Smith v Claims Resolution Service Ltd

[2021] NZHC 3424

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE

CIV-2018-409-643

[2021] NZHC 3424

BETWEEN

KARLIE MARGARET SMITH

Plaintiff/First Counterclaim Defendant

AND

CLAIMS RESOLUTION SERVICE LTD

First Defendant/Counterclaim Plaintiff

AND

GRANT SHAND BARRISTERS AND SOLICITORS

Second Defendant

AND

SHARON MARGARET SMITH

Second Counterclaim Defendant

Hearing:

9 December 2021

Appearances:

K M Smith (Plaintiff//Counterclaim defendant) in person R J Lynn (assisting)

G P Davis and S L Austin for First Defendant/Counterclaim Plaintiff
(A B Darroch for Second Defendant excused)

Judgment:

13 December 2021

JUDGMENT OF OSBORNE J

(freezing order)

This judgment was delivered by me on 13 December 2021 at 4.30 pm pursuant to Rule 11.5 of the High Court Rules

Registrar/Deputy Registrar Date:

SMITH v CLAIMS RESOLUTION SERVICE LTD [2021] NZHC 3424 [13 December 2021]

Introduction

[1]        Claims Resolution Service Ltd (CRS) is the first defendant and counterclaim plaintiff in this proceeding.

[2]        CRS applied without notice last month for a freezing order restraining the plaintiff/first counterclaim defendant, Karlie Smith, from dealing with her residential property or, alternatively, a portion of the proceeds of sale.

[3]Orders were made.1

[4]CRS’s interlocutory application was then adjourned for this on-notice hearing.

This proceeding

[5]        The background which follows substantially reproduces the pertinent section of the previous judgment.

[6]        Ms Smith’s claim relates back to damage suffered by Ms Smith’s home in the Canterbury Earthquake Sequence. She entered into contracts with CRS for claims resolution funding and advocacy services and with the second defendant for legal representation in relation to a civil proceeding against her insurer.

[7]        Ms Smith asserts she settled her insurance claim for a sum significantly less than the defendants had identified and advocated to be the full and true value of that claim. She alleges breaches of fiduciary duty by both CRS and the second defendant. She also asserts her contract with CRS was an unconscionable bargain. She seeks declarations to that effect. She also seeks declarations that the contracts are void and/or that it would be inequitable for the defendants to recover money under those contracts.

[8]        The defendants each filed statements of defence. CRS included a counterclaim for monies it alleged are due and owing under its contract with the plaintiff, Ms Smith, (and the second counterclaim defendant, Sharon Smith).

1      Smith v Claims Resolution Service Ltd [2021] NZHC 3106.

[9] The counterclaim defendants deny liability by reason of the matters referred to at [7] above.

[10]      In February 2019, Ms Smith was granted leave for this proceeding to proceed as a representative claim on an opt-in basis.2

[11]      Subsequently, steps have been taken to advance procedural matters concerning the opt-in process, culminating in the Court’s approval of the opt-in consent notice in July this year.

[12]      At that time, it became apparent that Ms Smith no longer wished to continue the proceeding as representative plaintiff. To date no one has been substituted as plaintiff (an opposed application in that regard has been heard, with the decision reserved).

[13]      On 2 November 2021, Mr Cameron (solicitor for the plaintiff/first counterclaim defendant and for the second counterclaim defendant) filed an application for orders declaring that he had ceased to act for the plaintiff. An affidavit was filed explaining that on or about 22 July 2021 the retainer between Ms Smith and Mr Cameron’s firm was terminated.

[14]      Mr Cameron’s application for an order declaring that he had ceased to act for Ms Smith was heard by Associate Judge Paulsen on 2 December 2021. An order was made that he would cease to act for Ms Smith at 5.00 pm 9 December 2021 or on such later date as I might determine at this hearing.

[15]      Notwithstanding Mr Cameron’s lack of instructions from Ms Smith, Mr Lynn of his firm appeared at this hearing to assist the Court. He helpfully provided written submissions for the hearing and assumed the role of contradictor. I record the Court’s gratitude for his involvement.

2      Smith v Claims Resolution Service Ltd [2019] NZHC 127 (an appeal against the granting of leave was unsuccessful: see Claims Resolution Service Ltd v Smith [2020] NZCA 664).

[16]      Ms Smith appeared in person at this hearing. She confirmed that for a number of reasons affecting her health and finances she no longer wished to pursue her claim and simply wants the remaining aspect of the proceeding resolved. She informs me that she has not sold her house.

Application for freezing order

[17]      CRS applies for a freezing order restraining the sale of Ms Smith’s property or, alternatively, restraining the net proceeds of the property up to $200,000. CRS supported the application by an affidavit of its General Manager, Leon Hendren. The application was also supported by an undertaking as to damages pursuant to r 7.54 High Court Rules 2016.

CRS’s grounds of application

[18]CRS makes its application under rr 32.2 and 32.5 High Court Rules upon the

basis that:

(a)it has (on its counterclaim) a good arguable case for payment of its unpaid invoices and interest of approximately $165,571.30 as at 11 November 2021. CRS refers to the failure of a plaintiff with substantially similar claims to those of Ms Smith in Claims Resolution Service Ltd v Pfisterer

— with the plaintiff in that case being unsuccessful on her claims and CRS obtaining judgment on its invoice, contractual interest and indemnity costs;³

(b)Ms Smith has assets to which the freezing order may apply, being her residential property Lot 54 on Deposited Plan 37325 identified in Record of Title Identifier CB30K/1155 (the property). Alternatively, if the property has been sold the freezing order may apply to the proceeds of any sale;

(c)there is a real risk of dissipation of assets revealed through Ms Smith’s own correspondence and the lack of evidence of any other assets; and

3      Claims Resolution Service Ltd v Pfisterer [2021] NZHC 1088. The High Court judgment is the subject of an undetermined appeal to the Court of Appeal.

(d)the balance of convenience favours the granting of a freezing order.

[19]      Mr Hendren deposed that the CRS/Smith contract provides for interest of 2 per cent per month (on unpaid invoices). He stated the unpaid (initial commission) invoice is $72,195.65 (as admitted through the pleadings) and that contractual interest is accruing at $47.47 per day, a total at 11 November 2021 of $93,375.65.

1. Mr Hendren noted the costs of this proceeding have yet to be quantified.

[21]      Mr Hendren identified the similarity of the claims and counterclaims of Ms Smith with those of Ms Pfisterer who was found liable to pay CRS the counterclaimed sums.

[22]      Mr Hendren then referred to recent dealings with Ms Smith, following her decision to no longer continue as a representative plaintiff.

[23]      Mr Hendren exhibited emails sent by Ms Smith to Bryan Staples of CRS with statements indicating a lack of money or assets, and her intentions with what she has, as shown below:

(a)On 10 September 2021:

I would still like to sort my bill Bryan but I don’t have that sort of money or even can borrow that amount.

(b)On 6 November 2021:

... it my girl 21 on 10 December and we’re going on a big holiday and celebrating [sic].

(c)On 7 November 2021:

I have an unconditional sale on my home and I am in financial ruins I have done the best I can to do the right thing by you and I have outstanding bills to pay Bryan.

[24]      The reference to “my home” was evidently to the property, of which Mr Hendren exhibited the record of title. The registered proprietors are Ms Smith and her parents, as joint tenants.

[25]      Mr Hendren recorded that he was now concerned that Ms Smith planned to sell the property with the intention or effect of defeating CRS’s interest. Mr Hendren was concerned that if Ms Smith sold the property and used the proceeds from the sale there would be no way CRS could recover its debt.

[26]      Mr Hendren proposed that, should a freezing order restraining the sale of the property not be made, an order in respect of the sum of $200,000 should be made against the proceeds of sale to protect CRS’s interest.

[27]      Mr Hendren confirmed  that  CRS  did  not  know  when  a  settlement  of  Ms Smith’s property sale would occur.

Lack of opposition

[28]      Ms Smith did not file opposition to the application. She appeared at the hearing in person and explained she is not up to taking steps in the proceeding on her own behalf because a number of things affecting her. That said, she addressed me on those concerns, and had the benefit of Mr Lynn addressing me on issues arising on the application.

Freezing orders - the regime

[29]      Under r 32.2(1) High Court Rules, the Court may make a freezing order on or without notice to a respondent.

[30]      The three requirements for a freezing order, as recognised by the Court of Appeal in Shaw v Narain, are:4

(a)a good arguable case;

(b)assets to which the freezing order can apply; and

(c)a real risk of dissipation of the assets.

4         Shaw v Narain [1992] 2 NZLR 554 (CA) at 548.

[31]      The test in relation to the risk of dissipation has been identified as “not unduly exacting”, and requires identification of circumstances from which a prudent, sensible commercial person could properly infer a danger of default.5

[32]      There then remains an obligation upon the applicant on a without notice application, pursuant to r 32.2(3), to fully and frankly disclose to the Court all material facts, including:

(a)any possible defences known to the applicant; and

(b)information casting doubt on the applicant's ability to discharge the obligation created by the undertaking as to damages.

[33]      Where (as here) a freezing order is made without notice to the respondent, it must, under r 32.7 High Court Rules, be limited to a particular date — in this case the order was limited in time to the date of this hearing (and then extended to the date of this judgment).

[34]      Under r 32.7(3) High Court Rules, the applicant has the onus of satisfying the Court that the (interim) freezing order should be continued or renewed.

[35]      Once the requirements for the making of a freezing order are established, so as to justify a continuation of the freezing order, the Court retains a discretion which it will exercise having regard to the balance of convenience.6

Evidential issues

[36]      Mr Lynn brought to my attention the fact that Ms Smith’s email statements, (above at [23]) were contained in email exchanges which appear to have taken place in an attempt to resolve the issues between herself and CRS. He submitted that the communications may therefore attract the privilege identified in s 57(1) Evidence Act 2006. The privilege attaches to communications with another party to a dispute that

5      Raukura Moana Fisheries Ltd v The Ship Irina Zharkikh [2001] 2 NZLR 801 (HC) at [122].

6      Colville Developments Ltd v Colville [2021] NZHC 2272 at [48].

they were intended to be confidential and were made in connection with an attempt to settle the dispute.

[37]      Mr Lynn referred to this Court’s judgment in Covington Group Holdings Limited v Zhong.7 There, Allan J, following extensive discussion of recent English authorities, discharged a Mareva injunction upon the basis that the Court had incorrectly had before it privileged communications.8

[38]      Because Mr Lynn’s written submissions were received at a late point before this hearing, Mr Davis, counsel for CRS, indicated he was not in a position to present detailed submissions as to the extent of the privilege and whether it strictly arose in this case. Mr Davis nevertheless submitted that any privilege should not apply in this case for the reason identified in s 57(3) of the Act which provides:

(3)       This section does not apply to —

…

(d)the use in a proceeding of a communication or document    made or prepared in connection with any settlement negotiations or mediation if the court considers that, in the interests of justice, the need for the communication or document to be disclosed in the proceeding outweighs the need for the privilege, taking into account the particular nature and benefit of the settlement negotiations or mediation.

[39]      I consider in this case, as a matter of justice, the need for disclosure of the quoted parts of Ms Smith’s emails outweigh the need for the privilege. Mr Hendren in exhibiting the emails was careful to redact any references to monetary negotiations. The emails as exhibited referred only to the statements Ms Smith made as to her own situation and intentions, which are the matters directly relevant to the risk of dissipation of assets in this case. If, as appears to be the case, Ms Smith was putting those factual matters forward as a basis for negotiating the outcome she preferred, it is in the interests of justice that both parties be able to preserve their positions for the time being by reference to what has been said (not by way of offer and counter-offer but by way of underlying facts).

7      Covington Group Holdings Ltd v Zhong (2004) 17 PRNZ 819 (HC) at [23]–[30].

8      At [77] and [80].

[40]      I therefore find that the privilege identified in s 57 of the Act does not apply in this case.

Issues for substantive consideration

Good arguable case

[41]      CRS, by its counterclaim, sues on its contract with Ms Smith which, on their own pleadings, the counterclaim defendants (including Ms Smith) accept existed.

[42]      At the date of CRS filing its application, the contractual claim (including penalty interest) exceeded $165,000.

[43]      By their pleading, the counterclaim defendants also accept that CRS carried out a number of advocacy and funding services for them between September 2016 and May 2018.

[44]      Mr Lynn responsibly did not submit that CRS lacks a good arguable case based on its contractual entitlements.

[45]      The counterclaim defendants’ principal defence to the CRS claim involves the same arguments — breach of fiduciary obligations when providing the services — as are central to Ms Smith’s statement of claim against the defendants. Mr Davis correctly asserts that Ms Smith’s representative claim raises substantially the same questions of law as involved in Pfisterer.9 While I recognise the factual merits of the two cases cannot be compared without a trial in this case, the fact the issues of law involved in Pfisterer were resolved in favour of CRS is a further indication that CRS’s counterclaim is capable of serious argument.

[46]The threshold test is satisfied.

9      Pfisterer, above n 3.

Applicable assets?

[47]      The assets to which the freezing order would apply — either the property (if its sale is completed) or a maximum of $200,000 of the proceeds of sale — are clearly identified and are appropriate subject-matter for a freezing order.

Risk of dissipation?

[48] Mr Lynn recognises the test in relation to the risk of dissipation as I have set it out at [30]–[31] above. He submits the heart of the jurisdiction lies not simply in the risk of dissipation of assets but rather a real risk that, as a consequence of dissipation, a judgment or an award may go unsatisfied.10 Mr Lynn notes the Courts will not make a freezing order based simply on the fact a respondent may be dealing with or disposing of assets — it is the risk the dissipation will result in an unsatisfied judgment that makes the dissipation relevant.11

[49]       Mr Lynn refers also to the restriction under r 32.6 High Court Rules which protects the entitlement of the respondent to pay their ordinary living expenses and to dispose of assets (including through the payment of debts) in the ordinary course of their business.

[50]      Mr Lynn draws attention to a number of the statements made in Ms Smith’s emails relating to her intention to sell her house — including that she is “in financial ruins”, has an intention to go “on a big holiday” and to celebrate her daughter’s 21st birthday; and that she has “bills to pay” but that she wants to do the “right thing” by the director of CRS.

[51]      Mr Lynn submits these various statements of Ms Smith are inconclusive evidence in relation to whether a prospective judgment will be wholly or partially unsatisfied through the removal or disposal of Ms Smith’s property. In his submission they indicate one form of asset (real estate) is being changed to another (cash). The discussed holidays and birthday celebrations will not necessarily impact on Ms

10     Oaks Hotel & Resorts NZ Ltd v Body Corporate 358851 [2013] NZHC 2695 at [17]–[18].

11 At [18]. See also Whitmarsh v A’mon Corporation Ltd (1988) 2 PRNZ 576 at 582.

Smith’s financial position to such an extent as to leave her unable to meet the CRS debt.

[52]      Notwithstanding Ms Smith’s present intention (as indicated to me informally in Court) not to sell the property, I am satisfied from her past communication that there remains a real risk she might do so unless restrained from doing so.

[53]      I also find there is an inescapable risk, in the event of a sale, of a level of dissipation that would affect recovery of any judgment sum. Ms Smith’s indications of intended expenditure (particularly of the nature identified in her emails), in the context of her statement of financial ruin, constitute evidence which clearly satisfies the dissipation threshold test.

[54]      Ms Smith’s wish to pay to other people their outstanding accounts does not fall within the protected purposes under r 32.6(3)(c) — that provision relates to payments in the ordinary course of the respondent’s business such as business expenses. Ms Smith’s indicated desire to pay those other accounts reinforces the risk of dissipation adversely affecting CRS.

Balance of convenience and overall justice

[55]      In my judgment on the without notice application, I recorded that the balance of convenience was clearly in favour of freezing the subject-matter for the time being.12 In the event there is an unconditional property sale that is yet to be completed, the parties may have the Court amend the freezing order to allow the sale to be completed subject to conditions as to retention of the proceeds. If Ms Smith has sufficient grounds to warrant release of some or all of the ($200,000) proceeds (such as for her ordinary living expenses) she will have leave to pursue an appropriate amendment of the freezing order.

[56]      Mr Lynn submits that the Court needs to consider whether CRS’s application is being made for a proper purpose. He refers to a number of matters as suggesting the present application should be viewed as part of a series of events by which undue

12     Smith v Claims Resolution Service Ltd, above n 1, at [33].

pressure is possibly being exerted on Ms Smith (to bring matters to a conclusion favourable to CRS). The specific matters raised by Mr Lynn include these:

(a)Ms Smith at the recent hearing on 2 December 2021 spoke of the difficulty she experiences in her discussions with Mr Staples (of CRS);

(b)Ms Smith reports Mr Staples as asking for settlement sums well in excess of the $200,000 sought as the frozen sum on this application; and

(c)CRS has not quantified the claim for legal costs (with CRS seeking to claim costs on an indemnity basis under its contract).

[57]      These matters cannot significantly affect my assessment of the case. With the effective abandonment of Ms Smith’s claim, the claim remaining between the parties is CRS’s counterclaim against Ms Smith and the other counterclaim defendants. There may well have been robust discussions between the parties in relation to the resolution of that claim (most of which is not actually before the Court in evidence). However the value of the freezing order sought by CRS is not by its nature excessive or indicative of undue pressure. It is substantially based on the contractual debt (principal plus interest), only with a modest allowance for costs.

[58]      Mr Lynn asks the Court to also take into account a lack of information provided by CRS in support of its undertaking as to damages. He referred in particular to CRS having not disclosed any information that might cast doubt on CRS’s ability to discharge the undertaking (in terms of r 32.2(3) High Court Rules (above at [32]).

[59]      There is in fact no evidence to suggest that there was anything in CRS’s situation which would cast doubt on its ability to discharge its undertaking. It is also the case that r 32.2(3) applies to without notice applications and not to the application the Court is now dealing with on-notice. The limiting of r 32.2(3) clearly involved a deliberate limitation to without notice applications having regard to the fact that the respondent to an on-notice application is able to present the Court with its information as to defences and any criticism of the undertaking as to damages.

[60]      Mr Lynn went further, while acknowledging r 32.2(3)(b) deals only with information which “casts doubt”, and submitted that an applicant needs to proactively disclose financial information to enable the Court to assess the strength of its undertaking. He referred to passages in the judgment of this Court in Yang v Chen.13 As I read the decision, that case involved a Mareva injunction granted on a without notice application. I do not read the judgment as suggesting there is a general rule of the nature proposed by Mr Lynn applying to all applications for freezing orders. There will be many cases where either the nature of the subject matter of the freezing order or the sums involved will make it important for the Court’s consideration of the application that the applicant does proactively provide information relating to the strength of its undertaking. But the need for such disclosure is fact-dependent. Here Ms Smith has no present plans to sell her property.

[61]      The effect of the freezing order for the time being will be as it affects the property. Given it is Ms Smith’s residence, there is no suggestion that substantial damages could arise from dealings with the title being frozen.

Further evidential issues

[62]      Mr Lynn also submitted, before Ms Smith made her statement to the Court as to staying on in the property, that the Court should take into account the interests of third parties. He identified in particular Ms Smith’s mother and any person who has entered into a contract to purchase the property. The second category falls away, given Ms Smith’s confirmation that the property has not been sold. The interests of Ms Smith’s mother (who happens also to be the second counterclaim defendant in this proceeding) will not be affected, at least for the time being, because Ms Smith says she does not intend to sell the property at this point. Should her intention change, in which event she would need her mother’s co-operation as a joint owner, her mother will be entitled to seek relief (as would she).

[63]      Having considered the various matters raised by Mr Lynn in relation to balance of convenience considerations, I do not find any of them to alter the conclusion

13     Yang v Chen HC Auckland CIV-2007-404-1751, 8 August 2007 at [8]–[9].

reached on the without notice application, namely that the balance is clearly in favour of freezing the subject matter for the time being.

[64]The overall justice of the case supports the granting of the freezing order.

Order

[65]I order:

(a)This order is to be drawn up in terms of Form G 38, sch 1, High Court Rules.

(b)The order is made in respect of the following assets:

(i)Lot 54 on Deposited Plan 37325, Record of Title Identifier  CB 30K/1155, Canterbury Land Registration District (the property); and

(ii)the net proceeds of any sale of the property in the sum of

$200,000 to be held in trust pending the outcome of this proceeding.

(c)Leave is reserved to the parties and to the co-owners of the property to apply for variation of the order on five working days’ notice. This leave encompasses the entitlement of the plaintiff to seek release of any frozen funds should they be necessary for the purpose of paying the plaintiff’s ordinary living expenses.

(d)The costs and disbursements of the interlocutory application are reserved.

Osborne J

Solicitors:

Canterbury Legal, Christchurch GCA Lawyers, Christchurch

Counsel: G P Davis Barrister, Christchurch Copy to: Darroch Forest Lawyers, Wellington