R v Singh
[2015] NZHC 2369
•29 September 2015
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2015-404-274 [2015] NZHC 2369
BETWEEN KATHLEEN MULLIGAN
Plaintiff
AND
ROSEMARY RHODES First Defendant
DONALD RHODES Second Defendant
Hearing: 29 September 2015 Appearances:
J M Skinner for Second Defendant, in support
A G Stuart for Plaintiff, to opposeJudgment:
29 September 2015
ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELL
Solicitors:
Webster Malcolm Law (Alan Stuart) Warkworth for Plaintiff
Skinners Law (James Skinner) Auckland, for Defendants
MULLIGAN v RHODES [2015] NZHC 2369 [29 September 2015]
[1] Donald Rhodes, the second defendant, applies to set aside a judgment given on 31 March 2015 and for a stay of enforcement.
[2] The plaintiff, Kathleen Mulligan, sued Mr and Mrs Rhodes under a deed of acknowledgment of debt of 11 July 2008 for repayment of a loan of $684,857 plus interest. She applied for summary judgment. Neither Mr Rhodes nor Mrs Rhodes opposed. She obtained summary judgment for the amount of the loan, plus interest and costs, a total of $787,175.95. On 27 May 2015 Mrs Mulligan lodged a charging order against a property owned by Mr and Mrs Rhodes at Woodhill (lot 1 DP135416, identifier NA79D/659). She obtained a sale order shortly afterwards. Mr Rhodes made the present applications after a bailiff visited him following the sale order being lodged in court.
Background
[3] Kathleen Mulligan is an 89-year-old widow living in a rest home. Her daughter, Patricia Sullivan, holds an enduring power of attorney in respect of property for her. Mrs Sullivan is effectively managing this proceeding on behalf of her mother.
[4] Mrs Mulligan has two daughters, Mrs Sullivan and Mrs Rhodes, the first defendant. Mr and Mrs Rhodes married in March 1974. They separated in April
2012. They have two adult children. Mrs Mulligan and her late husband, Tom, owned an 11-acre property just to the north of Warkworth. Later, after Tom’s death, the property was subdivided and one lot was sold off. That was in 2008. From the sale proceeds Mrs Mulligan made an advance to Mr and Mrs Rhodes of $667,357. That transaction was recorded in a deed of acknowledgment of debt dated 11 July
2008. It also recorded a further loan of $17,500, so that the total amount advanced by Mrs Mulligan to Mr and Mrs Rhodes was $684,857. The deed of acknowledgment of debt says:
This Deed is made this 11th day of July 2008
WHEREBY DONALD SYDNEY RHODES and ROSEMARY RHODES (“the Borrowers”) hereby acknowledge that they are indebted to KATHLEEN MULLIAN (“the Lender”) in the sum of SIX HUNDRED AND EIGHTY FOUR THOUSAND EIGHT HUNDRED AND FIFTY SEVEN DOLLARS ($684,357.00) (being advances made to date of
$17,500.00 together with a further advance of $667,357.00 the receipt of which sum is hereby acknowledged) and which sum the Borrowers agree to
repay upon demand in writing made by or on behalf of the Lender and
pending demand they will pay the Lender such interest as the Lender shall demand in writing from time to time (not to exceed 10% per annum) and if no demand is made then such advance shall be interest free.
In witness whereof this Deed has been executed the day and year first above written.
[5] Mr and Mrs Rhodes and Mrs Mulligan have signed the document as a deed.
The witness to all the signatures was Mrs Mulligan’s Warkworth solicitor.
[6] At the time of the deed, Mr and Mrs Rhodes were in some financial difficulty. Mrs Rhodes says that she and Mr Rhodes used the funds advanced by Mrs Mulligan to repay a number of loans, to advance funds ($111,256.21) to Mr Rhodes’ spray business, Rhodesway Services Ltd, to pay for house renovations, buy a car, and make sundry other purchases. The loan to Mr Rhodes’ company, Rhodesway Services Ltd, was recorded in a document which Mr and Mrs Rhodes prepared themselves. They modelled it on the deed of acknowledgment with Mrs Mulligan. The agreement between them and Rhodesway Services Ltd refers to an interest-free loan received from Mrs Mulligan.
[7] As already mentioned, Mr and Mrs Rhodes separated in April 2012. They have not yet finally resolved a division of relationship property. The relationship property issues turn in part on this proceeding. The question is whether the deed of acknowledgment of debt is enforceable against Mr and Mrs Rhodes.
[8] Between July 2008 and the date of separation, Mrs Mulligan did not make any demand under the deed of acknowledgment of debt, nor did she purport to forgive any part of the debt. That bears on matters of gift duty, to which I shall refer later in this judgment.
[9] After Mr and Mrs Rhodes separated, in November 2013, demand was made for repayment of the funds advanced in July 2008. Mrs Sullivan signed the demand as attorney for Mrs Mulligan. The demand is addressed to both Mr and Mrs Rhodes. It required repayment of the principal sum of $684,357. In addition it required interest to be paid on that sum pending repayment at the rate of 10 per cent per annum. Despite the demand, neither Mr Rhodes nor Mrs Rhodes paid.
[10] This proceeding was started in early February 2015. Both Mr and Mrs Rhodes were served with the summary judgment application at least 25 working days before it was called in court.1 Neither took any steps to oppose the summary judgment application. It was called on 31 March 2015. In the absence of any opposition, Venning J gave judgment to Mrs Mulligan against both Mr Rhodes and Mrs Rhodes.
[11] In the meantime there have been relationship property proceedings between Mr and Mrs Rhodes in the Family Court at Waitakere. Part of the proceedings concerns the family home at Woodhill. After separation Mrs Rhodes moved out and Mr Rhodes has remained living there. On 1 April 2015, the day after summary judgment was given to Mrs Mulligan, Mr and Mrs Rhodes signed a memorandum for consent orders to be made in the Family Court for the sale of the Woodhill property. I understand, however, that the arrangements in that memorandum have not been carried out yet. The parties’ memorandum contemplates the possibility of a deficit remaining after sale of the property but it does not expressly refer to any debt to Mrs Mulligan.
[12] Mr Rhodes refers to the bailiff visiting him. I understand that so far no steps have been taken to sell up the Woodhill property.
[13] Mrs Rhodes has not applied to set aside the judgment. To the contrary, she
supports her mother’s position.
1 The time required under r 12.7 of the High Court Rules.
Context
[14] The situation in this case is not uncommon. During a marriage the parents of one partner may advance funds or property to the couple. On separation, the basis for the advance may be contested. That is because the basis for the advance may affect how relationship property is to be divided. If the transfer of property of the advance was gratuitous and was made to both partners, the advance is usually not taken into account in identifying relationship property and debts. Equal division is the norm.
[15] On the other hand, if there is a debt due to the parents arising out of the advance or the transfer of property, that debt is taken into account in the division of property. Section 20A of the Property (Relationships) Act 1976 makes it clear that the rights of creditors are preserved. That is the case even if the creditors are the parents of one of the partners.
[16] If a transfer of property has been gratuitous, the parents may be loath to see the assets shared by both of the couple. In hindsight they might wish the asset to have been only for the benefit of their child, not for the other partner. They may regret having made a gratuitous advance.
[17] The other side of the coin is that if the transfer of property is subject to a debt back, the parents will reserve the right to enforce the debt against the couple. But, having been repaid, they may then confer further benefits on their child to the exclusion of the other partner. Mr Rhodes is in that position. He feels the unfairness of that position being played out in this case. That is why he contends that the July
2008 transaction was in truth a gift, not a loan. Because of that he says that he has a substantial ground of defence which requires the court to set aside the summary judgment.
The application to set aside the summary judgment
[18] The application to set aside the judgment is decided under r 12.14 of the High
Court Rules:
A judgment given against a party who does not appear at the hearing of an application for judgment under rr 12.2 or 12.3 may be set aside or varied by the court on any terms it thinks just if it appears to the court that there has been or may have been a miscarriage of justice.
The rule is similar to those allowing setting aside where judgment has been sealed by default (r 15.10) and judgment at trial when a party fails to appear (r 10.9).
[19] If judgment has been irregularly obtained, the courts will set it aside ex debito iustitiae. There is no suggestion here that Mrs Mulligan obtained judgment irregularly against Mr and Mrs Rhodes.
[20] Even if the judgment has been obtained regularly, the court still has a discretion to set it aside. It is conventional in these cases to refer to the judgment of McCarthy J in Paterson v Wellington Free Kindergarten Association Inc,2 which the
Court of Appeal approved in Russell v Cox.3 In short, while the court is not limited
in the considerations it may take into account, there are three matters which are considered to be of dominant importance. One is whether the defendant has a substantial ground of defence; the second is whether the defendant has reasonably explained the delay in not taking steps until after judgment has been given; and the third is whether the plaintiff will suffer irreparable injury if the judgment is set aside. As to applications to set aside a summary judgment, in Equiticorp Finance Group
Ltd v Cheah Somers J said:4
In the case of a summary judgment regularly obtained it will normally be necessary for the defendant seeking to set aside judgment to adduce material which leads the Court to the conclusion that the plaintiff has not satisfied the Court that there is a defence to the claim.
[21] In a summary judgment case if the defendant does succeed in showing that the plaintiff has not satisfied the court that there is a defence to the claim, the court will normally also dismiss the summary judgment application so that the case will go
to hearing on the merits in the normal way.
2 Paterson v Wellington Free Kindergarten Association Inc [1966] NZLR 975 (CA) at 983.
3 Russell v Cox [1983] NZLR 654 (CA).
4 Equiticorp Finance Group Ltd v Cheah [1989] 3 NZLR 1 (CA) at 8.
[22] The parties agree that if Mr Rhodes succeeds on his application to set aside the judgment there will be a stay of execution, because the judgment on which the enforcement is based will have gone. Similarly, Mr Skinner accepted that if the setting-aside application is not successful, there could not be any basis for a stay of enforcement. Accordingly the stay application stands or falls with the setting-aside application.
Has Mr Rhodes shown a substantial ground of defence?
[23] The key consideration is whether Mr Rhodes has a substantial ground of defence. I consider it on the basis that if Mr Rhodes had taken steps in a timely way to oppose the summary judgment application and had placed before the court the material that he now relies on, would the court have given summary judgment against him? In short, I am going to apply an approach similar to that used in a summary judgment application, except that the onus is on Mr Rhodes to show an arguable ground for resisting summary judgment.
[24] Mr Rhodes contends that the arrangements made in July 2008 were not a loan but were intended to be gratuitous, and he therefore cannot be called upon to repay the funds advanced. In his written submissions, Mr Skinner referred to the test for a gift stated by North J in Williams v Williams:5
The cases show that in order that there should be a valid gift of a chattel inter vivos three things are necessary. First, the expression of the intention of the donor to make a gift, secondly, the assent of the donee to the gift, and, thirdly, the actual or constructive delivery of the chattel to the donee.
[25] In this case there cannot be any dispute as to the actual question of delivery. The contest is primarily on the first elements, in particular the intention of the donor. Mr Skinner correctly submitted that in the case of a transaction between a mother and daughter where an asset is transferred, there is a presumption of advancement. There is case law that an advance by a parent to a son-in-law or daughter-in-law is not necessarily subject to a presumption of advancement. But as the transaction was
between mother and daughter and son-in-law, I regard the presumption as applicable.
5 Williams v Williams [1956] NZLR 970 (SC), 972.
There was a single transaction; whether the presumption applies or not must be the same for Mr Rhodes as for Mrs Rhodes.
[26] The matters Mr Rhodes relies on for contending that the transaction was meant to be a gift include:
1. The funds came from the sale of a lot from the subdivision of the block of land at Warkworth. That block of land had been bought in 1974. Mr Rhodes contends that that was to be a long-term investment, held in the name of the parents but for the ultimate benefit of Mrs Rhodes and Mrs Sullivan. There was an expectation in the family that the property would be sold at some stage and the proceeds distributed to Mrs Rhodes and Mrs Sullivan.
2. In 2008 Mr and Mrs Rhodes were struggling financially. They had been married for some 35 years at the time. That explains why a gift might be made rather than a loan.
3. There were discussions within the family at the time, suggesting that the intention was that a gift be made rather than a loan, although it does appear that Mr Rhodes did understand that the deed recorded a debt. He alleges that he had misgivings about that, which he raised with Mrs Rhodes but she assured him that it was intended to be a gift and had been documented as a loan simply to avoid gift duty.
4. On his 60th birthday in February 2009 Mrs Mulligan told him and his mother that the money was a gift.
5. The Rhodes children have given affidavits stating their understanding that the transaction was intended to be a gift.
6. No demand was made during the marriage. It was only after separation and once Mrs Sullivan had taken charge that the letter of the deed of acknowledgment of debt was enforced.
[27] The submissions for Mr Rhodes also suggested that in hindsight he and Mrs Rhodes ought not to have taken out a loan from Mrs Mulligan given that the amount advanced was far more than the debts they owed. Mr Skinner referred to the foolishness of spending money on items such as cars when the money could have been applied in a sensible fashion. That use of the money, in Mr Skinner’s submission, was consistent with the parties treating it as a gift rather than as funds advanced, to be repaid later.
[28] Mr Skinner also submitted on the apparent unfairness of the loan being enforced to require both Mr and Mrs Rhodes to repay the loan when, once repaid, the funds will go to Mrs Rhodes alone – resulting, in the end, in an inequality of division between Mr Rhodes and Mrs Rhodes.
[29] Mr Skinner highlighted the fact that Mrs Sullivan seems to be running the litigation and that there is no evidence from Mrs Mulligan. We are not told about Mrs Mulligan’s financial position. Mrs Mulligan has not stated what her intention was when she signed the deed of acknowledgment of debt.
[30] If the parties had not documented the transaction, then the evidence that Mr Rhodes relies on might have some bearing on the question whether the transaction was a loan or a gift. But what is important in this case is that the parties went to the trouble of documenting the transaction and signing the deed.
[31] They entered into a binding contract. The deed is legally enforceable and takes effect according to its terms. The meaning of the document is clear. Under it, Mr and Mrs Rhodes acknowledge their indebtedness to Mrs Mulligan, and they also undertake to repay the loan upon demand, in writing by Mrs Mulligan or on her behalf. They also undertake to pay interest, if interest is demanded, up to a limit of
10 per cent per annum.
[32] Given the clear meaning of the deed, it is not open to Mr Rhodes to adduce other evidence which is intended to contradict or vary, or add to the deed. That is the parol evidence rule. I have heard nothing from Mr Skinner which suggests that any of the exceptions to the parol evidence rule apply in this case.
[33] While the text of the deed is clear in itself, context can also count in interpreting an agreement. The context is this. This was an inter-generational transaction. Mr and Mrs Rhodes were in financial difficulty. Mrs Mulligan was willing to help them. If she had made an outright gift to them in July 2008, that would have been subject to gift duty under the Estate and Gift Duties Act 1968. Mr Stuart has calculated the gift duty to be $159,064.25 according to Schedule 3 of
the Estate and Gift Duties Act.6 While the donor has primary responsibility for
paying gift duty, a donee is also liable, although admittedly with a right of indemnity from the donor. If Mrs Mulligan had been contemplating making a gift, she no doubt, with professional advice, would have arranged the gift so that the duty was paid out of the gift and only the residue was available to Mr and Mrs Rhodes.
[34] While there is not full information as to Mrs Mulligan’s circumstances in
2008, it was foreseeable that she may need to go into a rest home at some later stage of her life. If she had made a gift, the funds she had made available to her children would be taken into account as her asset, when working out whether she could receive any state assistance for her costs of accommodation in a rest home. If she lent the money, the funds advanced would still be treated as an asset as well. But the difference is that by making a loan she could ensure that she could have recourse to those funds whereas she could not have been assured of that if it were a pure gift.
[35] Before the abolition of gift duty, it was standard practice to arrange inter- generational transfers by ensuring that there was a debt back to the transferee for the value of the asset transferred. That ensured that the transaction could not be considered a gift, or a transaction for inadequate consideration. It also gave the transferee the power to reduce the indebtedness by progressive forgiveness of the debt up to the duty-exempt limits under the Estate and Gift Duties Act. The decision
of the Court of Appeal in Mills v Dowdall,7 shows such inter-generational transfers
being carried out in just that way.
[36] These factors readily explain why the transaction was structured as a loan and not as an outright gift by Mrs Mulligan. It may well be that Mrs Mulligan may have
6 Gift duty was not abolished until 1 October 2011 under the Taxation (Tax Administration and
Remedial Matters) Act 2011.
7 Mills v Dowdall [1983] NZLR 154 (CA).
wanted to keep open the possibility that she would not require Mr and Mrs Rhodes to repay the loan. The fact that she did not call up the loan before the couple separated is consistent with that. She may have intended to forgive the debt in her will. Or she could have – although she did not – forgiven the debt by instalments of $27,000 per annum. The transaction gave her that flexibility. But the structure of the transaction was essentially one whereby funds were advanced, with an obligation to repay an equivalent sum. That was a loan, not a gift.
[37] While the parties could have structured the transaction in different ways – and one of those ways could have been to structure it as a gift – the law is clear that we must have regard to the actual transaction which the parties entered into. That is clear from the dicta of Richardson J in two cases: Mills v Dowdall8 and in NZI Bank Ltd v Euro-National Corporation.9 In the second case, he said:
The legal principles are well settled. First the true nature of a transaction can only be ascertained by careful consideration of the legal arrangements actually entered into and carried out. It is not to be determined by an assessment of the broad substance of the transaction measured by the overall economic consequences to the participants. The forms adopted cannot be dismissed as mere machinery for effecting other purposes. At common law there is no half-way house between sham and characterisation of the transaction according to the true nature of the legal arrangements actually entered into and carried out. A document may be brushed aside if and to the extent that it is a sham in two situations. The first is where the document does not reflect the true agreement between the parties in which case the cloak is removed and recognition is given to their common intentions. The second is where the document was bona fide in inception but the parties have departed from their initial agreement while leaving the original documentation to stand unaltered. Once it is established that a transaction is not a sham its legal effect will be respected. For recent discussions in this Court it is sufficient to refer to Re Securitibank (No 2) [1978] 2 NZLR 136; Buckley &Young Ltd v Commissioner of Inland Revenue [1978] 2 NZLR
485; Marac Finance Ltd v Virtue [1981] 1 NZLR 586; Mills v Dowdall
[1983] NZLR 154; and Marac Life Assurance Ltd v Commissioner of Inland
Revenue [1986] 1 NZLR 694.
[38] Mr Skinner submitted that I should regard the deed of acknowledgment of debt as a sham. I cannot see any arguable basis for that. The sham argument requires that all the parties to the agreement and their professional advisor were intending to hoodwink the Commissioner of Inland Revenue by setting up what
looked like a loan to in fact operate as a gift.
8 At 159-160.
9 NZI Bank Ltd v Euro-National Corporation [1992] 3 NZLR 528 (CA) at 539.
In Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue, the majority in the Supreme Court relevantly said:10
An allegation of sham, being akin to an allegation of fraud, should not be lightly made. Those engaging in a sham are in reality seeking to deceive others as to the true nature of what they have agreed and are intending to achieve.
[39] I see no reason why I should impute to Mrs Mulligan an intention to cheat the Commissioner of Inland Revenue. The transaction is an entirely orthodox loan with an obligation to repay and, as such, falls outside the scope of the Estate and Gift Duties Act. It would not be right for me to play fast and loose with the deed by saying that it is in fact a charade, intended to deceive the Inland Revenue so as to avoid paying gift duty.
[40] On that point, I cannot see any arguable basis for treating the deed of acknowledgment of debt as a sham.
[41] Mr Skinner relied on the decision of Wylie J in N v N,11 another case where funds were advanced by parents. The funds were advanced to a son. The transaction was recorded in writing. The daughter-in-law was not a party to the transaction. The transaction, recorded in writing, made it clear that the sum of $100,000 had been advanced by way of loan. The Family Court had held that that transaction was a gift. On appeal, Wylie J held that it was in truth a loan. Mr Skinner pointed out that the Family Court had considered evidence widely, in the same way as Mr Rhodes tries to put up wide-ranging evidence which goes against the wording of the deed. It may be understandable that in N v N, the court did conduct a more wide-ranging enquiry. That is because the daughter-in-law was not a party to the deed and therefore might be on stronger ground when testing the validity of the transaction alleged by her husband and his parents. But Mr Rhodes is not in that position. He is, after all, a party to the transaction. He cannot contend for the transaction to be other than what
he contracted it to be.
10 Ben Nevis Forestry Ventures Ltd v Commissioner of Inland Revenue [2008] MZSC 115, [2009] 2 NZLR 289 at [39].
11 N v N [2010] NZFLR 161 (HC).
[42] In a similar way, I regard much of Mr Rhodes’ evidence as irrelevant and as no more than parol evidence intended to alter the clear meaning and effect of the deed of acknowledgment of debt. I emphasise that the meaning of the document is ascertained objectively. The parties’ subjective beliefs as to the meaning of the document are irrelevant.
[43] Mr Skinner emphasised the alleged unfairness of the loan being called up after separation. He did not cite any authority for me to review the exercise of the contractual power and I am not aware of any ability to review the exercise of such a power in this case. Mr Skinner also noted that at the time Mr Rhodes did not have independent legal advice. Mr Rhodes suggests that he was at a disadvantage because he did not have a copy of the deed at the time. Notwithstanding that, it is apparent from the evidence that he was aware that the deed did provide for a loan and he was aware that it provided that the loan could be called up and that repayment might be required. That does not help him in arguing for a gift.
[44] Mr Skinner’s submissions as to the wisdom of the transaction are not matters for the court’s consideration. Likewise, I do not attach any weight to the fact that Mr Mulligan herself has not given evidence. Her evidence as to what she intended does not count any more than Mr Rhodes’ own subjective beliefs as to what was intended could count. Again, the meaning of the document is ascertained objectively. Text and context count, not what the parties subjectively believed.
[45] For these reasons I find that Mr Rhodes has not made out a substantial ground of defence which could throw the judgment into question. Having made that finding, it is unnecessary to go into the other matters – the question of delay and the question of irreparable injury to Mrs Mulligan if judgment were set aside.
[46] If Mr Rhodes had persuaded me that the summary judgment was unsafe, I would not have held against Mr Rhodes his delay in applying to set aside judgment. On the information available I cannot see that Mrs Mulligan would be irreparably injured by judgment being set aside. But in the absence of any sound defence, I can see no good reason for disturbing the judgment. In short, I am satisfied that no miscarriage of justice has or may have occurred.
Outcome
[47] That means that I dismiss the application to set aside the judgment and, as I
indicated earlier, the application to stay enforcement must also fail.
[48] As Mrs Mulligan has succeeded in resisting both applications, she is entitled to costs on a 2B basis.
…………………………………..
Associate Judge R M Bell
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