GLW Group Limited v Lepionka and Company Investments Limited
[2016] NZHC 3125
•19 December 2016
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2015-404-2168 [2016] NZHC 3125
BETWEEN GLW GROUP LIMITED
First Plaintiff
GARTH BOWKETT PATERSON Second Plaintiff
AND
LEPIONKA AND COMPANY INVESTMENTS LIMITED First Defendant
LEPIONKA AND COMPANY LIMITED Second Defendant
STEFAN JOZEF JOHN LEPIONKA AND NIGEL WARRANT HUGHES AS TRUSTEES OF THE SJ LEPIONKA FAMILY TRUST
Third Defendants
Hearing: 8 August 2016 Counsel:
D W Grove for the First Plaintiff
No Appearance by or for the Second Plaintiff
M J Tingey for the DefendantsJudgment:
19 December 2016
JUDGMENT OF WOODHOUSE J (Defendants' Application for Security for Costs)
This judgment was delivered by me on 19 December 2016 at 12:00 p.m. pursuant to r 11.5 of the High Court Rules 1985.
Registrar/Deputy Registrar
……………………………………
Solicitors / Counsel:
Mr D W Grove, Barrister, Auckland
Mr G Halse (plaintiffs’ instructing solicitor), Foy & Halse, Solicitors, Auckland
Mr M J Tingey, Barrister, AucklandMr M G Colson and Mr J H Stevens (defendants’ instructing solicitors) Bell Gully, Solicitors,
Wellington
GLW GROUP LTD v LEPIONKA AND COMPANY INVESTMENTS LTD [2016] NZHC 3125 [19 December
2016]
[1] The defendants seek orders that the plaintiffs provide security for the
defendants’ costs and that the proceeding be stayed if the security is not paid within
10 working days.
[2] The second plaintiff, Mr Paterson, was adjudicated bankrupt after the proceeding was issued. There was no appearance by or for Mr Paterson. For the defendants, Mr Tingey submitted that an order for security may be made notwithstanding the adjudication. I will address this point at the end of this judgment. The contest on the question of security was between the first plaintiff (GLW) and the defendants.
Factual background
[3] In 2009, Mr Paterson entered into an agreement to buy a 24 hectare property in Hawkes Bay for subdivision. Mr Paterson incorporated GLW, and GLW took title to the land.
[4] The purchase was funded by a loan from Westpac Banking Corporation
(Westpac), and Westpac made further loans, all secured by a first mortgage.
[5] GLW obtained resource consents for subdivision, but at the date this proceeding was issued (15 September 2015), separate titles had not been issued except for lot 1.
[6] In January 2014, GLW entered into an agreement to sell three lots to the second defendant and two lots to the third defendant. I will refer to the second and third defendants collectively as the Lepionka purchasers. The total purchase price was $4.64 million. The Lepionka purchasers paid deposits totalling $463,000.
[7] In May 2014, GLW granted a second mortgage over the property to an Australian company, AFI Management Pty Ltd (AFI). The mortgage is not registered, but AFI has lodged a caveat in reliance on it. AFI documents produced by Mr Lepionka appear to indicate loans from AFI to GLW in excess of AUD6.89 million.
[8] In January 2015, Westpac issued a formal notice of demand on GLW, under the Property Law Act 2007, for payment of $235,716.05 by 5 March 2015. GLW did not make payment.
The first defendant acquires the first mortgage
[9] All dates in the following paragraphs are in 2015, unless noted otherwise.
[10] On 25 March Mr Lepionka incorporated the first defendant company. On 31
March that company took an assignment of all of Westpac’s rights under the first mortgage. At that date the total debt to Westpac was $2.68 million. I will refer to the first defendant as the Lepionka mortgagee.
[11] On 1 April the Lepionka mortgagee entered into an agreement with the Lepionka purchasers (the Lepionka subdivision and compensation agreement). This recorded that the agreement was made to preserve and complete the purchase agreements made with GLW, and to complete the subdivision. The Lepionka purchasers agreed to pay $50,000 to the Lepionka mortgagee towards completion of the subdivision. In consideration of this, the Lepionka mortgagee agreed, amongst other things, to use commercially reasonable endeavours to complete the subdivision within six months. The mortgagee agreed that if the mortgage was redeemed or assigned, or the subdivision was not completed within six months, or the purchase agreements were cancelled by the Lepionka purchasers, the Lepionka mortgagee would pay the purchasers the following: (1) the $50,000 plus interest at 12 per cent compounding monthly; (2) $463,000, being the deposits paid to GLW, plus interest at 12 per cent per annum; (3) costs incurred by the Lepionka purchasers with their solicitors, accountants, and other costs incurred, from the date of the agreement to the date of payment; (4) $750,000 as compensation for non-completion of the subdivision and the purchase agreements.
[12] Also on 1 April the Lepionka mortgagee adopted the sale and purchase agreements entered into by the Lepionka purchasers with GLW.
GLW notices to redeem the mortgage
[13] On 2 April, the Lepionka mortgagees’ solicitors, Gibson Sheat, advised GLW that the Lepionka mortgagee had acquired the Westpac mortgage, and they forwarded notice under the Property Law Act that the Lepionka mortgagee had taken possession of the property.
[14] Between 2 and 9 April GLW, initially through Mr Paterson and then through GLW’s solicitor, Mr Toebes, advised Gibson Sheat that GLW wished to redeem the mortgage. Gibson Sheat’s initial response, to Mr Paterson, on 4 April, was:
In regards to the date for discharge, we will aim for Wednesday but given our office is closed for Easter, and Mr Lepionka is away on holiday, we cannot guarantee this.
[15] On 7 April, Gibson Sheat sent Mr Paterson and Mr Toebes a copy of the Lepionka subdivision and compensation agreement and a copy of the Lepionka mortgagee’s notice adopting the sale and purchase agreements between GLW and the Lepionka purchasers. The email concluded:
Given the adoption you may not now have the power to redeem the mortgage as the adoption may be akin to a sale by the mortgagee under a power of sale. Once we have Mr Toebes request for a discharge of mortgage we will turn our minds to it.
[16] On 8 April Mr Toebes asked Gibson Sheat for a repayment statement as at
9 April. Gibson Sheat’s response on 9 April was that they were waiting on some final amounts. They said the statement would be provided on a without prejudice basis as it was their view that GLW had no right to redeem the mortgage given that the Lepionka mortgagee “has now taken steps to sell the property using its power of sale under the adoption of the agreements for sale and purchase under s 179 of the Property Law Act”.
[17] On 13 April Gibson Sheat, on behalf of the Lepionka mortgagee, made demand on GLW for payment of the loan balance as at 10 April 2015, recorded as
$2,712,576.39. Payment was to be made within five days of the date of the letter.
[18] On 9 June Mr Toebes advised Gibson Sheat, and the solicitors acting for the Lepionka purchasers, that GLW proposed to redeem the first mortgage. Mr Toebes stated that this would require contemporaneous notice of cancellation of the purchase agreements of the Lepionka purchasers pursuant to the provision to that effect in the
1 April agreement between the Lepionka mortgagee and the Lepionka purchasers.
Gibson Sheat’s response, on 10 June, was:
Our client is unable to comply with your client’s request for a redemption of the mortgage. Our client has exercised its power of sale and as such is unable to comply.
Mr Coltart’s offers to purchase
[19] In August 2012 GLW had granted to Mr William Coltart an option to purchase lot 2. On 9 April 2015 the Lepionka mortgagee gave Mr Coltart notice of cancellation of the option.
[20] On 17 April 2015 Mr Coltart offered to purchase the entire property for
$5.65 million, plus GST. This offer was increased on 1 May 2015 to $6.93 million plus GST if any. On 5 May Mr Toebes, for GLW, advised Gibson Sheat that GLW agreed “in principle to the sale to Mr Coltart”. The offer was not accepted.
[21] Given Gibson Sheat’s advice on 10 April the total due on the first mortgage at that date was $2.71 million and assuming, generously in favour of the Lepionka mortgagee, that further costs took it to around $3 million by 1 May, Mr Coltart’s second offer would have left a surplus, after repayment to the Lepionka mortgagee, of around $3.9 million.
Mr Coltart’s appeal to the Court of Appeal
[22] The conduct of the Lepionka mortgagee, in respect of its decision to purchase the Westpac mortgage and take the further steps summarised to this point, was examined by the Court of Appeal in an appeal by Mr Coltart on a caveat dispute with the Lepionka mortgagee.1 Although the Court of Appeal was considering rights and
obligations as between Mr Coltart, as a caveator, and the Lepionka mortgagee,
1 Coltart v Lepionka and Company Investments Ltd [2016] NZCA 102, [2016] 3 NZLR 36 (Coltart).
findings of law of the Court, and conclusions that there was an arguable case against the Lepionka mortgagee, are relevant to important questions on the present application: whether GLW has an arguable case against the defendants and whether it is reasonably arguable that GLW’s impecuniosity was caused by the defendants. This is because, in particular, the Court concluded that Mr Coltart’s option arguably gave him an interest in GLW’s equity of redemption of the first mortgage, so the Court had to consider the equity that could be exercisable directly by the mortgagor GLW. That preliminary conclusion of the Court then required consideration of issues, of direct relevance to GLW’s position, whether the Lepionka mortgagee owed Mr Coltart a duty relating to the mortgagee’s exercise of its powers of sale and, if so, whether the Lepionka mortgagee was in breach of that duty.
[23] The Court of Appeal’s conclusion on whether a duty was owed was as
follows:
[55] It must follow that from the moment of acquiring Westpac’s charge the Lepionka mortgagee owed Mr Coltart and all others with an interest in the equity of redemption of the mortgage a duty to act in good faith when exercising its powers of sale. In this respect all the relevant steps taken by the mortgagee — including adoption of GLW’s agreements with the Lepionka purchasers, entry into the compensation agreements with the Lepionka purchasers, cancellation of Mr Coltart’s option and refusal of his offers to purchase the property — were incidental to its powers of sale.
(emphasis added)
[24] The Court next held that it was arguable that the Lepionka mortgagee acted in bad faith by acquiring the mortgage from Westpac, adopting the Lepionka purchasers’ contracts, cancelling Mr Coltart’s option and rejecting his offers to buy.2
All but cancellation of Mr Coltart’s option are matters directly bearing on GLW’s
claims.
Applications for security for costs: r 5.45
[25] There are two broad enquiries on an application for security for costs under r 5.45 of the High Court Rules.
2 Coltart, above n 1, at [56]-[50].
[26] The first is a threshold question. This is whether there is reason to believe that the plaintiff will be unable to meet an award of costs against it.
[27] If the threshold is met, the Court has an unfettered discretion as to whether an order for security should be made and, if so, the amount.
The threshold question
[28] GLW accepts that it has no liquid assets, but that is not determinative on the threshold question. GLW contends that its equity in the land is likely to be sufficient to meet an award of costs against it in favour of all three defendants. It also contends, against the Lepionka mortgagee, that the mortgage in any event gives the Lepionka mortgagee full security for its costs.
[29] The defendants contend that on any realistic analysis, including various estimates, or indications, of the amount owing to the second mortgagee, GLW has no equity in the land. In respect of the Lepionka mortgagee’s security for costs, several points were made by Mr Tingey to the effect that the security may not be sufficient to cover all costs. He further submitted, and correctly in terms of the provisions of the mortgage, that the mortgage does not provide any security for the costs of the Lepionka purchasers.
[30] On the question whether GLW has any equity in the land, Mr Grove, for GLW, acknowledged that the evidence for GLW is deficient in that GLW has not put forward any evidence of the amount owing to AFI. There is the evidence from Mr Lepionka, earlier noted, that some documents indicate that the second mortgage secures debt in excess of AUD6.89 million. The evidence as it stands indicates that GLW’s liability to AFI may be close to, and perhaps now more than, AUD7 million. On that basis, and adopting estimates of the total value of the land favourable to GLW, the present indications are that GLW has no equity in the land.
[31] In consequence, the application by all three defendants meets the threshold test when assessed by reference GLW’s assets; GLW has no equity in the land, and the land is its only asset. This also means that the application for security by the
Lepionka purchasers meets the threshold test. But the application by the Lepionka mortgagee also requires consideration of its security for costs under the mortgage.
[32] Moneys secured by the first mortgage include any costs or expense the Lepionka mortgagee suffers or incurs as a result of any exercise or contemplated exercise of any power as a mortgagee. Mr Tingey submitted that this does not avail GLW on the threshold issue for three reasons as against the Lepionka mortgagee. I address these in the following paragraphs.
[33] The first point was that the ultimate realisation by the Lepionka mortgagee may not be enough to meet the total owing to the Lepionka mortgagee, including costs incurred in this litigation. On the present evidence of values I am not persuaded that there is reason to believe that there would be a shortfall for the Lepionka mortgagee.
[34] The second point was that, as a matter of interpretation, the security would not cover costs incurred in resisting claims by GLW pursuant to claimed rights or powers as mortgagor. I do not agree. GLW is, of course, the plaintiff advancing claims pursuant to asserted rights or powers, but the Lepionka mortgagee is resisting these claims in reliance on the powers it claims it has, and which it contends have been properly exercised, pursuant to the mortgage.
[35] The third point was that GLW’s argument that the Lepionka mortgagee has security makes no allowance for AFI’s interest as second mortgagee; an award of costs to the Lepionka mortgagee, recoverable under the mortgage, will diminish the recovery by AFI. The proposition as to the effect is correct. But I do not consider that this is a matter that can be taken into account in determining whether there is reason to believe that a costs award against GLW could not be recovered by the Lepionka mortgagee.
[36] For the reasons just traversed, in relation to the security, I am therefore not satisfied that the Lepionka mortgagee has met the threshold test. However, in case I am wrong in that conclusion, the discussion that follows, in respect of exercise of the
discretion on the application by the Lepionka purchasers, may be taken to apply also to the application for security for costs by the Lepionka mortgagee.
Exercise of the discretion
[37] On the discretion, the Court of Appeal said in A S McLachlan Ltd v MEL Network Ltd:3
[15] The rule itself contemplates an order for security where the plaintiff will be unable to meet an adverse award of costs. That must be taken as contemplating also that an order for substantial security may, in effect, prevent the plaintiff from pursuing the claim. An order having that effect should be made only after careful consideration and in a case in which the claim has little chance of success. Access to the courts for a genuine plaintiff is not lightly to be denied.
[16] Of course, the interests of defendants must also be weighed. They must be protected against being drawn into unjustified litigation, particularly where it is over-complicated and unnecessarily protracted.
(emphasis added)
[38] In my judgment, this important statement of principle by the Court of Appeal is determinative of this application against the defendants. And that conclusion is founded, in substantial measure, on the findings of the Court of Appeal in Coltart which can be applied to the claims by GLW against all three defendants in this case.
[39] Mr Tingey, quite properly, acknowledged that GLW has an arguable case, at least against the Lepionka mortgagee, given the decision of the Court of Appeal. He qualified that in a material way in respect of the claim against the Lepionka purchasers. I will come to that in a moment. Confining attention at this point to the application for security by the Lepionka mortgagee, the strength of the Court of Appeal’s provisional findings in Coltart, weighed in conjunction with the Court of Appeal’s statement of principle in A S McLachlan, by itself satisfies me that the discretion on security should be exercised against the application by the Lepionka mortgagee.
[40] That conclusion is strengthened by considering the alternative causes of action advanced by GLW. There are four causes of action which may be summarised
3 A S McLachlan Ltd v MEL Network Ltd (2002) 16 PRNZ 747 (CA) (A S McLachlan).
as follows: (1) breach of duty to allow GLW to redeem the mortgage; (2) breach of equitable duties owed by the Lepionka mortgagee to GLW to act fairly and in good faith and to exercise its powers for a proper purpose; (3) relief under the Credit Contracts and Consumer Finance Act 2003 consequent upon alleged oppressive conduct by the Lepionka mortgagee; and (4) breach of duties owed by the Lepionka mortgagee to GLW under s 176 of the Property Law Act 2007. At least some of these causes of action extend the scope of the claim by GLW, assessing matters in a global way, beyond the specific issues considered by the Court of Appeal in Coltart, but with the conclusions in Coltart at least to an extent applicable to the additional causes of action advanced by GLW.
[41] The present pleading by GLW is in substance, if not in form, directed to rights and powers of GLW exercisable against the Lepionka mortgagee only, and not in any direct way against the Lepionka purchasers, and to duties owed to GLW by the Lepionka mortgagee, and not in any direct way by the Lepionka purchasers. This was a point given some emphasis by Mr Tingey. However, when the substance of GLW’s claims is considered against the factual background, as opposed to the form of the pleading, I am satisfied GLW does have a reasonably arguable case against the Lepionka purchasers. An amended statement of claim can be filed. The Lepionka purchasers are necessary parties to the claim, as defendants, because the substance of some of the relief sought by GLW is against the Lepionka purchasers as well as the Lepionka mortgagee, or will have adverse consequences for the Lepionka purchasers if GLW succeeds. Also, and importantly, it is arguable that the Lepionka purchasers have acted in concert with the Lepionka mortgagee to pursue a course of action which, if GLW’s claims are made out, may arguably render the Lepionka purchasers liable together with the Lepionka mortgagee.
[42] Both counsel addressed some further points bearing on discretion. Given my assessment of the merits, and with that point weighing materially against granting the orders for security, it is unnecessary to consider these other matters beyond briefly noting two.
[43] Mr Grove argued that the defendants, and the Lepionka mortgagee, caused
GLW’s impecuniosity. Mr Tingey submitted that the point has no merit because
GLW’s failure to pay Westpac, in response to Westpac’s formal demand under the Property Law Act for payment of some $235,000, establishes that GLW was plainly impecunious before the Lepionka mortgagee acquired the first mortgage. The issue here is different from the threshold enquiry directed to the question whether GLW would have any equity in the property if it fails in its claims. I consider that it is arguable that, if some of the claims by GLW against the defendants are established, and with those claims being reasonably arguable for reasons already outlined, GLW’s equity position may be quite different from the negative assessment for the threshold question. This is the second point of particular relevance of the Coltart decision.
[44] In Coltart the Court of Appeal held, amongst other things, that it was arguable that the Lepionka mortgagee acted in breach of a duty of good faith in acquiring Wesptac’s mortgage – a distressed security – in the first place and then in rejecting Mr Coltart’s offers to buy the entire property. Plainly the Lepionka mortgagee’s acquisition on 31 March 2015 of Wesptac’s security was not the reason why GLW on 5 March 2015 defaulted in payment of the sum of $235,716.05 demanded by Westpac. But for present purposes, in considering exercise of a discretion, one counter factual is what would have happened if the Lepionka mortgagee had not acquired the security. In this case, on evidence presently available, the position as between GLW as mortgagor and Westpac as first mortgagee may have worked out in one of two ways. The first, and on present evidence perhaps the more likely, would have been acquisition of the entire property by Mr Coltart for
$6.9 million. The other possibility is that GLW would have redeemed the mortgage. These possibilities still leave question marks as to the ultimate state of GLW’s balance sheet, but the enquiry as to the cause of impecuniosity from 1 April 2015 does not require analysis to that extent.
[45] The other point briefly to be noted is a submission for the defendants that there has been misconduct by GLW justifying exercise of the discretion against GLW. The points are contained in the written submissions for the defendants, but Mr Tingey did not put much weight on these in his oral submissions. In addition, they depended on contentions of fact which are firmly contested. The point certainly falls well short of shifting the discretionary conclusion in favour of the defendants.
The application against the second plaintiff
[46] On the application for an order for security against Mr Paterson, there is a preliminary question as to whether an order should be made without hearing from the Official Assignee. However, it is convenient to make some observations in respect of the application against Mr Paterson and his position as a party in general.
[47] Mr Paterson’s bankruptcy sufficiently establishes, in the absence of any other evidence, that he would be unable to pay costs. But on the discretion, the points in GLW’s favour would also weigh in Mr Paterson’s favour.
[48] I would therefore not make an order for security against Mr Paterson. But he should not remain as a plaintiff if there is no intention that his claim be continued. I would be grateful if Mr Grove would refer this matter to the Official Assignee. If the intention is that Mr Paterson’s claim be discontinued, a notice of discontinuance should be filed without delay. If it is not the intention, the Official Assignee is asked to file a memorandum by 3 February 2017, outlining what is proposed in respect of Mr Paterson’s claim as second plaintiff.
Result
[49] The application for security for costs by all three defendants is dismissed.
[50] The first plaintiff is entitled to costs on a 2B basis, together with reasonable disbursements. If there is any issue on the quantification of costs is it to be
determined in the first instance by the Registrar.
Woodhouse J
1