Official Assignee v Wheeler

[2015] NZHC 1644

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2015-404-000540 [2015] NZHC 1644

UNDER

a deed of sale and purchase and

acknowledgement of debt duly executed by Robert Henry Wheeler and Stephen James Lindsay dated the 15th day of July

2004

IN THE MATTER

of an application to recover a due debt

BETWEEN

THE OFFICIAL ASSIGNEE Plaintiff

AND

ROBERT HENRY WHEELER AND STEPHEN JAMES LINDSAY Defendants

Hearing:	13 July 2015
Appearances:	R S May for Plaintiff Defendants in Person
Judgment:	14 July 2015

JUDGMENT OF VENNING J

This judgment was delivered by me on 14 July 2015 at 4.30 pm, pursuant to Rule 11.5 of the High

Court Rules.

Registrar/Deputy Registrar

Date……………

Solicitors:           Luke Cunningham Clere, Wellington

Copy to:            Defendants

THE OFFICIAL ASSIGNEE v WHEELER & ANOR [2015] NZHC 1644 [14 July 2015]

[1]      The Official Assignee in the bankrupt estate of Robert Henry Wheeler (Mr Wheeler) seeks summary judgment against Mr Wheeler and Stephen James Lindsay (Mr Lindsay) in their capacity as trustees of the Oakvale Trust.

Background

[2]      Mr Wheeler is now 75 years old.  Through his working life he worked hard at a variety of jobs, including as a sharemilker, a farmer, a real estate agent, and a property developer.  In this way he accumulated a number of assets and investments. It appears he received advice it would be a good idea to place some of his assets in a trust.   On 15 July 2004 he established the Oakvale Trust.   Mr Wheeler and Mr Lindsay, his accountant, were the trustees.

[3]      On the same day Mr Wheeler as vendor and the trustees as purchasers entered a sale and purchase agreement and acknowledgement of debt agreement pursuant to which Mr Wheeler sold the following property to the Trust:

(a)       House at 3/71 Pupuke Road, Birkenhead –  $525,000

(b)	House properties at 11 September Place, Forrest Hill –	$380,000
(c)	Marine berth at Westpark –	$24,000
(d)	Promissory notes from Transbank Capital Corporation (Transcap) totalling –	$1,485,317
(e)	Shares –	$324
Total	$2,414,641

[4]      No money passed hands.  The purchase price of $2,414,641 was recorded as being a debt owed by the trustees to Mr Wheeler.  The purchase price was repayable upon demand.

[5]      Mr Wheeler subsequently started but did not complete a gifting programme. He forgave five separate amounts of $27,000 leaving a balance of $2,279,641 owing by the Trust to him as at 21 June 2010.

[6]      Mr Wheeler had also borrowed a substantial sum of money from AMP Home Loans Limited (AMP) to assist in a property development through a separate trust, the Phoenix Trust and to invest further in Transcap.

[7]      Mr Wheeler had made the original investments in Transcap after meeting a Mr Fitzpatrick whose brother-in-law was a director in Transcap.  Unfortunately the Transcap investments were bad investments.   It transpired the investments were effectively a ponzi type of scheme.  The entire capital that Mr Wheeler and the Trust had invested in Transcap was lost.

[8]      Mr Wheeler also fell into default in his obligations to AMP.  AMP pursued the sale of the development property under its security and sued Mr Wheeler for the balance.   AMP obtained judgment against Mr Wheeler.   He was subsequently adjudicated bankrupt on AMP’s petition on 23 September 2013.   Mr Wheeler’s bankrupt estate owes his creditors $775,843.

[9]      On investigating Mr Wheeler’s affairs the Official Assignee discovered the existence of the Trust and the debt still owing by the Trust under the agreement for sale and purchase.

[10]     The Official Assignee made demand of the trustees for repayment of the balance of $2,279,641. The trustees failed to pay. These proceedings followed.

Principles

[11]     The principles in relation to summary judgment application are well settled. The onus is on the Official Assignee to prove there is no defence to her claim against the defendants.   Where, as here, the Official Assignee’s evidence is prima facie sufficient to show there is no defence, the defendants need to respond if the summary judgment application is to be defended.

The parties’ cases

[12]     The documentation annexed to the affidavit of Ms Johnson, Deputy Assignee, confirms the existence of the Trust, the transfer of assets by Mr Wheeler to the Trust and the subsequent debt back.  Ms Johnson’s evidence also confirms that, after the five deeds of forgiveness of debt of $27,000 each, by June 2010 the debt remained at

$2,279,641.  The Official Assignee has recently made demand for that sum, which remains unmet.

[13]     On the basis of Ms Johnson’s evidence the Official Assignee is entitled to the judgment she seeks.

[14]     The issue is whether, having regard to the remaining evidence put before the Court by the defendants, the Court can still be satisfied  there is no  reasonably arguable defence to the Official Assignee’s claim.

[15]     The defendants raise the following general defences:

(a)      Mr Wheeler is liable to the Trust for losses sustained by the Trust in relation to failed investments, which supports a counterclaim or set- off against the Official Assignee’s claim;

(b)      a limitation argument;

(c)      AMP sold the security at an undervalue in breach of its obligations as mortgagee.

Preliminary point

[16]     There is a preliminary point.   It relates to the extent of the liability of the defendants as trustees.   Both the deed of trust and the sale and purchase and acknowledgement of debt include provisions limiting the liability of the trustees to the extent of the assets of the Oakvale Trust.

[17]     Clause 21.2 of the trust deed records:

21.2Limitation of liability for Trust liabilities:   No person enforcing any  liability  entered  into  or  incurred  by  the Trustees  shall  have recourse  to  any  property  belonging  to  any  one  or  more  of  the Trustees which does not form part of the Trust Fund.

[18]     Further, cl 10 of the deed of sale and purchase and acknowledgement of debt records:

10.The Purchasers [the trustees] have entered into this deed as trustees of the Trust so as to bind the trustees from time to time of the Trust. The liability of such trustees to the Vendor under this deed shall not be an unlimited personal liability.   Such trustees’ liability shall be limited to payment or satisfaction of the Debt out of, and so far as will extend, the funds belonging to the Trust and coming into the hands of the trustees in the proper course of the administration of the Trust.  …

[19]     There is no formal evidence before the Court as to the extent of the assets of the Trust or their value. A letter from the solicitors Simmons and McCartney written on behalf of the trustees says “all of the assets of the Trust, with the exception of the Trust’s strata titled property, have been lost”.  During the course of submissions the trustees (who represented themselves) advised the Court that the Trust’s sole asset is a unit title property (one of six) in a development on the North Shore.  They estimate its value at between $600,000 and $700,000.  It is subject to a mortgage of $300,000.

[20]     However, whatever the assets of the Trust may be, as discussed with the defendants and confirmed by Mr May during the course of submission, the liability of the defendants in relation to the present claim by the Official Assignee is limited to the assets of the Trust.  Mr Lindsay’s separate personal assets in particular, are not at risk.

The proposed counterclaim/set-off

[21]     The  proposed  counterclaim  outlined  in  the  letter  from  Simmons  and

McCartney on behalf of the defendants is somewhat novel. The solicitors stated:

1.The Trustees of the Oakvale Trust advise that all of the assets of the Trust, with the exception of the Trust’s strata titled property, have been lost. The Trustees were seriously misled by Mr. Wheeler on the subject of an investment into a Canadian based fund that he recommended to the Trust.  The Trust invested NZD$1,786,709.26 with that company.  Those funds were entirely lost and there is no

likelihood of recovery from the fund.   We have verified that loss. You can confirm for yourself by visiting the website for the Alberta Securities Commission and searching Transcap.

2.The entry into what was fraudulent/Ponzi investment scheme was made  on  the  advice and recommendation of Mr. Wheeler in  his personal capacity.   The Trust considers that in any circumstances, because of the fraud and consequential the loss to the Trust, the debt even if enforceable is not repayable to Mr Wheeler due to the negligent advice given.

[22]     The trustees, Mr Wheeler and Mr Lindsay, therefore seek to argue that they have a claim against Mr Wheeler for negligent advice he gave to himself and Mr Lindsay regarding the Transcap investment.

[23]     There is very limited evidence before the Court to support the counterclaim or set-off argument.

[24]     Mr Lindsay refers to the letter from the solicitors Simmons and McCartney and says that he considers that in the circumstances:

10.… entry into the Ponzi Scheme was made on the advice and recommendation of Bob in his personal capacity.  I consider that in any circumstances, because of the fraud and consequential loss to The Trust, the debt even if enforceable is not payable to Bob or his assigns due to the negligent advice given by Bob.

11.       When Bob advised that the Trust invest in Transcap, a company referred to in Simmons & McCartney’s letter of 24th June 2014 … I was rather worried.  Bob assured me that it was a good investment.  I told Bob that I thought it had the hallmarks of a Ponzi Scheme.  But the Trust continued to get good income from Transcap until 30th September 2008, at which stage all payments came to an end and then a huge number of spurious promises to pay were received.  It was only several years later that we realised the promises were spurious.  In early September 2008 I was getting the impression that the Transcap investments were proper and were not a Ponzi scheme as they had gone on for several years and generated good income. Anybody can imagine my surprise when it all came to a crashing end.

[25]     Mr Lindsay then attempts to address the difficulty which the timing of the deed of acknowledgement of debt of 21 June 2010 causes the trustees by saying:

12.The debt was acknowledged in writing on 21st June 2010 by Bob and me as trustees as at that date we were unaware that the promises to pay were to turn out to be spurious.

[26]     For his part Mr Wheeler does not directly deal with whether he gave advice to the trustees regarding the investment, other than saying:

As trustee I was unable to exercise proper due diligence for investing in [Transcap] which resulted in misleading the Trust as to the security of the investment,  and  as  advised  I resigned  as  trustee  effective  7th   July  2014 accordingly.  …

The TransCap fraud has made us victims of crime that has [led] us to Court for this case.

[27]     In his submissions Mr Wheeler says:

In 2004 I … invested I [Transpac].   Later as Trustee I recommended the

investment to the [Trust].

[28]     There is no detail as to when the negligent advice was said to have been given  or  any  detail  as  to  what  was  said  when  the  original  investments  were transferred to the Trust in July 2004.  On the evidence of Mr Lindsay it seems that the investments were completed by 30 September 2008 because at that stage he says all payments came to an end and a huge number of spurious promises to pay were received.   Mr Wheeler’s submission suggests he gave the advice and  made the further decisions to invest in his capacity as a trustee.

[29]     Although it is not covered in the evidence, it appears from discussion with

Mr Wheeler and Mr Lindsay during the course of the hearing that most of the

$1,786,709 claimed to have been lost was made up of the promissory notes of

$1,485,317 transferred under the sale and purchase agreement in 2004 (and  the initial returns on those investments).

[30]     As Mr May submits there are a number of hurdles in the way of the proposed claim by the trustees in response to the Official Assignee’s claim.   First, a counterclaim is not available as defence to a summary judgment application.   In Pemberton v Chappell Casey J noted that a counterclaim is not a defence.1

[31]     Rule 12.12(2) confirms the position.  It provides:

12.12   Disposal of application

…

(2)       If it appears to the court on an application for judgment under rule 12.2 or 12.3 that the defendant has a counterclaim that ought to be tried, the court—

(a)       may give judgment for the amount that appears just on any terms it thinks just; or

(b)      may  dismiss  the  application  and  give  directions under subclause (1).

[32]     Rule 12.12 confirms that even if a potential counterclaim exists it will not prevent the entry of judgment against the defendants.  It is a matter for the Court in the exercise of its discretion whether to give judgment or not, even if the defendant has a counterclaim that ought to be tried.

[33]     To the extent that there is any force in the proposed claim by the trustees against Mr Wheeler it has more application in the context of an equitable set-off rather than counterclaim.

[34]     However, there are also fundamental difficulties for the defendants with the proposed set-off.

[35]     An  equitable  set-off  would  not  be  available  to  the  trustees  for  any investments made after the sale of the original investments in 2004.  An equitable set-off is available only where the two claims are sufficiently linked:  Grant v NZMC Ltd:2

The link must be such that the two are in effect interdependent: judgment on

one cannot fairly be given without regard to the other; …

[36]     In this case the debt pursued by the Official Assignee is the purchase price of property transferred to the trust funds to Mr Wheeler.   The set-off claimed by the trustees against Mr Wheeler for investments made after 2004 must be based on allegedly misleading and negligent investment advice provided after that.   It is a quite separate issue and lacks the necessary linkage.

[37]     The only possible issue is whether there is potential for an argument the claim against Mr Wheeler is based on an innocent misrepresentation he made in relation to the transfer of the investments to the Trust in 2004.  Mr May conceded that if there was such a claim then, subject to any limitation point and the lack of evidence to support the claim, the trustees could have had a set-off, but limited to the value of the Transpac investments transferred at the time, namely $1,485,317.

[38]     Section 6 of the Contractual Remedies Act 1979 provides:

6        Damages for misrepresentation

(1)      If a party to a contract has been induced to enter into it by a misrepresentation, whether innocent or fraudulent, made to him by or on behalf of another party to that contract—

(a)       he shall be entitled to damages from that other party in the same manner and to the same extent as if the representation were a term of the contract that has been broken; and

(b)       he shall not, in the case of a fraudulent misrepresentation, or of  an  innocent  misrepresentation  made  negligently,  be entitled to damages from that other party for deceit or negligence in respect of that misrepresentation.

(2)       Notwithstanding anything in section 56 or section 60(2) of the Sale of Goods Act 1908, but subject to section 5 of this Act, subsection (1) shall apply to contracts for the sale of goods.

[39]     Section 6 extends to provide a remedy where the party to a contract, in this case the trustees, have been induced to enter into it by a misrepresentation, whether innocent of not, made to them by Mr Wheeler.   In the present case the trustees’ argument for set-off must be that they were induced to agree to pay Mr Wheeler the full sum of $1,485,317 as the part of the component price of the assets transferred for the Transpac investments on the basis that Mr Wheeler innocently represented to them that that was the value of the assets at the time.

[40]     While  I  have  some  real  reservation  as  to  the  ultimate  strength  of  that argument, and it may well face limitation issues, I am conscious that this is an application for summary judgment.   I am also conscious that the defendants are representing themselves.

[41]     On the information before the Court I accept there is the possibility of an argument that Mr Wheeler made an innocent misrepresentation to the trustees to the effect that the investments in Transpac were worth $1,485,317 and that the trustees were induced to enter the agreement for sale and purchase on the basis of that representation.

[42]     Any such claim may face limitation difficulties.  Consideration will need to be given to when the trustees learnt that the investments were valueless.  However, I am not prepared to rule out the possibility of such a set-off at this time.

Limitation

[43]     I can deal with the other proposed defences shortly.

[44]     In their letter Simmons and McCartney raised the possibility of a limitation defence  to  the  Official Assignee’s  claim  noting  that  the  obligation  to  pay  was recorded in a deed entered on 15 July 2004.  However, there is a short answer to any such proposed limitation defence.  The trustees’ obligation to pay the balance owing under the agreement for sale and purchase was not triggered until demand was made. The only evidence of demand is the demand by the Official Assignee of 15 October

2014.  As such, s 5(1) of the Limitation Act 2010 applies.  The date from which the limitation period commences to run is the date on which the trustees defaulted by failing to pay on the Official Assignee’s demand.   The Official Assignee’s claim against the defendants is within time.

[45]     Further,  even  if  that  were  not  the  case,  the  trustees  acknowledged  the existence of the debt on 21 June 2010 when Mr Wheeler released $27,000 from the debt.   The deed of release recorded that the amount owing by the trustees to Mr Wheeler was $2,279,641.  The claim has been brought within six years of the date of

that deed.3    The limitation defence does not avail the defendants.

3      Limitation Act 2010, s 47.

The proposed claim against AMP

[46]     The trustees’ complaint relating to the actions of AMP is not able to be taken into account by the Court on this application for summary judgment.  The time for Mr Wheeler to raise that issue was when AMP was acting to enforce its rights as mortgagee and in the later proceedings in which it obtained its judgment against him. Section 61 of the Insolvency Act 2006 confirms that Mr Wheeler’s adjudication is binding and it is not open for him, at this stage, to challenge the validity of it.

Conclusion/summary

[47]     Rule 12.2 provides:

12.2Judgment when there is no defence or when no cause of action can succeed

(1)       The court may give judgment against a defendant if the plaintiff satisfies the court that the defendant has no defence to [a cause of action in the statement of claim or to a particular part of any such cause of action].

(2)       The court may give judgment against a plaintiff if the defendant satisfies the court that none of the causes of action in the plaintiff's statement of claim can succeed.

[48]     While the Court could perhaps take a robust approach in this case and reject the proposed set-off, given the situation of the defendants in this case and noting that the entry of summary judgment is discretionary, I consider the appropriate course of action is to enter judgment for what must on any view of it be an undisputed sum, namely the difference between the amount owing by the trustees, less the possibility of a set-off in relation to the value of the Transpac investments as referred to in the agreement for sale and purchase at the time that the liability was initially incurred.  If the information orally provided to the Court by the defendants as to the extent of the Trust’s assets is correct, that is likely to exhaust the assets of the Trust in any event.

Result/orders

[49]     The plaintiff Official Assignee is to have judgment against the defendant trustees in the sum of $794,324.00 (calculated as $2,279,641 less $1,485,317).

[50]     The balance of the Official Assignee’s claim against the trustees, namely for

$1,485,317 is adjourned to be pursued by the Official Assignee in the usual way if the Official Assignee wishes to do so.

[51]     For the avoidance of doubt and as discussed above, while the judgment is entered in the sum of $794,324 against both defendant trustees, the judgment is against them in their capacity as trustees, and any enforcement of the judgment is limited to the extent of the assets held by them as trustees of the Oakvale Trust.

Costs

[52]     The Official Assignee is also entitled to costs against the defendant trustees on the proceeding and the hearing to be calculated on a 2B basis together with disbursements as fixed by the Registrar.  Again the enforcement of the costs order is

limited to the extent of the assets held by them as trustees.

Venning J