Roskill Nominees Limited v Cunningham

[2022] NZHC 160

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2019-404-1072

[2022] NZHC 160

BETWEEN

ROSKILL NOMINEES LIMITED

Plaintiff

AND

BRUCE STEWART CUNNINGHAM

Defendant

Hearing:	8 February 2022
Counsel:	G M Bogiatto for Plaintiff P M Hoskins for Defendant
Judgment:	11 February 2022

JUDGMENT OF ASSOCIATE JUDGE LESTER

ROSKILL NOMINEES LIMITED v CUNNINGHAM [2022] NZHC 160 [11 February 2022]

[1]                 The defendant, Bruce Stewart Cunningham (Mr Cunningham), applies for security for costs.

[2]                 I have the benefit of Associate Judge Gardiner’s decision in an earlier application between the parties where the Judge sets out the background facts and     I gratefully adopt her summary which I set out below.1

[1]        In 2010 Mr Cunningham was facing financial difficulties and, potentially, a mortgagee sale of his home. He agreed  that  Roskill  Nominees Limited (Roskill) would buy his property and hold it on trust for him for three months. He would then re-purchase it. Roskill and its owner, Clive Ashley Johnson (Mr Johnson) say that Mr Cunningham agreed to pay rental and reimburse Roskill for all costs and expenses it incurred in relation to the property. The property was not re-purchased by Mr Cunningham at the end of three months, with both parties blaming each other for this failure. Eventually, in 2018, Roskill sold the property to Mr Cunningham’s sons.

[2]        Roskill brought proceedings against Mr Cunningham, claiming unpaid rental of $213,782 and expenses of $226,135.93. This is proceeding CIV-2019-404-1072 (the 1072 proceeding). Mr Cunningham issued proceedings against Roskill and Mr Johnson demanding that they account for their dealings with the property, and claiming losses arising out of their breach of fiduciary duties. This is proceeding CIV-2019-404-2553 (the 2553 proceeding). The proceedings are being case managed together.

…

Facts

[5]        Roskill is an incorporated company. Mr Johnson, an accountant, is sole owner, and has largely been sole director, of the company since July 2010. Mr Johnson has also, at all material times, been a director and shareholder of Johnson Nominees (No 7) Ltd (Johnson).

[6]        Mr Cunningham is a retired beneficiary, residing at a Te Atatu property (the Te Atatu Property). Until 24 August 2010, Mr Cunningham was the registered owner of the Te Atatu Property, subject to a mortgage to Bridging Finance Ltd (BFL) and two caveats.

[7]        In 2010, BFL began to take steps to exercise its mortgagee remedies against the Te Atatu Property by way of sale, as Mr Cunningham was in default of his mortgage obligations.

[8]        To forestall BFL’s exercise of its power of sale, Mr Cunningham entered into an updated  agreement  with  Roskill  around  July  2010  (the  Te Atatu Agreement). Roskill agreed to purchase the Te Atatu Property from

1      Roskill Nominees Ltd v Cunningham [2021] NZHC 303.

Mr Cunningham for $650,000, and to lease it to Mr Cunningham and his two sons for $890 per week. The parties disagree as to whether payments of rent were to continue for more than three months. Mr Cunningham would also pay to Roskill any costs incurred by Roskill in relation to the Te Atatu Property, as well as a reasonable fee to reflect Roskill’s assistance in avoiding the BFL mortgagee sale. The Te Atatu Property would be held in trust by Roskill for Mr Cunningham and would be re-purchased by Mr Cunningham within three months.

[9]        By  separate  agreement  (the  Cable   Bay   Agreement),   dated   16 July 2010,  Mr Cunningham,  Roskill  and  Mr Johnson   agreed   that   Mr Johnson would sell Mr Cunningham a property in Cable Bay (the Cable Bay Property) for $237,500. Mr Cunningham paid a $162,500 deposit. Under the Cable Bay Agreement, the $162,500 deposit payable by Roskill for the Te Atatu Property was regarded as paid. The parties disagree as to whether Mr Johnson and Roskill had represented to Mr Cunningham that Roskill was the registered proprietor of the Cable Bay Property. The sale of the Cable Bay property did not go ahead. The parties disagree as to why.

[10]      On 28 August 2010, settlement under the Te Atatu Agreement concluded, and Mr Cunningham and his sons began their residential tenancies at the Te Atatu Property.   They did not pay rent from 11 January 2011 to   18 November 2018. Roskill attempted to evict them. Mr Cunningham pleads that during this period, Mr Johnson and Roskill used the Te Atatu Property for their own financial benefit, entering into unauthorised loan agreements and making unauthorised payments. The parties disagree about the extent of the fiduciary duties Roskill owed to Mr Cunningham.

[11]      In 2018 Mr Cunningham sought an interim injunction to prevent the mortgagee sale of the property (the 931 proceeding). This led to negotiations culminating in the parties entering into a deed in November 2018, by which Roskill sold the Te Atatu Property to Mr Cunningham’s sons for $650,000, subject to Roskill and Mr Cunningham reserving all rights against the other. The parties disagree as to whether Mr Cunningham consented to the sale.

[12]      Roskill pleads that it has incurred $439,917.93 worth of expenses in relation to the Te Atatu Property (the Outstanding Expenses), $213,782 of which  comprise  unpaid  rental.   Roskill  pleads  that,  despite  demand,   Mr Cunningham has neglected or refused to pay the Outstanding Expenses.

[3]In this Judgment, I refer to the plaintiff, Roskill Nominees Limited, as RNL.

Security for costs principles

[4]       Associate Judge Bell stated in Busch v Zion Wildlife Gardens Ltd (in rec and in liq), that an application under r 5.45 of the High Court Rules 2016 (the Rules), considers the following questions:2

(a)Has the applicant satisfied the Court of the threshold under r 5.45(1)?

2      Busch v Zion Wildlife Gardens Ltd (in rec and in liq) [2012] NZHC 17 at [2].

(b)How should the Court exercise its discretion under r 5.42(2)?

(c)What amount should security for costs be fixed at?

(d)Should a stay be ordered?

Factors relevant to the Court’s discretion if threshold satisfied

The merits

[5]       McGechan notes:3 “[a]s far as possible, bearing in mind the early stage of the proceeding, the Court will endeavour to assess the merits and prospects of success of the claim.”

[6]       While McGechan notes there is a very real limit as to how far such an enquiry can be made, nonetheless, the view I reach on the prospects of success of RNL’s claim is a relevant factor.

[7]       Also relevant is the extent to which the impecuniosity results from the defendant’s actions. In a sense, that is linked to the merit of the plaintiff’s claim as the plaintiff here says it is out of pocket as it met mortgage and outgoing obligations in relation to the property without receiving the rental it says the defendant committed to pay.

[8]       Delay can also be relevant if it causes unfairness  to the defendant.  Delay  is a factor here. This proceeding was commenced on 12 June 2019. As I have already noted, this is not the first interlocutory application to come before the Court – her Honour Judge Gardiner having dealt with an application for discovery approximately one year ago.

Threshold test – plaintiff unable to pay costs

[9]       The evidence filed by the applicant shows that the plaintiff had net liabilities approaching  $400,000  in  2019.   There  is  a  practical   acknowledgment  from   Mr Johnson that the company itself is unable to pay costs. In Mr Johnson’s affidavit

3      Andrew Beck and others McGechan on Procedure (online ed, Thomson Reuters) at [HR5.49.03(2)].

opposing the security, he confirms that RNL is shareholder funded but he says the company has met all its obligations to date and will continue to do so. He notes that the company met an earlier costs award (arising from Associate Judge Gardiner’s decision) of approximately $10,000.4 He says: “RNL will continue to meet its costs obligations and creditor obligations as and when they arise.” At the end of the day, Mr Johnson’s evidence is an acknowledgment that RNL does not have resources of its own and is dependent upon support from him to meet its financial obligations.

[10]     Mr Johnson does not offer an undertaking to meet any adverse costs award against RNL albeit his evidence comes close to such a commitment.

[11]In Gold Star Invest Ltd v V, referring to r 5.45(1)(b) of the Rules, Grice J said:5

… I am satisfied that the reference to “a plaintiff” refers to the plaintiff as an entity. That a plaintiff might have access to third party funding, or an undertaking is offered is not relevant to the threshold test.

[12]     Mr Bogiatto, counsel for RNL, submits all of RNL have been met through shareholder funding since 2010. However, this confirms RNL cannot stand on its own feet and must look to its shareholder. While Mr Johnson’s evidence that he has funded this litigation and will continue to do so, may put him into the position of a non-party funder exposing him to the risk of an award of non-party costs, that is a different question from whether the threshold has been met in respect of RNL. I am satisfied the threshold is met.   However, whether there should be an order for security is       a separate matter.

The essence of the plaintiff’s claim

[13]     The plaintiff says the arrangement between the parties was a rescue plan to avoid Mr Cunningham’s property being sold in 2010 at mortgagee sale. RNL was incorporated to purchase the property and in doing so discharged the existing mortgage which was in default. The plaintiff asserts Mr Cunningham and his two sons were to pay RNL’s new mortgage commitments by paying rent. Three tenancy agreements

4      Payment of a prior costs award by a third party cannot be treated as meaning future costs awards will be paid Gold Star Invest Ltd v V [2021] NZHC 334 at [22].

5      Gold Star Invest Ltd v V [2021] NZHC 344 at [16].

were entered into recording  the  rental  payable.  Apparently  after  three  months, Mr Cunningham was to retake ownership of the property by obtaining a new mortgage to discharge RNL’s obligations and to reimburse RNL’s expenses arising from holding the property. The transaction is incompletely recorded in an agreement for sale and purchase and residential tenancies agreements. The agreement about the transfer back was oral. Mr Cunningham only paid rent for three months. It seems rental under the other two agreements with Mr Cunningham’s sons was also not paid but there is no claim against them in this proceeding.

[14]     RNL says when the rental payments stopped it still had a mortgage obligation it had to maintain to preserve the property. From 2010, Mr Cunningham occupied the property through to 2018 without paying any rental (other than the first three months) and paying nothing towards the property’s upkeep and preservation, other than one account for water rates when the water supply to the property was about to be cut off.

[15]     RNL’s only assets were the Te Atatu property and the benefit of the residential tenancy agreements. In order to meet the mortgage costs and outgoings, RNL borrowed from its shareholder, Mr Johnson.

[16]     At the intervention of a son of Mr Cunningham, matters were reorganised in November 2018. By a deed entered in November 2018, Mr Cunningham consented to the sale of the property and his son acquired the property from RNL. That deed reserved all legal rights which each party may have had against the other.

[17]     RNL commenced these proceedings to recover monies it had expended or liabilities it had incurred during the time Mr Cunningham had been in occupation    of the property, that is, from mid-2010 to November 2018.

[18]     The  causes   of  action  pleaded  in  the  amended  statement   of  claim  of    2 August 2021 are:

(a)breach of contract in respect of the Agreement with Mr Cunningham to pay rental and expenses in relation to the property;

(b)breach of s 35 of the Contract and Commercial Law Act 2017 – inducement to enter into an agreement by representations;

(c)equitable estoppel in that Mr Cunningham created a belief and/or expectation in RNL that would make the rental payments, retake ownership of the property and pay all of the expenses and liabilities incurred by RNL in retaining title to the property.

[19]     The first question the circumstances give rise to is: how did Mr Cunningham think the outgoings for the property, including mortgage payments, were going to be met between mid-2010 and November 2018 in the absence of him and his sons paying rent? Mr Cunningham was only able to live in the property because RNL, via support from Mr Johnson, met the mortgage payments and outgoings. Mr Cunningham’s position in opposing RNL’s claim is that it is not able to recover the amounts it expended for his benefit or the rental he promised to pay.

[20]     Of course, Mr Cunningham maintains  his  own  claim  against  RNL  and  Mr Johnson. The circumstances of the Cable Bay transactions referred to at [9] of Judge Gardiner’s summary are far from clear. As that transaction did not settle, how the deposit payable by RNL to Mr Cunningham was to be recognised is also unclear.

The merits

(a) Trustee’s right to indemnity

[21]     RNL, a trustee, is entitled to an indemnity from the cestui que trust fund and in the case of a fixed trust, from a beneficiary:6

The plainest principles of justice require that the cestui que trust who gets all the benefits of the property, should bear its burdens unless he can shew some good reason why his trustee should bear them himself.

[22]     For the trustee’s indemnity to apply, the expense or liability must have been incurred in the proper administration of the Trust.7

6      Hardoon v Belilos [1901] AC 118 (PC) at pg 123.

7      Andrew Butler (ed) Equity and Trusts in New Zealand (2nd ed, Thomson Reuters, Wellington, 2009) at 449.

[23]     In his proceeding, Mr Cunningham pleads RNL was an express trustee under the 2010 agreement, RNL has not yet pleaded its right to an indemnity. Mr Bogiatto advised during the hearing that RNL intended to amend its pleadings to include a claim for indemnity.

[24]     Mr Cunningham, in his proceeding against Mr Johnson and RNL, pleads RNL held the property under an express trust for him. Mr Johnson, in an affidavit in that proceeding dated 27 March 2019, refers to what he calls the “2010 rescue plan” and says Mr Cunningham agreed:

(d)RNL would hold the  Property on trust  for  Mr Cunningham.   Once  Mr Cunningham had either repaid the mortgage debt or could afford to repurchase the Property, the title would transfer back to him; and

[25]     While Mr Johnson  at  times  seems  to  distance  himself  from  RNL  being  a trustee,  his  affidavit  is  clear.    If  there  is  an  express  trust  as  claimed  by     Mr Cunningham, it would appear RNL is entitled to be indemnified from the Trust property – indeed from Mr Cunningham, given he says he was the sole beneficiary of the Trust. While an indemnity is not a presently pleaded basis for RNL’s claim, the idea  of  an  indemnity  reflects  the  substance  of  RNL’s  position,  that   is,   that Mr Cunningham cannot have expected to have lived in the property for eight years without paying rent or meeting mortgage payments and other outgoings while at the same time claiming in his proceedings loss of capital gain on the property.

[26]     I do not see how Mr Cunningham can assert he is a beneficiary of an express Trust without recognising the burdens of the same.

[27]     As to the pleaded basis of RNL’s  claim, it is not clear to me on what basis  Mr Cunningham, having remained in occupation of the property for eight years and having signed a residential tenancy agreement in which he agreed to pay rent, can say RNL’s claim for rent is weak. The tenancy agreement is not limited to three months,

but even if it had been, s 60(1) of the Residential Tenancies Act 1986 provides:8

60       Tenant remaining in possession after termination of tenancy

(1) Where a tenant remains in occupation  of  the  premises  after  the tenancy has terminated or has been terminated, all the obligations of the tenant shall continue in force as if the tenancy were still subsisting until such time as the tenant ceases to occupy the premises.

…

[28]     Mr Hoskins, counsel for Mr Cunningham, submits that RNL’s claim lacks merit because it is statute barred. Mr Hoskins refers to the tenancy agreement sued upon by RNL being entered into more than six years before the issue of these proceedings. However, the date of the tenancy is not the relevant date for limitation in a claim for rent.9 RNL’s cause of action for each month’s rental only accrues upon the rental falling due and not paid. Unless and until rent falls due, it cannot be sued for. Accordingly, rent that accrued for six years prior to the date of the issuing of this proceeding on 12 June 2019 is not statute barred.

[29]     Mr Cunningham is accordingly prima facie liable under his tenancy agreement for rental from 12 June 2013 to (I assume), the date of the settlement date being       6 November 2018 – approximately five years five months being approximately

$126,000. The tenancy agreement entered into by Mr Cunningham requires him to pay $450 per week.

[30]     It follows I do not accept Mr Hoskin’s submission that RNL’s claim lacks merit, indeed, I conclude the opposite, that on the face of a signed tenancy agreement where Mr Cunningham remained in occupation, the plaintiff’s claim, at least for the rental, has substantial merit.10

[31]     Mr Hoskins was not able to identify a specific defence to the rental claim other than limitation. He did not suggest the weekly rental was excessive or seek to challenge the circumstances leading to the tenancy agreement. Mr Hoskins referred

8      RNL’s claim is outside the jurisdiction of the Tenancy Tribunal by virtue of s 77(5) of the Residential Tenancies Act 1986 as the value of its claim is over $100,000.

9      See Limitation Act 1950, s 19 and Limitation Act 2010, s 16(1)(a).

10     I record here that there are two other tenancy agreements entered into at the same time, these are with Mr Bruce Cunningham’s sons.

to a lack of bona fides on the part of RNL and Mr Johnson and that RNL had sat on the rights. He also submitted that RNL’s breach of fiduciary duties (pleaded in the 2552 proceeding) may be such that RNL would be barred from claiming rental. Again, this amounts to Mr Cunningham saying he should be allowed to live in the property rent free. I do not see in Mr Hoskin’s general comments a clear defence to the rental claim.

Impecuniosity due to defendant’s actions

[32]     On the basis of the above conclusion, Mr Cunningham’s failure to pay rental has deprived the plaintiff of some $126,000. This is a factor that stands against the ordering of security.

Delay

[33]     There has been delay in this case. Mr Hoskin submits his client only became aware of RNL’s lack of funds as a result  of  the  further  discovery  ordered  by Judge Gardiner, which was received 22 April 2021. However, Mr Cunningham was aware that RNL was incorporated solely for the purpose of being a trustee. He was certainly aware he had not paid any rent to RNL.

[34]     At the end of the day Mr Bogiatto accepted he could not maintain delay has caused his client any prejudice. This is because Mr Johnson’s sworn position is he has, and will continue, to fund RNL. Mr Johnson did not suggest any delay in bringing this application would impact on his willingness or ability to continue funding RNL’s legal costs. I treat delay as neutral.

Is security “just in all the circumstances”?

[35]     This is ultimately the test under r 5.45(2). McGechan notes that the ordering of security is highly discretionary.11

11     Andrew Beck and others, above n 3, at [HR5.45.03].

[36]     Here, RNL and its director, find themselves in their present situation as a result of assisting Mr Cunningham avoid a mortgagee sale of his property in  2010.   As     I noted earlier, Mr Cunningham’s position amounts to him saying he should have the windfall of living in the property for eight years without paying rent or outgoings.

[37]     Mr Hoskins was critical of how RNL had conducted this proceeding, referring to delays in completing discovery which  lead  to Judge Gardiner’s decision and      a general tardiness in responding to amended pleadings or memoranda.

[38]     Security for costs are not the vehicle to sanction a party for dragging the chain. Mr Cunningham was awarded costs on his discovery application. If Mr Hoskins has to seek telephone conferences or bring applications in order to chivvy RNL into action then it can ask for costs on those steps and enforce payment of those costs (no doubt with further costs consequences) if such awards are not paid.

[39]     Given the conclusion I have reached as to the merits of RNL’s claim, the other circumstances I have identified and notwithstanding that I consider the threshold for the ordering of security was satisfied, I decline to order security.

[40]     Mr Hoskins submitted Mr Johnson could afford to pay security and so there was no injustice in requiring him to do so.12 That may well be the case, but that is not the test. RNL has a claim for in excess of $100,000 for rent for which (at the moment) there is no clear answer. In those circumstances I do not consider Mr Cunningham is likely to obtain costs against RNL for which security is required.

Costs

[41]Mr Cunningham is legally aided. Accordingly, I make no order as to costs.

12 Mr Bogiatto referred to Highgate on Broadway v Devine [2012] NZHC 2288 at [23] and the importance of access to justice. However, given there was no suggestion an order of security would bring RNL’s claim to an end, access to the costs is not a factor in this case.

[42]     If Mr Bogiatto is to amend the statement of claim to plead the right to indemnity, that is to be completed within 20 working days.

Associate Judge Lester

Solicitors:

George Bogiatto, Auckland Corban Revell, Auckland

Copy to counsel:
P M Hoskins, Barrister, Whangarei