KBL Investments Limited v KBL Courtenay Limited

[2015] NZHC 30

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2012-404-7276 [2015] NZHC 30

BETWEEN

KBL INVESTMENTS LIMITED

Plaintiff

AND

KBL COURTENAY LIMITED First Defendant

STEPHEN KINGSLEY EDGAR TURNER

Second Defendant

ADRIAN LANCE GREEN Third Defendant

Hearing:	28, 29, 30 April, 1, 2, 5, 6, 7 May and 12 and 13 August 2014
Appearances:	P J Dale and V E Fletcher for Plaintiff D J Chisholm QC and M J W Lenihan for First, Second and Third Defendants
Judgment:	28 January 2015

JUDGMENT OF COOPER J

This judgment was delivered by Justice Cooper on 28 January 2015 at 4.00 pm, pursuant to

r 11.5 of the High Court Rules

Registrar/Deputy Registrar

Date:

Solicitors:

Izard Weston, Wellington

Carson Fox Legal Ltd, Auckland

KBL INVESTMENTS LTD v KBL COURTENAY LTD [2015] NZHC 30 [28 January 2015]

Table of Contents	Para No
Introduction	[1]
The facts	[3]
The causes of action	[118]
Breach of contract	[121]
Breach of fiduciary duty	[147]
A fiduciary relationship?	[154]
Breach of duty	[169]
Oppression	[176]
Damages	[188]
Result	[189]

Introduction

[1]      The plaintiff, KBL Investments Ltd, has brought claims:

(a)      against the first defendant, KBL Courtenay Ltd, based on breach of contract and oppression under the Credit Contracts and Consumer Finance Act 2003 (CCCF Act);  and

(b)      against  the  second  and  third  defendants,  Mr Stephen  Turner  and

Mr Adrian Green, alleging breach of fiduciary duty.

I will refer to the plaintiff as “KBL” and the first defendant as “Courtenay”.

[2]      The   claims   have   their   setting   in   steps   taken   by   KBL’s   principal, Mr Kevin Clark, to secure finance so as to prevent a mortgagee sale of a building owned by KBL situated at 11–13 Courtenay Place, Wellington (the property). Courtenay is a company formed by the second and third defendants, which entered into  a  “warehouse”  agreement  with  KBL under  which  it  acquired  the  property, subject to KBL’s right to repurchase it.  KBL, in the circumstances that developed, was unable to exercise that right and now claims that the defendants deliberately engineered that outcome.

The facts

[3]      Mr Clark was KBL’s main witness as to the facts on which the claims are

based.  He is a university graduate, having gained a Bachelor of Business majoring

in valuation and property management.   He worked as  a real estate agent,  and become an associate member of the Real Estate Institute of New Zealand.  From late

1998 he was active as a property developer, an occupation in which he has been engaged full time since 2000.   In his evidence he listed a number of projects in which he has been involved.   These were residential, commercial and industrial developments, and included developments involving buildings with multiple units.

[4]      Mr Clark met Mr Turner in 2000. At that stage, Mr Turner and Mr Green had established GTF Capital Ltd which, together with other companies in the “GTF Group” arranged funding for commercial property developments.   It was common ground that the GTF Group and other entities controlled by Mr Green and Mr Turner funded  or arranged  funding of around $60 million  for 11  different  development projects  undertaken  by  Mr Clark.      As  a  result  of  his  dealings  with  Mr Clark, Mr Turner formed a high regard for him, and said he appeared to be able.

[5]      Mr Turner also made the acquaintance of a Mr Matthew Ellingham, one of Mr Clark’s   business   colleagues.      Mr Turner   said   that   neither   Mr Clark   nor Mr Ellingham  had  ever  let  him  down,  and  were  always  able  to  perform  their obligations in respect of the projects Mr Turner’s companies funded.

[6]      Mr Clark  and  Mr Ellingham  formed  KBL  in  late  2002,  together  with Mr Benjamin Kirton  and  Mr Matthew Peters.    They  did  so  for  the  purpose  of acquiring the property.  Mr Clark said in evidence that the intention was to redevelop the property into a strata-title mixed-use building consisting of up to four retail units on the ground floor, and four large and four smaller residential apartments on the upper level.

[7]      The  property  was  acquired  in  accordance  with  funding  arrangements organised by Mr Turner and GTF Capital Ltd.  There was a first mortgage to Capital and Merchant Finance (CMF) and a second mortgage to Boston Securities Ltd (a company controlled by Mr Green).  The loans were intended to provide funding for redevelopment of the building.  Development work was substantially completed, and the building fully tenanted by October 2004. The loan to CMF was then fully repaid. Other funds had been secured from Perpetual which then held a first mortgage,

securing $2.6 million.   There was a second mortgage securing $800,000 held by

Dominion Finance Ltd. The loan to Boston Securities Ltd was repaid in mid 2005.

[8]      Balmain New Zealand Ltd acted as the agent and manager in respect of the loan  from  Perpetual  Trust  Ltd  (Perpetual).    That  mortgage  was  increased  to

$3.2 million in May 2007, and the second mortgage to Dominion Finance Ltd was then reduced to $100,000.  Mr Clark explained that KBL’s intention from the outset had been to carry out a unit title subdivision of the property.  A resource consent allowing that subdivision to proceed was obtained from Wellington City Council on

15 March 2010.  The resource consent provided for three commercial units at ground floor level and four residential units above.

[9]      KBL’s intended redevelopment of the property gave rise to issues with an adjoining land owner, Buckle Barracks Ltd, which was also intending to develop its land.  An agreement was negotiated between KBL and Buckle Barracks Ltd and a deed was executed on 25 August 2004 which provided for boundary adjustments, the creation of various easements and the transfer of air rights.  Under the deed, Buckle Barracks Ltd was obliged to obtain any necessary council consents to implement the agreement.   Until the boundary adjustment was  completed, KBL was  unable to proceed with the proposed unit title subdivision.  The processes necessary under the Resource Management Act 1991 were not completed until survey plan approval was granted in January 2008.   Deposit of the survey plan with Land Information New Zealand (LINZ), necessary to effect the boundary adjustment, registration of easements and the issue of new titles required consent of the mortgagee, which was not forthcoming.  This led to Buckle Barracks Ltd lodging a caveat against the title to the property, asserting a breach by KBL of the deed by failing to provide the consent of its mortgagees for the boundary adjustment subdivision.

[10]     It was Mr Clark’s evidence that KBL had experienced what he described as

“a  very  challenging  three  years  through  the  high  interest  rate  environment  of

2007–2009”.  This had led to it suffering trading losses each year, and cash inputs by the shareholders had been necessary to keep the company solvent.   In 2010, there were further cash-flow difficulties due to the loss of some tenants and vacant space

in the property.  Vacancies were filled by late 2010 and, according to Mr Clark, KBL

expected to be able to service its mortgages from that point.

[11]     Mr Andrew Morgan was the managing director of Balmain NZ Commercial Mortgages Ltd (Balmain) at the relevant time.   Mr Morgan gave evidence as the person who had managed KBL’s loan.   He said that he experienced difficulties in obtaining information from Mr Clark concerning the unit title subdivision, but in any event KBL was in breach of its obligations under the mortgage, including substantial rate arrears then dating back to the 2008/2009 rating year.

[12]     Mr Morgan said that on the lender’s instructions he caused a Property Law

Act 2007 notice to be served on KBL on 2 February 2011.  That notice expired on

3 March without being complied with and referred to the sum of $32,513.41 secured by the mortgage, comprising:

(a)       interest accrued for the period of 1 January 2011 to 31 January 2011 ($13,700.32);

(b)      other costs in the form of unpaid water rates paid by the mortgagee to

Wellington City Council ($18,613.09); (c)      a “discharge” fee of $200.

[13]     The  notice  also  referred  to  unpaid  rates  of  $45,911.04  owing  to  the Wellington City Council for the financial year ending June 2011.   In addition, the notice referred to the fact that KBL had:

… allowed the loan to value ratio of the moneys due to the Mortgagee to

exceed the sum that equates with the total aggregate of an amount equal to

70% of the market valuation of the Property.

[14]     Mr Clark gave evidence of his belief that the issue of the Property Law Act notice was due to Balmain looking to “aggressively close up the loan book” with which KBL’s loan was associated.   However, he did not suggest that the defaults listed in the Property Law Act notice were incorrect.  Mr Morgan refuted Mr Clark’s suggestion, noting that the lender’s “loan book” was not closed until 20 February

2013 and KBL’s loan was due for repayment on 8 May 2012.  Mr Morgan said that the Property Law Act notice was served for breach of specific covenants in the mortgage concerning the payment of rates and interest, as well as what he regarded as a material deterioration in the security value below the approved loan/security ratio of 70 per cent.   The latter had become evident when an updated valuation requested by Balmain in late 2010 was provided by Colliers in December that year and delivered to Balmain in January 2011.   That valuation valued the property at

$4,450,000.

[15]     I note further that according to Mr Morgan’s unchallenged evidence, rates had been in arrears through 2009 and 2010, and KBL was late in providing information required for annual reviews of the KBL loan.  He complained in addition that Mr Clark had allowed some leases to become monthly tenancies, thereby in his opinion increasing the risk of vacancies and rendering some tenancy schedules incorrect.     Mr Morgan’s  evidence  was  accompanied  by  reference  to  relevant contemporary documents.  In all the circumstances, I have no reason to doubt that Balmain issued the Property Law Act notice because of KBL’s failure to meet its obligations under the mortgage.

[16]     Mr Clark  decided  that  he  should  focus  on  completing  the  unit  title subdivision as soon as possible so as to create some viable refinancing options.  He sought advice from Aurecon Group on the steps needed to complete the unit title subdivision together with an indicative timetable.    Aurecon’s advice of 22 February

2011 described a process able to be completed in four to six weeks.   In addition, Mr Clark had asked Colliers to provide an addendum to its December 2010 valuation which had proceeded on the basis of existing title and occupancy arrangements.  The additional valuation, dated 17 February 2011, valued the “as if complete” current market values of the proposed units, as at December 2010.  The total of those values was $6,125,000.

[17]     According to Mr Clark, his intention was to progress the unit title subdivision to  the  point  where  all  that  was  required  was  the  execution  of  the  underlying boundary adjustment subdivision.  He considered that if finance could be obtained at

a level sufficient to repay Perpetual and Dominion Finance, then those mortgagees would have no reason to object to the boundary adjustment subdivision.

[18]     Pursuing    these    objectives,    Mr Clark    met    with    Mr Allan Mairs    of ASB Property Finance to discuss the possibility of obtaining funding from ASB. Although indicative proposals were received from the bank dated 8 and 17 March, in the event ASB ultimately did not make a firm offer of finance.  Mr Clark received a phone call from another ASB employee confirming that it would not do so on

18 May 2011.  It was at that point that he called Mr Turner.  In the meantime, the council had approved the survey plan pursuant to ss 223, 224(c) and 224(f) of the Resource Management Act, and s 5(1)(g) of the Unit Titles Act 1972.   This meant that the survey documents were ready to be lodged with LINZ, and all that was necessary was the completion of the underlying boundary adjustment subdivision.

[19]     Mr Turner confirmed Mr Clark’s evidence that their first contact in relation to the property was a telephone call on 18 May 2011.  They arranged to meet on the following day.  That evening, Mr Morgan sent Mr Clark an email in which he said that he had listed the property for sale and that “campaign listing” would commence the following week.  Mr Morgan asked Mr Clark to arrange access so that suitable photographs of the property could be taken.   Mr Morgan also advised that while KBL could fully repay the loan prior to the tender date, no further extensions could be provided.

[20]     Mr Clark and Mr Turner met on 19 May, and Mr Clark briefed him about the current situation.  Mr Turner described the key factual issues that emerged from the meeting as being:

(a)       KBL had been in default under its lending facilities for some time;

(b)a Property Law Act notice had been issued and not complied with, with the result that Balmain was entitled to commence the mortgagee sale process at any time it wished;

(c)       ASB Bank had declined finance;

(d)once the property had been subdivided into seven unit titles, according to Mr Clark’s advice it would be valued at over $6 million;

(e)      there needed to be a boundary adjustment with the adjoining Buckle Barracks Ltd property.   According to Mr Clark, the only thing preventing the completion of that subdivision was that the mortgagees were withholding their consent;

(f)      there was time pressure because of the likelihood of a mortgagee sale in the near future.

[21]     Mr Turner concluded that  KBL’s  position  “appeared  desperate”.    Further, lending money to KBL would be attended by a high risk, and any offer would have to be priced so as to reflect that and be subject to “fairly stringent” conditions.

[22]     Mr Turner wrote to Mr Morgan on 19 May, after the meeting.   His email referred to the meeting with Mr Clark, who he described as “very agitated” as a result of ASB letting him down.  Mr Turner said:

Kevin advises that you are in the process of appointing CBRE to mortgagee sell the property.  I am very confident that I can sort this out – get funds back to you/Allfinance[1] and enable Kevin Matt and Ben to complete the subdivision of the property and hold on to their equity.   I understand that including the Dominion second I need a total of about $3.4m – is this correct to your knowledge?

If it is within your power could you possibly hold off having the property marketed for mortgagee sale for a week from today in which time I will organise the takeout.

[23]     Mr Turner sent a copy of this email to Mr Clark, observing, “As discussed-

not sure he will play ball tho …”.

[24]     Mr Morgan replied later that day observing that Mr Clark had had since February to “sort this out”, and noting that the Property Law Act notice had expired in early March when the sales process should have commenced.  However, he had

deferred it as Mr Clark had said he could sort matters out in three to four weeks.  He

1      This was a reference to AllFinance NZ Funding Trust No 1, of whom Perpetual Trust Ltd was the trustee in respect of the loan.

said that the marketing campaign would start the following week, and there would be four weeks  until  the  tender  closed.   A total  payment  of  $3.5  million  would  be necessary, including rates and interest owing.

[25]     According to Mr Clark, the meeting he had with Mr Turner was positive and Mr Turner  said  that  he  should  be  able  to  issue  “an  offer  of  finance”  quickly. According to Mr Turner, he had discussed with Mr Clark an entity associated with Mr Green and him lending to KBL, KBL then completing the unit title subdivision and continuing to be the owner of the property.  However, he still needed to source funds from investors and he was uncertain he would be able to achieve that.  This was reflected by the terms of an email that Mr Turner sent to Mr Clark on 20 May, stating that he wanted to make some calls to some people about KBL, so that he could “firm up” his plan and that he would need to see Mr Clark after that.  Mr Clark said that this was typical of the approach that he expected from his previous dealings with Mr Turner, which led him to expect that Mr Turner would normally have funds in place before making any offer.

[26]     Since April, Mr Clark and Mr Kirton had also been discussing KBL’s position with a mortgage broker, Mr Gary Hey.   Mr Clark said in evidence that he and Mr Ellingham had a long relationship with Mr Hey and his firm, Mortgage People, which had assisted with the funding of “numerous projects”.  On 20 May Mr Clark and Mr Hey had a discussion about KBL’s difficulties, following which Mr Hey sent an email to Mr Clark, in which he set out a proposed plan of action. This included:

Quick fix to keep Balmain at bay is to get an indicative from Reesby’s with an underwrite fee attached …

Secondly is to split the commercial and residential and have this funded through the like of FMT or one of the nominee companies and Cressida.

The aim is to get this into mainstream banking and we have pretty good relationship  with ANZ/National-so  could  talk  to  them-Banks  take  a  bit longer to process.   Let me know what Kingsley is up to so that we don’t cross over.

[27]     Mr Clark discussed this with Mr Turner.   Later on 20 May he replied to

Mr Hey:

I have spoken with Kingsley.  He has confirmed that he wishes to deal with BNZ, and Westpac.  You can talk to anyone else.  Go ahead and deal with ANZ/Nat, FMT and Cressida.  I do request that you confirm with me before talking to any other parties.

[28]     Mr Hey was called to give evidence by KBL, but made no mention of any approaches he may have made to lending institutions at this time.   There was no other evidence that any of the institutions to which his 20 May email referred were in fact approached.  Mr Turner was cross-examined by Mr Dale about his approaching BNZ and Westpac.  However, Mr Turner said that he did not do so because within the space of a day he came to the conclusion that there would be no point in doing so.  When he initially told Mr Clark that he would, he was aware that there had been the prospect of an ASB offer, but knew very little about it.

[29]     However,  on  24  May  2011,  Mr Turner  sent  Mr Clark  an  email  which contained an offer of finance.  It was on the letterhead of a company called Orakei Securities  Ltd  (OSL),  a  company owned  by  Mr Turner  and  Mr Green.    It  was addressed to KBL, for the attention of Mr Clark.  It was headed: “Loan offer 11–13

Courtenay Place, Te Aro, Wellington”.  It began:

We are pleased to advise that Orakei Securities Limited is prepared to make funds available to you substantially according to the following terms and conditions.    Full  terms  will  be  detailed  in  the  Facility Agreement  and security documentation (“the Documents”).

[30]     Terms included the following:

Borrower:  KBL Investments Limited as trustee for the KBL Trust

Guarantors:  K Clark and B Kirton

Basis of Guarantee:       All obligations, joint and several Lender: Orakei Securities Limited (Orakei) Structure:     GTF Group Limited (GTF)

Facility Type:                 Short term interest only loan

Purpose:  To   refinance   the   existing   mortgagees   on   the property at 11–13 Courtenay Place and to enable the Borrower to complete the unit titling of this property and then refinance Orakei

Facility Limit:              $3,500,000

Date of Advance:          Approximately 17 June 2011

Term:  6 months

Maturity Date:              6 months from the Date of Advance

Early Repayment:          The  Borrower  can  repay  this  loan  at  any  time without penalty provided 30 days written notice is provided to Orakei.  In the event that no notice or insufficient notice is given, an early repayment fee of $23,000 is payable

Ordinary Interest Rate:   8.0% pa

Penalty Rate:                 10.00% pa over and above the Ordinary Interest Rate.  If the Borrower does not make payment on the due date then Orakei may charge the Penalty Rate on both the outstanding amount and the balance of the loan

Loan Basis:                  Interest is to be serviced monthly in arrears

Monthly Payments:       $23,333.33

Security:  (i)      A registered  first  and  only  mortgage  over property at 11–13 Courtenay Place, Te Aro, Wellington,   comprised   in   title   identifier

43418 (the Security Property)

(ii)     A  registered  first  ranking  GSA  over  the

Borrower

…

[31]     Other terms and conditions included:

1.Orakei’s solicitor will be instructed to prepare all the necessary Documents to protect the interests of Orakei in this loan.   Should Orakei’s solicitor discover any legal aspect that could detract from the validity or enforceability of the said Documents then Orakei may withdraw from this Loan Offer.

…

10.      This Loan Offer is conditional upon the receipt of signed “Investor

Acknowledgement   Forms”   (IAF)    from   contributors   to    this

$3,500,000 facility.

[32]     In addition, there were a number of Special Conditions:

1.The Colliers valuation report covering the Security Property is to be updated and readdressed to Orakei as instructed by Orakei for the cost  of  the  Borrower.    In  addition  to  the  valuation report  being acceptable to Orakei, it is to confirm a value, as is in one title, of no less than $4,450,000 GST inclusive if any, and once unit titled, a combined valuation of no less than $6,125,000 GST inclusive and that the report may be relied upon for mortgage lending purposes.

2.A representative of Orakei is to conduct an inspection of the Security Property.   Such inspection is to be satisfactory to Orakei in every respect.

…

4.Orakei is to be satisfied that the Security Property, as is, is at a sufficient earthquake strengthening level to satisfy market lending, insurance and tenant expectations.

…

6.        All leases for the Security Property are to be reviewed and be to

Orakei and its solicitor’s satisfaction.

7.Orakei and its solicitor are to review and be satisfied with the status of the proposed subdivision.

…

[33]     The penultimate paragraph of the letter was in the following terms:

Please execute the enclosed copy of this Loan Offer formalising your acceptance of the terms and conditions as stated, and return it to Orakei.  On receipt, Orakei will instruct its Solicitor to prepare the necessary Documents for the loan.  Should the duly executed copy of this offer not be returned to Orakei by the Offer Expiry Date, this offer may lapse.

[34]     The document included a “form of acceptance”.  This provided for signature on behalf of the parties, adjacent to the words “The terms and conditions contained in this Loan Offer are understood and agreed.”   Mr Clark signed for KBL as the borrower, and also on behalf of Mr Kirton and himself as the guarantors.

[35]     It was Mr Clark’s evidence that he expressly told Mr Turner and Mr Green that he hoped to be able to complete the unit titling in time to enable refinancing without  needing to  call  on  the funds to  be available from  OSL.    For  his  part, Mr Turner accepted in evidence that Mr Clark had told him that he was confident of being able to sort out the issues with the property, and repay OSL earlier than the six months provided for in the OSL offer.

[36]     As can be seen, the offer was conditional upon OSL securing investment funding from contributors.   In the event, Mr Turner and Mr Green were unable to secure  interest  from  investors  with  whom  they  normally  dealt.    Mr Turner  and Mr Green were extensively cross-examined by Mr Dale as to their inability to find investors, the date when they became aware that they would not be able to do so and reasons that they might have had for not making a genuine effort in that regard.  I will return to this issue below.

[37]     On 20 May 2011, Mr Clark had sent Mr Turner by email a copy of a letter that Izard Weston, acting for KBL, had sent to Mr Morgan on 12 May.   The letter summarised the position that had been reached at that stage, prior to advice being received that ASB would not be advancing funds.  The letter contained the following advice:

The  subdivision  cannot  be  completed  until  such  time  as  the  various easements and other documents referred to in Macalister Mazengarb’s previous letter to you are registered.   To enable registration of those easements, consent of the existing first and second mortgagees is required. Once the consents are given, then we understand that Macalister’s will be in a position to complete registration of the various documents promptly, and it will then follow that the unit titles will issue.

[38]     Mr Clark also forwarded to Mr Turner a seismic assessment that had been prepared in December 2010 for the tenant of one of the commercial premises in the property.  The assessment, carried out by Aurecon New Zealand Ltd, was produced for Wellington City Council which was evidently considering whether a proposed new tenancy fit-out could be deemed a change of use, thereby giving rise to obligations to upgrade the building’s resistance to earthquakes.  The letter advised that strengthening work carried out on the building between 2002 and 2004 meant

that the building was not “earthquake-prone”.2

2 Under s 122 of the Building Act 2004 a building is earthquake prone if the building would have its ultimate capacity exceeded in a moderate earthquake and would be likely to collapse causing injury or death, or damage to other property. The concept of a “moderate earthquake” is defined by reference to a so-called new building standard with existing buildings required to meet more than 33 per cent of the standard that would be achieved by a new building. In this case, Aurecon’s advice was that the building achieved a value in excess of 35 per cent of the current standard.

[39]     In  addition,  Mr Clark  forwarded  to  Mr Turner  copies  of  the  Colliers valuations of 6 December 2010  and 17 February 2011, readdressed to  OSL, but bearing their original dates.

[40]     Mr Clark also made a payment of $7,000 as a deposit on the structuring fee, in accordance with the OSL offer.  On 28 May he sent a further payment of $1,050 in respect of the required GST.

[41]     Then,  on  Tuesday  31  May  2011,  Mr Turner  and  Mr Green  travelled  to Wellington  where  they  met  with  Mr Clark  and  KBL’s  solicitor,  Mr Kemp  of Izard Weston.    The  purpose  of  the  meeting  was  to  discuss  legal  issues  and  in particular those concerning the caveat lodged by Buckle Barracks Ltd and the boundary adjustment subdivision.  Mr Clark recalled that there was also discussion of the unit title process and its straightforward nature.  Also on that day, Mr Turner and Mr Green inspected the property.

[42]     Following the meeting,  there was  an  exchange of letters between  KBL’s solicitors and Macalister Mazengarb, acting for Buckle Barracks Ltd.   Mr Kemp’s letter of 31 May sought confirmation of two matters, in the following terms:

1.That upon Orakei Securities Limited being registered as the sole mortgagee, against the title to our client’s property it (the new mortgagee) will provide to you an irrevocable undertaking that it will sign the form of consent as mortgagee to enable the registration of the easements and other documents required to be executed to give effect to the Agreement dated 25 August 2004 made between our respective clients and that your firm in turn will undertake it will not re-register the caveat against the title to our client’s property once the required easement and other related documents are registered.

2.That you are not aware of any other matters which would prevent the registration of the required documents to give effect to the agreement between our respective clients, but should any of the documents be requisitioned, then immediate steps will be taken to rectify them.

[43]     Mr Dentice of Macalister Mazengarb responded on the same day confirming the  matters  in  Mr Kemp’s  letter.    That  advice  was  forwarded  by  Mr Clark  to Mr Turner on Wednesday 1 June 2011.  Mr Turner telephoned Mr Clark on that day indicating that he was happy with the response from Mr Dentice.  This meant that if

the OSL proposal proceeded it could be registered as mortgagee without the prospect of further difficulties relating to Buckle Barracks Ltd and the boundary adjustment.

[44]     Mr Clark and Mr Turner met in Auckland on 2 June 2011, in Mr Turner’s office.  They then reviewed the deed of 25 August 2004 between KBL and Buckle Barracks Ltd, Mr Turner indicating that in general he was comfortable with the content.

[45]     As has already been noted, it transpired that Mr Turner and Mr Green were not  able  to  attract  sufficient  investor  interest  for  the  OSL  offer  to  proceed. Mr Turner explained that both he and Mr Green had a small group of investors who they would approach with opportunities for investment.   He said that at one stage there were about  15  persons  in  the group.   However,  as  a result  of the global financial  crisis,  by  May 2011  the  numbers  were  less  than  ten.    They  included Mr Turner’s father and Mr Green’s brother.  An American investor, who Mr Turner approached, was potentially interested in an investment in the vicinity of $500,000, and  Mr Turner’s  father  in  a  somewhat  lower  amount.    That  would  have  left  a substantial shortfall on the $3.5 million it was necessary to find.

[46]     Mr Green made contact with a Mr Welch, a Wellington-based investor, on

19 or 20 May.  Mr Green described Mr Welch as:

… a senior banker in Wellington and a highly sophisticated investor.  … he

… would have wanted to see the valuation but the key thing he wanted to do was find out how much capacity he had so was he up for the one and a half

million dollars or would he bring one of his friends or his relatives in and, two, his biggest concern expressed from up front was earthquake and he was going to do his own work on that.

[47]     It was Mr Green’s evidence that Mr Welch contacted him and told him that he was not interested in proceeding on 31 May, although he also said it might have been on the following day.  Mr Turner’s evidence was that that would have occurred after the meeting that he held with Mr Clark on 2 June 2011.  However, elsewhere in his evidence he conceded that he could not say exactly when he became aware that Mr Welch was not proceeding.

[48]     Mr  Dale  cross-examined  Mr Turner  and  Mr Green  about  the  absence  of documentary evidence of any contacts having been made with potential investors. However, I am not persuaded that there is any significance in the absence of documentary evidence.   In cross-examination, Mr Turner explained that, when the OSL offer was made to Mr Clark, he had sufficient confidence that he would be able to put together the $3.5 million required.   At that point, there was the following exchange:

Q.        Well, wouldn’t the next logical step in respect of any of the investors who had expressed some interest to then send them such things as the  valuation,  a  summary  of  what  was  involved,  maybe  even Mr Clark’s credit history, something of that kind?

A.        It was not the way we operated.   We would go on, do the due diligence on the building, get the loan offer accepted and if it looked like the deal was going to go ahead we would then put a thing called a, we’d put a, an investor acknowledgement form which you will see we referred to in our OSL offer, which was a three or four page description of the transaction out to the investors.   At that point they’d see a summary of what the security was, who the people were and we would provide varying amounts of supporting information with that at that time.

Q.        [So] you never sent apparently anything out to anybody in relation to this?

A.        That’s correct, because we got to the point where we could see, we lost the key party to it therefore the thing couldn’t proceed on the OSL basis.

Q.       And the key party being Mr Welch? A.     Correct.

[49]     I accept the evidence of Mr Turner and Mr Green that the OSL proposal did not proceed because although they attempted to interest investors in it they were unable to do so.  The evidence is unclear as to the date on which that position was reached and that lack of clarity is important, because of Mr Clark’s evidence that he was not told that the OSL proposal would not be proceeding until a meeting with Mr Turner  and  Mr Green  on  9 June  2011.    In  the  meantime,  he  had  met  with Mr Turner on 2 June to discuss the Buckle Barracks Ltd deed of 25 August 2004.  It seems unlikely, if Mr Green was told about Mr Welch’s decision not to proceed on

31 May, that he would not have told Mr Turner about that at that stage or soon afterwards.    If he  did,  it  is  odd  that  Mr Turner  would  not  have told  Mr Clark,

especially when he met with him on 2 June.  The possibilities are that Mr Green is mistaken about the date or that for some reason Mr Turner deliberately chose to conceal from Mr Clark the fact that the OSL proposal could not proceed.

[50]     I  consider  the  former  to  be  more  likely.    At  times  Mr  Green  did  have difficulty recalling dates, and he did not appear to have kept a diary or other record that would have assisted his recall.  Further, even on KBL’s theory of the case there would have been no reason for Mr Turner to have met with Mr Clark on 2 June while keeping that information from him if he were aware of it.

[51]     Mr  Dale  placed  some  emphasis  on  an  email  that  Mr Green  sent  to Mr Andrew Hay at BNZ on 26 May 2011.  Mr Hay was a person at the bank with whom Mr Green dealt from time to time. The email was in the following terms:

Hi Andrew,

Tried your landline this am, when you have a clear 5 mins would you please call  me.     I  have  an  opportunity  to  participate  in  a  freehold,  leased, commercial property in a prime location in Wellington, has real upside. Current  Colliers  valuation  $4.45  M  as  is.    Contracted  rent  roll  circa

$0.32 K pa.  Looking to gear reasonably aggressively.

…

[52]     This email was one of a number of communications between Mr Green and BNZ that had not been discovered prior to the trial, and were only provided while Mr Green  was  under  cross-examination.    He  was  cross-examined  on  the  late provision of the document.  Mr Dale put it to him that it should have been provided earlier in response to a specific request for documents relating to funding that BNZ agreed  to  provide  in  respect  of  the  purchase  of  the  property  by  Courtenay. Mr Green’s response was that he thought that all that needed to be provided was documentation relating to an application for funding and there had not been a formal application.

[53]     I am satisfied that the email (and other documents provided with it, in what became  Exhibit 5)  should  have  been  provided  in  discovery  prior  to  the  trial. However, I am also satisfied that Mr Green simply took a mistakenly narrow view on what should have been discovered, and in fact had not recalled the email which he

eventually obtained from BNZ after asking them to provide the full file, which he uplifted on the way to Court on the morning of Monday 5 May 2014.  When he saw the email he remembered it, but he had not seen it in the intervening period.  I am satisfied that although the documents in Exhibit 5 should have been previously discovered, the failure to do so was not due to any deliberate attempt at concealment by Mr Green.

[54]     Of more relevance is the content of the email of 26 May, which Mr Dale submitted showed that even at 26 May, when implementing the OSL proposal was still a possibility, Mr Green was contemplating purchase of the property and did not want the OSL proposal to proceed.

[55]     Mr Dale asked Mr Green why he had contacted BNZ on 26 May.  The cross- examination proceeded as follows:

A.        I wanted to do a fall back scenario so that if Mr Welch or one of Mr Kingsley – if Kingsley’s investors pulled out there was a plan B and the background to that is that I had had two meetings, um, with the  BNZ  on  completely  unrelated  matters.    One  was  a  file  I’d referred  to  them  mid-May,  one  was  my  own  personal  account, having the annual review.  Typical of that sort of discussion he said to  me,  “What  else  are  you  doing?”  and  I  said  that  I  was  with Kingsley and we were doing this, that and the other and he said, “If ever there is a chance I can help you with a transaction let me know.”  So on the 26th or by the 26th I thought, “What if one of these investors pulls out? What’s gonna happen?”

Q.       And I take it by the way Mr –

A.       The placement will fail and there is therefore no solution for KBL.

Simple as that.  So I rang him and I put him on notice to say, look

there’s an exciting transaction.   The wording of that email is very clearly a marketing document to a bank to get a young account manager excited and it achieved that purpose, he was very excited.

[56]     Later there was the following exchange:

Q.        You  see  when  we  look  at  what  you  said,  you  said  “I  have  an opportunity to participate in a freehold leased commercial property in a prime location in Wellington.  Has real upside,” and then you go on to refer to the valuation and looking to gear reasonably aggressively.

A.       Mhm.

Q.       There’s nothing in that is there that suggests objectively that you’re

trying to raise funds for KBL is there?

A.       No. Q.     No.

A.       And I wasn’t trying to raise funds for KBL.  There is no way a bank

would lend to KBL.

Q.        You were trying to arrange finance so that you could acquire the property yourself?

A.        I wanted to put – if the placement fell over and we know history says it did, that I had a alternative plan to enable the mortgagee sale to be avoided and the only way to do that was to put a Green/Turner entity in place because KBL was unbankable.

[57]     Later in cross-examination, Mr Green explained that he had told Mr Hay in a telephone conversation that a bank might only be needed as a backup.

[58]     Although Mr Dale submitted that I should conclude that Mr Green had by

26 May decided that Mr Turner’s and his interests would be better advanced if they acquired the property, and that the email of 26 May to BNZ was essentially the beginning of that process, I have not been persuaded that is the case.   Mr Green’s explanation that he was seeking a backup if investors were not able to be secured seems plausible as does his observation that that would necessarily involve putting in place a “Green/Turner entity” because “KBL was unbankable”.

[59]     Mr Turner and Mr Green considered options other than the OSL proposal. Mr Turner said that they were confident of being able to raise about $1 million, and thought that the remainder could be borrowed from a bank.   Bank finance for the OSL proposal was not feasible, because KBL would be the borrower and Mr Turner considered that trading banks would not lend to it, given what he described as its very poor payment history.  Together, Mr Green and Mr Turner developed the idea of a “warehouse” arrangement, in which a new special purpose entity would be the borrower, and personal guarantees would be provided to the bank by them.

[60]     The defendants called evidence from Mr Richard Shores, a director of Global Pacific Corporation, a financier and merchant banker that specialises in property investment, property development and business financing, to explain the nature of

warehouse agreements.  He described them as agreements that generally involve a property being sold by its existing owner to a buyer at an agreed price (the “strike price”).  The seller is granted an option to buy the property back at an agreed figure (the “buy back price”) at a specified future date.  The difference between the strike price and the buy back price represents the margin for the buyer.  It will generally include a fee payable by the buyer and allow for costs incurred during the period for which the property is held.

[61]     A proposal for such a warehouse arrangement was made by Mr Turner and Mr Green when Mr Clark met with them on 9 June 2011.  It was common ground that  Mr Turner advised  Mr Clark  in  the meeting that  the OSL offer  could  not proceed.  However, the warehouse facility was able to be funded by the combination of a loan from BNZ and personal contributions by Messrs Green and Turner.

[62]     Mr Clark said that they met at 12.30 pm at the GTF Group offices in Parnell. They then went to lunch at a Japanese restaurant.  Mr Clark claims that it was over lunch that he was told that the OSL offer was withdrawn because of the lack of investor  participation.    Mr Turner  and  Mr Green  then  presented  him  with  the alternative  option,  set  out  in  a  two-page  letter.    Mr Turner  described  this  as  a “warehouse finance facility”.   According to Mr Clark, the warehouse facility was explained to him by Mr Turner and Mr Green as an “innovative solution” which would “achieve the same ends as the Orakei offer.” He continued:

They said it was simpler for them to arrange the funding and to effect repayment to the mortgagee prior to the closing of the mortgagee tender date.  This was because they had arranged for a first mortgage with the BNZ and would be providing the balance of funds required themselves.

During and after the meeting there were no weaknesses in this new proposal which  occurred  to  me  or  were  discussed.    Rather  both  Mr Green  and Mr Turner  said  that  the  structure  was  very  comparable  to  the  proposed previous loan structure and that KBL would have the same level of comfort and the same benefits as with the [OSL] offer.

[63]     Mr Clark said that he thought the structure would enable KBL to avoid the mortgagee sale, provide the time required to get titles through and move into investment funding or to commence a possible sell down of one or more units. He added that there was no direct discussion on any of those issues, because it never

occurred to him for a moment that there would be any opposition to the unit titling process which KBL would need to complete and which had already been discussed at the Wellington meeting on 31 May.

[64]     The warehouse facility proposal was set out in a letter dated 9 June 2011 on GTF Capital letterhead3  and addressed to KBL Investments Ltd for the attention of Mr Clark.  It was headed “Structured Finance Transaction” and began by stating that a warehousing facility had been arranged which would enable repayment of KBL’s indebtedness prior to the mortgagee sale scheduled for 22 June 2011.   Under the heading  “Introduction”  it  was  said  that  the  facility  had  been  “conditionally approved”, and it was explained that the facility would require the property to be transferred into a newly formed entity (later in the letter called “TC”) at a cost of

$3,500,000.  KBL would have the explicit right to buy the property back at a price set by a specific formula detailed in the letter, and within the “term” of the warehousing facility.   It was said that full terms would be detailed in the Security Documentation, referred to as “the Documents”, but then set out a “précis of the proposed transaction” as follows:

Transferor:                 KBL

Transferee:                  Trust Company (TC).  A single asset entity formed for the sole purpose of owning the commercial property located at 11–13 Courtenay Place Te Aro Wellington (The Subject Property)

Personal Liability:        K  Clark  and  B  Kirton  (The  Guarantors)  are  to indemnify TC for any losses it may incur as a direct result of acquiring and owning the Subject Property, during the term of the Warehousing Facility

Guarantors Liability:    Several and limited to $250,000 per Guarantor

Lender(s):                   TC will uplift funding, to a maximum principal total of $3.5 million, which will be secured by registered charge(s) over the Subject Property.   Such loan(s) will not be the responsibility of the Guarantors

Structurer:                 GTF Group Limited (GTF)

Facility Type:             Short term “Warehousing Facility”

3      It was signed by Mr Turner as a director of GTF Group Ltd.

Purpose:  To  refinance  the  two  existing  mortgages  on  the property at 11–13 Courtenay Place

Settlement Date:        Approximately 17 June 2011

Term:  Approximately 6 months

Expiry Date:                16 December 2011.  Timing is of the essence, KBL or its nominee must have exercised its right and consummated the buy back of the Subject Property by the Expiry Date

…

[65]     There were a number of “standard terms and conditions”.  The first provided

that:

1.TC’s  solicitor  will  be  instructed  to  prepare  all  the  necessary Documents  to  protect  the  interests  of  TC  in  this  Warehousing Facility.  Should TC’s solicitor discover any legal aspect that could detract from the validity or enforceability of the said Documents then TC may withdraw from this Warehousing Facility offer.[4]

[66]     Standard condition 4 provided:

4.Should this Warehousing Facility have not been up-lifted by the close of business on 22 June 2011, TC has the right to cancel this Warehousing Facility offer in its absolute discretion.

[67]     Standard condition 7 provided:

7.If, by any reason of circumstances affecting any relevant interbank or financial market generally, it is or may be impractical for TC to obtain funding in that market (and accordingly it is impractical for TC to make, fund or maintain this Warehousing Facility) for any period, TC may at its discretion notify KBL and the obligation of TC to  make  the  Warehousing  Facility  available  to  KBL  shall  be cancelled or suspended as TC may elect.

[68]     There  were  a  number  of  special  conditions.     Special  conditions  1  to  6 provided:

1.The Colliers valuation report covering the Subject Property is to be updated and readdressed to Orakei Securities Limited (Orakei) and the proposed first mortgage lender, as instructed by Orakei for the cost of KBL.  In addition to the valuation report being acceptable to Orakei and the proposed first mortgage lender, it is to confirm a

4      The reference to TC was consistent with the definition of “Transferee”, a special purpose vehicle

to be established for the sole purpose of owning the property.

value, as is in one title, of no less than $4,450,000 GST inclusive if any,  and  once  unit  titled,  a  combined  valuation  of  no  less  than

$6,125,000 GST inclusive and that the report may be relied upon for mortgage lending purposes.[5]

2.TC is to be satisfied that the Subject Property, as is, is at a sufficient earthquake strengthening level to satisfy market, lending, insurance and tenant expectations.

3.TC is to be comfortable that the current insurance arrangements for the Subject Property are satisfactory in every respect.

4.        All leases for the Subject Property are to be reviewed and be to TC

and its lenders’ solicitors’ satisfaction

5.        TC’s solicitor is to review and be satisfied with the status of the

proposed subdivision

6.The Borrower is to satisfy TC that the Building WOF has issued prior to settlement of this Warehousing Facility

[69]     Under the heading “Costs”, there was provision for a “structuring fee” of

$35,000 plus GST, payable to GTF at the time the warehousing facility was settled. It was acknowledged that $7,000 plus GST had already been paid by KBL.  There was then provision for a warehousing facility fee of $250,000 plus GST (if any) to be payable to TC, to form part of the purchase price formula.

[70]     There was a further provision that:

3.        Monthly  interest  of  $24,000  is  payable  representing  a  return  of

8.25% pa on the transfer price of $3,500,000.  This interest is to be met from rental proceeds generated by the Subject Property.  Please

note, 100% of all rentals generated by the Subject Property are to be

paid to TC.  Surplus rentals will be held by TC and may be used for direct property expenses.  TC is authorized to pay management fees to GTF in the event GTF is required to expend time managing the Subject Property

[71]     The next clause dealt with the Purchase Price Formula (PPF).  This consisted of the sum of the Transfer Price, the Warehousing Facility fee, interest due but for any reason not paid and costs and fees due or incurred by TC and/or GTF.

[72]     The letter concluded:

5      This condition was, as with some other parts of the letter, a “cut and paste” from the OSL proposal.  But in this case, the references to OSL were inadvertently maintained, when in the case of other provisions TC was substituted for OSL.

We trust this Structured Finance transaction meets with your approval.

If so, please execute the enclosed copy of this Warehousing Facility Offer formalising your acceptance of the terms and conditions as stated, and return it to us.  On receipt, we will instruct TC’s Solicitor to prepare the necessary Documents.  Should the duly executed copy of this offer not be returned to us by the Offer Expiry Date, this offer may lapse.

[73]     According  to  Mr Turner,  he  drew  a  number  of  matters  to  Mr Clark’s attention.   First, unlike the OSL proposal that had expressly stated it was for the purpose of refinancing KBL’s mortgages and enabling the unit title subdivision of the  property  to  be  completed,  the  purpose  stated  in  the  warehousing  facility document was confined to refinancing the two existing mortgages on the property. Mr Turner claims that he told Mr Clark the purpose was only to avoid a mortgagee sale and to give KBL an option to repurchase the property.  He continued:

I said to Mr Clark that we did not want to be property developers because of the risk of being tainted as such by the IRD.  I said that this meant that we would not take any steps towards sub-dividing the property into unit titles while we owned it as this could be construed by the IRD as acting as a developer.

[74]     Mr Turner claimed that he also talked about the expiry date of 16 December

2011 and the fact that time was of the essence.  The right to repurchase would be lost unless settlement was completed before 16 December 2011.   Mr Turner rejected Mr Clark’s claim that Mr Green and he had emphasised that “KBL would still be controlling the property as though [it] was still the owner”.  Mr Turner said all that had been said was that Mr Clark would continue to manage the property; it was clear from the letter that KBL would relinquish ownership and therefore control.

[75]     Mr Turner said these points were all made as Mr Clark read through the letter and they discussed it.  Mr Clark took the letter with him when he left the meeting. After reading through it again he discussed it with Messrs Kirton and Ellingham later that day.  He said that he explained to them that the proposal had been presented as a practical alternative to the original loan offer, and appeared workable as “we would still be effectively managing and owning the properties.”   He did not mention the possibility that Mr Turner and Mr Green would not agree to complete the unit titling because no such statement had been made.   Mr Kirton gave evidence that he had some concerns about the transaction because it was unusual, and he appreciated that

it involved transferring the property.  However, he went along with it in accordance

with Mr Clark’s recommendation based on his previous dealings with Mr Turner.

[76]     Mr Clark expressed himself as “quite certain” that neither Mr Turner nor Mr Green stated that they would not “assist” with the subdivision.  He said that if they had  said  that,  then he would  not  have  agreed  to  the warehousing facility, because it would not have been possible to achieve the increase in value required for mortgage lending purposes.  He noted that, at the time, there was the possibility of securing an alternative loan from ASAP Finance.   Although there were some unattractive features of the proposal that had been received from ASAP Finance, it would at least have enabled completion of unit titling.  Mr Clark said that had the position been presented as “starkly” as Mr Green and Mr Turner claimed it was, then he would have “gone with the ASAP offer”.  He claimed in addition that Mr Turner told him that the effect of the warehouse facility would be the same as the earlier OSL proposal.

[77]     The differences about what occurred at the 9 June meeting occupied much time  in  the  hearing.     Messrs  Clark,  Turner  and  Green  were  all  extensively cross-examined about what took place, and each maintained the stance adopted in their evidence in chief.

[78]     There were important differences between the proposed warehouse facility and the OSL proposal.  Those differences were plain on the face of the document:  in particular the facts that the property would pass out of KBL’s ownership to TC;  that the stated purpose of the proposal was simply to enable the refinancing of the two existing mortgages (which would have avoided the imminent mortgagee sale);  that there was an expressly stated expiry date, time being said to be of the essence. Mr Clark,  as  has  been  noted,  was  an  experienced  property  developer  with  a university degree in valuation and property management, as well as being a member of the Real Estate Institute of New Zealand.  He had worked as a real estate agent.  I think he must have understood the terms of what was being proposed, and it must have obvious to him that TC’s cooperation would be necessary to complete the subdivision.   I consider on the balance of probabilities that that issue would have been discussed at the 9 June meeting and I do not accept Mr Clark’s evidence to the

contrary.  Similarly, it is likely that the other key aspects of the proposal set out in the 9 June letter were discussed, as Mr Turner said in evidence.  Further, I do not accept Mr Clark’s evidence that Mr Turner would have said the effect of the warehouse facility would have been  the same as the OSL proposal:   given the obvious differences between the two I consider it unlikely such an assertion would have been made unless limited to the point that entry into the warehouse facility would have the effect of avoiding the mortgagee sale.

[79]     As to Mr Clark’s claim that he “would have gone with the ASAP offer” if the

9  June  discussion  was  as  Mr Turner  recounted  it  I note  that  the  proposal  was contained in a letter dated 15 June 2011, some six days after the meeting in relation to the warehousing facility proposal.  The offer was for a loan of $3,089,000, being a cash  advance  of  $3 million  and  capitalised  application  fees  and  legal  costs  of

$89,000.   Its purpose was stated to be “to assist in the purchase of the mortgaged property” and the loan would be for a term of five months commencing on 1 July

2011.   Repayment was due on 1 December 2011.   Guarantees were required from Messrs Clark, Kirton and Ellingham.  There was to be a first ranking general security agreement “over all present and after acquired property of the Borrower and the Guarantors.” Among the special conditions were conditions requiring provision of a copy of the resource consent (presumably for the underlying boundary adjustment subdivision), the “loan account summary” for the last six months in respect of the two existing loans on the property and provision of a clean title on settlement (all caveats, encumbrances etc to be removed). The loan was also subject to “availability of funding on date of settlement”.

[80]     Although  Mr Clark  claimed in  a reply brief of  evidence  that  he did  not believe it would have been difficult for KBL to satisfy the ASAP Finance special conditions, he altered his position in cross-examination by Mr Chisholm QC.   He conceded that provision of the loan account summaries for the two existing loans would have required disclosing multiple and continuing breaches, failure to pay rates over an extended period of time, failure to pay interest and breaches of the required loan to value ratio.  The requirement to provide a copy of a letter of offer obtained from another lender for refinancing the property could not have been met except by reference to the ASB and OSL proposals that had not come to fruition.   He also

conceded that it would have been impossible to comply with the condition requiring copies  of  the  ss  223  and  224(c)  certificates  because  the  boundary  adjustment resource consent had lapsed in December 2010.  In the circumstances, the six-week minimum timetable that had been referred to in Aurecon’s advice of 16 June 2011 could not have been satisfied by the time of the scheduled mortgagee sale.6    Nor would it have been possible to provide a clean title, as required.  Mr Clark had to concede that the special conditions could not have been achieved and he would have needed to negotiate, and “work ASAP through the issues one by one.”   What the

reaction of ASAP (or ASAP’s funders) would have been is unknown.

[81]     In the circumstances, I am not prepared to find that the ASAP “offer” was a viable alternative proposal at the time when the warehousing facility proposal was discussed on 9 June, and I do not consider it assists in deciding what took place in the 9 June meeting.  I doubt that Mr Clark would have viewed it as such at the time, although he may have thought that it could be developed as an alternative to the warehouse facility which, on its face, required formal documentation.

[82]      Mr Clark signed a “Form of Acceptance”, which was the final page of the letter,  “for and  on  behalf” of KBL.    He also  signed  for  a second  time, as  the guarantor.   Adjacent to that signature were the words, “The terms and conditions contained in this Offer are understood and agreed.”   However, although there was space for his signature above his typed name, Mr Kirton did not sign the document. Mr Clark returned the document to Mr Turner the next day.

[83]     By an email dated 9 June, Buddle Findlay, acting for the first mortgagee of the property, gave conditional consent to the boundary adjustment subdivision.  One of the conditions required consent to be obtained from Dominion Finance Group Ltd (in  receivership)  as  second  mortgagee.    Gibson  Sheat,  acting  for  KBL made  a counter proposal on 10 June, which offered $500,000 in reduction of the principal owing on the first mortgage in return for consent to all necessary documentation needed to complete the unit title subdivision, and withdrawal of the property from

the mortgagee sale process until 30 September 2010, when full payment would be

6      In fact, the ss 223 and 224(c) certificates were not able to be obtained until 22 August 2011.

made.   If accepted this would have avoided the need to enter into the warehouse facility.  However agreement was not able to be reached.

[84]     Mr Turner and Mr Clark had a further meeting at the GTF Group office in Parnell  on  15 June,  which  was  the  day  on  which  Courtenay  was  incorporated. According to Mr Clark, he and Mr Turner agreed that they would proceed with the sale and purchase agreement necessary to satisfy Balmain and terminate the mortgagee tender and deal with the “finer detail” of the warehouse facility at a later time.  Mr Clark claimed that it was at this point that, for the first time, they discussed the issue of applying for the unit titles while the warehouse facility was in place. Mr Clark said that the issue arose because he was discussing KBL’s intention to deposit the unit title plans with LINZ and apply for new unit titles at the earliest opportunity, possibly as early as the date when the boundary adjustment title plan was deposited.  He said:

This led to me querying the situation should we not be able to apply for titles until such time as the property was in the warehouse facility, and if that would create any issues.  I brought it up because it occurred to me for the first time that strictly speaking KBL was no longer the owner of the property, and I thought there might be some procedural issue with the application.

[85]     I consider it implausible for the reasons already addressed that Mr Clark had not realised before this time that under the warehouse facility KBL would not be the landowner.   Mr Clark claimed to have a “very vivid recollection” of Mr Turner’s response.  He said he appeared to be “musing” on what Mr Clark had just said before stating that he had not contemplated that situation before.  It was then, for the first time, that he made “in an offhand way” a comment that there might be some concern about Mr Green and him being “tainted as developers”.  Mr Clark acknowledged that at this point Mr Turner stated that he did not want to be a developer.

[86]     Mr Turner  did  not  agree  that  the  issue  of  applying  for  unit  titles  once ownership had passed to Courtenay had been discussed for the first time at the

15 June meeting.   He said that Mr Clark would have been aware from previous discussions that Mr Turner and Mr Green did not want to take the risk of being “tainted by the IRD.”

[87]     Mr Turner maintained that the discussion about the warehouse facility had in fact taken place on 9 June and that there was nothing “offhand” about the comments he then made on that issue.  Mr Clark would either have to complete the unit title subdivision before title was transferred to Courtenay, or enter into some other arrangement after ownership had been transferred.  He and Mr Green did not want to run the risk of being tainted as developers.   I accept his evidence for the reasons already given.

[88]     On 16 June, Mr Matthew Carson of Carson Fox Legal acting for GTF Capital Ltd, forwarded to Mr Kemp at Izard Weston a draft “Warehousing Deed” between KBL and Courtenay together with (as schedules 1 and 2 respectively) agreements for the purchase of the property by Courtenay and the option for KBL to re-purchase it. On 17 June, Mr Carson sent a sale and purchase agreement to Mr Morgan at Balmain for the purchase of the property by Courtenay.  Settlement was to occur seven days from  the issue of  the new title incorporating the boundary adjustment,  and  the removal of the Buckle Barracks Ltd caveat.  The agreement was also conditional on the purchaser receiving confirmation from KBL’s mortgagees that they consented to the agreement, and copies of consents provided by the mortgagees to the “Vendor’s Further Subdivision.” The “Vendor’s Further Subdivision” was defined as meaning:

… the further subdivision of the Title by the creation of 7 individual strata

titles under the provisions of the Unit Titles Act 2010.

[89]     However,  because  Balmain  was  not  prepared  to  agree  to  that  clause remaining, it was removed from later drafts.

[90]     There was a further meeting between Mr Clark, Mr Green and Mr Turner on

22 June 2011 to finalise the terms of the agreement for sale and purchase that was to be submitted to Balmain.   Mr Turner said that at that meeting he and Mr Green reaffirmed to Mr Clark that they would not agree to the subdivision of the property into unit titles.  Agreement was reached on some amendments to the terms of the warehouse  agreement,  reducing  the  option  fee  by  $15,000  and  increasing  the purchase price by the equivalent amount.  It was common ground that this was done to  accommodate  Mr Clark’s  request  that  up-front  costs  be  reduced  as  much  as possible.  It was also common ground that the parties agreed that if Courtenay was

not required to settle the acquisition of the property, then the purchase price would reduce to $3,700,000.  It was also common ground that this was done so that KBL might have the opportunity to obtain unit titles quickly, obtain alternative finance, and not require Courtenay’s purchase of the property to proceed.

[91]     The agreement for sale and purchase was signed during the meeting and then submitted to Balmain.  Over the following days, Mr Clark and Mr Turner met with representatives of Dominion Finance and, by 28 June 2011, had confirmation that the receiver would accept payment of $120,000 in full and final settlement of KBL’s debt under the second mortgage.   Securing Balmain’s agreement to the proposals proved  more  difficult.    Various  issues  were  raised  down  to  13 July 2011  when Balmain confirmed that the property had been withdrawn from mortgagee sale.

[92]     After various  other difficulties  that  need  not  be recounted, the boundary adjustment subdivision was completed, titles were issued reflecting the boundary adjustment, and Courtenay was able to purchase the property on 3 October 2011. The purchase was funded with borrowing from BNZ in the sum of $2.5 million and equal contributions of $550,000 by Mr Turner and Mr Green.

[93]     There had been ongoing discussion concerning the final form of what had become two draft deeds, one called the Warehousing Deed, the other the Option Deed.  Various drafts were provided, but the essential terms that had been contained in the initial documents provided on 16 June did not change.   One issue arose concerning the period for which the warehouse facility would be in place.  Mr Clark said that on receiving further copies of the proposed deeds on Friday 16 September he  was  “immediately  concerned”  about  the  completion  date  being  stated  as

16 December 2011.  He said that would mean that, following settlement, the actual time that the property would have been held in the warehousing facility would be less than two months, when he had been under the assumption that a six-month period would be allowed.  He wrote to Mr Turner on 19 September in the following terms:

We will look to get the warehouse & option deeds turned around tomorrow. Our only concern is over the completion dates.   We were always of the understanding that the warehouse facility would be for a period of 6 months.

The initial dates were reflective of a settlement prior to the complications to the subdivision etc..

Could you please consider this, and confirm that KBL Courtenay is comfortable to adjust the dates as appropriate.

[94]     That request was rejected in an email from Matthew Carson, to which further versions of the draft deeds were attached containing minor amendments.

[95]     It may be that Mr Clark had made an assumption about the extension of the time for exercise of the option.   But there does not appear to be any basis upon which  it  could  be claimed that  Mr Turner  had  encouraged  such  an  expectation. Further, the warehousing facility had always been subject to the express stipulation that the “final Completion Date” would be 16 December 2011.  This was stated in the original warehouse facility proposal contained in the letter of 9 June 2011, and was in the draft formal documentation first forwarded by Mr Carson to Mr Kemp on

16 June.   The position of Mr Turner and Mr Green was set out in a further email written to Mr Carson on 28 September and forwarded by Mr Carson to Mr Kemp on the same day. The email included the following observations:

Adrian and I have reviewed previous communications to KBL and continue to maintain the view that we have acted with the utmost good faith towards Kevin Clark and KBL throughout the last 5 months.  The Balmain camp has made life challenging for all of us and we have worked hard to keep KBL’s position alive, including contracting to pay $50,000 more for the property and increase our deposit to $250,000.

These arrangements were put in place, including payment of our $250,000 deposit, and enabled KBL to avoid having the mortgagee sale effected in June 2011, putting us on risk for settlement of the property since then.

As a result of the various issues to date, not least of which was KBL’s failure to have the title sorted out prior to the WCC consents expiring and the need to  defer  our  purchase  of  the  property  until  new  title  issued,  we  have expended  much  more  on  third  party  costs  than  was  ever  envisaged. Assuming we can get the purchase settled relatively quickly, without racking up even more legal costs, we will have expended just over $35,000 in actual third party costs.

From the outset Kevin Clark understood that he was meeting third party costs and made 2 payments to us, totalling $13,000, which were explicitly acknowledged as progress payments for third party costs.  The deal between us, as outlined back in June in the Warehousing Facility offer letter and subsequently in the draft Deeds, always incorporated our recovery of third party costs.

In addition all documents and discussions have expressly stated that the final date for exercise of the option to purchase was the 16 December 2011 and that time was of the essence.

In the spirit of continuing to sustain the terms of the transaction agreed with

KBL, we propose that:

-     The Option Fee payable now by KBL remains at the reduced level of

$20,000 plus GST

-     Only the $13,000 paid to date by KBL is recovered at this point on third party expenditure

-     The balance of the third party costs – which on current estimates looks like another $22,000 plus anything not yet incurred, is payable by KBL at the time of exercise of the option

-     The final completion date for the option continues to be 16 December

2011

[96]     On Friday 30 September, Ms Bernie, a solicitor employed by Izard Weston, wrote  to  Mr Carson  about  the  then  imminent  settlement  of  the  purchase  by Courtenay.  Among the matters raised in her email was a request for confirmation that, “your client will sign the application for the unit title registration post- settlement.”  On the same day, Ms Gravatt, a legal executive employed by Carson Fox Legal replied:

I have been advised that you’ve already discussed that with Matthew; our client has made it clear from the beginning he will not register a unit title development it has concerns about being seen as a developer

[97]     There was no formal response to that letter.  Later that day, Mr Carson sent executed copies of the deeds, noting however that they would not be binding until fully executed copies were received from KBL and in the case of the warehousing deed, the two guarantors (Mr Carson and Mr Kirton), as well as settlement of the purchase by Courtenay.

[98]     The  deeds  were  executed  on  5  October  and  returned  to  Mr Carson  by Ms Bernie on 7 October.  The recitals to the Warehousing Deed referred to the fact that KBL was in “default with its mortgagee and … unable to refinance”.   They recorded the agreement of the parties that Courtenay would purchase the property form KBL in accordance with the agreement for sale and purchase (attached as Schedule 1 to the agreement) and that KBL or a nominee could re-purchase the

property under the terms of the Option Deed (attached as Schedule 2).   Reference was also made to the fact that Mr Clark and Mr Kirton had agreed to guarantee certain of KBL’s obligations under the Deed.

[99]     The attached agreement for sale and purchase provided for the payment by Courtenay of $3,550,000 plus GST (if any) to acquire the property.   Under the substantive provisions of the Warehousing Deed, Courtenay was obliged to execute the Option Deed, and comply with its obligations under the agreement for sale and purchase.  KBL was also obliged to execute and deliver the Option Deed, and to pay the fee due under it.   It also agreed to provide Courtenay, at no cost, with such assistance in the management of the property as Courtenay might require.  There was a provision that if KBL did not exercise the option the Option Deed and the option would terminate, and that, in such circumstances KBL would have no claim against or interest in the property.  The guarantees given by Messrs Clark and Kirton were of the performance of KBL’s obligations under the Deed, up to a maximum liability of

$250,000 each. There was no mention of the unit-titling of the property.

[100]   The Option Deed began with two brief recitals recording that Courtenay was purchasing the property from KBL, and that Courtenay had agreed to grant KBL (or its nominee) the right to re-purchase it.  Substantive terms provided for the option, to be granted in consideration of payment of the option fee ($20,000 plus GST) at the time of purchase.   It was stipulated that the option had to be exercised by written notice delivered by KBL to Courtenay prior to 5 pm on the option expiry date (stated to be 9 December 2011) “time being strictly of the essence”.  The notice was to be accompanied by an agreement for sale and purchase, containing a possession date, no later than 16 December 2011.  It was provided that if the option was not exercised in accordance with these requirements the option would be terminated, and KBL would thereafter have no claim against or interest in the property.   On what must have been a belts and braces approach there was a further provision near the end of the Deed providing that “[t]ime is of the essence of this Deed”.

[101]   There was a discussion between Mr Kemp and Mr Carson on 13 October concerning  the  unit  title  subdivision.    As  a  consequence,  Ms Bernie  wrote  to Mr Carson on 14 October stating that she had been advised that Wellington City

Council had approved the subdivision and issued the necessary certificate to enable the surveyor to lodge the plan with LINZ on 30 September for survey approval. Ms Bernie said that once LINZ approval had been obtained, it would be possible to proceed with deposit of the plan and apply for unit titles.

[102]   On  19 October  2011,  Ms Bernie  sent  Mr Carson  a  further  email,  in  the following terms:

KBL Investments Ltd are in the process of selling the units, which is obviously subject to our client exercising the buy-back option and entering into an unconditional contract with your client, as well as being subject to titles issuing.

Attached is the form of Agreement for Sale and Purchase which our client will be using, for your information.

We await confirmation from you that your client agrees to sign the Unit Plan application as bare trustee.

[103]   Mr  Carson  forwarded  the  email  to  Mr Turner,  who  sent  a  response  to

Mr Carson asking him to pass it on.  Mr Turner’s response was as follows:

Adrian and I have discussed this at length.

As Kevin has specifically acknowledged after settlement, Adrian and I have always said that we are not property traders or developers and accordingly would not undertake a subdivision whilst we own this property, as we would quite possibly be tainted, regardless of the trust structure we have used.

Accordingly   we   are   in   no   way   implicitly   or   otherwise   supporting

KBL Investments proposal to sell unit titled units at Courtenay Place.

Given our clearly stated position, we do not wish to spend our time and funds  considering  what  subdivision  structure  may  provide  the  level  of comfort we require and if KBL Investments wants us to consider an arrangement that allows their subdivision to proceed, then they need to provide  details  of  the  structure  to  us,  along  with  an  opinion  from  a recognised tax expert and then we will take advice ourselves on the matter. We have been very careful not to compromise our status with the IRD in the past so any proposal will need to meet a high threshold with regard to preserving our current position.

Please advise KBL Investments accordingly.

Mr Carson passed the response to Mr Kemp and Ms Bernie.

[104]   Mr Clark claimed that he did not see any point in going back to Mr Turner and arguing about the matter.  He turned his attention instead to try to find a practical solution.  He contacted Mr Keith Turner, a solicitor employed by NSA Tax Ltd, a firm of chartered accountants specialising in taxation and trust matters.  Mr Turner wrote on 4 November 2011 giving his opinion that Courtenay could apply for unit titles without being classified as either a developer of or dealer in land.  Mr Clark forwarded the opinion to Mr Kingsley Turner on 7 November.  The latter considered that there were inaccuracies in the opinion including the suggestion that Courtenay was in the business of lending money, when it was simply the special  purpose vehicle incorporated to hold the property, and had not lent money or conducted any other business.

[105]   Mr Turner and Mr Green decided to have the opinion reviewed and sought advice   from   Mr Carl Brandt,   a   principal   in   a   Hamilton-based   firm,   Brandt Segedin LP,  with  expertise  in  tax.    Mr Brandt  provided  what  he  described  as “preliminary advice” in a memorandum dated 18 November 2011.   He concluded that there was a potential risk for Courtenay.  He wrote:

For the record we understand that [Courtenay], as a single purpose entity, is not intended to be a business of developing/building or dealing in land. However when one wears the IRD hat for a minute, the undressed facts might open the door to this argument if for some reason the property is sold in the short term.  The onus will always be on [Courtenay] to show taxing provisions do not apply.

[106]   Mr Kingsley Turner forwarded a copy of Mr Brandt’s advice to Mr Clark on

18 November,  commenting  that  the  position  may  not  be  as  straightforward  as Mr Keith Turner    had    suggested.       Mr Clark    and    Mr    Kirton    met    with Mr Kingsley Turner on 22 November. At the meeting there was discussion about the tax issue.   According to Mr Kingsley Turner he said that he did not want to risk tainting and that any arrangement proposed would need to ensure there was no risk of this occurring.  There was also discussion about a possible extension, and about the possibility of financing the purchase of individual units.  Mr Turner rejected that, on the basis that he would have a “conflict of interest”.  He was of the view that he could not do any refinancing work on the property because of the possibility of argument if he was not able to secure a successful outcome.

[107]   Following the meeting, Mr Clark contacted Mr Keith Turner and asked for a response to Mr Brandt’s opinion.   On the following morning, Mr Clark spoke to Mr Kingsley Turner, expressing his desire for an extension of the 16 December 2011 completion date.  Mr Kingsley Turner responded in an email that day which was in the following terms:

Without Prejudice re Option Deed between KBL Investments Limited and KBL Courtenay Limited

Further to your telephone call of this morning advising that you seek an extension  of  the  Final  Completion  Date  in  the  above  Deed  for  up  to

3 months I have had discussion with Adrian Green with regard to this.

First, we would like to stress that since June this year when we first started work on this matter we have always emphasised that:

-    We did not want to assume any risks associated with effecting the subdivision of the property at 11–13 Courtenay Place into 7 unit titles, and

-     That timing was critical to us, in fact our 9 June letter detailing the proposed “warehousing facility” spelt out that “timing is of the essence..KBL must have exercised its buy back …by no later than”

16 December 2011.

Accordingly we are dismayed to be discussing subdivision and time extensions now.

KBL Courtenay’s position on your request is that:

-    We do not want to assume any risks associated with effecting the subdivision of the property at 11–13 Courtenay Place into 7 unit titles

-     We would consider executing a variation to the above mentioned Option Deed  and  the  associated  Sale  and  Purchase  Agreement  whereby KBL Investments Ltd, or nominee, has up to a further 2 months to settle its  buy  back  of  the  subject  property,  provided  that  on  each  of  the

15     Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10, [2009] 1 WLR 1988.

16     At 376.

17 At [27].

18 At [21].

And later in the same paragraph:

There is only one question:   is that what the instrument, read as a whole against the relevant background, would reasonably be understood to mean?

[138]   I note also Lord Hoffmann’s observation that the phrase “necessary to give business efficacy” must not be used as if detached from the “basic process of construction of the instrument.”19   Similarly, the fact that the implied term must “go

without saying”:20

… vividly emphasises the need for the court to be satisfied that the proposed implication spells out what the contract would reasonably be understood to mean.   But it carries the danger of barren argument over how the actual parties would have reacted to the proposed amendment.  That, in the Board’s opinion, is irrelevant.

[139]   In a case such as the present where there is a detailed written agreement between parties who have been legally advised and are experienced in commercial affairs there could be no warrant for departing from the strictness of these statements of the law.  In any event, the decision in BP Refinery has been followed in numerous cases in New Zealand and both it and Belize Telecom were applied by the Court of Appeal in Hickman v Turn and Wave Ltd.21   I am bound to follow the same approach.

[140]   The two terms sought to be implied have earlier been set out.   I do not consider that either of them can be implied. The reasons may be stated shortly.

[141]   First, it would not be necessary to imply the term concerning consent to the unit-titling of the property to give the contract business efficacy.   The agreement reached was able to be implemented, and one of the possible outcomes envisaged was the very eventuality that transpired:  the property was acquired by Courtenay, and KBL did not exercise the buy-back option.  In the meantime, the mortgages were in fact repaid and (with the extension subsequently agreed) KBL had the period down to 16 February 2012 to secure alternative funding.  While KBL asserts that it

was unable to do so because the defendants would not facilitate the completion of

19 At [23].

20 At [25].

21     Hickman v Turn and Wave Ltd [2011] NZCA 100, [2011] 3 NZLR 318 at [243]–[254]. That decision went on appeal to the Supreme Court, but the judgments in that Court do not address the implied term issue: Hickman v Turn and Wave Ltd  [2012] NZSC 72, [2013] 1 NZLR 741.

the unit title subdivision it does not follow that there was an implied term that Courtenay was obliged to do so.  In clear contrast to the OSL proposal, there was no statement in the 9 June letter that one of the purposes of the transaction was the completion of unit titling of the property;   the purpose was simply stated to be refinancing the two existing mortgages.  That is what occurred.  KBL’s objective of funding the buy-back by carrying out the unit titling was not one that Courtenay had agreed to facilitate.

[142]     I do not overlook the fact that the 9 June letter referred to the unit titling in Special Condition 1, which has been set out above.22    However the reference is a fleeting one, and restricted to providing information about the value of the property. As has been seen, the condition required provision, readdressed, of the Colliers valuation of the property in one title, and also once unit-titled.   According to the Colliers  valuation  the difference  between  the  respective  values  was  $1,675,000. Clearly this was relevant to the security that Courtenay could offer for the borrowing necessary to fund the purchase of the property.  I do not consider the condition has implications for the implied term issue.

[143]   Essentially for the same reasons, I do not consider that it could be said of the term that it was so obvious that it went without saying.  The simple fact is that the

9 June letter made no other reference to unit-titling.  This is not a case where there is a need to supply an omission arising by implication from the arrangements which have in fact been documented.  Rather, KBL seeks to engraft a new provision into the contract, dealing with and imposing obligations in respect of a new subject matter.  This is a long way from the concept of ascertaining the proper meaning of the contract.

[144]   An implied term can only be imposed where it reflects the common intention of the parties.  I am not satisfied that is the case here.

[145]   The other term sought to be implied was that there would be a term of six months from the date of settlement, if that were delayed through no fault of KBL.

The 9 June letter was clear in its terms that the period of “approximately six months”

22 At [68].

was to expire on 16 December 2011. When those words were adopted, it is clear that the settlement date envisaged was 17 June 2011, just over a week after the letter was written.  However, the express statement of an expiry date, together with a reference to “timing” being “of the essence”, makes it impossible to imply a term such as that now sought.   To do so would be contrary to the express terms of the notional agreement, and would alter the nature of the obligations assumed by Courtenay.

[146]   For these reasons, and  applying both  BP Refinery and  Belize Telecom,  I conclude that the proposed terms should not be implied.  Consequently the contract cause of action cannot succeed.

Breach of fiduciary duty

[147]   KBL claims that Mr Turner and Mr Green owed fiduciary duties to KBL, which they breached. The statement of claim alleges that on 18 May 2011, faced with mortgage arrears, an inability to refinance and an imminent mortgagee sale, KBL sought financial assistance from OSL, and Messrs Green and Turner, because:

(a)       OSL held itself out as giving financial advice and assistance.

(b)Mr Turner and Mr Green had on a number of previous occasions provided  financial  advice  and  funding  to  entities  associated  with Mr Clark.

(c)      KBL could not refinance on ordinary commercial terms and was at a substantial disadvantage because of difficulties associated with obtaining the mortgagee’s consent to the boundary adjustment subdivision.

[148]   It is then alleged that in his initial discussions with them Mr Clark provided Mr Turner and Mr Green with the Colliers valuation of 6 December and the addendum of 17 February and that:

On 19 May 2011, OSL, Green and Turner agreed to assist with financial

advice and to assist in refinancing the property …

[149]   This is followed by a reference to Mr Turner’s email to Mr Morgan, quoted above, saying that he was very confident that he could sort matters out, enabling KBL to complete the subdivision and “hold on” to their equity.23

[150]   In these circumstances it is claimed that Messrs Turner, Green and OSL owed fiduciary obligations to KBL to:

(a)       Use  their  best  endeavours  to  assist  KBL  with  its  refinancing application.

(b)      Act in good faith and in the best interests of KBL. (c) Not exploit [KBL] to their own advantage.

(d)      Not act in conflict with their obligations to [KBL]. 24

[151]   KBL’s  pleaded  allegations  were  the  subject  of  correspondence  in  which Mr Chisholm sought and Mr Dale gave further particulars of key allegations in the statement of claim relevant to the cause of action.   As a result it was effectively conceded that OSL had not held itself out as giving any advice or offering assistance, being simply the vehicle introduced to KBL by Messrs Turner and Green as the means by which independent investors would be lending to the plaintiff.  It was also clarified  that it was Mr Turner who was alleged to have said that he would organise the takeout on 19 and 20 May, Mr Green only subsequently being introduced to the transactions.

[152]   The pleaded breaches of fiduciary duty alleged are that the second and third defendants:

(a)       represented that the terms of the warehousing facility were effectively the same as the original OSL offer;

(b)      unreasonably refused to execute the unit plan application;

23 At [22].

24     The pleading alleged that OSL was also subject to these duties.

(c)      unreasonably refused to extend the “re-finance period” to run for six

months from the date of settlement;

(d)unreasonably refused to extend that period other than on payment of a fee of $100,000 per month;

(e)      sought  to  procure the property for themselves.  In  this  respect  the

pleading gave particulars referring to Mr Green’s approach to BNZ on

26 May 2011, the fact that KBL was not told that the OSL offer could not proceed until 9 June and the warehousing facility itself, said to have  been  advanced  for  the  purpose  of  their  acquisition  of  the property.

[153]   It will be apparent from the factual findings I have already made that KBL faces real difficulties in establishing these breaches. However, before discussing that directly  I  first  consider  whether  there  was  a  fiduciary relationship  between  the parties.

A fiduciary relationship?

[154]   In  advancing  KBL’s  claim  that  a  fiduciary  relationship  existed,  Mr Dale referred to the history of the relationship between Mr Clark and Messrs Turner and Green,   including   the   fact   that   they   had   previously   arranged   funding   for developments carried out by Mr Clark.  He claimed that the evidence showed that the  defendants  acted  as  brokers,  relying  in  particular  on  a  statement  made  by Mr Green that GTF Capital Ltd’s principal function was to source funds for parties operating in the commercial and corporate property sectors.  Mr Green continued:

Such funding was sourced from external, third party lenders such as banks, building societies, finance companies and solicitor nominee companies.  On occasions GTFC sourced funds from a lending entity that was owned by GTFC.  GTFC never itself advanced funds or acted as a lender.

[155]   Mr Dale referred also to evidence given by Mr Green in cross-examination that Mr Turner had acted as a broker to find money for Mr Clark, and also describing himself as a potential investor and one who could bring other investors on board.

[156]   Mr Turner himself gave evidence that he and Mr Green through the entities they controlled from time to time acted as brokers, procuring funding from third party lenders, in addition to themselves lending though one of the vehicles they controlled.  He accepted in cross-examination that in speaking to BNZ or Westpac (as he initially told Mr Clark he would on 20 May) to try to arrange a mortgage he would have been acting as a broker.  He accepted that he had been in that role “for a very brief period of time” prior to producing the OSL offer, although as has been noted earlier he did not in fact speak to either bank because he considered there would be no point in doing so.

[157]   Mr Dale submitted that there had been no express or implied termination of the broker/client relationship.  The OSL offer itself was consistent with the ongoing nature of the relationship since it was anticipated that third parties would contribute even if Messrs Turner and Green were also involved as investors.   There was no evidence that Mr Turner told Mr Clark that the relationship was at an end, and it was inappropriate to rely on the unlikely proposition that Mr Clark should have assumed this was so once he received the warehousing offer. Further, the 9 June offer had been presented on GTF Capital Ltd letterhead and was presented as a means of assisting KBL to stave off the mortgagee sale in return for a fee.  By entering into the arrangement KBL was surrendering any rights and protection it would have had as a mortgagor, and it was in a vulnerable position.

[158]   Mr Dale also emphasised that the warehousing facility was the second and third defendants’ idea.   He submitted that it had the hallmarks of a “trust type arrangement”; was “in essence” a loan; involved KBL having to rely on the cooperation of Courtenay to facilitate the loan refinancing, in particular in relation to the  unit  titling;  and  had  been  described  by  Mr  Turner  to  Mr  Clark  as  being effectively the same as the OSL proposal.

[159]   Mr Dale referred, among other authorities, to the judgment of the Supreme Court in Chirnside v Fay,  and the explanation by Tipping J, giving the reasons for judgment of himself and Blanchard JJ of the two kinds of fiduciary duty:   those arising where the relationship is of a kind which by its very nature is recognised as being inherently fiduciary, and those which arise not from the inherent nature of the

relationship but particular aspects of it which justify it being classified as fiduciary.25

He submitted that a fiduciary relationship of both kinds arose on the present facts.

[160]    Insofar as it was based on the relationship of broker and client he referred to a  number  of  authorities  that  dealt  with  the  position  of  stockbrokers  and  their clients.26    Perhaps  more  relevantly  for  the  present  facts,  he  also  referred  to Morlend Finance Corp (Vic) Pty Ltd v Westendorp in which a person who had been engaged to assist others seeking to obtain finance was held to be a finance broker acting as their agent.27   So too, in Wilson v Hurstanger Ltd a finance broker retained by borrowers was held to be subject to a duty that was “obviously”   fiduciary, requiring him to act loyally for them and not put himself in a position in which he had a conflict of interest.28    I accept that these authorities are sufficient to establish a general principle that a fiduciary relationship arises from the relationship of finance broker and client. However, that principle obviously has to be applied in a manner that reflects the particular factual context.

[161]   At the heart of KBL’s case seems to be the proposition that since Mr Turner had  agreed  to  assist  it  in  procuring  funding  for  the  purpose  of  avoiding  the mortgagee sale, he and Mr Green were obliged either to act in its best interests or formally terminate the relationship of broker and client.  But, even if the latter step had been taken, there would have been ongoing duties not to act so as to exploit KBL for their own advantage.

[162]   Mr Chisholm submitted that the claimed fiduciary relationship could only properly be based on a very brief period when Mr Turner indicated that he would speak to BNZ and Westpac.  He argued that from the time of presentation of the OSL offer KBL knew that the parties were operating at arm’s length and that OSL would be acting to protect itself.  KBL also had independent legal advice.  In any event the OSL proposal did not proceed, and even if it did OSL and KBL would, under its

terms have been parties to a commercial loan.  This was to be fully documented, on

25     Chirnside v Fay [2006] NZSC 68, [2007] 1 NZLR 433 at [73] and [75].

26     Including Re Ararimu Holdings Ltd [1989] 3 NZLR 487 (HC) at 493 and Ancell v Westpac

Banking Corp (1992) 4 NZBLC 102,853 (HC) at 102,866.

27     Morlend Finance Corp (Vic) Pty Ltd v Westendorp [1993] 2 VR 284 (SC) at 308.

28     Wilson v Hurstanger Ltd [2007] 1 WLR 2351 (CA) at [33]–[34].

the basis that OSL’s solicitor would be instructed to ensure that its interests were protected.  It was to be guaranteed by Messrs Clark and Kirton.  Mr Chisholm drew an analogy to the relationship of a bank with a customer to whom it has leant money, submitting that banks are not normally to be regarded as having fiduciary duties to their customers.29

[163]   I accept that in approaching a trading bank or potential investors on behalf of KBL, Mr Turner would have been in the position of a finance broker and subject to fiduciary duties.  However, it is clear on the facts that Mr Turner did not approach the banks, because very soon after his initial meeting with Mr Clark he concluded it would be futile to do so.  Thereafter his efforts became focused on the OSL offer and finding investors to contribute to it.

[164]   In accordance with past practice, the potential investors might have included Mr Turner and Mr Green themselves (as Mr Clark accepted in cross-examination), as well as members of their families, as well as the others in the group that they normally approached.  In the event, they were not able to secure investment interest. It is clear however that had there been such interest the investment would have been channelled through OSL.  It was not a situation in which Mr Turner (or Mr Green) had agreed to procure investors prepared to fund KBL direct.   In this respect it is significant that Mr Clark accepted in cross-examination that he understood there would be a clear conflict of interest between a lender and a borrower; that he knew that Mr Turner and Mr Green were “behind OSL”;  that it was a feature of the OSL proposal that OSL would be taking legal advice to ensure that its interests were protected;  that he understood that he would need to take legal advice to protect his own interests.

[165]    In the circumstances I consider that once investors had been secured for the OSL proposal it would be difficult to contend that the broker/client relationship had any continuing relevance.   The respective rights of the parties would have been subsumed  in  the  formal  contractual  arrangements  between  OSL  and  KBL  as

borrower and lender.

29     Referring to Lankshear v ANZ Banking Group (New Zealand) Ltd [1993] 1 NZLR 481 (HC) at

490 and Andrew Butler (ed) Equity and Trusts in New Zealand, (2nd  ed, Thomson Reuters, Wellington, 2009) at [17.4.1].

[166]   It  is  then  necessary  to  confront  the  fact  that  the  OSL proposal  did  not proceed. The offer was withdrawn at the 9 June meeting.  It was at that point that the role of Mr Turner and Mr Green was clearly crystallised:  they were proposing that a company in which they were personally interested would purchase the property subject to the buy-back offer.  This was clearly appreciated by Mr Clark.  I think it is unreal to suggest that in respect of the warehousing facility they were acting as finance brokers.     The nature of the proposal summarised in the 9 June letter is antithetical to the suggestion that Messrs Turner and Green were acting as brokers in putting it forward.

[167]   It is difficult to see what they could have done in addition to formulating and explaining the proposal.   I have earlier found that the essential aspects of it were discussed with Mr Clark by Mr Turner, and that they were indeed obvious.  It is not suggested that the proposal should not have been made, other than in the context of the allegations that it was only put forward as a means by which Messrs Turner and Green could dishonestly secure Courtenay’s acquisition and retention of the property. The  alternative  would  have  been  not  to  make  the  proposal,  in  which  case  the evidence justifies a conclusion that the mortgagee sale would have proceeded.

[168]   For the foregoing reasons, I conclude that Mr Green acted as a finance broker for a brief period (which includes the steps he took to ascertain whether there was investor interest in the OSL proposal), but neither he nor Mr Green proffered the warehousing  proposal  as  brokers.    The  proposal  did  not  therefore  attract  any fiduciary duty.

Breach of duty

[169]   In the circumstances it is not strictly necessary to consider whether there was a breach of fiduciary duty, but I do so for completeness.   For this purpose I will assume that Messrs Turner and Green owed the fiduciary obligations alleged in the statement of claim, and move straight to the alleged breaches.  The factual findings already made mean that none of them can be sustained.

[170]   The first alleged breach is that Messrs Turner and Green represented that the terms of the warehousing facility were effectively the same as the original OSL offer.

Mr Clark’s evidence was that this representation was made by Mr Turner, but I have rejected that evidence.   There was no evidence that Mr Green made such a representation. The allegation fails on the facts.

[171]   The second alleged breach is that Messrs Turner and Green unreasonably refused to execute the unit plan application.    However, I have held that they were not obliged to do so under the terms of the warehousing facility.  That conclusion would apply whether the contract was formed on 10 June, or whether, as I have held, the rights of the parties were those set out in the formal Warehousing and Option Deeds.

[172]   The third and fourth alleged breaches of duty are claims respectively that there was an unreasonable refusal to extend the “re-finance” period for six months and, further, an unreasonable refusal to extend the period other than on payment of a fee of $100,000 per month.   The second of these allegations is based on the two month extension (to 16 February 2012) that was agreed by the parties in November

2011.    The allegations must again fail on the basis that Messrs Turner and Green were not obliged to agree to any extension, and the terms as to payment on which the two month extension was granted were agreed by the emails exchanged on 19 and 23

November 2011.

[173]   The final breach of duty alleged is that Messrs Turner and Green sought to procure the property for themselves.  I have already rejected the factual assertions on which this allegation is based.   I have not been prepared to find that Mr Green’s approach to BNZ on 26 May 2011 was part of any desire to acquire the property; rather it was to ensure that if investors could not be found to support the OSL proposal there would be another option involving bank finance to a vehicle owned by the defendants.   Further, the fact that Mr Clark was not advised that the OSL proposal could not proceed until 9 June did not in my view involve a significant delay.  The advice followed by only a few days the confirmation of lack of investor interest and in that period Messrs Turner and Green developed the warehousing proposal.  While it may have been desirable for earlier advice to have been given, I do not consider that the delay has the significance with which KBL seeks to invest it. Nor do  I consider that  the warehouse facility was proffered  for the purpose of

acquiring the property.  No doubt Messrs Turner and Green sought to profit from the proposal.   They were entitled to do so having borrowed funds from the BNZ and invested their own capital.  But I am not persuaded on the balance of probabilities that they set out to acquire and retain the property or advanced the warehousing proposal for any other reason than to avoid the mortgagee sale and provide further time for KBL to seek to make alternative arrangements for funding in return.  If their sole objective had been to acquire the property they could have simply purchased at the mortgagee sale;  there was no need to embark on an elaborate sham in the form of the warehousing agreement.

[174]   In the result, had I concluded that Messrs Turner and Green owed fiduciary obligations to KBL I would not have concluded that they had been breached.

[175]   These conclusions mean that the breach of fiduciary duty claim must fail.

Oppression

[176]   The  third  cause  of  action  alleges  that  the  warehousing  facility  was  in substance a credit contract within the meaning of the CCCF Act.

[177]   The allegations are that Courtenay’s conduct was oppressive because:

(a)       It  was  aware  that  KBL  could  not  refinance  without  Courtenay’s

consent to the unit title subdivision.

(b)      Courtenay was aware that the period from 3 October to 9 December

2011 was insufficient to enable KBL to refinance, particularly if there were difficulties with the unit title subdivision.

(c)      The fee demanded of $100,000 per month for an extension of time to refinance was oppressive.

(d)Courtenay, by its agents Messrs Turner and Green, had represented that the terms of the warehousing facility were in substance the same as the original OSL offer, which was not true.

[178]   In  advancing  this  part  of  KBL’s  case  Mr  Dale  referred  to  the  Court  of

Appeal’s decision in Haddon v Custodians where the Court said:30

[79]     Section 120 of the CCCFA enables the Court to reopen a credit contract, but as the Supreme Court recently confirmed in GE Custodians v Bartle31 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 a contract 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. …

[179]   In essence this replicates the provisions of s 120(a) to 120(c) of the statute. Mr Dale submitted that the first two of the circumstances justifying reopening the contract applied in this case.   He submitted first that non-disclosure that the defendants intended to keep the property for themselves and “would not unit title” meant that KBL had been induced to enter into the contract by oppressive means. Secondly, maintaining that time was of the essence in respect of the six month period when there was an unforeseen event, and where the defendants had no intention of cooperating in any event.

[180]   Mr Chisholm submitted that the Warehousing Deed and the Option Deed were not covered by the definition of “credit contract” in s 7(1) of the CCCF Act, with the consequence that s 120 did not apply.   That definition describes a credit contract as “a contract under which credit is or may be provided”, and therefore turns on the meaning of “credit”, another term defined by the Act.  Under the definition in s 6:

… credit is provided under a contract if a right is granted by a person to another person to—

(a)       defer payment of a debt;  or

(b)       incur a debt and defer its payment;  or

(c)       purchase property or services and defer payment for that purchase

(in whole or in part).

[181]   The Deeds do not readily fall within the definition.  There was no deferment of the payment of a debt;  Courtenay acquired the property from KBL, conferring a

30     Haddon v Custodians [2011] NZCA 335.

31     GE Custodians v Bartle [2010] NZSC 146, [2011] 2 NZLR 31.

right to buy it back that had to be exercised in accordance with the terms of the Option Deed.  Nor was a debt incurred with payment deferred.  Finally, the property was purchased by Courtenay outright:  again, payment was not deferred.  KBL had the right to buy it back, but until it exercised that right it would not have to make a payment.

[182]   Mr Chisholm noted that the Deeds contained provisions dealing with the calculation of the price to be paid if the option were exercised by KBL.  However he submitted that this did not change the basic nature of the transaction.  I agree with that submission and consider that arrangement evidenced by the Deeds was not a credit contract. That is sufficient to defeat this cause of action.

[183]   However, even if that view were incorrect I am satisfied that KBL’s claim could not succeed.  Section 118 of the Act defines “oppressive” to mean:

… oppressive, harsh, unjustly burdensome, unconscionable, or in breach of

reasonable standards of commercial practice.

[184]   In GE Custodians v Bartle the Supreme Court agreed with observations of the Court of Appeal in Greenbank New Zealand Ltd v Haas about the definition of “oppressive” in s 118 of the Act, stating that:32

…the various words which together form the definition … all contain the underlying idea that the transaction or some term of it is in contravention of reasonable standards of commercial practice.

[185]   As has been noted, the defendants called evidence from Mr Shores, a person with relevant expertise in relation to warehouse agreements.  Mr Shores expressed the opinion that the margin charged for the warehouse facility was reasonable, a conclusion on which he was not challenged.  Nor did KBL itself call evidence on that  issue.    Mr Shores  also  expressed the opinion  that  the terms  on  which  the extension was (two months at $100,000 per month), offered were reasonable given that no “up front” fee was also charged.  He was cross-examined on this conclusion,

and   emphasised   that   warehouse   agreements   are   by   their   nature   expensive

32     GE Custodians v Bartle, above n 31, at [46]; Greenbank New Zealand Ltd v Haas [2000] 3

NZLR 341 (CA) at [24].

arrangements of “last resort”.   Once again, no evidence was called to contradict

Mr Shores on this issue.

[186]   Mr Dale appropriately acknowledged that this cause of action was dependent on the Court forming the view that there was a deliberate strategy to mislead KBL in order to acquire the property.   I accept that if that were the case then there would have been a departure from reasonable standards of commercial practice, justifying the reopening of the contract.  However, I have already rejected that contention.

[187]   I do not consider there is any other basis on which I could appropriately conclude that KBL was entitled to relief under the third cause of action.

Damages

[188]      Given that KBL’s claims have not succeeded there is no need to consider

the issue of damages (and causation).

Result

[189]   All of KBL’s claims are unsuccessful.

[190]   There will be judgment for the defendants accordingly.

[191]   Costs should follow the event.  If there is any issue as to costs that cannot be resolved by agreement I will receive memoranda, from the defendants within 15 working days and from KBL within 15 working days of receipt of the defendants’ submissions.