Gold Band Finance Ltd v Philpott
[2015] NZHC 2383
•30 September 2015
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
CIV-2014-409-000716 [2015] NZHC 2383
UNDER the Land Transfer Act 1952 IN THE MATTER OF
Caveat 8322656.1, Caveat 9233653.1 and
Caveat 8003770.1BETWEEN
GOLD BAND FINANCE LIMITED Applicant
AND
SHAYNE PHILPOTT and NEW ZEALAND TRUSTEE SERVICES LIMITED, COLIN PETER STOKES and FAY EUNICE RICHARDSON, ROBERT WILLIAM SMITH and GREGORY ROBERT SMITH
First Respondents
AND
STUART ELLESMERE LINDSAY and
JULIE IVONNE LINDSAY Second Respondents
Hearing: 16 March 2015, 18 March 2015 Appearances:
C R Vinnell and D T French for Applicant
J P Forsey and S R Caradus for First Respondents
A C Hughes-Johnson QC for Second RespondentsJudgment:
30 September 2015
JUDGMENT OF ASSOCIATE JUDGE OSBORNE
on application for removal of caveats
Background
[1] The applicant (Gold Band) sought an order under s 143 Land Transfer Act
1952 (the Act) in the usual terms to remove caveats immediately before registration of a transfer in power of sale by Gold Band.
GOLD BAND FINANCE LIMITED v PHILPOTT [2015] NZHC 2383 [30 September 2015]
[2] The parties have competing interests in relation to a Christchurch subdivision to be known as Noble Village. The developer is Noble Investments Limited (Noble). At an earlier time when Noble was planning to develop a large piece of rural land, Noble sold lots to the respondents (and others) in advance of the subdivision.
[3] Gold Band provided finance to Noble, secured over the titles held by Noble in the subdivision. The loan is in default. As between Noble and Gold Band, Gold Band is entitled to proceed with a mortgagee sale. It would already have done so but for caveats lodged by the respondents. Gold Band did not assert that the respondents lacked caveatable interests. The caveatable interests of the respondents had been upheld (subject to appeal) in a series of judgments which I delivered between June
2012 and September 2014.1
[4] In each case, the respondents became registered proprietors of land within the subdivision. The first respondents (whom I shall refer to collectively as “Philpott”) own Lot 9 together with a one-tenth share of Lot 22. The second respondents (the Lindsays) own Lot 4 together with a one-tenth share in Lot 22. However, this proceeding is not concerned with the Philpott and Lindsay interests in those lots.
[5] Rather, this proceeding concerns whether the interests which Philpott and the Lindsays claim in titles held by Noble are affected by Noble’s undertaking to provide access and services. Those interests have been recognised as caveatable interests by the earlier judgments.
[6] At this hearing, I initially heard submissions for both Philpott and the Lindsays. In the course of the hearing, Mr Hughes-Johnson QC and Mr Vinnell advised the Court that all issues between Gold Band and the Lindsays had been resolved by consent. Gold Band’s application against the Lindsays was thereafter dismissed.
[7] This judgment therefore concerns only the Philpott application.
1 Philpott v Noble Investments Ltd [2012] NZHC 1431; Philpott v Noble Investments Ltd [2013] NZHC 400 (caveatable interests upheld on appeal, but with appeal allowed on other grounds – Philpott v Noble Investments Ltd [2015] NZCA 342); Lindsay v Noble Investments Ltd [2014] NZHC 799 and Lindsay v Noble Investments Ltd [2014] NZHC 2127.
Issues
[8] Philpott identified two grounds of opposition to Gold Band’s application,
namely:
(a) Gold Band consented to the interests protected by the Philpott caveats and cannot rely upon the principle of indefeasibility of title.
(b)An arrangement which Gold Band entered into with Delta Utility Services Ltd (Delta) after the Philpott caveats were lodged, amounted to fraudulent or collusive conduct in an attempt to defeat Philpott’s interests and thereby disentitle Gold Band from relying on any priority it might have previously had.
[9] An alternative way of framing the issue is to ask whether, notwithstanding the principles relating to the indefeasibility of the title of a registered mortgagee, the interests of Philpott protected by its caveats will not be extinguished by Gold Band’s intended mortgagee sale.
The caveats
First Philpott Caveat
[10] The first Philpott caveat concerns an interest pursuant to a settlement agreement dated 8 August 2008, which included an agreement by Noble to create a right of way (an easement) over its land (“the 2008 agreement”).
Second Philpott caveat
[11] The second Philpott caveat concerns an interest pursuant to the 2002 sale agreement between Noble and Philpott. Noble agreed to provide services for sewer, stormwater,2 water supply, power and telecommunications for the benefit of the
Philpott land, which arguably required the registration of easements by Noble and
2 Although the second Philpott caveat refers to an interest in relation to stormwater (as well as other services), the 2002 agreements did not provide for stormwater services, a difference explained in Lindsay v Noble Investments Ltd [2014] NZHC 799 at [33]–[34].
which also provided for parts of its land to be vested as road for the benefit of the
Philpott land (“the 2002 agreement”).
Chronology
[12] A chronology of key events is:
17/5/2002 Agreement for sale of Lots 9, 19 and a one-tenth share in Lot 22 (“part-Lot 22”) by Noble to Philpott (including Deed of Option for Noble to purchase back Lot 19, and covenants by Philpott to relinquish part-Lot 22 for legal road).
13/10/2003 Noble registers encumbrance over titles (for vesting of Lot 22
“access lot” as legal road).
19/1/2004 Noble transfers (amalgamated) Lots 9, 19 and part-Lot 22 to
Philpott.
2/6/2006 Loan contract between Gold Band and Noble ($581,607) and
Deed of Assignment of Noble’s Option to Gold Band.
21/8/2006 Subdivision granted residential zoning.
19/9/2006 Gold Band caveats amalgamated title pursuant to assignment of
Option.
4/4/2008 Further loan contract between Gold Band and Noble to be secured by general security agreement and mortgage over Noble’s Options.
8/8/2008 Agreement by Noble with Philpott to (inter alia) create a right of way (an easement) over Noble’s land (as southern access to Lot
9).
22/8/2008 De-amalgamation of title: titles issue for further lots in the
subdivision (including Lot 19). Philpott transfers Lot 19 to Noble.
Mortgage to Gold Band registered over Lot 19.
Encumbrance to Christchurch City Council registered on further
Lots.
12/12/2008 First Philpott caveat lodged including over Lot 19 (to protect the right of way under the 2008 agreement).
28/10/2009 Second Philpott caveat lodged including over Lots 11 – 18 (to protect interests under 2002 agreement).
20/11/2009 Loan contract between Delta and Noble including Noble’s agreement to grant security by way of first mortgage over Noble’s Lot 14.
Unspecified date Philpott refuses to withdraw second Philpott caveat to allow registration of Delta mortgage as first mortgage.
14/4/2010 Gold Band, Delta and Noble enter into security sharing deed, with Gold Band to act as trustee for Delta in relation to Gold Band’s security over Noble’s Lot 14.
Noble examines options to repurchase Lots 19 and 18.
21/12/2011 Gold Band, Delta and Noble enter into further security sharing deed, with Gold Band to act as trustee in favour of Delta in relation to Gold Band’s security over Noble’s Lots 18 and 19.
28/6/2012 Judgment (No 1) in Philpott v Noble.3
3 Philpott v Noble [2012] NZHC 1431.
5/3/2013 Judgment (No 2) in Philpott v Noble.4
2/4/2013 The term of Gold Band’s loan expires.
22/8/2013 Partial Assignment of Debt and Security Sharing Deed by which Gold Band assigns to Delta portions of the Gold Band loan facility, with Gold Band to act as trustee for Delta’s rights and interests.
10/6/2014 Gold Band serves on Noble a notice under s 119 Property Law
Act 2007.
16/7/2014 Gold Band’s power of sale becomes exercisable.
6/10/14 Gold Band files its originating application for removal of caveats.
Removal of caveats on the application of a registered mortgagee – the principles
[13] Gold Band, as applicant, accepts that Philpott has a caveatable interest. Gold Band therefore does not invoke the principles by which applicants often seek to establish that the caveator lacks a reasonably arguable case for the interest it claims.
[14] The principles which Gold Band invokes flow from the Court’s (residual) discretion to order removal of the caveat pursuant to s 143 of the Act. In this case, those principles are engaged in the context of Gold Band’s position as the holder of a registered mortgage.
[15] Section 143 of the Act provides:
143 Procedure for removal of caveat
(1) Any such applicant or registered proprietor, or any other person having any registered estate or interest in the estate or interest protected by the caveat, may, if he thinks fit, apply to the High Court for an order that the caveat be removed.
4 Philpott v Noble [2013] NZHC 400.
(2) The court, upon proof that notice of the application has been served on the caveator or the person on whose behalf the caveat has been lodged, may make such order in the premises, either ex parte or otherwise, as to the court seems meet.
[16] The principles which I adopt are:
(a) By reason of indefeasibility of title,5 a caveator’s claim against a mortgagor’s estate is subject to the power of sale of any (prior registered) mortgagee.6
(b)The Court’s residual discretion under s 143 of the Act is reflected in the Court’s power to “make such order… as to the Court seems meet”. The power confers a wide discretion.7
(c) The discretion to order removal must be exercised cautiously.8
[17] To justify an order removing the caveat, the Court must be completely satisfied that the legitimate interest of the caveator will not thereby be prejudiced. This situation may obtain if the caveator can have no reasonable expectation of obtaining a benefit from the continuance of the caveat, or if the caveator’s interests can be reasonably accommodated in some other way.9
[18] The cases have dealt with situations in which a caveator had a reasonable expectation of obtaining a benefit from a continuance of the caveat (such as through specific performance of the agreement between the registered proprietor and the caveator, notwithstanding the registration of a mortgage before the caveat).
Examples include where the mortgagee:
5 Frazer v Walker [1967] NZLR 1069 (PC); Congregational Christian Church of Samoa
Henderson Trust Board v Broadlands Finance Ltd [1984] 2 NZLR 704 (HC).
6 National Mutual Finance (1988) Ltd v Berryman HC Wellington M451/91, 2 October 1991; Canterbury Finance Ltd v Sagar Trust Ltd (1997) 3 NZConvC 192,571 (HC) at 192,577 per Master Venning; see also Hinde, McMorland and Sim Land Law in New Zealand (looseleaf ed,
LexisNexis) at [10.020(d)].
7 Varney v Anderson [1988] 1 NZLR 478 (CA) at 479 per Cooke P.
8 Pacific Homes Ltd (in receivership) v Consolidated Joineries Ltd [1996] 2 NZLR 652 (CA) at
656 per Blanchard J; Stewart v Kaipara Consultants Ltd [2000] 3 NZLR 55 (CA) at 61 per
Blanchard J.
9 Pacific Homes Ltd (in receivership) v Consolidated Joineries Ltd, above n 8, at 656.
(a) consented to a sale to the caveator;10 and
(b)there had been conduct on the part of the mortgagee which equity recognised as resulting in a deferral of priority.11
Consent to sale – the principles
The legal relevance of consent
[19] Section 105 of the Act, which deals with the registration of a transfer effected through a mortgagee sale, confirms the general principle of indefeasibility and identifies exceptions to it.
[20] Section 105 of the Act provides:
105 Transfer by mortgagee
Upon the registration of any transfer executed by a mortgagee for the purpose of exercising a power of sale over any land, the estate or interest of the mortgagor therein expressed to be transferred shall pass to and vest in the purchaser, freed and discharged from all liability on account of the mortgage, or of any estate or interest except an estate or interest created by any instrument which has priority over the mortgage or which by reason of the consent of the mortgagee is binding on him.
(emphasis added)
[21] The key substantive principles relating to a mortgagee’s consent to a disposition by the owner were recognised by the Court of Appeal in Vegar-Fitzgerald v Aorangi Forests Ltd as including these propositions:12
(4) If a mortgagee has not consented to a sale by the owner, the purchaser’s equitable interest is extinguished by a sale by the mortgagee in exercise of its powers and the caveat cannot be sustained.13
(5) Consent in this context does not mean mere acquiescence or standing by… Instead consent requires proof of a clear and unequivocal, that is, positive and demonstrative act or acts.14
10 Land Transfer Act 1952, s 105.
11 National Mutual Finance (1988) Ltd v Berryman, above n 6, at 4.
12 Vegar-Fitzgerald v Aorangi Forests Ltd [2014] NZCA 200 at [13] per Harrison J.
13 Land Transfer Act 1952, s 105.
14 Cashmere Capital Ltd v Carroll [2009] NZSC 123, [2010] 1 NZLR 577 at [75]–[79] per
McGrath J.
Unconscionable conduct – the principles
[22] The rights of a registered mortgagee may be displaced by conduct which amounts to a deferral of priority, even absent fraud under the Land Transfer Act 1952 and absent consent under s 105 of the Act. This formulation, seen in the judgment of McGechan J in National Mutual Finance (1988) Ltd v Berryman, has been
repeatedly adopted.15
[23] The distinction between Land Transfer Act (or Torrens) fraud and unconscionable conduct giving rise to an in personam claim was explained by the Court of Appeal in CN and MA Davies Ltd v Laughton.16 Thomas J, delivering the judgment of the Court, explained in relation to claims in personam that:17
What is being challenged is not the validity of the registered title, as in Frazer v Walker, but the freedom of the registered proprietor to disregard an equity arising out of [his or her acts or omissions].
[24] If unconscionability is to ground an in personam claim, that claim must be a recognised cause of action. It is insufficient to allege unconscionable conduct, without more.18 The causes of action may be legal or equitable but the relief is equitable.19
[25] The Court of Appeal has recognised that the in personam exception to the indefeasibility rule should be confined to cases that truly engage the conscience of the party whose registered proprietorship is challenged.20 Situations in which the in
personam exception may arise include where equity would:
15 National Mutual Finance (1988) Ltd v Berryman, above n 6, at 4. See, for instance, Instant
Funding Ltd v Greenwich Property Holdings Ltd HC Auckland CIV-2007-404-6806, 20
December 2007 at [8] per Venning J; Son v Ko (2006) 7 NZCPR 649 (HC) at [8] per
Baragwanath J.
16 CN and MA Davies Ltd v Laughton [1997] 3 NZLR 705 (CA).
17 At 713, citing Frazer v Walker, above n 5.
18 Hinde McMorland and Sim above n 6, at [9.046] citing Conlan v Registrar of Titles [2001] WASC 201, 24 WAR 299 at [271] and [289] per Owen J.
19 Duncan v McDonald [1997] 3 NZLR 669 (CA) at 683 per Blanchard J.
20 Cashmere Capital Ltd v Crossdale Properties Ltd [2009] NZCA 185, [2009] 3 NZLR 612 at [18] per Baragwanath J; Cashmere Capital Ltd v Carroll, above n 14 reversed (but not on this point); see also Regal Castings Ltd v Lightbody [2008] NZSC 87, [2009] 2 NZLR 433 per Tipping J; see also Hinde McMorland and Sim, above n 6 at [9.046].
(a) protect the interest of a beneficiary in trusts such as an express trust,21 a constructive trust (whether institutional or remedial),22 and a resulting trust;23
(b)relieve a victim from the consequences of conduct by a person exercising undue influence (presumptively or factually);24
(c) hold the registered proprietor to be estopped from denying a
claimant’s interest in the land.25
[26] In Duncan v McDonald, the Court of Appeal observed that the precise limits of in personam claims have not yet been determined. Delivering the judgment of the Court, Blanchard J observed:26
It is a question of fact and degree when a registered proprietor’s behaviour will give rise to an equity of sufficient strength to support an in personam claim…. [M]ore is required than the act of registering an instrument with knowledge of a competing claim by a third party. More is also required than knowledge of an irregularity in or relating to the instrument. Before a registered proprietor is susceptible to an in personam claim it must be shown that he or she has acted or is acting unconscionably in obtaining or taking advantage of the registered interest, but the registered proprietor's conduct need not have involved actual dishonesty towards the in personam claimant. An attempt by the registered proprietor to enforce an interest knowingly obtained by his or her unlawful behaviour may be found to be unconscionable.
Gold Band’s case
[27] Gold Band asserts that the Court should make an order in the usual terms as to the removal of the Philpott caveats by reason of Gold Band’s rights as the holder
of a mortgage which was registered before the Philpott caveats. It says:
21 CN and MA Davies Ltd v Laughton, above n 16, at 711.
22 Regal Castings Ltd v Lightbody, above n 20, at [154] per Tipping J, with which Blanchard and Wilson JJ concurred. At [78], the latter Judges found that Lightbody had acted “unconscionably towards Regal in transferring the property with the intention of putting it beyond Regal’s reach”.
23 Tattersfield v Leo Walker Tattersfield Ltd (1980) 1 NZCPR 235 at 237 (HC) per Chilwell J;
Hinde McMorland and Sim, above n 6, at [9.052], fn 5. See also Hospital Productions Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 96–97 per Mason J, adopted by Baragwanath J in Son v Ko, above n 15, at [50].
24 Smith v Hugh Watt Society Inc [2004] 1 NZLR 537 (HC) at [83]–[88]; Garofano v Reliance
Finance Corporation Ltd (1992) 5 BPR 11,941 (NSWCA) at 11,945 per Meagher JA.
25 Halliday v Bank of New Zealand [2013] 1 NZLR 279 (HC) at [55] per Mallon J.
26 Duncan v McDonald above n 19, at 683–684.
(a) Gold Band and Noble entered the relevant loan contract on 4 April
2008, with security to be provided by way of a mortgage registered over Lots 11 – 19.
(b)The terms of the mortgage permit Gold Band to sell Lots 11 – 19 in the event of a default on the loan.
(c) The mortgage was registered on 22 August 2008. (d) The Philpott caveats were subsequently registered.
(e) Noble is in default of the loan contract by failing to pay interest and all amounts (including principal) due upon the expiry of the term of the loan.
(f) Gold Band’s power to sell the land became exercisable from 16 July
2014.
The two-fold Philpott opposition
[28] By its notice of opposition, Philpott does not take issue with the historical narrative relied upon by Gold Band, as set out in the immediately preceding paragraph.
[29] Philpott instead asserts that there exist two issues which give rise to circumstances in which it is arguable that the Court should exercise its discretion to refuse removal of the caveats.
[30] In particular, Philpott asserts that:
(a) it is arguable that Gold Band consented to the Philpott interest in the land; and
(b)it is arguable that Gold Band assisted subordinate parties to defeat Philpott’s interests and in doing so has lost the right to rely on any priority it may have had.
Is it arguable that Gold Band consented to Philpott’s interest in the land?
Philpott’s case
[31] For Philpott, Mr Forsey submitted that Gold Band took a number of steps which demonstrated “an active acceptance of or consent to [Philpott’s] interest”. The steps identified by Mr Forsey were:
(a) Gold Band knew it was lending for a two-stage project, with Noble undertaking works to enable residential zoning and subdivision;
(b)Noble’s ability to acquire land for use as security was conditional on completing various works, including road widening and obtaining consents;
(c) Gold Band sought and was provided with copies of the Agreements
(including special terms) and Options;
(d) Gold Band knew that the land to be acquired under the Option would
be “subject to easements and rights in the land”;
(e) The Option required Noble to obtain all consents “to provide for access and services to the lots within the Option Subdivision”;
(f) Gold Band made it a precondition to drawdown that it and/or its solicitors were satisfied with the Agreement and Option. The Court can infer that approval was given to the Agreement and Option, since the funds were subsequently advanced;
(g) Gold Band required Noble’s express undertaking that it would comply
with its obligations under the Option;
(h)Noble’s failure to comply with its obligations under the Option was a default of Gold Band’s loan conditions and entitled Gold Band to, inter alia, implement the Options on Noble’s behalf; and
(i)Gold Band took an assignment of the Option, subject to any equities associated with the Option including contractual obligations, and lodged caveats in reliance on those Options.
Case for Gold Band
[32] Gold Band, having registered its mortgage before the Philpott caveats were lodged, relies primarily upon the indefeasibility of its title.
[33] Mr Vinnell, for Gold Band, submitted correctly that Philpott’s evidence discloses neither a request made to Gold Band for consent nor the communication of consent by Gold Band.
[34] Mr Vinnell submitted that this is a case in which there is simply evidence of a degree of knowledge on the part of Gold Band of particular aspects of the subdivision (including details of arrangements between Noble and Philpott). For instance, Mr John Mander (the Chief Executive of Gold Band) referred to copies of relevant agreements for sale and purchase and special conditions which were received by Gold Band. Mr Vinnell accepts that the Court might reasonably find that there was (arguably) a significant degree of knowledge on Gold Band’s part and perhaps even acquiescence. But he submits that there is no evidential basis for a finding of consent.
Discussion
[35] The starting point for consideration of the consent issue lies in s 105 of the Act by which a mortgagee’s consent to a particular estate or interest overrides what would otherwise be an indefeasible title.
[36] When the various components of Philpott’s argument as to consent are
considered, none amounts (singly or cumulatively) to anything more than an
arguable knowledge of or acquiescence in the caveats by Gold Band. The evidence discloses neither a request for nor an express consent to the creation of the interests of Philpott. Rather, the emphasis of Mr Stokes’ affidavit was, as described by Mr Vinnell, largely aimed at establishing Gold Band’s knowledge of the caveator’s interest.
[37] To the extent that Mr Forsey, for Philpott, sought to distil an implied consent from Gold Band’s arguable knowledge and acquiescence (responsibly refraining from any suggestion of express consent), I note the following particular matters of submission:
(a) Mr Stokes sought to characterise Gold Band as a party to the agreements pursuant to which Philpott’s interests are claimed. Contrary to that assertion, Gold Band did not become a party to such contracts.
(b)In his affidavit Mr Stokes refers to Gold Band as having an assignment of the Deed of Option (incorporating the option to purchase Lot 19 and an obligation to provide access and services within the subdivision). Mr Stokes appears to infer that such an assignment would have then rendered Gold Band a party to the Noble/Philpott contracts. Contrary to Mr Stokes’ evidence, there was not an assignment of the Deed. Rather, Gold Band simply took an assignment of the benefit of the Deed of Option by way of security. It was Noble which was (and remained) bound by its obligations under the Noble/Philpott contracts.
(c) Mr Stokes’ affidavit makes an express reference to “an assurance”
from Gold Band in these terms:
Even after the consent has been stamped by the Council on
25 May 2009, Nobles [sic] and Gold Band’s agent assured
me that our subdivision could be progressed.
Responsibly, Mr Forsey did not seek to develop any argument as to consent flowing from this very general statement. In its terms, it does
not purport to consent to a deferral of interest. Furthermore, the statement is devoid of the detail (particularly as to the maker of the assurance) which might entitle it to be given any weight as evidence of consent.
(d)In relation to Gold Band’s state of knowledge, Mr Forsey included the proposition that Gold Band knew that Noble’s land (being the lots subject to the option) would be acquired in exchange for Noble’s undertaking road-widening and related works necessary for the provision of subdivisional rights for Lot 9 and subject to Philpott’s rights in the land. In fact, the consideration for the purchase pursuant to the option is expressly stated in the deed (clause 4.1) to be $10. Upon sale back, Philpott would receive the $10, the benefit of rezoning and the intended de-amalgamation of lots. The “road widening and related works” to which Mr Forsey refers, depend not upon the Deed of Option but upon other contracts.
(e) Mr Forsey referred in the context of consent to a provision in the Deed of Assignment whereby Noble undertook to comply with all its obligations under the Deed of Option. Even if the Deed of Option had been the instrument by which Noble committed to road widening and related works (which it was not), Noble’s undertaking in its Deed of Assignment to Gold Band to observe its obligations under the Deed of Option, does not constitute a consent in favour of Philpott to deferral of Gold Band’s interest. It is, rather, Noble’s undertaking to Gold Band, enforceable by Gold Band as it sees fit.
(f) Mr Forsey submitted that it was relevant to Gold Band’s knowledge that it had taken an assignment of the Deed of Option which, by reference to the judgment of the Supreme Court in Savvy Vineyards
3552 Ltd v Kakara Estate Ltd may be described as having taken place subject to the equities that attached to the Deed of Option.27 This
particular argument cannot advance Philpott’s position. The security
27 Savvy Vineyards 3552 Ltd v Kakara Estate Ltd [2014] NZSC 121, [2015] 1 NZLR 281.
by way of assignment of the Deed of Option was not put into effect because, when it came for the time for Philpott to re-transfer Lot 19 to
Noble, the option was exercised by Noble and not by Gold Band.
Conclusion
[38] The various matters relied upon by Mr Stokes and asserted by Mr Forsey to constitute consent therefore neither individually nor collectively give rise to an arguable case of consent.
[39] The consent exception under s 105 of the Act is therefore inapplicable even in a caveat-lapsing situation.
Have Gold Band’s mortgagee rights arguably been displaced by unconscionable conduct?
Philpott’s case
[40] Mr Forsey identified Philpott’s alternative ground of opposition as resting on the proposition that Gold Band assisted subordinate parties to defeat Philpott’s interest. Thereby Gold Band has lost its right to rely on any priority it once had. Mr Forsey placed reliance upon the reasoning and conclusions of Venning J in Instant Funding Ltd v Greenwich Property Holdings Ltd; a case in which the mortgagee’s arguably improper conduct led to the dismissal of an application to
remove a subsequent caveat.28
The Delta/Gold Band dealings from 2009
[41] To support the argument of impropriety, Philpott refers to the following factual matters all of which are in terms of the affidavit evidence either established or at least arguable (in the event that, as I have found, Gold Band did not consent to
the deferral of its interest in favour of Philpott).
28 Instant Funding Ltd v Greenwich Property Holdings Ltd, above n 15.
Established or arguable facts
[42] Gold Band had a registered security with priority over the interest caveated by Philpott. The value of the security may be sufficient to protect Gold Band’s exposure.
[43] Delta provides utility services and did so in relation to Noble’s subdivision from, at the latest, 2009. On 20 November 2009, Delta and Noble entered into a loan contract including Noble’s agreement to grant a first mortgage security over Noble’s Lot 14. Gold Band had agreed to Delta’s mortgage having first priority capped at an amount of $5 million. Philpott was approached to withdraw the Philpott caveats or to provide consent to allow registration of the Delta mortgage as a first mortgage, but refused to do either.
[44] Gold Band, Delta and Noble entered into a Security Sharing Deed on
14 April 2010. The parties recorded that, since Philpott had refused to withdraw the caveat to allow the registration of the Delta mortgage as a first mortgage, Gold Band had agreed to hold its mortgage over Lot 14 as trustee for Delta, Gold Band thereby subordinating its priority in favour of Delta.
[45] Noble and Delta subsequently entered into a second loan agreement in respect of further work completed by Delta. Delta was again unable to register a mortgage having priority over the Gold Band mortgage because Philpott refused to withdraw its/their caveats so far as they affected Lots 18 and 19. Gold Band, Delta and Noble then (on 21 December 2011) entered into a second Security Sharing Deed giving Delta first priority to $8.6 million on the new mortgage and increasing its priority under the first mortgage to $5.5 million.
[46] On 20 August 2013, Noble and Delta entered into a further (collateral)
mortgage agreement over the remaining lots (other than Lots 14, 18 and 19).
[47] On 22 August 2013, Gold Band and Delta entered into a deed of partial assignment of debt and security sharing with Avanti Finance Ltd (Avanti). By that deed, Gold Band sold 37.5 per cent of its Noble loan to Avanti and 30 per cent to
Delta. Gold Band also agreed to hold part of its mortgage security on trust for Delta and Avanti in those proportions.
[48] As a consequence of the various dealings between Gold Band, Noble, Delta and Avanti, the legal position is:
(a) Gold Band is the first mortgagee (both legal and beneficial of Lots
11–13 and 15–17); and
(b) Gold Band holds its first mortgage in Lots 14, 18 and 19 in trust for
Delta; and
(c) Gold Band’s interests include those of Avanti.
[49] I observe that notwithstanding the consequence of Gold Band’s assignments identified at [48], the position of Philpott remains exactly the same as it had been. Matters between Gold Band, Delta and Avanti are essentially internal to that grouping, provided Gold Band acts properly in its exercise of its powers as mortgagee. The single issue raised for Philpott in that regard is the suggestion that Gold Band has fettered its ability to act properly as mortgagee.
Mr Forsey’s submissions for Philpott
[50] Mr Forsey submitted that by the security sharing and trust arrangements entered into by Gold Band, Delta and Noble, Gold Band did fetter its ability to settle its loan agreement without Delta’s consent. He refers to provisions of the security sharing deeds (clause 2.4) which require Gold Band as trustee to act in accordance with the instructions of Delta in the event of a default of the terms of the Delta/Noble loan agreements. Gold Band also undertook, following withdrawal or lapse of the Philpott caveats, to do all things necessary when requested by Delta to have the Delta mortgage registered as a first ranking mortgage.
[51] Mr Forsey further submits that by their agreements, Delta and Gold Band have sought to confer on Delta the benefits of Gold Band’s first mortgage priority.
He submits that they have therefore defeated the interests of Philpott which “have priority over Delta”.
[52] Mr Forsey noted that Gold Band and Delta, through their arrangements with Avanti, agreed not to take action against Noble for any defaults for nine months commencing 20 August 2013. On 10 June 2014, Gold Band served on Noble a notice under s 119 Property Law Act.
[53] Upon the basis of the established or arguable factual background (at [42] to [48]), Mr Forsey submits that this is a case which, in the terms adopted by McGechan J in National Mutual Finance (1988) Ltd v Berryman, the rights of a registered mortgagee have arguably been displaced by conduct which amounts to a deferral of priority.29 More particularly, Mr Forsey submits that the circumstances which led to the dismissal of the mortgagee’s application in Instant Funding Ltd v Greenwich Property Holdings Ltd are analogous to this case.30
[54] In Instant Funding Ltd, Venning J dismissed Instant Funding’s application to remove a caveat. The facts of this case, summarised, were that:
(a) Instant Funding advanced $7,500,000 to Monice in September 2005, secured by a registered mortgage over a property.
(b)In June 2006, Monice agreed by a long-term agreement for sale and purchase to sell the property to Greenwich, with settlement due 31
March 2007.
(c) Greenwich registered a caveat to protect its interest under the agreement for sale and purchase on 12 September 2006.
(d) The purchase did not settle on 31 March 2007.
(e) On 2 July 2007, Monice was put into receivership, which constituted a default under the mortgage.
29 National Mutual Finance (1988) Ltd v Berryman, above n 6.
30 Instant Funding Ltd v Greenwich Property Holdings Ltd, above n 15.
(f) Instant Funding discussed assigning its mortgage to Vector, a company associated with Greenwich, but at the request of the receivers of Monice did not proceed with the assignment.
(g)Instant Funding, pursuant to its powers as mortgagee to sell, sold the property on 2 October 2007 with settlement due in December 2007.
[55] Venning J found that although Instant Funding had acquiesced in the sale to Greenwich, it had not consented to it. Mr Forsey does not rely on Instant Funding in relation to that finding.
[56] Mr Forsey submits that the approach to unconscionable conduct in Instant Funding should be applied in this case, having regard to the combination of known rights (of Greenwich in that case and Philpott in this case) and the conduct of a mortgagee in acting under the direction of others to deprive the holder of its rights.
[57] In Instant Funding Ltd, the critical issue for Venning J was Instant Funding’s dealings with Monice’s receiver. Venning J found that, but for those dealings, Instant Funding would have been entitled to exercise its rights as mortgagee. This was so notwithstanding that it knew Greenwich, as the holder of a subsequent interest, had spent money on the property. His Honour cited the Privy Council in Waimiha
Sawmilling Co Ltd (in liq) v Waione Timber Company Ltd, in which it was stated:31
If the designed object of a transfer be to cheat a man of a known existing right, that is fraudulent [for the purposes of the Land Transfer Act].
[58] Against that background, Venning J reviewed the evidence before concluding:32
[55] … on the evidence as it stands and the reasonably available inference, Greenwich has a reasonably arguable case that in exercising its powers to sell as mortgagee Instant Funding was doing so at the direction of or by agreement with the receivers of Monice to enable the receivers to defeat Greenwich’s interest in the property, which the receivers would not have been able to achieve without the assistance of Instant Funding.
31 At [35], citing Waimiha Sawmilling Co Ltd (in liq) v Waione Timber Company Ltd [1926] AC
101 (PC) at 106–107.
32 At [55] – [56].
[56] There may be an innocent explanation for Instant Funding acting in the way it has. However at the moment there is a lack of evidence on that issue. Instant Funding has chosen not to respond directly on the issue. There is an inference that it was acting at the direction of the receivers to that end.
Gold Band’s case
[59] As is evident from Venning J’s citation of the passage from the Privy Council’s judgment in Waimiha Sawmilling Co, the respondent in Instant Funding Ltd was asserting that there had arguably been fraud for the purposes of the Land Transfer Act.
[60] Mr Vinnell identified the peculiar circumstances of the Instant Funding Ltd case. Instant Funding had initially been content to allow Greenwich to complete its long-term agreement for sale and purchase (even after the receivership) by assigning the mortgage to Vector. All Instant Funding had to gain as mortgagee was repayment of its principal, interest and costs, all of which would have been recovered by completing the assignment of the mortgage to Vector. Venning J found that the inference open on the evidence was that Instant Funding agreed to act in the way it did in order to deprive Greenwich of its interest and to enable the receivers to
achieve a higher price to the property by sale to another purchaser.33
[61] For Gold Band, Mr Vinnell placed reliance upon observations of Keane J in Lombard Finance and Investments Ltd v Albert Street Ltd.34 Keane J referred to the provision for defeasibility on grounds of fraud under s 182 of the Act, with particular reference to the observations of the Privy Council in Waimiha Sawmilling Co. His Honour observed:35
Actual dishonesty calls for more [than knowledge]: an intent “to cheat a man of a known existing right”, or “a deliberate or dishonest trick causing an interest not to be registered”; and neither is to be assumed, “solely by reason of knowledge of an unregistered interest”.
[62] Keane J observed that the boundary between honestly taking a registered interest, knowing of an inconsistent unregistered interest, and dishonestly taking a
33 At [35].
34 Lombard Finance and Investments Ltd v Albert Street Ltd HC Auckland CIV-2004-404-2120, 14
October 2004.
35 At [24], citing Waimiha Sawmilling Co Ltd (in liq) v Waione Timber Company Ltd, above n 31, at 106–107.
registered interest to the prejudice of an unregistered interest can often be “a matter of degree, even slight degree”.36
[63] By reference to the early Supreme Court judgments cited in the Court of Appeal in Bunt v Hallinan, Keane J referred to earlier formulations of “dishonesty”, including to the taking of a registered interest which “improperly deprived” the holder of an unregistered interest.37
[64] Finally, Keane J adopted the extra-judicial observations of Blanchard J who had posited that the judicial enquiry always has to begin with the intent of the registered proprietor, with the question:38
Did he or she act with dishonest intent – an intent to cheat the one unregistered?
[65] In Lombard Finance, as in Instant Funding Ltd, the Court was then called upon to consider whether the mortgagee had a real need to exercise its power of sale and with what effect. To test that issue, the questions Keane J asked himself included:39
(a) Even at the date of the security did recourse to the power of sale look probable?
(b)Could it have been evident, even then, that this transaction had to be at the expense of the unregistered interest?
[66] Keane J concluded that complete and tested evidence would be required to determine whether the mortgagee’s conduct involved dishonesty.40 On the evidence, Keane J was not able to dismiss the possibility that Lombard’s third mortgage was a fraudulent device to extinguish existing unregistered equitable interests. In other words, there was, as in Instant Funding Ltd, a sufficient evidential basis to support
an inference of Land Transfer Act fraud.
36 At [27].
37 At [28], citing Bunt v Hallinan [1985] 1 NZLR 450 (CA).
38 At [30], citing Peter Blanchard “Indefeasibility under the Torrens system in New Zealand” D
Grinlington (ed) Torrens in the 21st Century (LexisNexis, Wellington, 2003).
39 At [37].
40 At [38].
Discussion
[67] The judgments in Instant Funding Ltd and Lombard Finance helpfully identify the required element of dishonesty in relation to Land Transfer Act fraud. In terms of the outcome in each case, there is a distinct similarity in that the relevant events raised questions as to the motive of the mortgagee in entering into dealings which affected the (unregistered) rights of the respondents. In Instant Funding Ltd, questions arose from the lack of any demonstrated need for a mortgagee sale. In Lombard Finance, questions similarly arose as to why Lombard Finance had taken a questionable or worthless security and whether it had any need to exercise its power
of sale, and with what gain.41
[68] Although, as Instant Funding Ltd and Lombard Finance indicate, arguable issues as to fraud may arise in caveat cases, inferences of dishonest or cheating conduct cannot arise merely through knowledge of the equitable interest.
[69] In the present case, I accept Mr Vinnell’s submission that Philpott is unable to point to anything in the evidence which implies cheating or dishonest conduct in the taking of and registration of the mortgage, the subsequent arrangements to share the security with Delta, or the steps now being taken to exercise the power of sale.
[70] It is not in dispute that Noble’s mortgage to Gold Band is in default and that the mortgagee was entitled to exercise its power of sale. Noble notified Gold Band in June 2014 that unless Gold Band and Delta continued to support Noble, then Noble would be unable to pay its debts as they fell due and would have to cease trading. To the date of the hearing (and, I infer, since), Noble has apparently been unable to satisfy the debt. Accordingly, if a mortgagee sale proceeds, the property will be sold and the sum secured by the mortgage to Gold Band paid (whether fully or in part) from the proceeds of sale. To the extent that Gold Band may share any proceeds of sale through its security sharing arrangements with Delta and Avanti, the mode of sharing is not a matter which affects Noble. As against Philpott, the payment of sale proceeds to Gold Band flows from its rights as registered
mortgagee.
41 At [35]–[36].
[71] Mr Forsey identified Delta’s right (under the security sharing deeds) to give instructions to Gold Band in relation to matters such as the timing of a mortgagee sale. But nothing in the circumstances of this case is close to the questionable motivation at issue in Instant Funding and Lombard Finance. Here, Gold Band has a clear commercial justification for pursuing a mortgagee sale. It had an equally clear commercial justification for entering into the original arrangements to share security in order to have civil works associated with the subdivision completed. The fact that Gold Band came to share the benefit of its security with Delta and Avanti through a trust arrangement rather than the registration of prior mortgages upon the caveator’s consent does not support an inference of dishonesty or cheating. Rather, it evidences, as the deeds indicate, a willingness to share the security given the financial accommodations which Delta and Avanti were offering Noble.
[72] The Philpott notice of opposition identifies its second (after consent) ground of opposition as lying in conduct of Gold Band which equity recognises as resulting in a deferral of priority. Philpott accordingly puts its claim on an in personam rather than Land Transfer Act 1952 fraud basis. Venning J, in Instant Funding, appears to have rested his judgment on the arguability of both fraud and unconscionable
conduct.42 Instant Funding’s apparent intention to defeat Greenwich’s interest
counted against it on both analyses. In this case, Gold Band seeks to enforce its security by sale in circumstances where there is no evidence of a sale process which might be as beneficial for Gold Band but less detrimental to Philpott.
[73] Mr Forsey relies heavily upon the trust arrangement by which Delta had the right to instruct Gold Band with regard to aspects of enforcement. But there is no evidence to support the inference that Gold Band, on now taking enforcement action upon the basis of its valid security, is doing so (as Instant Funding was arguably doing at the direction of the receivers of Monice) for a purpose which is affected by motivations other than recovery of its debt.
[74] Philpott’s case against Gold Band, even at the level of what is arguable, lacks the unconscionability evident on the facts of Instant Funding. It also lacks any
42 At [54] and following.
clearly identifiable cause of action upon which an in personam claim would have to be based.43
Conclusion
[75] Neither the circumstances relating to Gold Band’s security sharing arrangement with Delta nor Gold Band’s present intention to enforce its security by mortgagee sale involve, even arguably, unconscionable conduct by Gold Band. Gold Band made a commercial decision to share its security with Delta. Now, in the absence of repayment by Noble, Gold Band seeks to realise that security through an ordinary sale process. The arguable inference of unconscionable motivation in the selection of one buyer and the rejection of another in Instant Funding is not available in this case.
Costs
[76] Costs must follow the event against the first respondents, jointly and severally. I am inclined to award costs on a 2B basis. If there is disagreement, submissions are to be filed (four pages maximum); applicant for costs to file first; respondent within three working days thereafter. I will decide the matter on the papers.
Orders
[77] I order that:
(a) Land Information New Zealand shall remove the caveat numbered
8322656.1 lodged by the First Respondent noted against the titles for the following land, immediately before registration of a transfer in power of sale by the Applicant:
(i) Identifier 440795 (Canterbury Registry) being an estate in Fee Simple in Lot 11, Deposited Plan
323203;
43 Above at [24]; see in particular Hinde McMorland and Sim, above n 6, at [9.04].
(ii)Identifier 440796 (Canterbury Registry) being an estate in Fee Simple in Lot 12, Deposited Plan 323203;
(iii)Identifier 440797 (Canterbury Registry) being an estate in Fee Simple in Lot 13, Deposited Plan 323203;
(iv)Identifier 440798 (Canterbury Registry) being an estate in Fee Simple in Lot 14, Deposited Plan 323203;
(v)Identifier 440799 (Canterbury Registry) being an estate in Fee Simple in Lot 15, Deposited Plan 323203;
(vi)Identifier 440800 (Canterbury Registry) being an estate in Fee Simple in Lot 16, Deposited Plan 323203;
(vii)Identifier 440801 (Canterbury Registry) being an estate in Fee Simple in Lot 17, Deposited Plan 323203;
(viii)Identifier 440802 (Canterbury Registry) being an estate in Fee Simple in Lot 18, Deposited Plan 323203;
(b) Land Information New Zealand shall remove the caveat numbered
8003770.1 lodged by the First Respondent, noted against Identifier
440803 (Canterbury Registry) being an estate in Fee Simple in Lot 19, Deposited Plan 323203, immediately before registration of a transfer in power of sale by the Applicant;
(all identifiers in 1(a) and 1(b) being referred to together as
“the land”).
(c) Land Information New Zealand shall not accept any further applications from the Respondents to lodge any further caveats against the land prior to registration of a transfer in power of sale by the Applicant; and
(d)The costs of this application be paid by the Respondents, jointly and severally.
Associate Judge Osborne
Solicitors:
Anthony Harper Lawyers, Christchurch
Duncan Cotterill Lawyers, ChristchurchDallison Stone, Christchurch
Counsel: A C Hughes-Johnson QC, Christchurch
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