Penn v McQueen
[2019] NZHC 2192
•3 September 2019
NOTE: PURSUANT TO S 35A OF THE PROPERTY (RELATIONSHIPS) ACT 1976, ANY REPORT OF THIS PROCEEDING MUST COMPLY WITH SS 11B,
11C AND 11D OF THE FAMILY COURT ACT 1980. FOR FURTHER INFORMATION, PLEASE SEE
https://www.justice.govt.nz/family/about/restriction-on-publishing-judgments/
IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY
I TE KŌTI MATUA O AOTEAROA KIRIKIRIROA ROHE
CIV-2018-419-000175
[2019] NZHC 2192
BETWEEN CHERYL PENN
Appellant
AND
ELIJAH McQUEEN
Respondent
Hearing: 5 March 2019 (final submissions received 25 March 2019) Counsel:
V A Crawshaw QC and L M Reed for appellant S R Jefferson QC and J I Hawker for respondent
Judgment:
3 September 2019
Reissued:
23 October 2019
JUDGMENT OF KATZ J
This judgment was delivered by me on 3 September 2019 at 3.00 pm pursuant to r 11.5 of the High Court Rules.
Deputy Registrar
Solicitors: Riverside Law, Waikato
Wynyard Wood, Auckland
Counsel:V A Crawshaw QC, Hobson Chambers, Auckland S R Jefferson QC, Trinity Chambers, Auckland
PENN v McQUEEN [2019] NZHC 2192 [3 September 2019]
Introduction
[1] Cheryl Penn and Elijah McQueen1 entered into a de facto relationship in the United Kingdom (“UK”) in 2000. They subsequently married in 2006 and had two children. In December 2009 they relocated to New Zealand, Ms Penn’s home country.
[2] The couple separated in May 2011 and their marriage was dissolved on 25 July 2013. The Family Court’s substantive decision on relationship property issues was delivered by Judge S D Otene on 17 May 2018.2 Ms Penn now appeals various aspects of that decision.
Factual background and Family Court decision3
[3] In 1994 Mr McQueen’s father, in effect, gifted a property in London (“Ringmore Rise”) to Mr McQueen by transferring it to a family trust of which Mr McQueen was the beneficiary. The property subsequently came to be occupied by Ms Penn and Mr McQueen as their family home.
[4] In February 2007, Ms Penn became pregnant with the couple’s first child. In August 2007, they moved into a rental property to enable Ringmore Rise to be renovated to make it more suitable for children. That same month Mr McQueen received £149,500 from his mother.
[5] In April 2008, Mr McQueen ceased his employment because of an employment dispute. Ultimately, he received a settlement of £85,000 in respect of that dispute, which was put towards the family’s living costs. Mr McQueen subsequently started working elsewhere, albeit only on a part-time basis. Ms Penn was a full-time mother
1 In accordance with the practice agreed between the Family Court Judges and the Chief High Court Judge in relation to appeals from the Family Court to which ss 11B-11D of the Family Court Act 1980 applies, I have used fictitious names for the parties (and also for the respondent’s mother). The fictitious names I have adopted are those that were used by the Family Court in final spousal maintenance proceedings between the parties, and by this Court on appeal from the final spousal maintenance decision.
2 Penn v McQueen [2018] NZFC 3585 (“the Family Court decision”). I note that the Family Court decision uses the parties’ actual names on the intituling, and in the decision. For consistency, and to protect the parties’ anonymity, I have used the fictitious names adopted in this judgment both in my citation of the Family Court decision, and in all quotes from that decision that are included in this judgment.
3 The factual summary in this section is based on factual findings in the Family Court or is otherwise supported by evidence given in the Family Court proceeding.
at the time. The combination of Mr McQueen’s lack of income and the escalating costs of the renovation project put significant financial pressure on the parties. Mr McQueen accordingly asked his mother for further financial assistance. She advanced £10,000 to him on 13 August 2008 and a further £80,000 on 27 August 2008.
These funds were used to support the parties’ living costs.4
[6] For various reasons (including an apparently deteriorating relationship between Mrs McQueen and Ms Penn) a decision was made to formally record any further advances by way of loan agreement. On 12 December 2008, Mr McQueen entered into a loan agreement to borrow £275,000 from his mother. A formal loan agreement was prepared by Mrs McQueen’s solicitor and signed by both parties.
[7] Mrs McQueen had funds invested in the share market through Coutts and Co (“Coutts”). She was advised by her financial advisers not to liquidate her investments, however, as the capital gains tax rate in the UK was prohibitive (18 – 28 per cent). To avoid incurring capital gains tax, Mrs McQueen borrowed money from Coutts at interest rates of about 3 – 4 per cent, secured against her shares. This prevented a “loss” (through taxation) of 15 – 24 per cent.
[8] The loan agreement between Mrs McQueen and Mr McQueen provided that interest was payable by Mr McQueen to his mother at the same rate charged by Coutts to Mrs McQueen on her borrowing, accruing daily, compounded quarterly and at a penalty rate of two per cent if not paid on the due date.
[9] The £275,000 loan from Mrs McQueen was drawn down incrementally in the following months. By 26 May 2009, most of the funds had been drawn down. A supplemental loan agreement was entered into on that date, recording a further loan of
£200,000, on the same terms.
[10] In August 2009, Mr McQueen and Ms Penn moved back into Ringmore Rise, although the renovations were still being completed. They remained there until they moved to New Zealand in December 2009. Judge Otene found that a further sum of
£23,000 was also loaned by Mrs McQueen to her son on 14 December 2009 (shortly
4 Neither these advances, nor the £149,500 referred to in [4] above are claimed as relationship debts by Mr McQueen in this proceeding.
after the family had moved to New Zealand) on essentially the same terms as set out in the formal loan document, although this further loan was not formally documented. (I will refer to the three loans together as “the loan” unless the context otherwise requires).
[11] The initial tranche of the loan was drawn down on 15 January 2009, in the sum of £50,000. The balance of £448,000 was advanced incrementally, on 19 separate occasions between 24 February 2009 and 11 November 2010. Of the total loan amount of £498,000, £345,500 was drawn down when the parties were living in England, and the balance of £152,500 was drawn down after the parties had moved to New Zealand.
[12] Judge Otene found that there was “a genuine intent by Mr McQueen and Mrs McQueen that the funds were advanced by way of a loan and repayable”.5 She further found that Mr McQueen and his mother had not:6
…at any time departed from their original agreement to come to a position that the loan would not have to be repaid or formed an intent they would be written off or otherwise not repayable.
[13] For reasons that are set out further below, the Judge was satisfied that the entirety of the debt of £498,000 was relationship debt, as defined in s 20(1)(d) and (e) of the Property (Relationships) Act 1976 (“the Act”).
[14]Finally, the Judge directed Ms Penn to compensate Mr McQueen in the sum of
$12,500 for debts she had incurred in New Zealand prior to the relationship. These debts had subsequently been repaid from relationship property. Ms Penn was also ordered to make a further compensation payment of $5,000 in respect of a student loan she had taken out while living in the UK.
Issues on appeal
[15]Ms Penn’s notice of appeal raises the following issues:
(a)Was there an emerging sham in relation to the loans advanced by Mrs McQueen?
5 The Family Court decision at [62].
6 At [63].
(b)Was the additional sum of £23,000 advanced by Mrs McQueen to her son a further loan?
(c)Did the Judge err in finding that interest of $258,212 was payable on the loans from Mrs McQueen?
(d)Are the loans from Mrs McQueen relationship debts?
(e)Did the Judge err in her assessment of Ms Penn’s student loan debts (and other pre-relationship debts)?
Was there an emerging sham in relation to the loans advanced by Mrs McQueen?
[16] Ms Penn’s first ground of appeal is that the loan from Mrs McQueen became a sham as time progressed and the Judge should have found accordingly.
Emerging shams – the law
[17] The doctrine of emerging sham was explained by the Supreme Court in Ben Nevis v Forestry Ventures Ltd v Commissioner of Inland Revenue as follows: 7
[33] There is no need for us to engage in any extended discussion of what constitutes a sham for present purposes. In essence, a sham is a pretence. It is possible to derive the following propositions from the leading authorities. A document will be a sham when it does not evidence the true common intention of the parties. They either intend to create different rights and obligations from those evidenced by the document or they do not intend to create any rights or obligations, whether of the kind evidenced by the document or at all. A document which originally records the true common intention of the parties may become a sham if the parties later agree to change their arrangement but leave the original document standing and continue to represent it as an accurate reflection of their arrangement…
(Footnotes omitted.)
The second type of situation is sometimes referred to as an ‘emerging sham’.
7 Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] NZSC 115, [2009] 2 NZLR 289.
The Family Court’s findings
[18] Judge Otene found that at the time the loan agreement was executed there was a “genuine intent by Mr McQueen and Mrs McQueen that the funds were advanced by way of a loan and repayable”.8 That finding is not challenged on appeal. Her Honour further found, however, that the loans remained genuine throughout the relevant period. That finding is challenged on appeal. The Judge set out her reasoning as follows:
[63] I am not persuaded that Mr McQueen and Mrs McQueen at any time departed from their original agreement to come to a position that the loans would not have to be repaid or formed an intent that they would be written off or otherwise not repayable. Mrs McQueen certainly exercised forbearance. I do not find that remarkable in the context of a family arrangement such as this. To have enforced the loan terms when Mr McQueen was unable to comply would have been to disadvantage her son and grandchildren for whom she held love and affection. Mrs McQueen certainly lacked clarity about the loan details. She trusted the detail to Mr McQueen and her professional advisors. Again, unremarkable in the context of an arrangement between family members involving trusted advisors. In any case Mrs McQueen's evidence deposed and in trial satisfies me that although she was untroubled with when the advances would be repaid and vague on detail, fundamentally she considered the advances to be a loan, liable for repayment.
[64] Furthermore the rancour to which the separation and litigation between Mr McQueen and Ms Penn had descended makes it all the more unlikely that he or Mrs McQueen would have departed from an arrangement that gave the protection arising from a loan to an arrangement that made the funds vulnerable to claim in some way by Ms Penn.
[65] Mr McQueen accepts that the funds were not applied entirely to renovation costs. He says that significant amounts were diverted to general living expenses. I do not consider that evidences a departure from the original agreement. The background, again in context, is that the costs of the renovation were creating a significant financial burden that Mr McQueen could not meet. I am satisfied that it was that burden driving the loan arrangements notwithstanding the funds when received were used for other expenses that were being incurred alongside the renovation.
….
[67] I find that the advances of £475,000.00 made pursuant to the loan agreement dated 12 December 2008 and the supplemental loan agreement of 26 May 2009 are a debt from Mr McQueen to Mrs McQueen (or now to her estate).
(Footnotes omitted.)
8 The Family Court decision at [62].
Ms Penn’s submissions
[19] Ms Penn’s argument on appeal was that the loan falls within the “emerging sham” category. Specifically, it was submitted that Mr McQueen and his mother subsequently departed from their initial agreement and cannot therefore now rely on the loan documents as reflecting the true terms of their contract. In essence, over time the loan had become a pretence, an arrangement that Mr McQueen and his mother had no intention of adhering to. The following evidence was relied on in support of this submission:
(a)The loan sums were not repaid by the due date of 31 December 2012 (as set out in the loan agreement).
(b)The parties did not enter into any formal agreement to extend the term of the loan.
(c)Interest was not compounded quarterly and demanded on the due date, in accordance with the loan agreement. Nor was penalty interest sought for late payment (as provided for in the loan agreement). No demand for interest was made prior to separation. Further, Mrs McQueen said that she did not want Mr McQueen to pay interest on the loan.
(d)If Mr McQueen’s position is correct, the loan sums had been advanced (and/or used) for purposes other than the renovations. The loan agreement, however, expressly stated that the loan was for the purposes of the renovation.
[20] It was further submitted that Mrs McQueen’s evidence as to who was responsible for repaying the loan (Mr McQueen solely, or Mr McQueen and Ms Penn jointly) was contradictory. There is nothing in this point, however. Ultimately, who is responsible for repaying the loan is a legal issue for the Court to determine. Mrs McQueen’s views on the topic do not assist.
[21] On 11 August 2016, some five years after the parties separated, Mr McQueen paid £200,000 towards the loan. It was submitted that this was a contrivance, as by
then (four years after repayment was due) the loan had already become a sham. Ms Crawshaw further submitted that it is notable, that as the only child of Mrs McQueen and the primary beneficiary of her estate, any subsequent repayment of the loan would be to Mr McQueen’s ultimate benefit anyway.
[22] Taking all of these matters into account, Ms Crawshaw submitted that it is clear that, by the time the parties separated, neither Mr McQueen nor his mother intended to be bound by the terms of the loan agreement. They later asserted otherwise simply to try and prevent Ms Penn claiming her proper entitlement to relationship property.
Mrs McQueen’s evidence
[23] Mrs McQueen, who was in her 90s, passed away prior to trial. However, she was cross-examined on the loan during earlier spousal maintenance proceedings. When asked when her son had repaid the £275,000 loan she responded:
Well he hasn’t yet, I mean he’s had to establish a medical practice, to buy a home, to look after his daughters, so I’m not pressing him, and he hasn’t paid any back yet.
She was then asked whether he had paid interest on the £275,000 loan, to which she responded:
I don’t want him to do that, no.
[24] When pressed further on why the loan had not been repaid by 31 December 2012, Mrs McQueen explained that it was because Mr McQueen had “had a lot of expenses”. Mrs McQueen was unable to say, without reference to the relevant documentation, how much her son owed her in either principal or interest:
I do know, I’d have to look it all up in detail, I trust [my son] absolutely and I can look it up or we can look it up together.
[25] In terms of whether she knew when Mr McQueen had to repay her, she responded:
No. He would tell me when he can.
Mrs McQueen also said that she “didn’t mind” that the loan had not been repaid as at 31 December 2012.
[26] In a subsequent affidavit of 23 February 2016, Mrs McQueen deposed that she had given evidence in the spousal maintenance proceeding by telephone from England, which she found to be “confusing and intimidating”. Further, she had neglected to wear her hearing aid. She rejected any suggestion that she would be willing to “write off” the loan “because in my view both [my son and his wife] are equally responsible for its repayment”. She confirmed that she was still paying interest on the money she had borrowed (against her own savings) to lend to her son. Mrs McQueen was not able to be cross-examined on that affidavit, given that she passed away prior to trial.
Discussion
[27] I find Judge Otene’s reasoning, as set out at [18] above, compelling. I do not propose to repeat her reasons, but simply make the following additional observations.
[28] For an emerging sham to be established there must be evidence of an agreement to alter the original contract, while leaving the original documents in place. Ms Crawshaw submitted, in effect, that despite the loan being genuine at the outset, it should be inferred that at some later stage Mr McQueen and his mother agreed that the loan would not have to be repaid. Put another way – did Mrs McQueen subsequently agree to forgive the loan?
[29] Adam Caplan, a chartered accountant in the UK, gave evidence as to UK inheritance tax, capital gains tax, and discretionary trusts. His evidence included that, under UK law, Mrs McQueen’s loan to her son could only be forgiven by Mrs McQueen either signing a formal deed of waiver, or in her will. Further, for the loan not to form part of Mrs McQueen’s estate for the purposes of inheritance tax (currently levied at 40 per cent) she would have to survive for seven years beyond the date the loan is forgiven. Mr Jefferson QC noted that Mr Caplan’s evidence was not challenged, and I accept it as an accurate statement of UK law.
[30] Mrs McQueen did not sign a deed of waiver or forgive the loan in her will. I accordingly accept that, under UK law, the debt must be repaid to Mrs McQueen’s estate. Obviously, as the primary (possibly the sole) beneficiary of his mother’s estate, Mr McQueen could possibly utilise funds from his inheritance (or the discretionary trusts set up in is favour) to repay the outstanding balance of the debt. There is therefore some potential circularity, as noted by Ms Crawshaw. This does not, however, make the loan a sham.
[31] The legal treatment of the loan in the UK is not necessarily determinative of whether the loan is a sham under New Zealand law. However, when determining whether the totality of the evidence supports the conclusion that Mrs McQueen had forgiven the loan prior to her death, the English legal position is highly relevant. Mrs McQueen lived in England. She and her late husband clearly engaged in very careful estate planning in that jurisdiction, from (at least) the early 1990s onwards. They took (and acted upon) expert advice as to how to best structure their financial affairs. Despite having only one child, they established at least four discretionary trusts as part of their financial and estate planning (one of which has now been wound up). The way in which Mrs McQueen structured the loan to her son (by way of back to back lending against her Coutts’ investments) further evidences how carefully she structured her financial affairs to avoid adverse tax implications.
[32] Given this context, it seems inherently unlikely that Mrs McQueen would defeat the careful arrangements she had put in place by simply agreeing to forgive the loan to her son. The evidence does not support the conclusion that she did so in the two and a half years between the first advance of loan funds and the parties’ separation. As the Judge noted, post-separation it was even less likely that Mrs McQueen would have been willing to forgive the loan. Such conduct would likely benefit a daughter- in-law that she clearly had little fondness for, while disadvantaging her son (and exposing him to the prospect of significant estate duties).
[33] As for Mr McQueen, the allegation that he was a party to a sham was not put to him on cross-examination, and he therefore did not have an opportunity to address that allegation.
[34] I share Judge Otene’s view that Mr McQueen and Mrs McQueen did not at any stage depart from their original agreement that the loan would have to be repaid. As the Judge observed, Mrs McQueen certainly exercised forbearance. Given the family context, however, Mrs McQueen’s evidence as to why she did not press for repayment is inherently credible. It does not follow from her forbearance that she had agreed to forgive the debt. Although she did not demand repayment when due (or subsequently), Mrs McQueen consistently maintained that the relevant funds were loans. In response to questions regarding whether or not the debt would be forgiven, or repaid upon her death, Mrs McQueen answered that the debt would not be forgiven and that her estate would need to be repaid in the event that she died prior to repayment. This evidence is corroborated by Mr Caplan’s evidence, as set out above. Mrs McQueen’s evidence was that her “perfectly reliable bank” would eventually need to calculate the total repayment and ensure that the debt was repaid in full.
[35] In conclusion, I find no error in Judge Otene’s careful analysis of this issue, or in her conclusion.
Was the additional sum of £23,000 advanced by Mrs McQueen to her son a further loan?
Evidence/ Family Court’s findings
[36] In addition to the sums advanced pursuant to the loan agreement, there was a further sum of £23,000 advanced by Mrs McQueen to her son on 14 December 2009 (shortly after the parties had moved to New Zealand). The background to that advance is set out in an email from Mr McQueen to his mother at 10.11 am on 14 December 2009 which relevantly states that:
Lynnmarie [one of Mrs McQueen’s advisers] and I decided that it would be best for me to rack up my overdraft in the past few weeks and then ask you to extend my loan, once I knew exactly what I would be likely to need to finish the house. I’ve done that, and allowing for what’s left and the need to buy a couple of reasonable second-hand cars here, could you please loan me another
£25,000. You’ll need to talk to the lawyer again so we can add it to the grand total and get it signed for officially. I don’t know if you’ll need to extend your borrowing with Coutts to do this or can cover it from your cash reserves, but either way, as we discussed the other day before I left, all the income from the rental will come back to you as a standing order as soon as we have a tenant, which should more than cover the loan interest from Coutts, even if the loan goes up by £25,000.
[37]At 4.30 pm on the same day, Mrs McQueen responded:
I have digested your message and heard from Lynnmarie re money and that is fine.
[38] The sum of £25,000 was deposited into Mr McQueen’s current account with Coutts on the same day, with the reference “From Mum”.9
[39] Judge Otene noted that, prior to commencement of the renovations, financial assistance had been provided by Mrs McQueen to Mr McQueen and Ms Penn which Mr McQueen did not characterise as loans for the purpose of the relationship property proceedings. Her Honour concluded, however, that this further advance did not fall into that category but was impliedly advanced on the same terms as the loans documented by the loan agreement. She summarised the evidence that led her to that conclusion as follows:10
(a)The evidence of Trevor West to the effect that whilst Mrs McQueen would access surplus cash to advance small amounts to assist Mr McQueen and Ms Penn, substantial advances would require sale of her investments (which was disadvantageous due to capital gains tax) or raising a loan.
(b)Mr McQueen and Mrs McQueen set their relationship on a different footing in respect of the large advances funded by Mrs McQueen's borrowing rather than cash reserves through the period of the renovation, that being a debtor/creditor relationship.
(c)Mr McQueen made further request of Mrs McQueen on 14 December 2009 for funds of £25,000.00 by specific reference to extension of the loan.
(d)Mrs McQueen extended her lending facility on 25 January 2010 from
£475,000.00 to £600,000 temporally coincident to the request for further funds.
(Footnotes omitted.)
[40] Her Honour concluded that the terms of the documented loan agreement were implied into the undocumented loan given Mr McQueen’s request for further funds by way of extension of the loan and his anticipation that interest would be paid by
9 I assume that the reason why this further advance has been quantified at £23,000 rather than
£25,000 is that the total sum borrowed is £498,000, of which £475,000 is covered by the loan agreement. The balance is therefore £23,000.
10 The Family Court decision at [68].
diversion of rental income to Mrs McQueen to cover the interest repayments for which she would be liable to Coutts.
Ms Penn’s submissions
[41] Ms Crawshaw noted that although Mr McQueen’s email of 14 December 2009 referred to the new “loan” being “signed for officially” there is no evidence that that ever happened. Accordingly, she submitted, the Judge erred in concluding that this sum was advanced as a further loan. Given the lack of formal documentation, this advance should have been treated in the same way as the funds advanced prior to the first formal loan in December 2008, namely as a gift rather than a loan.
Discussion
[42] I find no error in the Judge’s analysis of this issue. Although there is no evidence that formal loan documentation was subsequently drawn up, it is clear from Mr McQueen’s email of 14 December 2009 that he offered to borrow this sum on the same terms as the previous loans. Mrs McQueen accepted that offer by return email and the sum was advanced accordingly, the same day. I accept Mr Jefferson’s submission that nothing turns on the fact that formal loan documentation was not subsequently drawn up. I further note that the proposition being advanced on appeal, namely that the further payment of £23,000 was a gift, not a loan, was not put to Mr McQueen in cross-examination at trial.
Are the loans from Mrs McQueen relationship or personal debts?
Personal and relationship debts – the law
[43] Section 20(1) of the Act defines personal debt and relationship debt. Personal debt is defined in the negative, as being a debt that is not a relationship debt or a debt to the extent it is not a relationship debt. A debt can be partly a relationship debt and partly a personal debt. “Relationship debt” is defined as follows:
20 Interpretation
(1)In sections 20A to 20E, unless the context otherwise requires,—personal debt means—
(a)a debt that is not a relationship debt:
(b)a debt to the extent that it is not a relationship debt relationship debt means a debt that has been incurred, or to the extent that it has been incurred,—
(a)by the spouses or partners jointly; or
(b)in the course of a common enterprise carried on by the spouses or partners, whether alone or together with another person; or
(c)for the purpose of acquiring, improving, or maintaining relationship property; or
(d)for the benefit of both spouses or partners in the course of managing the affairs of the household; or
(e)for the purpose of bringing up any child of the marriage, civil union, or de facto relationship.
[44] Mr McQueen’s position in the Family Court (and in this Court, on appeal) was that the loans from Mrs McQueen are relationship debts, not personal debts. He submitted that they fell within four of the five categories set out above, namely subs (a), (b) (d) and (e).
Family Court’s findings
[45] The loan agreement stated that the loans were for the Ringmore Rise renovation:
The Borrower shall use the entire Loan for the purposes of building works at the property.
[46] Judge Otene (accepting Mr McQueen’s calculations) found that the advances had actually been applied as follows:
(a)£170,754 was spent on the renovations;
(b)£272,114 was spent on general living costs for the family; and
(c)£55,132 (the balance of the funds) could not be strictly traced into either of those two categories.
[47] In respect of the £55,132 balance, her Honour found that nothing in the bank account or credit card statements indicated that the funds were applied for Mr McQueen’s personal expenditure. She ultimately held that the debt in its entirety
was a relationship debt, finding it fell within subs (d) and (e) of the definition of relationship debit in s 20(1) of the Act:
[84] When I take all these matters into account I am satisfied that the debt (principal and interest) in its entirety was incurred for the benefit of the parties in the course of managing the affairs of the household, namely the funding of the renovation and general living expenses. I reject Ms Penn’s contention that because Mr McQueen does not concede that she has an interest in Ringmore Rise the debt was incurred only to his benefit. That is to read benefit too narrowly. The intent was that Ringmore Rise would be used as a family home. That is clearly to the benefit of Ms Penn whether or not she ultimately has any claim to the home. I find the debt to be relationship debt pursuant to s 20(1)(d).
[85] Furthermore, Mr McQueen and Ms Penn intended that Ringmore Rise be used for their family home with their children and so occupied it for a brief time as the renovations were nearing completion. Their children could have also taken the benefit of funds applied to the family’s general living expenses. I am therefore satisfied that the debt (principal and interest) was incurred for the purpose of bringing up the children. I find the debt to be relationship debt pursuant to s 20(1)(e).
[48] As the loan only needed to fall within one limb of the definition of relationship debt, and the Judge had found that it fell within both (d) and (e), she did not consider categories (a) and (b).
The onus of proof
[49] Ms Crawshaw submitted that the Judge appears to wrongly have considered that it was Ms Penn’s responsibility to show that the debt was not a relationship debt. She submitted that the converse is the case, and Mr McQueen bore the onus of proof of establishing that the debt was a relationship debt.
[50] The passage relied on by Ms Crawshaw (which is set out at [54] below, in a different context) does not support the contention that the Judge considered Ms Penn to bear any onus of proof in regard to the classification of the debt. Nor does it appear from her Honour’s judgment as a whole that she incorrectly imposed an onus of proof on Ms Penn.
[51]The Court of Appeal observed in M v B that:11
11 M v B [2006] 3 NZLR 660 (CA) at [39].
The [Act] is about property rights and entitlements. The [Act], and the regulations which have been promulgated pursuant to it, make it clear that, although there is not a fully inquisitorial system, a Court needs only to be satisfied about a state of events which has existed, or which exists. Notions of onus of proof fit uncomfortably within this legislative regime.
The Judge was clearly mindful of the fact that it was for Mr McQueen (being the party seeking to have the debt classified as a relationship debt) to provide sufficient evidence to establish the relevant “state of events,” to the extent that he was the person in possession or control of that evidence. I find no error in her approach.
Cross-border issues and general “fairness”
[52] Ms Crawshaw submitted that the outcome of the Family Court decision is repugnant to justice because the New Zealand Family Court has classified the debt incurred for the purposes of renovating Ringmore Rise as a relationship debt, in circumstances where that court has no jurisdiction over the asset to which that debt relates (Ringmore Rise). The net result is that there is negative equity in the relationship property, and Ms Penn, who is clearly the less financially secure partner (by a significant margin) has been ordered to pay a large sum of money to Mr McQueen.
[53] Ms Crawshaw noted that the purpose of the Act is to provide for a “just” division of relationship property overall.12 Further, the definition of relationship debt in s 20 is stated as being “unless the context otherwise requires”. Ms Crawshaw submitted that it is therefore open to the Court, when classifying the loan, to have regard to the broader context (namely that Ringmore Rise is in the legal ownership of Mr McQueen). If proper regard is had to this context, she submitted, then the Court would classify the loan as Mr McQueen’s separate debt.
[54]Judge Otene acknowledged Ms Penn’s perception of unfairness:13
The Act is a code14 subject to express exceptions therein15 or qualifications that may arise from case specific application or interpretation of some provisions.16
12 Property (Relationships) Act 1976, s 1M(c).
13 The Family Court decision at [78].
14 Property (Relationships) Act 1976, 4(1).
15 Section 4(2).
16 See Fisher on Matrimonial and Relationship Property (NZ),(online ed, LexisNexis) at [1.25].
The interaction of ss 4 and 20 requires the Court to assess the claim and having found that the debt exists to classify it as personal or relationship and bring it into account in the calculation of the net relationship property. Here there are no applicable exceptions or qualifications permitting departure from the codified scheme for the division of relationship property between spouses. Ms Penn's perception of unfairness is acknowledged. Remedy may lie elsewhere but it cannot be by the invitation she makes to this Court.
[55] The facts of this case provide a stark illustration of the difficulties that can arise when relationship property matters are complicated by cross-border issues. In its June 2019 Review of the Property (Relationships) Act 1976 (“Review”) the Law Commission has made various law reform proposals to address such issues, given that “in an increasingly globalised world, relationship property matters are more likely to be complicated by cross-border issues”.17
[56] Sections 7 and 7A of the Act set out the conflicts of law rules relating to relationship property. Consistent with well-established principles of private international law, s 7 provides that a New Zealand court has jurisdiction over immovables situated in New Zealand. It also has jurisdiction over movables situated in New Zealand or elsewhere, provided that one of the spouses or partners is domiciled in New Zealand at the relevant date. As a result, in this case the New Zealand courts have jurisdiction in respect of the debt incurred for the renovations of the Ringmore Rise property (movable property), but do not have jurisdiction over the property itself (foreign immovable property). As the Law Commission observed in its Review:18
The distinction section 7 makes between movable and immovable property prevents the resolution of property disputes under a single legal regime. The PRA might apply to some of the partners' property but will not apply to any immovable property the partners own outside New Zealand. This frustrates the PRA's policy of a just division of property when relationships end and is inconsistent with the principle that questions arising under the PRA be resolved as inexpensively, simply and speedily as is consistent with justice. The increasingly globalised nature of relationships means that property disputes are more likely to involve cross-border issues, and the PRA should be able to respond to such issues as they arise.
(Footnotes omitted.)
17 Law Commission Review of the Property (Relationships) Act 1976 (NZLC R143, 2019) at [19.1].
18 At [19.9].
[57] The Commission has recommended that s 7 be repealed, and that new property relationship legislation provide that all of the partners’ property, including movable and immovable property situated outside New Zealand, be subject to the new Act’s rules of classification and division. It further recommends that this include the power, in relation to property outside New Zealand, to order a partner to transfer the property or pay a sum of money to the other partner.
[58] Unfortunately, this does not assist Ms Penn. Her appeal must be considered under the current regime. Any claim by Ms Penn that she has an interest in Ringmore Rise can only be determined by an English court. Further, it is not open to a New Zealand Court to make any “compensating adjustments” in respect of the New Zealand relationship property (or debts) to try and ensure that the final division of the (potential) total asset pool reflects a New Zealand approach.19
[59] The Court of Appeal decision of M v B provides further guidance as to how the Court should respond to Ms Crawshaw’s submission that the Court should, in effect, disregard the express provisions of the Act in favour of an outcome which is “fair”.20 In that case, the Court rejected the submission that, in essence, Parliament has vested the Courts with an open-ended discretion to achieve equality in accordance with an individual Judge’s perception of what is fair and just.21 The Court stated that:
[33] Parliament has determined the assessment and responses which are to be available to achieve the purposes of the Act in accordance with the identified principles. They have, in various discrete areas, indicated the parameters of operation. I do not accept that the purposes and principles in ss 1N and 1M provide the Court with a generalised mandate which can avoid or obscure the structural framework which Parliament adopted.
[34] At its high point, Mrs Hollings submitted that these sections were of such importance that they would enable a Court to do whatever appeared to it just and reasonable without hindrance or impediment to fulfil the purposes in light of the principles. The underlying philosophy and inspiration is always to be considered but their operational ambit must be evaluated within the particular statutory responses which Parliament has enacted. They do not permit Courts to go further than Parliament was willing to legislate for.
[35] The Chancellor’s foot was amputated many centuries ago. Doing what is “just” under any legislation (whether it has a social context or not) also
19 Samarawickrema v Samarawickrema [1994] NZFLR 913 (CA) at 489 per Cooke P, Hardie Boys, Gault, McKay and Tipping JJ.
20 M v B [2006] 3 NZLR 660.
21 At [32].
involves making decisions which are predictable and consistent. There is a distinct danger that, in the name of being just, individualised judicial discretion becomes too predominant.
[36] If a Court, at the end of each relationship property case, is going to enter into a topping up or discounting exercise in the name of being just, then parties and their advisers will not have confidence as to the outcome of litigation.
[60] As Judge Otene did, I also acknowledge the “perception of unfairness” in this case. Of course, whether the ultimate outcome is substantively unfair can only be finally assessed once the outcome of any proceedings in the UK (if brought) are known. Nevertheless, it is clearly far from ideal that Ms Penn should have to bring proceedings in two separate jurisdictions to achieve a final resolution of relationship property issues, or that this Court must classify (for relationship property purposes) the debt incurred in relation to the Ringmore Rise renovations, in circumstances where it has no jurisdiction over Ringmore Rise itself. That, however, is what the Act requires. I reject the submission that the unusual facts of this case justify the Court, in effect, ignoring the statutory wording of s 20(1) and simply imposing an outcome which it believes to be “just” in all the circumstances.
Was the debt incurred for the benefit of both spouses in the course of managing the affairs of the household?
[61] The Judge found that the entirety of the debt from Mrs McQueen was incurred for the benefit of both spouses in the course of managing the affairs of the household (s 20(1)(d)).
[62] In terms of the “living costs” component of the debt, there can be no dispute that Ms Penn gained the same benefit as Mr McQueen. Ms Crawshaw did not suggest otherwise. Rather, her argument was that the entirety of the debt was “incurred” solely for the renovations, even if not all spent for that purpose. (I reject this argument for the reasons set out at [80]-[82] below).
[63] In relation to the renovations portion of the debt, Judge Otene noted that the intent was that Ringmore Rise would be used as a family home:22
22 The Family Court decision at [84].
That is clearly to the benefit of Ms Penn whether or not she ultimately has any claim to the home.
[64] Ms Crawshaw submitted that the debt incurred for the renovations was not incurred for the benefit of both spouses, but solely for the benefit of Mr McQueen, given that his family trust owns the property. She noted that Ms Penn and Mr McQueen only lived in the property for less than four months prior to their relocation to New Zealand.
[65] The parties referred me to several cases in support of their respective positions. The facts of those cases were generally far removed from this one. Overall, I did not find them to be particularly helpful. I did, however, find the case of JES v JBC, which also involved renovations to a family home, to be of some assistance. In that case Miller J stated that: 23
[20] I am satisfied that the Judge was right to conclude that the loan was incurred for the benefit of the couple in managing the affairs of their household. The evidence established that the loan was incurred for that purpose, and “affairs of the household” must include renovations to the family home. The Judge might also have concluded that the debt was incurred for the purpose of bringing up the children, or at least the youngest of them, since it was incurred to renovate the home.
[66] JES sought leave to appeal Miller J’s decision to the Court of Appeal. Leave was declined. On the issue of renovation costs, the Court stated in its leave decision that:24
The conclusion that the purpose of borrowing money from MAS was to fund renovations was well open, indeed practically inevitable, on the evidence. The conclusion of law that the underlying debt was therefore “incurred” for relationship purposes within the meaning of s 20(d) of the Act seems unassailable, particularly as this undoubtedly is in accord with the realities as to how the renovations were funded.
[67] Ms Crawshaw submitted that JES v JBC is distinguishable from the present case because the loan in that case was incurred for the purposes of renovating a property owned by a trust in respect of which both parties were beneficiaries, and which the parties had treated as if it were relationship property. Here, however, the
23 JES v JBC HC WN CIV 2005-485-1046 [6 November 2006].
24 JES v JBC [2007] NZCA 209, [2007] NZFLR 905 at [5].
renovations were undertaken to a property being used as a family home (at the time) that was owned by a family trust of which only one of the parties was a beneficiary.
[68] I accept that this case is not on all fours with JES v JBC. To the extent that the renovations improved the capital value of Ringmore Rise, that benefit will accrue solely to Mr McQueen’s family trust (unless and until Ms Penn establishes an equitable interest in the property in the UK courts). The renovations were not embarked upon for capital gain, however, or to secure increased rental income. Rather, the scope and scale of what appears to have been quite a lavish (and expensive) renovation project was driven by the parties’ desire to create a suitable home environment for their children and their pets (the amount of money spent on fairly luxurious facilities for the family dog was the subject of considerable evidence).
[69] Although it is tempting to assess the “benefits’ incurred in hindsight, the reality is that when the parties embarked on the renovations they envisaged and intended that they would enjoy the benefit of the renovations to their then family home. Ms Penn was intimately involved in the renovation project, including project managing it, and in the various decisions that were made. The project was very much a joint one and was undertaken for family purposes. If the property had been renovated solely with a view to being tenanted, or to making a capital gain, it is likely that the scope and nature of the renovations (and the cost of them) would have been quite different. Both parties appear to acknowledge this in their evidence.
[70] The fact that circumstances subsequently changed, and the family decided to move to New Zealand, meant that many of the benefits the couple envisaged when they first committed to the project were not fully realised. They embarked on the renovations, however, for the benefit of their family as a whole.
[71] In my view, the Judge was correct to find that the entirety of the debt from Mrs McQueen was incurred for the benefit of both spouses in the course of managing the affairs of the household (s 20(1)(d)).
Does the debt fall within any of the other sub-paragraphs of the definition of “relationship debt”?
[72] Mr McQueen submitted in the Family Court that the debt to his mother fell within four of the five categories of relationship debt, namely s 20(1)(a), (b), (d) and (e). The Judge was satisfied that the debt fell within s 20(1)(d) and (e) and accordingly did not find it necessary to consider whether it also fell within s 20(1)(a) and (b).
[73] I have found that the Judge was correct to find that the debt fell within s 20(1)(d), which is sufficient to dispose of this aspect of the appeal. I do not therefore propose to consider the other three categories in any detail. I observe, however, that it was open to the Judge, in my view, to conclude that s 20(1)(e) applied for the reasons set out at [85] of her judgment, although there are some clear counter-arguments that could be made.
[74] Further, it is my view that the renovation portion of the debt falls within the s 20(1)(b) (debts incurred in the course of a common enterprise). There is a significant body of evidence to support Mr McQueen’s assertion that the renovation project was the common enterprise of both parties, in which they were both closely involved.
[75] The portion of the debt incurred for general living expenses, however, does not appear to fall within the “common enterprise” category in s 20(1)(b). Similarly, I have serious doubts as to whether any of the debt also falls within s 20(1)(a) (debts incurred by the partners jointly) given that Mr McQueen and his mother are the only signatories to the loan agreement.
What was the debt incurred for?
[76] Ms Crawshaw submitted that the entirety of the debt was “incurred” for the purposes of the renovation, and not for general living expenses, because clause 2.2 of the loan agreement states that:
The Borrower shall use the entire Loan for the purposes of building works at the property.
[77] The significance of the distinction is that, to the extent that the debt was incurred for general living expenses, it is difficult to argue that it was not a relationship
debt (and Ms Crawshaw did not attempt to do so). Rather, she submitted that the entirety of the debt was incurred for the purpose of the renovations (even if not used for that purpose) and accordingly fell outside the definition of relationship debt.
[78] Given that I have found that the Judge was correct to conclude that the portion of the loan that was spent on renovations falls within the definition of “relationship debt”, nothing turns on the distinction. Nevertheless, I will address Ms Crawshaw’s arguments on this issue, briefly.
[79] Ms Crawshaw submitted that the Judge had conflated two different things, what the debt was “incurred” for, and what the money was actually spent on. Given the “purpose” set out in the loan agreement, Ms Crawshaw submitted that the entirety of the loan was incurred for the renovations, regardless of what the funds may have been spent on.
[80] In my view, this submission takes too narrow an interpretation of the word “incurred”. Viewed in the overall context of the Act (including its principles and purposes) and with reference to the relevant factual background, it is my view that the Judge was correct to focus on the practical realities of the situation. Whatever the loan agreement might have stated, Mr McQueen must clearly have been aware (and intended) that the loan funds he drew down incrementally, on 20 separate occasions between 15 January 2009 and 11 November 2010, be used for both general living expenses and renovation costs. Indeed, from December 2009 onwards at the latest (after the parties had moved to New Zealand) Mrs McQueen must also have been aware that most or all of the loan funds being drawn down were being used for the family’s general living expenses. This view is supported by the terms of the 14 December 2009 email that Mr McQueen sent to his mother, which I have discussed previously. A total of £152,500 was drawn down, in six separate tranches, from December 2009 to November 2010, after the renovations had been completed (or largely completed) and the family had moved to New Zealand.
[81] The “purpose” of the loan, as specified in the loan agreement between Mr McQueen and his mother, is one relevant factor to consider in determining what the loan was incurred for. It can be inferred from the broader context, however, that
Mr McQueen drew down the loan, progressively, for multiple purposes and that his mother was comfortable with that. It is apparent from her overall evidence that she was very supportive (financially) of her only child and grandchildren. She also clearly had a broad understanding of the financial pressure her son was under to provide for his family, in the context of employment difficulties both in the UK and New Zealand.
[82] This is not a breach of contract case. The strict terms of the contract between Mr McQueen and his mother cannot be determinative of what the debt was incurred for when viewed from the perspective of Mr McQueen (or indeed Ms Penn, who was aware of the borrowing). Viewed from their perspective at the relevant time, it is my view that the loan was incurred for the purposes for which it was spent, which included both the Ringmore Rise renovations and general living expenses. I find no error in the Judge’s analysis of this issue.
Is interest of $258,212 payable on the loans from Mrs McQueen?
Evidence/ Family Court’s findings
[83] The loan agreement provides that interest is payable at the same rate charged by Coutts to Mrs McQueen on her borrowing, accruing daily, compounded quarterly and at a penalty rate of two per cent if not paid on the due date.
[84] Judge Otene held that, in light of her finding that the relevant advances were loans (not gifts) it necessarily followed that interest was payable on those loans:25
To conclude otherwise would be to expect that Mr McQueen (and Ms Penn if the debt is relationship) could take the benefit of the debt whilst Mrs McQueen having entered into a commercial arrangement to obtain the funds bore the cost of it entirely. That would be an unreasonable expectation even within a family arrangement such as this.
[85] When it came to assess the quantum of interest payable, her Honour (quite fairly) criticised both parties for the poor quality of their evidence and submissions on this issue.
25 The Family Court decision at [72].
[86] Mr West gave evidence on this issue, on behalf of Mr McQueen. He had been Mrs McQueen’s personal banker at Coutts for many years. When he was made redundant from Coutts, she followed him to his new employer, UBS. Mr West provided a “ballpark” calculation of outstanding interest up to the hearing date. The fundamental difficulty with Mr West’s calculation, however, was that it was based on the entirety of Mrs McQueen’s borrowings from Coutts (£1m at one stage) and not just her loan to Mr McQueen that is at issue in this proceeding (£498,000). A further difficulty was that, because Mr West was no longer employed at Coutts, he did not have direct access to Mrs McQueen’s banking records with that firm. It is not clear, however, why he did not simply obtain those documents from Mrs McQueen. As he did not have copies of Mrs McQueen’s banking records with Coutts, Mr West did not know whether or not she had paid interest on her loans or not, let alone how much interest she had actually paid. This could well have provided a helpful guide as to the quantum of interest payable by the parties (putting aside any issues of penalty interest) given that the loan agreement with Mr McQueen mirrored Mrs McQueen’s own interest obligation to Coutts.
[87] Nor did Mr McQueen give any evidence as to how much interest was owing by him to his mother on the sums he had borrowed from her. In cross-examination, he stated that he saw “no point in trying to calculate it”. It does not appear to have been put to him in cross-examination that no interest was in fact payable, because his mother had waived any claim to interest, or forgiven the interest portion of the debt.
[88] Mr Jefferson’s closing submissions in the Family Court addressed the issue of interest in about one page. Ms Crawshaw’s submissions did not address the issue at all. The Judge was accordingly left with the unenviable task of trying to calculate interest herself. Given the obvious deficiencies in Mr West’s evidence, she declined to accept his “ballpark” calculations, noting that:26
It has been within Mr McQueen's rather than Ms Penn's hands to marshal accurate evidence as to the quantum of accrued interest. It is difficult to understand why throughout six years of litigation he has not done so, particularly given the depths of the dispute and the potential magnitude of the debt. He must bear responsibility for the litigation risk arising from the quality of evidence he provided.
26 At [98[b)].
[89]On the other hand, the Judge also observed that:27
No assistance on this issue is provided by Ms Penn. Her submissions are silent, she seemingly having adopted a litigation strategy that the debt was not a relationship debt and taking matters no further to in the alternative put her case as to valuation of the debt. That is surprising given the extent of her potential liability. She too must bear responsibility for the litigation risk that essentially leaves her in the hands of the Court presented with low quality evidence.
[90] Ultimately, taking into account the evidence before the Court, but “by necessity applying the broad brush of fairness” the Judge fixed the interest on the debt to Mrs McQueen, as at the date of hearing, at $258,212.00 (with Mr McQueen being responsible for any interest payable after that date). Her methodology is set out in some detail in her judgment.28 In particular, based on her Honour’s assessment of the proportion of Mrs McQueen’s overall borrowings from Coutts that were then loaned to her son, she assessed two thirds of the interest calculated by Mr West as at December 2015, and one third of the interest from December 2015 until the date of hearing (February 2018), as being attributable to the sums Mrs McQueen had loaned to her son.
Ms Penn’s submissions
[91] Unlike Judge Otene, I have had the benefit of fairly comprehensive submissions on behalf of Ms Penn on the issue of interest, albeit directed to alleged errors on the part of the Judge, rather than an alternative quantum figure. It was submitted that the Judge’s findings on the issue of interest were wrong for three reasons:
(a)the calculation was incorrect (primarily because Mr West’s calculation did not include the apparent payment of interest via the application of rental income from the Ringmore Rise property during the marriage);
(b)Mr McQueen’s failure to repay the loan in accordance with the loan agreement unfairly added to the interest costs for Ms Penn;
27 At [98(c)].
28 See [99].
(c)the finding that Mr McQueen had not paid interest during the parties’ marriage was contrary to Mr McQueen’s representations to both Ms Penn and his mother.
(The first and third arguments are closely related).
Discussion
[92] The primary argument was that the Judge’s finding that Mr McQueen had not paid interest during the parties’ marriage were contrary to Mr McQueen’s contemporaneous representations to both Ms Penn and his mother.
[93] In his affidavit of 2 September 2015, Mr McQueen stated that he had not been able to make any repayments of the loan (as at that date) and that “interest is being incurred”. He went on to note that the issue of “interest payments seem to have been a source of confusion…so I explain them as follows”. He then explains that his mother borrowed from Coutts to lend money to him and “pays interest on the loan she took from the bank”. He says that “I will have to repay both the loan and the interest she has paid”. He then goes on to state that:
In the [loan] agreement there is also the provision for interest to be charged
– which reflects the lost opportunity my Mother has had in not using that borrowed money in an investment. Ultimately, I shall have to repay that too. My Mother tried to explain in her evidence that she was not going to ask for that until I could afford to pay. As at the current date I have not been able to begin repayments.
(Emphasis added.)
[94] Mr McQueen’s explanation does little to dispel any confusion. He appears to be saying that he is required to pay two separate lots of interest. First, he states that he will have to “repay” the interest his mother has paid to Coutts. In addition, he says that he also has to pay contractual interest pursuant to the loan agreement. He believes that this is necessary, in effect, to reimburse his mother for her lost opportunity cost of not being able to invest the relevant funds elsewhere.
[95] Mr McQueen’s view of his legal obligations, if I have understood it correctly, is misguided. The loan agreement expressly states that interest is payable to
Mrs McQueen at the same rate charged by Coutts to Mrs McQueen on her borrowing, accruing daily, compounded quarterly and at a penalty rate of two per cent if not paid on the due date. Coutts’ loan to Mrs McQueen, and Mrs McQueen’s loan to her son, are effectively mirror loans (at least as far as interest is concerned). The clear intent was to equalise the payment of interest that Mrs McQueen was required to pay on the amounts that she herself had borrowed from Coutts, and on-lent to her son. Mrs McQueen, obviously, could have also demanded a margin to cover any lost “opportunity cost”, but did not do so. She was presumably satisfied to lend money to her son on a “break even” basis.
[96] Ms Crawshaw pointed to two contemporaneous documents that are also relevant to an assessment of whether interest has been paid or not:
(a)First, there is the 14 December 2009 email from Mr McQueen to his mother referred to a [36] above. In it Mr McQueen states that:
I don’t know if you’ll need to extend your borrowing with Coutts to do this or can cover it from your cash reserves, but either way, as we discussed the other day before I left, all the income from the rental will come back to you as a standing order as soon as we have a tenant, which should more than cover the loan interest from Coutts, even if the loan goes up by £25,000.
(Emphasis added.)
(b)Second, in a letter from Mr McQueen to Ms Penn dated 20 October 2010 (prior to their separation), Mr McQueen refers to Ringwood Rise having been rented out in the 1990s (prior to his relationship with Ms Penn commencing) and that:
The house I own in London was gifted to me by my father some time between 1991-1994 (again to avoid UK death duties) and it has been held by me, in trust for my children and I, pursuant to the terms of my Father’s gift since then…The house was renovated extensively in the 90s, financed by my Mother, and then rented for income before we lived there and vacated it to emigrate. As you know, it is now rented again. When the costs of the London house renovations spiralled, as you already know, my Mother loaned me the money necessary to complete the work and this was secured with Coutts knowledge and agreement against the house. In order to loan me the money she took out a loan herself and
what the current tenants pay each month, currently covers her interest payments, which are collected quarterly by Coutts. She kindly opted not to charge me interest on the money she in turn loaned me at present. In total (loan plus interest) the debt I owe on the house now comes to over £400,000.
(Emphasis added.)
[97] Mr McQueen subsequently addressed the rental/interest issue again just under two years later, in his affidavit of 20 August 2012. At that stage, he said that:
Certainly, there has been a rental income from that house since soon after we emigrated. The income went into my Coutts current account. The first payment from tenants was April 21, 2010 and between then and May 23, 2011, a total of £18,910.98 (after tax, fees, and expenses) was paid in by Pedder Properties…
[98]I concluded at [42] above that the Judge was correct to find that the further
£23,000 advance was a loan and not a gift. I found that although no formal loan documentation was subsequently drawn up, the 14 December 2009 email exchange between Mr McQueen and his mother constituted a contractual offer and acceptance, sufficient to establish that the further advance was a loan and not a gift. Mr McQueen’s email, however, also included as a term of his offer/request to borrow further funds, that all the income from the rental of Ringmore Rise would be paid to his mother “as a standing order as soon as we have a tenant, which should more than cover the loan interest from Coutts, even if the loan goes up by £25,000”. I am satisfied that this passage accurately reflects the parties’ agreement (and that Mrs McQueen advanced the further funds on that basis).
[99] This conclusion is further supported by Mr McQueen’s letter to Ms Penn in October 2010, which clearly indicates that Mr McQueen did indeed honour his commitment to his mother to ensure that the rental payments from Ringmore Rise were applied to payment of interest. In his October 2010 letter, however, he appears to be under the same misapprehension as in his September 2015 affidavit, namely that his mother is entitled to two lots of interest from him, not just one. He suggests that the first lot of interest is being met by the rental payments, to enable Mrs McQueen to meet her own loan repayments to Coutts. He suggests, however, that there is also a second lot of interest payable (presumably the “opportunity cost” payment) that has
yet to be paid. That is not correct. Hence, if the rental payments that Mr McQueen received from the tenants at Ringmore Rise were paid to Coutts to meet his mother’s interest obligations, then Mr McQueen has discharged his interest obligation to her under the loan agreement, for the relevant period.
[100] As the Judge noted, it was for Mr McQueen to marshal the evidence on the issue of interest, and he has done an extremely poor job of doing so. Although his affidavit of 20 August 2012 stated that the rental income “went into my Coutts current account,” there is nothing to suggest that it was not then paid on to his mother to cover her interest payments. I see no reason why Mr McQueen would have told Ms Penn that that is what was happening, as at October 2010, if that was not true. It necessarily follows that £18,910.98 should be deducted from her Honour’s calculation of the quantum of interest payable on the debt to Mrs McQueen, to cover interest that was paid on the debt during the parties’ marriage. Using the same exchange rate as that used by Judge Otene29 this equates to $36,366.12, and reduces the interest owing on the debt to Mrs McQueen to $221,845.88.
[101] Ms Crawshaw further submitted that Ms Penn has been unfairly prejudiced by Mr McQueen’s failure to repay the loan in December 2012, in accordance with the terms of the loan agreement. This submission overlooks, however, that the loan was a relationship debt. It necessarily follows that both parties must bear the consequences of the failure to repay it. Unfortunately, as at December 2012, neither of them was able to do so.
[102] In my view, the Judge’s calculation of the interest payable on the loan was principled and fair, subject to the relatively modest adjustment that is required to reflect interest paid to Mrs McQueen (from the rental of Ringmore Rise) during the marriage.
29 Exchange rate (NZD:GBP) being 0.52. See the Family Court decision at [43].
Did the Judge err in her assessment of Ms Penn’s student loan debts (and other pre-relationship debts)?
[103] The final issue on appeal relates to the Judge’s assessment of Ms Penn’s student loan debts, and other pre-relationship debts.
The Family Court’s findings
[104] Mr McQueen claimed compensation pursuant to s 20E of the Act for the following debts that he contended were personal to Ms Penn and paid from relationship property:
(a)A student loan, incurred in New Zealand by Ms Penn before the parties had met ($15,000).
(b)Two personal loans, also incurred in New Zealand by Ms Penn before the parties had met (totalling $10,000).
(c)A student loan debt taken out by Ms Penn for her studies in the UK for a dentistry degree during the marriage (“UK Student Loan”) in the sum of £16,843.12 ($NZ45,548.73). (The dentistry degree was not completed).
[105] The Judge noted that, pursuant to s 20E, the Court is mandated upon application by a disadvantaged person to make a compensatory order for personal debt paid from relationship property.30 In respect of the debts incurred in New Zealand, prior to Ms Penn meeting Mr McQueen, her Honour held that they were clearly personal debts in terms of s 20. Those debts were repaid during the relationship and, after analysing the evidence, her Honour was satisfied that they were repaid from relationship property. The Court was therefore obliged to make a compensatory order (albeit with a discretion as to the amount of that order). Given “the underlying proposition of the statutory scheme that personal debt is the liability of the party who
30 At [106]. Section 20E(2) of the Property (Relationships) Act 1976 provides that: “The Court may make an order under this section on its own initiative, but must make an order under this section if party B applies for such an order”.
incurred it” the Judge ordered that Ms Penn must pay Mr McQueen $12,500 by way of compensation for her pre-relationship student and personal loans.
[106] As for the UK student loan, her Honour referred to the law on this issue, as set out by the learned authors of Fisher on Matrimonial and Relationship Property (and cases cited therein). Applying those legal principles to the facts, she rejected a submission that the loan in its entirety was “for the benefit of the family” and was therefore a relationship debt. She accepted, however, that part of the loan was used for living costs and should therefore be classified as relationship debt.
[107] Her Honour was unable to make a precise apportionment on the fairly limited evidence that Ms Penn had provided. In exercising her discretion as to the amount of compensation that should be awarded to Mr McQueen, she took into account, amongst other things, that the overall effect of her decision “will be of great economic disadvantage to Ms Penn and so cannot be other than disadvantageous to the children when they are in her care”.31 Taking into account the purposes and principles of the Act in the exercise of her discretion, she concluded that a fair approach was to apportion $10,000 of the loan to Ms Penn’s personal debt. She accordingly ordered that Ms Penn must pay Mr McQueen $5,000.00 by way of compensation for the student loan paid from relationship property.
Ms Penn’s submissions
[108] Ms Reed (junior counsel for Ms Penn) submitted that that the relevant debts were repaid from a bank account in Mr McQueen’s sole name, and not from relationship property. She further submitted that, in classifying the relevant debts
,Judge Otene had failed to take into account the opening words of s 20: “unless the context otherwise requires.” She submitted, in effect, that those words provide the Court with an absolute discretion to determine whether to determine the debt was a personal debt or not, notwithstanding the strict wording of the definition of relationship debt in s 20(1).
31 At [118].
[109] Finally, Ms Reed submitted that the Judge should have found that the debts were not personal debts, because (some of them at least) were incurred as a result of Ms Penn attempting to improve herself through additional training. Ms Reed further submitted that the Court should be mindful of the particular dynamics in this relationship; namely the gross financial disparity between the parties as a result of their respective earning capacities.
Discussion
[110] The submission that Mr McQueen repaid Ms Penn’s student loans from his separate property, rather than relationship property, does not appear to be supported by the evidence. Although the repayments were made from a Coutts bank account in Mr McQueen’s sole name, that account was used to pay for a range of relationship expenses. The account was identified as being relationship property in Judge Otene’s decision and the balance of the account was divided between Ms Penn and Mr McQueen.
[111]As for the submission based on “fairness” grounds, for the reasons set out at
[59] to [60] above, I do not accept that the introductory words to s 20 (or the purposes and principles of the Act) enable the Court to disregard the relevant statutory provisions and instead simply do what it perceives to be “just” in a particular case.
[112] Only the UK student loan was incurred during the relationship, and therefore, had the potential to be classified, at least in part, as a relationship debt. The Judge’s careful analysis of this issue (particularly given the inadequacies in the evidence) cannot be faulted. The end result she reached (awarding Mr McQueen less than one quarter of the compensation he has sought under this head) was neither unprincipled, nor unfair.
Result
[113] The appeal is allowed in part, in that I have assessed the interest payable on the loans from Mrs McQueen as being $221,845.88 rather than $258,212.00. This requires the following consequential changes to the orders made at [133] and [134] of the Family Court decision:
(a)I order that the respondent shall, from the date of the Family Court decision, be solely responsible for repayment of the debt (being
$951,338.00) and interest (being $221,845.88) thereon to his mother (now her estate) and shall hold Ms Penn indemnified in respect of any further liability.32
(b)To achieve equal sharing of the parties’ net relationship property the appellant shall pay the respondent the sum of $397,357.50.33
[114] The sums payable in accordance with these orders shall be made within 42 days of the date of these orders. Thereafter, interest shall accrue and be payable at a rate of 4 per cent per annum until payment.34
[115]The orders made in the Family Court otherwise remain in force.
[116] If costs cannot be resolved between counsel, then the parties have leave to file costs memoranda by 1 October 2019, with any reply memoranda to be filed by 15 October 2019.
Katz J
32 This is in substitution for the order at [133] of the Family Court decision.
33 This is in substitution for the order at [134] of the Family Court decision.
34 This is in substitution for the order at [137] of the Family Court decision.
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