Secure Financial Services Limited v Nguy
[2017] NZHC 1529
•4 July 2017
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2015-404-1534 [2017] NZHC 1529
BETWEEN SECURE FINANCIAL SERVICES
LIMITED Plaintiff
AND
JESSE SEANG TY NGUY First Defendant
MARLI INVESTMENTS LIMITED Second Defendant
Hearing: 29 June 2017 Appearances:
S A Grant and S Lang for Plaintiff
S Cooney for First and Second DefendantsJudgment:
4 July 2017
JUDGMENT OF FOGARTY J
This judgment was delivered by Justice Fogarty on
4 July 2017 at 3.30 p.m., pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Date:
Solicitors:
Bruce Dell Law, Auckland
Keegan Alexander, Auckland
SECURE FINANCIAL SERVICES LIMITED v NGUY [2017] NZHC 1529 [4 July 2017]
Introduction
[1] The plaintiff applies by way of interlocutory motion for: (a) Further discovery;
(b) Wasted costs;
(c) A new timetable.
[2] The timetable issue was not the subject of pre-hearing submissions and I assume has been settled. That leaves the application for further discovery by the first defendant and a wasted costs order against the first defendant, a barrister and solicitor.
[3] The subject matter of this case is an alleged exercise of sale by a first mortgagee, Marli Investments Ltd, of a property known as 3A4 at under value to the detriment of the second mortgagee the plaintiff, Secure Financial Services (SFS). That the mortgaged property was sold without notice at material times to second mortgagee of the impending sale. Further, that the sale was to associates of the first mortgagee.
[4] Marli transferred its mortgage to a company called Pleasant Forest Ltd, giving no notice to the second mortgagee. It is not suggested there was any legal breach in this step. Though this step was undertaken after Marli had given the first mortgagee owner of the property notice of default contending the total amount owing to the mortgagee was $800,000 and requiring the mortgagor to remedy the default. Under the heading consequences of default, there was merely the note to be remedied by 27 May 2011. That notice did not comply with s 120 of the Property Law Act as it did not set out the consequences of default as required by s 120(d). Section 120 provides:
120 Form of notice under section 119
(1) The notice required by section 119 must be in the prescribed form and must adequately inform the current mortgagor of—
(a) the nature and extent of the default; and
(b) the action required to remedy the default (if it can be remedied); and
(c) the period within which the current mortgagor must remedy the default or cause it to be remedied, being not shorter than 20 working days after the date of service of the notice, or any longer period for the remedying of the default specified by any term that is expressed or implied in any instrument; and
(d) the consequence that if, at the expiry of the period specified under paragraph (c), the default has not been, or cannot be, remedied,—
(i) the amounts secured by the mortgage and specified in the notice will become payable; or
(ii) the amounts secured by the mortgage and specified in the notice may be called up as becoming payable; or
(iii) the powers of the mortgagee or receiver specified in the notice will become exercisable; or
(iv) more than 1 of those things will occur.
(2) A notice required by section 119 may specify that the action required to remedy the default includes the payment (whether to the mortgagee or receiver) of a specified amount, being the reasonable costs and disbursements (whether of the mortgagee or receiver) in preparing and serving the notice.
[5] The first defendant acted for the assignee, Pleasant Forest Ltd. Pleasant
Forest took an assignment by way of purchase of the mortgages over units 3A3 and
3A4 from Marli. This of itself is not a breach of any obligation owed by the mortgagee Marli to the debtor mortgagor. But then the next day Pleasant Forest agreed to sell units 3A4 and 3B1 to Grafton Trustees for $1.1 million and exercised the power of sale in respect of unit 3A4 on 11 November without providing prior notice as required by s 121(1)(c) of the Property Law Act which reads:
121 Copy of notice under section 119 must be served on former mortgagor, covenantor, subsequent mortgagee, and caveator
(1) A copy of the notice served under section 119 must, as soon as possible, be served (whether by the mortgagee or receiver) on the
following persons if either the mortgagee or receiver has actual notice of the name and address of the person:
(a) …
(b) …
(c) any mortgagee under a subsequent mortgage, and any holder of any other subsequent encumbrance, over the mortgaged land if—
(i) the subsequent mortgage or other subsequent encumbrance is registered; or
(ii) the subsequent mortgage or other subsequent encumbrance is unregistered, but either the mortgagee or receiver has actual notice of it; and
[6] On the discovery so far, particularly an email to the first defendant’s firm, financiers were querying whether the mortgage could be transferred to Pleasant Forest without going through the process of notice to any subsequent mortgagee or caveator. It is to be alleged at trial that a Ms Roberts, a solicitor employed by the first defendant examined this proposition and said yes provided s 19-21 PLA or s 121 PLA has been complied with, and thereby the first defendant was on notice that notice to the plaintiff (SFS) may be insufficient.
[7] Sale by a first mortgagee of the property without notice to SFS the second mortgagee was in breach of s 121(1)(c) of the Property Law Act 2007:
121 Copy of notice under section 119 must be served on former mortgagor, covenantor, subsequent mortgagee, and caveator
(1) A copy of the notice served under section 119 must, as soon as possible, be served (whether by the mortgagee or receiver) on the following persons if either the mortgagee or receiver has actual notice of the name and address of the person:
(a) …
(b) …
(c) any mortgagee under a subsequent mortgage, and any holder of any other subsequent encumbrance, over the mortgaged land if—
(i) the subsequent mortgage or other subsequent encumbrance is registered; or
(ii) the subsequent mortgage or other subsequent encumbrance is unregistered, but either the mortgagee or receiver has actual notice of it; and
[8] The failure does not vitiate the sale. Section 121(2)(d):
(2) A failure to comply with this section does not prevent—
(a) … (b) … (c) …
(d) the exercise of the mortgagee's or receiver's power to sell the mortgaged land.
[9] However, such a sale exposes the first mortgagee to liability and damages for any loss arising from that failure. Section 121(3):
(3) However, if there is a failure to comply with this section, the mortgagee is liable in damages for any loss arising from that failure.
[10] Accordingly, it was a legal obligation and makes commercial sense to give notice to subsequent mortgagees to give those parties the opportunity to purchase the property or reach some other agreement which lessens the loss that would otherwise occur.
[11] These proceedings against the solicitor for the first mortgagee, the first defendant, go beyond alleging negligence and contend for a knowing breach of the Property Law Act when exercising the power of mortgagee sale knowingly defeating the interest of the second mortgagee, the plaintiff.
[12] To that end the plaintiff submits that the defendants should have discovered documents in their possession showing the interest of the second defendant in the acquisition of the property by Pleasant Forest. This documentation came to light through efforts of the plaintiffs.
[13] It was not disputed significantly before me that these documents need not have been discovered. Therein lies the basis of the argument for wasted costs.
[14] The plaintiffs are seeking orders for further discovery and wasted costs. The principal dispute (sale at under value without notice) is set down for a four day hearing commencing in June 2018 and the timetable has been set accordingly.
[15] These proceedings were commenced on 2 December 2014 and the parties agreed to standard discovery.
[16] The parties have agreed that the following issues require resolution at trial:
(a) Whether the first mortgagee Marli breached its duties owed to the second mortgagee.
(b)Whether the sale of the unit by the first mortgagee Marli was a sale at under value compared to the best price reasonably obtainable.
(c) Whether the solicitor, Mr Nguy, the first defendant, knowingly assisted the breaches by the first mortgagee or conspired with the controller of the first mortgagee, Mr Kelly, to deprive the second mortgagee of amounts to it in relation to the second mortgage.
(d)Whether Mr Nguy, the first defendant, solicitor for the first mortgagee, breached a duty of care to the second mortgagee by not notifying it of the proposed sale.
(e) Whether there was a surplus available for distribution to the second mortgagee if there had not been a breach of the duties.
[17] On any view of it, Mr Nguy as solicitor for the first mortgagee Marli is in a difficult position. If he conducted the mortgagee sale on instructions from his first mortgagee client not to comply with s 121, he is likely to be party to the breach.
[18] Alternatively, if he proceeded, notwithstanding the caution of Ms Roberts, he may be exposed, as pleaded, as a party to breach of s 121. Either way I can appreciate that there are some legal issues which cast some doubt as to the extent of Mr Nguy’s potential liability and that makes relevant the extent to which he knew of
and participated in the purposes and conduct of the related parties being corporate entities owned or controlled by Mr Steven Kelly, such as Pleasant Forest.
[19] Whether or not he is liable in common law negligence as distinct from being party to a breach of s 121, is an issue which does not appear to me to be covered clearly by authority. But again it is reasonably arguable and likewise justifies wide discovery by Mr Nguy of his relationships with Mr Kelly and Mr Kelly’s companies.
[20] The application for further discovery relates to seeking discovery of documents relating to neighbouring units 3A3 and 3B1 (the unit that was transferred and which is the centre of the litigation is 3A4). The relevance alleged is that Mr Nguy was involved in the purchase of these three properties.
[21] The detail of the discovery dispute appears from paragraph 14 on of the synopsis of submissions on behalf of the plaintiff.
[22] There is a three-fold complaint: 1) that these are highly relevant documents directly relating to the transactions; 2) no good reasons for why these documents are not on the record; and 3) that there has been an narrow construction of what is relevant.
[23] I note the submissions do not explain why documents relating to the sale of other property is relevant. Are they looking for similar facts?
[24] I note that the parties have agreed standard discovery. The question is not “relevance”. The documents have to fall within the ambit of Rule 8.7 of the High Court Rules 2016:
8.7 Standard discovery
Standard discovery requires each party to disclose the documents that are or have been in that party's control and that are—
(a) documents on which the party relies; or
(b) documents that adversely affect that party's own case; or
(c) documents that adversely affect another party's case;
or
(d) documents that support another party's case.
[25] The argument is developed from evidence of the file notes of Ms Roberts, referred to in [6] above. The plaintiff seeks to reinforce Mr Nguy’s responsibility by contending his close links with the owner of Pleasant Forest, the Kelly family.
[26] There are complaints that there was not disclosure of documents showing that
Mr Nguy was a trustee of Mr Kelly’s Family Trust.
[27] The contention is that Mr Kelly has a scheme and Mr Nguy knew of the scheme. The allegation against Mr Nguy is of dishonesty. The second amended statement of claim pleads:
19. Mr Nguy knew, or ought reasonably to have suspected, that Pleasant Forest was in breach of these duties and that the breaches were such he could not honestly facilitate the transfer of Unit 3A4.
[28] Coupled with my conclusion in paragraph [19] above, I am satisfied that standard discovery does require further discovery as sought, particularly seeking discovery of document relating to the neighbouring units, 3A3 and 3B1, and of Mr Nguy’s relationship with Mr Kelly and with Mr Kelly’s companies, of which Pleasant Forest is one. The plaintiff is entitled to further discovery as moved.
Wasted costs
[29] The argument here is that the plaintiff has secured significant costs preparing its case on the basis of incomplete documents disclosed by Mr Nguy. The wasted costs are estimated to be $11,900 plus Mr Fleming’s fees of approximately $3,000.
[30] I am of the view that there likely has been wasted costs, but that the order for wasted costs should not be made now, but rather, by the trial Judge at the end of the trial, who will be in a far better position to evaluate the degree of wasted time.
Conclusion
[31] The application for further discovery, dated 9 May 2017, is granted.
[32] There has been wasted costs.
[33] The value and award of wasted costs is deferred to be fixed by the trial Judge at the end of the trial.
[34] The plaintiff is entitled to costs on this application a 2B basis. If the parties cannot agree costs I will receive submissions limited to five pages, exchanged in draft in advance, and filed by Friday 4 August 2017.
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