Morrison v Autumnal Investments Limited
[2020] NZHC 3189
•3 December 2020
IN THE HIGH COURT OF NEW ZEALAND TAURANGA REGISTRY
I TE KŌTI MATUA O AOTEAROA TAURANGA MOANA ROHE
CIV-2017-470-000196
[2020] NZHC 3189
BETWEEN S A MORRISON and THE AUDAINE TRUST TRUSTEES LIMITED
Plaintiffs
AND
AUTUMNAL INVESTMENTS LIMITED
First Defendant
M W and A T O’REILLY
Second Defendants
CIV-2017-470-000190 BETWEEN
AUTUMNAL INVESTMENTS LIMITED
PlaintiffAND
S A MORRISON
Defendant
Hearing: 12 – 16 and 19-20 October 2020 Appearances:
G C Jenkin for Plaintiffs in CIV-2017-470-000196 and for Defendant in CIV-2017-470-000190
G Brittain QC and J Delaney for Defendants in CIV-2017-470- 196 and for Plaintiff in CIV-2017-470-000190
Judgment:
3 December 2020
JUDGMENT OF WYLIE J
This judgment was delivered by Justice Wylie
On 3 December 2020 at 4.00pm Pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar Date:…………………………
S A MORRISON and THE AUDAINE TRUST TRUSTEES LTD v AUTUMNAL INVESTMENTS LTD [2020]
NZHC 3189 [3 December 2020]
Contents
Introduction [1]
The evidence [5]
The Trust and the purchase of the properties [5]
The Trust’s and Mr Morrison’s financial difficulties [8]
The “no cost trustee” proposal [17]
Mr Love/Landing Road Trustee No 1 Ltd [19]
Further valuations obtained/Mr Morrison seeks to refinance [27]
Mr Morrison/Mr O’Reilly – a meeting in early April 2013? [31]
Mr and Mrs O’Reilly decide to purchase the properties [37]
Meeting of 12 April 2013 [50]
Further meeting on 15 April 2013 [62]
A trust document?/the lease [71]
Settlements [76]
Discussion – Neil Morrison and the O’Reillys [81]
Mr Morrison’s bankruptcy – the SAMZ companies [82]
Post-settlement arrangements [89]
The subdivision [97]
Attempts by Mr Morrison to buy back properties from Autumnal [100]
Update on the properties [116]
Assessment of the evidence [117]
Mr Morrison and Mr O’Reilly – general comments [117]
Mr Rendle’s evidence [122]
Was there a meeting between Mr Morrison and Mr O’Reilly in early April 2013?
[123]
Meeting of 12 April 2013 [128]
Matters post 12 April 2013 [134]
Findings on the balance of probabilities [136]
Pleadings – relevant law [137]
Express trust [138]
Institutional constructive trust [139]
Promissory estoppel [149]
Breach of fiduciary duty/buy back agreement [152]
Result [153]
Declaration/Transfer of properties [153]
Subdivision/Sale of section [155]
Accounting for profits [158]
Costs [165]
Introduction
[1] The plaintiffs, Stuart Morrison and The Audaine Trust Trustees Limited, are the current trustees of the Audaine Trust (“the Trust”). They have brought proceedings against the first defendant, Autumnal Investments Limited (“Autumnal”), and its directors and shareholders, Maurice and Anne O’Reilly. They seek a declaration that Autumnal holds two properties in Tauriko, west of Tauranga, both now contained in one title as trustee of an institutional constructive trust in favour of them as trustees of the Trust.1 They say that, as trustees of the Trust, they are the beneficial owners of the properties. They also seek an order that the properties vest in them on such terms and conditions as to the payment of money as the Court thinks just. In addition, they seek an order that Autumnal accounts to them for the proceeds of sale of a section subdivided off one of the properties and an account of the profits Autumnal has derived from its use of the properties.
[2] Autumnal denies that it holds the properties as a constructive trustee. It says that it is the registered proprietor and that it owns them in its own right. It has brought a counterclaim. Mr Morrison lives in a house on one of the properties and Autumnal seeks an order for possession. Although it was not sought in the pleadings, Mr Brittain QC, for the defendants, also sought an order that a caveat lodged by the plaintiffs should be removed. Mr Jenkin, for the plaintiffs, accepted that, if the plaintiffs are unsuccessful, the caveat should go.
[3] There was little disagreement between the parties as to the applicable law. The case turns largely on a factual dispute – what was agreed between Mr Morrison and Mr O’Reilly in late March/April 2013 when Autumnal entered into sale and purchase agreements to acquire the properties from Mr Morrison as the then trustee of the Trust? This dispute falls to be determined largely on the evidence of the two key protagonists
– Mr Morrison and Mr O’Reilly – as well as the evidence of other important witnesses, especially Mrs O’Reilly, a real estate agent – Stuart Gooch – and a semi-retired oil consultant – Randall Cross.
1 Five causes of action were pleaded in the second amended statement of claim. The plaintiffs relied primarily on an institutional constructive trust.
[4] The civil standard of proof applies – namely, the balance of probabilities. This simply means more probable than not.2 If on the evidence, the version of events advanced by witnesses on behalf of Mr Morrison and the Trust is more probable than not, the burden of proof will have been discharged. If the probabilities are equal or in favour of Autumnal, it will not have been discharged.3
The evidence
The Trust and the purchase of the properties
[5] Mr Morrison is a painter and decorator. He settled the Trust pursuant to a deed of trust dated 17 May 2001. He and HTT 2001 Limited were the initial trustees. He is the “preferred” beneficiary under the Trust deed.
[6] Over the period of 2004 to 2005, the trustees purchased three properties – all situated at Tauriko. Relevant details are as follows:
(a)a property comprising 6.4151 hectares, being Lot 1 DP 312692 and Lot 2 DP 369497, Identifier No. 282160 (South Auckland Registry). It is situated at 388 Cambridge Road, Tauriko (it was also referred to in evidence as 1 Kelston Way and as 380L Kelston Way, both Tauriko). It is a rural, residential property. There is a house on the property and the land is divided into a number of paddocks. The house is two-storied and it has four bedrooms. It has a double internal access garage with an attached workshop. It also has a self-contained flat and a bedsit-type apartment, both of which were at all relevant times let out to tenants. The property is referred to in this judgment as “the house block”;
(b)an adjoining kiwifruit orchard, comprising 2.9389 hectares, being Lot 2, DP 312692, Identifier No. 49909 (South Auckland Registry). It was referred to either as Lot 2, Plane Tree Lane or as 230L Kelston Way, Tauriko. It is planted with a variety of kiwifruit known as Hayward
2 Z v Dental Complaints Assessment Committee [2008] NZSC 55, [2009] 1 NZLR 1 at [102].
3 Miller v Minister of Pensions [1947] 2 All ER 372 at 374.
Green. The property is referred to in this judgment as “the orchard block”;
(c)a property containing 3.0538 hectares, being Lot 3, DP 87685, Identifier No. 69C/94 (South Auckland Registry). It is situated at 368A Cambridge Road, Tauriko. It is across the road from the house and orchard blocks. There is a house situated on the property, which, at all relevant times, was rented out. It is referred to in this judgment as “the Cambridge Road block”.
[7] In August 2010, HTT 2001 Limited retired as a trustee of the Trust. Mr Morrison continued as the sole trustee and the properties were transferred into his name (as trustee) in November 2011.
The Trust’s and Mr Morrison’s financial difficulties
[8] On 19 November 2010, Mr Morrison caused the Trust to enter into six term loan agreements with the ANZ National Bank Ltd (“the bank”). The initial borrowing secured by the agreements was approximately $1,982,905, together with current account borrowing up to a maximum of $42,500. The term loans were secured by way of mortgages over the three properties as well as by Mr Morrison’s personal guarantee.
[9] The Trust had been in default under previous term loan agreements with the bank and the new lending quickly fell into arrears as well. In August 2011, the bank, through its solicitors, served notices issued under s 119 of the Property Law Act 2007 on Mr Morrison in his capacity as the trustee of the Trust. The notices recorded that there were arrears owing to the bank of $344,536.67 as at 10 August 2011 and that the total amount then secured by the mortgages was $2,284,233.52. At the same time the bank gave notice to Mr Morrison under ss 121 and 122 of the Act in his capacity as guarantor.
[10] Mr Morrison obtained valuations of the properties in September 2011 from John Middleton of Middleton Valuation Ltd. The house block was valued at $890,000 (inclusive of GST) with a forced sale value of $613,000 to $744,000, the orchard block at $520,000 (plus GST) with a forced sale value of $470,000, and the Cambridge Road
block at $540,000 (inclusive of GST) with a forced sale value of $370,000 to
$450,000.
[11] At the time, the Psa-V virus was causing devastation in the kiwifruit industry, particularly to the Hort16A kiwifruit variety – a gold as opposed to a green variety. There was considerable concern amongst growers generally and this was having a negative effect on the value of kiwifruit orchards.
[12] Notwithstanding that the assessed value of the properties was insufficient to clear the accrued debt, Mr Morrison was anxious to try and ease the financial pressure he and the Trust were under. He discussed the sale of the properties with various real estate agents. He contemplated subdividing off a residential section from the orchard block. He obtained marketing appraisals from various real estate agents. He appointed Mr Gooch from Countrywide Real Estate Ltd (trading as Century 21) to find a buyer or buyers for the properties.4 He approached his accountants – RHB Accountants – who tried unsuccessfully to negotiate a resolution with the bank on his behalf. The bank was however prepared, on a without prejudice basis to the notices it had issued, to let Mr Morrison and the Trust try and sell the properties rather than force mortgagees’ sales.
[13] An auction was fixed for 12 April 2012 by Mr Gooch. Prior to the auction, Mr Morrison obtained updated valuations – again from Mr Middleton (whose company was by this time trading as part of the Telfer Young group). The updated valuations were dated 21 March and 5 April 2012. Mr Middleton valued the house block at $875,000 (inclusive of GST), the orchard block at $515,000 (plus GST, but excluding the kiwifruit crop which was assessed as having a value of $30,000) and the Cambridge Road block at $545,000 (inclusive of GST).
[14] Mr Gooch, on Mr Morrison’s behalf, tried to involve the bank in fixing the reserves for the properties to be offered for sale at the auction. The bank advised that the properties were being sold by the Trust, and that it was for Mr Morrison to set the
4 It was Morrison’s evidence that Mr Gooch was appointed by the ANZ Bank. When Mr Gooch gave evidence, he became clear that he was appointed by Mr Morrison and not by the bank. I prefer Mr Gooch’s evidence.
reserves. It did however indicate that it was prepared to provide discharges of the mortgages if the properties sold at or above the amounts set out in Mr Middleton’s valuations.
[15] The auction proceeded but the properties did not sell. Subsequent to the auction, an offer was made for the orchard block and some interest was expressed in the Cambridge Road block. The bank was not prepared to release the mortgage over the orchard block for the amount offered, advising that any offer for the block would need to be at least $455,000 plus GST, and preferably more. The offer was increased but it was still insufficient to satisfy the bank’s minimum requirement for the discharge of the mortgage over that property. In early May 2012, an offer was made for the orchard block. It was not at a price likely to be acceptable to the bank and it was not signed by Mr Morrison on behalf of the Trust.
[16] The property market was slowing at the time and the bank’s expectations of realisations from the sale of the properties slowly reduced. By May 2012, it was advising that any offer for the Cambridge Road block would need to be at least
$425,000 and any offer for the house block at least $660,000. On 13 December 2012, it advised Mr Morrison that it was prepared to consider providing discharges of the mortgages if the properties could be sold within the following ranges:
(a)the house block – $620,000 to $640,000 (inclusive of GST);
(b)the orchard block – $460,000 to $475,000 (plus GST); and
(c)the Cambridge Road block – $420,000 to $440,000 (presumably inclusive of GST although this was not stated).
It also indicated that if unconditional sales were not achieved by mid-January 2013, it would review its position and in all likelihood look to itself obtaining market appraisals for mortgagees’ sales of the properties. It noted that, given the then value of the properties, should sales eventuate and settle, there would still be a considerable shortfall which it would be looking to Mr Morrison to make good.
The “no cost trustee” proposal
[17] In late December 2012 or early January 2013, and as these various discussions were going on, Mr Morrison, in consultation with an old school friend, Arthur Rendle, came up with what he [Mr Morrison] considered to be a possible solution. Mr Morrison thought that it might be possible to save the properties for his and the Trust’s benefit. The idea was that the three properties could be sold to a friend, prepared to act as a trustee, for the amount required by the bank to obtain discharges of the three mortgages. The friend/trustee would hold the properties in trust for as long as it took for Mr Morrison and the Trust to get into a position where they could take the properties back and assume responsibility for any monies owing in respect of them. Mr Morrison would continue to manage the kiwifruit orchard and the other properties and he would continue to live in the house on the house block. The friend/trustee would be paid the sale proceeds from the kiwifruit when it was harvested and was to be fully indemnified for any costs, expenses and outgoings incurred in purchasing the properties. The friend/trustee would also receive a fee – $50,000 – to be paid at some time in the future. When the time came for the properties to be transferred back to the Trust, the Trust was to take over liability for whatever remained owing by the friend/trustee and repay the friend/trustee any out of pocket expenses. This proposal came to be referred to as the “no cost trustee” or “buy and hold” proposal and I use these terms in this judgment.
[18] Mr Morrison put this proposal to a number of his close friends – Graham Cave, his brother – Neil, Mr Rendle, Mr Cross and Rex Barnes. Mr O’Reilly said that he was also approached at an early stage, either in late 2012 or early 2013, and that the proposal was put to him. Mr Morrison denied this. He said that he did not approach Mr O’Reilly with the proposal until early April 2013. Mr Morrison also put the proposal to Trevor Love, an Auckland-based businessman. Mr Morrison said that he had been introduced to Mr Love by another friend, and that he had known him since the early 2000’s. Mr Morrison said that he understood, at least initially, that Mr Love was prepared to purchase the properties through an associated company under the no cost trustee proposal.
Mr Love/Landing Road Trustee No 1 Ltd
[19] In January 2013, offers were received in respect of each of the three properties. The offers were not produced at the hearing but it seems likely that they were from a company controlled by Mr Love known as Landing Road Trustee No. 1 Ltd (“Landing Road”). They were forwarded to the bank, but the bank was not prepared to provide discharges of the mortgages at the amounts offered. Nevertheless, to assist Mr Morrison in his negotiations with Landing Road, it advised that it would provide discharges of the mortgages against sales as follows:
(a)the house block – $610,000 (inclusive of GST);
(b)the orchard block – $455,000 (plus GST); and
(c)the Cambridge Road block – $410,000 (inclusive of GST).
[20] Mr Love was not initially prepared to increase Landing Road’s offers but the bank further softened its stance. On 27 February 2013, it indicated that it would discharge the mortgages if the offers were as follows:
(a)the house block – $525,000 (inclusive of GST);
(b)the orchard block – $419,350 (plus GST); and
(c)the Cambridge Road block – $335,000 (inclusive of GST).
[21] On 11 March 2013, Mr Gooch obtained two further offers from Landing Road, one for the house block at $525,000 (inclusive of GST) and the other for the Cambridge Road block at $335,000 (inclusive of GST).
[22] The offer for the house block contained the following (poorly worded) condition:
22.0 This Agreement forms part of a total transaction involving also the sale of two other Stuart Allen Morrison owned properties at Tauriko being a 2.9389 hectare orchard property and a 3.0538 hectare grazing block to the purchaser pursuant to an Agreement bearing even date herewith.
Notwithstanding anything herein contained settlement pursuant to the above mentioned Agreement and if for any reason settlement under both agreements shall not be effected contemporaneously on the date for possession or such later date as is agreed to then the purchaser may cancel this Agreement by notice in writing to the other in which case the transaction evidenced hereby shall be at an end and any monies paid hereunder shall be refunded in full.
The offer for the Cambridge Road block contained the same condition except that there was a reference to the house block rather than the “3.0538 hectare grazing block” (the Cambridge Road block).5
[23] Mr Morrison wanted to sell all three properties to the same person and he thought that cl 22 was designed to achieve this. However, at some point, cl 22 in the agreements was struck out. Although he initially denied it, Mr Morrison eventually accepted that he initialled the deletion. There was some speculation as to his motives in this regard, but this issue was not pressed at the hearing.
[24] Both agreements were signed by both Mr Love on behalf of Landing Road and by Mr Morrison on behalf of the Trust, although they were not then dated. They were forwarded to the bank. By reply email, the bank indicated that it was prepared to provide discharges of the mortgages over the two properties for the amounts offered. It also indicated that it was prepared to release its mortgage over the orchard property if the Trust could sell it “at or above the $419k mark”. Mr Gooch forwarded a copy of the email to Mr Morrison’s solicitor, Ross Harris at Harris Tate.
[25] The agreements for sale and purchase of the house block and the Cambridge Road block, with cl 22 deleted, were dated 19 March 2013. Both were conditional.
[26] The relationship between Mr Love and Mr Morrison soured as I discuss below. Ultimately, Landing Road purchased the Cambridge Road block only.
Further valuations obtained/Mr Morrison seeks to refinance
[27] Notwithstanding that it seems likely that Mr Morrison was at the time unaware that Mr Love was not going to proceed with the purchase of the house block, in late
5 It was Mr Morrison’s evidence that a similar clause was in all three initial agreements – presumably the agreements referred to in [19]. Given the wording of the clauses, this seems likely.
March 2013, he instructed Telfer Young to prepare updated valuations of all three properties. Mr Morrison said that the valuations were obtained so that he could investigate refinancing the bank loans. This explanation is curious, given that at that stage, the Trust had conditional agreements with Landing Road in respect of both the house block and the Cambridge Road block. Mr Morrison also said that he had an “inkling” that the agreements with Landing Road might not proceed. There may be more in this assertion. There was no other evidence as to what else prompted Mr Morrison to obtain the further valuations.
[28] This aside, Telfer Young inspected the properties on 27 March 2013 and the valuations were dated 2 April 2013. Mark Passey of Telfer Young valued the house block at $915,000 (inclusive of GST); the orchard block at $540,000 (plus GST but excluding the crop which he assessed as having a value of $40,000); and the Cambridge Road block at $545,000 (inclusive of GST).
[29] Mr Morrison said that, in early April 2013, he approached First Mortgage Trust Limited (“FMT”). It was a money lender based in Tauranga. It had been set up by various legal practices, all based in Tauranga, to undertake the lending which the practices had previously made on behalf of clients through their respective nominee companies. Mr Morrison said that he spoke to Colin Searle, a loans analyst at FMT. It was Mr Morrison’s evidence that Mr Searle made it clear to him that it was not prepared to refinance the bank loans if the Trust or he were the borrowers, but that it might look at financing the properties if some other party was the borrower.
[30] The updated valuations which Mr Morrison had obtained were sent by Mr Passey to Mr Searle on 2 April 2013 at 1.37pm. Mr Searle, for some reason which was not satisfactorily explained in the evidence,6 sent the valuations to Mr O’Reilly, also on 2 April 2013. Two of the valuations were sent to Mr O’Reilly at 1.48pm and the third at 2.28pm.
6 Mr Searle was not called as a witness.
Mr Morrison/Mr O’Reilly – a meeting in early April 2013?
[31] It was at about this time that, according to Mr Morrison, he approached Mr and Mrs O’Reilly with his no cost trustee proposal.
[32] Mr O’Reilly and Mr Morrison were old school friends. They had met in approximately 1956 and they had remained good friends over the years. Mr O’Reilly had enjoyed a close relationship to Mr Morrison’s late mother, Stella. She had lent him money at some stage. Mr O’Reilly is a successful businessman and he has been not only a friend but also something of a business mentor to Mr Morrison over the years. Mr O’Reilly knew that Mr Morrison was in financial difficulties with the bank. He had found this out, perhaps as early as 2011 but certainly by 2012. He was also aware of the properties owned by the Trust. Over the years he had visited the properties on many occasions. He knew that the bank was threatening to foreclose on the properties. Mr O’Reilly said that he was also aware that Mr Morrison was looking for someone to help him save the properties. It was Mr O’Reilly’s evidence that at some stage in late 2012 or early 2013, Mr Morrison asked him and his wife to lend him money to help him repay the ANZ but that they refused to do so. Mr O’Reilly had discussions with the bank, to try and help Mr Morrison get more time to refinance, and/or to restructure his affairs. Mr O’Reilly said that he did not have any detailed knowledge of what the bank was doing about the mortgage defaults, but that he knew that the bank had passed the loans over to its Credit Management Department, and that mortgagees’ sales were likely. He was also aware of Mr Morrison’s various unsuccessful attempts to sell the properties in 2012. Further, he considered that, even if Mr Morrison could sell the properties, it was inevitable that there would be a significant shortfall and that Mr Morrison was going to be adjudicated bankrupt because of his personal guarantee.
[33] Mr Morrison said that he met with Mr O’Reilly was in early April 2013. His evidence as to when this meeting was held, shifted as the proceeding progressed. Initially, he said it was on 6 or 7 April 2013, then on 4 or 5 April 2013 and finally, during the hearing, on 3 or 4 April 2013. He said that Mr O’Reilly was sympathetic to his situation and indicated that he and his wife were prepared to help. Mr Morrison said that Mr O’Reilly’s initial reaction was that he would help, but only so long as he
(Mr Morrison) arranged a suitable financier who was prepared to provide the necessary finance to buy the bank out, and only so long as he (Mr Morrison) met all of the expenses involved, including the transaction costs, the valuation fees, mortgage repayments, other outgoings and the orchard operating expenses. Mr Morrison said that Mr O’Reilly made it clear to him that he expected him (Mr Morrison) and/or the Trust to pay for everything. Mr Morrison said that at some point during his meeting with Mr O’Reilly, Mrs O’Reilly came through, and Mr O’Reilly asked her whether or not their shelf company – Autumnal – was being used, and that she said “no”. Mr Morrison said that at this stage, Mr O’Reilly said that he thought they could complete the transaction through Autumnal. He said that Mr O’Reilly agreed to speak to FMT, and that “he would front it”.
[34] Essentially it was Mr Morrison’s evidence that Mr O’Reilly agreed to his no cost trustee proposal. In his words:
Can you, Maurice [O’Reilly], buy my properties on my behalf, hold them in trust until such time as I can pay them back [as] a no-cost trustee? And the answer was “yes, we can do that …”
[35] Mr O’Reilly denied that he met with Mr Morrison in early April 2013, although he acknowledged that Mr Morrison was in the habit of popping in to see him from time to time. Rather, he said that “one day in 2013” Mr Morrison turned up at his home office in an upset and angry state. He said that Mr Morrison told him that Mr Love had reneged on the deal he (Mr Morrison) had with him, but that he (Mr Morrison) did not discuss the no cost trustee proposal with him at this meeting. He acknowledged that Mr Morrison had told him “at one point” about his proposal to sell the properties to a friend, so that he and the Trust could later buy them back, but that he (Mr O’Reilly) told Mr Morrison that he wanted no part of such an arrangement, and that he did not believe that anybody else would want to be involved either. He said that this discussion was “well prior” to 3 or 4 April 2013.
[36] It is common ground that Mrs O’Reilly was out of New Zealand from 4 April 2013 to 9 April 2013.
Mr and Mrs O’Reilly decide to purchase the properties
[37] At some stage (perhaps prior to Mrs O’Reilly leaving New Zealand or by telephone while she was in Australia), Mr and Mrs O’Reilly discussed whether they would purchase the properties. It was Mr O’Reilly’s evidence that these discussions did not involve Mr Morrison. He said that he and his wife were aware that the bank would discharge the mortgages over all three properties for approximately $1.27 million, because he had phoned Mr Morrison’s bank. He said that he and his wife could see the opportunity to secure the properties at a good price – “unquestionably it was a bargain” – and that they could then offer Mr Morrison somewhere to live until he got back on his feet. While they were not then sure what was happening with Mr Love’s agreements for sale and purchase, they agreed that they should get themselves into a position where they could act quickly.
[38] At some stage – likely in early April 2013 – Mr O’Reilly had an initial discussion with Mr Searle at FMT about the possibility of Autumnal obtaining finance, so that it could complete the purchase of the properties.
[39] Mr Morrison said that following the 3 or 4 April 2013 meeting, he went with Mr O’Reilly to Mr Searle’s office at FMT. He said that Mr O’Reilly did “all the talking”, and that Mr Searle said that he would get back to them. Mr O’Reilly denied attending any meeting at Mr Searle’s office with Mr Morrison. He said that he and his wife made the deliberate decision not to involve Mr Morrison at this stage, because they did not want emotion to enter into the issue. Mr Morrison did accept that after the initial meeting, he took no part in the financing process.
[40] On 2 April 2013 (the same day that Mr Searle sent the Telfer Young valuations to Mr O’Reilly – see above at [30]) Mr and Mrs O’Reilly lodged a finance application with FMT. They sought to borrow $1.25 million through Autumnal, so that they could purchase all three properties.
[41] On the following day – 3 April 2013 – Mr O’Reilly created two documents on his computer. One dealt with the terms of a proposed lease of the properties by Autumnal to Mr Morrison’s company, Kelston Redevelopments Ltd (“Kelston”). The other dealt with Autumnal’s proposed loan from FMT. It was Mr O’Reilly’s evidence
that he and his wife were looking at the available income streams from the properties, to make sure that they would be able to service any loan Autumnal might obtain from FMT, and that the documents were created for this purpose.
[42] On 8 April 2013, FMT made a loan offer to Autumnal. It offered to lend Autumnal $1,263,000, to purchase all three properties. By way of security, it required first all obligations mortgages from Autumnal, guarantees from Mr and Mrs O’Reilly, and a deed of assignment of Autumnal’s interest in the lease covering all rents payable by Kelston in respect of the properties.
[43] Mr O’Reilly contacted Mr Gooch and asked him to prepare offers for all three properties, and, on 9 April 2013, Mr Gooch emailed three draft sale and purchase agreements – one for each property – to Mr O’Reilly. Mr O’Reilly contacted his solicitor – John Gordon at Sharp Tudhope – regarding the proposed purchases. Mr Gordon delegated the work to another solicitor in the office – Jenny Glubb.
[44] Ms Glubb received a telephone call from Mr O’Reilly on 10 April 2013. He gave her preliminary instructions to act on the conveyancing and to prepare a lease from Autumnal to Kelston. Ms Glubb also received a phone call from Mr Gooch advising that Mr Love had made Landing Road’s offer in respect of the Cambridge Road property unconditional, but that the condition in the agreement in respect of the house block did not expire until 11 April 2013. Sharp Tudhope was also acting for Mr Love, and Ms Glubb confirmed the position with the solicitor acting for Landing Road and Mr Love. She then advised Mr O’Reilly of the position. Mr and Mrs O’Reilly decided that they would continue and purchase the house block and the orchard block if Mr Love did not want those properties.
[45] On 10 April 2013, Mr O’Reilly sent an email to Mr Gooch saying that “Stuart Morrison can sign the lease tomorrow”. He also kept Mr Searle up to date.
[46] Mr Gooch said that he met with Mr O’Reilly on 11 April 2013. He had already drafted agreements for Autumnal to purchase the house block and the orchard block, and Mr O’Reilly confirmed that he and his wife wanted to buy the house block and the orchard block through Autumnal. He told Mr Gooch that he wanted to help
Mr Morrison out, by allowing him to stay on in the house on the house block as long as he paid the day to day costs. Mr Gooch said that there was no suggestion made to him that the O’Reilly’s were considering a no cost trustee type proposal.
[47] Mr and Mrs O’Reilly and Mr Gooch attended on Ms Glubb at Sharp Tudhope’s offices on either 11 or 12 April 2013. Ms Glubb’s file note recorded that the meeting was 12 April 2013, but Sharp Tudhope’s time records record only one meeting on 11 April 2013. Ms Glubb thought that it was unlikely that there were two meetings. It also seems unlikely that Mr and Mrs O’Reilly had signed the agreements for sale and purchase at the time the meeting was held, because Ms Glubb’s file note recorded that they were very keen to sign conditional offers to purchase the properties from the Trust. In any event, Ms Glubb was given further instructions by Mr O’Reilly to prepare the lease between Autumnal and Kelston and various other matters relevant to the proposed purchases were discussed. Ms Glubb thought that Mr O’Reilly told her that he was intending to help Mr Morrison out with his financial difficulties, although she could not recall his exact wording. She was however sure that Mr O’Reilly never suggested to her that he and his wife were acquiring the properties on trust for Mr Morrison. She said that there was “absolutely no discussion” of the no cost trustee type arrangement.
[48] On 12 April 2013, FMT sent an amended proposal to Autumnal, offering Autumnal finance in the sum of $890,000 so that it could purchase the orchard block and the house block. Again, the loan was to be secured by first all obligations mortgages over both properties, a deed of assignment of Autumnal’s interest in the lease covering all rents payable by Kelston, and Mr and Mrs O’Reilly’s personal guarantees.
[49] Also on 12 April 2013, Ms Glubb started drafting the lease between Autumnal and Kelston.
Meeting of 12 April 2013
[50] It had been arranged (probably by Mr Gooch) that the parties would meet at the O’Reilly’s home on 12 April 2013. Mr Gooch considered that timing was critical, given the bank’s position. He had been keeping the bank informed of progress. He
had told the bank that Landing Road’s purchase of the Cambridge Road block had become unconditional, and that Autumnal was going to sign conditional offers on the house block and the orchard block.
[51] Mr Cross, who had previously been approached by Mr Morrison with the “no cost” trustee proposal, was in New Zealand at the time (he normally resides in Melbourne, Australia although at the time he was involved in a project in Kazakhstan) and he had arranged to spend the night of 11 April 2013 with Mr Morrison. He had hoped that he and Mr Morrison would be able to go fishing on the following day. Mr Morrison came and picked him up from his mother’s house in Te Aroha on 11 April 2013 and took him back to his home at Tauriko. Mr Cross was already aware of Mr Morrison’s financial position and he had already indicated that he was prepared to assist Mr Morrison and to proceed as a no cost trustee, but that he needed time to organise his affairs. Mr Morrison did not want to involve Mr Cross because he was frequently away on business at remote locations overseas. Mr Morrison told him about Mr Love and Landing Road. It was Mr Cross’s evidence that, while he was at Mr Morrison’s house on the evening of 11 April 2013, Mr Gooch rang. (Mr Gooch said that the telephone call was on 10 April 2013 and that the call was initiated by Mr Morrison). Either way, it seems likely that, as result of this call, Mr Morrison learnt, for the first time, that Mr Love and Landing Road would not be proceeding with the purchase of the house block, but that it would be buying the Cambridge Road block. Mr Love proposed to on-sell the Cambridge Road block at a profit. It was Mr Morrison’s evidence that when he became aware of Mr Love’s intentions, he became angry at the situation that had developed. In his words, he felt “shafted”.
[52] The meeting went ahead on the morning of 12 April 2013. Mr O’Reilly was present throughout. Mr Gooch was late and was at the meeting for only a relatively short time – perhaps 15 to 30 minutes. Mrs O’Reilly came and went. Mr Morrison bought Mr Cross with him and both he and Mr Cross were present throughout. There was considerable conflict on the evidence about what occurred at this meeting:
[53] Mr Morrison said that the purpose of the meeting was so that the O’Reillys could sign the agreements for sale and purchase. He was expecting Mr Gooch to bring the contracts for the house block and the orchard block to the meeting. He and
Mr Cross arrived before Mr Gooch, and he and Mr O’Reilly had a preliminary discussion. He said that Mr O’Reilly gave him various assurances. He said that Mr O’Reilly acknowledged that Autumnal would be a no cost trustee, and that he in turn assured Mr O’Reilly that he would be working hard as a painter and decorator to ensure that any shortfall between the orchard operating expenses and the anticipated income from the kiwifruit could be made up from his personal income. He said that Mr O’Reilly’s most pressing concern was to obtain a guarantee from him that Autumnal would not be liable for any costs, expenses or outgoings with respect to the properties while it held the same. He said that Mr O’Reilly also wanted to make sure that, when the time came to return the properties to the Trust, he would have the right to hold to one or other of the titles as security against any outstanding monies that might then be owed. He said that Mr O’Reilly accepted that, at that point in time, any mortgage would be transferred to the Trust or refinanced if that was then possible. He also said that he agreed Mr and Mrs O’Reilly would be paid a fee of $50,000 for their “trustee service”. He said that they discussed the possibility of subdividing a section for sale off from the orchard block, so that the proceeds could be used to reduce the mortgage debt. He said that he told Mr O’Reilly that if the subdivision proceeded and the section was sold, then the fee of $50,000, which he referred to as a holding fee or facilitation fee, could be paid at that stage from the proceeds, and that the balance would be available to reduce the FMT mortgage, which would help reduce expenses. He said that there was a great deal of goodwill and trust between him and Mr O’Reilly and that there was no misunderstanding as to the nature of the deal that had been reached – namely that the Trust would remain the beneficial owner of the two properties, and that Mr and Mrs O’Reilly would have no active involvement with respect to the orchard or the farm; rather he would carry on managing the properties in the same way as he had done in the past. Mr Morrison said that given the assurances made to him, he agreed to sign the sale and purchase agreements. He said that otherwise, he would have kept looking for someone else to take over the properties on a no cost trustee basis.
[54] Mr Cross said that Mr Morrison and Mr O’Reilly greeted each other like “long lost friends”. He was introduced to both Mr and Mrs O’Reilly. He said that he sat in a chair, observing the interior of the room and motor racing memorabilia hanging on the walls and displayed in the room. He said that there was an initial discussion
between Mr O’Reilly and Mr Morrison but that he did not really take much notice of what they were talking about. He said that Mr Gooch arrived approximately 15 minutes later, and that the documents were then signed. He did not recall any in-depth discussion about what had occurred regarding the Cambridge Road block or about the documents and he said that neither Mr O’Reilly nor Mr Morrison asked many questions of Mr Gooch. He accepted that they were talking amongst themselves. He said that after Mr O’Reilly had signed the documents everybody shook hands. He said that Mr Gooch left and that Mr O’Reilly and Mr Morrison continued talking. He said that Mr Morrison told Mr O’Reilly that he was very grateful for his help. He recalled Mr O’Reilly putting his hand on Mr Morrison’s arm, and then his shoulder, and saying something about their friendship going back a long way. He remembered Mr O’Reilly commenting that he was very happy to help Mr Morrison out and that he was prepared to do whatever he could to get him through his difficulties. He said that after Mr Gooch left, Mr O’Reilly made it clear to Mr Morrison that he did not want to be paying any costs and that he was concerned about Mr Morrison’s ability to meet the expenses involved, including anything unexpected. He said that Mr Morrison was emphatic that Mr O’Reilly did not need to worry about the costs involved because he was taking full responsibility for any costs that might not be able to be met from the sale of kiwifruit. He said that Mr O’Reilly expressed concern about the legal costs which would be incurred as well, and that Mr Morrison assured Mr O’Reilly that the legal costs and all other expenses would be to his account. He recalled Mr O’Reilly saying “when this is all over and you are in a position to do so, the properties will be returned to you at the discharge cost”. He also remembered Mr O’Reilly using the term “no cost trustee” to describe his involvement in the deal. He said that he then had a general discussion with Mr O’Reilly and was shown around the O’Reilly’s house. He said that when he and Mr Morrison were leaving, Mr O’Reilly again assured Mr Morrison that the properties would be returned to him at the appropriate time, and that in the meantime, Mr Morrison needed to keep his paint brushes “rocking and rolling” so he could meet any unforeseen expenses. He said that Mr O’Reilly reassured Mr Morrison that the properties would be looked after in trust and that the two of them needed to meet over a meal to discuss further details.
[55] Mr Gooch gave evidence that, while he was at the meeting, there was no discussion about Mr O’Reilly taking Mr Morrison’s properties on a buy and hold basis;
there was no discussion about Mr O’Reilly handing the properties back at some future time or receiving a fee for holding them; there was no mention of a no cost trustee or any sort of trust arrangement. He did not recall any discussion about a possible subdivision of the land. Nor did he recall any discussion about the valuations or Mr Morrison’s ability to pay the costs associated with the properties. He said that at no time during the transaction did anybody tell him that the O’Reillys were buying as trustees, or that there was an arrangement for the O’Reillys to transfer the properties back to Mr Morrison in return for a fee.
[56] Mr O’Reilly confirmed that he did meet on the morning of 12 April with Mr Morrison and Mr Gooch. He could not recall who organised the meeting, but said that “it was discussed where we had got to”. He said that Mr Morrison arrived at his home, together with another person who was introduced to him. He did not know this person and he could not recall his name. He said that there was some small talk while he waited for Mr Gooch to arrive and that he gave Mr Morrison’s friend a copy of his autobiography. He said that the friend went in and sat in his office and started browsing through the book. He said that Mr Gooch then arrived and that he had the offers with him. He said that that was his first discussion with Mr Morrison about the proposed purchases. He said that he told Mr Morrison that he and his wife were going to purchase the household block and the orchard block. He said that he made a comment along the lines that at least Mr Morrison was not going to be out of the house and that he would be able to carry on his painting business as usual, as well as graze stock and sell firewood obtained from the properties. He said that Mr Morrison was delighted. He said that he told Mr Morrison that he was going to have to sign a lease, but that there was no discussion about the detail at that point. He said that Mr Morrison and he agreed that they would meet on a later occasion to discuss the terms on which he could stay on. He was adamant that there was no discussion about a buy back or any sort of trust arrangement or the subdivision. He accepted that Mr Gooch was only present for a relatively short time – 10 to 15 minutes. He said that the only discussion related to the agreements that Mr Gooch bought to the meeting. He said it was “just a perfectly civil normal meeting, to deal with some documents, sale and purchase documents”. He did not recall signing the agreements on the day. However, nor did he recall signing them at a later point (clearly they were signed). He believed that Mr Gooch simply “wanted to bring the parties together”, and that “[Mr Morrison]
would have learnt for the first time that we were going to be the purchasers of those two properties and that would have been, I guess, what was discussed”. He was adamant that he did not give Mr Morrison any assurances in relation to any buy and hold or no cost trustee type arrangement.
[57] Mrs O’Reilly only had a vague recollection of the meeting on 12 April 2013. She said that the meeting was very brief. She could not remember Mr Cross, but did recall that Mr Morrison had a friend with him. She said that he played no part in the conversations that took place while she was in the room. All she could recall of the meeting was that Mr O’Reilly confirmed to Mr Morrison that they had decided to purchase the orchard block and the house block and that Mr Morrison could stay on in the house after they settled. She could not recall whether she signed the agreements for sale and purchase that day, or signed them at Sharp Tudhope’s offices at a later point in time.
[58]I assess this conflicting evidence later in this judgment.
[59] It is possible that there was a further meeting between Jenny Glubb, Mr O’Reilly and Mr Gooch at Sharp Tudhope’s offices on the afternoon of 12 April 2013, although, as I have noted above at [47], the evidence in this regard is unclear.
[60] Mr O’Reilly accepted that at some stage he did tell Mr Morrison that he might be able to buy the properties back if he could get back on his feet financially and that he and Mrs O’Reilly would consider selling the properties back to him at a favourable price. Mrs O’Reilly could not remember the exact sequence of events but she said in evidence that at some point she and her husband did discuss the possibility that Mr Morrison might be able to purchase the properties back from Autumnal if he could improve his financial position. She also said that she and her husband discussed the possibility that Mr Morrison might recover his financial position enough to purchase the properties back at less than market value. She said that this was always something they were prepared to consider but that they never discussed specifics.
[61] Neil Morrison, Mr Morrison’s brother, gave evidence that in mid-April 2013, Mr Morrison rang him with the news that Mr and Mrs O’Reilly had agreed to assist,
and that the properties had been transferred to Autumnal. He said that shortly after his brother’s call, he phoned Mr O’Reilly and thanked him for helping Mr Morrison out in his time of need by enabling him to get the bank off his back. He said that Mr O’Reilly replied that it was really no trouble as he had a shelf company, Autumnal, that was the perfect vehicle for the purpose. Mr O’Reilly said that he had done his arithmetic and that the deal stacked up, because the projected income from the orchard was expected to be more than enough to cover the mortgage outgoings as well as all of the expenses of running the orchard. Mr Neil Morrison said that Mr O’Reilly was quick to say that Mr Morrison needed to keep working hard so that he could put money aside in case the market collapsed and there was insufficient income from the sale of the kiwifruit in order to cover expenses, especially the instalments owed to the bank. He said that in order to allay Mr O’Reilly’s concerns, he raised the possibility that the section that Mr Morrison had cleared at the top of the orchard block could be put on the market and sold and that any risk to the O’Reillys could then be reduced.
Further meeting on 15 April 2013
[62] Ms Glubb met with Mr (and perhaps Mrs) O’Reilly and Mr Morrison at Sharp Tudhope’s office on 15 April 2013. Ms Glubb prepared an undated file note of this meeting. The file note records that various arrangements regarding the sale and purchase and the lease were discussed. It may be that the agreements for sale and purchase were signed by Mr O’Reilly (or perhaps by Mrs O’Reilly).
[63] The signed agreements were dated 15 April 2013. They provided for Autumnal to purchase the house block for $525,000 (inclusive of GST), and the orchard block for $419,350 (plus GST). The agreements were conditional upon Autumnal completing due diligence. The agreement for the orchard block recorded that the kiwifruit crop then on the vines was part of the going concern being purchased by Autumnal and that the crop formed part of the purchase price of the property and was to become the property of Autumnal on settlement.
[64] Mr Gooch sent copies of the signed agreements to Mr Harris on 16 April 2013 and they were received by Ms Glubb on the same day.
[65] Mr Morrison asserted that he also met with Mr Gordon on 15 April 2013. He said that he remembered meeting Mr Gordon because Mr Gordon was not wearing a suit or a tie. He said that they discussed the terms of the “trustee agreement” which he said he had entered into with Mr and Mrs O’Reilly, as well as FMT’s requirement that Autumnal should assign the benefit of the lease to FMT. He said that Mr Gordon did not express any disapproval with the deal. He recalled Mr Gordon taking extensive notes, but he did not recall then signing any documentation regarding the trustee arrangement.
[66] Mr Gordon denied any meeting with Mr Morrison on 15 April 2013. Rather, he said that Mr O’Reilly and Mr Morrison had come in to see Ms Glubb and that he was busy at the time. Ms Glubb had told him that Mr O’Reilly was coming in, and he briefly left his office, put his head around the door, said hello to Mr O’Reilly and exchanged brief pleasantries with him. He remembered that Mr Morrison was there, and that he was rather annoyed about that because he had had prior dealings with Mr Morrison and did not hold in high regard. Mr Gordon denied that he was party to any discussion about a no cost trustee type arrangement, or a buy and hold arrangement.
[67] There is no record of any meeting between Mr Gordon, Mr (and/or Mrs) O’Reilly and Mr Morrison in Sharp Tudhope’s time records for 15 April 2013.
[68] Mr O’Reilly did not remember the meeting on 15 April 2013, but he did recall that before the agreements for sale and purchase were made unconditional, he had to sort out the terms of the lease that Ms Glubb was preparing. He thought that this was likely the purpose of the meeting at Sharp Tudhope’s offices on that day.
[69] Mrs O’Reilly could not remember the meeting of 15 April 2013 either. It may be that she did not attend that meeting – she was not sure.
[70] Ms Glubb had no recollection of Mr Gordon attending the meeting, of Mr Gordon taking extensive notes, or of Mr Gordon not expressing any disapproval with respect to the nature of the deal as alleged by Mr Morrison. Her contemporaneous
file notes make no mention of any trust and she said that she was not aware of or instructed in relation to any trust arrangement.
A trust document?/the lease
[71] Ms Glubb prepared a draft of the lease between Autumnal and Kelston. She discussed it with Mr Gordon and Mr and Mrs O’Reilly on 17 April 2013. Mr Gordon made substantial amendments to the draft. It was then given to Mr O’Reilly. Ms Glubb also prepared a deed of novation of the orchard management contract that Mr Morrison had in place in respect of the kiwifruit orchard.
[72] Mr Morrison and his then wife had dinner with the O’Reillys at the O’Reillys house on 17 April 2013. It seems likely that the lease was signed that evening, as well as the deed of novation. Mr and Mrs O’Reilly said that over dinner they and the Morrisons discussed the basis on which Mr Morrison could continue to stay in the house on the house block. They said that the discussion was in very general terms but that they made it clear to Mr Morrison that they expected him to pull his weight and tidy up his business practices, so that he would be able to make payments to Autumnal from the income he would be earning from his painting and decorating business, from grazing stock on the household block and from the sale of firewood from the trees on the block. They said that they told Mr Morrison that he would need to continue looking after the property and the paying rates, the insurance premiums and other property related expenses, and that Mr Morrison agreed to do so.
[73] Mr Morrison said in evidence that he believed that there was a third document that he signed that evening, which recorded the terms of the agreement that he had reached with Mr O’Reilly. He did not retain a copy of the agreement, and when he was cross-examined, he accepted that he had not even read it.
[74]Mr O’Reilly said:
There was never a document saying that we entered into a trust arrangement with him, but we did enter into – we had an understanding, sorry, that if he [Mr Morrison] got his act together, hopefully one day he would be able to buy the property back, and I believe that that has been documented somewhere at some time, but never mind whether it’s true or not, we [are] standing by that agreement.
However, a little later in cross-examination, he said that there was no document providing for a right of repurchase.
[75] The lease was between Autumnal and Kelston, and it was guaranteed by Mr Morrison and his then wife. It recorded that Autumnal had entered into conditional agreements to purchase the house block and the orchard block, and that it had agreed to lease both blocks to Kelston on the terms set out in the lease with effect from the settlement date. It was for a term of three years commencing on the settlement date. The annual rental payable by Kelston to Autumnal during the term was $65,000 plus GST for the orchard and farm and $40,440 (inclusive of GST) for the home and the flat. Rental was payable by monthly payments in advance, with the first payment being due on the commencement of the lease. Kelston agreed to pay all outgoings in respect of the land, including local authority charges, charges or levies for water, gas, electricity, telephone and other utilities, or services applied to or used on the land, and all insurance premiums. It was recorded that Mr Morrison as trustee of the Trust had entered into a grower contract, and the parties agreed to execute a deed of novation of that contract. It was acknowledged that all kiwifruit produced from the land was to be picked under an allocated pin number, and Kelston acknowledged that all rights of ownership and other rights attached to the pin number were exclusively with Autumnal. Clause 4.4 provided as follows:
The net proceeds from the kiwifruit crop each year will be paid to the Lessor by [the contract grower] and applied as follows:
a.To be treated as income in the hands of the Lessee to the extent of the annual rental under clause 2.1:
i. firstly attributable to clause 2.1a; and
ii secondly attributable to clause 2.1b.
and all liability for outgoings, orchard operating expenses and the like and set off against the Lessee’s liability for such amounts.
b.To be treated as income in the hands of the Lessor once the amounts referred to in clause 4.4a have been met.
(the underlining is in the lease)
The lease went on to provide that Kelston retained and had authority to undertake the day to day management and control of the orchard business and all operations thereon.
Kelston was responsible for ensuring compliance with the Health and Safety in Employment Act 1992. It was required to immediately notify Autumnal of any claims by any employees or contractors, and it was required to assume full responsibility for all actions of its employees, contractors, agents and invitees. Kelston was not allowed to make any structural alterations to any structures or shelters erected on the land without obtaining the written consent of Autumnal. It was recorded that during the term of the lease, Kelston was to manage the kiwifruit vines and shelter belts growing on the land in accordance with good horticultural practice and in accordance with the grower contract, and it was responsible for all maintenance of the orchard, the kiwifruit support structures and the orchard irrigation system, including the pump, the bore and drains. Kelston also agreed to maintain all improvements on the land in good order and repair, and to make good any defects caused to the interior or exterior of the premises caused by improper or careless use. Autumnal agreed to keep the property insured. The parties agreed that Kelston could rent the flat on the land. The agreement also recorded that Kelston agreed to meet Autumnal’s costs relating to the preparation of the lease, any enforcement costs, and Autumnal’s legal and accounting costs in relation to the purchase and the lease of both the orchard block and the house block. Mr Morrison guaranteed Kelston’s obligations.
Settlements
[76] Autumnal paid the deposits due under the agreements for sale and purchase on 18 April 2013.
[77] On 23 April 2013, the agreement for sale and purchase between the Trust and Landing Road in respect of the Cambridge Road block settled.
[78] On 26 April 2013, Mr Morrison paid Autumnal $10,000 to cover the financing fee charged to Autumnal by FMT. It was Mr O’Reilly’s evidence that this sum was initially deducted from the purchase price, and that it was later recovered from Mr Morrison. Other evidence suggested that this did not happen. Rather, the payment of the $10,000 to Autumnal was recorded in Autumnal’s cashbook as occurring on 26 April 2013.
[79] The sale of the house block and the orchard block to Autumnal settled on 3 May 2013. The amount required to complete settlement was $935,509.72. Mr and Mrs O’Reilly put in $55,509.72 from their own funds to enable Autumnal to complete the purchases. The balance – $880,000 (after deducting a fee of $10,000) – was borrowed from FMT.
[80] Sharp Tudhope sent a tax invoice to Autumnal for its services in attending to the conveyancing, including the preparation of the lease and the deed of novation. Mr O’Reilly contacted Ms Glubb and instructed her to reissue the invoice to Kelston. That was attended to and an amended invoice was sent to Kelston on 27 June 2013. Eventually, the invoice was split into two, and new invoices were issued to entities associated with Mr Morrison. The invoice was paid on a drip feed basis. Ultimately it was paid in full.
Discussion – Neil Morrison and the O’Reillys
[81] During August/September 2013, the O’Reillys stayed with Neil Morrison and his wife at their home in Perth, Australia. The topic of the orchard and Mr Morrison’s situation came up. According to Mr Neil Morrison, Mr and Mrs O’Reilly said that the arrangement was working well, although there was still a nagging concern that, if the orchard was affected by the Psa virus, Mr Morrison needed to be in a financial position to step up and meet any shortfall with the mortgage instalments, so that they would not be called upon to honour their guarantees. Neil Morrison said that in the course of the discussion, Mr O’Reilly said that Mr Morrison needed “to keep the brushes rocking and rolling” so that he was financially able to step up in a crisis.
Mr Morrison’s bankruptcy – the SAMZ companies
[82] Mr Morrison was adjudicated bankrupt on 6 December 2013. Thereafter he was unable to continue working as a painter and decorator through his company, Kelston.
[83] Mr and Mrs O’Reilly were prepared to assist Mr Morrison. They set up a company to operate Mr Morrison’s painting and decorating business. The company was known as SAMZ Trading (No 1) Limited (“SAMZ (No 1)”). It was incorporated
on 18 December 2013. Mr and Mrs O’Reilly were its directors and shareholders and they arranged for the company to employ Mr Morrison.
[84] On 20 December 2013, a bank account was opened in the company’s name. An initial deposit of $10,000 was paid into the account by Mr Morrison. Mr Morrison was given a cash card on the SAMZ (No 1) account. Mrs O’Reilly also gave him a number of signed but blank cheques to meet any obligations SAMZ (No 1) incurred.
[85] The O’Reillys gave evidence that they hoped that setting up the company would help put Mr Morrison in a position where he could tidy up his finances. According to Mr O’Reilly, it was anticipated that Mr Morrison might be able to improve his financial standing so that he could raise finance in the future and so that he might be able to buy the properties back from Autumnal when he came out of his bankruptcy.
[86] Neil Morrison said that he had a discussion with the O’Reillys in New Zealand in October 2014. He said that it became obvious that the O’Reillys were not happy about Mr Morrison’s use of the SAMZ No 1’s credit card and the cheque book that they had allowed him to use. He said that they suspected that Mr Morrison was using the credit card and the cheque book to pay for personal expenses, rather than for business expenses. He said that Mr O’Reilly was reluctant to speak directly to Mr Morrison about his concerns. He remembered Mr O’Reilly saying:
The way [Mr Morrison] is going I don’t know how he’s going to buy the properties back. Who is going to loan him money at his age and with his track record?
Lynette Morrison (Neil Morrison’s wife) also recalled this conversation and the comment attributed to Mr O’Reilly.
[87] Ultimately, the O’Reillys decided to bring the SAMZ (No 1) arrangements to a close and the company ceased trading in April 2015. It was removed from the register of companies in January 2016.
[88] A new company SAMZ Trading (No 2) Limited (“SAMZ (No 2)”) was incorporated on 30 April 2015. Another of Mr Morrison’s friends, Mr Cave, was the
sole director and shareholder. It took over Mr Morrison’s painting and decorating business and continued to employ him. Mr Morrison was discharged from bankruptcy on 24 December 2016. Shortly thereafter, on 1 January 2017, he was appointed the sole director and shareholder of SAMZ (No 2).
Post-settlement arrangements
[89] The income from the sale of the kiwifruit was sufficient to meet the financing costs and the orchard operating expenses, although in the 2015 financial year, Autumnal recorded a loss of $24,879. There was a net profit in each of the other financial years 2014 to 2018. In 2019 there was a loss, but that was because the legal fees associated with these proceedings were expensed against income.
[90] On 3 May 2013, Autumnal sent an invoice to Mr Morrison for the rental payable under the lease for the house and flat – namely $40,440, payable by monthly instalments of $3,370 due on the first day of each month starting May 2013. It is common ground that no rental was ever paid and that Autumnal took no steps to require payment.
[91] It was Mr O’Reilly’s evidence that when Autumnal purchased the two properties, the self-contained flat on the house block was tenanted and Mr Morrison arranged for the tenant to pay the rent direct to Autumnal. However, in March 2014, there was a change of tenant. Mr O’Reilly said that he advertised through Trademe in an endeavour to obtain a new tenant. He directed all applicants to meet with Mr Morrison, so that he could select the tenant. He said that Mr Morrison was supposed to arrange for the new tenant to pay the rental direct to Autumnal but that he did not do so, and that for a period Mr Morrison kept the rental for himself. The tenant, Charmaine Spencer-Smith, confirmed that initially she paid the rental due to Mr Morrison and he accepted this. Mr O’Reilly said that he chased Mr Morrison up to get him to pay the rental over to Autumnal, but that he failed to do so. In February 2015, Mr O’Reilly both wrote to and approached the tenant and asked her to pay the rental to Autumnal. She did so until Mr Morrison asked her to pay the rental to the Trust in April 2019. Thereafter, she paid the rental to the Trust.
[92] The rental payable in respect of the bedsit apartment was always paid to Mr Morrison.
[93] Neither Kelston nor Mr Morrison have paid rental in respect of the orchard block notwithstanding the terms of the lease. It has not been demanded by Autumnal.
[94] Autumnal initially paid the rates on both the house block and the orchard block. However, on 12 September 2014, Mrs O’Reilly sent a note to Mr Morrison forwarding the then outstanding rate demand in respect of the house block and advising that Autumnal had paid the rates on the orchard block. Some, but not all of the rates on the house block were paid by Mr Morrison through SAMZ (No 1) in the year ended 31 March 2015, and by SAMZ (No 2) in the 2016 and 2017 financial years. All rates on the orchard block have been paid throughout by Autumnal. Mrs O’Reilly said that Autumnal paid the rates on both properties in 2018 and 2019 on legal advice and after the dispute with Mr Morrison had arisen.
[95] The insurance premiums were paid through SAMZ (No 1) in the 2015 financial year and then SAMZ (No 2) in the 2016, 2017 and 2018 financial years. Mrs O’Reilly said that Autumnal took over responsibility for payment of the insurance premiums in 2018. Again she said that this step was taken on legal advice.
[96] Much of the orchard work was undertaken by the contract grower and this work was paid for by Autumnal by way of deduction from the gross revenue obtained from the sale of the kiwifruit. Mr Morrison undertook some orchard maintenance work. He gave evidence that he mulched prunings from the orchard, regularly mowed the orchard, and carried out maintenance work to the pergolas carrying the vines and to the water reticulation system. He was not paid either wages or contractor’s costs for his labour in undertaking this work. Nor was there any payment to the Trust or Kelston. Nor did Mr Morrison, the Trust or Kelston receive any share of the profit resulting from the sale of the kiwifruit.
The subdivision
[97] In about August 2014, Mr Morrison went to the O’Reillys house and gave Mrs O’Reilly a number of invoices from Lysaght Consultants Limited who are
surveyors in Tauranga. They had been preparing a scheme plan of subdivision and liaising with the Council in this regard. According to Mr O’Reilly, the O’Reillys knew nothing about any proposed subdivision. Mr O’Reilly said that he was furious that Mr Morrison had started the subdivision process, when the land was no longer his. Mr O’Reilly got in touch with Lysaght Consultants and told them that Mr Morrison was not the registered owner. He advised that Autumnal would pay the invoices and he requested that any future dealings should be with Autumnal. He said that he also spoke to Mr Morrison about it and “gave him a piece of [his] mind”. According to Mr Morrison, the O’Reillys knew about the proposed subdivision and it had been discussed in April 2013.
[98] Mr O’Reilly accepted that he and his wife were aware of the potential to subdivide the property, and that it was always something they were going to consider. He said that when they found out about Lysaght Consultants’ involvement, they looked more closely at the proposed subdivision. They decided to proceed with it. The subdivision was completed in 2016 and Autumnal sold the lot created by the subdivision for $481,000. Various costs of sale were deducted and $300,000 was paid in reduction of the mortgages secured over the properties. This reduced the loan balance to $590,000. The net balance of $158,251.57 was paid into Autumnal’s bank account. Autumnal’s cashbook shows that $110,000 was then advanced to Mr and Mrs O’Reilly. Mrs O’Reilly explained that that advance was simply to record a banking error made by her. The monies had accidentally been placed on term deposit but in her and Mr O’Reilly’s names rather than Autumnal’s name. She said that when the deposit expired, the entry was reversed and the moneys, together with accrued interest, were credited back to Autumnal.
[99] The mortgage advance from FMT fell due for renewal in April 2015. Autumnal did not renew. Rather it refinanced with its usual bank.
Attempts by Mr Morrison to buy back properties from Autumnal
[100] Shortly after he was discharged from bankruptcy in December 2016, Mr Morrison set about acquiring the properties back from Autumnal. He asked Mr Rendle to help him. In early March 2017, Mr Rendle contacted Mr O’Reilly and
a meeting was arranged. Mr Rendle and a friend – a retired chartered accountant – Stuart Robertson, met with Mr O’Reilly at the O’Reillys home on 7 March 2017. Mr Rendle said that he explained to Mr O’Reilly that Mr Morrison had asked him and Mr Robertson to take over as trustees of the Trust. On behalf of Mr Morrison and the Trust, he requested that Autumnal transfer the properties back to the Trust in accordance with the agreement that he asserted had been reached with Mr Morrison. Mr Rendle said for this purpose that he asked Mr O’Reilly to provide him with particulars of the balance owing on the mortgage. He said that Mr O’Reilly’s response was that Mr Morrison was incapable of managing his own business affairs. Mr Rendle replied that that did not matter, because he and Mr Robertson were assisting Mr Morrison. He said that Mr O’Reilly then said that he had enough of Mr Morrison and that he wanted to be rid of him.
[101] Mr Rendle said that in the course of the meeting, Mr O’Reilly produced a two- page document headed “Agreement”, which he and Mr Robertson took turns to read. He initially said that the document had been prepared by a lawyer, but at the hearing he said that he could not be completely sure of that. He said that the document was not complete and that he saw only the first page and part of the second page. He said that Mr O’Reilly impressed on them that he had taken Mr Morrison to see his solicitor, John Gordon, and that at their request, Mr Gordon had drafted an agreement which was subsequently signed by Mr Morrison on behalf of the Trust and by Mr O’Reilly and his wife. Mr Rendle said that the document recorded an agreement between the parties whereby Autumnal would acquire the two properties and hold them in trust for Mr Morrison as trustee of the Trust. He said that he recalled reading a provision in the document to the effect that Mr Morrison was entitled to possession of the properties and that the Trust was responsible for the payment of all outgoings and other expenditure. He also said that he recalled reading a further provision to the effect that the revenue from the sale of kiwifruit would be paid to Autumnal and that the O’Reillys would apply the proceeds towards repayment of the mortgage. He said that Mr O’Reilly pointed to a paragraph on the second page, which stated that the Trust had a three year option within which to repurchase the properties, and that Mr O’Reilly said that more than three years had elapsed since the properties had been transferred. Mr Rendle said that he went to take a photo of the document on his cellphone but that
Mr O’Reilly insisted that he not do so, because the document was confidential and because he was the only person who held a copy.
[102] Mr Rendle said that at no time during his discussions, did Mr O’Reilly deny that he had agreed that Autumnal would hold the properties in trust for the benefit of Mr Morrison and the Trust. Indeed, he said that during the course of the discussions, Mr O’Reilly acknowledged that the transfer to Autumnal had not been an outright sale and that the Trust was entitled to purchase the properties back.
[103] Mr O’Reilly remembered being contacted by Mr Rendle and he remembered meeting with Mr Rendle and Mr Robertson to talk about Mr Morrison. He said that at the meeting, Mr Rendle and Mr Robertson claimed that he (Mr O’Reilly) and his wife were trustees for Mr Morrison, and that they had to transfer the properties over to Mr Rendle and Mr Robertson, because they were going to become the trustees of the Trust. He said that he made it very clear that there was no sort of trust relationship in place. He said that Mr Rendle and Mr Robertson discussed the possibility of Mr Morrison obtaining a loan of $1 million and that they asked whether the proceeds of sale of the kiwifruit crop would cover interest on that sum. He said that he told Mr Rendle and Mr Robertson that he and his wife would be open to considering an offer for the properties.
[104] After the meeting, Mr O’Reilly sent Mr Rendle an email, confirming his position. The email acknowledged the efforts which Mr Rendle and Mr Robertson were making to help Mr Morrison. It went on to say:
However, given Stuart [Morrison’s] defiant attitude towards responsible business practice together with his cavalier perspective of our assistance and his naivety regarding the values and costs involved, we are no longer feeling overly benevolent towards him.
Notwithstanding, we are willing to provide you with sufficient information for you to determine if you are realistically able to proceed with your proposal.
The email noted that the then rateable value of the properties was $2.2 million, and that the income from the kiwifruit orchard, with a mortgage of $1 million at an interest rate of 8.8 per cent, would be insufficient to cover the costs and would result in a deficit, or at a lower interest rate, a small surplus. He recorded that Mr Morrison had
outstanding debts owing to him and his wife of $701,660. He then concluded as follows:
We are not prepared to provide a selling price on the property but would seriously consider any reasonable offer made.
[105] On 16 March 2017, Mr Rendle sent a letter to Sharp Tudehope, attention Mr Gordon. He introduced himself and then stated as follows:
I am aware from both Stuart [Morrison] and Maurice [O’Reilly] that he had directed Stuart [Morrison] to come to you for advice on the setting up of the trust. A trust deed was subsequently prepared outlining in essence that Autumnal would purchase the property from the bank. The purchase to be undertaken by Autumnal … as Trustee to hold the orchard property for the anticipated time for Stuart [Morrison] to get his affairs back in order. At the time this was anticipated to be three years …
Mr Rendle went on to record that he hoped that Mr Gordon would be available to “manage and document the next stage”.
[106] On 24 March 2017, Mr Rendle sent an email to Mr Morrison. He acknowledged that he, Mr Robertson and Mr O’Reilly were “not on the same page”. He repeated his assertion that Mr O’Reilly had taken Mr Morrison to his lawyer to establish the Trust. He then stated as follows:
Maurice [O’Reilly] you very kindly took on this Trusteeship as Stuart [Morrison’s] longstanding friend. The time has now come to hand over to new trustees as was planned. I hoped this would be uncomplicated and it is a pity the lawyer you both consulted is presently unavailable, but the fact that you were acting as Trustee is inescapable, hence Stuart [Morrison’s] instruction to appoint new trustees and replace the existing structure with what he has been advised to do.
[107] There was further email correspondence between Mr Rendle and Mr O’Reilly. In the course of that correspondence Mr Rendle made serious allegations about Mr Gooch. Those allegations are irrelevant to the matters in dispute and I do not record them. Suffice it to say that Mr O’Reilly responded that the allegations were outrageous, unfounded and defamatory.
[108] On 31 March 2017, Mr O’Reilly sent an email to Neil Morrison. He did so, because Neil Morrison had been copied into some of the correspondence emanating from Mr Rendle. Amongst other things, the email stated as follows:
Although we don’t believe it would be in his best interests, Anne [O’Reilly] and I would be happy to see Stuart [Morrison] back in ownership of the property – but not on the terms Stuart [Morrison] has created in his mind and told everyone I previously agreed to. There was an agreement when he purchased but its not as Stu [Morrison] tells it. Additionally, he hasn’t abided by the agreement.
[109]Neil Morrison replied to Mr O’Reilly on 2 April 2017.
[110] Sharp Tudhope (Mr Gordon) replied to Mr Rendle’s email on 18 April 2017. Mr Gordon recorded that the firm had not acted for either the Trust or Mr Morrison, and that Harris Tate acted for them. He went on to record that Mr and Mrs O’Reilly denied the existence of any trust in favour of either the beneficiaries of the Trust or Mr Morrison. He recorded that Mr and Mrs O’Reilly’s view was that Autumnal was the beneficial owner of the properties. Mr Gordon went on to advise that he had never received instructions to record that Autumnal was holding the properties it had acquired on trust for any other party, and that this was consistent with Mr and Mrs O’Reillys view of the transaction.
[111] At this point, a caveat was lodged over the titles to the properties. That caveat is still in place.
[112] Mr Rendle responded to Sharp Tudhope on 20 April 2017. Inter alia he asserted as follows:
I reaffirm you did act for Mr Morrison and the … Trust and your invoice was paid. Due to the situation at the time of mutual trust between Maurice O’Reilly and Stuart Morrison your firm did advise both parties and drafted a trust formation document which both Mr Robertson and I have read and which you hold on file. Stuart Morrison claims that he remembers signing such an Agreement in your office. Maurice [O’Reilly] allowed us to read this document and he also gave a copy to Neil Morrison at the time when he visited and stayed with him in Perth. Your advice concluded that Mr Morrison was to approve the sale of the properties to Autumnal … which was a shelf company which Maurice [O’Reilly] stated was suitable to undertake the trusteeship transaction.
Mr Rendle went on to assert that he had several independent witnesses who could confirm the position.
[113] Mr Gordon responded on 24 April 2017. He reiterated that Sharp Tudhope had not acted for either Mr Morrison or the Trust. He stated that Mr Morrison paid Autumnal’s legal costs as part of the lease arrangement entered into between Autumnal and Kelston. He asserted that both he and Mr and Mrs O’Reilly were unaware of any “trust formation document”.
[114] On 2 May 2017, Neil Morrison sent a lengthy email to Mr O’Reilly. Mr O’Reilly responded. At much the same time, Mr Robertson set an email to Mr Gordon and Mr Gordon responded. The emails simply recorded the various points of view being advance. They do not add materially to the dispute and I do not recite them.
[115] Mr Rendle in his personal capacity filed a statement of claim on 11 December 2017. Autumnal and the O’Reillys, through their solicitors, filed a statement of defence in February 2018. For some reason, affidavits were then filed by Mr Rendle. There were affidavits from Mr Cross, from Mr Rendle and from Mr Morrison. The conduct of the proceedings was thereafter taken over by solicitors acting for the plaintiffs and an amended statement of claim was filed in May 2018. There was a second amended statement of claim filed in February 2020.
Update on the properties
[116] The properties have been amalgamated into the one title – Lot 2, DP491219, Identifier No 711317. As at July 2018, it had a capital value of $4,760,000.
Assessment of the evidence
Mr Morrison and Mr O’Reilly – general comments
[117] Mr Morrison was a blunt and relatively straight-talking witness. It became clear during the course of his evidence that he is not a sophisticated businessman, and that he placed little faith in, and was quick to apportion blame to, lawyers and other professionals. As a result, there is little documentation to support his case. He was unable to pronounce some of the words contained in his written brief and he tended to stumble over many of the longer and more complicated words. I suspected that he
was simply trying to read words that others had written for him. However, my suspicions were allayed when Mr Morrison disclosed that he is dyslexic.
[118] Mr O’Reilly was clearly a more astute (and successful) businessman. He was much more sophisticated in his dealings than Mr Morrison and he and his wife took professional advice on many aspects of the transaction.
[119] I was not however persuaded that either Mr Morrison or Mr O’Reilly was wholly truthful in giving evidence.
[120] Some of Mr Morrison’s assertions were specious. By way of example, I reject outright his assertion that he met with Mr Gordon on 15 April 2013, that the no cost trustee arrangement was discussed with Mr Gordon, that Mr Gordon took extensive notes, that Mr Gordon documented the arrangement and that he [Mr Morrison] signed an agreement recording the Trust at the dinner meeting on 17 April 2013. I accept Mr Gordon’s evidence in this regard. He had delegated the file to Ms Glubb. As a matter of professional courtesy, he came into the room during the course of the meeting on 15 April 2013, and exchanged pleasantries with Mr O’Reilly, who was his longstanding client. Mr Gordon’s evidence in this regard was supported by the contemporaneous documentation. There is no record of any meeting between Mr Gordon, Mr O’Reilly and Mr Morrison on 15 April 2013 in Sharp Tudhope’s time records. Ms Glubb’s file note of the meeting does not mention Mr Gordon or record any discussion about a trust arrangement. None of the other relevant witnesses could recall a meeting between Mr O’Reilly, Mr Morrison and Mr Gordon. No deed or agreement relating to the Trust was discovered or produced.7 There is no reliable
(f)Mr and Mrs O’Reilly’s actions in incorporating SAMZ (No 1) and arranging for the company to employ Mr Morrison are consistent with their desire to ensure that Mr Morrison was working, and generating income so that he could meet any shortfall that might arise. Again, these actions are consistent with the no cost trustee arrangement.
(g)Autumnal’s actions in relation to rent from the separate apartment on the house block also tell against it. Mr O’Reilly said that he chased Mr Morrison up to get him to pay over the rental to Autumnal, that he initially failed to do so, and that ultimately he (Mr O’Reilly) had to approach the tenant and ask her to pay the rental to Autumnal. However, he left Mr Morrison as the contact person for the tenant. This
is consistent with Autumnal taking the income produced by the property, to ensure that there was no shortfall to meet outgoings, but leaving Mr Morrison to manage things.
(h)Notwithstanding that much of the orchard work was undertaken by the contract grower, Mr Morrison undertook the more regular maintenance work. As noted above at [96], he mulched pruning from the orchard, he regularly mowed the orchard and he carried out maintenance work to the pergolas carrying the vines and to the water reticulation system. He produced invoices showing that he had met some of the costs involved. He was not paid for this work nor was he reimbursed for the costs he incurred. It is difficult to see why he would have undertaken the work or paid for repairs, unless he was operating on the understanding that ultimately he could seek the return of the properties.
(i)Mr Morrison’s actions in proceeding to instruct Lysaght Consultants Ltd in regard to the subdivision of part of the orchard block are consistent with his understanding that he and the Trust of which he was the sole trustee, remained the beneficial owners of the properties. His actions are also consistent with what he says was discussed on 12 April 2013. While Mr O’Reilly denied any prior discussion about the subdivision, and said that he was furious that Mr Morrison had started the subdivision process, assuming that the land was his, the fact remains that Mr and Mrs O’Reilly proceeded to complete the subdivision.
[135] None of these various matters is determinative in itself but there is an overall consistency in the evidence and it supports what Mr Morrison and Mr Cross said occurred.
Findings on the balance of probabilities
[136]I find, on the balance of probabilities, that:
(d)there was a discussion between Mr Morrison and Mr O’Reilly about the no cost trustee arrangement, probably in early April 2013;
(e)that Mr O’Reilly agreed to proceed on this basis; and
(f)that various assurances in this regard were given by Mr O’Reilly to Mr Morrison at or about this time and also at the meeting on 12 April 2013.
Pleadings – relevant law
Five causes of action were pleaded:
(a)an express trust;
(b)an institutional constructive trust;
(c)promissory estoppel;
(d)breach of fiduciary duty; and
(e)a buy-back agreement under the Credit Contracts and Consumer Finance Act 2003.
Express trust
[138] The first cause of action raised in the second amended statement of claim asserted an express trust. Mr Jenkin did not press this pleading. In my view he was right not to do so. While an express trust can be oral rather than written, s 25 of the Property Law Act 2007 requires that certain dispositions of interests in land be in writing. Inter alia a trust must be created in writing and signed by the settlor if it relates to land and is to take effect in the lifetime of the settlor. This provision precludes a finding that there was an express trust in this case. There was no evidence of anything in writing evidencing the no cost trustee arrangement I have found that the parties entered into.
Institutional constructive trust
[139] The second cause of action alleged that there was an institutional constructive trust between the parties and that Autumnal holds the properties on trust for the Trust as the beneficial owners.
[140] An institutional constructive trust arises by operation of the principles of equity, and whose existence the Court simply recognises in a declaratory way.8 There must be some property over which a constructive trust can be imposed.9 In the present case, this causes no difficulty. The constructive trust can be imposed over the properties.
[141] While Autumnal is the registered proprietor, its title remains susceptible to an in personam claim if there has been unconscionable conduct.10 A registered proprietor can be subject to claims arising out of his or her personal conduct (in personam claims) and whether the conduct occurred before or after registration. Registered proprietors can be required to hold their estate or interest and to deal with it, so as to give effect to obligations with which they have burdened themselves at law or in equity so long as enforcement of those claims is not inconsistent with the objective of the Torrens land registration system.11 A constructive trust will be recognised where it would be a fraud for the legal owner to assert beneficial ownership.12 Where property is conveyed in consideration of an oral promise by the transferee that the transferor will retain a beneficial interest in the property, and where retraction of the promise amounts to a fraud upon the transferor, then the transferee will be held a constructive trustee for the benefit of the transferor of either the whole property or of the relevant interest. The key to such cases lies in the question whether the transferor would have parted with the property but for the oral undertaking of the transferee. If that question is answered in the negative, then renunciation of the promise or disavowal of the common intention will operate in equity as a fraud on the transferor and entitle the transferor to the appropriate remedy. The circumstances must show that reliance on
8 Fortex Group Ltd (in rec and liq) v MacIntosh [1998] 3 NZLR 171 (CA) at 172—173.
9 At 175. See also Re Goldcorp Exchange Ltd (in rec) [1994] 3 NZLR 385 (PC).
10 Regal Castings Ltd v Lightbody [2008] NZSC 87; [2009] 2 NZLR 433.
11 Duncan v McDonald [1997] 3 NZLR 669 at [683].
12 Avondale Printers & Stationers Ltd v Haggie [1979] 2 NZLR 124 (SC) at 145.
the legal title in situations of this kind amounts to a fraud upon the plaintiff.13 The constructive trust arises because of the fraudulent denial of the common intention or oral promise, even where there was no perfected agreement or declaration of trust.14
[142] The three key elements to establish an institutional constructive trust, in the circumstances which have arisen in this case, are first, an oral undertaking or promise, secondly, that Mr Morrison as trustee of the Trust, was induced by the oral undertaking or promise given by Mr O’Reilly to part with the properties, and thirdly, that Mr Morrison, as trustee of the Trust, would not have so acted, but for the oral undertaking or promise.
[143] For the reasons I have set out above, I am satisfied that there was an oral undertaking or promise made by Mr O’Reilly in early April 2013, and repeated at the meeting on 12 April 2013.
[144] It was asserted for Autumnal and the O’Reillys that there was no evidence of a sufficiently unequivocal and unambiguous promise by Mr O’Reilly that Autumnal would act as a trustee for the Trust, or that the Trust could purchase the properties back at the amount required to discharge the mortgages secured over them. I do not accept this submission. I have already explained what Mr Morrison proposed – the no cost trustee arrangement or buy and hold – see [17]. I have recorded Mr Morrison’s evidence as to what was said between him and Mr O’Reilly in early April 2013 – see [33]-[34]. I have also recorded Mr Morrison’s version of what was discussed at the meeting on 12 April 2013. He said that Mr O’Reilly acknowledged that he would be a no cost trustee – see [53]. I have recorded Mr Cross’ recollection of the meeting on 12 April 2013 – see [54]. He remembered Mr O’Reilly using the term “no cost trustee” to describe his involvement in the deal. He recalled Mr O’Reilly saying that when it was all over, and Mr Morrison was in a position to do so, the properties would be returned at the discharge cost. In my judgment, there was an oral promise or undertaking and the comments made by Mr O’Reilly were not simply general or
13 At [163]; And see, Bannister v Bannister [1948] 2 All ER 133 (CA); Mahon v The Station at Waitiri Ltd [2017] NZCA 387; (2017) 18 NZCPR 760 at [47].
14 Laboyrie (as trustees of the Galway Trust) v Mills (as executor of the estate of Mills) [2020] NZHC 700.
comforting in nature. Rather they were sufficient to support the equitable relief sought.
[145] Further, in my judgment, Mr Morrison, as trustee of the Trust, was induced by the oral undertaking or promise given by Mr O’Reilly to part with the properties to Autumnal. Mr Morrison gave evidence to that effect – see [53]. He had a fallback position if Mr O’Reilly had not made the promise or given the undertaking. Mr Cross had recently sold a property in New Zealand, and he had the ability to borrow money in this country. On his evidence, he would have been able to complete the purchase and he was familiar with and had already agreed to the no cost trustee proposal which Mr Morrison was seeking to put in place. In my judgment, Mr Morrison was induced by Mr O’Reilly’s oral undertaking and promise to part with the properties. He acted to his and the Trust’s detriment in accepting that promise or undertaking because he did not take up Mr Cross’ offer, but instead entered into the sale and purchase agreements with Autumnal.
[146] I am also satisfied that Mr Morrison, as trustee of the Trust, would not have parted with the properties to Autumnal but for the oral undertaking or promise made by Mr O’Reilly. Mr Morrison said as much and I accept his evidence.
[147] The plaintiffs are seeking equitable relief. It is trite law that “he who comes into equity must come with clean hands”. Autumnal and the O’Reillys did not plead that there was any impropriety in Mr Morrison’s actions as trustee of the Trust. I nevertheless was concerned about the issue, and asked counsel to address it in closing. I agree with the submissions made by Mr Brittain in this regard. He noted that the bank allowed Mr Morrison to market the properties for sale on behalf of the Trust, and was content to discharge its mortgages on payment of the amounts nominated by it. It did not seek to go into possession as mortgagee. Nor did it proceed itself to mortgagees’ sales. The prices eventually obtained for the properties were below the valuations obtained by Mr Morrison on 2 April 2013 and, on the evidence, those valuations were not made available to the bank. There was however no evidence that any other party would have paid more than Autumnal for the properties. Mr Morrison’s decision not to provide the 2 April 2013 valuations to the bank does not appear to breach any legal duties that he owed to the bank. He was acting on
behalf of the Trust as owner of the properties, and not as the bank’s agent. There was no contractual obligation obliging him to make the valuations available. The discharge figures fixed by the bank were achieved. Nor is there any evidence that Mr Morrison was intending to defeat other creditors. On the evidence, Mr Morrison and the Trust did not have any other creditors. There is no evidence to suggest that there was a breach of s 346 of the Property Law Act, or that Mr Morrison was trying to defeat his or the Trust’s creditors. Accordingly, I do not consider that there is anything in the Trust’s or Mr Morrison’s actions which engages the clean hands principle or which precludes the Trust obtaining the relief it seeks.
[148] It follows that, in my judgment, Mr Morrison and the current trustees of the Trust have succeeded in establishing that there was an institutional constructive trust over the properties, in favour of the Trust as the beneficial owner of the properties.
Promissory estoppel
[149] This discussion leads into the third cause of action pleaded in the second amended statement of claim – promissory estoppel. Broadly, the elements of promissory estoppel are as follows:
(a)a belief or expectation that has been created or encouraged through some action, representation or omission to act by the party against whom the estoppel is alleged;
(b)the belief or expectation has been reasonably relied on by the party alleging estoppel;
(c)detriment will be suffered if the belief or expectation is departed from; and
(d)it would be unconscionable for the party against whom the estoppel is alleged to depart from the belief or expectation.15
15 Gold Star Insurance Ltd v Gaunt [1998] 3 NZLR 80 (CA) at 86; Gillies v Keogh [1989] 2 NZLR 327 (CA) at 346.
[150] It is also well established that the representation must be sufficiently unequivocal and not ambiguous, overly general or merely a comforting sound.16
[151] For the reasons I have already set out in discussing the institutional constructive trust pleading, I consider that Mr Morrison and the Trust can also rely on promissory estoppel, to preclude Autumnal from asserting any right to the beneficial ownership of the properties.
Breach of fiduciary duty/buy back agreement
[152] The fourth and fifth causes of action were abandoned by Mr Jenkin in opening the case for the plaintiffs.
Result
Declaration/Transfer of properties
[153] For the reasons I have set out, I make a declaration that Autumnal holds the properties – now Lot 2 DP 491219, Certificate of Title Identifier No. 711317, South Auckland Registry – as trustee of an institutional constructive trust in favour of the trustees of the Trust.
[154] Further, I make an order that Autumnal is to transfer the property back to the trustees of the Trust so that it vests in the trustees, such order to be subject to the following conditions:
(a)the trustees of the Trust are to pay to Autumnal such amount as shall be required to repay the mortgage secured over the title to the property;
(b)the trustees of the Trust are to pay to Autumnal the sum of $50,000, being the agreed remuneration for the provision by Autumnal of its services in holding the property as trustee;
16 NB Hunt & Sons Ltd v Maori Trustee [1986] 2 NZLR 641 (CA) at [655]; Marine Steel Ltd v The Ship “Steel Navigator” [1992] 1 NZLR 77 (HC) at [83]; The Ship “Betty Ott” v General Bills Ltd [1992] 1 NZLR 655 (CA) at [671]; Wilson Parking New Zealand Ltd v Fanshawe 136 Ltd [2014] NZCA 407; [2014] 3 NZLR 567.
(c)the trustees of the Trust are to pay to Autumnal the sum of $55,509.22, being the cash contribution made by Mr and Mrs O’Reilly to enable Autumnal to purchase the properties in May 2013; and
(d)the trustees of the Trust are to pay to Autumnal its reasonable costs and disbursements incurred in transferring the property back to the trustees of the Trust.
Subdivision/Sale of section
[155] Mr Morrison and the Trust also sought that Autumnal should account to them for the proceeds of the sale of the section subdivided off from the orchard block. Neither counsel addressed this issue in their respective submissions in any detail. Accordingly, I resort to general principles.
[156] The duty not to profit from a trusteeship is a fundamental obligation imposed on trustees, to ensure that their loyalty to the beneficiaries is not distracted by a desire to earn a personal profit from the office. The duty is applied strictly.
[157] On the evidence, the sum of $300,000, being part of the proceeds from the sale of the section, was used to reduce the amount outstanding under the mortgage over the properties by Autumnal. According to the settlement statement prepared by Sharp Tudhope, there was a surplus of $158,251.57 which was paid into Autumnal’s account. The sum of $110,000 was then advanced to Mr and Mrs O’Reilly in error, but which was subsequently transferred by them, together with accrued interest, back to Autumnal.
[158] In my judgment, Autumnal cannot profit from the trusteeship; rather it must account to the plaintiffs for the net sum received from the sale of the subdivided land and I so order.
Accounting for profits
[159] Neither counsel dealt with this issue in their respective submissions. Again, I resort to general principles.
[160] Autumnal has generated an income over the years. Its only business has been the management of the properties and the operation of the orchard block. Its accounts were produced and Hugh Sutherland, a forensic accountant called by the plaintiffs, undertook some analysis of those accounts. I reproduce a table Mr Sutherland prepared summarising Autumnal’s position.
Autumnal Investments Ltd
Statement of Financial Performance for the Year Ending 31 March
2019 2018 2017 2016 2015 2014 $ $ $ $ $ $ Revenue Kiwifruit Proceeds (1) 169,184 148,429 132,978 126,084 111,084 131,357 Interest Income (2) 1,280 7,081 4,171 159 660 842 Rental Income – Domestic Rental Income (3) 15,950 15,080 13,920 15,370 5,215 1,294 Total Income (4) 186,414 170,590 151,069 141,613 116,959 133,493 (5) Less Expenses (6) Accountancy (7) 3,425 3,868 1,689 1,950 2,389 1,125 Administration (8) 64,130 0 15,000 0 0 0 Interest – loans (9) 29,501 28,829 33,100 48,326 78,241 62,712 Legal Fees (10) 47,155 43,154 2,877 2,215 0 0 Orchard Operating Expenses (11) 63,276 63,070 68,515 60,635 57,972 45,249 Rates (12) 8,689 6,462 3,228 3,274 3,160 2,107 Other Expenses (13) 11,126 3,521 480 85 76 6 Expenses before Deprn (14) 227,302 148,892 124,889 116,485 141,838 111,199 Depreciation (15) 0 0 0 0 0 0 Total Expenses (16) 227,302 148,892 124,889 116,485 141,838 111,199 (17) Net Surplus/(Deficit) (18) (40,888) 21,698 26,180 25,128 (24,879) 22,294 Taxation (19) Net Surplus/(Deficit) After Tax (20) (40,888) 21,698 26,180 25,128 (24,879) 22,294
[161] As can be seen, in large part, the income derived from the orchard and by way of rental, has been used to meet the operating expenses incurred in relation to the orchard and interest payable on the mortgages. There have been additional monies paid out by Autumnal. In the financial year ending 31 March 2019, Autumnal paid out $64,130 to the O’Reillys. It was Mrs O’Reilly’s evidence that this was for the provision of administrative services she and her husband provided to the company over the years 2014, 2015, 2016 and 2017. In the financial year ending 31 March 2018, $43,154 was paid out in legal fees, and in the 2019 financial year, $47,155 was
paid out in legal fees. On the evidence, those fees were to meet the costs involved in these proceedings.
[162] It is a general duty that a trustee must act gratuitously. This general duty is subject to various exceptions, including where there is a prior agreement between the trustee and the beneficiary. Further, a trustee is also entitled to an indemnity for his or her expenses and has priority in this regard over a beneficiary.
[163] In the present case, it was Mr Morrison’s evidence that the income produced from the orchard was to go to the no cost trustee – see [17] – and the no cost trustee was to be fully indemnified for all costs incurred. The parties do not seem to have turned their minds to what would happen if the orchard generated a profit. Rather, their focus was on what would happen if the income from the orchard block was insufficient to meet the costs incurred. The various expenses incurred by Autumnal in operating the orchard, in paying mortgage interest, rates and other expenses bona fide connected with maintaining the properties can properly be charged by it from the income obtained from the orchard block and by way of rental. However, in the absence of express prior agreement, Autumnal had to act gratuitously. There is no evidence of any such agreement. As a result, Autumnal must account to the trustees of the Trust for any moneys received by it while acting as a trustee, less costs bona fide incurred in operating the orchard and in paying outgoings connected with maintaining or operating the properties. The legal fees paid in 2018/2019 are not costs relating to the maintenance of the orchard and Autumnal should account for those sums to the trustees. The administration costs paid to Mr and Mrs O’Reilly seem to be a bona fide business expense. Mrs O’Reilly’s evidence was that the amounts paid were to this end and there was no evidence to the contrary.
[164] I order that Autumnal account to the trustees of the Trust for all net income received from the properties over the period of its trusteeship.
Costs
[165] The plaintiffs are the successful parties in this proceeding and they are entitled to their reasonable costs and disbursements. I direct as follows:
(a)within 15 working days of the date of this judgment, the plaintiffs are to file a memorandum setting out the costs and disbursements they seek to recover;
(b)within a further 15 working days, the defendants are to file a memorandum in reply.
I will then deal with the issue of costs and disbursements on the papers, unless I require the assistance of counsel.
Wylie J
Solicitors/counsel:
Bruce Dell Law/G C Jenkin/Auckland
Jackson Reeves Lawyers/G Brittain QC, Tauranga
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