Hemmingson v Rod
[2015] NZHC 681
•13 April 2015
IN THE HIGH COURTOF NEW ZEALAND WELLINGTON REGISTRY
CIV-2014-485-9532 [2015] NZHC 681
BETWEEN ROBERT HEMMINGSON Plaintiff AND
STEVEN ROD First Defendant
THE CLANARD PROPERTY TRUST COMPANY
Second Defendant
Hearing: 31 March 2015 Counsel:
G A Paine and Q S Haines for Plaintiff
J Mahuta-Coyle for First Defendant
No appearance for Second DefendantJudgment:
13 April 2015
JUDGMENT OF ASSOCIATE JUDGE SMITH
[1] The defendants are the registered proprietors of a property (the land) at
110 Main Street, Foxton, known as the Foxton Hotel.
[2] In July 2014, Mr Hemmingson commenced the present proceeding. In it, he claims a declaration that the land is and remains his property. He seeks an order that the certificate of title be rectified to show him as the sole registered proprietor. The proceeding is set down for trial on 2 and 3 June 2015.
[3] Mr Rod now applies for an order for security for his costs.
ROBERT HEMMINGSON v STEVEN ROD [2015] NZHC 681 [13 April 2015]
Background
[4] The background to Mr Hemmingson’s claims is set out in detail in the judgment I gave in Hemmingson v Rod & The Clanard Property Trust Ltd,1 on 30
April 2014. That judgment was concerned with an application made by Mr Hemmingson to sustain a caveat which he had registered on the title to the land. In the judgment, I concluded that Mr Hemmingson might have an arguable claim to an interest in the land as beneficiary under a trust, but that his claim had not been adequately described in his caveat. I declined to make an order that the caveat should not lapse, but granted leave to Mr Hemmingson to register a second caveat. That was done, and the present proceeding was subsequently issued by Mr Hemmingson.
[5] For a period from July 2007 to 19 July 2011, Mr Hemmingson and Cheryl Hemmingson were the registered proprietors of the land. They held the land as trustees of family trusts which were established by or associated with Mr Hemmingson. At that stage, there were two mortgages registered on the title to the land, a first mortgage to Avanti Finance Ltd (Avanti) and a second mortgage to Mr and Mrs Davis.
[6] Mr Hemmingson ran into financial difficulties, and he was bankrupted on 15
October 2007. However, the land, being held by trustees, was not an asset available to Mr Hemmingson’s creditors in his bankruptcy. The business of the Foxton Hotel was therefore able to continue, initially run by a tenant, Foxton Hotel Ltd. There was never any formal lease in place. Rent was paid on a month-to-month arrangement, with rental payments aligned to cover the interest payable on the two mortgages. When Foxton Hotel Ltd was put into liquidation in March 2008, the trustees put in a manager, with Mr Hemmingson and his partner providing support.
[7] The owners were unable to keep up the required payments on the Avanti mortgage, and Avanti eventually exercised its power of sale. The land was transferred from Avanti as mortgagee to the defendants on 19 July 2011 for the sum
of $275,000.
1 Hemmingson v Rod & The Clanard Property Trust Ltd [2014] NZHC 873.
[8] There was a shortfall of some $100,000 owing to Avanti on its first mortgage, and the mortgagee sale had the effect of extinguishing the interest of Mr and Mrs Davis, who had advanced $50,000 under their second mortgage.
[9] Partially in an attempt to salvage their situation, but apparently also because Mr Davis was a friend of Mr Hemmingson and wanted to see him remaining as publican at the hotel, Mr and Mrs Davis agreed to fund the entire purchase price of
$275,000 paid by the defendants to Avanti, on terms which would enable Mr Hemmingson to continue operating the hotel business. There is a dispute as to what those terms were, and that dispute is at the heart of this proceeding.
[10] Mr Hemmingson says that Mr Rod became his accountant at some time not long before the land was sold to the defendants. He says that it was Mr Rod who negotiated with Avanti to purchase the land, Mr Rod was also involved in the negotiations under which Mr and Mrs Davis agreed to fund the purchase from Avanti.
[11] Mr Hemmingson alleges that the arrangement was that Mr and Mrs Davis would advance the money required to purchase the land to an asset-owning trust which would purchase the land, on the basis that Mr Hemmingson would continue to run the hotel business. He says that he and Mr Rod agreed that Mr Hemmingson would be the sole beneficiary of this trust.
[12] Mr Hemmingson left it to Mr Rod to establish the trust, and Mr Rod did establish a trust, called the R & S Trust. However, Mr Hemmingson (although named as settlor) was not named as a beneficiary. The “primary beneficiary” named in the trust deed was Mr Rod, and any child or children of Mr Rod.
[13] Mr Rod acknowledges that the initials “R” and “S” adopted as part of the name of the trust, were intended to refer to Mr Hemmingson (“R”) and Mr Rod (“S”). According to Mr Rod, Mr Hemmingson was not named as trustee or beneficiary of the R & S Trust because he had only recently been released from his second bankruptcy, and did not have any money to put towards the purchase.
Further, Avanti was not prepared to transfer the land to any entity which included
Mr Hemmingson.
[14] Mr Rod’s evidence is that he agreed with Mr Hemmingson that once it was certain that Mr Hemmingson was in the clear from possible claims by creditors of the Foxton Hotel, and had some money, the freehold of the land would be transferred to Mr Hemmingson. He says that, as consideration for Mr Rod’s successful negotiations with Avanti, Mr Hemmingson would pay him half the difference between the value of the land and the outstanding amount owing to Mr and Mrs Davis (who registered a first mortgage to secure the $275,000 advance which was used to acquire the land from Avanti).
[15] Mr Hemmingson says that that was not the arrangement at all. He says that he understood that he would be named as the proprietor of the land, and that he did not find out that that had not occurred until early 2012.
[16] Mr Hemmingson’s contention in the caveat proceeding was that Mr and Mrs Davis’ real intention was to lend the money to acquire the land from Avanti to Mr Hemmingson, and that the defendants would hold the land and the hotel assets as trustees for Mr Hemmingson.
[17] Mr Davis gave evidence to similar effect. He said that he understood that he would be lending the money to Mr Hemmingson, who would form a trust which would become the registered proprietor of the land. Mr Rod would be a trustee along with Mr Hemmingson.
[18] Mr Davis pointed out that a loan agreement for the $275,000 advanced by him and his wife was signed by Mr Hemmingson as guarantor. He said that he would never have contemplated a loan if it had not been for Mr Rod’s representation that Mr Hemmingson would be a party to the ownership of the land.
[19] From some time not long before the defendants acquired the land from Avanti, Mr Hemmingson had been paying $1,000 per week into Mr Rod’s trust account, from which Mr Rod would pay the interest on the mortgages to Avanti and
Mr and Mrs Davis. Mr Hemmingson says that the arrangement was that Mr Rod would also use the weekly payments of $1,000 to pay PAYE, GST, and rates payable for the hotel business and land.
[20] Mr Rod acknowledges he was the initial point of contact for Mr Hemmingson and the business of the Foxton Hotel, but says that he introduced Mr Hemmingson to one of his associates, Mr Frew, shortly after the initial contact. Mr Frew (through a separate company owned by him) took over acting as Mr Hemmingson’s accountant. Mr Rod rejects the suggestion that Mr Hemmingson’s weekly payments after the Avanti purchase was settled were for interest and outgoings on the land, as if Mr Hemmingson were the owner of the land – Mr Rod says that Mr Hemmingson was paying the $1,000 per week as rent for the land.
[21] Mr Rod says that, a few weeks after the settlement of the purchase from Avanti, Mr Hemmingson told him that he needed a lease of the land in order to obtain a liquor licence. Mr Rod’s evidence is that, until then, he had not given much thought to the issue of a lease “as I had assumed that [Mr Hemmingson] and I would be equal partners in any profit from the sale of the freehold”. Nevertheless, Mr Rod obtained a form of commercial lease which he filled in and sent to Mr Hemmingson.
[22] It appears that the lease document was completed on 7 June 2011, and signed by the defendants and Mr Hemmingson (although it is not clear that Mr Hemmingson ever sent a signed copy back to the defendants). The document provided for rent of $1,000 per week, including GST, and a 10 year term commencing on 15 July 2011. Mr Rod’s evidence is that the lease was a gross lease, under which Mr Hemmingson would be liable for rates and insurance.
[23] Mr Hemmingson continued to make payments to Mr Rod’s firm at the rate of
$1,000 per week between June 2011 and February 2012, when the payments stopped. At about that time, Mr Hemmingson had found out that he was not registered as a proprietor of the land. He contacted Mr Rod and told him that he thought he had been ripped off with regard to the weekly payments.
[24] In the caveat proceeding, Mr Hemmingson argued that the weekly payments of $1,000 were payments of mortgage interest and outgoings on the land which constituted contributions by him to the acquisition of the land, consistent with him being entitled to an interest in the land under a constructive trust.
[25] Mr Rod gave evidence in the caveat proceeding of how he had applied the weekly payments of $1,000 received from Mr Hemmingson after 12 June 2011. Nearly half of the figure was applied to the interest on the mortgage to Mr and Mrs Davis, and $111.11 was paid to the Inland Revenue Department for GST on the rent payments. Rates and insurance for the land and hotel were paid from the $1,000, and a sum of $150 was retained by Mr Rod as “an administration fee”. The balance of $88.23 was initially placed into a trust account, but it was soon used up when Mr Hemmingson missed a couple of weekly payments.
[26] The solicitor who had acted for Mr Rod and Clanard in the transaction with Avanti and Mr and Mrs Davis, was Mr Peter Morahan. Mr Hemmingson and Mr and Mrs Davis were not separately represented. Mr Hemmingson and Mr Davis made a surprise visit to Mr Morahan in his Lower Hutt office at some time in 2012. They both say that Mr Morahan initially could not tell them why the property had been registered in the names of the defendants, and that, later in the meeting, Mr Morahan told them that the land would be transferred to Mr Hemmingson upon payment of
$60,000. Mr Hemmingson’s evidence was that he did not know what that sum was for.
[27] Mr Morahan did not give evidence in the caveat proceeding, and has not provided an affidavit in this application.
[28] In July 2012, the defendants issued a formal notice to Mr Hemmingson to quit the land. Mr Hemmingson’s solicitors replied, attaching a copy of extracts from the June 2011 deed of lease, and contending that Mr Hemmingson was entitled to remain in possession of the land under the terms of the lease. Mr Rod’s evidence is that this was the first occasion on which he was made aware that Mr Hemmingson had actually signed the form of lease.
[29] On 14 July 2014, Mr Hemmingson wrote a letter to the Horowhenua District Council setting out his side of the dispute with the defendants. The letter included the following:
…
We arrived at an arrangement whereby [Mr Rod] would negotiate a settlement with Avanti, and we would form a trust which would own the land and buildings which we would name the R & S Investment Trust where I would be the main signatory to this and [Mr Rod] would be counter signatory as required by law. I would operate the hotel as a sole trader leasing the premises from the Trust.
…
[Mr Rod] arranged for Peter Morahan to complete the paperwork and I began making weekly payments to what I was told by [Mr Rod] to be the R & S Trust account so that he could make weekly mortgage payments and rates together with GST and PAYE payments as required. He did make regular mortgage payments but made only two rate payments and one GST payment.
For a considerable period of time I presumed everything was up to date and operating as we had planned so when I required a renewal of my liquor licences I needed a copy of a lease from the R & S Investment Trust which [Mr Rod] prepared and signed – at no time did he advise it was just a draft and I had to take it to my solicitor…
It was not until 2012 when IRD contacted me regarding non-payment of GST and PAYE for the previous 12 months did I discover that Rod and Morahan had fraudulently registered the title of the hotel into their names.
…
Apart from the mortgage payments made, [Mr Rod] stole the rest of the funds I was paying weekly which came to $15,000 and as the bulk of these funds were meant for IRD payments, with their penalties and interest it left me in debt to them for over $22,000 which I am paying off.
[30] In my judgment in the caveat proceeding, I considered that it was at least arguable that the payments made by Mr Hemmingson to Mr Rod were payments of interest under the mortgage to Mr and Mrs Davis. I noted that when Mr Hemmingson stopped making the weekly payments into Mr Rod’s trust account in February 2012, he began making these payments direct to Mr and Mrs Davis. I considered that Mr Hemmingson’s personal guarantee of the mortgage to Mr and Mrs Davis tended to confirm that the understanding was that Mr Hemmingson should have some interest in the land, or at least in the proceeds of sale of the land.
Any such interest would be greater than the kind of interest in land which is normally held by a lessee under a lease.
[31] I referred also to Mr Rod’s evidence that, until Mr Hemmingson told him that a formal lease would be necessary for him to obtain a liquor licence for the hotel, Mr Rod had been working on the assumption that he and Mr Hemmingson “would be equal partners in any profit from the sale of the freehold”. I concluded that the signing of the lease, in and of itself, was not sufficient to support a finding that Mr Hemmingson had no reasonably arguable claim to a beneficial interest in the land.
Mr Rod’ application for security for costs
[32] Mr Rod applies for an order for security in the sum of $18,905. That sum is calculated on a category 2, band B, basis under the High Court Rules.
[33] The jurisdiction to order security for a defendant’s costs is contained in r 5.45 of the High Court Rules. That rule provides:
5.45 Order for security of costs
(1) Subclause (2) applies if a Judge is satisfied, on the application of a defendant,—
…
(b) that there is reason to believe that a plaintiff will be unable to pay the costs of the defendant if the plaintiff is unsuccessful in the plaintiff's proceeding.
(2) A Judge may, if the Judge thinks it is just in all the circumstances, order the giving of security for costs.
(3) An order under subclause (2)—
(a) requires the plaintiff or plaintiffs against whom the order is made to give security for costs as directed for a sum that the Judge considers sufficient—
(i) by paying that sum into court; or
(ii) by giving, to the satisfaction of the Judge or the
Registrar, security for that sum; and
(b) may stay the proceeding until the sum is paid or the security given.
…
(5) A Judge may make an order under subclause (2) even if the defendant has taken a step in the proceeding before applying for security.
…
[34] In support of the application, Mr Rod relies on Mr Hemmingson’s two bankruptcies, and his alleged ongoing inability to manage his own financial affairs. Mr Rod also submits that the Court should exercise its discretion to order security because Mr Hemmingson has pleaded the wrong causes of action for the mischief complained of, thus drawing Mr Rod into unjustified and unnecessarily protracted litigation.
Legal principles applicable to security for costs applications
[35] In Totara Investments Ltd v Abooth Ltd & Ors, Associate Judge Abbott said:2
[24] The need for an applicant to provide “reason to believe” that the plaintiff is unable to pay has been recognised in many cases as a threshold test. It is also well accepted that once satisfied as to that threshold requirement, the Court has a very broad discretion. This can be seen from the classic exposition of the approach that the Court must take in the Court of Appeal's decision in A S McLachlan v MEL Network Limited (2002) 16
PRNZ 747 at paras [13] and [14]:
“[13] Rule 60(1)(b) High Court rules provides that where the Court is satisfied, on the application of a defendant, that there is reason to believe that the plaintiff will be unable to pay costs if unsuccessful, ‘the Court may, if it thinks fit in all the circumstances, order the giving of security for costs’. Whether or not to order security and, if so, the quantum are discretionary. They are matters for the Judge if he or she thinks fit in all the circumstances. The discretion is not to be fettered by constructing ‘principles’ from the facts of previous cases.
[14] While collections of authorities such as that in the judgment of Master Williams in Nikau Holdings Ltd v Bank of New Zealand (1992) 5 PRNZ 430, can be of assistance, they cannot substitute for a careful assessment of the circumstances of the particular case. It is not a matter of going through a check list of so-called principles. That creates a risk that a factor accorded weight in a particular case will be given disproportionate weight, or even treated as a requirement for the making or refusing of an order, in quite different circumstances.”
[36] In Concorde Enterprises Ltd v Anthony Motors (Hutt) Ltd (No. 2) Quilliam J noted that “…what the statute contemplates is that there should be credible (that is, believable) evidence of surrounding circumstances from which it may reasonably be inferred that the company will be unable to pay the costs. This does not, of course, amount to proof that the company will, in fact, be unable to pay them”.3
[37] In A S McLachlan Ltd v M E L Network Ltd,4 the Court of Appeal held that the (security for costs) rule contemplated that the plaintiff would be unable to meet an award of costs, and that an order for substantial security might effectively prevent the plaintiff from pursuing the claim. The Court of Appeal noted that in those circumstances an order having that effect should only be made after careful consideration, and in a case where the claim has little chance of success. Access to the courts for a genuine plaintiff is not likely to be denied. On the other hand, defendants must be protected from being drawn into unjustified litigation.5
[38] The Court of Appeal also noted in A S McLachlan that an assessment of the merits of a claim at an interlocutory stage can normally only be no more than an impression of the merits.6 The Court of Appeal also noted that security is not necessarily to be fixed by reference to the costs likely to be awarded against the plaintiff if he or she is unsuccessful at trial: security is to be fixed at a level that the Court thinks is fit in all of the circumstances.7
Application of the legal principles in this case
[39] I am satisfied that Mr Rod has reached the threshold level of showing that there is reason to believe that Mr Hemmingson will be unable to pay Mr Rod’s costs if Mr Hemmingson is unsuccessful in the proceeding.
[40] Mr Hemmingson has been adjudicated bankrupt on two previous occasions, and I accept Mr Mahuta-Coyle’s submission that it is unlikely that when he was
discharged from his most recent bankruptcy (in October 2010) he would have had
3 Concorde Enterprises Ltd v Anthony Motors (Hutt) Ltd (No. 2) [1977] 1 NZLR 516 at 519.
4 A S McLachlan Ltd v M E L Network (2002) 16 PRNZ 747.
5 At [15].
6 At [25].
7 At [27], citing National Bank of New Zealand Ltd v Donald Export Trading Ltd [1980] 1 NZLR
97 (CA) at 103.
any significant assets. The issue is whether it is more likely or less likely that his financial position has improved since then, to the point where he would be able to pay costs at the level which would probably be awarded against him if he were to lose at trial. If that were to occur, a costs award against him might be somewhere in the region of $30,000-$40,000.
[41] It appears to be common ground that Mr Hemmingson is “hopeless with money”,8 and that on its own suggests that it is improbable that Mr Hemmingson is significantly better off now than he was when he was discharged from bankruptcy in October 2010. That assessment appears to be supported by Mr Hemmingson’s letter dated 14 July 2014 to the Horowhenua District Council. The letter clearly implied that he was not then in a position to pay the sum of $22,000 which was owing to the Commissioner of Inland Revenue (he said that he was paying that sum off).
[42] Given that combination of circumstances, I think Mr Hemmingson at least “had a case to answer” on the impecuniosity issue. If his financial position had changed for the better since July 2014, one would have expected him to have provided evidence of the change. He has not done so, and I consider it reasonable in those circumstnaces to infer that he will be unable to pay a costs award of the kind which might be made if he is unsuccessful at trial.
[43] I now turn to consider the exercise of my discretion. First, Mr Hemmingson says in his notice of opposition that his debt to the Inland Revenue Department came about because money forwarded by him to Mr Rod to pay the Department was taken by Mr Rod and not paid on to the Department. He says that any impecuniosity is therefore due to the fault and fraudulent actions of Mr Rod.
[44] There is insufficient evidence for me to form any concluded view on this contention, but even if there were merit in it, the amount allegedly misappropriated by Mr Rod (about $15,000) is substantially less than the amount likely to be awarded against Mr Hemmingson if he is unsuccessful at trial. At best, his inability to pay any such costs award could only partially be attributed to the alleged misappropriation by Mr Rod. The argument that any impecuniosity has been caused
by the default or fraud of Mr Rod is accordingly insufficient to cause me to exercise my discretion against the making of an order for security.
[45] Turning to the merits of the parties’ respective claims, Mr Mahuta-Coyle submits that it is inconceivable that Avanti would have been prepared to convey the land, at a significant loss on its investment, to the very legal owner who had defaulted on the mortgage to Avanti in the first place. I think there is some force in that submission. Mr Mahuta-Coyle then submits that Mr Hemmingson’s only reasonably arguable claim is the claim on which the Court’s judgment in the caveat proceeding was focussed, namely his claim to a beneficial interest in the land that was intended to be kept off-register. Mr Mahuta-Coyle submits that the relief which Mr Hemmingson has claimed appears to reflect an attempt to improve his claimed beneficial interest in the proceeding from that which was earlier claimed.
[46] I do not now have before me any substantial additional evidence which would cause me to alter the view that I formed in the caveat proceeding that Mr Hemmingson has an arguable claim to a beneficial interest in the land. In this proceeding, Mr Hemmingson pleads that the defendants, as the trustees of the R & S Trust, are the registered proprietors of the land, and that he and Mr Rod had agreed
that Mr Hemmingson would be the sole beneficiary of the trust.9 If there is any
mismatch between those pleadings and Mr Hemmingson’s claims for relief, it seems to me that the mismatch ought to be capable of being cured by amendment if necessary, without causing prejudice to the defendants.
[47] That is not a matter on which I need to rule, and I refrain from doing so. For present purposes it is enough to conclude, as I do, that the merits of the case are not so clearly in Mr Rod’s favour that an order for security should be made at a level which would be likely to have the effect of bringing Mr Hemmingson’s claim to an end.
[48] There was some discussion at the hearing about possible delay on the part of Mr Rod in bringing his security for costs application, particularly with a trial scheduled to take place in about two months time. I am satisfied that there is nothing
in the point. The application for security for costs is substantially dependent on the July 2014 letter from Mr Hemmingson to the Horowhenua District Council, and it appears that Mr Rod would not have had access to that letter until it was provided on discovery on or about 5 February 2015. The application for security for costs was made on 23 February 2015.
[49] Balancing the interests of the parties as best I can, in accordance with the approach set out in Highgate on Broadway Ltd v Devine,10 I conclude that the justice of the case will best be met if I make a modest order for security for Mr Rod’s costs, in the sum of $10,000. In fixing that sum, I bear in mind that the value of this litigation in dollar terms is likely to be relatively low – Mr Hemmingson seeks to be registered as proprietor of land which in mid-July 2011 may have had a zero equity (the entire purchase price having been funded by the advance made by Mr and Mrs Davis, and there being insufficient evidence that the land was (or has since
become) significantly more valuable than the amount owed to Mr and Mrs Davis).
[50] I appreciate that there are issues of reputation involved in the case, particularly for Mr Rod, who is an accountant. Those interests must also be weighed in my considerations, and I think they can be properly reflected if security is ordered in the modest sum which I propose to award.
[51] A further consideration in the exercise of my discretion is that the continued registration of the caveat on the title to the land is a matter which both sides need to have resolved sooner rather than later. An award of security at a level which would be likely to prevent Mr Hemmingson’s claim proceeding at all is likely to result in a stay of his proceeding, and consequent further delays.
[52] Balancing those considerations, I order that Mr Hemmingson is to pay the sum of $10,000 into Court (or into any solicitor’s trust account which may be agreed upon in writing between the parties), as security for Mr Rod’s costs. That sum is to be paid into Court (or into the independent solicitor’s trust account) by no later than
1 May 2015. If the security for costs has not been paid by that date, Mr Rod may apply to have the proceeding stayed, and the 2 June trial date vacated.
[53] In accordance with my directions made on 28 October 2014, the defendants’ briefs of evidence are presently due to be served by 5 May 2015. In view of the fact that I have allowed Mr Hemmingson until 1 May 2015 to pay the security for costs which I have ordered, and the possibility that that might not occur, the time for the defendants to serve their briefs of evidence, and provide additional documents for inclusion in the common bundle of documents for trial, is extended to 12 May 2015.
[54] I record that Mr Paine asked that, if an order for security is made, it should be deferred until the outcome of the hearing is known. The basis for this submission was the proximity of the hearing, and the “lack of explanation for the inherent delays in bringing the application”. As I have said, I do not see any merit in the delay argument. And postponing the payment of security until the outcome of the hearing is known would defeat the entire purpose of an order for security for costs, namely providing Mr Rod with an assurance that, if he succeeds at trial, an appropriate part of his costs will definitely be met.
[55] Costs on this application are reserved.
Associate Judge Smith
Solicitors:
0