| IN THE COURT OF APPEAL OF NEW ZEALAND I TE KŌTI PĪRA O AOTEAROA |
| CA678/2019 CA225/2020 [2025] NZCA 125 |
| BETWEEN | ANTHONY MIKHAL SCHMIDT |
| AND | EBADA PROPERTY INVESTMENTS LIMITED |
| CA75/2020 | ||
| BETWEEN | TAYLOR JADE SCHMIDT | |
| AND | EBADA PROPERTY INVESTMENTS LIMITED | |
| Hearing: | 22 June 2023 (further submissions received 4 December 2024) |
Court: | Goddard, Brewer and Osborne JJ |
Counsel: | First Appellant in CA678/2019 and CA225/2020 and Second Appellant in CA75/2020 in person |
Judgment: | 17 April 2025 at 10.00 am |
JUDGMENT OF THE COURT
AThe appellants’ application for leave to amend the statement of claim is declined.
BThe respondents’ application for leave to put a further authority before the Court, and for leave to make an application to strike out the proceedings, is declined.
CThe appeals are dismissed.
DMr Schmidt must pay costs to the respondents for a standard appeal on a band A basis, with usual disbursements.
____________________________________________________________________
REASONS OF THE COURT
(Given by Goddard J)
Table of contents
Para no
Introduction
The parties’ dealings
High Court proceedings
Appeals to this Court
Summary of result
Post-hearing application to amend the Schmidts’ claims
Respondents’ post-hearing application
Result
The parties and the relevant trusts
The events that gave rise to the parties’ dispute
Events in 2002
Mr Schmidt reconnects with Mr Garrity
The Schmidts come under increasing financial pressure through 2005
Transfer of the Kaiaua Road property to Ebada
Date of alleged declaration of trust by Ebada
Payments from Transit to STL
Mr Garrity borrows further amounts against the Kaiaua Road property
Further financial pressure and a threatened mortgagee sale of the Bell Road property
Transfer of the Bell Road property to Ebada
Email exchange about use of STL funds from sale of Bell Road property
Some more fictions
Ebada comes under increasing financial pressure
Discussions about unwinding the arrangements
Ebada sells the Bell Road property
Discussions continue in relation to Kaiaua Road property
Mortgagee sale of Kaiaua Road property
Other interactions between the parties
The proceedings
The trial
High Court judgment
The central issue for determination by the High Court
Credibility findings
First cause of action — intentional breach of express trust
Second cause of action — breach of institutional constructive trust
Third cause of action — knowing assistance/knowing receipt
Fourth cause of action — breach of fiduciary duty
Fifth cause of action — undue influence
Result
Costs judgment
Issues on appeal
Did the arrangement between the Schmidts and Mr Garrity contemplate Ebada acting as a trustee?
Breach of fiduciary duty and undue influence claims
Mr Schmidt’s other grounds of appeal
Application for leave to amend statement of claim
The respondents’ post-hearing application
Costs appeal
Costs on appeal
Result
Introduction
The parties’ dealings
In 2005 Schmidt Trustee Ltd (STL) owned two properties: a property at 11 Bell Road, Mangatāwhiri (the Bell Road property) and a property at 1493–1495 Kaiaua Road, Mangatangi (the Kaiaua Road property). STL held these properties as trustee for trusts associated with the appellants, Ms Taylor Schmidt and Mr Anthony Schmidt, who at that time were de facto partners.
In late 2005 the Schmidts were under considerable financial pressure. They were in default under the mortgages over the properties, and faced claims from other creditors.
In December 2005 STL transferred the Kaiaua Road property to Ebada Property Investments Ltd (Ebada), the first respondent. Mr Brian Garrity, the second respondent, was at that time a close friend of Mr Schmidt. He was the sole shareholder and director of Ebada. Mr Garrity was a lawyer: at the relevant time he was employed by a bank. In December 2006 STL transferred the Bell Road property to Ebada. Each of these transfers took place pursuant to an agreement for sale and purchase which, on its face, appeared to be an outright sale by STL to Ebada. In each case Ebada borrowed against the property, and used that borrowing (which Mr Garrity personally guaranteed) to pay part of the agreed sale price to STL. However, each of these transactions included fabricated elements (discussed in more detail below) which concealed the fact that the actual consideration provided by Ebada was substantially below the market value of the property.
The Schmidts and Mr Garrity had, at the time of the transfers, a shared understanding of the basis on which Ebada would deal with the properties. That understanding (described variously as an “arrangement” or a “deal”) included, among other features, an understanding that if the financial position of the Schmidts improved they would be able to repurchase the properties from Ebada for amounts sufficient to discharge the outstanding borrowings secured over those properties, rather than at market value. The purposes of the understanding included enabling the Schmidts to preserve their equity in the properties and to continue living at the Bell Road property, and to enable Mr Schmidt’s father (Mr Wiremu Wanoa) to continue living at the Kaiaua Road property, while making payments to Ebada to cover the cost of outgoings and mortgage interest in respect of the properties.
The understanding broke down. The Schmidts and Mr Wanoa failed to make the payments required to cover outgoings and mortgage interest. Mr Garrity, who was himself under financial pressure, acted inconsistently with the understanding in a number of respects, including borrowing further sums secured over the properties for his own benefit. From 2008 onwards the relationship between the Schmidts and Mr Garrity became increasingly fraught.
In December 2008 Mr Garrity sold the Bell Road property to a third party. The Kaiaua Road property was sold pursuant to a mortgagee’s power of sale in 2013. The Schmidts did not receive any of the proceeds from either of these sales: the proceeds of the first sale were used to discharge Ebada’s indebtedness and the balance was retained by Ebada; the proceeds of the second sale appear to have been applied to reduce the indebtedness of Ebada and/or Mr Garrity.
High Court proceedings
The Schmidts brought proceedings in the High Court against Ebada and Mr Garrity in relation to the dealings with the properties. They alleged that the properties were transferred by STL to Ebada on trust. They claimed there was a deed of declaration of trust entered into in or about December 2005 under which Ebada agreed to act as trustee for various trusts created by the Schmidts to protect their family interests. They alleged that Ebada had breached its obligations as trustee, and claimed compensation for those breaches. In the alternative, they argued that the dealings in relation to the properties gave rise to an institutional constructive trust, which Ebada and Mr Garrity had breached. They claimed that Mr Garrity was liable to compensate them on the basis of knowing assistance in breaches of trust by Ebada and knowing receipt of the proceeds of those breaches of trust. They claimed that Mr Garrity owed them fiduciary duties, which he had breached. And they alleged that Mr Garrity had procured the transfer of the properties through undue influence.
Ebada and Mr Garrity denied all of these allegations. They said that the transfers of the properties were outright sales to Ebada. Mr Garrity did not owe fiduciary duties to the Schmidts, and had not exercised undue influence to procure the transfers.
The claims were tried before Venning J in the High Court in late 2019. The claims went to trial on the basis of a fourth amended statement of claim filed in September 2019, shortly before trial, pursuant to leave granted by the High Court.
By the time of the trial Ms Schmidt and Mr Schmidt had separated. Ms Schmidt, who had obtained legal aid, was legally represented. Mr Schmidt represented himself.
The Judge dismissed all of the claims.[1] He found that an unsigned declaration of trust document relied on by the Schmidts, which provided for Ebada to act as a trustee for Schmidt family interests, was a fiction and a document created solely for the purposes of the hearing.[2] The evidence did not support the claim that there was an express agreement between the Schmidts and Mr Garrity that Mr Garrity would hold the properties for them in Ebada’s name. Rather, there had been outright sales of the properties by STL to Ebada.[3]
[1]Schmidt v Ebada Property Investments Ltd [2019] NZHC 3548 [High Court judgment].
[2]At [135].
[3]At [154].
The Schmidts’ case that there was an express trust was not made out on the evidence.[4] Nor was the claim that the arrangements between the parties gave rise to an institutional constructive trust.[5] Because there was no trust, and thus no breach of trust, the claim against Mr Garrity for knowing assistance and knowing receipt could not succeed.[6]
[4]At [155].
[5]At [176].
[6]At [177].
The Judge rejected the claim that Mr Garrity was in a fiduciary relationship with the Schmidts.[7] The Judge found that Mr Garrity did not act as their lawyer in relation to the agreements for sale and purchase. Nor was there any other reason to classify the relationship as fiduciary. The Judge also dismissed the claim based on undue influence.[8]
[7]At [199].
[8]At [216].
Thus each of the Schmidts’ causes of action failed. Judgment was entered for Ebada and Mr Garrity on all causes of action. In a costs judgment delivered in April 2020 the Judge awarded costs in favour of Ebada and Mr Garrity on a 2B basis. The full amount of costs of $97,333.25 was awarded against Mr Schmidt. Of that amount, approximately $11,656 had been incurred before Ms Schmidt obtained legal aid. She was liable for that amount, jointly and severally with Mr Schmidt.[9]
Appeals to this Court
[9]Schmidt v Ebada Property Investments Ltd [2020] NZHC 757 [costs judgment].
Ms Schmidt and Mr Schmidt each filed their own appeal to this Court. Ms Schmidt did not challenge the Judge’s finding that there was no express trust. Nor did she challenge the finding in relation to undue influence. But she argued that the High Court had erred in dismissing the claims based on an institutional constructive trust, knowing assistance and knowing receipt, and breach of fiduciary duty. Mr Schmidt appealed against the whole of the High Court judgment, arguing that it was wrong in many respects and was the result of predetermination and bias.
Summary of result
We agree with the Judge’s observation that the arrangement between the Schmidts and Mr Garrity was “a strange one”.[10] It was designed to create the impression, so far as creditors and others were concerned, that there had been an outright sale for full value of the two properties by the Schmidt interests to Ebada. But there were complex informal understandings sitting behind the documentation, which as noted above included a number of fabricated elements.
[10]High Court judgment, above n 1, at [148].
The formal documents executed by the parties were, as the Judge held, inconsistent with Ebada acting as a trustee for the Schmidt interests. Rather, they were consistent with an outright sale. Although the informal understandings between the parties contemplated that the Schmidts would obtain certain benefits from the properties in the future, we agree with the Judge that there was no agreement between the parties that Ebada would hold the properties on trust for the Schmidt interests. It follows that the Judge was right to dismiss the claims based on an express trust or (alternatively) an institutional constructive trust.
We also agree with the Judge that Mr Garrity did not owe fiduciary duties to the Schmidts, and that the claim based on undue influence is not made out. The Schmidts entered into the transactions with their eyes open, in the expectation that they would obtain various benefits as a result of Ebada owning the properties and dealing with them in a manner consistent with the parties’ informal understandings. Mr Schmidt and Mr Garrity were the joint authors of the transactions and associated understandings.
The appeal against the High Court decision dismissing the claims as pleaded must therefore fail.
Post-hearing application to amend the Schmidts’ claims
At the hearing of the appeal Mr Woodhouse, who appeared as counsel for Ms Schmidt, raised the possibility of a further amendment to the Schmidts’ pleadings. Timetable orders were made to enable the Schmidts to seek leave to amend their statement of claim. Following the hearing the Schmidts applied for leave to amend their fourth amended statement of claim to plead (among other things) a “No-Cost Transfer Back Arrangement”, and a constructive trust founded on reasonable expectations about that arrangement (and other matters). That application was opposed by the respondents.[11]
[11]Ms Schmidt filed her application for leave to amend the statement of claim on 3 July 2023. On the same day, Mr Schmidt filed submissions in support of that application. On 5 July 2023, further material was filed in support of that application. The respondents filed submissions opposing that application on 25 July 2023. The following day, the respondents sought leave to file three schedules. Ms Schmidt and Mr Schmidt filed separate reply submissions opposing this application on 8 and 9 August 2023 respectively. On 10 August 2023, the respondents filed a memorandum seeking leave to put a relevant authority before the Court, to file relevant schedules, and objecting to the appellants’ reply submissions.
We are firmly of the view that this application should be declined. It would be contrary to the interests of justice to permit the Schmidts to amend their claim at this late stage, after trial and after the hearing of their appeal, to advance arguments that are materially different from and inconsistent with the pleadings on the basis of which they went to trial. And, it might be added, inconsistent with the evidence they gave at trial.
Respondents’ post-hearing application
The respondents made a post-hearing application seeking leave to refer the Court to a further authority and to apply to strike out the Schmidts’ claims.[12] We need not consider that application on its merits.
Result
[12]The respondents filed their application on 28 November 2024. On 3 and 4 December 2024, Ms Schmidt and Mr Schmidt filed separate submissions opposing that application.
The appeals must therefore be dismissed.
Our reasons are set out in more detail below.
The parties and the relevant trusts
Mr Schmidt and Mr Garrity attended school together. In September 1996, when Mr Garrity married his first wife Ramona, Mr Schmidt was one of his best men. Shortly after that they had a falling out, but those differences were resolved in mid‑2004 and they were close friends from that time onwards until 2008 when the understandings that are the subject of these proceedings unravelled.
Mr Schmidt met Ms Schmidt in 1998. Mr Schmidt had four children with his previous partner, Ms Paige Mindel. Ms Schmidt had three children from her previous relationship. In April 2000 Ms Schmidt and Mr Schmidt had their first child.
At around this time Ms Schmidt and Mr Schmidt decided to set up trusts for the benefit of their various children. In October 2000 they formed two mirror trusts, the T J Schmidt Trust and the A M Schmidt Trust.[13] These two trusts entered into a partnership agreement. At the same time the Schmidts established STL to act as a trustee for the partnership. The Schmidts were the directors and shareholders of STL. The Schmidts received legal advice from Ross Holmes Lawyers in Albany in connection with the formation of the trusts and STL.
[13]The trust documentation also refers to the A M Schmidt Trust as the Schmidt Trust.
In 2001 STL acquired the Bell Road property and the Kaiaua Road property from Mr Schmidt’s parents.
In late 2002 the Schmidts obtained advice from another law firm, Taylor Grant Tesiram, about establishing four further trusts: the Schmidt Estate Trust (SET), the Tech Estate Trust (TET), the Excel Tech Trust (ETT) and the Nature Estate Trust (NET) (together referred to below as “the four Trusts”). Executed trust documents related to the TET and NET were in evidence in these proceedings. As the Judge observed, there is no independent evidence that the other proposed trusts, SET or ETT, were ever actually created.[14] But nothing turns on that.
[14]High Court judgment, above n 1, at [12].
It appears that a further trust, the Excel Estate Trust, was also established at this time. A memorandum of guidance for the trustees of the Excel Estate Trust recorded that Mr Schmidt, Ms Schmidt and Ms Mindel had set up the Excel Estate Trust to hold assets on behalf of TET and NET. Taylor Grant Tesiram subsequently prepared deeds of declaration of trust relating to the property of the Excel Estate Trust. The deeds record Sturmon Trustee Services Ltd (a trustee company operated by another law firm (Sturrock Monteith)) as the trustee of that trust. The Schmidts say that Sturmon Trustee Services Ltd resigned as the corporate trustee of Excel Estate Trust in mid-2003 and was replaced by STL.
Ms Schmidt is named as the first plaintiff in the High Court proceedings. Mr Schmidt is named as second plaintiff. The extent of his involvement as a plaintiff subsequently became the subject of some dispute, as explained at [108] below. The Schmidts pleaded that the proceedings are brought by Ms Schmidt in her capacity as the sole trustee of the four Trusts. They say that Mr Schmidt was at material times a trustee of SET and ETT.
The number of trusts involved, some of which appeared to lack relevant documentation, added a measure of complexity to the parties’ dealings and to the proceedings. For simplicity we will refer to the Schmidts and to all the relevant trusts collectively as the “Schmidt interests”, except where it is necessary to identify a specific person or specific trust.
Mr Garrity and Ebada were named as defendants in the High Court proceedings. As noted above, Mr Garrity was a close friend of Mr Schmidt at relevant times. It appears to be common ground that Ebada was formed in 2005 for the purpose of implementing the arrangements entered into between the Schmidts and Mr Garrity.
The events that gave rise to the parties’ dispute
Events in 2002
A number of events occurred in 2002 which led to the arrangements in issue in these proceedings.
In April 2002 the Inland Revenue Department (IRD) carried out a search of the Kaiaua Road property and uplifted a number of records. Mr Schmidt’s evidence is that the focus of the search was on the business dealings of his parents. But IRD and the police officers who accompanied them seized various computers and records including, Mr Schmidt says, records relating to his affairs and to the four Trusts. The Schmidts instructed Mr Clews, a tax barrister, to act on their behalf in dealing with IRD. As a result of Mr Clews’ involvement, the Schmidts recovered their computers and documents from IRD.[15] Mr Schmidt says that the search conducted by IRD, and related uplift of documents, explains some of the gaps in the Schmidts’ records about the establishment of the various trusts referred to above.
[15]It appears that some of these documents were retained by Mr Clews and were the subject of further discovery provided after the High Court trial. But nothing turns on this.
At around this time Mr Schmidt began negotiating with Transit New Zealand (Transit) on behalf of STL in relation to compensation payable under the Public Works Act 1981. Transit had given notice of intent to take part of the Bell Road property under the Public Works Act.
In July 2002 the Schmidts’ two-year-old daughter died. Following an investigation into her death, the Schmidts were jointly charged with failing to provide the necessities of life. As Mr Schmidt said in his evidence, the following years were a very difficult time for him and for Ms Schmidt.
Mr Schmidt reconnects with Mr Garrity
In 2004 Mr Schmidt’s mother died suddenly. It was at Mr Schmidt’s mother’s funeral that Mr Schmidt saw Mr Garrity for the first time in several years, following an earlier falling out. Mr Schmidt says they decided to let the past be the past and rekindled their friendship. They saw each other regularly in 2004 and 2005.
The Schmidts come under increasing financial pressure through 2005
By September 2005 Ms Schmidt and Mr Schmidt were under considerable financial pressure. The mortgage over the Kaiaua Road property was in default. ANZ National Bank Ltd (ANZ) issued a notice under s 92 of the Property Law Act 1952 in relation to that property, and obtained an order for substituted service of the notice.
The Schmidts say it was around this time, in October 2005, that Mr Garrity advised them that their and the Excel Estate Trust’s interests would be better served by an independent trustee acting as a corporate trustee of their various trusts. They say it was agreed that Mr Garrity would incorporate a corporate trustee, Ebada, for this purpose. The properties at Kaiaua Road and Bell Road would then be transferred to and held by that company as trustee for the Excel Estate Trust.
Ebada and Mr Garrity deny that there was ever an agreement along these lines. They say that around this time Mr Schmidt raised the possibility of Mr Garrity purchasing the Kaiaua Road property from the Schmidts as a means of resolving their financial difficulties on the basis that Mr Garrity would allow Mr Schmidt’s father, Mr Wanoa, to remain on the property paying rent.
The Schmidts’ trial on the charges relating to the death of their daughter commenced on 31 October 2005. It concluded on 8 November 2005. Mr and Ms Schmidt were each found guilty. They were remanded in custody pending sentencing, and were subsequently sentenced to two and a half years’ imprisonment.
At around this time (there is a dispute about the precise date) Mr and Ms Schmidt each signed powers of attorney appointing Mr Garrity as their attorney. On 2 December 2005 Mr Garrity sent a fax to The Property Group Ltd (Property Group), which was representing Transit in connection with resolving Public Works Act compensation issues. He advised Property Group that he was a solicitor working in-house for ASB, and had been appointed by Mr and Ms Schmidt in a personal capacity to settle the question of compensation, pursuant to powers of attorney.[16]
[16]On 4 November 2005 Transit had agreed to pay interim compensation to STL of $190,000 without prejudice to STL’s right to have compensation determined under the Public Works Act.
In late 2005, Mr Garrity and his then wife Ramona separated.
During November and December 2005 Mr Garrity and Mr Schmidt continued to discuss the possible terms upon which Mr Garrity might acquire the Kaiaua Road property. On 24 November 2005 ANZ issued a further notice of default in relation to the mortgage over the Kaiaua Road property.
Transfer of the Kaiaua Road property to Ebada
The discussions between Mr Schmidt and Mr Garrity culminated in an agreement for sale and purchase dated 8 December 2005 between STL as vendor and Mr Garrity (or nominee) as purchaser for the Kaiaua Road property at a price of $290,000.
A deed of forgiveness of debt was also executed on that date, recording that the Schmidts were indebted to Mr Garrity in the amount of $130,000. The deed provided for the forgiveness of that debt by Mr Garrity in consideration for setting off that amount against the purchase price for the Kaiaua Road property. It was common ground before the High Court that the Schmidts did not owe $130,000 to Mr Garrity. The forgiveness of debt document executed by the Schmidts and Mr Garrity was a sham designed to paint a picture (to prospective lenders to Ebada, among others) of a sale of the Kaiaua Road property for $290,000 in circumstances where Ebada would in fact only be paying STL $160,000.[17]
[17]High Court judgment, above n 1, at [50].
On 20 December 2005 Ebada entered into loan and mortgage agreements with TEA Custodians (Pacific) Ltd (TEA) under which Ebada borrowed $175,000 secured against the Kaiaua Road property. Mr Garrity personally guaranteed the advance to Ebada. The sale of the Kaiaua Road property settled on 20 December 2005. On settlement Ebada paid $160,000 to STL, with the balance of the purchase price recorded as being in consideration for the deed of forgiveness of debt for $130,000.
Mr Taia, a solicitor from Russell McVeagh and friend of Mr Garrity, acted for the Schmidts on the sale. On 8 December 2005 Mr Garrity sent an email to Mr Taia instructing him on behalf of the Schmidts, and describing the transaction in the following terms:
1. The property is … owned by Schmidt Trustees Limited … The Property has been valued at $290k (regd valuation dated Oct 25).
…
3. I am acting pursuant to two POA’s signed by [the Schmidts] and, as discussed, they are both in jail.
4. The Company has an existing mortgage of circa $138k with [ANZ], but has run into some serious servicing issues re the debt. [ANZ] have issued a s92 PLA notice and intend initiating the foreclosure process on 6 Jan if the whole mortgage isn’t paid by then.
5. [The Schmidts] have exhausted all options and so they asked that I purchase the property (at market value ie $290k). I agreed and we have signed a sale and purchase agreement to that effect.
6. [Mr Schmidt] has an existing debt to me as I let him use the equity in two of my properties to fund a recent purchase of his (Ramona doesn’t know about this!!). We’ve agreed on a value for that debt of $130k and have a signed letter acknowledging this. This leaves an amount of $160k to satisfy the purchase price.
7. What they don’t want to do is to have the property fall into the hands of a third party as it is their former family home. They want me to hold it until such time as they’re in a position to purchase it back from me.
The story about an existing debt in item 6 of this email was, as Mr Garrity acknowledged at trial, untrue.
We interpolate that if the intention had been for Ebada to act as trustee for the Schmidt interests, it would have been both simple and essential to convey this in the emailed instructions to Mr Taia. But at a time when there is no reason to think that Mr Garrity was doing anything other than give effect to the parties’ shared understanding, he described the transaction in terms that made no reference to a trust. Rather, his description was of an outright sale, which (all being well) would be followed by a repurchase by the Schmidts at a later date.
Mr Taia visited the Schmidts in prison to obtain their signatures on the transfer.
Russell McVeagh’s reporting statement sent to the Schmidts recorded that $147,236.63 was applied to discharge STL’s mortgage to ANZ. A balance of $11,317.03 was available to STL after meeting costs associated with the sale. With Mr Schmidt’s agreement, those funds were paid into Mr Garrity’s bank account, as was a subsequent refund from ANZ of $2,004.17. Mr Garrity used those funds to make various payments on behalf of the Schmidts.
It appears that Mr Garrity retained the remaining $15,000 of the sum borrowed by Ebada. Mr Schmidt says this was an agreed “fee” for the assistance Mr Garrity had agreed to provide.
Mr Schmidt’s father, Mr Wanoa, remained in possession of the Kaiaua Road property and paid rent to Ebada, as agreed by Mr Schmidt and Mr Garrity.
Mr Garrity visited the Schmidts in prison on a number of occasions to obtain their signatures on various documents. In order to arrange those meetings, he held himself out to the Department of Corrections as the Schmidts’ lawyer. Mr Garrity said at trial that was not in fact the case — he was not acting as the Schmidts’ lawyer — but this was done for convenience, to enable him to meet with them during the week rather than during visiting times for family and friends at the weekend. The Schmidts say the representations Mr Garrity made to Corrections were true: he was their lawyer.
Date of alleged declaration of trust by Ebada
The Schmidts say that around this time, in December 2005, the Excel Estate Trust and Ebada entered into a deed of declaration of trust providing for Ebada to act as trustee for the four Trusts. The Schmidts produced an unsigned copy of a document to this effect at trial. Ebada and Mr Garrity deny that any such document was prepared at the time or was ever executed by Ebada.
Payments from Transit to STL
In January 2006 Property Group paid interim compensation of $235,946.05 (including GST and interest), in relation to the land to be taken by Transit at Bell Road. Mr Garrity had negotiated with ANZ (the mortgagee of the Bell Road property) that 10 per cent of the compensation payment could be retained by the Schmidts, provided 90 per cent was paid to ANZ to reduce the mortgage loan balance. The 10 per cent share ($23,594.61) was paid to Mr Garrity’s account in accordance with Mr Schmidt’s instructions. Mr Garrity subsequently made various payments on behalf of the Schmidts from those funds.
On 7 February 2006 Property Group made a further payment to Mr Garrity of $21,973.94 for legal and other out of pocket expenses. Mr Garrity says various payments were made on behalf of the Schmidts from those funds.
Mr Garrity borrows further amounts against the Kaiaua Road property
In May 2006 Ebada borrowed an additional $101,500 from TEA using the Kaiaua Road property as security.
Mr Schmidt says that Mr Garrity had advised him that he would need to borrow $50,000 to help with a potential relationship property settlement with Ramona, and Mr Schmidt agreed to this. He says they discussed that Mr Garrity would need to repay this amount and cover the interest costs. He says he was not aware at the time that Mr Garrity borrowed more than twice the agreed amount. There is no record of Mr Garrity disclosing this borrowing to the Schmidts at the time.
Further financial pressure and a threatened mortgagee sale of the Bell Road property
In June 2006 Mr Schmidt received notices demanding payment of unpaid rates in relation to Bell Road. The Schmidts owed money to the lawyers who acted for them at their criminal trial. Payments fell into arrears on a vehicle loan. ANZ was putting pressure on the Schmidts to refinance the Bell Road property.
On 30 August 2006 the Schmidts were released on parole and returned to Bell Road to live in the property.
The Schmidts’ financial position remained problematic. ANZ issued a notice under s 92 of the Property Law Act in relation to Bell Road. The notice was due to expire on 15 November 2006.
Transfer of the Bell Road property to Ebada
Between August and November 2006 Mr Schmidt and Mr Garrity had a number of discussions in relation to a possible transfer of the Bell Road property to Ebada. Various draft agreements for sale and purchase, and related documents, were prepared and discussed.
On 1 November 2006 an agreement for sale and purchase was entered into between STL as vendor and Mr Garrity (or nominee) as purchaser in relation to the Bell Road property. The agreement recorded the purchase price as $495,000. It stated that a deposit of $295,000 had been paid in remuneration (recorded in a deed of forgiveness of debt). The parties exchanged various draft deeds of forgiveness of debt showing Mr Garrity forgiving debts owed to him by the Schmidts in varying amounts, all fictitious. It was common ground at trial that the $295,000 debt for remuneration did not exist and had not been paid: this was another fiction created by the Schmidts and Mr Garrity to create the impression of a sale at a price substantially above the amount actually paid by Ebada.[18] The effective consideration paid by Ebada to STL was $200,000.
[18]At [63].
Ebada borrowed $200,000 from Westpac to settle the purchase of the Bell Road property. Mr Garrity again personally guaranteed the advance. Settlement took place on 24 November 2006.
Mr Taia again acted for the Schmidts in connection with this transaction.
Out of the $200,000 payable to STL, $121,495.82 was paid to ANZ to discharge the existing mortgage over the Bell Road property. The balance of approximately $74,000, after meeting other costs associated with the transaction, was paid into Excel Estate Trust’s bank account. That sum was to be divided between Mr Garrity and Mr Schmidt pursuant to an understanding they had reached about how these funds would be used, although there were some differences between them about how precisely that division was to work.
Mr Schmidt says that as with the Kaiaua Road property, he did not expect Mr Garrity to do all of this for nothing. He says he had agreed to Mr Garrity retaining $15,000 from the Kaiaua Road transaction, and agreed that he should at some point draw $20,000 of the mortgage borrowings on the Bell Road property as compensation for his duties. Mr Garrity did not accept that he received “fees” for his involvement, though he acknowledged he received some funds for his own benefit in connection with the Bell Road property transaction.
Mr Garrity had access to the Excel Estate Trust bank account. Following settlement of the Bell Road property purchase, he emailed Mr Schmidt to say he would take money out of the Excel Estate Trust account to cover some property expenses and to pay for the legal fees he had incurred in connection with the property transaction, and to meet various costs in relation to the Kaiaua Road property. He told Mr Schmidt he would “take out $40k and leave you with the rest”. He said he would set up an automatic payment from the Excel Estate Trust account of $250 per week to cover the mortgage “less my $40k part of it, which I will cover”. He added:
I’m ok with us topping up the mortgage in the New Year if we need to access more funds, if and only if we have sufficient cashflow to stay on top of it.
In November 2006 Mr Garrity transferred approximately $74,000 from the Excel Estate Trust account into his own bank account as agreed with Mr Schmidt.
The Schmidts place some emphasis on an email sent by Mr Schmidt to Mr Garrity on 12 December 2006, containing the text of a draft email that Mr Schmidt suggested be sent to Transit, which included the following:
Please also be advised that the property is under a new corporate trustee in EBADA Property Investments Limited, and you may communicate with the director Brian Garrity …
It is unclear whether an email along those lines was ever sent to Transit.
Email exchange about use of STL funds from sale of Bell Road property
In February 2007 Mr Schmidt and Mr Garrity exchanged emails in relation to the division of the funds available following the purchase of the Bell Road property by Ebada. Mr Schmidt had some questions about how the funds had been applied. On 27 February 2007 Mr Garrity emailed Mr Schmidt setting out his understanding of the arrangement between them, and what that meant for division of these funds:
The original deal was that, on top of the mortgage to cover the farm, I was gonna take out enough to cover what I had to pay Ramona ($50k - $30k I had already paid on credit cards, with $20k remaining), with a bit more to help you guys out ($20k). At your request, I agreed to a more even split and have always been operating under the assumption that it was $35k each, regardless of your email below. I probably should have paid more attention to your emails and said something earlier. My bad. Anyway, $35k each it has to be as I have already paid the $30k in credit card debt back, as well as the first of 5 instalments to Ramona.
…
That leaves about $7,050 (not including the deductions mentioned above for your Uncle Ed’s legal fees and the Bell Rd insurance). At this stage I’m happy to put across $2,000 (I’ll do it as soon as I’m done writing this), but I’m not gonna dip into what’s left as I need it as security to ensure the continued payment of the rents, rates and other expenses for both the Kaiaua Rd and Bell Rd mortgages.
Bro I know you won’t mind me speaking freely cause that’s just how tight we are, but I think you need to look hard at your cash flow position. It seems to me that the rent payments don’t get paid unless you use the borrowed money that I transfer. That’s gonna sink us both bro.
As this email indicates, Mr Garrity was under financial pressure at that time and needed access to funds from the Bell Road transaction in order to meet his financial obligations. It is also apparent that Mr Schmidt was reliant on those funds to meet the rent payments on the Bell Road property, which was not a sustainable approach. If the rent could not be paid, that would affect Mr Garrity’s ability to service the mortgage. If he could not do so that would, in Mr Garrity’s words, “sink us both”.
Some more fictions
In July 2007 IRD asked Mr Garrity to provide information about the Kaiaua Road property and the Bell Road property, and contact details for the tenants of those properties. Mr Garrity contacted Mr Schmidt. Mr Schmidt suggested a response to the IRD, including offering to “whip up” a new tenancy agreement to be sent to the IRD. Mr Garrity passed on the information Mr Schmidt gave him, including what appears to have been a false name for a tenant living at the Bell Road property. In cross-examination Mr Garrity confirmed that he knew that was false. When asked whether he was misleading IRD, the Court warned Mr Garrity about the privilege against self-incrimination and Mr Garrity declined to answer the question.[19]
Ebada comes under increasing financial pressure
[19]See at [103(c)].
By late 2007 Ebada and Mr Garrity were under considerable financial pressure. The Schmidts and Mr Wanoa had not been consistently paying rent and providing funds to meet outgoings in respect of the two properties. Mr Garrity was not in a position to fund the outgoings and service the mortgages without these income streams.
In February 2008 TEA, the mortgagee of the Kaiaua Road property, issued a letter of demand to Ebada in respect of late payments on the mortgage over that property.
On 20 February 2008 Transit made a final compensation payment of $42,488.60 in respect of the Bell Road property under the Public Works Act. That amount was paid into Mr Garrity’s account. Mr Schmidt and Mr Garrity exchanged emails about how these funds would be used, including meeting arrears on the Kaiaua Road property mortgage. Mr Garrity made a number of payments at Mr Schmidt’s instruction.
Mr Garrity expressed concern about the arrangements between him and the Schmidts, and suggested they be unwound:
Also, I want to talk to you about dissolving the arrangements. To be honest, it’s just not that good a deal for me, given the hassle dealing with [TEA] and Westpac whenever a loan payment is missed for insufficient funds being in the account, or when the rates and insurance go unpaid. So if you could come up with some alternative arrangements, it would be appreciated.
I’d rather we forego our commercial arrangements and maintain a worry free friendship.
Discussions about unwinding the arrangements
Around this time Mr Schmidt and Mr Garrity began discussions about a possible repurchase of the properties by the Schmidts. Mr Schmidt advised Mr Garrity that he intended to use the equity in the properties to borrow against them, and intended to subdivide the Bell Road property. In March 2008 Mr Garrity emailed Mr Schmidt noting that the current arrangements were not sustainable and describing the Transit payment as “merely a band aid solution to the wider issue of the unaffordability of sustaining both of these properties”. Mr Garrity offered financial assistance in return for “a share of the equity”:
If you want my assistance (ie. fronting the payments for half of all the fixed costs- except tenant related costs eg. rent), I’m happy to do so for a share of the equity. If you want to work towards this solution, let me know. I’d need some conditions in place though.
If not, I will hold the properties for another couple of months until the end of May and then will look to offload.
Sorry to put this pressure on you bro, but holding these properties has done nothing for me and, worst of all, has done nothing for our friendship.
We note that if Ebada had been an outright purchaser of the properties, free of any commitments to the Schmidts, Mr Garrity would not need to provide further financial assistance to the Schmidts in order to obtain a share of the equity in the Bell Road property — Ebada would already be entitled to 100% of the equity in that property.
Mr Schmidt and Mr Garrity continued to exchange emails about a possible purchase by the Schmidts of the properties. In September 2008 Mr Schmidt advised that he could “get the properties moved one at a time”. He asked for “the current discharge figure for Bell Road, and Kaiaua Road, and what those are made up of”.
Mr Schmidt told Mr Garrity that he needed him to sign sale and purchase agreements on both properties to enable a business deal to proceed. Mr Garrity responded saying he would call him. On 30 September 2008 Mr Schmidt advised Mr Garrity that he needed to get sale and purchase agreements “done up and signed tomorrow” and was looking to settle one of the purchases in the next fortnight and the other a few weeks after that.
Mr Garrity responded that sale and purchase agreements “aren’t going to fix our immediate problems. I need you and your dad to start paying rent again.” Mr Garrity said that he expected to receive a Property Law Act notice from TEA the following day.
On 3 October 2008 Mr Schmidt emailed Mr Garrity saying that “[t]he S & P agreements WILL fix all the problems.”[20] He emphasised that he needed those agreements in order to pursue a further business deal.
[20]Emphasis in original.
Mr Garrity responded on 6 October saying that “[t]o be blunt” he just did not trust that Mr Schmidt had a legitimate deal sorted and that anything would get done. He said that he was not willing to sign anything and give up the only security he had securing the mortgage debt.
The same day Mr Schmidt sent a long email to Mr Garrity expressing surprise and disappointment at Mr Garrity’s failure to co-operate with the proposed repurchases. Mr Schmidt expressed frustration about the delay in getting the sale and purchase agreements signed, saying:[21]
The delay in getting these S & P agreements to my colleague has also now given me a great deal of difficulty and put MANY other things in jeopardy. He is starting to question whether I actually have a legit interest in these properties. It has cost me $3500 to get them valued (which were good by the way). This is bad for me as I have worked long and hard to get his confidence, but have failed to get the s and p agreements to him. I did think of one matter with these properties. With the money you took out for Mona's settlement, we will just work that out later ok, I just need [the] properties settled out now. I dont expect you to all of a sudden come up with that kind of money right now. We can get to that later.
All in all, I dont know what you actually want from me. Rent money? I already told you the catch 22 I am in, and it worsens by the day. Its the 6th october today. Had I got the agreements last wed 1st, we could have been settling on Mon next week! If you can get them done, let me know. I cannot see that there is any risk to you. If they dont settle you simply cancel them. Easy as that, but in any event, with the absence of these agreements, I do not have an access to my money, unless I throw the towel in on the business arrangements I have in place. I leave the ball in your court bro. (and know you will always be my bro ok - this is just business crap)....but my hands are tied, I am as stuck as Rimas cock up bro g...haha. This is such a big big business deal....take 5 mins and go have a llok for yourself my nig...One thought then...why dont you at least sign a s and p for the farm and hold the depot till we settle the farm???
[21]Emphasis in original.
We interpolate that what these emails reflect is a shared understanding that Mr Garrity had obligations to the Schmidts in relation to the properties. Mr Schmidt was proceeding on the basis that he was entitled to the benefit of the equity in the properties after discharge of the debts secured over those properties, and that he would need to fund the discharge of those loans but otherwise would be able to access the properties and the equity in them. Mr Garrity did not demur from that understanding but was plainly sceptical about whether Mr Schmidt was in a position to repurchase the properties. At this point Mr Garrity still had not disclosed the extent of borrowing over the properties: this may well have been another factor in his reluctance to provide firm figures to Mr Schmidt and to enter into sale and purchase agreements along the lines proposed by Mr Schmidt.
On 21 October 2008 Mr Garrity advised Mr Schmidt that he could not let one property go unless both went at the same time. He said he was at a point where he did not care any more whether the properties went to mortgagee sale:
I’m simply interested in negotiating retaining a clean credit record and being compensated fairly for the hassle (Mona’s payments are a negligible cost vis a vis the benefit of not losing both properties – which would have happened had I not intervened).
However, I will try and get a market sale done prior to mortgagee sale to get a better price. And I plan on using the farm sale proceeds to clear the mortgage debt on both the farm and the depot. I will then forward your fair share from whatever is left over from the net proceeds of the sale (and I will be fair about it).
Mr Schmidt responded the same day, saying he did not understand why Mr Garrity was “choosing this route”. He continued:
On the Mona funds, I thought I compensated you 20K for your intervention. Ialso did have another option, but I chose you so you could have the 20K. Your help was always appreciated, but I must make it clear, that there was another option.
…
I have spoken to my colleague and they are willing to do a contemporaneous sale on both properties, but you will have to provide.
1.A discharge figure for the [Bell Road property] (current)
2.A discharge figure for the [Kaiaua Road property] (current)
We will have to push for a different approval on the depot. The plan was for the farm to settle and then to use the equity position as final leverage to get the depot through. Your requirement of both settling at once is going to provide more difficulties, but lets do that.
I don’t understand why you are even thinking about Mortgagee sale …
So lets cut to the chase. You get us the discharge figures, and we will get you unconditional agreements by a High Court barrister. I am saddened by this! I could have had BOTH properties settled up by now. We planned to settle the farm on the 12th October, with the depot a week later. You did not even give me the grace of 5 minutes to come and talk to me or look at what we were doing, and instead passed a convenient judgment on the situation. The arrears could have been tied up ages ago when I had control of the money, but for almost a month I got no response to you when I asked where the funds should go. By the time you got back to me matters had already progressed to the where they are now.
All water under the bridge now. I had agreements targeted for the 5th November, for the farm, but I will get back to you shortly. The farm has a current value of $900,000 and the depot $545,000 (you read that right!). So lets get the agreements signed. I will get the[m] delivered to your house address asap. I am very saddened that you have not even rung me. Lets just get through this ok. Sign the agreements, look at how we have structured the deposits and lets just get this thing done.
On 23 October 2008 Mr Garrity advised that Mr Schmidt’s proposed approach was not an option as both properties were cross securitised with the rest of his portfolio. As a result of issues with one of his other properties, the probable total discharge figure would be around $530,000–550,000, perhaps higher. Mr Garrity said that he was not sure what Mr Schmidt wanted to do, but while they worked that out Mr Schmidt needed to help pay the mortgage.
The parties continued to correspond about a possible purchase of one or both properties by the Schmidts. The correspondence became increasingly acrimonious.
Ebada sells the Bell Road property
In late 2008 Mr Garrity began negotiations with Mr Hair, who had a grazing lease over part of the Bell Road property, for the sale of that property. Ebada and Mr Hair entered into a sale and purchase agreement for the property for $700,000 on 15 December 2008. The sale settled on 9 January 2009. Around that time, the Schmidts learned about the agreement to sell the Bell Road property. They instructed a lawyer to file caveats over the titles for both properties. However it was too late to prevent the transfer of the Bell Road property as that had already been registered. Their caveats were withdrawn in late January 2009.
Discussions continue in relation to Kaiaua Road property
In early 2009 Mr Garrity agreed that Ebada would enter into a sale and purchase agreement in relation to the Kaiaua Road property with a company controlled by Mr Schmidt. The agreement was signed on the basis of a sale price of $400,000, and a deposit of $140,000. Mr Schmidt sought an advance of $260,000 from Westpac to his company. Mr Schmidt says that Mr Garrity initially agreed to use the sale proceeds from the Bell Road property to cover the $140,000 deposit but then changed his mind and proposed a deal under which the balance that was not paid by Mr Schmidt’s company would remain as an on-call debt owing by that company to Ebada. Mr Schmidt did not agree to pursue that option, so the signed sale and purchase agreement never materialised.
In February 2009 Mr Garrity said that he would consider a sale of the Kaiaua Road property at market value. Mr Garrity said that Ebada was “not a corporate trustee for anyone”. Mr Schmidt responded on 5 February 2009 saying that “[E]xcel was the actual owner in any event”. He was not willing to purchase for market value.
On 9 February 2009 Mr Garrity advised Mr Schmidt that he was still willing to settle a sale conditional upon getting certain remaining matters settled. Mr Schmidt responded on 10 February 2009:
The main matter is what happens with the 209K, and the 90K increase on the orig loan. There is also the 35K topped up on the farm. Aside from the funds that were paid to you as fees or cuts on both deals (those are not included in the 90 and 35), that makes at least 125K you topped up finance. If things proceed, are you intent on taking another 50K out of the funds, which takes things to 175K, or can we have 209K (less some costs, etc), and are you saying we have to write off your finance top ups of 125K? There are so many matters we need to just clarify. Can you let me know, and then what happens with the money once things are finalized? How do we know we will get it? How will you give it? etc, what reassuarnces are there? Open to how we do this, but difficult when there is no communication. Let me know ok
In an email sent on 27 February 2009 Mr Schmidt said the following:
With smoke screens, and mirrors (whatever those are?), you will have to get your head around the fact that all of this is a smoke screen, as you have created deeds of debts for debts that don’t exist. The obvious purpose is for you[r] tax issues. Thats fine. I have no problem with that. As I said, I will do it your way. You will have to accept within yourself one day, that you did not have rightful ownership over anything you have controlled these past months. As I said, I will do it your way, but this could have been done differently and [a lot] better with more safeguards for you where your tax issues are concerned. …
The differences between Mr Schmidt and Mr Garrity remained unresolved, and the proposed sale did not proceed.
Mortgagee sale of Kaiaua Road property
In June 2011 TEA obtained an order for vacant possession of the Kaiaua Road property, and proceeded to sell the property at mortgagee sale. It appears the proceeds were applied to meet the mortgage debt.
Shortly after that, in August 2011, the Schmidts filed proceedings in the High Court against Ebada, Mr Garrity and Mr Hair.
Other interactions between the parties
This already lengthy account of the dealings between the parties omits a number of other interactions of less significance. For example, in the course of 2006 Mr Garrity prepared, and the Schmidts executed, a number of discharge of debt documents recording fictitious obligations which ultimately were not used in connection with any of the relevant transactions. In November 2006 Mr Garrity prepared, and Mr Schmidt executed, a sale document for a marine vessel for $101,500. This document was also wholly fictitious: the vessel in question was owned by the Schmidt family, not by Mr Garrity, and no transaction between them in relation to the vessel ever took place. This document also was not ultimately used in connection with the property transactions. It may have been designed by Mr Garrity to relate in some way to the amount he borrowed against the Kaiaua Road property in May 2006, but that is unclear.
Dealings such as these are not directly relevant to the transactions in dispute, but illustrate the willingness of both Mr Garrity and Mr Schmidt to fabricate documents to support fictitious portrayals of their dealings, where that would be convenient vis-à-vis third parties.
The proceedings
The initial statement of claim filed in the High Court in 2011 was prepared by Ms Schmidt and Mr Schmidt themselves, without legal representation. Ms Schmidt was named as first plaintiff, and Mr Schmidt as second plaintiff.
An amended statement of claim was filed in October 2016. By this time Ms Schmidt had successfully applied for legal aid, and was represented by Mr Woodhouse and a barrister, Mr Chesterman. Mr Schmidt was not named as a plaintiff in this version of the pleading. Rather, Ms Schmidt was named as first plaintiff in her capacity as sole trustee of the four Trusts, and as second plaintiff in her individual capacity. Mr Hair was no longer named as a defendant.
A second amended statement of claim was filed in February 2017, again prepared by Ms Schmidt’s lawyers. She was named as the sole plaintiff in her capacity as sole trustee of the four Trusts.
In 2018 the question of Mr Schmidt’s status as a plaintiff arose at a case management conference before Associate Judge Andrew. The Judge issued a minute dated 15 November 2018 setting the proceeding down for trial, and making a number of other directions. The Judge noted that Mr Schmidt had advised that he did not wish to take part in the proceedings in the capacity of a party; he was happy to leave that role to Ms Schmidt to represent the interests of the relevant trusts. However the defendants said that Mr Schmidt was the main protagonist and primary advocate for the plaintiffs’ claim. They expected him to provide discovery, give evidence and remain liable for costs.
The Judge considered there was substantial merit in the defendants’ position. No orders had been made removing Mr Schmidt as a plaintiff from the proceeding, so he remained as second plaintiff. The Judge noted it appeared Mr Schmidt’s presence before the Court might be necessary to adjudicate on and settle all questions involved in the proceeding. If Mr Schmidt wished to be removed from the proceedings, he would need to make a formal application with supporting evidence.
The Judge directed that an amended statement of claim should be filed and served.
In response to that direction, a third amended statement of claim was filed in June 2019. It named Ms Schmidt as first plaintiff in her capacity as trustee of the four Trusts, and Mr Schmidt as second plaintiff. But the claim was expressed to be brought only by Ms Schmidt.
Shortly before trial, Ms Schmidt sought leave to file and serve a further amended statement of claim. That application came before Lang J on 9 September 2019. Lang J made directions permitting Ms Schmidt to make some, but not all, of her proposed amendments.[22] Lang J noted that the amended statement of claim should refer to the first plaintiff, Ms Schmidt, as “the first plaintiff” rather than “the plaintiff” as was then the case.[23]
[23]At [11].
The fourth amended statement of claim was filed on 12 September 2019. The proceeding went to trial on the basis of that pleading. Ms Schmidt was named as first plaintiff, and Mr Schmidt as second plaintiff. Although Mr Schmidt was named as a plaintiff, the allegations were all pleaded as made by Ms Schmidt.
Ms Schmidt pleaded that Mr Garrity had advised the Schmidts that they would be better served if the trustee of the four Trusts was an independent trustee or corporate trustee with an independent director and shareholder, and that Mr Garrity would be able to perform this role for the Schmidts. She pleaded that in or about December 2005 a deed of declaration of trust was entered into under which Ebada agreed to act as trustee for the four Trusts. Because the pleadings assume some importance in our decision, we set out the relevant paragraphs of the fourth amended statement of claim in full:
10. From about June 2004 to about December 2005 during various conversations Mr Garrity advised Mr Schmidt (and the First Plaintiff) that they would be better served if the trustee of the Four Trusts was an independent trustee or a trustee company with an independent director/shareholder and that he, Mr Garrity, would be able to perform this role for the Schmidts.
Particulars:
The advice referred to above was given by Mr Garrity to Mr Anthony Schmidt (then a trustee of two of the Four Trusts) and to the First Plaintiff in the period from about June 2004 to about December 2005, during various:
(a) visits by the First Plaintiff and Mr Schmidt to Mr Garrity’s residence at 37A Summerland Drive, Henderson, Auckland; and
(b) visits by Mr Garrity to the First Plaintiff’s (and Mr Schmidt’s) then residence at 11 Bell Road, Mangatawhiri;
(c) telephone conversations between Mr Garrity and Anthony Schmidt.
11. To the above end:
a. On or about 8 November 2005, Mr Garrity incorporated the First Defendant, Ebada Property Investments Limited (“Ebada”), with Mr Garrity as the sole Director and shareholder.
b. a deed of declaration of trust was entered in or about December 2005 under which [Ebada] agreed to act as trustee for the Four Trusts (which collectively were known as the Excel Estate Trust (“EET”)) and to acquire and hold property on behalf of EET;
c. registration of transfer of title of the Kaiaua Property from Schmidt Trustee Limited (as trustee for EET/the Four Trusts, to Ebada as trustee for EET/the Four Trusts was effected on 5 January 2006, as further particularised below;
d. registration of transfer of title of the Bell Road Property from Schmidt Trustee Limited (as trustee for EET/the Four Trusts), to Ebada as trustee for EET/the Four Trusts was effected on 20 December 2006, as further particularised below
…
15. Included in the terms of the Declaration of Trust referred to in paragraph 11(b) hereof were material terms relevant to Ebada as trustee of the properties that:
Clause 1
1. The Trustee/s declares that it will hold the Property on trust for the Beneficiary/s or their nominees.
Clause 2 (a) and (b):
2. The Trustee/s shall:
(a) upon request by the Beneficiary/s transfer any property to the Beneficiary/s or their direction;
(b) act on any instructions given by the Beneficiary/s relating to the exercise of all other rights and privileges vested in the Trustee/s as holder of any property and the performance of all duties imposed on the Trustee/s as holder of the property/s;
Clause 8:
[8.] The Trustee/s shall resign at the request of the Beneficiary Trusts, where the Beneficiary Trusts consider it is no longer appropriate or beneficial for the Beneficiary Trusts, for the Trustee/s to act in this role and may appoint a new Trustee/s at its own discretion….
The first cause of action alleged an intentional breach of the express trust by Ebada and by Mr Garrity as its sole director. The breaches alleged were:
(a)use of the Kaiaua Road and Bell Road properties by Ebada and/or Mr Garrity to borrow funds for their own purposes;
(b)sale of the Bell Road property to Mr Hair;
(c)failure by Ebada and Mr Garrity to account for the proceeds of that sale; and
(d)refusal on the part of Mr Garrity to facilitate the transfer of the Kaiaua Road property from Ebada to an entity controlled by the Schmidts.
Ms Schmidt claimed losses resulting from the sales of the two properties, compensation for anxiety and distress, interest and costs.
The second cause of action alleged breach of an institutional constructive trust. The foundation for the allegation that Ebada and/or Mr Garrity held the two properties on a constructive trust for the benefit of the four Trusts was the pleading set out at [114] above, namely an agreement by Mr Garrity that Ebada would act as a trustee and the execution of a deed of declaration of trust to that effect. The breaches alleged were:
(a)use of the Kaiaua Road and Bell Road properties by Ebada and/or Mr Garrity to borrow funds for their own purposes;
(b)sale of the Bell Road property to Mr Hair; and
(c)failure by Ebada and Mr Garrity to account for the proceeds of that sale.
The relief sought was the same as for the first cause of action.
The third cause of action pleaded a claim against Mr Garrity for knowing assistance in breaches of trust by Ebada and/or knowing receipt of the proceeds of those breaches of trust. The breaches identified were the same as those pleaded in the second cause of action. The same compensation was claimed as in the other causes of action.
The fourth cause of action pleaded a claim against Mr Garrity for breach of fiduciary duty. Ms Schmidt alleged that in 2005/2006 Mr Garrity had a relationship of special trust and confidence with the Schmidts, as the then trustees of the four Trusts, on the basis that:
(a)Mr Garrity was their long-term friend.
(b)Mr Garrity was a qualified and enrolled lawyer at the relevant time.
(c)The Schmidts were, at the time of the transfers of the properties to Ebada in a particularly vulnerable position.
(d)Mr Garrity provided legal advice and legal services to them and acted as their solicitor.
Ms Schmidt pleaded that Mr Garrity breached the fiduciary duties that he owed to the trustees and beneficiaries of the four Trusts. The pleading alleged that Mr Garrity breached his fiduciary duties because he:
a. arranged for the Bell Road and Kaiaua Properties to be transferred to Ebada, a company controlled solely by Mr Garrity;
i. in relation to the transfer of the Kaiaua Road property, the sale price was said to be satisfied in part by a “Deed of Forgiveness of Debt” for $130,000, which was for a debt that did not exist - In consequence the transfer was for (at least) $130,000 under-value;
ii. and in relation to the transfer of the Bell Road property, the sale price was said to be satisfied in part by a deposit “paid” of $295,000 (out of a total stated purchase price of $495,000), when the “payment” of the deposit was fictitious. - In consequence the transfer was for (at least) $295,000 under‑value
b. used the properties to raise funds for his own personal purposes and use the properties as cross collateral with his own properties;
c. ultimately arranged the sale by Ebada of the Bell Road Property and took and/or did not account for the proceeds of sale.
The same relief was claimed as in the preceding causes of action.
The fifth cause of action pleaded a claim against Mr Garrity based on undue influence. Ms Schmidt pleaded that in 2005/2006 Mr Garrity had a relationship of special trust and confidence to the Schmidts. She pleaded that he breached the duties he owed to them and exerted undue influence on them by entering into the transactions to transfer the two properties to Ebada. The same relief was claimed as in the preceding causes of action.
The trial
As already mentioned, the trial took place in October 2019 before Venning J. Additional discovery was provided after the trial, and there were further submissions arising out of that additional discovery in November and December 2019. Ms Schmidt was legally represented. Mr Schmidt represented himself. The defendants were legally represented.
The Judge identified an issue in relation to Mr Schmidt’s position and participation in the proceeding. On 17 October 2019 the Judge issued a minute addressing this issue:
[17] In a minute issued on 15 November 2018 Judge Andrew recorded that, at that time, Mr Schmidt had advised that he did not wish to take part in the proceedings in any capacity as a party. Mr Schmidt was apparently then content to leave it to Taylor Schmidt to represent the interests of the [Excel Estate Trust]. The defendants however expected him to provide discovery, give evidence and remain liable for costs. They resisted Mr Schmidt being removed from the proceeding. Judge Andrew considered there to be merit in the defendants’ position. He noted no order had been made removing the second plaintiff from the proceeding. The Judge considered that in terms of r 4.56 [of the High Court Rules 2016] his presence before the Court might be necessary to adjudicate on and settle all questions involved in the proceeding. The Judge directed that if Mr Schmidt wished to be removed he would need to make formal application. No such steps were taken.
[18] Given the current state of the pleading and Judge Andrew’s minute, Mr Schmidt, the second plaintiff, remains as a second plaintiff before the Court for the purposes of discovery, providing evidence and costs. Indeed, as noted, he was called as the principal witness for Taylor Schmidt.
[19] For those reasons I am satisfied that, save for the issue perhaps of costs, a separate issue, there is an identity of interests between Taylor Schmidt and Anthony Schmidt in these proceedings. It would be wrong in those circumstances to permit Mr Schmidt to effectively cross-examine Taylor Schmidt and other witnesses for the plaintiff when their position is exactly the same as Mr Schmidt.
[20] That leaves the issue of cross-examination of Mr Garrity, the defendant, the director of Ebada and defendant in his own right. Again, Mr Schmidt’s interest in the proceeding is, subject to the issue of costs, the same as Taylor Schmidt. Although he is named as a plaintiff the operative pleading does not raise a claim in his personal capacity or in any trustee capacity. To the extent there are issues Mr Schmidt considers should be raised in cross-examination of Mr Garrity he should raise them with Mr Woodhouse initially. If there are questions that Mr Schmidt considers should be put to Mr Garrity, which Mr Woodhouse is not prepared to put for whatever reason, then Mr Schmidt can advise the Court and the Court will rule on the question at that time bearing in mind the need for evidence to be relevant to be admissible.
[21] In terms of concluding submissions, again given the current pleadings, I presently cannot see a basis on which Mr Schmidt would need to address the Court in support of Ms Schmidt’s claim. She is represented by counsel. However, I accept that as Mr Schmidt is potentially liable for costs in the event the plaintiffs’ claim is unsuccessful, he can certainly address on that issue. If there are other issues he wishes to raise which have not been raised by Mr Woodhouse then again I will hear from Mr Schmidt at that time in relation to the issue of submissions as well.
The hearing proceeded on that basis. The Judge recorded that Mr Woodhouse, who appeared for Ms Schmidt, checked with Mr Schmidt at the conclusion of his cross-examination of witnesses and also at the conclusion of closing submissions. Where necessary, the Judge said, Mr Schmidt addressed the Court and filed submissions.[24]
[24]High Court judgment, above n 1, at [19].
The Schmidts called a number of witnesses. The principal witness for the plaintiffs was Mr Schmidt. Mr Garrity was the only witness for the defence.
As the Judge recorded, the principal evidentiary contest was between Mr Schmidt (and Ms Schmidt to a lesser degree) on the one hand and Mr Garrity on the other. There was a direct conflict between the evidence of the Schmidts and Mr Garrity about the central issue in this case, namely the nature of the transfers of the two properties to Ebada.[25]
High Court judgment
The central issue for determination by the High Court
[25]At [80].
The central issue raised by the Schmidts’ case was whether Mr Garrity agreed to hold the two properties on trust for various Schmidt trusts under the umbrella of the Excel Estate Trust, and incorporated Ebada for that purpose.
The Schmidts claimed that the Kaiaua Road property and the Bell Road property were transferred to Ebada on the basis of an express agreement by Mr Garrity that Ebada would hold those properties on trust for the Schmidt interests, and transfer them back to the Schmidt interests if directed to do so.[26]
[26]At [81].
Ebada and Mr Garrity’s case was that the transactions were outright sales in each case. Because of the nature of his relationship with Mr Schmidt, Mr Garrity agreed to rent back arrangements which would enable Mr Wanoa and the Schmidts to remain on the properties and, in the case of Bell Road, enjoy the rental income from Mr Hair and the Transit compensation. Mr Garrity also agreed that if in the future the Schmidts were in a position to do so, Ebada and Mr Garrity would deal with them in relation to a repurchase of the properties. However Mr Garrity’s position was that there was no commitment to do so, or to do so at any particular price.[27]
[27]At [82].
To support their case the Schmidts referred to an unsigned deed of declaration of trust document between Ebada and the Excel Estate Trust which they said Mr Garrity had prepared, and which they alleged the parties had signed on or around 12 December 2005. Mr Garrity denied that any such document was created at that time, either by him or the Schmidts. He submitted that the unexecuted declaration of trust document which the Schmidts produced to the Court was created by them for the purposes of their claim. As the Judge noted, the difference between the parties on this principal issue was stark. It required the Court to make credibility findings.[28]
Credibility findings
[28]At [83].
The Judge considered that Mr Schmidt, Ms Schmidt and Mr Garrity were all unsatisfactory and unreliable witnesses to a greater or lesser degree.[29]
[29]At [84].
The Judge found that Mr Schmidt’s evidence was unsatisfactory. He was evasive under cross-examination. The Judge did not accept his suggestion that he had no knowledge of the effect of trust documents. He found that Mr Schmidt was an intelligent and reasonably sophisticated man, at least in terms of general business experience.[30] Mr Schmidt had used a number of different names or aliases. He was prepared to falsify records and create new identities for different purposes whenever it suited him. He was prepared to say whatever he considered necessary to answer inquiries from banks and IRD, or to put them off.[31] He was prepared to make false documents and to sign them when it suited his purposes.[32] There were clear examples confirming Mr Schmidt was prepared to doctor or create documents to advance his case in the proceedings.[33]
[30]At [85]–[86].
[31]At [87]–[88].
[32]At [89].
[33]At [90]–[95].
The Judge considered that although Ms Schmidt was more direct in her answers than Mr Schmidt, her answers were obviously influenced by self-interest. She acknowledged that she had limited personal knowledge of the events at issue.[34] In those circumstances the Judge did not place any reliance on Ms Schmidt’s evidence insofar as it related to the circumstances surrounding the transfer of the Kaiaua Road and Bell Road properties to Ebada.[35]
[34]At [98]–[100].
[35]At [101].
The Judge considered that aspects of Mr Garrity’s evidence were also unsatisfactory. He too was prepared to create or be a party to the creation of, and to execute, documents which did not disclose the correct position, including the agreements for sale and purchase for the two properties, and in the case of the Kaiaua Road property the acknowledgment of debt, which gave incorrect and misleading impressions as to the price actually paid for the properties.[36]
[36]At [102] and [105].
The Judge summarised his credibility findings as follows:
[110] While not a ringing endorsement of Mr Garrity, I did not find him to be as evasive and untruthful when giving evidence on the major issues in the case as Mr and Ms Schmidt. On the important issues where there is a direct conflict, namely the basis upon which the properties were transferred to Ebada, I prefer Mr Garrity’s evidence to that of Mr and Ms Schmidt, primarily on the logic of the case and the contemporaneous documents which support his evidence. I also prefer Mr Garrity’s evidence to both Mr and Ms Schmidt on the issue of whether he uplifted a box with the trust documents and records from the Schmidts in October 2005. I accept that did not happen.
[111] Against that assessment of the principal witnesses, and for the reasons that follow, absent the production in evidence of copies of executed documents, I am also not prepared to accept that originals of the documents existed and were executed solely on the basis of Mr and Ms Schmidt’s oral evidence.
First cause of action — intentional breach of express trust
After carefully reviewing the evidence in relation to the claimed declaration of trust by Ebada in December 2005, the Judge rejected the evidence of the Schmidts that Mr Garrity had created such a document at that time. There was no reliable or credible evidence that such a document ever existed or that Ebada executed a document recording that it agreed to be a corporate trustee for the Schmidt family interests.[37]
[37]At [134].
The Judge said:
[135] On the balance of probability I prefer Mr Garrity’s evidence that the Excel Trust declaration of trust document, which the Schmidts seek to rely on, is a fiction and a document created solely for the purposes of this hearing. As Mr Garrity said in cross-examination, in response to the proposition that there was no reason for the Schmidts to make up the trust document: “If youare trying to construct a case after the fact there’s plenty of reason to do that, to do so”.
The Judge also identified a number of features of the dealings between the parties that counted against there being any express agreement between the Schmidts and Mr Garrity that Mr Garrity would hold the properties on trust for them in Ebada’s name.
The sales were described as sales to Mr Garrity (or his nominee) in the relevant agreements for sale and purchase. There was no reference to a trust in any of the relevant accompanying documentation.[38] Mr Schmidt’s evidence about the alleged agreement was vague. The Judge considered that he would have been well aware of the effect of the agreements for sale and purchase that he signed.[39] As the Judge noted, if the purpose of the transactions was to enable an independent corporate trustee to hold the property, there was no need for the agreements for sale and purchase to be prepared. A new trustee could have been appointed in a number of other ways.[40]
[38]At [136].
[39]At [138]–[141].
[40]At [144].
If the arrangement had been for both properties to be transferred to Ebada to be held on trust, both could have been transferred at the same time in December 2005. The separate transactions almost a year apart were more consistent with the Schmidts reluctantly selling the properties in response to the particular financial pressure on them in relation to each property at the relevant times in December 2005 and November 2006.[41]
[41]At [145].
The Judge did not consider that the dealings with the proceeds of sale supported the Schmidts’ case. There were problems with the explanations for those dealings put forward by both the Schmidts and Mr Garrity.[42]
[42]At [146]–[147].
The Judge considered that the arrangement was on its face a strange one, which reflected the very loose arrangements both the Schmidts and Mr Garrity took to how they dealt with financial matters. Those financial arrangements did not shed light on the nature of the underlying transaction.[43]
[43]At [148].
The Judge noted that Mr Garrity personally guaranteed the borrowing by Ebada. There was no reason for him to take on that personal financial responsibility if he and Ebada were only acting as trustee for the Schmidt interests.[44]
[44]At [149].
As the Judge recognised, the major factor in favour of the Schmidts’ case was that the agreements for sale and purchase were at less than market value because, in the case of the Kaiaua Road property, there was no $130,000 debt to be written off and, in the case of the Bell Road property, there had been no deposit of $295,000 actually paid, nor any work performed by Mr Garrity to entitle him to remuneration of that amount.[45]
[45]At [150].
However the Judge considered there were a number of other benefits to the Schmidts in the transaction:
[151] … Mr Garrity agreed to allow Mr Wanoa, Mr Schmidt’s father, to stay in the Kaiaua Road property (paying rent) and then later, on the transfer of Bell Road, he agreed to the Schmidts retaining possession of that property. Further, he agreed that any future compensation from Transit for Bell Road would be applied to the Schmidts’ benefit and that the Schmidts could keep the benefit of the lease income from Mr Hair. Finally, Mr Garrity was prepared to discuss the possible sale back to the Schmidts if and when their financial position improved.
The Judge accepted Mr Garrity’s evidence that he was prepared to purchase the properties, but only at the right price. Mr Garrity might have taken advantage of the financial pressure on the Schmidts and their personal difficulties to buy the properties at a significant discount. But that did not change the nature of the transactions, which remained outright sales.[46]
[46]At [154].
The Judge concluded that the evidence did not support the Schmidts’ case that there was an express trust. The first cause of action was not made out on the evidence.[47]
Second cause of action — breach of institutional constructive trust
[47]At [155].
The second cause of action also relied upon the claimed declaration of trust document and a “general discussion and understanding” by Mr Garrity that he would arrange for Ebada to act as an independent corporate trustee for the Schmidt interests. The Schmidts pleaded that that understanding gave rise to an institutional constructive trust.[48]
[48]At [156].
The Judge did not consider that any of the matters relied on by the Schmidts supported a finding that there was any agreement or understanding that the properties would be held on trust.[49] References to Mr Garrity “holding” the property for the Schmidts were consistent with the loose arrangement that the Judge had identified. The Judge considered this fell well short of acknowledging a trust.[50] There was simply an unenforceable understanding between two people, who at that stage were friends, about the possibility of the Schmidts repurchasing the properties.[51]
[49]At [163]–[164].
[50]At [168].
[51]At [170].
As the Judge noted, if Mr Schmidt believed Ebada to be holding the properties as trustee, one would have expected he would have raised that point in the numerous email communications passing between the parties in 2008 at a time when the relationship was deteriorating. At no time in the course of those email exchanges did Mr Schmidt state that Ebada held the property on trust for the Schmidt interests. Nor did he seek to terminate what he now says was the role of Ebada as trustee.[52]
[52]At [172].
We also agree with the Judge that if Mr Schmidt believed that Ebada was holding the properties as trustee, one would expect to see reference to this in the correspondence between him and Mr Garrity, especially when the arrangements began to unravel.[77] There are multiple references in the later email correspondence to departures from the “arrangement” or “deal” between the parties, but no suggestion at all that Ebada was a trustee for the Schmidt interests and was legally precluded from dealing with the properties as if they were its own.
[77]At [172].
The compelling inference that we draw from what was said in the contemporaneous documents and the form of transactions actually entered into — and from what was not said in those contemporaneous documents — is that there was never an understanding between the Schmidts and Mr Garrity that Ebada would act as a trustee for the Schmidt interests. To the contrary, it was a necessary element of the arrangements that Ebada should own the properties outright.
It follows that the Schmidts have not established that Mr Garrity advised them that there should be an independent trustee for the relevant Schmidt interests, as pleaded at [10] of the fourth amended statement of claim.[78] Nor have they established any general discussion or understanding to the effect that Ebada would hold the properties on trust for the benefit of the Schmidt interests and transfer them at the direction of the Schmidt interests.
[78]Set out above at [114].
In these circumstances it would have made no sense for the parties to execute an express declaration of trust document in December 2005 providing for Ebada to act as a trustee for the Schmidt interests. We agree with the Judge that there is no reliable and credible evidence that such a document ever existed or was executed by Ebada.[79] To the contrary, there is compelling evidence that the Schmidts and Mr Garrity did not contemplate Ebada acting as a trustee for the Schmidt interests.
[79]High Court judgment, above n 1, at [134].
It follows that the Judge was right to dismiss the first cause of action founded on an express declaration of trust. Mr Schmidt’s appeal against that conclusion must fail.
It also follows that the Judge was right to dismiss the second cause of action founded on an institutional constructive trust arising out of an understanding that Ebada would act as a trustee for the Schmidt interests. The Schmidts’ appeals against that finding must fail.
In the absence of any trust, there could be no breach of trust by Ebada, no knowing assistance on the part of Mr Garrity in a breach of trust, and no knowing receipt by Mr Garrity of the proceeds of a breach of trust. It follows that the Judge was right to dismiss the third cause of action. The Schmidts’ appeals against that finding also fail.
We add that an argument that Mr Garrity was a trustee on behalf of the Schmidt interests in respect of the sale proceeds from the Bell Road property and the Transit compensation that were received by him appears, at first blush, to have some merit. But no such claim was pleaded in the fourth amended statement of claim. And even if Mr Garrity and/or Ebada were trustees for the Schmidt interests in respect of those funds, that would not provide any support for the existence of a trust in respect of the properties transferred to Ebada. It is not possible to reason from a trust in respect of those funds to a trust in respect of the properties: the arrangements in respect of the properties and in respect of the funds payable to STL were completely different.
We also add for the sake of completeness that both parties failed to give effect to the initial understandings between them. The Schmidts failed to make the payments of rent and outgoings that were needed to keep the arrangements financially neutral for Ebada, and sustainable over time. Mr Garrity acted inconsistently with the understandings by borrowing additional amounts against the properties for his own benefit, securing his other debts against the properties, selling the Bell Road property and keeping the proceeds for his own benefit, and arguably also by allowing the Kaiaua Road property to be sold by the mortgagee (if there was indeed a viable alternative involving repurchase by the Schmidts). Mr Garrity was entitled to feel that the Schmidts had put him in a difficult and unsustainable position. The Schmidts were entitled to feel that they were seriously let down by their friend, who profited from the arrangements at their expense in a manner that was not originally intended. But Ebada did not hold the properties on trust, so Mr Garrity’s departures from the understandings with the Schmidts did not amount to breaches of trust.
Mr Garrity’s conduct might perhaps have been the subject of a different kind of claim: we discuss this possibility below.
Breach of fiduciary duty and undue influence claims
Mr Garrity was at all relevant times a lawyer. But as the Judge said, that does not mean he was acting as a lawyer for Ms Schmidt and Mr Schmidt.[80]
[80]At [181].
We agree with the Judge that Mr Garrity did not act as the Schmidts’ lawyer in relation to the agreements for sale and purchase.[81] He declined to do so, and arranged for Mr Taia to act on the transactions.
[81]At [184].
The process by which Mr Schmidt and Mr Garrity devised the structure of the transactions did not involve Mr Garrity giving legal advice to Mr Schmidt. These were not orthodox transactions, in connection with which a lawyer advises their client how to give legal effect to their (lawful) objectives. Rather, as explained above, there is an irresistible inference that Mr Schmidt and Mr Garrity jointly devised a structure that would pay off the mortgages over each property, enable the Schmidts and Mr Wanoa to continue to live at the properties, and preserve the equity the Schmidt interests’ had in those properties. They did so through a mix of legitimate and fictitious dealings. Both the Schmidts and Mr Garrity were intended to benefit from these dealings, in the manner outlined above.
In those circumstances, the relationship between Mr Garrity and the Schmidts cannot be classified as fiduciary. There was no agreement, express or implied, that Mr Garrity (or Ebada) would act on behalf of the Schmidts, and put their interests before his own, so far as the transfer of the two properties to Ebada was concerned.[82]
[82]See Chirnside v Fay [2006] NZSC 68, [2007] 1 NZLR 433 at [80]–[85].
In his dealings with Transit pursuant to the powers of attorney granted by the Schmidts, Mr Garrity plainly did owe fiduciary duties to the Schmidts. But it is not suggested that he failed to act in their best interests in his dealings with Transit. The Schmidts make no complaint about the outcome of those negotiations.
There is also a strong argument that Mr Garrity had fiduciary duties in relation to his receipt and management of funds received from Transit, and the Schmidts have raised concerns about some of the payments made by Mr Garrity out of those funds. But no claim in relation to misapplication of those funds is pleaded, so we need not make any findings about the extent of fiduciary duties in connection with those monies, or whether any such duties were breached.
Our finding that Mr Schmidt and Mr Garrity were the joint authors of the arrangements described above is also sufficient to dispel any claim founded on undue influence. This was a scheme devised by two friends to benefit them both: primarily the Schmidts, but also to a lesser extent Mr Garrity. In devising those arrangements Mr Garrity did not have any position of dominance, influence or advantage vis-à-vis the Schmidts. The Schmidts were under financial pressure — but that did not translate into a relevant form of advantage on the part of Mr Garrity for the purpose of an undue influence claim. And rather than taking unconscientious advantage of the opportunity presented by that financial pressure, Mr Garrity worked with Mr Schmidt to devise an (unorthodox) mechanism to relieve that pressure and buy the Schmidts more time, and an opportunity to remain on the properties for the time being and recover ownership of the properties if their circumstances improved. None of the elements of a claim of undue influence is present in connection with the arrangements entered into and the transfers of the properties.[83]
[83]Contractors Bonding Ltd v Snee [1992] 2 NZLR 157 (CA) at 165–166.
Mr Garrity did subsequently take advantage of his control, through Ebada, of the properties to use them for purposes that benefited him in a manner that was not contemplated by the understandings between him and the Schmidts. But that subsequent departure from the understandings does not retrospectively taint the transfers of the properties, or enable the Schmidts to challenge those transfers as having been procured by undue influence.
It follows that the Judge was right to dismiss the claims based on breach of fiduciary duty and undue influence. The appeals against those findings must also fail.
Mr Schmidt’s other grounds of appeal
For the sake of completeness, we note that Mr Schmidt’s appeal also contended that the trial Judge was biased and/or had predetermined the proceedings, by refence to various rulings made by the Judge and observations made by him in the course of trial.
We have formed our own view on the merit of the Schmidts’ claim,[84] and we agree with the result reached by the Judge. In those circumstances, there is nothing to be gained from dealing with Mr Schmidt’s allegations in detail. However we add that there was nothing in those allegations. There was no proper basis on which it could be suggested that the Judge was actually biased against the Schmidts, or that there was any material unfairness in the conduct of the trial. Nor was there any proper basis on which to allege predetermination. Counsel for Ms Schmidt quite properly did not adopt or support these allegations, which should not have been made: they were at best an unhelpful distraction from the merits of the appeal.
Application for leave to amend statement of claim
[84]As required by Austin, Nichols & Co Inc v Stichting Lodestar [2007] NZSC 103, [2008] 2 NZLR 141 at [4]–[5].
At the hearing of the appeal, following exchanges between the Court and counsel about the nature of the arrangements between the Schmidts and Mr Garrity, timetable orders were made providing for the Schmidts to apply for leave to amend their statement of claim to plead more clearly the nature of the arrangements concerning the properties and the legal consequences of those arrangements.
As foreshadowed at the hearing, Ms Schmidt applied for leave to file a fifth amended statement of claim.[85] That application was supported by Mr Schmidt. It was opposed by Ebada and Mr Garrity.
[85]Court of Appeal (Civil) Rules 2005, r 48(2).
The proposed amendments related to two aspects of the statement of claim:
(a)Ms Schmidt’s status as sole trustee of the trusts that had a legal or beneficial interest in the properties transferred to Ebada: these amendments were designed to address a possible mismatch between the trusts established by the Schmidts for which STL held the properties, prior to the transfer of those properties to Ebada, and the trusts that were referred to in the fourth amended statement of claim.
(b)Further particulars of the breach of constructive trust cause of action: these amendments plead alternative claims of a common intention constructive trust based on the “buy-back” arrangements between the parties, or alternatively a reasonable expectation of a constructive trust based on contributions to the properties by the Schmidt interests.
The first aspect of the leave application was not contemplated by the exchange between the Court and counsel. Leave to make those amendments had been sought and declined before trial. As explained above, we have been prepared to take a broad approach to the question of which of the Schmidt interests were beneficially entitled to the properties before the transfer to Ebada. In those circumstances, the first aspect of the application was neither necessary nor appropriate. It is declined.
The second aspect of the application is captured in the following proposed amendments (tracked) to the fourth amended statement of claim:
12. The transfer to Ebada of the Kaiaua property on 5 January 2006 was subject to existing and agreed borrowings of EET in the sum of approximately $175
60,000 ($15,000 of which was an amount the second defendant could keep as referred to in paragraph 17(a) below) which was secured with a mortgage to TEA Custodians (Pacific) limited (“TEA”). The transfer to Ebada was also subject to an understanding between the plaintiffs and the defendants that the defendants would hold the property on the basis that EET meet all costs of Ebada’s ownership, including all interest costs on the agreed borrowing associated with holding the Kaiaua Road property, and that the defendants would re-transfer the Kaiaua Road property to the plaintiffs’ Trusts or at their direction with the plaintiffs/their trusts paying all agreed outstanding borrowing secured against the property and when the defendants were able to effect such re-transfer (the “No‑Cost Transfer Back Arrangement”).13. On 20 December 2006 the transfer to Ebada (as trustee for EET/the Four Trusts) of the Bell Road property was effected by payment to Schmidt Trustee Limited (“STL”) (as trustee for EET/the Four Trusts) of the sum of $200,000.00 which sum was agree[d] to be used for:
…
Common intention
31. Pursuant to:
a. a Deed of Declaration of Trust prepared by Mr Garrity and signed by Mr Garrity for an[d] on behalf of Ebada on or about 12 December 2005 (but a copy of the signed copy is no longer available); and/or
b. the general discussion and understanding given to the First Plaintiff and Mr. Schmidt by Mr Garrity as particularised in paragraphs 10, 12 and 13, above, Mr Garrity procured that Ebada would hold the Kaiaua and Bell Road properties on trust for the benefit of the
FourTrusts and/or subject to the No Cost Transfer Back Arrangement (the “Common Intention Constructive Trust or “CICT”) to transfer the properties at the direction of the trustees of theFourTrusts.Second Cause of Action - Alternative to CICT – Reasonable Expectation Constructive Trust
32. If there was not a CICT, an institutional constructive trust arose as a result of the reasonable expectation of the plaintiff that the beneficiaries of the Trusts would have a beneficial interest in the Kaiaua and Bell Road properties as:
a. The contributions to the properties were more than minor, including:
i. the transfer of them to the First Defendant, Ebada, at sums considerable under-value ($130,000 in relation to Kaiaua Road and $312,000 in relation to Bell Road);
ii. The plaintiffs paying Ebada transactional costs (legal costs on the purchases) and agreeing to pay and paying all costs of Ebada holding the properties;
iii. the excess proceeds of sale of Bell Road being divided by the Second Defendant equally between him and the plaintiffs; and
iv. The Second Defendant receiving a $15,000 fee on the defendants to hold Kaiaua Road and there being a similar agreed fee for them to hold the Bell Road property.
b. The Plaintiffs had an expectation of an interest in the properties, arising from the understanding between the parties particularised in paragraphs 10, 12 and 13, and that they had procured the transfer of the properties to the Second Defendant at substantial under-value and paid all costs of the second defendant holding the properties through to approximately July-October 2008;
c. Such expectation of an interest was reasonable in the circumstances as pleaded; and
d. The Second Defendant should reasonably have expected to yield up an interest in favour of the plaintiff.
Mr Garrity and Ebada opposed the amendments sought on the basis that:
(a)They are not necessary for determining the real controversy between the parties.
(b)Granting leave would require remitting the case back to the High Court, and would cause further cost and delay, and prejudice to them.
(c)The merits of the amended constructive trust claim are not sufficient to warrant a grant of leave.
The parties filed detailed submissions. But we need not traverse these, as we are firmly of the view that the proposed amendments should not be permitted. It would be contrary to the interests of justice to do so.
The Schmidts’ claim went to trial in 2019 on the basis of a fourth amended statement of claim. Ms Schmidt had the benefit of legal advice in formulating that pleading, and all but the first of its precursors. The Schmidts chose to frame their claim in a particular way. Ebada and Mr Garrity were entitled to focus on responding to the claim as pleaded.
The argument that even in the absence of an understanding between the parties that Ebada would hold the properties on trust, there was a “No-Cost Transfer Back Arrangement” that gave rise to a constructive trust, is materially different from the claims advanced at trial. It is inconsistent with the claims as pleaded and inconsistent with the evidence given by the Schmidts at trial. It would be unfair to Ebada and Mr Garrity to require them to deal with the reformulated claims on appeal, without having an opportunity to explore those claims at trial through cross-examination and in their own evidence. And it would be unfair and oppressive to require the new claims to be the subject of a further trial at this late stage.
It would also be contrary to the public interest for further Court time to be occupied by the Schmidts having a second bite at the cherry. Plaintiffs have an obligation to put their best foot forward at trial (including pursuing all claims with the same subject matter at that trial) not only as a matter of fairness to the defendants, but also to ensure the efficient use of court time in the wider public interest.[86]
[86]See Blueskin Bay Forest Heights Ltd v Paterson Pitts Partners Ltd [2014] NZCA 268 at [19]–[22].
We add that the proposed amendments would not, in our view, materially assist the Schmidts’ claim. In the course of the hearing we explored with counsel the possibility of a claim in contract, or perhaps unjust enrichment, based on a challenge to the sham elements of the transaction, or based on the agreement that the Schmidt interests would be able to buy back the properties in certain circumstances. However as Mr Scampion submitted on behalf of the respondents, those were not the claims pleaded by the Schmidts. Such claims would now face obvious limitation barriers, which may explain why the Schmidts did not seek to introduce such claims in their fifth amended statement of claim.
We do not consider that placing greater emphasis on the “No-Cost Transfer Back Arrangement” provides any material support for the Schmidts’ constructive trust claim. The difficulty the Schmidts face is that it was plainly not intended that the Schmidt interests would have a beneficial interest in either property after it was transferred to Ebada. Nor would any expectation on their part of a continuing beneficial interest have been a reasonable one. It was integral to the arrangement that Ebada be the full legal and beneficial owner of the properties, and the Schmidt interests have no legal or equitable claim to those properties. The constraints on Ebada’s freedom to deal with the properties were deliberately intended to be confined to reliance on Mr Garrity as a friend to “do the right thing”. At their highest, these obligations might have been contractual (although a contract claim would have faced some difficulties even before limitation issues arose).
In these circumstances, the application for leave to amend the statement of claim must be declined.
The respondents’ post-hearing application
In November 2024 the respondents sought leave to put a recent decision of the High Court of England and Wales before the Court: Takhar v Gracefield Developments Ltd.[87] In reliance on that authority they sought leave to make an application to strike out the proceedings on the basis that the Schmidts’ conduct in relying on a forged declaration of trust document was dishonest and unconscionable, potentially an unlawful means conspiracy, an abuse of process, and potentially a contempt of Court.
[87]Takhar v Gracefield Developments Ltd [2024] EWHC 1714 (Ch).
That application was opposed by the Schmidts.
In circumstances where the Schmidts’ appeal from the High Court decision has not succeeded, and leave has been declined to amend their statement of claim, no useful purpose would be served by considering this application or by addressing the implications (if any) of the Takhar decision for the Schmidts’ proceedings. Leave is therefore declined.
Costs appeal
Ms Schmidt’s appeal against the costs order in the High Court was dependent on the success of her substantive appeal. It must therefore fail.
Mr Schmidt raised a number of additional issues concerning his status in the proceedings, and the limited basis on which he was permitted to participate as a party in the High Court. In the course of argument he confirmed that his costs appeal turned primarily on the outcome of the substantive appeal. But we will deal briefly with the other points he raised.
Mr Schmidt was named as a plaintiff in the proceedings that were initially filed in the High Court. Although his name was omitted in some subsequent iterations of the statement of claim, it was not open to him to cease to be a plaintiff without seeking leave. When the question of his status came before the Court, directions were made confirming that he remained a plaintiff and should be named as such.[88] Pursuant to those directions he was named as a plaintiff in the third and fourth statements of claim. There is no question that Mr Schmidt was a plaintiff at trial, and in principle liable for costs.
[88]See above at [108]–[109].
The directions given by the Judge in relation to Mr Schmidt’s participation at trial reflected the identity of interest between him and Ms Schmidt. Mr Schmidt has not identified any lines of inquiry or arguments that he wished to pursue at trial that were not pursued by Mr Woodhouse on behalf of Ms Schmidt. It was appropriate for the Judge to ensure that the trial was conducted efficiently and to prevent “friendly” cross-examination by Mr Schmidt of the witnesses called by Ms Schmidt. The trial directions given by the Judge have no bearing on Mr Schmidt’s liability as a plaintiff for the costs of the proceeding.
Mr Schmidt has not identified any arguable basis on which the award of costs against him might be challenged. His appeal against the costs judgment must be dismissed.
Costs on appeal
Costs before this Court should follow the event in the usual way. The respondents sought costs for a standard appeal on a band A basis, with usual disbursements. We agree that is the appropriate basis on which to award costs in this case.
No order for costs can be made against Ms Schmidt, who is legally aided.[89]
[89]Legal Services Act 2011, s 45.
It is appropriate to make an award of costs against Mr Schmidt, who was an appellant, and who participated fully in the appeal.
The post-hearing application to amend the statement of claim was made by Ms Schmidt, who is not liable for costs. It should be disregarded in determining the costs payable by Mr Schmidt.
The respondents’ post-hearing application to put a relevant authority before the Court and make an application to strike out proceedings should also be disregarded. It was ultimately unnecessary to consider this application on its merits. In circumstances where the possibility of amendment to the statement of claim was live, however, it was reasonable for the respondents to make this application. If the Court had been minded to grant leave to amend the statement of claim, the issues raised by the respondents’ application would have been relevant and material. In those circumstances, we consider that the modest costs associated with this application should lie where they fall.
Result
The appellants’ application for leave to amend the statement of claim is declined.
The respondents’ application for leave to put a further authority before the Court, and for leave to make an application to strike out the proceedings, is declined.
The appeals are dismissed.
Mr Schmidt must pay costs to the respondents for a standard appeal on a band A basis, with usual disbursements.
Solicitors:
Smith & Partners, Auckland for Respondents
- AGLC
- Schmidt v Ebada Property Investments Limited [2025] NZCA 125
- Case
- [2025] NZCA 125
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