FM Custodians Limited v Lawrie Wooding Properties Limited
[2013] NZHC 295
•22 February 2013
IN THE HIGH COURT OF NEW ZEALAND WHANGAREI REGISTRY
CIV-2011-488-794 [2013] NZHC 295
BETWEEN F M CUSTODIANS LIMITED Plaintiff
ANDLAWRIE WOODING PROPERTIES LIMITED
First Defendant
ANDLAWRIE WOODING FAMILY TRUST Second Defendant
ANDLAWRENCE DAVID WOODING AND MICHELE ANN WOODING
Third Defendants
Hearing: 12 February 2013
Appearances: M J Sharp for Plaintiff
J A Browne for Second and Third Defendants
Judgment: 22 February 2013
JUDGMENT OF ASSOCIATE JUDGE BELL
This judgment was delivered by me on 22 February 2013 at 3:00pm
pursuant to Rule 11.5 of the High Court Rules.
...................................
Registrar/Deputy Registrar
Solicitors:
Holland Beckett Sharp (M J Sharp) Private Bag 12011 Tauranga 3143 for Judgment Creditor
Email: [email protected]
Henderson Reeves Connell Rishworth, P O Box 11 Whangarei
Email: [email protected]
F M CUSTODIANS LIMITED V LAWRIE WOODING PROPERTIES LIMITED HC WHA CIV-2011-488-794 [22 February 2013]
[1] On 23 January 2012 I gave summary judgment against the first, second and third defendants for $3,822,941.04 plus costs and disbursements. The application was unopposed. None of the defendants took any steps. Judgment was regularly obtained. The second and third defendants have applied to set the judgment aside.
[2] The defendants’ liability arose under a term loan by FM Custodians Ltd to Lawrie Wooding Properties Ltd, the first defendant. The second defendants, the trustees of the Lawrie Wooding Family Trust, and the third defendants, Mr and Mrs Wooding, gave guarantees. In this judgment I will refer to the second and third defendants together as “the Woodings”. The loan was renewed and varied a number of times. Under the last variation of December 2010 the principal payable was
$4,490,930.00.
[3] As security for the loan, FM Custodians Ltd registered mortgages over properties of Lawrie Wooding Properties Ltd at Louisa Lane, Whangarei, a section with a partly-built house on it, a commercial building at 66 Bank Street, Whangarei, a vacant property at Old Onerahi Road, Whangarei, with commercial zoning but suitable for residential development, and the adjoining Flames Hotel at Waverley Street, Onerahi, Whangarei. The second defendants also gave a mortgage over a beach property at Matapouri. The first defendant gave a general security agreement over all its property, including the hotel.
[4] Lawrie Wooding Properties Ltd defaulted in making loan payments and FM Custodians Ltd enforced the loan and its securities. Before FM Custodians Ltd obtained judgment, it had exercised its powers under its mortgages to sell the properties at Louisa Lane, Bank Street and Matapouri. It obtained an order for possession of the Flames Hotel, and appointed a receiver for the hotel. Since judgment, FM Custodians Ltd has sold the vacant property at Old Onerahi Road and the receivership has continued. The hotel has not been sold.
The approach to the setting aside application in this case
[5] The application to set aside the judgment is said to be made under r 15.13 of the High Court Rules. However, this is a summary judgment case and the application is more appropriately considered under r 12.14:
12.14 Setting aside judgment
A judgment given against a party who does not appear at the hearing of an application for judgment under rule 12.2 or 12.3 may be set aside or varied by the court on any terms it thinks just if it appears to the court that there has been or may have been a miscarriage of justice.
[6] For the Woodings, Mr Browne cited Russell v Cox on the test for setting aside a judgment by default:[1]
[1] Russell v Cox [1983] NZLR 654 (CA) at 659.
Mr Woodhouse drew our attention to the observations of McCarthy J in Paterson v Wellington Free Kindergarten Association Inc [1966] NZLR 975, a case to which R 236 was applicable. McCarthy J, delivering the judgment of this Court, said:
"In approaching an application to set aside a judgment which complies with the rule, the Court is not limited in the considerations to which it may have regard, but three have long been considered of dominant importance. This was accepted by the Chief Justice in the Court below and by all counsel in this Court. They are, 1. That the defendant has a substantial ground of defence; 2. That the delay is reasonably explained; 3. That the plaintiff will not suffer irreparable injury if the judgment is set aside: Atwood v Chichester (1878) 3
QBD 722; Hovell v Ngakapa (1895) 13 NZLR 298; Trengrove v Inangahua Hospital Board [1956] NZLR 587. But, whilst it appears from these cases that delay, if reasonably explained and if it does not create irreparable injury, is not of itself a good reason for refusing to set aside, we do not doubt that where the delay is substantial, as it is here, the Court can more readily conclude that injury would be caused" (ibid, 983).
We think that in the light of Evans v Bartlam [[1937] AC 473] the passage to which reference has just been made should be read as doing no more than emphasising three matters which, as a matter of commonsense and practice, the Court will generally regard as of importance in deciding whether it is just to set aside a judgment. But it should not be regarded as laying down a general rule that an application to set aside a judgment must satisfy these conditions as a necessary prerequisite to the exercise of the discretion; it should be taken as doing no more than highlight factors which on any application to set aside a judgment may generally be regarded as relevant to an inquiry which will determine where the justice of the case will lie.
The relative importance of the various factors will vary from case to case. For these reasons we think that what Williams J said in Union Bank of Australia v Chesney [(1885) NZLR 3 SC 361, 362] must be read against the facts of that case (which might be decided in the same way today) and not taken as authority for a principle of universal application. The test against which an application to set aside a judgment should be considered is whether it is just in all the circumstances to set aside the judgment, and the several factors mentioned in the judgments discussed should be taken, not as rules of law, but as no more than tests by which the justice of the case is to be measured, in the context of procedural rules whose overall purpose is to secure the just disposal of litigation.
[7] The above approach is equally applicable to an application to set aside a summary judgment given in the absence of an appearance by a defendant, as when judgment by default is simply sealed. Perhaps the only difference is that on a summary judgment application, the court will have received evidence from the plaintiff proving its claim, whereas a plaintiff may be able to obtain ordinary judgment by default without adducing evidence as to the defendant’s liability. On an application to set aside a summary judgment, a defendant will have to show an arguable defence, notwithstanding the evidence given by the plaintiff in support of the application, whereas on an application to set aside a judgment by default under r
15.13 evidence from the plaintiff will not be available at the outset. [8] The Woodings raise these matters:
(a) FM Custodians Ltd breached its duty of reasonable care under s 176 of the Property Law Act 2007 to obtain the best price reasonably obtainable as at the times of sales. To market the properties, it used a real estate agent whose licence had been suspended. The properties at Louisa Lane, Bank Street, Matapouri and Old Onerahi Road were all sold well below valuations given by registered valuers.
(b) The conduct of the receivership is open to criticism.
(c) They query the amount for which judgment was given.
(d)There is a reasonable explanation for their delay in applying to set aside. Mr Kinzett, the chief executor officer of FM Custodians Ltd assured them that, even if they were sued, they would not face
bankruptcy. Relying on those assurances, they did not take any steps earlier to oppose the proceedings taken against them.
(e) There will not be any irreparable injury to the FM Custodians Ltd if judgment is set aside.
[9] In Russell v Cox, the Court of Appeal said that the relative importance of various factors will vary from case to case. In this case, the dominant question is whether the Woodings have a substantial ground of defence. While both sides generally accepted this, some elaboration may be appropriate.
[10] The Woodings’ chief argument for a defence is based on their claims that FM Custodians Ltd breached its duty under s 176 of the Property Law Act 2007. That section imposes a duty on a mortgagee who exercises a power to sell mortgaged property to take reasonable care to obtain the best price reasonably obtainable as at the time of the sale. FM Custodians Ltd owed that duty to the Woodings as covenantors and, in the case of the Matapouri property, as mortgagors. If a mortgagee breaches the duty of care, the classes of people owed the duty of care under s 176 may have a cause of action against the mortgagee for any losses they have suffered. For example, if a sale by a mortgagee produces a surplus after the mortgage has been repaid and all costs have been paid, the mortgagee may have no claim against the mortgagor. However, the mortgagor may still have a claim under s
176 against the mortgagee if the mortgagor can establish that, even though there was a surplus after sale, the mortgagee did not take reasonable care to obtain the best price reasonably obtainable. In such cases, the mortgagor has a claim for unliquidated damages.
[11] While mortgagors and covenantors may begin their own proceeding on a cause of action for breach of s 176, it is more common to find allegations of breach of the duty raised by way of defence, when a mortgagee sues to recover a shortfall after selling a mortgaged property. When a mortgagor or a covenantor claims a breach of s 176 in opposition to a claim by the mortgagee to recover the shortfall following a sale, the mortgagor or covenantor is contending that he or she has a claim for unliquidated damages against the mortgagee, which should be applied in
reduction of any liability for the shortfall following the sale. The mortgagor or covenantor may contend:
(a) That had the mortgagee complied with the duty there would be no shortfall; and
(b)That the breach of the duty gives them a claim for unliquidated damages against the mortgagee, which can be applied in reduction of any liability on the shortfall.
[12] Under the second part, the mortgagor or covenantor is raising a claim for unliquidated damages in reduction of any liability for the shortfall. The mortgagor or covenantor is entitled to do this because the claim for unliquidated damages can be raised by way of equitable set-off. Such a claim comfortably satisfies the test for
equitable set-off under the judgment of the Court of Appeal in Grant v NZMC Ltd.[2]
[2] Grant v NZMC Ltd [1989] 1 NZLR 8 (CA) at 12–13.
[13] In this case, the Woodings allowed judgment to go against them without opposition. Unless the judgment is set aside, they cannot ordinarily assert that the judgment is open to question because they had a defence to the claim. However, the entry of judgment need not stand in the way of the Woodings bringing their own independent claim against FM Custodians Ltd for breach of s 176.
[14] When a judgment has been given by default, the approach of the courts is that the judgment has a confined effect. A leading authority on the point is New Brunswick Railway Company v British and French Corporation Ltd where Lord Maugham LC said:[3]
In my opinion we are at least justified in holding that an estoppel based on a default judgment must be very carefully limited. The true principle in such a case would seem to be that the defendant is estopped from setting up in a subsequent action a defence which was necessarily, and with complete precision, decided by the previous judgment; in other words, by the res judicata in the accurate sense.
[3] New Brunswick Railway Company v British and French Corporation Ltd [1939] AC 1 (HL) at 21.
[15] In Product Development Solutions Ltd v Parametric Technology Corporation,[4] I applied that and held that a default judgment did not stand in the way of the defendant bringing an independent claim against the plaintiff, even if that independent claim could have been raised in the original proceeding by way of equitable set-off.
[4] Product Development Solutions Ltd v Parametric Technology Corporation [2013] NZHC 33.
[16] I take the same approach here. The fact that FM Custodians Ltd has obtained judgment by default against the Woodings does not stand in the way of the Woodings now beginning their own independent proceeding against FM Custodians Ltd for breach of s 176 of the Property Law Act. The summary judgment does not bar an independent cross-claim. The fact that the breach of s 176 might have been raised in the original proceeding does not stand in the way of the matter instead being brought by way of an independent claim.
[17] That becomes obvious in the case of the property in Old Onerahi Road, because that property was not sold until after FM Custodians Ltd had obtained judgment against the Woodings, but it is equally applicable to the properties at Louisa Lane, Bank Street and Matapouri, even though they had been sold before FM Custodians Ltd obtained judgment.
[18] Because the Woodings could bring an independent claim, the other factors referred to in Russell v Cox – reasonable explanation for delay and irreparable injury to plaintiff – are of secondary importance. They do not stand in the way of the Woodings bringing an independent claim. Accordingly the main question is whether the Woodings have an arguable case for breaches of the duty in s 176.
The duty under section 176 of the Property Law Act 2007
[19] Section 176 says:
176 Duty of mortgagee exercising power of sale
(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.
(2) A mortgagee who exercises a power to sell mortgaged property may not become the purchaser of the mortgaged property except in accordance with section 196 or an order of a court made under section 200.
[20] In Southland Building Society v Austin[5] I said:
[5] Southland Building Society v Austin [2012] NZHC 497 at [29]-[31]. For the appeal, see Austin v
Southland Building Society [2012] NZCA 337.
[29] Case law establishes the following propositions:
1Section 176 of the Property Law Act 2007 codifies the duty which, under the general law, a mortgagee exercising a power of sale will be taken to owe to the persons named in the section, including guarantors.
2The duty of care is concerned with obtaining the best price reasonably obtainable as at the time of sale. It is a duty to take reasonable care. It does not necessarily follow that the best price reasonably obtainable will be achieved.
3The duty has to be measured at the time of sale. The duty arises at the time that the decision to sell is made. There is a need to analyse the steps taken once the decision to sell is made, up to the time of sale.
4 The duty of care does not qualify the mortgagee’s right to
decide if and when to sell.
5When deciding whether reasonable steps have been taken by the mortgagee to obtain the best price, the steps taken by the mortgagee and those acting for it must be looked at in the round. The issue is a commercial one to be viewed in practical commercial terms.
6Where the security is substantial, or specialised property is involved, it will usually be necessary for the mortgagee to obtain and act upon specialised advice as to the method of sale. Appointing a competent agent to sell does not discharge the mortgagee’s duties, but since its duty is ultimately only one of reasonable care, putting the matter in
the hands of a competent agent will usually go a long way towards discharging the mortgagee’s duties.
7In the normal course, the proposed sale will need to be advertised with adequate description of the property’s attributes and within reason while wanting to attract all possible purchasers. In some cases this will need to extend to both general and specialist publications.
8There is no obligation to postpone the sale in the hope of obtaining a better price later. Nor is there an obligation to break up the assets to sell in a piecemeal manner, if this can only be carried out over a substantial period or at a risk of loss.
9When assets are sold by tender or auction, a reasonable period must usually be allowed for purchasers to inspect the property and arrange finance before submitting bids.
10For a breach of duty to be actionable, there must be proof of damage.
11 A mortgagee is under no obligation to improve the property or increase its value.
12A mortgagee’s sale for a price less than the current market value assessed by valuers does not of itself establish a breach of duty although a large discrepancy may indicate a failure to take reasonable care.
13A mortgagee does not have any general duty to maintain a property prior to sale.
14Following the service of the Property Law Act notice, there is no duty on a mortgagee to keep the guarantor informed of sales activities.
15The mortgagee is not entitled to sell in a hasty way, at a knock-down price sufficient to pay the debt which, because of the speed of sale, leaves a lower price than could otherwise be obtained.
[30] It has been said that the following steps indicate that a mortgagee has made reasonable efforts to obtain the best reasonably obtainable price:
[a] The appointment of a reputable estate agent to market the property.
[b] Obtaining a valuation report from an experienced valuer as a guide to what could reasonably be expected for the property.
[c] Marketing over a reasonably long period of time.
[d] An extensive advertising and promotional campaign.
[e] A properly conducted auction.
[f] A sale price that, given all the circumstances, can be reconciled with expert opinion as to value.
[31] Evidence proving these steps go towards showing compliance with the duty under s 176. However, a warning must be given. While mortgagees such as banks, building societies, finance companies and similar lenders may follow these steps as a matter of routine, it is still necessary to check whether these steps are appropriate in the particular circumstances of the case.
[21] The Woodings advance two major criticisms of the sales by FM Custodians
Ltd as mortgagee:
(a) FM Custodians Ltd engaged a real estate agent serving a period of suspension;
(b)The properties were sold at prices below amounts given in reports by registered valuers.
[22] The Woodings also say that they co-operated fully with FM Custodians Ltd in allowing the properties to be sold. They were of the understanding that, in return for the Woodings’ co-operating in the sales of assets, FM Custodians Ltd would not look to them personally. The Woodings say that although they co-operated fully, FM Custodians Ltd tended to act unilaterally by carrying out its own valuations, not disclosing the valuations to the Woodings, and deciding itself whether to sell, again without consulting them. The Woodings say that this goes against the understanding that there would be co-operation between the parties. However, Mr Browne did not submit that these matters gave a defence independent of s 176 of the Property Law Act. Accordingly, they do not require separate consideration.
Mr Dodd
[23] FM Custodians Ltd used a Mr Lindsay Dodd to market the properties. Mr Dodd had been a real estate agent licensed under the Real Estate Agents Act
2008. He had also been a real estate agent under the Real Estate Agents Act 1976. He was the subject of misconduct proceedings under s 72(a) of the Real Estate Agents Act 2008 before the Real Estate Agents Disciplinary Tribunal. He was found
to have forged some documents. The tribunal upheld the charge of misconduct. The
tribunal ordered that Mr Dodd’s licence be suspended for 12 months beginning from
15 March 2011. It was during this period of suspension that FM Custodians Ltd
used Mr Dodd to market the Woodings’ properties.
[24] Mr Kinzett says that FM Custodians Ltd used Mr Dodd, knowing of his suspension. He says that Mr Dodd was a very experienced real estate agent, whom it had used and found to be effective in the past. It considered that the matters that had given rise to the suspension related to his personal affairs, and did not bear on his ability to work for it. It engaged Mr Dodd to work for it. His responsibilities included obtaining details of properties, preparing advertising and taking expressions of interest, but he was not involved in decisions as to negotiating the sales. FM Custodians Ltd dealt with that aspect itself.
[25] It was not submitted that the work Mr Dodd carried out for FM Custodians Ltd during his period of suspension involved carrying out real estate agency work for which a licence was required under the Real Estate Agents Act 2008. The evidence is not clear whether Mr Dodd was an employee or an independent contractor.
[26] Under the case law, one of the ways to show reasonable efforts to obtain the best reasonably obtainable price is to appoint a reputable real estate agent to market the property. The Woodings say that engaging Mr Dodd did not meet that standard.
[27] FM Custodians Ltd submitted that it was entitled to “self market”. It did not
have to use a real estate agent. Using Mr Dodd was its way of self-marketing.
[28] Self-marketing involves a departure from the steps normally taken by a mortgagee. Mortgagees typically engage independent agents to market properties, because they are independent and because they have industry expertise in establishing and carrying out strategies to market properties effectively to potential purchasers. Accordingly, using agents goes towards discharging mortgagees’ duties. If a mortgagee chooses to market a property itself, rather than to use an independent agent, it will still have to comply with the standard of taking reasonable care to obtain the best price reasonably obtainable. As using an independent land agent can
usually be taken as satisfying that standard, a mortgagee who does not use an independent agent must still be able to show that self-marketing was as effective to attract potential purchasers. It cannot ask for the standards to be relaxed because it chose to market itself instead of using a land agent.
[29] Accordingly, the inquiry is whether the steps taken by FM Custodians Ltd were appropriate to market the properties to potential purchasers. The steps taken must be comparable to those that would be taken by a mortgagee using an independent land agent. Using a person such as Mr Dodd, who has relevant industry experience, goes towards meeting that standard. There is no suggestion that it was unlawful to use Mr Dodd. The marketing of each property will be considered.
[30] I consider the sale of each property to see whether the Woodings have an argument that FM Custodians Ltd did not comply with the duty under s 176. I note that before FM Custodians Ltd began marketing the properties, the Woodings had been trying to sell the properties.
Sale of Louisa Lane
[31] The Louisa Lane property is a residential section off Fairway Drive in Kamo, Whangarei. It is an elevated site on a steep slope with views. Work had been started for a substantial house.
[32] FM Custodians Ltd decided to sell the property by auction. It advertised the property for five weeks before the auction in The Northern Advocate, the New Zealand Herald, the Herald on Sunday, the Sunday Star Times and on the TradeMe website. FM Custodians Ltd says that it has found web-based advertising has been successful in generating inquiries for properties, more so than print media. A “For Sale” sign was also put up on the property. The cost of advertising came to
$7,832.66 (exclusive of GST). A copy of a newspaper advertisement for the sale was put in evidence. It was not criticised. The advertising for the Louisa Lane property is that typically carried out in such situations. It is comparable to that carried out when mortgagees instruct independent real estate agents.
[33] At the auction on 16 June 2011, the Louisa Lane property was passed in. Mr Kinzett says that FM Custodians Ltd received two offers after the auction, both of them for $120,000 including GST.
[34] FM Custodians Ltd then instructed Telfer Young, registered valuers, to provide a valuation of the property. A registered valuer prepared the report. The report gives the property a current market value of $120,000 including GST. The report noted the weak market and, in particular, the low demand for residential sections in the Whangarei City area. It appears that values were continuing to decline during 2011. The site was difficult, having a steep slope which would require additional costs. The original development proposed a substantial luxury home on pole foundations but the report said that during depressed times such development was significantly prejudiced. The valuer reached his valuation by reference to comparable sales.
[35] Mr Kinzett then negotiated with the offerors and persuaded one of them to increase their offer to $125,000 including GST. That offer was accepted and there was an agreement to sell on 8 July 2011 for $125,000.
[36] Against that, the Woodings had obtained a valuation for Louisa Lane in October 2010. QV Valuations provided the report. It gave the property a current market value of $272,000 comprising $190,000 for land value and $82,000 for improvements (estimated to be 22 per cent complete). Mr Kinzett acknowledges that he had a copy of that report when FM Custodians Ltd marketed and sold Louisa Lane.
[37] The Woodings say that the sale of Louisa Lane was for less than half the value given in the report by QV Valuations. It sold for less than the land value given in the QV report. They accept that merely selling below registered valuation does not of itself establish a breach of s 176, but say that it may still be evidence of it.[6]
[6] Moritzson Properties Ltd v McLachlan (2001) 9 NZCLC 262,448 (HC) at [61].
[38] The QV report was recent enough that it could provide useful information to
FM Custodians Ltd when selling the property. The purpose of the QV report was to
provide current market value for finance purposes. It was not made to assist in establishing how much the property might sell for on a forced sale by a mortgagee. The report does not address forced sale values.
[39] FM Custodians Ltd’s experience in marketing and trying to sell the property tells another story. The marketing was appropriate. Nevertheless, this was a difficult property to sell. At auction there were no offers. The offers after the auction were well below the values given by QV Valuation. In these circumstances, it was sound for FM Custodians Ltd to obtain a further valuation. The Telfer Young valuation confirmed to FM Custodians Ltd that the offers made at the $120,000 level were appropriately pitched.
[40] In these circumstances, I am satisfied that FM Custodians Ltd did comply with its duty under s 176. The Woodings have not shown an arguable case that FM Custodians Ltd did not take reasonable care to obtain the best price reasonably obtainable in July 2011.
Sale of Bank Street
[41] The property in Bank Street is a commercial building. It is a four storey building. It had originally been built in the 1920s with later additions in the 1980s, but had undergone substantial works in 2004 which included meeting current seismic strengthening requirements.
[42] Mr Kinzett says that it was decided to put the Bank Street property up for tender. Tenders closed on 17 June 2011. The property was marketed. A copy of the advertisement in evidence is appropriate. It was not criticised. Advertisements were published in The Northern Advocate, the New Zealand Herald, the Herald on Sunday, the Sunday Star Times and on the TradeMe website. There was also a “For Sale” sign. The cost of advertising came to $11,563.46 exclusive of GST. The advertising was appropriate as a way to inform a wide range of potential purchasers. FM Custodians Ltd received only one offer—$301,000 plus GST. FM Custodians Ltd decided that was too low to accept. It then obtained a valuation of the property by Telfer Young. The valuer put a current market value of $640,000 plus GST on the
basis of direct capitalisation and depreciated replacement costs. The valuation is tagged with the two conditions:
(a) That the local authority does not have any outstanding requisitions as to seismic strengthening; and
(b) That the existing contract income is being paid in full.
[43] FM Custodians Ltd then received an offer for the property of $650,000 plus GST. FM Custodians Ltd accepted the offer as there were no other offers for the property and this offer was above the valuation for the property given by Telfer Young.
[44] Against that, the Woodings raise two matters.
[45] They say that the property had been valued at $1,200,000. The valuation they rely on was given by a registered valuer in July 2008, three years before the tender by FM Custodians Ltd. It was not a current valuation. The 2008 valuation shows an actual rental being received of $85,000 per annum with an estimated market rental of
$118,000. On the other hand, the Telfer Young valuation showed an actual rental of
$14,000 per annum, with an estimated market rental of $77,000. FM Custodians Ltd was entitled to rely on the Telfer Young 2011 valuation rather than the earlier 2008 valuation. The earlier valuation is not evidence showing that FM Custodians Ltd sold at an under-value.
[46] The Woodings point out that the purchaser of the Bank Street property has the same registered office as FM Custodians Ltd. They suggest that there must be some connection between FM Custodians Ltd and the purchaser.
[47] Mr Kinzett’s affidavit addresses the matter. At the address for FM Custodians Ltd, there is also an office of chartered accountants, which is the registered office of the purchaser. There is no other evidence to suggest a connection between the purchaser and FM Custodians Ltd.
[48] FM Custodians Ltd has adequately answered the points raised by the Woodings. I am satisfied that there was appropriate marketing of the property and that the decision to sell by tender was one properly open to FM Custodians Ltd. It was appropriate for FM Custodians Ltd not to accept the tender of $301,000. Obtaining an updated current market valuation was prudent. The property was sold at a price close to the value given by the registered valuer.
[49] Mr Wooding also adds he had been trying to sell the property himself. He had gone to the property with a land agent, Mr Blomfield, but found that the locks had been changed, denying access. By this stage FM Custodians Ltd had already sold the property. Mr Wooding does not say that he had informed FM Custodians Ltd of the potential purchaser associated with Mr Blomfield or that this potential purchaser was known to Mr Wooding before FM Custodians Ltd had decided to sell for $650,000 plus GST. These circumstances do not change the fact that in marketing and selling the property, FM Custodians Ltd took reasonable care to sell for the best price reasonably obtainable on the market.
Sale of Matapouri property
[50] FM Custodians Ltd decided to sell the Matapouri property by auction on
16 June 2011. A copy of the advertisement for the property in evidence is appropriate and was not criticised. The property was advertised in the Northern Advocate, the New Zealand Herald, the Herald on Sunday, the Sunday Star Times and also on the TradeMe website for five weeks before the auction. The property was also flagged for sale.
[51] The cost of advertising came to $10,662.46 plus GST. Before the auction, FM Custodians Ltd obtained a valuation of the Matapouri property by Telfer Young. It gave the property a market value of $930,000 including GST but said that under mortgagee sale conditions the property was likely to realise $680,000 to $750,000 including GST. Amongst other things, the report by Telfer Young noted that the “current market is a buyer’s market and has been for some time” and purchasers were said to be “driving a hard bargain”. It also noted that purchasers have mixed
motivation and are generally “bargain hunters” expecting to buy below fair market
value.
[52] The valuer expected an extended recovery period to continue for the Tutukaka coast throughout the rest of 2011. The valuer assessed the property as having poor saleability. This was notwithstanding that the house on the property was built in about 1996 and was a multi-storey architecturally-designed building with three bedrooms over two levels and a self-contained two bedroom apartment on the ground floor level. The standard of construction and of amenities is well above that of many of the older baches at Matapouri. The house has a monolithic cladding system. Purchasers may have associated that with weather-tightness problems. However, Mr Wooding says that there were no weather-tightness problems, and that given the age of the building, weather-tightness problems would have become apparent by now. Even so, the use of insulclad now carries a stigma.
[53] At the auction on 16 June 2011, the bidding was opened at $600,000. There were no bids and the property was passed in. FM Custodians Ltd then listed the property with the local L J Hooker office to elicit some interest. An offer was then made. The property sold for $725,000.
[54] Mr Wooding had obtained a report from another registered valuer in January
2011. That valuer had assessed the current market value at $1,520,000 inclusive of GST. The report does not contain any recommendation for a forced sale valuation, but it did advise that the property would be adequate security for a first mortgage of
$1m.
[55] I recognise that of all the sales in issue, this must have been the most distressing for the Woodings. They would have had a justifiable pride of ownership. The property was close to the beach, but not on the beachfront. It had views over the estuary, and also out to the Poor Knights Islands. During boom times, when there was a strong demand for coastal properties, the Matapouri property would have been worth much more than what FM Custodians Ltd sold it for.
[56] There were competing submissions as to the relative merits of the two valuation reports. The report that Mr Wooding obtained cannot be dismissed out of hand. It was recent and had been signed-off by a recognised local registered valuer. Nevertheless the property had been appropriately marketed. But the state of the market became clear at the auction. No one present at the auction was prepared to offer $700,000 for the property. The later sale at $725,000 was appropriate, given the report by Telfer Young.
[57] For FM Custodians Ltd, Mr Sharp submitted that when faced with two recent relevant valuations, a mortgagee exercising a power of sale is entitled to choose which to adopt. The relative competence of the valuers is not in issue, in the same way as it would be in a claim against a valuer for negligent valuation. I accept that the mortgagee is entitled to rely on a relevant recent valuation report by a registered valuer in deciding whether to accept an offer to sell. That there is also another valuation giving a higher value does not, of itself, mean that the mortgagee has breached s 176 if he relies on one report rather than the other.
[58] The Woodings have not shown an arguable case that FM Custodians Ltd breached its duty under s 176 when it sold the Matapouri property.
Sale of Old Onerahi Road
[59] The Woodings’ setting aside application did not attack the sale of Old Onerahi Road. It could not have, because the property had not been sold. It has only been sold since they made their application. In these circumstances it would not be appropriate to rule on the s 176 issues for this sale, when they have not contended in this application that there was a breach and could not have. Their general complaint about Mr Dodd is not relevant here, because the property was sold long after his marketing efforts. Instead of ruling on the sale of Old Onerahi Road, the better course is to leave the Woodings to their rights to bring an independent claim. This judgment is not to be taken as saying one way or the other whether they should. What follows summarises the evidence for FM Custodians Ltd on Old Onerahi Road, but makes no findings under s 176.
[60] The Woodings had a conditional agreement to sell the Old Onerahi Road property for $900,000, but that agreement did not proceed. FM Custodians Ltd decided to put the Old Onerahi Road property out to tender. It was advertised with the Flames Hotel, which it adjoins, but was advertised as being available separately from the hotel. Advertisements for the hotel and Old Onerahi Road were put in The Northern Advocate, the New Zealand Herald, the Herald on Sunday, Sunday Star Times and on TradeMe over six weeks. Total advertising costs were $11,954.28 exclusive of GST. The tender process did not result in a sale. Mr Kinzett says that there was a conditional offer for $440,000 but that did not proceed. FM Custodians Ltd listed the property under general agency with Colliers, real estate agents, in August 2011.
[61] FM Custodians Ltd obtained a report from a registered valuer as to the current market value of the Old Onerahi Road property in May 2012. The report said the property was worth $475,000 plus GST. The report lists some sales of vacant sections in Onerahi. However, the value of $475,000 is derived by a rather rudimentary calculation on a subdivision basis. The valuer says that the property could be divided into 14 townhouse sites which would produce $1,400,000. He has allowed a round figure of $925,000 for all subdivision costs, holding costs, and allowances for profit and risk.
[62] Mr Kinzett says that the property was eventually sold on 20 December 2012 for $620,000 plus GST.
The Flames Hotel
[63] Similar considerations apply to the Flames Hotel. While FM Custodians Ltd did offer it for sale by tender, there has been no sale. Initially the Woodings ran the hotel, but FM Custodians Ltd obtained an order for possession. It appointed a receiver in June 2012. The receiver appointed a manager to run the hotel. Mr Kinzett says that there have been no realistic offers for the hotel, despite its own marketing and listing the hotel with real estate agents.
[64] The Woodings criticise the management of the hotel under the receivership. They say that the manager is a personal friend of Mr Kinzett, that he does not have the qualifications and experience claimed for him, and that his management of the hotel is less than professional. FM Custodians Ltd has responded to these attacks. For this case it is not necessary for me to consider them.
[65] As there has been no sale by the receiver, it is premature to consider whether the receiver has breached any duty under s 19 of the Receiverships Act 1993 to obtain the best price reasonably obtainable as at the time of sale. Similarly it is too early to consider whether FM Custodians Ltd could be liable for the actions of the receiver. I take the test for any liability of FM Custodians Ltd to the Woodings to be that stated by Lord Denning MR in Standard Chartered Bank Ltd v Walker:[7]
[7] Standard Chartered Bank Ltd v Walker [1982] 3 All ER 938 (CA) at 942, followed in Edmonds v
Westland Bank Ltd [1991] 2 NZLR 655 (CA) at 661.
The debenture holder, the bank, is not responsible for what the receiver does except in so far as it gives him directions or interferes with his conduct of the realisation. If it does so, then it too is under a duty to use reasonable care towards the company and the guarantor.
As there has been no sale, it cannot be established whether the Woodings could have any claim against the receiver or against FM Custodians Ltd for the actions of the receiver. No cause of action has arisen yet, as the Woodings have not yet suffered any loss.
Other matters of defence
[66] The Woodings have challenged the amount for which judgment was entered. FM Custodians Ltd filed an affidavit as to quantum for the original summary judgment application. That affidavit contained a detailed schedule showing the running total under the term loan, beginning from January 2011. The starting figure is $4,490,930.00, the amount of principal under the last variation made in December
2010.
[67] The Woodings’ approach was to raise questions as to the amount claimed by
FM Custodians Ltd. With one exception, they did not advance anything significant
or substantial to show that quantum had been wrongly calculated, that FM Custodians Ltd had incorrectly included in the debt something that should not have been, or that it failed to take into account something that should have been included. There was some argument over some minor costs, raised in submissions, but they were no more than quibbles. FM Custodians Ltd should not be put to the trouble of justifying them after it has obtained judgment. The one exception is that FM Custodians Ltd has not yet brought into account the net proceeds of sale of Old Onerahi Road. That can be addressed by FM Custodians Ltd bringing them into account in any steps taken to enforce the judgment. It does not require the judgment to be set aside.
[68] The Woodings also referred to their distressed personal circumstances and their expectations that FM Custodians Ltd had adequate security for its debt. Those are not matters of defence that go to the setting aside of the judgment, although they may be relevant in other circumstances.
Outcome
[69] The Woodings have not shown an arguable case that FM Custodians Ltd breached s 176 of the Property Law Act on the sales of Louisa Lane, Bank St and Matapouri. No useful purpose would be served by giving them the opportunity to bring a proceeding against FM Custodians Ltd under s 176 for these sales or to set aside the judgment on that account.
[70] The setting aside application could not sensibly challenge the sale of Old Onerahi Road – it had not happened before the Woodings applied, or the sale of the hotel – it has not happened yet. I therefore make no findings on those properties. That leaves the Woodings free to make independent claims on those properties later, if they have grounds.
[71] The Woodings do not have an arguable defence on quantum. The matters they raise as to security and their personal circumstances do not give them arguable defences that could have been raised in opposition to the application for summary judgment.
[72] The Woodings do have an explanation for some of their delay. At an early stage Mr Kinzett did give them assurances as to not bankrupting them. Those assurances did not give them grounds to oppose summary judgment, but do explain the absence of timely steps when they were first sued. But having an explanation for not taking steps earlier is not by itself a reason for setting aside judgment if they have no defence. Similarly it is not necessary to consider the question of irreparable injury to FM Custodians Ltd. Overall I am not satisfied that there has been or may have been a miscarriage of justice and that the judgment should be set aside.
[73] While the Woodings have not succeeded on their setting aside application, I record matters that have not been decided:
(a) Any claim in respect of the sale of Old Onerahi Road; (b) Any claim in respect of the Flames Hotel;
(c) Matters that could be relevant in FM Custodians Ltd’s bankruptcy applications against the Woodings, but are not relevant in a setting aside application, such as their personal circumstances, assurances given by FM Custodians Ltd as to not bankrupting and security held by FM Custodians Ltd.
Because these matters have not been decided, this judgment should not be taken as giving any indication how they would be.
[74] I make these orders:
(a) The application to set aside the judgment of 23 January 2012 is dismissed; and
(b)FM Custodians is entitled to costs on the application. If the parties cannot agree costs, memoranda may be filed, with the Woodings’ memorandum to come in five working days after FM Custodians Ltd’s.
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Associate Judge R M Bell
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