Solicitor-General v Machirus HC Christchurch CRI 2005 409 172

[2007] NZHC 1957

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CRI 2005 409 172

IN THE MATTER OF     AN APPLICATION PURSUANT TO THE PROCEEDS OF CRIMES ACT 1991

BETWEEN  SOLICITOR-GENERAL OF NEW ZEALAND

Applicant

AND  PETER LLOYD MACHIRUS First Respondent

AND  PHILLIP GRAEME SHATFORD AND YOLANDA SHATFORD

Second  Respondents

Hearing:         27 July 2007

Appearances: B Hawes and D M Jackson for Applicant

Mr Machirus in Person

Mr and Mrs Shatford in Person

Judgment:      31 July 2007

JUDGMENT OF CHISHOLM J

[1]      On  14  November  2005  a  restraining  order  was  made  in  relation  to  the property at 38 Shaw Avenue, Christchurch, pursuant to Part IV of the Proceeds of Crimes Act 1991.  At that time the first mortgagee of the property was taking steps to  exercise  its  power  of  sale  and  in  due  course  the  property  was  sold  by  the mortgagee to the second respondents.

[2]      The applicant now seeks a new restraining order against the property.   An interim order was made on an ex parte basis by Panckhurst J on 22 May.   Both respondents strongly oppose the application.

SOLICITOR-GENERAL OF NEW ZEALAND V  MACHIRUS AND ORSHC CHCH CRI 2005 409 172 31

July 2007

[3]      Along with others the first respondent faces numerous charges of burglary, theft, receiving and other charges arising from a police operation called Operation Rhino.  It is alleged by the police that stolen property was found at various locations including Shaw Avenue.   Although one of the first respondent’s co-accused, Gary Morrell, was the registered proprietor of the Shaw Avenue property, the first respondent had an option to purchase it pursuant to an agreement entered into in

2002.

[4]      Following a defended hearing a restraining order was made in relation to various properties,  including  Shaw  Avenue,  on 14  November  2005.    The  order expressly recorded that the first mortgagee of the property was to be free to exercise its rights as mortgagee and that if the property was sold any surplus proceeds were to be held by the Official Assignee as tainted property subject to any further order of the Court.

[5]      At auction the highest bid, which came from the second respondents, was

$365,000 and the property was handed  in.   Eventually the  mortgagee called  for tenders and the second respondents’ tender of $410,000 was accepted.  A deposit of

$41,000 was paid and the property was transferred to the second respondents in early

2006.  After repayment of the first and second mortgages and payment of expenses on sale there was no surplus.

[6]      Although the applicant is critical of some of the tactics used at the auction and the purchase price ultimately achieved, Mr Hawes accepted that  this was a legitimate sale by the mortgagee pursuant to its power of sale.  In other words, there is no suggestion that the sale process was a sham.

The Application

[7]      The application is made pursuant to s39 of the Proceeds of Crimes Act on the grounds set out in s43(3).  Section 43(3) provides:

“(3)    Where an application under section 39 of this Act seeks a restraining order against specified property of a person other than the defendant, the Court shall not make an order against the property unless the Court is satisfied that there are reasonable grounds for believing that—

(a)     The property is tainted property in relation to the relevant serious offence; or

(b)      The property is subject to the effective control of the defendant, and the defendant  derived a benefit, directly  or indirectly,  from the  commission  of  the offence.”

It is alleged by the applicant that the property is “tainted” in terms of paragraph (a) or alternatively that it is subject to the effective control of the first respondent in terms of paragraph (b).

[8]      A detailed affidavit in support of the application was sworn by Detective

Bermingham on 18 May 2007.  This affidavit summarised the applicant’s position:

“17.     The Applicants position is that the [First] Respondent has managed to repurchase

38  Shaw Avenue  through associate  Philip  Shatford,  retains  an  interest  in  that property, and continues to be involved in the development of the property.

18.Since the restraining order was removed the [First] Respondent has continued his development and dealings with 38 Shaw Avenue.

19.       Prior to the property being restrained, the [First] respondent had engaged Lincoln

Platt, an architect, over the construction and development of 38 Shaw Avenue …

20.Since the restraining order was removed, and the property was transferred into the name of Shatford, the [First] Respondent has been observed by police officers at 38

Shaw  Avenue  overseeing  the  construction  of  the  building  on  those  premises designed by Platt.

21.Prior  to  the  termination  of  operation  Rhino,  the  [First]  Respondents  former partner, Elepe Vaiana, and mother of his two  children was living  at 38  Shaw Avenue.

22.       Vaiana and her children have continued to live at this address.”

In support of these allegations the detective exhibited various documents including documents connecting the first respondent to various financial transactions after the mortgagee’s sale.   Statements by a real estate agent and two architects were also exhibited.

[9]      The first respondent opposes the application on numerous grounds including: absence of jurisdiction to make the order sought;   the property was sold by mortgagee’s sale and is not tainted property;  the mortgagee’s sale was carried out under the directions of the High Court and cannot be re-opened;  continued litigation is an abuse of process and in breach of s27 of the New Zealand Bill of Rights Act

1990.   Affidavits sworn by Mr  Machirus and  Vincent  Clayton support the  first respondent’s opposition.

[10]     In  broad  terms  the  second  respondents’  case  is  that  before  the  original restraining order was made in November 2005 Mr Shatford had invested $70,000 in relation to a proposed subdivision and redevelopment of Shaw Avenue which was going to be completed by him and Mr Machirus jointly after Mr Machirus exercised his option to purchase the property from Mr Morrell.  He was shocked to find that the property had become subject to a restraining order and when the property was sold  by  the  mortgagee  he  and  his  wife  purchased  it  to  protect  their  interests. Although Mr Shatford has known Mr Machirus for some time, he and his wife had no  involvement  with any criminal activity and they deny that  Mr  Machirus  has retained effective control over the property.  An affidavit was sworn by Mr Shatford.

The Hearing

[11]     The  first  respondent  required  Detective  Bermingham  and  the  architect, Lincoln Platt, for cross-examination.  Because Detective Bermingham was out of the country  the  applicant  made  Detective  Pritchard,  who  is  the  file  holder  of  the Operation Rhino trial file, available for cross-examination and he was duly cross- examined.  He confirmed that the second respondents were not involved in any way with Operation Rhino.

[12]     Mr  Platt  was  also  cross-examined.    He  confirmed  that  he  had  initially received instructions about building flats or a house at 38 Shaw Avenue in July

2005.  He was initially contacted by Mr Shatford and later met with Mr Shatford, Mr

Machirus and a third party.  Although Mr Shatford was to be his point of contact, his

dealings were on the basis that Mr Machirus was the owner and that the intention was to subdivide and build.  His fees were paid by Mr Machirus.  In May 2006 he received further instructions about the addition of a garage and met with both Mr Shatford and Mr Machirus.  At that time he was informed that for “legal reasons” the property needed to be in Mr Shatford’s name.   His impression was that  Mr Machirus had free access to the property.

[13]     Both Mr Machirus and Mr Shatford were cross-examined.  Mr Clayton was also cross-examined about his involvement in the auction, but it is unnecessary to make any further reference to his evidence.

[14]     Mr Shatford said that he lent Mr Machirus $70,000 on the basis that they would go halves in a section to be subdivided off and the spec home that was to be built on the section.  At that time he had no idea of Operation Rhino and no idea that the property at Shaw Avenue might be tainted.  He was extremely concerned when he found that there was a restraining order and wanted to purchase the property at the mortgagee’s sale to protect his investment.   He believed that once he bought the property it became untainted and that he and his wife could do what they saw fit with it.  He borrowed $375,000 from Westpac and later borrowed a further $150,000 to build a house on the section.  The new house is now about three quarters completed.

[15]     It was Mr Shatford’s evidence that he obtained the deposit of $41,000 by asking Mr Machirus for repayment of part of the $70,000 owed to him.   Later Mr Machirus  paid  the  mortgage  instalments  in  further  reduction  of  the  loan.    Mr Shatford denied that Mr Machirus had any say in the property following purchase or that there was an arrangement whereby Mr Machirus would be entitled to purchase the property back.    He  noted that  Mr  Machirus’s  former  partner,  daughter  and grandchildren had been living in the property throughout.

[16]     Mr Machirus acknowledged that he had initially purchased Shaw Avenue in

1990 and subsequently transferred it to Mr Morrell with an option to buy it back, that he had instructed Mr McGregor to draw up plans for four flats on the property, and that he had made various payments to Mr Morrell.  He said that after Mr Shatford became involved he borrowed $70,000 off Mr Shatford three or four months before

the restraining order was made in November 2005.   He acknowledged that he had paid  Mr  Platt’s  accounts.    Mr  Machirus  said  that  the  restraining  order  caused problems between himself and Mr Shatford.

[17]     It  was acknowledged  by Mr  Machirus that  he  had  been  involved  in  the payment of the $41,000 deposit.  He said that he had borrowed money from Linda Westbury and then paid the deposit on behalf of the Shatfords in reduction of the

$70,000 debt he owed to Mr Shatford.  Mr Machirus also acknowledged that he had paid a number of mortgage instalments after the property had been purchased by Mr and Mrs Shatford.  Again his explanation was that this was by way reduction of his debt.  He also acknowledged that he was frequently at the property, but said that this was because his ex partner lived there, as well as his daughter and grandchildren.

Discussion

[18]    It is convenient to address the two grounds advanced by the applicant individually.

Section 43(1)(a)

[19]     Although the property at 38 Shaw Avenue was “tainted” in terms of the Proceeds of Crime Act before the mortgagee’s sale, I am unable to accept that it retained that status after the sale.  It is not disputed that the sale by the mortgagee to Mr and Mrs Shatford was a legitimate armslength transaction and that it had been specifically endorsed by the Court when the original restraining order was made. Moreover, as Detective Pritchard confirmed, the purchasers, the second respondents, are not involved in any way with Operation Rhino.

[20]     In  Solicitor-General  v  Machirus  &  Morrell  (High  Court,  Christchurch Registry, CRI 2005 409 000177, 28 June 2007) Panckhurst J considered whether a tainted property retained that status after it had been sold by a mortgagee.  After a detailed consideration of relevant authorities Panckhurst J concluded at [25] that once the property had been realised, the sum obtained is different property and is not tainted, although the proceeds of sale might be caught by a pecuniary penalty order.

[21]     I adopt the reasoning and conclusion of Panckhurst J.  In this case there was no surplus with the result that the possibility of a pecuniary penalty order does not arise.  It might also be added that in a situation where a mortgagee’s sale had been conducted with the active endorsement  of the Court  and the  property  has  been purchased from the mortgagee at armslength by a bona fide purchaser, it would be remarkable if the Solicitor-General was able to re-restrain the property unless, of course, s43(3)(b) applied.

[22]     For the applicant Mr Hawes noted that Solicitor-General v Wong (1997) 14

CRNZ 624 is authority for the proposition that tainted property can include property wholly owned by persons who are not involved in the serious offences.   He also contended that innocent parties will ultimately be protected by ss17 and 18 (which enable third parties to apply for relief from a forfeiture order and for the Court to grant relief) or 40 (which requires an application for a restraining order to be served on the parties other than the owner).

[23]     I do not accept that those matters can alter the outcome that I have reached. Solicitor-General v Wong involved an entirely different situation where the owner of the property sought relief against forfeiture pursuant to s18 of the Act.  In my view that  case  does  not  in  any  way  call  into  question  the  conclusion  reached  by Panckhurst J in Solicitor-General v Machirus & Morrell.  Nor do ss17, 18 or 40.  A third party should not be put in a position of having to protect his or her position if there is no jurisdiction to make the order in the first place.

Section 43(3)(b)

[24]     To succeed on this ground it is necessary for the applicant to establish on the balance of probabilities that notwithstanding that the second respondents are the registered proprietors of the property, the first respondent nevertheless has effective control of it.  Given that the applicant relies on circumstantial evidence the real issue is whether it would be safe to draw the inference advocated by the applicant.

[25]     The  applicant  alleges  that  several  factors  justify  the  inference  that  Mr

Machirus has managed to re-purchase 38 Shaw Avenue through Mr Shatford and

still retains an interest in that property and continues to be involved in its development:   earlier pattern of dealing  between Mr  Machirus and  Mr  Morrell; intentional derailment of the auction process in an attempt to reduce the eventual purchase price;   Mr Machirus’s role with Mr Platt both before and after the mortgagee’s  sale;    documentary  record  revealing  payment  of  the  deposit  and mortgage instalments by Mr Machirus;  and other actions of Mr Machirus indicating continued ownership of the property.

[26]     Against those allegations is the evidence of Mr Machirus and Mr Shatford. They  rely  on  the  indefeasibility  of  Mr  and  Mrs  Shatford’s  title  as  bona  fide purchasers for value and in any event contend that there is an innocent explanation for the matters relied on by the applicant.  Their explanation is, of course, primarily based on the earlier dealings between Mr Machirus and Mr Shatford giving rise to the loan of $70,000 and the various transactions following the  mortgagee’s sale which had the effect of reducing that loan.

[27]     While  I  have  some  reservations  about  the  evidence  on  behalf  of  the respondents, I am far from satisfied that the circumstantial evidence adduced by the applicant is strong enough to support the inference advocated by the applicant.  It is, of course, a serious matter to go behind the title.   Even though an up-do-date title search has not been made available, it is common ground that Mr and Mrs Shatford are the registered proprietors.   Moreover, the uncontradicted evidence before the Court from Mr Shatford is that he and his wife have borrowed over $500,000 to purchase the property and to develop it.   There is no evidence to suggest that Mr Machirus guaranteed those borrowings.  If that had been the case it might have been expected that there would have been evidence to that effect before the Court.

[28]     Moreover, Mr Platt’s evidence about his initial dealings with Mr Machirus and Mr Shatford confirms that Mr Shatford was involved with 38 Shaw Avenue before   the   restraining   order   was   made   in   November   2005.      Under   those circumstances it would be dangerous for the Court to dismiss the evidence from Mr Shatford and Mr Machirus about the $70,000 loan in the absence of cogent evidence to the contrary.   Mr Shatford said that he had provided documentary information about the loan when the matter was first raised by the police.   Mr Hawes sought

leave for Detective Bermingham to be called upon his return from overseas this week.  I declined that application on the basis that the Crown had elected to proceed with Friday’s hearing notwithstanding Mr Machirus’s objection that Detective Bermingham, not Detective Pritchard, should be available for cross-examination. Having made that decision it would have been uneven justice if the Solicitor-General was allowed to adduce further evidence (assuming it would have assisted its case).

[29]     The evidence about the $70,000 loan provides a plausible explanation for Mr Machirus’s involvement  in payment of the deposit of $41,000 and the  mortgage instalments.   There is also a plausible explanation for his continuing involvement with the property arising from the earlier history and the fact that his daughter and grandchildren are still living there.   In addition there is a denial on oath by Mr Shatford  that  he  purchased  the  property on  behalf of Mr  Machirus  or  that  Mr Machirus has continuing control over it.  By comparison the circumstantial evidence relied on by the Crown is not particularly weighty.   It is certainly of insufficient cogency to justify the making of a restraining order under s43(3)(b).

Outcome

[30]     The Solicitor-General’s application for a restraining order in relation to 38

Shaw Avenue, Christchurch is dismissed.   The interim order is discharged.   Given that all the respondents have represented themselves there will be no order as to costs.

Solicitors:         Crown Solicitor, Christchurch

Copies to:         The Respondents