustees fell into arrears in relation to payments due to the plaintiffs.
[36] It is a standout feature of these cases that neither of those assertions are denied; the issue in each case resolves itself into whether the circumstances amounted to defaults by the borrowers.
The Thackeray proceeding
[37] The Thackeray trustees’ contention was essentially that whilst the contract expressly provided that a failure to secure a code compliance certificate for the Munro Street development by 1 Match 2020 would constitute a default entitling the plaintiffs to foreclose, that term was varied by the parties or waived by the plaintiffs.
[38] The Thackeray trustees had entered into an agreement to lease the property to a company by the name of USAR Napier (USAR).
[39] The agreement to lease contained what the parties referred to as a sunset clause, that is a provision to the effect that the Thackeray trustees were required to complete the build and hand over possession of the hotel by a sunset date or USAR would be entitled to terminate.
[40] The Thackeray trustees and USAR agreed to extend the sunset date on several occasions, eventually to 30 June 2020.
[41] Mr O’Connor’s submission was effectively that FMC and FMM were aware of and involved in the process of extending that date, and that this had the effect of pushing out the date by which the Thackeray trustees were required to obtain a code compliance certificate by a corresponding period – that is to 30 June 2020.
[42]Here is how Mr O’Connor put it in his written submissions:
The respondents’ case is that both the sunset date and the CCC date were extended. The sunset date was extended to 30 June 2020 and this meant that the CC date was also extended. The mortgagee provided a programme of works which had an end date in June 2020. The mortgagee’s programme of works extended both the CC date and the sunset date.
[43] In responding to this contention, the plaintiffs say that they were not a party to the agreement to lease between the Thackeray trustees and USAR; that any agreement or agreements to extend the sunset date between those parties did not bind them; that they were aware of only one extension — to 1 March 2020; that the extension of deadline in the loan agreement for securing a code compliance certificate is not the automatic result of an extension in the sunset date agreed between the Thackery trustees and USAR. There is considerable force in all this. The two deadlines are contained in different agreements involving different parties, and there is no indication that they are to be treated together.
[44] However, at least to the extent that FMC and FFM were aware of the negotiations between the Thackeray trustees and USAR, and the outcome of these, given that a code compliance certificate could not be obtained before the build was
complete and the hotel ready to be handed over to USAR, it appears to me that it may at least be open to the Thackeray trustees to argue that FMC and FMM waived their contractual entitlement to rely on the trustees’ failure to obtain a code compliance certificate by the original date.
[45] Whilst the plaintiffs say they were only privy to one extension of the sunset date (to 1 March 2020), an agreement between the plaintiffs and the Thackeray trustees to extend the loan recorded, in special condition 15, that the sunset date had been extended to (at that stage) 31 March 2020. The plaintiff’s principal witness, their credit manager, Mr Neville Whitworth, says this extension was only included to protect the value of the security in the hotel, as, without the agreement to lease, the value of the hotel would decrease. It is by no means obvious to me that this detracts from the force of the point that the agreement to extend the loan fixes FCM and FMM with knowledge of the extension of the sunset date. Furthermore, the plaintiffs’ own works programme put the practical completion date at 24 June 2020.
[46] The issue as to whether, by reason of their involvement in and knowledge of the process of extending the sunset date in the agreement to lease, FCM and FMM agreed to an extension of the date by which the Thackeray trustees were obliged to obtain a code compliance certificate, or waived their right to rely on the original date, is obviously a factual one, and in my view a finely balanced one. It follows that I am not satisfied that the plaintiffs can establish that the defendants have no defence available to them, or, put another way, I am left with real doubt on the point. For that reason, I dismiss the application for summary judgment.
The Thorn proceeding
[47]As already said, the fact that the Thorn trustees fell into arrears is not in dispute.
[48] The defendants say that it was the plaintiffs that caused the default by refusing to release monies available to the borrowers under the Thackeray loan to meet the amount payable under the Thorn loan.
[49] Essentially, the contention is that the plaintiffs were obliged to transfer available funds not drawn down on from the Thackeray facility to cover amounts outstanding under the Thorn facility.
[50]In my view, the submission has no merit.
[51] Simply because it was the same lender in each case, and some of the guarantors and securities were the same, cannot mean that the borrowers were entitled to insist on the loans being treated on a net basis. There would be little point in different lending facilities if it were otherwise.
[52] There is no reference in the loan documentation to them being cross-collateralised, or that one loan facility is a form of security for the other.
[53] It is true that on a previous occasion the plaintiffs had agreed to this. However, this cannot in my view oblige them to do so from that point on, or estop them from refusing to do so.
[54] I therefore accept the plaintiffs’ submission that there is no variation or implied term that would justify the defendants’ contention. The loan documents do not provide for unilateral variation and such a variation would require agreement from the plaintiffs.7 There is no evidence before the Court of any such agreement. Any implied term that one facility could be used to ‘bail out’ the other, would, amongst other requirements, have to be “so obvious it goes without saying.”8 Yet, special condition 11 of the Thackeray Loan Extension Agreement provides any act of default in relation to the Thackeray loan will also be deemed to be an act of default in relation to the Thorn loan and vice versa. The loan agreement is also operable without such an implied term.
[55] Estoppel requires an assurance and the clearer or more explicit the assurance is, the more likely it is that a court will grant relief.9 Again, there is no evidence of any such assurance in this case. I do not think the defendants could reasonably expect
7 See Macdonald v C1 Gloucester Street Ltd [2012] NZHC 2842 at [26].
8 BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 (PC).
9 See Wilson Parking New Zealand Ltd v Fanshawe 136 Ltd [2014] NZCA 407 at [114]-[115].
that the plaintiffs would transfer funds between facilities because they had done so on one earlier occasion. There is certainly no evidence that the plaintiffs created or encouraged by their conduct an assumption that the defendants could rely on, or that the plaintiffs knew that the defendants would rely on such an assumption.
[56] In my judgment the plaintiffs in this proceeding have demonstrated that the defendants have no defence to the claim, and are entitled to summary judgment.
Summary of conclusions
[57] The plaintiffs’ application for summary judgment against the Thackeray trustees and the Thackeray guarantors in the 29 proceeding is dismissed.
[58] The plaintiffs are entitled to summary judgment against the Thorn trustees and the Thorn guarantors in the 31 proceeding, and I enter judgment in the terms sought by the plaintiffs, subject to the injunctive relief granted by Gwyn J in her Honour’s judgment of 24 July 2020.
[59] As to costs, both parties have had a measure of success. My preliminary view is that costs might be left to lie where they have fallen in both proceedings. However, as I have not heard from counsel, I reserve costs. I expect that these can be agreed, but if not then counsel may file memoranda in the usual way and I will deal with costs on the papers.
Associate Judge Johnston
Solicitors:
Holland Beckett, Tauranga for plaintiffs in both proceedings Lawson Robinson, Napier for defendants in both proceedings
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