McMullin v Creston Limited HC Hamilton CIV 2010-419-1034

[2010] NZHC 2075

IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY

CIV-2010-419-1034

BETWEEN  FIONA MADELEINE MCMULLIN Applicant

ANDCRESTON LIMITED Respondent

Hearing:         22 October 2010

Appearances: C T Gudsell QC for the Applicant

C Fletcher and S Delic for the Respondent

Judgment:      9 November 2010

RESERVED JUDGMENT OF PRIESTLEY J

This judgment was delivered by me on Tuesday 9 November 2010 at 10.30 am pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date:………………………….

Counsel:
C T Gudsell QC, P O Box 19085, Hamilton. DX GP20058 Fax: [phone]

Email: [email protected]

C Fletcher, P O Box 29, Waikato Mail Centre, Hamilton 3240. Fax: [phone]

Email: [email protected]

MCMULLIN V CRESTON LIMITED HC HAM CIV-2010-419-1034  9 November 2010

Introduction

[1]      The  applicant  (Ms  McMullin)  is  a  lawyer  who  lives  in  Australia.    The respondent   (Creston)   owns   two   adjoining  residential   properties   in   Hillcrest, Hamilton.

[2]      One of these properties is the family home of a widow Carol Ann Thompson (Mrs Thompson) who took title to the property by virtue of her survivorship when her husband died some years ago.   The other property was owned by a company controlled by Mrs Thompson’s son, Jolyon B G Thompson, who was adjudicated bankrupt on 27 April 2010.

[3]      Creston was incorporated in May 2009.  It is effectively controlled by Mrs Thompson.   She is its director and shareholder.   Creston is the sole trustee of a family trust called the Creston Trust.

[4]      On  19  May 2009  a  company called  Marduk  Ltd,  which  had  owned  the property in which Mrs Thompson lived since 2006, transferred Mrs Thompson’s home to Creston.  On the same date another entity called Harmonia Properties Ltd, which had owned the other Hillcrest property since 2006 and was controlled by Jolyon Thompson, similarly transferred the property it owned to Creston.

[5]      Just under six months later, on 16 December 2009, Ms McMullin lodged caveats against the titles of both Hillcrest properties.  In due course she brought an application under s 145A of the Land Transfer Act 1952 seeking orders that the caveats not lapse.

Why has Ms McMullin lodged caveats?

[6]      Ms McMullin argues that monies to which a constructive trust attaches found their way into the two Hillcrest properties   Such monies, she claims, increased the equity  in  both  properties.    Thus  Creston  holds  a  portion  of  both  properties, amounting to $200,000, on trust for Ms McMullin.  She claims the $200,000 can be traced to the Hillcrest properties; that she has an arguable case both as to the tracing

exercise and the constructive trust; and that such an arguable case is sufficient for s 145A purposes to sustain the two caveats.

What interests do the caveats protect?

[7]      The estate or interest in the Hillcrest properties which the lodged caveats claim to protect is:

Beneficial  interest  in  implied  trust  affirmed  by  Carol-Ann  Thompson  as director and shareholder of Creston Ltd, registered proprietor....

How did this caveatable interest come about?

[8]      The evidence produced by the parties is unsatisfactory.  There are only two deponents; Ms McMullin and Mrs Thompson.  Ms McMullin’s first affidavit is filed in  support  of  her  s 145A  application.    Her  second  affidavit  is  in  reply to  Mrs Thompson’s affidavit.   Mrs Thompson’s affidavit has an unfortunate tendency to contain assertions which are really submissions or advocacy.  Her affidavit contains surprising narrative gaps.  Ms McMullin, for her part, has failed to exhibit a critical document.

[9]      Surprisingly, perhaps, there has been no affidavit by Jolyon Thompson who was unarguably better equipped (had he so chosen) to deal with the narrative of Ms McMullin’s affidavits than was his mother.

[10]     That  said,  the  following  features  of  Ms  McMullin’s  evidence  emerged. Between June and August 2008 Ms McMullin had various discussions with Jolyon Thompson.  The thrust of those discussions was some participation by Ms McMullin in the development of two properties in Northcote, Auckland.  One of the properties was owned by an entity called Delos Properties Ltd and the other by Eos Properties Ltd.   Jolyon Thompson was the sole director and shareholder of both those companies.

[11]     The  culmination  of  the  discussions  appears  to  have  been  a  concluded agreement for the sale and purchase of shares between Ms McMullin and Jolyon

Thompson.   Under that agreement Ms McMullin purchased 50 shares in each of

Delos and Eos, for the sum of $260,200.

[12]     The agreement which the couple entered into was more than a simple share sale.  It recorded the objective of the two shareholders to develop the two Northcote properties by constructing townhouses to be sold at a profit.  Ms McMullin asserts that the purchase price for Jolyon Thompson’s shares was paid on the basis it was to be used to develop the two properties.

[13]     An Auckland firm of solicitors, O’Brien Ward, acted for Jolyon Thompson at that time.  Their trust account ledger shows the sum of $260,200 being paid in by Ms McMullin on 27 August 2008.  The transaction was notated “share purchase price”. Two days later the sum of $200,000 was paid out by direct credit to Mrs Thompson (notated “funds due”).  The balance, after deduction of fees and other disbursements, of just over $55,600 was paid out to Jolyon Thompson.

[14]     There matters rested so far as Ms McMullin was concerned.  She asserts that over the next five months Jolyon Thompson assured her the development of the Northcote properties was proceeding.  Not until January 2009 did she discover these assurances were false.   Nonetheless Ms McMullin took no action, and appears to have made no inquiries, until late October 2009 when she discovered the Northcote properties had been sold by mortgagee sale.   At that stage she contacted Jolyon Thompson and inquired about the fate of the $200,000.  He told her it had been used by his mother to repay “her mortgages” which were encumbering the two Hillcrest properties.

[15]    On 11 December 2009 Ms McMullin telephoned Mrs Thompson.   This telephone call was followed by a return call from Mrs Thompson who had clearly discussed matters with her son.

[16]     Ms McMullin kept what she claims to be a written record of the telephone conversation.  It is Ms McMullin’s evidence that Mrs Thompson acknowledged she had received $200,000 from her; that she understood it was a loan to both her and her  son;  and  that  it  had  been  used  to  repay  the  mortgage  on  her  home.    Ms

McMullin’s  evidence  is  that  during  the  second  telephone  conversation  Mrs

Thompson  acknowledged  or  affirmed  that,  as  a  result  of  the  use  to  which  the

$200,000 had been put, Ms McMullin had an interest in Mrs Thompson’s property. This assertion is the basis for the beneficial interests the caveats claim to protect (supra [7]).

[17]     The specific aspects of the telephone conversations on which Ms McMullin relies are Mrs Thompson’s acknowledgement of the use to which the $200,000 was put; her acknowledgement that Ms McMullin had put “ money into your house”; and possible  admissions  that,  as  a  result,  Ms  McMullin  had  an  interest  in  Mrs Thompson’s property.

[18]     Mrs Thompson, in her affidavit in reply, denies that she made comments of that type.  Her version of the 11 December 2009 telephone conversation is that she had no idea who Ms McMullin was; had no knowledge of Ms McMullin’s business arrangements with her son; and that she refused to discuss her own private business details with a stranger.  She denies she admitted that the $200,000 had found its way into her property or that she acknowledged Ms McMullin might have an interest in her property.

[19]     It is not necessary to traverse the details of Ms McMullin’s second (reply) affidavit.   She suggested that Mrs Thompson was well aware of the agreement between her son and Ms McMullin relating to the August 2008 purchase of shares because Jolyon Thompson had discussed that transaction with Mrs Thompson.  She also asserts that at some stage during 2009  she had “some dealings”  with Mrs Thompson’s current solicitors, who were then acting for the two Thompsons in respect  of the  Northcote  properties.    She  refines  somewhat  her  earlier  affidavit evidence.   She refers specifically to a 25 November 2009 telephone conversation with Jolyon Thompson during which he stated that the $200,000 had been paid directly into his mother’s bank account and he was unable to retrieve it because she was purchasing the property in Hillcrest next door to her home.  The suggestion is that the restructuring of the ownership of the two Hillcrest properties was something of a joint enterprise, involving both mother and son, with the result the mother would have been fixed with knowledge about the source of the $200,000.

[20]     Ms  McMullin  has circulated  a draft  statement  of  claim  foreshadowing  a proceeding she wishes to file in the High Court at Auckland.  The statement of claim cites six defendants which include Ms McMullin’s former solicitor, Creston, and Mrs Thompson.   The draft statement of claim contains allegations and causes of action which, although related to the events in August 2008, do not necessarily bear on the caveat issue.   The causes of action against Creston, however, allege that Creston, through Mrs Thompson, has misapplied the plaintiff’s $200,000 and as a result, there is a constructive trust which gives Ms McMullin a vested interest in the two Hillcrest properties.   An alternative cause of action alleges unjust enrichment arising out of the same pleaded allegations.

Discussion

[21]     The submissions of Mr Gudsell QC were simple.  He accepted Ms McMullin carried the onus of establishing that she had a reasonably arguable case to sustain the caveats.1   Section 137(1)(a) permitted Ms McMullin, as a beneficiary of an implied trust (or a constructive trust) to lodge a caveat.   On the basis of Ms McMullin’s evidence, $200,000 of her money had been misapplied and could be traced into Creston’s two Hillcrest properties.  The summary procedure available under s 145A was unsuitable to determine disputed questions of fact,2  there being a clear conflict between Ms McMullin and Mrs Thompson.   There is good authority that monies which had been misapplied, and could be traced into an interest in land, were fixed with a constructive trust which, on Ms McMullin’s evidence, was precisely the situation which arose with her $200,000 flowing into the Hillcrest properties.3

[22]     Mr Gudsell further submitted that some aspects of Mrs Thompson’s evidence about the 11 December telephone conversation were inconsistent.

1 Castle Hill Run Ltd v NZI Finance Ltd [1985] 2 NZLR 104 (CA) at 106.

2 Sims v Lowe [1988] 1 NZLR 656 (CA) at 659-660; Macrae v Rapana HC Auckland M633/94, 17

June 1994, Fisher J.

3 Foskett v McKeown [2000] UK HL 29; [2000] 3 All ER at 97; Fletcher Steel Ltd v Nahal Contractors Ltd HC Auckland CIV-2006-404-498, 24 May 2007; Sun Developments Ltd (In Liquidation) v Finlayson HC Wellington CIV-2007-485-032, 26 February 2007.

[23]     A  court,  in  any  summary  context,  needs  to  approach  factual  assertions robustly.4   Weaknesses in Ms McMullin’s position include:

•    Her failure to exhibit the August 2008 agreement between her and Jolyon

Thompson relating to her purchase of shares.

•A term of the share sale agreement pleaded in the draft statement of claim which expressly excludes any implied warranties and representations not set out in the agreement.   That contractual provision conceivably could cause difficulties for Ms McMullin’s assertion that the sale proceeds of the shares would  be  used  to  develop  the  Northcote  properties.     (Mr  Gudsell’s submission in that regard was that s 4(1) of the Contractual Remedies Act

1979  would  permit  Ms  McMullin  to  mitigate  the  relevant  contractual provision.)

•The lacuna in the evidence as to what precisely happened with the $200,000 after it had been paid out to Mrs Thompson on 29 August 2008.  The only evidence to which Ms McMullin can point is the contested comments made by Mrs Thompson during the 11 December 2009 telephone conversation, over 15 months later.

[24]     Mr Fletcher’s submissions were that the caveats could not be sustained.  He criticised Ms McMullin for not producing the share purchase agreement and submitted there was no contractual basis to allege that Jolyon Thompson was obliged to  earmark  his  share  sale  proceeds  to  develop  the  Northcote  properties.    Ms McMullin was well aware that Jolyon Thompson intended to use some of the funds to repay the loan to his mother.

[25]     Mrs  Thompson,  on  her  evidence,  was  unaware  that  the  $200,000  loan repayment she received from her son had been sourced from monies received from Ms McMullin.  She was oblivious to this assertion until six months after Creston had purchased the Hillcrest properties.

4 Eng Mee Yong v Letchumanan [1980] AC 331 (PC) at 341 per Lord Diplock.

[26]     In  Mr  Fletcher’s  submission  Ms  McMullin  did  not  have  a  reasonably arguable case.  On the authority of the Privy Council decision of Eng Mee Yong v Letchumanan,5  Ms McMullin’s evidence was “surprising or inherently improbable” and I should look on it “incredulously”.

[27]     This was a situation where the ultimate owner, the family trust which Creston represented, had no notice of Ms McMullin’s claimed interest in the land.  A claim of a caveatable interest in land had to be seen in the context of the Torrens system and the indefeasibility of title which it guaranteed.

[28]     Mr Fletcher further submitted, at best, Ms McMullin was relying on the existence of a remedial constructive trust to support her caveats, rather than an institutional constructive trust.  Because there was no court order which entitled Ms McMullin to claim a beneficial interest, it followed Ms McMullin had no caveatable interest.  Although acknowledging the existence of institutional constructive trusts in

New Zealand law,6 Mr Fletcher submitted that there was no evidence to support “the

existence or sustainability” of an institutional  constructive trust.

[29]     Advancing an argument which cannot possibly be sustained on the basis of affidavit evidence alone, Mr Fletcher described Ms McMullin’s file notes of the 11

December 2009 telephone conversations as being “carefully constructed”.   He described the telephone conversations as being a deliberate and contrived attempt on Ms McMullin’s part to establish something from an unsuspecting Mrs Thompson “which she could use for [her] benefit to create a tenuous link to the money [she] had paid to Jolyon Thompson”.

[30]     Mr Fletcher asserted from the Bar that there was available evidence that the

$200,000 in any event had not found its way into the two Hillcrest properties.  Were that to be so, then Ms McMullin’s case against Creston would clearly crumble. However,  there  is  no  evidence  to  that  effect.     I  was  not  disposed  to  grant Mr Fletcher’s application for an adjournment to enable more evidence to be placed

5 Eng Mee Yong v Letchumanan [1980] AC 331 (PC) at 341 per Lord Diplock.

6 Fortex Group Ltd (in Receivership and Liquidation) v MacIntosh [1998] 3 NZLR 171 (CA);

Commonwealth Reserves I v Chodar [2001] 2 NZLR 374 (HC).

[31]     Mr Fletcher asked, rhetorically, what possible commercial incentive there would have been for Jolyon Thompson to put all the money he was receiving from the sale of his shares back into the two Northcote properties and furthermore, in terms of the provisions of the share agreement, let Ms McMullin have first call on anticipated profits.

[32]     Weaknesses in Creston’s position include:

•Jolyon Thompson, on critical issues such as his dealings with and representations  to  Ms  McMullin  at  the  time  of  the  August  2008  share transfer, has not given evidence.

•There has been no evidence from Mrs Thompson about what occurred with the $200,000 she received from her son in late August 2008, despite the fact that the tracing argument available to Ms McMullin was clearly signalled.

•Jolyon Thompson’s involvement with his mother, and in particular his involvement in the restructuring of the ownership of the two Hillcrest properties, is unexplored.

•The clear conflict of evidence between Ms McMullin and Mrs Thompson about the detail of the 11 December 2009 telephone conversations cannot possibly be resolved in a summary fashion.

•A number of Mr Fletcher’s submissions, although powerful, are premature because the three major participants (Ms McMullin, Jolyon Thompson, and Mrs Thompson) have not yet been able to paint a full picture of their relevant dealings and understandings.

[33]     Mr  Fletcher  correctly  identified  the  two  issues  which  will  ultimately  be central to Ms McMullin’s constructive trust claim and her ability to trace.  The first issue is whether the $200,000 paid by Ms McMullin for the shares can in fact be traced into the equity of Creston’s two Hillcrest properties.  The second issue will be whether, if Ms McMullin indeed has an equitable claim, Creston had notice of it. Ms McMullin may well have formidable problems in those areas.

[34]     But for the purposes of a summary approach under s 145A, Mr Gudsell is undoubtedly correct when he identified the central issue as being whether Ms McMullin has an arguable case that the caveats should stay.  In terms of the Land Transfer Act 1952 and caveatable interests, there can be no serious quarrel with the proposition that if Ms McMullin can establish she has a beneficial interest in the Hillcrest properties, then the caveats have been legitimately lodged.

[35]     As set out earlier in this judgment, to achieve that result Ms McMullin would have to establish in some substantive proceeding that first, there was a clear and enforceable arrangement between her and Jolyon Thompson that the sale proceeds of the shares were to be used to the benefit of the Northcote properties; secondly, Jolyon Thompson deliberately misapplied the funds; thirdly, the $200,000 can be directly traced from Jolyon Thompson via his mother into the Hillcrest properties many months later; and fourthly, Mrs Thompson and, through her, Creston had knowledge of Ms McMullin’s interest.

[36]     Although, as I have said, Ms McMullin may ultimately fail in establishing that critical chain, I am satisfied on the basis of the evidence currently before the Court that the claim is arguable.

[37]     I accept that a robust approach is required.  But, on the basis of the current evidence I am not able to hold that Jolyon Thompson never agreed to apply the sale proceeds of the shares to the Northcote properties.  Nor am I able to hold that the

$200,000 paid to Mrs Thompson in August 2008 did not find its way into the

Hillcrest  properties.    Nor,  in  a  summary  context,  can  I  properly  uphold  Mrs

Thompson’s version of the 11 December 2009 telephone conversation and reject Ms McMullin’s version.   Nor, given Mrs Thompson’s clear involvement in the restructuring of the Hillcrest titles, can  I hold  that neither she nor Creston had knowledge of the source of the $200,000 and the purpose to which it was allegedly put.

[38]     It  thus  follows  that  the  threshold  of  an  arguable  case  has,  for  s 145A

purposes, been crossed.

Result

[39]     For the reasons I have given there is an order pursuant to s 145A of the Land Transfer Act 1952 that caveats 8375510.1 and 8375510.2, lodged against the two titles of the respondent’s properties, at 104 Hillcrest Road and 4 O’Donoghue Street in Hamilton, not lapse.

Costs

[40]     I have not heard counsel on costs.   Prima facie the applicant is entitled to costs.   Given the procedural and litigation difficulties lying ahead of both parties, however, counsel may well prefer to leave the issue of costs in abeyance.

[41]     I thus reserve costs with leave reserved to apply.  There is no reason why any subsequent costs issue cannot be resolved by an Associate Judge sitting in Hamilton.

.......................................… Priestley J