FM Custodians Limited v Brown HC Dunedin CIV-2009-012-000691
[2010] NZHC 2409
•21 December 2010
IN THE HIGH COURT OF NEW ZEALAND DUNEDIN REGISTRY
CIV-2009-012-000691
BETWEEN FM CUSTODIANS LIMITED Plaintiff
ANDRANDOLPH ROSS BROWN COLLEEN JOY BROWN ARTHUR WILLIAM BAYLIS
PRACTICE MANAGEMENT TRUSTEE LIMITED
Defendants
CIV-2009-412-000881
AND UNDER the Companies Act 1993
IN THE MATTER OF an application to set aside a statutory demand
BETWEEN TATUA CONSULTING SERVICES LIMITED
Plaintiff
ANDFM CUSTODIANS LIMITED Defendant
Hearing: 12 April 2010
Appearances: JWA Johnson for Plaintiff (691 proceeding) and Defendant (881 proceeding)
D P Robinson for Defendants (691 proceeding) and Plaintiff (881 proceeding)
Judgment: 21 December 2010
JUDGMENT OF ASSOCIATE JUDGE OSBORNE
as to Applications for Summary Judgment
and for Setting Aside of a Statutory Demand
FM CUSTODIANS LIMITED V BROWN AND ORS HC DUN CIV-2009-012-000691 21 December 2010
Introduction
[1] The defendant in the 691 proceeding (the trustees) owned two Arrowtown properties, one a house property and the other a bare section. They were mortgaged to the plaintiff (FM Custodians). They were sold by FM Custodians at auction on 1
May 2009. FM Custodians did not make a full recovery of money it had lent to the trustees.
[2] These proceedings require an examination of whether the right of FM Custodians to recover the balance of its loan and associated costs is affected by a cross-claim by which the defendants assert that FM Custodians acted in breach of s 176 Property Law Act 2007 when selling the properties.
[3] In the 691 proceeding FM Custodians seeks summary judgment for the balance of the loan together with associated costs.
[4] In the 881 proceeding the trustees seek an order setting aside a statutory demand issued by FM Custodians for payment of the loan balance.
The facts
[5] There is little difference between the parties as to the facts. A brief period, from 28 April 2009 to 1 May 2009, is of critical importance – even in relation to that period there is little disagreement on the facts.
[6] Some background is necessary before that point is reached.
[7] Randolph Ross Brown and his wife Colleen Joy Brown lived at Bracken Street, Arrowtown. Their home was on 22 Bracken Street. 20 Bracken Street is the bare section.
[8] Mr Brown is a director of Tatua Consulting Services Limited. Tatua, in
2005, borrowed $1,000,000 from FM Custodians on a term loan contract. The Browns had a trust, the Brown Family Trust. The trustees of the Brown Family Trust became covenantors to the loan agreement. Two of the trustees, Arthur William Baylis and Practice Management Trustee Limited, were independent trustees with their liability generally limited to trust assets. The Browns were also trustees and their liability was not limited. The trustees also gave a guarantee to FM Custodians, with the independent trustees’ liability again limited to assets of the trust.
[9] The trustees owned the Arrowtown properties. As security for the loan, they mortgaged the Arrowtown properties to FM Custodians.
[10] A number of further loan agreements followed between the parties. The fifth in sequence, and that with which this proceeding is concerned, was entered into on
15 May 2008. I will refer to it as “the loan agreement”. Its principal terms were:
Lender: FM Custodians Borrower: Tatua Borrowing: $1,200,000
Covenantors: The Brown Family Trust trustees
(with liability of the independent trustees limited)
Security: Mortgages over the Arrowtown properties
Repayment date: 1 November 2008
Guarantees: 2005 guarantees by the trustees extended to this loan
[11] There were two subsequent mortgagees, Edincorp Equities Limited and
Marac Finance Limited
[12] On 1 November 2008 Tatua failed to repay the loan. Interest fell into arrears on 1 December 2008.
[13] FM Custodians issued a Property Law Act notice on 26 January 2009, the notice expiring unremedied on 12 March 2009.
[14] From February 2009 the properties were marketed by Mr Warren White of Southern Lakes Real Estate Limited. Tatua was not in a position to fund marketing and the real estate company funded some advertising. During this period a potential buyer orally indicated (through Mr White) an offer of $1,025,000 for the house property, including contents. Mr Brown was not interested in selling the property at that figure. A written offer was not obtained.
[15] In March 2009 discussions took place between the Browns and FM Custodians as to the marketing and sale of the property. Southern Lakes came up with a marketing proposal, which was subsequently implemented. A deed was prepared and signed between the trustees and FM Custodians and the two subsequent mortgagees. The trustees were themselves to attempt to obtain a sale of the property as an owner’s sale and not as a mortgagee sale. Key provisions of the deed were:
Clause 1The trustees were to immediately instruct a real estate agent to market and sell the property by public auction on terms and conditions acceptable to FM Custodians, with an auction date approved by FM Custodians (but anticipated to be no later than 30 April 2009).
Clause 3FM Custodians was to provide a reasonable budget of funds to pay the reasonable marketing costs of the agent, such costs to be treated as costs of acting to protect FM Custodians’ mortgage security.
Clause 6FM Custodians was to obtain two valuations of the property for sale, on a forced sale and willing seller/willing buyer basis, with the costs to be treated as costs of acting to protect FM Custodians’ mortgage security.
Clause 8The parties were to be consulted as to setting the reserve price for the property on the basis of the valuations.
Clause 11If there was any offer for the property prior to the auction which FM Custodians proposed to approve or if there was a bid at auction which exceeded the reserve price, then such offer would immediately be disclosed to the second and third mortgagees, who would have the opportunity to negotiate with FM Custodians to purchase the first mortgage at or above the offered amount.
Clause 12Should FM Custodians decide at any time before or during the auction, or after the auction (in the event the property was not sold at auction), that it was in FM Custodians’ interest to take over the marketing and sale of the property as mortgagee then it could do so, and it would have the right to continue with the trustees’ sale programme using the same agent.
[16] As the date for auction approached, the parties agreed to adopt the REINZ form for Sale of Real Estate by Auction (2nd edition, March 2001). Standard vendor’s warranties and undertakings were deleted. The sale of the property was to include standard chattels (such as stove and floor coverings) but not the Browns’ furniture.
[17] On 28 April 2009 the Browns’ solicitor, Mr David Smillie, emailed to FM Custodians an additional clause for inclusion in the auction terms, intended to make clear that the vendors retained the right to withdraw the property from sale even if the reserve price had been met. The purpose of the clause was to preserve the clause
11 right of the second and third mortgagees to negotiate a purchase if a bid was received which exceeded the reserve price.
[18] Rather than responding to the content of the email from Mr Smillie, Mr Graeme Reid, a consultant to FM Custodians who had been dealing with the Browns’ mortgage, promptly emailed back to Mr Smillie saying:
We’ve just had a change of plan on this and I'm currently trying to contact
Bruce Baylis urgently. I'll copy you in on my email to him shortly.
[19] Shortly afterwards, Mr Reid emailed Mr Baylis (one of the trustees). He indicated that Canterbury Mortgage Trust (CMT) was taking action to exercise its right, under clause 12 of the deed, to cancel the deed and to proceed to a mortgagee sale. By that time one valuation report had been obtained; the second was expected shortly. Mr Reid referred to progress on valuation advice and stated:
The reality therefore seems to be that the reserve prices CMT would be thinking of are likely to be less than that which it is owed.
(The reference to CMT is Canterbury Mortgage Trust – FM Custodians is the custodian trustee through which investors in mortgages arranged by CMT have their investments held.)
[20] Mr Reid added:
The Deed of Arrangement provides for either the 2nd or 3rd mortgagees to buy CMT’s mortgage at an amount equal to the highest bid if reserve is reached. If however, that right was to be exercised (assuming the reserve price was achieved but less than the amount owing) then CMT would loose [sic] its right to recover the shortfall from the guarantors, because the guarantees would be transferred to the new owner of CMT’s mortgage. In other words, CMT would face a loss which might otherwise have been avoided by recovery from the guarantors.
[21] Mr Reid concluded by saying that CMT’s solicitors had been instructed to prepare terms and conditions for the auction and that he intended that the auction on
1 May would proceed as planned, but now under the instructions of CMT as mortgagee.
[22] Mr Smillie replied later the same day. He noted:
•What the second and third mortgagees, under clause 11 of the deed, had been given was only “the opportunity to negotiate…”.
•The second and third mortgagees agreed with that interpretation and were prepared to consider any amendment requested to give CMT comfort.
[23] He concluded by stating that the Browns’ view was that the best price would be obtained by a sale by the mortgagor as opposed to a sale by the first mortgagee. He requested an urgent response.
[24] Mr Reid responded by email the following morning (29 April 2009). He commented that it would be undesirable if the top bidder(s) became frustrated or someone decided not to bid because acceptance of his/her bid was subject to further negotiations with unknown parties. He noted the potential concern for bidders in not knowing if the property is actually on the market. He viewed this as a significant negative factor which would likely affect the outcome of the auction.
[25] Mr Smillie responded promptly by email. He stated that the second and third mortgagees were prepared to agree to the deletion of clause 11 of the deed to remove the concern which Mr Reid had expressed in relation to the perception of bidders. In return, the Browns wanted CMT to agree to the property sale continuing as a sale by the trustees.
[26] By this time (the morning of 29 April) Mr Reid had now received the second of the two valuations CMT was obtaining.
[27] Colliers International had earlier provided a valuation dated 21 April 2009. It concluded that the house property had a current market value of $1,300,000 and a forced sale value of $910,000. It assessed the current market value of the bare section as $300,000, with a forced sale value of $225,000.
[28] Andrew Crawford of Lakes Property Services provided a valuation dated 27
April 2009. He assessed the current market value of the house property at
$1,230,000 with a forced sale value of $920,000. He assessed the bare section as having a current market value of $325,000 and a forced sale value of $260,000.
[29] In the early afternoon of 29 April 2009 Mr Reid responded to Mr Smillie. He said:
Our thinking at this time is that the sale will continue under CMT’s instructions however the matter is to be discussed again by our Board when it meets this afternoon. I will let you know the final decision after that.
[30] Mr Smillie emailed back that his clients were of the view that the sale should be by the Brown Family Trust in order to get the best price possible. Given the agreement of the second and third mortgagees to the deletion of clause 11 of the deed, he could not see any reason for CMT’s decision to sell as mortgagee, “as surely it will only result in a reduced sale price and a worse result for all”. He referred to the fact that the marketing campaign to date had been on the basis that it was a normal sale by the owner. He suggested that a sudden announcement that the sale was now a mortgagee sale would be a significant, adverse factor in terms of the price and could prejudice the Browns’ position. He said that he considered that a sale by the first mortgagee in those circumstances could well be open to challenge. He asked that this information be conveyed to the CMT Board.
[31] On the following morning (30 April 2009) Mr Reid emailed Mr Smillie. He advised that the recent emails had been discussed by the CMT Board the previous day. He stated that he regretted to advise that the decision was made that CMT’s mortgagee auction would proceed the next day (31 April 2009).
[32] On 30 April 2009 Mr Smillie emailed a response, reserving all the Browns’ rights and remedies in the matter. He recorded that the Browns considered that CMT’s actions had the potential to result in a significant diminution of value and associated loss.
[33] During this period there were discussions between the Southern Lakes agent (Mr White) and Mr Reid. Although Mr White had been acting for the Browns, he had refused for the purpose of these proceedings to provide an affidavit to the Browns when requested. The Browns had wanted Mr White to depose to the views, which he had told them he had given to Mr Reid. The Browns were also aware that Mr White had advised Mr George Gallagher, a manager of the third mortgagee (Marac), that Mr White had voiced concerns as to the change to a mortgagee sale. After the Browns had filed their evidence, Mr White provided to FM Custodians an affidavit in reply. He explained in that affidavit why he had not provided an affidavit to the Browns’ solicitor. He said that as a real estate agent he had a fiduciary duty to act in the vendor’s interest at all times. He therefore signed an affidavit for FM Custodians, which was the vendor and had paid for the marketing.
Mr White appears to have been unaware that there is no property in a witness. In the event, the Court has been left with an affidavit which he prepared in consultation with the solicitors for FM Custodians and no affidavit produced at the request of the Browns’ solicitors. The Court may well therefore have less than a complete picture as to what Mr White can say on the developments of late-March.
[34] Mr Brown deposes that Mr White had relayed to him that Mr White had objected to the published sale of the properties as mortgagee sales; that he advised Mr Reid that to conduct the sale as a mortgagee sale would prejudice attempts to sell the property for the best price; and that the best course was to continue the marketing and method of sale that had previously been agreed.
[35] In his affidavit, Mr White stated that when he received Mr Reid’s advice three days before the auction that the auction was to become a mortgagee sale:
I would have preferred that the auction remain under Mr Brown’s instructions but I had no choice in the matter.
[36] Later in his affidavit he adds:
Although I was not in favour of the change to a mortgagee sale at the eleventh hour in the sales process, I do not believe the price was affected by the change to a mortgagee sale. Indeed, the Property was sold around the middle of the range of our marketing expectations.
[37] And, a little later:
Mr Brown was fully aware of my thoughts on the change from an auction to a mortgagee auction. In all my years of real estate I have always endeavoured to stop mortgagee companies from advertising as mortgagee as often the prices end up being less.
[38] An earlier paragraph has a parallel in a reply affidavit of Mr Gallagher (the Marac manager), who deposed that Mr White had made it clear to Mr Gallagher that Mr White had voiced his objections to Mr Reid.
[39] I will return to discuss the extent to which Mr White’s affidavit leaves important matters unstated and the extent to which it appears to have internal contradictions. What it does signal, however, is a confirmation that he discussed his
concerns as to the change to a mortgagee auction. Mr Gallagher’s evidence points to those concerns also having been expressed to Mr Reid. He therefore lays a foundation for the Court to consider what his concerns were.
[40] In the event, the auction took place on 1 May 2009. Mr Reid had advised Mr
Brown prior to the auction that the reserve on the house property was to be
$1,100,000 but reviewable to $1,000,000. The house property bidding reached
$980,000 during the auction and Mr Reid then lowered the reserve to $980,000 so as to put the property “on the market”. Bidding continued up to $987,000 and the property was then sold to the highest bidder.
[41] Mr Reid set the reserve price of the bare section at $275,000. Bidding continued up to $315,500 and the bare section was then sold to the highest bidder.
[42] The sales were subsequently settled. On receipt of the settlement monies, FM Custodians made apportionments, which are not in dispute.
[43] FM Custodians, on 7 October 2009, issued to Tatua a statutory demand for the sum of $110,515.52, representing the balance of principal, interest and legal fees owing under the term loan contract. It is accepted by the trustees that the quantum claimed in the statutory demand accurately reflects the shortfall arising on sale.
The trustees’ case
[44] The trustees’ case turns on events which took place over two days, on 29 and
30 April 2009, once FM Custodians took the decision to proceed to mortgagee sale, which occurred on 1 May 2009. Reference was made in submissions to the CMT decision to move to a mortgagee sale having occurred on 28 April, but that is clearly not the case: Mr Reid’s email notification identifies 29 April 2009 as the date of the CMT Board decision.
[45] The issue common to both FM Custodians’ summary judgment application and to the trustees’ application to set aside the statutory demand is whether the trustees have an arguable counterclaim based on the conduct of FM Custodians in
conducting a sale of the Arrowtown properties which failed to take reasonable care to obtain the best price reasonably obtainable at the time of sale.
[46] Given that the issue is essential and common to both proceedings, I will examine it in relation to both at the same time. Before doing so, I note the principles that apply to each jurisdiction.
Summary judgment principles
[47] The starting point for a plaintiff’s summary judgment application is r 12.2
High Court Rules, which requires that the plaintiff satisfy the Court that the defendant has no defence to any cause of action in the statement of claim or to a particular cause of action.
[48] Before turning to some particular issues which arise in relation to this case, I
summarise the general principles which I adopt in relation to the application:
i) Commonsense, flexibility and a sense of justice are required (Haines v
Carter [2001] 2 NZLR 167 at 187).
ii)The onus is on the plaintiff seeking summary judgment to show that there is no arguable defence. The Court must be left without any real doubt or uncertainty on the matter.
iii)The Court will not hesitate to decide questions of law where appropriate.
iv)The Court will not attempt to resolve genuine conflicts of evidence or to assess the credibility of statements and affidavits.
v)In determining whether there is a genuine and relevant conflict of facts, the Court is entitled to examine and reject spurious defences or plainly contrived factual conflicts. It is not required to accept uncritically every statement put before it, however equivocal,
imprecise, inconsistent with undisputed contemporary documents or other statements, or inherently improbable.
vi)In assessing a defence the Court will look for appropriate particulars and a reasonable level of detailed substantiation.
vii)In weighing these matters, the Court will take a robust approach and enter judgment even where there may be differences on certain factual matters if the lack of a tenable defence is plain on the material before the Court.
viii)Where a last-minute, unsubstantiated defence is raised and an adjournment would be required, a robust approach may be required for the protection of the integrity of the summary judgment process.
ix) Once the Court is satisfied that there is no defence, the Court retains a discretion to refuse summary judgment but does so in the context of the general purpose of the High Court Rules which provide for the just, speedy and inexpensive determination of proceedings.
The jurisdiction to set aside a statutory demand – the principles
[49] The Court’s jurisdiction to set aside a statutory demand is contained in s 290
Companies Act, and I refer specifically to the basis upon which the Court may grant an application as contained in s 290(4) which reads:
290 Court may set aside statutory demand
…
(4) The Court may grant an application to set aside a statutory demand if it is satisfied that—
(a) There is a substantial dispute whether or not the debt is owing or is due; or
(b) The company appears to have a counterclaim, set-off, or cross-demand and the amount specified in the demand
less the amount of the counterclaim, set-off, or cross- demand is less than the prescribed amount; or
(c) The demand ought to be set aside on other grounds.
[50] For the purposes of this hearing I adopt as a general approach to the exercise of this jurisdiction these five principles:
• The applicant must show that there is arguably a genuine and substantial dispute as to the existence of the debt.
• The mere assertion that the dispute exists is not sufficient.
Material short of proof is required to support the claim that the debt is disputed.
• If such material is available the dispute should normally be resolved other than by means of proceedings in the Court’s Companies Act jurisdiction.
• An applicant must establish that any counterclaim, cross-demand or set-off is reasonably arguable in all the circumstances.
• It is not usually possible to resolve disputed questions of fact on affidavit evidence alone, particularly when issues of credibility arise.
Duty of mortgagee exercising power of sale
[51] Section 176(1) Property Law Act provides:
(1)A mortgagee who exercises a power to sell mortgaged property, including exercise of the power through the Registrar under section
187, or through a court under section 200, owes a duty of reasonable care to the following persons to obtain the best price reasonably obtainable as at the time of sale:
(a) the current mortgagor: (b) any former mortgagor:
(c) any covenantor:
(d) any mortgagee under a subsequent mortgage:
(e) any holder of any other subsequent encumbrance.
[52] This statutory duty of care co-exists with the equitable duty of good faith which was described in Cuckmere Brick Co Ltd v Mutual Finance Ltd [1971] 2 All ER 633 (CA).
[53] In considering the two duties, McGrath J, for the Court of Appeal in Apple
Fields Ltd v Damesh Holdings Ltd [2001] 2 NZLR 586 at [47] said that:
… in most cases, including the present, the duty of care will be the more onerous obligation: Commercial and General Acceptance Ltd v Nixon (1981)
38 ALR 225 per Brennan J at p 249.
[54] It is therefore convenient to focus in this case, as have counsel, upon the statutory duty.
[55] Certain principles have been recognised by the Courts in relation to the statutory duty. I apply the following principles (this summary drawing heavily upon the principles identified in Bennion & Ors New Zealand Land Law (2nd ed, Thompson Reuters 2009) at 9.9.07 and Alston & Ors Land Law (looseleaf ed, Brookers) vol 2 at 8.9.06):
i)The duty of care does not qualify the mortgagee’s right to decide, in its own interest, if and when to sell, although once a mortgagee decides to sell it becomes subject to the duty.
ii)In assessing compliance with the duty under s 176, the matter must be looked at broadly and in a realistic way.
iii)The time for assessing whether the price is the best reasonably obtainable is the time of sale.
iv)The statutory obligation is not to obtain the best price reasonably obtainable, but to take reasonable care to obtain the best price reasonably obtainable.
v)The phrase “best price reasonably obtainable” in s 176 is clear and the substitution of other words such as the “true market value” is of little assistance.
vi)The determination of the “best price” is to be assessed having regard to the purpose of s 176 (to protect the vulnerability of those to whom the duty is owed).
vii)When the property is sold in a forced sale situation, such as a mortgagee sale, there is a substantial discount from the market value that the property would achieve in a sale undertaken by an owner not under financial pressure to sell.
Discussion of particular principles
The timing of the duty
[56] As Mr Johnson for FM Custodians submitted, it is well settled that the mortgagee is entitled to make its own commercial decisions about whether, and if so at what time, to sell mortgaged property: China and South Sea Bank Ltd v Tan [1989] 3 All ER 839 at 842 (per Lord Templeman, delivering the judgment of the Privy Council); applied in Countrywide Banking Corporation v Robinson [1991] 1
NZLR 75 (CA) at 77.
[57] The evidence establishes in this case that the decision of FM Custodians through the Board of CMT to “change plan” and move to a mortgagee sale was made on 29 April 2009.
[58] Clause 12 of the deed had preserved to FM Custodians the right to change to a mortgagee sale and to bring the provisions of the deed to an end at any time should
FM Custodians decide that it was in its interest to take over the marketing and sale of the property as mortgagee. Under the deed, rights then reverted to what they would have been as at the day before the deed was entered into.
[59] Mr Robinson did not suggest that the existence and provisions of the deed affected the timing of the duty under s 176 Property Law Act.
[60] As a matter of law, therefore, the duty upon FM Custodians under s 176 of the Act arose on 29 April 2009.
[61] This led Mr Johnson to a further proposition, namely that any actions of the parties before 29 April 2009 are irrelevant in this litigation and that the reasons of FM Custodians in deciding to withdraw from the deed and to proceed to a mortgagee sale are also irrelevant. To the extent that those factors do not affect the date on which the duty arose, I agree. To the extent that those matters are the background against which the mortgagee sale took place on 1 May 2009, I disagree for reasons I come to now.
The duty to take reasonable care to obtain the best price reasonably obtainable as at the time of sale
[62] The focus of Mr Robinson’s submissions was as to the manner in which FM Custodians proceeded with its sale.
[63] I did not understand Mr Robinson to focus his attack on the fact that FM Custodians had exercised its power of sale – the mere exercise of a power of sale is not by itself oppressive: Coffey v DFC Financial Services Ltd (1991) 5 NZCLC
67,403 at 67,417; Taylor v Westpac Banking Corporation (1996) 7 TCLR 177 (CA)
at 182.
[64] Mr Robinson made some submissions questioning either the integrity or the logic of Mr Reid’s reasoning when FM Custodians decided to exercise its right under clause 12 of the deed to proceed to mortgagee sale. It was at the least questionable whether the justification given by Mr Reid – that FM Custodians would lose
recourse for payment of the balance of the debt under its guarantees – was correct. When Mr Reid offered the alternative explanation – that he thought it would be undesirable, and frustrating for a top bidder, to have a top bid subject to further negotiations – and the other parties to the deed (including the second and third mortgagees) offered to delete clause 11 of the deed, that offer was never taken any further by Mr Reid or by the Board of CMT.
[65] Mr Johnson did not seek to develop any submissions for FM Custodians in support of the logic of the position Mr Reid and FM Custodians/CMT adopted. In effect, it was Mr Johnson’s submission that FM Custodians’ reasoning was no business of the Court. He referred to the express provisions of clause 12 of the deed which entitled FM Custodians to withdraw from the deed and to sell as mortgagee at any time if FM Custodians decided it was in its best interests to do so. Mr Johnson stated that the reasons of FM Custodians in withdrawing were irrelevant under clause
12.
[66] I accept that clause 12 entitled FM Custodians to make a subjective decision in its own interests. There was no contractual duty superimposed upon the statutory (s 174) duty to prevent FM Custodians making that decision.
[67] On the other hand, the responsibility of the Court in relation to s 174 is to consider compliance with the statutory duty in a broad and realistic way. The manner in which a mortgagee acts through the process of sale once it has made the decision to sell will be key to what informs the Court’s decision as to whether reasonable care has been taken to obtain the best price reasonably obtainable.
[68] Following on from his submission that the reasoning of FM Custodians for moving to a mortgagee sale did not bear scrutiny, Mr Robinson submitted that there was no demonstrable need to market the property in the fashion dictated by FM Custodians from 29 April 2009, and that such marketing in relation to the sale was contrary to the advice received.
[69] Mr Johnson submitted that there can never been an objection to the sale of a property advertised as a mortgagee tender. He referred to Taylor (above at [63]) as
clear authority for that proposition, as was stated in the judgment of Wylie J in Wallace v Bank of New Zealand HC Auckland CIV-2009-404-003534, 1 July 2009 at [51].
[70] Mr Robinson submitted that the comment by Wylie J in Wallace in relation to the decision in Taylor stated the conclusion of the Court of Appeal too broadly. I agree.
[71] In Taylor the appellants had failed to repay a bank loan. The bank, for some six months, refrained from exercising its power of sale, to enable the appellants to negotiate with a prospective purchaser. In February 1996 the final indulgence period ran out and the bank took the view that its position would be prejudiced if a sale was not undertaken as soon as possible. It decided that a sales campaign would be launched in April 1996. The appellants issued proceedings and made application for an interim injunction restraining the bank from exercising its power of sale. In the way the case was argued for the appellants in the High Court, Morris J found that there was no serious question to be tried and dismissed the application. The arguments for the appellants were redirected in the Court of Appeal. One of the submissions focused on the method adopted by the bank in selling the property. It is that which is relevant to the present case. While the passage from the judgment of the Court delivered by Thomas J is lengthy, a full quotation of it will serve to emphasise the difference between the facts of that case and the facts of this case.
[72] His Honour said at 182-183:
2) A mortgagee's sale?
The appellants claim that advertising the sale as a mortgagee's sale results in the buyers expecting a purchase at a discounted price. Independent evidence is advanced in affidavits to that effect, but is disputed by independent evidence adduced by the Bank. There does not seem to be any dispute but that the advertisement of the property as a mortgagee's sale will attract interest in it. The disagreement is as to what impact the advertisement of the sale as a mortgagee's sale will have on the ultimate price.
We do not intend to arbitrate this issue for two reasons. First, the Bank is acting on apparently sound professional advice. It proposes to undertake a marketing campaign designed by a professional real estate agency with national and international experience and expertise in the area of marketing and mortgagee sales. The campaign is to be specifically tailored for the sale
of this property and will include a two page full colour laminated brochure to be circulated nationally and internationally. Six weeks, as against the eight weeks thought to be the minimum time by the appellants' advisers, has been allowed for the tender process in accordance with standard practice. Further time then will be available for the Bank to negotiate with a genuine tenderer, or tenderers, if that is prudent. The budget which the Bank has allocated for promoting the sale cannot seriously be criticised. Nor are the appellants being excluded from the process.
We do not see, therefore, why the Court should seek to determine what the impact of the sale, advertised as a mortgagee's sale, will be (even if that could be definitely predicted). It is sufficient to take the Bank's decision to proceed with the sale and advertise it as a mortgagee's sale out of the category of oppressive conduct that the Bank is acting upon apparently reasonable professional advice. We do not consider that it can be plausibly suggested that the advice is not reasonable. This Court should not be called upon to second-guess the appropriateness of the course adopted by the Bank in the guise of determining whether or not it is oppressive.
The second point is decisive in respect of this point. It is common ground that the mere exercise of a power of sale is not by itself oppressive. See Coffey v DFC Financial Services Ltd (1991) 5 NZCLC 67,403, at 67,417; and Grose v Development Finance Corporation of NZ (1987) 1 NZBLC
102,646 at 102,650. Mr Dugdale relied upon the latter part of the dictum in
McKay J in Coffey's case (at 67,417). That dictum reads as follows:
"The mere exercise by the respondent of the rights or powers specifically conferred by the contract cannot of itself be sufficient to satisfy the test of 'oppressive' under s 9 unless the contract itself is oppressive, or unless there are circumstances which make it so." (Emphasis added)
Thus, Mr Dugdale sought to identify circumstances beyond the contract itself to indicate the alleged oppressiveness. But the sale of a mortgagor's property pursuant to a mortgagee's sale is not an extrinsic circumstance. It is part and parcel of the exercise of the Bank's power of sale. A sale by way of a mortgagee's sale cannot be sensibly divorced from the exercise of that right or power. If this were not so it would always be oppressive to sell a property pursuant to a power of sale by way of a mortgagee's sale.
We therefore reject this element entirely.
[73] The full passage indicates that Mr Johnson’s submission as to the effect of the decision in Taylor (above at [69]) is too broadly stated. In Taylor, the bank was acting on apparently sound professional advice. The time allowed for the campaign was in accordance with standard practice. The Court found no reason to find the professional marketing advice which had been given was unreasonable.
[74] English authority in this area indicates that the mortgagee’s freedom to choose the time at which to sell is not as unfettered as the usual statement of that
principle suggests. Reference may be made to the decision of the English Court of Appeal in which it was found that a mortgagee did not ensure that a property was exposed to the market for an adequate period: Predeth v Castle Phillips Finance Co Ltd [1986] 2 EGLR 144.
[75] The short-comings of late advertisement of a mortgagee sale have been identified in a number of cases. For a convenient collection, see Fuller Mortgages Companion (LexisNexis Wellington, 2009) at 14.7.5. In Dean v Leadenhall Superannuation Nominees Limited (1986) 2 NZCPR 411 (HC) the Court refused to set aside an interim injunction which had been granted ex parte to restrain a mortgagee sale. One ground of judgment relates to the placing of an advertisement three days before the sale. While the sale in question was a sale under supervision of the Registrar and the mortgaged land (in 1986) worth possibly “millions”, the judgment of Jeffries J at 418-419 contains a discussion of late advertising which is relevant to the present case. I refer particularly to the giving of time to those who learn of an auction to carry out their enquiries and to respond in time. These observations might apply as much to a sale where the nature of the sale changes as to one in which the advertising is occurring for the first time:
Here I add that I consider there is validity to Mr Goddard's argument that the advertisement is not simply to get people to attend the auction, and there is evidence that well over 100 people were there, but we know not for what reason. There are many reasons why people attend auctions and I do not intend to explore them. For a block of land whose value might be measured in millions it is important that ample notice be given to prospective buyers so that they may arrange finance and that means possible lenders would need to inspect the property. Where the notice is as short as it was in this case it might not be too much of an exaggeration to say that there was no notice at all, as Mr Goddard submitted.
[76] In the present case the evidence establishes conduct which, while initially similar to that in Taylor, then loses similarity:
i)In this case, the marketing began with a detailed marketing report and recommendation made by Mr White to Mr Reid on
25 March 2009, with advertising and publicity to follow in an “intensive four-week marketing campaign” for sale at auction by the trustees as owners of the property.
ii)By the deed entered shortly thereafter, FM Custodians agreed that it would be the trustees who would immediately instruct the real estate agent to market and sell the property (on terms and conditions acceptable to FM Custodians) by a date anticipated to be no later than 30 April 2009, but soon set as 1
May 2009.
iii)The deed required the trustees to instruct the agent to provide up to the auction weekly written reports to Mr Reid, and authorised Mr White to discuss any aspect of the marketing and sale with Mr Reid at any time provided such communications were also fully disclosed to the trustees.
iv)The agent, Mr White, had been acting for the trustees from February 2009 – he had indicated to the trustees his support for a private sale, as a prudent step to achieving best price. When close to the auction FM Custodians contemplated a mortgagee sale, Mr White’s advice to Mr Reid (as he reported it to Mr Brown and to Mr Gallagher) was to the effect that to conduct the sale as a mortgagee sale would prejudice attempts to sell the properties for the best price and that the best course was to continue with the marketing and method of sale previously agreed. In his own affidavit, as I have recorded, Mr White deposed that he was not in favour of the change to mortgagee sale at the eleventh hour in the sales process. He would have preferred the auction to remain under the trustees’ instructions but he had no choice in the matter.
v)Following Mr Reid’s change of plan to a mortgagee sale, those who had expressed interest as purchasers were apparently advised directly of the change – there is no evidence of any broader publicity, and indeed in the two days available it seems unlikely that any could have been conducted.
vi) The auction proceeded as scheduled on 1 May 2009.
[77] In setting out those events, I do not overlook the evidence of Mr White in his evidence that he does not believe the price (obtained at auction) was affected by the change to a mortgagee sale. He refers to the fact that the property was sold around the middle of the range of his marketing expectations. I will return to this evidence in relation to the related but separate issue as to whether the trustees have arguably suffered any damage.
[78] When I consider the evidence as to how FM Custodians sought to discharge its duty of care to the property owners, the facts of this case are markedly different to those in Taylor. The two points of strong similarity are that first, marketing advice was obtained at the outset with the recommended marketing programme then implemented and, secondly, the initial plan was to have the owner sell the property. The cases then diverge. In Taylor, the bank sought to implement the recommended marketing strategy. In the present case, the marketing strategy was pursued until two days before the auction. There is no evidence that marketing advice was obtained by Mr Reid at the point he was contemplating a “change of plan”. There is in fact evidence that he was counselled against the change of plan by the agent responsible for the original four-week marketing programme. There is no evidence to indicate any advice taken as to how best to present to interested purchasers the dramatic and radical change from sale by owner to sale by mortgagee. In the space of two days before the auction those interested in purchasing the property were left to digest that change. I have been given no evidence as to the impact that had on the attitude of the individuals involved. As a matter of commonsense, it would likely have an impact.
[79] It has been noted judicially that the marketing of a property as a mortgagee sale can increase interest and benefit the vendor. This is referred to by the Court of Appeal in Taylor in the passage I have cited (above at [72]). I have been given no evidence by FM Custodians as to any consideration given to postponing the auction by at least a brief period to enable the agent to pursue the benefits of such increased interest and to offset any adverse impact from what Mr White has referred to as the eleventh-hour change in the sale process.
[80] It was precisely because the bank in Taylor was proposing to faithfully follow its marketing advice that the Court considered it should not be called upon to second-guess the appropriateness of the course adopted by the bank. It is implicit in the Court’s judgment that, at least in an interlocutory context dealt with on affidavit evidence, the Court may be called upon to second-guess the appropriateness of a course adopted by a bank if the bank has either not taken marketing advice or, having taken it, departs from it.
[81] I return briefly to Mr Reid’s failure to address in his evidence his reasoning for the dramatic change in late-March. The reasoning offered at the time has difficulties associated with it. The Court is not informed as to why the Board, offered the concessions by the trustees and the other mortgagees, still chose to change to a mortgagee sale.
[82] In the context of the duty of care upon the mortgagee, I bear in mind the approach of the High Court of Australia in Commercial and General Acceptance (above at [53]), in which repeated reference is made to the obligation existing to ensure that a mortgagee does not sacrifice the interest of others: per Mason J at 234; Aickin J at 240, 243.
[83] I note in that context that because this proceeding has come to a hearing in relation to a summary judgment application, there has been no discovery or inspection. The Court therefore does not have the benefit of seeing the papers(s) submitted by Mr Reid to his board, nor of seeing any minutes of the Board meeting. Further understanding of the conduct of FM Custodians in discharging its duty of care which might emerge from those documents is simply not before the Court.
[84] The trustees supported their case through an affidavit of Peter Noel Lees Jackson. Mr Jackson gave evidence as an expert in relation to valuation of residential and other property. He deposed that he had in October 2009 reviewed the two valuations provided to CMT in relation to the Arrowtown properties. He agreed with the valuers’ assessment of a likely impact of mortgagee sale being a reduction in the range of 25-30 per cent from a current market value on a “willing buyer/willing seller” basis. He then turned to the quality of the actions taken by
CMT in changing to a mortgagee sale from 29 April 2009. He did so against the background of the terms of the deed. He said that he agreed with Messrs Baylis and Gallagher in the evidence they had given as to the approach a prudent mortgagee would take. He opined that the change to a mortgagee sale “on the basis of the information currently available to [him]” was inappropriate and unjustified and likely amounted to a breach of the duty to take reasonable care.
[85] I take into account the fact that the ultimate issue Mr Jackson is addressing involves legal as well as other conclusions. Mr Jackson’s evidence does not address the point that as a matter of law a mortgagee has the right to choose to sell at mortgagee sale. That said, my perception of his conclusions is that his criticism of the decision by the mortgagee to conduct the sale as a mortgagee sale has its focus on the decision made on or around 29 April 2009 to convert the 1 May 2009 auction date to an auction on behalf of the mortgagee, with attendant publication of that fact. To that extent, his evidence lays some additional foundation for the proposition that this mortgagee did not act in accordance with acceptable standards. As Mr Jackson’s evidence stands at present, however, it is brief and undeveloped in its reasoning – for that reason I attach some, but not great, weight to it.
[86] These factors, taken together, satisfy me that it is reasonably arguable that there was in this case a breach by FM Custodians of its duty of reasonable care (to the trustees and to subsequent mortgagees) to obtain the best price reasonably obtainable at the time of sale.
Is it reasonably arguable that the trustees have suffered damage?
[87] The trustees’ argument as to a breach of the mortgagee’s duty of reasonable care to obtain the best price reasonably obtainable as at the time of sale is meaningful if they have also arguably suffered damage in the form of a diminution in the value of their equity of redemption.
[88] The nature of damages recoverable has to be viewed against the background of the mortgagee’s right to decide, in its own interest, if and when to sell as mortgagee. In considering the impact of the mortgagee’s conduct in the sale process,
the Court must also recognise the reality identified by O’Regan J in Agio Trustees
Co Ltd v Harts Contributory Mortgages Nominee Co Ltd (2001) 4 NZConvC
193,480 at [76]. That is that there is, in a “forced sale situation” a substantial discount from the market value that the property would achieve in a sale undertaken by an owner not under financial pressure to sell. The evidential basis for that proposition in the present case is succinctly contained in the uniform approach adopted by the two valuers who provided reports for the purposes of the auctions.
[89] The Court therefore recognises that in some cases a forced sale value may be the best price obtainable – the fact that a mortgagee obtained a price less than the current market value assessed by valuers does not, of itself, establish a breach of duty: see Wallace at [54] and the authorities there cited.
[90] The valuers’ reports indicate that this was a difficult property to value, the house having an unconventional layout which might prove costly and difficult to reconfigure, and the valuers valuing against a growing number of forced sale situations in the Arrowtown market, which had a limited appetite for properties over
$1,000,000.
[91] The valuers (Colliers and Lakes Property Services) respectively assessed forced sale values at the house property at 30 per cent and 27 per cent below their assessed market values. The trustees’ expert, Mr Johnson, deposed to a likely forced sale reduction of “up to 33 per cent”. By comparison, the assessed force sale values of the bare section were respectively 25 per cent and 20 per cent below the assessed market values.
[92] In the event, the bare section sold for $315,000 – between the two valuers’
assessments of market value (Colliers at $300,000 and Lakes Property Services at
$325,000), and significantly above the valuers’ forced sale values ($225,000 and
$260,000 respectively).
[93] The house property was sold for $987,000. This was appreciably below the valuers’ market value assessments (Colliers at $1.3m and Lakes Property Services at
$1.23m). It was also above the valuers’ forced sale values ($910,000 and $920,000
respectively). It was substantially below the market value assessments – by 24 per cent (Colliers) or 20 per cent (Lakes Property Services).
[94] Even were a Court to draw adverse inferences from sales below market value figures (which I do not), there would in the circumstances of this case be no adverse inference to be drawn from the sale price of the bare section.
[95] The house property was sold at a price above the valuers’ assessments for a forced sale situation, but still at a substantial discount below “market”. The evidence from valuations filed disclosed a significant range of opinion as to the likely discount produced by the market on a forced sale. There is an unsurprising level of uncertainty.
[96] I have referred to a comment in the evidence of Mr White when he said that he did not believe the price was affected by the change to a mortgagee sale. He went on to add:
Indeed, the property was sold around the middle of the range of our marketing expectations.
[97] By the nature of the present applications, there has been no testing of the evidence of Mr White (who did not give evidence as an expert) or of the trustees’ expert, Mr Jackson. But Mr Jackson opined to the contrary that:
I consider that the mortgagee’s conduct was prejudiced to the interest of the plaintiff (and subsequent mortgagees) and would have resulted in a purchase price substantially less than that which could otherwise have been achieved.
[98] There may be sound reasons why the two opinions differ. Mr Jackson’s opinion for instance appears heavily predicated on the basis that a sale by the owner would have achieved the better sale price and that that is a substantial cause of lower realisation. On the other hand, Mr White’s conclusion as to the sale price not being affected by the change appears, in the passage I have quoted (above at [95]) to be driven by the fact that the ultimate sale price fell “mid-range” in his marketing expectation. But those expectations were of course Mr White’s. They were based on a valuation of a property which was recognised as difficult to value. At trial, it is open to the trustees to seek to demonstrate, as Mr Jackson’s evidence intimates, that
the house property could reasonably have sold closer to its current market value than was realised.
[99] The expectations evident in the Court of Appeal’s decision in Taylor (that marketing advice will be taken and followed) and in the English Court of Appeal’s decision in Predeth and this Court’s decision in Dean (that there will be exposure to the market for an adequate period) are in a sense statements in the context of the duty of care – as to how care is taken to avoid the prejudice of sale at an unnecessarily low value. These considerations may assume even greater significance where there are different views as to the arguable range.
[100] It is the trustees’ case that the peculiarity of this case, which distinguishes it from others, is the drastic change of course caused by FM Custodians on 29 April
2009. Two witnesses chose the same epithet to describe the situation – a decision taken at the eleventh hour. Three closely related consequences of that abrupt change of course give rise to an arguable likelihood that there was caused a diminution in value:
•First, in the absence of a lead-in period in which the vendors could receive the benefits which arise from marketing a forced sale precisely as a forced sale, the owners and subsequent mortgagees were deprived of any opportunity to obtain such benefit.
•Secondly, in the absence of any apparent marketing advice as to how best to put the abrupt and late change of approach – from owner sale to mortgagee sale – to the market, FM Custodians is unable to maintain that it acted in accordance with professional marketing advice. It has arguably therefore not avoided damage to the trustees or to other parties who fall within the duty of care under s 174 of the Act.
•Thirdly, there remains on the evidence the arguable possibility that, in the two days available after the mortgagee’s decision to sell, the market may simply not have had time to deal with and digest the uncertainties which attended this mortgagee sale – Will I be able to get vacant possession? Will
the property be cared for before I take possession? That these are devaluing uncertainties is reflected in judgments of this Court such as Westpac Banking Corporation v Yu HC Auckland CP599-IM01 29 October 2001 at [34] and Westpac Banking Corporation v Chisholm (2007) 8 NZCPR 301 at [18].
[101] The two-day period in which to notify the market that the sale was a forced sale is a highly unusual feature of this case. An observation of the Vice Chancellor, Sir Donald Nicholls, in Palk v Mortgage Services Funding PLC [1993] Ch 330 (CA), resonates. The English Court of Appeal was dealing with a contest between mortgagors and mortgagees. The mortgagors had sought in the County Court, and been refused, an order for the sale of their property under the (UK) Law Property Act
1925. The Court had to consider the nature of the duties owed by a mortgagee, particularly with reference to common law and equity. In relation to a mortgagee in possession, his Lordship observed, at 338, that such a mortgagee may not prefer to do nothing, bide his time, and wait indefinitely for an improvement in the market, with the property empty meanwhile. His Lordship then turned to a decision to sell, with the observation which in my judgment applies as forcefully where the mortgagee is not in possession as where it is:
Similarly if he sells the property: he cannot sell hastily at a knock-down price sufficient to pay off his debt. The mortgagor also has an interest in the property and is under a personal liability for the shortfall. The mortgagee must keep that in mind.
[102] A hasty sale producing a very modest price deprives the mortgagor and subsequent mortgagees of the better return that might have been available to those parties through a forced sale process conducted and/or advertised in a less abrupt manner. In this context, at trial it may well be found to be no answer for FM Custodians to refer to the fact that there had been a month-long marketing campaign
– the nature of the sale was fundamentally altered by the CMT Board decision taken on 29 April 2009.
Conclusion
[103] I find it fairly arguable that FM Custodians breached the duty which it owed to the mortgagor and to subsequent mortgagees under s 176(1) of the Property Law
Act, namely a duty of reasonable care to obtain the best price reasonably obtainable as at the time of sale. I also find it fairly arguable that damage may have been caused to the mortgagor through such a breach if established. The extent of that damage is a matter for assessment at a trial. The valuers’ margins between market value and forced sale value of the house property were $230,000 in the case of Colliers and $320,000 in the case of Lakes Property Services. The FM Custodians contractual claim as at October 2009 is for $110,515.52 plus interest and costs. That claim might realistically be less than the value of the trustees’ counterclaim.
Orders
CIV-2009-012-000691
[104] I order:
i) The plaintiff’s application for summary judgment is dismissed. ii) In accordance with the approach of the Court of Appeal in NZI
Bank Ltd v Philpott [1990] 2 NZLR 403. Having regard to the contractual provisions in relation to solicitor/client costs, I refrain from fixing the costs and reserve costs both as to level and incidence.
iii)I adjourn the proceeding to a case management conference, by telephone, at 9.30 a.m., 2 February 2011.
CIV-2009-412-000881
[105] I order:
i) The statutory demand served on the plaintiff on 14 October
2009 is set aside.
ii)The costs of this application are reserved – it appears that this is an application in which costs should follow the event on a
2B basis. If the parties are unable to agree on this then memoranda are to be filed (limited to four pages) with the respondent’s memorandum to be filed within five working
days after the applicant’s.
Associate Judge Osborne
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