Qu v Official Assignee in the bankruptcy of Zeng
[2022] NZHC 3114
•25 November 2022
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2015-404-002256
[2022] NZHC 3114
BETWEEN JIA JUN QU
Plaintiff
AND
THE OFFICIAL ASSIGNEE IN THE BANKRUPTCY OF THE PROPERTY OF JUN ZENG
Defendant
parties continued over
Hearing: 3 August 2022 Appearances:
G P Blanchard KC and C Jiang for Plaintiffs
Judgment:
25 November 2022
Reissued:
11 August 2023
JUDGMENT OF EDWARDS J
[Liability]
This judgment was delivered by me on 25 November 2022 at 4.30 pm pursuant to r 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Counsel/Solicitors:
G P Blanchard KC, Auckland Tompkins Wake, Auckland
QU v THE OFFICIAL ASSIGNEE IN THE BANKRUPTCY OF THE PROPERTY OF ZENG [2022] NZHC 3114
[25 November 2022]
BETWEEN JIAN PING WANG
Second Plaintiff
YAN QU
Third PlaintiffJ M BUILDING MATERIALS COMPANY LIMITED
Fourth Plaintiff
FORMODA REAL ESTATE
DEVELOPMENT COMPANY LIMITED
Fifth Plaintiff
AND J & H DEVELOPMENT LIMITED
(in Liquidation) Second Defendant
HUIMIN ZHAO
Third Defendant
[1] The first, second and third plaintiffs (plaintiffs) seek judgment against Ms Zhao (third defendant) on claims of dishonest assistance and knowing receipt.
[2] The claims follow entry of summary judgment in 2017 against Mr Zeng who has since been made bankrupt (first defendant), and J & H Development Ltd (“J & H”) (the second defendant).1 The claims against Mr Zeng were for breach of fiduciary duty, deceit, conversion, and money had and received.
[3] Ms Zhao resides in China. She has been served with the proceedings in accordance with orders of substituted service, but she has not taken any steps. Accordingly, this claim proceeds by way of formal proof.
[4] Claims of this nature are not easily dealt with in the absence of a contradictor. I have relied heavily on counsel for the plaintiffs’ submissions.
Relevant facts
[5] Mr Qu (first plaintiff) and Ms Wang (second plaintiff) are husband and wife. Yan Qu (third plaintiff) is their daughter. Yan Qu is referred to in the plaintiffs’ affidavits as Margaret, and I will do likewise.
[6] Mr Qu and Ms Wang are directors and shareholders of the fourth and fifth plaintiff companies (“JMB” and “Formoda” respectively).
[7]Margaret met Mr Zeng in 2007 and they married in 2008.
[8] While still married, Mr Zeng began a relationship with Ms Zhao. She was married to a friend of his, Mr Wang, and they had known each other for some time.
[9] Not long after his marriage to Margaret, Mr Zeng asked his parents-in-law for money to assist with property development. Mr Zeng incorporated J & H for property development purposes.
1 Qu v Zeng [2017] NZHC 315.
[10] Between 2008 and 2015 Mr Zeng and J & H obtained significant loans from Mr Qu and Ms Wang and their companies for alleged property developments in Hamilton and Auckland. It is not necessary to canvass the details of most of those loans and property developments in this judgment as the claim against Ms Zhao only concerns her alleged involvement with a property development project (the “Flagstaff Joint Venture”).
[11] The Flagstaff Joint Venture involved a development in Hamilton. Mr Zeng’s proposal was that Mr Qu and Ms Wang would fund the purchase of nine sections in Flagstaff, Hamilton. Construction would be carried out in two stages.
(a)Stage one would involve the construction of a house each on four of the sections. Construction would be financed by Mr Qu and Ms Wang. These houses would then be sold and the sale proceeds would be used to repay the costs of purchase and construction costs, plus interest.
(b)Stage two involved constructing houses on another four sections. Construction costs for stage two would be financed by Mr Wang. Once completed, these houses would be sold and the sale proceeds used to repay the costs of purchase and Mr Wang’s construction costs, plus interest.
[12] The balance of the net sale proceeds were to be split equally between Mr Qu, Ms Wang and Mr Zeng on the one hand, and Mr Wang on the other. The remaining section would be left empty for the meantime.
[13] Between 22 March 2010 and 28 February 2012, Mr Qu and Ms Wang advanced a total of $1,722,576 to purchase nine sections in Flagstaff (the “Flagstaff Land Loans”).2
[14] The properties were registered in the name of either Mr Zeng, Ms Wang or Margaret.
2 The nine properties are: 158 Cumberland Drive; 7 Nicks Way; 150 Cumberland Drive; 4 Trent Lane; 5 Trent Lane; 144 Cumberland Drive; 4 Keston Crescent; 126 Cumberland Drive; and 3 Keston Crescent.
[15] Between 2010 and 2015, Mr Qu and Ms Wang advanced a total of $4,759,313 to Mr Zeng for construction costs of the Flagstaff Joint Venture (“the Flagstaff Construction Loans”).
[16] However, instead of constructing houses, Mr Zeng sold most of the sections as vacant lots and kept the proceeds. The sections registered in his name were sold without the plaintiffs’ knowledge.
[17] Mr Zeng also sold two of the sections registered in Margaret’s name without her knowledge and by deceiving her into authorising the transfers by misrepresenting the purpose of those transfers. The sale proceeds for these two properties, totalling
$266,334.92, were paid into Margaret’s account without her knowledge. All but
$10,000 of the proceeds was then transferred into a joint account in Margaret’s and Ms Wang’s names. The funds were then withdrawn by forging Margaret’s signature on two cheques.
[18] On 30 May 2013, Mr Zeng entered into a sale and purchase agreement to sell one of the houses (158 Cumberland Drive) for $640,000. The sale settled on 4 July 2013 and Mr Zeng used the net sale proceeds to make a payment towards the Flagstaff Land Loans. This was the only house Mr Zeng constructed in relation to the Flagstaff Joint Venture.
[19] From 2014 to early 2015, Mr Zeng made various false representations to Mr Qu, Ms Wang and Margaret. Those misrepresentations included that construction on three houses had been suspended because Mr Wang had stopped funding it. Based on this false representation, Mr Zeng obtained $250,000 from Mr Qu on the pretence that it would convince Mr Wang to complete the Flagstaff construction (the “Misappropriated Funds”). This money was then diverted into Mr Zeng’s own accounts.
[20] By early 2015, the plaintiffs had become suspicious. They visited the Flagstaff sections and discovered Mr Zeng’s fraud. They confronted him in March 2015. He admitted his fraudulent conduct, and wrote a letter to Mr Qu, Ms Wang and Margaret in which he admitted to breaking the law and apologised.
[21] In 2015, Mr Zeng made partial repayments to the plaintiffs. These were applied to loans other than the Flagstaff Land Loans. Ms Qu and Mr Wang sold three of the remaining properties in the Flagstaff Joint Venture for a total of $1,803,960 and these sums were applied to the Flagstaff Land Loans.
[22] After discovering Mr Zeng’s conduct, the plaintiffs issued these proceedings on 28 September 2015. Mr Zeng and J & H did not defend the proceedings. Without notice freezing orders were made against Mr Zeng and J & H on 30 September 2015.3
[23]Mr Zeng and J & H breached the freezing orders by dissipating assets.
[24] The plaintiffs discovered Ms Zhao’s involvement in late 2016. By this time, she had left to Shanghai. Evidence relied on by the plaintiffs to prove both causes of action against her is discussed in more detail later in this judgment.
[25] On 2 March 2017, Fogarty J granted summary judgment in favour of the plaintiffs against Mr Zeng.4 The Judge found that Mr Zeng was clearly in a fiduciary relationship with the plaintiffs, and that trust had been reposed in him. He found that Mr Zeng and breached various contracts, had essentially been converting money, and had been deceitful.5
[26] In relation to the Flagstaff development, the Judge entered judgment for the following sums:6
(a)$250,000 (Misappropriated Funds);
(b)In relation to the Flagstaff [Land] Loans:
(i)$1,772,576 of principal;7 and
3 Qu v Zeng HC Auckland CIV-2015-404-002256, 30 September 2015 (Minute of Woolford J).
4 Qu v Zeng [2017] NZHC 315.
5 At [16].
6 At [28].
7 This figure may be in error as judgment was also entered in relation to the Flagstaff Land Loans for the principal sum of $1,211,132. That is the sum sought by the plaintiffs in this case.
(ii)$1,193,952 of interest;
(c)In relation to the Flagstaff Construction Loans:
(i)$4,658,262 of principal; and
(ii)$2,365,546 of interest.
[27] Indemnity costs were also awarded against Mr Zeng.8 The proceedings remained on foot to allow the plaintiffs to advance proprietary and tracing claims against Mr Zeng’s and J & H’s assets.9
[28] Mr Zeng was adjudicated bankrupt on 6 July 2017 and J & H was placed into voluntary liquidation on 3 August 2017.
[29] In June 2018, Woodhouse J held that Mr Zeng and J & H were in contempt of Court.10 Mr Zeng was sentenced to 250 hours of community service.11
[30] On 9 August 2019, an application to add Ms Zhao as third defendant and to file an amended statement of claim was filed. Orders granting that application were made on 12 June 2020.
[31] In November 2021, the plaintiffs and the Official Assignee reached an agreed position whereby the plaintiffs decided not to pursue their proprietary and tracing claims against Mr Zeng and J & H.
[32] On 8 July 2022, the plaintiffs filed a third amended statement of claim, further particularising their claims against Ms Zhao. Service was effected by way of compliance with substituted service orders, and, as previously mentioned, Ms Zhao has not taken any steps in the proceeding.
8 Qu v Zeng [2017] NZHC 315 at [33].
9 At [29]–[31].
10 Qu v Zeng [2018] NZHC 1300.
11 Qu v Zeng [2018] NZHC 1395.
Is Ms Zhao liable for dishonest assistance?
[33]The plaintiffs seek judgment against Ms Zhao for dishonest assistance.
[34] There are four elements that must be established for the dishonest assistance cause of action:12
(a)The existence of a trust or fiduciary duty;
(b)A breach of that trust or fiduciary duty by a trustee or fiduciary that results in loss;
(c)Participation by a defendant third party (a stranger to the trust) by assisting in the breach of trust or fiduciary duty; and
(d)Dishonesty on the part of the defendant.
[35] The first two elements have already been determined by Fogarty J in Qu v Zeng.13 It is the third and fourth elements at issue in this case.
[36] The plaintiffs rely on various strands of evidence to prove their case as set out in their written submissions. I take each in turn.
[37] First, there is evidence that Ms Zhao was listed as the co-owner with Mr Zeng and signed the building contract for 158 Cumberland Drive (wrongly recorded as 157 Cumberland Drive). Neither she, nor Mr Wang, were owners of that property, it being registered in Margaret’s name.
[38] Clearly, Ms Zhao must have known she was not the owner of that land. Her participation in relation to obtaining the construction loan in relation to this property, and her dishonesty, may be inferred from Ms Zhao’s signature on this agreement – at least in relation to the construction contract for this section.
12 Sandman v McKay [2019] NZSC 41 at [46].
13 Qu v Zeng [2017] NZHC 315 at [16], [27], [28], [30] and [32].
[39] Next, the plaintiffs rely on evidence that Mr Wang’s signature appeared on a number of building contracts for construction of houses on various lots. Reliance is placed on the fact that Mr Wang is Ms Zhao’s ex-husband to infer that Ms Zhao (or Mr Zeng) must have forged Mr Wang’s signature. It is also asserted that Ms Zhao assisted Mr Zeng to use Mr Wang’s name to fraudulently obtain $250,000 of additional funding (the Misappropriated Funds) from the plaintiffs on false pretences.
[40] This evidence, on its own, is not sufficient to establish Ms Zhao’s participation in Mr Zeng’s breach of fiduciary duty in relation to the building contracts concerned, and the Misappropriated Funds. The fact that Ms Zhao was previously married to Mr Wang does not mean that she was involved in using his name as part of the Flagstaff development deception. That is particularly so in this case because Mr Wang was also Mr Zeng’s friend. Furthermore, the only evidence adduced in support of this aspect of the claim suggests that it was Mr Zeng (as opposed to Ms Zhao) who forged Mr Wang’s signature on the construction contracts.
[41] Nevertheless, I accept that Ms Zhao’s connection to Mr Wang is part of the pool of evidence from which dishonest participation may be inferred.
[42] The plaintiffs rely on expert forensic accounting evidence which shows that Ms Zhao, and a company associated with her (ECF) received funds which Mr Zeng had obtained from the plaintiffs. I am unable to reconcile the evidence with the submissions on the exact quantum received, but I accept that some funds were received, and inferences may be drawn from that evidence.14
[43] In addition, the plaintiffs rely on evidence to show that Ms Zhao received the following sums as a result of Mr Zeng’s breach:
(a)A total of $93,378 from the sale proceeds in relation to five different lots (150 Cumberland Drive, 158 Cumberland Drive, 7 Nicks Way, and 3 and 4 Keston Crescent).
14 The submissions refer to a total of $816,171 having been received by Ms Zhao. However, it is not clear where that figure is derived from. The updating affidavit of Mr Shaw refers to a total net amount of $755,937 having been received, being amounts received of $1,562,273 less amounts paid of $806,336.
(b)A total of $92,432 of the Flagstaff Construction Loans.
[44] In addition, a company set up to support Ms Zhao’s immigration application (ECF) received $40,000 from the Flagstaff Land Loans, and $85,495 from the Flagstaff Construction Loans.15
[45] Counsel for the plaintiffs submit that inferences may also be drawn from Ms Zhao’s conduct after the plaintiffs issued proceedings against Mr Zeng. That evidence includes receiving ownership of a Porsche Cayenne from Mr Zeng and transferring funds from New Zealand to China in over 30 transfers of around $10,000 each. It also includes receipt of a large 250 kilogram shipment made of up 13 cartons of 20 kilograms each from Mr Zeng in January 2016.
[46] Standing back, and considering the evidence in its entirety, I am satisfied that there is sufficient evidence to draw the necessary inferences to establish Ms Zhao’s dishonest assistance in relation to the Flagstaff Land Loans and Flagstaff Construction Loans. However, I am not satisfied that there is sufficient evidence to establish dishonest assistance in relation to the Misappropriated Funds.
Knowing receipt
[47]The second cause of action against Ms Zhao is knowing receipt.
[48]The elements of this cause of action are as follows:16
(a)There is property subject to a trust;
(b)The property is transferred;
(c)The transfer is in breach of trust;
(d)The property (or its traceable proceeds) is received by the defendant;
15 Although this evidence is relied on to prove the dishonest assistance claim, it does not form part of the knowing receipt claim as it cannot be proved that Ms Zhao received the money flowing through ECF.
16 Green & McCahill Holdings Ltd v Ara Weiti Developments Ltd [2021] NZHC 219 at [80].
(e)The receipt is for the defendant’s own benefit; and
(f)The defendant receives the property with knowledge that the property is trust property and has been transferred in breach of trust, or if not a bona fide purchaser of a legal estate without notice, retains the property, or deals with it inconsistently with the trust, after acquiring such knowledge.
[49] The only issues in relation to this cause of action are those set out in (d), (e) and (f) above. The plaintiffs rely on the same evidence relied on for the dishonest assistance claim. However, in this case they are only seeking judgment for the sum of
$185,810 (being the total of the sums of $93,378 and $92,432 received by Ms Zhao as referred to in [43] of this judgment). I am satisfied that the claim of knowing receipt is established.
Limitation Act 2010
[50] Counsel for the plaintiffs has drawn my attention to a potential defence under the Limitation Act 2010.
[51] To the extent that the plaintiffs’ claim falls outside the six-year primary period, then I am satisfied that the plaintiffs did not become aware of Ms Zhao’s relevant conduct until October or November 2016. Under ss 11 and 14 of the Limitation Act, a claim is not time-barred if it is filed within three years of the late knowledge date. The claim against Ms Zhao was filed on 9 August 2019, within the stipulated time period.
Relief
[52] Although I have found Ms Zhao liable for both dishonest assistance and knowing receipt, I require further submissions directed towards the quantification of loss, and the calculation of interest, before making any orders by way of relief. The specific issues to be addressed are set out in a separate minute delivered with this judgment.
Result
[53] The first, second and third plaintiffs’ claim for dishonest assistance in relation to the Flagstaff Land Loans and Flagstaff Construction Loans, and knowing receipt are allowed, but only as to liability.
[54] Counsel for the plaintiffs is directed to file further submissions on issues relating to relief as set out in the minute delivered with this judgment. Judgment on relief, and costs, will issue thereafter.
Edwards J