Hair v Schmidt

[2014] NZHC 2476

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2014-404-1038
CIV-2014-404-1039
CIV-2014-404-1041

CIV-2014-404-1925 [2014] NZHC 2476

UNDER	the Insolvency Act 2006
IN THE MATTER	of the bankruptcy of Taylor Jade Smith (also known as Linda Ash)
BETWEEN	NOEL HAIR Judgment Creditor
AND	TAYLOR JADE SCHMIDT Judgment Debtor

Hearing:	24 September 2014
Counsel:	NW Woods and SG Rhind for judgment creditor AJ Woodhouse for judgment debtor
Judgment:	24 September 2014

(ORAL) INTERIM JUDGMENT OF ASSOCIATE JUDGE BELL

Solicitors:           Rice Craig, Auckland

Woodhouse Law, Auckland

Hair v Schmidt [2014] NZHC 2476 [24 September 2014]

[1]      Mrs Schmidt  has  applied  to  set  aside  four  bankruptcy  notices.    As  a preliminary matter, following the decision of Heath J in Balzat v Zhang,1     I am hearing these applications in court.  I am not hearing them in chambers.  I will repeat this at the end of the decision so that there is no confusion about this.2

[2]      Mr Hair’s bankruptcy notices are these:

(a)       In CIV-2014-404-1038 for $12,558.20.  The notice, issued on 2 May

2014, is based on an order for costs made by Heath J in Schmidt v Ebada Property Investments Ltd.3     Heath J gave Mr Hair, the third defendant,  summary  judgment  against  Mr  and  Mrs Schmidt  as plaintiffs;

(b)      In CIV-2014-404-1039 for $3,290.    The notice issued, on 23 May

2014, is based on an order for costs I made in CIV-2010-404-7389.  In that case, Mrs Schmidt had applied under s 145A of the Land Transfer Act 1952 to sustain a caveat. I dismissed her application and ordered costs in favour of Mr Hair;

(c)      In  CIV-2014-404-1041  the  amount  appearing  on  the  bankruptcy notice, issued on 23 May 2014, is $6,764.37.  The notice is based on a costs order made by Miller J on 3 May 2011 in CIV-2010-404-6804. In that decision he dismissed an application by Mr and Mrs Schmidt for leave to appeal against a decision of the District Court on an appeal from the Tenancy Tribunal under the Residential Tenancies Act

1986.   As  I will  show  later  in  this  judgment,  the  amount  in  the bankruptcy notice is incorrect.  It will be necessary to establish how

much is actually payable under the costs order of Miller J; and

1      Balzat v Zhang HC Auckland CIV-2009-404-1923, 22 September 2009.

2      I say this because some people have difficulty reading those parts of my judgments where I state that the matter has been heard in Court.  See Wati v Sharma HC Auckland CIV-2008-404-6367,

9 March 2011, paragraph 1, second sentence and Sharma v Wati [2012] NZCA 195, paragraph

17(d).

3      Schmidt v Ebada Property Investments Ltd HC Auckland CIV-2011-404-4752, 25 November

2011.

(d)In CIV-2014-404-1925 for $3,564. That is the amount of a costs order of  the  Court  of  Appeal,  dismissing  an  application  by  Mr  and Mrs Schmidt  for  special  leave  to  appeal  from  the  judgment  of Miller J. That bankruptcy notice was issued on 6 August 2014.

[3]      I am advised that there is a fifth bankruptcy notice which has been issued and recently served.   The time for complying with  that  notice has  not  yet  expired. Mr Woodhouse advises that he has instructions for that notice and an application to set aside is expected.   I have indicated to the parties that it may be helpful for me to hear any application on that bankruptcy notice, given that I have had to familiarise myself with the issues between Mrs Schmidt and Mr Hair.

[4]      All the judgment debts in the bankruptcy notices are for costs awards.  I will refer to them as the “Heath”, “Bell”, “Miller” and “Court of Appeal” costs orders.  It has  been  convenient  to  have  all  applications  heard together.    Evidence for one application has been used for all.

[5]      The applications raise a number of questions:

(a)       Are  the  costs  orders  final  under  s 17(1)(a)  of  the  Insolvency Act

2006?

(b)Is the amount in the bankruptcy notice for the Miller costs order correct and how much is actually payable under that order?

(c)      Is Mrs Schmidt required to pay interest on the costs orders to comply with the bankruptcy notices?

(d)      Should the Court approve Mrs Schmidt’s offer of security? and,

(e)      Does Mrs Schmidt have a cross-claim under s 17(7) of the Insolvency Act which is greater than the costs orders and which she could not use in defence in the proceedings in which the costs orders were made?

The last issue is the most important and also the most complex.  It raises a number of sub-issues.  If Mrs Schmidt succeeds on her cross-claim argument, it will allow her to continue a dispute that has been running between her and her husband, on the one hand,  and  Mr Hair,  on  the  other,  since  early 2009.    That  dispute  arises  out  of Mr Hair’s purchase of a rural property at Bell Road, Mangatawhiri, near Pokeno. Differences between Mrs Schmidt and Mr Hair arising out of that purchase have been heard in the Tenancy Tribunal, the District Court, the High Court and the Court of Appeal.

[6]      Before I deal with the cross-claim, I deal with the other issues.  Some of them can be disposed of relatively quickly.

Are the costs orders final under s 17(1)(a) of the Insolvency Act 2006?

[7]        Mr Woodhouse had prepared written submissions that the Heath costs orders could not be considered final because there was an appeal pending against that decision.   In the hearing Mr Woodhouse conceded that he could not sustain that submission.  Heath J gave Mr Hair summary judgment against Mr and Mrs Schmidt. It was a final decision in that proceeding as far as it concerned Mr Hair.  The fact that an appeal was later started against that decision, does not rob the decision of finality.  The approach under r 12 of the Court of Appeal (Civil) Rules is that the lodging of an appeal does not stay enforcement of a judgment.  In a similar way a costs order, once given, is final, particularly a costs order given in a final decision disposing of a proceeding.  In this, I follow the approach of Associate Judge Osborne

in Re Sigglekow, ex parte Turner.4

Is the amount in the bankruptcy notice for the Miller costs order correct?

[8]      As noted, the bankruptcy notice states that the amount payable under the judgment is $6,764.37.  However, that is not the amount of the costs which Miller J awarded Mr Hair.  That was the amount which Mr Hair sought.  In his judgment of

6 October 2011, Miller J awarded Mr Hair costs of $3,572 and disbursements of

$133.04, a total of $3,705.04.  It was accepted that the sealed order did not correctly

record Miller J’s decision.  A fresh sealed order for costs has been filed showing the

correct amount.

How much is payable under that costs order?

[9]      Certain credits are due to Mr and Mrs Schmidt on account of other orders that were made and directions given by Miller J.

[10]     In the appeal from the decision of the District Court, Mr and Mrs Schmidt had applied for a stay of execution.  Woolford J ordered a stay but he required, as a condition of the stay, that Mr and Mrs Schmidt pay into Court the sum of $7,206 being outstanding rent arrears.  Venning J also required Mr and Mrs Schmidt to pay into court security for costs in the sum of $940.

[11]     The money the Schmidts paid into court has been paid out to Mr Hair.  There is a dispute as to how the money paid out of court ought to be allocated between rent arrears and costs.   In a later decision, Miller J found that the outstanding rent in November 2011 was $7,506.5

[12]     The argument for Mrs Schmidt is that when Miller J ordered money to be paid out of court from the funds paid in, that money went entirely towards the costs order of October 2011 and that anything unpaid is rent arrears.  The costs order has been satisfied.  For rent arrears, Mr Hair has no judgment or final order which can provide a foundation for a bankruptcy notice.

[13]     In my view, the allocation ought to be made on the basis that money paid out of court ought to be paid towards the liabilities for which they were paid into Court. That is, the $7,206 paid in under the order of Woolford J should be paid out towards the arrears in rent; the $940 paid in for security for costs ought to be applied towards the costs order.  Accordingly, from the costs order of $3,705.04 I deduct $940 paid into Court by way of security for costs.  That results, by my calculation, in a balance payable under the costs order of $2,765.04.  That is the amount of the judgment debt

for the bankruptcy notice for the Miller costs order.  That bankruptcy notice will be amended to show the amount payable as $2,765.04.6

[14]     Mr Hair is left with $300 owed to him for rent arrears for which he does not have a judgment.   If this case goes on and there is a subsequent application for adjudication, Mr Hair will be entitled to include the unpaid $300 in rent as a debt owed by Mrs Schmidt.

Is Mrs Schmidt required to pay interest on the costs orders to comply with the bankruptcy notices?

[15]     The bankruptcy notices do not contain any claims for interest accrued under the judgments.   In my view, it would have been open to Mr Hair to claim in a bankruptcy notice interest that has accrued on a costs order under r 11.27 of the High Court Rules, calculated from the date of the order up until the date of the issue of the notice.  The bankruptcy notices are required to state a fixed and certain sum owing under the judgment.  The sums stated in these bankruptcy notices do not include any interest component.

[16]     If  she  intends  to  comply  with  the  notices  by  payment,  Mrs Schmidt  is required to pay only the amounts in the notices without any additional interest. Mr Woods conceded the point.

Should the Court approve Mrs Schmidt’s offer of security?

[17]     Mrs Schmidt had proposed offering security for the judgment debts, offering Mr Hair a charge of the proceeds of litigation.   In the hearing, Mr Woodhouse no longer pursued that point.   He stated that if the matter became an application for adjudication then he would refer to that as a matter the Court should take into account in the exercise of its residual discretion under s 37 of the Insolvency Act.

He did not ask me to consider here.

6      Section 30 of the Insolvency Act 2006 does not stand in the way of the Court correcting the notice. See Re Ebbett HC Tauranga B109/92, 9 October 1992.

Cross-claim

[18]   Mrs Schmidt’s cross-claim is that made in Schmidt v Ebada Property Investments Ltd.  There is a useful summary of the significant facts in the judgment of Heath J of 25 November 2011:7

[4]       I base my summary of the facts primarily on the Statement of Claim and Mr and Mrs Schmidt’s joint affidavit in support of their interim injunction application.  I do so because, on applications of the type before the Court, it is necessary to assume that disputed questions of fact will be resolved at trial in favour of the plaintiffs.  My summary should not be taken as indicating any acceptance by Ebada Property Investments Ltd (Ebada), Mr Garrity or Mr Hair of the allegations made against each of them.  Most of the material allegations of fact are in dispute.

[5]       In 2001, Schmidt Trustee Ltd acquired the Bell Road property.  At that time, Schmidt Trustee Ltd was, on Mr and Mrs Schmidt’s case, trustee of two “Parallel Trusts” called “The TJ Schmidt Trust and The AM Schmidt Trust”.  Subsequently they are said to have been joined  into  “a combined  Partnership Trust”  called “The  Schmidt Trusts”.

[6]      In  October  2002,  the  Excel  Estate Trust  was  formed  “with  four

‘Mirror Beneficiary Trusts’” called The Nature Estate Trust, The

Tech Estate Trust, The Schmidt Estate Trust and The Excel Tech

Trust.  These are said to have been “joined by a Deed of Declaration (collectively)”, into The Excel Estate Trust.    Mr and Mrs Schmidt assert that from the time of formation of the Excel Estate Trust (in October 2002) Schmidt Trustee Ltd held the Bell Road property on trust for it.

[7]       Mr Garrity formerly practised as a lawyer.   Mr and Mrs Schmidt allege that from July 2004, he provided services as both a lawyer and a trustee for the various trusts to which I have referred.

[8]       In August 2004, Mr Garrity entered into negotiations on behalf of Schmidt Trustee Ltd with Transit New Zealand.  The object was to obtain compensation for the acquisition of part of the Bell Road land that had been taken under the Public Works Act 1981.

[9]       Around September 2004, Mr Hair began to graze cattle on the Bell Road property.   A number of contracts were entered into, though there are differences between Mr and Mrs Schmidt and Mr Hair about those that were signed and are enforceable.

[10]      Ebada was incorporated on 8 November 2005.   Mr Garrity is its sole director  and  shareholder.    Mr  and  Mrs  Schmidt  allege  that  Mr Garrity formed the company “with the intention of using it to hold property”.  They say it was agreed, at that time, that Ebada would become the trustee of the Excel Estate Trust and that Bell Road,

7      Schmidt v Ebada Property Investments Ltd above, n 4.

along with properties at 1493 and 1495 Kaiaua Road, Mangatangi, would be transferred into Ebada’s name.  Mr and Mrs Schmidt allege that various agreements were made with Mr Garrity in relation to the payment of the mortgage debt and the costs of sale.

[11]     On 20 December 2005,  an agreement to transfer the Kaiaua Road properties into Ebada’s name was allegedly reached.   Ebada took title to the two Kaiaua Road properties on 5 January 2006.

[12]      On 17 January 2006, Mr Garrity completed negotiations with Transit New Zealand about the Bell Road property.   Transit New Zealand agreed to pay an interim settlement sum.   Mr and Mrs Schmidt allege  that  a  further  payment  of  $23,594.61  was  made  to  Mr Garrity’s personal account.   They allege that, at Mr Garrity’s direction, $212,351.44 was paid off the mortgage on the Bell Road land but that Mr Garrity (without authority from them) retained the

$23,594.61 for his own purposes.

[13]     Schmidt Trustee Ltd transferred the Bell Road property to Ebada on

20 November 2006.   Mr and Mrs Schmidt were not directors of Schmidt Trustee Ltd at that time.  Nor was Mr Garrity.  At the time of its acquisition by Ebada, Mr and Mrs Schmidt claim that the Bell Road property had a registered valuation of $740,000.  Mr Garrity is alleged to have instructed lawyers to act for both Schmidt Trustee Ltd and Ebada in relation to the transfer of the Bell Road property, as  part  of  a  concerted  attempt  to  deprive  the  Schmidts  of  their rightful interest in the land.

[14]     In their own words, Mr and Mrs Schmidt say:

(a)       Ebada acquired finance in the amount of $200,749.19 from

Westpac Bank.   ‘Bell Road’ had a registered valuation of

$740,000.00  at  the  time  of  transfer.    There  was  around

$618,504.18 in equity in ‘Bell Road’ ($740,000.00 less the

Mortgage of $121,495.82) when it was transferred from [Schmidt Trustee Ltd] (for [Excel Estate Trust]) to Ebada (for Excel Estate Trust]).

(b)       The funds of $200,749.19 were transferred from Ebada (for [Excel Estate Trust]) to lawyers acting for [Schmidt Trustee Ltd] (for [Excel Estate Trust]), who were then, as instructed by Mr Garrity;

(i)        To pay $121,495.82 to discharge [Schmidt Trustee

Ltd’s] Mortgage with The ANZ Bank; and

(ii)      To pay $74,324.47 to [Excel Estate Trust’s] Bank Account.  This was the residual amount once all the legal  fees  and  associated  costs  for  [Excel  Estate Trust] were paid; and

(c)       Mr Garrity accessed [Excel Estate Trust’s] bank account, and

made 2 transfers to his Bank Account for $4,416.00 and

$70,000.00 on 27 November 2006.

(d)      It was also agreed between [Excel Estate Trust], Ebada and

Mr Garrity;

(i)      To pay $20,000.00 to Mr Garrity and Ebada as compensation for their Lawyer/Trustee duties.  This was paid out of the $74,324.47 held for [Excel Estate Trust]; and

(ii)       That [Excel Estate Trust] pay all the outgoing costs for ‘Bell Road’ (such as Rates, and Insurance), while Ebada held ‘Bell Road’ in Trust for [Excel Estate Trust].

(e)       Mr Garrity and Ebada did not fully account to [Excel Estate Trust] for these funds of $74,324.47.  A partial account was given, but no full record. Mr Garrity advised on 27 February

2007 that he had taken $35,000.00 of these funds to contribute to his $50,000.00 divorce commitment, despite

advising in May 2006 that he was to draw these funds off

‘Kaiaua Road’, and indeed did.

[15]     Mr Hair purchased the Bell Road property from Ebada in

December 2008 for $700,000.   He took title to it on 13

January  2009.    A  few  days  later,  on  21  January  2009, Schmidt   Trustee   Ltd   was   struck   off   the   register   of companies.  No application for restoration has been made.

[16]      Mr and Mrs Schmidt say that Mr Hair acquired the property with knowledge of the frauds committed by Ebada and Mr Garrity.  The injunction is sought to preserve their interests while Mr and Mrs Schmidt pursue a substantive claim to impeach Mr Hair’s otherwise indefeasible title to the land.

[19]     In that proceeding, Mr and Mrs Schmidt applied for an interim injunction to restrain Mr Hair from selling, transferring or disposing of the Bell Road property and, in response, Mr Hair applied for summary judgment, strike out and/or security for costs.   Heath J gave summary judgment in favour of Mr Hair on all causes of action against him.  He dismissed the Schmidts’ application for interim injunction. By reason of those orders, he did not have to deal with the applications for strike out or security for costs.   He also awarded Mr Hair costs, that being the basis for the costs order in the bankruptcy notice in CIV-2014-404-1038.

[20]     Mr and Mrs Schmidt were litigants in person.  They are not legally qualified. While they did not describe it as such, their proceeding against Mr Hair was an action for the recovery of land. They were seeking findings that Mr Hair was not the lawful owner of the property at Bell Road.  They alleged that he came within the

fraud exception to the indefeasibility principle under the Land Transfer Act 1952. The effect of Heath J’s decision granting summary judgment to Mr Hair was that Mr and Mrs Schmidt did not have any prospect of founding an allegation of fraud that Mr Hair’s title could not be impeached.  Heath J said that Mr Hair was protected under s 182 of the Land Transfer Act.

[21]     That question had come before the courts earlier.  Mr Schmidt had lodged a caveat. Associate Judge Christiansen dismissed the application to sustain the caveat, but primarily on procedural grounds, rather than substantive grounds.8

[22]     Mrs Schmidt also lodged a caveat.  I dismissed her application to sustain the caveat on substantive grounds.9     I held that Mr Hair was protected under s 182 of the Land Transfer Act.  In his decision, Heath J did not hold that there was any issue estoppel arising out of my decision that precluded him from holding against Mr Hair on the question under s 182 of the Land Transfer Act.   While he referred to my decision, he decided the case independently of my decision and by reference to the

evidence filed in that proceeding.

[23]     Mrs Schmidt appealed to the Court of Appeal against my caveat decision, but that the appeal has since lapsed under r 43 of the Court of Appeal (Civil) Rules.10

[24]     The Schmidts also appealed against the decision of Heath J.  Mr Schmidt has since been adjudicated bankrupt and Mrs Schmidt has continued the appeal alone. There  have  been  difficulties  in  the  running  of  the  appeal.    On  22 June  2012, Courtney J dismissed the Schmidt’s application for a stay of execution pending the appeal.   In October 2012, the Court of Appeal gave the Schmidts an extension of time  to  file  the  case  on  appeal.    Since  then,  Mrs Schmidt  has  obtained  legal representation.   The appeal was part-heard on 2 September 2014.   The Court of Appeal has asked for submissions on further questions.  In particular, the Court was interested in this matter: whether issue estoppel applied in respect of my caveat decision, so that Heath J and any other court could not decide the title question

otherwise.

8      Schmidt v Hair HC Auckland CIV-2010-404-3987, 23 July 2010.

9      Schmidt v Hair HC Auckland CIV-2010-404-7389, 14 March 2011.

10     Schmidt v Hair, CA213/2011.

[25]     For this hearing, the parties have helpfully provided a copy of the notice of appeal in the Court of Appeal and copies of submissions filed.  The issues in that appeal seem to include these matters at least:

(a)      Does my caveat decision that Mr Hair was protected by s 182 of the Land Transfer Act give rise to an issue estoppel that would apply in subsequent proceedings between Mrs Schmidt and Mr Hair?

(b)      If not, was Heath J correct to enter summary judgment in favour of

Mr Hair?

(c)      If there is any relevant issue estoppel, can Mrs Schmidt now appeal out of time against my caveat decision?

(d)If those matters go against Mrs Schmidt, can she get around those difficulties and avoid the application of the indefeasibility provisions of the Land Transfer Act by making in personam claims for knowing receipt and unjust enrichment?

[26]     Many  of  the  matters  that  the  Court  of  Appeal  will  need  to  decide  on Mrs Schmidt’s appeal against Heath J’s decision also arise in her argument that she has a valid cross-claim against Mr Hair.  Her cross-claim argument is that she now has a monetary claim against Mr Hair for an amount that exceeds the costs orders against her.  To explain, whereas she initially sought an order divesting Mr Hair of his interest in the Bell Road property, she no longer seeks that order, but instead seeks a money award against him.   That is because Mr Hair has since onsold the property.    There  is  no  suggestion  that  Mr Hair’s  purchaser  would  not  have  the protection of the indefeasibility provisions of the Land Transfer Act.  That is why Mrs Schmidt has converted her claim for recovery of the property to a claim for damages.  I also understand that she proposes in any amended statement of claim to include claims for knowing receipt and unjust enrichment.

[27]     For  me  to  decide  whether  Mrs Schmidt  has  a  proper  cross-claim  under s 17(7) of the Insolvency Act will require me to consider these matters:

(a)      Is there an issue estoppel arising of my caveat decision that bars her cross-claim?

(b)Is there an issue estoppel arising out of the decision of Heath J that bars her cross-claim?

(c)       Am I bound by the decision of Heath J while it is subject to appeal?

(d)Should I entertain the possibility that the Court of Appeal might grant leave  to  Mrs Schmidt  to  make  a  fresh  appeal  against  my  caveat decision?

(e)      If  there  is  no  issue  estoppel,  should  I  decide  afresh  whether Mrs Schmidt has a case that Mr Hair was not protected by s 182 of the Land Transfer Act?

(f)      Can Mrs Schmidt present an alternative cross-claim against Mr Hair, where she does not have to confront the indefeasibility provisions of the Land Transfer Act and make out a case of fraud?

[28]   There is considerable overlap between what I have to decide on these applications and what the Court of Appeal will have to decide on Mrs Schmidt’s appeal.

[29]     Mr Woods urged me to decide the merits of the application to set aside in any event.  In his submission, I could decide the matter simply by making decisions on the facts.  That argument relied on a submission that there are prior decisions which would prevent me from finding in favour of Mrs Schmidt.

[30]     I am unable to accept the submission by Mr Wood that I should decide finally in this proceeding those matters where there is an overlap with the appeal in the Court of Appeal.

[31]     There are two reasons for that.   The first, and most important one, is that there  is,  in  my view,  a  real  risk  that  any  decision  which  I might  give  on  the

overlapping matters may be different from the Court of Appeal’s decision.  Where my decision and the Court of Appeal’s diverge, it would be necessary to undo my decision.  That would put the parties to further work.  I appreciate the importance of deciding applications to set aside bankruptcy notices promptly.   There is a disadvantage in waiting for matters to be decided in the Court of Appeal.  But, in my judgment,  that  detriment  will  be  more  than  outweighed  by  the  advantages  of certainty given by the Court of Appeal decision on the appeal.  I would be guided by that decision in finally disposing of these applications.

[32]     Second, part of Mrs Schmidt’s argument is that my caveat decision is not binding, and it was also wrong on the merits.  That would require me to examine my earlier decision and to decide whether it should stand.  It is invidious for a judge to examine one of his earlier decisions and decide whether it was correct.  The Court of Appeal’s job is to deal with challenges to first instance decisions.  It does a far better job  of  examining  my  decisions  and  detecting  errors  in  them  than  I  do.    It  is preferable that I leave that job to that Court.

[33]     Having said that, I am going to express some provisional views on some aspects of the matter.  I emphasise that these are provisional views only.  I express them in light of the argument that I have heard.  They are provisional in the sense that  if  the  Court  of  Appeal  decides  matters  otherwise,  differently  from  my provisional views, then in a further hearing of these applications I will, of course, defer to the Court of Appeal.  There may be some advantage to the parties and the Court of Appeal in my expressing some provisional views on some of the argument that I have heard.

Is there an issue estoppel arising out of my caveat decision?

[34]     The first matter goes to the question of issue estoppel arising out of my caveat decision.   I understand that arguments have been presented in the Court of Appeal  that  a  decision  under  the  Land  Transfer  Act  finding  that  there  is  no caveatable interest cannot be considered a final decision.

[35]     The court’s normal approach on considering applications to sustain caveats is

to consider whether the caveator has an arguable case for the interest claimed in the

caveat.  If a judge decides that there is not a caveatable interest, that is a decision that no useful purpose would served by allowing the caveator to issue proceedings directed at obtaining a final ruling that the interest should be upheld.  It is a finding of no arguable case.   There would be no point in requiring parties to issue proceedings, requiring pleadings to be exchanged, requiring discovery to be undertaken, requiring evidence to be given, and giving the opportunity for parties to be cross-examined.  Given that effect of a decision of no caveatable interest, it is my provisional view that such a decision is final.

Standard of proof for fraud allegation

[36]     The next aspect arises out of a later decision of the Court of Appeal in another case involving the Schmidts, Schmidt v Pepper New Zealand (Custodians) Ltd.11    That appeal arose out of a proceeding not involving Mr Hair.  It concerned other properties in which the Schmidts claimed an interest.   They had lodged a caveat against two titles to properties in Kaiaua, South Auckland.  Heath J ordered the caveat to be removed.  The Schmidts alleged fraud on the part of the mortgagee. The Court of Appeal dealt with the fraud allegations as follows:12

[15]     Allegations of fraud or dishonesty are very serious. They must be pleaded  with  care  and  particularity. As  the  authors  of  Bullen  & Leake & Jacobs Precedents of Pleadings emphasise, counsel must not draft any originating process or pleading containing an allegation of fraud unless they have reasonably credible material which, as it stands, establishes a prima facie case of fraud – that is, material of such a character which would lead to the conclusion that serious allegations could properly be based upon it. Fraud cannot be left to be inferred from the facts – fraudulent conduct must be distinctly alleged and as distinctly proved. General allegations, however strong the words may be appear to be, are insufficient to amount to a proper allegation of fraud.

[16]      While   these   principles   have   been   articulated   in   authoritative discussions of duties imposed upon counsel, they apply with equal rigour to those who represent themselves. Those who seek to portray themselves as well acquainted with the law and its processes cannot shelter behind the barrier of unfamiliarity when it suits. They must satisfy the same exacting standard when preparing their own pleadings. The obligation exists for the benefit of defendants – to allow them to  be fully aware  of, and  able to address,  a serious allegation – and for the Court which will be called upon to decide it.

11     Schmidt v Pepper New Zealand (Custodians) Ltd [2012] NZCA 565.

12     At [15]–[16] (citations omitted).

The important part of that decision for present purposes is the Court’s holding that when fraud is alleged the person alleging fraud must have reasonably credible material establishing a prima facie case of fraud.

[37]     I have since applied that approach in caveat cases where fraud has been alleged.  In Trustees Executors Ltd v Steve G Ltd, I said:13

Trustees Executors  Ltd argued  its case on  the  basis  that it  only had to establish a reasonably arguable case.  However, on this part of the case, it must make out a prima facie case of fraud under the Land Transfer Act, and is subject to the same rules for pleading and proof as in any other case where fraud is alleged.   In caveat cases there are sound policy reasons for maintaining these  standards.   The indefeasibility provisions  of  the  Land Transfer Act are in part directed at protecting purchasers by enabling them to enter into transactions in reliance on the register and the interests recorded there, without having to inquire as to unregistered interests.  That protection would be weakened if there were a low threshold for allegations that purchasers had acted fraudulently.  There is one area where this protection is currently important – sales by distressed debtors.  Purchasers can buy from them in reliance on interests recorded on the register and without having to inquire into the integrity or validity of transactions between the registered proprietor and third parties.  That enables orderly sales by debtors, who may have every interest in realising assets to meet liabilities.  Purchasers may be discouraged from dealing with distressed debtors if they were to be subject to low threshold allegations of obtaining title fraudulently.

[38]     I applied the same test requiring a prima face case in another caveat case, Paugra Holdings Ltd (in liq) v Harvestfield Holdings Ltd.14   I found that the caveator had proved a prima facie case of fraud on the part of the registered proprietor.  The unsuccessful caveator appealed.  My decision was set aside but the Court of Appeal did not hold that I had applied the wrong test on the standard of proof.15

[39]     It seems to me that if Mrs Schmidt were to claim now that Mr Hair was fraudulent in the land transfer sense, then following the decision of the Court of Appeal, she would need to establish fraud to a prima facie standard, not just an arguable case.  A similar approach applies where she wants to contend that she has a cross-claim under s 17(7) of the Insolvency Act.  It is not enough simply to show a

reasonably arguable case if she wants to allege fraud against a judgment creditor to

13     Trustees Executors Ltd v Steve G Ltd [2013] NZHC 16 at [65].

14     Paugra Holdings Ltd (in liq) v Harvestfield Holdings Ltd [2013] NZHC 2200.

15     Paugra Holdings Ltd (in liq) v Harvestfield Holdings Ltd [2014] NZCA 164, (2014) 26 NZTC

21-070.

defeat or to set aside a bankruptcy notice.  It is incumbent on her to make out a prima facie case of fraud.

Is Mrs Schmidt able to run causes of action in knowing receipt under Barnes v Addy

or unjust enrichment, as flagged in her notice of appeal?16

[40]     As  I  understand  the  case  for  Mrs Schmidt,  she  wishes  to  contend  that, independently of proving fraud to the standard required under the Land Transfer Act ( that is, actual fraud under Assets Co v Mere Roihi17),  she can instead run claims for knowing receipt and unjust enrichment, and perhaps also knowing assistance, on the basis that she does not have to make out a case of actual dishonesty or of wilful blindness and that liability to some lesser standard can be applied.

[41]     There is Australian authority that that approach is not open.  That is found in a decision of the High Court of Australia, Farah Constructions Pty Ltd v Say-Dee Pty Ltd18 which approved the decision of the majority in the Victoria Court of Appeal in Macquarie Bank Ltd v Sixty-Fourth Throne Pty Ltd.   It cited Tadgell JA with approval:19

it is not possible to escape the circumstance that, if there was a “knowing receipt” by the appellant, it was a receipt by virtue of registration under the Transfer of Land Act….

The argument for the respondent appears to assume that the acquisition by a mortgagee, in that capacity, of a proprietary interest following registration of a forged instrument of mortgage in respect of property that is subject to a trust amounts to a receipt by the mortgagee of trust property. If it were so, it might be possible to treat the holder of the registered proprietary interest as a constructive trustee arising from “knowing receipt” of trust property. As it seems to me, however, there is neither room nor the need, in the Torrens system of title, to do so. If registration of the mortgagee's interest is achieved dishonestly then the registration, and with it the interest, are liable to be set aside   not   because,   on   registration,   the   registered   holder   became   a constructive trustee but because s. 42(1) recognises that fraud renders the interest defeasible. If, on the other hand, the registration is not achieved by fraud the Act provides, subject to its terms, for an indefeasible interest. Those terms allow, it is true, a claim in personam founded in equity against the holder of a registered interest to be invoked to defeat the interest; and a claim in  personam founded  in  equity  may  no  doubt  include  a  claim to

16     Barnes v Addy (1874) LR 9 ChApp 244.

17     Assets Co v Mere Roihi [1905] AC 176 (PC).

18     Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22, (2007) 81 ALJR 1107 at [190]–

[198].

19     Macquarie Bank Pty Ltd v Sixty-Fourth Throne Pty Ltd [1998] 3 VR 133 (CA) at 156-157 (citations omitted).

enforce what is called a constructive trust… a claim in personam against the holder of a mortgage registered under the Transfer of Land Act, dubbing the holder a constructive trustee by application of a doctrine akin to “knowing receipt” when registration of the mortgage was honestly achieved, would introduce by the back door a means of undermining the doctrine of indefeasibility which the Torrens system establishes. It is to be distinctly understood that, until a forged instrument of mortgage is registered, the mortgagee receives nothing: before registration the instrument is a nullity. As Street J pointed out in Mayer v Coe…, the proprietary rights of a registered mortgagee of Torrens title land derive “from the fact of registration and not from an event antecedent thereto”. In truth, I think it is not possible, consistently with  the  received  principle  of  indefeasibility as  it  has  been understood since Frazer v Walker and Breskvar v Wall, to treat the holder of a registered mortgage over property that is subject to a trust, registration having been honestly obtained, as having received trust property. The argument that the appellant is liable as a constructive trustee because it had “knowingly received” trust property should in my opinion fail.

[42]     In my judgment that is persuasive authority that it is not open to Mrs Schmidt to circumvent the requirement to make out a case of fraud by pleading a claim under an alternative cause of action.  The central point is that the claims of Mrs Schmidt, however she chooses to frame them, are focused on Mr Hair’s acquisition of title. Had Mr Hair not obtained title to the Bell Road property she would have no claim against him.  If she wants to challenge his acquisition of that title, she must confront the indefeasibility rules under the Land Transfer Act.  If she cannot prove the actual fraud to the land transfer standard, it is not open to her to side step that by trying some alternative cause of action.

The substantive merits of Mrs Schmidt’s cross-claim

[43]     On the merits, I am not persuaded that Mrs Schmidt has a case for fraud against Mr Hair.  The first point is whether Ebada Investments Ltd and Mr Garrity were in any sense in breach of trust in selling the Bell Road property.  I have been referred to an unsigned document, alleged to be a declaration of trust by Ebada in respect of the Bell Road property.   That declaration of trust does not detail what powers the trustee is to have.   The trustee ordinarily has the power to sell trust

assets20    Mrs Schmidt has not laid any foundation for showing that the sale of the

property was not authorised under the trust or was in any sense improper.  That was

20     Trustee Act 1956, s 14(1)(a).

the first ground in my caveat decision in holding the finding that there was no basis for a caveatable interest.

[44]     Second, the evidence that Mrs Schmidt relies on is equivocal as to dishonesty on the part of Mr Hair.  Evidence that is equivocal as to dishonesty is not enough to make out a prima facie case.  In this I refer to the judgment of Lord Millett Three Rivers District Council v Bank of England (No 3)21 and refer in particular to the parts I cited in my decision in Ng v Harkness Law Ltd.22

[45]     Again, I emphasise that these are all provisional findings.   I stand to be corrected on them by the Court of Appeal.

What will be the effect if Mrs Schmidt succeeds on appeal?

[46]     If, contrary to my provisional views, Mrs Schmidt succeeds on the appeal the ramifications are likely to be these.

[47]     Of necessity, Heath J’s ruling that Mr Hair should have summary judgment would be set aside.   I would expect, as a consequence, Heath J’s order for costs against  Mrs Schmidt  also  to  be  set  aside  and  that  would  then  get  rid  of  the bankruptcy notice in  CIV-2014-404-1038.   To  reach  that  decision,  the Court  of Appeal is likely to have to set aside my caveat decision as well.  It therefore seems likely that my costs decision would also go.  I will await the ruling from the Court of Appeal on that point.

[48]     In my caveat decision and in the case before Heath J, the question of a claim by Mrs Schmidt against Mr Hair was directly before the court.   That is the very

matter which she says is the subject of her cross-claim.  To be allowed to run her

21     Three Rivers District Council v Bank of England (No 3) [2003] 2 AC 1 (HL), the judgment of

22 March 2001, at [184]-[189]. Lord Millett was in the minority, but he and Lord Hobhouse differed from the majority on the application of the principles in that case, not on the principles to be applied. Lord Hope, one of the majority, gave a similar summary at [55]. The value of the dissenting judgments is that they were later vindicated when the case went to trial: see the costs judgment of Tomlinson J in Three Rivers District Council v Bank of England [2006] EWHC 816 (Comm).

22     Ng v Harkness Law Ltd [2014] NZHC 850 at [43].

cross-claim, she needs the Court of Appeal to set aside my caveat decision and

Heath J’s decision.

[49]     As to the costs orders made by Miller J and the Court of Appeal, I accept that Mrs Schmidt was not able to raise her cross-claim in those proceedings.   When a successful  respondent  to  an  appeal  applies  for  costs,  the  unsuccessful  appellant cannot resist the costs application by contending that the appellant has some other claim pending in some other proceeding, which should be grounds for not awarding costs.  For all practical and legal purposes, the claim by Mrs Schmidt is a cross-claim under s 17(7) for the bankruptcy notices in CIV-2014-404-1041 and 1925.  Whether they are viable cross-claims will emerge following the decision of the Court of Appeal.

Outcome

[50]     I summarise matters so far.

[51]     I have heard this matter in court, not in chambers.  I have found the amount payable under the costs order of Miller J in CIV-2014-404-1041 is $2,765.04.  The claims  that  the  costs  orders  were  not  final,  that  the  Court  should  approve Mrs Schmidt’s offer of security, and that Mrs Schmidt should pay interest on the costs orders to comply with the notices have fallen by the wayside.  While I have given provisional views on the merits of the cross-claim, I will not be able to make a final  decision  on  that  until  the  Court  of  Appeal  has  given  its  decision  on Mrs Schmidt’s appeal.  In those circumstances, I am adjourning this proceeding.

[52]     If the Court of Appeal does not give a decision on Mrs Schmidt’s appeal before the end of 2014, I direct that this matter is to be called at 11.45 am on Tuesday, 16 December 2014.   If the Court of Appeal gives its decision earlier, counsel may file a memorandum asking for a telephone conference to be convened for further directions to be given.

[53]     If an application is made to set aside the fifth bankruptcy notice, I invite the parties to have that referred to me for a telephone conference, rather than list it in Court, so that further directions can be given.

[54]     As this matter is only part-heard, I reserve costs.  I record that the hearing has taken one day.

Associate Judge RM Bell