Haddon v GE Custodians
[2011] NZCA 335
•21 July 2011
| IN THE COURT OF APPEAL OF NEW ZEALAND |
| CA475/2010 [2011] NZCA 335 |
| BETWEEN GARY FRANCIS HADDON |
| AND GE CUSTODIANS |
| AND BARBARA GALE HADDON |
| AND GRAEME DOUGLAS HADDON |
| AND CHRISTOPHER TE IKA TEPARA |
| AND SANDRA RAEWYN JAMESON |
| Hearing: 21 June 2011 |
| Court: Randerson, Keane and Allan JJ |
| Counsel: C S Henry for Appellant |
| Judgment: 21 July 2011 at 3 p.m. |
JUDGMENT OF THE COURT
AThe appeal is dismissed.
B The appellant must pay to the first respondent costs as for a standard appeal on a Band A basis with usual disbursements.
____________________________________________________________________
REASONS OF THE COURT
(Given by Keane J)
Table of Contents
| Para No | |
| Genesis of transaction | [9] |
| Potentially frustrating events | [21] |
| Elements of transaction | [26] |
| Default events | [33] |
| Grounds for opposition | [39] |
| Judgment under appeal | [42] |
| Absence of prior disclosure | [54] |
| Pleading point | [57] |
| Inapplicable duty | [60] |
| Duty complied with | [65] |
| Oppression | [68] |
| Ability to re-open oppressive transaction | [79] |
| Conclusions | [89] |
On 2 July 2010 GE Custodians, in its capacity as mortgagee, obtained summary judgment in the High Court, Auckland, granting it vacant possession of two properties in respect of which it wished to exercise its power of sale.[1]
[1] GE Custodians v Haddon HC Auckland CIV-2009-404-6464, 2 July 2010.
The first property, a 3.76 hectare Paeroa farmlet, belonged to Graeme Haddon and his partner Christopher Tepara together with the trustees of the Haddon Family Trust. The trustees were Graeme Haddon's father, Gary Haddon (Mr Haddon), the appellant, and his mother Barbara Haddon, and his cousin, Sandra Jameson. The second property was Mr and Mrs Haddon's home in Glendene, Auckland. On this appeal Gary Haddon alone appeals the judgment given as it relates to him in his personal capacity and as it affects the Glendene property only.
Essentially, Mr Haddon contends in his notice of appeal that in granting summary judgment Associate Judge Christiansen went beyond the essential question he had to decide, which was whether GE had established that Mr Haddon and his co-borrowers were devoid of a reasonably arguable defence. On incomplete evidence, Mr Haddon contends, the Judge instead entered completely into the merits of the case, and made a series of errors.
On the appeal itself Mr Haddon has also taken a threshold point, not taken in his notice of appeal, to which he adverted only implicitly in his amended notice of opposition to summary judgment and never advanced before the Judge. It is that GE is prohibited from enforcing its credit contract with the trustees, and thus the mortgage over the Glendene property, because GE neither pleaded nor proved that it had complied with its duty under the Credit Contracts and Consumer Finance Act (CCCFA) 2003 to make initial disclosure.
Principally, Mr Haddon contends however in his notice of appeal that the Judge erred when he concluded, without any basis in the evidence, that he and his co-borrowers did not have an arguable claim of oppression under the CCCFA.
Mr Haddon does not contend, or not primarily, that GE lent on oppressive terms, or that GE acted oppressively in seeking to exercise its power of sale and to obtain vacant possession beforehand. He contends rather that the transaction was oppressive, or that GE acted oppressively, because GE knew or ought to have seen from the outset that he and his co‑borrowers lacked the ability to meet the liability they then so improvidently assumed. GE, he contends, ought to have warned them of this, ought even never to have lent to them, and ought now to bear the cost of their inevitable default.
Inherent in this ground of appeal is that the loan transaction entered into involved from the outset an imbalance of risk; that, in the event that Mr Haddon and his co-borrowers fell into default, as he says on this appeal was inevitable almost immediately, GE was far better placed. It could have recourse to their properties as it now seeks to do. He and his co-borrowers, he and his wife especially, were left with nothing.
Finally, Mr Haddon contends, the Judge failed to take into account that he and his co-borrowers had a third party claim against their legal advisers on the loan transaction and thus failed to take into account the eventual ability to meet their debt in that way. This was an ability, he contends, that obviates GE's need now to exercise its power of sale and to take immediate vacant possession.
Genesis of transaction
On 22 August 2007 Graeme Haddon, and his partner Christopher Tepara, entered into an agreement to purchase the Paeroa farmlet for $465,000 conditional on obtaining finance by 31 August 2007. Settlement was to be on 12 October 2007.
At that date they were living near Cambridge at a property which may have belonged to the Ministry of Social Development. Graeme Haddon was employed by, or was an independent contractor with, the Ministry. Mr Tepara was an independent contractor. Together they cared for children in need, or at risk, placed with them by the Child, Youth and Family Service. Living with them also was one of Mr Tepara's sons, then aged 15 - 16.
They then owned a small apparently debt free property in Otorohanga, which they wished to retain, and, though they were earning between them, it seems, $5,000 each fortnight, whether before or after tax is not clear, they lacked the means to complete the Paeroa purchase without help. They had unsecured debts amounting to $100,000. They looked to Mr and Mrs Haddon, who were themselves modestly placed.
Mr Gary Haddon is now aged 62 and in 2007 he had been employed for 37 years by the Ports of Auckland. His wife is now aged 60. In 2007 she had for ten years been a self employed caregiver. Despite the fact that they had owned their own home in Glendene for 40 years, it remained subject to a mortgage for $131,000. Yet even so, Mr and Mrs Haddon were open in principle to assisting in the Paeroa purchase by mortgaging further.
All four, in turn, looked to Sandra Jameson, who then held a franchise called Roost Mortgage Brokers. Ms Jameson's evidence is that she had several meetings with them and cautioned Mr and Mrs Haddon, specifically, about the risk that they were assuming if they assisted in the purchase. They were not dissuaded.
All four co-borrowers agreed that the Paeroa purchase should proceed and that they should join in financing that purchase by mortgaging their properties in Glendene and in Otorohanga as well as the new property. Furthermore, they agreed to borrow a further $100,000 to clear Graeme Haddon's and Mr Tepara's unsecured debt.
Ms Jameson sought finance, without success, from three trading banks, ASB, Westpac and National. The banks questioned Graeme Haddon's and Mr Tepara's creditworthiness. Both were then understood to be independent contractors to the Ministry. Neither was taxed at source and the children in their care were difficult. The uncertainties to which these factors gave rise apparently proved fatal.
On 19 September 2007 Ms Jameson applied, therefore, to United Home Loans Limited, also a broker, seeking a loan not dependent principally on the four borrowers' income streams, but dependent rather on the asset worth of their own two properties as well as that to be purchased. United was then in the business, it seems, of offering loans with that different security focus up to the amount of 80 per cent of the value of the securities offered.
In their application, made on a standard Roost form, the four borrowers stated that the registered value of the Glendene property was $365,000, that the registered value of the Otorohanga property was $100,000, and the Paeroa property had its contract value, $465,000. Those three values in aggregate, together with $100,000 for furniture and effects, brought their asset worth, they stated, to $1.03M. Their liabilities, they stated, came to no more than $137,482, being Mr and Mrs Haddon's first mortgage liability and some smaller debts.
In a credit worksheet dated 21 September 2007 United recorded that Graeme Haddon's yearly income, after tax, was $79,482 and that of Mr Tepara was $45,330, in all $124,812. Gary Haddon's net yearly income was, it recorded, $46,550 and that of his wife was $8,050, in all $54,600. Their combined net annual income came to $179,412. Their total outgoings, the credit sheet recorded, including the mortgage payments they were assuming, came to $76,647. They retained a cash surplus after living and mortgage expenses of $86,264.
United recorded on this credit sheet that it required the four co-borrowers to verify their incomes by pay slips or employer's letter. They were to supply valuations supporting the values of the Otorohanga and Glendene properties. They had to supply satisfactory loan histories. A credit default had to be explained satisfactorily. Graeme Haddon and Mr Tepara were to make updated applications confirming no changes in their statement of position.
Against that background United arranged with GE a loan up to almost 80 per cent of the nominated values of the Glendene, Otorohanga and Paeroa properties.
Potentially frustrating events
On 18 September 2007 Mr Tepara's son, then living with him, suddenly died. The Ministry, it seems, then or shortly after, removed from Mr Tepara and Graeme Haddon the children in their care, bringing to an end or radically reducing their income. Within days, moreover, Mr Tepara suffered the first of a series of heart attacks.
On 21 - 22 September, Ms Jameson says, she rang a United lending manager, Mr Fitzgerald, and told him of Mr Tepara's loss. There was then an outstanding precondition for the grant of the loan application concerning Mr Tepara's credit, to which he could not attend. She was, she says, assured that this would not compromise the application.
At the same time, Ms Jameson says, she asked the United manager what would happen if Graeme Haddon and Mr Tepara lost their jobs, or their income reduced, because as was apparent from the joint application made Mr and Mrs Haddon could not, by themselves, meet the payments called for. He told her, she says, not to worry about it.
Graeme Haddon and Mr Tepara could at that stage, Ms Jameson acknowledges, have pulled out of the Paeroa purchase and withdrawn their loan application. They had not yet paid the deposit the agreement for sale and purchase called for and, in any event, the agreement remained conditional on finance. They elected not to do so. Nor, as they just as easily could have, did Mr and Mrs Haddon withdraw their support.
On 21 September 2007 Graeme Haddon and Mr Tepara had their Otorohanga solicitor ask the Paeroa vendor's solicitors to extend to 28 September 2007 the time within which they had to obtain finance. On 25 September 2007 they, together with Mr and Mrs Haddon, engaged solicitors in Epsom, Auckland, the Conveyancing Shop, to give them independent advice about, and to act on, the transaction in all its elements.
Elements of transaction
The loan GE then made is governed by an agreement dated 12 October 2007, which the four borrowers executed on 15 October 2007. In terms of this agreement, a general agreement amplified in two annexures, an “Accounts Schedule”, and more detailed “Terms and Conditions”, GE lent them $730,437 and advanced on settlement, after deducting two fees and an insurance premium, the sum of $721,375.
The loan was conditional on Mr and Mrs Haddon discharging their existing first mortgage, which then stood at $131,000, and after that sum and a further $100,000 were taken out of the sum advanced for the unsecured debts of Graeme Haddon and Mr Tepara, $490,375 remained, which was more than enough to meet the Paeroa property purchase price, $465,000.
The loan was made in two separate advances, one of $140,000 and the other of $590,437. The smaller advance appears to equate with the refinancing liability Mr and Mrs Haddon were then assuming. The larger advance equated with the liability Graeme Haddon and Mr Tepara were then assuming for their twin purposes. The nominal interest rate for each advance was 9.69%. (The actual rate for the larger advance was 10.2%). The penal rate for each was to be two percent above the actual rate.
The loan agreement assumed that Mr and Mrs Haddon were to co-own the Paeroa property with their son and Mr Tepara. On advice, Mr and Mrs Haddon took their respective interests as trustees of the trust, the Haddon Family Trust, which they settled for the purpose of the transaction. Ms Jameson became the third trustee, but with limited liability. This property was to secure to GE on first mortgage a priority sum of $697,500.
Mr and Mrs Haddon were to and did remain sole owners of the Glendene property, which was to secure on first mortgage a priority sum of $547,500 and their son and Mr Tepara were to and did remain sole owners of the Otorohanga property, which was to secure on first mortgage a priority sum of $150,000.
Over the 30 year term of the loan the borrowers were to make 360 monthly payments. During the first year, the interest only phase, they were to pay monthly $1,130 on the lesser loan and $4,767 on the greater, in all $5,898. During the second year, the balance of the fixed rate phase, they were to pay monthly $1,203 on the lesser loan and $5,076 on the greater, in all $6,280. During the remaining 28 years they were to pay monthly $1,264 on the lesser loan and $5,392 on the greater, in all $6,656.
The effect was that over the 30 year term of the loan they committed themselves to monthly payments to meet both the sum advanced, $730,437, and the interest imposed, $1,632,228, in all $2,363,665.
Default events
In December 2007 Ms Jameson, at Graeme Haddon and Mr Tepara's request, applied to GE for a 'mortgage holiday' relying on the death of Mr Tepara's son, and on the fact that Mr Tepara was unfit to work. Apart from the heart attacks he had suffered, he appears also to have suffered kidney disease. He was undergoing dialysis and Graeme Haddon had become his fulltime caregiver.
On 2 May 2008 GE declined this application on the basis that the borrowers were not under the CCCF entitled to a 'mortgage holiday', quite why is not in evidence; and, on that day also, United wrote to Mr and Mrs Haddon telling them that mortgage arrears then stood at $5,900.
In August 2008, after Ms Jameson had spoken for the first time to the solicitors for GE, the borrowers made a second 'mortgage holiday' application; and on 16 September 2008, presumably to ensure that the borrowers were not then in a state of default, a potential impediment, Mr and Mrs Haddon, with the help of their family, repaid the arrears outstanding, $36,856. GE declined this second application also.
The sale of the Glendene property then became increasingly imminent. Eventually it was scheduled to take place on 10 December 2008. To avoid that, Mr Gary Haddon's sister and brother in law offered to purchase the property unconditionally for $300,000. Quite independently, Mr and Mrs Haddon's former first mortgagee, a credit union with which they had a long association, offered them $300,000 to refinance.
On 17 December 2008 GE, through its solicitors, agreed in principle to the discharge of the Glendene mortgage, but not to release Mr and Mrs Haddon individually, or as trustees of their family trust, from their obligations under the loan agreement. As a result, they chose not to pursue either option.
Mr and Mrs Haddon had by then engaged solicitors of their own, who continued to negotiate with GE's solicitors, not to halt the sale of their property, but to enable them to remain in possession until sale. In the event, GE did hold back. It did not demand vacant possession until March 2009. It did not bring this claim until 24 September 2009.
Grounds for opposition
In their original notice of opposition Mr and Mrs Haddon and their co-borrowers opposed summary judgment on grounds wider than those on which they relied in their amended notice of opposition current at the day of hearing.
GE, they alleged, initially, was in breach of its duties of care in tort and contract when it relied on United - a broker, they alleged, that GE knew to embellish applications and not to advise applicants of risk. As a fiduciary, they contended, GE was itself derelict in not alerting them to the risk they were assuming. GE was in breach of equitable and statutory duties, they said, when it refused to release Mr and Mrs Haddon entirely, when offered the market value of the Glendene property. GE was derelict also, they say, in twice declining them mortgage holidays.
In their amended notice of opposition, however, as their counsel, Mr Henry, confirmed to the Judge, their principal ground for opposing summary judgment was that the transaction was oppressive, or that GE had acted oppressively, in each instance in the sense that it ought certainly to have alerted them to the high risk they were assuming, and ought indeed to have declined their loan application.
Judgment under appeal
In his decision under appeal the Judge first rejected each of the wider bases for a duty of care alleged in the original notice of opposition and thus rejected also the possibility of any related breach.
First, he held, GE never came under a duty of care to the borrowers in tort. In contrast to the investors that, at that stage, this Court had held entitled to relief in the Bartle case,[2] the borrowers were not victims of a third party. They had not been drawn into the loan transaction. They had elected to make their Paeroa purchase offer conditional on finance. They had pursued finance. The transaction carried no unclear, let alone concealed, risks. That United might have acted as agent for both borrower and lender, he held, made no difference.
[2] Bartle v GE Custodians [2010] NZCA 174,[2010] 3 NZLR 601.
The Judge rejected equally any duty of care in contract. The contract, he held, did not expressly impose on GE any such duty. Nor was there any need or basis to imply one. A fiduciary relationship, he held also, did not usually arise between banker and customer unless in the particular context trust and confidence had to be of the essence. This was a simple creditor and debtor relationship, in which the borrowers relied on advice from Ms Jameson and solicitors.
GE, the Judge then said, had established on the face of it that the borrowers lacked any reasonably arguable defence. It was for the borrowers, therefore, to raise some question of fact or law standing in the way of summary judgment with some foundation in evidence. The Court, he said, did not have to accept uncritically every assertion, however improbable or imprecise it might be.[3]
[3] Attorney General v Rakiura Holdings Ltd (1986) 1 PRNZ 12 (HC) at14.
While the borrowers claimed they had not been warned about risk, the Judge noted that Ms Jameson had said that she had warned Mr and Mrs Haddon. She was clearly aware that Graeme Haddon and Mr Tepara had an adverse credit history. Yet she, acting as their mortgage broker, had submitted their loan application to United, the application to which GE ultimately acceded.
While, the Judge said, Ms Jameson had also maintained that, before the loan agreement was entered into, she had told United's lending manager about Mr Tepara's fragile mental and physical health, and he had advised her not to panic, that did not make GE a fiduciary, even if United's knowledge and conduct could be attributed to it. The borrowers had received independent legal advice. Nor could their proposed claim against their lawyers give them a defence against GE.
The Judge rejected, as lacking any basis in evidence, the allegations that United had inserted new material into the credit application, and that GE had been aware that United was given to embellishing applications. He rejected the contention that GE was in breach for failing to provide Mr and Mrs Haddon's statements of account. It was under no express duty to do so, he held, and in May 2008 certainly United remained in close touch with them as GE's “mortgage servicer”.
GE was entitled, the Judge held, first in December 2007 and then in September 2008, to decline any “mortgage holiday”. The four trustees were then in default and they could not apply on the grounds of unforeseen hardship under s 55 of the CCCFA until that had been remedied. Furthermore, even then, he held, GE was not obliged to accede to any such application and they, themselves, had not applied to the Court for relief.
The borrowers' principal ground for opposing summary judgment, their claim of oppression, the Judge said, arose from the “very unfortunate situation” in which Mr and Mrs Haddon found themselves. They were at risk, he accepted, of losing their home of 40 years and they were at an age, he recognised, where they had every cause for concern.
The Judge was clear, however, that the evidence on which GE relied, which included that given on behalf of the borrowers, was sufficient to enable him to hold with confidence that the transaction was not oppressive. He said this:[4]
This case involves a simple, transparent, borrower-initiated transaction. The transaction was initiated by Graeme Haddon and Christopher Tepara and was supported by Graeme's parents. Their loan application indicated all four were income earners and that their repayment ability was not in issue. The defendants were not sequentially drawn into this transaction like the Bartles were in the Blue Chip investment. In that case when the Bartles signed up it was not clear how much they would be borrowing, much less that further consequential borrowing would be required. Also, it is clear from the evidence of Ms Jameson that Mr and Mrs Haddon were aware of the risks of the transaction and had an opportunity to pull out before completing their contractual commitment to the plaintiff.
[4] At [48].
In deciding that GE should have summary judgment immediately, the Judge saw no need for the borrowers to have discovery to verify whether United had been more than a broker and was actually GE's agent, or to allow Mr and Mrs Haddon to join as third parties their solicitors on the loan transaction. They could always, he held, pursue their solicitors independently. Their relationship with GE was quite separate. GE was entitled to immediate relief.
The Judge granted summary judgment, giving GE vacant possession of both the Paeroa and Glendene properties within 14 days after service of the order. This appeal ensued.
Absence of prior disclosure
Mr Haddon's threshold ground of appeal, first raised at the hearing before us, is that GE's cause of action was, and remains, fatally deficient because GE neither pleaded nor gave evidence that it had complied with s 17 of the CCCFA.
Section 17 obliges “every creditor under a consumer credit contract” to disclose to a debtor under the contract, before the contract is made or within five working days after, certain “key information” and indeed “all of the terms of the contract”. Where s 17(1) is not complied with, s 99(1) prohibits a creditor from enforcing the contract, or any right to recover property, or any security interest taken.
GE's claim, Mr Haddon contends consequently, was fatally flawed from its inception. It was and remains barred by s 99(1) and must now be struck out despite the fact that summary judgment was entered. We are unable to agree. There are three reasons, we consider, why this submission lacks substance. We begin with the pleading point.
Pleading point
GE's statement of claim, as pleaded, was not deficient. In setting out the fact of the advance it made, the two properties over which it took security, the fact of the borrowers' default, its issue of the notices of demand, the borrowers' failure to respond within time or at all, and the sum consequently outstanding under the loan agreement and the mortgages, GE set out in its statement of claim all that was called for to found its claim in debt.[5]
[5] High Court Rules, r 5.26.
GE's statement of claim, furthermore, once supported by an affidavit expressing the necessary opinion that the borrowers had no reasonably arguable defence, gave it a sufficient basis to apply for summary judgment.[6] The borrowers had then to resist that application, if they chose, by a sufficient notice of opposition and affidavit in support.[7] And they had to be explicit.[8] GE was not required to anticipate defences of which it had no notice.[9]
[6] High Court Rules, r 12.2.
[7] High Court Rules, r 12.9.
[8]High Court Rules, r 12.9(2)(a); Pemberton v Chappell [1987] 1 NZLR 1 (CA); Maclean v Stewart (1997) 11 PRNZ 66 (CA).
[9] Greenbank NZ Ltd v Haas [2000] 2 NZLR 341 (CA).
The amended notice of opposition on which the borrowers eventually relied did invoke s 99, with other sections of the CCCFA, but without saying why. The borrowers did not contend then, as Mr Haddon does on this appeal, that s 99 completely denied GE any right of relief. In the absence of some compelling reason explaining why that point was not then taken explicitly, it is not open to Mr Haddon now.[10]
Inapplicable duty
[10] Robinson v Bank of New Zealand CA114/91, 15 June 1992.
Secondly, that conclusion involves no injustice to Mr Haddon because we are satisfied equally that GE was never subject to the duty s 17 imposes. It applies only to creditors who are parties to a “consumer credit contract”, and there are two reasons, one certainly, why this loan agreement and the mortgages givendo not lie within that category.
The more immediate of those reasons is that the loan agreement itself to which the borrowers subscribed actually said that it was not a “consumer credit contract”. The Accounts Schedule to the agreement states instead that it was an “unregulated contract”; and the Terms and Conditions define such a contract to be a “credit contract”, which is not a “consumer credit contract”.
Why that is so is not evident on the face of the contract as a whole and so, because this was not the subject of any submission, we do not regard this reason presently as conclusive. We do place full weight on the other reason. It is this.
A “consumer credit contract” is a “credit contract” in which the borrowers are “natural persons” and enter into the contract “primarily for personal, domestic or household purposes”.[11] Where instead a borrower is a trustee, “acting in his or her capacity as a trustee of a family trust”, the contract remains an ordinary “credit contract”,[12] and is not a “consumer credit contract”; and a “family trust” is “a trust that is established primarily to benefit ... a natural person for whom the settlor has natural love and affection”.[13]
[11] Credit Contract and Consumer Finance Act 2003, s 11(1)(a), (b).
[12] Section 15(1)(c).
[13] Section 5.
The very purpose for which Mr and Mrs Haddon settled the trust was to enter as trustees into the Paeroa purchase, the loan agreement and the resultant mortgage, in order to benefit their son Graeme and, incidentally, Mr Tepara. That the trust did not name their son as a beneficiary specifically, it is general as to who the beneficiaries were, does not detract from that conclusion.
Duty complied with
Thirdly, and again negating any possibility of injustice to Mr Haddon, even if s 17(1) did apply, GE complied largely, if not completely, with the duty it imposes on a creditor to supply a debtor with the “key information” it speaks of, namely the information set out in Schedule 1 of the CCFA, for which the regulations supply a model statement.[14]
[14] Credit Contracts and Consumer Finance Regulations 2004, reg 12; schedule 2.
A creditor must advise the debtor of the initial unpaid advance, the total advances, the credit limit, the annual interest rate, the method of charging interest, the total interest charges (except where the agreement extends beyond seven years), any interest free period, the credit fees and charges, the payments required, what full repayment calls for, the security interest, the default interest charges and default fees and the debtor's right to cancel.
All of this is set out in the Accounts Schedule to the loan agreement, complemented by the Terms and Conditions, to which both of the borrowers subscribed. The only aspect lacking is a statement of the full interest payable. But that was not called for because the agreement extended beyond seven years and, in any event, could easily be calculated, as we have, from what was disclosed.
Oppression
Mr Haddon's principal ground of appeal remains. It is that the Judge erred in declining to find that the borrowers were entitled to have the contract re‑opened under s 120 of the CCCFA on the ground of oppression.
However conventional the terms of contract might have been, and however conventionally GE might have appeared to have exercised its rights, Mr Haddon contends that the liability he and his wife assumed, as GE had to know or ought to have known from the outset, was always beyond their means. In that sense, he contends, they have suffered oppression of which GE was the architect. He advances four reasons for contending that to be so and two that we regard as adding nothing further.
First, Mr Haddon contends, GE had actual knowledge of the purpose of the loan. That purpose was not as was set out in the application or in GE's grant of loan: to refinance one or more of the properties then owned by the borrowers without any increase in their liability. It was to purchase the Paeroa property and to satisfy the unsecured debts of Graeme Haddon and Mr Tepara. Inherent in their application, as GE could not have avoided recognising, was that all four, and he and his wife in particular, were taking on a very much larger debt burden.
Secondly, he contends, GE knew or ought to have been put on inquiry as to whether he and his co-borrowers, he and his wife especially, had the means to make the principal and interest payments called for. Their son Graeme and Mr Tepara were to meet the larger share of those payments. But after Mr Tepara's son's death, he contends, as GE then knew or should have recognised, they ceased any longer to have the means to do so. Mr Tepara's state of health had then to be an issue. So too Mr Tepara’s ability and that of Graeme Haddon to retain the Ministry contract. GE became obliged, he contends therefore, to verify what their combined actual incomes actually were.
Thirdly, he contends, GE then knew, or ought to have recognised, that in entering the loan transaction he and his wife were not independently advised. GE knew that all four were being advised by a single adviser. It knew that Graeme Haddon and Mr Tepara were purchasing the Paeroa property. It must have known that they were borrowing a further $100,000 to clear their unsecured debts. He and his wife, GE had to be aware, were borrowing only to assist their son and were only refinancing to do so. It had to see that their interests were potentially in conflict with those of their son and Mr Tepara. It should have insisted that they be independently advised.
Fourthly, he contends, even if he and his wife were advised sufficiently independently, at least notionally, United, and thus GE, knew of or are fixed with knowledge of the events disclosed by Ms Jameson to the United lending manager, Mr Fitzgerald, just before the loan was granted, that made any grant in breach of reasonable standards of commercial practice. GE had to be aware that he and his wife were from the outset obliged, as a matter of stark reality, to carry the complete burden of the debt, andalso that they were completely incapable of doing so.
The first of Mr Haddon's two points that we regard as adding nothing to these four points is that the actual terms of the loan were not consistent with reasonable commercial practice. Mr Haddon does not, however, say why the terms in some way offended and may be saying no more than that the transaction was unreasonable commercially because the default provisions were to come into play almost immediately.
Mr Haddon's further point is that at the date of loan United, as a matter of public record, lacked any shareholder and could not then have been a lawful entity. On this appeal, however, there is no evidence as to that at the date of loan. It is also irrelevant. United then certainly existed in fact. It was the indispensable conduit between the borrowers' own broker, Roost, and GE and, on the evidence, no more than a conduit.
The only issue that can arise as to United is whether before the loan transaction was entered into, its lending manager had been told by Ms Jameson that the borrowers would from the outset be incapable of making the payments of principal and interest called for and that default was inevitable; and whether GE must be fixed with whatever United then knew.
On this appeal, as before the Judge, GE contends in response that as at the date of the loan the borrowers had more than adequate assets to support the loan they had applied for. They sought and obtained a loan equal to 78.5 percent of the value of the three properties they offered as security for the loan. Nor was there any issue then as to their income capacity. The credit sheet, to which we refer in [18] and[19] of this decision, confirms that the monthly loan repayments they were called on to make were then within their capacity.
Nor, GE contends, was it oppressive in seeking vacant possession. Payment failures began in January 2008. The property law notices were issued in June 2008. After Mr and Mrs Haddon's large repayment in October 2008 arrears began to accumulate again. As at June 2010 $711,825 was outstanding. GE did not demand vacant possession until March 2009. This proceeding did not ensue until September 2009.
Ability to re-open oppressive transaction
Section 120 of the CCCFA enables the Court to reopen a credit contract, but as the Supreme Court recently confirmed in GE Custodians v Bartle[15] does not oblige it to do so, in any one of three circumstances. First, where a debtor has been induced by the creditor or the creditor's agent or an intermediary, to enter into the transaction by oppressive means. Secondly, where the terms of the contract entered into are oppressive. Thirdly, where the creditor has exercised, or expressed the intention of exercising, any power in an oppressive way. Mr Haddon's sole complaint on this appeal, we were told, is that the contract was oppressive.
[15] GE Custodians v Bartle [2010] NZSC 146, [2011] 2 NZLR 31.
Section 118 defines “oppressive” to mean “oppressive, harsh, unjustly burdensome, unconscionable, or in breach of reasonable standards of commercial practice”. This concept, as the Supreme Court said in Bartle, is broader than the equitable doctrine of unconscionability. Speaking of the words of the definition, the Court said:[16]
... the various words which together form the definition ... all contain different shades of meaning but they all contain the underlying idea that the transaction or some term of it is in contravention of reasonable standards of commercial practice. That sets an objective standard. A contract or course of conduct may therefore ... be treated as oppressive even though the party whose conduct is said to be oppressive may be (subjectively) blameless because the party is simply following industry practice. Where that practice is in breach of reasonable standards, compliance with it will not immunise a lender. It is for the Courts rather than the industry to set the standard. But that assumes a situation in which the lender knows of the matter found to give rise to oppression or knows something which should have put it on inquiry.
[16] At [46].
Whether a transaction is oppressive is to be assessed against all the circumstances, and some specific matters not relevant on this appeal.[17] There cannot have been oppression if what is complained of “would not have been considered oppressive at the time and in the circumstances that it was made or performed”.[18] The Court is entitled to receive as well comparative evidence as to what are reasonable standards of commercial practice.[19]
[17] Section 124.
[18] Section 123.
[19] Section 126.
So while the Court does have a wide ability to intervene once it is satisfied as to the fact of oppression,[20] whether there has been oppression calls for a wide ranging inquiry that is both objective and stringent, and that inquiry is not confined to the interests of the borrowers. The interests of the lender must also be recognised and, if need be, protected.
[20] Section 127.
The mere fact that the borrower finds the debt burden assumed to be unsustainable will not usually be sufficient in itself to establish oppression. For the transaction to be oppressive the borrower must be able to fix the lender with oppression, in one of the three ways s 120 specifies, either directly or indirectly. And where, as here, the oppression is said to lie not in the lender having been frankly extortionate, but to result rather from the borrower's inability from the outset to meet the liability assumed, the borrower must be able to fix the lender plainly with knowledge that this was so.
Just how cogent that evidence has to be was brought home by the Supreme Court in the Bartle case. There the debtors began as investors in a joint venture that carried liabilities and risks they did not begin to appreciate. Yet even there the Supreme Court emphasised two factors limiting the Court's ability to find oppression.
A contract, the Court said, will not be oppressive if the source of oppression contended for depends on something that the lender, or the lender's agent, was unaware of and as to which neither had any cause to inquire. The Court said this:[21]
In our view, a credit contract should not be seen as oppressive unless the lender has a basis for knowing that to be so. If such a basis exists, however, the lender's failure to appreciate that the credit contract is oppressive, will not excuse it and the contract may be reopened.
[21] At [47].
Furthermore, the Court said, where the borrower is independently advised that brings about between borrower and lender an equality of arms of considerable significance. The Court said this:[22]
Even when a lender has knowledge of circumstances which might otherwise cause it to suspect something about the borrower or the borrowing which might make the borrowing highly improvident, it will ordinarily be excused from making inquiry if it is also aware that the borrower is being advised about the transaction by an independent lawyer.
[22] At [48].
Just how significant that can be appears from what the Court then said next:[23]
The lender is entitled to assume that a lawyer instructed by the borrower will not have accepted that instruction if any conflict of interest exists and so will give dispassionate advice on whether and on what terms the borrower should proceed with the transaction, including the borrowing. The lender is also entitled to assume that the advice given to the borrower by the lawyer is competent advice and that the borrower has chosen to enter into the transaction on a fully informed basis, and so that all risks associated with it have been pointed out.
[23] At [48].
The Supreme Court did accept, endorsing a decision of this Court,[24] that there can be “exceptional cases” where the lender cannot rely on the independence of the borrower's legal adviser. That will be so when the borrower knows that the adviser's independence has been “compromised”; where the lender knows that the adviser is unaware of “crucial facts” about the transaction terms or the risk; and in the “rare case” where the lender knows “the substance of the transaction or a term ... is so disadvantageous that no solicitor could properly advise signature”.
Conclusions
[24] Wilkinson v ASB Bank Ltd [1998] 1 NZLR 674 (CA) at 692.
There can be no question that this transaction worked real hardship for Mr and Mrs Haddon from the outset. They assumed relatively late in their lives a very large debt burden relative to their means. They did so only to assist their son Graeme and his partner. Almost from its inception, perhaps even at its inception, their son and his partner were unable, as was intended, to make the larger share of the repayments called for. Effectively they sacrificed immediately their home of 40 years.
There can be no suggestion, however, that GE or United, even accepting United to have been GE's agent and not merely a broker, induced Mr and Mrs Haddon to enter into this transaction together with their son and his partner. GE responded to their application. Nor can GE be assailed for failing to disclose to the borrowers precisely what they were taking on. The Accounts Schedule to the agreement they subscribed to is completely explicit. GE gave them all they needed to know to make an informed decision. Mr and Mrs Haddon have not in evidence suggested otherwise.
There can be no suggestion either that the loan itself, complemented by the mortgages taken, was anything other than conventional. The 30 year term was unremarkable, given that their son Graeme and his partner were considerably younger than they were. The interest rate was a market rate. The considerable size of the monthly payments called for no more than that which reflected the size of the sum borrowed. Here too Mr and Mrs Haddon have not in evidence suggested otherwise.
Mr and Mrs Haddon consciously assumed the risk that has now eventuated. Before they joined in the loan applications first to the trading banks and then to GE, to fund the Paeroa purchase and to clear their son's debt, Ms Jameson advised them of that risk. They could have withdrawn from the GE transaction when Mr Tepara's son died, if they then had any reason to question whether their son and Mr Tepara could meet their share of the repayments called for. They chose not to withdraw. After independent legal advice they settled their family trust and, in their individual capacities and by that medium, entered fully into the transaction.
It is true that Mr and Mrs Haddon did, with their son and his partner, instruct a single legal adviser, as GE must have known. It is true also that, as GE could have inferred as readily, their interests and those of their son and his partner were not identical. On the evidence as it is, however, we consider GE was still fully entitled to assume that Mr and Mrs Haddon were independently advised as to the liability and the attendant risk that they were assuming.
There is no evidence to suggest that GE had any reason to be concerned that Graeme Haddon and Mr Tepara had exerted any undue influence over Mr and Mrs Haddon. The evidence is that Mr and Mrs Haddon, after advice, were intent on assisting their son and his partner. Mr and Mrs Haddon have not waived privilege in order to complain that they were inadequately advised, let alone that the advice they received was compromised by any conflict of interest on the part of their adviser.
There is nothing to suggest either that GE then knew that the borrowers' legal adviser was unaware of any of the terms of the loan transaction, or of the risks. The contrary has to be the case. The terms of the transaction were completely explicit and clear. Nor, on the face of the application the borrowers made through Roost and United to GE, had GE any reason to suppose that it would have been improper for any legal adviser to advise the borrowers to proceed.
The only issue that there can be, therefore, is whether GE also knew of, or had reason to be concerned about, the possibility that, despite the fact that Graeme Haddon and his partner wished to persist in the transaction, and Mr and Mrs Haddon wished to also, the four were even then incapable of sustaining the payments called for. Whether, in other words, GE knew that the loan would fall immediately into default and that it would have to resort immediately to its security interest and sell up their properties.
Whether GE knew, as Mr Haddon says it did, that the National Bank, the ANZ and Westpac, had declined the earlier applications depends on whether United was GE's agent and GE is fixed with what United knew. But assuming that GE was so fixed that is at most a reason to pause. The reason Roost went to United, after the trading banks declined the earlier applications, was that, in contrast to them, it offered loans principally on the basis of asset worth. It was less concerned with income capacity. But the evidence also is that GE had reason to be satisfied about their income capacity. On the face of the information they supplied, they had more than adequate means to meet the monthly payments called for.
Whether GE is to be taken to have known of the concern Ms Jameson says she expressed to United's lending manager, Mr Fitzgerald, about Graeme Haddon's and Mr Tepara's continued creditworthiness, before the transaction was entered into, again depends on whether United was GE's agent. But assuming once again that
GE was so fixed, here too that is at most a reason to pause.According to her evidence, Ms Jameson spoke to the manager, only to ensure that despite the death of Mr Tepara's son, GE would still grant the loan. She asked him, she said, “what would happen if Chris and Graeme lost their jobs or anything happened to their income because, as identified in the original application, Gary and Barbara could never pay the mortgage payments ... " She said that she asked this because “I was very worried about Chris's mental state and health”. She does not say that she said that to the lending manager, or that she told him that GE could no longer rely on the borrowers' then disclosed income capacity.
The probability is, we consider, that Ms Jameson is highly unlikely to have suggested anything of the sort. If she had said that Graeme Haddon and Mr Tepara, and consequently Mr and Mrs Haddon, had ceased to be creditworthy GE would never have proceeded with the transaction. There was no advantage to GE in lending such a large sum of money only to have to have immediate recourse to its powers of sale. Mortgagee sales, notoriously, almost invariably realise less than the value of the security taken. GE could only have anticipated a shortfall, perhaps a significant one.
The fact is that GE did grant the loan application. It did advance the sum applied for. It did suffer the almost immediate default. It had no option but to look to its power of sale. That inevitably has to be highly distressing for Mr and Mrs Haddon. But there can be no suggestion that either the circumstances of the transaction, or the way in which GE is seeking to realise its security, result in any oppression in law to Mr Haddon and his wife for which they are entitled to relief.
The Associate Judge was right to award GE summary judgment entitling it to vacant possession of Mr and Mrs Haddon's property for the purpose of exercising its power of sale. Mr and Mrs Haddon's appeal will be dismissed and, as a result, they must pay to GE costs as for a standard appeal on a Band A basis with usual disbursements.
Solicitors:
Witten Hannah, Takapuna for Appellant
Gibson Sheat Lower Hutt for Respondent
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