Public Trust v Ottow HC Auckland CIV 2009-404-3825
[2009] NZHC 2904
•4 November 2009
IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY
CIV-2009-404-3825
BETWEEN PUBLIC TRUST
Plaintiff
ANDHANS PETER OTTOW First Defendant
ANDANNA-MARIA OTTOW Second Defendant
Hearing: 7 October 2009
Appearances: D Keen for Plaintiff
P McPherson for First Defendant
M Lenihan for Second Defendant
Judgment: 4 November 2009 at 11:30 am
JUDGMENT OF ASHER J
This judgment was delivered by me on 4 November 2009 at 11:30 am
pursuant to Rule 11.5 of the High Court Rules
………………………………………..
Registrar/Deputy Registrar
………………………………………..
Date
Solicitors:
D Keen, Simpson Grierson, PO Box 2402, Wellington
P McPherson, Hesketh Henry, Private Bag 92093, Auckland Mail Centre, AucklandM Vallant, Vallant Hooker & Partners, PO Box 47088, Ponsonby, Auckland 1011
Copy:
M Lenihan, Barrister, PO Box 1294, Shortland Street, Auckland 1140F Joychild, PO Box 1294, Shortland Street, Auckland 1140
PUBLIC TRUST V OTTOW AND ANOR HC AK CIV-2009-404-3825 4 November 2009
Table of Contents
Paragraph
Number Background [2] Approach to summary judgment [10]
Summary judgment principles [10] Breach of s 176 of the Property Law Act 2007 [12] The no set-off clause [12] Submissions for Mr Ottow [15]
Defence based on breach of s 176 [17] Not allowing visitors on site [19] The properties were poorly maintained [22] Other interested purchasers [24] Failure to inform Mr Ottow of the sale [25]
Overall evaluation of the sales effort [27]
Conclusion on mortgage’s duty of care to obtain the
best price reasonably obtainable
[35]
Undue influence of Mrs Ottow [36]
Was Mrs Ottow subject to undue influence? [46] Agency [60] Was the Public Trust put on inquiry? [68] Conclusion on undue influence [73]
Summary [76]
Costs [78]
[1] The defendants, Hans Peter Ottow and Anna-Maria Ottow, are guarantors
under a deed of 29 July 2005 of certain debts owed to the Public Trust. The Public Trust seeks summary judgment against them for the sum of $323,678.62, together with interest at 13.55 percent per annum from 23 January 2009 until the date of payment.
Background
[2] The plaintiff, the Public Trust, is a trustee for a mortgage distribution fund. The defendants, Mr and Mrs Ottow, with one Tony John Thomas of Auckland, Accountant, were until last year the trustees of a family trust (“the Ottow Trust”), a trust that appears to have been created for the benefit of members of the Ottow family. The trust deed is dated 10 July 1995 and shows that Mr Ottow was the settlor, and that both he and Mrs Ottow together with others were discretionary beneficiaries. There were no residuary beneficiaries.
[3] In 2005 the Ottow Trust owned two properties on Waiheke Island, being 26 and 28 Cory Road, Palm Beach. To assist in their purchase of these properties and their continued retention by the Ottow Trust, the Trust had obtained various advances from the Public Trust.
[4] Mr and Mrs Ottow, in their personal capacity, had signed a deed of guarantee dated 29 July 2005 guaranteeing the due payment to the Public Trust by the Ottow Trust of all amounts which were payable by the Ottow Trust at any time (para 3.1), (“the guarantee”). The stated amount of liability was $772,000. The loans were secured by mortgages granted over properties owned by the Ottow Trust, in particular by way of a first mortgage over 26 and 28 Cory Road.
[5] The relevant term loan deed under which default has arisen is dated
9 August 2007, and is for an advance of $372,000, (“the term loan agreement”). This was the re-advance of earlier loans. Schedule A of the term loan agreement shows that the securities for the advance were the two mortgages over 26 and 28 Cory Road and the guarantee.
[6] By December 2007 the Ottow Trust had failed to pay instalments owing under the term loan agreement and secured by the mortgages over the Cory Road properties. The Public Trust issued Property Law Act Notices dated
18 January 2008 to each of the trustees of the borrower as mortgagors, and to Mr and Mrs Ottow at guarantors. The Notices expired on 27 February 2008. On expiry the Ottow Trust had not remedied the default by paying arrears or interest.
[7] Mr and Mrs Ottow separated in 2005. By 2007 they were involved in proceedings in the Family Court in relation to relationship property. They were removed as trustees of the Ottow Trust by order of the High Court in the relationship property proceedings in early 2008, and an independent solicitor, Chris Darlow of Auckland, was appointed as trustee. Mr Darlow paid $125,000 on behalf of the Ottow Trust to the Public Trust in April 2008 and managed to prevent an immediate mortgagee sale. Mr Darlow then attempted to sell 26 and 28 Cory Road through to September. He instructed the Real Estate agents Bayleys Real Estate (“Bayleys”) as the agent.
[8] The loan fell back into arrears in August 2008. At this stage Mr Darlow appears to have ceased marketing efforts on behalf of the Trust. The Public Trust then took over the sale efforts in its role as mortgagee. It listed the properties with Bayleys on 25 September 2008. A four-week marketing campaign was carried out through October 2008, and an auction held on 29 October 2008. At the auction number 26 Cory Road was not sold, with the highest bid being $670,000, but it was subsequently sold by negotiation on 4 November 2008 for $780,000. Number 28 Cory Road was sold at the auction for $480,000. The sale of the two properties settled on 12 November 2008. The sale proceeds paid to the Public Trust totalled $1,216,035.91. The sale proceeds were applied to repay the moneys owing under the loan agreements, but there was a shortfall, and an outstanding balance remains. That outstanding balance was $323,678.62 calculated at 2 April 2009. That is the amount owed by the Ottow Trust, and the amount claimed by the Public Trust from the Ottows as guarantors.
[9] Mr and Mrs Ottow do not contest the quantum of the debt of the Ottow Trust
of $323,678.62, and they accept that in terms of the loan agreement interest runs at
13.55 percent per annum. The defences raised are affirmative defences. Mr and Mrs Ottow are each represented individually and have presented different submissions. It is the essence of Mr Ottow’s defence that the Public Trust has breached s 176 of the Property Law Act 2007 by failing to meet its obligation to obtain the best price reasonably obtainable when conducting the mortgagee sales of the properties at 26 and 28 Cory Road, Palm Beach, Waiheke Island. Mrs Ottow supports this submission, although she takes issue with some aspects of it, but it is her particular ground of opposition that the guarantee was procured by undue influence.
Approach to summary judgment
Summary judgment principles
[10] The principles to be applied to an application for summary judgment are well settled and were not subject to any competing submissions. Rule 12.2 of the High Court Rules sets out when an application may succeed:
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.
It was said in Pemberton v Chappell [1987] 1 NZLR 1 (CA) at 3:
In this context the words “no defence” have reference to the absence of any real question to be tried. That notion has been expressed in a variety of ways, as for example, no bona fide defence, no reasonable ground of defence, no fairly arguable defence.
[11] The legal principles relating to the grant of summary judgment were summarised in the recent Court of Appeal decision of Krukziener v Hanover Finance Ltd (2008) 19 PRNZ 162 at [26]. They are as follows:
a) The question on a summary judgment application is whether the defendant has no defence to the claim; that is, that there is no real question to be tried: Pemberton v Chappell [1987] 1 NZLR 1 at 3 (CA). The Court must be left without any real doubt or uncertainty.
b)The onus is on the plaintiff, but where the plaintiff’s evidence is sufficient to show there is no defence, the defendant will have to respond if the application is to be defeated: MacLean v Stewart (1997) 11 PRNZ 66 (CA).
c) The Court will not normally resolve material conflicts of evidence or assess the credibility of deponents. But it need not accept uncritically evidence that is inherently lacking in credibility, as for example where the evidence is inconsistent with undisputed contemporary documents
or other statements by the same deponent, or is inherently improbable:
Eng Mee Yong v Letchumanan [1980] AC 331 at 341 (PC).
d)In the end the Court’s assessment of the evidence is a matter of judgment. The Court may take a robust and realistic approach where the facts warrant it: Bilbie Dymock Corp Ltd v Patel (1987) 1 PRNZ 84 (CA).
Breach of s 176 of the Property Law Act 2007
The no set-off clause
[12] There is a no set-off clause at paragraph 16.1 of the guarantee. Section 176
provides:
176 Duty of mortgagee exercising power of sale (1)
A mortgagee who exercises a power to sell mortgaged
property,
including exercise of the power through the Registrar under section
187, or through a court under section 200, owes a duty of reasonable care to the following persons to obtain the best price reasonably obtainable as at the time of sale:
(a) the current mortgagor:
(b) any former mortgagor: (c) any covenantor:
(d) any mortgagee under a subsequent mortgage:
(e) any holder of any other subsequent encumbrance.
(2)A mortgagee who exercises a power to sell mortgaged property may not become the purchaser of the mortgaged property except in accordance with section 196 or an order of a court made under section 200.
[13] This section replaced s 103A of the Property Law Act 1952. It codified a duty which the mortgagee had in exercising a power of sale, and enlarged the ambit
of s 103A in that it specifically extended the duty from being a duty stated to be owed to the mortgagor only, to a duty owed to the persons set out in s 176(1)(a)-(e). Those persons to whom the duty is now owed include “any covenantor”, which includes a guarantor.
[14] The words of s 176 are mandatory in form. A mortgagee “owes” the duty. Under section 177 a mortgagee is not able to raise as a defence to a claim for breach
of the duty imposed by s 176, that it was acting as the agent of the current mortgagor
or any former mortgagor, and cannot claim compensation or indemnity from such current or former mortgagor. Given the absolute language, and the exclusion of these defences or indemnities, it must be assumed that the legislature intended that the duty could not be excluded by contract. The section would have very limited practical effect if this were not so. If mortgagees were able to impose effective no
set-off clauses on mortgagors to nullify the effect of s 176, it could be expected that such clauses would become the norm. Mortgagees generally have the commercial negotiating power to impose limitation of liability clauses on borrowers and guarantors. It can be predicted that the benefits of s 176 would largely be excluded
by contract. This could not have been the policy of the legislature. This was the conclusion of Faire AJ in Crown Money Corporation Ltd v Pink-Martin HC AK CIV-2008-404-000297 5 September 2008 at [77]. I note that Ms Keen for the plaintiff has not sought to argue otherwise, and does not rely on the no set-off clause.
Submissions for Mr Ottow
[15] Mr McPherson for Mr Ottow submits that the plaintiff has breached its duties under s 176 in selling the properties at a price which was significantly less than the best price which was reasonably obtainable. He submits that 26 Cory Road had a current market valuation of $835,000 to $890,000 in ‘forced sale’ circumstances and that in fact it sold for $780,000 which was between $55,000 and $110,000 less than the estimated for sale value. In relation to 28 Cory Road in September 2009 there was a for sale valuation of $515,000 to $550,000, and in fact 28 Cory Road sold for
$480,000, which was between $35,000 and $75,000 less than that valuation. He points out that even the plaintiff’s own expert valuations showed for sale values of $90,000 to $200,000 more than the values actually achieved.
[16] To support this submission Mr Ottow alleges a number of specific failures on the part of the Public Trust. These are:
a) Mrs Ottow was not allowing visitors to the site, and the sale process proceeded without prospective purchasers having access to the site.
b) The properties were poorly maintained at the time of sale.
c) There was inadequate signage on the property.
d)Mr Ottow had prospective interested purchasers, whose interest was not pursued.
e) No advice to Mr Ottow of the sale of the properties.
Defence based on breach of s 176
[17] When a mortgagee does exercise the power of sale, that power of sale must
be exercised in accordance with s 176. Although s 176 imposes a specific duty on the New Zealand mortgagee, there is a similar duty at common law on English mortgagees. The English authorities on the duties of mortgagees offer useful guidance despite the different land transfer and conveyancing practices. Given the
wide ranging complaints of Mr Ottow concerning the sale, it must be observed that a mortgagee is “not a trustee of the power of sale of the mortgagor”: Nash v Eads (1880) 25 SJ 95, Jessel MR. It can be noted that:
a) A mortgagee has no duty at any time to exercise the powers of sale or possession. In default of any provision to the contrary in the mortgage, the power of sale is for the benefit of the mortgagee, who can sell at any time in accordance with the mortgagee’s convenience: Raja (Administratrix of the Estate of Raja (Dcd)) v Austin Gray (A Firm) [2002] EWCA Civ 1965 at [55], per Peter Gibson LJ; Silven Properties v Royal Bank of Scotland [2004] 1 WLR 997 at [14].
b)The mortgagee’s duty of care is to take reasonable care to obtain the best price reasonably obtainable at the time of sale: Agio Trustees Co. Ltd v Harts Contributory Mortgages Nominee Co. Ltd (2001) 4 NZ ConvC 193,480 (HC).
c) It does not matter that the time may be unpropitious and that by waiting a higher price could be obtained: Tse Kwong Lam v Wong Chit Sen [1983] 1 WLR 1349 at 1355B; Silven Properties v Royal Bank of Scotland at [14].
d)A mortgagee is under no obligation to improve the property or increase its value: Silven Properties v Royal Bank of Scotland at [16].
e) A mortgagee sale for a price less than the current market value assessed by valuers does not, of itself, establish a breach of duty, although a large discrepancy may indicate a failure to take reasonable care: Moritzson Properties Ltd v McLachlan (2001) 9 NZCLC 262,448 at [61].
f) A mortgagee does not have any general duty to maintain properties prior to sale: Silven Properties v Royal Bank of Scotland at [16].
g) Following the service of a Property Law Act Notice there is no duty on a mortgagee to keep a guarantor informed of sales activities: G Merel & Co. Ltd v Barclays Bank (1963) 1 SJ 542.
h)The mortgagee is not entitled to sell in a hasty way at a knock-down price sufficient to pay the debt, which because of the speed of sale leads to a lower price than could otherwise be obtained: see Palk v Mortgage Services Funding Plc [1993] 1 Ch 330 at 337-8.
i)Proper care must be taken to expose the property to the market and to obtain the best price reasonably obtainable: Harts Contributory Mortgages Nominee Co. Ltd v Bryers HC AK CP403-IM00 19 December 2001 at [43](d) and (f).
[18] Before examining the sales effort on behalf of the Public Trust it is necessary
to consider the specific allegations. The allegation of inadequate signage was not pursued in submissions. In any event, there is no evidence indicating that signage issues caused a lower sale price.
Not allowing visitors on site
[19] It may have been that Mrs Ottow for some reason was discouraging access inside the properties during the sale process at an early stage in 2008. There were some exchanges in April 2008 that support this contention. There is some evidence that prospective purchasers were viewing the properties from the road. However, Mrs Ottow in her affidavit does not accept that this was so, and said that she did not stop visitors from entering the properties.
[20] Even assuming that she was impeding site visits, this does not mean that the sale could not proceed, or that there was an obligation on the mortgagee to obtain Court orders giving it access, or take possession. Access issues will often occur in mortgagee sales. It was always open to Mr Ottow as a trustee of the Ottow Trust to take legal steps to ensure that his wife co-operated in the sales process. He did not
do so. Mrs Ottow as a former trustee and current beneficiary caused this problem.
The Public Trust could do little, short of not proceeding to sale or taking possession,
to remedy the problem. It was not obliged to do either. It was entitled to proceed to sale, working with any access problems that had been created by Mrs Ottow. In fact, Mr Ottow acknowledges that following Mr Darlow’s involvement some access for purchasers was arranged.
[21] Further, there was no evidence that any inability to visit the inside of the properties resulted in a lower sale price than would otherwise have been obtained.
The properties were poorly maintained
[22] There is no evidence of any serious maintenance failure. Further, there is no credible evidence that any rectifiable maintenance issue resulted in a lower sale price than could otherwise have been obtained.
[23] A mortgagee does not have any general duty to maintain properties prior to sale: Silven Properties v Royal Bank of Scotland at [16]. It was always open to the Ottow Trust to maintain the properties, or for Mr Ottow in his personal capacity to do so.
Other interested purchasers
[24] In her affidavit the owner and manager of Bayleys Waiheke Island, Mary Curnow, went through earlier offers on the property that Mr Ottow claimed had been made to Mr Darlow. I do not propose going through these individually. Suffice to say that none of them can be construed as genuine, firm, unconditional offers from a third party that could profitably have been pursued in September and October 2009. There is simply no solid evidence to support the contention that better offers that could have led to a better sale price were not pursued. The Ottows have not produced any independent person or expert who supports the claim that some offers should have been followed up, or who is critical of the Public Trust’s marketing efforts.
Failure to inform Mr Ottow of the sale
[25] Mr Ottow’s complaint that he was not advised that the properties were to be sold at mortgagee sale until after the marketing for the mortgagee sale had commenced and auction dates were allocated, has no merit. Mr Ottow was on notice after having received the Property Law Act notices that the properties could be sold. It was open to him follow up on what was happening. Following the service of a Property Law Act notice there is no duty on a mortgagee to keep a guarantor informed of sales activities: G Merel & Co. Ltd v Barclays Bank. The guarantor is from then on notice that the mortgagee may, among its options, be pursuing such a sale.
[26] Mr Ottow said he had no opportunity to collect personal items. However, by Mr Ottow’s own admission he had been away from the family home for almost four years before the sales. If he had left items at the property in 2005 when he moved out, he had had plenty of time to collect them. Moreover, the Public Trust did in fact advise Mr Darlow, the trustee, of the auction date over a month before the actual auction. It seems that Mr Ottow had knowledge of the auction from at least 24 September 2008. So he had one month’s notice, and could have collected any items that he had left at the property. He had time to tidy up the house and garden if he wished to do so.
Overall evaluation of the sales effort
[27] The replacement trustee, Mr Darlow, using the real estate agent Bayleys Waiheke Island, made very extensive efforts to sell the properties. These are detailed in the affidavit of Ms Curnow of Bayleys. Bayleys endeavoured to market the properties for Mr Darlow from March 2008 through to September 2008.
[28] In September 2008 the Public Trust itself started to make efforts to sell the properties. Ms Curnow outlined very extensive advertising and promotional efforts made through October 2009. It was her opinion that holding an auction was the best and most appropriate sale method. Window cards and colour flyers were prepared,
as were colour photographs, a location plan, and emails and flyers to the full Bayleys
purchaser database. Overall 400 people were contacted about the properties. Five persons actually viewed the properties. 80 people attended the auction.
[29] Ms Curnow provided evidence showing that the real estate market in 2008 at Waiheke was the worst on Bayleys’ records. There was a slowing down of the market and a general decline in sales activity. She explained that there had been an earlier full marketing campaign of the properties for Mr Darlow in March 2008, which had been unsuccessful. The properties were marketed openly and extensively. Any previous offeror could have attended the auction or made an offer. There was nothing to prevent any such person from putting in a bid and purchasing the property. The affidavits for the Public Trust and of Ms Curnow show the sort of thorough marketing campaign that could be expected. There is nothing to indicate that Mrs Ottow’s lack of co-operation with the sale process, and in particular the lack of access to inside the homes and the lack of signage, meant that a lower price was ultimately obtained. Indeed the evidence is to the contrary, in that Ms Curnow, the only sales expert who swore an affidavit, appears to be of the view that the best sales effort was made. Ms Curnow described the state of the market at the time of sale as the “worst on our record”. In that context the prices obtained, when considered against the valuations, were within the range of what could be expected.
[30] Even if there was some detriment arising from Mrs Ottow’s lack of co- operation, the fault lies at the door of the Ottows, not the Public Trust. The Public Trust could not be expected to nursemaid the Ottows or coerce them into taking more steps to achieve the best price possible. Mr Ottow, who has made the primary complaint in this area, could have taken steps to force his wife to co-operate with sale efforts. It is difficult to see how the Public Trust could have forced Mrs Ottow to do anything in relation to the sale, unless the Public Trust actually took possession as mortgagee. It had no obligation to take such a step, and indeed the mortgage provided that the Public Trust was not obliged to exercise any right or authority contained in the mortgage or vested in it by any statute.
[31] The following steps indicate that a mortgagee has made reasonable efforts to obtain the best reasonably obtainable price:
a) The appointment of a reputable real estate agent to market the property.
b)Obtaining a valuation report from an experienced valuer as a guide to what could reasonably be expected for the property.
c) Marketing over a reasonably long period of time.
d) An extensive advertising and promotional campaign. e) A properly conducted auction.
f) A sale price that, given all the circumstances, can be reconciled with expert opinion as to value.
[32] The mortgagee took all these steps. However, because the sale prices were less than the values fixed by the valuers, it was argued that the duty had been breached.
[33] A failure to achieve an assessed valuation price at a mortgagee sale is not in itself any indication of a breach of the mortgagee’s duty of care to obtain the best price reasonably obtainable: Moritzson Properties Ltd v McLachlan at [61]. A failure to achieve a price that a mortgagor believes the property should achieve, does not give rise to an inference that a mortgagee has breached its duty to take reasonable care: Wallace v Bank of New Zealand HC AK CIV-2009-404-3534 1 July 2009 Wylie J, at [54]. Of course, a sale at a price which is much less than the assessed value, when there is no explanation for the discrepancy, can indicate a failure to take reasonable care.
[34] In a poor and receding market as there was in October 2008, it is entirely understandable that prices will be somewhat lower than those anticipated in valuations. There is not a sufficient disparity between the valuer’s figures and the actual sales prices to warrant any inference of a breach of the mortgagee’s duty. Moreover, I note that the highest offer at the auction for number 26 Cory Road of $670,000 was rejected and the property was passed in. The property was
subsequently sold some five days later for $780,000, $110,000 more than the highest price offered. This delay is indicative of the Public Trust seeking to maximise the sale price, and the fact that the best possible price was obtained.
Conclusion on mortgage’s duty of care to obtain the best price reasonably obtainable
[35] The overwhelming impression of the evidence of Ms Curnow and the other witnesses for the Public Trust is of a responsible and concerted marketing campaign
to get the best possible sales price. Mr Ottow’s complaints quite simply lack credibility. There is no evidential foundation for the proposition that the Public Trust did not take all reasonable care to obtain the best price reasonably obtainable at the time of sale. This first defence does not succeed.
Undue influence of Mrs Ottow
[36] Mrs Ottow opposes summary judgment on the grounds that the guarantee was procured by undue influence, and that the Public Trust breached duties it owed to her. Mrs Ottow alleges that she was unduly influenced by Mr Ottow. Mrs Ottow submits that the Public Trust was put on notice of this undue influence through its agent, Mrs Ottow’s lawyer. It is submitted for Mrs Ottow that the loan was to the Ottow Trust and not for the commercial purposes of Mrs Ottow, and that the Public Trust failed to take reasonable steps to satisfy itself of the purpose of the loan, and insulate itself from the undue influence on Mrs Ottow.
[37] Mrs Ottow married Mr Ottow in 1982, and they separated in 2005. They had two children, born in 1987 and 1990. Mrs Ottow claims that it was a violent and abusive relationship. She asserts that she is under treatment from a psychologist, having complex post-traumatic stress disorder, which is a result of her marriage. She is presently a sickness beneficiary.
[38] In relation to the Ottow Trust she accepts that she was aware that she was a trustee of this Trust together with her husband and the accountant Mr Thomas. She states, however, that she had no involvement in the legal or financial affairs of the Trust and that these were the responsibility of Mr Ottow. He was in charge.
[39] Mrs Ottow’s background is as a registered nurse. She helped Mr Ottow with
his property developments as well as working as a nurse. Mr Ottow would design the houses to be built and manage the development. She would manage and supervise the site work. For a period she maintained two jobs until she ceased nursing in 1994. She states in her affidavit that in 1997 she ceased having any involvement with the property developments.
[40] She states that she signed many documents during the course of the marriage. She does not recall signing the guarantee or seeing anyone from the Public Trust. Mr Ottow’s lawyer was Joanna Pidgeon. If Mrs Ottow had to sign documents for Ms Pidgeon she would go into her office. She accepts that it is her signature on the guarantee. She notes in her affidavit that she signed the guarantee about a year before the final separation and that things were very tense between her and Mr Ottow.
[41] When Mrs Ottow signed the guarantee Ms Pidgeon certified that she explained the document to Mr and Mrs Ottow. Mrs Ottow does not recall being spoken to alone about the guarantee.
[42] Mrs Ottow sought to file a further affidavit on the morning of the hearing. It annexed psychologist reports, which state that she is now suffering from post- traumatic stress disorder. She also embellished her earlier affidavit by stating that she was reliant on her husband for financial support when she stopped working, and that although she was a beneficiary of the Ottow Trust she “never knowingly received income from the Trust”. She went on to say, however, that she signed so many documents that it was possible that she was given some income from the Ottow Trust. The Public Trust objected to the late filing of this affidavit.
[43] There is no reason why affidavits could not have been provided as to Mrs Ottow’s mental state, rather than hearsay evidence. Given that the psychologist reports are 2009 documents relating to her current mental health, those reports add little, as Mrs Ottow had already stated in her first affidavit that she was suffering from the disorder at the relevant time. I put the reports to one side.
[44] As to her remarks about her relying on her husband and not receiving income from the Ottow Trust, her qualification of her statement is of such magnitude that her statement really means very little. However, given that this is an application which, if successful, will finally dispose of the proceedings I will treat the statements about her income from the Trust as in evidence.
[45] The Court of Appeal in Hogan v Commercial Factors Limited [2006] 3
NZLR 618 recognised that it is not uncommon for sureties to attempt to avoid liability by arguing that they were induced to enter into the guarantees by reason of undue influence exercised by or on behalf of the borrower and seek to raise that defence against the creditor. It was noted at [13] that this will throw up three issues:
(a) Was the surety subject to undue influence?
(b)If so, were the circumstances as known to the creditor such as to put the creditor on inquiry as to the risk of undue influence?
(c) If so, did the creditor act in such a way as to insulate itself from the consequences of such undue influence?
Was Mrs Ottow subject to undue influence?
[46] Mrs Ottow claims that she cannot remember signing the guarantee, that she did not receive advice independent from the advice being received by her husband, and that she would have signed it because she was told to and not after any proper consideration of whether it was in her interests to do so.
[47] Undue influence is classified into two classes; the first being actual undue influence and the second being presumed undue influence: Wilkinson v ASB Bank Limited [1998] 1 NZLR 674 (CA) at 679. There are two classes of presumed undue influence. The first arises where there are certain relationships such as solicitor/client, and the second arises if the complainant proves the de facto existence of a relationship under which the complainant generally reposed trust and confidence in the alleged wrongdoer.
[48] Dispositions by a wife in favour of her husband do not as a matter of law raise a presumption of undue influence within the first class of undue influence:
Wilkinson v ASB Bank Limited at 680. However, a wife may be able to demonstrate that as a matter of fact she left decisions on financial affairs to her husband and show that the relationship between the husband and the wife in the particular case was such that the wife reposed confidence and trust in her husband in relation to their financial affairs, and therefore undue influence could be presumed: Wilkinson v ASB Bank Limited at 680, Bank of Montreal v Stewart [1911] AC 120.
[49] In Royal Bank of Scotland Plc v Etridge (No 2) at [11], Lord Nichols stated at paras [14] and [21], that there were two prerequisites to the shift of the evidential burden of proof. He stated at [21] that these were:
First, that the complainant reposed trust and confidence in the other party, or the other party acquired ascendancy of the complainant. Second, that the transaction is not readily explicable by the relationship of the parties.
[50] There is no single touchstone in determining the circumstances in which one person acquires influence over another and exercises that influence. Lord Nichols in Royal Bank of Scotland Plc v Etridge (No 2) stated at [11]:
Several expressions have been used in an endeavour to encapsulate the essence: trust and confidence, reliance, dependence or vulnerability on the one hand and ascendancy, domination or control on the other.
[51] Mr Lenihan argues that it is arguable that undue influence can be presumed
by Mr Ottow over Mrs Ottow, given Mrs Ottow’s mental condition and the fact that
Mr Ottow was in sole charge of their financial affairs. She states that Mrs Ottow had
no involvement in those affairs from 1997. She points to Mrs Ottow’s lack of recollection of signing the guarantee.
[52] However, there are some strong countervailing factors indicating an absence
of undue influence. There is every indication that the Public Trust advances were for the benefit of the Trust, and that Mrs Ottow was a beneficiary of the Trust and going
to reside in one of the Cory Road properties, for her benefit. The notes for the loan application in 2005 which gave rise to the guarantees were exhibited. They show that the “clients” had purchased a further lifestyle block in Cory Road, and that it “…is their intention to develop a new superior residence thereon.” On completion of the new dwelling the existing Cory Road properties would be sold to reduce the
mortgage advance. There is no evidence that the borrowing was for Mr Ottow’s business interests. The evidence is, rather, that the borrowing was for the development of a family residence.
[53] An email was exhibited from Mrs Ottow’s barrister to her dated
13 April 2007 relating to relationship property issues. That email stated that Mrs Ottow received income from the “cottages” on the Waiheke properties. The email is not entirely unambiguous, but Mrs Ottow, in the second affidavit that she filed, offered no explanation of any alternative meaning. The fact that she would have received rent is consistent with her role as a trustee with an interest in the Cory Road properties.
[54] There is evidence, therefore, that Mrs Ottow received a benefit from the advances of the Public Trust, which related to properties in which she lived or would live with her family, and which would be owned by a trust of which she was a trustee and a beneficiary.
[55] When the relevant advance was rolled over in August 2007, Mrs Ottow was separated from Mr Ottow, and represented by her own lawyer, Ms Paterson of Rennie Cox. The Public Trust wrote to Ms Paterson asking if Mrs Ottow agreed to the roll over of the loan, and Ms Paterson responded on 2 August 2007 to say that Mrs Ottow agreed. The fax did not contain any suggestion that the guarantee of that advance, or other advances, were contested because of undue influence. The loan agreement was subsequently signed by Mrs Ottow as a trustee and as a guarantor, and her signature on both occasions was witnessed by Ms Paterson.
[56] Mrs Ottow, therefore, signed the term loan agreement as guarantor and did not complain of undue influence after approximately one year of living apart and being locked in litigation with her husband. She must have been aware of the guarantee, as when she signed the document in 2007 she was shown as a guarantor. It could be expected that this would have been the time to raise undue influence. She must have seen the loan roll-over as having some advantage to her In fact, she did not claim undue influence until these proceedings issued and she was faced with the
claim against her. This indicates that there had been no undue influence on
Mrs Ottow when she signed the original guarantee.
[57] In any event, her active co-operation with the roll-over can be seen as an affirmation of the contract, which removes the defence of undue influence. A contract procured by undue influence which is affirmed expressly or by implication, can no longer be rescinded: Allcard v Skinner (1887) 36 Ch D 145. It was argued, relying on Haines v Carter [2001] 2 NZLR 167 at [116] that Mrs Ottow was still under the influence of Mr Ottow when the roll-over occurred in July 2007. This is not a submission that has the support of any credible evidence. As already noted, Mrs Ottow had been separated from Mr Ottow for a year, and had an independent lawyer acting in her sole interest. She was in active litigation against Mr Ottow, and cannot be regarded as under his influence.
[58] Therefore, there is insufficient material to show that the guarantee and term loan agreement were not explicable from her commercial perspective, as giving her a commercial benefit. Of the two prerequisites referred to in Royal Bank of Scotland Plc v Etridge (No 2) [2002] 2 AC 773 at [21] to shift the burden of proof set out at [49] above, the second, the transaction not being readily explicable by the relationship of the parties, is not made out on the papers filed to date, even on an arguable basis. There is, indeed, no arguable defence that in signing the guarantee, Mrs Ottow was subject to Mr Ottow’s undue influence. The transaction is entirely explicable, given Mrs Ottow’s position, and her experience and subsequent behaviour are consistent with her rational acceptance that the advances and guarantee were for her and the family’s benefit.
[59] I will, however, go on to consider the Public Trust’s position assuming that there was undue influence by Mr Ottow. If that were so, two questions then arise, as explained in Wilkinson at 680. First, was the situation one where the wrongdoer who perpetrated the undue influence was the agent of the Public Trust? The second is whether the Public Trust had actual or constructive notice of the undue influence or misrepresentation.
Agency
[60] The Public Trust documents relating to the guarantee and the contemporaneous advances were exhibited. The cover of the guarantee contained a warning that by signing the guarantor became personally liable, and stated:
You should seek independent legal advice (that is advice independent of any advice obtained by the borrower) before signing this document because of the risk of ultimate liability.
[61] The guarantee was sent by the Public Trust on 27 July 2005 to Ms Pidgeon of Hesketh Henry, Barristers and Solicitors. The loan agreements and guarantee were forwarded, and it was noted that the guarantee should be executed before and witnessed “by a solicitor”, and initialled and signed by the guarantors where indicated. This was presumably organised by Ms Pidgeon, who witnessed the Ottows’ signatures. She provided the Public Trust with a standard form certificate stating that she fully explained the effect of the provisions of the guarantee to the Ottows, and that they indicated to her that they understood the warning and the nature of the obligations and would be signing voluntarily. It was apparent from her certificate and the signed document that she had acted for both the borrowers and guarantors.
[62] On the facts Mr Lenihan for Mrs Ottow sought to apply the principles set out
in Nathan v Dollars and Sense Ltd [2008] 2 NZLR 557, in arguing that there was a relevant agency. In that case the guarantors were the parents of the borrower. The borrower sought funds for his business and sought to have his parents as guarantors. The financier’s lawyer asked the son to obtain his parents’ signatures and carry out other tasks in relation to the guarantee on the financier’s behalf. The son in fact forged the mother’s signature. The Supreme Court, while it accepted that the financier did not authorise the forgery, concluded that the appropriate enquiry was to assess the nature of the task to be performed on behalf of the principal, and how the use of the agent for that purpose created risk for the guarantor. It held that there was a sufficiently close connection between the task for which the agent was engaged and the agent’s unlawful act, and that the actions were within the scope of the agency, even if done exclusively for the benefit of the agent: at [40]-[41].
[63] In that case the borrower was given particular tasks to carry out on behalf of the financier. That is not the situation here. The Public Trust did not ask Mr Ottow
to do anything. There is no factual basis on which it can be argued that Mr Ottow was the Public Trust’s agent.
[64] The question then arises whether Ms Pidgeon, the lawyer to whom the guarantee was sent by the Public Trust and who provided it with her solicitor’s certificate, was the agent for the Public Trust and in some way that can attribute the undue influence to the Public Trust.
[65] It was pointed out in Royal Bank of Scotland Plc v Etridge (No 2) at [77], that
a bank in the United Kingdom in these circumstances does not have, and is not intended to have, any knowledge of or control over the advice the solicitor gives the wife. The solicitor is not accountable to the bank for the advice given to the wife. Here to impute to the Public Trust knowledge of what passed between the solicitor and the wife would contradict this essential feature of the arrangement, which was to leave the task of advising the Ottows to an independent lawyer. I do not accept that the mere fact that the Public Trust warned of the need for independent legal advice and sought a solicitor’s certificate, made Ms Pidgeon the Public Trust’s agent in giving that advice. In this regard I respectfully agree with the decision of Doogue AJ in ANZ National Bank Limited v Smith HC AK CIV-2008-404-007866 2 September 2009 at [27], where he rejected a similar proposition. I do not accept that the Public Trust had any duty to ensure that Mrs Ottow had separate legal advice from the Ottow Trust. The advance was effectively a joint advance to Mr and Mrs Ottow.
[66] There is a distinction between a lender instructing a party to carry out tasks
on its behalf, as was the case in Nathan v Dollars and Sense Ltd, and a lender sending instructions to solicitors asking them to independently advise their clients. In the latter case, given that the advice is required to be independent of the Public Trust by definition in the warning at the start of the guarantee, it is not possible to see how Ms Pidgeon is the Public Trust’s agent. To the contrary, the solicitor must advise the client in the client’s interests, which will conflict with the lender’s interests. The fact that a certificate is sent by the solicitor confirming the giving of
that independent advice and that the guarantors signed the guarantee voluntarily may place a duty of care on the solicitor in relation to the lender: Allied Finance & Investments Ltd v Haddow & Co. [1983] NZLR 22 (CA). But it does not make the solicitor the lender’s agent.
[67] Even if Ms Pidgeon was to be regarded as the agent of the Public Trust, there
is nothing to show that she was party to the undue influence. That has not been suggested in Mrs Ottow’s affidavit. Indeed, Mrs Ottow says she cannot recall signing the guarantee.
Was the Public Trust put on inquiry?
[68] At the time the guarantee was signed Mrs Ottow was represented by Ms J Pidgeon of Hesketh Henry, who acted for the Ottow Trust and was also her husband’s lawyer. It is submitted for Mrs Ottow that Ms Pidgeon would have been fully aware that Mrs Ottow had no involvement in Mr Ottow’s property developments. This knowledge, it is submitted, could be fixed on the Public Trust.
[69] It was stated in Royal Bank of Scotland Plc v Etridge (No 2) at [48] –[49]:
[48] As to the type of transactions where a bank is put on inquiry, the case where a wife becomes surety for her husband’s debts is, in this context, a straightforward case. The bank is put on inquiry. On the other side of the line is the case where money is being advanced, or has been advanced, to husband and wife jointly. In such a case the bank is not put on inquiry, unless the bank is aware the loan is being made for the husband’s purposes, as distinct from their joint purposes. That was decided in CIBC Mortgages plc v Pitt [1994] 1 AC 200.
[49] Less clear cut is the case where the wife becomes surety for the debts of a company whose shares are held by her and her husband. Her shareholding may be nominal, or she may have a minority shareholding or an equal shareholding with her husband. In my view the bank is put on inquiry in such cases, even when the wife is a director or secretary of the company. Such cases cannot be equated with joint loans. The shareholding interests, and the identity of the directors, are not a reliable guide to the identity of the persons who actually have the conduct of the company’s business.
[70] Here the Public Trust was not faced with a wife becoming surety for her husband’s debts, or indeed a company in which she had a minority interest. The Ottow Trust cannot be equated to a company controlled by Mr Ottow. Mrs Ottow
was herself a trustee. The loans were for the Ottow Trust, of which Mrs Ottow was a beneficiary and trustee, and the purpose of the advances related to the Cory Road properties, which on their face were owned for the benefit of both of the Ottows. The moneys advanced were to end up in properties in which the Ottow family would reside. The advances were effectively being made to Mr and Mrs Ottow jointly, so it could be expected that they would share a legal advisor. There is nothing to show any awareness on the part of the Public Trust that there was anything oppressive about Mr Ottow’s relationship with his wife. All the indications were, to the contrary, that the Ottows were working in concert on the Waiheke properties for their mutual family benefit.
[71] The Public Trust, through its exchange with Ms Pidgeon, may be taken for summary judgment purposes to be aware that Mrs Ottow was not receiving advice from a lawyer who was independent of the borrower, in the manner provided for in the warning at the front of the guarantee. But that was a standard form warning. Here, the borrowers were Mr and Mrs Ottow as trustees, and they were also the guarantors. In those circumstances, it could be expected that there would not be advice given to the Ottows separate from the advice they were getting as trustees. They were borrowing for the property that was to be their residential home, and using a discretionary family trust to do so. In such circumstances there was nothing surprising in the documents coming back witnessed by their joint lawyer Ms Pidgeon. It was perfectly reasonable for the Public Trust, despite the warning on
its documents, to not perceive the common witnessing of the Ottows’ signatures as a sign of undue influence. Ms Pidgeon appears to have been comfortable in doing so, and this is not surprising given that the one of the borrowers was Mrs Ottow as trustee, and she was to enjoy the family home that the borrowed moneys would be used for.
[72] Therefore there was nothing to put the Public Trust on enquiry that there was any undue influence being exercised on Mrs Ottow. It was positively in her interests
to sign the guarantee.
Conclusion on undue influence
[73] As was stated in Wilkinson v ASB Bank at 689:
The Court must balance the desirability of protecting vulnerable persons from loss of their assets, particularly their homes, against the undesirability of economically sterilising those assets. Sympathy for a victim of undue influence or misrepresentation should not lead a Court into the error of imposing upon lenders an unrealistic standard.
[74] Acceptance of Mrs Ottow’s submissions would entirely tip that balance. There is an obvious commercial explanation for Mrs Ottow signing the guarantee. It was in her interests to do so. This, her commercial experience, and her subsequent behaviour where she effectively affirmed the guarantee, show a defence based on undue influence by Mrs Ottow cannot succeed. Ms Pidgeon was not the agent of the Public Trust, but even if she was there is nothing to indicate that she was in any way a party to any undue influence, and so the Public Trust cannot have knowledge of undue influence imputed to it through that route. In any event, there is nothing to indicate that the Public Trust knew or should have known or was in any way put on notice, of undue influence between Mr and Mrs Ottow.
[75] Therefore, the second defence does not succeed.
Summary
[76] I am satisfied that the Ottows have no defence to the claim of the Public
Trust.
[77] Judgment is entered for the Public Trust against the first and second defendants in the sum of $323,678.62 together with interest at 13.55 per cent per annum from 23 January 2009.
Costs
[78] Issues of costs are reserved so that submissions can be filed. The plaintiff is
to file its submissions within 14 days of today’s date. The defendants are to file submissions within a further 14 days.
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Asher J
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