Schmidt v Pepper New Zealand (Custodians) Ltd

[2012] NZCA 565

IN THE COURT OF APPEAL OF NEW ZEALAND

CA763/2011
[2012] NZCA 565

BETWEEN  TAYLOR JADE SCHMIDT
Appellant

AND  PEPPER NEW ZEALAND (CUSTODIANS) LIMITED
Respondent

CA764/2011

AND BETWEEN             TAYLOR JADE SCHMIDT
First Appellant

AND  ANTHONY MIKHAL SCHMIDT
Second Appellant

AND  EBADA PROPERTY INVESTMENTS LIMITED
First Respondent

AND  BRIAN PATRICK GARRITY
Second Respondent

AND  TEA CUSTODIANS (PACIFIC) LIMITED & PEPPER CUSTODIANS (NEW ZEALAND) LIMITED
Third Respondents

CA765/2011

AND BETWEEN             TAYLOR JADE SCHMIDT
First Appellant

AND  ANTHONY MIKHAL SCHMIDT
Second Appellant

AND  EBADA PROPERTY INVESTMENTS LIMITED
First Respondent

AND  BRIAN PATRICK GARRITY
Second Respondent

AND  TEA CUSTODIANS (PACIFIC) LIMITED & PEPPER CUSTODIANS (NEW ZEALAND) LIMITED
Third Respondents

Hearing:         27 November 2012

Court:             Randerson, Harrison and Stevens JJ

Counsel:         Appellants in Person
E M S Cox and K N Mortimer for Respondent (CA763/2011) and Third Respondents (CA764/2011 and CA765/2011)
I M Razak for First and Second Respondents (CA764/2011 and CA765/2011)

Judgment:      3 December 2012 at  10.30 am

JUDGMENT OF THE COURT

AThe applications for orders granting an extension of time to take further steps are dismissed.

BThe appeals are struck out.

C        Mrs Schmidt is to pay costs to Ebada and Pepper as for a standard appeal on an application for leave on a band B basis and usual disbursements. 

REASONS OF THE COURT

(Given by Harrison J)

Introduction

1. The appellants, Taylor Jade Schmidt and Anthony Mikhal Schmidt, have filed appeals against a judgment delivered by Heath J in the High Court at Auckland[1] (a) granting an application by the third respondent in one of these appeals, Pepper New Zealand (Custodians) Ltd (Pepper), to remove a caveat registered by Mrs Schmidt against titles to two properties in Kaiaua, South Auckland; (b) dismissing an application by the Schmidts for an interim injunction restraining Pepper from taking steps to enforce its mortgage against the properties; and (c) dismissing the Schmidts’ application to set aside an earlier order for possession made on 30 June 2011. 

   [1]Pepper New Zealand (Custodians) Ltd v Schmidt HC Auckland CIV-2011-404-5497, 15 November 2011.

2. The Schmidts lodged three appeals against each of the orders made in the one judgment.  All were filed on 16 November 2011, the day after delivery.  However, the Schmidts took no steps to prosecute their appeals until 24 May 2012 when they filed applications for a fixture to hear their appeals or alternatively an order granting an extension of time to file the case on appeal.  By then more than six months had passed since the appeals were filed.  Accordingly the appeals were deemed to be abandoned[2] unless the Court granted an extension of time on applications made within three further months.[3] 

   [2]      Court of Appeal (Civil) Rules 2005, r 43(1).

   [3]      Rules 43(2) and (3).

3. While the Schmidts sought a hearing for their applications, they took no further steps to pursue the appeals until 15 November 2012 when they filed the case on appeal together with synopses of submissions in support of their applications for orders granting extensions of time.  Both Pepper and Ebada Property Investments Ltd (Ebada), cited as a first respondent in two appeals, oppose the Schmidts’ application. 

4. The factors relevant to this Court’s exercise of its discretion under r 43 are well settled.[4]  The Schmidts are seeking a judicial indulgence.  The length and reason for their delays should be explained, and we must be satisfied that their substantive appeals have merit.  The wider interests of justice are also material including any hardship to the respondents. 

Decision

[4]Harris v Davies [2007] NZCA 358 at [8]; Schmidt v Ebada Property Investments Ltd [2012] NZCA 452 at [6]–[7].

1. The Schmidts’ applications must fail on a number of grounds. 

2. First, the Schmidts have not satisfactorily explained the reason for their failure to pursue these appeals with diligence.  They have not filed any affidavits to provide a reliable evidential foundation which might fairly explain the delays.

3. The Schmidts assert that they have not pursued their appeals in a timely fashion because of:

   (a)The existence of a gentleman’s agreement with Ebada and Pepper whereby the Schmidts would not be required to take steps to prosecute their appeals while settlement negotiations were in train between the parties in early 2012.  Counsel for both Ebada and Pepper deny the existence of such an agreement.  Without any evidence of its terms or conditions when its existence is denied, we cannot give any weight to this assertion.

   (b)Distraction by commitments in the High Court where the Schmidts were seeking interlocutory relief against Ebada and Pepper.  That factor, if it exists, is not a valid justification for inactivity is this Court.

   (c)An inability to obtain legal representation and a timely grant of legal aid.  Apart from general statements that applications for legal aid have been made, and attempts have been made to engage counsel, we have no satisfactory evidence to support this assertion.

   (d)Financial constraints.  The Schmidts say they have been unable to pursue their appeals because of an inability to fund the cost of printing the case.  Again, there is no evidence to support this assertion.

4. If any or all of these grounds did in fact exist, then the Schmidts were obliged to establish them by evidence and raise them promptly in support of an application for an extension of time.  In this respect they cannot seek a more lenient approach because they represent themselves.  All the material which they have filed in this Court displays a detailed knowledge of and familiarity with the legal process and its requirements. 

5. Second, the appeals are without any apparent merit.  While the circumstances appear complicated, in large part because of the Schmidts use of various corporate and trust structures, the essential facts are straight forward.  An entity called Schmidt Trustee Ltd owned the properties before transferring them to Ebada in January 2006.  (Schmidt Trustee Ltd was struck off the companies register in January 2009.) Ebada then borrowed monies from TEA Custodians (Pacific) Ltd to fund the purchase which were secured by way of mortgage to TEA.

6. As Heath J recited in his judgment:

   [4]       The Schmidts allege that Schmidt Trustee Ltd transferred the two properties as a result of a fraud committed by Ebada, through its director Mr Garrity.  They allege that Ebada holds the properties as “a corporate trustee” of trusts with which they are associated.

   [5]       On 17 February 2010, Mr Schmidt lodged a caveat against each property to protect his claimed interest.  Those caveats lapsed.  On 23 November 2010, caveats were lodged by Mrs Schmidt.  Those caveat express, as the ground on which Mrs Schmidt’s claim is made:

   Caveator is a trustee for a beneficiary trust which has beneficial interest in the land by virtue of an unregistered agreement.  The registered proprietor Ebada Property Investments Ltd holds the property in trust for The Nature Estate Trust & Tech Estate Trust.  Caveator is a Beneficiary and a Trustee of both trusts.

   [6]       Although registered on 23 November 2010, the caveats were signed by Mrs Schmidt on 15 January 2010.  Those caveats were also subjected to challenge, at the suit of Ebada and Mr Garrity.  They were sustained.

   (Footnotes omitted.)

7. TEA loaned Ebada a total of $276,500 in two separate advances.  Ebada fell into default.  In due course TEA took steps to enforce its mortgage.  On 22 June 2011 TEA transferred its interest to GE Custodians (GE).  In turn, on 8 August 2011 GE transferred its interest to Pepper. 

8. In the meantime, TEA applied for summary judgment for orders granting vacant possession of the properties against Ebada and its principal shareholder, Mr Garrity.  On 30 June 2011 Associate Judge Christiansen granted TEA’s application.  On 12 and 13 October 2011 Woodhouse J made an order substituting Pepper for TEA.  A question has arisen about the validity of the sealed order for possession in TEA’s favour but ultimately it is no consequence.

9. The Schmidts’ opposition to Pepper’s application to remove the caveat and their own application for an injunction to restrain Pepper from taking steps to enforce its security were based upon the primary ground that, as Heath J pointed out,[5] Schmidt Trustee Ltd fraudulently conveyed the property to Ebada in January 2006.  Additionally the Schmidts alleged that TEA was complicit in Ebada’s fraud.  After carefully surveying the facts, Heath J was satisfied that the Schmidts’ allegations had no arguable evidential foundation. 

   [5] At [1].

10. In argument before us the Schmidts repeat the same general assertions.  In essence they say that:

    (a)Mr Garrity, who was formerly a lawyer, persuaded Mrs Schmidt, presumably as a director of Schmidt Trustee Ltd, to sign the memorandum of transfer to Ebada.  Ebada’s subsequent actions in deceitfully obtaining further funding from TEA, without the Schmidts’ authority and then failing in his duties to meet mortgage outgoings, amounted to “clear fraudulent intent”.

    (b)A company called Wizard Home Loans Ltd acted as TEA’s agent for providing the mortgage funds.  The Henderson branch of Wizard was closed and the subject of a Serious Fraud Office enquiry because of alleged improprieties.  Wizard acted as TEA’s agent for this purpose.  An article published in the New Zealand Herald is said to provide the evidential basis for this allegation.

11. Allegations of fraud or dishonesty are very serious.  They must be pleaded with care and particularity.  As the authors of Bullen & Leake & Jacobs Precedents of Pleadings[6] emphasise, counsel must not draft any originating process or pleading containing an allegation of fraud unless they have reasonably credible material which, as it stands, establishes a prima facie case of fraud – that is, material of such a character which would lead to the conclusion that serious allegations could properly be based upon it.  Fraud cannot be left to be inferred from the facts – fraudulent conduct must be distinctly alleged and as distinctly proved.[7]  General allegations, however strong the words may be appear to be, are insufficient to amount to a proper allegation of fraud.[8] 

    [6]      Bullen & Leake & Jacobs Precedents of Pleadings (16th ed, Sweet & Maxwell, London, 2008)          vol 2 at [49-02].

    [7]      Davy v Garrett (1878) 7 Ch D 473 (CA) at 489.

    [8]      Wallingford v Mutual Society (1880) 5 App Cas 685 (HL) at 697.

12. While these principles have been articulated in authoritative discussions of duties imposed upon counsel, they apply with equal rigour to those who represent themselves.  Those who seek to portray themselves as well acquainted with the law and its processes cannot shelter behind the barrier of unfamiliarity when it suits.   They must satisfy the same exacting standard when preparing their own pleadings.  The obligation exists for the benefit of defendants – to allow them to be fully aware of, and able to address, a serious allegation – and for the Court which will be called upon to decide it. 

13. The Schmidts have failed by a considerable margin to meet this obligation and to particularise any credible evidence on which a Court might rely to find that Ebada or TEA acted fraudulently in or about January 2006.  At best they rely on speculation; there is nothing to link any alleged fraud by Wizard to Ebada or TEA.  An assertion that, for example, Wizard contravened its own lending policies by arranging a loan in excess of internal limits is not evidence of dishonesty. 

14. It is equally fatal to the Schmidts’ position that they do not allege fraud against TEA or advance any evidence in support.  Pepper’s interest as mortgagee is indefeasible unless fraud is established against it.[9] 

    [9]      Land Transfer Act 1952, ss 62, 63(1)(c) and 182.

15. We add that the Schmidts rely on this Court’s recent decision in their favour on a similar application for an extension of time Schmidt v Ebada.[10]  However, that decision is distinguishable on a number of grounds, in particular, because the allegations of fraud made in that case relate to a different property at Bell Road, Mangatawhiri, and to different events and circumstances.[11]

    [10]      Schmidt v Ebada Property Investments Limited [2012] NZCA 452.

    [11]      At [2] and [4].

16. Third, we are satisfied that the delays in prosecuting these appeals are causing significant financial hardship to Pepper.  Repayments have not been made under the mortgage for some years.  The value of Pepper’s security has been steadily eroded by these continuing delays.  There is no evidence of the current values of the properties but earlier reports available to Pepper suggest a value of $290,000.  The Schmidts assert the value is higher.  The amount currently outstanding under Pepper’s mortgage is $456,206.70.  The mortgagee is suffering the loss of cash flow while it is unable to exercise its rights.  And on its figures, there is now a real risk that the continuing escalation of the debt including penalty interest and costs will exceed the price at which the properties may be sold under forced conditions.  There is also prejudice to Ebada and Mr Garrity who are responsible for all payments due on the mortgage pending the sale of the property. 

17. For these three reasons, the Schmidts’ application for an extension of time to pursue their appeals against the orders granting summary judgment and dismissing their application for injunctions must fail. 

18. We add that the Schmidts have no apparent standing to contest the order for possession.  Mr Schmidt advised us that his father is and has been in occupation of the property for some years.  Apart from a nominal amount of $300 he has paid no rent.  The point is that the Schmidts have no standing in respect of the order for possession, irrespective of whether a sealed copy of the order is in favour of the correct entity. 

19. Another obstacle now lies in Mr Schmidt’s path.  Mr Razak for Ebada advised that Mr Schmidt has recently been adjudicated bankrupt.  Mr Schmidt himself confirmed the adjudication in September or October 2012.  He asserts that he is appealing the order and has applied for a stay.  But he concedes that he did not seek or obtain the Official Assignee’s consent to pursue these applications. 

20. Upon adjudication, a bankrupt’s assets and rights pass to the Official Assignee[12] including rights to sue and commence legal proceedings other than in respect of purely personal claims such as for defamation.  In the result Mr Schmidt’s rights to pursue these appeals pass to the Official Assignee.  He has no standing to continue.  His appeals would have been stayed in any event unless or until the Official Assignee consented. 

Result

[12]      Insolvency Act 2006, s 101.  See Churchill Group Holdings Ltd v Aral Property Holdings Ltd            [2011] NZCA 34 and Billie Little (ed) Brookers Insolvency Law and Practice (online            looseleaf ed, Thomson Reuters) at [IN101.01].

1. The applications for orders granting an extension of time to take further steps are dismissed.

2. The appeals are struck out.

3. Mrs Schmidt is to pay costs to Ebada and Pepper as for a standard appeal on an application for leave on a band B basis and usual disbursements.

Solicitors:
Gibson Sheat, Lower Hutt for Respondent (CA763/2011) and Third Respondents (CA764/2011 and CA765/2011)
Smith & Partners, Auckland for First and Second Respondents (CA764/2011 and CA765/2011)