Herring v Herring

[2010] NZCA 500

For a Court ready (fee required) version please follow this link

IN THE COURT OF APPEAL OF NEW ZEALAND

CA673/2009
[2010] NZCA 500

BETWEENRUSSELL JAMES HERRING
Appellant

ANDRUSSELL JAMES HERRING, BRENDA MAY HERRING (ALSO KNOWN AS BRENDA MAY TREACY) AND ANTHONY ROBERT HERRING ALL AS TRUSTEES OF THE R J & B M HERRING FAMILY TRUST
Respondents

Hearing:27 July 2010

Court:Arnold, Ellen France  and Harrison JJ

Counsel:O G Paulsen and S Dwight for Appellant
D M Lester for Second Named Respondent

Judgment:2 November 2010 at 3 pm 

JUDGMENT OF THE COURT

AThe appeal is dismissed.

B No order as to costs.

REASONS

Arnold and Ellen France JJ
Harrison J (dissenting)

ARNOLD AND ELLEN FRANCE JJ

(Given by Ellen France J)

Introduction

[1]       Brenda Herring (now Brenda Treacy) and Russell Herring were formerly married.  During their marriage they set up a family trust and transferred ownership of their family home and the majority interests in three family companies to the trust.  Ms Treacy (Brenda) and Mr Herring (Russell) are the trustees.  Their solicitor, Anthony Herring, has recently retired as a trustee.

[2]       The trust’s acquisitions were funded by advances from Brenda and Russell to the trust.  They then gifted part of the debt owing to them to the trust each year.  The balance of the debt owed to each of them by the trust is $271,000.

[3]       One of the three family companies is Web Power Ltd.  Brenda is the sole director of this company.  Russell and Brenda in their personal capacities are minor shareholders in Web Power and both drew substantial sums from the company.  They each owe a considerable debt to Web Power in their personal capacities.  The debts are roughly equal (Russell’s slightly the larger).  Although quantum is disputed, it seems reasonably clear the debts are both greater than $271,000.

[4]       Following the breakup of their marriage, Russell demanded repayment of the $271,000 owed to him personally by the trust.  When payment was not forthcoming, Russell applied to the High Court for summary judgment.

[5]       Brenda resisted summary judgment.  One of the grounds for her opposition was that $271,000 of the debt Russell owed Web Power had been assigned to Brenda in her capacity as trustee and that this afforded her an equitable set off against the debt owed to Russell by the trust.

[6]       Fogarty J considered it was arguable there was an equitable set off and refused summary judgment.[1]  Russell appeals against the refusal to grant summary judgment.

[1]      Herring v Herring [2010] 2 NZLR 549 (HC).

[7]       The appeal raises two issues:

(a)       Was there an arguable defence of equitable set off to Russell’s claim?

(b)Should summary judgment be declined on the basis of the residual discretion?

We deal with each issue in turn after summarising the approach taken in the High Court.

The High Court decision

[8]       While initially there were four grounds of opposition to summary judgment, the two pursued before Fogarty J were first, the argument based on equitable set off and, secondly, that Brenda could set off the debt of $271,000 owed to her in her personal capacity against the debt owed to Russell by the trust.

[9]       As to the former ground, Fogarty J dealt first with an argument that the assignment was not valid.  The Judge agreed that the assignment, standing on its own, “does look odd and appears on the face of it to be without consideration”.[2]  However, Fogarty J considered the assignment may be supported with appropriate resolutions by Web Power.  The technical irregularities with the assignment could be improved and it made more certain, so a set off could be raised were the case to go to trial.

[2] At [29].

[10]     As to whether it was arguable there was an equitable set off, the Judge considered the principles set out in Grant v NMC Ltd and, in particular, the observation by Somers J that the link between the claims must be such that the claims are “interdependent”.[3]  Fogarty J described the test ultimately as “whether it is unconscionable to allow the plaintiff to proceed without bringing to account a cross-claim sufficiently linked”.[4]  The Judge continued:

[28]     There is no doubt that by reason of the separate personality of Webpower the credit that Russell has with the trustees of $271,000 and the disputed liability he has for drawings as a shareholder with Webpower are independent of each other.  But, as Mr Lester put it:

Equity is not distracted by labels, it looks to substance.

...

[30]     There can be no dispute that the affairs of Webpower and its owners, the trustees, are interrelated.  I do not think that too much emphasis should be placed on the selection of the word “interdependent” in the summation in Grant.  On the facts of that case, coupled with the analysis of the authorities which precede it, the word “interrelated” could have been substituted without there being any significant difference in meaning.

[3]      Grantv NMC Ltd [1989] 1 NZLR 8 (CA) at 12–13.

[4] At [27].

[11]     On this analysis, Fogarty J concluded it was “formalistic” for Russell to call for satisfaction of the trustees’ indebtedness to him while there is a case that he has a greater indebtedness to one of the assets held by the trustees.[5]

[5] At [34].

[12]     Fogarty J did not consider it necessary to adjudicate on the second ground of opposition to summary judgment.  But the Judge indicated that he “struggle[d] to grasp” how the liability of the trust to Russell could be set off by releasing him as co-trustee from liability in respect of the trust’s debt to Brenda.[6]  The Judge did not believe there was any necessary equivalence in such an exchange of benefits.  There is no cross-appeal on this aspect.

An arguable defence of equitable set off?

[6] At [36].

[13]     Before considering the relevant principles, we need to say a little more about the facts.  The deed of assignment of debt was entered into by Brenda and Web Power on 8 July 2009.  The deed set out the amount Russell owed Web Power as in the accounts ended 31 March 2007, ie, $310,667.  The deed provided that Web Power had agreed to assign part of the debt to Brenda in her capacity as trustee of the Herring family trust.

[14]     Brenda agreed to accept the assignment on conditions of $271,000 of Russell’s overdrawn shareholder’s current account.  The conditions we need to note are in the operative part of the deed as follows:

1.The Assignor agrees to assign, and the Assignee agrees to accept assignment of $271,000.00 of Russell’s overdrawn Shareholders Current Account in the Assignor on the following terms and conditions:-

1.1The part of Russell’s overdrawn Current Account being assigned to the Assignee is $271,000.00, or such other amount agreed that may be agreed between the Assignor and the Assignee in writing (“Russell’s Overdrawn Current Account”);

1.2The assignment is solely for the purpose of meeting the claim against the Assignee set out in the Proceedings.  To the extent that the assignment is not necessary for that purpose, the assignment will have no effect.

[15]     The relevant principles concerning equitable set off are as discussed in Grant and in Hamilton Ice Arena Ltd v Perry Developments Ltd.[7]  In terms of Hamilton Ice we emphasise the distinction drawn by Tipping J in delivering the judgment of this Court between set off and counter claim.  The latter gives rise to a right to an independent judgment but “no ability to reduce or extinguish the plaintiff’s claim against the defendant”.[8]  It is this result which underscores the need for a particularly close interrelationship as outlined in the excerpt from Grant discussed by Fogarty J.

[7]      Hamilton Ice Arena Ltd v Perry Developments Ltd [2002] 1 NZLR 309 (CA).

[8] At [3].

[16]     The issue raised by Fogarty J’s approach in this case is whether the requirement of “interdependence” referred to in Grant and in Hamilton Ice is met on the facts.

[17]     Mr Paulsen, on behalf of Russell, says the Judge has erred in treating interrelationship as interdependence.  Once the Judge found the claims were independent, that should have been the end of it.  In his submission, fairness is not enough to give rise to an equitable set off.  What is needed is an interdependent claim going to the root of the other claim.  Mr Paulsen also submits that mutuality of identity of the parties is required.

[18]     In response, Mr Lester submits that it may be that while not all interrelated claims are interdependent, all interdependent claims can be characterised as interrelated.  In other words, the Judge was right to treat the two terms as equivalent although, in any event, Mr Lester says the Judge did ultimately remind himself that the test was whether the claims were linked.  Finally, Mr Lester disputes that mutuality is an absolute requirement.

[19]     We do not consider the interdependence between the claims is such that the existence of the debt assigned by Web Power should be regarded as impeaching the debt owed to Russell.  Rather, it is more in the “if you had paid me I would have been able to pay you” category of claims.[9]  A number of the factors identified in Mr Paulsen’s submissions are relevant:

(a)One claim is for advances Russell made to the trustees to acquire the assets of the trust.  The other arises out of Web Power’s business and reflects advances made by Web Power to Russell personally as a shareholder.

(b)The link between the affairs of the trust and those of Web Power is limited to the fact the trustees are shareholders of Web Power.

(c)The fact of the trustees’ shareholding does not create any beneficial interest in Russell’s debt to Web Power.

(d)The parties could have provided that the debt owing by the trust would be extinguished by way of Web Power drawings but did not do so.  The only reductions in the trust debt were by way of gifting.

[9]      Hamilton Ice at [41].

[20]     As to the need for identity of parties, in Hamilton Ice the Court did not rule out the possibility that in some “unusual” circumstances it might be appropriate to allow equitable set off where there is no identity of parties, but indicated that “any such circumstance (other than one justifying the lifting of the corporate veil) would have to be consistent with the extinguishment rationale”.[10]

[10] At [9].

[21]     Mr Lester relies on the policy behind the mutuality rules in set off, ie, the wish to prevent party A setting off a liability to party B against a claim against A by party C.  Mr Lester says concerns about one party using an asset for their sole benefit in prejudice to the rights of another do not arise here.  That is because the debt sued for by Russell is owed by the trustees jointly and severally.  Brenda has taken the assignment to meet that joint and several debt.  In doing so she is using a debt transferred to her personally but which, Mr Lester submits, she holds for the benefit of all trustees to meet their joint trustee liability.

[22]     The difficulty with this argument is that the assignment is to Brenda alone.  It is Brenda, not the trustees, who will benefit from it because a transfer to her does not enrich the trust.  It is not at all clear that this is the sort of case warranting a departure from the mutuality requirement.  To avoid this problem, Mr Lester argues that Brenda holds the Web Power debt subject to a Quistclose trust[11] for the benefit of her co-trustees.  As we understand it, this is a new argument.  It does not fit well with the notion of an assignment of the Web Power debt to Brenda which involves an unconditional transfer of the chose in action. 

[11]      Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 (HL).

[23]     Ultimately, in any event, the lack of interdependence is fatal to the claim that it is arguable there was an equitable set off.  As we are all agreed on this point, this aspect of the appeal can be disposed of on this basis and we do not need to deal with the question of the validity of the assignment.

The residual discretion

[24]     Although, as we have indicated, Mr Lester addressed us on equitable set off his primary argument was that Fogarty J’s key finding was that all issues between the parties should be dealt with comprehensively.  In other words, Mr Lester says the Judge’s conclusion was that summary judgment was not appropriate.  Another way of putting this argument is that the Judge exercised the residual discretion under r 12.2 of the High Court Rules to decline to grant summary judgment.  That rule provides that the Court “may” give judgment if the plaintiff satisfies the Court that the defendant has no defence.

[25]     It does appear that the Judge was concerned at the fairness of Russell’s approach given the other issues between the parties. However, Mr Paulsen is correct that the Judge does not expressly consider the matter in terms of whether or not to exercise the residual discretion to decline summary judgment.  Fogarty J did not need to do that given his conclusion on equitable set off.  Because we take a different view on set off, we turn to consider whether or not to exercise the residual discretion.  In this connection, we note that Mr Paulsen did address the exercise of the discretion in his written and oral submissions.

[26]     There is precedent for exercising the residual discretion to decline summary judgment in circumstances similar to the present.  In Sayles v Sayles,[12] Wylie J confirmed that there was a residual discretion and that the Court can look at the injustice to the defendant arising out of other aspects of the overall dispute between the parties.  A similar approach has been taken in the United Kingdom.  The relevant rule is worded differently[13] but there too a concern that all matters relevantly of dispute should be determined together has provided a basis for exercising the discretion to decline to grant summary judgment.[14]

[12]      Sayles v Sayles (1986) 1 PRNZ 95 (HC).

[13]Rule 24.2(b) of the Civil Procedure Rules 1998 (UK) provides the court may give summary judgment only if “there is no other compelling reason why the case or issue should be disposed of at a trial”.

[14]Trafalgar House Ltd v General Surety Co [1996] 1 AC 199 (HL) at 210; Miles v Bull [1969] 1 QB 258 (QB) at 266.

[27]     We understand that if summary judgment is entered then Brenda will have to realise some assets.  That may involve the sale of the matrimonial home.  Given that the parties are unable to reach agreement, how their relationship property is to be divided and how the trust property is to be dealt with are matters that should be resolved in the context of proceedings under the Property (Relationships) Act 1976 and s 182 of the Family Proceedings Act 1982. Such proceedings will enable a comprehensive assessment of the parties’ respective positions to be undertaken, which is to be contrasted with the limited focus of the present proceedings. 

[28]     At the time we heard the appeal, neither party had taken any steps to institute relationship property proceedings.  Brenda’s failure to do so is, as Harrison J observes, a relevant factor.  Nonetheless, counsel has advised that, since the hearing in this Court, Russell has filed proceedings under s 182 of the Family Proceedings Act.  Those proceedings are likely to be more directly focused than the present proceedings on the underlying issues concerning the appropriate division of what appears to be essentially relationship property.  We think it likely that the present proccedings will serve only to complicate matters.

[29]     Because of the nature of the underlying issues and the desirability of resolving all of the issues between the parties, we consider summary judgment should be declined.  This is a case where, as in Sayles, the grant of summary judgment will entail “some injustice” and, “whether intentionally or not”[15] an oppressive use of the procedure of the Court.   Accordingly, we dismiss the appeal.

Costs

[15]      At 8.

[30]     The case has taken on something of a different cast on appeal.  In these circumstances, we consider that costs should lie where they fall.  We make no order as to costs.

HARRISON J

[31]     I agree with Arnold and Ellen France JJ that Fogarty J erred in concluding that Russell was unable to establish that Brenda had no defence by way of equitable setoff to his demand upon the trustees for payment of $271,000.  I am satisfied that, first, Web Power’s assignment to Brenda of part of Russell’s alleged indebtedness was invalid whether in law or equity and, second, in any event, their claims were not interdependent such that one was sufficiently linked to the other to require an accounting between the two. 

[32]     However, I disagree with Arnold and Ellen France JJ’s conclusion that Brenda’s appeal should nevertheless be dismissed by invoking the statutory discretion not to enter summary judgment.[16]  In my judgment Russell’s appeal should be allowed unconditionally, and summary judgment entered in his favour.  I can state my reasons shortly. 

[16]      High Court Rules, r 12.2(1).

[33]     The grounds upon which a Court may exercise its discretion in a defendant's favour once a plaintiff has proven there is no defence to a claim are very limited.[17]  The discretion is only of the most residual kind.[18]  The ground relied upon by Arnold and Ellen France JJ is the possibility of oppression or injustice to Brenda.  However, the circumstances will be rare where a plaintiff who has shown there is no arguable defence will be denied summary judgment.[19]  An example of such a rare case is Sayles v Sayles.[20]

[17]Bromley Industries Ltd v Martin and Judith Fitzsimons Ltd [2009] NZCA 382, (2009) 19 PRNZ 850 at [65].

[18]      Pemberton v Chappell [1987] 1 NZLR 1 (CA) at 5.

[19]      Jowada Holdings Ltd v Cullen Investments Ltd CA248/02, 5 June 2003 at [30].

[20]      Sayles v Sayles (1986) 1 PRNZ 95 (HC).

[34]     In my judgment the discretion is residual in the sense that it should only be invoked to prevent an oppression or injustice which results from or is incidental to the use of the summary judgment procedure itself, normally where it would deprive a defendant of an opportunity to avail himself or herself of a material procedural right.  That is why, for example, the discretion may be available where entry of summary judgment might pre-empt rights of discovery of documents going to the underlying merits of the claim or defence, or rights of joinder of third parties, possibly affecting the overall incidence of liability.  In Sayles the defendant had already issued a proceeding seeking a declaration as to ownership of assets acquired together with the plaintiff during their relationship; the plaintiff responded by applying for summary judgment, relying on a different legal entitlement, which if granted might defeat or prejudice the defendant’s existing claim to the same property.  It was the use of the summary judgment procedure in those unusual circumstances which was potentially unjust or oppressive in Sayles. 

[35]     The facts of this case are far removed from Sayles.  What is, I think, decisive is that Brenda has taken no steps, other than adopting the plainly ineffective expedient of an invalid assignment.  She has not attempted to invoke the statutory right available to her for resolving matrimonial disputes relating to trust property.[21]  She has not led any evidence to provide a factual foundation for an argument of injustice or oppression.  In short, she has sat on her rights.  Furthermore, Fogarty J did not base his decision on discretionary grounds and in my judgment the material before us does not satisfy the high threshold for refusing summary judgment where the plaintiff proves there is no arguable defence.  I do not think that the existence of separate proceedings, issued after an appeal is heard, can properly be taken into account. 

[21]      Property (Relationships) Act 1976, s 182.

[36]     Russell has sued on an acknowledgement of debt.  The trustees do not deny that the money is owing or that the acknowledgement is valid.  Brenda does not suggest that any additional evidence is available to support her defence.  Thus, if Russell’s case went to trial in the ordinary way, he would be entitled to judgment.  In that event a Court could not refuse to enter judgment, having found in Russell’s favour on the merits, on the ground Brenda might have earlier resorted to a different remedy available relating to the same property. 

[37]     While I am unconvinced by Mr Paulsen’s rationale for Russell’s decision himself not to invoke s 182 instead of issuing this proceeding, I agree with him that Russell was not obliged to pursue that right but was entitled to rely on a separate remedy properly available to him in law and that he should not now be deprived of his right to judgment on an otherwise undisputed debt.

[38]     For these brief reasons, I would allow the appeal and enter summary judgment in Russell’s favour together with costs.

Solicitors:
Cavell Leitch Pringle & Boyle, Christchurch for Appellant
Layburn Hodgins, Christchurch for Second Named Respondent