Kivits v Draper
[2016] NZHC 1961
•23 August 2016
IN THE HIGH COURT OF NEW ZEALAND WHANGAREI REGISTRY
CIV-2015-488-68 [2016] NZHC 1961
BETWEEN CORNELIUS KIVITS AND
HUBERTINE KIVITS Plaintiffs
AND
ROBERT EDWARD DRAPER AND CYNTHIA GLADYS DRAPER
First Defendants
BURTON & CO Second Defendant
Hearing: 15 August 2016 Appearances:
J Strauss for the Plaintiffs
D G Collecutt for the First Defendants
Appearance excused for the Second DefendantJudgment:
23 August 2016
JUDGMENT OF ASSOCIATE JUDGE R M BELL
This judgment was delivered by me on 23 August 2016 at 11:00am
pursuant to Rule 11.5 of the High Court Rules
…………………………………………………….
Registrar/Deputy Registrar
Solicitors:
North Harbour Law (N du Toit), Orewa, for Plaintiffs
Carson Fox Legal (M Carson), Auckland, for First DefendantsKeegan Alexander (P Napier), Auckland, for Second Defendant
Counsel:
J Strauss, Auckland, for PlaintiffsD G Collecutt, Auckland, for First Defendants
KIVITS AND KIVITS v DRAPER AND DRAPER [2016] NZHC 1961 [23 August 2016]
[1] On 5 November 2015 the plaintiffs, the Kivits, obtained judgment by default against the Drapers, the first defendants, for $1,447,142.94 plus interest on
$450,000.00 at 20.5 per cent per annum from 18 September 2010 until judgment, plus costs of $10,431.86. On 23 May 2016 the Drapers applied to set aside the default judgment.
Judgment regularly obtained
[2] The Drapers accept that the Kivits obtained judgment by default against them regularly, but it is necessary to explain that further. The Kivits began this proceeding on 17 June 2015. The second defendants, a law firm, applied for summary judgment. On 24 July 2015 Mrs Draper swore an affidavit in support of the summary judgment application. She must therefore have been aware of the proceeding then. She swore a further affidavit in support of the application on
29 September 2015. On 17 August 2015 the Kivits’ process servers served Mr Draper, but not Mrs Draper. The Kivits applied for substituted service on Mrs Draper. They sought an order under r 6.8 of the High Court Rules that she be treated as having been served on the basis that she was already aware of the proceeding. I directed that time for Mrs Draper to file a statement of defence should not run from 17 August 2015 (when her husband was served) but from when the Kivits informed her afresh of the proceeding. I directed the Kivits’ lawyers to write to Mrs Draper at her home in Glenbervie, sending a copy of the proceeding and a copy of my minute. The time for filing a statement of defence would run from the time when, in the ordinary course of post, the documents would reach that address. Mrs Draper sent a statement of defence to the court by 12 October 2015. That was within time but she did not pay the filing fee and did not serve the Kivits. On
27 October 2015 the Kivits presented for sealing a judgment by default against the Drapers. It was sealed on 5 November 2015. Mrs Draper wrote to the court complaining about the entry of judgment. I ruled that she had not complied with the High Court Rules, because she had not paid the filing fee and had not served the
Kivits. Accordingly the Kivits were entitled to enter judgment by default.1 The
Drapers have not taken issue with that ruling.
Setting aside regularly obtained default judgments
[3] The Drapers apply under r 15.10:
Any judgment obtained by default under rule 15.7, 15.8, or 15.9 may be set aside or varied by the court on such terms as it thinks just, if it appears to the court that there has been, or may have been, a miscarriage of justice.
The approach on applications to set aside judgments obtained regularly by default is well established. In Paterson v Wellington Free Kindergarten Association Inc, McCarthy J said:2
In approaching an application to set aside a judgment which complies with the rule, the Court is not limited in the considerations to which it may have regard, but three have long been considered of dominant importance. This was accepted by the Chief Justice in the Court below and by all counsel in this Court. They are, 1. That the defendant has a substantial ground of defence; 2. That the delay is reasonably explained; 3. That the plaintiff will not suffer irreparable injury if the judgment is set aside: Atwood v Chichester (1878) 3 QBD 722; Hovell v Ngakapa (1895) 13 NZLR 298; Trengrove v Inangahua Hospital Board [1956] NZLR 587. But, whilst it appears from these cases that delay, if reasonably explained and if it does not create irreparable injury, is not of itself a good reason for refusing to set aside, we do not doubt that where the delay is substantial, as it is here, the Court can more readily conclude that injury would be caused.
In Russell v Cox the Court of Appeal quoted the above and said:3
We think that in the light of Evans v Bartlam the passage to which reference has just been made should be read as doing no more than emphasising three matters which, as a matter of common sense and practice, the Court will generally regard as of importance in deciding whether it is just to set aside a judgment. But it should not be regarded as laying down a general rule that an application to set aside a judgment must satisfy these conditions as a necessary prerequisite to the exercise of the discretion; it should be taken as doing no more than highlight factors which on any application to set aside a judgment may generally be regarded as relevant to an inquiry which will determine where the justice of the case will lie.4
1 Minute of 11 December 2015.
2 Paterson v Wellington Free Kindergarten Association Inc [1966] NZLR 975 (CA) at 983.
3 Russell v Cox [1983] NZLR 654 at 659.
4 See also Neumayer v Kapiti Coast District Council [2014] NZHC 417, [2015] NZAR 1185 at [8]; Mathieson v Jones CA198/92, 11 December 1992, 6-7; Jones v Chatfield [1993]
1 NZLR 617 (HC) at 621-622.
Do the Drapers have a substantial ground of defence?
[4] The Drapers say that the Kivits have over claimed and that they have a limitation defence. For that, it is necessary to understand the Kivits’ claim. The Kivits sue on a fixed sum mortgage the Drapers gave them on 26 April 2001. The mortgage is security for a principal sum of $600,000. $150,000 was to be paid on or before 30 May 2001; $450,000 was to be paid on 5 February 2002. The ordinary interest rate is 15.5 per cent and the penalty interest rate is 20.5 per cent. The mortgage was registered against the titles to two properties at Parakai as a second mortgage.
[5] An annexure schedule has additional terms, including these:
16. Where all or part of the principal sum has already been advanced this mortgage is given in consideration of the mortgagee’s forbearance to sue for immediate repayment of such advance.
17. The mortgage secures the principal sum of $100,000 advanced on the 20th day of November 2001 and is in substitution for Memorandum of Mortgage D.379629.3 and all monies intended to be secured under Mortgage D.379629.3 are secured hereunder.
18. The Mortgagor shall pay the sum of $18,423.05 as interest on the principal sum of $100,000 advanced on the 28th day of November 2001, on the 5th day of February 2002 or such earlier date as the principal sum shall be repaid.
19. Notwithstanding anything contained herein, the Mortgagor shall not be required to pay any ordinary interest rate on the sum of $150,000 to be paid on the 31st day of May 2001 and the sum of $350,000 to be paid on the
5th day of February 2002, the latter sum being interest due under Mortgage D.379629.3 of which the former sum is part of the principal sum under that mortgage.
20. Nothing herein contained shall prevent penalty interest being charged on the aforementioned sums if repayment is not made on the due dates.
[6] The mortgage incorporated the provisions of registered Memorandum Number 1996/4003, but that was not put in evidence. Neither side submitted that its provisions could be relevant.
[7] A letter by the Kivits’ lawyer dated 30 April 2001 provides context. It
records that the Drapers had earlier held a mortgage on a property at
315 Whangaparaoa Road, but that had been discharged. The Drapers received
$500,000 in part reduction of money owing under the Whangaparaoa Road mortgage (D.379629.3) and accepted substituted security by way of a second mortgage over two properties at Parakai. The lawyer warned that there was no real equity in the Parakai properties, given the sum secured to the first mortgagee, a bank. The lawyer’s letter also records that Mrs Draper had given a personal cheque for
$150,000 to meet the amount due on 31 May 2001.
[8] The $100,000 in clause 17 of the mortgage was the unpaid balance of principal that had been earlier secured under the Whangaparaoa Road mortgage. Interest on the $100,000 was due on 5 February 2002 under clause 18. The
$350,000 in clause 19 was unpaid interest under the same loan. Mr Collecutt submitted that that remained an interest obligation under this mortgage, but I reject that. The mortgage clearly makes the $350,000 part of the total principal of
$600,000. This was a refinancing under which unpaid interest under an earlier advance became principal under the new advance. Interest on the $350,000 ran from
5 February 2002.
[9] In December 2006 the mortgage was discharged from one of the Parakai properties, while leaving the mortgage over the other property (at Pengelly Place) still in effect.
[10] Under a written agreement of 7 September 2010 the Kivits released the mortgage over the Pengelly Place property and the Drapers paid them $150,000. Mrs Draper drafted the agreement. They all signed it. The terms included:
1The Lenders have lent the Borrowers over a number of years various sums of money.
2 The money is secured by second mortgage over a property at 13
Pengelly Place, Parakai (“the property”).
3A CONDITIONAL OFFER has now been made to purchase the property. The Borrowers wish to sell the property to raise funds to avoid the property being sold by the Bank by mortgagee sale and to avoid the necessity for the Lenders to borrow further sums of money from the Borrowers.
4It is irrevocably agreed between the parties that the sum of ONE HUNDRED AND FIFTY THOUSAND DOLLARS ($150,000) shall
be paid to the Lenders’ Bank Account at (details omitted) by the
Borrower’s Solicitors immediately on settlement of the property.
…
[11] The Kivits’ statement of claim against the Drapers pleads the payment of
$150,000 under the September 2010 agreement but says that $450,000 of the principal remains unpaid, and claims interest at the penalty interest rate on $600,000 from 6 February 2002 to 7 September 2010 and interest on $450,000 at the same interest rate from 8 September 2010. The Kivits sealed judgment in terms of their pleading.
The part payment defence
[12] The Drapers have shown that they paid the Kivits:
[a] $503,617.50 on 27 April 2001. That was the part reduction of the principal under the Whangaparaoa mortgage. The Drapers’ written reply submission said that it was uncertain what that payment related to, but it is clear in the light of the context that it was not a payment under the mortgage in this case. If it had been, it would not have been necessary for the Drapers to pay $150,000 on 31 May, but a smaller sum.
[b] $150,000 on 31 May 2001. That was the payment required under the mortgage in this case.
[c] $150,000 on 7 September 2010. That was the payment under [10]
above.
They do not claim to have made any other payments under the mortgage in this case. The Kivits accept that the Drapers have an arguable defence as to the payment of
$150,000 in May 2001 and that the amount of the judgment that they sealed was over-stated.
The limitation defence
[13] The Limitation Act 1950 applies. The Limitation Act 2010 repealed the Limitation Act 1950, but the 1950 Act continues to apply to proceedings based on acts or omissions before 1 January 2011.5 The Drapers submitted that the applicable limitation period was six years after accrual of the cause of action under s 4(1)(a):
(1) Except as otherwise provided in this Act … the following actions shall not be brought after the expiration of 6 years from the date on which the cause of action accrued, that is from to say, -
(a) actions founded on simple contact …
There is however a separate provision for proceedings to recover money secured by a mortgage:6
20Limitation of actions to recover money secured by a mortgage or charge or to recover proceeds of the sale of land
(1) No action shall be brought to recover any principal sum of money secured by a mortgage or other charge on property, whether real or personal, or to recover proceeds of the sale of land (not being the proceeds of the sale of land held upon trust for sale), after the expiration of 12 years from the date when the right to receive the money accrued.
(2) …
(3) …
(4) No action to recover arrears of interest payable in respect of any sum of money secured by a mortgage or other charge or payable in respect of proceeds of the sale of land, or to recover damages in respect of such arrears, shall be brought after the expiration of 6 years from the date on which the interest became due:
…
[14] The Drapers’ case was that under s 4(1)(a) all claims under the mortgage
were now statute-barred because of the expiry of 6 years from when any causes of
5 Limitation Act 1950 s 2A; Limitation Act 2010 ss 57 and 59.
6Debt Buyers Ltd v Hancox [2015] NZHC 2484, (2015) 16 NZCPR 819; Debt Buyers Ltd v Adamson [2016] NZHC 932 at [41]-[55] following English decisions, Bristol & West plc v Bartlett [2002] EWCA Civ 1181, [2003] 1 WLR 284; Scottish Equitable plc v Thompson [2003] EWCA CIV 225 and West Bromwich Building Society v Wilkinson [2005] UKHL 44, [2005] 1 WLR 2303.
action arose. But s 20 applies in this case. The effect is that the Kivits’ claim is
reduced, but not eliminated.
[15] Under s 20 time runs from when each cause of action accrues.7 The cause of action for not repaying the principal of $450,000 accrued on 5 February 2002. At that time, payment of the principal was secured by the mortgage of 26 April 2001. Under s 20(1), the Kivits had 12 years in which to issue proceedings to recover the principal. Any proceeding to recover the principal would be time-barred after
5 February 2014. The fact that the mortgage had been discharged in September 2010 would not matter. What counts is that at the time the cause of action accrued the debt was secured by mortgage. Under s 20 any claim for payment of principal would be statute-barred, unless saved by any provision extending time for suing.
[16] The limitation period is different for a claim for interest. Interest did not fall due until 5 February 2002. It continued to accrue so long as the principal was not repaid. It is arguable for the Drapers that after the mortgage had been discharged from both Kaipara properties and any claim for repayment of the principal became statute-barred, there could be no claim for payment of interest on the statute-barred principal. Accordingly, any obligation to pay accruing interest on the principal also expired on 5 February 2014. Under s 20(4) the Kivits could claim only interest that fell due in the six years before they issued the proceeding (that is, from 18 June 2009 onwards), but interest would stop running from 5 February 2014. The limitation defence does not discharge the Drapers from liability entirely, but it does reduce it significantly.
Acknowledgment or part payment under s 25(4)
[17] The Drapers accepted that to make out a limitation defence they would need to meet any rebuttal that they had acknowledged the debt or made a part payment. Any cause of action will accrue afresh from the date of the acknowledgement or part payment, not earlier. That requires a consideration of the agreement of September
2010. If that is an acknowledgement by the Drapers or they made a part payment
7 West Bromwich Building Society v Wilkinson, above n 6, at [10].
under it, this proceeding is in time for a claim for unpaid principal and more interest can be recovered.
[18] The relevant provisions of the 1950 Act are:
Section 25(4):
Where any right of action has accrued to recover any debt or other liquidated pecuniary claim, or any claim to the personal estate of a deceased person or to any share or interest therein, and the person liable or accountable therefor acknowledges the claim or makes any payment in respect thereof, the right shall be deemed to have accrued on and not before the date of the acknowledgment or the last payment:
Provided that a payment of a part of the rent or interest due at any time shall not extend the period for claiming the remainder then due, but any payment of interest shall be treated as a payment in respect of the principal debt.
And s 26:
(1) Every such acknowledgment as aforesaid shall be in writing and signed by the person making the acknowledgment.
(2) Any such acknowledgment or payment as aforesaid may be made by the agent of the person by whom it is required to be made under the last preceding section, and shall be made to the person, or to an agent of the person, whose title or claim is being acknowledged or, as the case may be, in respect of whose claim the payment is being made.
[19] As to acknowledgment, the Drapers accept that the agreement of 7 September
2010 is in writing and signed by them but they deny that it is an acknowledgment under s 25(4) and s 26(1). The agreement was made within the 12 years under s 20(1). The Drapers submitted that there was not a clear acknowledgment of indebtedness under the mortgage. They cited Lord Denning MR in Good v Parry:8
Nowadays, as the result of this new Act, there is no necessity to look for a promise, express or implied. There need only be an acknowledgment of a debt or other liquidated amount. That means, I think, that there must be an admission that there is a debt or other liquidated amount outstanding and unpaid. Even though the debtor says in the same writing that he will never
8Good v Parry [1963] 2 QB 418 (CA) at 423-424. That was a decision on s 23(4) of the Limitation Act 1939 (England and Wales), which is in the same terms as s 25(4) of the New Zealand 1950 Act.
pay it, nevertheless it is a good acknowledgment. In order to be an acknowledgment, however, the debt must be quantified in figures or, at all events, it must be liquidated in this sense that it is capable of ascertainment by calculation, or by extrinsic evidence, without further agreement of the parties. For instance: “I admit I owe you the sum shown in this rentbook” would be a perfectly good acknowledgment for it only needs to be calculated. … But if the debt is not quantified and is not ascertainable without further agreement, then there is no acknowledgment sufficient to satisfy the statute.
No doubt a promise in writing by a debtor to pay whatever sum is found due on taking an account is a good acknowledgment today just as it was before the Act, provided always that the amount is a mere matter of calculation from vouchers, or can be ascertained by extrinsic evidence, and is not dependent on the further agreement of the debtor.
In that case, a letter stating that the question of outstanding rent could be settled as a separate agreement as soon as an account was held to be subject to further agreement and therefore insufficient to count as an acknowledgment.
[20] In response the Kivits cited three New Zealand cases decided before the 1950
Act. Under the earlier law under the Statute of Limitations 1623 there was a requirement for a promise to pay, but that would be implied in a simple acknowledgement of debt.9 As Lord Denning said, that is no longer the law. Even so, the following were held to be acknowledgements under the old law:
[a] A letter by a surviving partner to the brother of the widow of a deceased former partner responding to a statement prepared for taking accounts on the dissolution of a partnership, in which the survivor sought details of the debt, because the amount claimed was greater than expected.10
[b] This letter by a debtor:11
I want you to know that our liability to you is in no way forgotten and that it will ultimately be sent to you. The question existing in our minds is when… I assure you that at the first opportunity you will be repaid with a thankful and joyous heart.
9 Spencer v Hemmerde [1922] 2 AC 507 (HL) at 513.
10 Smith v Smith [1926] NZLR 311 (SC).
11 Brown v Adams [1939] NZLR 226 (SC).
[c] This response to a demand by a creditor:12
I have to thank you for your great consideration and patience. Things are beginning to look brighter for the coming year. At the first opportunity I will come in and see you.
[21] Here the agreement is an acknowledgment by the Drapers that they are indebted to the Kivits. Clause 1 of the agreement refers to loans by the Kivits to the Drapers. Clause 2 makes it clear there is a second mortgage as security for the loans. Because that excludes any indebtedness which is not referred to in the mortgage, it identifies the debt. Identification is important because there is evidence of other transactions between the parties. The agreement for the Kivits to release the mortgage from the property and for the Drapers to pay them $150,000 only makes sense if there are still sums owing under the mortgage. If the debt had already been discharged, the Drapers could have required the Kivits to release the mortgage as of right. The Drapers’ reliance on Good v Parry is misdirected. Here there was a clear debt: the unpaid principal of $450,000 plus interest that had accrued. The amount of the debt could be worked out by calculation and did not require further agreement of the parties. Accordingly the Drapers have not shown an arguable case for absence of acknowledgment under s 25(4). Time for any claim for payment of the debt under the mortgage ran afresh from the date of the agreement.
[22] The Drapers also submitted that there was not a part payment, because the payment of $150,000 was given in consideration of the discharge of the mortgage rather than in reduction of the debt under the mortgage. That is implausible. It is an argument constructed solely to avoid the part payment question. Any creditor who ran that argument would risk being accused of unscrupulous usury. It does not make sense for a mortgagor to say that a payment of $150,000 to a mortgagee given on the discharge of a mortgage should be ignored in calculating the debt. Given that the Drapers gave a written acknowledgement of the debt in any event, the argument would leave them exposed to liability for unpaid principal of $450,000. This is not a matter of “either…or…” While the Drapers paid the $150,000 under an agreement
to discharge the mortgage, it was also a part reduction of the mortgage debt.
12 Arthur Yates and Company Ltd v Whitham [1939] NZLR 470 (SC).
[23] There is a question as to appropriation. Is the payment of $150,000 to be allocated against interest or principal? At the time of the payment a claim for principal was not statute-barred, but some of the interest had been unpaid for more than six years and that was therefore statute-barred under s 20(4). In the absence of evidence, the payment is attributed only to those debts which are not statute-barred.13
The Drapers have an arguable case that the $150,000 should be allocated toward
principal only. The evidence is not clear enough that I can rule against that. Even if part of the $150,000 is allocated towards interest, that would not extend the period for claiming other interest that had already accrued due. Under the proviso to s 25(4) such a payment of interest only starts time running again in respect of the principal debt.
[24] Because there has been both a part payment and an acknowledgment under s 25(4), time for paying the principal began to run afresh under s 25(4).
[25] The Drapers have not shown an arguable case for absence of acknowledgment or part payment. It is arguable for them that the payment of
$150,000 went in reduction of the principal and not against any outstanding interest. Under s 25(4), time to sue for the principal began to run afresh from 7 September
2010. Accordingly this proceeding is within time for a claim of unpaid principal of
$300,000. However the payment of 7 September 2010 is characterised, it does not start time running afresh for interest that had already fallen due before that date. Because the claim for principal is not statute-barred, the Kivits can claim for interest falling due in the six years before the start of this proceeding. To the extent that the Drapers’ liability is reduced from the amount of the judgment to the principal of
$300,000 and interest on that sum for six years, they have established arguable defences.
Delay reasonably explained
[26] The Drapers attempted to file a statement of defence on 12 October 2015. That misfired because they did not pay the filing fee and serve the statement of
13 Mills v Fowkes (1839) 5 Bing. NC 455; Nash v Hodgson (1855) 6 De GM & G 474: Re Boswell
Merritt v Boswell [1906] 2 Ch 359 (settled on appeal [1907] 2 Ch 331, (CA)).
defence on the plaintiffs. Notwithstanding that, they did attempt to file a defence within time. They did not file their setting aside application until 13 May 2016. The Drapers explain that after receiving my minute of 11 December 2015, where I said that they would need to make a setting-aside application, they instructed lawyers but required time to raise the funds for the retainer. I accept that.
Irreparable injury to the plaintiffs
[27] There is one area for potential prejudice to the plaintiffs if judgment is set aside. The Drapers have been unco-operative. Mr Draper refused to accept documents served on him. Directions for substituted service on Mrs Draper were required. On 26 April 2016 on the application of the plaintiffs and the second defendant, I made orders for non-party discovery against the Drapers. They were required to file and serve an affidavit of documents by 17 May 2016. They have not done so. They have given no assurance to the court that they will co-operate in the orderly running of this proceeding if they are able to defend.
[28] Now that they have legal representation, there is some assurance that their defence will be competently managed. But there will be no such assurance if they no longer instruct lawyers. In that case, their lack of representation would throw an additional burden on other parties. They should also comply with the discovery order. Any grant of relief needs to be tailored to deal with that. The Drapers need to bear in mind that in asking for a regularly obtained judgment to be set aside, they are asking the court to remedy a potential miscarriage of justice. It is not to be used to inflict injustice on other parties.
Outcome
[29] Overall I am satisfied that there will be an injustice to the Drapers if the Kivits’ judgment against them is allowed to stand. The amount of the judgment is too high, given the Drapers’ defences of part payment and limitation. At the same time relief must be moulded to ensure that the Drapers do not use any setting aside to drag matters out by delay or by non-compliance with the court’s directions.
[30] I give these directions:
[a] This case is adjourned to a telephone conference at 12:30pm on
Monday 12 September 2016.
[b] No later than 5 September 2016 the defendants are to file and serve an affidavit of documents required under my order of 24 April 2016. Copies of their privileged documents are to be made available for inspection at the same time.
[c] If the Drapers have complied with the order for discovery and provided documents for inspection by 5 September 2016, the judgment against them will be amended to:
[i] the principal sum of $300,000; and
[ii] interest on that sum at 20.5 per cent for the six years before the start of this proceeding.
[d] Directions at the conference may include fixing an address for service for the Drapers and specifying modes of service on the Drapers in case they no longer retain their current lawyers.
[e] The parties should identify what remains in dispute between the Kivits and the Drapers. The conference will give directions for those matters. The second defendants are also to take part.
[31] I make no order for costs on the application under r 15.10. The Kivits accepted that no order for costs should be made against the defendants on the application to set aside the judgment when the plaintiffs’ judgment was overstated.14
I shall wish to hear from counsel whether the amended judgment sum should retain
the original costs component.
14 Active Leisure (Sports) Pty Ltd v Crocodile Sports & Leisurewear Ltd [1997] 1 NZLR 350 (HC)
at 358.
Associate Judge R M Bell
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