Rosgo Financial Services Limited v Matrix Mortgages Limited HC Auckland CIV-2010-404-006132
[2011] NZHC 141
•15 February 2011
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2010-404-006132
BETWEEN ROSGO FINANCIAL SERVICES LIMITED
First appellant
ANDROSHNI DEVI GOLIAN Second Appellant
ANDMATRIX MORTGAGES LIMITED Respondent
Hearing: 9 February 2011
Appearances: S Barter for Appellant
D Chisholm for Respondent
Judgment: 15 February 2011 16:45:00
JUDGMENT OF VENNING J
This judgment was delivered by me on 15 February 2011 at 4.45 pm, pursuant to Rule 11.5 of the
High Court Rules.
Registrar/Deputy Registrar
Date……………
Solicitors: Barter & Co, PO Box 197, Albany Village, Auckland 0755
Hornabrook Macdonald, PO Box 91845, Victoria St West, Auckland 1142
Copy to: D J Chisholm, PO Box 2629, Shortland Street, Auckland 1140
ROSGO FINANCIAL SERVICES LTD V MATRIX MORTGAGES LTD HC AK CIV-2010-404-006132 15
February 2011
Introduction
[1] Rosgo Financial Services Limited is a mortgage broker. Ms Golian is its sole director. Rosgo and Ms Golian sought finance for a client from Matrix Mortgages Limited.
[2] Matrix agreed to advance finance to the appellants’ client. The client defaulted and was unable to repay its borrowing. Matrix sued Rosgo and Ms Golian in the District Court alleging they had engaged in misleading and deceptive conduct under the Fair Trading Act 1986 by providing inaccurate information in support of the loan application. Matrix sought to recover $108,800.
[3] Judge Mathers agreed that for the purposes of the Act Matrix was misled by Rosgo and Ms Golian’s conduct. However, she also considered that Matrix was to some extent responsible for its own loss in failing to carry out the checks a prudent lender should have undertaken. The Judge assessed Rosgo and Ms Golian’s liability at 65 per cent of Matrix’s loss and entered judgment for Matrix in the sum of
$70,720 together with interest and costs.[1]
[1] Matrix Mortgages Ltd v Rosgo Financial Services Ltd DC Auckland CIV-2008-404-002902, 19
August 2010.
[4] Rosgo and Ms Golian appeal against the finding that their conduct was misleading and deceptive in terms of the Act. Matrix cross-appeals against the Judge’s assessment that Rosgo contributed to its own loss.
Background/parties
[5] In addition to being the sole director of Rosgo, Ms Golian was also a trustee of the Arsiwalla Family Trust, the beneficiaries of which were Ms Dantra and her husband Mr Arsiwalla. Ms Dantra and Mr Arsiwalla were the directors and
shareholders of Zurvan Investments Limited, the entity that required finance.
[6] In June 2007 Ms Golian as director of Rosgo sought finance in the sum of approximately $770,000 from Axis Finance Limited for Zurvan. To support the application Ms Golian provided statements of income, assets and liabilities for Zurvan, Mr Arsiwalla and Ms Dantra. Axis is a broking company related to Matrix. Matrix is the finance company. Axis referred the application to Matrix. The principal of both Axis and Matrix is a Mr Singh. Ms Rosgo dealt with Mr Singh throughout.
[7] Matrix was limited in its funding to a maximum advance of $120,000 but suggested another finance company, Cashmere Capital Limited might advance the balance.
[8] In due course Matrix agreed to advance the sum of $120,000 to Zurvan. Of that sum $11,200 was taken in establishment and low equity fees. Zurvan defaulted in its obligations to repay the loan. It was placed into liquidation on 23 May 2008 and Ms Dantra and Mr Arsiwalla were adjudicated bankrupt on 3 July 2008.
The judgment under appeal
[9] The Judge found that the appellants were in trade and that by failing to disclose to Matrix that at the time of the application for finance Zurvan owed Ms Golian and Rosgo a substantial sum of money, Ms Golian misled the respondent. There was a clear nexus between that conduct and Matrix’s loss.
[10] However, the Judge also accepted that Matrix had failed to take sufficient care in evaluating information concerning the borrower’s disposable funds, particularly in regard to the securities held by other financial institutions. She accepted that Mr Singh must therefore bear some responsibility for the loss. On that basis she apportioned Ms Golian and Rosgo’s responsibility for Matrix’s loss at 65 per cent and Matrix’s responsibility for its own loss at 35 per cent.
The appellants’ case
[11] Mr Barter submitted that the Judge’s finding that the appellants were liable under the Act to Matrix was wrong because:
(a) it was not reasonable to find the appellants’ conduct misleading;
(b)the conduct of the appellants was not causative either of the decision to make the loan advance or the subsequent loss; and
(c) in the alternative, if the Judge was correct to find the appellants’ acts or omissions were an effective cause of loss then the portion of the appellants’ liability should have been assessed at significantly less than 65 per cent.
The issues on the appeal
Was the Judge correct to find the appellants’ conduct misleading for the
purposes of the Act?
Was Matrix’s loss caused by the conduct of the appellants – was the conduct
an operating or effective cause of the loss?
Was the Judge’s apportionment of the appellants’ liability at 65 per cent too
high (as argued by the appellants) or too low (as argued by the respondent)?
Was the Judge correct to find the appellants’ conduct misleading for the purposes
of the Act?
[12] In his written submissions Mr Barter submitted that the appellants were no more than a mere conduit passing on the information and forms completed by the borrowers to Matrix and the Judge erred in finding the appellants’ failure to disclose the debt owed to them by way of fees was objectively misleading. In Red Eagle Corporation Ltd v Ellis the Supreme Court noted that to be seen to be a mere conduit
the conveyor of misleading or deceptive information must have made it plain to the recipient that he or she is merely passing on information received from another without giving it his or her own imprimatur – that is, making it appear to be information of which the conveyer has first-hand knowledge.[2] Unless it must be obvious to the recipient that the information is second-hand only, the conveyor who does not make that clear must accept the risk that he or she will reasonably be taken
by the recipient to have spoken from personal knowledge.
[2] Red Eagle Corporation Ltd v Ellis [2010] NZSC 20, [2010] 2 NZLR 492 at [38].
[13] In the present case the Judge was undoubtedly right to find the appellants were acting as more than mere conduits. While the appellants passed on the loan application, including the statements of income, assets and liabilities in respect of Zurvan, Mr Arsiwalla and Ms Dantra, Ms Rosgo also wrote a covering letter to support the application which effectively adopted the information supplied by the applicants and expanded upon it. That letter was in the following terms:
Further to my telephone conversation please find enclosed a loan application for above clients.
Background
Applicants have requested to refinance their existing mortgage with you. They have total debt of $2,900,000 and they have requested to have a second mortgage thru you. First mortgage will be from Weststar Finance at
$2,400,000. They will need to clear all the debts with this loan.
They have already placed the property on the market and have requested this loan to be only for 6 months.
They are very young energetic couple who are self employed. They are IT and business consultants and have been in the business for last 4 years in New Zealand. However they have been in the same business for last 6 years overseas. They are both graduated in Business management, she has BCom and BSC and he has BA in commerce a Bachelor [in] Aviation Management. He is studying project management now. They own a house which is valued at over $1m. They also own other rental property. They also have just secured a contract with one of the biggest company Vodaphone and are project management and are paid $200 per hour hence $400 for both of them. This is a long [term] project as it involves Singapore, Fiji, NZ and Australia. Their rental income equates to $1820 per week.
Request
We are proposing as follows:
1. Refinance
They have requested to refinance their existing loans. Maximum loan from you is $700,000 including fees.
Security
1. Security for the loan is to be registered second mortgage over subject property being 187 St Heliers Road, St Heliers.
2. they can also offer you 2 other properties as securities which is
geared at about 65%. But as a caveat only as ASB will not allow second behind them. Please confirm and we can provide the address.
Structure
1. Loan is to be interest only for 6 months.
Servicing
Clients have an existing rental income of $1820 per week. They also have an annual income of about $1.2 million per annum.
...
[14] The letter went much further than merely enclosing an application for finance. It purported to provide further information regarding the personal qualities of the borrowers and their ability to service the borrowing. It also expressly referred to their rental and other income. It seems that was itself incorrect. The enclosed documentation disclosed a total rental income of $1,120 per week and an annual income of $1,091,311. As well as effectively giving the application her imprimatur by the letter Ms Golian in fact embellished the application. The appellants were more than mere conduits.
[15] The respondent says the appellants’ conduct was objectively misleading and
deceptive on at least three bases:
(a) On an equity basis Ms Golian knew that the applicants’ statements of assets and liabilities were incorrect. They had not disclosed all their liabilities, in particular, at least $200,000 owing to her company.
(b)On an income and serviceability basis, Ms Golian knew that the applicants were unable to pay her own fees.
(c) The borrowers’ honesty. Ms Golian knew the applicants’ loan application was inaccurate but she still submitted it.
[16] Those submissions are all based on a debt that Zurvan and its principals owed to the appellants. At the time the loan application was made on 21 June 2007, Zurvan and its principals owed Rosgo approximately $200,000 for fees rendered by Rosgo to Zurvan for various services dating back to August 2006. In cross- examination Ms Golian accepted that that liability was not mentioned by the applicants in the application for finance and that she knew by reading their application that the statement of assets and liabilities was inaccurate. She said in her evidence that she had spoken to Mr Singh and disclosed the applicants’ liability to her company. Mr Singh denied that. The Judge preferred Mr Singh’s evidence. There is no basis for this Court to interfere with that factual finding: Austin, Nichols
& Co Inc v Stichting Lodestar.[3]
[3] Austin, Nichols & Co Inc v Stichting Lodestar. [2007] NZSC 103, [2008] 2 NZLR 141 at [13].
[17] The non disclosure of information known by Ms Golian to be material could, objectively assessed, constitute misleading and deceptive conduct for the purposes of the Act as being likely to mislead or deceive Matrix in this case: Des Forges v Wright.[4]
[4] Des Forges v Wright [1996] 2 NZLR 758 (HC) at 764.
[18] I accept Mr Chisholm’s submission that the deliberate omission was relevant in a number of ways. Mr Singh’s evidence was that on receipt of the application he had significantly discounted the valuation of the various properties owned by the applicants so that on his analysis the applicants had an excess of assets over liabilities of only $374,000. While on that basis and with an appropriate return to take account of the risk Matrix was prepared to advance $120,000, if the further liability of $200,000 had been disclosed then the position would have been different. Related to that point, the obligation to Rosgo was historical. Although the application for finance was made in June 2007 the indebtedness to Rosgo and Ms Golian went back to August 2006 which showed, or at least suggested, that the applicants were unable to meet current commitments. There is no suggestion of that
in Ms Golian’s covering letter of application.
[19] Finally the application was simply not correct. That impacted on the applicants’ honesty. They failed to disclose the significant liability to Ms Golian and her company. The liability was obviously still a live issue for both the appellants and Zurvan because on the very next day after the application was made, Rosgo wrote to Zurvan seeking to confirm the fees obligation as a capitalised sum of $326,400 to be secured by way of a third mortgage against the subject property and a caveat against a related property.
[20] It follows that I find Rosgo’s application for finance on behalf of Zurvan, when taken with the accompanying documents, was capable of misleading Matrix and further in this case it did, so that, as the Judge found, Matrix was misled by the appellants for the purposes of the Act.
[21] That leaves Mr Barter’s principal point in the appeal. He submitted that it could not be said that the loss had been caused by the conduct of Rosgo and Ms Golian.
[22] In this context, for liability under the Act, the conduct must be an operating or effective cause of loss, but it need not be the sole cause.[5]
[5] Red Eagle Corporation Ltd v Ellis, above n 2, at [29].
[23] Mr Barter submitted that the application for finance and material contained with it dated 21 June 2007 did not cause the loss because it was only after the applicants achieved sales of the properties that Matrix agreed to lend, so that Matrix’s loss was caused by the failure of those sales rather than any actions by Rosgo or Ms Golian. He submitted Matrix was aware of the risk but made the decision to lend for short-term gain at a significant rate of return in expectation of the settlement of the agreements for sale and purchase and repayment from the sales. He also submitted that, given the negligible security available, once Mr Singh had discounted the assets it would have made no difference if there had been a further reduction in security.
[24] Mr Barter emphasised the establishment and low equity fees totalling
$11,200 levied against the applicants for finance as a recognition of the risk inherent in the transaction.
[25] However, the short answer to the submission that Matrix advanced these moneys in reliance on the expectation the sales would be completed rather than on any failure to disclose by the appellants, is that while the sales may have been one factor supporting Matrix’s decision to lend, the impugned conduct in breach of s 9, namely Ms Golian’s non-disclosure remained an operating and effective cause. The Judge found:[6]
[6] At [46].
[46] I turn now to consider whether the plaintiff was careless and whether that carelessness was a “contributory operative cause of the loss”. In my view, Mr Singh was careless when considering and approving the loan. He did not take sufficient care in evaluating the borrowers’ disposable funds, particularly in regard to the security taken by the ASB Bank. There was also the suggestion that Mr Singh should have been on more alert as to the Prendos valuation. Mr Singh could have, and should have been on greater enquiry as a prudent and experienced lender. I suspect he was, to some extent, lulled into a false sense of security by the special relationship between Ms Golian and the borrowers. I do not accept however that such carelessness made Ms Golian’s breach immaterial.
With respect I agree with her.
[26] It is important to record here that Ms Golian accepted that the information in the applicants’ statement of assets and liabilities was inaccurate. Mr Singh said (and the Judge accepted) that the accuracy of the information was extremely important in assessing whether the loan could be serviced. Further, Mr Singh said that he (and Matrix) continued to rely on the accuracy of the information in the application of 21
June 2007 and would not have made the offer if he had known it was inaccurate. The Judge accepted that evidence also.
[27] In short, there was a sufficient basis in the evidence for the Judge’s finding that the appellants’ conduct was an effective and contributing cause of the respondent’s decision to lend, and consequent loss.
[28] Mr Barter next submitted that in a later facsimile of 3 July 2007 to Mr Singh regarding Zurvan Ms Golian drew Mr Singh’s attention to a second mortgage. He suggested that effectively broke the chain of causation, or should have. But again, as the Supreme Court held in Red Eagle, there may be another operating cause of loss or damage, namely the claimant’s own conduct in failing to take reasonable care to
look after its own interest.[7] The issue for the Court is whether that carelessness
should be regarded as the sole or a contributory operative cause of the loss.
[7] Red Eagle Corporation Ltd v Ellis, above n 2, at [30].
[29] As Gleeson CJ remarked in Henville v Walker:[8]
The purpose of the legislation is not restricted to the protection of the careful or the astute. Negligence on the part of the victim of a contravention is not a bar to an action under [the Australian equivalent of s 43] unless the conduct of the victim is such as to destroy the causal connection between contravention and loss or damage.
[8] Henville v Walker [2001] HCA 52, (2001) 206 CLR 459 at [13].
[30] Mr Singh’s failure to follow up the reference to the second mortgage was undoubtedly careless and contributed in a material way to the loss. The Judge found it to be a contributing factor as I do. Nevertheless it did not affect Matrix’s reliance on the misleading conduct of Ms Golian and Rosgo in failing to disclose the additional liability owed to them. Mr Singh’s evidence was that if he had been aware of the money owing to Rosgo, then the loan would not have been advanced.
The Judge again accepted that evidence.[9] As noted earlier, in doing so, the Judge
[9] At [14].
rejected Ms Golian’s evidence she had disclosed the information to Mr Singh:
[33] I turn now to discuss my view of the evidence. In this case there are various instances where there is an issue as to credibility, particularly in relation to Ms Golian’s evidence. It is rare, particularly in a civil case, where I have been driven to such a firm view, having seen and heard Ms Golian give evidence, that where there is any conflict I can place little, if any, weight upon her evidence. Put another way, where there is any conflict between Mr Singh and Ms Golian, I prefer the evidence of Mr Singh.
...
[37] Then it was suggested that Ms Golian advised Mr Singh of the debt from Zurvan and that therefore Mr Singh/Matrix was fully aware of Zurvan’s financial circumstances. I simply do not believe Ms Golian in this regard and reject her evidence.
[31] While the loan offer was not made until 9 July 2007, after the facsimile of 3
July 2007, as noted Mr Singh and Matrix continued to rely on the information provided in the application (and the non-disclosure by Ms Golian of the indebtedness) so that the chain of causation was not broken by the facsimile of 3 July
2007.
[32] For those reasons the appeal against a finding of breach of s 9 and liability under s 43 cannot succeed.
Contribution
[33] That leaves the issue of contribution. It follows from the above that I accept the actions of Mr Singh on behalf of Matrix were careless. Mr Chisholm accepted it is difficult on appeal to disturb the broad-brush assessment made at first instance. The Judge’s assessment of 65/35 as to the apportionment was within range. Neither party makes out a case to disturb it.
Result
[34] The appeal and cross-appeal are dismissed. The respondent is entitled to costs on the appeal on a 2B basis.
Venning J
0
3
0